Document:

Exhibit 10.59

 

ASSET PURCHASE AGREEMENT

 

This Asset Purchase Agreement (“Agreement”) is made and entered into as
of December 22, 2003, by and among Viking Systems, Inc., a Nevada
corporation (“Purchaser”) and Vista Medical Technologies, Inc., a Delaware
corporation (the “Company”).

 

RECITALS

 

WHEREAS, Purchaser desires
to acquire from the Company, and the Company desires to sell to Purchaser,
certain assets of the Company’s medical device and technology business
(the”Business”) on the terms and subject to the conditions set forth in this
Agreement; and

 

WHEREAS, the Purchaser
desires to assume certain liabilities of the Business as more fully described
herein; and

 

WHEREAS, the Company shall
retain certain product rights with respect to the products and assets of the
Business, which product rights will be exclusively licensed to Purchaser
pursuant to the terms of the License Agreement; and

 

WHEREAS, certain other
assets and liabilities of the Company will remain with the Company and not be
transferred to Purchaser, all as more particularly set forth herein; and

 

WHEREAS, Purchaser and the
Company acknowledge that this Agreement and the agreements attached as exhibits
hereto collectively constitute the agreements necessary to accomplish the
transactions contemplated by this Agreement and are parts of an integrated
arrangement between the parties with respect to the purchase and sale of the
Purchased Assets (as defined in Section 1.1) and certain licenses and
other relationships between the parties, and that separate agreements have been
used for the sake of convenience.

 

NOW, THEREFORE, in
consideration of the premises and the mutual covenants and promises contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

 

ARTICLE I

DEFINITIONS

 

1.1   Defined Terms. As used in this Agreement,
the following defined terms have the meanings indicated below:

 

“Actions or Proceedings” means any action, suit, proceeding,
arbitration, Order, inquiry, hearing, assessment with respect to fines or
penalties or litigation (whether civil, criminal, administrative, investigative
or informal) commenced, brought, conducted or heard by or before, or otherwise
involving, any Governmental or Regulatory Authority.

 

“Affiliate” means, with respect to any Person, another Person
that directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with such Person.

 

“Assets and Properties” and “Assets
or Properties” of any Person each means all assets and properties of
every kind, nature, character and description (whether real, personal or mixed,
whether tangible or intangible, whether absolute, accrued, contingent, fixed or
otherwise and wherever situated), including the goodwill related thereto,
operated, owned or leased by such Person, including, without limitation, cash,
cash equivalents, accounts and notes receivable, chattel paper, documents,
instruments, general intangibles, real estate, equipment, inventory, goods and
Intellectual Property.

 

“Assumed Contracts” has the meaning set forth in
Section 2.1(d) below.

 

“Assumed Liabilities” has the meaning set forth in
Section 2.3(a) below.

 

1

 

“Books and Records” of any Person means all files, documents,
instruments, papers, books, computer files (including but not limited to files
stored on a computer’s hard drive or on floppy disks), electronic files and
records in any other medium relating to the business, operations or condition
of such Person.

 

“Business Day” means a day other than Saturday, Sunday or any
day on which banks located in the State of California are authorized or
obligated to close.

 

“Cash Purchase Price” means the sum of (i) $132,000 and
(ii) the difference (at Closing) between the Company’s aggregate accounts
receivable and aggregate accounts payable. To the extent the Cash Purchase
Price exceeds $400,000, only $400,000 will be paid at Closing and the remainder
will be paid upon the earlier of (i) collection of the associated accounts
receivable or (ii) forty-five (45) days after Closing.

 

“Claim Notice” has the meaning set forth in Section 8.2(c).

 

“Closing” has the meaning set forth in Section 2.9(a)
below.

 

“Closing Date” has the meaning set forth in Section 2.9(a)
below.

 

“Closing Shares” means that number of shares of Purchaser’s
Common Stock equal to 10% of Purchaser’s fully-diluted capitalization (which,
for purposes of calculation, includes all outstanding common stock, preferred
stock and convertible or exercisable securities) as of Closing.

 

“Code” means the Internal Revenue Code of 1986, as amended.

 

“Company” has the meaning set forth in the first paragraph of
this Agreement.

 

“Company Disclosure Schedule” means the disclosure schedule of
the Company attached hereto which sets forth the exceptions to the
representations and warranties contained in Article III
hereof and certain other information called for by this Agreement.

 

“Company Intellectual Property” means any Intellectual Property
exclusively relating to the conduct of the Business that is owned by,
exclusively licensed to or managed by the Company.

 

“Company Records” has the meaning set forth in
Section 2.1(f) below.

 

“Company Reports” has the meaning set forth in Section 3.3
below.

 

“Confidentiality Agreement” has the meaning set forth in
Section 5.11 below.

 

“Customer Lists and Accounts” has the meaning set forth in
Section 2.1(f) below.

 

“Damages” has the meaning set forth in Section 8.2(a)
below.

 

“Dispute Notice” has the meaning set forth in
Section 8.2(c).

 

“Encumbrances” means any mortgage, pledge, assessment, security
interest, deed of trust, lease, lien, adverse claim, levy, charge or other
encumbrance of any kind, or any conditional sale or title retention agreement
or other agreement to give any of the foregoing in the future.

 

“Environment” means any surface water, ground water, drinking
water supply, land surface or subsurface strata, ambient air and any indoor
workplace.

 

“Environmental Laws” means all national, state, local and
foreign laws, codes, regulations, common law, requirements, directives, Orders,
and administrative or judicial interpretations thereof, all as in effect on the
date hereof or on the Closing Date, that may be enforced by any Governmental or
Regulatory Authority, relating to pollution, the protection of the Environment
and the safety of workers and the public, or the regulation of the emission,
discharge, disposal, release or threatened release of Materials in or into the
Environment.

 

2

 

“Environmental Notice” means any written notice by any Person
alleging potential liability (including, without limitation, potential
liability for investigatory costs, cleanup costs, governmental costs, harm or
damages to person, property, natural resources or other fines or penalties)
arising out of, based on or resulting from (a) the emission, discharge,
disposal, release or threatened release in or into the Environment of any
Materials or (b) circumstances forming the basis of any violation, or
alleged violation, of any applicable Environmental Law.

 

“ERISA” means the Employee Retirement Income Security Act of
1974, as amended, and the rules and regulations promulgated thereunder.

 

“Exchange Act” means the Securities Exchange Act of 1934, as
amended.

 

“Excluded Assets” has the meaning set forth in Section 2.2
below.

 

“Fair Market Value” has the meaning set forth in
Section 8.2(e)(iv) below.

 

“Financial System” has the meaning set forth in
Section 8.9 below.

 

“GAAP” means United States generally accepted accounting
principles.

 

“General Assignment” has the meaning set forth in
Section 2.9(b)(iv) below.

 

“Governmental or Regulatory Authority” means any court,
tribunal, arbitrator, authority, agency, commission, official or other
instrumentality of the United States or other country, any state, county, city
or other political subdivision.

 

“Indemnity Shares” means 10% of the Closing Shares, al of which
are to be held by the Company in accordance with the terms of this Agreement.

 

“Intellectual Property” means (i) trademarks, service
marks, trade names, trade dress, labels, product configurations, logos, and all
other names and slogans associated with any products or embodying the goodwill
of the Business, whether or not registered, and any applications or
registrations therefor (including any goodwill or common law rights associated
therewith), (ii) plans, design drawings, specifications and performance
criteria, operating instructions and maintenance manuals, manufacturing
information (including production documentation, methods, layouts and supplier
and cost information), copies of on-site computer software and related
documentation (including, without limitation, source and object code to the
extent available), prototypes, models or samples, ideas, concepts and data,
research records, all promotional literature, customer and supplier lists and
similar data and information and all other confidential or proprietary
technical and business information, (iii) copyrights, copyright
registrations and applications for registration, (iv) patent and patent
applications (including all reissues, divisions, continuations,
continuations-in-part, renewals, and extensions of the foregoing) owned by the
Company and (v) all other intellectual property rights and goodwill
related thereto.

 

“Knowledge of the Company” or “Known to the Company” means the actual knowledge of any
Company executive officer after reasonable inquiry.

 

“Leased Real Property” has the meaning set forth in
Section 3.9 below.

 

“Liabilities” means any liability, debts, obligations of any
kind or nature (whether known or unknown, whether asserted, or unasserted,
whether absolute or contingent, whether accrued or unaccrued, whether
liquidated or unliquidated, and whether due or to become due), including but
not limited to any liability for Taxes.

 

“License Agreement” has the meaning set forth in
Section 2.2 below.

 

“Materials” means pollutants, contaminants or chemical,
industrial, hazardous, radioactive or toxic materials or wastes, including,
without limitation, petroleum, petroleum products and radiation.

 

3

 

“Material Adverse Effect” means, for any Person, a material
adverse effect, whether individually or in the aggregate, (a) on the
business, operations, financial condition, Assets and Properties, Liabilities
or prospects of such Person, or (b) on the ability of such Person to
consummate the transactions contemplated hereby. For an event or condition to
have a Material Adverse Effect hereunder, such event or condition must
specifically and particularly affect the Person in question as opposed to
affecting generally the economy, an industry or society (or a segment thereof).

 

“Offer Recipients” has the meaning set forth in
Section 5.9(a) below.

 

“Order” means any writ, judgment, decree, injunction or similar
order of any Governmental or Regulatory Authority (in each such case whether
preliminary or final).

 

“Ordinary Course of Business” means the action of a Person that
is consistent with the past practices of such Person and is taken in the
ordinary course of the normal day-to-day operations of such Person.

 

“Permits” means all licenses, permits, certificates of
authority, authorizations, approvals, registrations and similar consents
granted or issued by any Governmental or Regulatory Authority relating to the
Business, the Purchased Assets or the Assumed Liabilities.

 

“Permitted Encumbrances” means (i) anyEncumbrance for
taxes that are not yet due or payable, (ii) any Encumbrance for tax
assessments and other charges or claims with respect to taxes, the validity of
which are being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with generally accepted
accounting principles, (iii) any minor imperfection of title or similar
Encumbrances which individually or in the aggregate with other such
Encumbrances does not impair the value of the property subject to such
Encumbrance or the use of such property in the conduct of the Business,
(iv) mechanics’ and materialmen’s liens incurred in the Ordinary Course of
Business for construction or alterations, (v) statutory liens of landlords
and workmen’s, repairmen’s, warehousemen’s and carriers’ liens arising in the
Ordinary Course of Business, (vi) requirements incurred or other
Encumbrances relating to deposits made in the Ordinary Course of Business in
connection with workers’ compensation, unemployment insurance and other similar
statutory requirements and (vii) Eencumbrances constituted by the terms of
(A) any equipment lease; (B) any capital lease; (C) any license
and (D) any real property lease.

 

“Person” means any natural person, corporation, general
partnership, limited partnership, limited liability company, proprietorship,
other business organization, trust, union, association or Governmental or
Regulatory Authority.

 

“Products” has the meaning set forth in Section 2.1(a)
below.

 

“Property” has the meaning set forth in Section 2.1(b)
below.

 

“Purchased Assets” has the meaning set forth in
Section 2.1 below.

 

“Purchaser” has the meaning set forth in the first paragraph of
this Agreement.

 

“Purchaser Disclosure Schedule” means the disclosure schedule
of the Purchaser attached hereto which sets forth the exceptions to the
representations and warranties contained in Article IV
hereof and certain other information called for by this Agreement.

 

“Purchaser Group” has the meaning set forth in
Section 8.2(a) below.

 

“Registration Rights Agreement” means the agreement
substantially in the form of Exhibit D
attached hereto.

 

“SEC” means the United States Securities and Exchange
Commission, or any successor entity.

 

“Securities” means, collectively, the Closing Shares and
Indemnity Shares.

 

4

 

“Securities Act” means the Securities Act of 1933, as amended.

 

“Survival Period” has the meaning set forth in Section 8.1
below.

 

“Tax” (and, with correlative meaning, “Taxes,” “Taxable” and
“Taxing”) means all sales and use taxes, real and personal property taxes,
income taxes, gross receipts taxes, documentary transfer taxes, employment
taxes, withholding taxes, unemployment insurance contributions and other taxes
or governmental charges of any kind, however denominated, including any
Liability in respect thereto, under any federal, state, local, foreign or other
applicable tax law.

 

“Tax Return” means any return, report, information return,
schedule or other document (including any related or supporting information)
filed or required to be filed with respect to any taxing authority with respect
to Taxes.

 

“Updated Capitalization Representation” has the meaning set
forth in Section 4.2 below.

 

“Updated Company Disclosure Schedule” has the meaning set forth
in Section 5.13 below.

 

“Updated Purchaser Disclosure Schedule” has the meaning set
forth in Section 5.13 below.

 

1.2         Construction of Certain Terms and Phrases.
Unless the context of this Agreement otherwise requires, (a) words of any
gender include each other gender; (b) words using the singular or plural
number also include the plural or singular number, respectively; (c) the
terms “hereof,” “herein,” “hereby” and derivative or similar words refer to
this entire Agreement; (d) the terms “Article” or “Section” refer to the specified
Article or Section of this Agreement; (e) the term “or” has, except where
otherwise indicated, the inclusive meaning represented by the phrase “and/or”;
and (f) ”including” means “including without limitation.” Whenever this
Agreement refers to a number of days, such number shall refer to calendar days
unless Business Days are specified. All accounting terms used herein and not
expressly defined herein shall have the meanings given to them under GAAP.

 

ARTICLE II

PURCHASE AND SALE OF ASSETS

 

2.1         Purchase and Sale of Certain Assets of the Company.
Subject to the terms and conditions hereof, the Company shall sell, assign,
grant, transfer, convey and deliver to Purchaser, and Purchaser shall purchase
and accept from the Company as of the Closing, other than the Excluded Assets,
all of the assets of the Business, wherever situated, as the same shall exist
on the Closing Date (collectively, the “Purchased Assets”), including without
limitation the following:

 

(a)   Products. All products listed on Schedule 2.1(a), including without
limitation all specifications, documentation, supplements, improvements,
modifications, updates, corrections and enhancements to past versions of such
products, shipping versions of such products and versions of such products
currently under development (the “Products”)

 

(b)   Property. All fixed assets and tangible
personal property used exclusively in the operation of the Business and set
forth in Schedule 2.1(b)
attached hereto (the “Property”);

 

(c)   Customer Lists. All customer lists and
customer accounts owned by the Company and used primarily in operation of the
Business and set forth in Schedule 2.1(c)
attached hereto (the “Customer Lists and Accounts”);

 

(d)   Assumed Contracts. All rights of the
Company under the agreements entered into between the Company and third parties
named therein in the operation of the Business and listed in Schedule 2.1(d) attached hereto (the
“Assumed Contracts”);

 

5

 

(e)   Permits. All Permits (other than Permits
that are not assignable pursuant to applicable laws) issued to or held by the
Company relating to the Purchased Assets, the Business or Assumed Liabilities
as forth in Schedule 2.1(e)
attached hereto;

 

(f)    Company Records. All of the Books and
Records of the Company exclusively related to the Business, Purchased Assets
and Assumed Liabilities (the “Company Records”);

 

(g)   Inventory. Only the inventory of the
Business set forth in Schedule 2.1(g);
and

 

(h)   Accounts. All accounts receivable and
accounts payable of the Business as set forth in Schedule 2.1(h).

 

2.2         Excluded Assets. The Company shall retain
all of its rights, title and interest in and to all the assets of the Company
other than the Purchased Assets including, without limitation, the Company
Intellectual Property and the assets set forth in Schedule 2.2 (collectively, the “Excluded Assets”).
Certain Company Intellectual Property shall be licensed to Purchaser in
exchange for royalty payments pursuant to the terms of a License Agreement to
be executed in connection herewith, substantially in the form of Exhibit A hereto (the “License
Agreement”).

 

2.3         Assumed Liabilities/Excluded Liabilities.

 

(a)   As
of the Closing Date, Purchaser agrees to assume, satisfy or perform when due
those liabilities and obligations of the Company listed in Schedule 2.3 (the “Assumed
Liabilities”).

 

(b)   Other
than the Assumed Liabilities, Purchaser shall not assume, or be deemed to have
assumed or guaranteed, or otherwise be responsible for any liability,
obligation or claims of any nature of the Company, whether matured or
unmatured, liquidated or unliquidated, fixed or contingent, known or unknown,
or whether arising out of acts or occurrences prior to, at or after the date
hereof. Without limiting the generality of the foregoing, the Company shall
remain liable for all, Tax liabilities, litigation matters involving the
Company and the payment of all Liabilities and obligations to personnel of the
Company with respect to the notice and continuation coverage requirement of
Section 4980B(e) of the Code and regulations thereunder, payroll,
overtime, accrued vacation time, holiday time, severance arrangements or
worker’s compensation of any nature which are accrued but unpaid as of the
Closing Date.

 

2.4         Purchase Price. On the Closing Date, as
consideration for the Purchased Assets, Purchaser agrees:

 

(a)   To
pay and deliver to the Company the Cash Purchase Price; and

 

(b)   To
deliver to the Company a certificate evidencing the Closing Shares;

 

(c)   To
assume the Assumed Liabilities.

 

2.5         Allocation of Aggregate Purchase Price.
The allocation of the purchase price set forth in Section 2.4 above shall
be as set forth on Schedule 2.5
attached hereto. Purchaser and the Company agree (a) to report the sale of
the Purchased Assets for federal and state Tax purposes in accordance with the
allocations set forth on Schedule 2.5
hereto and (b) not to take any position inconsistent with such allocations
on any of their respective tax returns.

 

2.6         Private Placement. The Closing Shares to
be issued to the Company will be exempt from the registration requirements of
the Securities Act pursuant to the private placement exemption provided by
Rules 505 and/or 506 of Regulation D promulgated under the Securities
Act and/or Section 4(2) of the Securities Act and applicable state
securities laws, based in part upon the representations and warranties of the
Company contained herein. The Company hereby agrees to take all actions and
execute all subscription and other documents which Purchaser reasonably deems
necessary to qualify the issuance of the Closing Shares for such exemption.

 

6

 

2.7         Sales, Use and Other Taxes. The Company
shall be responsible for all sales, use, documentary stamp and other Taxes, if
any, arising out of the sale of the Purchased Assets to Purchaser pursuant to
this Agreement or any of the transactions contemplated by this Agreement.

 

2.8         Bulk Sales Compliance. The Purchaser
hereby waives compliance by the Company with the provisions of any and all laws
relating to bulk transfers in connection with the sale of the Purchased Assets.
The Company covenants and agrees to indemnify and hold harmless Purchaser from
and against any and all Damages arising out of noncompliance with such bulk
transfers laws.

 

2.9         Closing.

 

(a)         Time and Place. The consummation of the
purchase and sale of the Purchased Assets under this Agreement (the “Closing”)
shall take place at the offices of Heller Ehrman White & McAuliffe,
LLP, 4350 La Jolla Village Drive, Suite 700, San Diego, California, 92122-1246,
at 10:00 a.m. on January 21, 2004 or at such other time and in such manner
as the parties mutually agree in writing (the “Closing Date”).

 

(b)         Closing Deliveries by the Company. At the
Closing, the Company shall have delivered or caused to be delivered to
Purchaser:

 

(i)    possession
of all of the Purchased Assets;

 

(ii)   the
License Agreement, duly executed by the Company;

 

(iii)  a
Bill of Sale substantially in the form of Exhibit B
attached hereto, conveying good and marketable title in and to all of the
Purchased Assets, duly executed by the Company;

 

(iv)  an
Assignment and Assumption Agreement substantially in the form of Exhibit C attached hereto (the
“General Assignment”), duly executed by the Company;

 

(v)   the
Registration Rights Agreement, duly executed by the Company;

 

(vi)  the
Updated Company Disclosure Schedule;

 

(vii) a
certificate of an officer of the Company with respect to the matters set forth
in Section 7.1 hereof;

 

(viii) a
certificate of the Secretary of the Company, certifying as of the Closing Date
(A) a true and complete copy of the Certificate of Incorporation of the
Company, (B) a true and complete copy of the resolutions of each of the
board of directors and stockholders of the Company authorizing the execution,
delivery and performance of this Agreement by the Company and the consummation
of the transaction contemplated hereby, (C) a certificate of good standing
as of a recent date of the Company in the State of Delaware and
(D) incumbency matters; and

 

(ix)  consents
to assignment of the Assumed Contracts in form and substance satisfactory to
Purchaser and its counsel.

 

(c)         Closing Deliveries By Purchaser. At the
Closing, Purchaser shall have delivered or caused to be delivered:

 

(i)    the
Cash Purchase Price to the Company;

 

(ii)   the
Closing Shares to the Company;

 

(iii)  the
License Agreement, duly executed by Purchaser;

 

(iv)  the
General Assignment, duly executed by Purchaser;

 

(v)   the
Registration Rights Agreement, duly executed by Purchaser;

 

7

 

(vi)  the
Updated Purchaser Disclosure Schedule;

 

(vii) a
certificate of an officer of Purchaser with respect to the matters set forth in
Section 6.1 hereof;

 

(viii) a
certificate of the Secretary of Purchaser, certifying as of the Closing Date
(A) a true and complete copy of the Certificate of Incorporation of the
Purchaser, (B) a true and complete copy of the resolutions of the board of
directors of the Purchaser authorizing the execution, delivery and performance
of this Agreement by the Purchaser and the consummation of the transactions
contemplated hereby, (C) a certificate of good standing as of a recent
date of the Purchaser in the State of Nevada and (D) incumbency matters;
and

 

(ix)  such
other documents as the Company may reasonably request for the purpose of
facilitating the consummation of the transactions contemplated herein.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

The Company represents and
warrants to Purchaser as of the date hereof, except as set forth on the
Disclosure Schedule furnished separately to Purchaser or as set forth in the
Company Reports, which exceptions shall be deemed to be representations and
warranties as if made hereunder, as follows:

 

3.1         Organization of the Company. The Company
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Delaware. The Company has the requisite corporate
power and corporate authority to carry on its business and own its Assets and
Properties except where failure to have such power and authority would not have
a Material Adverse Effect on the Business. The Company is duly qualified to
conduct its respective business and is in good standing under the laws of each
jurisdiction where such qualification is required except for any jurisdiction
where failure so to qualify would not have a Material Adverse Effect upon the
Business.

 

3.2         Authority. The Company has all necessary
corporate power and corporate authority and has taken all corporate action
necessary to enter into this Agreement, to consummate the transactions contemplated
hereby and to perform its respective obligations hereunder and no other
proceedings or corporate or stockholder action on the part of the Company is
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by the Company and (assuming due authorization, execution and
delivery by the other parties to this Agreement) constitutes a legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief or other
equitable remedies.

 

3.3         Financial Statements and Reports. The
reports and documents filed by the Company under Section 13 or subsections
(a) or (c) of Section 14 of the Exchange Act with the SEC since
January 1, 2001 (such reports are collectively referred to herein as the
“Company Reports”) constitute all of the reports and documents required to be
filed by the Company under Section 13 or subsections (a) or (c) of
Section 14 of the Exchange Act with the SEC from January 1, 2001
through the date of this Agreement. The Company Reports have been duly and
timely filed, were in compliance in all material respects with the requirements
of the Exchange Act and the rules and regulations thereunder when filed, and
were complete and correct in all material respects as of the dates at which the
information therein was furnished. As of their respective dates, the Company
Reports did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited financial statements and unaudited interim
financial statements of Company included in the Company Reports
(i) complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto when filed, (ii) were prepared in accordance with GAAP
applied on a consistent basis throughout the periods

 

8

 

covered thereby (except as may be indicated
therein or in the notes thereto, and in the case of quarterly financial
statements, as permitted by Form 10-Q under the Exchange Act),
(iii) fairly present the consolidated financial condition, results of
operations and cash flows of Company as of the respective dates thereof and for
the periods referred to therein, and (iv) are consistent with the books
and records of Company. Since the date of the filing with the SEC of Company’s
most recent Form 10-Q, there has been no material adverse change in the
financial condition or results operations of Company that has resulted in a
Material Adverse Effect on the Business or the Purchased Assets. There are no
restatements of Company’s financial statements currently contemplated as
discussed with Company’s Audit Committee.

 

3.4         No Conflicts. The execution and delivery
by the Company of this Agreement does not, and the performance by the Company
of its obligations under this Agreement and the consummation of the
transactions contemplated hereby will not:

 

(a)   conflict
with or result in a violation or breach of any of the terms, conditions or
provisions of the Certificate of Incorporation or Bylaws of the Company;

 

(b)   conflict
with or result in a violation or breach of any term or provision of any law,
Order, Permit, statute, rule or regulation of a Governmental or Regulatory
Authority applicable to the Business or the Purchased Assets;

 

(c)   result
in a breach of, or default under (or give rise to right of termination,
cancellation or acceleration under) any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, license, permit, agreement, lease or
other similar instrument or obligation to which the Business or the Purchased
Assets may be bound; or

 

(d)   result
in an imposition or creation of any Encumbrance on the Business or any of the
Purchased Assets.

 

3.5         Consents, Approvals and Filings. No
consent, approval or action of, filing with or notice to any Governmental or
Regulatory Authority or other Persons on the part of the Company is required in
connection with the execution, delivery and performance of this Agreement or
the consummation of the transactions contemplated hereby other than approval by
the Company’s stockholders in accordance with the Company’s bylaws and the
Delaware General Corporation Law.

 

3.6         No Undisclosed Liabilities. Except as
disclosed in the Company Reports (including financial statements contained
therein), there are no Liabilities, nor any basis for any claim against the
Company for any such Liabilities, relating to or affecting the Business or the
Purchased Assets, other than Liabilities incurred after the date of the latest
Company Report in the Ordinary Course of Business which have not had, and could
not reasonably be expected to result in, individually or in the aggregate, a
Material Adverse Effect on the Business or the Purchased Assets.

 

3.7         Purchased Assets. Section 3.7 of the
Company Disclosure Schedule contains a complete and accurate schedule
specifying the location of all of the Purchased Assets, as of the Closing Date.
The Company has good and marketable title to, or a valid leasehold interest in
all of the Purchased Assets, free and clear of all Encumbrances (other than
Permitted Encumbrances). The Purchased Assets (together with the Excluded
Assets), constitute all property of any nature owned by the Company used in, or
useful to, the operation of the Business as conducted as of the date hereof.
All tangible personal property of the Company and/or used in or useful to the
operation of the Business is in good operating condition and repair, ordinary
wear and tear excepted. The Company shall be in actual possession of all of the
Purchased Assets at the Closing.

 

3.8         Benefit Plans; ERISA. Except as set forth
on Section 3.8 of the Company Disclosure Schedule, Purchaser will incur no
liability with respect to, or on account of, and the Company will retain any
liability for, and on account of, any employee benefit plan of the Company,
including, but not limited

 

9

 

to, liabilities the Company may have to such
employees under all incentive compensation plans, bonus plans, pension and
retirement plans, profit-sharing plans (including, any profit-sharing plan with
a cash-or-deferred arrangement subject to Section 401(k) of the Code)
stock purchase and option plans, savings and similar plans, medical, dental,
travel, accident, life, disability and other insurance and other plans or
arrangements, whether written or oral and whether “qualified” or
“non-qualified” under the Code, or to any employee as a result of termination
of employment by the Company as contemplated by this Agreement. The Company has
not, with respect to any Offer Recipients, maintained, contributed to, or been
obligated or required to contribute to, a “multiemployer plan,” as such term is
defined in Section 3(37) of ERISA. The Company is not a party to any
collective bargaining agreement covering any Offer Recipients and the Company
knows of no effort to organize any such employee as a part of any collective
bargaining unit.

 

3.9         Real Property. The Company does not own
any real property. Section 3.9 of the Company Disclosure Schedule contains
the complete and accurate street address of each parcel of real property leased
by the Company or any of its Affiliates in the conduct of the Business (as
lessee or lessor) (the “Leased Real Property”). The Company has a valid
leasehold interest in all real property used in or relating to the conduct of
the Business, free and clear of all Encumbrances (other than Permitted
Encumbrances). Each lease with respect to the Leased Real Property is a legal,
valid and binding agreement subsisting in full force and effect enforceable in
accordance with its terms, and except as set forth in Section 3.9 of the
Company Disclosure Schedule, there is no, and the Company has not received
notice of any, default (or any condition or event which, after notice or lapse
of time or both, would constitute a default) thereunder. Such leases in effect
allow the particular use of the premises involved, and no provision of any
lease prohibits or unduly limits the Company’s ability to conduct the Business
so as to have a Material Adverse Effect on the Business if enforced. The
Company does not owe any brokerage commissions with respect to any such Leased
Real Property.

 

3.10        Intellectual Property Rights.

 

(a)   Section 3.10(a)
of the Company Disclosure Schedule contains a true, correct, complete and
current list and summary of all patents, trademarks and copyright registrations
or applications comprising Company Intellectual Property. The Company owns and
has good and exclusive title to (or valid right to use) each item of Company
Intellectual Property free and clear of any Encumbrance (other than Permitted
Encumbrances).

 

(b)   Section 3.10(b)
of the Company Disclosure Schedule lists all Actions or Proceedings before any
Governmental or Regulatory Authority (including the United States Patent and
Trademark Office or equivalent authority anywhere in the world) related to any
Company Intellectual Property. No Company Intellectual Property or product or service
of the Business is subject to any proceeding or outstanding decree, order,
judgment, agreement, or stipulation restricting in any manner the use,
transfer, or licensing thereof by the Company, or which may affect the
validity, use or enforceability of such Company Intellectual Property.

 

(c)   To
the Knowledge of the Company, each item of Company Intellectual Property is
valid and subsisting, all necessary registration, maintenance and renewal fees
in connection with such Company Intellectual Property have been made and all
necessary documents and certificates in connection with the Company
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions,
as the case may be, for the purposes of maintaining such Company Intellectual
Property.

 

(d)   To
the extent that any Company Intellectual Property has been developed or created
by a third party for the Company, the Company has a written agreement with such
third party with respect thereto and the Company thereby has obtained ownership
of, and is the exclusive owner of, or has a valid license to use, all
Intellectual Property in such work, material or invention by operation of law
or by valid assignment.

 

10

 

(e)   Except
as set forth in Section 3.10(e) of the Company Disclosure Schedule, the
Company has not transferred ownership of, or granted any license (exclusive or
non-exclusive) with respect to any Company Intellectual Property to any third
party.

 

(f)    Section 3.10(f)
of the Company Disclosure Schedule lists all contracts, licenses and agreements
to which the Company is a party that are currently in effect (i) with
respect to the Company Intellectual Property licensed or offered to any third
party; or (ii) pursuant to which a third party has licensed or transferred
any Company Intellectual Property to the Company. Each of the contracts,
licenses and agreements listed in Section 3.10(f) of the Company Disclosure
Schedule is in full force and effect. The consummation of the transactions
contemplated by this Agreement will neither violate nor result in the breach,
modification, cancellation, termination or suspension of such contracts,
licenses and agreements. The Company is in compliance with, and has not
breached any term of any of such contracts, licenses and agreements. To the
Knowledge of the Company, following the Closing Date Purchaser will be
permitted to exercise all of the Company’s rights under the contracts, licenses
and agreements required to be listed in Section 3.10(f) to the same extent
the Company would have been able to had the transactions contemplated by this
Agreement not occurred and without the payment of any additional amounts or
consideration other than ongoing fees, royalties or payments which the Company
would otherwise be required to pay.

 

(g)   To
the Knowledge of the Company, the operation of the Business, as currently
conducted, has not, does not and will not infringe or misappropriate the
Intellectual Property of any third party or constitute unfair competition or
trade practices under the laws of any jurisdiction.

 

(h)   The
Company has not received notice from any third party that the operation of the
Business or any act, product or service of the Business infringes or
misappropriates the Intellectual Property of any third party or constitutes
unfair competition or trade practices under the laws of any jurisdiction.

 

(i)    To
the Knowledge of the Company, (i) no Person has or is infringing or
misappropriating any Company Intellectual Property and (ii) there have
been, and are, no claims asserted against the Company or against any customer
of the Company, related to any product or service of the Business.

 

3.11       Litigation. Except as set forth in
Section 3.11 of the Company Disclosure Schedule, there are no Actions or
Proceedings pending or, to the Knowledge of the Company, threatened or
anticipated against, relating to or affecting (i) the Business or the
Purchased Assets or (ii) the transactions contemplated by this Agreement,
and, to the Knowledge of the Company, there is no basis for any such Action or
Proceeding. The Company is not in default with respect to any Order, and there
are no unsatisfied judgments against the Company.

 

3.12       Compliance with Law. To the Knowledge of
the Company, it is in compliance with all applicable laws, statutes, Orders,
ordinances and regulations, whether federal, state, local or foreign, except
where the failure to comply, in each instance and in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on the Business. The
Company has not received any notice to the effect that, or otherwise has been
advised that, it is not in compliance with any of such laws, statutes, Orders,
ordinances or regulations, where the failure to comply could reasonably be
expected to result in a Material Adverse Effect on the Business.

 

11

 

3.13       Contracts.

 

(a)         Section 3.13
of the Disclosure Schedule contains a true and complete list of each of the
following contracts, agreements or other arrangements to which the Company is a
party and by which any of the Purchased Assets are bound:

 

(i)    all
loan agreements, indentures, debentures, notes or letters of credit relating to
the borrowing of money or to mortgaging, pledging or otherwise placing an
Encumbrance on any Purchased Assets;

 

(ii)   all
leases or agreements under which the Company is lessee or lessor of, or holds,
or operates, any property, real or personal, owned by any other party used in
connection with the conduct of the Business;

 

(iii)  all
commitments, contracts, sales contracts, purchase orders, mortgage agreements
or groups of related agreements with the same party or any group or affiliated
parties which require or may in the future require payment of any consideration
by the Company;

 

(iv)  all
license agreements, distribution agreements or any other agreements involving
any of the Company Intellectual Property;

 

(v)   all
contracts or commitments that in any way restrict the Company from carrying on
the Business;

 

(vi)  all
other contracts and agreements pertaining to the conduct of the Business or by
which any of the Purchased Assets is bound that (A) involve the payment or
potential payment, pursuant to the terms of any such contract or agreement, by
the Company and (B) cannot be terminated within thirty (30) days
after giving notice of termination without resulting in any cost or penalty to
the Company; and

 

(vii) all
contracts or commitments that in any way grants a third party a right of first
refusal for the purchase of any of the Purchased Assets.

 

(b)         A
correct and complete copy of each contract, agreement or other arrangement
disclosed in Section 3.13 of the Company Disclosure Schedule has been
previously provided to Purchaser. Each contract, agreement or other arrangement
disclosed in Section 3.13 of the Company Disclosure Schedule is in full
force and effect and constitutes a legal, valid and binding agreement,
enforceable in accordance with its terms.

 

3.14       Environmental Matters. The Business is in
compliance with, and has at all times complied with, all applicable
Environmental Laws in all respects and, to the Knowledge of the Company, there
are no circumstances which may prevent or interfere with such compliance in the
immediate future. In the last five (5) years, the Company has not received
any communication (whether written or oral), whether from a Governmental or
Regulatory Authority, citizen group, employee or otherwise, that alleges that
the Company or any predecessor of any of the Leased Real Property or Purchased
Assets is not in full compliance with Environmental Laws. All Permits,
licenses, registrations and other governmental authorizations currently held by
the Company pursuant to Environmental Laws are identified in Section 3.14
of the Company Disclosure Schedule and are in good standing and without any
violation and represent all such environmental Permits necessary for the conduct
of the Business as currently conducted. The Company has not been notified by
any Governmental or Regulatory Authority that any environmental Permit will be
modified, suspended or revoked or cannot be renewed, reissued or transferred,
and, to the Knowledge of the Company, no environmental Permit will be modified,
suspended or revoked, or cannot be renewed, reissued or transferred.

 

3.15       Inventory. The inventory of the Business
is in good and merchantable condition, and suitable and usable at its carrying
value in the Ordinary Course of Business for the purposes for which

 

12

 

intended. There is no material adverse
condition affecting the supply of materials available to the Company in the
conduct of the Business. All inventories used in or relating to the conduct of
the Business are owned by the Company free and clear of any Encumbrances (other
than Permitted Encumbrances).

 

3.16       Plants, Buildings, Structures, Facilities and
Equipment. All plants, buildings, structures, facilities and
equipment used by the Company in the conduct of the Business are structurally
sound with no known material defects and are in good operating condition and
repair (subject to normal wear and tear) so as to permit the operation of the
Business as presently conducted. The current condition of such plants,
buildings, structures and facilities comply with applicable zoning and permit
requirements.

 

3.17       Customer Lists and Accounts. The Customer
Lists and Accounts set forth in Schedule 2.1(b)
is a true and correct list of the Company’s customers and accounts as of the
date hereof.

 

3.18       Relationships with Suppliers and Licensors.
No current supplier to the Company with the respect to the Business has
notified the Company of an intention to terminate or substantially alter its
existing business relationship with the Company nor has any licensor under a
license agreement with the Company that constitutes part of the Assumed
Contracts notified the Company of an intention to terminate or substantially
alter the Company’s rights under such license.

 

3.19       Tax Matters. All Taxes of the Company have
been or will be paid on a timely basis. The Company has duly and timely filed
(or will file prior to the Closing) all Tax Returns required to be filed prior
to Closing, and all such Tax Returns and reports are true, correct, and
complete in all material respects. There are no Encumbrances (other than
Permitted Encumbrances) for Taxes on any of the Purchased Assets. The Company has
complied with all record keeping and tax reporting obligations relating to
income and employment taxes due with respect to compensation paid to employees
or independent contractors. The Company is not a “foreign person” within the
meaning of Section 1445(f)(3) of the Code. There are no pending or, to the
Knowledge of the Company, threatened proceedings with respect to Taxes for
which Purchaser could bear successor liability beyond what is set forth in the
Disclosure Schedule or which could become a charge against the Purchased
Assets, and there are no outstanding waivers or extensions of statutes of
limitations with respect to assessments of Taxes, of the Company for which
Purchaser could bear successor liability beyond what is set forth in the
Disclosure Schedule or which could become a charge against the Purchased
Assets.

 

3.20       Permits. Section 3.20 of the
Disclosure Schedule contains a true and complete list of all Permits used by
the Company in the conduct of the Business. All such Permits are currently
effective and valid and have been validly issued and are freely transferable to
Purchaser at the Closing. To the Knowledge of the Company, no additional
Permits are necessary to enable the Company to conduct the Business in
compliance with all applicable federal, state and local laws. To the Knowledge
of the Company, the execution, delivery or performance of this Agreement will
not have any effect on the continued validity or sufficiency of the Permits,
nor will any additional Permits be required by virtue of the execution,
delivery or performance of this Agreement to enable the Company to conduct the
Business as now operated. To the Knowledge of the Company, there is no pending
Action or Proceeding by any Governmental or Regulatory Authority which could
affect the Permits or their sufficiency for the current conduct of the Business
or of the conduct of the Business after the Closing.

 

3.21       Brokers. The Company has not retained any
broker in connection with the transactions contemplated hereunder. Purchaser
has, and will have, no obligation to pay any broker’s, finder’s, investment
banker’s, financial advisor’s or similar fee in connection with this Agreement
or the transactions contemplated hereby by reason of any action taken by or on
behalf of the Company.

 

3.22       Material Misstatements and Omissions. The
statements, representations and warranties of the Company contained in this
Agreement (including the exhibits and schedules hereto) and in each document,
statement, certificate or exhibit furnished or to be furnished by or on behalf
of the

 

13

 

Company pursuant hereto, or in connection
with the transactions contemplated hereby, taken together, do not contain and
will not contain any untrue statement of a material fact and do not or will not
omit to state a material fact necessary to make the statements or facts
contained herein or therein, in light of the circumstances made, not
misleading.

 

3.23       Investment Representations. The Company is
an “accredited investor” as such term is defined in Rule 501(a)
promulgated under the Securities Act. The Company is aware that the Closing
Shares have not been registered under the Securities Act or any applicable
state securities laws, and hereby agrees that the Closing Shares may not be
offered or sold (i) in the absence of registration under the Securities
Act and any applicable state securities laws or an exemption from the
registration requirements of the Securities Act and any applicable state securities
laws and (ii) unless in compliance with the terms and provisions of this
Agreement. The Company represents that the Company is familiar with
Rule 144 promulgated by the SEC pursuant to the Securities Act, as
presently in effect, and understands the resale limitations imposed thereby and
by the Securities Act. The Company understands that the offering and sale of
the Closing Shares is intended to be exempt from registration under the
Securities Act, by virtue of the private placement exemption provided by
Rule 505 and/or 506 of Regulation D promulgated under the Securities
Act and/or Section 4(2) of the Securities Act, based, in part, upon the
representations, warranties and agreements contained in this Agreement, and
Purchaser may rely on such representations, warranties and agreements in
connection therewith.

 

The Company agrees that it
will be acquiring the Closing Shares for its own account and for investment,
and not with a view to the distribution thereof or with any present intention
of distributing or selling any of the Closing Shares except in compliance with
the Securities Act, applicable state securities laws and this Agreement. The
Company represents that by reason of its business and financial experience, the
Company has knowledge, sophistication and experience in business and financial
matters as to be capable of evaluating the merits and risk of the prospective
investment. The financial condition and investments of the Company are such
that the Company is in a financial position to hold the Closing Shares for an
indefinite period of time and to bear the economic risk of, and withstand a
complete loss of, the investment in the Closing Shares.

 

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF PURCHASER

 

Purchaser represents and
warrants to the Company as of the date hereof, except as set forth on the
Purchaser Disclosure Schedule furnished separately to the Company, which
exceptions shall be deemed to be representations and warranties as if made
hereunder, as follows:

 

4.1       Organization. Purchaser is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Nevada. Purchaser has the requisite corporate power and corporate
authority to carry on its business and own its Assets and Properties except
where failure to have such power and authority would not have a Material
Adverse Effect on Purchaser. Purchaser is duly qualified to conduct its
respective business and is in good standing under the laws of each jurisdiction
where such qualification is required except for any jurisdiction where failure
so to qualify would not have a Material Adverse Effect upon Purchaser.

 

4.2       Capital Stock of Purchaser. The authorized
capital stock of Purchaser, consists of (i) 20,000,000 shares of common
stock, par value $0.001 per share, of which 6,294,650 shares were issued and
outstanding as of the date hereof; (ii) no shares of capital stock of
Purchaser in treasury; and (iii) 5,000,000 shares of Preferred Stock,
$0.001 par value per share, all of which have been designated Series A
Preferred Stock and all of which were issued and outstanding as of the date
hereof (each of which shares is convertible into four shares of common stock).
Each share of the issued and outstanding capital stock of Purchaser is duly authorized,
validly issued, fully paid and nonassessable. Purchaser will provide at Closing
an updated version of this Section 4.2, updated and accurate as of the

 

14

 

Closing (the “Updated Capitalization
Representation”). The fully diluted percentage ownership of Purchaser
represented by the Closing Shares will not materially change between the date
hereof and the Closing.

 

Except for outstanding
options to purchase up to 1,200,000 shares of common stock, there are no
outstanding options, warrants, rights (including conversion or preemptive
rights) or agreements for the purchase or acquisition from Purchaser of any
shares of its capital stock.

 

4.3       Authority. Purchaser has all necessary
corporate power and corporate authority and has taken all corporate action
necessary to enter into this Agreement, to consummate the transactions
contemplated hereby and to perform its respective obligations hereunder and no
other proceedings or corporate or stockholder action on the part of Purchaser
is necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by Purchaser and (assuming due authorization, execution and delivery
by the other parties to this Agreement) constitutes a legal, valid and binding
obligation of Purchaser enforceable against Purchaser in accordance with its
terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally and (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or
other equitable remedies.

 

4.4       Litigation. Except as set forth in the
Purchaser Disclosure Schedule, there are no Actions or Proceedings pending or,
to the Knowledge of Purchaser, threatened or anticipated against, relating to
or affecting (i) Purchaser or (ii) the transactions contemplated by
this Agreement, and, to the Knowledge of Purchaser, there is no basis for any
such Action or Proceeding. Purchaser is not in default with respect to any
Order, and there are no unsatisfied judgments against Purchaser.

 

4.5       Financial Statements and Reports.
Purchaser is required to file reports and documents under Section 13 or
subsections (a) or (c) of Section 14 of the Exchange Act with
the SEC (such reports are collectively referred to herein as the “Purchaser
Reports”). Purchaser is not current with respect to filing the Purchaser
Reports. However, Purchaser will become current in the filing of the Purchaser
Reports within ninety (90) days following the Closing and such Purchaser
Reports, when filed, will be in compliance in all material respects with the
requirements of the Exchange Act and the rules and regulations thereunder and
will be complete and correct in all material respects as of the applicable
filing dates. The Purchaser Reports, when brought current, will not contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The audited
financial statements and unaudited interim financial statements of Purchaser to
be included in the Purchaser Reports will (i) comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto when filed, (ii) be
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby (except as may be indicated therein or in the notes
thereto, and in the case of quarterly financial statements, as permitted by
Form 10-Q under the Exchange Act), (iii) fairly present the
consolidated financial condition, results of operations and cash flows of
Purchaser as of the respective dates thereof and for the periods referred to
therein, and (iv) be consistent with the books and records of Purchaser.
Purchaser acknowledges that it has access to, and has reviewed (to the extent
it has deemed necessary) the Company Reports.

 

4.6       Financial Statements. Purchaser has
delivered to the Company its unaudited balance sheet and unaudited statements
of income and cash flows for the nine month period ending September 30,
2003 (the “Statement Date”) (all of the foregoing financial statements,
collectively, the “Financial Statements”). The Financial Statements, together
with the notes thereto, are complete and correct in all material respects, have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated, except as
disclosed therein, and present

 

15

 

fairly the financial condition and position
of Purchaser as of the dates, and for the periods, specified therein; provided,
however, that the unaudited Financial Statements are subject to normal
recurring year-end audit adjustments (which are not expected to be material),
and do not contain all footnotes required under generally accepted accounting
principles.

 

4.7       No Undisclosed Liabilities. Purchaser has
no material liabilities and knows of no material contingent liabilities not
disclosed in the Financial Statements, except current liabilities incurred in
the ordinary course of business subsequent to the Statement Date which have not
been, either in any individual case or in the aggregate, materially adverse.

 

4.8       Brokers. Purchaser has not retained any
broker in connection with the transactions contemplated hereunder. Purchaser
will have no obligation to pay any broker’s, finder’s investment banker’s,
financial advisor’s or similar fee in connection with this Agreement or the
transactions contemplated hereby.

 

4.9       No Conflicts. The execution and delivery
by Purchaser of this Agreement does not, and the performance by Purchaser of
its respective obligations under this Agreement and the consummation of the
transactions contemplated hereby will not:

 

(a)   conflict
with or result in a violation or breach of any of the terms, conditions or
provisions of the Certificate of Incorporation or Bylaws of Purchaser;

 

(b)   conflict
with or result in a violation or breach of any term or provision of any law, Order,
Permit, statute, rule or regulation of a Governmental or Regulatory Authority
applicable to Purchaser, the business or Assets or Properties of Purchaser or
the capital stock of Purchaser; or

 

(c)   result
in a breach of, or default under (or give rise to a right of termination,
cancellation or acceleration) under any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, license, agreement, lease or other
similar instrument or obligation to which Purchaser may be bound; or

 

(d)   result
in an imposition or creation of any Encumbrance (other than a Permitted
Encumbrance) on the business or Assets or Properties of Purchaser except as
contemplated by this Agreement.

 

4.10      Consents and Governmental Approvals and Filings.
No consent, approval or other action of, filing with or notice to any
Governmental or Regulatory Authority on the part of Purchaser is required in
connection with the execution, delivery and performance of this Agreement or
the consummation of the transactions contemplated hereby.

 

4.11      Compliance with Law. To the Knowledge of
Purchaser, except with respect to the lack of timeliness and currency of the
Purchaser Reports described in Section 4.5 above, it is in compliance with
all applicable laws, statutes, Orders, ordinances and regulations, whether
federal, state, local or foreign, except where the failure to comply, in each
instance and in the aggregate, would not reasonably be expected to have a
Material Adverse Effect on Purchaser. Purchaser has not received any notice to
the effect that, or otherwise has been advised that, it is not in compliance
with any of such laws, statutes, Orders, ordinances or regulations, where the
failure to comply could reasonably be expected to result in a Material Adverse
Effect on Purchaser.

 

4.12      Trading of Securities. Neither Purchaser
nor any of its officers, directors or ten percent (10%) or greater
shareholders, nor, to Purchaser’s Knowledge any of its employees, affiliates,
agents or representatives have violated any laws, statutes, Orders, ordinances
and regulations, whether federal, state, local or foreign, arising out of or in
any way related to the issuance of or trading in the capital securities of
Purchaser, including, without limitation, Rule 10b-5 of the Exchange Act.

 

16

 

4.13      Closing Shares. The Closing Shares, upon
issuance thereof, will be duly authorized, validly issued, fully paid,
nonassessable, and not subject to any Encumbrance. The Closing Shares shall be
issued in compliance with all applicable securities laws.

 

4.14      Material Misstatements and Omissions. The
statements, representations and warranties of Purchaser contained in this
Agreement (including the exhibits and schedules hereto) and in each document,
statement, certificate or exhibit furnished or to be furnished by or on behalf
of Purchaser pursuant hereto, or in connection with the transactions
contemplated hereby, taken together, do not contain and will not contain any
untrue statement of a material fact and do not or will not omit to state a
material fact necessary to make the statements or facts contained herein or
therein, in light of the circumstances made, not misleading.

 

ARTICLE V

COVENANTS OF THE PARTIES

 

Each of the parties covenants
with the others to act, as follows:

 

5.1      Operation of Business Prior to Closing Date.
Except as otherwise contemplated by this Agreement, between the date hereof and
the Closing Date (or earlier termination of this Agreement), the Company will operate
the Business in the Ordinary Course of Business and, to the extent consistent
therewith, with no less diligence and effort than would be applied in the
absence of this Agreement, use all commercially reasonable efforts to seek to
preserve intact its current Business organizations, keep available the service
of current managers, officers and employees of the Business and preserve
relationships with customers, suppliers, distributors, lessors, employees,
contractors and others having business dealings with the Business with the
intention that the Business shall be unimpaired at the Closing Date. Without
limiting the generality of the foregoing, except as otherwise expressly
provided in this Agreement, prior to the Closing Date (or earlier termination of
this Agreement), the Company:

 

(a)   will
not create, incur or assume any obligation which would adversely affect the
Purchased Assets or Purchaser’s ability to conduct the Business in
substantially the same manner and condition as conducted by the Company on the
date of this Agreement;

 

(b)   except
to the extent an obligation is established in a written agreement in existence
prior to the date hereof, will not change in any manner the compensation of, or
agree to provide additional benefits to, or enter into any employment agreement
with, any Offer Recipient, except as contemplated in Section 5.9 below and
except for such benefits provided to substantially all of the Company’s
similarly situated employees;

 

(c)   will
maintain insurance coverage in amounts adequate to cover the reasonably
anticipated risks of the Business;

 

(d)   will
not sell, dispose of or encumber any of the Purchased Assets or license any
Purchased Assets to any Person except object code licenses on a non-exclusive
basis in a manner and on terms consistent with past practice;

 

(e)   will
not enter into any material agreements or commitments relating to the Business,
except on commercially reasonable terms in the Ordinary Course of Business of
the Business;

 

(f)    will
comply in all material respects with all laws and regulations applicable to the
Business;

 

(g)   will
not enter into any agreement with any third party for the distribution of any
of the Purchased Assets;

 

(h)   will
not materially amend its Certificate of Incorporation or Bylaws (except as
necessary to comply with the terms of this Agreement)

 

17

 

5.2      Investigation by Purchaser. Subject to all
applicable patient confidentiality laws and confidentiality obligations of the
Company, the Company shall allow Purchaser or its authorized representatives,
at Purchaser’s own expense during regular business hours, or otherwise with the
consent of the Company (which consent shall not be unreasonably withheld), to
make such inspection of the Company and to inspect (and, if applicable, make
copies of) Books and Records, plants, offices, warehouses and other facilities
of the Company as reasonably requested by Purchaser or its authorized
representatives.

 

5.3      Consents. As soon as practicable after
execution of this Agreement, each party will commence all action required
hereunder to obtain all applicable Permits, consents, approvals and agreements
of, and to give all notices and make all filings with, any third parties as may
be necessary to authorize, approve or permit the full and complete consummation
of the transactions contemplated hereby by the Closing Date. In this regard,
the Company will use its reasonable best efforts to obtain consent from its
landlord to assign to Purchaser (effective at Closing) the real property lease
pertaining to the Company’s facility located at 134 Flanders Rd., Westborough,
MA 01581. In the event the Company is unable to obtain such assignment, the
Company will sublease such facility to Purchaser effective at Closing.

 

5.4      Notification of Certain Matters. Each of
the parties shall give prompt notice to the other party, of (i) the
discovery of a fact or facts of which the notifying party has actual knowledge
which cause it to conclude that any of the representations, warranties or
statements made by it or in an any exhibit, schedule or other document
delivered pursuant to this Agreement, may be false or misleading or omission of
any facts necessary in order to make such representations, warranties or
statements not false or misleading; (ii) the occurrence, or failure to
occur, of any event which occurrence or failure would be likely to cause any
representation or warranty made by them in this Agreement to be untrue or
inaccurate any time from the date hereof to the Closing Date; and
(iii) any failure of the notifying party to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder. Each party hereto shall use all reasonable efforts to remedy any
failure on its part to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder.

 

5.5      Cooperative Efforts. Subject to the terms
and conditions of this Agreement, each of the parties hereto will use its
commercially reasonable efforts to take, or cause to be taken, all action, or
to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation,
obtaining all consents and approvals of all Persons and Governmental or
Regulatory Authorities and removing any injunctions or other impairments or
delays or otherwise which are necessary to the consummation of the transactions
contemplated by this Agreement.

 

5.6      Filings. Each of the parties hereto will
use its best efforts to make or cause to be made all such filings and
submissions as may be required under applicable laws and regulations for the
consummation of the transactions contemplated by this Agreement. The Company
and Purchaser will coordinate and cooperate with one another in exchanging such
information and provide each other such assistance as any other party may
reasonably request in connection with the foregoing.

 

5.7      Inconsistent Activities. Unless and until
this Agreement is terminated pursuant to Section 9.1, the Company will not
directly or indirectly solicit, initiate or encourage any inquiries or
proposals from, discuss or negotiate with, provide any non-public information
to or consider the merits of any unsolicited inquiries or proposals from, any
Person (other than Purchaser) relating to any transaction involving the sale of
the Business or the Purchased Assets, or any merger, consolidation, business
combination or similar transaction involving the Business (each a “Proposed
Acquisition Transaction”). The Company will immediately notify Purchaser if any
discussions or negotiations are sought to be initiated, any inquiry or proposal
is made, or any information is requested with respect to any Proposed

 

18

 

Acquisition Transaction and notify Purchaser
of the terms of any proposal which it or its Affiliates, if any, may receive in
respect of any such Proposed Acquisition Transaction, including without
limitation the identity of the prospective purchaser or soliciting party.

 

5.8      Public Announcements. Except as may be
required by applicable law, including any determination that a press release or
other public statement or filing is required under applicable securities or
regulatory rules, prior to the Closing, none of the parties hereto shall issue
or cause the publication of any press release or otherwise make any public
statement with respect to the transactions contemplated hereby without the
prior written consent of each of the other parties hereto.

 

5.9      Employee Matters.

 

(a)   Offer of Employment. Subject to and in
accordance with the provisions of this Section 5.9, Purchaser will offer
employment to all employees other than Stephen Gorgol who are employed in the
Business as of the date of this Agreement (such employees to receive offers of
employment are referred to as the “Offer Recipients”). The Company has
delivered to Purchaser a list setting forth the names, home addresses,
compensation levels, stock option position, if any, and job titles of all Offer
Recipients. Prior to the Closing, Purchaser, after notice to the Company as to
the timing and method of contact, shall have the right to contact each of the
Offer Recipients for the purposes of making offers of employment with Purchaser
to be effective after the Closing Date and receiving written acceptances of
such employment (in each case contingent on consummation of the transactions
contemplated by this Agreement). Upon Closing, Purchaser shall hire all Offer
Recipients who accept such offer in the manner and within the time frame
reasonably established by Purchaser. Each such employee who is employed by the
Company on the Closing Date and who actually transfers to employment with
Purchaser at or after the Closing Date as a result of an offer of employment
made by Purchaser is hereafter referred to as a “Transferred Employee.” On a
periodic basis following the date hereof and prior to the Closing, Purchaser
shall advise the Company of its intentions with respect to Offer Recipients it
desires to extend or has extended offers to and the general status of
discussions with such employees.

 

(b)   Transition. The employment of the
Transferred Employees by the Company shall end at the close of business on the
Closing Date and the employment of the Transferred Employees by Purchaser shall
commence at 12:01 a.m. on the day after the Closing Date, except as to
those Transferred Employees who are on disability leave of less than twenty-six
(26) weeks, authorized leave of absence or military service as of the
Closing Date, in which case such Transferred Employees shall remain employees
of the Company until, and will commence employment with Purchaser as of,
12:01 a.m. on the date they return to active employment. Transferred
Employees shall not include any person on a disability leave of more than
twenty-six (26) weeks. The terms of employment with Purchaser shall be as
mutually agreed to between each Transferred Employee and Purchaser, subject to
the succeeding provisions of this Section 5.9.

 

(c)   Retention of Employees Prior to Closing.
The Company agrees to use reasonable efforts to (i) retain the Offer
Recipients as employees of the Business until the Closing Date, and
(ii) assist Purchaser in securing the employment after the Closing Date of
the Offer Recipients. The Company shall notify Purchaser promptly if any Offer
Recipient terminates employment with the Company after the date of this
Agreement but prior to the Closing.

 

(d)   Employees Other than Transferred Employees.
Any employees of the Company who do not become Transferred Employees will
remain employees of the Company after the Closing. Any severance obligations to
such employees shall be the Company’s responsibility.

 

5.10      Prorations. The Purchaser and the Company
agree to make customary prorations (as of the Closing Date) in respect of items
customarily prorated in connection with the sale of assets similar to

 

19

 

the Purchased Assets, including, without
limitation, if applicable, real estate taxes and power and utility charges.

 

5.11     Confidentiality. Each of the parties
hereto will maintain in confidence, and will cause its respective directors,
officers, members, managers, employees, agents, Affiliates and advisors to
maintain in confidence any written, oral or other information furnished at any
time by another party to this Agreement in connection with the transactions
contemplated by this Agreement, unless (a) such information is already
known to such party or to such others other than on a confidential basis,
(b) such information becomes publicly available through no fault of such
party, (c) the use of such information is necessary or appropriate in
making any filing or obtaining any consent or approval required for the
consummation of the transactions contemplated by this Agreement, or
(d) the furnishing or use of such information is required by law. If the
transactions contemplated hereby are not consummated, the confidentiality
obligations of each party pursuant to this Section 5.111 will continue,
and each party will, at the request of the party supplying the information,
return or destroy (and provide appropriate certification thereof) any and all
such written, electronic or computer-based information.

 

5.12     Approval of the Company’s Stockholders.
The Company shall take the actions necessary to conduct a special meeting of
the Company’s stockholders to consider and vote on the transactions
contemplated by this Agreement at the earliest practicable date after the date
of this Agreement and in connection therewith the Company’s Board of Directors
shall recommend to the Company’s Stockholders that they approve this Agreement
and the transactions contemplated thereby. The Company agrees to use its
commercially reasonable efforts to take all necessary steps to obtain approval
of the Company’s stockholders, including the filing and distribution of a proxy
statement, calling of a special meeting and the holding of that meeting. Such a
special meeting shall be called, held and conducted and proxies shall be
solicited, in compliance with the Company’s Certificate of Incorporation and
Bylaws, both as amended, and in compliance with applicable law.

 

5.13     Updating of Disclosure Schedules. The
Company shall prepare and deliver an updated version of the Company Disclosure
Schedule (the “Updated Company Disclosure Schedule”) and all schedules and
exhibits thereto to include all information necessary to make the
representations and warranties of the Company contained in this Agreement, as
supplemented by the Updated Company Disclosure Schedule, accurate as of the
Closing Date. The Company shall deliver a reasonably complete version of the
Updated Company Disclosure Schedule to Purchaser approximately five
(5) days prior to Closing. Purchaser shall prepare and deliver an updated
version of the Purchaser Disclosure Schedule (the “Updated Purchaser Disclosure
Schedule”) and all schedules and exhibits thereto to include all information
necessary to make the representations and warranties of Purchaser contained in
this Agreement, as supplemented by the Updated Purchaser Disclosure Schedule,
accurate as of the Closing Date. Purchaser shall deliver a reasonably complete
version of the Updated Purchaser Disclosure Schedule to the Company
approximately five (5) days prior to Closing.

 

5.14      Board of Directors of Purchaser. Purchaser
shall take all necessary steps such that, upon the Closing, John Lyon will be
elected to Purchaser’s Board of Directors if he so chooses to serve thereon.
This option for Mr. Lyon shall be available for 90 days following the
Closing.

 

ARTICLE VI

CONDITIONS TO THE OBLIGATIONS OF THE COMPANY

 

The obligations of the
Company to effect the transactions contemplated hereby are subject to the
satisfaction, at or before the Closing, of each of the following conditions:

 

6.1      No Material Adverse Effect. Purchaser
shall not have acted or caused any Person to have acted in any manner which has
created or could reasonably be expected to create (individually or in the
aggregate), a Material Adverse Effect on Purchaser.

 

20

 

6.2      Stockholder Approval. Purchaser shall have
obtained the approval of its shareholders (if necessary) for the consummation
of the transactions contemplated by this Agreement.

 

6.3      Closing Deliveries. Purchaser shall have
executed and delivered the documents required to be executed and delivered by
Purchaser pursuant to Section 2.9(c) above.

 

ARTICLE VII

CONDITIONS TO THE OBLIGATIONS OF PURCHASER

 

The obligation of Purchaser
to effect the transactions contemplated hereby is subject to the satisfaction,
at or before the Closing, of each of the following conditions:

 

7.1      Material Adverse Effect. The Company shall
not have acted or caused any Person to have acted in any manner which has
created or could reasonably be expected to create (individually or in the
aggregate), a Material Adverse Effect on the Business or the Purchased Assets.

 

7.2      Stockholder Approval. The Company shall
have obtained the approval of its stockholders for the consummation of the
transactions contemplated by this Agreement.

 

7.3      Closing Deliveries. The Company shall have
executed and delivered the documents required to be executed and delivered by
the Company pursuant to Section 2.9(b) above.

 

ARTICLE VIII

ACTIONS BY THE PARTIES AFTER THE CLOSING

 

8.1      Survival of Representations, Warranties, Etc.
The representations, warranties and covenants contained in or made pursuant to
this Agreement or any certificate, document or instrument delivered pursuant to
or in connection with this Agreement in the transactions contemplated hereby
shall survive the execution and delivery of this Agreement and the Closing
hereunder (notwithstanding any investigation, analysis or evaluation by any
party hereto or their designees of the Assets and Properties, business,
operations or condition (financial or otherwise) of the other party), and
thereafter the representations and warranties of the Parties herein shall
continue to survive in full force and effect for a period of twelve
(12) months after the Closing Date (the “Survival Period”).

 

8.2      Indemnification.

 

(a)   By the Company. The Company shall
indemnify, defend and hold harmless Purchaser and each of its officers,
directors, employees, agents, successors and assigns (collectively the
“Purchaser Group”) from and against any and all costs, losses, Liabilities,
damages, lawsuits, deficiencies, claims and expenses, including without
limitation, penalties, costs of mitigation, clean-up or remedial action,
reasonable attorneys’ fees and all amounts paid to third parties in
investigation, defense or settlement of any of the foregoing (collectively, the
“Damages”), suffered by Purchaser, incurred in connection with, arising out of,
resulting from or incident to (i) any breach of any covenant,
representation, warranty or agreement or the inaccuracy of any representation,
made by the Company in or pursuant to this Agreement and (ii) Liabilities
that are not Assumed Liabilities.

 

(b)   By Purchaser. Purchaser shall indemnify,
defend and hold harmless the Company, its officers, managers, employees,
agents, successors and assigns (the “Company Group”) from and against any and
all Damages incurred in connection with, arising out of, resulting from or
incident to any (i) breach of any covenant, representation, warranty or
agreement or the inaccuracy of any representation made by Purchaser in or
pursuant to this Agreement and (ii) Assumed Liabilities.

 

(c)   Resolution of Claims. A claim for
indemnification for any matter not involving a third-party claim may be
asserted by written notice to the party from whom indemnification is sought to
the other party (the “Claim Notice”). Upon receipt of a Claim Notice, the party
from whom indemnification is sought shall have fifteen (15) Business Days
to object, in writing, to such claim

 

21

 

(the “Dispute Notice”),
otherwise the party seeking indemnification shall have the right to enforce its
indemnity rights as defined hereunder. If the party from whom indemnification
is sought provides the other party with a Dispute Notice in a timely fashion, the
parties shall attempt in good faith to agree upon the rights or the respective
parties with respect to such claim. If the parties agree as to the resolution
of such claim, they shall prepare a memorandum setting forth the terms of such
resolution signed by each of the parties hereto and enforce the indemnification
rights hereunder. If no agreement is reached within thirty (30) days after
delivery of the Dispute Notice, the dispute resolution provisions of this
Agreement shall govern.

 

(d)   Third Party Claims; Defense of Claims. If
any Action or Proceeding is filed or initiated against any party entitled to
the benefit of indemnity hereunder, written notice thereof shall be given to
the indemnifying party as promptly as practicable (and in any event within ten
(10) days after the service of the citation or summons); provided,
however, that a delay or failure of any indemnified party to give timely notice
shall not affect rights to indemnification hereunder except to the extent that
the indemnifying party demonstrates actual damage caused by such failure. Any
such notice shall state (with reasonable specificity) the basis on which
indemnification is being asserted, the amount of Damages for which
indemnification is being asserted and copies of all relevant pleadings, demands
and other papers being served on the indemnified party. After such notice, the
indemnifying party may, if it so elects, take control of the defense and
investigation of such Action or Proceeding and to employ and engage attorneys
of its own choice to handle and defend the same, such attorneys to be
reasonably satisfactory to the indemnified party, at the indemnifying party’s
sole cost, risk and expense (unless the indemnifying party has failed to assume
the defense of such Action or Proceeding), and compromise or settle such Action
or Proceeding, which compromise or settlement shall be made only with the
written consent of the indemnified party, such consent not to be unreasonably
withheld. The indemnified party may withhold such consent if such compromise or
settlement would adversely affect the conduct of business or requires less than
an unconditional release to be obtained. If the indemnifying party fails to
assume the defense of such Action or Proceeding within fifteen (15) days after
receipt of notice thereof pursuant to this Section 8.2, the indemnified
party against which such Action or Proceeding has been filed or initiated will
(upon delivering notice to such effect to the indemnifying party) have the
right to undertake, at the indemnifying party’s own cost and expense, the
defense, compromise or settlement of such Action or Proceeding on behalf of and
for the account and risk of the indemnifying party; provided, however, that
such Action or Proceeding shall not be compromised or settled without the
written consent of the indemnifying party, which consent shall not be
unreasonably withheld. In the event the indemnified party assumes defense of
the Action or Proceeding, the indemnified party will keep the indemnifying
party reasonably informed of the progress of any such defense, compromise or
settlement and will consult with, when appropriate, and consider any reasonable
advice from, the indemnifying party of any such defense, compromise or
settlement. The indemnifying party shall be liable for any settlement of any
action subject to indemnification and effected pursuant to and in accordance
with this Section 8.2 and for any final judgment (subject to any right of
appeal), and the indemnifying party agrees to indemnify and hold harmless the
indemnified party from and against any Damages by reason of such settlement or
judgment.

 

The indemnified party shall
cooperate in all reasonable respects with the indemnifying party and its
attorneys in the investigation, trial and defense of such Action or Proceeding
and any appeal arising therefrom; provided, however, that the indemnified party
may, at its own cost, participate in the investigation, trial and defense of
such Action or Proceeding and any appeal arising therefrom.

 

(e)           Limitations on Indemnity.

 

(i)    The
Company shall have no liability to Purchaser for amounts payable pursuant to
its indemnification obligations in this Section 8.2 until the total of all
such Damages incurred by

 

22

 

any member of the Purchaser
Group, individually or in the aggregate, exceed Fifty Thousand Dollars
($50,000) (the “Threshold Amount”), and then indemnification by the
indemnifying party shall apply to all such Damages exceeding the Threshold
Amount. Purchaser shall have no liability to the Company for amounts payable
pursuant to its indemnification obligations in this Section 8.2 until the
total of all such Damages incurred by any member of the Company Group,
individually or in the aggregate, exceed Fifty Thousand Dollars ($50,000) (the
“Threshold Amount”), and then indemnification by the indemnifying party shall
apply to all such Damages exceeding the Threshold Amount.

 

(ii)   The
Indemnity Shares shall be the sole and exclusive means for Purchaser to collect
any Damages for which it is entitled to indemnification under this
Article VIII. The maximum aggregate amount of indemnification for any
Damages for which the Company is required to indemnify the members of the
Purchaser Group under this Agreement shall be limited to the aggregate value of
the Indemnity Shares. The maximum aggregate amount of indemnification for any
Damages for which Purchaser is required to indemnify the members of the Company
Group under this Agreement shall be limited to the aggregate value of the
Indemnity Shares. Purchaser shall have the right to satisfy any indemnification
claims made by the Company through the issuance to the Company of shares of
Purchaser’s common stock.

 

(iii)  The
limitations on the Company’s and Purchaser’s indemnification obligations in
8.2(e)(i) and 8.2(e)(ii) above shall not apply to any Damages arising
out of or in connection with any fraud or intentional breach by Purchaser or
the Company of any representation, warranty, covenant or agreement or obligation
of such party.

 

(iv)  For
all purposes of this Article VIII, the value of Indemnity Shares shall be
determined at the time a claim for indemnity is made and shall be the “Fair
Market Value” of the Indemnity Shares at that time. For purposes hereof, “Fair
Market Value” shall mean the average of the closing price of the common stock
of Purchaser as quoted or traded on its primary inter-dealer quotation system
or any securities exchange, over the ten (10) trading day period ending
three (3) trading days prior to the date on which the subject claim for
indemnification is made hereunder. However, if at any time the common stock of
Purchaser is not listed on any securities exchange or quoted on an inter-dealer
quotation system, “Fair Market Value” shall mean the fair value of the class or
series of capital stock of Purchaser constituting Indemnity Shares as
determined in good faith and in the sole discretion of a reputable appraiser
chosen by the Company’s Board of Directors and Purchaser’s Board of Directors,
together. If these respective Boards of Directors cannot agree on an appraiser
within thirty (30) days from the making of the claim, each Board of
Directors shall choose a reputable appraiser within ten (10) days
thereafter and such appraiser shall have ten (10) additional days to
choose the final appraiser, whose appraisal shall be binding on the parties.
The cost of such process shall be borne equally by the Company and Purchaser.

 

8.3         Restriction on Transferability of the Securities.
The certificates representing the Securities (if and when issued) shall bear
the following legend restricting transfer, and such other legends as may be
required by any applicable state securities law:

 

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH
ACT OR ANOTHER AVAILABLE EXEMPTION.

 

8.4         Agreement not to dispose of Indemnity Shares.
The Company agrees that, for purposes of keeping the Indemnity Shares available
for satisfaction of any claims for indemnification pursuant to

 

23

 

this Article VIII hereof (if necessary),
it will make no transfer, sale or hypothecation of the Indemnity Shares until
twelve (12) months following the Closing Date.

 

8.5         Further Assurances. In case at any time
after the Closing any further action is necessary or desirable to carry out the
purposes of this Agreement, each of the parties will take such further action
(including the execution and delivery of such further instruments and
documents) as the other party reasonably may request, at the sole cost and
expense of the requesting party (unless the requesting party is entitled to
indemnification therefor under this Article VIII).

 

8.6         Reports Under Securities Exchange Act of 1934.
With a view to making available to the Company the benefits of Rule 144
promulgated under the Act and any other rule or regulation of the SEC that may
at any time permit the Company to sell Purchaser’s Common Stock to the public
without registration, Purchaser agrees to use its best efforts to:

 

(a)   make
and keep public information available, as those terms are understood and
defined in SEC Rule 144, at all times; and

 

(b)   file
with the SEC in a timely manner all reports and other documents required of
Purchaser under the Act and the 1934 Act.

 

8.7         Transfer of Rights to Name. Subject to
approval of the Company’s stockholders, the Company shall transfer and assign
to Purchaser all rights in the name “Vista Medical Technologies,” as the same
may be used in whole.

 

8.8         Access to Records. After the Closing Date,
Purchaser shall retain for a period consistent with Purchaser’s
record-retention policies and practices those records of the Company relating
to the Purchased Assets. Purchaser also shall provide the Company (including
the Company’s accountants and auditors) reasonable access thereto, during
normal business hours and on at least three days’ prior written notice, to
enable them to prepare financial statements or Tax Returns or deal with Tax
audits. After the Closing Date, the Company shall provide Purchaser (including
Purchaser’s accountants and auditors) reasonable access to records relating to
Excluded Assets, during normal business hours and on at least three days’ prior
written notice, for any reasonable business purpose specified by Purchaser in
such notice.

 

8.9         Transitional Use of Financial System. The
Company may designate one of its employees who will have the right, for a
period of 90 days following the Closing, to use the financial reporting
and auditing system transferred to Purchaser in connection herewith (the
“Financial System”) for the purpose of generating and maintaining the Company’s
financial reporting obligations and practices. Such employee shall have full
use of (and access to) the Financial System for such 90 day period.

 

8.10        Payment of Royalties. Purchaser agrees to
pay the royalties described in the License Agreement.

 

8.11        Payment for Inventory. The Company and
Purchaser acknowledge and agree that the Company is consigning to Purchaser, in
connection with the Closing, the Company’s inventory of Products. The Company
agrees to account and pay for such inventory in accordance with the procedure
set forth on Exhibit E.

 

ARTICLE IX

MISCELLANEOUS

 

9.1         Termination.

 

(a)          This
Agreement may be terminated and the transactions contemplated hereby abandoned:

 

(i)    at
any time prior to the Closing, by mutual written consent of Purchaser and the
Company;

 

24

 

(ii)   at
any time after April 16, 2004 (the “Termination Date”), by the Purchaser
or the Company in writing, if the transactions contemplated by this Agreement
have not been consummated on or before the Termination Date and such
terminating party is not then in material breach of this Agreement; provided
that no party may terminate this Agreement pursuant to this clause (ii) if
such party’s failure to fulfill any of its obligations under this Agreement
shall have been a principal reason that the Closing shall not have occurred on or
before said date;

 

(iii)  by
the Company on written notice to the Purchaser if (i) there shall have
been a material breach of any representations or warranties on the part of
Purchaser set forth in this Agreement or if any representations or warranties of
Purchaser shall have become untrue in any material respect, provided that the
Company has not breached any of its obligations hereunder in any material
respect; or (ii) there shall have been a breach by Purchaser of any of its
covenants or agreements hereunder in any material respect or materially
adversely affecting (or materially delaying) the ability of Purchaser or the
Company to consummate the transactions contemplated hereby, and Purchaser has
not cured such breach within ten (10) Business Days after notice by the
Company thereof, provided that the Company has not breached any of its
obligations hereunder in any material respect;

 

(iv)  by
Purchaser on written notice to the Company if (i) there shall have been a
material breach of any representations or warranties on the part of the Company
set forth in this Agreement or if any representations or warranties of the
Company shall have become untrue in any material respect, provided that
Purchaser has not breached any of its obligations hereunder in any material
respect; or (ii) there shall have been a breach by the Company of any of
its covenants or agreements hereunder in any material respect or materially
adversely affecting (or materially delaying) the ability of Purchaser to
consummate the transactions contemplated hereby, and the Company has not cured
such breach within ten (10) Business Days after notice by Purchaser
thereof, provided that Purchaser has not breached any of its obligations
hereunder in any material respect;

 

(v)   by
Purchaser, if the Company becomes insolvent or seeks protection under any
bankruptcy, receivership, trust deed, creditors arrangement, composition or
comparable proceeding, or if any such proceeding is instituted against the
Company;

 

(vi)  by
Purchaser, if the Company becomes insolvent or seeks protection under any
bankruptcy, receivership, trust deed, creditors arrangement, composition or
comparable proceeding, or if any such proceeding is instituted against the
Company; and/or

 

(b)         In
the event of the termination of this Agreement as provided in this
Section 9.1, except as otherwise provided in this Agreement or the
instruments and agreements executed in connection herewith, no party shall have
any other liability hereunder of any nature whatsoever to any other party,
including any liability for Damages; provided,
however, that if, at the time of such termination, any party is in
default under its obligations hereunder, the party in default shall be liable
to the other parties for such default; and provided,
further, that the provisions of
Section 5.11 and Article IX shall continue in full force and effect.

 

(c)         In
the event that a condition precedent to its obligations is not satisfied,
nothing contained herein shall be deemed to require any party to terminate this
Agreement, rather than to waive such condition precedent and proceed with the
Closing.

 

9.2         Notices. All notices, requests and other
communications hereunder must be in writing and will be deemed to have been
duly given only if delivered personally against written receipt or by facsimile
transmission with answer back confirmation or mailed (postage prepaid by
certified or registered mail,

 

25

 

return receipt requested) or by overnight
courier to the parties at the following addresses or facsimile numbers: 

 

	
  If to the
  Company, to:

  	
   

  	
  Vista Medical
  Technologies, Inc.

  2101 Faraday Avenue

  Carlsbad, CA 92008

  Attention: John R. Lyon

  Facsimile No.: 760-603-9170

  
	
   

  	
   

  	
   

  
	
  with
  copies to:

  	
   

  	
  Craig S. Andrews, Esq.

  Heller Ehrman White & McAuliffe LLP

  4350 La Jolla Village Drive #700

  San Diego, CA 92122-1246

  Facsimile No.: 858-450-8499

  
	
   

  	
   

  	
   

  
	
  If to
  Purchaser, to:

  	
   

  	
  Viking Systems, Inc.

  7514 Girard Ave., Suite 1509

  La Jolla, CA 92037

  Facsimile No.: (619) 839-3793

  Attention: Thomas B. Marsh

  
	
   

  	
   

  	
   

  
	
  with
  copies to:

  	
   

  	
  A.O. “Bud” Headman, Jr.

  Cohne, Rappaport & Segal, P.C.

  525 E. 100 S., Suite 500

  Salt Lake City, Utah 84102

  Facsimile No.: (801) 355-1813

  

 

All such notices, requests and other
communications will (i) if delivered personally to the address as provided
in this Section 9.2, be deemed given upon delivery, (ii) if delivered
by facsimile transmission to the facsimile number as provided in this
Section 9.2, be deemed given upon receipt, and (iii) if delivered by
mail in the manner described above to the address as provided in this
Section 9.2, be deemed given upon receipt (in each case regardless of
whether such notice, request or other communication is received by any other
Person to whom a copy of such notice, request or other communication is to be
delivered pursuant to this Section 9.2). Any party from time to time may
change its address, facsimile number or other information for the purpose of
notices to that party by giving notice specifying such change to the other
parties hereto.

 

9.3         Entire Agreement. This Agreement (and all
Exhibits and Schedules attached hereto, all other documents delivered in
connection herewith and the Confidentiality Agreement) supersedes all prior
discussions and agreements among the parties with respect to the subject matter
hereof and contains the sole and entire agreement among the parties hereto with
respect hereto.

 

9.4         Waiver. Any term or condition of this
Agreement may be waived at any time by the party that is entitled to the
benefit thereof, but no such waiver shall be effective unless set forth in a
written instrument duly executed by or on behalf of the party waiving such term
or condition. No waiver by any party hereto of any term or condition of this
Agreement, in any one or more instances, shall be deemed to be or construed as
a waiver of the same or any other term or condition of this Agreement on any
future occasion. All remedies, either under this Agreement or by law or
otherwise afforded, will be cumulative and not alternative.

 

9.5         Amendment. This Agreement may be amended,
supplemented or modified only by a written instrument duly executed by or on
behalf of each party hereto.

 

9.6         No Third Party Beneficiary. The terms and
provisions of this Agreement are intended solely for the benefit of each party
hereto and their respective successors or permitted assigns, and it is not the

 

26

 

intention of the parties to confer
third-party beneficiary rights upon any other Person other than any Person
entitled to indemnity under Section 8.2 above.

 

9.7         No Assignment; Binding Effect. Neither
this Agreement nor any right, interest or obligation hereunder may be assigned
by any party hereto without the prior written consent of the other parties
hereto and any attempt to do so without such consent will be void, except that
any party’s rights to indemnification under Section 8.2 may be freely
assigned. This Agreement is binding upon, inures to the benefit of and is
enforceable by the parties hereto and their respective successors and assigns.

 

9.8         Headings. The headings used in this
Agreement have been inserted for convenience of reference only and do not
define or limit the provisions hereof.

 

9.9         Severability. If any provision of this
Agreement is held to be illegal, invalid or unenforceable under any present or
future law, and if the rights or obligations of any party hereto under this
Agreement will not be materially and adversely affected thereby, (i) such
provision will be fully severable, (ii) this Agreement will be construed
and enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof, (iii) the remaining provisions of this Agreement
will remain in full force and effect and will not be affected by the illegal,
invalid or unenforceable provision or by its severance herefrom and
(iv) in lieu of such illegal, invalid or unenforceable provision, there
will be added automatically as a part of this Agreement a legal, valid and
enforceable provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible and mutually acceptable to the
parties herein.

 

9.10       Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the State of
California applicable to contracts executed and performed in such State,
without giving effect to conflicts of laws principles.

 

9.11       Consent to Jurisdiction and Forum Selection.
The parties hereto agree that all actions or proceedings arising in connection
with this Agreement shall be initiated and tried exclusively in the State and
Federal courts located in the County of San Diego, State of California. The
aforementioned choice of venue is intended by the parties to be mandatory and
not permissive in nature, thereby precluding the possibility of litigation
between the parties with respect to or arising out of this Agreement in any
jurisdiction other than that specified in this Section 9.11. Each party
hereby waives any right it may have to assert the doctrine of forum non
conveniens or similar doctrine or to object to venue with respect to any
proceeding brought in accordance with this paragraph, and stipulates that the
State and Federal courts located in the County of San Diego, State of
California shall have in personam jurisdiction and venue over each of them for
the purposes of litigating any dispute, controversy or proceeding arising out
of or related to this Agreement. Each party hereby authorizes and accepts
service of process sufficient for personal jurisdiction in any action against
it as contemplated by this Section 9.11 by registered or certified mail,
return receipt requested, postage prepaid, to its address for the giving of
notices as set forth in this Agreement, or in the manner set forth in
Section 9.2 of this Agreement for the giving of notice. Any final judgment
rendered against a party in any action or proceeding shall be conclusive as to
the subject of such final judgment and may be enforced in other jurisdictions
in any manner provided by law.

 

9.12       Expense. Each of the parties hereto shall
pay the fees, expenses and costs incurred by such party incidental to the
preparation of this Agreement and to the consummation of the transactions
contemplated hereby.

 

9.13       Construction. No provision of this
Agreement shall be construed in favor of or against any party on the ground
that such party or its counsel drafted the provision. Any remedies provided for
herein are not exclusive of any other lawful remedies which may be available to
either party. This Agreement shall at all times be construed so as to carry out
the purposes stated herein.

 

27

 

9.14       Counterparts. This Agreement may be
executed in any number of counterparts and by facsimile, each of which will be
deemed an original, but all of which together will constitute one and the same
instrument.

 

[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

 

28

 

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the parties hereto, or their duly authorized officer, as of the date first
above written. 

 

	
   

  	
  “Purchaser”

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Viking Systems, Inc.

  a Nevada corporation

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/  THOMAS B.
  MARSH

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name: Thomas B. Marsh

  	
   

  
	
   

  	
  Title: President

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  “Company”

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Vista Medical
  Technologies, Inc.,

  a Delaware corporation

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/  JOHN R.
  LYON

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name: John R. Lyon

  	
   

  
	
   

  	
  Title: President and Chief
  Executive Officer

  	
   

  
						

 

29

 

EXHIBIT A

LICENSE AGREEMENT

 

PATENT AND TECHNOLOGY LICENSE AGREEMENT

 

This AGREEMENT (“AGREEMENT”) is made on
this       day
of       2003 (“EFFECTIVE DATE”), by and between Vista Medical
Technologies, Inc., a Delaware corporation, having a principal place of
business located at 2101 Faraday Avenue, Carlsbad, CA 92008 (“LICENSOR”), and Viking Systems, Inc.,
a Nevada corporation, having a principal place of business located at 7514 Girard
Ave., Suite 1509, La Jolla, CA 92037 (“LICENSEE”).

 

RECITALS

 

A.    WHEREAS, pursuant
to that certain Asset Purchase Agreement by and between LICENSOR and LICENSEE
dated December 22 (the “Asset Purchase Agreement”), LICENSEE is acquiring
from the LICENSOR, and LICENSOR is selling to LICENSEE, certain assets (“ASSETS”) of the LICENSOR’s medical device
and technology business (“BUSINESS”);
and

 

B.    WHEREAS, LICENSOR
owns certain intellectual property rights necessary to make use of such ASSETS,
commercialize LICENSED PRODUCTS and operate the BUSINESS; and

 

C.    WHEREAS, LICENSEE
desires to license certain intellectual property rights necessary to make use
of such ASSETS, commercialize LICENSED PRODUCTS and operate the BUSINESS and
LICENSOR is willing to grant such an exclusive license to LICENSEE.

 

NOW, THEREFORE, in
consideration of the mutual covenants and promises herein contained, the
parties agree as follows:

 

I. DEFINITIONS

 

All definitions below or
elsewhere in this AGREEMENT apply to both their singular and plural forms, as
the context may require. “Herein, “ “hereunder,” and “hereof”
and other similar expressions refer to this AGREEMENT. “Section” refers to sections in this
AGREEMENT. “Including” means
“including without limitation.” “Days”
means “calendar days,” unless otherwise stated.

 

1.1    ”AFFILIATE”    means
any business entity more than fifty percent (50%) owned by LICENSEE, any
business entity which owns more than fifty percent (50%) of LICENSEE, or any
business entity that is more than fifty percent (50%) owned by a business
entity that owns more than fifty percent (50%) of LICENSEE.

 

1.2    ”CONFIDENTIAL INFORMATION”    means
the proprietary or confidential information of a party (each, a “DISCLOSER”) which is disclosed to the other
party (each, a “RECIPIENT”) before
or after the EFFECTIVE DATE and (i) is identified as “confidential” by
DISCLOSER in writing prior to disclosure and (ii) relates to products,
plans, designs, costs, prices, finances, marketing plans, business
opportunities, personnel, research, development, know-how, trade secrets,
inventions, blueprints, techniques, chemical or biological materials, drugs,
devices, specimens, apparatus, processes, algorithms, software programs,
schematics, designs, contracts, customer lists, procedures, formulae, patent
applications and other information relating to DISCLOSER’s business, services,
processes or technology. CONFIDENTIAL INFORMATION shall not include information
that RECIPIENT proves: (i) was known by RECIPIENT, or was publicly available,
prior to disclosure by DISCLOSER to RECIPIENT; (ii) became publicly
available after disclosure by DISCLOSER to RECIPIENT through no act of
RECIPIENT; (iii) is hereafter rightfully furnished to RECIPIENT by a third
party without confidentiality restriction; or (iv) is disclosed with the
prior written consent of DISCLOSER or as expressly authorized under this
AGREEMENT.

 

30

 

1.3    ”GROSS REVENUES”    means
royalties, up-front payments, marketing, distribution, franchise, option,
license, or documentation fees, bonus and milestone payments, equity securities
or any other payment or value received by License from the sale, licensing,
sublicensing, renting, leasing or other commercialization of Licensed Products,
less sales/and/or use taxes actually paid, import and/or export duties actually
paid, outbound transportation prepaid or allowed, and amounts allowed or
credited due to returns.

 

1.4    ”IMPROVEMENTS”    means
any and all derivative works, modifications, improvements, enhancements,
translations, abridgements, additional developments or the like to the existing
LICENSED TECHNOLOGY made by LICENSEE, LICENSEE’s AFFILIATES and/or LICENSEE’s
sublicensees after the EFFECTIVE DATE.

 

1.5    ”INTELLECTUAL PROPERTY” or
“INTELLECTUAL PROPERTY RIGHTS”    collectively
means any and all patents (including reissues, divisions, continuations and
extensions thereof), patent registrations, patent applications, data rights,
utility models, business processes, trademarks, trade secrets, know how, trade
names, registered or unregistered designs, mask works, copyrights, moral rights
and any other form of proprietary protection afforded by law to intellectual
property, or any applications therefor, which arises or is enforceable under
the laws of the United States, any other jurisdiction or any bi-lateral or
multi-lateral treaty regime.

 

1.6    ”KNOW-HOW”    means
any and all information, processes, procedures, documents and materials
relating to the design, development and manufacture of LICENSED PRODUCTS known
to LICENSOR as of the EFFECTIVE DATE.

 

1.7    ”LICENSED PRODUCTS”    means
any product incorporating or arising out of LICENSED TECHNOLOGY, including the
OEM PRODUCTS and the VISTA PRODUCTS.

 

1.8    ”LICENSED PATENTS”    means
all of the patent applications and patents listed on Schedule 3.10(a) of the Company Disclosure Schedule (as
defined in the Asset Purchase Agreement), and any patents issued therefrom,
together with all pending and issued foreign counterparts of such applications,
and all pending and issued renewals, continuations, continuations-in-part,
divisions, patents of addition, reexaminations and/or reissues of such
applications or foreign counterparts.

 

1.9    ”LICENSED TECHNICAL
INFORMATION”    means LICENSOR’s rights in any
technical information, KNOW-HOW, processes, procedures, compositions, devices,
methods, formulae, protocols, techniques, software, designs, drawings or data
which are not claimed in LICENSED PATENTS but that are necessary or useful for
practicing LICENSED PATENTS.

 

1.10    ”LICENSED TECHNOLOGY”    means
inventions or discoveries covered by LICENSED PATENTS and/or LICENSED TECHNICAL
INFORMATION as more fully defined in Exhibit A.
LICENSED TECHNOLOGY includes any IMPROVEMENTS developed by LICENSEE or its
AFFILIATES subsequent to the EFFECTIVE DATE as set forth in Section 4.2.

 

1.11    ”LIMITED ROYALTY PERIOD”    has
the meaning set forth in Section 3.1(b).

 

1.12    ”LIMITED ROYALTY PERIOD GROSS
REVENUES”    means Gross Revenues from Licensee’s
Sale of Vista Products less the gross revenues earned by LICENSOR from its Sale
of Vista Products during 2003.

 

1.13    ”OEM PRODUCTS”    means
the Aesculap product line, the Wolf product line and the OEM Camera product
line as further defined in Exhibit B,
and any improvements, derivatives, modifications or enhancements thereto.

 

1.14    ”SALE” OR “SOLD”    means
the transfer, licensing, renting, leasing, disposition or other
commercialization of Licensed Products for value.

 

31

 

1.15    ”TERM”    has
the meaning set forth in Section 10.1.

 

1.16    ”VISTA PRODUCTS”    means
the Endosite System product line and the Three Chip Endosite System product
line as further defined in Exhibit B,
and any improvements, derivatives, modifications or enhancements thereto.

 

II. LICENSE; TECHNOLOGY TRANSFER

 

2.1   Subject
to the terms and conditions of this Agreement, LICENSOR hereby grants to
LICENSEE, a worldwide, exclusive (even as to LICENSOR) license, with the right
to sublicense, under LICENSED TECHNOLOGY, and all INTELLECTUAL PROPERTY RIGHTS
therein (i) to make, have made, use, import, reproduce, offer to sell
and/or sell LICENSED PRODUCTS; and (ii) to modify and create IMPROVEMENTS.

 

2.2    Sublicenses.    LICENSEE
may grant sublicenses under LICENSED TECHNOLOGY consistent with the terms of
Section 2.1 and this AGREEMENT. Notwithstanding anything else herein and
for avoidance of doubt, LICENSEE shall have no right to commercialize the
LICENSED TECHNOLOGY except as incorporated into LICENSED PRODUCTS.

 

2.3    Technology Transfer.    No
later than thirty (30) days following the EFFECTIVE DATE, LICENSOR shall
deliver to LICENSEE all LICENSED TECHNOLOGY.

 

III. CONSIDERATION, PAYMENTS AND REPORTS

 

3.1       Royalties.    In
consideration of rights granted by LICENSOR to LICENSEE under this AGREEMENT,
LICENSEE agrees to pay LICENSOR the following:

 

(a)   A
five percent (5%) royalty on Gross Revenues for all OEM PRODUCTS Sold by
LICENSEE, its AFFILIATES or its sublicensees;

 

(b)   For
the first (1st) two (2) twelve (12) month periods after the EFFECTIVE
DATE (“LIMITED ROYALTY PERIOD”), a
ten percent (10%) royalty on the Limited Royalty Period Gross Revenues for all
VISTA PRODUCTS Sold by LICENSEE, its AFFILIATES or its sublicensees; and

 

(c)   After
the LIMITED ROYALTY PERIOD, a ten percent (10%) royalty on Gross Revenues for
all VISTA PRODUCTS Sold licensed, leased, rented or otherwise commercialized by
LICENSEE, its AFFILIATES or its sublicensees.

 

3.2       Minimum Royalties.    Notwithstanding
Section 3.1, the minimum royalty payment by LICENSEE to LICENSOR for the
Licensed Products shall be as follows:

 

(a)   One
Hundred and Fifty Thousand U.S. Dollars ($150,000) for the first (1st) twelve
(12) month period after the EFFECTIVE DATE to be paid no later than thirty
(30) days after the first (1st) anniversary of the EFFECTIVE DATE;

 

(b)   Three
Hundred Thousand U.S. Dollars ($300,000) for the second twelve (12) month
period starting on the first (1st) anniversary of the EFFECTIVE DATE to be paid
no later than thirty (30) days after the second (2nd) anniversary of the
EFFECTIVE DATE;

 

(c)   Three
Hundred Thousand U.S. Dollars ($300,000) for the third twelve (12) month
period starting on second (2nd) anniversary of the EFFECTIVE DATE to be paid no
later than thirty (30) days after the third (3rd) anniversary of the
EFFECTIVE DATE;

 

(d)   Three
Hundred Thousand U.S. Dollars ($300,000) for the fourth twelve (12) month
period starting on the third (3rd) anniversary of the EFFECTIVE DATE to be paid
no later than thirty (30) days after the fourth (4th) anniversary of the
EFFECTIVE DATE; and

 

32

 

(e)   Three
Hundred and Seventy-Five Thousand U.S. Dollars ($375,000) for the fifth twelve
(12) month period starting on the fourth (4th) anniversary of the
EFFECTIVE DATE to be paid no later than thirty (30) days after the fifth
(5th) anniversary of the EFFECTIVE DATE.

 

3.3       Termination
of License.    If LICENSEE does not pay LICENSOR
the minimum royalty for each twelve month period as set forth in
Section 3.2, and such failure continues for thirty (30) days after
LICENSOR notifies LICENSEE thereof in writing, the licenses granted under
Section 2 shall terminate immediately and all rights and interests granted
therein shall revert back to LICENSOR. The parties shall take any and all
necessary actions and execute all documents necessary to ensure that the intent
of this Section is enforced.

 

3.4       Royalty
Obligation and Conditional Transfer of LICENSED TECHNOLOGY.    The
royalties agreed to hereunder shall be paid until the earlier of the date on
which LICENSEE has paid LICENSOR an aggregate of Four Million Five Hundred
Thousand U.S. Dollars ($4,500,000) or the fifth anniversary of Effective Date.
(“TOTAL ROYALTY”). If LICENSEE
pays LICENSOR the TOTAL ROYALTY, LICENSOR shall assign and transfer to LICENSEE
all of LICENSOR’s rights, title and interests in and to the LICENSED
TECHNOLOGY. The parties shall take any and all necessary actions and execute
all documents necessary to ensure the intent of this Section is enforced.

 

3.5       Payment
Terms.    The royalties due hereunder shall be
paid on a semi annual basis (“Payment Period”) commencing six (6) months
from the Effective Date. Within thirty (30) days after the end of each
Payment Period, LICENSEE:

 

(i)    shall
pay all royalties set forth in this Section 3 accrued and payable for such
period, and

 

(ii)   furnish
LICENSOR with a royalty report along with a written statement certified by an
officer of LICENSEE (a) stating that the royalty report is true and
accurate, and (b) specifying the total royalties payable to LICENSOR for
such period and providing the basis for the calculation of such royalties.

 

All payments due to LICENSOR shall be made
solely in U.S. Dollars in immediately available funds, via wire transfer to
such account as is designated by LICENSOR in writing to LICENSEE. Late payments
shall accrue interest from the date due until the date paid at a rate of one
percent (1%) per month, or the maximum rate allowed under applicable law,
whichever is less. LICENSEE shall make no offset for any amounts due to
LICENSOR regardless of the justification for such intended offset.

 

3.6       Right of
Audit.    During the TERM and for three
(3) years after the expiration and termination of this AGREEMENT for any
reason (the “AUDIT PERIOD”),
LICENSEE shall keep complete, true and accurate records containing all invoices
and other data related to the computation and verification of the royalties to
be paid under Section 3 and any other amounts to be paid to LICENSOR, and
(b) the basis of information provided in the royalty report or any
statements provided by LICENSEE to LICENSOR pursuant to this AGREEMENT. During
the AUDIT PERIOD LICENSEE shall permit LICENSOR or its designees or agents, at
LICENSOR’s expense and upon ten (10) days prior written notice, to inspect
and make copies of such records for the sole purpose of verifying the accuracy
of the royalties and other payments made by LICENSEE under this AGREEMENT.
LICENSEE shall itself, and shall cause its accountants to, diligently cooperate
with the audit. If any audit reveals any underpayment by LICENSEE, LICENSEE
shall within ten (10) days after such audit remit to LICENSOR all amounts
due, with interest thereon at the rate of one percent (1%) per month compounded
(or the highest rate permitted by applicable law, whichever is lower),
calculated from the date such amounts were due. If any underpayment is more
than five percent (5%) of the total payments due for the period audited,
LICENSEE shall remit to LICENSOR in full all costs for such audits and the
subsequent audit, including any fees of a certified public accountant.

 

3.7       Taxes.    In
addition to any other amounts due under this AGREEMENT, LICENSEE agrees to pay,
indemnify and hold LICENSOR harmless from any TAXES imposed by any governmental

 

33

 

authority with respect to LICENSEE’s use of
the LICENSED TECHNOLOGY. “TAXES”
herein means any tax, fee or cost not based on LICENSOR’s net income, including
any sales, use, excise, import or export, value added, withholding or similar
tax, or any duty or fee and any penalties or interest associated with any of
the foregoing. LICENSEE’s obligation to pay TAXES shall survive any expiration
or termination of this AGREEMENT. Notwithstanding the foregoing, if LICENSEE is
required by U.S. or other law to withhold any amount from sums payable to
LICENSOR hereunder, LICENSEE shall deduct and pay any withholding taxes to the
appropriate U.S. or other tax authorities, respectively, and shall provide
LICENSOR with a tax receipt evidencing such payment.

 

IV. PATENTS AND INVENTIONS

 

4.1       Ownership.    Except
for the licenses granted herein and as set forth in Section 3, LICENSOR
shall retain all of its rights, title and interests, which it may have, in the
underlying INTELLECTUAL PROPERTY RIGHTS of the LICENSED TECHNOLOGY and any
IMPROVEMENTS.

 

4.2       LICENSEE
IMPROVEMENTS.    In the event that LICENSEE
develops IMPROVEMENTS subsequent to the EFFECTIVE DATE, LICENSEE shall have all
rights to such IMPROVEMENTS under the terms of the exclusive license granted to
LICENSEE in Section 2.1.

 

4.3       Patent
Prosecution.    LICENSEE shall have the responsibility
for preparing, filing, prosecuting and maintaining the LICENSED PATENTS and
conducting any interferences, reexaminations or requesting reissues or patent
term extensions with respect to the LICENSED PATENTS in the United States, and
the right to prepare, file, prosecute and maintain the LICENSED PATENTS and
conduct any interferences, reexaminations or request reissues or patent term
extensions with respect to the LICENSED PATENTS, or to take such similar
actions to protect the LICENSED PATENTS in any other country. During the TERM
LICENSEE shall prosecute and/or maintain, as appropriate, the LICENSED PATENTS
in at least the countries in which LICENSOR has already begun prosecution
and/or maintenance (“PROSECUTION COUNTRIES”),
a list of which shall be provided by LICENSOR upon request. LICENSEE shall keep
LICENSOR fully informed as to the status of such patent matters, including
without limitation by providing LICENSOR with the opportunity to review and
comment on any documents which will be filed in any patent office and by
providing LICENSOR copies of any documents received by LICENSEE from such
patent offices including notices of all interferences, reexaminations,
oppositions or requests for patent term extensions. In the event that LICENSEE
declines or fails to prepare, file, prosecute or maintain any LICENSED PATENTS
in any PROSECUTION COUNTRY, LICENSEE shall promptly, and in no event later than
ninety (90) days prior to any filing deadline, provide written notice to
LICENSOR and LICENSOR shall then have the right to assume such responsibilities
at its own expense using counsel of its choice. In addition, LICENSEE shall
promptly notify LICENSOR of any decision to abandon a patent or application
covered by the LICENSED PATENTS in any country, in which case, LICENSOR shall
have the option, at its expense and with counsel of its choice, of continuing
to prosecute any such pending patent application or of keeping the issued
patent in force. If LICENSEE abandons, declines or fails to prepare, file,
prosecute or maintain any LICENSED PATENTS as set forth in this Section, the
licenses granted by LICENSOR to LICENSEE pursuant to Section II shall
immediately become non-exclusive.

 

4.4       Additional
Filings.    LICENSEE shall have the right to
file for the protection of the LICENSED TECHNICAL INFORMATION, or any rights
therein in any country. LICENSEE shall keep LICENSOR fully informed as to the
status of such matters, including without limitation by providing LICENSOR with
the opportunity to review and comment on any documents to protect the LICENSED
TECHNICAL INFORMATION which will be filed in any governmental office or agency
and by providing LICENSOR copies of any documents received by LICENSEE from
such governmental offices or agencies.

 

34

 

V.
INFRINGEMENT BY THIRD PARTIES

 

5.1    Notice.    Each
party shall promptly notify the other in writing of any alleged or threatened
INTELLECTUAL PROPERTY infringement of the LICENSED TECHNOLOGY which may
adversely impact the rights of the parties hereunder, of which it becomes
aware.

 

5.2    Enforcement.    In
the event that either party becomes aware of any alleged or threatened
INTELLECTUAL PROPERTY infringement of the LICENSED TECHNOLOGY, as between the
parties, LICENSEE shall have the first right, but not the obligation, to take
appropriate action against any person or entity directly or contributorily
infringing such LICENSED TECHNOLOGY, and to retain any recovery from such
action. In furtherance of such right, LICENSOR hereby agrees that LICENSEE may
join LICENSOR as a party in any such action (with LICENSOR having the right to
participate in such action and to be represented, if it so desires and at its
own expense, by counsel of its own selection) and to give LICENSEE reasonable
assistance and any needed authority to control, file and prosecute such action,
without expense to LICENSOR. If LICENSEE does not file suit against a
substantial infringer within six (6) months of knowledge thereof, then LICENSOR
may, at its sole discretion, enforce any INTELLECTUAL PROPERTY RIGHTS in any
LICENSED TECHNOLOGY licensed hereunder, provided LICENSOR does so both on
behalf of itself and LICENSEE, with LICENSOR retaining all recoveries from such
enforcement. In furtherance of such right, LICENSEE hereby agrees that LICENSOR
may join LICENSEE as a party in any such action (with LICENSEE having the right
to participate in such action and to be represented, if it so desires and at
its own expense, by counsel of its own selection) and to give LICENSOR
reasonable assistance and any needed authority to control, file and prosecute
such action, without expense to LICENSEE.

 

5.3    Cooperation.    In
any suit or dispute involving an infringer, the parties agree to cooperate
fully with each other at the expense of the party bringing the suit.
Cooperation shall include permitting access during regular business hours upon
reasonable notice, to all relevant personnel, records, papers, information,
samples, specimens, and the like in its possession.

 

5.4    Licenses to Abate Third Party
Infringement.    LICENSEE shall have the sole
right in accordance with the terms and conditions herein to sublicense the
rights granted to LICENSEE under Section 2.1 to any alleged infringer.

 

VI.
INDEMNIFICATION

 

6.1    Indemnification By LICENSOR.    Subject
to Section 6.2, LICENSOR, at its own expense, shall: (i) defend, or at its
option settle, any claim, suit or proceeding brought by a third party against
LICENSEE: (a) that the LICENSED TECHNOLOGY (except for IMPROVEMENTS) as used in
accordance with this Agreement infringes any United States patent issued as of
the Effective Date, or any United States copyright or trademark right(s) of a
third-party, or misappropriates any United States trade secret of a third
party, (b) that LICENSOR breached any of its warranties, representations or
obligations in Section 8.1, or (c) arising out of LICENSOR's negligence,
tortious conduct or willful misconduct hereunder; and (ii) pay any final and
non-appealable judgment entered or settlement against LICENSEE thereon;
provided, however, that LICENSOR shall not be responsible for any compromise or
settlement made without its consent. LICENSOR shall have no obligation to
LICENSEE unless: (1) LICENSEE gives LICENSOR prompt written notice of the
claim; (2) LICENSOR is given the right to control and direct the investigation,
preparation, defense and settlement of the claim; and (3) LICENSEE fully
cooperates with LICENSOR, at LICENSOR's expense, in such defense and
settlement.

 

(a)    Exclusions.    LICENSOR's
indemnification obligations shall not apply to any claim relating to: (a) the
IMPROVEMENTS or any element of the LICENSED TECHNOLOGY that has been changed,
abused or not used as authorized hereunder; (b) the bundling of LICENSED
TECHNOLOGY with software, hardware or other materials of LICENSEE and third
parties;

 

35

 

(c) use of the LICENSED
TECHNOLOGY that exceeds the scope of the licenses expressly granted in this
Agreement; and/or (d) LICENSEE's failure to use the LICENSED TECHNOLOGY or any
portion thereof in accordance with the provisions of this Agreement.

 

(b)    Additional Rights.    If
the use, sale or distribution of the OEM PRODUCTS or the VISTA PRODUCTS by
LICENSEE, or its AFFILIATES or sublicensees is enjoined due to infringement of
the LICENSED TECHNOLOGY in the Unites States, or if LICENSOR wishes to minimize
its potential liability in connection therewith, LICENSOR may, at its option
and expense, either: (a) substitute functionally equivalent non-infringing
LICENSED TECHNOLOGY; (b) modify the infringing LICENSED TECHNOLOGY so that the
OEM PRODUCTS or VISTA PRODUCTS no longer infringe, but remain functionally
equivalent; (c) obtain for LICENSEE the right to continue to use such LICENSED
TECHNOLOGY; or (d) if none of the foregoing is feasible, refund to LICENSEE a
pro rata portion of the royalties paid hereunder (as depreciated on a straight
line basis over five (5) years from the EFFECTIVE DATE).

 

6.2    Indemnification By LICENSEE.    LICENSEE,
at its own expense, shall: (i) defend, or at its option settle, any claim, suit
or proceeding against LICENSOR arising from or in connection with (x)
LICENSEE's breach of any of its warranties, representations or obligations in
Section 8.2, 12.10, 12.11 and 12.12, (y) any LICENSEE modification,
combination, adaptation, integration, incorporation, reproduction, sale, lease,
rental or other commercialization, distribution or performance of the LICENSED
PRODUCTS, or (z) LICENSEE's negligence, tortious conduct or willful misconduct;
and (ii) pay any final judgment entered or settlement against LICENSOR thereon,
provided, however, that LICENSEE shall not be responsible for any compromise or
settlement made without its consent. LICENSEE shall have no obligation to
LICENSOR pursuant to this Section 6.2 unless: (a) LICENSOR gives LICENSEE
prompt written notice of the claim; (b) LICENSEE is given the right to control
and direct the investigation, preparation, defense and settlement of the claim;
and (c) LICENSOR fully cooperates with LICENSEE, at LICENSEE's expense, in such
defense and settlement.

 

6.3   In the event the provisions of this Article
VI conflict with similar provisions contained in the Asset Purchase Agreement,
the provisions of the Asset Purchase Agreement shall control.

 

VII.
CONFIDENTIAL INFORMATION

 

7.1    Nondisclosure.    RECIPIENT
shall not, except as otherwise expressly provided herein, disclose, disseminate
or otherwise allow access to the CONFIDENTIAL INFORMATION of DISCLOSER to
anyone other than RECIPIENT's employees that have a need to know such
CONFIDENTIAL INFORMATION to implement this AGREEMENT and who are bound by
written confidentiality obligations with provisions no less stringent than
those contained in this Section VII. RECIPIENT shall prevent unauthorized
disclosure or use of the CONFIDENTIAL INFORMATION of DISCLOSER. DISCLOSER and
RECIPIENT shall execute any documents and otherwise shall take all necessary
steps to ensure that DISCLOSER and RECIPIENT shall each be able to enforce
DISCLOSER's rights hereunder against RECIPIENT, its employees and all other
third parties to whom RECIPIENT discloses DISCLOSER's CONFIDENTIAL INFORMATION,
under the laws of each jurisdiction in which DISCLOSER's CONFIDENTIAL
INFORMATION is disclosed by RECIPIENT. RECIPIENT shall be responsible for any
breach of this Section VII by RECIPIENT's employees, contractors or agents.

 

7.2    Ownership.    Except
as set forth herein, RECIPIENT acknowledges and agrees that DISCLOSER (or its
licensors) owns all rights, title and interests, including INTELLECTUAL
PROPERTY RIGHTS, in and to DISCLOSER's CONFIDENTIAL INFORMATION.

 

7.3    Notification.    If
RECIPIENT learns or believes that any person who has had access to the
CONFIDENTIAL INFORMATION of DISCLOSER has violated or intends to violate this

 

36

 

AGREEMENT, RECIPIENT shall immediately notify DISCLOSER and shall
cooperate with DISCLOSER in seeking injunctive or other equitable relief
against any such person.

 

7.4    Exceptions.    RECIPIENT
may disclose the CONFIDENTIAL INFORMATION of DISCLOSER, if such disclosure is
required by law, provided that RECIPIENT promptly notifies DISCLOSER to allow
intervention by DISCLOSER (prior to the disclosure), cooperates with DISCLOSER
to contest or minimize the disclosure (including application for a protective
order) at RECIPIENT's expense and limits such disclosure to the party entitled
to receive the CONFIDENTIAL INFORMATION and to the scope of the legal
requirement. Notwithstanding the foregoing, any CONFIDENTIAL INFORMATION
disclosed pursuant to this Section 7.4 shall otherwise continue to be treated
as CONFIDENTIAL INFORMATION hereunder.

 

7.5    Confidentiality of AGREEMENT.    Neither
party will publicly disclose any term of this AGREEMENT or announce the
existence of this AGREEMENT without the prior written consent of the other
party, except that each party may reveal the terms of this AGREEMENT (a) to its
accountants, banks, financing sources, lawyers and other professional advisors,
provided that such parties undertake in writing to keep such information
confidential, or (b) as required by applicable laws and regulations including
those of the U.S. Securities and Exchange Commission on the notification. Each
party may also disclose the tax treatment and tax structure of the transactions
contemplated by this AGREEMENT and all materials of any kind (including
opinions or other tax analyses) that are provided to it relating to such tax
treatment and tax structure.

 

7.6    Reproduction of CONFIDENTIAL
INFORMATION.    CONFIDENTIAL INFORMATION shall
not be reproduced except as required to implement this AGREEMENT. Any
reproduction or derivative of any CONFIDENTIAL INFORMATION of DISCLOSER by
RECIPIENT shall remain the property of DISCLOSER and shall contain all
confidential or proprietary notices or legends which appear on the original.

 

VIII.
REPRESENTATIONS AND WARRANTIES

 

8.1    Representations and Warranties
by LICENSOR.    LICENSOR represents, warrants
and covenants to LICENSEE:

 

(a)    Corporate Power.    LICENSOR
is duly organized and validly existing under the laws of Delaware and has full
corporate power and authority to enter into this AGREEMENT and to carry out the
provisions hereof.

 

(b)    Due Authorization.    LICENSOR
is duly authorized to execute and deliver this AGREEMENT and to perform its
obligations hereunder. The person executing this AGREEMENT on LICENSOR's behalf
has been duly authorized to do so by all requisite corporate action.

 

(c)    Binding Agreement.    This
AGREEMENT is a legal and valid obligation binding upon LICENSOR and enforceable
in accordance with its terms. The execution, delivery and performance of this
AGREEMENT by LICENSOR does not conflict with any agreement, instrument or
understanding, oral or written, to which it is a party or by which it may be
bound, nor violate any material law or regulation of any court, governmental
body or administrative or other agency having jurisdiction over it.

 

(d)    Grant of Rights.    LICENSOR
has not, and will not during the term of this AGREEMENT, grant any right to any
third party that would conflict with the rights granted to LICENSEE hereunder.

 

(e)    Validity.    LICENSOR
is aware of no action, suit or inquiry or investigation instituted by any
governmental agency that questions or threatens the validity of this AGREEMENT.

 

37

 

(f)    Ownership.    To
LICENSOR's knowledge, it owns or holds valid and enforceable licenses to the
LICENSED PATENTS and LICENSED TECHNICAL INFORMATION and has sufficient rights
and power to grant the licenses to LICENSEE that it purports to grant herein.

 

(g)    Third Party Rights.    LICENSOR
has no knowledge of any third party INTELLECTUAL PROPERTY RIGHT that is
infringed by the use or commercialization of the LICENSED PRODUCTS as
contemplated hereby.

 

8.2    Representations and Warranties
by LICENSEE:    LICENSEE represents, warrants
and covenants to LICENSOR:

 

(a)    Corporate Power.    LICENSEE
is duly organized and validly existing under the laws of the State of Nevada
and has full corporate power and authority to enter into this AGREEMENT and to
carry out the provisions hereof.

 

(b)    Due Authorization.    LICENSEE
is duly authorized to execute and deliver this AGREEMENT and to perform its obligations
hereunder. The person executing this AGREEMENT on LICENSEE's behalf has been
duly authorized to do so by all requisite corporation action.

 

(c)    Binding Agreement.    This
AGREEMENT is a legal and valid obligation binding upon LICENSEE and enforceable
in accordance with its terms. The execution, delivery and performance of this
AGREEMENT by LICENSEE does not conflict with any agreement, instrument or
understanding, oral or written, to which it is a party or by which it may be
bound, nor violate any material law or regulation of any court, governmental
body or administrative or other agency having jurisdiction over it.

 

8.3   EXCEPT FOR ANY EXPRESS WARRANTY GIVEN IN
SECTION 8.1 OR 8.2, NEITHER PARTY MAKES ANY WARRANTY, AND EACH PARTY EXPRESSLY
DISCLAIMS ALL OTHER WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED OR ARISING OUT OF
A COURSE OF CONDUCT OR COURSE OF DEALING, INCLUDING ALL WARRANTIES OF TITLE,
PERFORMANCE, USE, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
NON-INFRINGEMENT.

 

IX.
ASSIGNMENT

 

9.1   Neither this AGREEMENT nor any right or
obligation hereunder is assignable in whole or in part by any party without the
prior written consent of the other party. Notwithstanding the foregoing, either
party may assign this AGREEMENT, without such consent to a third party in
connection with any merger, acquisition, consolidation, reorganization (in
which a change of control occurs), CHANGE OF CONTROL of or by the assigning
party, or the sale of all, substantially all or a majority of such parties' assets
or voting securities. A “CHANGE OF CONTROL”
occurs when over fifty percent (50%) of a party's then outstanding securities
are acquired by a third party. This AGREEMENT shall inure to the benefit of
each of the party's successors and assignees provided that such successors or
assignees assume the party's obligations under this AGREEMENT.

 

X. TERM AND
TERMINATION

 

10.1    Term.    Subject
to Sections 10.2 and 10.3 hereinbelow, the term of this AGREEMENT is from the
EFFECTIVE DATE until the five (5) year anniversary of the EFFECTIVE DATE (the “TERM”).

 

10.2    Termination for Breach.    Each
party shall have the right to terminate this AGREEMENT if the other party
breaches this AGREEMENT and fails to cure such breach within thirty (30) days
following the date the breaching party receives a written breach notice from
the non-breaching party

 

38

 

describing the breach; provided, however, that the foregoing cure
right shall not apply for a breach of Sections II, IV and VII, whereupon the
non-breaching party may terminate this AGREEMENT immediately upon written
notice to the breaching party without granting the breaching party the right to
cure such breach.

 

10.3    Termination for Bankruptcy.    Each
party shall have the right to terminate this AGREEMENT immediately upon written
notice if the other party files a petition, action or other proceeding seeking
relief or protection under any bankruptcy laws, whether voluntary or
involuntary; or the other party becomes insolvent, or is unable to pay its
debts as due or ceases to conduct business in the normal course (however, if
such petition, action or proceeding is involuntary, then only if such petition,
action or proceeding is not dismissed within sixty (60) days of filing);

 

10.4    Post-Termination Obligations.    Upon
termination or expiration of this AGREEMENT:

 

(a)   nothing herein will be construed to release
either party of any obligation or liability maturing prior to the effective
date of the termination or expiration of this AGREEMENT;

 

(b)   Any outstanding payments and the provisions
of Sections I, V, VI, VII, VIII, IX, XI, XII and Sections 3.4, 3.5, 3.6, 3.7,
4.1, 4.2 and 10.4 shall survive any termination or expiration of this AGREEMENT
by their terms for any reason.

 

(c)   Each party shall cease to use or exploit in
any manner the CONFIDENTIAL INFORMATION of the other party or any elements
thereof in accordance with Section VII and shall return to the other party all
CONFIDENTIAL INFORMATION (including all copies and derivatives, in any form,
thereof) disclosed by the other party, and LICENSEE shall cease to use the
CONFIDENTIAL INFORMATION of LICENSOR, provided that LICENSEE shall not be
prohibited from using such CONFIDENTIAL INFORMATION in providing support
services for the LICENSED PRODUCTS and selling all LICENSED PRODUCTS and parts
therefor that it has on hand at the date of termination; and

 

(d)   Except as set forth in Section 3.4,
LICENSEE shall immediately cease the manufacture of LICENSED PRODUCTS.

 

XI.
LIMITATION OF LIABILITY

 

11.1
TO THE MAXIMUM ALLOWED BY APPLICABLE LAW, IN NO EVENT SHALL LICENSOR BE LIABLE
FOR ANY LOSS, INABILITY TO USE, INTERRUPTION OF BUSINESS, OR ANY INDIRECT,
SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY KIND (INCLUDING LOST
PROFITS) ARISING OUT OF THE LICENSED TECHNOLOGY, THE LICENSED PRODUCTS, OR
OTHERWISE UNDER THIS AGREEMENT, REGARDLESS OF THE FORM OF ACTION, WHETHER IN
CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT PRODUCT LIABILITY, OR OTHERWISE,
EVEN IF LICENSEE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

 

11.2
TO THE MAXIMUM EXTENT ALLOWED UNDER APPLICABLE LAW, IN NO EVENT SHALL
LICENSOR'S AGGREGATE LIABILITY TO LICENSOR, OR ANY THIRD PARTY FOR ANY AND ALL
CLAIMS ARISING FROM OR RELATING TO THIS AGREEMENT, WHETHER IN CONTRACT, TORT OR
ANY OTHER THEORY OF LIABILITY, EXCEED THE AMOUNTS PAID BY LICENSEE TO LICENSOR
HEREUNDER PRIOR TO THE DATE OF THE EVENT GIVING RISE TO SUCH LIABILITY. THIS
LIMITATION SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY
LIMITED REMEDY PROVIDED HEREIN.

 

39

 

XII.
GENERAL

 

12.1    Integration, Amendments.    This
AGREEMENT and Exhibits A and B attached hereto, represent and
constitute the sole, final and entire agreement between the parties with
respect to the subject matter hereof, may only be amended in writing signed by
the duly authorized officers of both parties, and supersedes all prior
agreements and understandings with respect to the matters covered by this
AGREEMENT.

 

12.2    Notices.    Any
notice, waivers or consents required by this AGREEMENT must be given by
prepaid, first class, certified mail, return receipt requested, and addressed
in the case of LICENSOR to:

 

Vista Medical Technologies,
Inc.

2101 Faraday Avenue

Carlsbad, CA 92008

Facsimile: (760) 603-9170

Attention: John R. Lyon

 

or in the case of LICENSEE
to:

Viking Systems, Inc.

7514 Girard Ave., Suite 1509

La Jolla, CA 92037

Facsimile No.: (619)
839-3793

Attention: Thomas B. Marsh

 

or other addresses as may be
given from time to time under the terms of this notice provision.

 

12.3    Governing Law.    This
AGREEMENT is entered into in and shall be governed, construed and enforced in
all respects solely and exclusively under the laws of the State of California,
USA without giving effect to any law which would result in the application of a
different body of law. Any and all suits hereunder shall be brought and
resolved solely and exclusively in, and the parties hereby irrevocably consent
to the exclusive jurisdiction and proper venue of, the state and federal courts
located in the County of San Diego, State of California, USA, and waive any
objections thereto based on any ground including improper venue or Forum
Non-Conveniens. The parties agree that any process directed to any of them in
any such litigation may be served outside the State of California, USA, with
the same force and effect as if the service had been made within the State of
California, USA, and that service of process may be effected in accordance with
Section 12.2 hereof. Any decision rendered by such court shall be binding,
final and conclusive upon the parties, and a judgment thereon may be entered
in, and enforced by, any court having jurisdiction over the party against which
an award is entered or the location of such party's assets.

 

12.4    Injunctive Relief.    Notwithstanding
anything to the contrary herein, each party shall be entitled to seek
injunctive or other equitable relief, wherever such party deems appropriate in
any jurisdiction, in order to preserve or enforce such party's rights for any
breach or threatened breach of the other party of Sections II, IV or VII. Each
party agrees that: (i) Section II, IV and VII are necessary and reasonable to
protect the other party and its business, (ii) any violation of these
provisions could cause irreparable injury to the other party for which money
damages would be inadequate, and (iii) as a result, the other party will be
entitled to seek and obtain injunctive relief against the breach or threatened
breach of the provisions of Section II, IV or VII without the necessity of
posting bond or proving actual damages. The parties agree that the remedies set
forth in this Section 12.4 are in addition to and in no way preclude any other remedies
or actions that may be available at law or under this AGREEMENT.

 

12.5    Attorneys' Fees.    The
prevailing party in any action or suit shall be entitled to recover all costs
it incurred in connection therewith, including, without limitation, reasonable
attorneys' fees.

 

40

 

12.6    No Waiver.    The
failure of either party to require performance by the other party of any
provision hereof shall not affect its right to require such performance at any
time thereafter; nor shall the waiver by either party of a breach of any
provision hereof be taken or held to be a waiver of the provision itself. Any
such waiver or any amendment of this AGREEMENT must be in writing and signed by
both parties to be effective.

 

12.7    Headings.    Headings
included herein are for convenience only and will not be used to construe this
AGREEMENT.

 

12.8    Severability.    If
one or more provisions in this AGREEMENT are ruled entirely or partly invalid
or unenforceable by any court or governmental authority of competent
jurisdiction, then: (i) the validity and enforceability of all provisions not
ruled to be invalid or unenforceable shall remain unaffected; (ii) the effect
of such ruling shall be limited to the body making the ruling; (iii) the
provision(s) held wholly or partly invalid or unenforceable shall be deemed
amended, and the parties shall reform the provision(s) to the minimum extent
necessary to render them valid and enforceable in conformity with the parties'
intent as manifested herein; and (iv) if the ruling, or the controlling
principle of law or equity leading to the ruling, is subsequently overruled,
modified, or amended, then the provision(s) in question, as originally set
forth in this AGREEMENT, shall be deemed valid and enforceable to the maximum
extent permitted by the new controlling principle of law or equity.

 

12.9    Independent Contractors.    The
relationship between LICENSEE and LICENSOR is solely that of independent
contractors. Neither party nor its employees, agents or representatives shall
be considered employees, agents, partners, franchisees, joint venturers or
representatives of the other party. Neither party shall act or represent
itself, directly or by implication, as agent, party to a joint venture with the
other party, partner or representative of the other, or in any manner assume or
attempt to assume or create any obligation or liability of any kind, express or
implied, on behalf of, or in the name of, the other.

 

12.10    Export Controls.    LICENSEE
understands that the LICENSED TECHNOLOGY is subject to the export control laws
and regulations of the U.S. or other applicable jurisdictions. LICENSEE agrees
that it will not export or re-export the LICENSED TECHNOLOGY in violation of
such laws or regulations.

 

12.11    Corrupt Practices.    LICENSEE
shall not, directly or indirectly, make, offer or agree to make or offer on
behalf of LICENSOR, any loan, gift, donation or other payment, directly or
indirectly, whether in cash or in kind, for the benefit of or at the direction
of any candidate, committee, political party, political function or government
or government subdivision, or any individual elected, appointed or otherwise
designated as an employee or officer thereof, for the purposes of influencing
any act or decision of such entity or individual or inducing such entity or
individual to do or omit to do anything in order to obtain or retain business
or other benefits in violation of the United States Foreign Corrupt Practices
Act.

 

12.12    Boycott.    LICENSEE
shall not, directly or indirectly, take any action that would cause LICENSOR to
be in violation of United States anti-boycott laws under the United States
Export Administration Act or the United States Internal Revenue Code, or any regulation
thereunder.

 

12.13    Counterparts.    This
AGREEMENT may be executed in one or more counterparts, each of which shall be
an original and all of which shall constitute together the same document.

 

12.14    Interpretation.    This
AGREEMENT has been negotiated by the parties and their respective counsel. This
AGREEMENT will be fairly interpreted in accordance with its terms and without
any strict construction in favor of or against any party. Any ambiguity will
not be interpreted against the drafting party.

 

41

 

IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized representatives to execute this AGREEMENT. 

 

	
  VIKING SYSTEMS, INC.

  	
  VISTA MEDICAL
  TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
  Thomas
  B. Marsh, President

  	
   

  	
   

  	
  John
  R. Lyon, President

  
	
   

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  	
  Date:

  	
   

  
								

 

42

 

EXHIBIT A

 

LICENSED
TECHNOLOGY

 

All “Company Intellectual Property,” as defined in the Asset Purchase
Agreement.

 

43

 

EXHIBIT B

 

LICENSED
PRODUCTS

 

VISTA
PRODUCTS

 

OEM
PRODUCTS

 

44

 

EXHIBIT B

BILL OF
SALE

 

This
Bill of Sale, effective as
of         , 2004, is being
executed and delivered by Vista Medical Technologies, Inc., a Delaware
corporation (“Vista”), to Viking Systems, Inc., a Nevada corporation
(“Viking”), in connection with that certain Asset Purchase Agreement pursuant
to which Vista has agreed to sell, and Viking has agreed to purchase, certain
assets of Vista (the “Purchase Agreement”). Capitalized terms used herein but
not defined herein shall have the meanings ascribed to such terms in the
Purchase Agreement.

 

WHEREAS,
Vista has agreed to sell to Viking all of the Purchased Assets in exchange for
the purchase price described in Section 2.4 of the Purchase Agreement (the
“Purchase Price”).

 

WHEREAS,
Vista is executing and delivering this Bill of Sale to Viking for the purpose
of selling to and vesting in Viking all right, title and interest in and to the
Purchased Assets.

 

NOW,
THEREFORE, in exchange for the Purchase Price, Vista hereby agrees as follows:

 

1.    
Vista agrees to grant, sell, convey, assign, transfer and deliver to Viking,
free and clear of any encumbrance or adverse claim of any kind whatsoever, all
of its right, title, and interest in and to the Purchased Assets.

 

2.    
From time to time after the date hereof, Vista agrees to execute and deliver to
Viking such instruments of sale, transfer, conveyance, assignment and delivery,
and such consents, assurances, powers of attorney and other instruments as may
be reasonably requested by Viking in order to vest in Viking all right, good
and marketable title and interest of Vista in and to the Purchased Assets and
otherwise in order to carry out the purpose and intent of this instrument.
Vista covenants and agrees to warrant and defend the sale, transfer,
assignment, conveyance, grant and delivery of the Purchased Assets hereby made
against all persons whomsoever, to take all steps reasonably necessary to
establish the record of Viking's title to the Purchased Assets.

 

3.    
Without limiting Section 2 hereof, Vista hereby constitutes and appoints Viking
the true and lawful agent and attorney in fact of Vista, with full power of
substitution and resubstitution, in whole or in part, in the name and stead of
Vista but on behalf and for the benefit of Viking and its successors and
assigns, from time to time:

 

a.    
to demand, receive and collect any and all of the Purchased Assets and to give
receipts and releases for and with respect to the same, or any part thereof;

 

b.    
to institute and prosecute, in the name of Vista or otherwise, any and all
proceedings at law, in equity or otherwise, that Viking or its successors and
assigns may deem proper in order to collect or reduce to possession any of the
Purchased Assets and in order to collect or enforce any claim or right of any
kind hereby assigned or transferred, or intended so to be; and

 

c.    
to do all things legally permissible, required or reasonably deemed by Viking
to be required to recover and collect the Purchase Assets and to use Vista's
name in such manner as Viking may reasonably deem necessary for the collection
and recovery of same.

 

Vista
hereby declaring that the foregoing powers are coupled with an interest and are
and shall be irrevocable by Vista.

 

4.    
This instrument shall be binding upon Vista, and its successors and assigns,
for the uses and purposes set forth above.

 

5.    
This instrument shall be governed by and construed in accordance with the laws
of the State of California applicable to contracts executed and performed in
such State, without giving effect to conflicts of laws principles.

 

[SIGNATURE PAGE TO FOLLOW]

 

-CONFIDENTIAL-

 

45

 

IN
WITNESS WHEREOF, Vista has caused this Bill of Sale to be executed and
delivered on the date and year first written above. 

 

	
   

  	
  VISTA MEDICAL
  TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

	
  THE STATE OF CALIFORNIA

  	
  )

  	
   

  
	
   

  	
  )

  	
   

  
	
  COUNTY OF

  	
  )

  	
   

  

 

On               
, 2004, before
me,                        ,
personally
appeared                                                                         
, known personally to me (or proved to me on the basis of satisfactory evidence)
to be
the                          
of the above named corporation whose name is subscribed to the within instrument
and acknowledged to me that she/he executed the same in her/his authorized
capacity, and that by her/his signature on the instrument the person, or the
entity upon behalf of which she/he acted, executed the instrument.

 

WITNESS my hand and official seal. 

 

 

	
   

  	
   

  
	
   

  	
  NOTARY
  PUBLIC—STATE OF CALIFORNIA

  

 

46

 

[SIGNATURE PAGE TO BILL OF
SALE]

 

 

47

 

EXHIBIT C

GENERAL
ASSIGNMENT

 

ASSIGNMENT
AND ASSUMPTION AGREEMENT

 

This
ASSIGNMENT AND ASSUMPTION AGREEMENT
(this “Agreement”) is made as of
                            ,
2004, by and between Vista Medical Technologies, Inc., a Delaware corporation
(“Assignor”), and Viking Systems, Inc., a Nevada corporation (the “Assignee”).

 

RECITALS:

 

A.    Assignor
and the Assignee have entered into an Asset Purchase Agreement dated as of
December 22, 2003 (the “Purchase Agreement”). Capitalized terms used herein but
not defined herein shall have the meanings ascribed to such terms in the
Purchase Agreement

 

B.    Pursuant
to the Purchase Agreement, Assignor has agreed to convey, transfer, assign and
deliver to Assignee all of the Purchased Assets, and Assignee has agreed to
assume the Assumed Liabilities.

 

AGREEMENT:

 

In
consideration of the promises and of the agreements contained herein and in the
Purchase Agreement and for other good and valuable consideration, the receipt
and sufficiency of which are hereby expressly acknowledged, the parties hereto
agree as follows:

 

1.    Assignment.    Assignor,
for itself and its successors and assigns forever, hereby assigns, transfers
and conveys to Assignee all of its right, title and interest in, related to or
arising out of, the Purchased Assets.

 

2.    Assumption.    The
Assignee, for itself and its successors and assigns forever, hereby accepts and
assumes the due and punctual performance, discharge and observation of, and
shall perform, discharge and observe, all of Assignor's obligations in, related
to, or arising out of the Purchased Assets and the Assumed Liabilities.

 

3.    Additional Rights and
Obligations.    Assignor and Assignee hereby
agree and acknowledge that this Agreement is being entered into pursuant to and
subject to the terms and conditions set forth in the Purchase Agreement and
that additional rights and obligations of the parties are expressly provided
for therein, and that the execution and delivery of this Agreement shall not
impair or diminish any of the rights or obligations of any of the parties to
the Purchase Agreement as set forth therein.

 

4.    Reasonable Efforts;
Cooperation.    The parties shall use their
reasonable best efforts to take, or cause to be taken, all actions and to do,
or cause to be done, all things reasonably necessary, proper or advisable to
consummate and make effective as promptly as practicable the provisions
contained herein and to cooperate with each other in connection with the
foregoing.

 

5.    Consents.    Notwithstanding
anything to the contrary in this Agreement, as to those Purchased Assets for
which consent of third parties to assignment is required, the obtaining of such
consents shall be a condition precedent to the assignment to Assignee by
Assignor of its interests therein and to the assumption by Assignor of
Assignee's obligations thereunder.

 

6.    Counterparts.    This
Agreement may be executed in counterparts and by facsimile, each of which shall
be deemed an original, and all such counterparts shall constitute one and the
same instrument. Any counterpart may be delivered by facsimile.

 

48

 

7.    Governing Law.    This
Agreement shall be governed by and construed in accordance with the laws of the
State of California.

 

This Assignment and Assumption Agreement has been executed as of the
date first written above. 

 

	
   

  	
  VISTA
  MEDICAL TECHNOLOGIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  VIKING
  SYSTEMS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

49

 

EXHIBIT D

REGISTRATION
RIGHTS AGREEMENT

 

VIKING
SYSTEMS, INC.

REGISTRATION
RIGHTS AGREEMENT

 

THIS
REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is entered into as of
the    day
of              ,
2004, by and among Viking Systems Inc., a Nevada corporation (the “Company”),
and Vista Medical Technologies, Inc., a Delaware corporation (the “Holder”).

 

WHEREAS,
Holder received shares of the Company's Common Stock pursuant to the terms of
that certain Asset Purchase Agreement between the Company and Holder dated
December 22, 2003 (the “Asset Purchase Agreement”).

 

WHEREAS,
in connection with the Asset Purchase Agreement and the transactions
contemplated therein, the Company has agreed to grant to Holder the rights
described herein.

 

NOW,
THEREFORE, in consideration of the premises and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree hereto as follows:

 

1.    General.

 

1.1    Definitions.    As used in this
Agreement the following terms shall have the following respective meanings:

 

(a)   “Exchange Act” means the Securities
Exchange Act of 1934, as amended.

 

(b)   “Holder” means any person owning of record
Registrable Securities that have not been sold to the public or any assignee of
record of such Registrable Securities.

 

(c)   “Register,” “registered,” and
“registration” refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement or
document.

 

(d)   “Registrable Securities” means (a) the
Shares and (b) any Common Stock of the Company issued as (or issuable upon the
conversion or exercise of any warrant, right or other security which is issued
as) a dividend or other distribution with respect to, or in exchange for or in
replacement of, the Shares. Notwithstanding the foregoing, Registrable
Securities shall not include any securities sold by a person to the public
either pursuant to a registration statement or Rule 144 or sold in a private
transaction in which the transferor's rights under Section 2 of this Agreement
are not assigned.

 

(e)   “Registration Expenses” shall mean the fees
and expenses of a single counsel for Holder selected by Holder (with the
approval of the Company, which approval shall not be unreasonably withheld) and
all expenses incurred by the Company in complying with Section 2.1 hereof,
including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel for the Company, blue sky fees and
expenses and the expense of any special audits incident to or required by any
such registration (but excluding the compensation of regular employees of the
Company which shall be paid in any event by the Company).

 

(f)   “SEC” or “Commission” means the Securities
and Exchange Commission.

 

(g)   “Securities Act” shall mean the Securities
Act of 1933, as amended.

 

50

 

(h)   “Selling Expenses” shall mean underwriting
discounts and selling commissions applicable to the sale and the legal fees and
expenses of special counsel to Holder above and beyond the counsel provided for
in the definition of Registration Expenses.

 

(i)    ”Shares”
shall mean the Company's Common Stock issued pursuant to the Asset Purchase
Agreement and held by Holder or its permitted assigns.

 

(j)    ”Special
Registration Statement” shall mean (i) a registration statement relating to any
employee benefit plan or (ii) with respect to any corporate reorganization or
transaction under Rule 145 of the Securities Act, including any registration
statements related to the resale of securities issued in such a transaction or
(iii) a registration related to stock issued upon conversion of debt
securities.

 

2.    Registration.

 

2.1     Piggyback
Registrations.    The Company shall notify the
Holder in writing at least thirty (30) days prior to the filing of any
registration statement under the Securities Act for purposes of a public
offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding Special Registration Statements) and will afford Holder
an opportunity to include in such registration statement all or part of the
Registrable Securities held by such Holder. If Holder desires to include in any
such registration statement all or any part of its Registrable Securities,
Holder shall, within twenty (20) days after the above-described notice from the
Company, so notify the Company in writing. Such notice shall state the intended
method of disposition of the Registrable Securities by Holder. If Holder
decides not to include all of its Registrable Securities in any registration
statement thereafter filed by the Company, Holder shall nevertheless continue
to have the right to include any Registrable Securities in any subsequent
registration statement or registration statements as may be filed by the
Company with respect to offerings of its securities, all upon the terms and
conditions set forth herein.

 

(a)    Underwriting.    If
the registration statement under which the Company gives notice under this
Section 2.1 is for an underwritten offering, the Company shall so advise
Holder. In such event, the right of any Holder to be included in a registration
pursuant to this Section 2.1 shall be conditioned upon Holder's participation
in such underwriting and the inclusion of Holder's Registrable Securities in
the underwriting to the extent provided herein. If Holder proposes to
distribute its Registrable Securities through such underwriting, it shall enter
into an underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of this Agreement, if the underwriter determines in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, the number of shares that may be included in the underwriting
shall be allocated, first, to the Company; and second, to all other selling
stockholders of the Company (including Holder) on a pro rata basis; provided,
however in no event shall the number of shares to be included by Holder be
reduced to a number less than 25% of the number of shares initially proposed to
be included by Holder. If Holder disapproves of the terms of any such
underwriting, Holder may elect to withdraw therefrom by written notice to the
Company and the underwriter. Any Registrable Securities excluded or withdrawn
from such underwriting shall be excluded and withdrawn from the registration.
For any Holder which is a partnership or corporation, the partners, retired
partners and stockholders of such Holder, or the estates and family members of
any such partners and retired partners and any trusts for the benefit of any of
the foregoing person shall be deemed to be a single “Holder,” and any pro rata
reduction with respect to such “Holder” shall be based upon the aggregate
amount of shares carrying registration rights owned by all entities and
individuals included in such “Holder,” as defined in this sentence divided by
the total

 

51

 

number of shares held by all
stockholders proposed to be included as selling stockholders in the
registration statement.

 

(b)    Right to Terminate
Registration.    The Company shall have the
right to terminate or withdraw any registration initiated by it under this Section
2.1 prior to the effectiveness of such registration whether or not any Holder
has elected to include securities in such registration. The Registration
Expenses of such withdrawn registration shall be borne by the Company in
accordance with Section 2.2 hereof.

 

2.2     Expenses of
Registration.    Except as specifically provided
herein, all Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 2.1 herein shall be borne by
the Company. All Selling Expenses incurred in connection with any registrations
hereunder, shall be borne by Holder.

 

2.3     Obligations of the
Company.    Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:

 

(a)   Prepare and file with the SEC a
registration statement with respect to such Registrable Securities and use all
reasonable efforts to cause such registration statement to become effective and
remain effective for a period of ninety (90) days or until Holder has completed
the distribution related thereto, whichever first occurs.

 

(b)   Prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement for the
period set forth in Section 2.3(a) above.

 

(c)   Furnish to Holder such number of copies of
a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as Holder may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by it.

 

(d)   Use its reasonable efforts to register and
qualify the securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as shall be reasonably
requested by Holder; provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.

 

(e)   In the event of any underwritten public
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing underwriter(s) of
such offering. If Holder participates in such underwriting, it shall also enter
into and perform its obligations under such an agreement.

 

(f)   Notify Holder of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the happening
of any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing.

 

(g)   Use its reasonable efforts to furnish, on
the date that such Registrable Securities are delivered to the underwriters for
sale, if such securities are being sold through underwriters, (i) an opinion,
dated as of such date, of the counsel representing the Company for the purposes
of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and (ii) a letter, dated

 

52

 

as of such date, from the
independent certified public accountants of the Company, in form and substance
as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering addressed to the underwriters.

 

2.4     Termination of
Registration Rights.    All registration rights
granted under this Section 2 shall terminate and be of no further force and
effect upon the earlier of (i) seven (7) years from the date hereof or (ii) at
such time as SEC Rule 144 or another similar exemption under the Securities Act
is available for the sale, without registration, of all of Holder's Registrable
Securities during a three (3) month period.

 

2.5     Furnish Information.    It
shall be a condition precedent to the obligations of the Company to take any
action pursuant to Section 2.1 that the selling Holders shall furnish to the
Company such information regarding themselves, the Registrable Securities held
by them and the intended method of disposition of such securities as shall be
required to effect the registration of their Registrable Securities.

 

2.6     Indemnification.    In
the event any Registrable Securities are included in a registration statement
under Section 2.1:

 

(a)   To the extent permitted by law, the Company
will indemnify and hold harmless Holder, the partners, officers and directors
of Holder, any underwriter (as defined in the Securities Act) for Holder and
each person, if any, who controls Holder or underwriter within the meaning of
the Securities Act or the Exchange Act, against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a “Violation”) by the Company: (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) 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, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation
promulgated under the Securities Act, the Exchange Act or any state securities
law in connection with the offering covered by such registration statement; and
the Company will pay as incurred to such Holder, partner, officer, director,
underwriter or controlling person any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided however, that the indemnity
agreement contained in this Section 2.6(a) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Company, which consent shall not be
unreasonably withheld, nor shall the Company be liable in any such case for any
such loss, claim, damage, liability or action to the extent that it arises out
of or is based upon a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by such Holder, partner, officer, director, underwriter or
controlling person of such Holder.

 

(b)   To the extent permitted by law, Holder
will, if Registrable Securities held by Holder are included in the securities
as to which such registration, qualifications or compliance is being effected,
indemnify and hold harmless the Company, each of its directors, its officers
and each person, if any, who controls the Company within the meaning of the
Securities Act and any underwriter, against any losses, claims, damages or
liabilities (joint or several) to which the Company or any such director,
officer, controlling person or underwriter may become subject under the
Securities Act, the Exchange Act or other federal or state law,

 

53

 

insofar as such losses,
claims, damages or liabilities (or actions in respect thereto) arise out of or
are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by Holder under an instrument duly executed by
Holder and stated to be specifically for use in connection with such
registration; and Holder will pay as incurred any legal or other expenses
reasonably incurred by the Company or any such director, officer, controlling
person or underwriter in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this Section 2.6(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of Holder, which consent shall not
be unreasonably withheld; provided further, that in no event shall any
indemnity under this Section 2.6 exceed the gross proceeds from the offering
received by Holder.

 

(c)   Promptly after receipt by an indemnified
party under this Section 2.6 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this Section
2.6, deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; provided, however, that an
indemnified party shall have the right to retain its own counsel, with the
reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by
such counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 2.6, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 2.6.

 

(d)   If the indemnification provided for in this
Section 2.6 is held by a court of competent jurisdiction to be unavailable to
an indemnified party with respect to any losses, claims, damages or liabilities
referred to herein, the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall to the extent permitted by applicable law
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability in such proportion as is appropriate
to reflect the relative fault of the indemnifying party on the one hand and of
the indemnified party on the other in connection with the Violation(s) that
resulted in such loss, claim, damage or liability, as well as any other
relevant equitable considerations. The relative fault of the indemnifying party
and of the indemnified party shall be determined by a court of law by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission; provided, that in no event shall any
contribution by Holder hereunder exceed the net proceeds from the offering
received by Holder except in the case of willful fraud of Holder.

 

(e)   The obligations of the Company and Holder
under this Section 2.6 shall survive completion of any offering of Registrable
Securities in a registration statement and the termination of this Agreement.
No indemnifying party, in the defense of any such claim or litigation, shall,
except with the consent of each indemnified party, consent to entry of any

 

54

 

judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation.

 

Notwithstanding
the foregoing, to the extent the indemnification provisions contained in the
underwriting agreement entered into in connection with the underwritten public
offering are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.

 

2.7     Limitation on
Subsequent Registration Rights.    After the
date of this Agreement, the Company shall not, without the prior written
consent of Holder, enter into any agreement with any holder or prospective
holder of any securities of the Company that would grant such holder rights
senior to those granted to Holder hereunder with respect to the allocation of
shares in an underwriting agreement.

 

3.    Miscellaneous.

 

3.1     Governing Law.    This
Agreement shall be governed by and construed under the laws of the State of
California as applied to agreements
among California residents entered into and to be performed entirely within
California.

 

3.2     Survival.    The
representations, warranties, covenants, and agreements made herein shall
survive any investigation made by Holder or the Company and the closing of the
transactions contemplated hereby. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument.

 

3.3     Successors and Assigns.    Except
as otherwise expressly provided herein, the provisions hereof shall inure to
the benefit of, and be binding upon, the successors, assigns, heirs, executors,
and administrators of the parties hereto and shall inure to the benefit of and
be enforceable by each person who shall be a holder of Registrable Securities
from time to time; provided, however, that prior to the receipt by the Company of
adequate written notice of the transfer of any Registrable Securities
specifying the full name and address of the transferee, the Company may deem
and treat the person listed as the holder of such shares in its records as the
absolute owner and holder of such shares for all purposes.

 

3.4     Entire Agreement.    This Agreement,
the Asset Purchase Agreement and the other documents delivered pursuant thereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and no party shall be liable or bound to any
other in any manner by any representations, warranties, covenants and
agreements except as specifically set forth herein and therein.

 

3.5     Severability.    In
the event one or more of the provisions of this Agreement should, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality, or unenforceability shall not affect any other
provisions of this Agreement, and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.

 

3.6     Amendment and Waiver.

 

(a)   Except as otherwise expressly provided,
this Agreement may be amended or modified only upon the written consent of the
Company and Holder Securities.

 

(b)   Except as otherwise expressly provided, the
obligations of the Company and the rights of Holder under this Agreement may be
waived only with the written consent of Holder.

 

55

 

3.7     Delays or Omissions.    It
is agreed that no delay or omission to exercise any right, power, or remedy
accruing to Holder, upon any breach, default or noncompliance of the Company
under this Agreement shall impair any such right, power, or remedy, nor shall
it be construed to be a waiver of any such breach, default or noncompliance, or
any acquiescence therein, or of any similar breach, default or noncompliance
thereafter occurring. It is further agreed that any waiver, permit, consent, or
approval of any kind or character on Holder's part of any breach, default or
noncompliance under the Agreement or any waiver on Holder's part of any
provisions or conditions of this Agreement must be in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement, by law, or otherwise, shall be
cumulative and not alternative.

 

3.8     Notices.    All
notices required or permitted hereunder shall be in writing and shall be deemed
effectively given: (a) upon personal delivery to the party to be notified, (b)
when sent by confirmed electronic mail or facsimile if sent during normal
business hours of the recipient; if not, then on the next business day, (c)
five (5) days after having been sent by registered or certified mail, return
receipt requested, postage prepaid, or (d) one (1) day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the party
to be notified at the address as set forth on the signature pages hereof or at
such other address as such party may designate by ten (10) days advance written
notice to the other parties hereto.

 

3.9     Attorneys' Fees.    In
the event that any suit or action is instituted to enforce any provision in
this Agreement, the prevailing party in such dispute shall be entitled to
recover from the losing party all fees, costs and expenses of enforcing any
right of such prevailing party under or with respect to this Agreement,
including without limitation, such reasonable fees and expenses of attorneys
and accountants, which shall include, without limitation, all fees, costs and
expenses of appeals.

 

3.10     Titles and Subtitles.    The
titles of the sections and subsections of this Agreement are for convenience of
reference only and are not to be considered in construing this Agreement.

 

3.11     Counterparts.    This
Agreement may be executed in any number of counterparts and by facsimile, each
of which shall be an original, but all of which together shall constitute one
instrument.

 

REMAINDER
OF PAGE LEFT INTENTIONALLY BLANK

 

56

 

IN
WITNESS WHEREOF, the parties hereto have executed this REGISTRATION RIGHTS AGREEMENT
as of the date set forth in the first paragraph hereof.

 

	
  “Company”

  	
  “Holder”

  
	
   

  	
   

  
	
  Viking Systems, Inc.

  	
  Vista Medical
  Technologies, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Address:

  	
   

  	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

SIGNATURE PAGE TO VIKING
SYSTEMS, INC.

REGISTRATION RIGHTS
AGREEMENT

 

57

 

EXHIBIT E

INVENTORY
PROCEDURE

 

Methodology
of Vista to Viking inventory transfer (by warehouse category)

 

M1

 

All
material in M1 will be categorized into two buckets based on the open A/P
report as of December 31, 2003.

 

Bucket
1 will contain all material which has been paid for by Vista.

 

Bucket
2 will contain all material which has not been paid for by Vista.

 

If
multiple lots exist determination of what has been paid for will be based on
the FIFO system.

 

All
material in Bucket 1 will be transferred to M2 in the MRP system (however the
material will not physically move.) All M2 inventory will be consigned to
Viking when the deal closes.

 

From
Jan 1 on, all material will be issued from M2 until it is depleted. Viking will
pay Vista, on a monthly basis, the delta between the value of the inventory
(standard at closing) in M2 at the beginning of the month and the end of the
month for a period of 12 months. (It is understood that the MRP system will
always interrogate M2 inventory first.)

 

CP

 

CP
contains factory refurbished product for use in service replacement and
loaners. The total book value as of Dec 16 is $136,184.13. Of that total
$20,729.19 is active product and the balance is for discontinued product which
is in use by customers.

 

It
is proposed that the entire CP inventory be acquired by Viking for the value of
the active product as of December 31, 2003.

 

SM

 

SM,
which contains slow moving inventory, will be consigned to Viking at closing.
Viking will pay Vista, on a monthly basis, the delta between the value of the
SM inventory at the beginning of the month and the end of the month, for 12
months.

 

WIP

 

WIP
will be valued based on the WIP Analysis report as of Dec 31, 2003.

 

A
list of Inventory on hand that has not been paid for will be developed from the
Open A/P Report as mentioned above.

 

All
items on the list will be checked against M1 as mentioned above.

 

The
quantity on the unpaid list that is in M1 will be added to bucket 2, which has
inventory that has not been paid for by Vista.

 

The
quantity on the unpaid list that is greater than the M1 quantity will be the
amount deducted from the WIP Analysis report value.

 

The
adjusted WIP value (WIP Analysis Report less any deductions) will then be added
to bucket 1, which is inventory that has been paid for by Vista.

 

The
value (standard) of inventory in WIP Bucket 1 will be consigned to Viking at
closing.

 

58

 

The
inventory in WIP Bucket 2 will become the property of Viking at the time of
closing and Viking will be responsible to pay the supplier.

 

WIP Three CCD Salvage

 

Vista
currently has 200 Three CCD prism blocks in a salvage job at $0 value. When
salvaged they will have the same value as a newly purchased unit, $875. It
requires approx. 1 hr of labor, ($125) to salvage. Viking will pay Vista $400
for every CCD which is salvaged.

 

WIP CP

 

Vista
maintains an inventory for service replacement and loaners. Typically this
inventory is refurbished to new product standards but sold at a discount to
existing customers whose product is out of warranty or that has been misused
and is in need of repair. Viking will take ownership at closing and pay 1/3 of
the net profit derived from sale of this inventory once it is refurbished and
sold.

 

FINAL TRANSFER

 

On
January 1, 2005 all remaining material in M2 and SM will transfer to Viking
from Vista for $1.00.

 

59Exhibit 4.1

 

CONFORMED COPY

 

FIRST DEED OF AMENDMENT
TO THE INTERCOMPANY

LOAN TERMS AND
CONDITIONS

 

 

DATED 25th November, 2003

 

 

PERMANENT FUNDING (NO. 1) LIMITED

 

and

 

PERMANENT FINANCING (NO. 1) PLC

 

and

 

PERMANENT FINANCING (NO. 2) PLC

 

and

 

THE BANK OF NEW YORK

 

and

 

CITIBANK, N.A.

 

 

	
  

  
	
   

  
	
  London

  
	
  ICM:7338503

  

 

 

CONTENTS

 

	
  Clause

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  1.

  	
  Interpretation

  	
   

  
	
  2.

  	
  Amendments
  To The Original Intercompany Loan Terms and Conditions

  	
   

  
	
  3.

  	
  Amendments

  	
   

  
	
  4.

  	
  Exclusion of Third
  Party Rights

  	
   

  
	
  5.

  	
  Counterparts and
  Severability

  	
   

  
	
  6.

  	
  Governing Law and
  Jurisdiction

  	
   

  
	
   

  	
   

  
	
  Signatories

  	
   

  

 

Appendix

 

 

THIS FIRST DEED OF AMENDMENT TO THE INTERCOMPANY LOAN TERMS
AND CONDITIONS is made on 25th November, 2003

 

BETWEEN:

 

(1)                                  PERMANENT FUNDING (NO. 1) LIMITED (registered number 4267660),
a private limited company incorporated under the laws of England and Wales,
whose registered office is at Blackwell House, Guildhall Yard, London EC2V 5AE
(Funding
1);

 

(2)                                  PERMANENT FINANCING (NO. 1) PLC (registered number 4416192),
a public limited company incorporated under the laws of England and Wales,
whose registered office is at Blackwell House, Guildhall Yard, London EC2V 5AE
(the First
Issuer);

 

(3)                                  PERMANENT FINANCING (NO. 2) PLC (registered number 4623188),
a public limited company incorporated under the laws of England and Wales,
whose registered office is at Blackwell House, Guildhall Yard, London EC2V 5AE
(the Second
Issuer);

 

(4)                                  THE BANK OF NEW YORK, whose principal office is at
One Canada Square, London E14 5AL  in its capacity as Security Trustee; and

 

(5)                                  CITIBANK, N.A., acting through its office is
at 5 Carmelite Street, London EC4Y 0PA and acting in its capacity as the Agent
Bank.

 

WHEREAS:

 

(A)                              On 14th June, 2002 the First
Issuer made a loan to Funding 1 on the terms set out in the terms and
conditions signed for the purposes of identification by Funding 1, the Agent
Bank and the Security Trustee on 14th June, 2002 (the Original  Intercompany Loan Terms and Conditions)
and a separate intercompany loan confirmation dated 14th June, 2002 (the First Issuer
Intercompany Loan Confirmation (together the First Issuer Intercompany Loan Agreement).

 

(B)                                On 6th March, 2003 the Second
Issuer made a loan to Funding 1 on the terms set out in the Original Intercompany
Loan Terms and Conditions and a separate intercompany loan confirmation dated
6th March, 2003 (the Second Issuer Intercompany Loan Confirmation
(together the Second Issuer Intercompany Loan Agreement).

 

(C)                                From time to time Funding 1
may enter into new intercompany loan agreements with New Issuers on the terms
set out in the Intercompany Loan Terms and Conditions (as amended and restated
in the manner set out in this Deed and from time to time) and the relevant new
intercompany loan confirmation (each a New Intercompany Loan Confirmation and
together with the Intercompany Loan Terms and Conditions a New Intercompany Loan Agreement).

 

(D)                               The parties to the First
Intercompany Loan Agreement and the Second Intercompany Loan Agreement have
agreed to amend and restate the Original Intercompany Loan Terms and Conditions
as set out herein.

 

 

NOW THIS DEED WITNESSES as follows:

 

1.                                      INTERPRETATION

 

1.1                                 The amended and restated master definitions
and construction schedule signed by, amongst others, the parties to this Deed
and dated 25th November, 2003 (as the same may be amended, varied or
supplemented from time to time with the consent of the parties to this Deed)
(the Master
Definitions and Construction Schedule) are expressly and
specifically incorporated into this Deed and, accordingly, the expressions
defined in the Master Definitions and Construction Schedule (as so amended,
varied or supplemented from time to time) shall, except where the context
otherwise requires and save where otherwise defined herein, have the same
meanings in this Deed, including the Recitals hereto and this Deed shall be
construed in accordance with the interpretation provisions set out in Clause 2
of the Master Definitions and Construction Schedule.

 

1.2                                 The Intercompany Loan Terms and Conditions
as amended and restated pursuant to this Deed will be referred to as the First
Amended and Restated Intercompany Loan Terms and Conditions and/or the
Intercompany Loan Terms and Conditions, as the context so requires.

 

2.                                      AMENDMENTS TO THE ORIGINAL
INTERCOMPANY LOAN TERMS AND CONDITIONS

 

2.1                                 Upon execution of this Deed by the parties
hereto, the Original Intercompany Loan Terms and Conditions shall be and hereby
are amended and restated in the form set out in the form of Appendix 1 hereto
and the First Issuer Intercompany Loan Agreement and the Second Intercompany
Loan Agreement will be deemed to be amended so that references to the
Intercompany Loan Terms and Conditions signed by Funding 1, the Security
Trustee and the Agent Bank for the purposes of identification on 14th June,
2002, shall be construed as the Intercompany Terms and Conditions as amended
and restated by this Deed.

 

3.                                      AMENDMENTS

 

Subject to Clause 25.8 of the Funding 1
Deed of Charge (Supplemental Provisions Regarding the Security Trustee), any
amendments to this Deed will be made only with the prior written consent of
each party to this Deed.

 

4.                                      EXCLUSION OF THIRD PARTY RIGHTS

 

The parties to this Deed do not intend that
any term of this Deed should be enforced, by virtue of the Contracts (Rights of
Third Parties) Act 1999, by any person who is not a party to this Deed.

 

5.                                      COUNTERPARTS AND SEVERABILITY

 

5.1                                 This Deed may be executed in any number of
counterparts (manually or by facsimile) and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute one and the same
instrument.

 

5.2                                 Where any provision in or obligation under
this Deed shall be invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions or
obligations under this Deed, or of such provision or obligation in any other
jurisdiction, shall not be affected or impaired thereby.

 

 

6.                                      GOVERNING LAW AND JURISDICTION

 

6.1                                 This Deed is governed by the laws of
England.

 

6.2                                 Each party to this Deed hereby irrevocably
submits to the non-exclusive jurisdiction of the English courts in any action
or proceeding arising out of or relating to this Deed, and hereby irrevocably
agrees that all claims in respect of such action or proceeding may be heard and
determined by such courts.  Each party
to this Deed hereby irrevocably waives, to the fullest extent it may possibly
do so, any defence or claim that the English courts are an inconvenient forum
for the maintenance or hearing of such action or proceeding.

 

DULY EXECUTED AND DELIVERED AS A DEED by each of the parties hereto
or on its behalf on the date appearing on page 1.

 

 

 

SIGNATORIES

 

Funding 1

 

	
  EXECUTED as a DEED by

  	
  )

  
	
  PERMANENT FUNDING (NO.
  1)

  	
  )

  
	
  LIMITED acting by two

  	
  )

  
	
  directors/a
  director and the secretary

  	
  )

  

 

Director: DAVID BALAI

 

Director: JAMES GARNER SMITH MACDONALD

 

 

First Issuer

 

	
  EXECUTED as a DEED by

  	
  )

  
	
  PERMANENT FINANCING (NO.
  1)

  	
  )

  
	
  PLC acting by two

  	
  )

  
	
  directors/a
  director and the secretary

  	
  )

  

 

Director: DAVID BALAI

 

Director: JAMES GARNER SMITH MACDONALD

 

 

Second Issuer

 

	
  EXECUTED as a DEED by

  	
  )

  
	
  PERMANENT FINANCING (NO.
  2)

  	
  )

  
	
  PLC acting by two

  	
  )

  
	
  directors/a
  director and the secretary

  	
  )

  

 

Director: DAVID BALAI

 

Director: JAMES GARNER SMITH MACDONALD

 

 

Agent Bank

 

	
  EXECUTED as a DEED on behalf of

  	
   

  
	
  CITIBANK, N.A., a company incorporated in

  	
  )

  
	
  the
  United States of America,

  	
  )

  
	
  in
  its capacity as Agent Bank

  	
  )

  
	
  by

  	
  )GEORGIA
  MITCHELL

  

 

being a person who, in accordance with the
laws

of that
territory, is acting under the authority

of the company

 

 

Security
Trustee

 

	
  EXECUTED as a DEED by

  	
  )KATE RUSSELL

  
	
  THE BANK OF NEW YORK

  	
  )

  
	
  acting
  by its attorney in the presence of

  	
  )

  

 

Witness: M. AFSHAR

 

Name: M. AFSHAR

 

Address: ALLEN & OVERY, LONDON

 

 

APPENDIX 1

 

AMENDED AND RESTATED INTERCOMPANY LOAN TERMS AND
CONDITIONS

 

 

INTERCOMPANY LOAN TERMS
AND CONDITIONS

 

 

PERMANENT FUNDING (NO. 1) LIMITED

 

 

CONTENTS

 

	
  Clause

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  1.

  	
  Interpretation

  	
   

  
	
  2.

  	
  The Term
  Advances

  	
   

  
	
  3.

  	
  Purpose

  	
   

  
	
  4.

  	
  Limited
  Recourse

  	
   

  
	
  5.

  	
  Utilisation of the
  Term Advances

  	
   

  
	
  6.

  	
  Interest

  	
   

  
	
  7.

  	
  Repayment

  	
   

  
	
  8.

  	
  Prepayment

  	
   

  
	
  9.

  	
  Taxes

  	
   

  
	
  10.

  	
  Illegality

  	
   

  
	
  11.

  	
  Mitigation

  	
   

  
	
  12.

  	
  Representations
  and Warranties of Funding 1

  	
   

  
	
  13.

  	
  Covenants

  	
   

  
	
  14.

  	
  Default

  	
   

  
	
  15.

  	
  Default Interest and
  Indemnity

  	
   

  
	
  16.

  	
  Payments

  	
   

  
	
  17.

  	
  Entrenched
  Provisions

  	
   

  
	
  18.

  	
  Further
  Provisions

  	
   

  
	
  19.

  	
  Redenomination

  	
   

  
	
  20.

  	
  Governing Law

  	
   

  
	
   

  	
   

  	
   

  
	
  Schedule

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  1.

  	
  Amended and
  Restated Intercompany Loan Terms And Conditions

  	
   

  
	
  2.

  	
  Notice of Drawdown
  of a Term Advance

  	
   

  
	
  3.

  	
  Solvency
  Certificate

  	
   

  
	
  4.

  	
  Form of
  Relevant Intercompany Loan Confirmation

  	
   

  
	
   

  	
   

  	
   

  
	
  Signatories

  

 

 

TERMS AND CONDITIONS MADE ON 14th June, 2002 and signed on the front page
hereof for the purposes of identification by Permanent Funding (No. 1) Limited,
Citibank, N.A., London Branch (in its capacity as Agent Bank) and State Street
Bank and Trust Company (in its capacity as Security Trustee).

 

WHEREAS:

 

(A)                              On 14th June, 2002 Permanent
Financing (No. 1) PLC (the First Issuer) shall make a loan to
Permanent Funding (No. 1) Limited (Funding 1) on the terms set out in these
terms and conditions (the Intercompany Loan Terms and Conditions) and
the separate intercompany loan confirmation dated 14th June, 2002 (the First Issuer
Intercompany Loan Confirmation (together the First Issuer Intercompany Loan Agreement).

 

(B)                                From time to time Funding 1
may enter into new intercompany loan agreements with New Issuers which shall be
made on the terms set out in these Intercompany Loan Terms and Conditions (as
the same may be amended from time to time in the manner set out herein) and the
relevant new intercompany loan confirmation (each a New Intercompany Loan Confirmation
and together with the Intercompany Loan Terms and Conditions a New
Intercompany Loan Agreement).

 

1.                                      INTERPRETATION

 

1.1                                 Terms used but not otherwise defined in
these Intercompany Loan Terms and Conditions shall, except where the context
otherwise requires and save where otherwise defined in these Intercompany Loan
Terms and Conditions or the relevant Intercompany Loan Agreement, have the
meanings given to them in the master definitions and construction schedule
dated 25th November, 2003 and signed by the parties to the Transaction
Documents (as the same may be amended, varied or supplemented from time to time
with the consent of the parties to the Transaction Documents) (the Master
Definitions and Construction Schedule) and these Intercompany Loan
Terms and Conditions shall be construed accordingly.  References in these Intercompany Loan Terms and Conditions to the
Intercompany Loan Agreement shall include references to these Intercompany Loan
Terms and Conditions as incorporated into the Intercompany Loan Agreement by
way of reference and shall be construed accordingly.

 

2.                                      THE TERM ADVANCES

 

2.1                               Conditions precedent

 

Save as the Issuer and the Security Trustee
may otherwise agree, the Term Advances will not be available for utilisation
unless:

 

(a)                                  Funding 1 and the Issuer have
signed an Intercompany Loan Confirmation (substantially in the form set out in
Schedule 3 to these Intercompany Loan Terms and Conditions);

 

(b)                                 the Security Trustee has
confirmed to Funding 1 that it or its advisers have received all of the
information and documents listed in Schedule 1 to the Intercompany Loan
Confirmation in form and substance satisfactory to the Security Trustee; and

 

(c)                                  the conditions set out in
Clause 5.1 (Drawdown conditions relating to the Term Advances) have been
satisfied.

 

1

 

2.2                               New Intercompany Loan
Agreements

 

Funding 1 may at any time, by written notice
to the Security Trustee and the Rating Agencies, enter into a New Intercompany
Loan Agreement with a New Issuer and draw additional term advances thereunder
(each a New
Term Advance). Each New Term Advance will be financed by the issue
of New Notes by the New Issuer, and will only be permitted if the following
conditions precedent are satisfied on the relevant Drawdown Date:

 

(a)                                  the proceeds of the New
Intercompany Loan are used by Funding 1 in accordance with Clause 3.1 (Purpose
and application of the Term Advances) hereof;

 

(b)                                 each of the Rating Agencies
confirms in writing to the Security Trustee that there will not, as a result of
the New Issuer issuing any New Notes or Funding 1 entering into any additional
agreements as a result of entering into the New Intercompany Loan, be any
adverse effect on the then current ratings by the Rating Agencies of the
existing Notes of any Issuer, the proceeds of which have been advanced to
Funding 1 pursuant to, inter alia, these Intercompany Loan Terms
and Conditions;

 

(c)                                  no Intercompany Loan Event of
Default under any Intercompany Loan Agreement is continuing or unwaived at the
relevant Drawdown Date;

 

(d)                                 the Principal Deficiency
Ledger does not have a debit balance as at the relevant Drawdown Date; and

 

(e)                                  any other relevant conditions
precedent specified in the Intercompany Loan Confirmation.

 

3.                                      PURPOSE

 

3.1                               Purpose and application of the
Term Advances

 

The Term Advances shall be used by Funding
1 either:

 

(a)                                  to pay the Seller (in whole or
in part) for New Loans to be assigned to the Mortgages Trustee pursuant to the
terms of the Mortgage Sale Agreement (which shall increase the Funding 1 Share
of the Trust Property); and/or

 

(b)                                 to acquire a portion of the
Current Seller Share of the Trust Property from the Seller pursuant to the
terms of the Mortgages Trust Deed; and/or

 

(c)                                  to refinance the existing debt
of Funding 1, including any existing Intercompany Loan.

 

3.2                               Application of amounts

 

Without prejudice to the obligations of
Funding 1 under this Clause 3, neither the Security Trustee nor any of the
Funding 1 Secured Creditors shall be obliged to concern themselves as to the
application of amounts drawn by Funding 1 under the Intercompany Loan
Agreement.

 

2

 

4.                                      LIMITED RECOURSE

 

4.1                               Recourse limited to available
funds

 

Each of the Issuer and the Security Trustee
agree that the liability of Funding 1 in respect of its obligations to repay
principal and pay interest or any other amounts due under the Intercompany Loan
Agreement or for any breach of any other representation, warranty, covenant or
undertaking of Funding 1 under the Intercompany Loan Agreement, shall be
limited to amounts standing to the credit of the Funding 1 Transaction Account
and the Funding 1 GIC Account from time to time (including, for the avoidance
of doubt, amounts received by Funding 1 in respect of the Funding 1 Share of
the Trust Property and from the Funding 1 Swap Provider); provided that the
application of such amounts to the discharge of Funding 1’s obligations under
an Intercompany Loan Agreement shall be subject to the terms of the Funding 1
Deed of Charge and the relevant Funding 1 Priority of Payments in all cases.

 

4.2                               Shortfall on Final Repayment
Date in respect of certain Term Advances

 

(a)                                  Clause 4.2(b) will only apply to those Term
Advances specified in the Intercompany Loan Confirmation.

 

(b)                                 On the Final Repayment Date of an
Intercompany Loan, the amount of interest and principal due and payable on the
Term AA Advances or Term BBB Advances of that Intercompany Loan shall be an
amount equal to the sum available to pay all outstanding interest and/or
principal amounts due (including interest and principal amounts deferred and
unpaid) on such Term Advance after paying amounts of a higher order of priority
in accordance with the relevant Funding 1 Priority of Payments.  To the extent that on the Final Repayment
Date of an Intercompany Loan there is a shortfall between the amount available
to pay such interest and principal on the Term AA Advances or Term BBB Advances
of that Intercompany Loan and the amount required to pay such interest and
principal on such Term Advance, then shall shortfall shall be extinguished on
the Final Repayment Date of such Term Advance and Funding 1 shall have no
further liability therefor.

 

5.                                      UTILISATION OF THE TERM ADVANCES

 

5.1                               Drawdown conditions relating
to the Term Advances

 

Save as otherwise provided in the
Intercompany Loan Agreement, the Term Advances will be made available by the
Issuer to Funding 1 on the Closing Date if:

 

(a)                                  the Notes have been issued by
the Issuer and the subscription proceeds have been received by or on behalf of
the Issuer;

 

(b)                                 not later than 2.00 p.m.
(London time) on the Closing Date (or such later time as may be agreed in
writing by Funding 1, the Issuer and the Security Trustee), the Issuer and the
Security Trustee have received from Funding 1 a Drawdown Notice requesting a
drawing under the Intercompany Loan Agreement, receipt of which shall (subject
to the terms of the Intercompany Loan Agreement and to the issue of the Notes
by the Issuer) oblige Funding 1 to borrow the whole of the amount requested in
the Drawdown Notice on the date stated in the Drawdown Notice (which shall be
the Closing Date) upon the terms and subject to the conditions contained in the
Intercompany Loan Agreement;

 

(c)                                  Funding 1 has confirmed in the
relevant Drawdown Notice that:

 

3

 

(i)                                     no Intercompany Loan Event of
Default has occurred and is continuing unremedied (if capable of remedy) or
unwaived or would result from the making of the Term Advances;

 

(ii)                                  the representations set out in
Clause 12 (Representations and Warranties of Funding 1) are true on and as of
the Closing Date by reference to the facts and circumstances then existing;

 

(d)                                 the aggregate principal amount
of the Term Advances to be drawn on the Drawdown Date would not exceed the
amount available for drawing under the Intercompany Loan Agreement as at the
relevant Drawdown Date; and

 

(e)                                  Funding 1 has delivered a
solvency certificate substantially in the form set out in Schedule 2 to these
Intercompany Loan Terms and Conditions.

 

5.2                               Single drawing of the Term
Advances

 

Each of the Term Advances will only be
available for drawing in one amount by Funding 1 on the Drawdown Date subject
to satisfaction of the matters specified in Clause 2.1 (Conditions precedent)
and Clause 5.1 (Drawdown conditions relating to the Term Advances).

 

6.                                      INTEREST

 

6.1                               Interest Periods

 

(a)                                  The first Interest Period will commence on
(and include) the Drawdown Date of the Term Advances and end on (but exclude)
the first Funding 1 Interest Payment Date falling thereafter.  Each subsequent Interest Period shall
commence on (and include) a Funding 1 Interest Payment Date and end on (but
exclude) the next following Funding 1 Interest Payment Date.

 

(b)                                 Whenever it is necessary to compute an
amount of interest in respect of the Term Advances for any period (including
any Interest Period), such interest shall be calculated on the basis of actual
days elapsed in a 365 day year.

 

6.2                               Determination of Term Advance
Rates of Interest

 

(a)                                  The rate of interest payable in respect of
each Term Advance (each a Term Advance Rate of Interest and together
the Term
Advance Rates of Interest) shall be determined on the basis of the
provisions set out below:

 

(i)                                     On the first Term Advance Interest Determination Date
(being the first day of the Interest Period for which the rate will apply) of
the Term Advances, the Agent Bank will determine the Term Advance Rates of
Interest in accordance with the provisions of the Intercompany Loan
Confirmation;

 

(ii)                                  on each subsequent Term Advance Interest
Determination Date, the Agent Bank will determine the Relevant Screen Rate  in respect of each Term Advance as at or
about 11.00 a.m. (London time) on the Term Advance Interest Determination Date
in question.  If the Relevant Screen
Rate is unavailable, the Agent Bank will request the principal London office of
each of the Reference Banks to provide the Agent Bank with its offered
quotation to leading banks for three-month Sterling deposits of £10,000,000 in
the London inter-bank market as at or about 11.00 a.m. (London time)

 

4

 

on the
Term Advance Interest Determination Date and the Term Advance Rates of Interest
for the relevant Interest Period shall be the aggregate of (A) the Relevant
Margin (as defined in the relevant Intercompany Loan Confirmation) for the Term
Advances and (B) the Relevant Screen Rate for the Term Advances or, if the
Relevant Screen Rate is unavailable, the linear interpolation of the arithmetic
mean of such offered quotations for three-month Sterling deposits (rounded
upwards, if necessary, to five decimal places); and

 

(iii)                               if on any Term Advance Interest
Determination Date, the Relevant Screen Rate is unavailable and only two or
three of the Reference Banks provide offered quotations, the Term Advance Rates
of Interest for the relevant Interest Period shall be determined in accordance
with the provisions of sub-paragraph (i) or, as the case may be, (ii) above on
the basis of the offered quotations of those Reference Banks providing such
quotations.  If, on any such Term
Advance Interest Determination Date, only one or none of the Reference Banks
provide the Agent Bank with such an offered quotation, the Agent Bank shall
forthwith consult with the Security Trustee and the Issuer for the purposes of
agreeing two banks (or, where one only of the Reference Banks provided such a quotation,
one additional bank) to provide such a quotation or quotations to the Agent
Bank (which bank or banks are in the opinion of the Security Trustee suitable
for such purpose) and the Term Advance Rates of Interest for the Interest
Period in question shall be determined, as aforesaid, on the basis of the
offered quotations of such banks as so agreed (or, as the case may be, the
offered quotations of such bank as so agreed and the relevant Reference
Bank).  If no such bank or banks is or
are so agreed or such bank or banks as so agreed does or do not provide such a
quotation or quotations, then the Term Advance Rates of Interest for the
relevant Interest Period shall be the Term Advance Rates of Interest in effect
for the last preceding Interest Period to which sub-paragraph (i) or
sub-paragraph (ii), as the case may be, shall have applied but taking account
of any change in the Relevant Margin.

 

There will be no maximum or minimum Term
Advance Rate of Interest.

 

(b)                                 The Agent Bank shall, as soon as practicable
after 11.00 a.m. (London time) on each Term Advance Interest Determination
Date, determine and notify the Issuer, Funding 1, the Cash Manager and the
Security Trustee of (i) the Term Advance Rates of Interest applicable to the
relevant Interest Period and (ii) the sterling amount (the Interest Amount) payable in
respect of such Interest Period in respect of the Outstanding Principal Balance
of each Term Advance.  The Interest
Amount in respect of each Term Advance shall be determined by applying the relevant
Term Advance Rate of Interest to the Outstanding Principal Balance of the
relevant Term Advance, multiplying the sum by 365 days and rounding the
resultant figure to the nearest pence (half a pence being rounded upwards).

 

(c)                                  If the Agent Bank does not at any time for
any reason determine the Term Advance Rate of Interest and/or calculate the
Interest Amount for any of the Term Advances in accordance with the foregoing
paragraphs, the Security Trustee shall (i) determine the Term Advance Rate of Interest
at such rate as (having such regard as it shall think fit to the procedure
described above) it shall deem fair and reasonable in all the circumstances
and/or (as the case may be) (ii) calculate the Interest Amount for each Term
Advance in the manner specified in Clause 6.2(a) and any such determination
and/or calculation shall be deemed to have been made by the Agent Bank.

 

(d)                                 All notifications, opinions,
determinations, certificates, calculations, quotations and decisions given,
expressed, made or obtained for the purposes of this Clause 6, whether by the

 

5

 

Reference
Banks (or any of them) or any other bank or the Agent Bank or the Security
Trustee shall (in the absence of wilful default, bad faith or manifest error)
be binding on Funding 1, the Issuer, the Cash Manager, the Reference Banks,
such bank, the Agent Bank, the Security Trustee and (in such absence as
aforesaid) no liability to Funding 1 shall attach to the Issuer, the Reference
Banks, such bank, the Agent Bank, the Security Trustee or the Cash Manager in
connection with the exercise or non-exercise by them or any of them of their
powers, duties and discretions hereunder.

 

7.                                      REPAYMENT

 

7.1                               Repayment on Funding 1
Interest Payment Dates

 

Each Term Advance shall be repaid in
instalments on the Funding 1 Interest Payment Dates and in the amounts
specified in the Intercompany Loan Confirmation.

 

7.2                               Term Advance Ratings determine
order of repayment

 

(a)                                  Unless otherwise specified in the Intercompany
Loan Confirmation, each Term Advance shall be repaid (as to both interest and
principal) in accordance with the Term Advance Rating of that Term Advance,
such that, to the extent that amounts are due and payable on more than one Term
Advance on any Funding 1 Interest Payment Date, the Term Advance with the
highest Term Advance Rating shall be repaid (as to both interest and principal)
ahead of the Term Advances with the next highest Term Advance Rating, down to
the Term Advances with the lowest Term Advance Rating being repaid (as to both
interest and principal) only after all of the Term Advances with higher Term
Advance Ratings have been repaid.

 

(b)                                 The Term Advances shall be funded by the
issue of a class or classes of Notes to be issued by the Issuer.  The Term Advance Ratings shall be determined
by the rating assigned by the Rating Agencies to the relevant class of Notes on
the Closing Date.  If the ratings
assigned to a class of Notes by any Rating Agency changes after the Closing
Date, then that shall not affect the designated Term Advance Ratings. If the
ratings assigned to two or more Term Advances (including any New Term Advances)
are the same, then those Term Advances and New Term Advances will be repaid (as
to both interest and principal) pro rata and pari passu (but subject to
the relevant Schedule Repayment Dates and permitted repayment dates
thereof).  If the ratings assigned to a
class of Notes by the Rating Agencies are not consistent, then the affected
Term Advance will reflect all the ratings assigned to it and Funding 1 will
make payments on such Term Advance after making payments on Term Advances with
a Term Advance Rating equivalent to or higher than the highest of the ratings
assigned to the affected Term Advance and before Term Advances with a Term
Advance Rating equivalent to or lower than the lowest of the ratings assigned
to the affected Term Advance (unless otherwise agreed with the Security Trustee
and the Rating Agencies).

 

(c)                                  The Term Advance Ratings for each Term
Advance are specified in the Intercompany Loan Confirmation.

 

8.                                      PREPAYMENT

 

8.1                               Prepayment for taxation or
other reasons

 

If:

 

(a)                                  the total Interest Amount in
relation to the Intercompany Loan for any Interest Period ceases to be
receivable (on account of any present or future Taxes, duties, assessments or
governmental charges of whatever nature); or

 

6

 

(b)                                 a Term Advance becomes illegal
as described in Clause 10 (Illegality); or

 

(c)                                  the Issuer is required to
deduct or withhold from any payment of principal, interest or premium in
respect of its Notes any amount for or on account of Tax,

 

then, without prejudice to the obligations
of Funding 1 under Clause 10 (Illegality) and subject to Clause 11
(Mitigation), Funding 1 may, on any Funding 1 Interest Payment Date having
given not more than 60 days and not less than 30 days’ (or such shorter period
as may be required by any relevant law in the case of any Term Advance which
becomes illegal pursuant to Clause 10 (Illegality)) prior written notice to the
Issuer and the Security Trustee (or on or before the latest date permitted by
the relevant law in the case of Clause 10 (Illegality)) and while the relevant
circumstances continue, prepay all but not some only of all of the Term
Advances without penalty or premium but subject to Clause 15 (Default Interest
and Indemnity).

 

8.2                               Application of monies

 

The Issuer hereby agrees to apply any
amounts received by way of prepayment pursuant to Clauses 7.1 (Repayment on
Funding 1 Interest Payment Dates) and 8.1 (Prepayment for taxation or other
reasons) in making prepayments under the Notes.

 

8.3                               Funding 1 Ledgers

 

Funding 1 shall maintain, or cause to be
maintained, the Funding 1 Ledgers in accordance with the Cash Management Agreement.

 

9.                                      TAXES

 

9.1                               No gross up

 

All payments by Funding 1 under the
Intercompany Loan Agreement shall be made without any deduction or withholding
for or on account of and free and clear of, any Taxes, except to the extent
that Funding 1 is required by law to make payment subject to any Taxes.

 

9.2                               Tax receipts

 

All Taxes required by law to be deducted or
withheld by Funding 1 from any amounts paid or payable under the Intercompany
Loan Agreement shall be paid by Funding 1 when due and Funding 1 shall, within
30 days of the payment being made, deliver to the Issuer evidence satisfactory
to that Issuer (including all relevant Tax receipts) that the payment has been
duly remitted to the appropriate authority.

 

10.                               ILLEGALITY

 

If, at any time, it is unlawful for the
Issuer to make, fund or allow to remain outstanding a Term Advance made or to
be made by it under the Intercompany Loan Agreement, then the Issuer shall,
promptly after becoming aware of the same, deliver to Funding 1, the Security
Trustee and the Rating Agencies a legal opinion to that effect from reputable
counsel and if the Issuer so requires, Funding 1 shall promptly to the extent
necessary to cure such illegality prepay all the Term Advances subject to and
in accordance with the provisions of Clause 8.1 (Prepayment for taxation or
other reasons).

 

7

 

11.                               MITIGATION

 

If circumstances arise in respect of the
Issuer which would, or would upon the giving of notice, result in:

 

(a)                                  the prepayment of the Term
Advances pursuant to Clause 10 (Illegality);

 

(b)                                 a withholding or deduction
from the amount to be paid by Funding 1 on account of Taxes, pursuant to Clause
9 (Taxes),

 

then, without in any way limiting, reducing
or otherwise qualifying the obligations of Funding 1 under this Agreement, the
Issuer shall:

 

(i)                                     promptly upon becoming aware
of the circumstances, notify the Security Trustee,  Funding 1 and the Rating Agencies; and

 

(ii)                                  upon written request from
Funding 1, take such steps as may be practical to mitigate the effects of those
circumstances including (without limitation) the assignment of all its rights
under the Intercompany Loan Agreement to, and assumption of all its obligations
under that Intercompany Loan Agreement by, another company satisfactory to the
Security Trustee, which is willing to participate in the relevant Term Advances
in its place and which is not subject to (a) and/or (b) above,

 

provided that no such transfer or
assignment and transfer may be permitted unless the Rating Agencies confirm in
writing to the Issuer and the Security Trustee that there will be no
downgrading of the then current rating of the Notes of any Issuer as a result
and Funding 1 indemnifies the Issuer and the Security Trustee for any
reasonable costs and expenses properly incurred as a result of such transfer or
assignment.

 

12.                               REPRESENTATIONS AND WARRANTIES OF
FUNDING 1

 

12.1                        Representations and warranties

 

Funding 1 makes the representations and
warranties set out in this Clause 12 to the Issuer and the Security Trustee (as
trustee for each of the Funding 1 Secured Creditors).

 

12.2                        Status

 

(a)                                  It is a limited liability company duly
incorporated, validly existing and registered under the laws of the
jurisdiction in which it is incorporated, capable of being sued in its own
right and not subject to any immunity from any proceedings.

 

(b)                                 It has the power to own its property and
assets and to carry on its business as it is being conducted.

 

12.3                        Powers and authority

 

It has the power to enter into, perform and
deliver, and has taken all necessary corporate and other action to authorise
the execution, delivery and performance by it of each of the Transaction
Documents to which it is a party.

 

8

 

12.4                        Legal validity

 

Each Transaction Document to which it is or
will be a party constitutes or when executed in accordance with its terms will
constitute, a legal, valid and binding obligation enforceable in accordance
with its terms, subject to general equitable principles, insolvency,
liquidation and other laws affecting creditors rights generally.

 

12.5                        Non-conflict

 

The execution by it of each of the
Transaction Documents to which it is a party and the exercise by it of its
rights and the performance of its obligations under such Transaction Documents
including, without limitation, borrowing pursuant to the terms of the
Intercompany Loan Agreement or granting any security contemplated by the
Transaction Documents will not:

 

(a)                                  result in the existence or
imposition of nor oblige it to create any Security Interest in favour of any
person (other than the Funding 1 Secured Creditors) over all or any of its
present or future revenues or assets;

 

(b)                                 conflict with any document
which is binding upon it or any of its assets;

 

(c)                                  conflict with its
constitutional documents; or

 

(d)                                 conflict with any law,
regulation or official or judicial order of any government, governmental body
or court, domestic or foreign, having jurisdiction over it.

 

12.6                        No litigation

 

No litigation, arbitration or
administrative proceedings are current or, to its knowledge, pending or
threatened.

 

12.7                        No default

 

No Intercompany Loan Event of Default is
continuing unremedied (if capable of remedy) or unwaived or would result from
the making of any Term Advance.

 

12.8                        Authorisations

 

All governmental consents, licences and
other approvals and authorisations required or desirable in connection with the
entry into, performance, validity and enforceability of, and the transactions
contemplated by, the Transaction Documents have been obtained or effected (as
appropriate) and are in full force and effect.

 

12.9                        Registration requirements

 

Except for due registration of the Funding
1 Deed of Charge under Section 395 of the Companies Act 1985, it is not necessary
that the Funding 1 Deed of Charge or the Intercompany Loan Agreement be filed,
recorded or enrolled with any authority or that, except for registration fees
payable to the Registrar of Companies in respect of the Security Documents, any
stamp, registration or similar tax be paid on or in respect thereof.

 

9

 

12.10                 Ranking of security

 

The security conferred by the Funding 1
Deed of Charge constitutes a first priority security interest of the type
described in the Funding 1 Deed of Charge, over the security assets referred
to, in the Funding 1 Deed of Charge and the security assets are not subject to
any prior or pari passu Security Interests.

 

12.11                 No other business

 

(a)                                  It has not traded or carried on any
business since its date of incorporation or engaged in any activity whatsoever
that is not incidental to or necessary in connection with any of the activities
in which the Transaction Documents provide or envisage that it will engage.

 

(b)                                 It is not party to any material agreements
other than the Transaction Documents.

 

12.12                 Ownership

 

(a)                                  Its entire issued share capital is legally
and beneficially owned and controlled by Holdings.

 

(b)                                 Its shares are fully paid.

 

12.13                 Good title as to assets

 

Funding 1 is and will remain the absolute
beneficial owner of the Funding 1 Share and absolute legal and beneficial owner
of all other assets charged or assigned by the Funding 1 Deed of Charge to
which it is a party.

 

12.14                 Tax

 

(a)                                  It is tax resident and legally domiciled in
its jurisdiction of incorporation.

 

(b)                                 It has no branch, business establishment or
other fixed establishment outside the United Kingdom.

 

12.15                 Repetition

 

The representations in this Clause 12 shall
survive the execution of the Intercompany Loan Agreement and the making of each
Term Advance under the Intercompany Loan Agreement, and shall be repeated by
Funding 1 on each Funding 1 Interest Payment Date after the date of the
Intercompany Loan Agreement by reference to the facts and circumstances then
subsisting.

 

13.                               COVENANTS

 

13.1                        Duration

 

The undertakings in this Clause 13 remain
in force from the date of the Intercompany Loan Agreement for so long as any
amount is or may be outstanding under the Intercompany Loan Agreement.

 

13.2                        Information

 

Funding 1 shall supply to the Security
Trustee and the Rating Agencies:

 

(a)                                  as soon as the same are
available its audited accounts for that Financial Year; and

 

10

 

(b)                                 promptly, such other
information in connection with the matters contemplated by the Transaction
Documents as the Security Trustee or the Rating Agencies may reasonably
request.

 

13.3                        Notification of Default

 

Funding 1 shall notify the Issuer and the
Security Trustee of any Intercompany Loan Event of Default (and the steps, if
any, being taken to remedy it) promptly upon its occurrence.

 

13.4                        Authorisations

 

Funding 1 shall promptly:

 

(a)                                  obtain, maintain and comply
with the terms of; and

 

(b)                                 upon request, supply certified
copies to the Issuer and the Security Trustee of,

 

any authorisation required under any law or
regulation to enable it to perform its obligations under, or for the validity
or enforceability of, any Transaction Document to which it is a party.

 

13.5                        Pari passu ranking

 

Funding 1 shall procure that its
obligations under the Transaction Documents do and will rank at least pari passu
with all its other present and future unsecured obligations, except for
obligations mandatorily preferred by law applying to companies generally.

 

13.6                        Negative pledge

 

Funding 1 shall not create or permit to
subsist any security interest (including but not limited to any mortgage,
standard security, charge (whether legal or equitable), assignment by way of
security, pledge, lien, hypothecation or other security interest securing any
obligation of any person (including, without limitation, any trust or
arrangement having the effect of providing security)) over or in respect of any
of its assets (unless arising by operation of law) other than as provided
pursuant to the Transaction Documents.

 

13.7                        Disposals

 

Funding 1 shall not either in a single
transaction or in a series of transactions, whether related or not and whether
voluntarily or involuntarily, sell, transfer, lease or otherwise dispose of all
or any part of its assets, properties or undertakings or any interest, estate,
rights, title or benefits therein, other than as provided for pursuant to the
Transaction Documents.

 

13.8                        Mergers and acquisitions

 

(a)                                  Funding 1 shall not, without the consent of
the Issuer and the Security Trustee, enter into any amalgamation, demerger,
merger or reconstruction.

 

(b)                                 Funding 1 shall not acquire any assets or
business or make any investments other than as contemplated in the Transaction
Documents.

 

11

 

13.9                        Lending and borrowing

 

(a)                                  Save as contemplated by the Transaction
Documents, Funding 1 shall not make any loans or provide any other form of
credit to any person.

 

(b)                                 Funding 1 shall not give any guarantee or
indemnity to or for the benefit of any person in respect of any obligation of
any other person or enter into any document under which Funding 1 assumes any
liability of any other person.

 

(c)                                  Funding 1 shall not incur any indebtedness
in respect of any borrowed money other than under the Transaction Documents.

 

13.10                 Shares and dividends

 

Funding 1 shall not:

 

(a)                                  declare or pay any dividend or
make any other distribution in respect of any of its shares other than in
accordance with the Funding 1 Deed of Charge;

 

(b)                                 issue any further shares or
alter any rights attaching to its issued shares as at the date hereof; or

 

(c)                                  repay or redeem any of its
share capital.

 

13.11                 Change of business

 

(a)                                  Funding 1 shall not carry on any business
or engage in any activity other than as contemplated by the Transaction
Documents.

 

(b)                                 Funding 1 shall not have any subsidiaries
or subsidiary undertakings as defined in the Companies Act 1985.

 

(c)                                  Funding 1 shall not have any employees or
own any premises.

 

13.12                 Tax

 

(a)                                  Funding 1 shall join with the Issuer in
making a group income election under section 247 of the Income and Corporation
Taxes Act 1988 in relation to any such payments as are referred to in section
247(4) of that Act and which are made under the Intercompany Loan Agreement by
Funding 1 to the Issuer and Funding 1 will ensure that no steps will be taken
(whether by act, omission or otherwise) by it which would reasonably be
expected to lead to the revocation or invalidation of the aforementioned
election.  Funding 1 shall immediately
notify the Issuer and the Security Trustee if it becomes aware that the
aforementioned election has ceased to be in full force and effect or if
circumstances arise, of which it is aware, which would be reasonably likely to
result in that election ceasing to be in full force and effect.

 

(b)                                 Funding 1 shall not apply to become part of
any group for the purposes of section 43 of the Value Added Tax Act 1994 with
the Issuer unless required to do so by law.

 

13.13                 United States Activities

 

Funding 1 will not engage in any activities
in the United States (directly or through agents), will not derive any income
from United States sources as determined under United States income tax
principles and will not hold any property if doing so would cause it to be
engaged

 

12

 

or deemed to be engaged in a trade or
business within the United States as determined under United States tax
principles.

 

14.                               DEFAULT

 

14.1                        Intercompany Loan Events of
Default

 

Each of the events set out in Clauses 14.2
to 14.9 (inclusive) is an Intercompany Loan Event of Default (whether or not
caused by any reason whatsoever outside the control of Funding 1 or any other
person).

 

14.2                        Non-payment

 

Subject to Clause 4.1 (Recourse limited to
available funds), Funding 1 does not pay on the due date or for a period of
three London Business Days after such due date any amount payable by it under
any Intercompany Loan Agreement at the place at and in the currency in which it
is expressed to be payable.

 

14.3                        Breach of other obligations

 

Funding 1 does not comply in any material
respect with any of its obligations under the Transaction Documents (other than
those referred to in Clause 14.2 (Non-payment)) and such non-compliance, if capable
of remedy, is not remedied promptly and in any event within twenty London
Business Days of Funding 1 becoming aware of the non-compliance or receipt of a
notice from the Security Trustee requiring Funding 1’s non-compliance to be
remedied.

 

14.4                        Misrepresentation

 

A representation, warranty or statement
made or repeated in or in connection with any Transaction Document or in any
document delivered by or on behalf of Funding 1 under or in connection with any
Transaction Document is incorrect in any material respect when made or deemed
to be made or repeated.

 

14.5                        Insolvency

 

Any corporate action is taken by Funding 1,
or any legal proceedings are started, for the winding-up, dissolution,
administration or appointment of a liquidator, receiver, administrator,
administrative receiver, trustee or similar officer of Funding 1 or of any or
all of Funding 1’s revenues and assets or any documents are filed with the
court for the appointment of an administrator of Funding 1 or any formal notice
of intention to appoint an administrator of Funding 1 is served or any
application is made or petition is lodged for the making of an administration
order in relation to Funding 1 .

 

14.6                        Creditors’ process

 

Any attachment, sequestration, distress or
execution affects any asset of Funding 1 and is not discharged within twenty
London Business Days.

 

14.7                        Unlawfulness

 

It is or becomes unlawful for Funding 1 to
perform any of its obligations under any Transaction Document.

 

13

 

14.8                        The Funding 1 Deed of Charge

 

The Funding 1 Deed of Charge is not, or is
alleged by Funding 1 not to be, binding on or enforceable against Funding 1 or
effective to create the security intended to be created by it.

 

14.9                        Ownership

 

The entire issued share capital of Funding
1 ceases to be legally and beneficially owned and controlled by Holdings.

 

14.10                 Acceleration

 

Upon the occurrence of an Intercompany Loan
Event of Default which is continuing unremedied and/or has not been waived, the
Security Trustee may by written notice to Funding 1 (the Intercompany Loan Acceleration Notice)
which is copied to each of the Funding 1 Secured Creditors and the Mortgages
Trustee:

 

(a)                                  declare the Term Advances
under each or any Intercompany Loan Agreement to be immediately due and payable
(whereupon the same shall, subject to Clause 14.11 (Repayment of Term Loan on
acceleration)), become so payable together with accrued interest thereon and
any other sums then owed by Funding 1 under the relevant Intercompany Loan
Agreement or Agreements; and/or

 

(b)                                 declare the Term Advances
under each or any Intercompany Loan Agreement to be due and payable on demand
of the Security Trustee.

 

14.11                 Repayment of Term Loan on acceleration

 

Upon the Security Trustee declaring the Term
Advances to be immediately due and payable pursuant to Clause 14.10(a)
(Acceleration), the amount due and payable in respect of the Term Advances
shall be calculated on the basis described in Clause 8.1 (Prepayment for
taxation or other reasons).

 

15.                               DEFAULT INTEREST AND INDEMNITY

 

15.1                        Default Loan Interest Periods

 

If any sum due and payable by Funding 1
under the Intercompany Loan Agreement is not paid on the due date for payment
in accordance with the relevant provision of the Intercompany Loan Agreement or
if any sum due and payable by Funding 1 under any judgment or decree of any
court in connection with the Intercompany Loan Agreement is not paid on the
date of such judgment or decree, the period beginning on such due date or, as
the case may be, the date of such judgment or decree and ending on the date
upon which the obligation of Funding 1 to pay such sum (the balance thereof for
the time being unpaid being herein referred to as an unpaid sum) is discharged
shall be divided into successive periods, each of which (other than the first)
shall start on the last day of the preceding such period and the duration of
each of which shall (except as otherwise provided in this Clause 15) be
selected by the Security Trustee having regard to when such unpaid sum is
likely to be paid.

 

15.2                        Default interest

 

During each such period relating to an
unpaid sum as is mentioned in this Clause 15 an unpaid sum shall bear interest
at the rate per annum which the Issuer, acting reasonably, determines and
certifies to Funding 1 and the Security Trustee, will be sufficient to enable
it

 

14

 

to pay interest and other costs and
indemnities on or in respect of any amount which the Issuer does not pay as a
result of a non-payment under the Intercompany Loan Agreement, and/or any
drawing made by it under the Liquidity Facility Agreement, as a result of such
unpaid sum not being paid to it.

 

15.3                        Payment of default interest

 

Any interest which shall have accrued under
Clause 15.2 (Default interest) in respect of an unpaid sum shall be due and
payable and shall be paid by Funding 1 at the end of the period by reference to
which it is calculated or on such other date or dates as the Security Trustee
may specify by written notice to Funding 1.

 

15.4                        Broken periods

 

Funding 1 shall forthwith on demand
indemnify the Issuer against any loss or liability that the Issuer incurs as a
consequence of any payment of principal being received from any source
otherwise than on a Funding 1 Interest Payment Date or an overdue amount being
received otherwise than on its due date.

 

15.5                        Funding 1’s payment indemnity

 

Funding 1 undertakes to indemnify the
Issuer:

 

(a)                                  against any cost, claim, loss,
expense (including legal fees) or liability together with any amount in respect
of Irrecoverable VAT thereon (other than by reason of the negligence or wilful
default by the Issuer), which it may sustain or incur as a consequence of the
occurrence of any Intercompany Loan Event of Default or any default by Funding
1 in the performance of any of the obligations expressed to be assumed by it in
any of the Transaction Documents (other than by reason of negligence or wilful
default on the part of the Issuer or prior breach by the Issuer of the terms of
any of the Transaction Documents to which it is a party);

 

(b)                                 against any loss it may suffer
as a result of its funding a Term Advance requested by Funding 1 under the
Intercompany Loan Agreement (which shall include the amounts referred to in
clause 6 of the Intercompany Loan Confirmation) but not made; and

 

(c)                                  against any other loss or
liability (other than by reason of the negligence or default of the Issuer or
breach by the Issuer of the terms of any of the Transaction Documents to which
it is a party (except where such breach is caused by the prior breach of
Funding 1) or loss of profit) it may suffer by reason of having made the
Term Advances available or entering into the Intercompany Loan Agreement or
enforcing any security granted pursuant to the Funding 1 Deed of Charge.

 

16.                               PAYMENTS

 

16.1                        Payment

 

(a)                                  Subject to Clause 4 (Limited Recourse),
interest and principal shall be paid on the Term Advances for value by Funding
1 to the Issuer Transaction Account specified by the Issuer in the Intercompany
Loan Confirmation on each Funding 1 Interest Payment Date and the relevant
irrevocable payment instruction for such payment shall be given by Funding 1 by
no later than noon to the Cash Manager under the Cash Management Agreement
(with a copy to the Issuer and the Security Trustee) on the Intercompany Loan
Determination Date immediately before the relevant Funding 1 Interest Payment
Date.

 

15

 

(b)                                 On each date on which the Intercompany Loan
Agreement requires an amount to be paid by Funding 1 under that Intercompany
Loan Agreement, Funding 1 shall, unless the Intercompany Loan Agreement
specifies otherwise, make the same available to the Issuer in accordance with
the terms of the Intercompany Loan Agreement and by payment in Sterling in
immediately available, freely transferable, cleared funds to the Issuer
Transaction Account specified in the Intercompany Company Loan Confirmation or,
if the Intercompany Loan Agreement specifies otherwise, to the relevant account
or to such other account as the Issuer (with the consent of the Security
Trustee) may notify to Funding 1 for this purpose.

 

16.2                        Alternative payment
arrangements

 

If, at any time, it shall become
impracticable (by reason of any action of any governmental authority or any
change in law, exchange control regulations or any similar event) for Funding 1
to make any payments under the Intercompany Loan Agreement in the manner
specified in Clause 16.1 (Payment), then Funding 1 shall make such alternative
arrangements for the payment direct to the Issuer of amounts due under the
Intercompany Loan Agreement as are acceptable to the Security Trustee (acting
reasonably).

 

16.3                        No set-off

 

Subject to the terms of the Intercompany
Loan Confirmation, all payments required to be made by Funding 1 under the
Intercompany Loan Agreement shall be calculated without reference to any
set-off or counterclaim and shall be made free and clear of and without any
deduction for or on account of any set-off or counterclaim.

 

17.                               ENTRENCHED PROVISIONS

 

Each of Funding 1, the Issuer and the
Security Trustee acknowledge and agree that Funding 1 may from time to time
enter into New Intercompany Loan Agreements subject to the provisions of Clause
2 (The Term Advances) of this Agreement. 
If Funding 1 intends to enter into a New Intercompany Loan Agreement
then the provisions of this Agreement may be varied (with the consent of the
parties to this Agreement) in the Intercompany Loan Confirmation to the extent
necessary to reflect the terms of that New Intercompany Loan PROVIDED THAT no
variation shall be made to any of the following terms without the prior written
consent of the Funding 1 Secured Creditors and the Rating Agencies:

 

(a)                                  the Funding 1 Interest Payment
Dates;

 

(b)                                 the determination of the Term
Advance Rates of Interest (other than the Relevant Margin);

 

(c)                                  Clause 4 (Limited Recourse);

 

(d)                                 Clause 7 (Repayment); and

 

(e)                                  Clause 9 (Taxes).

 

18.                               FURTHER PROVISIONS

 

18.1                        Evidence of indebtedness

 

In any proceeding, action or claim relating
to the Intercompany Loan Agreement a statement as to any amount due to the
Issuer under the Intercompany Loan Agreement which is certified as being
correct by an officer of the Security Trustee shall, unless otherwise provided
in the

 

16

 

Intercompany Loan Agreement, be prima facie
evidence that such amount is in fact due and payable.

 

18.2                        Rights cumulative, waivers

 

The respective rights of the Issuer and the
Security Trustee under the Intercompany Loan Agreement:

 

(a)                                  may be exercised as often as
necessary;

 

(b)                                 are cumulative and not
exclusive of its rights under the general law; and

 

(c)                                  may be waived only in writing
and specifically.

 

Delay in exercising or non-exercise of any
such right is not a waiver of that right.

 

18.3                        Severability

 

If a provision of the Intercompany Loan
Agreement is or becomes illegal, invalid or unenforceable in any jurisdiction,
that shall not affect:

 

(a)                                  the validity or enforceability
in that jurisdiction of any other provision of the Intercompany Loan Agreement;
or

 

(b)                                 the validity or enforceability
in other jurisdictions of that or any other provision of the Intercompany Loan
Agreement.

 

18.4                        Notices

 

Any notices to be given pursuant to the
Intercompany Loan Agreement to any of the parties thereto shall be in writing
and shall be sufficiently served if sent by prepaid first class post, by hand
or facsimile transmission and shall be deemed to be given (in the case of
facsimile transmission) when despatched, (where delivered by hand) on the day
of delivery if delivered before 5.00 p.m. (London time) on a London Business
Day or on the next London Business Day if delivered thereafter or on a day
which is not a London Business Day or (in the case of first class post) when it
would be received in the ordinary course of post and shall be sent to such
addresses as are set out in the Intercompany Loan Confirmation or to such other
address or facsimile number or for the attention of such other person or entity
as may from time to time be notified by any party to the others by written
notice in accordance with the provisions of this Clause 18.4.

 

18.5                        Variation

 

Subject to Clause 17 (Entrenched
Provisions), no variation of any provision(s) of the Intercompany Loan
Agreement shall be effective unless it is in writing and signed by (or by a
person duly authorised by) each of the parties to the Intercompany Loan
Agreement.

 

18.6                        Security Trustee

 

The Security Trustee shall have no
responsibility for any of the obligations of the Issuer or any other party to
the Intercompany Loan Agreements (other than itself).  For the avoidance of doubt, the parties to the Intercompany Loan
Agreement acknowledge that the rights and obligations of the Security Trustee under
the Intercompany Loan Agreements are governed by the Funding 1 Deed of Charge.

 

17

 

18.7                        Counterparts

 

The Intercompany Loan Agreement may be
signed (manually or by facsimile) and delivered in more than one counterpart
all of which, taken together, shall constitute one and the same Agreement.

 

18.8                        Third Party Rights

 

The Intercompany Loan Agreement does not
create any right under the Contracts (Rights of Third Parties) Act 1999 which
is enforceable by any person who is not a party to the Intercompany Loan
Agreement.

 

19.                               REDENOMINATION

 

Each obligation under this Agreement which
has been denominated in sterling shall be redenominated in Euro in accordance
with EMU legislation upon such redenomination of the Notes.

 

20.                               GOVERNING LAW

 

The Intercompany Loan Agreement is governed
by English law.

 

21.                               SUBMISSION
TO JURISDICTION

 

Each party to the Intercompany Loan
Agreement hereby irrevocably submits to the non-exclusive jurisdiction of the
English courts in any action or proceeding arising out of or relating to the
Intercompany Loan Agreement, and hereby irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined by such
courts.  Each party to the Intercompany
Loan Agreement hereby irrevocably waives, to the fullest extent it may possibly
do so, any defence or claim that the English courts are an inconvenient forum
for the maintenance or hearing of such action or proceeding.

 

18

 

SCHEDULE 1

 

NOTICE OF DRAWDOWN OF A
TERM ADVANCE

 

From:      Permanent
Funding (No. 1) Limited (Funding 1)

 

To:          [     ]
(the Issuer)

 

Copy:     The
Bank of New York (the Security Trustee)

 

Dear Sirs,

 

1.                                       We refer to the agreement
between, inter
alios, ourselves, the Issuer and the Security Trustee (as from time
to time amended, varied, novated or supplemented (the Intercompany Loan Agreement))
dated [          ] whereby an
Intercompany Loan was made available to Funding 1.  Terms defined in the Intercompany Loan Agreement shall have the
same meaning in this notice.

 

2.                                       We hereby give you notice
that, pursuant to the Intercompany Loan Agreement and upon the terms and
subject to the conditions contained therein, we wish a [describe Term Advance] to be
made to us as follows:

 

(a)                                  Amount:
£[     ] of which £[     ] is
to be retained by you by way of set off against our obligation to reimburse
such amount to you on the Closing Date under [clause 6.1] (Fee for provision of
Term Advance) of the Intercompany Loan Confirmation.

 

(b)                                 Drawdown Date:
[          ]

 

3.                                       We confirm that no
Intercompany Loan Event of Default has occurred and is continuing which has not
been waived, or would result from the making of such Term Advance.

 

4.                                       We confirm that the principal
amount of the Term Advance requested does not exceed the amount available under
the Intercompany Loan Agreement as at [relevant Drawdown Date].

 

5.                                       The net proceeds of this
drawdown should be credited to our account numbered
[          ] with
[          ].

 

Yours faithfully,

 

 

for and on behalf of

Permanent
Funding (No. 1) Limited

 

19

 

SCHEDULE 2

 

SOLVENCY CERTIFICATE

 

Permanent Funding (No. 1) Limited (the Company)

 

To:          [•]

 

 

(the Issuer)

 

The Bank of New York (the Security
Trustee)

 

We the undersigned HEREBY CERTIFY, that (i)
having made all appropriate searches and investigations of the Company’s books
and records and the Company’s accounts (both management and those required by
law); and (ii) the officers of the Company having duly considered the provisions
of the insolvency laws of the United Kingdom (including, without limitation,
the provisions of sections 123 and 238 to 241 and 423 of the Insolvency Act
1986 (the Act)):

 

(a)                                  the Company is not unable to pay its debts
within the meaning of section 123 of the Act and would not become unable to do
so in consequence of entering into the Transaction Documents to which it is a
party or making any drawing or granting any security under the Transaction
Documents to which it is a party, and the Company’s assets currently exceed its
liabilities (taking into account its actual, contingent and prospective
liabilities) and will continue to do so notwithstanding the entry into by it of
the Transaction Documents and the making of any drawing or the granting of any security
under the Transaction Documents to which it is a party;

 

(b)                                 no execution or other process issued on a
judgment, decree or order of any court in favour of a creditor of the Company
remains unsatisfied in whole or in part;

 

(c)                                  to the best of our knowledge and belief no
corporate action has been taken or is pending, no other steps have been taken
and no legal proceedings have been commenced or are threatened or are pending
for (i) the winding-up, liquidation, dissolution, administration or reorganisation
of the Company and no documents have been filed with the court for the
appointment of an administrator and no notice of intention to appoint an
administrator has been served; or (ii) the Company to enter into any
composition or arrangement with its creditors generally; or (iii) the
appointment of a receiver, administrative receiver, trustee or similar officer
in respect of the Company or any of its property, undertaking or assets.  No event equivalent to any of the foregoing
has occurred in or under the laws of any relevant jurisdiction;

 

(d)                                 no steps have been
taken by the Company with a view to obtaining a moratorium in respect of any
indebtedness of the Company or for the purpose of proposing a company voluntary
arrangement.  No event equivalent to any of the foregoing
has occurred in or under the laws of any relevant jurisdiction;

 

(e)                                  neither the entry into of the Transaction
Documents to which it is a party nor the making of any drawing nor granting of
security under the Transaction Documents to which it is a party would be a
transaction at an undervalue within the meaning of section 238 of the Act,
since the value of any consideration received by the Company as a result of
such drawing and/or 

 

20

 

grant
of security would not be significantly less than the value of any consideration
provided by the Company under the Transaction Documents to which it is a party;

 

(f)                                    the entry into of the Transaction Documents
to which it is a party, any drawing made by the Company under or pursuant to
the Transaction Documents to which it is a party, and any security granted by
the Company under or pursuant to the Transaction Documents to which it is a
party will be entered into or made, as the case may be, by the Company, in good
faith and for the purpose of carrying on its business, and there are reasonable
grounds for believing that such entry into of such Transaction Documents, such
drawings and grants of security would benefit the Company; and

 

(g)                                 in entering into the Transaction Documents
to which it is a party, making a drawing under or pursuant to the Transaction
Documents to which it is a party and/or granting security under or pursuant to
the Transaction Documents to which it is a party the Company has no desire to
give a preference to any person as contemplated by section 239 of the Act nor
is it the purpose of the Company to put assets beyond the reach of a person who
is making, or may at some time make, a claim against the Company or of
otherwise prejudicing the interests of such a person in relation to the claim
which he is making or may make.

 

Terms defined in the Master Definitions and
Construction Schedule signed by the parties to the Transaction Documents  and dated 25th November, 2003 shall have the
same respective meanings when used in this Certificate.

 

DATED •

 

Signed for and on behalf of Permanent
Funding (No. 1) Limited

 

 

	
   

  	
   

  
	
  Director

  
	
   

  
	
   

  	
   

  
	
  Director/Secretary

  

 

21

 

SCHEDULE 3

 

FORM OF RELEVANT INTERCOMPANY LOAN CONFIRMATION

 

 

LOAN CONFIRMATION

 

INTERCOMPANY LOAN AGREEMENT

 

 

DATED •

 

 

PERMANENT FUNDING (NO.
1) LIMITED

as Funding 1

 

 

•

as Relevant Issuer

 

 

STATE STREET BANK AND
TRUST COMPANY

as Security Trustee

 

 

CITIBANK, N.A., LONDON
BRANCH

as Agent Bank

 

 

	
  

  
	
   

  
	
  London

  

 

22

 

THIS AGREEMENT is dated •

 

BETWEEN:

 

(6)                                  PERMANENT FUNDING (NO. 1) LIMITED (registered in England and
Wales No. 4267660) whose registered office is at Blackwell House, Guildhall
Yard, London EC2V 5AE (Funding 1);

 

(7)                                  [Relevant Issuer] (registered in England and
Wales No. •) whose registered office is at Blackwell House,
Guildhall Yard, London EC2V 5AE (the [Relevant 
Issuer]);

 

(8)                                  STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust
company organised under the laws of the Commonwealth of Massachusetts of the
United States of America with a branch office at 1 Canada Square, Canary Wharf,
London  E14 5AF, acting in its capacity
as Security Trustee; and

 

(9)                                  CITIBANK N.A., LONDON BRANCH, whose offices are at 5
Carmelite Street, London EC4Y 0PA, acting in its capacity as Agent Bank.

 

IT IS AGREED as follows:

 

1.                                      INTERPRETATION

 

1.1                                 The Master Definitions and
Construction Schedule signed for the purposes of identification by Allen &
Overy and Sidley Austin Brown & Wood on 13th June, 2002 (as the same may be
amended, varied or supplemented from time to time with the consent of the
parties hereto) and the [Relevant Issuer] Master Definitions and Construction
Schedule signed for the purposes of identification by Allen & Overy and
Sidley Austin Brown & Wood on 13th June, 2002 (as the same may be amended,
varied or supplemented from time to time with the consent of the parties
hereto) are expressly and specifically incorporated into this Agreement and,
accordingly, the expressions defined in the Master Definitions and Construction
Schedule and/or the [Relevant Issuer] Master Definitions and Construction
Schedule (as so amended, varied or supplemented) shall, except where the
context otherwise requires and save where otherwise defined herein, have the
same meanings in this Agreement, including the Recitals hereto and this
Agreement shall be construed in accordance with the interpretation provisions
set out in clause 2 of the Master Definitions and Construction Schedule and the
[Relevant Issuer] Master Definitions and Construction Schedule.  In the event of a conflict between the
Master Definitions and Construction Schedule and the [Relevant Issuer] Master Definitions
and Construction Schedule, the [Relevant Issuer] Master Definitions and
Construction Schedule shall prevail.

 

1.2                                 Unless the context otherwise
requires, references in the Intercompany Loan Term and Conditions to:

 

[complete as appropriate]

 

2.                                      INTERCOMPANY LOAN TERMS AND
CONDITIONS

 

Each of the parties to this Agreement agree
that the Intercompany Loan Terms and Conditions signed by Funding 1 and the
Security Trustee for the purposes of identification on 14th June, 2002 and the
provisions set out therein shall form part of this Agreement and shall be
binding on the parties to this Agreement as if they had expressly been set out
herein.  References in this Agreement to
this
Agreement shall be construed accordingly.

 

23

 

3.                                      THE TERM ADVANCES

 

3.1                               Term Advances

 

[describe the term advances]

 

3.2                               [Term Advance Rating]

 

The Term Advance Rating in respect of the
[Term AAA Advances] shall be •, in respect of the [Term AA Advances]
shall be • and the Term Advance Rating in respect of the [Term
BBB Advances] shall be •.

 

3.3                               [Conditions  Precedent]

 

Save as the [Relevant Issuer] and the
Security Trustee may otherwise agree, the Term Advances will not be available
for utilisation unless the Security Trustee has confirmed to Funding 1 that it
or its advisers have received all the information and documents listed in 0 in
form and substance satisfactory to the Security Trustee.

 

4.                                      INTEREST

 

[Set out interest rate, interest periods and payment
dates]

 

5.                                      REPAYMENT

 

5.1                                 [Describe, inter alios:

 

Repayment subject to terms of the Funding 1 Deed of Charge;

 

Repayment of relevant Term Advances prior to the occurrence
of a Trigger Event and prior to the service on Funding 1 of an Intercompany
Loan Acceleration Notice or the service on each Issuer of a Note Acceleration
Notice;

 

Repayment of relevant Term Advances following the occurrence
of a Non-Asset Trigger Event but prior to 
the service on Funding 1 of an Intercompany Loan Acceleration Notice or
the service on each Issuer of a Note Acceleration Notice;

 

Repayment of the relevant Terms Advances following the
occurrence of an Asset Trigger Event but prior to  the service on Funding 1 of an Intercompany Loan Acceleration
Notice or the service on each Issuer of a Note Acceleration Notice;

 

Repayment following of relevant Term Advances following the
service on each Issuer of a Note Acceleration Notice bur prior to the service
on Funding 1 of an Intercompany Loan Acceleration Notice;

 

Repayment following the service on Funding 1 of an
Intercompany Loan Acceleration Notice].

 

5.2                               [Acknowledgement of New Intercompany
Loans

 

The [Relevant Issuer] hereby acknowledges
and agrees that from time to time Funding 1 may enter into New Intercompany
Loans with New Issuers and that the obligation of Funding 1 to repay this
Intercompany Loan and any New Intercompany Loan will depend on the Term Advance
Rating of the individual Term Advances made to Funding 1 under the respective

 

24

 

Intercompany Loans.  Subject to clause 25 of the Funding 1 Deed
of Charge (Supplemental Provisions Regarding the Security Trustee), any
amendments to this Agreement will be made only with the prior written consent
of each party to this Agreement.]

 

6.                                      CERTAIN FEES, ETC.

 

[describe payment and provision, including
set-off,  for fees and indemnities]

 

7.                                      APPLICATION OF CERTAIN
PROVISIONS

 

The provisions set out in Clause 4.2
(Shortfall on Final Repayment Date in respect of certain Term Advances) of the
Intercompany Loan Terms and Conditions shall apply to:  [describe Term Advances]

 

8.                                      ADDRESSES

 

The addresses referred to in [Clause 15.4]
of the Intercompany Loan Terms and Conditions are as follows:

 

The Security Trustee:

 

	
  For the attention of:

  	
   

  	
  Corporate Trust

  
	
   

  	
   

  	
   

  
	
  Address:

  	
   

  	
  State Street Bank and Trust Company,

  
	
   

  	
   

  	
  1
  Canada Square, Canary Wharf, London E14 5AF

  
	
   

  	
   

  	
   

  
	
  Facsimile:

  	
   

  	
  +44 (0) 20 7416 2548

  

 

 

 

The [Relevant Issuer]:

 

	
  For the attention of:

  	
   

  	
  [The Secretary]

  
	
   

  	
   

  	
   

  
	
  Address:

  	
   

  	
  [Relevant Issuer]

  
	
   

  	
   

  	
   

  
	
  Facsimile:

  	
   

  	
  [+44 (0) 20 7556 0975]

  
	
   

  	
   

  	
   

  
	
  Copy to:

  	
   

  	
  HBOS Treasury Services plc

  
	
   

  	
   

  	
  33
  Old Broad Street

  
	
   

  	
   

  	
  London
  EC2N 1HZ

  
	
   

  	
   

  	
  Facsimile
  number +44 (0) 20 7574 8784

  
	
   

  	
   

  	
  For
  the attention of Head of Capital Markets and Securitisations

  

 

25

 

Funding 1:

 

	
  For the attention of:

  	
   

  	
  The Secretary

  
	
   

  	
   

  	
   

  
	
  Address:

  	
   

  	
  Permanent Funding (No. 1) Limited

  
	
   

  	
   

  	
   

  
	
  Facsimile:

  	
   

  	
  +44 (0) 20 7556 0975

  
	
  Copy
  to:

  	
   

  	
  HBOS
  Treasury Services plc

  
	
   

  	
   

  	
  33
  Old Broad Street

  
	
   

  	
   

  	
  London
  EC2N 1HZ

  
	
   

  	
   

  	
  Facsimile
  number +44 (0) 20 7574 8784

  
	
   

  	
   

  	
  For
  the attention of Head of Capital Markets and Securitisations

  
	
   

  	
   

  	
   

  
	
  Rating Agencies:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Moody’s:

  	
   

  	
  2 Minster Court, Mincing Lane, London
  EC3R 7XB

  
	
  For
  the attention of:

  	
   

  	
  Nicholas
  Lindstrom

  
	
  Telephone:

  	
   

  	
  +44
  (0) 20 7772 5332

  
	
  Fax:

  	
   

  	
  +44
  (0) 20 7772 5400

  
	
   

  	
   

  	
   

  
	
  S&P:

  	
   

  	
  Garden House, 18 Finsbury Circus, London
  EC2M 7BP

  
	
  For
  the attention of:

  	
   

  	
  Andre
  Vollman

  
	
  Telephone:

  	
   

  	
  +44
  (0) 20 7826 3855

  
	
  Fax:

  	
   

  	
  +44
  (0) 20 7826 3598

  
	
   

  	
   

  	
   

  
	
  Fitch:

  	
   

  	
  Eldon House, 2 Eldon Street, London EC2M
  7UA

  
	
  For
  the attention of:

  	
   

  	
  European
  Structured Finance

  
	
  Telephone:

  	
   

  	
  +44
  (0) 20 7417 4355

  
	
  Fax:

  	
   

  	
  +44
  (0) 20 7417 6262

  

 

26

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