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: January 11, 2006
Original Conversion Price (subject to adjustment herein): $1.15
$
---------------
SENIOR SECURED CONVERTIBLE DEBENTURE
DUE JANUARY 11, 2009
THIS SECURED CONVERTIBLE DEBENTURE is one of a series of duly authorized
and issued Senior Secured Convertible Debentures of Electronic Control Security,
Inc., a New Jersey corporation, having a principal place of business at 000
Xxxxxxxxxx Xxxxxx, Xxxxxxx, Xxx Xxxxxx 00000 (the "Company"), designated as its
Senior Secured Convertible Debenture, due January 11, 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 January 11, 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) (other than the Holder or its Affiliates) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 40% 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 60% 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 60% 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 $0.001 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 of this Debenture.
"Debenture Register" shall have the meaning set forth in Section 2(c).
"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 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 to the Holder
would not violate the limitations set forth in Section 4(c)(ii) and (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.
"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.
"Forced Conversion" shall have the meaning set forth in Section 6(c).
"Forced Conversion Notice" shall have the meaning set forth in Section
6(c).
"Forced Conversion Notice Date" shall have the meaning set forth in
Section 6(c).
"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) 95% of the lesser of (i) the average of the 10 VWAPs
immediately prior to the applicable Interest Payment Date or (ii) the
average of the 10 VWAPs immediately prior to the date the applicable
interest payment shares are issued and delivered if after the Interest
Payment Date.
"Interest Conversion Shares" shall have the meaning set forth in
Section 2(a).
"Interest Notice Period" shall have the meaning set forth in Section
2(a).
"Interest Period" means, initially, the period beginning on and
including the Original Issue Date and ending on and including March 31,
2006 and each successive period as follows: the period beginning on and
including April 1 and ending on and including June 30; the period beginning
on July 1 and ending on and including September 30; and the period
beginning on October 1 and ending on and including December 31; and the
period beginning on January 1 and ending on and including March 31.
"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 then outstanding principal amount of this Debenture to be
prepaid, plus all accrued and unpaid interest thereon, or (B) the
outstanding 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).
"Optional Redemption" shall have the meaning set forth in Section
6(a).
"Optional Redemption Amount" shall mean the sum of (i) 120% of the
principal amount of the Debenture then outstanding, (ii) accrued but unpaid
interest and (iii) all liquidated damages and other amounts due in respect
of the Debenture.
"Optional Redemption Date" shall have the meaning set forth in Section
6(a).
"Optional Redemption Notice" shall have the meaning set forth in
Section 6(a).
"Optional Redemption Notice Date" shall have the meaning set forth in
Section 6(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 $_______, in the aggregate, incurred in connection with the
acquisition of capital assets and lease obligations with respect to newly
acquired or leased assets and (c) Indebtedness of up to $500,000 incurred
after the Original Issue Date pursuant to which the holders thereof shall
have entered into a written subordination agreement satisfactory to the
Holder, which Indebtedness shall have a maturity date after the Maturity
Date hereof and shall have such other terms and conditions as are
reasonably satisfactory to the Holder.
"Permitted Lien" shall mean the individual and collective reference to
the following: (a) Liens for taxes, assessments and other governmental
charges (including, without limitation, in connection with workers'
compensation and unemployment insurance) 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 Borrowers) 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 and mechanics' Liens, statutory landlords' Liens, and other
similar Liens arising in the ordinary course of 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 Borrowers 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 and (c) Liens
incurred in connection with Permitted Indebtedness under clause (b)
thereunder provided that such Liens are not secured by assets of the
Borrowers or its Subsidiaries other than the assets so acquired or leased.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"Prime Rate" means, for each Interest Period means, (i) the Prime Rate
as shown on such Trading Day immediately prior to the beginning of such
Interest Period in The Wall Street Journal (Eastern Edition) under the
caption "Money Rates - Prime Rate"; or (ii) if The Wall Street Journal does
not publish such rate, the rate of interest publicly announced by Citibank
N.A. as its prime rate, on the Trading Day immediately prior to the
beginning of such Interest Period.
"Purchase Agreement" means the Securities Purchase Agreement, dated as
of January 11, 2006, 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 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.
"Threshold Period" shall have the meaning given to such term in
Section 6(c).
"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
OTC Bulletin Board, the Nasdaq Capital Market, the American Stock Exchange,
the New York Stock Exchange or the Nasdaq National Market.
"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 a Trading Market and if prices for the Common Stock are then
quoted on the OTC Bulletin Board, the volume weighted average price of the
Common Stock for such date (or the nearest preceding date) on the OTC
Bulletin Board; (c) 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 the 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 an independent appraiser selected in good faith by the Holder
and reasonably acceptable to the Company.
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 per annum equal to the
greater of (i) 8% per annum or (ii) the Prime Rate for the applicable
Interest Period plus 2.5%, or such lesser rate as shall be the highest rate
permitted by applicable law, payable quarterly on April 1, July 1, October
1 and January 1, beginning on April 1, 2006, on each Conversion Date (as to
that principal amount then being converted), on each Optional Redemption
Date (as to that principal amount then being redeemed) 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, (i) payment in shares of Common Stock may only
occur if during the 10 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, 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, (ii) as to such Interest Payment
Date, prior to the such Interest Notice Period (but not more 5 Trading Days
prior to the commencement of the Interest Notice 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 Interest Share
Amount equal to the quotient of (x) the applicable Interest Share Amount
divided by (y) the then Conversion Price (the "Interest Conversion
Shares"), (iii) the average of the 10 VWAPs immediately prior to the
applicable Interest Payment Date equals or exceeds the then Conversion
Price and (iv) the average daily volume during the 20 Trading Days
immediately prior to the applicable Interest Payment Date equals or exceeds
(a) 75,000 shares of Common Stock per Trading Day (subject to adjustment
for forward and reverse stock splits, recapitalizations, stock dividends
and the like after the Original Issue Date) in the case of an Interest
Share Amount over 50% of the interest payment or (b) 50,000 shares of
Common Stock per Trading Day (subject to adjustment for forward and reverse
stock splits, recapitalizations, stock dividends and the like after the
Original Issue Date) in the case of an Interest Share Amount equal to or
less than 50% of the interest payment.
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. The aggregate number of shares of Common Stock otherwise issuable
to the Holder on an Interest Payment Date shall be reduced by the number of
Interest Conversion Shares previously issued to the Holder in connection
with such Interest Payment Date.
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 (other than the
Interest Conversion Shares issued prior to an Interest Notice Period) 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).
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 of the
Debentures based on their (or their predecessor's) initial purchases of
Debentures pursuant to the Purchase Agreement.
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. If any Interest Conversion Shares are
issued to the Holder in connection with an Interest Payment Date and are
not applied against an Interest Share Amount, then the Holder shall
promptly return such excess shares to the Company.
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.
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 2 Business Days 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 $1.15 (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 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 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 the Company has given continuous notice pursuant to
Section 2(b) for payment of interest in shares of Common Stock at
least 20 Trading Days prior to the date on which the Conversion Notice
is delivered to 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 excluding for such issuance the
condition that the Company deliver Interest Conversion Shares as to
such interest payment) 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 commercially reasonable
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.
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 fifth 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 third Trading Day after the Conversion Date,
and if after such third Trading Day the Holder is required by its
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 (which notice shall
include evidence of the amounts payable in respect of such Buy-In).
Notwithstanding anything contained herein to the contrary, if a 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.
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 other than in connection with the issuance of shares of Common Stock
as regularly scheduled dividends pursuant to the terms of the Company's
Series B Convertible Preferred Stock which preferred stock shall not be
amended after the date hereof to increase the number of such securities or
to decrease the exercise, exchange or conversion price of such securities
(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 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 two Business Days
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 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 (other than
pursuant to the Purchase Agreement) 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 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. Optional Redemption and Forced Conversion.
a) Optional Redemption at Election of Company. Subject to the
provisions of this Section 6, at any time after the 12-month anniversary of
the Effective Date, the Company may deliver a notice to the Holder (an
"Optional Redemption Notice" and the date such notice is deemed delivered
hereunder, the "Optional Redemption Notice Date") of its irrevocable
election to redeem some or all of the then outstanding Debentures, for an
amount, in cash, equal to the Optional Redemption Amount on the 20th
Trading Day following the Optional Redemption Notice Date (such date, the
"Optional Redemption Date" and such redemption, the "Optional Redemption").
The Optional Redemption Amount is due in full on the Optional Redemption
Date. The Company may only effect an Optional Redemption if during the
period commencing on the Optional Redemption Notice Date through to the
Optional Redemption Date and through and including the date such shares of
Common Stock are issued to the Holder, each of the Equity Conditions shall
have been met. If any of the Equity Conditions shall cease to be satisfied
at any time during the required period, then the Holder may elect to
nullify the Optional Redemption Notice by notice to the Company within 3
Trading Days after the first day on which any such Equity Condition has not
been met (provided that if, by a provision of the Transaction Documents,
the Company is obligated to notify the Holder of the non-existence of an
Equity Condition, such notice period shall be extended to the third Trading
Day after proper notice from the Company) in which case the Optional
Redemption Notice shall be null and void, ab initio. The Company covenants
and agrees that it will honor all Notices of Conversion tendered from the
time of delivery of the Optional Redemption Notice through the date all
amounts owing thereon are due and paid in full.
b) Redemption Procedure. The payment of cash pursuant to an Optional
Redemption shall be made on the Optional Redemption Date. If any portion of
the cash payment for an Optional 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 Optional 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, and,
with respect the failure to honor the Optional Redemption as applicable,
the Company shall have no further right to exercise such Optional
Redemption. 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.
c) Forced Conversion. Notwithstanding anything herein to the
contrary, if after the Effective Date, (i) each of the VWAPs for any 20
consecutive Trading Days (such period commencing only after the Effective
Date, such period the "Threshold Period")) exceeds $3.50 (subject to
adjustment for reverse and forward stock splits, stock dividends, stock
combinations and other similar transactions of the Common Stock that occur
after the Original Issue Date) and (ii) the daily trading volume on the
Trading Market for each Trading Day during such Threshold Period exceeds
75,000 shares of Common Stock (subject to adjustment for forward and
reverse stock splits, recapitalizations, stock dividends and the like after
the Original Issue Date), the Company may, within 1 Trading Day of the end
of any such period, deliver a notice to the Holder (a "Forced Conversion
Notice" and the date such notice is received by the Holder, the "Forced
Conversion Notice Date") to cause the Holder to immediately convert all or
part of the then outstanding principal amount of Debentures pursuant to
Section 4. The Company may only effect a Forced Conversion Notice if all of
the Equity Conditions are met through the applicable Threshold Period until
the date of the applicable Forced Conversion and through and including the
date such shares of Common Stock are issued to the Holder. Any Forced
Conversion shall be applied ratably to all Holders based on their initial
purchases of Debentures pursuant to the Purchase Agreement. For purposes of
clarification, a Forced Conversion shall be subject to all of the
provisions of Section 4, including, without limitation, the provision
requiring payment of liquidated damages and limitations on conversions.
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 regularly scheduled dividends pursuant to the terms
of the Company's Series B Convertible Preferred Stock which preferred stock
shall not be amended after the date hereof to increase the dividend rate or
number of shares of such securities).
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) 7 Trading Days
after notice of such default sent by the Holder or by any other Holder
and (B)15 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
within the earlier to occur of (i) 5 Trading Days after notice of such
default sent by the Holder or by any other Holder and (ii) 10 Trading
Days after the Company shall become or, should reasonably have become,
aware of such failure, 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 or in any other
Transaction Documents 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 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 ten 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 40% 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, in either case,
for more than 30 consecutive Trading Days or 60 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 fifth Trading Day after a
Conversion Date or any Forced 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; or
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 more than $100,000, 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 10 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
15% 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 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 (000) 000-0000, Attn: Xxxxxx Xxxxxxxxx, President 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 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.
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
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.
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 CONTROL SECURITY, INC.
By:
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Name:
Title:
