**Exhibit10.12**

 

Execution Copy

 

THE SECURITIESREPRESENTED BY THIS INSTRUMENT WERE ORIGINALLY ISSUED ON MARCH 4, 2004,AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, ORUNDER ANY STATE SECURITIES LAW.

 

**WARRANTAND REPURCHASE AGREEMENT**
| Date of Issuance:  March 4, 2004 |   | Certificate No.  W-3 |
|--------------------------------------------|--------|----------------------|

 

FOR VALUE RECEIVED, Sparhawk Laboratories, Inc., aMissouri corporation (the “Company”), hereby grants to Chemdex, Inc., aKansas corporation (the “Purchaser”) (the Purchaser is also referred toherein as the “Holder”), the right to purchase from the Companysixty-nine (69) units of the Warrant Equity, subject to adjustment as providedbelow, at a price per unit of $1.00 (as adjusted from time to time hereunder,the “Exercise Price”).  This Warrantand Repurchase Agreement (the “Warrant”) is issued pursuant to anInvestor Representation Letter, dated as of March 4, 2004 (the “PurchaseAgreement”), between the Company and the Purchaser.

 

The amount and kind of securities obtainable pursuantto the rights granted hereunder and the purchase price for such securities aresubject to adjustment pursuant to the provisions contained in this Warrant.

 

This Warrant is subject to the following provisions:

 

**Section 1.              Exercise of Warrant.**

 

1A.          ExercisePeriod; Expiration Date.

 

(i)            TheHolder may exercise, in whole or in part, the purchase rights represented bythis Warrant at any time and from time to time beginning on the day after thefifth anniversary of the Date of Issuance (unless the Warrant expires prior tosuch date as provided in Section 1A(ii) hereof) to and including (iflater) the Expiration Date (the “Exercise Period”).  If the Warrant has not expired prior to the day after the fifthanniversary of the Date of Issuance, then thereafter the Company shall give theHolder written notice of the expiration of the Exercise Period at least 30 daysbut not more than 90 days prior to the end of the Exercise Period.

 

(ii)           ThisWarrant shall expire on the earlier of (i) the tenth anniversary of the Date of Issuance or (ii)  the date on which all principal, interest,premiums (if any) and other amounts due in respect of the UnsecuredSubordinated Note have been paid in full (the “Expiration Date”), evenif the Expiration Date precedes the start of the Exercise Period.

 

----

 

1B.          ExerciseProcedure.

 

(i)            ThisWarrant shall be deemed to have been exercised when the Company has receivedall of the following items (the “Exercise Time”):

 

(a)           a completed Exercise Agreement, asdescribed in Section 1C below, executed by the Holder exercisingall or part of the purchase rights represented by this Warrant;

 

(b)           this Warrant; and

 

(c)           a check payable to the Company in anamount equal to the product of the Exercise Price multiplied by the amount ofWarrant Equity being purchased upon such exercise.

 

(ii)           Certificatesfor units of Warrant Equity purchased upon exercise of this Warrant shall bedelivered by the Company to the Holder within 5 Business Days after the date ofthe Exercise Time.  Unless this Warranthas expired or all of the purchase rights represented hereby have beenexercised, the Company shall prepare a new Warrant, substantially identicalhereto, representing the rights formerly represented by this Warrant which havenot expired or been exercised and shall, within such 5-Business Day period,deliver such new Warrant to the Holder.

 

(iii)          TheWarrant Equity issuable upon the exercise of this Warrant shall be deemed tohave been issued to the Holder at the Exercise Time, and the Holder shall bedeemed for all purposes to have become the record holder of such Warrant Equityat the Exercise Time.

 

(iv)          Theissuance of certificates for Warrant Equity upon exercise of this Warrant shallbe made without charge to the Holder for any issuance Tax in respect thereof orother cost incurred by the Company in connection with such exercise and therelated issuance of Warrant Equity. Each unit of Warrant Equity issuable upon exercise of this Warrantshall, upon payment of the Exercise Price therefor, be fully paid and nonassessableand free from all Taxes and Liens.

 

(v)           TheCompany shall not close its books against the transfer of this Warrant or ofany amount of Underlying Warrant Equity in any manner which interferes with thetimely exercise of this Warrant.  Ifapplicable, the Company shall from time to time take all such action as may benecessary to assure that the par value per unit of the unissued Warrant Equityacquirable upon exercise of this Warrant is at all times equal to or less thanthe sum of the Exercise Price then in effect and the per unit price paid forthis Warrant.

 

(vi)          TheCompany shall assist and cooperate with any Holder required to make anygovernmental filings or obtain any governmental approvals prior to or inconnection with any exercise of this Warrant (including, without limitation,making any filings required to be made by the Company).

 

(vii)         Notwithstandingany other provision hereof, if an exercise of any portion of this Warrant is tobe made in connection with a sale of the Company, the exercise of any portionof this Warrant may, at the election of the holder hereof, be conditioned uponthe sale of

 

2

----

 

the Company, in which case such exercise shall not be deemed to beeffective until the consummation of such transaction.

 

(viii)        TheCompany shall at all times reserve and keep available out of its authorized butunissued units of Warrant Equity solely for the purpose of issuance upon theexercise of this Warrant, such amount of Warrant Equity issuable upon theexercise of this Warrant.  The Companyshall take all such actions as may be necessary to assure that all such unitsof Warrant Equity may be so issued without violation of any applicable law orgovernmental regulation or any requirements of any securities exchange uponwhich units of Warrant Equity may be listed (except for official notice ofissuance which shall be immediately delivered by the Company upon eachissuance).  The Company shall not takeany action which would cause the amount of authorized but unissued unites ofWarrant Equity to be less than the amount of such units required to be reservedhereunder for issuance upon exercise of this Warrant.

 

1C.          ExerciseAgreement.  Upon any exercise ofthis Warrant, the Exercise Agreement shall be substantially in the form setforth in Exhibit I hereto.  SuchExercise Agreement shall be dated the actual date of execution thereof.

 

1D.          Effectof Exercise.  Upon exercise of thisWarrant, the Company shall stamp “EXERCISED” on the face of this Warrant andreturn the original Warrant to the Holder, it being understood that all of theHolders’ and the Company’s rights and obligations under this Warrant shallsurvive the exercise hereof.

 

**Section 2.              Adjustment of Exercise Price andNumber of Units.**  Inorder to prevent dilution of the rights granted under this Warrant, theExercise Price shall be subject to adjustment from time to time as provided inthis Section, and the amount of Warrant Equity obtainable upon exercise of thisWarrant shall be subject to adjustment from time to time as provided in thisSection.

 

2A.          Adjustmentof Exercise Price and Amount of Warrant Equity.

 

(i)            Theinitial Exercise Price shall be $1.00 per unit of Warrant Equity.

 

(ii)           Ifand whenever on or after the Date of Issuance, the Company issues or sells, orin accordance with this Section is deemed to have issued or sold, anyunits of Warrant Equity for a consideration per unit less than $1,800 (as suchamount is proportionately adjusted for splits, combinations, distributions andrecapitalizations affecting the Warrant Equity after the original date ofissuance of this Warrant, the “Base Price”), then immediately upon suchissue or sale the Exercise Price shall be reduced to the Exercise Pricedetermined by multiplying the Exercise Price in effect immediately prior tosuch issue or sale (or deemed issue or sale) by a fraction, the numerator ofwhich shall be the sum of (1) the amount of Warrant Equity Deemed Outstandingimmediately prior to such issue or sale (or deemed issue or sale) multiplied bythe Base Price as of the date of such issue or sale (or deemed issue or sale),plus (2) the consideration, if any, received by the Company upon such issue andsale (or deemed issue or sale), and the denominator of which shall be theproduct derived by multiplying the Base Price

 

3

----

 

by the amount of Warrant Equity Deemed Outstanding immediately aftersuch issue or sale (or deemed issue or sale).

 

(iii)          Uponeach such adjustment of the Exercise Price hereunder, the amount of WarrantEquity acquirable upon exercise of this Warrant shall be adjusted to the amountof Warrant Equity determined by multiplying the Exercise Price in effectimmediately prior to such adjustment by the amount of Warrant Equity acquirableupon exercise of this Warrant immediately prior to such adjustment and dividingthe product thereof by the Exercise Price resulting from such adjustment.

 

(iv)          Noadjustment under this Section 2 shall be made in connection with theissuance of (i) up to 166 units of Warrant Equity to officers, directors oremployees of the Company pursuant to equity incentive plans, (ii) any issuanceof Warrant Equity pursuant to the terms of the warrants issued to C3 pursuantto the Senior Loan Agreement, (iii) any issuance of Warrant Equity pursuant tothe terms of the warrants issued to Walco pursuant to the Junior LoanAgreement, (iv) any issuance of Warrant Equity pursuant to this Warrant, and(v) any issuance of Equity Interests pursuant to the exercise of preemptiverights granted to Messrs. John U. Bascom and E. Bert Hughes in Section 11of the Shareholders Agreement; provided, that, the exclusion in this part (v)shall not be deemed to include the proposed issuance of Equity Interests by theCompany to which such preemptive rights become exercisable.

 

2B.          Effecton Exercise Price of Certain Events. For purposes of determining the adjusted Exercise Price and amount ofWarrant Equity acquirable upon exercise of this Warrant under this Section, thefollowing shall be applicable:

 

(i)            Issuanceof Rights or Options.  If theCompany in any manner grants or sells any Options and the price per unit forwhich Warrant Equity is issuable upon the exercise of such Options, or uponconversion or exchange of any Convertible Securities issuable upon exercise ofsuch Options, is less than the Base Price determined immediately prior to suchgranting or sale, then immediately upon such issue or sale in effectimmediately prior to the time of the granting or sale of such Options, then thetotal maximum amount of Warrant Equity issuable upon the exercise of suchOptions, or upon conversion or exchange of the total maximum amount of suchConvertible Securities issuable upon the exercise of such Options, shall be deemedto be outstanding and to have been issued and sold by the Company at the timeof the granting or sale of such Option for such price per unit.  For purposes of this paragraph, the “priceper unit for which Warrant Equity is issuable upon exercise of such Options, orupon conversion or exchange of such Convertible Securities” is determinedby dividing (A) the total amount, if any, received or receivable by the Companyas consideration for the granting or sale of such Options, plus the minimumaggregate amount of additional consideration payable to the Company upon theexercise of all such Options, plus in the case of such Options which relate toConvertible Securities, the minimum aggregate amount of additionalconsideration, if any, payable to the Company upon the issuance or sale of suchConvertible Securities and the conversion or exchange thereof, by (B) the totalmaximum amount of Warrant Equity issuable upon the exercise of such Options orupon the conversion or exchange of all such Convertible Securities issuableupon the exercise of such Options.  Noadjustment under this Section shall be made upon the actual issuance ofsuch Warrant Equity or of such Convertible Securities upon the

 

4

----

 

exercise of such Options or upon the actual issuance of such WarrantEquity upon conversion or exchange of such Convertible Securities.

 

(ii)           Issuanceof Convertible Securities.  If theCompany in any manner issues or sells any Convertible Securities and the priceper unit for which Warrant Equity is issuable upon conversion or exchangethereof is less than the Base Price determined immediately prior to suchissuance or sale, then the maximum amount of Warrant Equity issuable uponconversion or exchange of all such Convertible Securities shall be deemed to beoutstanding and to have been issued and sold by the Company at the time of theissuance or sale of such Convertible Securities for such price per unit.  For the purposes of this paragraph, the “priceper unit for which Warrant Equity is issuable upon conversion or exchangethereof” is determined by dividing (A) the total amount received orreceivable by the Company as consideration for the issue or sale of suchConvertible Securities, plus the minimum aggregate amount of additionalconsideration, if any, payable to the Company upon the conversion or exchangethereof, by (B) the total maximum amount of Warrant Equity issuable upon theconversion or exchange of all such Convertible Securities.  No adjustment under this Section shallbe made upon the actual issuance of such Warrant Equity upon conversion orexchange of such Convertible Securities, and if any such issuance or sale ofsuch Convertible Securities is made upon exercise of any Options for whichadjustments of the Exercise Price had been or are to be made pursuant to otherprovisions of this Section, no further adjustment of the Exercise Price shallbe made by reason of such issue or sale.

 

(iii)          Changein Option Price or Warrant Rate.  Ifthe purchase price provided for in any Option, the additional consideration (ifany) payable upon the issuance, conversion or exchange of any ConvertibleSecurity, or the rate at which any Convertible Security is convertible into orexchangeable for Warrant Equity changes at any time, the Exercise Price ineffect at the time of such change shall be adjusted immediately to the ExercisePrice which would have been in effect at such time had such Option orConvertible Security originally provided for such changed purchase price, additionalconsideration or changed conversion rate, as the case may be, at the timeinitially granted, issued or sold and the amount of Warrant Equity shall becorrespondingly adjusted; provided, that if such adjustment of theExercise Price would result in an increase in the Exercise Price then ineffect, such adjustment shall not be effective until 30 days after writtennotice thereof has been given to all Holders. For purposes of this Section, if the terms of any Option or ConvertibleSecurity which was outstanding as of the Date of Issuance are changed in themanner described in the immediately preceding sentence, then such Option orConvertible Security and the Warrant Equity deemed issuable upon exercise,conversion or exchange thereof shall be deemed to have been issued as of thedate of such change; provided, that no such change shall at any timecause the Exercise Price to be increased.

 

(iv)          Treatmentof Expired Options and Unexercised Convertible Securities.  Upon the expiration of any Option or thetermination of any right to convert or exchange any Convertible Securitieswithout the exercise of such Option or right, the Exercise Price then in effectand the amount of Warrant Equity acquirable hereunder shall be adjustedimmediately to the Exercise Price which would have been in effect at the timeof such expiration or termination had such Option or Convertible Securities, tothe extent outstanding immediately prior to such expiration or termination,never been issued; provided, that if such expiration or terminationwould result in an increase in the Exercise Price then in effect, such increaseshall not be

 

5

----

 

effective until 30 days after written notice thereof has been given toall Holders.   For purposes of thisSection, the expiration or termination of any Option or Convertible Securitywhich was outstanding as of the date of issuance of this Warrant shall notcause the Exercise Price hereunder to be adjusted unless, and only to theextent that, a change in the terms of such Option or Convertible Securitycaused it to be deemed to have been issued after the date of issuance of thisWarrant.

 

(v)           Calculationof Consideration Received.  If anyWarrant Equity, Options or Convertible Securities are issued or sold or deemedto have been issued or sold for cash, the consideration received therefor shallbe deemed to be the net amount received by the Company therefor.  In case any Warrant Equity, Options orConvertible Securities are issued or sold for a consideration other than cash,the amount of the consideration other than cash received by the Company shallbe the fair value of such consideration, except where such considerationconsists of securities, in which case the amount of consideration received by theCompany shall be the Market Price thereof as of the date of receipt.  In case any Warrant Equity, Options orConvertible Securities are issued to the owners of the non-surviving entity inconnection with any merger in which the Company is the surviving entity, theamount of consideration therefor shall be deemed to be the fair value of suchportion of the net assets and business of the non-surviving entity as isattributable to such Warrant Equity, Options or Convertible Securities, as thecase may be.  The fair value of anyconsideration other than cash and securities shall be determined jointly by theCompany and the Majority Warrant Holders. If such parties are unable to reach agreement within a reasonable periodof time, such fair value shall be determined by an appraiser jointly selectedby the Company and the Majority Warrant Holders.  The determination of such appraiser shall be final and bindingupon the parties, and the fees and expenses of such appraiser shall be borne bythe Company.

 

(vi)          IntegratedTransactions.  In case any Option orConvertible Security is issued in connection with the issue or sale of otherEquity Interests of the Company, together comprising one integrated transactionin which no specific consideration is allocated to such Options or ConvertibleSecurities by the parties thereto, the Options and Convertible Securities shallbe deemed to have been issued without consideration.

 

(vii)         TreasuryUnits.  The amount of Warrant Equityoutstanding at any given time does not include units owned or held by or forthe account of the Company or any of its Subsidiaries, and the disposition ofany units so owned or held shall be considered an issue or sale of WarrantEquity.

 

(viii)        RecordDate.  If the Company takes a recordof the holders of Warrant Equity for the purpose of entitling them (A) toreceive a Dividend payable in Warrant Equity, Options or in ConvertibleSecurities or (B) to subscribe for or purchase Warrant Equity, Options orConvertible Securities, then such record date shall be deemed to be the date ofthe issuance or sale of the units of Warrant Equity deemed to have been issuedor sold upon the declaration of such Dividend or the making thereof or the dateof the granting of such right of subscription or purchase, as the case may be.

 

2C.          Subdivisionor Combination of Warrant Equity. If the Company at any time subdivides (by any unit split, Dividend orotherwise) Warrant Equity into a greater amount of

 

6

----

 

units, the Exercise Price in effect immediately prior to suchsubdivision shall be proportionately reduced and the amount of Warrant Equityobtainable upon exercise of this Warrant shall be proportionately increased,and if the Company at any time combines (by reverse unit split or otherwise)Warrant Equity into a smaller amount of units, the Exercise Price in effectimmediately prior to such combination shall be proportionately increased andthe amount of Warrant Equity obtainable upon exercise of this Warrant shall beproportionately decreased.

 

2D.          Reorganization,Reclassification, Consolidation, Merger or Sale.  Any recapitalization, reorganization, reclassification,consolidation, merger, sale of all or substantially all of the Company’s assetsor other transaction, which in each case is effected in such a manner thatholders of Warrant Equity are entitled to receive (either directly or uponsubsequent liquidation) Equity Interests or assets with respect to or inexchange for Warrant Equity is referred to herein as an “Organic Change.”  Prior to the consummation of any OrganicChange, the Company shall make lawful and adequate provision to insure that theHolder shall thereafter have the right to acquire and receive, in lieu of oraddition to (as the case may be) Warrant Equity immediately theretoforeacquirable and receivable upon the exercise of this Warrant, such EquityInterests or assets as may be issued or payable with respect to or in exchangefor the amount of Warrant Equity immediately theretofore acquirable andreceivable upon exercise of this Warrant had such Organic Change not takenplace.  In any such case, appropriateprovision shall be made with respect to the Holder’s rights and interests toinsure that all of the provisions of this Warrant shall thereafter continue tobe applicable in relation to any Equity Interests or assets thereafterdeliverable upon the exercise of the Warrants (including, in the case of anysuch consolidation, merger or sale in which the successor entity or purchasingentity is other than the Company, an immediate adjustment of the Exercise Priceto the value for the Warrant Equity reflected by the terms of suchconsolidation, merger or sale, and a corresponding immediate adjustment in theamount of Warrant Equity acquirable and receivable upon exercise of theWarrants, if the value so reflected is less than the Base Price in effectimmediately prior to such consolidation, merger or sale). The Company shall noteffect any such consolidation, merger or sale, unless prior to the consummationthereof, the successor entity (if other than the Company) resulting fromconsolidation or merger or the entity purchasing such assets assumes by writteninstrument, the obligation to deliver to the Holder such Equity Interests orassets as, in accordance with the foregoing provisions, the Holder may beentitled to acquire.

 

2E.           CertainEvents.  If any event occurs of thetype contemplated by the provisions of this Section but not expresslyprovided for by such provisions (including, without limitation, the granting ofequity appreciation rights, phantom equity rights or other rights with equityfeatures), then the Company’s board of directors shall make an appropriateadjustment in the Exercise Price and the amount of Warrant Equity obtainableupon exercise of this Warrant so as to protect the rights of the Holder; provided,that no such adjustment shall increase the Exercise Price as otherwisedetermined pursuant to this Section or decrease the amount of WarrantEquity issuable upon exercise of this Warrant.

 

2F.           NoAvoidance.  In the event the Companyshall enter into any transaction for the purpose of avoiding the provisions ofthis Section, the benefits provided by such provisions shall nevertheless applyand be preserved.

 

7

----

 

2G.          Notices.

 

(i)            Immediatelyupon any adjustment of the Exercise Price and the amount of Warrant Equityobtainable upon exercise of this Warrant, the Company shall send written noticethereof to the Holder, setting forth in reasonable detail and certifying thecalculation of such adjustment.

 

(ii)           TheCompany shall send written notice to the Holder at least 20 days prior to thedate on which the Company closes its books or takes a record (A) with respectto any Dividend upon the Warrant Equity, (B) with respect to any offer toholders of Warrant Equity or (C) for determining rights to vote with respect toany Organic Change, dissolution or liquidation.

 

(iii)          TheCompany shall also give at least 20 days prior written notice of the date onwhich any Organic Change, dissolution or liquidation shall take place.

 

**Section 3.              Liquidating Dividends.**  If the Company declares or makes a Dividendupon the Warrant Equity, except for a Dividend payable in Warrant Equity (a “LiquidatingDividend”), then the Company shall pay to the Holder at the time of paymentthereof the Liquidating Dividend which would have been paid to the Holder onthe Warrant Equity had this Warrant been fully converted immediately prior tothe date on which a record is taken for such Liquidating Dividend, or, if norecord is taken, the date as of which the record holders of Warrant Equityentitled to such Dividends are to be determined.

 

**Section 4.              No Preemptive Rights.**  The Holder of this Warrant does not have anypreemptive rights or similar right with respect to any issuance of EquityInterests by the Company.

 

**Section 5.              No Adjustment of Number of Unitsof Outstanding Warrant Equity.**  In connection with any adjustment pursuant to Section 2which would have the effect of increasing the amount of Warrant Equity whichwould be issuable upon exercise of this Warrant (assuming for this purpose thatno portion of this Warrant had been exercised), the Company shall not make anyadjustment to the amount of Warrant Equity previously obtained upon anyexercise of this Warrant.

 

**Section 6.              Put Arrangement.**

 

6A.          PutRight.  Subject to the provisions ofSection 6E and 6F, the Holder of Underlying Warrant Equity shall have theright to put all, but not less than all, of the Underlying Warrant Equity thenheld by the Holder (“Warrant Put”) at the Put Price by delivering awritten notice (the “Put Notice”) to the Company.

 

6B.          Determinationof Put Price.  Upon the delivery ofthe Put Notice, the Company and the Holder shall promptly (and in any eventwithin 10 Business Days after the delivery date or the Put Notice) meet for thepurpose of calculating the Put Price. The Company will be obligated to purchase all the Holder’s UnderlyingWarrant Equity at a mutually agreeable time and place which will in no event belater than 90 days after the date of the delivery of the Put Notice (the “PutClosing”).

 

6C.          PutClosing.  At any Put Closing, theHolder shall deliver to the Company certificates representing the UnderlyingWarrant Equity held by the Holder and the Company

 

8

----

 

shall deliver to the Holder the product of (i) the Put Price multipliedby (ii) the number of units of the Holder’s Underlying Warrant Equity bycashier’s or certified check or wire transfer of immediately available fundspayable to such holder.  The Companywill undertake Diligent Efforts (as defined below) during the 120-day periodimmediately following the delivery date of the Put Notice to finance thepayment of the aggregate Put Price in accordance with this Section so thatthe aggregate Put Price for all of the Holder’s Underlying Warrant Equity maybe paid in full in cash, but only to the extent such financing can be obtainedon commercially reasonable terms.  Suchdiligent efforts (“Diligent Efforts”) shall include, but shall not belimited to, pursuing private or public offerings of equity or debt securities,restructuring of any Borrower’s debt and other recapitalizations.  In the event that, notwithstanding suchDiligent Efforts, the Company is unable to purchase all of the Holder’sUnderlying Warrant Equity at the Put Closing in cash within such 120-dayperiod, the Company will at the Put Closing pay the maximum portion of theaggregate Put Price for all of the Holder’s Underlying Warrant Equity which itis legally able to pay in cash and pay the remaining portion of the aggregatePut Price for such other Underlying Warrant Equity which it is not able to payin cash by issuing to the Holder a promissory note (the “Put Notes”)accruing interest at an annual rate equal to 13% per annum (payable monthly)and payable on demand; provided, however, that such Put Notes shall besubordinate in right of payment to all indebtedness of the Company to itssecured lenders, on substantially the same terms and conditions as set forth inthe Subordination Agreement with respect to the Unsecured SubordinatedNote.  After the Put Closing, theCompany will continuously undertake Diligent Efforts to arrange debt and/orequity financing in order to retire Put Notes for cash and will provide to theHolder of such Put Notes any information regarding the Company’s efforts toobtain such financing as is reasonably requested by the Holder of Put Notes.

 

6D.          LegalProhibitions.  The Company shall notbe required to pay cash or property to repurchase Underlying Warrant Equity tothe extent the sole reason for not doing so is that it is prohibited from doingso under applicable law due to a lack of surplus; provided, that theCompany will take all reasonable steps necessary to make such payments underthis Section, including without limitation reducing its capital and/orincreasing its net assets (by re-appraisal or otherwise).  The Company shall deliver an Officer’sCertificate to the holder that specifies the provision of law on account ofwhich the Company is so precluded from making such payment and the action thatthe Company is taking to remedy the same.

 

6E.           Recissionof Put Notice.  Notwithstandinganything contained herein to the contrary, if the Company is not able to paythe aggregate Put Price for all of the Holder’s Underlying Warrant Equity infull in cash within 120 days after the delivery of a Put Notice, the Holder mayrescind the exercise of the Warrant Put by delivering written notice to theCompany within 30 days after the Company notifies the Holder that it will beunable to pay the aggregate Put Price in full in cash.  If the Company fails to satisfy itsobligations pursuant to this Section the Holder may pursue any and allrights and remedies at law or in equity.

 

6F.           CovenantRequired to Exercise Put Option. Notwithstanding anything contained herein to the contrary, the Holdermay not exercise the Put Option without the consent of Commerce, so long as theCompany has a loan outstanding that is guaranteed by the Small BusinessAdministration (the “SBA”) under its § 7A program.

 

9

----

 

**Section 7.              Call Arrangement for UnderlyingWarrant Equity.**

 

7A.          CallRight.  At any time after the fifthanniversary of the Date of Issuance, subject to Section 7D, the Companywill have the right to purchase on one occasion only (the “Warrant Call”)all, but not less than all, of the Underlying Warrant Equity then held by theHolder at the Call Price by giving written notice thereof (the “Call Notice”)to the Holder of the Underlying Warrant Equity; provided, however,that the Company may exercise the Warrant Call once and only once (and anydelivery of a Call Notice hereunder will be deemed to be an exercise of theCall).  The Call Notice shall state thetime and place at which the Company will repurchase the Holder’s UnderlyingWarrant Equity (which shall in no event be later than 90 days followingdelivery of the Call Notice) (the “Call Closing”).

 

7B.          Determinationof Call Price.  Upon delivery of theCall Notice, the Company and the Holder shall promptly (and in any event within10 days after the delivery of the Call Notice) meet for the purpose ofcalculating the Call Price.  Promptlyupon determination of the Call Price and in no event less than 15 days prior tothe date of the Call Closing, the Company will notify the Holder of theUnderlying Warrant Equity of the Call Price.

 

7C.          CallClosing.  At the Call Closing theCompany will be obligated to purchase all of the Holder’s Underlying WarrantEquity.  At the Call Closing the Holderof the Underlying Warrant Equity shall deliver to the Company certificatesrepresenting units of Underlying Warrant Equity or the Warrant held by theHolder, as applicable, and the Company shall deliver to the Holder the productof (x) the Call Price multiplied by (y) the number of units of UnderlyingWarrant Equity subject to the Call Notice by cashier’s or certified checkpayable to the Holder or by wire transfer of immediately available funds to anaccount designated by the Holder. In the event that the Company is unable orfails for any reason, to consummate the purchase of all of the Holder’sUnderlying Warrant Equity for cash on the terms and within the time periods setforth herein, the Company’s Call rights under this Section willautomatically terminate.

 

7D.          RequiredConsents.  As long as either theSenior Subordinated Debt or the Junior Subordinated Debt is outstanding, theCompany may not exercise the Warrant Call without the written consent of C3and/or Walco, respectively.

 

**Section 8.             **Definitions**.** The following terms have meanings set forth below:

 

“Affiliate” of any particular party means:  (i) any other party which directly orindirectly, controls or is controlling by or is under common control with suchparty and (ii) any officer, director, manager, managing partner or member ofsuch party or any other party holding a similar position with respect to suchparty.  A party shall be deemed to be “controlledby” any other party if such other party possesses, directly or indirectly,power to vote 50% or more of the securities (on a fully diluted basis) havingordinary voting power for the election of directors, managers or managingpartners or power to direct or cause the direction of the management andpolicies of such party whether by contract or otherwise.

 

“C3” means C3 Capital Partners, L.P., aDelaware limited partnership, and its successors.

 

10

----

 

“Call Price” means, with respect to any unit ofUnderlying Warrant Equity, 5 times the Company’s Weighted Average EBITDA,divided by the sum of the total amount of Warrant Equity outstanding as of thedelivery date of the Call Notice for which the determination of the Call Priceis being made plus the amount of Warrant Equity issuable upon exercise orconversion of any Options or Convertible Securities as of such date, in eachcase calculated as of such date. The expenses of determining the Call Price atany time shall be borne by the Company.

 

“Commerce” means Commerce Bank, N.A., anational bank, and its successors.

 

“Common Equity” means, collectively, theCompany’s common stock, par value $1.00 per share, and any equity securities ofany class or series of the Company hereafter authorized or otherwise createdthat is not limited to a fixed sum or percentage of par or stated value inrespect of the rights of the holders thereof to participate in Dividends.

 

“Convertible Securities” of a Person means anysecurities (directly or indirectly) convertible into or exchangeable for anyEquity Interest of such Person, including, without limitation, all warrants,options and other rights to acquire any Equity Interests of such Person.

 

“Dividend” means any distribution by a Personwith respect to its Equity Interests whether in cash, securities (includingcommon and preferred equity) or other property, including, without limitation,distributions upon any liquidation, dissolution or winding up of such Person.

 

“EBITDA” with respect to any computationperiod, means the consolidated net income of the Company and its Subsidiariesfor such computation period, as determined in accordance with GAAP; provided,that to the extent consistent with GAAP, all accounting principles (includingall practices and valuation and estimation methodologies) historically used bythe Company and its Subsidiaries, shall be used in connection with thedetermination of EBITDA, plus, to the extent deducted in the determining suchconsolidated net income, (x) the amount of foreign, federal, state and localincome and franchise Taxes and other Taxes of the Company and its Subsidiariesfor such fiscal year, (y) the amount of interest expense for Indebtedness forsuch computation period and (z) the amount of depreciation, amortization andsimilar non-cash charges for such computation period; EBITDA shall exclude (i)gains or losses from asset sales outside of the ordinary course of business,(ii) transition or severance costs, if any, incurred in connection with the transactionscontemplated in the Acquisition Agreement or (iii) other non-recurring items(but shall include insurance proceeds for business interruption).

 

“Equity Interests” means all of the equity orother ownership interests in a Person (including, without limitation,Convertible Securities and other rights containing phantom or other equityparticipation features).

 

“Junior Loan Agreement” means the SecuritiesPurchase Agreement, dated March 4, 2004, between the Company and Walco.

 

“Junior Subordinated Debt” shall mean the$1,000,000 junior subordinated note, dated March 4, 2004, issued by theCompany to Walco, as amended or modified from time to time, including anysuccessor to or replacement of such note.

 

11

----

 

“Market Price” of any Equity Interest means theaverage of the closing prices of such Equity Interest’s sales on all securitiesexchanges on which such security may at the time be listed, or, if there hasbeen no sales on any such exchange on any day, the average of the highest bidand lowest asked prices on all such exchanges at the end of such day, or, if onany day such Equity Interest is not so listed, the average of therepresentative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M.,New York time, or, if on any day such Equity Interest is not quoted in theNASDAQ System, the average of the highest bid and lowest asked prices on suchday in the domestic over-the-counter market as reported by the NationalQuotation Bureau, Incorporated, or any similar successor organization, in eachsuch case averaged over a period of 21 days consisting of the day as of which “MarketPrice” is being determined and the 20 consecutive Business Days prior tosuch day.  If at any time such EquityInterest is not listed on any securities exchange or quoted in the NASDAQSystem or the over-the-counter market, the “Market Price” shall be thefair value thereof determined jointly by the Company and the Holder.  If such parties are unable to reachagreement within a reasonable period of time, such fair value shall bedetermined by an appraiser jointly selected by the Company and the Holderreasonably skilled in valuing securities of this type. The determination of the“Market Price” of Warrant Equity or Underlying Warrant Equity (asapplicable) pursuant to Section 2 shall be made assuming that theCompany is a going concern and such sale is made between a willing buyer and awilling seller and taking into account all relevant factors determinative ofvalue without regard to any discount for any lack of liquidity attributable toa lack of a public market for such security, any block discount or discountattributable to the size of any Person’s holdings of such security or anyminority interest or any voting rights thereof or lack thereof. Thedetermination of such appraiser shall be final and binding upon the parties,and the fees and expenses of such appraiser shall be borne by the Company.

 

“Options” means any right or options tosubscribe for the purchase of Warrant Equity or Convertible Securities.

 

“Person” means an individual, a partnership, acorporation, a limited liability company, an association, a  joint stock company, a trust, a jointventure, an unincorporated organization, a governmental entity or any department,agency or political subdivision thereof and any other entity.

 

“Put Price” means, with respect to any unit ofUnderlying Warrant Equity, 4 times the Company’s Weighted Average EBITDA, dividedby the sum of the total amount of Warrant Equity outstanding as of thedelivery date of the Put Notice for which the determination of the Put Price isbeing made plus the amount of Warrant Equity issuable upon exercise orconversion of any Options or Convertible Securities as of such date, in eachcase calculated as of such date.  Theexpenses of determining the Put Price at any time shall be borne by theCompany.

 

“Senior Loan Agreement” means the SecuritiesPurchase Agreement, dated March 4, 2004, between the Company and C3.

 

“Senior Subordinated Debt” shall mean the$1,300,000 senior subordinated note, dated March 4, 2004, issued by theCompany to C3, as amended or modified from time to time, including anysuccessor to or replacement of such note.

 

12

----

 

“Shareholders Agreement” means the ShareholdersAgreement, dated March 4, 2004, among the Company, the Shareholders, C3and Walco.

 

“Subordination Agreement” means theSubordination Agreement, dated March 4, 2004, by and among Commerce, C3,Walco, the Purchaser and the Company.

 

“Underlying Warrant Equity” means (i) theWarrant Equity issued or issuable upon exercise of the Warrants and (ii) anyEquity Interests issued or issuable with respect to the securities referred toin clause (i) by way of Dividend or equity split or in connection with acombination of units, recapitalization, merger, consolidation or otherreorganization.  For purposes hereof,any Person who holds this Warrant shall be deemed to be the holder of the UnderlyingWarrant Equity obtainable upon exercise of this Warrant in connection with thetransfer thereof or otherwise regardless of any restriction or limitation onthe exercise of this Warrant, such Underlying Warrant Equity shall be deemed tobe in existence, and such Person shall be entitled to exercise the rights of aholder of Underlying Warrant Equity hereunder. As to any particular units of Underlying Warrant Equity, such unitsshall cease to be Underlying Warrant Equity when they have been repurchased bythe Company.

 

“Unsecured Subordinated Note” shall meanthe $350,000 unsecured subordinated note, dated March 4, 2004, issued bythe Company to the Purchaser.

 

“Walco” means Walco International, Inc., aCalifornia corporation, and its successors.

 

“Warrant Equity” means units of the Company’sauthorized but unissued Common Equity; provided, that if there is achange such that the Equity Interests issuable upon exercise of the Warrantsare issued by a Person other than the Company or there is a change in the classof Equity Interests so issuable, then the term “Warrant Equity” shallmean the smallest unit in which such Equity Interest is issuable.

 

“Warrant Equity Deemed Outstanding” means, atany given time, the amount of Warrant Equity actually outstanding at such time,plus the amount of Warrant Equity deemed to be outstanding pursuant to Sections2B(i) and 2B(ii), regardless of whether or not the Options andConvertible Securities are actually exercisable at such time, but excluding anyWarrant Equity issuable upon the exercise of the Warrant.

 

“Weighted Average EBITDA” means the weightedaverage EBITDA for the 36 months prior to the month in which the Call Notice orthe a Put Notice is delivered (“Month of Exercise”) calculated as (x)the sum of (A) 3 times the EBITDA for months 25-36 preceding the Month ofExercise, (B) 4 times the EBITDA for months 13-24 preceding the Month ofExercise, and (C) 5 times the EBITDA for months 1-12 preceding the Month ofExercise, divided by (y) 12.

 

“Working Capital” means current assets,including cash, receivables, and inventory less current liabilities(excluding the current portion of third party debt), including payables andaccruals.

 

**Section 9.              No Voting Rights; Limitations ofLiability.** ThisWarrant shall not entitle the holder hereof to any voting rights or otherrights as an equityholder of the Company.

 

13

----

 

No provision hereof, in the absence of affirmative action by the Holderto purchase Warrant Equity, and no enumeration herein of the rights or privilegesof the Holder shall give rise to any liability of such holder for the ExercisePrice for Underlying Warrant Equity or as an equityholder of the Company.

 

**Section 10.            Warrant Not Transferable.**  This Warrant and all rights hereunder arenot transferable, in whole or in part, by the Holder, provided, however,that with prior notice to the Company, the Holder may transfer the Warrant, inwhole but not in part, to an Affiliate of the Holder.

 

**Section 11.            Warrant Not Exchangeable forDifferent Denominations.** Because this Warrant is not transferable, this Warrant is notexchangeable for new Warrants of like tenor representing in the aggregate thepurchase rights hereunder, provided, however, that if the Holdertransfers the Warrant to an Affiliate as provided by Section 10, then uponsurrender of this Warrant a new Warrant will be issued in the name of suchAffiliate (with the Date of Issuance unchanged).

 

**Section 12.            Replacement**.  Upon receipt of evidence reasonablysatisfactory to the Company (an affidavit of the Holder shall be satisfactory)of the ownership and the loss, theft, destruction or mutilation of thecertificate evidencing this Warrant, and in the case of any such loss, theft ordestruction, upon receipt of indemnity reasonably satisfactory to the Companyor, in the case of any such mutilation upon surrender of such certificate, theCompany shall (at its expense) execute and deliver, in lieu thereof, a newcertificate of like kind representing the same rights represented by such lost,stolen, destroyed or mutilated certificate and dated the date of such lost,stolen, destroyed or mutilated certificate.

 

**Section 13.            Notices.**  Except as otherwise expressly providedherein, all notices referred to in this Warrant shall be in writing and shallbe delivered personally, sent by reputable overnight courier service (chargesprepaid) or sent by registered or certified mail, return receipt requested,postage prepaid and shall be deemed to have been given when so delivered, sentor deposited in the U.S. Mail (i) to the Company, at its principal executiveoffices and (ii) to the Holder, at the Holder’s address as it appears in therecords of the Company (unless otherwise indicated by the Holder).

 

**Section 14.            Amendment and Waiver.**  Except as otherwise provided herein, theprovisions of this Warrant may be amended and the Company may take any actionherein prohibited, or omit to perform any act herein required to be performedby it, only if the Company has obtained the written consent of the Holder.

 

**Section 15.            Governing Law.** This Warrant shall be governed and construedin accordance with the laws of the State of Missouri, without giving effect toany choice of law or conflict of law provision or rule (whether of the State ofMissouri or any other jurisdiction) that would cause the application of thelaws of any jurisdiction other than the State of Missouri.

 

**Section 16.            Survival.**  The provisions of this Warrant which bytheir nature survive the expiration, termination, cancellation or exercise ofthe rights granted herein shall survive in accordance with their terms.

 

14

----

 

**Section 17.            Construction.** TheCompany and the Purchaser have participated jointly in the negotiation anddrafting of this Warrant.  In the eventan ambiguity or question of intent or interpretation arises, this Warrant shallbe construed as if drafted jointly by the Company and the Purchaser, and nopresumption or burden of proof shall arise favoring or disfavoring any party byvirtue of the authorship of any of the provisions of this Warrant.

#  

#  

**[Remainderof page intentionally left blank; signature page follows]**

 

15

----

 

IN WITNESSWHEREOF, the Company has executed and delivered this Warrant on the date firstwritten above.

 

 
|   | SPARHAWK  LABORATORIES, INC. |
|--------|------------------------------|
|   |                         |
|   |                         |
|   | By:                          | \s\ E. Bert Hughes |   |
|   |                         | Name: | E. Bert Hughes |
|   |                         | Title: | President |
|        |                              |  |  |  |

 

16

----

 

Execution Copy

 

EXHIBIT I

 

EXERCISE AGREEMENT

 
| To:                                                      |   | Dated:                                        ,                |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The undersigned,pursuant to the provisions set forth in the attached Warrant (Certificate No.W-            ),hereby agrees to subscribe for the purchase of                units of the Warrant Equity covered by such Warrant and makes payment herewithin full therefor at the price per unit provided by such Warrant:

 

 
|   | Signature |   |
|--------|-----------|--------|
|   |      |
|   | Address   |   |
|        |           |        |  |

 

----