Document:

exv4w1

 

Exhibit 4.1

REIMBURSEMENT AGREEMENT

REIMBURSEMENT AGREEMENT

by and among

DNA COMPUTING SOLUTIONS, INC.

TERAFORCE TECHNOLOGY CORPORATION

and

Richard E. Bean

Robert E. Garrison II

Steven A. Webster

James Hawkins

Peter Badger

John Styles

Donald Campbell

Dated as of July 27, 2004

 

 

REIMBURSEMENT AGREEMENT

     This REIMBURSEMENT AGREEMENT dated as of July 27, 2004, (the “Agreement),
is made by and between TERAFORCE TECHNOLOGY CORPORATION, a Delaware corporation
( “TERA”), DNA COMPUTING SOLUTIONS, INC, a Delaware corporation and a
wholly-owned subsidiary of TERA (“DNA-CS”) (TERA and DNA-CS collectively
referred to as the Companies) and Richard E. Bean, an individual residing in
Texas, Robert E. Garrison II, an individual residing in Texas, Steven A.
Webster, an individual residing in Texas, James Hawkins, an individual residing
in Texas, Peter Badger, an individual residing in Texas, Donald Campbell, an
individual residing in Texas, and John Styles, an individual residing in Texas
( each individual a “Guarantor” and collectively the “Guarantors”) (the TERA,
DNA-CS and Guarantors collectively referred to as the “Parties”)

W I T N E S S E T H:

     WHEREAS, the Companies contemplate entering into a loan agreement with
First Capital Bank (the “Bank”) providing for the loan of up to $575,000 to
DNA-CS (the “Loan Agreement”) ; and

     WHEREAS, DNA-CS will granted the Bank a security interest in certain
assets, including accounts receivable and inventories; and

     WEREAS, in order to enter into the Loan Agreement the Bank has required
the Guarantors to provide limited guarantees aggregating $776,250; and

     WHEREAS, in order to induce the Bank to enter into the Loan Agreement,
each Guarantor has executed a limited guarantee to secure the loan there under
in the amount as indicated in Schedule I ( the “Guarantee”); and

     WHEREAS, the Bank shall provide Advances (as hereinafter defined) to the
DNA-CS in accordance with the provisions of the Loan Agreement and shall be
entitled to make demand upon the Guarantors pursuant to the provisions of the
Guarantees in the case of an Event of Default (as defined in the Loan
Agreement) by the Companies under the Loan Agreement; and

     NOW, THEREFORE, in consideration of the foregoing, the Companies and the
Guarantors covenant and agree as follows:

 

 

ARTICLE I

GENERAL TERMS

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

          “Advances” shall mean an advance of funds under and subject to the terms
and conditions of the Loan Agreement provided that the principal amount
outstanding shall never exceed the Loan Maximum.

          “Agreement” shall have the meaning specified in the preamble.

          “Associated Expenses” shall mean the expenses associated with recovering
the Guarantor Advances, excluding the Guarantor Advances and interest thereon.

          “Bank” shall have the meaning set forth in the recitals.

          “Common Stock” shall mean the common stock, par value $0.01, of TERA.

          “Demand for Reimbursement” shall have the meaning specified in Section
3.1(a).

          “Governmental Authority” means any United States or foreign federal,
territorial, state or local governmental authority, quasi-governmental
authority, instrumentality, court, government or self-regulatory organization,
commission, tribunal or organization or any regulatory, administrative or other
agency, or any political or other subdivision, department or branch of any of
the foregoing.

          “Guarantor Advance” shall mean the amount of money advanced by the
Guarantor to the Bank pursuant to a demand for payment by the Bank on the
Guarantee.

          “Guarantor” and “Guarantors” shall have the meanings specified in the
preamble.

          “Guarantee” shall have the meaning set forth in the recitals.

          “Guarantor’s Percentage ” shall mean the amount of a Guarantor’s
Guarantee divided by the aggregate amount of Guarantees provided by the
Guarantors.

          “Loans” shall mean the Companies’ obligations pursuant to the Loan
Agreement and the Loan Agreement.

          “Loan Documents” shall mean the Loan Agreement and all exhibits and
related documents thereto, as they may be amended, extended or modified from
time to time, including, without limitation, a promissory note.

          “Loan Maximum” shall mean the principal amounts outstanding of $500,000.

          “Person” means an individual, corporation, partnership, association,
limited liability company, trust, estate or other similar business entity or
organization, including a Governmental Authority.

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          “Registration Rights Agreement” shall have the meaning specified in
Section 4.3.

          “Reimbursement Obligation” shall have the meaning specified in Section
3.1(a).

          “Related Documents” shall mean the Warrants and the Registration Rights
Agreement.

          “Warrants” shall have the meaning specified in Section 4.1.

     Section 1.2. Interpretation.

          (a) In this Agreement:

               (i) the singular number includes the plural number and vice versa;

               (ii) reference to any gender includes each other gender;

               (iii) the words “herein,” “hereof” and “hereunder” and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision;

               (iv) reference to any Person includes such Person’s heirs, administrators,
successors and assigns but, if applicable, only if such heirs, administrators,
successors and assigns are permitted by this Agreement, and reference to a
Person in a particular capacity excludes such Person in any other capacity or
individually, provided that nothing in this sub clause (iv) is intended to
authorize any assignment not otherwise permitted by this Agreement;

               (v) reference to any agreement, document or instrument means such
agreement, document or instrument as amended, supplemented or modified and in
effect from time to time in accordance with the terms thereof and, if
applicable, the terms hereof, and reference to the Note includes any Note
issued pursuant hereto in extension or renewal hereof and in substitution or
replacement here for;

               (vi) unless the context indicates otherwise, reference to any Article,
Section, Schedule or Exhibit means such Article or Section hereof or such
Schedule or Exhibit hereto;

               (vii) the words “including” (and with correlative meaning “include”) means
including, without limiting the generality of any description preceding such
term;

               (viii) with respect to the determination of any period of time, the word
“from” means “from and including” and the word “to” means “to, but excluding”;

               (ix) reference to any law means such as amended, modified, codified or
reenacted, in whole or in part, and in effect from time to time; and

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          (b) No provision of this Agreement shall be interpreted or construed
against any Person solely because that Person or its legal representative
drafted such provision.

ARTICLE II

THE GUARANTIES

     Section 2.1 Guarantees. On the terms and subject to the terms hereof,
each Guarantor agrees to provide the Guarantee in the amount as indicated on
Schedule I in substantially the form as in Exhibit A.

ARTICLE III

ASSUMPTION OF LOAN, REIMBURSEMENT

     Section 3.1 Assumption of Loan. Should the Guarantors be required to
make payment to the Bank pursuant to the Guarantee, the Companies hereby
consent to the assumption of the Loan by the Guarantors, including all
collateral rights. The Companies will use their best efforts to facilitate
such assumption.

     Section 3.2. Reimbursable Amounts and Other Payments

          (a) Amounts. Should the Guarantors not elect to, or be unable for any
reason to, assume the Loan, the Companies shall reimburse each Guarantor the
amount paid by the Guarantor to the Bank equal to the amount of his Guarantor
Advance and any interest, taxes, fees, charges or other costs and expenses
incurred by Guarantor in connection with such payment (the “Reimbursement
Obligation”). Each such Reimbursement Obligation shall be paid by the
Companies to Guarantor promptly upon written demand from Guarantor (“Demand
for Reimbursement”), but in no event later than thirty (30) days after such
demand. Each such Demand for Reimbursement, in order to be valid, shall be
accompanied by sufficient documentation, such as copies of documents provided
by the Bank to the Guarantors, supporting the amount of the Reimbursement
Obligation.

          (b) Interest. The Company shall pay interest on any and all amounts
remaining unpaid under Section 3.1(a) at any time from the date such amounts
become payable until paid in full, payable on demand, at simple interest at
the prime rate established by Bank One, N.A., plus 2.0% per annum (or, if
less, the highest rate permitted under applicable law). The Guarantors may,
at their election, receive interest payments in shares of Common Stock. The
number of shares of Common Stock to be issued shall be determined by dividing
the amount of the interest payment by $0.18.

          (c) Currency. All payments by the Company to Guarantor shall be
made in lawful currency of the United States of America and in immediately
available funds at, and pursuant to, such instructions as Guarantor may from
time to time give.

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     Section 3.2. Obligations Absolute.

          (a) The DNA-CS’s obligations under this Article III shall be absolute and
unconditional irrespective of any set-off, counterclaim, or defense to payment
which the Company may have or have had against the Bank.

          (b) The DNA-CS hereby agrees that Guarantor shall not be responsible
for, and the Reimbursement Obligations shall not be affected by, among other
things,

(i) the validity or genuineness of documents or of any
endorsements thereon even though such documents shall prove
to be invalid, fraudulent, or forged;

(ii) any dispute between the DNA-CS, TERA and the Bank; or

(iii) any claims whatsoever of the DNA-CS or TERA against the
Bank.

          (c) Guarantor shall not be liable for any error, omission,
interruption or delay in transmission, dispatch or delivery of any message or
advice, howsoever transmitted, in connection with the Guaranty, except for
errors or omissions caused by Guarantor’s primary negligence or willful
misconduct.

          (d) The Companies agrees that any action taken or omitted by the
Guarantor in connection with the Guaranty, provided Guarantor’s actions are not
the result of Guarantor’s primary negligence, willful misconduct, or breach of
contractual obligations, shall be binding on the DNA-CS and TERA and shall not
result in any liability to Guarantor.

     Section 3.4 Indemnity In addition to the rights and obligations set
forth in Section 3.1(a), the Companies hereby agrees to indemnify and hold
harmless Guarantor, and each of his respective successors, heirs and assigns,
from and against any and all claims and damages, losses, liabilities, costs or
expenses (including reasonable attorneys fees) which Guarantor may incur by
reason of or in connection with the issuance, execution and delivery or
transfer or payment or failure to pay the Guarantee except to the extent of the
primary negligence or willful misconduct of Guarantor, or as may be
attributable to Guarantor’s breach of his obligations under this Agreement.

     Section 3.5 Agreement Among Guarantors Upon the Bank invoking any or all
of the Guarantees, each Guarantor shall fund an amount equal to the total
amount of payments made to the Bank times his Guarantor’s Percentage. Should
any Guarantor’s Guarantor Advance be in excess of this amount, the other
Guarantors shall reimburse that Guarantor such that each Guarantor Advance is
proportionate to each Guarantor’s Percentage. Such reimbursement shall be made
within 30 days of a demand from another Guarantor.

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ARTICLE IV

CONVERSION RIGHTS AND WARRANTS

     Section 4.1. Warrants. As an inducement to enter into this Agreement,
TERA agrees to issue to the Guarantors Warrants to purchase an aggregate of
1,597,222 shares of Common Stock at an exercise price per share of $0.21, the
form of which is attached as Exhibit B (the “Warrants”). Each Guarantor shall
receive Warrants to purchase a number of shares of Common Stock equal to the
aggregate number of Warrants times his Guarantor’s Percentage.

     Section 4.2. Additional Warrants. If by December 31, 2004 TERA has not
completed a sale of common stock or preferred stock with net proceed of not
less than $3,000,000, then TERA will issue to the Guarantors additional
Warrants to purchase an aggregate of 798,611 shares of Common Stock at an
exercise price of $0.21, the form of which is attached as Exhibit B.
Furthermore, if at April 30, 2005 the 12% Convertible Subordinated Notes due
June 2005 previously issued by TERA remain outstanding with a principal balance
of more than $300,000, then TERA will issue to the Guarantors additional
Warrants to purchase an aggregate of 798,611 shares of Common Stock at an
exercise price of $0.21, the form of which is attached as Exhibit B. Each
Guarantor shall receive Warrants to purchase a number of shares of Common Stock
equal to the aggregate number of additional Warrants times his Guarantor’s
Percentage.

     Section 4.3 Conversion Rights. As long as any Loans are outstanding
or DNA-CS is able to incur Loans under the Loan Agreement, each Guarantor shall
have the right to purchase a number of shares of Common Stock equal to his
proportionate share of the Loan Maximum divided by $0.18. Proceeds from the
issuance of such shares of Common Stock shall be utilized by TERA to repay
amounts outstanding under the Loan Agreement and cause the Bank to release
Guarantees underlying the amount of the Loan repaid. The Companies will
undertake such procedures to ensure the Guarantor that the Guarantee will be
released immediately upon the purchase of the shares of Common Stock. Further,
each Guarantor shall have the right to covert any Reimbursement Obligation
into a number of shares of Common Stock equal to the amount of the
Reimbursement Obligation divided by $0.18. The Companies shall give the
Guarantors not less than 30 days notice of the intent to repay the Loans and
obtain the release of the Guarantees.

     Section 4.4. Registration Rights. The TERA further agrees to grant the
registration rights to register the resale of the shares of Common Stock to be
issued pursuant to the Conversion Rights and the Warrants and the in
accordance with the Registration Rights Agreement attached hereto as Exhibit C
(the “Registration Rights Agreement").

     Section 4.5. Subsequent Financings. Should TERA, at any time while the
Guarantees are outstanding, issue Common Stock at a price per share less than
$0.18, or issue warrants or convertible securities that provide for an exercise
or conversion price of less than $0.18 per share, then the conversion rate in
Section 4.3 and the Warrant exercise price in Sections 4.1 and 4.2 above shall
be reduced to such lesser amount and the exercise price of the warrants shall
be reduced to such lesser amount.

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     Section 4.6 Sharing of Consideration. Should any Guarantor be
required to make a Guarantor Advance in an amount in excess of an amount equal
to the Loan Maximum times his Guarantor’s Percentage and does not receive
reimbursement from the other Guarantors pursuant to Section 3.5 of this
Agreement and within the time frame required by Section 3.5, that Guarantor
shall receive additional Warrants and Conversion Rights proportionate with the
amount of such excess funding. Any Guarantor not making reimbursement to other
Guarantors pursuant to Section 3.5 of this Agreement shall forfeit Warrants and
Conversion Rights proportionate to the amount of reimbursement not made.

ARTICLE V

REPRESENTATIONS AND WARRANTIES

     Section 5.1. Representations and Warrants of the TERA and DNA-CS. TERA
and DNA-CS hereby represents and warrants to Guarantors as follows:

          (a) Corporate Existence and Good Standing. Each is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to own its
property and carry on its business as now conducted, and is in good standing
and authorized to do business in each jurisdiction in which the it owns real
property or conducts such business, where the failure to maintain such good
standing or authorization is reasonably expected to have a materially adverse
effect on its business, operations or financial or other condition, or could
materially adversely affect its ability to perform its obligations under this
Agreement.

          (b) Authorization and Validity. This Agreement and Related Documents have
been duly authorized by all necessary corporate action, and each has been duly
executed and delivered by TERA and DNA-CS and each is valid, binding and
enforceable against the TERA and DNA-CS in accordance with its terms except as
may be limited by bankruptcy or insolvency laws and similar laws affecting
creditor rights generally and by generally and by general principles of equity.

          (c) No Conflict; Government Consent; Title to Assets; No Liens. Neither
the execution and delivery of this Agreement and Related Documents, nor the
consummation of the transactions contemplated hereby or thereby nor compliance
with the terms hereof or thereof under the circumstances contemplated hereby or
thereby will conflict with, are prohibited by or will contravene, violate or
constitute a breach of or a default under the Amended and Restated Certificate
of Incorporation or By-Laws of TERA or DNA-CS or constitute on the part of the
TERA or DNA-CS a material breach of or a material default under any agreement
or other instrument to which the either company is a party or any existing law,
administrative regulation, or, to its knowledge, any court order or consent
decree to which TERA or DNA-CS is subject, or by which any of its properties is
bound.

     5.2 Representations of Guarantors. Each Guarantor represents and
warrants to the TERA and DNA-CS that he has full power and authority to execute
and deliver this Agreement and the Related Documents, and that this Agreement
and Related Documents are valid, binding and enforceable in accordance with
their terms as they relate to such Guarantor, except as may

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be limited by bankruptcy and insolvency laws, and similar laws affecting
creditors rights generally and by general principals of equity. Each Guarantor
represents and warrants that he or she (a) has such knowledge and experience in
financial and business matters that such Guarantor is capable of evaluating the
merits and risks of his or her investment and has the financial ability to
assume the monetary risk associated therewith; (b) is able to bear the complete
loss of his or her investment; (c) has received such documents and information
from the TERA or DNA-CS as such Guarantor has requested and has had the
opportunity to ask questions of, and receive answers from, the TERA and DNA-CS
and the terms and conditions of the offering of the Warrants and the Common
Stock to be issued pursuant to the Conversion Rights and the Warrants and to
obtain additional information; (d) is an “accredited investor” as defined in
Rule 501(a) of Regulation D promulgated under the 1933 Act; and (e) is not
relying upon any statements or instruments made or issued by any person other
than the TERA or DNA-CS in making a decision to invest in the Shares.

ARTICLE VI

AFFIRMATIVE AND NEGATIVE COVENANTS

     Section 6.1 Conduct of Business. The TERA and DNA-CS covenant and agree
that each shall remain duly incorporated, validly existing and in good standing
as a domestic corporation in the State of Delaware, will not voluntarily
dissolve without first discharging its obligations under this Agreement.

     Section 6.1 Limitation on Borrowings. TERA and DNA-CS covenant and agree
that amount of the Loans shall not exceed an amount equal to the sum of (a) the
amount of DNA-CS inventories multiplied by 50% and (b) the amount of DNA-CS
accounts receivable multiplied by 80%.

     Section 6.2 Pledge of Assets. The Companies will not pledge any assets,
other than in relation to the Loan Agreement, without the express written
consent of the Guarantors.

ARTICLE VII

COVENANTS

     Section 8.1 Successors and Assigns. This Agreement shall be binding
upon each party and their respective successors, heirs and assigns.

     Section 8.2. Notices. All notices, requests and demands to or upon the
respective parties shall be in writing (including by facsimile) and, unless
otherwise expressly provided herein, shall be deemed to have been duly given or
made (a) in the case of delivery by hand, when delivered, (b) in the case of
delivery by mail, three (3) days after being deposited in the mails, postage
prepaid, or (c) in the case of delivery by facsimile, when sent and receipt has
been confirmed, addressed as follows:

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	 	If to Guarantors: 	 	to the addresses as indicated on Schedule I
	 
	 	If to the Company:	 	 TeraForce Technology Corporation

Attn.: Herman M. Frietsch, Chairman & CEO

1240 East Campbell Road

Richardson, Texas 75081

Telecopier: (469) 330-4999

     Any entity entitled to receive notice hereunder may, by notice given
hereunder, designate any further or different addresses to which subsequent
notices, certificates or other communications shall be sent.

     Section 8.3. Amendment. This Agreement may be amended, modified or
discharged only upon an agreement in writing of TERA, DNA-CS and each of the
Guarantors.

     Section 8.4. Effect of Delay and Waivers. No delay or omission to
exercise any right or power accruing upon any default, omission or failure of
performance hereunder shall impair any such right or power or shall be
construed to be a waiver thereof, but any such right and power may be exercised
from time to time and as often as may be deemed expedient. In order to entitle
Guarantors to exercise any remedy now or hereafter existing at law or in equity
or by statute, it shall not be necessary to give any notice, other than such
notice as may be herein expressly required. In the event any provision
contained in this Agreement should be breached by any party and thereafter
waived by the other party so empowered to act, such waiver shall be limited to
the particular breach so waived and shall not be deemed to waive any other
breach hereunder. No waiver, amendment, release or modification of this
Agreement shall be established by conduct, custom or course of dealing, but
solely by an instrument in writing duly executed by the parties thereunto duly
authorized by this Agreement.

     Section 8.5. Counterparts. This Agreement may be executed simultaneously
in counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.

     Section 8.6. Severability. The invalidity or unenforceability of any one
or more phrases, sentences, clauses or Sections contained in this Agreement
shall not affect the validity or enforceability of the remaining portions of
this Agreement, or any part thereof. In particular, this section means (among
other things) that TERA and DNA-CS do not agree or intend to pay, and
Guarantors do not agree to contract for, charge, collect, take, reserve or
receive (collectively referred to herein as “charge or collect”), any amount in
the nature of interest or in the nature of a fee for anything construed to be a
loan, which would in any way or event (including demand, prepayment, or
acceleration) cause Guarantors to charge or collect more for entering into this
Agreement than the maximum amount Guarantors would be permitted to charge or
collect by federal law or the laws of the State of Texas. Any such excess
interest or unauthorized fee shall, instead or anything stated to the contrary,
be applied first to reduce the principal balance of the loan, if any, and when
the principal has been paid in full, refunded to the Companies.

     Section 8.7. Governing Law and Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State of Texas.

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     This Agreement has been signed by the Company as of the date first above
written.

	 	 	 
	 

	 	TERA:
	

	 	TeraForce Technology Corporation
	 
	 	 
	

	 	By: /s/ Robert P. Capps
	

	 	Robert P. Capps, Executive Vice President
	 
	 	 
	

	 	DNA-CS:
	

	 	DNA Computing Solutions, Inc.
	 
	 	 
	

	 	By: /s/ Robert P. Capps
	

	 	Robert P. Capps, Executive Vice President
	 
	 	 
	

	 	GUARANTORS:
	 
	 	 
	

	 	/s/ Richard E. Bean
	

	 	Richard E. Bean
	 
	 	 
	

	 	/s/ Robert E. Garrison
	

	 	Robert E. Garrison II
	 
	 	 
	

	 	/s/ Steven A. Webster
	

	 	Steven A. Webster
	 
	 	 
	

	 	/s/ James Hawkins
	

	 	James Hawkins
	 
	 	 
	

	 	/s/ Peter Badger
	

	 	Peter Badger
	 
	 	 
	

	 	/s/ John Styles
	

	 	John Styles
	 
	 	 
	

	 	/s/ Donald Campbell
	

	 	Donald Campbell

10exv4w2

 

Exhibit 4.2

Form of Warrants

THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK ISSUABLE
THEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), OR ANY OTHER APPLICABLE SECURITIES LAW AND,
ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK
ISSUABLE THEREBY MAY NOT BE RESOLD, PLEDGED, OR OTHERWISE TRANSFERRED, EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH ANY
OTHER APPLICABLE SECURITIES LAWS.

WARRANT

to Purchase Common Stock of

TERAFORCE TECHNOLOGY CORPORATION

Expiring on July 31, 2008

     This Common Stock Purchase Warrant (the “Warrant”) certifies that for
value received, [INVESTOR] (the “Holder”) is entitled to subscribe for and
purchase from the Company (as hereinafter defined), in whole or in part,
[   ] shares of duly authorized, validly issued, fully paid and
nonassessable shares of Common Stock (as hereinafter defined) at the Exercise
Price (as hereinafter defined), subject, however, to the provisions and upon
the terms and conditions hereinafter set forth. This Warrant and all rights
hereunder shall expire at 5:00 p.m., Dallas, Texas time, on July 31, 2008.

     As used herein, the following terms shall have the meanings set forth
below:

     “Company” shall mean TeraForce Technology Corporation, a Delaware
corporation, and shall also include any successor thereto with respect to the
obligations hereunder, by merger, consolidation or otherwise.

     “Common Stock” shall mean and include the Company’s Common Stock, par
value $0.01 per share, authorized on the date of the original issue of this
Warrant.

     “Exercise Price” shall mean $0.21 per share of Common Stock payable upon
exercise of the Warrant, as adjusted pursuant to the provisions hereof.

     “Guarantees” shall have the meaning as defined in that Reimbursement
Agreement between the Holder and the Company of even date hereof.

     “Market Price” for any day, when used with reference to Common Stock,
shall mean the price of said Common Stock determined as follows: (x) the last
reported sale price for the Common Stock on such day on the principal
securities exchange on which the Common Stock is listed or admitted to trading
or if

 

 

no such sale takes place on such date, the average of the closing bid and
asked prices thereof as officially reported, or, if not so listed or admitted
to trading on any securities exchange, the last sale price for the Common Stock
on the National Association of Securities Dealers National Market on such date,
or, if there shall have been no trading on such date or if the Common Stock
shall not be listed on such system, the average of the closing bid and asked
prices in the over-the-counter market as furnished by any NASD member firm
selected from time to time by the Company for such purpose, in each such case,
unless otherwise provided herein, averaged over a period of ten (10)
consecutive Trading Days prior to the date as of which the determination is to
be made; or (y) if the Common Stock shall not be listed or admitted to trading
as provided in clause (x) above, the fair market value of the Common Stock as
determined in good faith by the Board of Directors of the Company.

     “Person” means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.

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

     “Trading Days” shall mean any days during the course of which the
principal securities exchange on which the Common Stock is listed or admitted
to trading is open for the exchange of securities.

     “Warrant Shares” shall mean the shares of Common Stock purchased or
purchasable by the Holder hereof upon the exercise of the Warrant.

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ARTICLE I

EXERCISE OF WARRANT

     1.1 Method of Exercise. The Warrant represented hereby may be exercised
by the Holder hereof, in whole or in part, at any time and from time to time on
or after the date hereof until 5:00 p.m., Dallas, Texas time, on July 31, 2008.
To exercise the Warrant, the Holder hereof shall deliver to the Company (i) a
written notice in the form of the Subscription Notice attached as an exhibit
hereto, stating therein the election of such Holder to exercise the Warrant in
the manner provided in the Subscription Notice; and (ii) payment in full of the
Exercise Price (A) in cash or by bank check for all Warrant Shares purchased
hereunder or (B) if permitted pursuant to Section 1.6 below, by notifying the
Company that this warrant is being exercised pursuant to a Cashless Exercise
(as defined in Section 1.6) or (C) a combination of (A) and (B) above; and
(iii) this Warrant. The Warrant shall be deemed to be exercised on the date of
receipt by the Company of the Subscription Notice, accompanied by payment for
the Warrant Shares and surrender of this Warrant, as aforesaid, and such date
is referred to herein as the “Exercise Date”. Upon such exercise, the Company
shall, as promptly as practicable and in any event within ten (10) business
days, issue and deliver to such Holder a certificate or certificates for the
full number of the Warrant Shares purchased by such Holder hereunder, and
shall, unless the Warrant has expired or has been redeemed, deliver to the
Holder hereof a new Warrant representing the portion, if any, that shall not
have been exercised, in all other respects identical to this Warrant. As
permitted by applicable law, the Person in whose name the certificates for
Common Stock are to be issued shall be deemed to have become a holder of record
of such Common Stock on the Exercise Date and shall be entitled to all of the
benefits of such holder on the Exercise Date, including without limitation the
right to receive dividends and other distributions for which the record date
falls on or after the Exercise Date and to exercise voting rights.

     1.2 Reservation of Shares. The Company shall reserve at all times so long
as the Warrant remains outstanding, free from preemptive rights, out of its
treasury Common Stock or its authorized but unissued shares of Common Stock, or
both, solely for the purpose of effecting the exercise of the Warrant, a
sufficient number of shares of Common Stock to provide for the exercise of the
Warrant.

     1.3 Valid Issuance. All shares of Common Stock that may be issued upon
exercise of the Warrants will, upon issuance by the Company, be duly and
validly issued, fully paid and non-assessable and free from all taxes, liens
and charges with respect to the issuance thereof.

     1.4 No Fractional Shares. The Company shall not be required to issue
fractional shares of Common Stock on the exercise of this Warrant. If any
fraction of a share of Common Stock would be issuable on the exercise of this
Warrant, the Company shall pay an amount in cash calculated by it to be equal
to the Market Price of one share of Common Stock at the time of such exercise
multiplied by such fraction computed to the nearest whole cent.

     1.5 Reimbursement Agreement; Registration Rights Agreement. This Warrant
is issued in connection with that certain Reimbursement Agreement dated    
between the Company and the Holder (the “Reimbursement Agreement”). Except as
otherwise set forth in that certain Registration Rights Agreement dated as of
   between the Company and the Holder (the “Registration Rights
Agreement”), the Warrant and the Warrant Shares are not registered pursuant to
the Securities Act and may not be transferred absent an effective registration
statement or an exemption from such registration.

3

 

     1.6 Cashless Exercise. If (i) the Company and the Holder mutually elect;
or (ii) the Warrant Shares to be issued are not registered for resale to the
extent required by the Registration Rights Agreement, then, notwithstanding
anything to the contrary, the Holder may exercise, at its election, in its sole
discretion, this Warrant in whole or in part and, in lieu of making the cash
payment otherwise contemplated to be made to the Company upon exercise of this
Warrant, elect instead to receive the Warrant Shares through a “cashless” or
“net-issue” exercise of the Warrant (“Cashless Exercise”). The Holder shall
exchange the Warrant subject to a Cashless Exercise for that number of Warrant
Shares determined by multiplying the number of Warrant Shares issuable
hereunder by a fraction, the numerator of which shall be the difference between
(x) the Market Price and (y) the Exercise Price for each such Warrant Share,
and the denominator of which shall be the Market Price; the Subscription Notice
shall set forth the calculation upon which the Cashless Exercise is based.

ARTICLE II

TRANSFER

     2.1 Ownership of Warrant. The Company may deem and treat the Person in
whose name the Warrant is registered as the Holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any
notice to the contrary unless agreed to in writing by the Company.

     2.2 Restrictions on Transfer of Warrants. The Holder of the Warrant
agrees that the Warrant is not transferrable without the prior written consent
of the Company and any such transfer without such consent shall be void and
without effect, unless such transfer occurs by operation of law. Subject to
the restrictions on transfer of the Warrant in this Section 2.2, the Company,
from time to time, shall register the transfer of the Warrant in such books
upon surrender of this Warrant at the Company’s principal office, properly
endorsed or accompanied by appropriate instruments of transfer and written
instructions for transfer satisfactory to the Company. Upon any such transfer
and upon payment by the Holder or its transferee of any applicable transfer
taxes, a new Warrant shall be issued to the transferee and the transferor (as
their respective interests may appear) and the surrendered Warrant shall be
canceled by the Company. The Holder shall pay all taxes and all other expenses
and charges payable in connection with the transfer of the Warrant pursuant to
this Section 2.2.

     2.3 Compliance with Securities Laws. Subject to the terms of the
Registration Rights Agreement and notwithstanding any other provisions
contained in this Warrant, the Holder hereof understands and agrees that the
following restrictions and limitations shall be applicable to all Warrant
Shares and to all resales or other transfers thereof pursuant to the Securities
Act, and that as a condition to the exercise of such warrant that the following
are and will be true and correct:

          (A) The Holder hereof agrees that the Warrant Shares shall not be
sold or otherwise transferred unless the Warrant Shares are registered
under the Securities Act and applicable state securities or blue sky laws
or are exempt therefrom.

          (B) A legend in substantially the following form will be placed on
the certificate(s) evidencing the Warrant Shares:

4

 

               “THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), OR ANY OTHER APPLICABLE
SECURITIES LAW AND, ACCORDINGLY, THE SECURITIES REPRESENTED
BY THIS CERTIFICATE MAY NOT BE RESOLD, PLEDGED, OR OTHERWISE
TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER, OR UPON RECEIPT OF AN OPINION OF COUNSEL
REASONABLY ACCEPTABLE TO THE COMPANY PURSUANT TO A
TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE SECURITIES
ACT AND IN ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES
LAWS.”

          (C) Stop transfer instructions will be imposed with respect to the
Warrant Shares so as to restrict resale or other transfer thereof,
subject to this Section 2.3.

          (D) The Holder is an #accredited investor# within the meaning of
Rule 501 of Regulation D as promulgated under the Securities Act, and
will be so as a condition of purchasing any of the Warrant Shares. The
Holder will acquire the Warrant, and if exercised, any Warrant Shares for
its own account for investment purposes and not with a view towards
distribution. The Holder must bear the economic risk of the investment
for an indefinite period of time because the Warrant and Warrant Shares
have not been registered under the Securities Act and therefore cannot be
sold unless they are subsequently registered under the Securities Act or
an exemption from such registration is available. The Holder has received
and carefully reviewed copies of all documents filed by the Company with
the Securities and Exchange Commission as of the date hereof, and will do
so before each exercise of the Warrant. No representations or warranties
have been made to the Holder by the Company, the officers or directors of
the Company, or any agent, employee or affiliate of any of them. The
Holder is aware that the Warrant and any purchase of the Warrant Shares
involves a high degree of risk and that it may sustain, and has the
financial ability to sustain, the loss of its entire investment. The
Holder has had the opportunity to ask questions of, and receive answers,
satisfactory to it from the Company’s management regarding the Company.
The Holder understands that no Federal or State governmental authority
has made any finding or determination relating to the fairness of an
investment in the Warrant or Warrant Shares and that no Federal or State
governmental authority has recommended or endorsed, or will recommend or
endorse, the investment herein. The Holder, in making the decision to
acquire the Warrant, and if it is exercised, the purchase of the Warrant
Shares subscribed for, has relied upon independent investigations made by
it and has not relied on any information or representations made by third
parties. The Holder has significant assets, and upon consummation of the
purchase of the Warrant Shares, will continue to have significant assets
exclusive of the Warrant Shares. The Holder understands that the Warrant,
and if exercised, the Warrant Shares are being offered and sold to it in
reliance on specific provisions of Federal and State securities laws and
that the Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and
understandings of the Holder set forth herein in order to determine the
applicability of such provisions. The Holder, in making the decision to
purchase the Warrant, and if exercised, the Warrant Shares subscribed
for, has relied upon independent investigations made by it and has not
relied on any information or representations made by third parties.

5

 

ARTICLE III

ANTI-DILUTION

     3.1 Anti-Dilution Provisions. If the outstanding shares of the Company’s
Common Stock shall be subdivided into a greater number of shares or a dividend
in Common Stock shall be paid in respect of Common Stock, the Exercise Price in
effect immediately prior to such subdivision or at the record date of such
dividend shall simultaneously with the effectiveness of such subdivision or
immediately after the record date of such dividend be proportionately reduced.
If outstanding shares of Common Stock shall be combined into a smaller number
of shares, the Exercise Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased. When any adjustment is required to be made in the
Exercise Price, the number of Warrant Shares purchasable upon the exercise of
this Warrant shall be changed to the number determined by dividing (i) an
amount equal to the number of shares issuable upon the exercise of this Warrant
immediately prior to such adjustment, multiplied by the Exercise Price in
effect immediately in effect prior to such adjustment, by (ii) the Exercise
Price in effect immediately after such adjustment.

     3.2 Reduction of Exercise Price. Should the Company, at any time
while the Guarantees are outstanding, issue Common Stock at a price per share
less than $0.18, or issue warrants or convertible securities that provide for
an exercise or conversion price of less than $0.18 per share, then the Exercise
Price shall be reduced to such lesser amount.

     3.3 Reorganizations and Asset Sales. If any capital reorganization or
reclassification of the capital stock of the Company, or any consolidation,
merger or share exchange of the Company with another Person, or the sale,
transfer or other disposition of all or substantially all of its assets to
another Person shall be effected in such a way that a holder of Common Stock of
the Company shall be entitled to receive capital stock, securities or assets
with respect to or in exchange for their shares, then as part of any such
reorganization, reclassification, consolidation, merger or sale, as the case
may be, lawful provision shall be made so that the Holder of this Warrant shall
have the right thereafter to receive upon exercise hereof the kind and amount
of shares of stock or other securities or property which such Holder would have
been entitled to receive if, immediately prior to any such reorganization,
reclassification, consolidation, merger or sale, as the case may be, such
Holder had held the number of shares of Common Stock which were the purchasable
upon the exercise of this Warrant. In any such case, appropriate adjustment
(as reasonably determined in good faith by the Board of Directors of the
Company) shall be made in the application of the provisions set forth herein
with respect to the rights and interests thereafter of the Holder of this
Warrant, such that the provisions set forth herein (including provisions with
respect to adjustment of the Exercise Price) shall thereafter be applicable, as
nearly as is reasonably practicable, in relation to any shares of stock or
other securities or property thereafter deliverable upon the exercise of this
Warrant.

     3.4 Notice of Adjustment. Whenever the Exercise Price or the number of
Warrant Shares issuable upon the exercise of the Warrant shall be adjusted as
herein provided, or the rights of the Holder hereof shall change by reason of
other events specified herein, the Company shall compute the adjusted Exercise
Price and the adjusted number of Warrant Shares in accordance with the
provisions hereof and shall prepare a notice setting forth the adjusted
Exercise Price and the adjusted number of Warrant Shares issuable upon the
exercise of the Warrant or specifying the other shares of stock, securities or
assets receivable as a result of such change in rights, and showing in
reasonable detail the facts and calculations upon which such adjustments or
other changes are based. The Company shall cause to be mailed to the Holder
hereof, no later than 10 days after any such adjustment herein provided, copies
of such notice
stating that the Exercise Price and the number of Warrant Shares
purchasable upon exercise of the Warrant have been adjusted and setting forth
the adjusted Exercise Price and the adjusted number of Warrant Shares
purchasable upon the exercise of the Warrant.

6

 

ARTICLE IV

MISCELLANEOUS

     4.1 Entire Agreement. This Warrant, together with the Securities Purchase
Agreement and the Registration Rights Agreement, contain the entire agreement
between the Holder hereof and the Company with respect to the Warrant Shares
purchasable upon exercise hereof and the related transactions and supersedes
all prior arrangements or understandings with respect thereto.

     4.2 Governing Law; Venue. This warrant shall be governed by and construed
in accordance with the laws of the State of Texas. Venue for any dispute
arising under this Warrant shall lie in the state or federal courts of Dallas
County, Texas.

     4.3 Waiver and Amendment. Any term or provision of this Warrant may be
waived at any time by the party which is entitled to the benefits thereof and
any term or provision of this Warrant may be amended or supplemented at any
time by agreement of the Holder hereof and the Company, except that any waiver
of any term or condition, or any amendment or supplementation, of this Warrant
shall be in writing. A waiver of any breach or failure to enforce any of the
terms or conditions of this Warrant shall not in any way effect, limit or waive
a party’s rights hereunder at any time to enforce strict compliance thereafter
with every term or condition of this Warrant.

     4.4 Illegality. In the event that any one or more of the provisions
contained in this Warrant shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the remaining
provisions of this Warrant shall not, at the election of the party for whom the
benefit of the provision exists, be in any way impaired.

     4.5 Copy of Warrant. A copy of this Warrant shall be filed among the
records of the Company.

     4.6 Notice. Any notice or other document required or permitted to be
given or delivered to the Holder or the Company hereof shall be in writing and
will deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided a confirmation
of transmission is mechanically generated and kept on file by the sending
party); or (iii) one (1) day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be: any notice or other document required or permitted to be given or
delivered to the Company shall be sent to the offices of the Company at 1240
East Campbell Road, Richardson, Texas 75081, Attn: Chief Financial Officer,
Telecopy No. (469) 330-4972 or such other address as shall have been furnished
in writing by the Company to the Holder of this Warrant. Any notice sent or
required to be sent hereunder to the Holder shall be sent to the address of the
Holder as contained in the corporate records of the Company or such other
address as shall have been furnished in writing by the Holder to the Company.

     4.7 Limitation of Liability; Not Stockholders. No provision of this
Warrant shall be construed as conferring upon the Holder hereof the right to
vote, consent, receive dividends or receive notices (other than as herein
expressly provided) in respect of meetings of stockholders for the election of
directors of the Company or any other matter whatsoever as a stockholder of the
Company. No provision hereof, in the absence of affirmative action by the
Holder hereof to purchase shares of Common Stock, and no mere enumeration
herein of the rights or privileges of the Holder hereof, shall give rise to any

7

 

liability of such Holder for the purchase price of any shares of Common
Stock or as a stockholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company.

     4.8 Exchange, Loss, Destruction, etc. of Warrant. Upon receipt of
evidence satisfactory to the Company of the loss, theft, mutilation or
destruction of this Warrant, and in the case of any such loss, theft or
destruction upon delivery of a bond of indemnity or such other security in such
form and amount as shall be reasonably satisfactory to the Company, or in the
event of such mutilation upon surrender and cancellation of this Warrant, the
Company will make and deliver a new Warrant of like tenor, in lieu of such
lost, stolen, destroyed or mutilated Warrant. Any Warrant issued under the
provisions of this Section 4.8 in lieu of any Warrant alleged to be lost,
destroyed or stolen, or in lieu of any mutilated Warrant, shall constitute an
original contractual obligation on the part of the Company. This Warrant shall
be promptly canceled by the Company upon the surrender hereof in connection
with any exchange or replacement. The Company shall pay all taxes (other than
securities transfer taxes or income taxes) and all other expenses and charges
payable in connection with the preparation, execution and delivery of Warrants
pursuant to this Section 4.8.

     4.9 Registration Rights. The Warrant Shares shall be entitled to such
registration rights under the Securities Act and under applicable state
securities laws as are specified in the Registration Rights Agreement.

     4.10 Headings. The Article and Section and other headings herein are for
convenience only and are not a part of this Warrant and shall not affect the
interpretation thereof.

     IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name.

Dated:

	 	 	 	 	 
	 	TERAFORCE TECHNOLOGY CORPORATION

 	 
	 	By:  

	 	 	 
	 	Name:  	 	Robert P. Capps 	 
	 	Title:  	 	Executive Vice President and Chief
Financial
 Officer 

8

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