-----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, Lqrl95ySU45k2Kb7SGLwE8Xh+iTJtyP7dfJTK9NB3VXDgEYekbteevMtlvZfANlq IrdF68vFcPZvOfwYCgO29g== 0000897101-02-000037.txt : 20020413 0000897101-02-000037.hdr.sgml : 20020413 ACCESSION NUMBER: 0000897101-02-000037 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20011120 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAC TECHNOLOGIES INC CENTRAL INDEX KEY: 0001019034 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 411761861 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13463 FILM NUMBER: 02513319 BUSINESS ADDRESS: STREET 1: 4444 WEST 76TH STREET STREET 2: SUITE 600 CITY: EDINA STATE: MN ZIP: 55435 BUSINESS PHONE: 6128357080 MAIL ADDRESS: STREET 1: 4444 WEST 76TH STREET STREET 2: SUITE 600 CITY: EDINA STATE: MN ZIP: 55435 8-K 1 sac020249_8k.txt SAC TECHNOLOGIES, INC. FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 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): November 20, 2001 SAC TECHNOLOGIES, INC. ---------------------- (Exact name of registrant as specified in its charter) Minnesota 1-13463 41-1741861 - ------------------------- ----------------------- ------------------- (State or other (Commission File No.) (IRS Employer jurisdiction of Identification No.) incorporation) 1285 Corporate Center Drive Suite 175 Eagan, MN 55212 --------------------------------------- (Address of principal executive office) Registrant's telephone number, including area code: (651) 687-0414 -------------- N/A ----------------------------------------------------------------- (Former name or former address, if changed since last report) ITEM 5. OTHER EVENTS. 1. RECAPITALIZATION TRANSACTION. On November 26, 2001, SAC Technologies, Inc. (the "Company") completed a comprehensive recapitalization transaction (the "Transaction") with The Shaar Fund, Ltd. (the "Fund") pursuant to a Funding Agreement between the parties. As a result of the Transaction, the Company converted approximately $4.6 million of short term debt and accruals into long term convertible notes, obtained $1.065 million of additional funding and issued shares of its newly designated Series B Convertible Preferred Stock, $0.01 par value per share (the "Series B Shares") in exchange for all of the issued and outstanding shares of its Series A Convertible Preferred Stock and all accrued dividends and interest due thereon. Notes in the principal amount of approximately $4 million are secured by a pledge of substantially all assets of the Company, including its intellectual property. Under the terms of the Transaction, the Fund agreed to provide up to $1.08 million of additional financing in monthly installments during the six (6) month period commencing March 1, 2002 so long as certain conditions are satisfied. The material terms of the convertible securities issued or issuable to the Fund in the Transaction are set forth below: * 5% Convertible Debenture. A Restated 5% Convertible Debenture in the principal amount of $539,625.93 was issued in exchange for the cancellation of an outstanding debenture in the principal amount of $418,000 and accrued interest of $121,625.93. The 5% Convertible Debenture is due September 30, 2003, accrues interest at the rate of 5% per annum payable quarterly in arrears commencing August 31, 2002, may be prepaid without penalty, and is convertible into shares of common stock at a per share conversion price equal to the lesser of $0.75 or a 22% discount to the average of the closing bid prices of the common stock during the five trading days preceding conversion. * No Interest Convertible Debenture. During the past two years, the Company has accrued fines and penalties under a registration rights agreement with the Fund in the amount of approximately $1,312,500. The Fund converted this accrual into a Convertible Debenture (together with the Restated 5% Convertible Debenture, the "Debentures") in the principal amount of $1,000,000. The Debenture is due September 30, 2003, does not accrue interest, may be prepaid without penalty, and is convertible into shares of common stock at a conversion price of $0.75 per share. * Secured Convertible Note. During the past 18 months, the Company has obtained unsecured loans from the Fund in the aggregate principal amount of $2,770,000. The Fund converted this amount and associated accrued interest of $263,377.78 together with additional financing of $1,065,000 into a Secured Convertible Note in the principal amount of $4,092,920 (the "Convertible Note"). The Convertible Note is due September 30, 2003, is secured by a pledge of substantially all of the Company's assets, including its intellectual property, accrues interest at the rate of 10% per annum payable quarterly in arrears commencing September 30, 2002, may be prepaid without penalty and is convertible into shares of common stock at a conversion price of $0.75 per share. The security interest terminates upon the Company obtaining $5,000,000 of additional equity financing. 2 * Series B Shares. The Company issued 21,430 Series B Shares in exchange for all 18,449 outstanding shares of Series A Convertible Preferred Stock and all accrued dividends and interest due thereon. Pursuant to the Company's Articles of Incorporation, all previously issued shares of Series A Convertible Preferred Stock were retired and cancelled and became authorized but unissued shares of preferred stock. The Series B Shares accrue dividends at the rate of 9% per annum which are payable semi annually in cash, or at the option of the Company in additional shares of common stock and are redeemable at the option of the Company, so long as the Company's common stock is eligible for quotation on the OTC Bulletin Board and the shares issuable upon conversion are subject to an effective registration statement. The Series B Shares are convertible into shares of common stock at a per share conversion price equal to the lesser of $0.75 or a 22% discount to the average of the closing bid prices of the common stock during the five trading days preceding conversion. Other than provided by applicable law, holders of the Series B Shares have no voting rights. * Warrants. The Company issued warrants to the Fund to purchase 4,000,000 shares of common stock at an exercise price of $1.00 per share. The Warrants have a term of five (5) years and are immediately exercisable. 3 The terms of the Debentures, Convertible Note, Series B Shares and Warrants preclude the Fund from exercising or converting such securities if such exercise or conversion would result in it beneficially owning in excess of 4.99% of the Company's common stock. The conversion and exercise prices of such instruments are subject to adjustment in the event of any stock slit, stock dividend or similar transaction or upon the issuance of additional shares or options or other convertible securities without consideration or for consideration per share less than the exercise or conversion price in effect. The Debentures, Convertible Note, Series B Shares and Warrants were issued in a private placement transaction exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereunder without payment of underwriting discounts or commissions to any person. The Fund agreed to provide up to $1,080,000 of additional financing through monthly advances in the amount of $180,000 during the six (6) month period commencing March 1, 2002. The advances, if any, will be made pursuant to a Convertible Note on the terms described above (the "Advance Note"). The Fund's obligation to make advances in any month is subject to the satisfaction of the following conditions: (i) all of the Company's representations and warranties in the Funding Agreement being true and current in all material respects; (ii) the Company amending its Articles of Incorporation to increase the number of shares of common stock it is authorized to issue from 20,000,000 to 60,000,000 shares; (iii) the Company being in compliance with its obligations under the Funding Agreement and the other agreements between the Company and the Fund entered into in connection with the Transaction; and (iv) the average of the closing bid prices of the Company's common stock during the month preceding the advance exceeding $1.00 per share. In connection with the Transaction, the Company entered into a registration rights agreement with the Fund which requires the Company to file registration statements with the Securities and Exchange Commission covering the public resale of (i) the shares of common stock issuable upon exercise or conversion, as applicable, of the Convertible Note, Debentures, Series B Shares and Warrants by no later March 15, 2002 and have such registration statement declared effective by no later than May 30, 2002; and (ii) shares of common stock issuable upon conversion of the Advance Note by no later than thirty (30) days after, and have such registration statement declared effective 105 days after the last advance under the Advance Note. In the event that the Company either fails to file the registration statement or have such registration statement declared effective by the dates set forth above, it is subject to a fine equal to two percent (2%) of the liquidation preference of the Series B Shares and two percent (2%) of the then outstanding principal amount of the Convertible Notes, Debentures or Advance Notes, as applicable, subject to such registration statement for each thirty (30) day period (prorated on a daily basis if such period is less than thirty (30) days) thereafter until such filing or effective date. 2. RETENTION OF VICE PRESIDENT OF TECHNOLOGY On November 20, 2001, the Company entered into a one (1) year employment agreement (the "Employment Agreement") with Mira LaCous to serve as the Vice President of Technology and Development of the Company at an annual base salary of $100,000 and a bonus of up to 50% of such base salary payable at the discretion of the Board of Directors. Ms. LaCous has been employed by the Company since May 15, 2000. The Employment Agreement automatically renews for an additional one year term unless written notice of termination is received at least one (1) month prior to the date it would otherwise terminate. The Employment Agreement contains standard and customary confidentiality, non-solicitation and "work made for hire" provisions as well as a covenant not to compete which prohibits Ms. LaCous from doing business with any current or prospective customer of the Company or engaging in a business competitive with that of the Company during the term of her employment and for the one (1) year period thereafter. The Employment Agreement may be terminated by the Company at any time with or without cause. In the event Ms. LaCous is terminated without cause after completing one (1) year of employment with the Company, Ms. LaCous shall continue to be paid her then current base salary for a period of nine (9) months from the date of such termination. Ms. LaCous may terminate the Employment Agreement if her current salary or benefits are reduced by more than 30%, in which event, Ms. LaCous shall continue to be paid her then current base salary for a period of two (2) months from the date of such termination. 4 In connection with the Employment Agreement, the Company issued options to Ms. LaCous to purchase an aggregate of 340,000 shares of common stock at an exercise price of $0.46 per share of which 200,000 were issued under the Company's 1999 Stock Option Plan. Options to purchase 75,000 vested upon issuance and the remainder vest in equal monthly installments during the three (3) year period commencing on the date of grant. The options terminate on the earlier of seven (7) years from the date of grant or ninety (90) days after the termination of Ms. LaCous' employment, unless such termination is for cause, in which case, the options expire on the date of such termination. The options were issued in a private placement transaction exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereunder without payment of underwriting discounts or commissions to any person. 3. RESIGNATION OF BARRY M. WENDT On December 3, 2001 Barry M. Wendt resigned from the Company's Board of Directors. He served as the Chairman of the Board of Directors since the inception of the Company in 1993. His consulting agreement with the Company terminates January 31, 2002. In connection with his resignation, Jeffry R. Brown was elected to serve as the Chairman of the Board of Directors of the Company. ITEM 7. EXHIBITS Exhibit Description Method of Filing - ------- ----------- ---------------- 3.6 Certificate of Designation of Series B 9% Filed herewith Convertible Preferred Stock 10.31 Funding Agreement by and between the Registrant Filed herewith and The Shaar Fund dated November 26, 2001 10.32 Registration Rights Agreement by and between the Filed herewith Registrant and The Shaar Fund Ltd. dated November 26, 2001 10.33 Exchange Agreement by and between the Registrant Filed herewith and The Shaar Fund dated November 26, 2001 10.34 Secured Note Due September 30, 2003 Filed herewith 10.35 Restated 5% Convertible Debenture Due September Filed herewith 30, 2003 10.36 No Interest Debenture Due September 30, 2003 Filed herewith 10.37 Warrant Filed herewith 10.38 Security Interest Provisions Filed herewith 10.39 Employment Agreement by and between the Filed herewith Registrant and Mira LaCous dated November 20, 2001 10.40 Option to Purchase 140,000 Shares of Common Stock Filed herewith issued to Mira LaCous 5 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: January 17, 2002 SAC TECHNOLOGIES, INC. BY: /s/ Jeffry R. Brown ------------------- Jeffry R. Brown Chief Executive Officer 6 EXHIBIT INDEX Exhibit Description - ------- ----------- 3.6 Certificate of Designation of Series B 9% Convertible Preferred Stock 10.31 Funding Agreement by and between the Registrant and The Shaar Fund dated November 26, 2001 10.32 Registration Rights Agreement by and between the Registrant and The Shaar Fund Ltd. dated November 26, 2001 10.33 Exchange Agreement by and between the Registrant and The Shaar Fund dated November 26, 2001 10.34 Secured Note Due September 30, 2003 10.35 Restated 5% Convertible Debenture Due September 30, 2003 10.36 No Interest Debenture Due September 30, 2003 10.37 Warrant 10.38 Security Interest Provisions 10.39 Employment Agreement by and between the Registrant and Mira LaCous dated November 20, 2001 10.40 Option to Purchase 140,000 Shares of Common Stock issued to Mira LaCous EX-3.6 3 sac020249_ex3-6.txt CERTIFICATE OF DESIGNATION EXHIBIT 3.6 CERTIFICATE OF DESIGNATION The undersigned officer of SAC Technologies, Inc., a Minnesota corporation (the "Corporation" or "Company") does hereby certify that the following resolution was adopted by the Board of Directors of the Corporation in accordance with Minnesota statutes Chapter 302A.327 on November 26, 2001: WHEREAS, the Articles of Incorporation of the Company presently authorize the issuance of 5,000,000 shares of Preferred Stock, $.01 par value per share, in one or more series upon terms and conditions that are to be designated by the Board of Directors; and WHEREAS, in order to accommodate a business purpose deemed proper by the Board of Directors, the Board of Directors does hereby seek to provide for the designation of a segment of the Company's Preferred Stock as "Series B 9% Convertible Preferred Stock;" and WHEREAS, the terms, conditions, voting rights, preferences, limitations and special rights of the Series B 9% Convertible Preferred Stock in their entirety are as provided herein. NOW, THEREFORE, be it: RESOLVED, that a series of the class of authorized Preferred Stock, $.01 par value per share, of the Company hereinafter designated "Series B 9% Convertible Preferred Stock," be hereby created, and that the designation and amount thereof and the voting powers, preferences and relative, participating and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as the "Series B 9% Convertible Preferred Stock" (the "Series B Shares") and the number of shares initially constituting such series shall be 50,000 which may be issued in whole or fractional shares. Section 2. Dividends and Distributions. (a) The holders of Series B Shares shall be entitled to receive dividends at a rate of nine percent (9%) per annum of the liquidation preference of $100 per share (the "Liquidation Preference"), which shall be fully cumulative, prior and in preference to any declaration or payment of any dividend (payable other than in shares of common stock, $.01 par value per share, of the Company (the "Common Stock")) or other distribution on the Common Stock of the Company. If the dividends on the Series B Shares cannot legally be paid in full, dividends shall be paid, to the maximum permissible extent, to the holders of the Series B Shares, PARRI PASSU. The dividends on the Series B Shares shall accrue from the date of issuance of each share and shall be payable semi-annually on June 15 and December 15 of each year (each a "Dividend Date") commencing on December 15, 2001, except that if any such date is a Saturday, Sunday or legal holiday (a "Non-Business Day") then such dividend shall be payable on the next day that is not a Saturday, Sunday or legal holiday on which banks in the State of Minnesota are permitted to be closed (a "Business Day") to holders of record as they appear on the stock books of the Company on the applicable record date, which shall be not more than 60 nor less than 10 days preceding the payment date for such dividends, as fixed by the Board of Directors (the "Record Date"). The dividends on the Series B Shares shall be payable only when, as and if declared by the Board of Directors out of funds legally available therefor. The dividends shall, at the option of the Corporation, either (1) be payable in cash; or (2) in shares of Common Stock (the "Series B Payments-in-Kind") in accordance with Section 2 (b) below. In the absence of an election by the Board of Directors within 10 days of each date on which a dividend is declared (each a "Declaration Date") to pay dividends in cash, the dividends shall be payable in additional shares of Common Stock. The amount of dividends payable for any period that is shorter or longer than 30 days shall be computed on the basis of a 360-day year of twelve 30-day months. All accrued but unpaid dividends shall accrue interest after each Dividend Date at a rate of nine percent (9%) per annum (compounded on a semi-annual basis) from each Dividend Date, computed on the basis of a 360-day year of twelve 30-day months. (b) Series B Payments-in-Kind shall be payable as of the Dividend Date of each period for which the election is made, except that if such date is a Non-Business Day then such Series B Payment-in-Kind shall be payable as of the next Business Day to holders of record as they appear on the stock books of the Company on the applicable Record Date. Each Series B Payment-in-Kind shall be equal in amount to that number of shares of Common Stock for which the dividend is paid that is equal in number to the aggregate cash dividends payable with respect to such Series B Shares on any such Declaration Date divided by the Conversion Price. Certificates representing the Common Stock issuable in payment of any Series B Payment-in-Kind shall be delivered to each holder entitled to receive such Series B Payment-in-Kind (in appropriate denominations) on the Dividend Date. If a Series B Payment-in-Kind is not made in compliance with the terms hereof, the Corporation shall be obligated to pay the cash dividends under the procedures in the previous paragraph. (c) The holders of Series B Shares shall not be entitled to receive any dividends or other distributions except as provided in this Certificate of Designation of Series B Shares. Section 3. Voting Rights. Except as provided by applicable law, the holders of the Series B Shares shall have no voting rights. - 2 - Section 4. Liquidation, Dissolution, Winding Up or Certain Mergers or Consolidations. If the Company shall adopt a plan of liquidation or of dissolution, or commence a voluntary case under the federal bankruptcy laws or any other applicable state or federal bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in any involuntary case under such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the Company or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due and on account of such event the Company shall liquidate, dissolve or wind up, or upon any other liquidation, dissolution or winding up of the Company, or, unless approved by the holders of at least 50% of the outstanding Series B Shares, engage in a merger, plan of reorganization or consolidation in which the entity is not the surviving Company, then and in that event, no distribution shall be made to the holders of shares of capital stock, unless, prior thereto, the holders of the Series B Shares shall have first received an amount in cash or equivalent value in securities or other consideration equal to the Liquidation Preference thereof. If upon any liquidation, dissolution, winding up, merger, plan of reorganization or consolidation, the amount so payable or distributable does not equal or exceed the Liquidation Preference of the Series B Shares, then, and in that event, the amount of cash so payable, and amount of securities or other consideration so distributable, shall be shared ratably among the holders of the Series B Shares. For the purposes hereof, the term "Liquidation Preference" shall mean $100 per share with respect to each of the Series B Shares, plus any and all accrued unpaid dividends thereon. Section 5. Conversion. (a) Right To Convert: (i) Subject to the provisions for adjustment hereinafter set forth and the limitation of the number of shares of Common Stock issuable upon conversion set forth in Section 5(a)(ii) below, commencing upon issuance, each Series B Share shall be convertible in the manner hereinafter set forth into fully paid and nonassessable shares of Common Stock, at the option of the holder thereof, at any time at the principal office of the Company or any transfer agent for the Series B Shares, into the number of fully paid and nonassessable shares of Common Stock which results from dividing the "Conversion Price" (as defined below) into the Liquidation Preference. The "Conversion Price" shall be equal to the lower of (1) $.75 and (2) 78% of the "Market Price" (as defined below) of the Common Stock as of a "Conversion Date" (as defined below). Upon conversion, all accrued or declared but unpaid dividends (including any interest accrued thereon calculated as of the date of conversion) on the Series B Shares shall either be paid in cash, to the extent permitted by applicable law or, at the option of the Company in shares of Common Stock. The market price per share of Common Stock (the "Market Price") shall be the average of the closing bid prices per share of Common Stock during the five (5) trading days immediately preceding a "Conversion Date, as such closing bid prices are reported on Bloomberg; provided, however, if there is no closing bid price reported on any day during such five (5) day period, in lieu of the closing bid price for such day, the last sales price as reported on the - 3 - Bloomberg for such day shall be utilized in such calculation and provided further, if there is no closing bid or last sales price reported for any such day, the fair market value of a share of Common Stock on such day as determined in good faith by the Board of Directors of the Company, or in the event the Common Stock is listed on NASDAQ or a stock exchange, the Market Price shall be the average of the last bid prices per share of Common Stock during the five (5) trading days immediately preceding a "Conversion Date" on NASDAQ or such exchange, as reported by Bloomberg. The conversion date (the "Conversion Date") shall be any date on which a notice of conversion executed by Holder setting forth the number of Series B Shares being converted is received via facsimile or hard copy by the Corporation. (ii) Notwithstanding anything contained herein to the contrary, in no event (except while there is outstanding a tender offer for any or all of the shares of the Company's Common Stock) shall any holder of any Series B Shares be entitled to convert Series B Shares, or shall the Company have the obligation to issue shares upon such conversion or in payment of any Series B Payment-in-Kind, to the extent that, after such conversion the sum of (A) the number of shares of Common Stock beneficially owned by such holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Series B Shares or unexercised portion of any warrants or other securities convertible into shares of Common Stock of the Company beneficially owned by such holder), and (B) the number of shares of Common Stock issuable upon the conversion of the Series B Shares with respect to which the determination of this proviso is being made, would result in beneficial ownership by such holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock (after taking into account the shares to be issued to such Holder upon such conversion). For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), except as otherwise provided in clause (A) of such sentence. (b) Adjustments to Conversion Price: (i) The following definitions shall apply for purposes of this Section: (A) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (B) "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities convertible into or exchangeable for Common Stock. (C) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 5(b)(iii), deemed to be issued) by the Company after the Series B Original Issue Date (as defined below), other than shares of Common Stock issued or issuable: (i) upon conversion of Series B Shares; - 4 - (ii) in a transaction described in Section 5(b)(vi); (iii) pursuant to a stock grant, option plan or purchase plan, other employee stock incentive program or agreement approved by the Board of Directors; (iv) pursuant to the terms of any stock grant, option, warrant, employment agreement or other written obligation, agreement or commitment to which the Company was a party as of the Series B Original Issue Date (as defined below) and which was disclosed in the Company's filings with the Securities and Exchange Commission; (v) by way of dividend or other distribution on shares of Common Stock excluded from the definition of Additional Shares of Common Stock by the foregoing clauses (i), (ii) (iii) or (iv); or (vi) after October 1, 2001 to consultants or other persons providing services to the Company so long as such issuance does not exceed 850,000 shares of Common Stock (or options or warrants to purchase same). (D) "Series B Original Issue Date" shall mean the date on which the first Series B Share was issued. (ii) No Adjustment of Conversion Price: No adjustment in the Conversion Price shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the Company is issued for consideration less than the "Effective Conversion Price" in effect on the date of such issuance. The effective conversion price (the "Effective Conversion Price") on any date shall be equal to that number obtained by multiplying the Conversion Price in effect on such date by .67. (iii) Deemed Issue of Additional Shares of Common Stock: (A) Options and Convertible Securities: In the event the Company at any time or from time to time after the Series B Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the exercise of such Options and conversion or exchange of such Convertible Securities shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 5(b)(v) hereof) of such Additional Shares of Common Stock would be less than the Effective Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: - 5 - (i) except as provided in Section 5(b)(iii)(A)(ii) hereof, no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (ii) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any change in the consideration payable to the Company, or change in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (other than under or by reason of provisions designed to protect against dilution), the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto) and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; and (iii) no readjustment pursuant to clause (ii) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (1) the Conversion Price on the original adjustment date or (2) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Conversion Rate Upon Issuance of Additional Shares of Common Stock: In the event the Company shall issue Additional Shares of Common Stock without consideration or for a consideration per share less than the Effective Conversion Price in effect on the date of and immediately prior to such issue, then and in each such event the Conversion Price shall be reduced to a price (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (calculated on a fully-diluted basis assuming the exercise or conversion of all then exercisable or convertible options, warrants, purchase rights and other convertible securities) plus the number of shares of Common Stock which the aggregate consideration received by the Company for the total number of Additional Shares of Common Stock so issued would purchase at the Effective Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (calculated on a fully-diluted basis assuming the exercise or conversion of all then exercisable or convertible options, warrants, purchase rights and other convertible securities) plus the number of such Additional Shares of Common Stock so issued. (v) Determination of Consideration. For purposes of this Section, the consideration received by the Company for the issuance of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: - 6 - (i) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Company; (ii) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined by the Board of Directors in the good faith exercise of its reasonable business judgment; and (iii) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Company for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (i) and (ii) above, as determined by the Board of Directors in the good faith exercise of its reasonable business judgment. (B) Options and Convertible Securities. The consideration per share received by the Company for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5(b)(iii)(A), relating to Options and Convertible Securities, shall be determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) Other Adjustments. (A) Subdivisions, Combinations, or Consolidations of Common Stock: In the event the outstanding shares of Common Stock shall be subdivided, combined or consolidated, by stock split, stock dividend, combination or like event, into a greater or lesser number of shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision, combination, consolidation or stock dividend shall, concurrently with the effectiveness of such subdivision, combination or consolidation, be proportionately adjusted. (B) Reclassifications: In the case, at any time after the date hereof, of any capital reorganization or any reclassification of the stock of the Company (other than as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Company with or into another person (other than a consolidation or merger (i) in - 7 - which the Company is the continuing entity and which does not result in any change in the Common Stock or (ii) which is treated as a liquidation pursuant to Section 4 hereof), the Series B Shares shall, after such reorganization, reclassification, consolidation or merger be convertible into the kind and number of shares of stock or other securities or property of the Company or otherwise to which such holder would have been entitled if immediately prior to such reorganization, reclassification, consolidation or merger such holder had converted its Series B Shares into Common Stock. The provisions of this Section 5(b)(vi) shall similarly apply to successive reorganizations, reclassifications, consolidations or mergers. (c) Fractional Shares. In lieu of any fractional shares to which the holder of a Series B Share would otherwise be entitled upon conversion, the Company shall pay cash equal to such fraction multiplied by the fair market value of one share of Common Stock as determined by the Board of Directors in the good faith exercise of its reasonable business judgment. (d) Miscellaneous: (i) All calculations under this Section 5 shall be made to the nearest cent or to the nearest one hundredth (1/100) of a share, as the case may be. (ii) The holders of at least 50% of the outstanding Series B Shares shall have the right to challenge any determination by the Board of Directors of fair market value pursuant to this Section 5, in which case such determination of fair market value shall be made by an independent appraiser selected jointly by the Board of Directors and the challenging parties, the cost of such appraisal to be borne equally by the Company and the challenging parties. (iii) No adjustment in the Conversion Price need be made if such adjustment would result in a change in such Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in the Conversion Rate. (e) No Impairment. The Company will not, through any reorganization, recapitalization, 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 to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series B Shares against impairment. (f) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Series B Shares, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series B Shares. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding Series B Shares, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to - 8 - increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. Section 6. Reports as to Adjustments. Whenever the Conversion Price or the type of securities, cash or other property into which the Series B Shares may be converted is adjusted as provided in Section 5 hereof, the Company shall promptly mail to the holders of record of the outstanding Series B Shares at their respective addresses as the same shall appear in the Company's stock records, a notice stating that the Conversion Price has been adjusted and setting forth the new number of shares of Common Stock (or describing the new stock, securities, cash or other property) into which each Series B Share is convertible as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment became effective. Section 7. Redemption. (a) All or any portion of the Series B Shares may be redeemed upon payment of $100 per Series B Share, plus accrued and unpaid dividends thereon (the "Redemption Price"), at any time by the Company at its sole discretion upon thirty (30) days' written notice to the holders of the Series B Shares provided that: (i) the Company's shares of Common Stock shall be eligible for quotation and trading on the OTC Electronic Bulletin Board, on a national securities exchange, the NASDAQ National Market System or the NASDAQ SmallCap Market on the "Redemption Date" (as hereinafter defined); and (ii) the shares of Common Stock issuable upon conversion of the Series B Shares shall be subject to an effective registration statement permitting their resale under the Securities Act of 1933, as amended. In the event that the Company redeems less than all of the outstanding Series B Shares it shall redeem such shares pro rata among all holders of the Series B Shares. (b) Any notice of redemption ("Redemption Notice") given by the Company with respect to the Series B Shares shall be delivered by mail, first class postage prepaid, to each holder of record (at the close of business on the business day preceding the day on which notice is given) of the Series B Shares, at the address last shown on the records of the Company for such holder or given by the holder to the Company, for the purpose of notifying such holder of the redemption to be effected. The Redemption Notice shall specify a date (the "Redemption Date") not earlier than 30 days after the mailing of the Redemption Notice on which the Series B Shares then outstanding shall be redeemed and the place at which payment may be obtained, which shall be the principal offices of the Company. The Redemption Notice shall call upon each holder of Series B Shares to either (i) surrender to the Company, in the manner and at the place designated, such holder's certificate or certificates representing the Series B Shares to be redeemed or (ii) convert the Series B Shares into Common Stock prior to the Redemption Date in accordance with the provisions of Section 5 above. If the Company elects to redeem shares pursuant to this Section 7 and defaults or fails to perform its redemption obligations pursuant to this Section 7 in connection therewith, the holders of the Series B Shares shall then have the - 9 - absolute right to convert such Series B Shares into Common Stock in accordance with the provisions of Section 5. (d) On the Redemption Date, the Company shall pay by cash or wire transfer of immediately available funds to the person whose name appears on the certificate or certificates of the Series B Shares that (i) shall not have been converted pursuant to Section 5 hereof and (ii) shall have been surrendered to the Company in the manner and at the place designated in the Redemption Notice, the Redemption Value, and thereupon each surrendered certificate shall be canceled. (e) If the funds of the Company legally available for redemption of the Series B Shares are insufficient to redeem the total number of Series B Shares outstanding on the Redemption Date, the Series B Shares shall be redeemed (on a pro rata basis from the holders of the Series B Shares, from time to time), to the extent the Company is legally permitted to do so, and the redemption obligations of the Company hereunder will be a continuing obligation until the Company's redemption of all of the Series B Shares. (f) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Value, all rights of the holders of the Series B Shares (except the right to receive the Redemption Value subsequent to the Redemption Date upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. Section 8. Reacquired Shares. Any Series B Shares converted, purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof, and, if necessary to provide for the lawful purchase of such shares, the capital represented by such shares shall be reduced in accordance with the Minnesota Business Company Act. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock, $.01 par value, of the Company and may be reissued as part of another series of Preferred Stock, $.01 par value, of the Company. I certify that I am authorized to execute this statement and I further certify that I understand that by signing this statement, I am subject to the penalties of perjury as set forth in Section 609.48 as if I had signed this statement under oath. SAC TECHNOLOGIES, INC. ----------------------------------- Gary Wendt, Chief Financial Officer - 10 - EX-10.31 4 sac020249_ex10-31.txt FUNDING AGREEMENT EXHIBIT 10.31 FUNDING AGREEMENT THIS FUNDING AGREEMENT ("Funding Agreement") is dated as of November 26, 2001, by and between SAC TECHNOLOGIES, INC., a Minnesota corporation, with headquarters located at 1285 Corporate Center Drive, Suite 175, Eagan, Minnesota 55121(the "Company"), and THE SHAAR FUND LTD., (the "Investor"). W I T N E S S E T H WHEREAS, the Investor has previously extended credit to the Company in the amount of $3,028,761; and WHEREAS, the Company wishes to induce the Investor to loan to the Company, and the Investor is willing to loan to the Company, subject to the terms and conditions set forth herein, up to an additional Two Million One Hundred Forty-Five Thousand and 00/100 ($2,145,000.00) Dollars. NOW, THEREFORE, for and in consideration of the premises and the mutual agreement contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. LOAN. (a) Subject to the terms and conditions set forth herein, the Investor shall loan to the Company One Million Sixty-Five Thousand and 00/100 ($1,065,00.00) Dollars (the "Initial Advance") to the Company in same day U.S. funds by wire transfer to an account designated by the Company. The Initial Advance shall be evidenced by a Secured Note in substantially the form attached hereto as Exhibit C, in the principal amount of $4,092,920 (the "Initial Note") aggregating the Initial Advance and the amounts due under under prior notes (the "Prior Notes") delivered by the Company to the Investor as set forth in Schedule 1(a) annexed hereto, in the aggregate principal amount of Two Million Seven Hundred Seventy Thousand and 00/100 ($2,770,000) Dollars, and accrued interest of Two Hundred Fifty-Seven Thousand Nine Hundred Twenty and 00/100 ($257,920.00) Dollars through the date hereof. (b) The Investor agrees to loan up to an additional One Million Eighty Thousand and 00/100 ($1,080,000.00) Dollars to the Company by advancing (the "Advances") to the Company monthly, commencing March 2002 and ending August 2002, on a non-cumulative basis, an additional amount of $180,000 per month if the Market Price for the prior calendar month exceeds $1.00. Notwithstanding the foregoing, the Investor may, in its sole discretion, agree to fund other Advances submitted by the Company, in such amounts as it may determine from time to time. To the extent that Advances or other funding is made available by the Investor or its affiliates from the date hereof until August 31, 2002, the Investor's obligation to fund Advances shall be reduced accordingly. As used herein, "Market Price" per Common Share means the average of the closing bid prices of the Common Shares as reported by Bloomberg LP for the Principal Market on which the Company's Common Stock is traded. Each Advance shall be evidenced by a Secured Note (the "Advance Notes") in substantially the form attached hereto as Exhibit C-1. (c) The Investor shall not be obligated to fund an Advance unless they shall have received at least ten (10) business days written notice from the Company, setting forth the amount requested and the use of said proceeds, which shall be in accordance with Schedule 6 hereto. No such notice shall be delivered prior to the first business day of the month of such Advance. Upon each funding hereunder, the Company shall deliver a Certificate of an executive officer of the Company, substantially in the form annexed hereto as Exhibit A. (d) Simultaneous herewith the Company shall issue and deliver five year Warrants to the Investor or its designee, granting to the Investor or its designee to purchase four million (4,000,000) shares of Common Stock with an exercise price of $1.00 per share. The Warrants shall contain cashless exercise provisions, and shall be substantially in the form annexed hereto as Exhibit B. (e) The Investor shall not be obligated to make any Advances under Paragraph 1(b) hereof, unless on or prior to February 28, 2002, the Company (a) shall have secured all necessary shareholder approval to increase the number of authorized shares to 60,000,000 shares of Common Stock, and shall have made all necessary filings in respect thereof with the Secretary of State of Minnesota, (b) all representations and warranties made by the Company shall be true and correct in all material respects, as if same were made on the date of such advance, (c) the Company is in compliance with its filing obligations under the Registration Rights Agreement, and (d) the Company shall be in material compliance with all other obligations under the Related Agreements between the Company and the Holder. 2. NOTES. The terms of the Initial Advance shall be set forth in and evidenced by the Initial Note. The terms of the Advances shall be set forth in and evidenced by one or more Secured Promissory Notes in the aggregate amount up to One Million Eighty Thousand and 00/100 ($1,080,000.00) Dollars, payable to the order of the Investor or its assignees (the Initial Note and the Advance Notes are hereinafter collectively referred to as the "Notes"). The Notes shall be secured pursuant to the terms of the Security Interest Provisions annexed hereto as Exhibit D. 3. MUTUAL DELIVERIES. (a) Upon the delivery by the Investor of (i) the Initial Advance, as provided in Section 1 above, and (ii) the Prior Notes (or an indemnity reasonably acceptable to the Company) the Company shall deliver to the Investor the Initial Note. (b) The Company shall also deliver, or cause to be delivered, the original or execution copies of the following instruments and agreements duly executed by all parties thereto other than the Investor (together with the Initial Notes - the "Related Agreements"): (i) this Agreement with the Security Interest Provisions (Exhibit D); (ii) Series B Convertible Preferred Stock and 5% Convertible Debenture Exchange Agreement ("Exchange Agreement") and Annexes thereto in the form annexed hereto as Exhibit E; (iii) Registration Rights Agreement in the form annexed hereto as Exhibit F; (iv) the opinion of counsel in the form annexed hereto as Exhibit G; and (v) executed letter agreements from Gary Wendt, Barry M. Wendt, Jeffrey Brown, H. Donald Rosacker, and Jeffrey J. May. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Investor that: (a) The Company has the corporate power and authority to enter into this Funding Agreement and the Related Agreements and to perform its obligations hereunder and thereunder. The execution and delivery by the Company of this Funding Agreement and the Related Agreements and the consummation by the Company of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company. This Funding Agreement and the Related Agreements have been duly executed and delivered by the Company and constitute valid and binding obligations of the Company enforceable against it in accordance with their respective terms, subject to the effects of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and to the application of equitable principles in any proceeding (legal or equitable). (b) The execution, delivery and performance by the Company of this Funding Agreement and the Related Agreements and the consummation of the transactions contemplated hereby and thereby do not and will not breach or constitute a default under any applicable law or regulation or of any agreement, judgment, order, decree or other instrument binding on the Company which breach or default could reasonably by expected to have a material adverse effect on the Company. (c) Except as set forth in Schedule 4(c) hereto, the Company is in material compliance with all applicable laws, regulations, judgments, decrees and orders material to the conduct of its business. (d) Except as set forth in Schedule 4(d) hereto, there is no pending, or to the knowledge of the Company, threatened, judicial, administrative or arbitral action, claim, suit, proceeding or investigation against or involving the Company, which might affect the validity or enforceability of this Funding Agreement or the Related Agreements or which involves the Company and which if adversely determined, could reasonably be expected to have a material adverse effect on the Company. (e) No consent or approval of, or exemption by, or filing with, any party or governmental or public body or authority is required in connection with the execution, delivery and performance under this Funding Agreement or the Related Agreements or the taking of any action contemplated hereunder or thereunder, except for Federal and State Blue Sky securities law filings, and required filings pursuant to the Security Interest Provisions. (f) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Minnesota. The Company is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its current ownership or leasing of any properties or its ownership or leasing of any properties or the character of its operations as currently conducted requires such qualification or licensing, except where the failure to be so qualified would not have a material adverse effect on the Company. The Company has all corporate power and authority, and has obtained all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies necessary to own or lease its properties and conduct its business other than those authorizations, approvals and such other documents the lack of which could not reasonably be expected to have a material adverse effect on the Company. (g) Except as set forth is Schedule 4 (g), the execution, delivery and performance of this Agreement by the Company and the Related Agreements to be delivered hereunder and the consummation of the transactions contemplated hereby and thereby will not: (i) violate any provision of the Company's Articles of Incorporation or Bylaws, (ii) violate, conflict with or result in the breach of any of the terms of, result in a material modification of the effect of, otherwise, give any other contracting party the right to terminate, or constitute (or with notice or lapse of time or both constitute) a default under, any contract or other agreement to which the Company is a party or by or to which the Company or any of the Company's assets or properties may be bound or subject, (iii) violate any order, judgment, injunction, award or decree of any court, arbitrator or governmental or regulatory body by which the Company, or the assets or properties of the Company are bound, (iv) to the Company's knowledge, violate any statute, law or regulation. (h) Except as set forth in the Company's filings with the Securities and Exchange Commission (the "SEC Filings") or in Schedule 4(h) hereto, there has been no material change in the capitalization, assets, or liabilities of the Company since the issuance of the financial statements, for the period ending December 31, 2000, delivered to Investor, nor is the Company in default under, or an Event of Default has occurred in respect of any Prior Agreement between the Company and the Investor. (i) CONTROL PERSONS. Except as set forth in the SEC Filings, none of the following has occurred during the past five (5) years with respect to the Company (or any subsidiary or predecessor entity) or control person of the Company (a "Person"): (1) A petition under the federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such Person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing; (2) Such Person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) Such Person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities: (i) Acting, as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, any other person regulated by the Commodity Futures Trading Commission ("CFTC") or engaging in or continuing any conduct or practice in connection with such activity; (ii) Engaging in any type of business practice; or (iii) Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws; (4) Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (3) of this item, or to be associated with persons engaged in any such activity; (5) Such person was found by a court of competent jurisdiction in a civil action or by the CFTC or SEC to have violated any federal or state securities law, and the judgment in such civil action or finding by the CFTC or SEC has not been subsequently reversed, suspended, or vacated. (j) Each party represents and warrants that it has had no dealings in connection with this transaction with any finder or broker who will demand payment of any fee or commission from the Investor. Each party agrees to indemnify the other against and hold the other harmless from any and all liabilities to any persons claiming brokerage commissions or finder's fees on account of services purported to have been rendered in connection with this Agreement or the transactions contemplated hereby. 5. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor hereby represents and warrants to the Company that: (a) The Investor has the corporate power and authority to enter into this Funding Agreement and the Related Agreements and to perform its obligations hereunder and thereunder. The execution and delivery by the Investor of this Financial Agreement and the Related Agreements and the consummation by the Investor of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Investor. This Funding Agreement and the Related Agreements have been duly executed and delivered by the Investor and constitute valid and binding obligations of the Investor, enforceable against it in accordance with their respective terms, subject to the effects of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and to the application of equitable principles in any proceeding (legal or equitable). (b) The execution, delivery and performance by the Investor of this Funding Agreement and the Related Agreements and the consummation of the transactions contemplated hereby and thereby do not and will not breach or constitute a default under any applicable law or regulation or of any agreement, judgment, order, decree or other instrument binding on the Investor. (c) There is no pending, or to the knowledge of the Investor, threatened, judicial, administrative or arbitral action, claim, suit, proceeding or investigation which might affect the validity or enforceability of this Funding Agreement or the Related Agreements. (d) No consent or approval of, or exemption by, or filing with, any party of governmental or public body or authority is required in connection with the execution, delivery and performance under this Funding Agreement or the Related Agreements or the taking of any action contemplated hereunder or thereunder. (e) The Investor has prior substantial investment experience, including investment in non-listed and non-registered securities and has had the opportunity to engage the services of an investment advisor, attorney or accountant to read all of the documents furnished or made available by the Company to the Investor in connection with this investment and to evaluate the merits and risks of this investment. (f) Such Investor is acquiring the Notes, the Warrants and shares of Common Stock issuable upon conversion (the "Securities") to be acquired hereunder for its own account for investment purposes only and not with a view to or for distributing or reselling such Securities or any part thereof or interest therein, without prejudice, however, to such Investor's right, subject to the provisions of this Agreement and the Registration Rights Agreement, at all times to sell or otherwise dispose of all or any part of such Securities pursuant to an effective registration statement under the Securities Act and in compliance with applicable state securities laws or under an exemption from such registration. (g) Each party represents and warrants that it has had no dealings in connection with this transaction with any finder or broker who will demand payment of any fee or commission from the Investor. Each party agrees to indemnify the other against and hold the other harmless from any and all liabilities to any persons claiming brokerage commissions or finder's fees on account of services purported to have been rendered in connection with this Agreement or the transactions contemplated hereby. 6. USE OF PROCEEDS. The Company will use the proceeds received hereunder (excluding amounts paid by the Company for legal fees, and escrow fees in connection with the sale of the Notes) for the purposes and the amounts specified in Schedule 6 hereto, and the Company shall not vary such purpose or amount without the prior written consent of the Investor in each instance. Unless specifically consented to in advance in each instance by the Investor, the Company shall not, directly or indirectly, use such proceeds for the repayment of any outstanding loan by the Company, or the redemption of any equity securities. 7. COVENANTS OF THE COMPANY. The Company covenants and agrees that, so long as any of the Notes shall be outstanding, except as otherwise required under the Related Agreements, the Company shall: (a) Promptly pay and discharge all lawful taxes, assessments and governmental charges or levies imposed upon it or upon its income and profits, or upon any of its property, before the same shall become in default as well as all lawful material claims for labor, materials and supplies which, if unpaid, might become a lien or charge upon such properties or any part thereof; provided, however, that it shall not be required to pay and discharge any such tax, assessment, charge, levy or claim so long as the validity thereof shall be contested in good faith by appropriate proceedings, and the Company shall set aside on its books adequate reserves with respect to any such tax, assessment, charge, levy or claim so contested. (b) Pay, or cause to be paid, all material debts and perform, or cause to be performed, all material obligations promptly and in accordance with the respective terms thereof. (c) Implement and maintain a standard system of accounting in accordance with generally accepted accounting principles ("GAAP"). (d) Provide to the Investor copies of all SEC Filings within five (5) days after filing. (e) Do, or cause to be done, all things that may be necessary to (i) maintain its due organization, valid existence and good standing under the laws of its state of incorporation; (ii) preserve and keep in full force and effect all qualifications, registrations and licenses in those jurisdictions in which the failure to do so could or would have a material adverse effect; (iii) maintain its power or authority to carry on its business as now conducted; and (iv) use its best efforts to keep available the services of its key present employees and agents and maintain its current relations with suppliers, customers, distributors and joint venture partners (subject to the business judgment of executive management). (f) At all times maintain, preserve, protect and keep material property used and useful in the conduct of its business in good repair, working order and condition (subject to normal wear and tear), and from time to time make all needful and proper repairs, renewals, replacements, betterment and improvements thereto, so that the business carried on in connection therewith may be properly conducted at all times. (g) Keep adequately insured all property of a character usually insured by similar corporations and carry such other insurance as is usually carried by similar corporations. (h) The Company is not in possession of, nor has the Company or its agents disclosed to Investor, any material non-public information that (i) if disclosed, would reasonably be expected to have a materially adverse effect on the price of the Common Stock or(ii) according to applicable law, rule or regulation, should have been disclosed publicly by the Company prior to the date hereof but which has not been so disclosed. Each of the Company, its officers, directors, employees and agents shall in no event disclose non-public information to Investor, advisors to or representatives of Investor, unless prior to disclosure of such information, the Company identifies such information as being non-public information and provides Investor, such advisors and representatives with the opportunity in writing to accept or refuse to accept such non-public information for review and the Investor in writing agrees to accept such non-public information. The Company may, as a condition to disclosing any non-public information hereunder, require Investor's advisors and representatives to enter into a confidentiality agreement in form and substance reasonably satisfactory to the Company and Investor. (i) Not assume, guaranty or otherwise, directly or indirectly, become liable or responsible for the obligations of any other person or entity, except for 75% or greater owned subsidiaries, for the purpose of paying or discharging the obligations of such person or entity unless such guarantees relate to the business of the Company, are incurred in the ordinary course of its business and do not exceed in the aggregate $100,000. (j) Not declare or pay any cash dividends, or redeem any equity securities of the Company or authorize or make any other distribution on any class of equity securities of the Company except for the payment of dividends on the Series B Preferred Stock. (k) The Board of Directors shall promptly after the execution hereof, (x) adopt proper resolutions authorizing an increase in number of authorized shares of Common Stock to 60,000,000 shares, (y) recommend to, promptly and duly obtain shareholder approval to carry out such resolutions (and hold a special meeting of the shareholders no later than February 28, 2002) and (z) within 5 Business Days of obtaining such shareholder authorization, file an appropriate amendment to the Company's articles of incorporation to evidence such increase. (l) Not enter into any agreement or understanding which may, directly or indirectly, cause or effect a change in "control" of the Company as defined in Rule 405 under the Securities Act of 1933, without the prior written consent of the Investor, which shall not be unreasonably withheld. (m) The Company understands that a delay in the issuance of the Shares of Common Stock beyond five (5) days from delivery of the Conversion Notice delivered in accordance with the terms of this Agreement and the Notes, (the "Delivery Date") could result in economic loss to the Investor. As compensation to the Investor for such loss, the Company agrees to pay late payments to the Investor for late issuance of Shares upon Conversion in accordance with the following schedule (where "No. Business Days Late" is defined as the number of business days beyond seven (7) business days from Delivery Date: Late Payment For Each $10,000 of Principal Amount of Notes No. Business Days Late Being Converted ---------------------------------------------- 1 $100 2 $200 3 $300 4 $400 5 $500 6 $600 7 $700 8 $800 9 $900 10 $1,000 >10 $1,000 +$200 for each Business Day Late beyond 10 days The Company shall pay any payments incurred under this Section in immediately available funds upon demand. Furthermore, in addition to any other remedies which may be available to the Investor, in the event that the Company fails for any reason to effect delivery of such shares of Common Stock within five (5) business days after the Delivery Date, the Investor will be entitled to revoke the relevant Notice of Conversion by delivering a notice to such effect to the Company whereupon the Company and the Investor shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion. 8. COVENANTS OF THE INVESTOR. For so long as Investor owns any Notes, Investor and its affiliates shall not engage in short sales of the Company's Common Stock; provided, however, that the Investor or its affiliates may enter into any sale, hedging or similar arrangement it deems appropriate with respect to that number of shares of Common Stock equal to the number of shares of Common Stock covered by a particular Conversion Notice delivered under the Notes commencing on the day the Investor delivers such Conversion Notice (as contemplated by Section 7(m) hereof). 9. RELEASE. Effective upon the mutual execution hereof , the Company and the Investor, for itself and on behalf of all affiliated persons and entities, representatives, and all predecessors in interest, successors and assigns (collectively, the "Releasing Parties"), hereby releases and forever discharges each of the other party, and its direct and indirect partners, officers, directors, employees, affiliates, representatives, agents, trustees, beneficiaries, predecessors in interest, successors in interest and nominees of and from any and all claims, demands, actions and causes of action, whether known or unknown, fixed or contingent, arising prior to the date of execution of this Agreement, that the Company may have had, may now have or may hereafter acquire with respect to any matters whatsoever under, relating to or arising from any prior Purchase Agreement, Registration Statement, and the agreements entered into in connection therewith (sometimes collectively referred to as the "Prior Agreements"), but excluding any claims under the Company Indemnity delivered pursuant to Paragraph 3(b) hereof or Section 6 of the Exchange Agreement. Each releasing party also fully waives any offsets it may have with respect to the amounts owed under the Prior Agreements. Additionally, each party represents, warrants and covenants that it has not, and at the time this release becomes effective will not have, sold, assigned, transferred, or otherwise conveyed to any other person or entity all or any portion of its rights, claims, demands, actions, or causes of action herein released. (10) INDEMNIFICATION. If (i) the Investor becomes involved in any capacity in any action, proceeding or investigation brought by any stockholder of the Company, in connection with or as a result of the consummation of the transactions contemplated by the Transaction Documents or the Prior Agreements, or if such the Investor impleaded in any such action, proceeding or investigation by any person, or (ii) the Investor becomes involved in any capacity in any action, proceeding or investigation brought by the Securities and Exchange Commission, any self-regulatory organization or other body having jurisdiction, against or involving the Company or in connection with or as a result of the consummation of the transactions contemplated by the Transaction Documents or the Prior Agreements, or if the Investor is impleaded in any such action, proceeding or investigation by any person, then in any such case, the Company hereby agrees to indemnify, defend and hold harmless the Investor from and against and in respect of all losses, claims, liabilities, damages or expenses resulting from, imposed upon or incurred by the Investor, directly or indirectly, and reimburse such Investor for its reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith, as such expenses are incurred. In addition, the Company will reimburse the Investor for reasonable internal and overhead costs for the time of any officers or employees of the Investor devoted to appearing and preparing to appear as witnesses, assisting in preparation for hearings, trials or pretrial matters, or otherwise with respect to inquiries, hearing, trials, and other proceedings relating to the subject matter of the Transaction Documents, the Prior Agreements or the Note. The indemnification and reimbursement obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have (other than matters specifically addressed in the Registration Rights Agreement, which shall be governed solely by that agreement), shall extend upon the same terms and conditions to any affiliates of the Investor who are actually named in such action, proceeding or investigation, and partners, directors, agents, employees and controlling persons (if any), as the case may be, of the Investor and any such affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Investor, any such affiliate and any such person. The Company also agrees that neither the Investor nor any such affiliate, partner, director, agent, employee or controlling person shall have any liability to the Company or any person asserting claims on behalf of or in right of the Company in connection with or as a result of the consummation of the Transaction Documents or the Prior Agreements, except as provided in or contemplated by the Transaction Documents. Notwithstanding the foregoing, the indemnification agreement contained within this Section 9 shall not apply (i) to any action, proceeding, or investigation which is based on or relating to (A) Investor's trading activities; (B) Investor's violation of the Securities Act, the Exchange Act, any state securities laws or any rule or regulation thereunder, including, but not limited to, Investors use of material non-public information; (C) actions for which indemnification would not be available to Investor under the Registration Rights Agreement; or (D) actions which are not in compliance with any obligation of Investor under any of the Transaction Documents, or (ii) to any indemnity or undertaking by Investor in favor of the Company in connection with any lost, stolen, or missing Prior Notes or Certificates evidencing other securities. 11. ASSIGNMENT. Subject to compliance with applicable securities law, this Funding Agreement and the Related Agreements may be assigned by the Investor to transferees or assignees of the Note, provided that the Company is, prior to or simultaneously with such transfer, furnished with written notice of the name and address of such transferee or assignee, and such assignee agrees in writing to be bound by the terms hereof and provided further that, if the Note is only assigned or transferred in part, then such assignment shall only be made in part on an appropriate proportionate basis. If there is a conflict between this provision and any provision of the Related Agreements, this provision shall govern. 12. RIGHT OF FIRST REFUSAL. (i) The Company covenants and agrees that if during the period from the date hereof through the date on which the Notes are paid in full, the Company offers to enter into any transaction (a "New Transaction") for the sale of Common Stock (other than in connection with an acquisition, merger or other business combination), the Company shall notify the Investor in writing of all of the terms of such offer (a "New Transaction Offer"). The Investor shall have the right (the "Right of First Refusal"), exercisable by written notice given to the Company by the close of business on the tenth business day after the Investor's receipt of the New Transaction Offer (the "Right of First Refusal Expiration Date"), to participate in all or any part of the New Transaction Offer on the terms so specified. (ii) If, and only if, the Investor does not exercise the Right of First Refusal in full, the Company may consummate the remaining portion of the New Transaction with any New Investor on substantially the terms specified in the New Transaction Offer within ninety (90) days of the Right of First Refusal Expiration Date. (iii) If the terms of the New Transaction to be consummated with such other party differ from the terms specified in the New Transaction Offer so that the terms are more beneficial in any material respect to the New Investor, the Company shall give the Investor a New Transaction Offer relating to the terms of the New Transaction, as so changed, and the Investor's Right of First Refusal and the preceding terms of this paragraph 11 shall apply with respect to such changed terms. 13. REGISTRATION RIGHTS. Reference is made to the Registration Rights Agreement. The Company's acknowledges that the Investor has certain rights under the Registration Rights Agreement with respect to the Common Stock issuable upon conversion of the Notes.. 14. SECURITY INTEREST RELEASE PROVISIONS. The Investor agrees to execute necessary documents to release its Security Interest in the Collateral pursuant to the Security Interest Provisions upon the Company securing cash investments of not less than $5,000,000 in new shareholder equity. The Company further covenants and agrees that , notwithstanding such release, it will not grant any other security interest or other lien or rights in the Collateral (however denominated) as long as any of the Notes remain outstanding. 15. NOTICES. Any notice required or permitted hereunder shall be given in writing (unless otherwise specified herein) and shall be deemed effectively given upon personal delivery or seven business days after deposit in the United States Postal Service, by (a) advance copy by fax, and (b) mailing by express courier or registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days advance written notice to each of the other parties hereto. COMPANY: SAC Technologies, Inc. 1285 Corporate Center Drive Suite 175 Eagan, Minnesota 55121 Telephone No.: (651) 687-0414 Telecopier No.: with a copy to: Vincent Vietti, Esq. Eleven Penn Center 14th Floor 1835 Market Street Philadelphia, PA 19103-2895 215-665-8760 (Philadelphia) Fax PURCHASER: The Shaar Fund Ltd. Kaya Flamboyan 9 Curacao Netherlands Antilles (Tel: 599-9-732-2222) (Fax: 599-9-732-2225) with copies (which shall not constitute notice) to: Levinson Capital Management, LLC 35 East Grassy Sprain Road Suite 300 Yonkers, NY 10710 Phone number: 914-395-0096 Fax number: 914-395-0059 ESCROW AGENT: Krieger & Prager, Esqs. 39 Broadway, Suite 1440 New York, New York 10006 Telephone No.: (212) 363-2900 Facsimile No.: (212) 363-2999 16. SEVERABILITY. If a court of competent jurisdiction determines that any provision of this Funding Agreement is invalid, unenforceable or illegal for any reason, such determination shall not affect or impair the validity, legality and enforceability of the other provisions of this Funding Agreement. If any such invalidity, unenforceability or illegality of a provision of this Funding Agreement becomes known or apparent to any of the parties hereto, the parties shall negotiate promptly and in good faith in an attempt to make appropriate changes and adjustments to such provision specifically and this Funding Agreement generally to achieve as closely as possible, consistent with applicable law, the intent and spirit of such provision specifically and this Funding Agreement generally. 17. EXECUTION IN COUNTERPARTS. This Funding Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute the same Funding Agreement. 18. The Company shall pay all fees and disbursements of the Investor with respect to the preparation and enforcement of this Agreement and the Related Agreements. 19. GOVERNING LAW. This Agreement and the Related Agreements shall be governed by and construed in accordance with the laws of the State of New York, except to the extent that the Minnesota Business Corporation Act would apply to the internal corporate governance of the Company. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON COVENIENS, to the bringing of any such proceeding in such jurisdictions. 20. JURY TRIAL WAIVER. The Company and Purchaser hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out of or in connection with the Transaction Documents. 21. RESTATED AGREEMENT. As hereby restated, this Agreement supercedes any prior agreement between the parties with respect to the subject matter hereof, and the Notes heretofore delivered pursuant to this Agreement shall be deemed amended in accordance with the provisions hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties have executed this Funding Agreement as of the date first written above. SAC TECHNOLOGIES, INC. By: _______________________ Name: Title: THE SHAAR FUND LTD. By: _______________________ Name: Title: EX-10.32 5 sac020249_ex10-32.txt REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.32 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of November 26,2001 (this "Agreement"), is made by and between SAC TECHNOLOGIES, INC., a Minnesota corporation, with headquarters located at 1285 Corporate Center Drive, Suite 175, Eagan, Minnesota 55121 (the "Company"), and each entity named on a signature page hereto (each, an "Investor") (each agreement with an Investor being deemed a separate and independent agreement between the Company and such Investor, except that each Investor acknowledges and consents to the rights granted to each other Investor under such agreement). W I T N E S S E T H: WHEREAS, upon the terms and subject to the conditions of (i) the Funding Agreement, dated as of November 26, 2001, between the Investor and the Company (the "Funding Agreement"), (ii) the Series B Convertible Preferred Stock and 5% Convertible Debenture Exchange Agreement between the Investor and the Company, and (iii) the Non-Interest Bearing Debenture of the Company dated November 26, 2001 in the principal amount of $ 1,000,000 (collectively the "Transaction Agreements") (terms not otherwise defined herein shall have the meanings ascribed to them in the Funding Agreement), the Company has agreed to issue to the Investor certain convertible securities of the Company which are convertible into Common Stock (the "Common Stock"); and WHEREAS, the Company has agreed to issue the Warrants to the Investor, upon the terms and subject to the conditions contained in the Warrants, which may be exercised for the purchase of shares of Common Stock (the "Warrant Shares") upon the terms and conditions of the Warrants; and WHEREAS, to induce the Investor to execute and deliver the Related Agreements, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "Securities Act"), with respect to the Common Stock and the Warrant Shares; and NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows: . DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: (a) "Investor" means the Investor and any permitted transferee or assignee who agrees to become bound by the provisions of this Agreement in accordance with Section 9 hereof and who holds Common Stock, Warrants or Registrable Securities. (b) "Potential Material Event" means any of the following: (i) the possession by the Company of material information not ripe for disclosure in a registration statement, which shall be evidenced by determinations in good faith by the Board of Directors of the Company that disclosure of such information in the registration statement would be detrimental to the business and affairs of the Company; or (ii) any material engagement or activity by the Company which would, in the good faith determination of the Board of Directors of the Company, be adversely affected by disclosure in a registration statement at such time, which determination shall be accompanied by a good faith determination by the Board of Directors of the Company that the registration statement would be materially misleading absent the inclusion of such information. (c) "Register," "Registered," and "Registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement by the United States Securities and Exchange Commission (the "SEC"). (d) "Registrable Securities" means the Common Stock and the Warrant Shares (e) "Registration Statement" means a registration statement of the Company under the Securities Act. . REGISTRATION. () MANDATORY REGISTRATION. (i) The Company shall promptly prepare and file with the SEC, as soon as possible after the Closing Date but no later than March 15, 2002 (the "Required Filing Date"), either a Registration Statement or an amendment to an existing Registration Statement, in either event registering for resale by the Investor a sufficient number of shares of Common Stock for the Investors to sell the Registrable Securities (or such lesser number as may be required by the SEC, but in no event less than (A) 200% of the aggregate number of shares of Common Stock which would be issued upon conversion of all relevant Convertible Securities other than those issued under the Funding Agreement, (B) 130% of the aggregate number of shares of Common Stock which would be issued upon conversion of the Initial Note, and (C) 100% of the aggregate number of shares of Common Stock which would be issued upon exercise of the relevant Warrants at the time of filing of the Registration Statement (assuming for such purposes that such Convertible Securities and Warrants had been eligible to be exercised and had been exercised in accordance with their terms, whether or not such eligibility or exercise had in fact occurred as of such date). The Registration Statement (W) shall include only the Registrable Securities and (X) shall also state that, in accordance with Rule 416 and 457 under the Securities Act, it also covers such indeterminate number of additional shares of Common Stock as may become issuable to prevent dilution resulting from stock splits or stock dividends. The Company will use its reasonable best efforts to cause such Registration Statement to be declared effective on a date (a "Required Effective Date") no later than is the earlier of (Y) five (5) days after notice by the SEC that it may be declared effective or (Z) May 30, 2002. With respect to the Advances as the same is defined in the Funding Agreement, the Company acknowledges that it is obligated to file a separate Registration Statement pursuant to the terms hereof, provided however,that with respect to such separate Registration Statement, the Required Filing Date shall be deemed to be thirty (30) days after the date of the Final Advance, and the Required Effective Date shall be deemed to beone hundred and five (105) days after the date of the Final Advance. (ii) If at any time (an "Increased Registered Shares Date"), the number of shares of Common Stock represented by the Registrable Shares, issued or to be issued as contemplated by the Transaction Agreements, exceeds the aggregate number of shares of Common Stock then registered, the Company shall, within ten (10) business days after receipt of a written notice from any Investor, either (X) amend the relevant Registration Statement filed by the Company pursuant to the preceding provisions of this Section 2, if such Registration Statement has not been declared effective by the SEC at that time, to register two hundred percent (200%) of such Registrable Shares, computed as contemplated by the immediately preceding subparagraph (i), or (Y) if such Registration Statement has been declared effective by the SEC at that time, file with the SEC an additional Registration Statement (an "Additional Registration Statement") to register two hundred percent (200%) of the shares of Common Stock represented by the Registrable Shares, computed as contemplated by the immediately preceding subparagraph (i), that exceed the aggregate number of shares of Common Stock already registered. The Company will use its reasonable best efforts to cause such Registration Statement to be declared effective on a date (a "Required Effective Date") which is no later than (Q) with respect to a Registration Statement under clause (X) of this subparagraph (ii), the Required Effective Date contemplated by the immediately preceding subparagraph (i) and (R) with respect to an Additional Registration Statement, the earlier of (I) five (5) days after notice by the SEC that it may be declared effective or (II) ninety (90) days after the Increased Registered Shares Date. () PAYMENTS BY THE COMPANY. (i) If the Registration Statement covering the Registrable Securities is not filed with the SEC by the Required Filing Date or is not effective on the Required Effective Date or the Restricted Sale Date as may be applicable, the Company will make payment to the Investor in such amounts and at such times as shall be determined pursuant to this Section 2(b). (ii) The amount (the "Periodic Amount") to be paid by the Company to the Investor shall be determined as of each Computation Date (as defined below) and such amount shall be equal to the Periodic Amount Percentage (as defined below) of the principal or face amount of the instruments under which the Registrable Securities covered by the Registration Statement will be issued for the period from the date following the relevant Required Filing Date, Required Effective Date or Restricted Sale Date, as the case may be, to the first relevant Computation Date, and thereafter to each subsequent Computation Date until the Registration is filed or declared effective. The "Periodic Amount Percentage" means (A) two percent (2%) of the Principal Amount from the date following the relevant Required Filing Date, Required Effective Date or Restricted Sale Date, as the case may be, to the first relevant Computation Date (prorated on a daily basis if such period is less than thirty [30] days), and (B) two percent (2%) of the Principal Amount to each Computation Date thereafter (prorated on a daily basis if such period is less than thirty [30] days). Anything in the preceding provisions of this paragraph (ii) to the contrary notwithstanding, after the Effective Date the Principal Amount shall be deemed to refer to the sum of (X) the Principal Amount of Registrable Securities, which are included in the Registration Statement but have not yet been sold or converted. (iii) Each Periodic Amount will be payable by the Company in cash or other immediately available funds to the Investor monthly, without requiring demand therefor by the Investor. (iv) The parties acknowledge that the damages which may be incurred by the Investor if the Registration Statement is not filed by the Required Filing Date, including if the right to sell Registrable Securities under a previously effective Registration Statement is suspended, may be difficult to ascertain. The parties agree that the Periodic Amounts represent a reasonable estimate on the part of the parties, as of the date of this Agreement, of the amount of such damages, and shall be the exclusive remedy. (v) Notwithstanding the foregoing, the amounts payable by the Company pursuant to this provision shall not be payable to the extent any delay in the effectiveness of the Registration Statement occurs because of an act of, or a failure to act or to act timely by the Investor or its counsel, or to the extent that such Registrable Securities may be sold pursuant to Rule 144(k) or another available exemption under the Act. (vi) "Computation Date" means (A) the date which is the earlier of (1) thirty (30) days after the Required Filing Date, Required Effective Date, or a Restricted Sale Date, as the case may be, or (2) of the date after the Required Effective Date or such Restricted Sale Date on which the Registration Statement is filed or is declared effective or has its restrictions removed as the case may be, and (B) each date which is the earlier of (1) thirty (30) days after the previous Computation Date or (2) the date after the previous Computation Date on which the Registration Statement is filed or is declared effective or has its restrictions removed as the case may be. . OBLIGATIONS OF THE COMPANY. In connection with the registration of the Registrable Securities, the Company shall do each of the following. () Prepare promptly, and file with the SEC by the Required Filing Date a Registration Statement with respect to not less than the number of Registrable Securities provided in Section 2(a) above, and thereafter use its reasonable best efforts to cause such Registration Statement relating to Registrable Securities to become effective by the Required Effective Date and keep the Registration Statement effective at all times during the period (the "Registration Period") continuing until the earliest of (i) the date that is three (3) years after the last day of the calendar month following the month in which the Effective Date occurs, (ii) the date when the Investors may sell all Registrable Securities under Rule 144 or (iii) the date the Investors no longer own any of the Registrable Securities, which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; (b) Prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during the Registration Period, comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the Registration Statement; (c) The Company shall permit a single firm of counsel designated by the Investors to review the Registration Statement and all amendments and supplements thereto a reasonable period of time (but not less than three (3) business days) prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects. If such counsel objects, the Required Filing Date shall be extended by the number of days from the date the Registration Statement was delivered to such counsel to the date such counsel no longer objects. (d) Notify each Investor, such Investor's legal counsel identified to the Company (which, until further notice, shall be deemed to be Krieger & Prager, ATTN: Samuel Krieger, Esq.; (the "Investor's Counsel")), and any managing underwriters immediately (and, in the case of (i)(A) below, not less than five (5) days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one (1) business day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is proposed to be filed; (B) whenever the SEC notifies the Company whether there will be a "review" of such Registration Statement; (C) whenever the Company receives (or a representative of the Company receives on its behalf) any oral or written comments from the SEC relating to a Registration Statement (copies or, in the case of oral comments, summaries of such comments shall be promptly furnished by the Company to the Investors); and (D) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the SEC or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) if at any time any of the representations or warranties of the Company contained in any agreement (including any underwriting agreement) contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) of the occurrence of any event that to the best knowledge of the Company makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. In addition, the Company shall furnish the Investors with copies of all intended written responses to the comments contemplated in clause (C) of this Section 3(d) not later than one (1) business day in advance of the filing of such responses with the SEC so that the Investors shall have the opportunity to comment thereon. (e) Furnish to each Investor and such Investor's Counsel (i) promptly after the same is prepared and publicly distributed, filed with the SEC, or received by the Company, one (1) copy of the Registration Statement, each preliminary prospectus and prospectus, and each amendment or supplement thereto, and (ii) such number of copies of a prospectus, and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (f) As promptly as practicable after becoming aware thereof, notify each Investor of the happening of any event of which the Company has knowledge, as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and use its best efforts promptly to prepare a supplement or amendment to the Registration Statement or other appropriate filing with the SEC to correct such untrue statement or omission, and deliver a number of copies of such supplement or amendment to each Investor as such Investor may reasonably request; (g) As promptly as practicable after becoming aware thereof, notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the SEC of a Notice of Effectiveness or any notice of effectiveness or any stop order or other suspension of the effectiveness of the Registration Statement at the earliest possible time; (h) Notwithstanding the foregoing, if at any time or from time to time after the date of effectiveness of the Registration Statement, the Company notifies the Investors in writing of the existence of a Potential Material Event, the Investors shall not offer or sell any Registrable Securities, or engage in any other transaction involving or relating to the Registrable Securities, from the time of the giving of notice with respect to a Potential Material Event until such Investor receives written notice from the Company that such Potential Material Event either has been disclosed to the public or no longer constitutes a Potential Material Event; provided, however, that the Company may not so suspend the right to such holders of Registrable Securities for more than two twenty (20) business day periods in the aggregate during any 12-month period (the last date of such period being the "Restricted Sale Date") with at least a ten (10) business day interval between such periods, during the periods the Registration Statement is required to be in effect; (i) Use its reasonable efforts to secure and maintain the designation of all the Registrable Securities covered by the Registration Statement on the "OTC Bulletin Board Market" of the National Association of Securities Dealers Automated Quotations System ("NASDAQ") within the meaning of Rule 11Aa2-1 of the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the quotation of the Registrable Securities on the OTC Bulletin Board Market. (j) Provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than three (3) days after the effective date of the Registration Statement; (k) Cooperate with the Investors to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the Registration Statement and enable such certificates for the Registrable Securities to be in such denominations or amounts as the case may be, as the Investors may reasonably request, and, within three (3) business days after a Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an appropriate instruction and opinion of such counsel; and . OBLIGATIONS OF THE INVESTORS. In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: () It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of the Registrable Securities held by it, as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least ten (10) days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor (the "Requested Information") if such Investor elects to have any of such Investor's Registrable Securities included in the Registration Statement. If at least two (2) business days prior to the filing date the Company has not received the Requested Information from an Investor (a "Non-Responsive Investor"), then the Company may file the Registration Statement without including Registrable Securities of such Non-Responsive Investor; () Each Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statement; and () Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(e) or 3(f), above, such Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(e) or 3(f) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. . EXPENSES OF REGISTRATION. (a) All reasonable expenses (other than underwriting discounts and commissions of the Investor) incurred in connection with registrations, filings or qualifications pursuant to Section 3, but including, without limitation, all registration, listing, and qualifications fees, printers and accounting fees, the fees and disbursements of counsel for the Company and a fee for a single counsel for the Investors (as a group and not individually) not exceeding $3,500 for the Registration Statement covering the Registrable Securities applicable to the Common Stock and Warrants issued on the Closing Date, and $2,000 for each amendment thereto, shall be borne by the Company. (b) Except as set forth in Annex 5 (b) hereto, neither the Company nor any of its subsidiaries has, as of the date hereof, nor shall the Company nor any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Investors in this Agreement or otherwise conflicts with the provisions hereof. Except as set forth in Annex 5(b) hereto, neither the Company nor any of its subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person. Without limiting the generality of the foregoing, without the written consent of the Investors holding a majority of the Registrable Securities, the Company shall not grant to any person the right to request the Company to register any securities of the Company under the Securities Act unless the rights so granted are subject in all respects to the prior rights in full of the Investors set forth herein, and are not otherwise in conflict or inconsistent with the provisions of this Agreement and the other Transaction Agreements. . INDEMNIFICATION. In the event any Registrable Securities are included in a Registration Statement under this Agreement: () To the extent permitted by law, the Company will indemnify and hold harmless each Investor who holds such Registrable Securities, the directors, if any, of such Investor, the officers, if any, of such Investor, each person, if any, who controls any Investor within the meaning of the Securities Act or the Exchange Act (each, an "Indemnified Person" or "Indemnified Party"), against any losses, claims, damages, liabilities or expenses (joint or several) incurred (collectively, "Claims") to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any of the following statements, omissions or violations in the Registration Statement, or any post-effective amendment thereof, or any prospectus included therein: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation under the Securities Act, the Exchange Act or any state securities law (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to clause (b) of this Section 6, the Company shall reimburse the Investors, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a) shall not (I) apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(c) hereof; (II) be available to the extent such Claim is based on a failure of the Investor to deliver or cause to be delivered the prospectus made available by the Company; (III) apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld., or (IV) any violation or alleged violation by an Indemnified Person of the Securities Act, the Exchange Act, any state securities laws or any rule or regulation under the Securities Act, the Exchange Act, or any state securities laws. Each Investor will indemnify the Company and its officers, directors and agents (each, an "Indemnified Person" or "Indemnified Party") against any claims arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company, by or on behalf of such Investor, expressly for use in connection with the preparation of the Registration Statement, subject to such limitations and conditions as are applicable to the Indemnification provided by the Company to this Section 6. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. () Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be. In case any such action is brought against any Indemnified Person or Indemnified Party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such Indemnified Person or Indemnified Party of its election so to assume the defense thereof, the indemnifying party will not be liable to such Indemnified Person or Indemnified Party under this Section 6 for any legal or other reasonable out-of-pocket expenses subsequently incurred by such Indemnified Person or Indemnified Party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The Indemnified Person or Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and reasonable out-of-pocket expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the Indemnified Person or Indemnified Party. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. . CONTRIBUTION. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that (a) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6; (b) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation; and (c) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. . REPORTS UNDER SECURITIES ACT AND EXCHANGE ACT. With a view to making available to the Investors the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to: () make and keep public information available, as those terms are understood and defined in Rule 144; () file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and () furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration. (d) The Company will, at the request of any Holder of Registrable Securities, upon receipt from such Holder of a certificate certifying (i) that such Holder has held such Registrable Securities for a period of not less than one (1) year, (ii) that such Holder has not been an affiliate (as defined in Rule 144) of the company for more than ninety (90) preceding days, and (ii) as to such other matters as may be appropriate in accordance with such Rule, remove from the stock certificate representing such Registrable Securities that portion of any restrictive legend which relates to the registration provisions of the Securities Act, provided, however, counsel to Investor may provide such instructions and opinion to the transfer agent regarding the removal of the restrictive legend. . ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Investors to any transferee of the Registrable Securities (or all or any portion of any unconverted Debenture, Series B Convertible Preferred Stock or unexercised Warrant) only if: (a) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (b) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee and (ii) the securities with respect to which such registration rights are being transferred or assigned, (c) immediately following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the Securities Act and applicable state securities laws, and (d) at or before the time the Company received the written notice contemplated by clause (b) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein. In the event of any delay in filing or effectiveness of the Registration Statement as a result of such assignment, the Company shall not be liable for any damages arising from such delay, or the payments set forth in Section 2(c) hereof arising from such delay. . AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold a eighty (80%) percent interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. 11. MISCELLANEOUS. (a) A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) Notices required or permitted to be given hereunder shall be given in the manner contemplated by the Securities Purchase Agreement, (i) if to the Company or to the Investor, to their respective address contemplated by the Securities Purchase Agreement, and (iii) if to any other Investor, at such address as such Investor shall have provided in writing to the Company, or at such other address as each such party furnishes by notice given in accordance with this Section 11(b). (c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (d) This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON COVENIENS, to the bringing of any such proceeding in such jurisdictions. To the extent determined by such court, the Company shall reimburse the Buyer for any reasonable legal fees and disbursements incurred by the Buyer in enforcement of or protection of any of its rights under this Agreement. (e) If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. (f) Subject to the requirements of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (g) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (h) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (i) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by telephone line facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. (j) The Company acknowledges that any failure by the Company to perform its obligations under Section 3(a) hereof, or any delay in such performance could result in loss to the Investors, and the Company agrees that, in addition to any other liability the Company may have by reason of such failure or delay, the Company shall be liable for all direct damages caused by any such failure or delay, unless the same is the result of force majeure. Neither party shall be liable for consequential damages. (k) This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement thereof. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. COMPANY: SAC TECHNOLOGIES, INC. By: Name: Title: INVESTOR: THE SHAAR FUND, LTD. By: Name: Title: ANNEX 5(b) 1. Approximately 1,570,000 shares issuable upon exercise of Warrants and Options previously granted, 780,000 of which are issuable to executive officers or key employees of the Company. EX-10.33 6 sac020249_ex10-33.txt EXCHANGE AGREEMENT EXHIBIT 10.33 EXCHANGE AGREEMENT SECURITIES EXCHANGE AGREEMENT THIS SECURITIES EXCHANGE AGREEMENT, dated as of the date of acceptance set forth below (this "Agreement"), is entered into by and between SAC TECHNOLOGIES, INC. a Minnesota corporation, with headquarters located at 1285 Corporate Center Drive, Suite No. 175, Eagan, MN 55121 (the "Company"), and The Shaar Fund, Ltd. (the "Buyer"). W I T N E S S E T H: WHEREAS, the Company and the Buyer are executing and delivering this Agreement in accordance with and in reliance upon the exemption from securities registration afforded, inter alia, by Rule 506 under Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 Act"), and/or Section 4(2) of the 1933 Act; and WHEREAS, the Buyer is the record and beneficial owner of 18,449 shares (the "Series A Shares") of the Company's Series A Convertible Preferred Stock, $.01 par value per share (the "Series A Preferred Stock"), and a 5% Convertible Debenture due June 30, 2001 of the Company in the outstanding principal amount of $418,000 (the "June Debenture"); and WHEREAS, the Buyer wishes to exchange the Series A Shares and June Debenture and the Company wishes to issue, upon the terms and subject to the conditions of this Agreement, shares of the Company's Series B Convertible Preferred Stock, $.01 par value per share (the Series B Preferred Stock"), and a newly issued 5% Convertible Debenture Due September 30, 2003 (the "Debenture"). NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. AGREEMENT TO EXCHANGE; CERTAIN DEFINITIONS. (a) Exchange and Issuance. Subject to the terms and conditions of this Agreement and the other Related Agreements ( as defined in that certain Funding Agreement dated as of even date herewith by and between the Company and Buyer (the "Funding Agreement")), the Company agrees to issue, and the Buyer agrees to exchange; (i) 21,430 shares (the "Series B Shares") of Series B Preferred Stock with such rights preferences and designations set forth in the Certificate of Designation attached as Exhibit A hereto in exchange for (A) 18,449 shares of Series A Preferred Stock; and (B) the waiver of all accrued but unpaid dividends due on the Series A Shares, all accrued interest on such accrued but unpaid dividends and all of the Company's other obligations to Buyer under the Certificate of Designation of Series A Preferred Stock; and (ii) the Debenture in substantially the form attached hereto as Exhibit "B" together with all accrued and unpaid interest due thereon in exchange for the surrender and cancellation of the June Debenture. (b) Certain Definitions. As used herein, each of the following terms has the meaning set forth below, unless the context otherwise requires: (i) "Securities" means the Series B Preferred Stock, the Debenture and the Conversion Shares. (ii) "Conversion Shares" means the shares of Common Stock issuable upon conversion of the Series B Preferred Stock or Debenture. (iii) "Latest Audited Date" means December 31, 2000. (iv) "Person" means any living person or entity, such as, but not necessarily limited to, a corporation, partnership or trust. (v) "Certificate" means the certificate evidencing the Series B Shares duly executed on behalf of the Company. (vi) "Affiliate" means, with respect to a specific Person refereed to in the relevant provision, another Person who or which controls or is controlled by or is under common control with such Specified Person. (vii) "Series A Certificates" mean the certificates evidencing the Series A Shares. (viii) "Certificate of Designation" means the Certificate of Designation of the Series B Preferred Stock in substantially the form attached hereto as Exhibit "A". (ix) "Waiver Letter" means that certain waiver letter dated as of even date herewith in substantially the form attached hereto as Exhibit "C". 2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION; INDEPENDENT INVESTIGATION. The Buyer hereby makes those representations, warranties, covenants and agreements set forth in Section 5 of the Funding Agreement with respect to itself, the Securities and the transactions contemplated hereby, which are incorporated herein by this reference. 3. COMPANY REPRESENTATIONS, ETC. The Company hereby makes those representations, warranties, covenants and agreements set forth in Section 4 of the Funding Agreement with respect to itself, the Securities and the transactions contemplated hereby, except as otherwise provided in the Schedules of the Company attached to the Funding Agreement, which are incorporated herein by this reference, and the following additional representation and warranty: (a) Disclosure. All information relating to or concerning the Company set forth in the Funding Agreement, Related Agreements and SEC Filings is true and correct in all material respects and does not fail to state any material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. 4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS. The Company and Buyer hereby make those covenants and acknowledgements set forth in Sections 7 and 8 of the Funding Agreement, including, but no limited to, those set forth in Section 7(m) with respect to the Conversion Shares and Series A Preferred Stock, which are incorporated herein by this reference. 5. ADDITIONAL AGREEMENTS. (a) Transfer Restrictions. The Securities may only be disposed of pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available exemption from or in a transaction not subject to the registration requirements thereof. In connection with any transfer of any Securities other than pursuant to an effective registration statement or to the Company, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration under the Securities Act. Notwithstanding the foregoing, the Company hereby consents to and agrees to register (i) any transfer of Securities by the Investor to an Affiliate of the Investor, or any transfers among any such Affiliates, and (ii) any transfer by the Investor to any investment entity under common management with the Investor, provided in each case of clauses (i) and (ii) the transferee certifies to the Company that it is an "accredited investor" as defined in Rule 501(a) under the Securities Act and provides an opinion of counsel reasonably satisfactory to the Company, to the effect that such transfer does not require registration under the Securities Act. Any such transferee shall have the rights of the Investor under this Agreement and the Registration Rights Agreement. (b) Acknowledgment of Dilution. The Company acknowledges that the issuance of Conversion Shares upon (i) conversion of the Debenture and Series B 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 obligation to issue Conversion Shares in accordance with the Certificate of Designation and the Debenture is without regard to the effect of any such dilution. (c) Increase in Authorized Shares. The Board of Directors shall (i) adopt proper resolutions authorizing an increase in number of authorized shares of Common Stock to 60,000,000 shares; (ii) recommend to promptly and duly obtain shareholder approval to carry out such resolutions (and hold a special meeting of the shareholders no later than February 15,2002; and (iii) within 5 Business Days of obtaining such shareholder authorization, file an appropriate amendment to the Company's Articles of Incorporation to evidence such increase. (d) Registration Rights. Reference is made to the Registration Rights Agreement attached to the Funding Agreement as Exhibit F. The Company acknowledges that the Investor has certain rights under the Registration Rights Agreement with respect to the Conversion Shares. 6. CLOSING. The Closing of the purchase and sale of the Securities hereunder shall occur simultaneous with the execution of this Agreement. The Closing shall be conditioned upon Buyer's execution and delivery of the Waiver Letter and Seller's filing of the Certificate of Designation with the Minnesota Secretary of State. At the Closing, Buyer shall deliver the June Debenture and Series A Certificates to the Company (or an indemnity in favor of the Company) against delivery of the Certificate and the Debenture by the Company to Buyer. 7. GOVERNING LAW: MISCELLANEOUS. (a) This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws, except to the extent that the Minnesota Business Corporation Act would apply to the Internal Corporate Governance of the Company. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON CONVENIENS, to the bringing of any such proceeding in such jurisdictions. To the extent determined by such court, the Company shall reimburse the Buyer for any reasonable legal fees and disbursements incurred by the Buyer in enforcement of or protection of any of its rights under any of the Transaction Agreements. (b) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (c) This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (d) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (e) A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. (f) This Agreement may be signed in one or more counterparts, each of which shall be deemed an original. (g) The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. (h) If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. (i) This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement thereof. (j) This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. (k) Until such time as Company amends its Articles of Incorporation to increase the number of shares of Common Stock it is authorized to issue as set forth in Section 5(c) hereof, the Buyer waives the Company's compliance with Section 5(f) of the Certificate of Designation and until such time, the Company shall be required to reserve for issuance upon conversion of any shares of Series B Preferred Stock or conversion of the Debenture, all of its authorized and unissued shares of Common Stock. 8. NOTICES. Any notice required or permitted hereunder shall be given in writing (unless otherwise specified herein) and shall be deemed effectively given on the earliest of (a) the date delivered, if delivered by personal delivery as against written receipt therefor or by confirmed facsimile transmission, (b) the seventh business day after deposit, postage prepaid, in the United States Postal Service by registered or certified mail, or (c) the third business day after mailing by domestic or international express courier, with delivery costs and fees prepaid, in each case, addressed to each of the other parties thereunto entitled at the following addresses (or at such other addresses as such party may designate by ten (10) days' advance written notice similarly given to each of the other parties hereto): COMPANY: SAC Technologies, Inc. 1285 Corporate Center Drive Suite 175 Eagan, Minnesota 55121 Attn: Chief Executive Officer Telephone No.: (651) 687-0414 Telecopier No.: (651) 687-0515 with a copy to: Vincent A. Vietti, Esq. Buchanan Ingersoll Professional Corporation Eleven Penn Center, 14th Floor Philadelphia, PA 19103-2895 Telephone No.: (215) 665-3860 Telecopier No.: (215) 665-8760 BUYER: At the address set forth on the signature page of this Agreement. with a copy to: Krieger & Prager LLP 39 Broadway Suite 1440 New York, NY 10006 Attn: Samuel Krieger, Esq. Telephone No.: (212) 363-2900 Telecopier No. (212) 363-2999 9. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company's and the Buyer's representations and warranties herein shall survive the execution and delivery of this Agreement, the delivery of the Certificates and the Debenture and shall inure to the benefit of the Buyer and the Company and their respective successors and assigns. IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer and the Company by one of their respective officers thereunto duly authorized as of the date set forth below. Address THE SHAAR FUND, LTD. - -------------------------------- By: Shaar Advisory Services, S.A. - -------------------------------- Telecopier No.: By: _____________________________ ----------------- - -------------------------------- Jurisdiction of Incorporation or Organization SAC TECHNOLOGIES, INC. By: _____________________________ (Signature of Authorized Person) _________________________________ Printed Name and Title EX-10.34 7 sac020249_ex10-34.txt SECURED NOTE EXHIBIT 10.34 NOTE THIS NOTE HAS NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE OR UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE NOTE MAY NOT BE OFFERED, RESOLD, PLEDGED OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR EXEMPTION OR SAFE HARBOR THEREFROM. NNo. US $ 4,092,920 ------------- ------------------ SAC TECHNOLOGIES, INC. SECURED NOTE DUE SEPTEMBER 30, 2003 FOR VALUE RECEIVED, the Company promises to pay to THE SHAAR FUND LTD., the registered holder hereof (the "Holder"), the principal sum of Four Million Ninety-Two Thousand Nine Hundred Twenty and 00/100 ($4,092,920.00) Dollars, on September 30, 2003 (the "Maturity Date"), and to pay interest at the rate of 10% per annum from time to time in arrears on the outstanding principal balance due hereunder, commencing September 30, 2002 and thereafter on the 30th day of April and September (each an "Interest Payment Date") until the Maturity Date. Accrual of interest shall commence on the first such business day to occur after the date hereof and shall continue until payment in full of the principal sum has been made or duly provided for on a 360 day basis. The principal of, and interest on, this Note are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, at the address last appearing on the Note Register of the Company as designated in writing by the Holder from time to time. The Company will pay the principal of and interest upon this Note on the Maturity Date or the Interest Payment Date as may be applicable, less any amounts required by law to be deducted, to the registered holder of this Note as of the tenth day prior to the such date and addressed to such holder at the last address appearing on the Note Register. The forwarding of such check shall constitute a payment of principal and interest hereunder and shall satisfy and discharge the liability for principal and interest on this Note to the extent of the sum represented by such check plus any amounts so deducted. This Note is subject to the following additional provisions: 1. (a) The Company acknowledges that there has been received on the date hereof, the sum of $1,065,000.00, (the "Loan") which together with the obligations of the Company to the Investor on the Prior Notes in the sum of $3,027,920.00 constitutes the principal amount of this Note. (b) This Note is being issued pursuant to the Terms of a Funding Agreement between the Company and The Shaar Fund Ltd, dated as of November 26, 2001 Terms not otherwise defined herein shall have the meanings ascribed to them in the Funding Agreement. 2. The Company shall be entitled to withhold from all payments of principal of, and interest on, this Note any amounts required to be withheld under the applicable provisions of the United States income tax laws or other applicable laws at the time of such payments, and Holder shall execute and deliver all required documentation in connection therewith. 3. This Note has been issued subject to investment representations of the original purchaser hereof and may be transferred or exchanged only in compliance with the Securities Act of 1933, as amended (the "Act"), and other applicable state and foreign securities laws. In the event of any proposed transfer of this Note, the Company may require, prior to issuance of a new Note in the name of such other person, that it receive reasonable transfer documentation including legal opinions that the issuance of the Note in such other name does not and will not cause a violation of the Act or any applicable state or foreign securities laws. Prior to due presentment for transfer of this Note, the Company and any agent of the Company may treat the person in whose name this Note is duly registered on the Company's Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. 4. No provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Note at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct obligation of the Company. 5. A. At the Holder's election, at any time during the term of this Note or at maturity the Holder is entitled to convert the principal amount of this Note and accrued interest, provided that the principal amount is at least US $10,000 (unless if at the time of such election to convert the aggregate principal amount of all Notes registered to the Holder is less that Ten Thousand Dollars (US $10,000), then the whole amount thereof) into shares of Common Stock of the Company "Conversion Shares") at a conversion price of $.75 for each share of Common Stock ("Conversion Price"), by telecopying an executed and completed Notice of Conversion in the form attached hereto as Exhibit A. Conversion shall be deemed to have been effected at on the date the Notice of Conversion is telecopied and received by the Company and at such time the rights of the Holder under this Note shall cease to the extent of such conversion. B. (i) Notwithstanding any other provision hereof to the contrary, the Company shall have the right to prepay, in whole or in part, the then outstanding principal amount of the Notes then held by the Holder for an amount (the "Redemption Amount") equal to the sum of (a) the principal of the Notes being repaid and (b) all accrued but unpaid interest thereon through the date the Redemption Amount is paid to the Holder (the "Redemption Payment Date"), The Company shall give at least fifteen (15) business days, but not more than twenty (20) business days, written notice of such redemption to the Holder (the "Notice of Redemption"). (ii) With respect to any Notes for which a Notice of Conversion is submitted to the Company prior to the Redemption Payment Date, the Notice of Conversion shall take precedence and such Notes shall be converted in accordance with the terms hereof. Furthermore, in the event such Redemption Payment is not timely made, the Notice of Redemption shall be null and void, and any rights of the Company to thereafter redeem outstanding Notes shall be subject to the deposit of the Redemption Amount, in escrow, with an attorney designated by the Holder , within 2 business days of delivery of any Notice or Redemption . C. For so long as this Note is outstanding, if the Company issues and sells (A) Common Shares at a purchase price that is lower than $.75 per share, (B) warrants or options with an exercise price that is lower than $.75, or (C) convertible, exchangeable or exercisable securities with a right to exchange at lower than $.75 per share on the date of issuance of such convertible, exchangeable or exercisable securities, then the Conversion Price shall be reduced to equal the lowest of any such lower price. Notwithstanding the foregoing, the following issuances of securities shall not be subject to this Section: issuances pursuant to options, warrants, other convertible securities or other obligations outstanding or in existence as of the date hereof; issuances pursuant to any of the Company's option plans existing on the date hereof; issuances for which adjustment is made pursuant to other provisions hereof; and issuances of up to an additional 850,000 shares of Common Stock (or options or warrants to purchase same) issued subsequent to October 1, 2001 to consultants or other persons providing services to the Company. In the case of the issuance of Common Stock (otherwise than upon the conversion of shares of capital stock or other securities of the Corporation) for a consideration in whole or in part other than cash, including securities acquired in exchange therefor (other than securities by their terms so exchangeable), the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors, irrespective of any accounting treatment; provided that such fair value as determined by the Board of Directors shall not exceed the aggregate Current Market Price of the shares of Common Stock being issued as of the date the Board of Directors authorizes the issuance of such shares. D. In case of any stock split or reverse stock split, stock dividend, reclassification of the Common Stock, recapitalization, or like capital adjustment affecting the Common Stock of the Company (each, an "Adjustment"), the Conversion Price in effect at the time of the effective date for such Adjustment shall be proportionally adjusted so that the Holder of this Note converted after such date shall be entitled to receive the aggregate number and kind of shares which, if this Note had been converted by such Holder immediately prior to such date, the Holder would have owned upon such conversion and been entitled to received upon such Adjustment (and for such purposes the Holder shall, to the extent relevant, be deemed to have converted this Note immediately prior to the record date or the effective date, as the case may, for the Adjustment). For example, if the Company declares a 2:1 stock dividend or stock split and the Conversion Price immediately prior to the record date for such Adjustment was $.75 per share, the adjusted Conversion Price immediately after the Adjustment would be $.375 per share. Such adjustment may be made successively if there is more than one Adjustment. In all other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. A rights offering to stockholders shall be deemed a stock dividend to the extent of the bargain purchase element of the rights. E. If, for any reason, prior to the conversion of this Note in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security holders of the Company, then the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the Holder's unconverted Notes outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the "Outstanding Notes") been converted as of the close of business on the trading day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the conversion of all or any of the Outstanding Notes, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the amount of the Outstanding Notes then being converted, and (II) the denominator is the amount of the Outstanding Notes. Whenever the Conversion Price shall be adjusted as provided herein, the Company shall forthwith file, at the principal office of the Company, a statement showing in detail the facts requiring such adjustment and the Conversion Price that shall be in effect after such adjustment, and the Company shall also cause a copy of such statement to be sent by mail, first class postage prepaid, to each other party hereto, at its address appearing on the Company's records. Each such statement shall be signed by the Company's independent public accountants, if applicable. F .Conversion of this Note may be exercised, in whole or in part, by the Holder by telecopying an executed and completed notice of conversion. Interest accrued or accruing from the Issue Date to the date of conversion shall, at the option of the Holder, be paid in cash or Common Stock upon conversion at the Conversion Price. No fractional shares of Common Stock or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share. The date on which notice of conversion is given (the "Conversion Date") shall be deemed to be the date on which the Holder faxes the conversion notice ("Notice of Conversion"), substantially in the form annexed hereto as Exhibit A, duly executed, to the Company.. Facsimile delivery of the Notice of Conversion shall be accepted by the Company at facsimile number (651) 687-0515; ATTN: Chief Financial Officer. Certificates representing Common Stock upon conversion will be delivered within five (5) business days from the date the Notice of Conversion is delivered to the Company's transfer agent or the Company. G. From and after the date of the filing of the Certificate of Amendment pursuant to Section 7(k) of the Funding Agreement, the Company shall have at all times authorized and reserved for issuance, free from preemptive rights, shares of Common Stock sufficient to yield the number of shares of Common Stock issuable at conversion as may be required to satisfy the conversion rights based on the Conversion Price as in effect from time to time, pursuant to the terms and conditions of the maximum face of the Notes and accrued interest to maturity. Until the filing of such Certificate, the Company shall not issue any authorized but unissued shares except upon conversion of this Note or other convertible securities due and owing to the Holder. 6. Notwithstanding any other provision hereof, or of any of the other Transaction Agreements, in no event (except (i) as specifically provided in this Agreement as an exception to this provision, or (ii) while there is outstanding a tender offer for any or all of the shares of the Company's Common Stock) shall the Holder be entitled to convert this Note or shall the Company have the obligation, to deliver Conversion Shares to the extent that, after such exercise or delivery, the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of unconverted part of the Note, any other convertible security or unexercised Warrants) would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock (after taking into account the shares to be issued to the Holder upon such exercise). For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), except as otherwise provided in clause (1) of such sentence. Holder further agrees that if Holder transfers or assigns any of the Shares to a party who or which would not be considered such an affiliate, such assignment shall be made subject to the transferee's or assignee's specific agreement to be bound by the provisions of this section as if such transferee or assignee were the original Holder hereof. Nothing herein shall preclude the Holder from disposing of a sufficient number of other shares of Common Stock beneficially owned by the Holder so as to thereafter permit the conversion of this Note. 7. The Holder of the Note, by acceptance hereof, agrees that this Note is being acquired for investment and that such Holder will not offer, sell or otherwise dispose of this Note except under circumstances which will not result in a violation of the Act or any applicable state Blue Sky or foreign laws or similar laws relating to the sale of securities. The exercise by Holder of or failure to so exercise any authority granted herein shall in no manner affect Company's liability to Holder, and provided, further, that Holder shall be under no obligation or duty to exercise any of the powers hereby conferred upon them and they shall be without liability for any act or failure to act in connection with the collection of, or the preservation of, any rights under any of the Collateral. 8. This Note shall be governed by and construed in accordance with the laws of the State of New York. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON COVENIENS, to the bringing of any such proceeding in such jurisdictions. 9. The following shall constitute an "Event of Default": a. The Company shall default in the payment of principal or interest on this Note and same shall continue for a period of five (5) business days; or b. Any of the representations or warranties made by the Company herein, or in any certificate or financial or other written statements heretofore or hereafter furnished by the Company in connection with the execution and delivery of the Funding Agreement, the Exchange Agreement, or this Note shall be false or misleading in any material respect at the time made; or c. The Company shall fail to perform or observe, in any material respect, any other covenant, term, provision, condition, agreement or obligation of the Funding Agreement or this Note, and such failure shall continue uncured for a period of ten (10) business days after written notice from the Holder of such failure; or d. The Company shall fail to perform or observe, in any material respect, any covenant, term, provision, condition, agreement or obligation of the Company hereunder, and such failure shall continue uncured for a period of thirty (30) days after written notice from the Holder of such failure; or e. The Company shall (1) admit in writing its inability to pay its debts generally as they mature; (2) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (3) apply for or consent to the appointment of a trustee, liquidator or receiver for its or for a substantial part of its property or business; or f. A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged within ninety (90) days after such appointment; or g. Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and shall not be dismissed within ninety (90) days thereafter; or h. Any money judgment, writ or warrant of attachment, or similar process in excess of Two Hundred Thousand ($200,000) Dollars in the aggregate shall be entered or filed against the Company or any of its properties or other assets and shall remain unpaid, unvacated, unbonded or unstayed for a period of ninety (90) days or in any event later than five (5) business days prior to the date of any proposed sale thereunder; or i. Bankruptcy, reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company and, if instituted against the Company, shall not be dismissed within ninety (90) days after such institution or the Company shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding; or j. The Company shall have its Common Stock suspended or delisted from an exchange or other trading market from trading for in excess of ten (10) trading days. k. The Company fails to issue shares of Common Stock to the Holder or to cause its Transfer Agent to issue shares of Common Stock upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Note, fails to transfer or to cause its Transfer Agent to transfer any certificate for shares of Common Stock issued to the Holder upon conversion of this Note and when required by this Note or the Registration Rights Agreement, and such transfer is otherwise lawful, or fails to remove any restrictive legend or to cause its Transfer Agent to transfer on any certificate or any shares of Common Stock issued to the Holder upon conversion of this Note as and when required by this Note, the Agreement or the Registration Rights Agreement and such legend removal is otherwise lawful, and any such failure shall continue uncured for five (5) business days. Then, or at any time thereafter, and in each and every such case, unless such Event of Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default) at the option of the Holder and in the Holder's sole discretion, the Holder may consider this Note immediately due and payable within five (5) business days of written notice by Holder to the Company, without presentment, demand, protest or notice of any kinds, all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and the Holder may immediately enforce any and all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by law. 10. Upon failure to make any payment of any installment of principal or interest when due hereunder, Company further promises to pay, automatically on all installments of principal and interest which are not timely paid when due, and until such payment default is cured and on the then outstanding principal balance, additional interest in addition to the rate set forth hereinabove, so that interest will then accrue at a rate equal to fifteen (15%) percent per annum. 11. Any interest rate provided for hereunder which exceeds the maximum rate provided by applicable law shall instead be deemed to be such maximum rate and any interest in excess of such maximum rate paid to Holder shall be applied to reduce the principal balance of this Note so that in no event shall Holder receive or be entitled to receive interest in excess of the maximum amount permitted by applicable law. 12. Nothing contained in this Note shall be construed as conferring upon the Holder the right to vote or to receive dividends or to consent or receive notice as a shareholder in respect of any meeting of shareholders or any rights whatsoever as a shareholder of the Company, unless and to the extent converted in accordance with the terms hereof. 13. The obligation of the Company for payment of principal, interest and all other sums hereunder is secured by Security Interest Provisions between the Company and the Holder as set forth in the Annex hereto. 14. The Company and the Holder hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out of or in connection with the Note. 15. The Holders books and records as to the amounts advanced hereunder and the date of such advances shall be conclusive evidence thereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized. Dated: November 26, 2001 SAC TECHNOLOGIES, INC. By:________________________ ___________________________ (Print Name) ___________________________ (Title) [FORM OF CONVERSION NOTICE] TO: --------------------------------- --------------------------------- --------------------------------- The undersigned hereby instructs the Company to convert the portion of the Note specified above into Shares of Common Stock Issued at Conversion in accordance with the provisions of Section 5 of the Note. The undersigned directs that the Common Stock issuable and certificates therefor deliverable upon conversion, the Note recertificated in the principal amount, if any, not being surrendered for conversion hereby, together with any check in payment for fractional Common Stock, be issued in the name of and delivered to the undersigned unless a different name has been indicated below. All capitalized terms used and not defined herein have the respective meanings assigned to them in the Note. By delivering this conversion notice, the undersigned owner represents and warrants that it does not now, nor after giving effect to this conversion notice will it, beneficially own in excess of 4.99% of the outstanding shares of Common Stock of the Company within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended. Date ___________________________________________________________________ Signature ______________________________________________________________________ [Name] Address: _______________________________________________________________________ _______________________________________________________________________ EX-10.35 8 sac020249_ex10-35.txt RESTATED 5% CONVERTIBLE DEBENTURE EXHIBIT 10.35 "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS." RESTATED 5% CONVERTIBLE DEBENTURE DUE SEPTEMBER 30, 2003 November 26, 2001 $539,625.93 NO. ___________________ SAC Technologies, Inc., a Minnesota corporation with principal executive offices located at SAC Technologies, Inc., 1285 Corporate Center Drive, Suite 175, Eagan, Minnesota 55121, the ("Company"), for value received, hereby promises to pay to the Holder (as defined below), or order, on September 30, 2003 (the "Maturity Date") the principal sum of Five Hundred Thirty-Nine Thousand Six Hundred Twenty-Five and 93/100($539,625.93) and to pay interest thereon from the date of original issuance (or the most recent interest payment date to which interest has been paid), quarterly in arrears, commencing August 31, 2002 and thereafter on each February 28, May 31, August 31 and November 30 of each year, at the rate of 5% per annum (the "Debenture Interest Rate"), until the principal of this Debenture has been paid in full or duly and irrevocably provided for by conversion or as otherwise permitted herein. The interest so payable and duly and punctually provided for on any interest payment date shall be paid to the Person in whose name this Debenture is registered at the close of business on the 15th day next preceding the applicable interest payment date and all interest payable on the principal amount of this Debenture shall be calculated on the basis of 360-day year for the actual number of days elapsed. The Company shall have the right to prepay, in whole or in part, the then outstanding principal amount due hereunder. ARTICLE 1 DEFINITIONS SECTION 1.1 Definitions. The terms defined in this Article whenever used in this Debenture have the following respective meanings: (a) "ADDITIONAL CAPITAL SHARES" has the meaning set forth in Section 3.1(c). (b) "AFFILIATE" has the meaning ascribed to such term in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. (c) "APPLICABLE DISCOUNT" shall mean 78%. (d) "BUSINESS DAY" means a day other than Saturday, Sunday or any day on which banks located in the state of New York are authorized or obligated to close. (e) "CAPITAL SHARES" means the Common Shares and any other shares of any other class or series of common stock, whether now or hereafter authorized and however designated, which have the right to participate in the distribution of earnings and assets (upon dissolution, liquidation or winding-up) of the Company. (f) "COMMON SHARES" or "COMMON STOCK" means shares of the common stock, $.01 par value, of the Company. (g) "COMMON STOCK ISSUED AT CONVERSION" when used with reference to the securities issuable upon conversion of this Debenture, means all Common Shares now or hereafter Outstanding and securities of any other class or series into which the Debenture hereafter shall have been changed or substituted, whether now or hereafter created and however designated. (h) "COMPANY" means SAC Technologies, Inc., a Minnesota corporation, and any successor or resulting corporation by way of merger, consolidation, sale or exchange of all or substantially all of the Company's assets, or otherwise. (i) "CONVERSION DATE" means any day on which all or any portion of the principal amount of this Debenture is converted in accordance with the provisions hereof. (j) "CONVERSION NOTICE" has the meaning set forth in Section 3.2. (k) "CONVERSION PRICE" on any date of determination means the applicable price for the conversion of this Debenture into Common Shares on such day as set forth in Section 3.1. RESERVED (m) "CURRENT MARKET PRICE" on any date of determination means the closing bid price of a Common Share on such day as reported by Bloomberg LP for the Principal Market. (n) "DEBENTURE" means this 5% Convertible Debenture of the Company or such other convertible debentures or Debentures exchanged therefor as provided in Section 2.1. (o) "DEFAULT INTEREST RATE" shall be equal to the Debenture Interest Rate plus an additional 4% per annum. (p) "EVENT OF DEFAULT" has the meaning set forth in Section 6.1. (q) "EXCHANGE AGREEMENT" shall mean the Series B Convertible Preferred and 5% Convertible Debenture Exchange Agreement of even date herewith. (r) "HOLDER" means The Shaar Fund Ltd., any successor thereto, or any Person to whom this Debenture is subsequently transferred in accordance with the provisions hereof. (s) "MARKET DISRUPTION EVENT" means any event that results in a material suspension or limitation of trading of Common Shares on NASDAQ. (t) "MARKET PRICE" per Common Share means the average of the closing bid prices of the Common Shares as reported by Bloomberg LP for the Principal Market during the Valuation Period. (u) "MAXIMUM RATE" has the meaning set forth in Section 6.3. (v) "OUTSTANDING" when used with reference to Common Shares or Capital Shares (collectively, "Shares"), means, on any date of determination, all issued and outstanding Shares, and includes all such Shares issuable in respect of outstanding warrants, options or rights to subscribe for or purchase shares outstanding scrip or any certificates representing fractional interests in such Shares; PROVIDED, HOWEVER, that any such Shares directly or indirectly owned or held by or for the account of the Company or any Subsidiary of the Company shall not be deemed "Outstanding" for purposes hereof. (w) "PERSON" means an individual, a corporation, a partnership, an association, a limited liability company, a unincorporated business organization, a trust or other entity or organization, and any government or political subdivision or any agency or instrumentality thereof. (x) "Principal Market" shall mean the market or exchange whichever is at the time the principal trading exchange or market for the Common Stock. (y) "REGISTRATION RIGHTS AGREEMENT" means that certain registration rights agreement dated November 26,2001, between the Company and The Shaar Fund Ltd. (z) "SEC" means the United States Securities and Exchange Commission. (aa) "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as in effect at the time. (bb) "SUBSIDIARY" means any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are owned directly or indirectly by the Company. (cc) "TRADING DAY" means any day on which purchases and sales of securities authorized for quotation on NASDAQ are reported thereon and on which no Market Disruption Event has occurred. (dd) "VALUATION EVENT" has the meaning set forth in Section 3.1. (ee) "VALUATION PERIOD" means the five Trading Day period immediately preceding the relevant Conversion Date. All references to "cash" or "$" herein means currency of the United States of America. ARTICLE 2 EXCHANGES AND TRANSFER SECTION 2.1 Exchange and Registration of Transfer of Debentures. Subject to compliance with applicable securities laws, the Holder may, at its option, surrender this Debenture at the principal executive offices of the Company and receive in exchange therefor a Debenture or Debentures, each in the denomination of $10,000 or integral multiples of $1,000 in excess thereof, dated as of the date of this Debenture, and, subject to Section 4.2, payable to such Person or order as may be designated by such Holder. The aggregate principal amount of the Debenture or Debentures exchanged in accordance with this Section 2.1 shall equal the aggregate unpaid principal amount of this Debenture as of the date of such surrender; PROVIDED, HOWEVER, that upon any exchange pursuant to this Section 2.1 there shall be filed with the Company the name and address for all purposes hereof of the Holder or Holders of the Debenture or Debentures delivered in such exchange. This Debenture, when presented for registration of transfer or for exchange or conversion, shall (if so required by the Company) be duly endorsed, or be accompanied by a written instrument of transfer in form reasonably satisfactory to the Company duly executed, by the Holder duly authorized in writing. SECTION 2.2 Loss, Theft, Destruction of Debenture. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Debenture and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Debenture, the Company shall make, issue and deliver, in lieu of such lost, stolen, destroyed or mutilated Debenture, a new Debenture or Debentures of like tenor and unpaid principal amount dated as of the date hereof. This Debenture shall be held and owned upon the express condition that the provisions of this Section 2.2 are exclusive with respect to the replacement of a mutilated, destroyed, lost or stolen Debenture and shall preclude any and all other rights and remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement of negotiable instruments or other securities without the surrender thereof. SECTION 2.3 Who Deemed Absolute Owner. The Company may deem the Person in whose name this Debenture shall be registered upon the registry books of the Company to be, and may treat it as, the absolute owner of this Debenture (whether or not this Debenture shall be overdue) for the purpose of receiving payment of or on account of the principal amount of this Debenture, for the conversion of this Debenture and for all other purposes, and the Company shall not be affected by any notice to the contrary. All such payments and such conversion shall be valid and effectual to satisfy and discharge the liability upon this Debenture to the extent of the sum or sums so paid or the conversion so made. ARTICLE 3 CONVERSION OF DEBENTURE SECTION 3.1 Conversion; Conversion Price. At the option of the Holder, this Debenture may be converted, either in whole or in part, up to the full principal amount hereof (in increments of not less than $10,000 principal amount) into Common Shares (calculated as to each such conversion to the nearest 1/100th of a share), at any time, at a price equal to the lesser of (a) the Current Market Price multiplied by the Applicable Discount, or (b) $.75 per share. The Holder shall not have the right to convert any portion of this Debenture or interest thereon to the extent that the issuance to the Holder of Common Shares upon such conversion would result in the Holder being deemed the "beneficial owner" of 4.99% or more of the then outstanding Common Shares within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended. At the Holder's option, the amount of accrued and unpaid interest as of the Conversion Date shall not be subject to conversion but instead may be paid in cash as of the next interest payment date; if the Holder elects to convert the amount of accrued and unpaid interest at the Conversion Date into Common Stock, the Common Stock issued to the Holder shall be valued at the Conversion Price. Notwithstanding anything to the contrary contained herein, if a Valuation Event occurs during any Valuation Period, a new Valuation Period shall begin on the Trading Day immediately following the occurrence of such Valuation Event and end on the Conversion Date; provided that if a Valuation Event occurs on the fifth day of any Valuation Period, then the Conversion Price shall be the Current Market Price of the Common Shares on such day; and provided, further, that the Holder may, in its discretion, postpone such Conversion Date to a Trading Day which is no more than five Trading Days after the occurrence of the latest Valuation Event. In the event that the Holder deems the Valuation Period to be other than the five Trading Days immediately prior to the Conversion Date, the Holder shall give written notice of such fact to the Company at the time of conversion. For purposes of this Section 3.1, a "VALUATION EVENT" shall mean an event in which the Company at any time during a Valuation Period takes any of the following actions: (a) subdivides or combines its Capital Shares; (b) pays a dividend in its Capital Shares or makes any other distribution of its Capital Shares; (c) issues any additional Capital Shares (the "Additional Capital Shares"), otherwise than as provided in the foregoing Sections 3.1(a) and 3.1(b) above, at a price per share less, or for other consideration lower, than the Current Market Price in effect immediately prior to such issuances, or without consideration, except for issuances under employee benefit plans consistent with those presently in effect including, without limitation, issuances of Additional Capital Shares reserved pursuant to the Company's 1996 Stock Option Plan or 1999 Option Plan, as in effect on the date hereof, and issuances under presently outstanding warrants, options or convertible securities, and up to 350,000 additional shares of Common Stock or options or warrants to purchase same issued to consultants or employees of the Company; (d) issues any warrants, options or other rights to subscribe for or purchase any Additional Capital Shares and the price per share for which Additional Capital Shares at any time thereafter may be issuable shall be less than the Current Market Price on the date of such issuance; (e) issues any securities convertible into or exchangeable or exercisable for Capital Shares and the consideration per share for which Additional Capital Shares may at any time thereafter be issuable pursuant to the terms of such convertible, exchangeable or exercisable securities shall be less than the Current Market Price in effect on the date of such issuance; (f) makes a distribution of its assets or evidences of indebtedness to the holders of its Capital Shares as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for the payment of dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Company's assets (other than under the circumstances provided for in the foregoing Sections 3.1(a) through 3.1(e)), PROVIDED, in each case, that such distribution described in this Section 3.1(f) does not constitute an Event of Default; or (g) takes any action affecting the number of Outstanding Capital Shares, other than an action described in any of the foregoing Sections 3.1(a) through 3.1(f) hereof, inclusive, which in the opinion of the Company's Board of Directors, determined in good faith, would have a material adverse effect upon the rights of the Holder at the time of a conversion of this Debenture. SECTION 3.2 Exercise of Conversion Privilege. (a) Conversion of this Debenture may be exercised, in whole or in part, by the Holder by telecopying an executed and completed notice of conversion in the form annexed hereto as Annex I (the "Conversion Notice") to the Company. Each date on which a Conversion Notice is telecopied to and received by the Company in accordance with the provisions of this Section 3.2 shall constitute a Conversion Date. The Conversion Notice shall state the name or names (with addresses) of the persons who are to become the holders of the Common Stock issued upon such conversion. Upon receipt of the telecopied Conversion Notice, the Company shall within three Business Days of receipt of the Conversion Notice (i) issue the Common Stock effective as of the Conversion Date in accordance with the provisions of this Article 3, and (ii) cause to be mailed for delivery by overnight courier to the Holder (X) a certificate or certificate(s) representing the number of Common Shares to which the Holder is entitled by virtue of such conversion, (Y) cash, as provided in Section 3.4, in respect of any fraction of a Share issuable upon such conversion and (Z) cash in the amount of accrued and unpaid interest as of the Conversion Date, if any, to the extent payable in cash. Conversion shall be deemed to have been effected at the time stated in the Conversion Notice and at such time the rights of the Holder of this Debenture, as such, shall cease to the extent of such conversion, and the Person and Persons in whose name or names the Common Stock Issued at Conversion shall be issuable shall be deemed to have become the holder or holders of record of the Common Shares represented thereby. The Conversion Notice shall constitute a contract between the Holder and the Company, whereby the Holder shall be deemed to subscribe for the number of Common Shares which it will be entitled to receive upon such conversion and, in payment and satisfaction of such subscription (and for any cash adjustment to which it is entitled pursuant to Section 3.4), and to release the Company from all liability thereon. No cash payment aggregating less than $1.50 shall be required to be given unless specifically requested by the Holder. (b) The Company understands that a delay in the issuance of the Shares of Common Stock beyond the Delivery Date could result in economic loss to the Buyer. As compensation to the Buyer for such loss, the Company agrees to pay late payments to the Buyer for late issuance of Shares upon Conversion in accordance with the following schedule (where "No. Business Days Late" is defined as the number of business days beyond seven (7) business days from Delivery Date: Late Payment For Each $10,000 of Debenture No. Business Days Late Being Converted ------------------------------------------------- 1 $100 2 $200 3 $300 4 $400 5 $500 6 $600 7 $700 8 $800 9 $900 10 $1,000 >10 $1,000+$200 for each Business Day Late beyond 10 days The Company shall pay any payments incurred under this Section in immediately available funds upon demand. Furthermore, in addition to any other remedies which may be available to the Holder, in the event that the Company fails for any reason to effect delivery of such shares of Common Stock within five (5) business days after the Delivery Date, the Holder will be entitled to revoke the relevant Notice of Conversion by delivering a notice to such effect to the Company whereupon the Company and the Holder shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion. (c) Except as set forth in Section 3.1 hereof, at any time after the date of this Debenture, (i) the Company challenges, disputes or denies the right of the Holder hereof to effect the conversion of this Debenture into Common Shares or otherwise dishonors or rejects any Conversion Notice delivered in accordance with this Section 3.2 and this Agreement or (ii) any third party who is not and has never been an Affiliate of the Holder commences any lawsuit or proceeding or otherwise asserts any claim before any court or public or governmental authority which seeks to challenge, deny, enjoin, limit, modify, delay or dispute the right of the Holder hereof to effect the conversion of this Debenture into Common Shares, then the Holder shall have the right, by written notice to the Company, to require the Company to promptly redeem this Debenture for cash at a redemption price equal to 122% of the principal amount hereof together with all accrued and unpaid interest thereon (the "Mandatory Purchase Amount"). Under any of the circumstances set forth above, the Company shall be responsible for the payment of all costs and expenses of the Holder, including reasonable legal fees and expenses, as and when incurred in disputing any such action or pursuing its rights hereunder (in addition to any other rights of the Holder). SECTION 3.3 [This Section Reserved] SECTION 3.4 Fractional Shares. No fractional Common Shares or scrip representing fractional Common Shares shall be issued upon conversion of this Debenture. Instead of any fractional Common Shares which otherwise would be issuable upon conversion of this Debenture, the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction. No cash payment of less than $1.50 shall be required to be given unless specifically requested by the Holder. SECTION 3.5 Reclassification, Consolidation, Merger or Mandatory Share Exchange. A. In case of any stock split or reverse stock split, stock dividend, reclassification of the Common Stock, recapitalization, merger or consolidation, or like capital adjustment affecting the Common Stock of the Company (each, an "Adjustment"), the Conversion Rate in effect at the time of the effective date for such Adjustment shall be proportionally adjusted so that the Holder of this Debenture converted after such date shall be entitled to receive the aggregate number and kind of shares which, if this Debenture had been converted by such Holder immediately prior to such date, the Holder would have owned upon such conversion and been entitled to received upon such Adjustment (and for such purposes the Holder shall, to the extent relevant, be deemed to have converted this Debenture immediately prior to the record date or the effective date, as the case may, for the Adjustment). For example, if the Company declares a 2:1 stock dividend or stock split and the Conversion Rate immediately prior to the record date for such Adjustment was $.75 per share, the adjusted Conversion Rate immediately after the Adjustment would be $.375 per share. Such adjustment may be made successively if there is more than one Adjustment. In all other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. A rights offering to stockholders shall be deemed a stock dividend to the extent of the bargain purchase element of the rights. The provisions of this Section 3.5 shall similarly apply to successive reclassifications, changes, consolidations, mergers, mandatory share exchanges and sales and transfers. B. If, for any reason, prior to the conversion of this Debenture in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security holders of the Company, then the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the Holder's unconverted Debentures outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the "Outstanding Debentures") been converted as of the close of business on the trading day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the conversion of all or any of the Outstanding Debentures, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the amount of the Outstanding Debentures then being converted, and (II) the denominator is the amount of the Outstanding Debentures. Whenever the Conversion Price shall be adjusted as provided herein, the Company shall forthwith file, at the principal office of the Company, a statement showing in detail the facts requiring such adjustment and the Conversion Price that shall be in effect after such adjustment, and the Company shall also cause a copy of such statement to be sent by mail, first class postage prepaid, to each other party hereto, at its address appearing on the Company's records. Each such statement shall be signed by the Company's independent public accountants, if applicable. SECTION 3.6 Conversion Price Adjustments. The Conversion Price shall be subject to adjustment from time to time as follows: (i) Common Stock Issued at Less Than the Conversion Price. If the Corporation shall issue any Common Stock other than Excluded Stock (as hereinafter defined) without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to such issuance, the Conversion Price in effect immediately prior to each such issuance shall immediately (except as provided below) be reduced to the price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (calculated on a fully- diluted basis assuming the exercise or conversion of all then exercisable or convertible options, warrants, purchase rights and other convertible securities) plus the number of shares of Common Stock which the aggregate consideration received by the Company for the total number of additional shares of Common Stock so issued would purchase at the Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (calculated on a fully-diluted basis assuming the exercise or conversion of all then exercisable or convertible options, warrants, purchase rights and other convertible securities) plus the number of such additional shares of Common Stock so issued. For the purposes of any adjustment of the Conversion Price pursuant to clause (i), the following provisions shall be applicable: (A) Cash. In the case of the issuance of Common Stock for cash, the amount of the consideration received by the Corporation shall be deemed to be the amount of the cash proceeds received by the Corporation for such Common Stock before deducting therefrom any discounts, commissions, taxes or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (B) Consideration Other Than Cash. In the case of the issuance of Common Stock (otherwise than upon the conversion of shares of capital stock or other securities of the Corporation) for a consideration in whole or in part other than cash, including securities acquired in exchange therefor (other than securities by their terms so exchangeable), the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors, irrespective of any accounting treatment; provided that such fair value as determined by the Board of Directors shall not exceed the aggregate Current Market Price of the shares of Common Stock being issued as of the date the Board of Directors authorizes the issuance of such shares. (C) Options and Convertible Securities. In the case of the issuance of (i) options, warrants or other rights to purchase or acquire Common Stock (whether or not at the time exercisable), (ii) securities by their terms convertible into or exchangeable for Common Stock (whether or not at the time so convertible or exchangeable) or options, warrants or rights to purchase such convertible or exchangeable securities (whether or not at the time exercisable): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise of such options, warrants or other rights to purchase or acquire Common Stock shall be deemed to have been issued at the time such options, warrants or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subclauses (A) and (B) above), if any, received by the Corporation upon the issuance of such options, warrants or rights plus the minimum purchase price provided in such options, warrants or rights for the Common Stock covered thereby; (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities, or upon the exercise of options, warrants or other rights to purchase or acquire such convertible or exchangeable securities and the subsequent conversion or exchange thereof, shall be deemed to have been issued at the time such securities were issued or such options, warrants or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options, warrants or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration (determined in the manner provided in subclauses (A) and (B) above), if any, to be received by the Corporation upon the conversion or exchange of such securities, or upon the exercise of any related options, warrants or rights to purchase or acquire such convertible or exchangeable securities and the subsequent conversion or exchange thereof; (3) On any change in the number of shares of Common Stock deliverable upon exercise of any such options, warrants or rights or conversion or exchange of such convertible or exchangeable securities or any change in the consideration to be received by the Corporation upon such exercise, conversion or exchange, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price as then in effect shall forthwith be readjusted to such Conversion Price as would have been obtained had an adjustment been made upon the issuance of such options, warrants or rights not exercised prior to such change, or of such convertible or exchangeable securities not converted or exchanged prior to such change, upon the basis of such change; (4) On the expiration or cancellation of any such options, warrants or rights, or the termination of the right to convert or exchange such convertible or exchangeable securities, if the Conversion Price shall have been adjusted upon the issuance thereof, the Conversion Price shall forthwith be readjusted to such Conversion Price as would have been obtained had an adjustment been made upon the issuance of such options, warrants, rights or such convertible or exchangeable securities on the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options, warrants or rights, or upon the conversion or exchange of such convertible or exchangeable securities; and (5) If the Conversion Price shall have been adjusted upon the issuance of any such options, warrants, rights or convertible or exchangeable securities, no further adjustment of the Conversion Price shall be made for the actual issuance of Common Stock upon the exercise, conversion or exchange thereof; (provided, however, that no increase in the Conversion Price shall be made pursuant to subclauses (1) and (2) of this subclause (C)). (ii) Excluded Stock. "Excluded Stock" shall mean issuances pursuant to options, warrants, other convertible securities or other obligations outstanding or in existence as of the date hereof; issuances pursuant to any of the Company's option plans existing on the date hereof; issuances for which adjustment is made pursuant to other provisions hereof; and issuances of up to an additional 850,000 shares of Common Stock, options or warrants to purchase same issued subsequent to October 1, 2001, to consultants or other persons providing services to the Company. (iii) [RESERVED] (iv) Other Distributions. In case the Corporation shall fix a record date for the making of a distribution to all holders of shares of its Common Stock (A) of shares of any class other than its Common Stock or (B) of evidence of indebtedness of the Corporation or any Subsidiary or (C) of assets (excluding cash dividends or distributions, and dividends of distributions referred to in subparagraph(iii) above, or (D) of rights or warrants (excluding those referred to in subparagraph)(i) above), in each such case the Conversion Price in effect immediately prior thereto shall be reduced immediately thereafter to the price determined by dividing (1) an amount equal to the difference resulting from (A) the number or shares of Common Stock outstanding on such record date multiplied by the Conversion Price per share on such record date, less (B) the fair market value (as determined by the Board of Directors, whose determination shall be conclusive) of said shares or evidences of indebtedness or assets or rights or warrants to be so distributed, by (2) the number of shares of Common Stock outstanding on such record date. Such adjustment shall be made successively whenever such a record date is fixed. In the event that such distribution is not so made, the Conversion Price then in effect shall be readjusted, effective as of the date when the Board of Directors determines not to distribute such shares, evidence of indebtedness, assets, rights or warrants, as the case may be, to the Conversion Price which would then be in effect if such record date had not been fixed. (vi) Rounding of Calculations; Minimum Adjustment. All calculations under this subparagraph (f) shall be made to the nearest cent or to the nearest one hundredth (1/100th) of a share, as the case may be. Any provision of this paragraph to the contrary notwithstanding, no adjustment in the Conversion Price shall be made if the amount of such adjustment would be less than $0.05, but any such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate $0.05 or more. (vii) Timing of Issuance of Additional Common Stock Upon Certain Adjustments. In any case in which the provisions of this paragraph shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event (A) issuing to the holder of any Convertible Debenture converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the shares of Common Stock issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount of cash in lieu of a fractional share of Common Stock pursuant to subparagraph (e) of this Section ; provided that the Corporation upon request shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares, and such cash, upon the occurrence of the event requiring such adjustment. (g) Statement Regarding Adjustments. Whenever the Conversion Price shall be adjusted as provided herein, the Corporation shall forthwith file at the principal office of the Corporation, a statement showing in detail the facts requiring such adjustment and the Conversion Price that shall be in effect after such adjustment, and the Corporation shall also cause a copy of such statement to be sent by mail, first class postage prepaid, to each holder of Convertible Debentures at its address appearing on the Corporation's records. Each such statement shall be signed by the Corporation's independent public accountants, if applicable. Where appropriate, such copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of subparagraph (i). (h) Notice to Holders. In the event the Corporation shall propose to take any action of the type described in clause (i) (but only if the action of the type described in clause (i) would result in an adjustment in the Conversion Price), (iii), (iv), or (v) of subparagraph (f), the Corporation shall give notice to each holder of Convertible Debentures, in the manner set forth in subparagraph (h), which notice shall specify the record date, if any, with respect to any such action and the approximate date on which such action is to take place. Such notice shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable upon conversion of ConvertibleDebentures. In the case of any action which would require the fixing of a record date, such notice shall be given at least ten (10) days prior to the date so fixed, and in case of all other action, such notice shall be given at least fifteen (1) days prior to the taking of such proposed action. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any such action. (j) Costs. The Corporation shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of shares of Common Stock upon conversion of any Convertible Debentures; provided that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the Convertible Debenture in respect of which such shares are being issued. ARTICLE 4 STATUS; RESTRICTIONS ON TRANSFER SECTION 4.1 Status of Debenture. This Debenture constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms subject, as to enforceability, to general principles of equity and to principles of bankruptcy, insolvency, reorganization and other similar laws of general applicability relating to or affecting creditors' rights and remedies generally. SECTION 4.2 Restrictions on Transfer. This Debenture, and any Common Shares issuable according to the terms hereof, have not been registered under the Securities Act. This Debenture and any Common Shares issued upon conversion may not be offered or sold, directly or indirectly, except pursuant to an effective registration statement under the Act, or pursuant to an available exemption therefrom. ARTICLE 5 COVENANTS The Company covenants and agrees that so long as this Debenture shall be outstanding: SECTION 5.1 Conversion. The Company shall not later than five Business Days after its receipt of the Conversion Notice, issue and deliver to the Holder the requisite shares of common stock issuable upon conversion, according to the terms hereof. SECTION 5.2 Notice of Default. If any one or more events occur which constitute or which, with notice, lapse of time, or both, would constitute an Event of Default, the Company shall forthwith give notice to the Holder, specifying the nature and status of the Event of Default or other event or of such demand or action, as the case may be. SECTION 5.3 Insurance. The Company shall carry and maintain in full force and effect at all times with insurers that are financially sound and reputable such insurance in such amounts as is customary in the industry of the Company. SECTION 5.4 Payment of Obligations. Prior to conversion of the entire principal amount of this Debenture, the Company shall pay, extend, or discharge at or before maturity, all its respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings. SECTION 5.5 Compliance with Laws. The Company shall comply with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities, except for such noncompliance which would not have a material adverse effect on the business, properties, prospects, condition (financial or otherwise) or results of operations of the Company. SECTION 5.6 Inspection of Property, Books and Records. The Company shall keep proper books of record and account in which full, true and correct entries shall be made of all material dealings and transactions in relation to its business and activities and shall permit representatives of the Holder at the Holder's expense to visit and inspect any of its respective properties, to examine and make abstracts from any of its respective books and records, not reasonably deemed confidential by the Company, and to discuss its respective affairs, finances and accounts with its respective officers and independent public accountants, all at such reasonable times and as often as may reasonably be desired. SECTION 5.7 Not declare or pay any dividends , redeem any equity securities of the Company or authorize or make any other distribution on any class of equity securities of the Company except for the payment of dividends on the Series B Preferred Stock. SECTION 5.8 The Board of Directors shall promptly after the execution hereof, (x) adopt proper resolutions authorizing an increase in number of authorized shares of Common Stock to 60,000,000 shares, (y) recommend to and otherwise use its best efforts to promptly and duly obtain shareholder approval to carry out such resolutions (and hold a special meeting of the shareholders no later than February 15, 2002) and (z) within 5 Business Days of obtaining such shareholder authorization, file an appropriate amendment to the Company's articles of incorporation to evidence such increase. ARTICLE 6 REMEDIES SECTION 6.1 Events of Default. "Event of Default" wherever used herein means any one of the following events: (a) the Company shall default in the payment of principal of or interest on this Debenture as and when the same shall be due and payable and, in the case of an interest payment default, such default shall continue for five Business Days after the date such interest payment was due, or the Company shall fail to perform or observe any other covenant, agreement, term, provision, undertaking or commitment under this Debenture, or the Exchange Agreement, and such default shall continue for a period of ten Business Days after the receipt by the Company of written notice that the Company is in default hereunder; or (b) The Company fails to issue shares of Common Stock to the Holder or to cause its Transfer Agent to issue shares of Common Stock upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Debenture, fails to transfer or to cause its Transfer Agent to transfer any certificate for shares of Common Stock issued to the Holder upon conversion of this Debenture and when required by this Debenture, and such transfer is otherwise lawful, or fails to remove any restrictive legend or to cause its Transfer Agent to transfer on any certificate or any shares of Common Stock issued to the Holder upon conversion of this Debenture as and when required by this Debenture, the Agreement or the Registration Rights Agreement and such legend removal is otherwise lawful, and any such failure shall continue uncured for five (5) business days. (c) any of the representations or warranties made by the Company herein, the Exchange Agreement, the Registration Rights Agreement or in any certificate or financial or other written statements heretofore or hereafter furnished by or on behalf of the Company in connection with the execution and delivery of this Debenture, the Exchange Agreement or the Registration Rights Agreement shall be false or misleading in any material respect on the Closing Date; or (d) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company or any subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under the United States Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), or any other applicable Federal or state law, or appointing a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding-up or liquidation of its affairs, and any such decree or order continues and is unstayed and in effect for a period of 60 calendar days; or (e) the institution by the Company or any Subsidiary of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under the Bankruptcy Code or any other applicable federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as and when they become due, or the taking of corporate action by the Company in furtherance of any such action; or (f) a final judgment or final judgments for the payment of money shall have been entered by any court or courts of competent jurisdiction against the Company and remains undischarged for a period (during which execution shall be effectively stayed) of 90 days, provided that the aggregate amount of all such judgments at any time outstanding (to the extent not paid or to be paid, as evidenced by a written communication to that effect from the applicable insurer, by insurance) exceeds $200,000 : or (g) it becomes unlawful for the Company to perform or comply with its obligations under this Debenture or the Exchange Agreement; or (h) the Company shall default (giving effect to any applicable grace period) in the payment of principal or interest as and when the same shall become due and payable, under any indebtedness, individually or in the aggregate, of more than $200,000 ; or (i) the Common Shares shall be delisted from the Principal Market or suspended from trading on the Principal Market, and shall not be reinstated, relisted or such suspension lifted, as the case may be, within ten (10) days. SECTION 6.2 Acceleration of Maturity; Rescission and Annulment. If an Event of Default occurs and is continuing, then and in every such case any Holder may rescind the Conversion Notice and obtain payment for the entire outstanding principal amount of the Debenture which remains unconverted, by a notice in writing to the Company, and upon any such declaration the entire principal amount of this Debenture shall become immediately due and payable by virtue of such rescission; provided, however, in the case of any Event of Default described in paragraphs (c), (d) or (f) above, the entire then outstanding principal amount of this Debenture, together with all accrued and unpaid interest thereon, automatically shall become immediately due and payable without the necessity of any notice or declaration as aforesaid. SECTION 6.3 Default Interest Rate. (a) If any portion of the principal of or interest on the Debenture shall not be paid when due (whether at the stated maturity, by acceleration or otherwise) such principal of and interest on the Debenture which is due and owing but not paid shall, without limiting the Holder's rights under this Debenture, bear interest at the Default Interest Rate until paid in full or otherwise converted as set forth herein. SECTION 6.4 Remedies Not Waived. No course of dealing between the Company and the Holder or any delay in exercising any rights hereunder shall operate as a waiver by the Holder. SECTION 6.5 Waiver. No recourse shall be had for the payment of the principal of, or the interest on, this Debenture, or for any claim based hereon, or otherwise in respect hereof, against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. ARTICLE 7 MISCELLANEOUS SECTION 7.1 Notice of Certain Events. In the case of the occurrence of any event described in Sections 3.1, 3.5 or 3.6 of this Debenture, the Company shall cause to be mailed to the Holder of this Debenture at its last address as it appears in the Company's security registry, at least 20 days prior to the applicable record, effective or expiration date hereinafter specified (or, if such 20 days notice is not possible, at the earliest possible date prior to any such record, effective or expiration date), a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, issuance or granting of rights, options or warrants, or if a record is not to be taken, the date as of which the holders of record of Common Stock to be entitled to such dividend, distribution, issuance or granting of rights, options or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of record of Common Stock will be entitled to exchange their shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale transfer, dissolution, liquidation or winding-up. SECTION 7.2 Register. (a) The Company shall keep at its principal office a register in which the Company shall provide for the registration of this Debenture. Upon any transfer of this Debenture in accordance with Article 2 and 4 hereof, the Company shall register such transfer on the Debenture register. (b) The Company may deem the person in whose name this Debenture shall be registered upon the registry books of the Company to be, and may treat it as, the absolute owner of this Debenture (whether or not this Debenture shall be overdue) for the purpose of receiving payment of interest on or principal of this Debenture, for the conversion of this Debenture and for all other purposes, and the Company shall not be affected by any notice to the contrary. All such payments and such conversions shall be valid and effective to satisfy and discharge the liability upon this Debenture to the extent of the sum or sums so paid or the conversion or conversions so made. SECTION 7.3 Withholding. To the extent required by applicable law, the Company may withhold amounts for or on account of any taxes imposed or levied by or on behalf of any taxing authority in the United States having jurisdiction over the Company from any payments made pursuant to this Debenture. SECTION 7.4 Governing Law. THIS DEBENTURE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO CONFLICTS OF LAWS PRINCIPLES). WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDINGS RELATING TO THIS DEBENTURE, THE COMPANY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES DISTRICT COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK AND HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. SUBJECT TO APPLICABLE LAW, THE COMPANY AGREES THAT FINAL JUDGMENT AGAINST IT IN ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS DEBENTURE SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION WITHIN OR OUTSIDE THE UNITED STATES BY SUIT ON THE JUDGMENT, A CERTIFIED COPY OF WHICH JUDGMENT SHALL BE CONCLUSIVE EVIDENCE THEREOF AND THE AMOUNT OF ITS INDEBTEDNESS, OR BY SUCH OTHER MEANS PROVIDED BY LAW. SECTION 7.5 Jury Trial Waiver. The Company and Purchaser hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out of or in connection with the Transaction Documents. SECTION 7.6 Headings. The headings of the Articles and Sections of this Debenture are inserted for convenience only and do not constitute a part of this Debenture. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the Company has caused this Debenture to be signed by its duly authorized officer under its corporate seal, attested by its duly authorized officer, on the date of this Debenture. SAC TECHNOLOGIES, INC. By: ----------------------------------- Name: Title: Attest By: ----------------------------------- Name: Title: INITIAL HOLDER THE SHAAR FUND, LTD. By: INTER CARIBBEAN SERVICES LTD. By: ----------------------------------- Name: Title: ANNEX I [FORM OF CONVERSION NOTICE] TO: --------------------------------- --------------------------------- --------------------------------- The undersigned owner of this 5% Convertible Debenture due September 30, 2003 issued by SAC Technologies, Inc. (the "Debenture") hereby irrevocably exercises its option to convert $_____ principal amount of the Debenture into shares of the common stock, $.01 par value, of SAC Technologies, Inc. ("Common Stock"), in accordance with the terms of the Debenture. The undersigned hereby instructs the Company to convert the portion of the Debenture specified above into Shares of Common Stock Issued at Conversion in accordance with the provisions of Article 3 of the Debenture. The undersigned directs that the Common Stock issuable and certificates therefor deliverable upon conversion, the Debenture recertificated in the principal amount, if any, not being surrendered for conversion hereby, together with any check in payment for fractional Common Stock, be issued in the name of and delivered to the undersigned unless a different name has been indicated below. All capitalized terms used and not defined herein have the respective meanings assigned to them in the Debenture. By delivering this conversion notice, the undersigned owner represents and warrants that it does not now, nor after giving effect to this conversion notice will it, beneficially own in excess of 4.99% of the outstanding shares of Common Stock of the Company within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended. Date ___________________________________________________________________ Signature ______________________________________________________________________ [Name] Address: _______________________________________________________________________ _______________________________________________________________________ EX-10.36 9 sac020249_ex10-36.txt CONVERTIBLE DEBENTURE EXHIBIT 10.36 "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS." CONVERTIBLE DEBENTURE DUE SEPTEMBER 30, 2003 November 26, 2001 $1,000,000 NO. ___________________ SAC Technologies, Inc., a Minnesota corporation with principal executive offices located at SAC Technologies, Inc., 1285 Corporate Center Drive, Suite 175, Eagan, Minnesota 55121, the ("Company"), for value received, hereby promises to pay to the Holder (as defined below), or order, on September 30, 2003 (the "Maturity Date") the principal sum of One Million Dollars and 00/100 ($1,000,000) WITHOUT INTEREST. The Company shall have the right to prepay, in whole or in part, the then outstanding principal amount due hereunder. ARTICLE 1 DEFINITIONS SECTION 1.1 Definitions. The terms defined in this Article whenever used in this Debenture have the following respective meanings: (a) "ADDITIONAL CAPITAL SHARES" has the meaning set forth in Section 3.1(c). (b) "AFFILIATE" has the meaning ascribed to such term in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. (c) RESERVED (d) "BUSINESS DAY" means a day other than Saturday, Sunday or any day on which banks located in the state of New York are authorized or obligated to close. (e) "CAPITAL SHARES" means the Common Shares and any other shares of any other class or series of common stock, whether now or hereafter authorized and however designated, which have the right to participate in the distribution of earnings and assets (upon dissolution, liquidation or winding-up) of the Company. (f) [RESERVED] (g) "COMMON SHARES" or "COMMON STOCK" means shares of the common stock, $.01 par value, of the Company. (h) "COMMON STOCK ISSUED AT CONVERSION" when used with reference to the securities issuable upon conversion of this Debenture, means all Common Shares now or hereafter Outstanding and securities of any other class or series into which the Debenture hereafter shall have been changed or substituted, whether now or hereafter created and however designated. (i) "COMPANY" means SAC Technologies, Inc., a Minnesota corporation, and any successor or resulting corporation by way of merger, consolidation, sale or exchange of all or substantially all of the Company's assets, or otherwise. (j) "CONVERSION DATE" means any day on which all or any portion of the principal amount of this Debenture is converted in accordance with the provisions hereof. (k) "CONVERSION NOTICE" has the meaning set forth in Section 3.2. (l) "CONVERSION PRICE" on any date of determination means the applicable price for the conversion of this Debenture into Common Shares on such day as set forth in Section 3.1. (m) [RESERVED] (n) "CURRENT MARKET PRICE" on any date of determination means the closing bid price of a Common Share on such day as reported by Bloomberg LP for the Principal Market. (o) "DEBENTURE" means this Convertible Debenture of the Company or such other convertible debentures or Debentures exchanged therefor as provided in Section 2.1. (p) RESERVED. (q) "EVENT OF DEFAULT" has the meaning set forth in Section 6.1. (r) "HOLDER" means The Shaar Fund Ltd., any successor thereto, or any Person to whom this Debenture is subsequently transferred in accordance with the provisions hereof. (s) "MARKET DISRUPTION EVENT" means any event that results in a material suspension or limitation of trading of Common Shares on NASDAQ. (t) RESERVED (u) RESERVED (v) "OUTSTANDING" when used with reference to Common Shares or Capital Shares (collectively, "Shares"), means, on any date of determination, all issued and outstanding Shares, and includes all such Shares issuable in respect of outstanding warrants, options or rights to subscribe for or purchase shares outstanding scrip or any certificates representing fractional interests in such Shares; PROVIDED, HOWEVER, that any such Shares directly or indirectly owned or held by or for the account of the Company or any Subsidiary of the Company shall not be deemed "Outstanding" for purposes hereof. (w) "PERSON" means an individual, a corporation, a partnership, an association, a limited liability company, a unincorporated business organization, a trust or other entity or organization, and any government or political subdivision or any agency or instrumentality thereof. (x) "PRINCIPAL MARKET" shall mean the market or exchange whichever is at the time the principal trading exchange or market for the Common Stock. (y) "REGISTRATION RIGHTS AGREEMENT" means that certain registration rights agreement dated November 26, 2001 between the Company and The Shaar Fund Ltd. (z) "SEC" means the United States Securities and Exchange Commission. (aa) "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as in effect at the time. (bb) "SUBSIDIARY" means any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are owned directly or indirectly by the Company. (cc) "TRADING DAY" means any day on which purchases and sales of securities authorized for quotation on NASDAQ are reported thereon and on which no Market Disruption Event has occurred. All references to "cash" or "$" herein means currency of the United States of America. ARTICLE 2 EXCHANGES AND TRANSFER SECTION 2.1 Exchange and Registration of Transfer of Debentures. Subject to compliance with applicable securities laws, the Holder may, at its option, surrender this Debenture at the principal executive offices of the Company and receive in exchange therefor a Debenture or Debentures, each in the denomination of $10,000 or integral multiples of $1,000 in excess thereof, dated as of the date of this Debenture, and, subject to Section 4.2, payable to such Person or order as may be designated by such Holder. The aggregate principal amount of the Debenture or Debentures exchanged in accordance with this Section 2.1 shall equal the aggregate unpaid principal amount of this Debenture as of the date of such surrender; PROVIDED, HOWEVER, that upon any exchange pursuant to this Section 2.1 there shall be filed with the Company the name and address for all purposes hereof of the Holder or Holders of the Debenture or Debentures delivered in such exchange. This Debenture, when presented for registration of transfer or for exchange or conversion, shall (if so required by the Company) be duly endorsed, or be accompanied by a written instrument of transfer in form reasonably satisfactory to the Company duly executed, by the Holder duly authorized in writing. SECTION 2.2 Loss, Theft, Destruction of Debenture. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Debenture and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Debenture, the Company shall make, issue and deliver, in lieu of such lost, stolen, destroyed or mutilated Debenture, a new Debenture or Debentures of like tenor and unpaid principal amount dated as of the date hereof. This Debenture shall be held and owned upon the express condition that the provisions of this Section 2.2 are exclusive with respect to the replacement of a mutilated, destroyed, lost or stolen Debenture and shall preclude any and all other rights and remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement of negotiable instruments or other securities without the surrender thereof. SECTION 2.3 Who Deemed Absolute Owner. The Company may deem the Person in whose name this Debenture shall be registered upon the registry books of the Company to be, and may treat it as, the absolute owner of this Debenture (whether or not this Debenture shall be overdue) for the purpose of receiving payment of or on account of the principal amount of this Debenture, for the conversion of this Debenture and for all other purposes, and the Company shall not be affected by any notice to the contrary. All such payments and such conversion shall be valid and effectual to satisfy and discharge the liability upon this Debenture to the extent of the sum or sums so paid or the conversion so made. ARTICLE 3 CONVERSION OF DEBENTURE SECTION 3.1 Conversion; Conversion Price. At the option of the Holder, this Debenture may be converted, either in whole or in part, up to the full principal amount hereof (in increments of not less than $10,000 principal amount) into Common Shares (calculated as to each such conversion to the nearest 1/100th of a share), at any time, at a price equal to $.75 per share. The Holder shall not have the right to convert any portion of this Debenture to the extent that the issuance to the Holder of Common Shares upon such conversion would result in the Holder being deemed the "beneficial owner" of 4.99% or more of the then outstanding Common Shares within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended. SECTION 3.2 Exercise of Conversion Privilege. (a) Conversion of this Debenture may be exercised, in whole or in part, by the Holder by telecopying an executed and completed notice of conversion in the form annexed hereto as Annex I (the "Conversion Notice") to the Company. Each date on which a Conversion Notice is telecopied to and received by the Company in accordance with the provisions of this Section 3.2 shall constitute a Conversion Date. The Conversion Notice shall state the name or names (with addresses) of the persons who are to become the Holders of the Common Stock issued upon such conversion. Upon receipt of the telecopied Conversion Notice, the Company shall within three Business Days of receipt of the Conversion Notice (i) issue the Common Stock effective as of the Conversion Date in accordance with the provisions of this Article 3, and (ii) cause to be mailed for delivery by overnight courier to the Holder (X) a certificate or certificate(s) representing the number of Common Shares to which the Holder is entitled by virtue of such conversion, and (Y) cash, as provided in Section 3.4, in respect of any fraction of a Share issuable upon such conversion. Conversion shall be deemed to have been effected at the time stated in the Conversion Notice and at such time the rights of the Holder of this Debenture, as such, shall cease to the extent of such conversion, and the Person and Persons in whose name or names the Common Stock Issued at Conversion shall be issuable shall be deemed to have become the Holder or Holders of record of the Common Shares represented thereby. The Conversion Notice shall constitute a contract between the Holder and the Company, whereby the Holder shall be deemed to subscribe for the number of Common Shares which it will be entitled to receive upon such conversion and, in payment and satisfaction of such subscription (and for any cash adjustment to which it is entitled pursuant to Section 3.4), and to release the Company from all liability thereon. No cash payment aggregating less than $1.50 shall be required to be given unless specifically requested by the Holder. (b)The Company understands that a delay in the issuance of the Shares of Common Stock beyond the Delivery Date could result in economic loss to the Buyer. As compensation to the Buyer for such loss, the Company agrees to pay late payments to the Buyer for late issuance of Shares upon Conversion in accordance with the following schedule (where "No. Business Days Late" is defined as the number of business days beyond seven (7) business days from Delivery Date: Late Payment For Each $10,000 of Convertible Debenture No. Business Days Late Being Converted - --------------------------------------------------- 1 $100 2 $200 3 $300 4 $400 5 $500 6 $600 7 $700 8 $800 9 $900 10 $1,000 >10 $1,000+$200 for each Business Day Late beyond 10 days The Company shall pay any payments incurred under this Section in immediately available funds upon demand. Furthermore, in addition to any other remedies which may be available to the Holder, in the event that the Company fails for any reason to effect delivery of such shares of Common Stock within five (5) business days after the Delivery Date, the Holder will be entitled to revoke the relevant Notice of Conversion by delivering a notice to such effect to the Company whereupon the Company and the Holder shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion. (c) Except as set forth in Section 3.1 hereof, at any time after the date of this Debenture, (i) the Company challenges, disputes or denies the right of the Holder hereof to effect the conversion of this Debenture into Common Shares or otherwise dishonors or rejects any Conversion Notice delivered in accordance with this Section 3.2 and this Agreement or (ii) any third party who is not and has never been an Affiliate of the Holder commences any lawsuit or proceeding or otherwise asserts any claim before any court or public or governmental authority which seeks to challenge, deny, enjoin, limit, modify, delay or dispute the right of the Holder hereof to effect the conversion of this Debenture into Common Shares, then the Holder shall have the right, by written notice to the Company, to require the Company to promptly redeem this Debenture for cash at a redemption price equal to 122% of the principal amount hereof (the "Mandatory Purchase Amount"). Under any of the circumstances set forth above, the Company shall be responsible for the payment of all costs and expenses of the Holder, including reasonable legal fees and expenses, as and when incurred in disputing any such action or pursuing its rights hereunder (in addition to any other rights of the Holder). SECTION 3.3 [This Section Reserved] SECTION 3.4 Fractional Shares. No fractional Common Shares or scrip representing fractional Common Shares shall be issued upon conversion of this Debenture. Instead of any fractional Common Shares which otherwise would be issuable upon conversion of this Debenture, the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction. No cash payment of less than $1.50 shall be required to be given unless specifically requested by the Holder. SECTION 3.5 Reclassification, Consolidation, Merger or Mandatory Share Exchange. A. In case of any stock split or reverse stock split, stock dividend, reclassification of the Common Stock, recapitalization, or like capital adjustment affecting the Common Stock of the Company (each, an "Adjustment"), the Conversion Price in effect at the time of the effective date for such Adjustment shall be proportionally adjusted so that the Holder of this Debenture converted after such date shall be entitled to receive the aggregate number and kind of shares which, if this Debenture had been converted by such Holder immediately prior to such date, the Holder would have owned upon such conversion and been entitled to received upon such Adjustment (and for such purposes the Holder shall, to the extent relevant, be deemed to have converted this Debenture immediately prior to the record date or the effective date, as the case may, for the Adjustment). For example, if the Company declares a 2:1 stock dividend or stock split and the Conversion Price immediately prior to the record date for such Adjustment was $.75 per share, the adjusted Conversion Price immediately after the Adjustment would be $.375 per share. Such adjustment may be made successively if there is more than one Adjustment. In all other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. A rights offering to stockHolders shall be deemed a stock dividend to the extent of the bargain purchase element of the rights.. The provisions of this Section 3.5 shall similarly apply to successive reclassifications, changes, consolidations, mergers, mandatory share exchanges and sales and transfers. B. If, for any reason, prior to the conversion of this Debenture in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security Holders of the Company, then the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the Holder's unconverted Debentures outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security Holders of the Company (the "Outstanding Debentures") been converted as of the close of business on the trading day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the conversion of all or any of the Outstanding Debentures, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the amount of the Outstanding Debentures then being converted, and (II) the denominator is the amount of the Outstanding Debentures. Whenever the Conversion Price shall be adjusted as provided herein, the Company shall forthwith file, at the principal office of the Company, a statement showing in detail the facts requiring such adjustment and the Conversion Price that shall be in effect after such adjustment, and the Company shall also cause a copy of such statement to be sent by mail, first class postage prepaid, to each other party hereto, at its address appearing on the Company's records. Each such statement shall be signed by the Company's independent public accountants, if applicable. SECTION 3.6 Adjustments to Conversion Price. For so long as this Debenture is outstanding, if the Company issues and sells (A) Common Shares at a purchase price that is lower than $.75 per share, (B) warrants or options with an exercise price that is lower than $.75, or (C) convertible, exchangeable or exercisable securities with a right to exchange at lower than $.75 per share on the date of issuance of such convertible, exchangeable or exercisable securities, then the Conversion Price shall be reduced to equal the lowest of any such lower price. Notwithstanding the foregoing, the following issuances of securities shall not be subject to this Section: issuances pursuant to options, warrants, other convertible securities or other obligations outstanding or in existence as of the date hereof; issuances pursuant to any of the Company's option plans existing on the date hereof; issuances for which adjustment is made pursuant to other provisions hereof; and issuances subsequent to October 1, 2001 of up to an additional 850,000 shares of Common Stock (or options or warrants to purchase same) issued to consultants or other persons providing services to the Company. In the case of the issuance of Common Stock (otherwise than upon the conversion of shares of capital stock or other securities of the Corporation) for a consideration in whole or in part other than cash, including securities acquired in exchange therefor (other than securities by their terms so exchangeable), the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors, irrespective of any accounting treatment; provided that such fair value as determined by the Board of Directors shall not exceed the aggregate Current Market Price of the shares of Common Stock being issued as of the date the Board of Directors authorizes the issuance of such shares. ARTICLE 4 STATUS; RESTRICTIONS ON TRANSFER SECTION 4.1 Status of Debenture. This Debenture constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms subject, as to enforceability, to general principles of equity and to principles of bankruptcy, insolvency, reorganization and other similar laws of general applicability relating to or affecting creditors' rights and remedies generally. SECTION 4.2 Restrictions on Transfer. This Debenture, and any Common Shares issuable according to the terms hereof, have not been registered under the Securities Act. This Debenture and any Common Shares issued upon conversion may not be offered or sold, directly or indirectly, except pursuant to an effective registration statement under the Act, or pursuant to an available exemption therefrom. ARTICLE 5 COVENANTS The Company covenants and agrees that so long as this Debenture shall be outstanding: SECTION 5.1 Conversion. The Company shall not later than five Business Days after its receipt of the Conversion Notice delivered in accordance with Section 3.2 and this Agreement, issue and deliver to the Holder the requisite shares of common stock issuable upon conversion, according to the terms hereof. SECTION 5.2 Notice of Default. If any one or more events occur which constitute or which, with notice, lapse of time, or both, would constitute an Event of Default, the Company shall forthwith give notice to the Holder, specifying the nature and status of the Event of Default or other event or of such demand or action, as the case may be. SECTION 5.3 Insurance. The Company shall carry and maintain in full force and effect at all times with insurers that are financially sound and reputable such insurance in such amounts as is customary in the industry of the Company. SECTION 5.4 Payment of Obligations. Prior to conversion of the entire principal amount of this Debenture, the Company shall pay, extend, or discharge at or before maturity, all its respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings. SECTION 5.5 Compliance with Laws. The Company shall comply with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities, except for such noncompliance which would not have a material adverse effect on the business, properties, prospects, condition (financial or otherwise) or results of operations of the Company. SECTION 5.6 Inspection of Property, Books and Records. The Company shall keep proper books of record and account in which full, true and correct entries shall be made of all material dealings and transactions in relation to its business and activities and shall permit representatives of the Holder at the Holder's expense to visit and inspect any of its respective properties, to examine and make abstracts from any of its respective books and records, not reasonably deemed confidential by the Company, and to discuss its respective affairs, finances and accounts with its respective officers and independent public accountants, all at such reasonable times and as often as may reasonably be desired. SECTION 5.7 Not declare or pay any dividends, redeem any equity securities of the Company or authorize or make any other distribution on any class of equity securities of the Company except for the payment of dividends on the Series B Preferred Stock. SECTION 5.8 The Board of Directors shall promptly after the execution hereof, (x) adopt proper resolutions authorizing an increase in number of authorized shares of Common Stock to 60,000,000 shares, (y) recommend to and otherwise use its best efforts to promptly and duly obtain shareholder approval to carry out such resolutions (and hold a special meeting of the shareholders no later than February 15, 2002) and (z) within 5 Business Days of obtaining such shareholder authorization, file an appropriate amendment to the Company's articles of incorporation to evidence such increase. ARTICLE 6 REMEDIES SECTION 6.1 Events of Default. "Event of Default" wherever used herein means any one of the following events: (a) the Company shall default in the payment of principal on this Debenture as and when the same shall be due and payable and, such default shall continue for five Business Days after the date such payment was due, or the Company shall fail to perform or observe any other covenant, agreement, term, provision, undertaking or commitment under this Debenture, or the Funding Agreement, and such default shall continue for a period of ten Business Days after the receipt by the Company of written notice that the Company is in default hereunder; or (b) The Company fails to issue shares of Common Stock to the Holder or to cause its Transfer Agent to issue shares of Common Stock upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Debenture, fails to transfer or to cause its Transfer Agent to transfer any certificate for shares of Common Stock issued to the Holder upon conversion of this Debenture and when required by this Debenture, and such transfer is otherwise lawful, or fails to remove any restrictive legend or to cause its Transfer Agent to transfer on any certificate or any shares of Common Stock issued to the Holder upon conversion of this Debenture as and when required by, and in accordance with this Debenture or the Registration Rights Agreement and such legend removal is otherwise lawful, and any such failure shall continue uncured for five (5) business days. (c) any of the representations or warranties made by the Company herein, the Funding Agreement, the Registration Rights Agreement or in any certificate or financial or other written statements heretofore or hereafter furnished by or on behalf of the Company in connection with the execution and delivery of this Debenture or the Funding Agreement shall be false or misleading in any material respect on the Closing Date; or (d) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company or any subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under the United States Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), or any other applicable Federal or state law, or appointing a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding-up or liquidation of its affairs, and any such decree or order continues and is unstayed and in effect for a period of 60 calendar days; or (e) the institution by the Company or any Subsidiary of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under the Bankruptcy Code or any other applicable federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as and when they become due, or the taking of corporate action by the Company in furtherance of any such action; or (f) a final judgment or final judgments for the payment of money shall have been entered by any court or courts of competent jurisdiction against the Company and remains undischarged for a period (during which execution shall be effectively stayed) of 90 days, provided that the aggregate amount of all such judgments at any time outstanding (to the extent not paid or to be paid, as evidenced by a written communication to that effect from the applicable insurer, by insurance) exceeds $200,000; or (g) it becomes unlawful for the Company to perform or comply with its obligations under this Debenture; or (h) the Common Shares shall be delisted from the Principal Market or suspended from trading on the Principal Market, and shall not be reinstated, relisted or such suspension lifted, as the case may be, within ten (10) days; or (i) the Company shall default (giving effect to any applicable grace period) in the payment of principal as and when the same shall become due and payable, under any indebtedness, individually or in the aggregate, of more than $200,000. SECTION 6.2 Acceleration of Maturity; Rescission and Annulment. If an Event of Default occurs and is continuing, then and in every such case any Holder may rescind the Conversion Notice and obtain payment for the entire outstanding principal amount of the Debenture which remains unconverted, by a notice in writing to the Company, and upon any such declaration the entire principal amount of this Debenture shall become immediately due and payable by virtue of such rescission; provided, however, in the case of any Event of Default described in paragraphs (c), (d) or (f) above, the entire then outstanding principal amount of this Debenture,Shall become immediately due and payable without the necessity of any notice or declaration as aforesaid. SECTION 6.3 RESERVED SECTION 6.4 Remedies Not Waived. No course of dealing between the Company and the Holder or any delay in exercising any rights hereunder shall operate as a waiver by the Holder. SECTION 6.5 Waiver. No recourse shall be had for the payment of the principal of, this Debenture, or for any claim based hereon, or otherwise in respect hereof, against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. ARTICLE 7 MISCELLANEOUS SECTION 7.1 Notice of Certain Events. In the case of the occurrence of any event described in Sections 3.5 or 3.6 of this Debenture, the Company shall cause to be mailed to the Holder of this Debenture at its last address as it appears in the Company's security registry, at least 20 days prior to the applicable record, effective or expiration date hereinafter specified (or, if such 20 days notice is not possible, at the earliest possible date prior to any such record, effective or expiration date), a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, issuance or granting of rights, options or warrants, or if a record is not to be taken, the date as of which the Holders of record of Common Stock to be entitled to such dividend, distribution, issuance or granting of rights, options or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that Holders of record of Common Stock will be entitled to exchange their shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale transfer, dissolution, liquidation or winding-up. SECTION 7.2 Register. (a) The Company shall keep at its principal office a register in which the Company shall provide for the registration of this Debenture. Upon any transfer of this Debenture in accordance with Article 2 and 4 hereof, the Company shall register such transfer on the Debenture register. (b) The Company may deem the person in whose name this Debenture shall be registered upon the registry books of the Company to be, and may treat it as, the absolute owner of this Debenture (whether or not this Debenture shall be overdue) for the purpose of receiving payment of principal of this Debenture, for the conversion of this Debenture and for all other purposes, and the Company shall not be affected by any notice to the contrary. All such payments and such conversions shall be valid and effective to satisfy and discharge the liability upon this Debenture to the extent of the sum or sums so paid or the conversion or conversions so made. SECTION 7.3 Withholding. To the extent required by applicable law, the Company may withhold amounts for or on account of any taxes imposed or levied by or on behalf of any taxing authority in the United States having jurisdiction over the Company from any payments made pursuant to this Debenture. SECTION 7.4 Governing Law. THIS DEBENTURE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO CONFLICTS OF LAWS PRINCIPLES). WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDINGS RELATING TO THIS DEBENTURE, THE COMPANY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES DISTRICT COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK AND HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. SUBJECT TO APPLICABLE LAW, THE COMPANY AGREES THAT FINAL JUDGMENT AGAINST IT IN ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS DEBENTURE SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION WITHIN OR OUTSIDE THE UNITED STATES BY SUIT ON THE JUDGMENT, A CERTIFIED COPY OF WHICH JUDGMENT SHALL BE CONCLUSIVE EVIDENCE THEREOF AND THE AMOUNT OF ITS INDEBTEDNESS, OR BY SUCH OTHER MEANS PROVIDED BY LAW. SECTION 7.5 Jury Trial Waiver. The Company and Purchaser hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out of or in connection with the Transaction Documents. SECTION 7.6 Headings. The headings of the Articles and Sections of this Debenture are inserted for convenience only and do not constitute a part of this Debenture. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the Company has caused this Debenture to be signed by its duly authorized officer under its corporate seal, attested by its duly authorized officer, on the date of this Debenture. SAC TECHNOLOGIES, INC. By: ----------------------------------- Name: Title: Attest By: ----------------------------------- Name: Title: INITIAL Holder THE SHAAR FUND, LTD. By: INTER CARIBBEAN SERVICES LTD. By: ----------------------------------- Name: Title: ANNEX I [FORM OF CONVERSION NOTICE] TO: --------------------------------- --------------------------------- --------------------------------- The undersigned owner of this Convertible Debenture due September 30, 2003 issued by SAC Technologies, Inc. (the "Debenture") hereby irrevocably exercises its option to convert $_____ principal amount of the Debenture into shares of the common stock, $.01 par value, of SAC Technologies, Inc. ("Common Stock"), in accordance with the terms of the Debenture. The undersigned hereby instructs the Company to convert the portion of the Debenture specified above into Shares of Common Stock Issued at Conversion in accordance with the provisions of Article 3 of the Debenture. The undersigned directs that the Common Stock issuable and certificates therefor deliverable upon conversion, the Debenture recertificated in the principal amount, if any, not being surrendered for conversion hereby, together with any check in payment for fractional Common Stock, be issued in the name of and delivered to the undersigned unless a different name has been indicated below. All capitalized terms used and not defined herein have the respective meanings assigned to them in the Debenture. By delivering this conversion notice, the undersigned owner represents and warrants that it does not now, nor after giving effect to this conversion notice will it, beneficially own in excess of 4.99% of the outstanding shares of Common Stock of the Company within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended. Date ___________________________________________________________________ Signature ______________________________________________________________________ [Name] Address: _______________________________________________________________________ _______________________________________________________________________ EX-10.37 10 sac020249_ex10-37.txt COMMON STOCK PURCHASE WARRANT EXHIBIT 10.37 FORM OF WARRANT THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION. SAC TECHNOLOGIES, INC. COMMON STOCK PURCHASE WARRANT 1. Issuance; Certain Definitions. In consideration of good and valuable consideration, the receipt of which is hereby acknowledged by SAC TECHNOLOGIES, INC., a Minnesota corporation (the "Company"), THE SHAAR FUND LTD. or registered assigns (the "Holder") is hereby granted the right to purchase at any time until 5:00 P.M., New York City time, on November 25, 2006(the "Expiration Date") Four Million (4,000,000) fully paid and nonassessable shares of the Company's Common Stock, par value $0.01 per share (the "Common Stock") at an initial exercise price per share (the "Exercise Price") of $ 1.00, subject to further adjustment as set forth herein. This Warrant is being issued pursuant to the terms of that certain Funding Agreement, dated as of November 26, 2001(the "Funding Agreement"), to which the Company and Holder (or Holder's predecessor in interest) are parties. 2. Exercise of Warrants. 2.1 General. (a) This Warrant is exercisable in whole or in part at the Exercise Price per share of Common Stock payable hereunder, (i)payable in cash or by certified or official bank check, or (ii) by "cashless exercise", by means of tendering this Warrant Certificate to the Company to receive a number of shares of Common Stock equal in Market Value to the difference between the aggregate Market Value of the shares of Common Stock issuable upon exercise of this Warrant and the total cash exercise price thereof divided by the Market Value. Upon surrender of this Warrant Certificate with the annexed Notice of Exercise Form duly executed, together with payment of the Exercise Price for the shares of Common Stock purchased, the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. For the purposes of this Section 2, "Market Value" shall be an amount equal to the average closing bid price of a share of Common Stock for the ten (10) days preceding the Company's receipt of the Notice of Exercise Form duly executed multiplied by the number of shares of Common Stock to be issued upon surrender of this Warrant Certificate. ______________ (b) The Holders right to exercise this warrant pursuant to the foregoing Section (a) (ii) shall commence on the earlier of (X) one year after date of issuance or (Y) repayment of fifty (50%) percent of the principal amount of the Initial Notes issued pursuant to the Funding Agreement (the "CE Date") (c) For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that, pursuant to applicable law as of the date hereof, the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder and the holding period for the Warrant Shares shall be deemed to have been commenced on the CE Date. 2.2 Limitation on Exercise. Notwithstanding the provisions of this Warrant, the Funding Agreement or of the other Transaction Agreements (as defined in the Funding Agreement), in no event (except (i) with respect to an automatic conversion, if any, of the Preferred Stock as provided in its Certificate of Designations, (ii) as specifically provided in this Warrant as an exception to this provision, or (iii) while there is outstanding a tender offer for any or all of the shares of the Company's Common Stock) shall the Holder be entitled to exercise this Warrant, or shall the Company have the obligation to issue shares upon such exercise of all or any portion of this Warrant, to the extent that, after such exercise the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Preferred Stock or unexercised portion of the Warrants), and (2) the number of shares of Common Stock issuable upon the exercise of the Warrants with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock (after taking into account the shares to be issued to the Holder upon such exercise). For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), except as otherwise provided in clause (1) of such sentence. The Holder, by its acceptance of this Warrant, further agrees that if the Holder transfers or assigns any of the Warrants to a party who or which would not be considered such an affiliate, such assignment shall be made subject to the transferee's or assignee's specific agreement to be bound by the provisions of this Section 2.2 as if such transferee or assignee were the original Holder hereof. 3. Reservation of Shares. From and after the date of filing of Certificate of Amendment pursuant to Section 7(j) of the Funding Agreement, the Company hereby agrees that at all times during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant (the "Warrant Shares"). 4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 6. Protection Against Dilution. 6.1 Adjustment Mechanism. If an adjustment of the Exercise Price is required pursuant to this Section 6, the Holder shall be entitled to purchase such number of shares of Common Stock as will cause (i) the total number of shares of Common Stock Holder is entitled to purchase pursuant to this Warrant after such adjustment, multiplied by (ii) the adjusted Exercise Price per share, to equal (iii) the dollar amount of the total number of shares of Common Stock Holder is entitled to purchase before adjustment multiplied by the total Exercise Price before adjustment. 6.2 Capital Adjustments. In case of any stock split or reverse stock split, stock dividend, reclassification of the Common Stock, recapitalization, merger or consolidation, or like capital adjustment affecting the Common Stock of the Company (each, an "Adjustment"), the Exercise Price in effect at the time of the effective date for such Adjustment shall be proportionally adjusted so that the Holder of this Warrant exercised after such date shall be entitled to receive the aggregate number and kind of shares which, if this Warrant had been exercised by such Holder immediately prior to such date, the Holder would have owned upon such exercise and been entitled to received upon such Adjustment (and for such purposes the Holder shall, to the extent relevant, be deemed to have exercised this Warrant immediately prior to the record date or the effective date, as the case may, for the Adjustment). For example, if the Company declares a 2:1 stock dividend or stock split and the Exercise Price immediately prior to the record date for such Adjustment was $5.00 per share, the adjusted Exercise Price immediately after the Adjustment would be $2.50 per share. Such adjustment may be made successively if there is more than one Adjustment. In all other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. A rights offering to stockholders shall be deemed a stock dividend to the extent of the bargain purchase element of the rights. 6.3 Adjustment for Spin Off. If, for any reason, prior to the exercise of this Warrant in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security holders of the Company, then the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the Holder's unexercised Warrants outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the "Outstanding Warrants") been exercised as of the close of business on the trading day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the exercise of all or any of the Outstanding Warrants, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the amount of the Outstanding Warrants then being exercised, and (II) the denominator is the amount of the Outstanding Warrants. 7. Transfer to Comply with the Securities Act; Registration Rights. 7.1 Transfer. This Warrant has not been registered under the Securities Act of 1933, as amended, (the "Act") and has been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or issuable upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. 7.2 Registration Rights. (a) Reference is made to the Registration Rights Agreement (as that term is defined in the Funding Agreement). The Company acknowledges its obligations to the Holder under the Registration Rights Agreement with respect to the Warrant Shares, which are incorporated herein by reference. (b) In addition to the registration rights referred to in the preceding provisions of Section 7.2(a), effective after the expiration of the effectiveness of the Registration Statement as contemplated by the Registration Rights Agreement, the Holder shall have demand piggy-back registration rights with respect to the Warrant Shares then held by the Holder or then subject to issuance upon exercise of this Warrant (collectively, the "Remaining Warrant Shares"), subject to the conditions set forth below. If, at any time after the Registration Statement has ceased to be effective, the Company participates (whether voluntarily or by reason of an obligation to a third party) in the registration of any shares of the Company's stock, the Company shall give written notice thereof to the Holder and the Holder shall have the right, exercisable within ten (10) business days after receipt of such notice, to demand inclusion of all or a portion of the Holder's Remaining Warrant Shares in such registration statement. If the Holder exercises such election, the Remaining Warrant Shares so designated shall be included in the registration statement at no cost or expense to the Holder (other than any costs or commissions which would be borne by the Holder under the terms of the Registration Rights Agreement). The Holder's rights under this Section 7.2 are subject to the following conditions: if there is a managing underwriter of the offering of shares referred to in the registration statement and such managing underwriter advises the Company in writing that the number of shares proposed to be included in the offering will have an adverse effect on its ability to successfully conclude the offering and, as a result, the number of shares to be included in the offering is to be reduced, the number of Remaining Warrant Shares of the Holder which were to be included in the registration (before such reduction) will be reduced pro rata with the number of shares included for all other parties whose shares are being registered. 8. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage pre-paid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission, or, if mailed, two days after the date of deposit in the United States mails, as follows: (i) if to the Company, to: SAC TECHNOLOGIES, INC. 1285 Corporate Center Drive Suite 175 Eagan, Minnesota 55121 Telephone No.: (651) 687-0414 Telecopier No.: with a copy to: Buchanan Ingersoll Professional Corporation Eleven Penn Center, 14th Floor 1835 Market Street Philadelphia, PA 19103-2895 Attn: Vincent A. Vietti, Esq. Telephone No.: (215) 665-3860 Telecopier No.: (215) 665-8760 (ii) if to the Holder, to: The Shaar Fund Ltd. c/o CITCO FUND SERVICES (CURACAO) N.V. Kaya Flamboyan 9 Curacao Netherlands Antilles (Tel: 599-9-732-2222) (Fax: 599-9-732-2225) with copies to: Levinson Capital Management, LLC 35 East Grassy Sprain Road Suite 300 Yonkers, NY 10710 Fax number: 914-395-0059 and Krieger & Prager, Esqs. 39 Broadway New York, New York 10006 Telephone No.: (212)363-2900 Telecopier No. (212)363-2999 Any party may, by notice given in accordance with this Section to the other parties, designate another address or person for receipt of notices hereunder. 9. Supplements and Amendments; Whole Agreement. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant contains the full understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings other than expressly contained herein and therein. 10. Governing Law. This Warrant shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State, except to the extent that the Minnesota Business Corporation Act would apply to the internal corporate governance of the Company. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Warrant and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON CONVENIENS, to the bringing of any such proceeding in such jurisdictions. To the extent determined by such court, the Company shall reimburse the Holder for any reasonable legal fees and disbursements incurred by the Buyer in enforcement of or protection of any of its rights under this Warrant. 11. Counterparts. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 12. Descriptive Headings. Descriptive headings of the several Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the 26th day of November, 2001 SAC TECHNOLOGIES, INC. By:_________________________________ Name: Its: Attest: - ------------------------ Name: Title: NOTICE OF EXERCISE OF WARRANT The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant Certificate dated as of , 2001, to purchase shares of the Common Stock, par value $0.01 per share, of SAC TECHNOLOGIES, INC. and tenders herewith payment in accordance with Section 1 of said Common Stock Purchase Warrant. Please deliver the stock certificate to: Dated: By: ___ CASH: $ _______________________ ___ CASHLESS EXERCISE AGGREGATE MARKET VALUE OF _____ SHARES $_______________ AGGREGATE CASH EXERCISE PRICE OF _______ SHARES $_______________ DIFFERENCE a MARKET VALUE $_______________ NUMBER OF SHARES ISSUABLE EX-10.38 11 sac020249_ex10-38.txt SECURITY INTEREST PROVISIONS EXHIBIT 10.38 SECURITY INTEREST PROVISIONS For purposes of this ANNEX, the terms "Company", "Investor" and "Notes" have the meanings ascribed to them in the Funding Agreement to which this Annex is attached. Unless otherwise specified, all capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Note. Section 1. The Security Interests. (A) In order (i) to secure the due and punctual fulfillment of its obligations, advances, interest or other rights under the Notes, and (ii) to secure its obligations to the Investor whether now existing or hereafter arising under the Notes (all of the foregoing hereinafter called "Obligations"), the Company hereby grants, conveys, transfers and assigns to the Investor a continuing security interest in the following described personal property (hereinafter collectively called the "Collateral"): All assets and properties of whatever kind and description, including all intellectual property, licenses and license rights, now or hereafter owned by the Company and all accessions, additions or improvements to, all replacements, substitutions and parts for, and all proceeds and products of the foregoing; all bank and securities accounts of any kind or nature; all books, records and documents relating to the foregoing located at the principal place of business or any other place of business of the Company, or at such other location as the business may hereafter be located , or held by any agent, representative or bailee of the Company wherever located, together with a perpetual irrevocable license to Investor and any successor to copy, utilize, install and otherwise use any intellectual property of Company, and all accessions, additions or improvements useful or necessary in connection with the installation, use, configuration, maintenance or operation of the Collateral. (B) The security interests granted pursuant to this Section 1 (the "Security Interests") are granted as security only and shall not subject the Investor to, or transfer or in any way affect or modify, any obligation or liability of the Company under any of the Collateral or any transaction which gave rise thereto. Section 2. Filing; Further Assurances. The Company will, at its expense, cause to be searched the public records with respect to the Collateral and will execute, deliver, file and record (in such manner and form as the Investor may require), or permit the Investor to file and record, any financing statements, any carbon, photographic or other reproduction of a financing statement or this Security Agreement (which shall be sufficient as a financing statement 1 hereunder), any specific assignments or other paper that may be reasonably necessary or desirable, or that the Secured Party may request, in order to create, preserve, perfect or validate any Security Interest or to enable the Investor to exercise and enforce its rights hereunder with respect to any of the Collateral. Effective upon the existence of a Company Event of Default (as defined below), the Company hereby appoints Investor as Company's attorney-in-fact to execute in the name and behalf of Company such additional financing statements as Investor may request. Section 3. Representations and Warranties of Company. The Company hereby represents and warrants to the Investor (a) that, to its knowledge, except as set forth in Exhibit A attached hereto, and without having made any search or investigation with respect thereto, the Company is, or to the extent that certain of the Collateral is to be acquired after the date hereof, will be, the owner of the Collateral free from any adverse lien, security interest or encumbrance; (b) to its knowledge, without having made any search or investigation with respect thereto, that except for such financing statements as may be described on Exhibit A attached hereto and made a part hereof, no financing statement covering the Collateral is on file in any public office, other than the financing statements filed pursuant to this Security Agreement; (c) that all additional information, representations and warranties contained in Exhibit B attached hereto and made a part hereof are true, accurate and complete on the date hereof. Section 4. Covenants of Company. The Company hereby covenants and agrees with the Investor that the Company (a) will, at the Company's sole cost and expense, defend the Collateral against all claims and demands of all persons at any time claiming any interest therein junior to the Investor's interest; (b) will provide the Investor with prompt written notice of (i) any change in the chief executive officer of the Company or the office where the Company maintains its books and records pertaining to the Collateral; (ii) the movement or location of all or a material part of the Collateral to or at any address other than as set forth in said Exhibit B; and (iii) any facts which constitute a Company Event of Default, or which, with the giving of notice and/or the passage of time, could or would constitute a Company Event of Default, pursuant to Section 7 below; (c) will promptly pay any and all taxes, assessments and governmental charges upon the Collateral prior to the date penalties are attached thereto, except to the extent that such taxes, assessments and charges shall be contested in good faith by the Company; (d) will immediately notify the Investor of any event causing a substantial loss or diminution in the value of all or any material part of the Collateral and the amount or an estimate of the amount of such loss or diminution; (e) will have and maintain adequate insurance at all times with respect to the Collateral, for such other risks as are customary in the Company's industry for the respective items included in the Collateral, such insurance to be payable to the Investor and the Company as their respective interests may appear, and shall provide for a minimum of ten (10) days prior written notice of cancellation to the Investor, and Company shall furnish the Secured Party with certificates or other evidence satisfactory to the Investor of compliance with the foregoing insurance provisions; (f) will not sell or offer to sell or otherwise assign, transfer or dispose of the Collateral or any interest therein, without the prior written consent of the Investor, except in the ordinary course of business; (g) will keep the Collateral free from any adverse lien, security interest or encumbrance (except for encumbrances specified in Exhibit B attached hereto) and in good order and repair, reasonable wear and tear excepted, and will not waste or destroy the Collateral or any part thereof; and (h) will not use the Collateral in material violation of any 2 statute or ordinance the violation of which could materially and adversely affect the Company's business. Section 5. Records Relating To Collateral. The Company will keep its records concerning the Collateral at its offices designated in Exhibit B or at such other place or places of business of which the Investor shall have been notified in writing no less than ten (10) days prior thereto. The Company will hold and preserve such records and chattel paper and will permit representatives of the Investor at any time during normal business hours upon reasonable notice to examine and inspect the Collateral and to make abstracts from such records and chattel paper, and will furnish to the Investor such information and reports regarding the Collateral as the Investor may from time to time reasonably request. Section 6. General Authority. From and during the term of any Company Event of Default, the Company hereby appoints the Investor the Company's lawful attorney, with full power of substitution, in the name of the Company, for the sole use and benefit of the Investor, but at the Company's expense, to exercise, all or any of the following powers with respect to all or any of the Collateral: (a) to demand, sue for, collect, receive and give acquittance for any and all monies due or to become due; (b) to receive, take, endorse, assign and deliver all checks, notes, drafts, documents and other negotiable and non- negotiable instruments and chattel paper taken or received by the Investor; (c) to settle, compromise, prosecute or defend any action or proceeding with respect thereto; (d) to sell, transfer, assign or otherwise deal in or with the same or the proceeds thereof or the related goods securing the Collateral, as fully and effectually as if the Investor were the sole and absolute owner thereof; (e) to extend the time of payment of any or all thereof and to make any allowance and other adjustments with reference thereto; and (f) to discharge any taxes, liens, security interests or other encumbrances at any time placed thereon; provided that the Investor shall give the Company not less than ten (10) business days prior written notice of the time and place of any sale or other intended disposition of any of the Collateral. The exercise by Investor of or failure to so exercise any authority granted herein shall in no manner affect Company's liability to Investor, and provided, further, that Investor shall be under no obligation or duty to exercise any of the powers hereby conferred upon them and they shall be without liability for any act or failure to act in connection with the collection of, or the preservation of, any rights under any of the Collateral. 3 Section 7. Company Events of Default. The Company shall be in default under this Security Agreement upon the occurrence of any of the following events (a "Company Event of Default"): (i) if any representation or warranty made by the Company in this ANNEX or in any of the Notes, the Funding Agreement or the Registration Rights Agreement, shall be false or misleading in any material respect; or (ii) the occurrence of a default by the Company under the Notes or this ANNEX. Section 8. Remedies Upon Company Event of Default. If any Company Event of Default shall have occurred, the Investor may exercise all the rights and remedies of a Investor under the Uniform Commercial Code. The Investor may require the Company to assemble all or any part of the Collateral and make it available to the Investor at a place to be designated by the Investor which is reasonably convenient. The Investor shall give the Company ten (10) business days prior written notice of the Investor's intention to make any public or private sale or sale at a broker's board or on a securities exchange of the Collateral. At any such sale the Collateral may be sold in one lot as an entirety or in separate parcels, as the Investor, in its sole discretion, may determine. The Investor shall not be obligated to make any such sale pursuant to any such notice. The Investor may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be adjourned. The Investor, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the Security Interests and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. Section 9. Application of Collateral and Proceeds. The proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied in the following order of priorities: (a) first, to pay the reasonable expenses of such sale or other realization, including, without limitation, reasonable attorneys' fees, and all expenses, liabilities and advances reasonably incurred or made by the Investor in connection therewith, and any other unreimbursed expenses for which the Investor is to be reimbursed pursuant to Section 10; (b) second, to the payment of the Obligations in such order of priority as the Investor, in its sole discretion, shall determine; and (c) finally, to pay to the Company, or its successors or assigns, or as a court of competent jurisdiction may direct, any surplus then remaining from such proceeds. Section 10. Expenses; Investor's Lien. The Company will forthwith upon demand pay to the Investor: (a) the amount of any taxes which the Investor may have been required to pay by reason of the Security Interests (including, without limitation, any applicable transfer taxes) or to free any of the Collateral from any lien thereon; and (b) the amount of any and all reasonable out-of-pocket expenses, including, without limitation, the reasonable fees and disbursements of its counsel, and of any agents not regularly in its employ, which the Investor may incur in 4 connection with (i) the preparation of any amendments or modifications of this Security Agreement, (ii) the collection, sale or other disposition of any of the Collateral; (iii) the exercise by the Investor of any of the powers conferred upon it hereunder, or (iv) any default by the Company hereunder. Section 11. Termination of Security Interests; Release of Collateral. Upon the earlier of (i) the repayment and performance in full of all the Obligations, or (ii) upon the Company securing cash investments of not less than $5,000,000 in new shareholder equity, or (iii) the Security Interests shall terminate and all rights to the Collateral shall revert to the Company. Upon any such termination of the Security Interests or release of Collateral, the Investor will, at the Company's expense, to the extent permitted by law, execute and deliver to the Company such documents as the Company shall reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be. The Company further covenants and agrees that notwithstanding such release under subsection (ii), it will not grant any other security interest or other lien or rights in the Collateral (however denominated) as long as any of the Notes remain outstanding. Section 12. Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (a) personally served,(b) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (c) delivered by reputable air courier service with charges prepaid, or (d) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice given in accordance herewith. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (i) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (ii) on the second business day following the date of mailing by express courier service or on the fifth business day after deposited in the mail, in each case, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: If to the Company: SAC Technologies, Inc. 1285 Corporate Center Drive Suite 175 Eagan, Minnesota 55121 Telephone No.: (651) 687-0414 Telecopier No.: with a copy (which shall not constitute notice) to: The Shaar Fund Ltd. Kaya Flamboyan 9 Curacao 5 Netherlands Antilles (Tel: 599-9-732-2222) (Fax: 599-9-732-2225) with copies (which shall not constitute notice) to: Levinson Capital Management, LLC 35 East Grassy Sprain Road Suite 300 Yonkers, NY 10710 Phone number: 914-395-0096 Fax number: 914-395-0059 and to: Krieger & Prager, LLP Suite 1440 39 Broadway New York, New York 10006 Telephone: (212) 363-2900 Facsimile: (212) 363-2999 Either party hereto may from time to time change its address or facsimile number for notices under this Section 12 by giving at least ten (10) days' prior written notice of such changed address or facsimile number to the other party hereto. Section 13. Miscellaneous. (a) No failure on the part of the Investor to exercise, and no delay in exercising, and no course of dealing with respect to, any right, power or remedy under this Security Agreement shall operate as a waiver thereof; nor shall any single or partial exercise by the Investor of any right, power or remedy under this Security Agreement preclude the exercise, in whole or in part, of any other right, power or remedy. The remedies in this Security Agreement are cumulative and are not exclusive of any other remedies provided by law. Neither this Security Agreement nor any provision hereof may be changed, waived, discharged or terminated orally but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. (b) Unless otherwise defined herein, or unless the context otherwise requires, all terms used herein which are defined in the New York Uniform Commercial Code have the meanings therein stated. (c) The execution and delivery by Company of this Agreement and all documents delivered in connection herewith have been duly and validly authorized by all necessary corporate action of Company and this Agreement and all documents delivered in connection herewith have been duly and validly executed and delivered by Company. The execution and delivery by Company of this Agreement and all documents delivered in connection herewith will not result in a breach or default of or under the Certificate of Incorporation, By-laws or any agreement of Company. This Agreement and all documents delivered in connection therewith 6 are legal, valid and binding obligations of Company enforceable against Company in accordance with their terms. (e) In the event that any action is taken by Company or Investor in connection with this Note, or any related document or matter, the losing party in such legal action, in addition to such other damages as he or it may be required to pay, shall pay reasonable attorneys' fees to the prevailing party. Section 14. Separability. If any provision hereof shall prove invalid or unenforceable in any jurisdiction whose laws shall be deemed applicable, the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Investor. Section 15. Governing Law. This Annex shall be governed by and construed in accordance with the laws of the State of New York. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on FORUM NON COVENIENS, to the bringing of any such proceeding in such jurisdictions. Section 16. Jury Trial Waiver. The Company and the Investor hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out of or in connection with the Note or this Annex. Acknowledged: SAC TECHNOLOGIES, INC., Company By:________________________________ Its ________________________________ STATE OF ________________ COUNTY OF ______________ On the ______ day of ________, 2001, before me personally came _________________________, to me known, who being by me duly sworn, did depose and say that he resides at _____________________________________, __________________; that he is the _______________ of SAC TECHNOLOGIES, INC., the corporation described in and which executed the foregoing instrument as Company; that he was authorized to execute the foregoing instrument on behalf of said corporation by the Board of Directors of said corporation; and that he executed the foregoing instrument voluntarily and of his own free will on behalf of said corporation. ___________________________________ Notary Public My commission expires: 7 EXHIBIT A FINANCING STATEMENTS ON FILE ON DATE HEREOF 1. Financing Statement on Form UCC-1, naming Company, as Debtor, and ____________________________ and certain other parties, as Secured Party, as filed in the office of the Secretary of State of the State of __________ on , 2001. This financing statement covers collateral substantially similar to the Collateral and represents a security interest senior to the security interest granted hereby. Company represents that, to its knowledge and without having made any search or investigation, except for the security interest referred to in paragraph 1 above, there are no security interests in the Collateral in favor of any other party. 8 EXHIBIT B ADDITIONAL REPRESENTATIONS AND WARRANTIES 1. The exact name of the Company as shown on its Articles of Incorporation is SAC Technologies, Inc. 2. The Company does business under the names: SAC Technologies, Inc. Bio- Key International 3. The Company was incorporated on January 6, 1993 under the laws of the State of Minnesota and is in good standing under those laws. 4. The Chief Executive Officer of the Company is Jeffrey Brown. 5. The Company is qualified to transact business in: Minnesota; Nevada 6. The Company's only place(s) of business is/are at: a. 1285 Corporate Center Drive, Suite 175, Eagan, Minnesota, 55121. b. PMB #192; 4894 W. Lane Mountain Road, Las Vegas, NV 89130-2239 7. The Company owns or has an interest in personal property at the following locations: Address Record Owner of Real Estate ------- --------------------------- [SEE SCHEDULE ANNEXED] EXHIBIT C Intellectual Property and Licenses EX-10.39 12 sac020249_ex10-39.txt EMPLOYMENT AGREEMENT EXHIBIT 10.39 EMPLOYMENT AGREEMENT THIS AGREEMENT (along with all Exhibits attached hereto hereinafter referred to as the "Agreement") made effective as of November 20th, 2001 by and between SAC Technologies, Inc., dba BIO-key International, a Minnesota corporation with its principal place of business at 1285 Corporate Center Drive, Suite 175, Eagan, MN 55121 (the "Company") and Mira LaCous, residing at 1567 Antler Point, Eagan, MN 55122 (the "Employee"). WITNESSETH: WHEREAS, the Company desires to secure the employment of the Employee as Vice President in accordance with the provisions of this Agreement; and WHEREAS, the Employee desires and is willing to be employed by the Company in accordance herewith. NOW THEREFORE, in consideration of the premises and mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment Term. This Agreement shall remain in force and effect for a term commencing on the Effective Date hereof and expiring on the first (1st) anniversary hereof (the "Initial Term"), or until the employment relationship is terminated pursuant to Section 4 hereof. Upon the expiration of the Initial Term, this Agreement will be renewed automatically for successive one-year periods (each, a "Renewal Term"), unless sooner terminated in accordance with the provisions of Section 4 or unless Company gives written notice of non-renewal at least one (1) month prior to the date on which the Employee's employment would otherwise end, in which case paragraph 4(e) takes effect. 2. Duties; Exclusive Services and Best Efforts. (a) Duties. Employee shall hold the position of Vice President of Technology and Development. At this position, the Employee will have the responsibility for all core technology, software design and development, customer support, professional services related to technology implementations, and participation in corporate strategy activities for the Company including but not limited to strategic planning, product roll out, beta test development, budget forecasting as well as any duties assigned to the Employee as directed by the Company's CEO. Employee working with the CEO will participate in negotiating contracts and strategic alliances with outside vendors and prospective clients. (b) Exclusive Services and Best Efforts. The Employee agrees to devote her best efforts, energies and skill to the faithful, competent and diligent discharge of the duties and responsibilities attributable to her position, and to this end, will devote her fulltime attention to the business and affairs of the Company. The Employee also agrees that she shall not take personal advantage of any business opportunities that arise during her employment that may benefit the Company. All material facts regarding such opportunities must be promptly reported to the Company's CEO for consideration. In addition, the Company acknowledges and agrees that the Employee shall be permitted to engage in and pursue such contemporaneous activities and interests, as the Employee may desire, for personal profit or otherwise, provided such activities do not interfere with the Employee's performance of her duties and obligations hereunder. 3. Compensation. On and after the commencement of Employee's employment, the Employee shall receive, for all services rendered to the Company hereunder, the following: (a) Base Salary. The Employee shall be paid an initial base annual salary equal to One Hundred Thousand Dollars ($100,000) paid at the rate of $8,333 per month. The Employee's annual base salary shall be payable in equal installments in accordance with the Company's general salary payment policies but no less frequently than monthly. Employee's Base Salary may be increased annually, or at such other intervals, as the CEO shall determine from time to time. (b) Discretionary Bonus. In addition to Base Salary, a "Discretionary Bonus" may be awarded to the Employee on the basis of merit performance on an annual basis in the discretion of the Board of Directors or Compensation Committee thereof; provided, however, that the failure of the Company to provide any Discretionary Bonus shall not give rise to any claim against the Company. The Discretionary Bonus shall not exceed fifty (50%) percent of the Employee's Base Salary; the Company in its sole discretion shall determine the amount, if any, and timing of any Discretionary Bonus. (c) Incentive Compensation. The Employee may be eligible for awards from the Company's incentive compensation plans, including without limitation any stock option plans applicable to high level executives of the Company, in accordance with the terms thereof and on a basis commensurate with their position and responsibilities. The Company in its sole discretion shall determine any such compensation. Nothing herein shall affect any rights or obligations of the Employee or the Company created pursuant to any stock option plan or stock option agreement between the parties hereto. (d) Stock Options. For this Agreement, Employee shall be granted (i) subject to the provisions of the Company's 1999 Stock Option Plan attached hereto as Exhibit A, a stock option to purchase 200,000 shares of the Company's Common Stock; and (ii) subject to the terms of stock option agreement in substantially the form attached hereto as Exhibit B, a stock option to purchase 140,000 shares of the Company's Common Stock. Option to purchase Seventy-Five thousand (75,000) shares shall vest on execution of this Agreement; and two hundred and sixty-five thousand (265,000) shares shall vest in equal monthly installments over a thirty-six (36) month period. (f) Benefits Plans. The Employee shall be eligible to participate in any and all employee welfare and health benefit plans (including, but not limited to, life insurance, health, medical and dental plans) and other employee benefit plans, including but not limited to qualified pension plans, which may be established by the Company from time to time for the benefit of other Company employees of comparable status. The Employee shall be required to comply with the conditions attendant to coverage by such preceding plans and policies and shall comply with and be eligible for benefits only in accordance with the terms and conditions of such plans as they may be amended from time to time. Nothing in this Section shall be construed as requiring the Company to establish or continue any particular benefit plan in discharge of its obligations under this Agreement. (g) Vacation. The Employee shall be eligible for four (4) weeks of paid vacation each year of her employment hereunder. Except as required by applicable law, in no event shall the Employee be entitled to receive any cash compensation in lieu of unused vacation time. (h) Expenses. Subject to and in accordance with the Company's policies and procedures, and, upon presentation of pre-approved itemized accounts, the Employee shall be reimbursed by the Company for reasonable and necessary business-related expenses, which expenses are incurred by the Employee on behalf of the Company. (i) Deductions from Salary and Benefits. The Company will withhold from any salary or benefits payable to the Employee all federal, state, local, and other taxes and other amounts as required by law, rule or regulation. 4. Termination. Either may terminate this Agreement the Employee or the Company at any time, subject only to the provisions of this Section 4. (a) Voluntary Termination. If Employee terminates her own employment, the Company shall be released from any and all further obligations under this Agreement, except that the Company shall be obligated to pay Employee her salary and benefits owing to Employee through the effective date of termination. Employee shall also be entitled to any reimbursement owed in accordance with Section 3(h). Employee's obligations under Sections 5, 7, 8 and 9 hereof and shall survive the termination of Employee's employment, and Employee shall remain bound thereby. (b) Death. This Agreement shall terminate on the date of the Employee's death, in which event salary, benefits, and reimbursable expenses owing to the Employee through the date of the Employee's death shall be paid to her estate. (c) Disability. If, during the term of this Agreement, in the opinion of the Company, the Employee, because of physical or mental illness or incapacity or disability, shall become unable to perform substantially all of the duties and services required of him under this Agreement for a period of thirty (30) consecutive calendar days or sixty (60) days in the aggregate during any twelve-month period, the Company may, upon at least ten (10) days prior written notice given at any time after the expiration of such thirty (30) day or sixty (60) day period, notify the Employee of its intention to terminate this Agreement as of the date set forth in the notice. In case of such termination, the Employee shall be entitled to receive salary, benefits, and reimbursable expenses owing to the Employee through the date of termination. The Company shall have no further obligation or liability to the Employee. The Employee's obligations under Sections 5, 7 8 and 9 hereof shall survive the termination of Employee's employment, and employee shall remain bound thereby. (d) Termination by Employer for Cause. The Company may terminate this Agreement for "Cause" at any time. Upon such termination for "Cause", the Company shall be released from any and all further obligations under this Agreement, except that the Company shall be obligated to pay the Employee her salary and benefits owing to the Employee through the effective date of such termination. The Employee shall also be entitled to any reimbursement owed in accordance with Section 3(h). The Employee's obligations under Sections 5, 7, 8 and 9 hereof shall survive the termination of Employee's employment, and employee shall remain bound thereby. CAUSE. "Cause" for Termination shall include, but is not limited to, the following conduct of the Employee: (i) Breach of any material provision of this Employment Agreement by the Employee if not cured within two (2) weeks after receiving written notice thereof; (ii) Misconduct as an Employee of the Company, including but not limited to, misappropriating funds or property of the Company; any attempt to obtain any personal profit from any transaction in which the Employee has an interest that is adverse to the Company or any breach of the duty of loyalty and fidelity to the Company; or any other act or omission of the Employee which substantially impairs the Company's ability to conduct its ordinary business in its usual manner; (iii) Material neglect or refusal to perform the duties assigned to the Employee pursuant to this Employment Agreement if not cured within two (2) weeks after receiving notice thereof; (iv) Conviction of a felony or plea of guilty or NOLO CONTENDERE to a felony; (v) Acts of dishonesty or moral turpitude by the Employee that are detrimental to the Company or any other act or omission which subjects the Company or any of its affiliates to public disrespect, or scandal, or that causes the Company to be in violation of governmental regulations that subjects the Company either to sanctions by governmental authority or to civil liability to its employees or third parties; (vi) Disclosure or use of confidential information of the Company, other than as specifically authorized and required in the performance of the Employee's duties. (e) Termination by Employer Without Cause. Upon termination of this Agreement without Cause, the Company shall be released from any and all further obligations under this Agreement, except that the Employee shall continue to be paid or provided, as applicable, in the same manner as before termination, and for a period of time ending nine (9) months from the date of termination of the Employee without Cause, if, and only if, the Employee has completed twelve (12) months of employment with Company and signs a valid general release of all claims against the Company, its affiliates, subsidiaries, officers, directors and agents, in a form provided by the Company. The Employee's obligations under Sections 5, 7, 8 and 9 hereof shall survive the termination of the Employee's employment, regardless of the circumstances of any such termination, and the Employee shall remain bound thereby. (f) Termination by Mutual Agreement. This Agreement may be terminated at any time by mutual agreement of the Employee and the Company. (g) Termination by Employee for Cause. Employee for Cause may terminate this Agreement if Employee's current salary or benefits are reduced by more than 30%. In the event the Employee terminates employment for Cause, Employee shall continue to be paid or provided, as applicable, in the same manner as before termination, and for a period of time ending two (2) months from the date of termination by Employee without Cause, if, and only if, the Employee signs a valid general release of all claims against the Company, its affiliates, subsidiaries, officers, directors and agents, in a form provided by the Company. The Employee's obligations under Sections 5, 7, 8 and 9 hereof and shall survive the termination of the Employee's employment, regardless of the circumstances of any such termination, and the Employee shall remain bound thereby. 5. Non-Competition and Business Opportunities. (a) Non-Competition. The Employee understands that the Company is in the business of developing and licensing biometric identification technologies, and distributing products incorporating such technologies, to original equipment manufacturers and end users. The Employee agrees that during the period of her employment hereunder and for a period of one (1) year thereafter, the Employee will not directly or indirectly: (i) market, sell or perform services such as are offered or conducted by the Company, its affiliates and subsidiaries during the period of her employment, to any customer or client of the Company or "Prospective Customer" or client of the Company; or (ii) engage, directly or indirectly, whether as principal or as agent, officer, director, employee, consultant, shareholder, or otherwise, alone or in association with any other person, corporation or other entity, in any "Competing Business". For the purpose of this Section 5(a) "Prospective Customer" shall mean any person with whom the Company has engaged in any discussion or negotiation regarding the use of the Company's products or services. For purposes of this Section 5(a), the term "shareholder" shall exclude any interest owned by Employer in a public company to the extent the Employer owns less than ten percent (10%) of any such company's outstanding common stock. For the further purposes of this Agreement, the term "Competing Business" shall mean any person, corporation or other entity developing and/or licensing biometric identification technologies or distributing products incorporating such technologies to original equipment manufacturers and end users at the time of such termination or non-renewal. Due to the nature of the markets served and the technology and products to be developed and marketed by the Company which are intended to be available on a national basis, the restrictions set forth in this Section 5(a) can not be limited to a specific geographic area within the United States. (b) Business Opportunities. The Employee agrees that during the period of her employment hereunder, the Employee will not take personal advantage of any business opportunities that are similar or substantially similar to the business of the Company. In addition, all material facts regarding any such business opportunities must be promptly and fully disclosed by the Employee to the CEO as soon as the Employee becomes aware of any opportunity, and in no event later than forty-eight (48) hours after learning of such opportunity. Business opportunities covered by this Section 5(b) include opportunities relating to the development and licensing of biometric identification/verification technologies or the distribution of products incorporating such technologies to original equipment manufacturers, distributors and end users. (c) Non-Solicitation. The Employee agrees that during the period of employment hereunder and for a period of one (1) year thereafter, the Employee will not request or otherwise attempt to induce or influence, directly or indirectly, any present customer, distributor or supplier, or Prospective Customer, distributor or supplier, of the Company, or other persons sharing a business relationship with the Company to cancel, to limit or postpone their business with the Company, or otherwise take action which might be to the material disadvantage of the Company. The Employee agrees that during the period of employment hereunder and for a period of one (1) year thereafter, Employee will not hire or solicit for employment, directly or indirectly, or induce or actively attempt to influence, hire or solicit, any employee, agent, officer, director, contractor, consultant or other business associate of the Company to terminate his or her employment or discontinue such person's consultant, contractor or other business association with the Company. (d) Scope. The parties hereto agree that, due to the nature of the Company's business, the duration and scope of the non-competition and non-solicitation provisions set forth above are reasonable. In the event that any court determines that the duration or the geographic scope, or both, are unreasonable and that such provisions are to that extent unenforceable, the parties hereto agree that such provisions shall remain in full force and effect for the greatest time period and in the greatest area that would not render it unenforceable. The parties intend that the non-competition and non-solicitation provisions herein shall be deemed to be a series of separate covenants, one for each and every county of each and every state of the United States of America and each and every political subdivision of each and every country outside the United States of America where this provision is intended to be effective. The Employee agrees that damages are an inadequate remedy for any breach of such provisions and that the Company, shall, whether or not it is pursuing any potential remedies at law, be entitled to seek in any court of competent jurisdiction, equitable relief in the form of preliminary and permanent injunctions without bond or other security upon any actual or threatened breach of either of these competition provisions. If the Employee shall violate this Section 5, the duration of this Section 5 automatically shall be extended as against the Employee for a period equal to the period during which the Employee shall have been in violation of this Section 5. The covenants contained in this Section 5 are deemed to be material and the Company is entering into this Agreement relying on such covenants. 6. Representations and Warranties of the Employee. The Employee, hereby represents and warrants to the Company as follows: (i) The Employee has the legal capacity and unrestricted right to execute and deliver this Agreement and to perform all of her obligations hereunder; (ii) the execution and delivery of this Agreement by the Employee and the performance of her obligations hereunder will not violate or be in conflict with any fiduciary or other duty, instrument, agreement, document, arrangement, or other understanding to which Employee is a party or by which she is or may be bound or subject; and (iii) except as set forth in Exhibit C attached hereto, the Employee is not a party to any instrument, agreement, document, arrangement, including, but not limited to, invention assignment agreement, confidential information agreement, non-competition agreement, non-solicitation agreement, or other understanding with any person (other than the Company) requiring or restricting the use or disclosure of any confidential information or the provision of any employment, consulting or other services. 7. Disclosure of Innovations; Assignment of Ownership of Innovations; Protection of Confidential Information. Employee hereby represents and warrants to the Company that Employee understands that the Company is in the business of developing and licensing biometric identification technologies, and distributing products incorporating such technologies, to original equipment manufacturers, distributors and end users (THE "COMPANY'S BUSINESS") and that Employee may have access to, generate/create, or acquire information with respect to Confidential Information (as defined below), including software, processes and methods, development tools, scientific, technical and/or business innovations. (a) Disclosure of Innovations. Employee agrees to disclose in writing to the Company all inventions, improvements and other innovations of any kind that Employee may make, conceive, develop or reduce to practice, alone or jointly with others, during the term of Employee's employment with the Company, whether or not they are eligible for patent, copyright, trademark, trade secret or other legal protection ("Innovations"). Examples of Innovations shall include, but are not limited to, software, discoveries, research, inventions, formulas, techniques, processes, know-how, marketing plans, new product plans, production processes, advertising, packaging and marketing techniques and improvements to computer hardware or software. Such innovations disclosed to the Company shall not be disclosed to any other person or party without the written permission of the Employee. (b) Assignment of Ownership of Innovations. Employee acknowledges that she has been employed by the Company since May 15, 2000 (the "Start Date"). Employee agrees that (i) all Innovations made, conceived, developed or reduced to practice by Employee, either alone or together with others, at any time after the Start Date and prior to the date hereof related to biometric identification/verification technologies are; and (ii) all Innovations made, conceived, developed or reduced to practice by Employee, either alone or together with others, at any time on or after the Start Date will be the sole and exclusive property of the Company and Employee hereby assigns all of Employee's rights, title or interest in the Innovations and in all related patents, copyrights, trademarks, trade secrets, rights of priority and other proprietary rights to the Company, provided however, that Employee does not assign to the Company any of Employee's rights in any Innovations (i) for which no equipment, supplies, facility or trade secret information of the Company was used; (ii) which was developed entirely on Employee's own time; (iii) which does not relate directly to the Company's Business or to the Company's actual or demonstrably anticipated research or development; and (iv) which does not result from any work performed by Employee for the Company. At the Company's request and expense, during and after the period of Employee's employment with the Company, Employee will assist and cooperate with the Company in all respects and will execute documents, and, subject to Employee's reasonable availability, give testimony and take further acts requested by the Company to obtain, maintain, perfect and enforce for the Company patent, copyright, trademark, trade secret and other legal protection for the Innovations. Employee hereby appoints an authorized officer of the Company as Employee's attorney-in-fact to execute documents on her behalf for this purpose. Employee has attached hereto as Exhibit D a list of Innovations as of the date hereof which belong to Employee and which are not assigned to the Company hereunder (the "Prior Innovations"), or, if no such list is attached, Employee represents that there are no Prior Innovations. (c) Protection of Confidential Information of the Company. Employee understands that Employee's work as an employee of the Company creates a relationship of trust and confidence between Employee and the Company. During and after the period of Employee's employment with the Company, Employee will not use or disclose or allow anyone else to use or disclose any "Confidential Information" (as defined below) relating to the Company, its products, services, suppliers or customers except as may be necessary in the performance of Employee's work for the Company or as may be specifically authorized in advance by appropriate officers of the Company. "Confidential Information" shall include, but not be limited to, information consisting of research and development, patents, trademarks and copyrights and applications thereto, technical information, computer programs, software, methodologies, innovations, software tools, know-how, knowledge, designs, drawings, specifications, concepts, data, reports, processes, techniques, documentation, pricing, marketing plans, customer and prospect lists, trade secrets, financial information, salaries, business affairs, suppliers, profits, markets, sales strategies, forecasts, employee information and any other information not available to the general public, whether written or oral, which Employee knows or has reason to know the Company would like to treat as confidential for any purpose, such as maintaining a competitive advantage or avoiding undesirable publicity. Employee will keep Confidential Information secret and will not allow any unauthorized use of the same, whether or not any document containing it is marked as confidential. These restrictions, however, will not apply to Confidential Information that has become known to the public generally through no fault or breach of Employee's or that the Company regularly gives to third parties without restriction on use or disclosure. If Employee is subpoenaed or ordered to disclose this information by a Court of competent jurisdiction, Employee shall promptly inform the Company so that the Company can determine whether it wants to attempt to quash the subpoena or order. If the Employee has informed the Company, then it shall not constitute a breach of this Employment Agreement when or if the Employee responds to or replies to a proper subpoena or other order of the Court. 8. WORK MADE FOR HIRE. (a) Work Made For Hire. Subject to Paragraph 7 (whose terms shall control) Employee further recognizes and understands that Employee's duties at the Company may include the preparation of materials, including without limitation written or graphic materials, and that any such materials conceived or written by Employee shall be done as "work made for hire" as defined and used in the Copyright Act of 1976, 17 U.S.C. ss.ss. 1 et seq. In the event of publication of such materials, Employee understands that since the work is a "work made for hire", the Company will solely retain and own all rights in said materials, including right of copyright. In the event that any of such works shall be deemed by a court of competent jurisdiction not to be a "work made for hire," this Agreement shall operate as an irrevocable assignment by Employee to the Company of all right, title and interest in and to such works, including, without limitation, all worldwide copyright interests therein, in perpetuity. The fact that such copyrightable works are created by Employee outside of the Company's facilities or other than during Employee's working hours with the Company shall not diminish the Company's right with respect to such works which otherwise fall within this paragraph. Employee agrees to execute and deliver to the Company such further instruments or documents as may be requested by the Company in order to effectuate the purposes of this paragraph. (b) Disclosure of Works and Inventions/Assignment of Patents. Subject to Paragraph 7 (whose terms shall control), in consideration of the promises set forth herein, Employee agrees to disclose promptly to the Company, or to such person whom the Company may expressly designate for this specific purpose (its "Designee"), any and all works, inventions, discoveries and improvements authored, conceived or made by Employee during the period of employment commencing from the Start Date and related to the business or activities of the Company, and Employee hereby assigns and agrees to assign all of Employee's interest in the foregoing to the Company or to its Designee. Employee agrees that, whenever she is requested to do so by the Company, Employee shall execute any and all applications, assignments or other instruments which the Company shall deem necessary to apply for and obtain Letters Patent or Copyrights of the United States or any foreign country or to otherwise protect the Company's interest therein. Such obligations shall continue beyond the termination or nonrenewal of Employee's employment or service with respect to any works, inventions, discoveries and/or improvements that are authored, conceived of, or made by Employee during the period of Employee's employment or service, and shall be binding upon Employee's successors, assigns, executors, heirs, administrators or other legal representatives. 9. Company Property. All records, files, lists, including computer generated lists, drawings, documents, software, documents, equipment, models, binaries, object modules, libraries, source code and similar items relating to the Company's business that the Employee shall prepare or receive from the Company and all Confidential Information shall remain the Company's sole and exclusive property ("Company Business Property"). Upon termination of this Agreement, the Employee shall promptly return to the Company all property of the Company in her possession, including Company Business Property. The Employee further represents that she will not copy or cause to be copied, print out, or cause to be printed out any Company Business Property other than as specifically authorized and required in the performance of the Employee's duties. The Employee additionally represents that, upon termination of her employment with the Company, she will not retain in her possession any such Company Business Property. 10. Cooperation. The Employee and Company agree that during the term of Employee's employment they shall, at the request of the other Party, render all assistance and perform all lawful acts that each Party considers necessary or advisable in connection with any litigation involving either Party or any director, officer, employee, shareholder, agent, representative, consultant, client, or vendor of the Company. 11. Employment Dispute Settlement Procedure/Waiver of Rights. The Employee and the Company each agree that, in the event either party (or its representatives, successors or assigns) brings an action in a court of competent jurisdiction relating to the Employee's recruitment, employment with, or termination of employment from the Company, each party in such action agrees to waive his, her or its right to a trial by jury, and further agrees that no demand, request or motion will be made for trial by jury. The parties hereto further agree that, in the event that either seeks relief in a court of competent jurisdiction for a dispute covered by this Agreement, any other Agreement between the Employee and the Company or which relates to the Employee's recruitment, employment with, or termination of employment from the Company, the defendant or third-party defendant in such action may, at any time within sixty (60) days of the service of the complaint, third-party complaint or cross-claim upon such party, at his, her or its option, require all or part of the dispute to be arbitrated by one arbitrator in accordance with the rules of the American Arbitration Association. The parties agree that the option to arbitrate any dispute is governed by the Federal Arbitration Act. The parties understand and agree that, if the other party exercises his, her or its option, any dispute arbitrated will be heard solely by the arbitrator, and not by a court. Judgment upon the award rendered, however, may be entered in any court of competent jurisdiction. The cost of such arbitration shall be borne equally by the parties. The terms of this paragraph does not require the parties to use neutrals or mediators who are members of the American Arbitration Association. This dispute resolution agreement will cover all matters directly or indirectly related to the Employee's recruitment, employment or termination of employment by the Company; including, but not limited to, claims involving laws against discrimination whether brought under federal and/or state law and/or local law, and/or claims involving co-employees but excluding Worker's Compensation Claims. Nothing contained in this Section 11 shall limit the right of the Company to enforce by court injunction or other equitable relief the Employee's obligations under Sections 5, 7, 8 and 9 hereof. The right to a trial, and to a trial by jury, is of value. THE EMPLOYEE MAY WISH TO CONSULT AN ATTORNEY PRIOR TO SIGNING THIS AGREEMENT. IF SO, THE EMPLOYEE SHOULD TAKE A COPY OF THIS AGREEMENT WITH HER. 12. Choice of Law and Jurisdiction. This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of Minnesota. Each of the parties hereto hereby irrevocably consents and submits to the exclusive jurisdiction of the state courts of the State of Minnesota, and of the United States District Court for the District of Minnesota in connection with any suit, action, or other proceeding concerning this Agreement or enforcement of Sections 5, 7, 8 and 9 hereof. The Employee waives the right to a jury trial and agrees to accept service of process by certified mail at the Employee's last known address, if there is proof of receipt by the Employee (at a minimum, return receipt requested). 13. Successors and Assigns. The Employee hereunder, may assign neither this Agreement, nor any of the Employee's rights, powers, duties or obligations. This Agreement shall be binding upon and inure to the benefit of the Employee and her heirs and legal representatives and the Company and its successors. Successors of the Company shall include, without limitation, any company or companies, individuals, groups, associations, partnerships, firm, venture or other entity or party acquiring, directly or indirectly, all or substantially all of the assets of the Company, whether by merger, consolidation, purchase, lease or otherwise. Any such successor referred to in this paragraph shall thereafter be deemed "the Company" for the purpose hereof. All covenants and restrictions upon the Employee hereunder, including, but not limited to Sections 5, 7, 8 and 9 hereof, are specifically assignable by the Company. 14. Waiver. Any waiver or consent from the Company with respect to any term or provision of this Agreement or any other aspect of the Employee's conduct or employment shall be effective only in the specific instance and for the specific purpose for which given and shall not be deemed, regardless of frequency given, to be a further or continuing waiver or consent. The failure or delay of the Company at any time or times to require performance of, or to exercise any of its powers, rights or remedies with respect to any term or provision of this Agreement or any other aspect of the Employee's conduct or employment in no manner (except as otherwise expressly provided herein) shall affect the Company's right at a later time to enforce any such term or provision. 15. Notices. All notices, requests, demands, and other communications hereunder must be in writing and shall be deemed to have been duly given if delivered by hand or mailed within the continental United States by first class, registered mail, return receipt requested, postage and registry fees prepaid, to the applicable party and addressed as follows: (a) If to the Company: SAC Technologies, Inc., dba: BIO-key International 1285 Corporate Center Drive, Suite 175 Eagan, MN 55121 Attn: Chief Executive Officer With a copy to: Buchanan Ingersoll Professional Corporation Eleven Penn Center 1845 Market Street Philadelphia, PA 19103 Attn: Vincent A. Vietti, Esquire (b) If to the Employee: Mira LaCous 1567 Antler Point Eagan, MN 55122 The parties agree to give notice of any change of address within 15 days of the change of address. 16. Construction of Agreement. (a) Severability. In the event that any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions shall not in any way be affected or impaired thereby. (b) Headings. The descriptive headings of the several paragraphs of this Agreement are inserted for convenience of reference only and shall not constitute a part of this Agreement. 17. Entire Agreement and Amendments. This Agreement, including all Exhibits which shall form parts hereof, contains the entire agreement of the parties concerning the Employee's employment and all promises, representations, understandings, arrangements and prior agreements on such subject are merged herein and superseded hereby. The provisions of this Agreement may not be amended, modified, repealed, waived, extended or discharged except by an agreement in writing signed by the party against whom enforcement of any amendment, modification, repeal, waiver, extension or discharge is sought. No person acting other than pursuant to a resolution of the Board of Directors shall have authority on behalf of the Company to agree to amend, modify, repeal, waive, extend or discharge any provision of this Agreement or anything in reference thereto or to exercise any of the Company's rights to terminate or to fail to extend this Agreement. 18. Survival. The Employee's obligations under Paragraphs 5, 7, 8 and 9 shall survive and continue pursuant to the terms and conditions of this Agreement following specific termination. 19. Understanding. The Employee represents and agrees that she fully understands her rights to discuss all aspects of this Agreement with her private attorney, that to the extent she desires, she availed himself of this right, that she has carefully read and fully understands all of the provisions of this Agreement, that she is competent to execute this Agreement, that her decision to execute this Agreement has not been obtained by any duress and that she freely and voluntarily enters into this Agreement, and that she has read this document in its entirety and fully understands the meaning, intent, and consequences of this Agreement. 20. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 21. Injunctive Relief. The Employee hereby agrees and acknowledges that in the event of a breach or anticipatory breach of this Agreement by the Employee, the Company may suffer irreparable harm and monetary damages alone would not adequately compensate the Company. Accordingly, the Company will therefore be entitled to injunctive relief to enforce this Agreement. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and attested by its duly authorized officers, and the Employee has set her hand, all as of the day and year first above written. ATTEST: SAC TECHNOLOGIES, INC. __________________________ By:_____________________________ Name:________________________ Title:_______________________ WITNESS: EMPLOYEE __________________________ ________________________________ Mira LaCous ________________________________ Date EX-10.40 13 sac020249_ex10-40.txt OPTION TO PURCHASE COMMON STOCK Exhibit 10.40 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES, REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT. OPTION TO PURCHASE COMMON STOCK OF SAC TECHNOLOGIES, INC. Void after November 19, 2008 This certifies that, for value received, MIRA LACOUS ("Holder"), is entitled, subject to the terms set forth below, to purchase from SAC TECHNOLOGIES, INC., a Minnesota corporation (the "Company"), shares of the common stock, $.01 par value per share, of the Company ("Common Stock"), as constituted on the date hereof (the "Option Issue Date"), with the Notice of Exercise attached hereto duly executed, and simultaneous payment therefor in lawful money of the United States or as otherwise provided in Section 3 hereof, at the Exercise Price then in effect. The number, character and Exercise Price of the shares of Common Stock issuable upon exercise hereof are subject to adjustment as provided herein. 1. TERM OF OPTION. Subject to compliance with the vesting provisions identified at Section 2.3 hereof, this Option shall be exercisable, in whole or in part, during the term commencing on the Option Issue Date and ending at 5:00 p.m. CST on November 19, 2008 (the "Option Expiration Date") and shall be void thereafter. 2. NUMBER OF SHARES, EXERCISE PRICE AND VESTING PROVISIONS. 2.1 NUMBER OF SHARES. The number of shares of Common Stock which may be purchased pursuant to this Option shall be 140,000 shares (the "Shares"), subject, however, to adjustment pursuant to Section 11 hereof. 2.2 EXERCISE PRICE. The Exercise Price at which this Option, or portion thereof, may be exercised shall be $0.46(1) per Share, subject, however, to adjustment pursuant to Section 11 hereof. - --------------------------- (1) The closing price of the Company's common stock as reported on the OTC Electronic Bulletin Board on the date of grant. 2.3 VESTING. This Option shall vest in accordance with the following schedule: Upon signing of this agreement and holder becomes acting Vice President of Technology of Company............. 30,882 Shares Commencing December 20, 2001 and on the first day of each month there- after and terminating October 20, 2004, so long as Holder remains employed by the Company.............. 3,031 Shares per month On November 20, 2004, so long as Holder remains employed by the Company.............................. 3,033 Shares 3. EXERCISE OF OPTION. 3.1 PAYMENT OF EXERCISE PRICE. Subject to the terms hereof, the purchase rights represented by this Option are exercisable by the Holder in whole or in part, at any time, or from time to time, by the surrender of this Option and the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company) accompanied by payment of the Exercise Price in full either (i) in cash or by bank or certified check for the Shares with respect to which this Option is exercised; (ii) by delivery to the Company of shares of the Company's Common Stock having a Fair Market Value (as defined below) equal to the aggregate Exercise Price of the Shares being purchased which Holder is the record and beneficial owner of and which have been held by the Holder for at least six (6) months; or (iii) by delivering to the Company a Notice of Exercise together with an irrevocable direction to a broker-dealer registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to sell a sufficient portion of the Shares and deliver the sales proceeds directly to the Company to pay the Exercise Price; or (iv) by any combination of the procedures set forth in subsections (i), (ii) and (iii) of this Section 3.1. 3.2 FAIR MARKET VALUE. If previously owned shares of Common Stock are tendered as payment of the Exercise Price, the value of such shares shall be the "Fair Market Value" of such shares on the trading date immediately preceding the date of exercise. For the purpose of this Agreement, the "Fair Market Value" shall be: (a) If the Common Stock is admitted to quotation on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the Fair Market Value on any given date shall be the average of the highest bid and lowest asked prices of the Common Stock as reported for such date or, if no bid and asked prices were reported for such date, for the last day preceding such date for which such prices were reported; 2 (b) If the Common Stock is admitted to trading on a United States securities exchange or the NASDAQ National Market System, the Fair Market Value on any date shall be the closing price reported for the Common Stock on such exchange or system for such date or, if no sales were reported for such date, for the last day preceding such date for which a sale was reported. Notwithstanding the foregoing, the Fair Market Value of the Common Stock on the effective date of the Initial Public Offering (as defined in Section 7.2) shall be the offering price to the public of the Common Stock on such date; (c) If the Common Stock is traded in the over-the-counter market and not on any national securities exchange nor in the NASDAQ Reporting System, the Fair Market Value shall be the average of the mean between the last bid and ask prices per share, as reported by the National Quotation Bureau, Inc., or an equivalent generally accepted reporting service, or if not so reported, the average of the closing bid and asked prices for a share as furnished to the Company by any member of the National Association of Securities Dealers, Inc., selected by the Company for that purpose; or (d) If the Fair Market Value of the Common Stock cannot be determined on the basis previously set forth in this definition on the date that the Fair Market Value is to be determined, the Board of Directors of the Company shall in good faith determine the Fair Market Value of the Common Stock on such date. If the tender of previously owned shares would result in an issuance of a whole number of Shares and a fractional Share of Common Stock, the value of such fractional share shall be paid to the Company in cash or by check by the Holder. 3.3 TERMINATION OF EMPLOYMENT; DEATH. (a) If Holder shall cease to be employed by the Company, all Options to which Holder is then entitled to exercise may be exercised only within ninety (90) days after the termination of employment and prior to the Option Termination Date or, if such termination was due to disability or retirement (as hereinafter defined), within one (1) year after termination of employment and prior to the Option Termination Date. Notwithstanding the foregoing, in the event that any termination of employment shall be for Cause as that term is defined in the employment agreement dated November 20, 2001 by and between the Company and Holder, then this Option shall forthwith terminate. (b) If Holder shall die while employed by the Company and prior to the Option Termination Date, any Options then exercisable may be exercised only within one (1) year after Holder's death, prior to the Option Termination Date and only by the Holder's personal representative or persons entitled thereto under the Holder's will or the laws of descent and distribution. (c) This Option may not be exercised for more Shares (subject to adjustment as provided in Section 11 hereof) after the termination of the Holder's employment or death, as the case may be, than the Holder was entitled to purchase thereunder at the time of the termination of the Holder's employment or death. 3 3.4 EXERCISE DATE; DELIVERY OF CERTIFICATES. This Option shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and Holder shall be treated for all purposes as the holder of record of such Shares as of the close of business on such date. As promptly as practicable on or after such date and in any event within ten (10) days thereafter, the Company at its expense shall issue and deliver to the Holder a certificate or certificates for the number of Shares issuable upon such exercise. In the event that this Option is exercised in part, the Company at its expense will execute and deliver a new Option of like tenor exercisable for the number of shares for which this Option may then be exercised. 4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Option. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction. 5. REPLACEMENT OF OPTION. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Option and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Option, the Company at its expense shall execute and deliver, in lieu of this Option, a new Option of like tenor and amount. 6. RIGHTS OF STOCKHOLDER. Except as otherwise contemplated herein, the Holder shall not be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, or change of stock to no par value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Option shall have been exercised as provided herein. 7. TRANSFER OF OPTION. 7.1. NON-TRANSFERABILITY. This Option shall not be assigned, transferred, pledged or hypothecated in any way, nor subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution. Any attempted assignment, transfer, pledge, hypothecation or other disposition of this Option contrary to the provisions hereof, and the levy of an execution, attachment, or similar process upon the Option, shall be null and void and without effect. 7.2. COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON TRANSFERS. In addition to restrictions on transfer of this Option and Shares set forth in Section 7.1 above. 4 (a) The Holder of this Option, by acceptance hereof, acknowledges that this Option and the Shares to be issued upon exercise hereof are being acquired solely for the Holder's own account and not as a nominee for any other party, and for investment (unless such shares are subject to resale pursuant to an effective prospectus), and that the Holder will not offer, sell or otherwise dispose of any Shares to be issued upon exercise hereof except under circumstances that will not result in a violation of applicable federal and state securities laws. Upon exercise of this Option, the Holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the Shares of Common Stock so purchased are being acquired solely for the Holder's own account and not as a nominee for any other party, for investment (unless such shares are subject to resale pursuant to an effective prospectus), and not with a view toward distribution or resale. (b) Neither this Option nor any share of Common Stock issued upon exercise of this Option may be offered for sale or sold, or otherwise transferred or sold in any transaction which would constitute a sale thereof within the meaning of the 1933 Act, unless (i) such security has been registered for sale under the 1933 Act and registered or qualified under applicable state securities laws relating to the offer an sale of securities; (ii) exemptions from the registration requirements of the 1933 Act and the registration or qualification requirements of all such state securities laws are available and the Company shall have received an opinion of counsel satisfactory to the Company that the proposed sale or other disposition of such securities may be effected without registration under the 1933 Act and would not result in any violation of any applicable state securities laws relating to the registration or qualification of securities for sale, such counsel and such opinion to be satisfactory to the Company. (c) All Shares issued upon exercise hereof shall be stamped or imprinted with a legends in substantially the following form (in addition to any legend required by state securities laws). THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES, REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT. (d) Holder recognizes that investing in the Option and the Shares involves a high degree of risk, and Holder is in a financial position to hold the Option and the Shares indefinitely and is able to bear the economic risk and withstand a complete loss of its investment in the Option and the Shares. The Holder is a sophisticated investor and is capable of evaluating the merits and risks of investing in the Company. The Holder has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management, has been given full and complete access to information concerning the Company, and has utilized 5 such access to its satisfaction for the purpose of obtaining information or verifying information and has had the opportunity to inspect the Company's operation. Holder has had the opportunity to ask questions of, and receive answers from the management of the Company (and any person acting on its behalf) concerning the Option and the Shares and the agreements and transactions contemplated hereby, and to obtain any additional information as Holder may have requested in making its investment decision. (e) Holder acknowledges and represents: (i) that she has been afforded the opportunity to review and is familiar with the business prospects and finances of the Company and has based her decision to invest solely on the information contained therein and has not been furnished with any other literature, prospectus or other information except as included in such reports; (ii) she is at least 21 years of age; (iii) she has adequate means of providing for her current needs and personal contingencies; (iv) she has no need for liquidity for her investment in the Option or Shares; (v) she maintains her domicile and is not a transient or temporary resident at the address on the books and records of the Company; (vi) all of her investments and commitments to non-liquid assets and similar investments are, after her acquisition of the Option and Shares, will be reasonable in relation to her net worth and current needs; (vii) she understands that no federal or state agency has approved or disapproved the Option or Shares or made any finding or determination as to the fairness of the Option and Common Stock for investment; and (viii) she recognizes that the Common Stock is not presently eligible for public trading and that the Company has made no representations, warranties, or assurances as to the future trading value of the Common Stock, whether a public market will develop for the resale of the Common Stock, or if developed whether it will continue. 8. RESERVATION AND ISSUANCE OF STOCK; PAYMENT OF TAXES. (a) The Company covenants that during the term that this Option is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Shares upon the exercise of this Option, and from time to time will take all steps necessary to amend its Certificate of Incorporation to provide sufficient reserves of shares of Common Stock issuable upon the exercise of the Option. (b) The Company further covenants that all shares of Common Stock issuable upon the due exercise of this Option will be free and clear from all taxes or liens, charges and security interests created by the Company with respect to the issuance thereof, however, the Company shall not be obligated or liable for the payment of any taxes, liens or charges of Holder, or any other party contemplated by Section 7, incurred in connection with the issuance of this Option or the Common Stock upon the due exercise of this Option. The Company agrees that its issuance of this Option 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 shares of Common Stock upon the exercise of this Option. The Common Stock issuable upon the due exercise of this Option, will, upon issuance in accordance with the terms hereof, be duly authorized, validly issued, fully paid and non-assessable. 6 (c) Upon exercise of the Option, the Company shall have the right to require the Holder to remit to the Company an amount sufficient to satisfy federal, state and local tax withholding requirements prior to the delivery of any certificate for Shares of Common Stock purchased pursuant to the Option, if in the opinion of counsel to the Company such withholding is required under applicable tax laws. (d) If Holder is obligated to pay the Company an amount required to be withheld under applicable tax withholding requirements may pay such amount (i) in cash; (ii) in the discretion of the Board of Directors of the Company, through the delivery to the Company of previously-owned shares of Common Stock having an aggregate Fair Market Value equal to the tax obligation provided that the previously owned shares delivered in satisfaction of the withholding obligations must have been held by the Holder for at least six (6) months; (iii) in the discretion of the Board of Directors of the Company, through the withholding of Shares of Common Stock otherwise issuable to the Holder in connection with the Option exercise; or (iv) in the discretion of the Board of Directors of the Company, through a combination of the procedures set forth in subsections (i), (ii) and (iii) of this Section 8(d). 9. NOTICES. (a) Whenever the Exercise Price or number of shares purchasable hereunder shall be adjusted pursuant to Section 11 hereof, the Company shall issue a certificate signed by its Chief Financial Officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Exercise Price and number of shares purchasable hereunder after giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first-class mail, postage prepaid) to the Holder of this Option. (b) All notices, advices and communications under this Option shall be deemed to have been given, (i) in the case of personal delivery, on the date of such delivery and (ii) in the case of mailing, on the third business day following the date of such mailing, addressed as follows: If to the Company: SAC Technologies, Inc. 1285 Corporate Center Drive Suite 175 Eagan, MN 55121 With a copy to: Buchanan Ingersoll Professional Corporation 11 Penn Center, 14th Floor 1835 Market Street Philadelphia, Pa. 19103 Attn.: Vincent A. Vietti, Esquire 7 and to the Holder: Mira LaCous c/o SAC Technologies, Inc. 1285 Corporate Center Drive Suite 175 Eagan, MN 55121 Either of the Company or the Holder may from time to time change the address to which notices to it are to be mailed hereunder by notice in accordance with the provisions of this Paragraph 9. 10. AMENDMENTS. (a) Any term of this Option may be amended with the written consent of the Company and the Holder. Any amendment effected in accordance with this Section 10 shall be binding upon the Holder, each future holder and the Company. (b) No waivers of, or exceptions to, any term, condition or provision of this Option, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 11. ADJUSTMENTS. The number of Shares of Common Stock purchasable hereunder and the Exercise Price is subject to adjustment from time to time upon the occurrence of certain events, as follows: 11.1. REORGANIZATION, MERGER OR SALE OF ASSETS. If at any time while this Option, or any portion thereof, is outstanding and unexpired there shall be (i) a reorganization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein); or (ii) a merger or consolidation of the Company in which the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then, as a part of such reorganization, merger, or consolidation, lawful provision shall be made so that the holder of this Option shall upon such reorganization, merger, or consolidation, have the right by exercising such Option, to purchase the kind and number of shares of Common Stock or other securities or property (including cash) otherwise receivable upon such reorganization, merger or consolidation by a holder of the number of shares of Common Stock that might have been purchased upon exercise of such Option immediately prior to such reorganization, merger or consolidation. The foregoing provisions of this Section 11.1 shall similarly apply to successive reorganizations, consolidations or mergers. If the per-share consideration payable to the Holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Company's Board of Directors. In all events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Option with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Option shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Option. 8 11.2. RECLASSIFICATION. If the Company, at any time while this Option, or any portion thereof, remains outstanding and unexpired, by reclassification of securities or otherwise, shall change any of the securities as to which purchase rights under this Option exist into the same or a different number of securities of any other class or classes, this Option shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Option immediately prior to such reclassification or other change and the Exercise Price therefor shall be appropriately adjusted, all subject to further adjustment as provided in this Section 11. 11.3. SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time while this Option, or any portion thereof, remains outstanding and unexpired shall split, subdivide or combine the securities as to which purchase rights under this Option exist, into a different number of securities of the same class, the Exercise Price and the number of shares issuable upon exercise of this Option shall be proportionately adjusted. 11.4. ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES OR PROPERTY. If while this Option, or any portion hereof, remains outstanding and unexpired the holders of the securities as to which purchase rights under this Option exist at the time shall have received, or, on or after the record date fixed for the determination of eligible Stockholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then and in each case, this Option shall represent the right to acquire, in addition to the number of shares of the security receivable upon exercise of this Option, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (other than cash) of the Company that such holder would hold on the date of such exercise had it been the holder of record of the security receivable upon exercise of this Option on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock, other securities or property available by this Option as aforesaid during such period. 11.5 GOOD FAITH. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 11 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Option against impairment. 12. FUNDAMENTAL TRANSACTION. For purposes of this Section 12, a "Fundamental Transaction" shall mean (i) the dissolution or liquidation of the Company; (ii) a merger, reorganization or consolidation in which the Company is acquired by another person or entity (other than a holding company formed by the Company); (iii) the sale of all or substantially all of the assets of the Company to any person or persons; or (iv) the sale in a single transaction or a series of related transactions of voting stock representing more than fifty percent (50%) of the 9 voting power of all outstanding shares of the Company to any person or persons. In the event of a Fundamental Transaction, this Option shall automatically become immediately exercisable in full, and shall be deemed to have attained such status immediately prior to the Fundamental Transaction. Holder shall be given at least 15 days prior written notice of a Fundamental Transaction and shall be permitted to exercise any vested Options during this 15 day period (including those Options vesting as a result of the provisions of this Section 12). In the event of a Fundamental Transaction, any Options which are neither assumed or substituted for in connection with the Fundamental Transaction nor exercised as of the date of the Fundamental Transaction, shall terminate and cease to be outstanding effective as of the date of the Fundamental Transaction, unless otherwise provided by the Board of Directors of the Company. 13. SEVERABILITY. Whenever possible, each provision of this Option shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Option is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision of this Option in such jurisdiction or affect the validity, legality or enforceability of any provision in any other jurisdiction, but this Option shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 14. GOVERNING LAW. The corporate law of the State of Minnesota shall govern all issues and questions concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, interpretation and enforceability of this Option and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of Minnesota, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Minnesota or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Minnesota. 15. JURISDICTION. The Holder and the Company agree to submit to personal jurisdiction and to waive any objection as to venue in the federal or state courts of Minnesota. Service of process on the Company or the Holder in any action arising out of or relating to this Option shall be effective if mailed to such party at the address listed in Section 9 hereof. 16. ARBITRATION. If a dispute arises as to interpretation of this Option, it shall be decided finally by three arbitrators in an arbitration proceeding conforming to the Rules of the American Arbitration Association applicable to commercial arbitration. The arbitrators shall be appointed as follows: one by the Company, one by the Holder and the third by the said two arbitrators, or, if they cannot agree, then the third arbitrator shall be appointed by the American Arbitration Association. The third arbitrator shall be chairman of the panel and shall be impartial. The arbitration shall take place in Minneapolis, Minnesota. The decision of a majority of the arbitrators shall be conclusively binding upon the parties and final, and such decision shall be enforceable as a judgment in any court of competent jurisdiction. Each party shall pay the fees and expenses of the arbitrator appointed by it, its counsel and its witnesses. The parties shall share equally the fees and expenses of the impartial arbitrator. 10 17. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The execution, delivery and performance by the Company of this Option: (i) are within the Company's corporate power; (ii) have been duly authorized by all necessary or proper corporate action; (iii) are not in contravention of the Company's certificate of incorporation or bylaws; (iv) will not violate in any material respect, any law or regulation, including any and all Federal and state securities laws, or any order or decree of any court or governmental instrumentality; and (v) will not, in any material respect, conflict with or result in the breach or termination of, or constitute a default under any agreement or other material instrument to which the Company is a party or by which the Company is bound. 18. SUCCESSORS AND ASSIGNS. This Option shall inure to the benefit of and be binding on the respective successors, assigns and legal representatives of the Holder and the Company. 19. COUNTERPARTS. This Option may be executed in two or more counterparts and delivered via facsimile, each of which shall be deemed to be an original, and all of which together shall be deemed to be one and the same instrument. IN WITNESS WHEREOF, the Company and Holder have caused this Option to be executed on this 20th day of November, 2001. SAC TECHNOLOGIES, INC.. By: /s/ Jeffry Brown ---------------- Jeffry Brown Chief Executive Officer AGREED AND ACCEPTED: MIRA LACOUS /s/ Mira LaCous - ------------------- Signature 11 NOTICE OF EXERCISE TO: [_____________________________] (1) The undersigned hereby elects to purchase _______ shares of Common Stock of SAC TECHNOLOGIES, INC. pursuant to the terms of the attached Option, and tenders herewith payment of the purchase price for such shares in full in the following manner (please check one of the following choices): [ ] In Cash [ ] Cashless exercise through a broker; or [ ] Delivery of previously owned Shares. (2) In exercising this Option, the undersigned hereby confirms and acknowledges that the shares of Common Stock to be issued upon conversion thereof are being acquired solely for the account of the undersigned and not as a nominee for any other party, and for investment (unless such shares are subject to resale pursuant to an effective prospectus), and that the undersigned will not offer, sell or otherwise dispose of any such shares of Common Stock except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. (3) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Mira LaCous - -------------------------- --------------------------------- (Date) (Signature) 12 -----END PRIVACY-ENHANCED MESSAGE-----