UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
UPGRADE INTERNATIONAL CORP.
$1,000,000 PRINCIPAL AMOUNT SUBORDINATED DEBENTURE
CONVERTIBLE AT THE PRICE EQUAL TO THE
AVERAGE BID PRICE FOR THE COMPANY'S COMMON STOCK
FOR THE FIVE TRADING DAYS IMMEDIATELY PRECEDING THE
DATE OF CONVERSION, BUT NOT TO EXCEED USD $2.50 PER SHARE
U.S. SUBSCRIPTION AGREEMENT
The Securities being offered and subscribed for hereby are speculative and
risky. See "Risk Factors" attached as Addendum B. Subscribers must be prepared
to bear the economic risk of their investment for an indefinite time period and
must be able to withstand a total loss of their investment. The Securities have
not been registered under the Securities Act of 1933, as amended ("Securities
Act") or any state or foreign securities laws. Neither the Securities and
Exchange Commission ("SEC") nor any state or foreign regulatory authority has
passed upon the accuracy or adequacy of the Business Plan included as Addendum A
hereto or any other related materials. Neither has any such agency reviewed or
endorsed the merits of this Offering. Any representation to the contrary is a
criminal offense. The Securities are offered under exemptions provided by the
Securities Act and certain state securities laws. The Securities are subject to
restrictions on transferability and resale, and may be transferred or resold
only if effectively registered with the SEC under the Securities Act and with
any state whose securities laws apply, or under an exemption from registration
that is available under those laws. If a holder wishes to transfer or sell
Securities under an exemption from registration, the holder must provide to the
Company an attorney's opinion acceptable to the Company that states the reasons
why an exemption from registration is available.
No person is authorized to give any information or to make any
representation not contained in the accompanying materials, and, if any such
information or representation is given or made, such information or
representation must not be relied upon as having been authorized by the Company.
The delivery of these materials at any time does not imply that the information
contained herein is correct as of any subsequent time. These materials do not
purport to be all inclusive or to contain all the information that a potential
subscriber may desire in considering the Offering.
All potential subscribers will have an opportunity to meet with
representatives of the Company to verify any of the information included in the
accompanying materials and to obtain additional information regarding the
Offering and the Company. Copies of all documents, contracts, financial
statements and other Company records will be made available for inspection at
any such meeting or during normal business hours upon request to the Company.
Subscribers must acknowledge below that they have read the accompanying
materials carefully and thoroughly, they were given the opportunity to obtain
additional information, and they did so to their satisfaction. In making an
investment decision, investors must rely on their own examination of the Company
and the terms of the Offering, including the merits and risks involved.
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
The following documents accompany this Subscription Agreement and are
incorporated herein by reference:
Addendum A Business Plan of the Company
Addendum B Risk Factors
Addendum C Summary of Placement
Addendum D Articles of Incorporation of the Company
Addendum E Bylaws of the Company
Addendum F Form of Convertible Subordinated Debenture
The Date of these Subscription Documents is October 15, 1999.
2
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
ARIZONA RESIDENTS: THESE SECURITIES HAVE BEEN EXEMPTED FROM REGISTRATION
PURSUANT TO A.R.S. Sec.44-1846, BUT THE FACT OF THE GRANTING OF SUCH EXEMPTION
IS NOT TO BE DEEMED TO BE A FINDING BY THE ARIZONA CORPORATION COMMISSION THAT
THESE OFFERING MATERIALS ARE TRUE OR ACCURATE, NOR DOES SUCH GRANT OR EXEMPTION
MEAN THAT THE COMMISSION HAS PASSED UPON THE MERITS OR OTHERWISE APPROVED THE
SECURITIES DESCRIBED HEREIN.
ALABAMA RESIDENTS: THESE SECURITIES ARE OFFERED PURSUANT TO A CLAIM OF
EXEMPTION UNDER THE ALABAMA SECURITIES ACT. A REGISTRATION STATEMENT RELATING
TO THESE SECURITIES HAS NOT BEEN FILED WITH THE ALABAMA SECURITIES COMMISSION.
THE COMMISSION DOES NOT RECOMMEND OR ENDORSE THE PURCHASE OF ANY SECURITIES, NOR
DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF THESE PRIVATE PLACEMENT
MATERIALS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
CALIFORNIA RESIDENTS: THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS
AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE
STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR
RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS
UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION
25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL
PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION
BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
FLORIDA RESIDENTS: THE SECURITIES BEING OFFERED HAVE NOT BEEN REGISTERED WITH
THE FLORIDA DIVISION OF SECURITIES AND INVESTOR PROTECTION. THE FIRM IS
REGISTERED AS AN ISSUER/DEALER TO SELL ITS OWN SECURITIES.
GEORGIA RESIDENTS: THESE SECURITIES HAVE BEEN ISSUED OR SOLD IN RELIANCE ON
PARAGRAPH (13) OF CODE SECTION 10-5-9 OF THE "GEORGIA SECURITIES ACT OF 1973"
AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER
SUCH ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT.
ILLINOIS RESIDENTS: THESE SECURITIES ARE BEING OFFERED AND SOLD PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER SECTION 4G OF THE ILLINOIS SECURITIES LAW OF
1953, AS AMENDED, AND CANNOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION THAT
IS EXEMPT UNDER THE ILLINOIS SECURITIES LAW OR PURSUANT TO AN EFFECTIVE
REGISTRATION THEREUNDER OR OTHERWISE IN COMPLIANCE WITH SUCH LAW.
KENTUCKY RESIDENTS: THE SECURITIES OFFERED BY THIS MEMORANDUM HAVE NOT BEEN
REGISTERED UNDER THE KENTUCKY SECURITIES ACT, ARE OFFERED IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION THEREUNDER AND MAY NOT BE RESOLD, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS SO REGISTERED OR AN EXEMPTION FROM
REGISTRATION IS AVAILABLE.
NEW YORK RESIDENTS: THESE PRIVATE PLACEMENT MATERIALS HAVE NOT BEEN REVIEWED BY
THE ATTORNEY GENERAL PRIOR TO THEIR ISSUANCE AND USE. THE ATTORNEY GENERAL OF
THE STATE OF NEW YORK HAS NOT PASSED UPON OR ENDORSED THE MERITS OF THIS
OFFERING.
2
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THESE PRIVATE PLACEMENT MATERIALS DO NOT CONTAIN AN UNTRUE STATEMENT OF A
MATERIAL FACT OR OMIT TO STATE A MATERIAL FACT NECESSARY TO MAKE THE STATEMENTS
MADE, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY ARE MADE, NOT MISLEADING.
THESE MATERIALS CONTAIN FAIR SUMMARIES OF THE MATERIAL TERMS OF DOCUMENTS
SUMMARIZED HEREIN.
NORTH CAROLINA RESIDENTS: IN MAKING INVESTMENT DECISIONS, INVESTORS MUST RELY ON
THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE
MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY
FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE
FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY
OF THESE OFFERING DOCUMENTS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE
AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS PURSUANT TO
REGISTRATION OR EXEMPTION THEREFOR. INVESTORS SHOULD BE AWARE THAT THEY WILL BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.
OHIO RESIDENTS: THE SECURITIES OFFERED BY THIS MEMORANDUM ARE ISSUED IN RELIANCE
UPON THE EXEMPTIONS FROM REGISTRATION SET FORTH IN SECTIONS 1707.03(K)(2), (O)
AND (Q) OF THE OHIO REVISED CODE, AND THEY CANNOT BE RESOLD, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT IN A TRANSACTION THAT IS EXEMPT
UNDER THE OHIO REVISED CODE OR PURSUANT TO AN EFFECTIVE REGISTRATION THEREUNDER
OR OTHERWISE IN COMPLIANCE WITH SUCH CODE.
OKLAHOMA RESIDENTS: THE SECURITIES OFFERED PURSUANT TO THESE OFFERING MATERIALS
HAVE NOT BEEN REGISTERED UNDER THE OKLAHOMA STATUTES, 1971, AS AMENDED (THE
"OKLAHOMA ACT"), AND MAY NOT BE RESOLD WITHOUT BEING REGISTERED OR QUALIFIED FOR
AN EXEMPTION UNDER THE OKLAHOMA ACT.
TEXAS RESIDENTS: THE SECURITIES OFFERED BY THIS MEMORANDUM MAY BE OFFERED AND
SOLD ONLY TO "ACCREDITED INVESTORS" AS DEFINED UNDER THE TEXAS SECURITIES ACT.
----
THIS MEMORANDUM IS ONLY FOR YOUR CONFIDENTIAL USE AND MAY NOT BE REPRODUCED.
ANY ACTION CONTRARY TO THESE RESTRICTIONS MAY PLACE YOU AND THE COMPANY IN
VIOLATION OF THE TEXAS SECURITIES ACT.
TENNESSEE RESIDENTS: IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON
THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE
MERITS AND RISKS INVOLVED.
THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS
MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE
SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE U. S. SECURITIES
3
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.
ARTICLE 1. SUBSCRIPTION
1.1 The undersigned subscriber ("Subscriber"), intending to be legally
bound, hereby irrevocably subscribes for and agrees to purchase from Upgrade
International Corp., a corporation organized under the laws of the State of
Florida, U.S.A. (the "Company"), a Subordinated Debenture due OCTOBER 15, 2001
("Debenture") together with simple interest at the rate of seven per cent (7 %)
per annum and convertible into shares of the Company's Common Stock, par value
$0.001 per share (the "Shares"), at a price which is equal to 75% of the average
bid price for the Company's Common Stock for the five (5) consecutive trading
days immediately preceding the date of conversion, but in no event shall the
conversion price exceed USD $2.50 per Share, for a purchase price of ONE MILLION
AND NO/100 U.S. DOLLARS (the "Purchase Price"). This subscription is submitted
to you in accordance with and subject to the terms and conditions set forth in
this Subscription Agreement and pursuant to Rule 506 of Regulation D promulgated
under the U.S. Securities Act of 1933, as amended (the "Securities Act"). The
Debenture and Shares are sometimes referred to herein collectively as the
"Securities."
1.2 Subscriber's subscription payment, in the form of a bank check or
certified check made payable to "Monahan & Biagi PLLC Trust Account FBO Upgrade
International Corp." in the amount of the Purchase Price is delivered herewith
(unless payment is being wired in accordance with the following instructions)
together with two executed copies of this Subscription Agreement. In the event
this subscription is not accepted, in whole or in part, by the Company, the full
or ratable amount, as the case may be, of Subscriber's subscription payment
shall be promptly refunded to Subscriber without deduction therefrom or interest
thereon. Wiring instructions are as follows:
To: The Commerce Bank of Washington
601 Union Street - Suite 3600
Seattle, Washington U.S.A. 98101
Telephone: (206) 292-4589
ABA Number: 125 008 013
For Credit to: Monahan & Biagi PLLC
4
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
MPD Account No.: 001 800329
Sub Account Name: Upgrade International Corp.
Sub Account No.: 91
Notify on Arrival: Juanita Grundmann; (206) 587-5700
1.3 In the event this subscription is accepted by the Company, in whole
or in part, the Company shall deliver to Subscriber a certificate for the Shares
as to which Subscriber's subscription is accepted, such certificate to be dated
the date of acceptance of this subscription and to bear the legends described
herein, together with a copy of this Subscription Agreement executed by the
Company.
1.4 Subscriber acknowledges and agrees that the Company did not prepare
any information to be delivered to prospective investors in connection with this
subscription other than the materials accompanying this Subscription Agreement,
and the Company does not make any representation or warranty concerning the
completeness of any information received by prospective investors. Subscriber
acknowledges and agrees that prospective investors are advised to conduct their
own review of the business, properties and affairs of the Company before
subscribing.
1.5 Subscriber understands and agrees that: (1) this subscription is
not subject to the Company's receiving any minimum amount of subscriptions or
the escrow of any subscription payments; (2) this Subscription Agreement is not
binding upon the Company until accepted by it; (3) Subscriber's subscription
payment shall be available to the Company immediately after the Company's
acceptance of this subscription; and (4) the Company shall have the right to
accept or reject this subscription in whole or in part for any reason or for no
reason.
ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to, and agrees with, Subscriber as
follows:
2.1 The Company is duly organized, validly existing and in good
standing under the laws of the State of Florida, U.S.A., with all requisite
power and authority to own, lease, license, and use its properties and assets
and to carry out the business in which it is engaged. The Company is duly
qualified to transact the business in which it is engaged and is in good
standing as a foreign corporation in every jurisdiction in which its ownership,
leasing, licensing or use of property or assets or the conduct of its business
make such qualification necessary.
2.2 The Company is authorized to issue 50,000,000 Shares of Common
Stock, par value $0.001 per share.
5
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
2.3 The Company has all requisite power and authority to execute,
deliver and perform its obligations under this Subscription Agreement and to
issue, sell and deliver the Securities. This Subscription Agreement has been
duly authorized by the Company, and (subject, with respect to enforceability, to
the provisions of specific performance, bankruptcy and similar laws and
principles of equity) when executed and delivered by the Company, will
constitute the legal, valid and binding obligation of the Company, enforceable
as to the Company in accordance with its terms. The Securities have been duly
authorized by the Company and (subject, with respect to enforceability, to the
provisions of specific performance, bankruptcy and similar laws and principles
of equity), when issued, sold and delivered in accordance with the terms of this
Subscription Agreement, the Shares will be duly authorized, validly issued,
fully paid and non-assessable.
2.4 No consent, authorization, approval, order, license, certificate or
permit of or from, or declaration or filing with, any federal, state, local or
other governmental authority or any court or any other tribunal is required by
the Company for the execution, delivery or performance by the Company of this
Subscription Agreement or the execution, issuance, sale or delivery of the
Securities (except as may be required under federal, state or provincial
securities laws).
2.5 No consent of any party to any contract, agreement, instrument,
lease, license, arrangement or understanding to which the Company is a party or
to which any of its properties or assets are subject is required for the
execution, delivery or performance by the Company of this Subscription Agreement
or the issuance, sale and delivery of the Securities.
2.6 The execution, delivery and performance of this Subscription
Agreement and the issuance, sale and delivery of the Securities, will not
violate, result in a breach of, conflict with (with or without the giving of
notice or the passage of time or both) or entitle any party to terminate or call
a default under any material contract, agreement, instrument, lease, license,
arrangement or understanding or violate or result in a breach of any term of the
certificate of incorporation or by-laws of, or conflict with any law, rule,
regulation, order, judgment or decree binding upon, the Company or to which any
of its operations, businesses, properties or assets are subject, the result of
which may have a material adverse effect on the business, operations,
liabilities or condition (financial or otherwise) of the Company.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF SUBSCRIBER
Subscriber hereby represents, warrants and certifies to, and agrees with,
the Company as follows:
6
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
3.1 Subscriber has received, thoroughly reviewed, and understands all
of the information contained in Addenda A though E described on page 2 of this
Subscription Agreement, and Subscriber has had an opportunity to ask questions
and to obtain all desired information regarding the Company, the Offering and
this Subscription Agreement. Subscriber currently has knowledge sufficient to
Subscriber, in the prudent management of Subscriber's affairs, regarding the
Company and its operations and principals to justify Subscriber's submission of
this Subscription Agreement to the Company. Regarding the Company, its business
plans and financial condition: Subscriber has received all materials that have
been requested by Subscriber, and the Company has answered all inquiries that
Subscriber or Subscriber's representatives have put to it; Subscriber has had
access to all additional information necessary to verify the accuracy of the
information requested by Subscriber or this Subscription Agreement; and
Subscriber has taken all the steps necessary to evaluate the merits and risks of
an investment by Subscriber in the Securities. In making this investment
decision, Subscriber has not relied on any information not provided by the
Company.
3.2 Subscriber has such knowledge and experience in finance,
securities, investments and other business matters as to be able to protect
Subscriber's interests in connection with this transaction, and Subscriber's
investment in the Company hereunder is not material when compared to
Subscriber's total financial capacity. Subscriber has adequate means for
providing for Subscriber's current needs and possible contingencies, has no need
for liquidity regarding this investment, and has no reason to expect a change in
Subscriber's circumstances, financial or other, that may cause or require sale
of Subscriber's Securities.
3.3 Subscriber understands the many risks of an investment in the
Company and can afford to bear such risks, including, but not limited to, the
risk of losing Subscriber's entire investment.
3.4 Subscriber acknowledges that the Shares presently are quoted on the
NASD Over-the-Counter Bulletin Board (OTCBB), that such market generally is thin
and illiquid, and that Subscriber may find it impossible to liquidate
Subscriber's investment at a time when Subscriber may desire to do so, or at any
other time.
3.5 Subscriber has been advised by the Company that (a) the Securities
have not been registered under the U.S. Securities Act of 1933, as amended
("Securities Act"), (b) the Securities are being offered and sold to Subscriber
on the basis of the exemptions from registration provided by Securities Act
Section 4(2) and Regulation D promulgated under the Securities Act, (c) the
Offering has not been filed with or submitted to, reviewed by, or otherwise
passed on by the U. S. Securities and Exchange Commission or any other U.S.
federal or state agency or self-regulatory organization where an exemption is
being relied upon, and (d) the Company's reliance on the exemptions provided by
Securities Act Section 4(2) and Regulation D is based in part upon the
representations made by Subscriber in this Subscription Agreement. Subscriber
acknowledges that Subscriber has been informed by the Company of, or Subscriber
is otherwise familiar with, the nature of the limitations imposed by the
Securities Act and the rules and regulations thereunder on the transfer of
securities.
7
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
3.6 Subscriber (or any person identified in any special instructions
above) is acquiring the Securities for Subscriber's (their) own account for
investment and not with a view to the sale or distribution thereof or the
granting of any participation therein, and Subscriber (or such person) has no
present intention of distributing or selling to others any of such Securities or
granting any participation therein. Subscriber (or such person) has no
agreement or other arrangement, formal or informal, with any person to sell,
transfer, pledge or otherwise dispose of any of the Securities which would
guarantee to Subscriber (or such person) any profit, or protect Subscriber (or
such person) against loss, regarding the Securities, and Subscriber (or such
person) has no plans to enter into any such agreement or arrangement.
3.7 Subscriber is an "Accredited Investor" as that term is defined in
Regulation 501(a) of Regulation D promulgated under the Securities Act.
Specifically, Subscriber is (check all appropriate item(s)):
-----------------------------------------------------------------
_____(a) A bank as defined in Section 3(a)(2) of the Securities Act,
or a savings and loan association or other institution as defined in Section
3(a)(5)(A) of the Securities Act, whether acting in its individual or fiduciary
capacity; a broker or dealer registered pursuant to Section 15 of the Securities
Exchange Act of 1934; an insurance company as defined in Section 2(13) of the
Securities Act; an investment company registered under the Investment Company
Act of 1940 or a business development company as defined in Section 2(a)(48) of
that Act; a small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958; a plan established and maintained by a state, its
political subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such plan has total
assets in excess of $5,000,000; an employee benefit plan within the meaning of
the Employee Retirement Income Security Act of 1974, if the investment decision
is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is
either a bank, savings and loan association, insurance company, or registered
investment advisor, or if the employee benefit plan has total assets in excess
of $5,000,000 or, if a self-directed plan, with investment decisions made solely
by persons that are accredited investors.
_____(b) A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940.
_____(c) An organization described in Section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000.
8
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
_____(d) A director or executive officer of the Company.
_____(e) A natural person whose individual net worth, or joint net
worth with that person's spouse, at the time of his or her purchase exceeds
$1,000,000.
_____(f) A natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year. If
Subscriber is a California resident, Subscriber's investment in the Company will
not exceed 10% of Subscriber's net worth (or, if married, joint net worth with
spouse). If Subscriber is a Massachusetts resident, Subscriber's investment in
the Company will not exceed 25% of Subscriber's joint net worth with spouse
(exclusive of principal residence and its furnishings).
_____(g) A trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a sophisticated person as described in Rule
506(b)(2)(ii) promulgated under the Securities Act (i.e., a purchaser not an
Accredited Investor who either alone or with his purchaser representative(s) has
such knowledge and experience in financial and business matters that the
purchaser is capable of evaluating the merits and risks of the prospective
investment).
_____(h) An entity in which all of the equity owners are accredited
investors. (If this alternative is checked, Subscriber must identify each
equity owner and provide statements signed by each equity owner demonstrating
how each qualifies as an accredited investor.)
3.8 If Subscriber is a natural person, Subscriber is: a bona fide
resident of the State contained in Subscriber's address set forth on the
signature page of this Agreement as Subscriber's residence address; at least 21
years of age; and legally competent to execute this Agreement. If Subscriber is
an entity other than a natural person, Subscriber is duly authorized to execute
this Agreement, and this Agreement, when executed and delivered by Subscriber,
will constitute Subscriber's legal, valid and binding obligation, enforceable
against Subscriber in accordance with its terms; and the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all requisite corporate or
other necessary action on the part of Subscriber.
3.9 Subscriber acknowledges the Securities will be subject to a stop
transfer order and the certificate or certificates evidencing the Securities
will bear the following or a substantially similar legend and such other legends
as may be required by other applicable securities laws (if any):
9
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
"These Securities have not been registered under the Securities Act of
1933, as amended. Such Securities may be sold or offered for sale,
transferred, hypothecated or otherwise assigned only pursuant to
registration under such Act or pursuant to an available exemption from
registration supported by an opinion reasonably acceptable to the
Company by counsel reasonably acceptable to the Company that an
exemption from registration for such sale, offer, transfer,
hypothecation or other assignment is available under such Act."
3.9 Subscriber agrees that Subscriber will not offer or resell the
Securities unless (a) resale of such Securities is registered under the
Securities Act, or (b) an exemption from registration is available under the
Securities Act.
3.10 Subscriber is acquiring the Securities for Subscriber's own
account for investment and not with a view to the sale or distribution thereof
or the granting of any participation therein, and Subscriber has no present
intention of distributing or selling to others any of such Securities or
granting any participation therein. Subscriber has no agreement or other
arrangement, formal or informal, with any person to sell, transfer, pledge or
otherwise dispose of any of the Securities which would guarantee to Subscriber
any profit, or protect Subscriber against loss, regarding the Securities, and
Subscriber has no plans to enter into any such agreement or arrangement.
3.11 It never has been represented, guaranteed or warranted to
Subscriber by the Company, or its principals, including any of the officers,
directors, shareholders, partners, employees or agents of either, or any other
persons, whether expressly or by implication, that:
(a) the Company or Subscriber will realize any given percentage of
profits or amount or type of consideration, profit or loss as a result of the
Company's activities or Subscriber's investment in the Company; or
(b) the past performance or experience of the management of the
Company, or of any other person, in any way indicates the predictable results of
ownership of the Securities or of the Company's activities.
3.12 Subscriber understands that the net proceeds from all paid and
accepted subscriptions will be used for Company purposes, and that the
Securities to be issued hereunder will not be secured by any collateral.
Further, the Company may, in its sole discretion, reject this subscription or
reduce this subscription in any amount and to any extent, whether or not pro
rata reductions are made of investors' subscriptions.
10
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
3.13 The representations, warranties, certifications and agreements
made by Subscriber herein are true and correct and shall survive the execution
and delivery of this Subscription Agreement and the purchase and receipt of the
Securities.
ARTICLE 4. INDEMNIFICATION
Subscriber acknowledges that Subscriber understands the meaning and legal
consequences of the terms of this Subscription Agreement, including, but not
limited to, the representations, warranties, certifications and agreements made
by Subscriber in Article 3 hereof, and Subscriber hereby agrees to indemnify and
hold harmless the Company and each incorporator, officer, director, employee,
agent and controlling person thereof, past, present or future, from and against
any and all claims, loss, damage, liability, costs and expenses, including
without limitation reasonable attorneys' fees and expenses, due or relating to
or arising out of a breach, inaccuracy or inadequacy of any such representation,
warranty, certification or agreement or of any other term of this Subscription
Agreement.
ARTICLE 5. REGISTRATION OF SHARES
Upon conversion of the full principal amount of the Debenture and all
accrued interest thereon into shares of Common Stock of the Company, or upon
conversion of such lesser amount on the Maturity Date of this Debenture, the
Company agrees to promptly file with the SEC a registration statement covering
the Conversion Shares, and agrees to use reasonable efforts to cause such
registration to become effective. Notwithstanding the foregoing, the Company
agrees to register the underlying Shares subject to the Debenture together with
and in conjunction with the Company's pending $2.50 per share common round,
which is estimated to be accomplished on or before December 31, 1999.
ARTICLE 6. GENERAL PROVISIONS
6.1 Neither this Subscription Agreement, nor any of Subscriber's
interest herein, shall be assignable or transferable by Subscriber in whole or
in part except by operation of law.
6.2 All notices or other communications given or made hereunder shall
be in writing and shall be delivered or mailed to Subscriber at the address set
forth below and to the Company at the address set forth below, or shall be
delivered by facsimile transmission with a copy by first class mail, postage
prepaid, to the other party at his/its address set forth below. Notices hand
delivered shall be deemed given upon receipt and notices sent by mail shall be
deemed given on the fifth business day following deposit in the mail, first
class airmail postage prepaid. Notices delivered by facsimile transmission
shall be deemed given one business day following the day of transmission,
provided that the sender has confirmation of receipt of transmission and mails a
copy by first class mail, postage prepaid, addressed to the other party at
his/its address below.
11
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
6.3 This Subscription Agreement shall be construed in accordance with
and governed by the laws of the State of Washington, U.S.A., as in effect for
contracts made and to be performed in the State of Washington. Subscriber
hereby submits to the jurisdiction of the courts of or located in the State of
Washington for all purposes relating to this Subscription Agreement, the
Securities and Subscriber's interest in the Company, and such courts shall have
exclusive jurisdiction relating thereto.
6.4 This Subscription Agreement constitutes the entire agreement
between the parties hereto regarding the subject matter hereof and may be
amended only by a writing executed by both parties.
6.5 This Subscription Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed this Subscription Agreement
as of the day and year this subscription is accepted by the Company as set forth
below.
Signature of/for Subscriber(s): Signature of/for Any Co-Subscriber:
___________________________________ ______________________________________
___________________________________ ______________________________________
Print Name of Signatory Here Print Name of Any Co-Signatory Here
Subscriber's Mailing Address: Type of Ownership:
________________________________ Individual _______
Street and Number Community
Property _______
________________________________ Tenants in
City or Town Common _______
Joint Tenants
________________________________ With Rights
State Country Zip Code of Survivorship _______
Partnership _______
________________________________ Corporation _______
12
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
U.S. Social Security or other Custodial Account _______
Tax Number of Subscriber Other (explain) _______
__________________________
Facsimile No.: (718) 851-3511 __________________________
CERTIFICATE OF SIGNATORY
------------------------
(To be completed if Securities are being subscribed for by an Entity)
I, _____________________________, am the _____________________________ of
__________________________________________ (the "Entity"). I hereby certify
that I am empowered and duly authorized by the Entity to execute and carry out
the terms of the Subscription Agreement and to purchase and hold the Securities
on behalf of the Entity, and I further certify that the Subscription Agreement
has been duly and validly executed on behalf of the Entity and constitutes a
legal and binding obligation of the Entity.
IN WITNESS WHEREOF, I have set my hand this _____ day of ________________,
1999.
______________________________________
(Signature)
ACCEPTANCE
----------
UPGRADE INTERNATIONAL CORP., a corporation organized under the laws of the
State of Florida, U.S.A., hereby accepts the foregoing subscription subject to
the terms and conditions of this Subscription Agreement this ______ day of
___________________, 1999.
UPGRADE INTERNATIONAL CORP.
By:______________________________________
Daniel Bland, President
Address: 1411 Fourth Avenue, Suite 629
13
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
Seattle, Washington 98101
Facsimile No.:_____________________________
14
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
CONVERTIBLE SUBORDINATED DEBENTURE
OF
UPGRADE INTERNATIONAL CORP.
THIS DEBENTURE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
CONVERTIBLE SUBORDINATED DEBENTURE
OCTOBER 15, 1999 $1,000,000.00
FOR VALUE RECEIVED, UPGRADE INTERNATIONAL CORP., a Florida corporation
("COMPANY"), promises to pay to __________________________________ ("HOLDER"),
the principal sum of One Million Dollars (USD $1,000,000), together with simple
interest from the date of this Debenture on the unpaid principal balance at the
rate of seven percent (7%) per annum. All unpaid principal, together with any
then unpaid and accrued interest and other amounts payable hereunder, shall be
due and payable on the earlier of: (i) October 15, 2001 (the "MATURITY DATE"),
or (ii) when such amounts are made due and payable upon or after the occurrence
of an Event of Default (as defined below). This Debenture is issued pursuant to
the Convertible Subordinated Debenture Subscription Agreement dated as of
October 15, 1999 (as amended, modified or supplemented, the "SUBSCRIPTION
AGREEMENT") between Company and the Holder.
The following is a statement of the rights of Holder and the conditions to
which this Debenture is subject, and to which the Holder hereof, by the
acceptance of this Debenture, agrees:
1. DEFINITIONS. As used in this Debenture, the following capitalized
-----------
terms have the following meanings:
28
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
(a) For purposes of the foregoing, the "ARTICLES" shall mean the
Articles of Incorporation of Company.
(b) "HOLDER" shall mean the Person specified in the introductory
paragraph of this Debenture or any Person who shall at the time be the holder of
this Debenture.
(c) "INDEBTEDNESS" of shall mean and include the aggregate amount
of, without duplication (i) all obligations for borrowed money, (ii) all
obligations evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations to pay the deferred purchase price of property or services
(other than accounts payable incurred in the ordinary course of business
determined in accordance with generally accepted accounting principles), (iv)
all obligations with respect to capital leases, (v) all guaranty obligations,
(vi) all obligations created or arising under any conditional sale or other
title retention agreement with respect to property acquired by such Person, and
(vii) all reimbursement and other payment obligations, contingent or otherwise,
in respect of letters of credit.
(d) "INVESTMENT" of any Person shall mean any loan or advance of
funds by such Person to any other Person (other than advances to employees of
such Person for moving and travel expense, drawing accounts and similar
expenditures in the ordinary course of business), any purchase or other
acquisition of any equity securities or Indebtedness of any other Person, any
capital contribution by such Person to or any other investment by such Person in
any other Person (including, without limitation, any Indebtedness incurred by
such Person of the type described in clauses (i) and (ii) of the definition of
"INDEBTEDNESS" on behalf of any other Person); provided, however, that
-------- -------
Investments shall not include accounts receivable or other indebtedness owed by
customers of such Person which are current assets and arose from sales in the
ordinary course of such Person's business.
(e) "COMPANY" includes the corporation initially executing this
Debenture and any Person which shall succeed to or assume the obligations of
Company under this Debenture.
(f) "PERSON" shall mean and include an individual, a partnership,
a corporation (including a business trust), a joint stock company, a limited
liability company, an unincorporated association, a joint venture or other
entity, or a governmental authority.
29
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
(g) "SENIOR INDEBTEDNESS" shall mean, unless expressly
subordinated to or made on a parity with the amounts due under this Debenture,
the principal of, unpaid interest on and amounts reimbursable, fees, expenses,
costs of enforcement and other amounts due in connection with (i) indebtedness
of Company to banks, commercial finance lenders, insurance companies, leasing or
equipment financing institutions or other lending institutions regularly engaged
in the business of lending money (excluding venture capital, investment banking
or similar institutions which sometimes engage in lending activities but which
are primarily engaged in investments in equity securities), which is for money
borrowed, or purchase or leasing of equipment in the case of lease or other
equipment financing, whether or not secured, and (ii) any such indebtedness or
any debentures, notes or other evidence of indebtedness issued in exchange for
such Senior Indebtedness, or any indebtedness arising from the satisfaction of
such Senior Indebtedness by a guarantor.
(h) "TRANSACTION DOCUMENTS" shall mean the Debenture and the
Subscription Agreement.
2. INTEREST. Accrued interest on this Debenture shall be payable at
--------
such time as the outstanding principal amount hereof shall be paid in full.
3. EVENTS OF DEFAULT. The occurrence of any of the following shall
-------------------
constitute an "EVENT OF DEFAULT" under this Debenture and the Subscription
Agreement:
(a) Failure to Pay. Company shall fail to pay (i) any principal
payment on the due date hereunder, or (ii) any interest or other payment
required under the terms of this Debenture or the Subscription Agreement on the
date due, and such payment shall not have been made within fifteen (15) days of
Company's receipt of Holder's written notice to Company of such failure to pay;
or
(b) Breaches of Covenants. Company shall fail to observe or
perform any covenant, obligation, condition or agreement contained in this
Debenture or the Subscription Agreement (other than those covenants specified in
Section 3(a)), and (i) such failure shall continue for thirty (30) days and
remain uncured, or (ii) if such failure is not curable within such 30-day
period, but is reasonably capable of cure within 60 days, either (A) such
failure shall continue for 60 days, or (B) Company shall not have commenced a
cure in a manner reasonably satisfactory to Holder within the initial 30- day
period; or
(c) Representations and Warranties. Any representation, warranty,
certificate, or other statement (financial or otherwise) made or furnished by or
on behalf of Company to Holder in writing in connection with this Debenture or
the Subscription Agreement, or as an inducement to Holder to enter into this
Debenture and the Subscription Agreement, shall be false, incorrect, incomplete
or misleading in any material respect when made or furnished; or
30
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
(d) Voluntary Bankruptcy or Insolvency Proceedings. Company shall
(i) apply for or consent to the appointment of a receiver, trustee, liquidator
or custodian of itself or of all or a substantial part of its property, (ii) be
unable, or admit in writing its inability, to pay its debts generally as they
mature, (iii) make a general assignment for the benefit of its or any of its
creditors, (iv) be dissolved or liquidated in full or in part, (v) become
insolvent (as such term may be defined or interpreted under any applicable
statute), (vi) commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in
effect, or consent to any such relief or to the appointment of or taking
possession of its property by any official in an involuntary case or other
proceeding commenced against it, or (vii) take any action for the purpose of
effecting any of the foregoing; or
(e) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings
for the appointment of a receiver, trustee, liquidator or custodian of Company
or of all or a substantial part of the property thereof, or an involuntary case
or other proceedings seeking liquidation, reorganization or other relief with
respect to Company or the debts thereof under any bankruptcy, insolvency or
other similar law now or hereafter in effect, shall be commenced and an order
for relief entered, or such proceeding shall not be dismissed or discharged
within 90 days of commencement; or
(f) Transaction Documents. Any Transaction Document or any
material term thereof shall cease to be, or be asserted by Company not to be, a
legal, valid and binding obligation of Company enforceable in accordance with
its terms.
4. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or existence of
-------------------------------
any Event of Default (other than an Event of Default referred to in Paragraphs
3(d) and 3(e)) and at any time thereafter during the continuance of such Event
of Default, Holder may, by written notice to Company, declare all outstanding
obligations payable by Company hereunder to be immediately due and payable
without presentment, demand, protest or any other notice of any kind, all of
which are hereby expressly waived, anything contained herein or in the
Subscription Agreement to the contrary notwithstanding. Upon the occurrence or
existence of any Event of Default described in Paragraphs 3(d) and 3(e),
immediately and without notice, all outstanding obligations payable by Company
hereunder shall automatically become immediately due and payable, without
presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived, anything contained herein or in the Subscription
Agreement to the contrary notwithstanding. In addition to the foregoing remedy,
upon the occurrence or existence of any Event of Default, Holder may exercise
any other right, power or remedy granted to it by the Transaction Documents or
otherwise permitted to it by law, either by suit in equity or by action at law,
or both.
31
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
5. SUBORDINATION. The indebtedness evidenced by this Debenture is
--------------
hereby expressly subordinated, to the extent and in the manner hereinafter set
forth, in right of payment to the prior payment in full of all of Company's
Senior Indebtedness.
(a) Insolvency Proceedings. If there shall occur any
receivership, insolvency, assignment for the benefit of creditors, bankruptcy,
reorganization, or arrangement with creditors (whether or not pursuant to
bankruptcy or other insolvency laws), sale of all or substantially all of the
assets, dissolution, liquidation, or any other marshalling of the assets and
liabilities of Company, (i) no amount shall be paid by Company in respect of the
principal of, interest on or other amounts due with respect to this Debenture at
the time outstanding, unless and until the principal of and interest on the
Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim or
proof of claim shall be filed with Company by or on behalf of the Holder of this
Debenture which shall assert any right to receive any payments in respect of the
principal of and interest on this Debenture except subject to the payment in
full of the principal of and interest on all of the Senior Indebtedness then
outstanding.
(b) Default on Senior Indebtedness. If there shall occur an event
of default which has been declared in writing with respect to any Senior
Indebtedness, as defined herein, or in the instrument under which it is
outstanding, permitting the holder to accelerate the maturity thereof and Holder
shall have received written notice thereof from the holder of such Senior
Indebtedness, then, unless and until such event of default shall have been cured
or waived or shall have ceased to exist, or all Senior Indebtedness shall have
been paid in full, no payment shall be made in respect of the principal of or
interest on this Debenture, unless within 180 days after the happening of such
event of default, the maturity of such Senior Indebtedness shall not have been
accelerated. Not more than one notice may be given to the Holder pursuant to
the terms of this Section 5(b) during any 365-day period.
(c) Further Assurances. By acceptance of this Debenture, the
Holder agrees to execute and deliver customary forms of subordination agreements
requested from time to time by holders of Senior Indebtedness, and as a
condition to the Holder's rights hereunder, Company may require that Holder
execute such forms of subordination agreements provided that such forms shall
not impose on Holder terms less favorable than those provided herein.
(d) Other Indebtedness. No Indebtedness which does not constitute
Senior Indebtedness shall be senior in any respect to the Indebtedness
represented by this Debenture unless consented to in writing by the Holder.
32
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
(e) Subrogation. Subject to the payment in full of all Senior
Indebtedness and until this Debenture shall be paid in full, the holder of this
Debenture shall be subrogated to the rights of the holder(s) of such Senior
Indebtedness (to the extent of the payments or distributions made to the
holder(s) of such Senior Indebtedness pursuant to the provisions of this Section
5) to receive payments and distributions of assets of Company applicable to the
Senior Indebtedness. No such payments or distributions applicable to the Senior
Indebtedness shall, as between Company and its creditors, other than the holders
of Senior Indebtedness and the Holder, be deemed to be a payment by Company to
or on account of this Debenture; and for purposes of such subrogation, no
payments or distributions to the holders of Senior Indebtedness to which the
Holder would be entitled except for the provisions of this Section 5 shall, as
between Company and its creditors, other than the holders of Senior Indebtedness
and the Holder, be deemed to be a payment by Company to or on account of the
Senior Indebtedness.
(f) No Impairment. Subject to the rights, if any, of the holders
of Senior Indebtedness under this Section 5 to receive cash, securities or other
properties otherwise payable or deliverable to the Holder of this Debenture,
nothing contained in this Section 5 shall impair, as between Company and Holder,
the obligation of Company, subject to the terms and conditions hereof, to pay to
the Holder the principal hereof and interest hereon as and when the same become
due and payable or shall prevent the Holder of this Debenture, upon default
hereunder, from exercising all rights, powers and remedies otherwise provided
herein or by applicable law.
(g) Lien Subordination. Any Lien of Holder, whether now or
hereafter existing in connection with the amounts due under this Debenture, on
any assets or property of Company or any proceeds or revenues therefrom which
Holder may have at any time as security for any amounts due and obligations
under this Debenture, shall be subordinate to all Liens now or hereafter granted
to a holder of Senior Indebtedness by Company or by law, notwithstanding the
date, order or method of attachment or perfection of any such Lien or the
provisions of any applicable law.
(h) Reliance of Holders of Senior Indebtedness. Holder, by its
acceptance hereof, shall be deemed to acknowledge and agree that the foregoing
subordination provisions are, and are intended to be, an inducement to and a
consideration of each holder of Senior Indebtedness, whether such Senior
Indebtedness was created or acquired before or after the creation of the
indebtedness evidenced by this Debenture, and each such holder of Senior
Indebtedness shall be deemed conclusively to have relied on such subordination
provisions in acquiring and holding, or in continuing to hold, such Senior
Indebtedness.
33
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
6. CONVERSION.
-----------
(a) Conversion by Holder. The Holder of this Debenture has the
right, at the Holder's option and at any time prior to October 15, 2001, to
convert the principal amount and all accrued interest due and owing on this
Debenture, either in its entirety or in increments of $25,000, into fully paid
and non-assessable shares of Common Stock of the Company. The number of shares
of Common Stock into which this Debenture may be converted ("Conversion Shares")
shall be determined by dividing the principal amount together with all accrued
interest to the date of conversion (or such lesser amount in increments of
$25,000) by the Conversion Price (as defined below) in effect at the time of
such conversion.
(b) Conversion Price. The Conversion Price shall be equal to
seventy-five percent (75%) of the average bid price for the Company's Common
Stock for the five (5) consecutive trading days immediately preceding the date
of conversion, but in no event shall the Conversion Price exceed USD $2.50 per
Share.
(c) Automatic Conversion upon Merger. The entire principal amount
of this Debenture and all accrued interest thereon shall be automatically
converted into shares of Common Stock at the Conversion Price at the time in
effect immediately prior to any consolidation or merger of Company with or into
any entity or Person, or any other corporate reorganization in which the Company
shall not be the continuing or surviving entity of such consolidation, merger or
reorganization, or any transaction or series of related transactions by Company
in which in excess of 50% of the Company's voting power is transferred, or a
sale of all or substantially all of the assets of the Company.
(d) Conversion upon Call of Company. Notwithstanding any
provision to the contrary herein, if at any time prior to the Maturity Date of
this Debenture, the average bid price for the Company's Common Stock for any
five (5) consecutive trading day period equals One and 50/100 Dollar (USD $1.50)
or less, the Company, at its option, shall be entitled to require the Holder
hereof to immediately convert the entire outstanding principal amount of this
Debenture and all accrued interest thereon into shares of Common Stock of the
Company at a conversion price of USD $1.50 per Share, or in lieu thereof, to
cancel this Debenture by paying to the Holder the then outstanding principal
balance together with any accrued and unpaid interest thereon.
(e) Adjustments for Stock Splits. In the event the Company should
at any time or from time to time after the date of issuance hereof fix a record
date for the effectuation of a split or subdivision of the outstanding shares of
Common Stock, or the holders of Common Stock are entitled to receive a dividend
or other distribution payable in additional shares of Common Stock without
payment of any consideration by the holder for the additional shares, the
Conversion Price of this Debenture shall be appropriately decreased so that the
number of shares of Common Stock issuable upon conversion of this Debenture
shall be increased in proportion to such increase in the number of outstanding
shares.
34
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
(f) Adjustments for Reverse Stock Splits. If the number of shares
of Common Stock outstanding at any time after the date hereof is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date of such combination, the Conversion Price for this Debenture shall
be appropriately increased so that the number of shares of Common Stock issuable
on conversion hereof shall be decreased in proportion to such decrease in the
number of outstanding shares.
(g) 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
this Debenture, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of this Debenture.
(h) Notice of Conversion Pursuant to Section 6(a). Before the
Holder of this Debenture shall be entitled to convert this Debenture into shares
of Common Stock of the Company pursuant to Section 6(a), Holder shall surrender
this Debenture to the Company at its principal corporate office, and shall give
written notice in substantially the form attached as Appendix I hereto, to
Company with a copy to Company's legal counsel: James F. Biagi, Jr., Monahan &
Biagi, P.L.L.C., 701 Fifth Avenue, Suite 5701, Seattle, Washington 98104, of
Holder's election to convert all (or a portion) of the principal amount of the
Debenture and any accrued interest thereon, which notice shall also state
therein the name or names in which the certificate or certificates for shares of
Company's Common Stock are to be issued.
(i) Notice of Conversion Pursuant to Section 6(c). If this
Debenture is automatically converted pursuant to Section 6(c) or is converted at
the Company's option pursuant to Section 6(d), written notice shall be delivered
to the Holder at the address last shown on the records of the Company for the
Holder or given by the Holder to the Company for the purpose of notice,
notifying the Holder of the conversion to be effected, specifying the Conversion
Price, the principal amount of the Debenture to be converted, the amount of
accrued interest to be converted, the date on which such conversion will occur,
and calling upon such Holder to surrender the Debenture to the Company in the
manner and at the time and place designated.
(j) Issuance of Securities on Conversion. Upon receipt of written
notice from the Holder of this Debenture and surrender of the Debenture pursuant
to Sections 6(a) and 6(h) above, the Company shall, at its expense, cause to be
issued and delivered to the Holder, a certificate or certificates representing
35
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
the number of fully paid and nonassessable shares of Common Stock to which
Holder shall be entitled on such conversion. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of
surrender of the Debenture as provided in Section 6(h) above. No fractional
shares will be issued on conversion of this Debenture. In lieu of the Company
issuing any fractional shares to the Holder upon the conversion of this
Debenture, the Company shall pay to the Holder in cash the amount of any
outstanding principal and accrued interest that is not so converted.
(k) Delay in Issuance on Conversion. For purposes of Section 6(j)
above, "cause to be issued" shall mean that Company will instruct its transfer
agent to issue and deliver the certificate or certificates for such shares to
Holder. In the event the certificate(s) for the shares of Common Stock are not
issued within ten (10) days of the date written notice of Holder's election to
convert is received by the Company together with the surrendered Debenture,
Holder shall notify Company of such delay, and Company shall have an additional
10-day period in which to effect the issuance of such certificates. If the
certificates are not issued on or before the expiration of this 10-day extension
period, Holder shall be entitled to receive additional shares of the Company's
Common Stock as follows: for each full thirty (30)-day period that elapses
(subsequent to the aforesaid 10-day extension period) in which the
certificate(s) are not issued, Holder shall be entitled to receive additional
shares of Common Stock in an amount equal to one percent (1%) of the number of
shares that Holder is entitled to receive at the time of conversion.
(l) Termination of Rights. All rights with respect to this
Debenture shall terminate upon the issuance of shares of Common Stock upon
conversion of this Debenture or upon payment in full of the outstanding
principal amount together with any accrued interest thereon, whether or not this
Debenture has been surrendered. Notwithstanding the foregoing, the Holder
agrees to surrender this Debenture to the Company for cancellation as provided
herein, but in any event not later than ten (10) days following conversion of
this Debenture or payment in full.
7. SUCCESSORS AND ASSIGNS. Subject to the restrictions on transfer
------------------------
described in Sections 9 and 10 below, the rights and obligations of Company and
Holder shall be binding upon and benefit the successors, assigns, heirs,
administrators and transferees of the parties.
8. WAIVER AND AMENDMENT. Any provision of this Debenture may be
-----------------------
amended, waived or modified upon the written consent of Company and Holder.
9. TRANSFER OF THIS DEBENTURE OR SECURITIES ISSUABLE ON CONVERSION
--------------------------------------------------------------------
HEREOF. With respect to any offer, sale or other disposition of this Debenture
------
or securities into which such Debenture may be converted, Holder shall give
written notice to Company prior thereto, describing briefly the manner thereof,
36
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
together with a written opinion of Holder's counsel, to the effect that such
offer, sale or other distribution may be effected without registration or
qualification (under any federal or state law then in effect). Promptly upon
receiving such written notice and reasonably satisfactory opinion if so
requested, Company, as promptly as practicable, shall notify Holder that Holder
may sell or otherwise dispose of this Debenture or such securities, all in
accordance with the terms of the notice delivered to the Company. If a
determination has been made pursuant to this Section 9 that the opinion of
counsel of Holder is not reasonably satisfactory to Company, Company shall so
notify the Holder promptly after such determination has been made. The Debenture
thus transferred and each certificate representing the securities thus
transferred shall bear a legend as to the applicable restrictions on
transferability in order to ensure compliance with the Securities Act of 1933,
as amended (the "Act"), unless in the opinion of counsel for Company such legend
is not required in order to ensure compliance with the Act. Company may issue
stop transfer instructions to its transfer agent in connection with such
restrictions. Subject to the foregoing, transfers of this Debenture shall be
registered upon registration books maintained for such purpose by or on behalf
of Company as provided in the Subscription Agreement. Prior to presentation of
this Debenture for registration and transfer, Company shall treat the registered
holder thereof as the owner and holder of this Debenture for the purpose of
receiving all payments of principal and interest hereon and for all other
purposes whatsoever, whether or not this Debenture shall be overdue, and Company
shall not be affected by notice to the contrary.
10. ASSIGNMENT BY COMPANY. Neither this Debenture nor any of the
------------------------
rights, interests or obligations hereunder may be assigned, by operation of law
or otherwise, in whole or in part, by Company without the prior written consent
of Holder, except in connection with an assignment in whole to a successor
corporation to Company, provided that such successor corporation acquires all or
substantially all of Company's property and assets and Holder's rights hereunder
are not impaired.
11. TREATMENT OF DEBENTURE. To the extent permitted by generally
-------------------------
accepted accounting principles, Company will treat, account and report the
Debenture as debt and not equity for accounting purposes and with respect to any
returns filed with federal, state or local tax authorities.
12. NOTICES. All notices and other communications required or
--------
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given upon receipt or, if earlier: (a) five
(5) days after deposit with the U.S. Postal Service or other applicable postal
service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, (c) one business day after the business day of deposit
37
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
with Federal Express or similar overnight courier, freight prepaid, or (d) one
business day after the business day of a facsimile transmission, if delivered by
facsimile transmission with a copy by first class mail, postage prepaid, and
shall be addressed (i) if to the Holder, at the Holder's address as set forth in
the Subscription Agreement or on the register maintained by the Company, and
(ii) if to the Company, at the address of its principal corporate offices, or
(iii) at such other address as a party may designate by ten (10) days advance
written notice to the other party pursuant to the provisions above.
13. NO SHAREHOLDER RIGHTS. Nothing contained in this Debenture shall
-----------------------
be construed as conferring upon the Holder or any other person the right to vote
or to consent or to receive notice as a shareholder in respect of meetings of
shareholders for the election of directors of the Company or any other matters
or any rights whatsoever as a shareholder of the Company, and no dividends shall
be payable or accrued in respect of this Debenture.
14. REGISTRATION OF SHARES. Upon conversion of the full principal
------------------------
amount of this Debenture and all accrued interest thereon into shares of Common
Stock of the Company, or upon conversion of such lesser amount on the Maturity
Date of this Debenture, the Company agrees to promptly file with the SEC a
registration statement covering the Conversion Shares, and agrees to use
reasonable efforts to cause such registration to become effective.
Notwithstanding the foregoing, the Company agrees to register the underlying
Shares subject to the Debenture together with and in conjunction with the
Company's pending $2.50 per share common round, which is estimated to be
accomplished on or before December 31, 1999.
15. PAYMENT; PREPAYMENT.
---------------------
(a) In the event the Holder of this Debenture does not exercise
Holder's option to convert the entire principal amount of this Debenture (and
all accrued interest thereon) prior to the Maturity Date, the unconverted
outstanding principal amount, together with all accrued interest thereon, shall
be due and payable to Holder on October 15, 2001. Company shall be entitled to
a grace period of ten (10) days following the Maturity Date to make the required
payment. Payment shall be made in lawful tender of the United States.
(b) The unpaid principal and interest due on this Debenture may
not be prepaid, in whole or in part, without the express written consent of the
Holder of this Debenture.
16. USURY. In the event any interest is paid on this Debenture which
-----
is deemed to be in excess of the then legal maximum rate, that portion of the
interest payment representing an amount in excess of the then legal maximum rate
shall be deemed a payment of principal and applied against the principal of this
Debenture.
38
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
17. GOVERNING LAW. This Debenture and all actions arising out of or in
-------------
connection with this Debenture shall be governed by and construed in accordance
with the laws of the State of Washington as in effect for contracts made and to
be performed in the State of Washington.
18. HEADING; REFERENCES. All headings used herein are used for
--------------------
convenience only and shall not be used to construe or interpret this Debenture.
Except where otherwise indicated, all references herein to Sections refer to
Sections hereof.
IN WITNESS WHEREOF, the Company has caused this Debenture to be issued as
of the date first written above.
UPGRADE INTERNATIONAL CORP.,
a Florida corporation
By:______________________________________
Daniel S. Bland, President
39
<PAGE>
UPGRADE INTERNATIONAL CORP. Private Placement of Subordinated Debenture
U.S. Subscription Agreement Convertible at a price equal to 75% of the
average bid price for the Common Stock
for the five consecutive trading days
immediately preceding the date of
conversion, but not to exceed $2.50 per
Share
APPENDIX I
NOTICE OF CONVERSION
(TO BE SIGNED ONLY UPON CONVERSION OF DEBENTURE)
TO: UPGRADE INTERNATIONAL CORPORATION
The undersigned, the holder of the foregoing Convertible Subordinated
Debenture, hereby surrenders such Debenture for conversion into shares of Common
Stock of Upgrade International Corporation, to the extent of
_______________________ Dollars ($__________) unpaid principal amount [and
accrued interest] of such Debenture, and requests that the certificates for such
shares be issued in the name of, and delivered to______________________________,
whose address is_____________________________________________________________.
Dated:____________________
________________________________
(Signature)
________________________________
________________________________
________________________________
(Address)
40
<PAGE>
