Document:

Exhibit 10.1

 

EXECUTION COPY

 

For Discussion
Purposes Only;

Not a Commitment;

Subject to IBM Credit’s Internal Credit Approval Process

 

 

APPLIED DIGITAL SOLUTIONS, INC.

DIGITAL ANGEL SHARE TRUST

 

FORBEARANCE AGREEMENT

 

Summary of Terms and Conditions

March 24, 2003

 

This Summary of Terms and
Conditions (the “Term Sheet”) sets forth the indicative terms and
conditions of the Forbearance Agreement (the “Forbearance Agreement”)
among IBM Credit LLC, Applied Digital Solutions, Inc., Digital Angel Share
Trust and the other Loan Parties party to the Third Amended and Restated Credit
Agreement, dated as of March 1, 2002 (as amended through the date hereof,
the “Credit Agreement”), among IBM Credit LLC, Applied Digital
Solutions, Inc., Digital Angel Share Trust and the other Loan Parties party
thereto.  Terms used but not defined
herein shall have the meanings assigned to such terms in the Credit Agreement.

This Term Sheet does not constitute a
commitment of IBM Credit to lend or an agreement of IBM Credit to prepare,
negotiate, execute or deliver such a commitment.

 

 

	
  1.             Parties
  to Forbearance Agreement

  
	
   

  	
   

  	
   

  
	
  Borrowers:

  	
   

  	
  Digital Angel Share Trust, a Delaware statutory
  business trust (in such capacity, the “Trust” and in its capacity as a
  Borrower, the “Tranche A Borrower”); and

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Applied Digital Solutions, Inc., a Missouri
  corporation (“ADS” or the “Tranche B Borrower”).

  
	
   

  	
   

  	
   

  
	
  Guarantors:

  	
   

  	
  Each of the Tranche B Borrower and its Subsidiaries
  (other than Digital Angel Corporation), as a guarantor for the Tranche A Borrower’s
  obligations under the Tranche A Facility (as described below) (in such
  capacity, the “Tranche A Guarantors”); and

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  The Tranche A Borrower, as a guarantor for the
  Tranche B Borrower’s obligations under the Tranche B Facility (as described
  below) (in such capacity, the “Tranche B Guarantor”; together

  

 

 

	
   

  	
   

  	
  with the Tranche A Guarantors, the “Guarantors”).

  
	
   

  	
   

  	
   

  
	
  Lender:

  	
   

  	
  IBM Credit LLC, a Delaware limited liability company
  (“IBM Credit”).

  
	
   

  	
   

  	
   

  
	
  2.             Forbearance
  Provisions

  
	
   

  	
   

  	
   

  
	
  Forbearance:

  	
   

  	
  Notwithstanding the occurrence and continuance of
  the Specified Events of Default (as defined below), subject to the terms and
  conditions hereof and of the Forbearance Agreement, IBM Credit will agree to
  forbear, during the Forbearance Period, from the exercise of any or all
  rights and remedies under the Credit Agreement, the other applicable
  Restructuring Documents and applicable law solely in respect of the Specified
  Events of Default; it being understood that the foregoing is not and shall
  not be construed as an amendment, waiver or modification of the Credit
  Agreement except as expressly provided herein and in the Forbearance
  Agreement.

  
	
   

  	
   

  	
   

  
	
  Forbearance Period:

  	
   

  	
  The period beginning on the Effective Date (as
  defined below) and ending on the Termination Date (as defined below).

  
	
   

  	
   

  	
   

  
	
  Specified Events of Default:

  	
   

  	
  “Specified Events of Default” are: (i) the
  Events of Default occurring and continuing under Section 8.1(A) of the Credit
  Agreement as a result of the Borrowers’ failure to pay to IBM Credit in
  immediately available funds the amounts due and payable in accordance with
  Section 2.3(B) and 2.4(B), respectively, of the Credit Agreement or,
  alternatively, forty percent (40%) of the original principal amount of the
  Loans and interest and expenses ($46,228,415.89) due and payable since
  February 28, 2003, in accordance with Section 2.8 of the Credit Agreement and
  IBM Credit’s letter to the Borrowers, dated March 3, 2003 and (ii) any Events
  of Default existing on the date hereof which IBM Credit is aware of (including
  the Events of Default resulting from the failure to comply with the financial
  conditions covenants set forth in Section 7.1 of the Credit Agreement for the
  applicable period ending December 31, 2002). 

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  In the Notice of Default, dated March 6, 2003, IBM
  Credit notified the Borrowers and the other Loan Parties of the Specified
  Events of Default and that all Obligations are immediately due and payable in
  accordance with Section 8.2 of the Credit Agreement.

  

 

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  All the Loans and other Obligations remain
  outstanding and continue to be due and payable.

  
	
   

  	
   

  	
   

  
	
  Termination Date:

  	
   

  	
  The earlier to occur of (i) the date on which
  the Loans and other Obligations are repaid in full or otherwise satisfied
  under “Payment Provisions” or (ii) a Termination Event.

  
	
   

  	
   

  	
   

  
	
  Termination Events:

  	
   

  	
  The occurrence of any of the following events is a “Termination
  Event”: (i) failure of ADS to be cash flow positive on a
  consolidated operational basis (excluding Digital Angel) at all times on and
  after the 30-day anniversary of the Effective Date; or (ii) failure to
  deliver the Budget (as defined below) to IBM Credit within one (1) Business
  Day of the date when due in form and substance satisfactory to IBM Credit; or
  (iii) the filing of any ADS or Digital Angel shareholder lawsuit deemed
  to be material, as determined by IBM Credit in its sole and absolute
  discretion, or any lawsuit by or on behalf of ADS or Digital Angel or any
  other Loan Party against the Tranche A Borrower, IBM Credit, IBM or any
  Affiliate thereof; or (iv) the occurrence of an Event of Default other
  than a Specified Event of Default after the date hereof or an Event of
  Default existing on or prior to the date hereof and continuing after the date
  hereof which IBM Credit is not aware of; or (v) failure to repay the
  Loans when due as set forth under “Payment Provisions” below (subject to the
  exercise of purchase rights set forth under “Purchase Rights” thereunder); or
  (vi) breach of any other covenant or agreement set forth herein or in
  the Forbearance Agreement and the Restructuring Documents.

  
	
   

  	
   

  	
   

  
	
  3.             Payment
  Provisions

  
	
   

  	
   

  	
   

  
	
  Repayment:

  	
   

  	
  The Tranche A Loan must be repaid in full no
  later than September 30, 2003 provided that all but
  $3 million of the Tranche A Loan (the “Tranche A Deficiency
  Amount”) will be deemed to be paid in full on such date if less than the
  full amount of the Tranche A Loan is repaid but all of the net cash
  proceeds of the Digital Angel Share Sale (as defined below) on terms
  satisfactory to IBM Credit are applied to the repayment of the Tranche A
  Loan. The Tranche A Deficiency Amount (if any) must be repaid no later
  than March 31, 2004.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  The Tranche B Loan must be repaid in full no
  later than March 31, 2004.  All
  legal fees incurred by IBM Credit as set forth in “Expenses” will be
  capitalized as additional principal under the Tranche B Loan.  From and after the date of this Term 

  

 

3

 

	
   

  	
   

  	
  Sheet, the Tranche B Loan will bear interest at
  seven percent (7%) per annum.

  
	
   

  	
   

  	
   

  
	
  Purchase Rights:

  	
   

  	
  The Loans may be purchased by or on behalf of the
  Borrowers as follows:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  1.  The Loans
  and all the other Obligations may be purchased on or before June 30,
  2003 for $30 million cash.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.  The Loans
  and all the other Obligations may be purchased on or before
  September 30, 2003 for $50 million cash.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  3. 
  Notwithstanding anything to the contrary stated above, the
  Tranche A Loan may be purchased on or before September 30, 2003 for
  $40 million cash with an additional $10 million cash payment in respect
  of the Tranche A Deficiency Amount and the Tranche B Loan due on or before
  December 31, 2003.  Payment of $50
  million in aggregate by the date set forth above shall constitute
  satisfaction of the Obligations.

  
	
   

  	
   

  	
   

  
	
  4.             Digital
  Angel Share Sale

  	
   

  	
  The following conditions must be satisfied in
  respect of the sale under the Trust Agreement of the Digital Angel shares
  held by the Trust (the “Digital Angel Share Sale”).  Such engagement will include provision of
  a fairness opinion, if requested by the Trust.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  1.  Promptly,
  and in any event within 30 days of the Effective Date, the Trust shall
  engage an investment bank (the “Investment Bank”) reasonably
  acceptable to IBM Credit to conduct the Digital Angel Share Sale.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.  The
  Investment Bank fee structure will be on customary terms and based upon the
  success of the Digital Angel Share Sale, such fees to be reasonably
  acceptable to IBM Credit.  IBM Credit
  will not be required to indemnify the Investment Bank.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  3.  Within
  30 days of the Effective Date, the Investment Bank will have prepared
  and delivered to IBM Credit, the Trust and ADS a report, in form and
  substance satisfactory to IBM Credit in its reasonable discretion, in respect
  of the Digital Angel Share Sale process (including, without limitation, a
  timetable to conduct such sale, the persons responsible for managing such
  process, the parameters of the expected transaction terms and the Investment
  Bank’s expected range of proceeds). 
  Any Digital Angel Share Sale must be consummated without any
  indemnification claims or 

  

 

4

 

	
   

  	
   

  	
  contingencies against the proceeds.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  4.  (a)
  Unanimous written consent of the Advisory Board Members (as defined in the
  Trust Agreement) approving pursuit of the Digital Angel Share Sale on the
  terms proposed by the Investment Bank will have been delivered to IBM
  Credit.  Upon such approval, the Trust
  will diligently and expeditiously pursue the Digital Angel Share Sale consistent
  with its obligations under the Trust Agreement. 

       (b) Other required
  consents to the Digital Angel Share Sale (including any consents required
  under the Digital Angel/Wells Fargo Credit Agreement, dated as of October 30,
  2002) will have been obtained.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  5.  Digital
  Angel will agree to cooperate (including, without limitation, assisting and
  preparation of road show materials and making senior management of Digital
  Angel available to participate in meetings with any prospective investors in
  a road show) with the Investment Bank and the Trust to facilitate the Digital
  Angel Share Sale.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  6.  All
  proceeds of the Digital Angel Share Sale will be applied to the Loans and
  other Obligations to the extent required under the “Repayment” paragraph of
  the “Payment Provisions” section above.

  
	
   

  	
   

  	
   

  
	
  5.             Cash
  Collateral

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Budget:

  	
   

  	
  On a weekly basis, IBM Credit will receive a
  detailed budget (the “Budget”) in respect of each operating company of
  ADS (including Digital Angel, SysComm and Computer Equity) on both a
  consolidated and an entity-by-entity basis. 
  The Budget will be provided to IBM Credit on a rolling 13-week basis
  itemizing all revenues projected to be received and all expenses proposed to
  be made in the ordinary course of business of such entities, such as expenses
  incurred or payable in respect of vendors, materialmen and payroll (it being
  expressly understood by the parties hereto that any legal and other
  professional fees (including, without limitation, retainers and expenses
  incurred or paid) in connection with a defense of any shareholder suit are
  not ordinary course business expenses) during such periods and other cash
  flow and financial projections, all in form and substance satisfactory to IBM
  Credit in its reasonable discretion.

  

 

5

 

	
  Deposit Accounts:

  	
   

  	
  Collateral consisting of collected funds deposited
  (whether directly or transmitted from lockboxes) in Deposit Accounts shall
  remain subject to the control of IBM Credit in accordance with the Contingent
  Blocked Account Agreement or the other Deposit Account Control Agreements, as
  applicable (including, without limitation, any Deposit Account and related
  Deposit Account Control Agreement replacing or in substitution of the
  Contingent Blocked Account Agreement and the Deposit Accounts thereunder)
  (such Collateral, the “Cash Collateral”).

  
	
   

  	
   

  	
   

  
	
  Usage:

  	
   

  	
  IBM Credit will make available Cash Collateral from
  the Deposit Accounts to ADS to pay expenses of ADS and its Subsidiaries
  (excluding Digital Angel and SysComm) in accordance with the Budget.  The Budget (excluding the budget in
  respect of Digital Angel and SysComm) may be adjusted on a week-to-week basis
  by an amount equal to 10% of permitted expenditures in the aggregate (the “Maximum
  Adjustment Amount”) provided that no single line item for
  permitted expenditures in the Budget may be adjusted on a week-to-week basis
  by an amount in excess of 20% of the Maximum Aggregate Adjustment Amount.

  
	
   

  	
   

  	
   

  
	
  6.             Other Collateral

  	
   

  	
  Tranche A Facility:  The Borrowers and the other Loan Parties
  hereby confirm and reaffirm that the Tranche A Facility and the Obligations
  will continue to be secured by a perfected first priority security interest
  in the Digital Angel shares held by the Trust for the benefit of IBM Credit
  up to the aggregate amount of the outstanding Tranche A Loan and Tranche B
  Loan.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Tranche B Facility:  The Borrowers and the other Loan Parties
  hereby confirm and reaffirm that the Tranche B Facility and the Obligations
  will continue to be secured by a perfected, first priority security interest
  in (i) substantially all the assets of the Tranche B Borrower and its
  Subsidiaries, excluding the assets of Digital Angel or its Subsidiaries, (ii)
  all Capital Stock in Subsidiaries and other investments held by the Tranche B
  Borrower, and (iii) any notes or other securities held by the Tranche B
  Borrower in connection with the sale of assets or investments. 

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  The Borrowers and the other Loan Parties hereby
  confirm and reaffirm that they will take all necessary or reasonably
  desirable actions to maintain and preserve IBM Credit’s prior perfected
  security interest in the Collateral (including, without limitation, in
  respect of any Collateral consisting of Deposit Accounts pursuant

  

 

6

 

	
   

  	
   

  	
  to any replacement or substitute cash management
  system or arrangement).

  
	
   

  	
   

  	
   

  
	
  7.             Certain
  Conditions

  	
   

  	
  The Forbearance
  Agreement will be effective on the date (the “Effective Date”) on
  which all of the following conditions precedent to the Forbearance Agreement
  are satisfied (such date to occur on or before March 31, 2003):

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (a) IBM Credit shall have received a copy
  of the Forbearance Agreement, all the material terms of which shall be
  substantially the same as the material terms set forth in this Term Sheet and
  otherwise in form and substance satisfactory to IBM Credit, duly executed by
  the parties thereto.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (b) IBM Corporation (“IBM”) and IBM
  Credit shall have received releases from each of ADS (on behalf of itself and
  its officers and directors), Digital Angel, the other Loan Parties, Richard
  Sullivan (in all capacities relating to the Restructuring Documents), Jerome
  Artigliere, Garrett Sullivan and the Advisory Board Members (as defined in
  the Trust Agreement) (collectively, the “Releasing Parties”)
  satisfactory to IBM and IBM Credit forever releasing and discharging IBM and
  IBM Credit or any affiliate thereof, together with their past and present
  officers, directors, stockholders, employees, subsidiaries, affiliates,
  related companies, predecessors, successors, assigns, agents, trustees,
  attorneys, or other representatives and each of them from all actions, causes
  of action, proceedings, charges, complaints, claims, demands, damages, costs,
  liabilities, agreements, and obligations of every kind, which they have ever
  had, now have or may have in the future in respect of any matter under,
  arising out of or relating to the Restructuring Documents, this Term Sheet,
  the Forbearance Agreement and the Lawsuit (as defined below).  Such releases shall contain covenants not
  to sue IBM Credit, IBM or any affiliate thereof in respect of any matter
  under, arising out of or relating to the Restructuring Documents, this Term
  Sheet and the Forbearance Agreement and the Lawsuit.  Such releases shall be duly authorized by
  all organizational action (including Board resolutions) as applicable,
  executed and delivered by each of the Releasing Parties.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (c) The Advisory Board Members (as defined in
  the Trust Agreement) will be satisfactory to IBM Credit and duly authorized
  by all applicable organizational action of the Trust (including applicable
  resolutions).

  

 

7

 

	
   

  	
   

  	
  (d) The Advisory Board and Digital Angel shall
  have agreed in writing that IBM Credit is a third party beneficiary in
  the Digital Angel Share Sale process.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (e) Each of ADS, Digital Angel, the Advisory
  Board, the Trust and the other Loan Parties shall have taken all necessary
  organizational action (including applicable applicable Board resolutions)
  authorizing the transactions contemplated by this Term Sheet and the
  Forbearance Agreement (including, without limitation, any releases and the
  Digital Angel Share Sale).

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (f) ADS shall have delivered to IBM Credit an
  initial Budget, satisfactory in form and substance to IBM Credit in its
  reasonable discretion.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (g) ADS shall take any actions requested by IBM
  Credit to enable IBM Credit to continue its “control” of Deposit Accounts.

  
	
   

  	
   

  	
   

  
	
  8.             Certain
  Additional Covenants

  
	
   

  	
   

  	
   

  
	
  Dismissal
  of Lawsuit:

  	
   

  	
  ADS
  will cause the lawsuit, initially filed on March 7, 2003, as Case
  No. CA 03-02512AE in the Fifteenth Judicial Circuit in and for Palm
  Beach County, Florida and removed to the Southern District of Florida, Case
  No. 03-80186-CIV-PAINE on March 12, 2003 (the “Lawsuit”), to
  be dismissed with prejudice within one (1) Business Day of execution of this
  term sheet by the parties hereto.

  
	
   

  	
   

  	
   

  
	
  Press Releases:

  	
   

  	
  ADS and the other applicable Loan Parties will
  deliver to IBM Credit prior to the issuance thereof, any press releases
  relating to the transactions contemplated hereby (including, without
  limitation, the Digital Angel Share Sale). 
  IBM Credit will review such press releases solely for accuracy of the
  transactions contemplated hereby.  The
  Borrowers will have sole liability in respect of any such press releases.

  
	
   

  	
   

  	
   

  
	
  9.             Assignments

  	
   

  	
  IBM Credit may assign its Loans and other
  Obligations to any affiliate or any other Person; provided that such
  Person agrees to be bound by the terms of the Forbearance Agreement.

  

 

8

 

	
  10.          Expenses

  	
   

  	
  Each Borrower and each other Loan Party agrees to
  pay and reimburse IBM Credit for all its reasonable costs and expenses
  incurred in connection with the preparation and delivery of this Term Sheet,
  the Digital Angel Share Sale and the Forbearance Agreement, including,
  without limitation, the reasonable fees and disbursements of Jones Day,
  counsel to IBM Credit, and the reasonable fees and costs and expenses of the
  Investment Bank.  Each Borrower and
  each other Loan Party further agree to pay all reasonable costs and expenses
  incurred in connection with the Digital Angel Share Sale (including, without
  limitation, the reasonable fees and disbursements of the Investment Bank and
  Jones Day, counsel to IBM Credit) regardless of any purchase of the Loans and
  other Obligations under “Payment Provisions - Purchase Rights.”  Legal fees will be payable in accordance
  with the provisions of “Payment Provisions - Repayment.”

  
	
   

  	
   

  	
   

  
	
  11.          Indemnification

  	
   

  	
  Each Borrower and each other Loan Party hereby agree
  to indemnify and hold harmless IBM, IBM Credit and their respective officers,
  directors, consultants, advisors, agents and assigns (collectively, the “Indemnified
  Persons”) against all losses, claims, damages, liabilities or other
  expenses (including reasonable attorneys’ fees and court costs now or
  hereinafter arising from the enforcement of this Term Sheet and the
  Forbearance Agreement and the documentation relating hereto, the “Losses”)
  to which any of them may become subject insofar as such Losses arise out of
  or are based upon any event, circumstance or condition (a) occurring or
  existing on or before the date of this Term Sheet and the Forbearance
  Agreement relating to any financing arrangements IBM Credit may from
  time to time have with (i) such Borrower, (ii) any Person that shall be
  acquired by such Borrower or (iii) any Person that such Borrower may acquire
  all or substantially all of the assets of, or (b) directly or indirectly
  relating to the execution, delivery or performance of this Term Sheet and the
  Forbearance Agreement or the consummation of the transactions contemplated
  hereby or thereby or to any of the Collateral or to any act or omission of
  the Borrower in connection therewith. 
  Such indemnification will include any Losses arising out of or
  relating to any press releases as described under “Certain Additional
  Covenants - Press Releases.” 
  Notwithstanding the foregoing, a Loan Party shall not be obligated to
  indemnify IBM or IBM Credit for any Losses incurred by IBM or IBM Credit
  which are a result of IBM’s or IBM Credit’s gross negligence or willful
  misconduct.  The 

  

 

9

 

	
   

  	
   

  	
  indemnity provided herein shall survive the
  termination of this Term Sheet and the Forbearance Agreement and shall be in
  addition to the indemnity provisions set forth in Section 9.2 of the Credit
  Agreement.

  
	
   

  	
   

  	
   

  
	
  12.          Counterparts

  	
   

  	
  This Term Sheet may be executed by one or more of
  the parties to this Term Sheet on any number of separate counterparts
  (including by telecopy), and all of said counterparts taken together shall be
  deemed to constitute one and the same instrument.  A set of the copies of this Term Sheet signed by the parties
  hereto shall be delivered to each Borrower and IBM Credit.

  
	
   

  	
   

  	
   

  
	
  13.          GOVERNING
  LAW

  	
   

  	
  THIS
  TERM SHEET AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS TERM
  SHEET SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH,
  THE LAW OF THE STATE OF NEW YORK INCLUDING WITHOUT LIMITATION SECTION 5-1401
  OF THE NEW YORK GENERAL OBLIGATIONS LAW.

  
	
   

  	
   

  	
   

  
	
  14.          Limitation
  of Trustee Liability

  	
   

  	
  It is expressly understood and agreed by the parties
  that (a) this document is executed and delivered by Wilmington Trust Company,
  not individually or personally, but solely as Trustee, in the exercise of the
  powers and authority conferred and vested in it, pursuant to the Trust
  Agreement, (b) each of the representations, undertakings and agreements
  herein made on the part of the Trust is made and intended not as personal
  representations, undertakings and agreements by Wilmington Trust Company but
  is made and intended for the purpose for binding only the Trust, (c) nothing
  herein contained shall be construed as creating any liability on Wilmington
  Trust Company, individually or personally, to perform any covenant either
  expressed or implied contained herein, all such liability, if any, being
  expressly waived by the parties hereto and by any person claiming by, through
  or under the parties hereto, and (d) under no circumstances shall Wilmington
  Trust Company be personally liable for the payment of any indebtedness or
  expenses of the Trust or be liable for the breach or failure of any
  obligation, representation, warranty or covenant made or undertaken by the
  Trust under this Term Sheet or any other related documents.

  

 

10

 

	
  15.          Interpretation

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Continuing Effect of the Credit Agreement:

  	
   

  	
  The Borrowers and each other Loan Party hereby
  acknowledge and agree that the Credit Agreement shall continue to be and
  shall remain unchanged and in full force and effect in accordance with its
  terms, except as expressly modified hereby and by the Forbearance Agreement.

  
	
   

  	
   

  	
   

  
	
  No Limitation on Remedies after Forbearance Period:

  	
   

  	
  The Borrowers and each Loan Party hereby acknowledge
  and agree that, at the end of the Forbearance Period, the provisions hereof
  and of the Forbearance Agreement shall become of no force and effect and
  IBM Credit shall be free, in accordance with the Credit Agreement and
  the other Restructuring Documents, to exercise and enforce, or to take steps
  to exercise and enforce, all rights, powers, privileges and remedies
  available to them under the Credit Agreement, any other Restructuring
  Document or applicable law on account of the Specified Events of Default (or
  any other Default or Event of Default) as if the Forbearance Agreement had
  not been entered into by the parties hereto.

  
	
   

  	
   

  	
   

  
	
  Reservation
  of Rights:

  	
   

  	
  Notwithstanding
  anything contained in this Term Sheet or the Forbearance Agreement to the
  contrary, the Borrowers and each other Loan Party acknowledge that
  IBM Credit does not waive, and expressly reserves, the right to
  exercise, at any time during the Forbearance Period, any and all of its
  rights and remedies under (a) the Credit Agreement, any other
  Restructuring Document and applicable law in respect of the Specified Events
  of Default against any Person other than the Borrowers or any such Loan Party
  and (b) the Credit Agreement, any other Restructuring Document and
  applicable law in respect of any Default or Event of Default other than the
  Specified Events of Default.

  
	
   

  	
   

  	
   

  
	
  16.          Consent

  	
   

  	
  Notwithstanding any provisions to the contrary in
  the Credit Agreement, IBM Credit hereby agrees to consent to the buy out by
  ADS of the respective Employment Agreements of each respective Employee with
  ADS common stock with a current market value not to exceed the required
  buyout amount under the applicable Employment Agreement.

  

 

IN WITNESS WHEREOF, each of IBM Credit, each Borrower, each
Guarantor and each other Loan Party hereto has read this entire Term Sheet, and
has caused their respective 

 

11

 

authorized
representatives to execute this Term Sheet and has caused its corporate seal,
if any, to be affixed hereto as of the date first written above.

 

	
  IBM CREDIT CORPORATION, 

  as Lender

  	
   

  	
  APPLIED DIGITAL SOLUTIONS, INC., 

  as Tranche B Borrower and Tranche A Guarantor

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  DIGITAL
  ANGEL SHARE TRUST, 

  as Tranche A Borrower and Tranche B 

  Guarantor

  	
   

  	
  ADS
  MONTEREY, INC.

  
	
   

  	
   

  	
  By:

  	
   

  
	
  By:    Wilmington
  Trust Company, not in its individual capacity but solely as Trustee

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  
	
  Name:     Wilmington Trust Company

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:       Trustee

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  ADVANCED POWER SOLUTIONS, INC.

  	
   

  	
  THE AMERICOM GROUP, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
							

 

12

 

	
  APPLIED DIGITAL SOLUTIONS 

  FINANCIAL CORP.

  	
   

  	
  BALVA FINANCIAL CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  COMPUTER EQUITY CORPORATION

  	
   

  	
  DIGITAL ANGEL CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
  DIGITAL ANGEL HOLDINGS, LLC

  	
   

  	
  FEDERAL CONVENTION 

  CONTRACTORS, INC.  

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  FEDERAL SERVICES, INC.

  	
   

  	
  GOVERNMENT 

  TELECOMMUNICATIONS, INC. 
  

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
									

 

13

 

	
  INFORMATION TECHNOLOGY SERVICES, INC.

  	
   

  	
  INFOTECH USA, INC.  

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  PDS ACQUISITION CORP.

  	
   

  	
  PERIMETER ACQUISITION CORP.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  PRECISION POINT CORPORATION

  	
   

  	
  SYSCOMM INTERNATIONAL 

  CORPORATION

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:  Nat
  Ebenstein

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title: 
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  U.S. ELECTRICAL PRODUCTS CORP.

  	
   

  	
  VERICHIP CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
							

 

14

 

	
  WEBNET SERVICES, INC.

  	
   

  	
  ACT COMMUNICATIONS INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  ACT-GFX CANADA, INC.

  	
   

  	
  ADS BAY AREA, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  ADSI TELECOMM SERVICES, INC.  

  	
   

  	
  ADSI TELECOMM SERVICES OF 

  MARYLAND, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
  ADVANCED TELECOMM OF 

  MARYLAND, INC.

  	
   

  	
  ADVANCED TELECOMM OF 

  PITTSBURGH

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
							

 

15

 

	
  ADVANCED TELECOMMUNICATIONS, INC.

  	
   

  	
  APPLIED DIGITAL ORACLE 

  PRACTICE, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By: 

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  ARJANG, INC.  

  	
   

  	
  BLUE STAR ELECTRONICS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  BOSTEK, INC.

  	
   

  	
  CYBERTECH STATION, INC.

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  ELITE COMPUTER SERVICES, INC.

  	
   

  	
  INDEPENDENT ACQUISITION, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
									

 

16

 

	
  INTELLESALE, INC.

  	
   

  	
  MICRO COMPONENTS 

  INTERNATIONAL INCORPORATED

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
  NEIRBOD CORP.

  	
   

  	
  NORCOM RESOURCES 

  INCORPORATED

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  PIZARRO RE-MARKETING, INC.

  	
   

  	
  SERVICE TRANSPORT COMPANY

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  TELEDATA CONCEPTS, INC.

  	
   

  	
  WYR, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
  Title:

  

 

17

 

Acknowledged and agreed:

 

 

	
   

  	
   

  	
   

  
	
  Richard Sullivan

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Garrett Sullivan

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Jerome Artigliere

  	
   

  	
   

  

 

18Exhibit
4.2

 

REGISTRATION
RIGHTS AGREEMENT

 

THIS REGISTRATION RIGHTS AGREEMENT, dated as of March
3, 2003, by and between Vista Medical Technologies, Inc. (the “Company”) and
the parties listed on Exhibit A hereto (each, a “Purchaser” and
collectively, the “Purchasers”).

 

WHEREAS, simultaneously with the execution and
delivery of this Agreement, pursuant to a Preferred Stock Purchase Agreement
dated the date hereof (the “Purchase Agreement”) the Purchasers have committed
to purchase up to 1,000,000 shares of the Company’s Series A Preferred Stock
(the “Preferred Shares”); and

 

WHEREAS, the Company desires to grant to the
Purchasers the registration rights set forth herein with respect to the
Preferred Shares.

 

NOW, THEREFORE, the parties hereto mutually agree as
follows:

 

Section 1.                                            Registrable
Securities.  As used herein the term
“Registrable Securities” means the shares of the Company’s Common Stock
issuable upon conversion of the Preferred Shares.  Such shares shall be considered Registrable Securities until (i)
all such shares have been disposed of pursuant to the Registration Statement,
(ii) all such shares have been sold under circumstances under which all of the
applicable conditions of Rule 144 (or any similar provision then in force)
(“Rule 144”) under the Securities Act of 1933, as amended (the “Securities
Act”) are met, (iii) all such shares have been otherwise transferred to persons
who may trade such shares without restriction under the Securities Act, and the
Company has delivered a new certificate or other evidence of ownership for such
shares not bearing a restrictive legend, or (iv) such time as, in the opinion
of counsel to the Company, all such shares may be sold without any time, volume
or manner limitations pursuant to Rule 144(k) (or any similar provision then in
effect) under the Securities Act.  In
the event of any merger, reorganization, consolidation, recapitalization or
other change in corporate structure affecting the Company’s Common Stock, such
adjustment shall be deemed to be made in the definition of “Registrable
Securities” as is appropriate in order to prevent any dilution or enlargement
of the rights granted pursuant to this Agreement.

 

Section 2.                                            Restrictions
on Transfer.  The Purchasers
acknowledge and understand that in the absence of an effective Registration
Statement authorizing the resale of the Registrable Securities as provided
herein, the Registrable Securities are “restricted securities” as defined in
Rule 144.  The Purchasers understand
that no disposition or transfer of the Registrable Securities may be made by a
Purchaser in the absence of (i) an opinion of counsel in form and substance
reasonably satisfactory to the Company, that such transfer may be made without
registration under the Securities Act or (ii) such registration.

 

With a view to making available to the Purchasers the
benefits of Rule 144, the Company agrees to:

 

 

(a)                                  comply
with the provisions of paragraph (c)(1) of Rule 144; and

 

(b)                                 file
with the Securities and Exchange Commission (“SEC”) in a timely manner all
reports and other documents required to be filed by the Company pursuant to
Section 13 or 15(d) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”); and, if at any time it is not required to file such reports
but in the past had been required to or did file such reports, it will, upon
the request of a Purchaser, make available other information as required by,
and so long as necessary to permit sales of, its Registrable Securities
pursuant to Rule 144.

 

Section 3.                                            Registration
Rights With Respect to the Securities.

 

(a)                                  The
Company agrees that, by the earlier of (i) within thirty (30) days following
receipt of a Purchaser Request (as defined below) or (ii) within four hundred
(400) days after the initial issuance of any Preferred Shares (as applicable,
the “Filing Deadline”), it will prepare and file with the SEC, a registration
statement (on Form S-3 and/or S-1, or other appropriate form of registration
statement) under the Securities Act (the “Registration Statement”), at the sole
expense of the Company (except as provided in Section 3(d) hereof), in respect
of a Purchaser(s), so as to permit a public offering and resale of the
Registrable Securities under the Securities Act by such Purchaser(s).  For purposes hereof, a “Purchaser Request”
means a written request to the Company, by Purchasers holding at least 50% of
the then-outstanding shares of Registrable Securities, requesting that the
Company effect a registration of Registrable Securities pursuant to the terms
of this Agreement.  A Purchaser Request
may only be delivered after September 30, 2003 if at least 36.8% of the
Preferred Shares (as adjusted for stock splits, stock dividends,
recapitalizations and the like) have been converted to Common Stock of the
Company; provided however, that a Purchaser Request may not be made if the
Company has disposed of its OEM endoscopic and 3D business lines.

 

(b)                                 The
Company shall cause the Registration Statement to become effective within sixty
(60) days of the applicable Filing Deadline (as applicable, the “Effectiveness
Deadline”).

 

(c)                                  The
Company will maintain the Registration Statement (or post-effective amendment
filed under this Section 3) effective under the Securities Act until the
earliest of (i) the date that all shares of Registrable Securities registered
on such Registration Statement have been sold or otherwise disposed of pursuant
to the Registration Statement, (ii) the date all shares of Registrable
Securities may be sold under the provisions of Rule 144 without limitation as
to volume, (iii) the date all shares of Registrable Securities have been
otherwise transferred to persons who may trade such shares without restriction
under the Securities Act, and the Company has delivered a new certificate or
other evidence of ownership for such securities not bearing a restrictive
legend, or (iv) the date all shares of Registrable Securities may be sold
without any time, volume or manner limitations pursuant to Rule 144(k) or any
similar provision then in

 

2

 

effect under the
Securities Act (the “Effectiveness Period”).

 

(d)                                 If
(a) any Registration Statement is not filed on or prior to the Filing Deadline,
or (b) after a Registration Statement is filed with and declared effective by
the SEC, such Registration Statement ceases to be effective as to all
Registrable Securities to which it is required (pursuant to the provisions
hereof) to relate at any time prior to the expiration of the Effectiveness
Period without being succeeded within fifteen days by an amendment to such
Registration Statement or by a subsequent Registration Statement filed with and
declared effective by the SEC, or (c) any Registration Statement is not
declared effective by the SEC on or prior to the applicable Effectiveness
Deadline (any such failure or breach being referred to as a “Registration
Event”), then in addition to any other rights available to the Purchasers of
the Preferred Shares: (x) on the date triggering each such Registration Event,
the Company shall pay to each Purchaser an amount in cash, as liquidated
damages and not as a penalty, equal to 1% of the aggregate purchase price paid
by such Purchaser for such Purchaser’s Preferred Shares; and (y) on each
monthly anniversary of the date triggering each such Registration Event (if the
Registration Event shall not have been cured by such date) until the applicable
Registration Event is cured, the Company shall pay to each Purchaser an amount
in cash, as liquidated damages and not as a penalty, equal to 1% of the
aggregate purchase price paid by such Purchaser for such Purchaser’s Preferred
Shares.  If the Company fails to pay any
liquidated damages pursuant to this Section in full within seven days after the
date payable, the Company will pay interest thereon at a rate of 7% per annum
(or such lesser maximum amount that is permitted to be paid by applicable law)
to the Purchaser, accruing daily from the date such liquidated damages are due
until such amounts, plus all interest thereon, are paid in full.  The liquidated damages pursuant to the terms
hereof shall apply on a pro-rata basis for any portion of a month prior to the
cure of a Registration Event.

 

(e)                                  All
fees, disbursements and out-of-pocket expenses and costs incurred by the
Company in connection with the preparation and filing of the Registration
Statement under subparagraph 3(a) and in complying with applicable securities
and blue sky laws (including, without limitation, all attorneys’ fees of the
Company) shall be borne by the Company. 
The Purchasers shall bear the cost of underwriting and/or brokerage
discounts, fees and commissions, if any, applicable to the Registrable
Securities being registered and the fees and expenses of Purchasers’
counsel.  The Purchasers and their
counsel shall have a reasonable period, not to exceed three (3) business days,
to review the proposed Registration Statement or any amendment thereto, prior
to filing with the SEC, and the Company shall provide the Purchasers with
copies of any comment letters received from the SEC with respect thereto within
two (2) business days of receipt thereof. 
The Company shall make reasonably available for inspection by Purchasers
participating in any such registration, any underwriter participating in any
disposition pursuant to the Registration Statement, and any attorney,
accountant or other agent retained by the participating Purchasers or any such
underwriter all relevant financial and other records, pertinent corporate
documents and properties of the Company and its 

 

3

 

subsidiaries, and
cause the Company’s officers, directors and employees to supply all information
reasonably requested by such Purchasers or any such underwriter, attorney,
accountant or agent in connection with the Registration Statement, in each
case, as is customary for similar due diligence examinations; provided, however,
that all records, information and documents that are designated in writing by
the Company, in good faith, as confidential, proprietary or containing any
material non-public information shall be kept confidential by the Purchasers
and any such underwriter, attorney, accountant or agent (pursuant to an
appropriate confidentiality agreement in the case of the Purchasers,
underwriter, attorney, accountant or agent), unless such disclosure is made
pursuant to judicial process in a court proceeding (after first giving the
Company an opportunity promptly to seek a protective order or otherwise limit
the scope of the information sought to be disclosed) or is required by law, or
such records, information or documents become available to the public generally
or through a third party not in violation of an accompanying obligation of
confidentiality; and provided  further that, if the foregoing
inspection and information gathering would otherwise disrupt the Company’s
conduct of its business, such inspection and information gathering shall, to
the maximum extent possible, be coordinated on behalf of the Purchasers and the
other parties entitled thereto by one firm of counsel designed by and on behalf
of the majority in interest of Purchasers and other parties.  The Company shall qualify any of the
Registrable Securities for sale in such states as the participating Purchasers
reasonably designate and shall furnish indemnification in the manner provided
in Section 6 hereof.  However, the
Company shall not be required to qualify in any state which will require an
escrow or other restriction relating to the Company and/or the sellers, or
which will require the Company to qualify to do business in such state.  The Company at its expense will supply the
participating Purchasers with copies of the Registration Statement and the
final prospectus included therein (the “Prospectus”) and other related
documents in such quantities as may be reasonably requested by such Purchasers.

 

(f)                                    Notwithstanding
anything to the contrary contained herein, the Company shall not be required by
this Section 3 to include the Purchasers’ Registrable Securities in any
Registration Statement if, in the opinion of counsel for both the Purchasers
and the Company (or, should they not agree, in the opinion of another counsel
experienced in securities law matters acceptable to counsel for the Purchasers
and the Company) the proposed offering or other transfer as to which such
registration is requested is exempt from applicable federal and state
securities laws and would result in all purchasers or transferees obtaining
securities which are not “restricted securities”, as defined in Rule 144 under
the Securities Act.

 

If at any time or from time to time after the
effective date of the Registration Statement, the Company notifies the
Purchasers in writing of the existence of a Potential Material Event (as
defined in Section 3(g) below), the Purchasers shall not offer or sell any
Registrable Securities or engage in any other transaction involving or relating
to Registrable Securities, from the time of the giving of notice with respect
to a Potential Material Event until the Purchasers receive written notice from
the Company (to

 

4

 

be delivered by the Company as soon as reasonably
practicable) that such Potential Material Event either has been disclosed to
the public or no longer constitutes a Potential Material Event (a “Suspension
Period”).  The Company may invoke a
Suspension Period only for a reasonable period of time not to exceed 45 days
(or such earlier time as such Potential Material Event is consummated or no
longer proposed or the applicable material information has been made
public).  There shall not be more than
two Suspension Periods declared by the Company.

 

(g)                                 “Potential
Material Event” means any of the following: (i) the possession by the Company
of material information that is not ripe for disclosure in a registration
statement, yet would be required to appear in a registration statement, as
determined in good faith by the Audit Committee of the Company; (ii) the
possession by the Company of material information, disclosure of which information
in the Registration Statement would be detrimental to the business and affairs
of the Company; or (iii) any material engagement or activity by the Company
which would, in the good faith determination of the Audit Committee of the
Company, be adversely affected by disclosure in a registration statement at
such time, which determination shall be accompanied by a good faith
determination by the Chief Executive Officer, Chief Financial Officer and the
Audit Committee of the Board of Directors of the Company that the Registration
Statement would be materially misleading absent the inclusion of such
information.

 

Section 4.                                            Cooperation
with Company.  The Purchasers will
cooperate with the Company in all respects in connection with this Agreement,
including timely supplying all information reasonably requested by the Company
(which shall include all information regarding the Purchasers and proposed
manner of sale of the Registrable Securities required to be disclosed in the
Registration Statement) and executing and returning all documents reasonably
requested in connection with the registration and sale of the Registrable
Securities and entering into and performing its obligations under any
underwriting agreement, if the offering is an underwritten offering, in usual
and customary form, with the managing underwriter or underwriters of such
underwritten offering. The participating Purchasers shall consent to be named
as an underwriter in the Registration Statement.  The Purchasers acknowledge that in accordance with current SEC
policy, the participating Purchasers will be named as the underwriter of the
Registrable Securities in the Registration Statement.

 

Section 5.                                            Registration
Procedures.  If and whenever the
Company is required by any of the provisions of this Agreement to effect the
registration of any of the Registrable Securities under the Securities Act, the
Company shall (except as otherwise provided in this Agreement), as
expeditiously as possible, subject to the Purchasers’ assistance and
cooperation as reasonably required:

 

(a)                                  prepare
and file with the SEC such amendments and supplements to the Registration
Statement and the Prospectus as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act

 

5

 

with respect to
the sale or other disposition of all securities covered by such registration
statement whenever the Purchasers of such Registrable Securities shall desire
to sell or otherwise dispose of the same (including prospectus supplements with
respect to the sales of securities from time to time in connection with a
registration statement pursuant to Rule 415 promulgated under the Securities
Act) and (ii) take all lawful action such that each of (A) the Registration
Statement and any amendment thereto does not, when it becomes effective,
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) the Prospectus, and any amendment or supplement thereto,
does not at any time during the Effectiveness Period include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;

 

(b)                                 prior
to the filing with the SEC of any Registration Statement (including any
amendments thereto) and the distribution or delivery of the Prospectus (including
any supplements thereto), provide draft copies thereof to the participating
Purchasers and reflect in such documents all such comments as the participating
Purchasers (and their counsel) reasonably may propose and (ii) furnish to the
Purchasers such numbers of copies of the Prospectus including a preliminary
prospectus or any amendment or supplement to the Prospectus, as applicable, in
conformity with the requirements of the Securities Act, and such other
documents, as the Purchaser may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Securities;

 

(c)                                  register
and qualify the Registrable Securities covered by the Registration Statement
under the applicable blue sky laws (subject to the limitations set forth in
Section 3(c) above), and do any and all other acts and things which may be
reasonably necessary or advisable to enable the Purchasers to consummate the
public sale or other disposition in such jurisdiction of the Registrable
Securities, except that the Company shall not for any such purpose be required
to qualify to do business as a foreign corporation in any jurisdiction wherein
it is not so qualified;

 

(d)                                 list
such Registrable Securities on the market or exchange on which the Common Stock
of the Company is then listed, if the listing of such Registrable Securities is
then permitted under the rules of such market or exchange;

 

(e)                                  notify
the Purchasers at any time when  the
Prospectus is required to be delivered under the Securities Act, of the happening
of any event of which it has knowledge as a result of which the Prospectus, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of  the circumstances then existing, and the Company shall prepare
and file a curative amendment or curative supplement under Section 5(a) as
quickly as commercially possible and the period beginning on the date of notice
until the curative amendment is effective or curative

 

6

 

supplement is
provided to the Purchasers shall be deemed a Suspension Period;

 

(f)                                    as
promptly as practicable after becoming aware of such event, notify the
participating Purchasers who hold Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance
by the SEC or any state authority of any stop order or other suspension of the
effectiveness of the Registration Statement at the earliest possible time and
take all lawful action to effect the withdrawal, rescission or removal of such
stop order or other suspension;

 

(g)                                 take
all such other lawful actions reasonably necessary to expedite and facilitate
the disposition by the Purchasers of their Registrable Securities in accordance
with the intended methods therefor provided in the Prospectus which are
customary for issuers to perform under the circumstances;

 

(h)                                 in
the event of an underwritten offering, promptly include or incorporate in a
prospectus supplement or post-effective amendment to the Registration Statement
such information as the managing underwriters reasonably agree should be
included therein and to which the Company does not reasonably object and make
all required filings of such prospectus supplement or post-effective amendment
as soon as practicable after it is notified of the matters to be included or
incorporated in such prospectus supplement or post-effective amendment; and

 

(i)                                     maintain
a transfer agent for its Common Stock.

 

Section 6.                                            Indemnification.

 

(a)                                  The
Company agrees to indemnify and hold harmless the Purchasers and each person,
if any, who controls the Purchasers within the meaning of the Securities Act
(“Distributing Purchaser”) against any losses, claims, damages or liabilities,
joint or several (which shall, for all purposes of this Agreement, include, but
not be limited to, all reasonable costs of defense and investigation and all
reasonable attorneys’ fees), to which the Distributing Purchaser may become
subject, under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, or any related preliminary
prospectus, the Prospectus or amendment or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration  Statement, preliminary prospectus, the
Prospectus or amendment  or supplement
thereto in reliance upon, and in conformity with, written information furnished
to the Company by the Distributing Purchaser specifically for use in the
preparation thereof. This Section 6(a) shall not inure to the benefit of any
Distributing Purchaser with respect to any person 

 

7

 

asserting such
loss, claim, damage or liability who purchased the Registrable Securities which
are the subject thereof if the Distributing Purchaser failed to send or give
(in violation of the Securities Act or the rules and regulations promulgated
thereunder) a copy of the Prospectus to such person at or prior to the written
confirmation to such person of the sale of such Registrable Securities, where
the Distributing Purchaser was obligated to do so under the Securities Act or
the rules and regulations promulgated thereunder.  This indemnity agreement will be in addition to any liability
which the Company may otherwise have.

 

(b)                                 Each
Distributing Purchaser agrees that it will indemnify and hold harmless the
Company, and each officer, director of the Company or person, if any, who
controls the Company within the meaning of the Securities Act, against any
losses, claims, damages or liabilities (which shall, for all purposes of this
Agreement, include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys’ fees) to which the Company or any
such officer, director or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, or any related preliminary prospectus, the
Prospectus or amendment or supplement thereto, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but in each case only to the extent that such untrue statement or
alleged untrue statement or omission or alleged omission was made in the
Registration Statement, preliminary prospectus, the Prospectus or amendment or
supplement thereto in reliance upon, and in conformity with, written
information furnished to the Company by such Distributing Purchaser
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Distributing Purchaser may otherwise
have.

 

(c)                                  Promptly
after receipt by an indemnified party under this Section 6 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party under this Section 6,
notify the indemnifying party of the commencement thereof; but the omission so
to notify the indemnifying party will not relieve the indemnifying party from
any liability which it may have to any indemnified party except to the extent
of actual prejudice demonstrated by the indemnifying party.  In case any such action is brought against
any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
in, and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, assume the defense thereof, subject to the provisions
herein stated and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the indemnifying party
will not be liable to such indemnified party under this Section 6 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation, unless
the indemnifying party shall not

 

8

 

pursue the action
to its final conclusion.  The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel
reasonably satisfactory to the indemnified party; provided that if the
indemnified party is the Distributing Purchaser, the fees and expenses of such
counsel shall be at the expense of the indemnifying party if (i) the employment
of such counsel has been specifically authorized in writing by the indemnifying
party, or (ii) the named parties to any such action (including any impleaded
parties) include both the Distributing Purchaser and the indemnifying party and
the Distributing Purchaser shall have been advised by such counsel that there
may be one or more legal defenses available to the indemnifying party different
from or in conflict with any legal defenses which may be available to the
Distributing Purchaser (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the Distributing
Purchaser, it being understood, however, that the indemnifying party shall, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable only for the reasonable fees and
expenses of one separate firm of attorneys for the Distributing Purchaser,
which firm shall be designated in writing by the Distributing Purchaser and be
approved by the indemnifying party).  No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.

 

All fees and expenses of the indemnified party
(including reasonable costs of defense and investigation in a manner not
inconsistent with this Section 6 and all reasonable attorneys’ fees and
expenses) shall be paid to the indemnified party, as incurred, within ten (10)
business days of written notice thereof to the indemnifying party; provided,
that the indemnifying party may require such indemnified party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such indemnified party is not entitled to indemnification
hereunder.

 

Section 7.                                            Contribution.  In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) the indemnified
party makes a claim for indemnification pursuant to Section 6 hereof but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of
the last right of appeal) that such indemnification may not be enforced in such
case notwithstanding the fact that the express provisions of Section 6 hereof
provide for indemnification in such case, or (ii) contribution under the
Securities Act may be required on the part of any indemnified party, then the
Company and the applicable Distributing Purchaser shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(which shall, for all purposes of this Agreement, include, but not be limited
to, all reasonable costs of defense and investigation and all reasonable
attorneys’ fees), in either such case (after contribution from others) on the
basis of relative fault as well as any other relevant equitable
considerations.  The relative fault
shall be determined by reference to, among other things,

 

9

 

whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company on the one hand or the applicable Distributing Purchaser on the other
hand, and the parties’ relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.  The Company and the Distributing Purchaser
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to in this
Section 7.  The amount paid or payable
by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this Section 7
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.

 

Section 8.                                            Notices.  All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be delivered as set forth
in the Purchase Agreement.

 

Section 9.                                            Assignment.  Neither this Agreement nor any rights of the
Purchasers or the Company hereunder may be assigned by either party to any
other person.

 

Section 10.                                      Counterparts/Facsimile.  This Agreement may be executed in two or
more counterparts, each of which shall constitute an original, but all of
which, when together shall constitute but one and the same instrument, and
shall become effective when one or more counterparts have been signed by each
party hereto and delivered to the other party. 
In lieu of the original, a facsimile transmission or copy of the
original shall be as effective and enforceable as the original.

 

Section 11.                                      Remedies and
Severability.  The remedies provided
in this Agreement are cumulative and not exclusive of any remedies provided by
law.  If any term, provision, covenant
or restriction of this Agreement is held by a court of competent jurisdiction
to be invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated, and
the parties hereto shall use their best efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction.  It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of those that may
be hereafter declared invalid, illegal, void or unenforceable.

 

Section 12.                                      Conflicting
Agreements.  The Company shall not
enter into any agreement with respect to its securities that is inconsistent
with the rights granted to the Purchasers in this Agreement or otherwise
prevents the Company from complying with all of its

 

10

 

obligations
hereunder.

 

Section 13.                                      Headings.  The headings in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

 

Section 14.                                      Governing Law.  This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts made in California by persons domiciled in California and without
regard to its principles of conflicts of laws. 
The Company and the Purchaser agree to submit themselves to the in personam
jurisdiction of the state and federal courts situated within the County of San
Diego, California with regard to any controversy arising out of or relating to
this Agreement. Any party shall have the right to seek injunctive relief from
any court of competent jurisdiction in any case where such relief is
available.  Any party shall have the
right to seek injunctive relief from any court of competent jurisdiction in any
case where such relief is available. 
The prevailing party in such injunctive action shall be awarded its
costs, including attorney’s fees, from the non-prevailing party.

 

***************************

 

11

 

[REGISTRATION RIGHTS AGREEMENT SIGNATURE
PAGE]

 

IN WITNESS WHEREOF, the parties hereto have caused
this Registration Rights Agreement to be duly executed as of the date set forth
above.

 

	
   

  	
  VISTA MEDICAL TECHNOLOGIES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John R. Lyon

  	
   

  
	
   

  	
    John
  R. Lyon, President & CEO

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  VECTRA PARTNERS, LLC

  	
   

  
	
   

  	
  P.O. Box 675161

  	
   

  
	
   

  	
  Rancho Santa Fe, CA 92067

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Scott
  Pancoast

  	
   

  
	
   

  	
    Name:

  	
  Scott Pancoast

  	
   

  
	
   

  	
    Title:

  	
  Manager

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SBIC PARTNERS, L.P.

  	
   

  
	
   

  	
  201 Main Street

  	
   

  
	
   

  	
  Suite 2700

  	
   

  
	
   

  	
  Fort Worth, Texas  76102

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Forrest Binkley & Brown L.P.,

  	
   

  
	
   

  	
   

  	
  General Partner

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By: Forrest Binkley & Brown Venture Co.,

  
	
   

  	
   

  	
  General Partner

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Nicholas B. Binkley

  	
   

  
	
   

  	
   

  	
  Nicholas B. Binkley

  	
   

  
	
   

  	
   

  	
  Office of the President

  	
   

  
								

 

12

 

EXHIBIT
A

 

SCHEDULE
OF PURCHASERS

 

Vectra Partners,
LLC

 

SBIC Partners,
L.P.

 

13

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