Exhibit 4.1
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
Original Issue Date: December __, 2005
Original Conversion Price (subject to adjustment herein): $0.4544
$_______________
8% CONVERTIBLE DEBENTURE
DUE DECEMBER __, 2009
THIS 8% CONVERTIBLE DEBENTURE is one of a series of duly authorized and
issued 8% Convertible Debentures of Electronic Sensor Technology, Inc., a Nevada
corporation, having a principal place of business at 0000 Xxxxxxxx Xxxxxx
Xxxxxx, Xxxxxxx Xxxx, XX 00000 (the "Company"), designated as its 8% Convertible
Debenture, due December __, 2009 (this debenture, the "Debenture" and
collectively with the other such series of debentures, the "Debentures").
FOR VALUE RECEIVED, the Company promises to pay to
________________________ or its registered assigns (the "Holder"), or shall have
paid pursuant to the terms hereunder, the principal sum of $_______________ by
December __, 2009, or such earlier date as this Debenture is required or
permitted to be repaid as provided hereunder (the "Maturity Date"), and to pay
interest to the Holder on the aggregate unconverted and then outstanding
principal amount of this Debenture in accordance with the provisions hereof.
This Debenture is subject to the following additional provisions:
Section 1. Definitions. For the purposes hereof, in addition to the
terms defined elsewhere in this Debenture: (a) capitalized terms not otherwise
defined herein have the meanings given to such terms in the Purchase Agreement,
and (b) the following terms shall have the following meanings:
"Alternate Consideration" shall have the meaning set forth in
Section 5(d).
"Base Conversion Price" shall have the meaning set forth in
Section 5(b).
"Business Day" means any day except Saturday, Sunday and any day
which shall be a federal legal holiday in the United States or a day on
which banking institutions in the State of New York are authorized or
required by law or other government action to close.
"Buy-In" shall have the meaning set forth in Section 4(d)(v).
"Change of Control Transaction" means the occurrence after the
date hereof of any of (i) an acquisition after the date hereof by an
individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company,
by contract or otherwise) of in excess of 33% of the voting securities
of the Company, or (ii) the Company merges into or consolidates with any
other Person, or any Person merges into or consolidates with the Company
and, after giving effect to such transaction, the stockholders of the
Company immediately prior to such transaction own less than 66% of the
aggregate voting power of the Company or the successor entity of such
transaction, or (iii) the Company sells or transfers its assets, as an
entirety or substantially as an entirety, to another Person and the
stockholders of the Company immediately prior to such transaction own
less than 66% of the aggregate voting power of the acquiring entity
immediately after the transaction, (iv) a replacement at one time or
within a three year period of more than one-half of the members of the
Company's board of directors which is not approved by a majority of
those individuals who are members of the board of directors on the date
hereof (or by those individuals who are serving as members of the board
of directors on any date whose nomination to the board of directors was
approved by a majority of the members of the board of directors who are
members on the date hereof), or (v) the execution by the Company of an
agreement to which the Company is a party or by which it is bound,
providing for any of the events set forth above in (i) through (iv).
"Common Stock" means the common stock, par value $.001 per
share, of the Company and stock of any other class of securities into
which such securities may hereafter have been reclassified or changed
into.
"Conversion Date" shall have the meaning set forth in
Section 4(a).
"Conversion Price" shall have the meaning set forth in
Section 4(b).
"Conversion Shares" means the shares of Common Stock issuable
upon conversion of this Debenture or as payment of interest in
accordance with the terms.
"Debenture Register" shall have the meaning set forth in
Section 2(c).
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"Dilutive Issuance" shall have the meaning set forth in
Section 5(b).
"Dilutive Issuance Notice" shall have the meaning set forth in
Section 5(b).
"Effectiveness Period" shall have the meaning given to such term
in the Registration Rights Agreement.
"Equity Conditions" shall mean, during the period in question,
(i) the Company shall have duly honored all conversions and redemptions
scheduled to occur or occurring by virtue of one or more Notice of
Conversions of the Holder, if any, (ii) all liquidated damages and other
amounts owing to the Holder in respect of this Debenture shall have been
paid, (iii) there is an effective Registration Statement pursuant to
which the Holder is permitted to utilize the prospectus thereunder to
resell all of the shares issuable pursuant to the Transaction Documents
(and the Company believes, in good faith, that such effectiveness will
continue uninterrupted for the foreseeable future), (iv) the Common
Stock is trading on the Trading Market and all of the shares issuable
pursuant to the Transaction Documents are listed for trading or quoted
on a Trading Market (and the Company believes, in good faith, that
trading of the Common Stock on a Trading Market will continue
uninterrupted for the foreseeable future), (v) there is a sufficient
number of authorized but unissued and otherwise unreserved shares of
Common Stock for the issuance of all of the shares issuable pursuant to
the Transaction Documents, (vi) there is then existing no Event of
Default or event which, with the passage of time or the giving of
notice, would constitute an Event of Default, (vii) the issuance of the
shares in question (or, in the case of a redemption, the shares issuable
upon conversion in full of the redemption amount) to the Holder would
not violate the limitations set forth in Section 4(c), (viii) no public
announcement of a pending or proposed Fundamental Transaction, Change of
Control Transaction or acquisition transaction has occurred that has not
been consummated and (ix) for a period of 20 consecutive Trading Days
prior to the applicable date in question, the daily trading volume for
the Common Stock on the Trading Market exceeds 200,000 shares per
Trading Day (subject to adjustment for forward and reverse stock splits
and the like).
"Event of Default" shall have the meaning set forth in
Section 8.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Fundamental Transaction" shall have the meaning set forth in
Section 5(d).
"Interest Conversion Rate" means the lesser of (a) the
Conversion Price and (b) the 90% of the lesser of (i) the average of the
20 VWAPs immediately prior to the applicable Interest Payment Date or
(ii) the average of the 20 VWAPs immediately prior to the date the
applicable interest payment shares are issued and delivered if after the
Interest Payment Date.
"Interest Notice Period" shall have the meaning set forth in
Section 2(a).
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"Interest Payment Date" shall have the meaning set forth in
Section 2(a).
"Interest Share Amount" shall have the meaning set forth in
Section 2(a).
"Late Fees" shall have the meaning set forth in Section 2(d).
"Mandatory Default Amount" shall equal the sum of (i) the
greater of: (A) 130% of the principal amount of this Debenture to be
prepaid, plus all accrued and unpaid interest thereon, or (B) the
principal amount of this Debenture to be prepaid, plus all other accrued
and unpaid interest hereon, divided by the Conversion Price on (x) the
date the Mandatory Default Amount is demanded or otherwise due or (y)
the date the Mandatory Default Amount is paid in full, whichever is
less, multiplied by the VWAP on (x) the date the Mandatory Default
Amount is demanded or otherwise due or (y) the date the Mandatory
Default Amount is paid in full, whichever is greater, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of this
Debenture.
"New York Courts" shall have the meaning set forth in
Section 9(d).
"Notice of Conversion" shall have the meaning set forth in
Section 4(a).
"Original Issue Date" shall mean the date of the first issuance
of the Debentures regardless of the number of transfers of any Debenture
and regardless of the number of instruments which may be issued to
evidence such Debenture.
"Permitted Indebtedness" shall mean (a) the Indebtedness
existing on the Original Issue Date and set forth on Schedule 3.1(gg)
attached to the Purchase Agreement, (b) lease obligations and purchase
money Indebtedness of up to $3,000,000, in the aggregate, incurred in
connection with the acquisition of capital assets and lease obligations
with respect to newly acquired or leased assets, (c) up to $1.8 million
of Indebtedness under an asset-based line of credit (with a nationally
recognized commercial lending institution whose primary business is not
investing in securities) entered into in connection with the replacement
of the Company's existing line of credit and (d) Indebtedness incurred
by the Company that does not mature or require payments of principal
prior to the four year anniversary of the Original Issue Date and is
made expressly subordinate in right of payment to the Indebtedness
evidenced by this Debenture, as reflected in a written agreement
acceptable to the Holder and approved by the Holder in writing.
"Permitted Lien" shall mean the individual and collective
reference to the following: (a) Liens for taxes, assessments and other
governmental charges or levies not yet due or Liens for taxes,
assessments and other governmental charges or levies being contested in
good faith and by appropriate proceedings for which adequate reserves
(in the good faith judgment of the management of the Company) have been
established in accordance with GAAP, (b) Liens imposed by law which were
incurred in the ordinary course of business, such as carriers',
warehousemen's, materialmen's and mechanics' Liens, statutory landlords'
Liens, and other similar Liens arising in the ordinary course of
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business, and (x) which do not individually or in the aggregate
materially detract from the value of such property or assets or
materially impair the use thereof in the operation of the business of
the Company and its consolidated Subsidiaries or (y) which are being
contested in good faith by appropriate proceedings, which proceedings
have the effect of preventing the forfeiture or sale of the property or
asset subject to such Lien, (c) Liens incurred in connection with
Permitted Indebtedness under clause (b) thereunder provided that such
Liens are not secured by assets of the Company or its Subsidiaries other
than the assets so acquired or leased, (d) pledges or deposits in
connection with worker's compensation, unemployment insurance and other
social security legislation, (e) Liens on equipment (including proceeds
thereof and accessions thereto) leased by the Company pursuant to
operating leases entered into in the ordinary course of business
incurred solely for the purpose of financing the lease of such
equipment, (f) Liens in favor of customs authorities arising as a matter
of law to secure payment of customs duties in connection with the
importation of goods, (g) Liens arising solely by virtue of any
statutory or common law provision relating to banker's liens, rights of
setoff or similar rights and remedies as to deposit accounts or other
funds maintained with a creditor depository institution and (h) the
Liens existing on the Original Issue Date and set forth on Schedule
3.1(_) attached to the Purchase Agreement.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"Purchase Agreement" means the Securities Purchase Agreement,
dated as of December __, 2005, to which the Company and the original
Holder are parties, as amended, modified or supplemented from time to
time in accordance with its terms.
"Quarterly Conversion Period" shall have the meaning set forth
in Section 6(a) hereof.
"Quarterly Conversion Price" shall have the meaning set forth in
Section 6(a) hereof.
"Quarterly Redemption" shall mean the redemption of this
Debenture pursuant to Section 6(a) hereof.
"Quarterly Redemption Amount" shall mean, as to a Quarterly
Redemption, $____(1).
"Quarterly Redemption Date" means each January 1, April 1,
July 1 and October 1, commencing on January 1, 2008 and ending upon the
full redemption of this Debenture.
"Quarterly Redemption Notice" shall have the meaning set forth
in Section 6(a) hereof.
"Quarterly Redemption Period" shall have the meaning set forth
in Section 6(a) hereof.
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(1) 1/9 th of the principal amount of the Debenture.
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"Quarterly Redemption Share Amount" shall have the meaning set
forth in Section 6(a) hereof.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date of the Purchase Agreement, to which the
Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.
"Registration Statement" means a registration statement meeting
the requirements set forth in the Registration Rights Agreement,
covering among other things the resale of the Conversion Shares and
naming the Holder as a "selling stockholder" thereunder.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Subsidiary" shall have the meaning given to such term in the
Purchase Agreement.
"Trading Day" means a day on which the Common Stock is traded on
a Trading Market.
"Trading Market" means the following markets or exchanges on
which the Common Stock is listed or quoted for trading on the date in
question: the Nasdaq SmallCap Market, the American Stock Exchange, the
New York Stock Exchange, the Nasdaq National Market or the OTC Bulletin
Board.
"Transaction Documents" shall have the meaning set forth in the
Purchase Agreement.
"VWAP" means, for any date, the price determined by the first of
the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Trading Market, the daily volume weighted average
price of the Common Stock for such date (or the nearest preceding date)
on the Trading Market on which the Common Stock is then listed or quoted
as reported by Bloomberg Financial L.P. (based on a Trading Day from
9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the Common
Stock is not then listed or quoted on the OTC Bulletin Board and if
prices for the Common Stock are then reported in the "Pink Sheets"
published by Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid
price per share of the Common Stock so reported; or (c) in all other
cases, the fair market value of a share of Common Stock as determined by
a nationally recognized independent appraiser selected in good faith by
the Holder and reasonably acceptable to the Company.
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Section 2. Interest.
a) Payment of Interest in Cash or Kind. The Company shall
pay interest to the Holder on the aggregate unconverted and then
outstanding principal amount of this Debenture at the rate of 8% per
annum, payable quarterly on January 1, April 1, July 1 and October 1,
beginning on January 1, 2006, on each Quarterly Redemption Date (as to
that principal amount then being redeemed), on each Conversion Date (as
to that principal amount then being converted) and on the Maturity Date
(except that, if any such date is not a Business Day, then such payment
shall be due on the next succeeding Business Day) (each such date, an
"Interest Payment Date"), in cash or duly authorized, fully paid and
non-assessable shares of Common Stock at the Interest Conversion Rate,
or a combination thereof (the amount to be paid in shares, the "Interest
Share Amount"); provided, however, payment in shares of Common Stock may
only occur if during the 20 Trading Days immediately prior to the
applicable Interest Payment Date (the "Interest Notice Period") and
through and including the date such shares of Common Stock are issued to
the Holder all of the Equity Conditions (excluding condition (ix) in the
definition of Equity Conditions), unless waived by the Holder in
writing, have been met and the Company shall have given the Holder
notice in accordance with the notice requirements set forth below.
b) Company's Election to Pay Interest in Kind. Subject to
the terms and conditions herein, the decision whether to pay interest
hereunder in shares of Common Stock or cash shall be at the discretion
of the Company. Prior to the commencement of an Interest Notice Period,
the Company shall provide the Holder with written notice of its election
to pay interest hereunder on the applicable Interest Payment Date either
in cash, shares of Common Stock or a combination thereof (the Company
may indicate in such notice that the election contained in such notice
shall continue for later periods until revised) and the Interest Share
Amount as to the applicable Interest Payment Date. During any Interest
Notice Period, the Company's election (whether specific to an Interest
Payment Date or continuous) shall be irrevocable as to such Interest
Payment Date. Subject to the aforementioned conditions, failure to
timely provide such written notice shall be deemed an election by the
Company to pay the interest on such Interest Payment Date in cash. At
any time the Company delivers a notice to the Holder of its election to
pay the interest in shares of Common Stock, the Company shall file a
prospectus supplement pursuant to Rule 424 disclosing such election.
c) Interest Calculations. Interest shall be calculated on
the basis of a 360-day year and shall accrue daily commencing on the
Original Issue Date until payment in full of the principal sum, together
with all accrued and unpaid interest and other amounts which may become
due hereunder, has been made. Payment of interest in shares of Common
Stock shall otherwise occur pursuant to Section 4(d)(ii) and only for
purposes of the payment of interest in shares, the Interest Payment Date
shall be deemed the Conversion Date. Interest shall cease to accrue with
respect to any principal amount converted, provided that the Company in
fact delivers the Conversion Shares within the time period required by
Section 4(d)(ii).
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Interest hereunder will be paid to the Person in whose name this
Debenture is registered on the records of the Company regarding
registration and transfers of this Debenture (the "Debenture Register").
Except as otherwise provided herein, if at any time the Company pays
interest partially in cash and partially in shares of Common Stock to
the holders of the Debentures, then such payment shall be distributed
ratably among the holders based upon the principal amount of Debentures
held by each holder.
d) Late Fee. All overdue accrued and unpaid interest to be
paid hereunder shall entail a late fee at the rate of 18% per annum (or
such lower maximum amount of interest permitted to be charged under
applicable law) ("Late Fees") which will accrue daily from the date such
interest is due hereunder through and including the date of payment.
Notwithstanding anything to the contrary contained herein, if on any
Interest Payment Date the Company has elected to pay interest in Common
Stock and is not able to pay accrued interest in the form of Common
Stock because it does not then satisfy the conditions for payment in the
form of Common Stock set forth above, then, at the option of the Holder,
the Company, in lieu of delivering either shares of Common Stock
pursuant to this Section 2 or paying the regularly scheduled cash
interest payment, shall deliver, within three Trading Days of each
applicable Interest Payment Date, an amount in cash equal to the product
of the number of shares of Common Stock otherwise deliverable to the
Holder in connection with the payment of interest due on such Interest
Payment Date and the highest VWAP during the period commencing on the
Interest Payment Date and ending on the Trading Day prior to the date
such payment is made.
e) Prepayment. Except as otherwise set forth in this
Debenture, the Company may not prepay any portion of the principal
amount of this Debenture without the prior written consent of the
Holder.
Section 3. Registration of Transfers and Exchanges.
a) Different Denominations. This Debenture is exchangeable
for an equal aggregate principal amount of Debentures of different
authorized denominations, as requested by the Holder surrendering the
same. No service charge will be made for such registration of transfer
or exchange.
b) Investment Representations. This Debenture has been
issued subject to certain investment representations of the original
Holder set forth in the Purchase Agreement and may be transferred or
exchanged only in compliance with the Purchase Agreement and applicable
federal and state securities laws and regulations.
c) Reliance on Debenture Register. Prior to due presentment
to the Company for transfer of this Debenture, the Company and any agent
of the Company may treat the Person in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose
of receiving payment as herein provided and for all other purposes,
whether or not this Debenture is overdue, and neither the Company nor
any such agent shall be affected by notice to the contrary.
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Section 4. Conversion.
a) Voluntary Conversion. At any time after the Original
Issue Date until this Debenture is no longer outstanding, this Debenture
shall be convertible into shares of Common Stock at the option of the
Holder, in whole or in part at any time and from time to time (subject
to the limitations on conversion set forth in Section 4(c) hereof). The
Holder shall effect conversions by delivering to the Company the form of
Notice of Conversion attached hereto as Annex A (a "Notice of
Conversion"), specifying therein the principal amount of this Debenture
to be converted and the date on which such conversion is to be effected
(a "Conversion Date"). If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of
Conversion is provided hereunder. To effect conversions hereunder, the
Holder shall not be required to physically surrender this Debenture to
the Company unless the entire principal amount of this Debenture plus
all accrued and unpaid interest thereon has been so converted.
Conversions hereunder shall have the effect of lowering the outstanding
principal amount of this Debenture in an amount equal to the applicable
conversion. The Holder and the Company shall maintain records showing
the principal amount converted and the date of such conversions. The
Company shall deliver any objection to any Notice of Conversion within 1
Business Day of receipt of such notice. In the event of any dispute or
discrepancy, the records of the Holder shall be controlling and
determinative in the absence of manifest error. The Holder and any
assignee, by acceptance of this Debenture, acknowledge and agree that,
by reason of the provisions of this paragraph, following conversion of a
portion of this Debenture, the unpaid and unconverted principal amount
of this Debenture may be less than the amount stated on the face hereof.
b) Conversion Price. The conversion price in effect on any
Conversion Date shall be equal to $0.4544 (subject to adjustment
herein)(the "Conversion Price").
c) Conversion Limitations.
i. [RESERVED].
ii. Holder's Restriction on Conversion. The Company
shall not effect any conversion of this Debenture, and a Holder
shall not have the right to convert any portion of this
Debenture to the extent that after giving effect to such
conversion, such Holder (together with such Holder's Affiliates,
and any other person or entity acting as a group together with
such Holder or any of such Holder's Affiliates), as set forth on
the applicable Notice of Conversion, would beneficially own in
excess of the Beneficial Ownership Limitation (as defined
below). For purposes of the foregoing sentence, the number of
shares of Common Stock beneficially owned by such Holder and its
Affiliates shall include the number of shares of Common Stock
issuable upon conversion of this Debenture with respect to which
the determination of such sentence is being
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made, but shall exclude the number of shares of Common Stock
which would be issuable upon (A) conversion of the remaining,
nonconverted principal amount of this Debenture beneficially
owned by such Holder or any of its Affiliates and (B) exercise
or conversion of the unexercised or nonconverted portion of any
other securities of the Company (including, without limitation,
any other Debentures or the Warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained
herein beneficially owned by such Holder or any of its
Affiliates. Except as set forth in the preceding sentence, for
purposes of this Section 4(c), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Exchange Act
and the rules and regulations promulgated thereunder. To the
extent that the limitation contained in this Section 4(c)
applies, the determination of whether this Debenture is
convertible (in relation to other securities owned by such
Holder together with any Affiliates) and of which amounts of
this Debenture are convertible shall be in the sole discretion
of such Holder, and the submission of a Notice of Conversion
shall be deemed to be such Holder's determination of whether
this Debenture may be converted (in relation to other securities
owned by such Holder) and which amounts of this Debenture are
convertible, in each case subject to such aggregate percentage
limitations. To ensure compliance with this restriction, each
Holder will be deemed to represent to the Company each time it
delivers a Notice of Conversion that such Notice of Conversion
has not violated the restrictions set forth in this paragraph
and the Company shall have no obligation to verify or confirm
the accuracy of such determination. In addition, a determination
as to any group status as contemplated above shall be determined
in accordance with Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder. For purposes of
this Section 4(c), in determining the number of outstanding
shares of Common Stock, a Holder may rely on the number of
outstanding shares of Common Stock as reflected in the most
recent of the following: (A) the Company's most recent Form
10-QSB or Form 10-KSB, as the case may be, (B) a more recent
public announcement by the Company or (C) any other notice by
the Company or the Company's transfer agent setting forth the
number of shares of Common Stock outstanding. Upon the written
or oral request of a Holder, the Company shall within two
Trading Days confirm orally and in writing to such Holder the
number of shares of Common Stock then outstanding. In any case,
the number of outstanding shares of Common Stock shall be
determined after giving effect to the conversion or exercise of
securities of the Company, including this Debenture, by such
Holder or its Affiliates since the date as of which such number
of outstanding shares of Common Stock was reported. The
"Beneficial Ownership Limitation" shall be 4.99% of the number
of shares of the Common Stock outstanding immediately after
giving effect to the issuance of shares of Common Stock issuable
upon conversion of
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this Debenture held by the Holder. The Beneficial Ownership
Limitation provisions of this Section 4(c) may be waived by such
Holder, at the election of such Holder, upon not less than 61
days' prior notice to the Company to change the Beneficial
Ownership Limitation to 9.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock upon conversion of this
Debenture held by the Holder, and the provisions of this Section
4(c) shall continue to apply. Upon such a change by a Holder of
the Beneficial Ownership Limitation from such 4.99% limitation
to such 9.99% limitation, the Beneficial Ownership Limitation
may not be waived by such Holder. The provisions of this
paragraph shall be implemented in a manner otherwise than in
strict conformity with the terms of this Section 4(c) to correct
this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Beneficial Ownership Limitation
herein contained or to make changes or supplements necessary or
desirable to properly give effect to such limitation. The
limitations contained in this paragraph shall apply to a
successor holder of this Debenture.
d) Mechanics of Conversion
i. Conversion Shares Issuable Upon Conversion of
Principal Amount. The number of shares of Common Stock issuable
upon a conversion hereunder shall be determined by the quotient
obtained by dividing (x) the outstanding principal amount of
this Debenture to be converted by (y) the Conversion Price.
ii. Delivery of Certificate Upon Conversion. Not
later than three Trading Days after any Conversion Date, the
Company will deliver or cause to be delivered to the Holder (A)
a certificate or certificates representing the Conversion Shares
which shall be free of restrictive legends and trading
restrictions (other than those required by the Purchase
Agreement) representing the number of shares of Common Stock
being acquired upon the conversion of this Debenture (including,
if so timely elected by the Company, shares of Common Stock
representing the payment of accrued interest otherwise
determined pursuant to Section 2(a) but assuming that the
Interest Payment Period is the 20 Trading Days period
immediately prior to the date on which the Conversion Notice is
delivered to the Company) and (B) a bank check in the amount of
accrued and unpaid interest (if the Company is required to pay
accrued interest in cash). The Company shall, if available and
if allowed under applicable securities laws, use its best
efforts to deliver any certificate or certificates required to
be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another established
clearing corporation performing similar functions.
iii. Failure to Deliver Certificates. If in the case
of any Notice of Conversion such certificate or certificates are
not delivered to or as directed by the applicable Holder by the
third Trading Day after a Conversion Date, the Holder shall be
entitled by written notice to the Company at any time on or
before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the
Company shall immediately return the certificates representing
the principal amount of this Debenture tendered for conversion.
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iv. Obligation Absolute; Partial Liquidated Damages.
If the Company fails for any reason to deliver to the Holder
such certificate or certificates pursuant to Section 4(d)(ii) by
the third Trading Day after the Conversion Date, the Company
shall pay to such Holder, in cash, as liquidated damages and not
as a penalty, for each $1000 of principal amount being
converted, $10 per Trading Day (increasing to $20 per Trading
Day after 5 Trading Days after such damages begin to accrue) for
each Trading Day after such fifth Trading Day until such
certificates are delivered. The Company's obligations to issue
and deliver the Conversion Shares upon conversion of this
Debenture in accordance with the terms hereof are absolute and
unconditional, irrespective of any action or inaction by the
Holder to enforce the same, any waiver or consent with respect
to any provision hereof, the recovery of any judgment against
any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other Person of
any obligation to the Company or any violation or alleged
violation of law by the Holder or any other person, and
irrespective of any other circumstance which might otherwise
limit such obligation of the Company to the Holder in connection
with the issuance of such Conversion Shares; provided, however,
such delivery shall not operate as a waiver by the Company of
any such action the Company may have against the Holder. In the
event the Holder of this Debenture shall elect to convert any or
all of the outstanding principal amount hereof, the Company may
not refuse conversion based on any claim that the Holder or any
one associated or affiliated with the Holder has been engaged in
any violation of law, agreement or for any other reason, unless,
an injunction from a court, on notice, restraining and or
enjoining conversion of all or part of this Debenture shall have
been sought and obtained and the Company posts a surety bond for
the benefit of the Holder in the amount of 150% of the principal
amount of this Debenture outstanding, which is subject to the
injunction, which bond shall remain in effect until the
completion of arbitration/litigation of the dispute and the
proceeds of which shall be payable to such Holder to the extent
it obtains judgment. In the absence of an injunction precluding
the same, the Company shall issue Conversion Shares or, if
applicable, cash, upon a properly noticed conversion. Nothing
herein shall limit a Xxxxxx's right to pursue actual damages or
declare an Event of Default pursuant to Section 8 herein for the
Company's failure to deliver Conversion Shares within the period
specified herein and such Holder shall have the right to pursue
all remedies available to it at law or in equity including,
without limitation, a decree of specific performance and/or
injunctive relief. The exercise of any such rights shall not
prohibit the Holder from seeking to enforce damages pursuant to
any other Section hereof or under applicable law.
v. Compensation for Buy-In on Failure to Timely
Deliver Certificates Upon Conversion. In addition to any other
rights available to the Holder, if the Company fails for any
reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(d)(ii) by the fifth Trading Day after the
Conversion Date, and if after such fifth Trading Day the Holder
is required by its
12
brokerage firm to purchase (in an open market transaction or
otherwise) Common Stock to deliver in satisfaction of a sale by
such Holder of the Conversion Shares which the Holder
anticipated receiving upon such conversion (a "Buy-In"), then
the Company shall (A) pay in cash to the Holder (in addition to
any remedies available to or elected by the Holder) the amount
by which (x) the Holder's total purchase price (including
brokerage commissions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of
Common Stock that such Holder anticipated receiving from the
conversion at issue multiplied by (2) the actual sale price of
the Common Stock at the time of the sale (including brokerage
commissions, if any) giving rise to such purchase obligation and
(B) at the option of the Holder, either reissue (if surrendered)
this Debenture in a principal amount equal to the principal
amount of the attempted conversion or deliver to the Holder the
number of shares of Common Stock that would have been issued had
the Company timely complied with its delivery requirements under
Section 4(d)(ii). For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In
with respect to an attempted conversion of this Debenture with
respect to which the actual sale price of the Conversion Shares
at the time of the sale (including brokerage commissions, if
any) giving rise to such purchase obligation was a total of
$10,000 under clause (A) of the immediately preceding sentence,
the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In.
Notwithstanding anything contained herein to the contrary, if
the Holder requires the Company to make payment in respect of a
Buy-In for the failure to timely deliver certificates hereunder
and the Company timely pays in full such payment, the Company
shall not be required to pay such Holder liquidated damages
under Section 4(d)(iv) in respect of the certificates resulting
in such Buy-In.
vi. Reservation of Shares Issuable Upon Conversion.
The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued shares of Common
Stock solely for the purpose of issuance upon conversion of this
Debenture and payment of interest on this Debenture, each as
herein provided, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holder (and
the other holders of the Debentures), not less than such number
of shares of the Common Stock as shall (subject to the terms and
conditions set forth in the Purchase Agreement) be issuable
(taking into account the adjustments and restrictions of Section
5) upon the conversion of the outstanding principal amount of
this Debenture and payment of interest hereunder. The Company
covenants that all shares of Common Stock that shall be so
issuable shall, upon issue, be duly and validly authorized,
issued and fully paid, nonassessable and, if the Registration
Statement is then effective under the Securities Act, registered
for public sale in accordance with such Registration Statement.
13
vii. Fractional Shares. Upon a conversion hereunder
the Company shall not be required to issue stock certificates
representing fractions of shares of the Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the VWAP at such time. If the
Company elects not, or is unable, to make such a cash payment,
the Holder shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
viii. Transfer Taxes. The issuance of certificates for
shares of the Common Stock on conversion of this Debenture shall
be made without charge to the Holder hereof for any documentary
stamp or similar taxes that may be payable in respect of the
issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issuance and delivery of
any such certificate upon conversion in a name other than that
of the Holder of this Debenture so converted and the Company
shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or
shall have established to the satisfaction of the Company that
such tax has been paid.
Section 5. Certain Adjustments.
a) Stock Dividends and Stock Splits. If the Company, at any
time while this Debenture is outstanding: (A) pays a stock dividend or
otherwise makes a distribution or distributions on shares of its Common
Stock or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall not include
any shares of Common Stock issued by the Company pursuant to this
Debenture, including as interest thereon), (B) subdivides outstanding
shares of Common Stock into a larger number of shares, (C) combines
(including by way of reverse stock split) outstanding shares of Common
Stock into a smaller number of shares, or (D) issues by reclassification
of shares of the Common Stock any shares of capital stock of the
Company, then the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding immediately before such
event and of which the denominator shall be the number of shares of
Common Stock outstanding immediately after such event. Any adjustment
made pursuant to this Section shall become effective immediately after
the record date for the determination of stockholders entitled to
receive such dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision,
combination or re-classification.
b) Subsequent Equity Sales. If the Company or any
Subsidiary thereof, as applicable, at any time while this Debenture is
outstanding, shall offer, sell, grant any option to purchase or offer,
sell or grant any right to reprice its securities, or otherwise dispose
of or issue (or announce any offer, sale, grant or any option to
purchase or other disposition) any Common Stock or Common Stock
Equivalents entitling any Person to
14
acquire shares of Common Stock, at an effective price per share less
than the then Conversion Price (such lower price, the "Base Conversion
Price" and such issuances collectively, a "Dilutive Issuance"), as
adjusted hereunder (if the holder of the Common Stock or Common Stock
Equivalents so issued shall at any time, whether by operation of
purchase price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to warrants, options or
rights per share which is issued in connection with such issuance, be
entitled to receive shares of Common Stock at an effective price per
share which is less than the Conversion Price, such issuance shall be
deemed to have occurred for less than the Conversion Price on such date
of the Dilutive Issuance), then the Conversion Price shall be reduced to
equal the Base Conversion Price. Such adjustment shall be made whenever
such Common Stock or Common Stock Equivalents are issued.
Notwithstanding the foregoing, no adjustment will be made under this
Section 5(b) in respect of an Exempt Issuance. The Company shall notify
the Holder in writing, no later than the Business Day following the
issuance of any Common Stock or Common Stock Equivalents subject to this
section, indicating therein the applicable issuance price, or of
applicable reset price, exchange price, conversion price and other
pricing terms (such notice the "Dilutive Issuance Notice"). For purposes
of clarification, whether or not the Company provides a Dilutive
Issuance Notice pursuant to this Section 5(b), upon the occurrence of
any Dilutive Issuance, after the date of such Dilutive Issuance the
Holder is entitled to receive a number of Conversion Shares based upon
the Base Conversion Price regardless of whether the Holder accurately
refers to the Base Conversion Price in the Notice of Conversion.
c) Pro Rata Distributions. If the Company, at any time
while this Debenture is outstanding, shall distribute to all holders of
Common Stock (and not to the holders of the Debenture) evidences of its
indebtedness or assets (including cash and cash dividends) or rights or
warrants to subscribe for or purchase any security, then in each such
case the Conversion Price shall be adjusted by multiplying such
Conversion Price in effect immediately prior to the record date fixed
for determination of stockholders entitled to receive such distribution
by a fraction of which the denominator shall be the VWAP determined as
of the record date mentioned above, and of which the numerator shall be
such VWAP on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of the Common Stock as
determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holder of
the portion of assets or evidences of indebtedness so distributed or
such subscription rights applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made and
shall become effective immediately after the record date mentioned
above.
d) Fundamental Transaction. If, at any time while this
Debenture is outstanding, (A) the Company effects any merger or
consolidation of the Company with or into another Person, (B) the
Company effects any sale of all or substantially all of its assets in
one or a series of related transactions, (C) any tender offer or
exchange offer (whether by the Company or another Person) is completed
pursuant to which holders of
15
Common Stock are permitted to tender or exchange their shares for other
securities, cash or property, or (D) the Company effects any
reclassification of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such case, a
"Fundamental Transaction"), then upon any subsequent conversion of this
Debenture, the Holder shall have the right to receive, for each
Conversion Share that would have been issuable upon such conversion
immediately prior to the occurrence of such Fundamental Transaction, the
same kind and amount of securities, cash or property as it would have
been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental
Transaction, the holder of one share of Common Stock (the "Alternate
Consideration"). For purposes of any such conversion, the determination
of the Conversion Price shall be appropriately adjusted to apply to such
Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Conversion Price among
the Alternate Consideration in a reasonable manner reflecting the
relative value of any different components of the Alternate
Consideration. If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the
Alternate Consideration it receives upon any conversion of this
Debenture following such Fundamental Transaction. To the extent
necessary to effectuate the foregoing provisions, any successor to the
Company or surviving entity in such Fundamental Transaction shall issue
to the Holder a new debenture consistent with the foregoing provisions
and evidencing the Holder's right to convert such debenture into
Alternate Consideration. The terms of any agreement pursuant to which a
Fundamental Transaction is effected shall include terms requiring any
such successor or surviving entity to comply with the provisions of this
paragraph (d) and insuring that this Debenture (or any such replacement
security) will be similarly adjusted upon any subsequent transaction
analogous to a Fundamental Transaction.
e) Calculations. All calculations under this Section 5
shall be made to the nearest cent or the nearest 1/100th of a share, as
the case may be. For purposes of this Section 5, the number of shares of
Common Stock deemed to be issued and outstanding as of a given date
shall be the sum of the number of shares of Common Stock (excluding
treasury shares, if any) issued and outstanding.
f) Notice to the Holder.
i. Adjustment to Conversion Price. Whenever the
Conversion Price is adjusted pursuant to any of this Section 5,
the Company shall promptly mail to each Holder a notice setting
forth the Conversion Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment.
If the Company issues a variable rate security, despite the
prohibition thereon in the Purchase Agreement, the Company shall
be deemed to have issued Common Stock or Common Stock
Equivalents at the lowest possible conversion or exercise
16
price at which such securities may be converted or exercised in
the case of a Variable Rate Transaction (as defined in the
Purchase Agreement).
ii. Notice to Allow Conversion by Xxxxxx. If (A) the
Company shall declare a dividend (or any other distribution) on
the Common Stock; (B) the Company shall declare a special
nonrecurring cash dividend on or a redemption of the Common
Stock; (C) the Company shall authorize the granting to all
holders of the Common Stock rights or warrants to subscribe for
or purchase any shares of capital stock of any class or of any
rights; (D) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the
Common Stock, any consolidation or merger to which the Company
is a party, any sale or transfer of all or substantially all of
the assets of the Company, of any compulsory share exchange
whereby the Common Stock is converted into other securities,
cash or property; (E) the Company shall authorize the voluntary
or involuntary dissolution, liquidation or winding up of the
affairs of the Company; then, in each case, the Company shall
cause to be filed at each office or agency maintained for the
purpose of conversion of this Debenture, and shall cause to be
mailed to the Holder at its last addresses as it shall appear
upon the stock books of the Company, at least 20 calendar days
prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to
be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of the Common Stock of
record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger,
sale, transfer or share exchange is expected to become effective
or close, and the date as of which it is expected that holders
of the Common Stock of record shall be entitled to exchange
their shares of the Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation,
merger, sale, transfer or share exchange; provided, that the
failure to mail such notice or any defect therein or in the
mailing thereof shall not affect the validity of the corporate
action required to be specified in such notice. The Holder is
entitled to convert this Debenture during the 20-day period
commencing the date of such notice to the effective date of the
event triggering such notice.
Section 6. Quarterly Redemption.
a) Quarterly Redemption. On each Quarterly Redemption Date,
the Company shall redeem the Quarterly Redemption Amount plus accrued
but unpaid interest, the sum of all liquidated damages and any other
amounts then owing to such Holder in respect of this Debenture (the
"Quarterly Redemption"). The Quarterly Redemption Amount due on each
Quarterly Redemption Date shall be paid in cash; provided, however, as
to any Quarterly Redemption and upon 20 Trading Days' prior written
irrevocable notice (the "Quarterly Redemption Notice" and the 20 Trading
Day period immediately following the Quarterly Redemption Notice, the
17
"Quarterly Redemption Period"), in lieu of a cash redemption payment the
Company may elect to pay all or part of a Quarterly Redemption Amount in
Conversion Shares (such dollar amount to be paid on a Quarterly
Redemption Date in Conversion Shares, the "Quarterly Redemption Share
Amount") based on a conversion price equal to the lesser of (i) the then
Conversion Price and (ii) 90% of the average of the VWAPs for the 20
consecutive Trading Days ending on the Trading Day that is immediately
prior to the applicable Quarterly Redemption Date (subject to adjustment
for any stock dividend, stock split, stock combination or other similar
event affecting the Common Stock during such 20 Trading Day period) (the
price calculated during the 20 Trading Day period immediately prior to
the Quarterly Redemption Date, the "Quarterly Conversion Price" and such
period, the "Quarterly Conversion Period"); provided, further, that the
Company may not pay the Quarterly Redemption Amount in Conversion Shares
unless, (y) from the date the Holder receives the duly delivered
Quarterly Redemption Notice through and until the date such Quarterly
Redemption is paid in full, the Equity Conditions, unless waived in
writing by the Holder, have been satisfied and (z) as to such Quarterly
Redemption, prior to such Quarterly Redemption Period (but not more than
5 Trading Days prior to the commencement of the Quarterly Redemption
Period), the Company shall have delivered to the Holder's account with
The Depository Trust Company a number of shares of Common Stock to be
applied against such Quarterly Redemption Share Amount equal to the
quotient of (x) the applicable Quarterly Redemption Share Amount divided
by (y) the then Conversion Price (the "Pre-Redemption Conversion
Shares"). The Holder may convert, pursuant to Section 4(a), any
principal amount of this Debenture subject to a Quarterly Redemption at
any time prior to the date that the Quarterly Redemption Amount and all
amounts owing thereon are due and paid in full. Unless otherwise
indicated by the Holder in the applicable Notice of Conversion, any
principal amount of this Debenture converted during the applicable
Quarterly Redemption Period until the date the Quarterly Redemption
Amount is paid in full shall be first applied to the principal amount
subject to the Quarterly Redemption Amount payable in cash and then to
the Quarterly Redemption Share Amount. Any principal amount of this
Debenture converted during the applicable Quarterly Redemption Period in
excess of the Quarterly Redemption Amount shall be applied against the
last principal amount of this Debenture scheduled to be redeemed
hereunder, in reverse time order from the Maturity Date; provided,
however, if any such conversion is applied to such Quarterly Redemption
Amount, the Pre-Redemption Conversion Shares, if any were issued in
connection with such Quarterly Redemption or were not already applied to
such conversions, shall be first applied against such conversion. The
Company covenants and agrees that it will honor all Notice of
Conversions tendered up until such amounts are paid in full. The
Company's determination to pay a Quarterly Redemption in cash, shares of
Common Stock or a combination thereof shall be applied ratably to all of
the holders of the Debentures based on their (or their predecessor's)
initial purchases of Debentures pursuant to the Purchase Agreement. At
any time the Company delivers a notice to the Holder of its election to
pay the Quarterly Redemption Amount in shares of Common Stock, the
Company shall file a prospectus supplement pursuant to Rule 424
disclosing such election.
18
b) Redemption Procedure. The payment of cash pursuant to a
Quarterly Redemption shall be made on the Quarterly Redemption Date. If
any portion of the cash payment for a Quarterly Redemption shall not be
paid by the Company by the respective due date, interest shall accrue
thereon at the rate of 18% per annum (or the maximum rate permitted by
applicable law, whichever is less) until the payment of the Optional
Redemption Amount, plus all amounts owing thereon is paid in full.
Alternatively, if any portion of the Quarterly Redemption Amount remains
unpaid after such date, the Holders subject to such redemption may
elect, by written notice to the Company given at any time thereafter, to
invalidate ab initio such redemption, notwithstanding anything herein
contained to the contrary. Notwithstanding anything to the contrary in
this Section 6, the Company's determination to redeem in cash or its
elections under Section 6(b) shall be applied among the Holders of
Debentures ratably. The Holder may elect to convert the outstanding
principal amount of the Debenture pursuant to Section 4 prior to actual
payment in cash for any redemption under this Section 6 by fax delivery
of a Notice of Conversion to the Company.
Section 7. Negative Covenants. So long as any portion of this
Debenture is outstanding, the Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly:
a) other than Permitted Indebtedness, enter into, create,
incur, assume, guarantee or suffer to exist any indebtedness for
borrowed money of any kind, including but not limited to, a guarantee,
on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits
therefrom;
b) other than Permitted Liens, enter into, create, incur,
assume or suffer to exist any liens of any kind, on or with respect to
any of its property or assets now owned or hereafter acquired or any
interest therein or any income or profits therefrom;
c) amend its certificate of incorporation, bylaws or other
charter documents so as to materially and adversely affect any rights of
the Holder;
d) repay, repurchase or offer to repay, repurchase or
otherwise acquire more than a de minimis number of shares of its Common
Stock or Common Stock Equivalents other than as to the Conversion Shares
to the extent permitted or required under the Transaction Documents or
as otherwise permitted by the Transaction Documents;
e) enter into any agreement with respect to any of the
foregoing; or
f) pay cash dividends or distributions on any equity
securities of the Company other than as to the Securities to the extent
permitted or required under the Transaction Documents.
19
Section 8. Events of Default.
a) "Event of Default", wherever used herein, means any one
of the following events (whatever the reason and whether it shall be
voluntary or involuntary or effected by operation of law or pursuant to
any judgment, decree or order of any court, or any order, rule or
regulation of any administrative or governmental body):
i. any default in the payment of (A) the principal
amount of any Debenture, or (B) interest (including Late Fees)
on, or liquidated damages in respect of, any Debenture, as and
when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or
otherwise) which default, solely in the case of an interest
payment or other default under clause (B) above, is not cured,
within 3 Trading Days;
ii. the Company shall fail to observe or perform any
other covenant or agreement contained in this Debenture or any
other Debenture (other than a breach by the Company of its
obligations to deliver shares of Common Stock to the Holder upon
conversion which breach is addressed in clause (xi) below) which
failure is not cured, if possible to cure, within the earlier to
occur of (A) 5 Trading Days after notice of such default sent by
the Holder or by any other Holder and (B)10 Trading Days after
the Company shall become or should have become aware of such
failure;
iii. a default or event of default (subject to any
grace or cure period provided for in the applicable agreement,
document or instrument) shall occur under (A) any of the
Transaction Documents, or (B) any other material agreement,
lease, document or instrument to which the Company or any
Subsidiary is bound;
iv. any representation or warranty made herein, in
any other Transaction Documents, in any written statement
pursuant hereto or thereto, or in any other report, financial
statement or certificate made or delivered to the Holder or any
other holder of Debentures shall be untrue or incorrect in any
material respect as of the date when made or deemed made;
v. (i) the Company or any of its Subsidiaries shall
commence a case, as debtor, a case under any applicable
bankruptcy or insolvency laws as now or hereafter in effect or
any successor thereto, or the Company or any Subsidiary
commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect relating to the Company or
any Subsidiary thereof or (ii) there is commenced a case against
the Company or any Subsidiary thereof, under any applicable
bankruptcy or insolvency laws, as now or hereafter in effect or
any successor thereto which remains undismissed for a period of
60 days; or (iii) the Company or any Subsidiary thereof is
adjudicated by a court of competent jurisdiction insolvent or
bankrupt; or any order of relief or other order approving any
such case or
20
proceeding is entered; or (iv) the Company or any Subsidiary
thereof suffers any appointment of any custodian or the like for
it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or (v) the
Company or any Subsidiary thereof makes a general assignment for
the benefit of creditors; or (vi) the Company shall fail to pay,
or shall state that it is unable to pay, or shall be unable to
pay, its debts generally as they become due; or (vii) the
Company or any Subsidiary thereof shall call a meeting of its
creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (viii) the Company or any
Subsidiary thereof shall by any act or failure to act expressly
indicate its consent to, approval of or acquiescence in any of
the foregoing; or (ix) any corporate or other action is taken by
the Company or any Subsidiary thereof for the purpose of
effecting any of the foregoing;
vi. the Company or any Subsidiary shall default in
any of its obligations under any mortgage, credit agreement or
other facility, indenture agreement, factoring agreement or
other instrument under which there may be issued, or by which
there may be secured or evidenced any indebtedness for borrowed
money or money due under any long term leasing or factoring
arrangement of the Company in an amount exceeding $150,000,
whether such indebtedness now exists or shall hereafter be
created and such default shall result in such indebtedness
becoming or being declared due and payable prior to the date on
which it would otherwise become due and payable;
vii. the Common Stock shall not be eligible for
quotation on or quoted for trading on a Trading Market and shall
not again be eligible for and quoted or listed for trading
thereon within five Trading Days;
viii. the Company shall be a party to any Change of
Control Transaction or Fundamental Transaction, shall agree to
sell or dispose of all or in excess of 33% of its assets in one
or more transactions (whether or not such sale would constitute
a Change of Control Transaction) or shall redeem or repurchase
more than a de minimis number of its outstanding shares of
Common Stock or other equity securities of the Company (other
than redemptions of Conversion Shares and repurchases of shares
of Common Stock or other equity securities of departing officers
and directors of the Company; provided such repurchases shall
not exceed $100,000, in the aggregate, for all officers and
directors during the term of this Debenture);
ix. a Registration Statement shall not have been
declared effective by the Commission on or prior to the 180th
calendar day after the Closing Date;
x. if, during the Effectiveness Period (as defined
in the Registration Rights Agreement), the effectiveness of the
Registration Statement lapses for any reason or the Holder shall
not be permitted to resell Registrable Securities (as defined in
the Registration Rights Agreement) under the Registration
Statement,
21
in either case, for more than 20 consecutive Trading Days or 30
non-consecutive Trading Days during any 12 month period;
provided, however, that in the event that the Company is
negotiating a merger, consolidation, acquisition or sale of all
or substantially all of its assets or a similar transaction and
in the written opinion of counsel to the Company, the
Registration Statement, would be required to be amended to
include information concerning such transactions or the parties
thereto that is not available or may not be publicly disclosed
at the time, the Company shall be permitted an additional 10
consecutive Trading Days during any 12 month period relating to
such an event;
xi. the Company shall fail for any reason to deliver
certificates to a Holder prior to the tenth Trading Day after a
Conversion Date pursuant to and in accordance with Section 4(d)
or the Company shall provide notice to the Holder, including by
way of public announcement, at any time, of its intention not to
comply with requests for conversions of any Debentures in
accordance with the terms hereof;
xii. any monetary judgment, writ or similar final
process shall be entered or filed against the Company, any
Subsidiary or any of their respective property or other assets
for than $150,000, and shall remain unvacated, unbonded or
unstayed for a period of 45 calendar days.
b) Remedies Upon Event of Default. If any Event of Default
occurs, the full principal amount of this Debenture, together with
interest and other amounts owing in respect thereof, to the date of
acceleration shall become, at the Holder's election, immediately due and
payable in cash. The aggregate amount payable upon an Event of Default
shall be equal to the Mandatory Default Amount. Commencing 5 days after
the occurrence of any Event of Default that results in the eventual
acceleration of this Debenture, the interest rate on this Debenture
shall accrue at the rate of 18% per annum, or such lower maximum amount
of interest permitted to be charged under applicable law. Upon the
payment in full of the Mandatory Default Amount on this entire Debenture
the Holder shall promptly surrender this Debenture to or as directed by
the Company. The Holder need not provide and the Company hereby waives
any presentment, demand, protest or other notice of any kind, and the
Holder may immediately and without expiration of any grace period
enforce any and all of its rights and remedies hereunder and all other
remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Xxxxxx at any time prior to payment hereunder
and the Holder shall have all rights as a Debenture holder until such
time, if any, as the full payment under this Section shall have been
received by it. No such rescission or annulment shall affect any
subsequent Event of Default or impair any right consequent thereon.
Section 9. Miscellaneous.
a) Notices. Any and all notices or other communications or
deliveries to be provided by the Holder hereunder, including, without
limitation, any Notice of
22
Conversion, shall be in writing and delivered personally, by facsimile,
sent by a nationally recognized overnight courier service, addressed to
the Company, at the address set forth above, facsimile number
______________, Attn: ______________________________________or such
other address or facsimile number as the Company may specify for such
purposes by notice to the Holder delivered in accordance with this
Section. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile telephone
number or address of such Xxxxxx appearing on the books of the Company,
or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:30 p.m. (New York
City time), (ii) the date after the date of transmission, if such notice
or communication is delivered via facsimile at the facsimile telephone
number specified in this Section later than 5:30 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) the second Business Day following the date of mailing,
if sent by nationally recognized overnight courier service, or (iv) upon
actual receipt by the party to whom such notice is required to be given.
b) Absolute Obligation. Except as expressly provided
herein, no provision of this Debenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay
the principal of, interest and liquidated damages (if any) on, this
Debenture at the time, place, and rate, and in the coin or currency,
herein prescribed. This Debenture is a direct debt obligation of the
Company. This Debenture ranks pari passu with all other Debentures now
or hereafter issued under the terms set forth herein.
c) Lost or Mutilated Debenture. If this Debenture shall be
mutilated, lost, stolen or destroyed, the Company shall execute and
deliver, in exchange and substitution for and upon cancellation of a
mutilated Debenture, or in lieu of or in substitution for a lost, stolen
or destroyed Debenture, a new Debenture for the principal amount of this
Debenture so mutilated, lost, stolen or destroyed but only upon receipt
of evidence of such loss, theft or destruction of such Debenture, and of
the ownership hereof, and indemnity, if requested, all reasonably
satisfactory to the Company.
d) Governing Law. All questions concerning the
construction, validity, enforcement and interpretation of this Debenture
shall be governed by and construed and enforced in accordance with the
internal laws of the State of New York, without regard to the principles
of conflicts of law thereof. Each party agrees that all legal
proceedings concerning the interpretations, enforcement and defense of
the transactions contemplated by any of the Transaction Documents
(whether brought against a party hereto or its respective affiliates,
directors, officers, shareholders, employees or agents) shall be
commenced in the state and federal courts sitting in the City of New
York, Borough of Manhattan (the "New York Courts"). Each party hereto
hereby irrevocably submits to
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the exclusive jurisdiction of the New York Courts for the adjudication
of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with
respect to the enforcement of any of the Transaction Documents), and
hereby irrevocably waives, and agrees not to assert in any suit, action
or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, or such New York Courts are improper or
inconvenient venue for such proceeding. Each party hereby irrevocably
waives personal service of process and consents to process being served
in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under
this Debenture and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in
any manner permitted by law. Each party hereto hereby irrevocably
waives, to the fullest extent permitted by applicable law, any and all
right to trial by jury in any legal proceeding arising out of or
relating to this Debenture or the transactions contemplated hereby. If
either party shall commence an action or proceeding to enforce any
provisions of this Debenture, then the prevailing party in such action
or proceeding shall be reimbursed by the other party for its attorneys
fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such action or proceeding.
e) Waiver. Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be
construed to be a waiver of any other breach of such provision or of any
breach of any other provision of this Debenture. The failure of the
Company or the Holder to insist upon strict adherence to any term of
this Debenture on one or more occasions shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Debenture. Any waiver
must be in writing.
f) Severability. If any provision of this Debenture is
invalid, illegal or unenforceable, the balance of this Debenture shall
remain in effect, and if any provision is inapplicable to any person or
circumstance, it shall nevertheless remain applicable to all other
persons and circumstances. If it shall be found that any interest or
other amount deemed interest due hereunder violates applicable laws
governing usury, the applicable rate of interest due hereunder shall
automatically be lowered to equal the maximum permitted rate of
interest. The Company covenants (to the extent that it may lawfully do
so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay,
extension or usury law or other law which would prohibit or forgive the
Company from paying all or any portion of the principal of or interest
on this Debenture as contemplated herein, wherever enacted, now or at
any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may
lawfully do so) hereby expressly waives all benefits or advantage of any
such law, and covenants that it will not, by resort to any such law,
hinder, delay or impeded the execution of any power herein granted to
the Holder, but will suffer and permit the execution of every such as
though no such law has been enacted.
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g) Next Business Day. Whenever any payment or other
obligation hereunder shall be due on a day other than a Business Day,
such payment shall be made on the next succeeding Business Day.
h) Headings. The headings contained herein are for
convenience only, do not constitute a part of this Debenture and shall
not be deemed to limit or affect any of the provisions hereof.
i) Assumption. Any successor to the Company or surviving
entity in a Fundamental Transaction shall (i) assume in writing all of
the obligations of the Company under this Debenture and the other
Transaction Documents pursuant to written agreements in form and
substance satisfactory to the Holder (such approval not to be
unreasonably withheld or delayed) prior to, or contemporaneous with,
such Fundamental Transaction and (ii) to issue to the Holder a new
debenture of such successor entity evidenced by a written instrument
substantially similar in form and substance to this Debenture,
including, without limitation, having a principal amount and interest
rate equal to the principal amounts and the interest rates of the
Debentures held by the Holder and having similar ranking to this
Debenture, and satisfactory to the Holder (any such approval not to be
unreasonably withheld or delayed). The provisions of this Section 9(i)
shall apply similarly and equally to successive Fundamental Transactions
and shall be applied without regard to any limitations of this
Debenture.
*********************
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IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed by a duly authorized officer as of the date first above indicated.
ELECTRONIC SENSOR TECHNOLOGY, INC.
By:
---------------------------
Name:
Title:
26
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 8%
Convertible Debenture of Electronic Sensor Technology, Inc., a Nevada
corporation (the "Company"), due on December __, 2009, into shares of common
stock, par value $.001 per share (the "Common Stock"), of the Company according
to the conditions hereof, as of the date written below. If shares are to be
issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect thereto and is delivering herewith
such certificates and opinions as reasonably requested by the Company in
accordance therewith. No fee will be charged to the holder for any conversion,
except for such transfer taxes, if any.
By the delivery of this Notice of Conversion the undersigned represents
and warrants to the Company that its ownership of the Common Stock does not
exceed the amounts determined in accordance with Section 13(d) of the Exchange
Act, specified under Section 4 of this Debenture.
The undersigned agrees to comply with the prospectus delivery
requirements under the applicable securities laws in connection with any
transfer of the aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debenture to be Converted:
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on
Account of Conversion at Issue.
Number of shares of Common Stock to be issued:
Signature:
Name:
Address:
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SCHEDULE 1
CONVERSION SCHEDULE
The 8% Convertible Debentures due on December __, 2009, in the aggregate
principal amount of $____________ issued by Electronic Sensor Technology, Inc.
This Conversion Schedule reflects conversions made under Section 4 of the above
referenced Debenture.
Dated:
Aggregate Principal
Amount Remaining
Subsequent to
Date of Conversion Conversion
(or for first entry, Amount of (or original
Original Issue Date) Conversion Principal Amount) Company Attest
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