Exhibit 10.41
Dated: November 30, 2005
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE 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.
No. MEP-1 $600,000
COMPLIANCE SYSTEMS CORPORATION
Secured Convertible Debenture
Due November 30, 2007
This Secured Convertible Debenture (the "Debenture") is issued on
November 30, 2005 ("Closing Date") by COMPLIANCE SYSTEMS CORPORATION, a
Delaware corporation (the "Obligor"), to XXXXXXXXXX EQUITY PARTNERS, LTD (the
"Holder"), pursuant to that certain Securities Purchase Agreement (the
"Securities Purchase Agreement") of even date herewith.
FOR VALUE RECEIVED, the Obligor hereby promises to pay to the Holder or
its successors and assigns the principal sum of Six Hundred Thousand Dollars
($600,000), together with accrued but unpaid interest on or before two year
anniversary of the Closing Date (the "Maturity Date") in accordance with the
following terms:
Interest. Interest shall accrue on the outstanding principal balance
hereof at an annual rate equal to ten percent (10%). Interest shall be
calculated on the basis of a 360-day year and the actual number of days
elapsed, to the extent permitted by applicable law. Interest hereunder will
be paid to the Holder or its assignee (as defined in Section 4) in whose
name this Debenture is registered on the records of the Obligor regarding
registration and transfers of Debentures (the "Debenture Register").
Right of Redemption. The Obligor at its option shall have the right,
with three (3) business days advance written notice (the "Redemption
Notice"), to redeem a portion or all amounts outstanding under this Debenture
prior to the Maturity Date if the closing bid price of the Obligor's Common
Stock, as reported by Bloomberg, LP, is less than the Fixed Price at the time
of the Redemption Notice. The Obligor shall pay an amount equal to the
principal amount being redeemed and accrued interest, plus a redemption
premium ("Redemption Premium") equal to twenty percent (20%) of the amount
being redeemed (collectively referred to as the "Redemption Amount"). The
Obligor shall deliver to the Holder the Redemption Amount on the third (3rd)
business day after the Redemption Notice.
Notwithstanding the foregoing in the event that the Obligor has elected
to redeem a portion of the outstanding principal amount and accrued interest
under this Debenture the Holder shall still be entitled to effectuate
Conversions as contemplated hereunder.
Security Agreement. This Debenture is secured by a Security Agreement
(the "Security Agreement") of even date herewith between the Obligor and the
Holder and a Pledge and Escrow Agreement ("Pledge Agreement") of even date
herewith between the Obligor, the Holder, and the Escrow Agent.
Consent of Holder to Sell Capital Stock or Grant Security Interests.
So long as any of the principal amount or interest on this Debenture remains
unpaid and unconverted, the Obligor shall not, without the prior consent of
the Holder, (i) issue or sell any shares of common stock or preferred stock
without consideration or for consideration per share less than the Closing
Bid Price of the common stock determined immediately prior to its issuance,
(ii) issue or sell any preferred stock, warrant, option, right, contract,
call, or other security or instrument granting the holder thereof the right
to acquire common stock without consideration or for consideration per share
less than the Closing Bid Price of the common stock determined immediately
prior to its issuance, (iii) enter into any security instrument granting the
holder a security interest in any of the assets of the Obligor except in
connection with the Company leasing or purchasing office equipment, computer
and networking equipment, co-location equipment and other equipment and
supplies in the ordinary course of the Company's business, provided such
equipment and supplies do not, in the aggregate, exceed fifty thousand
dollars ($50,000.00) per annum, or (iv) file any registration statements on
Form S-8.
Rights of First Refusal. So long as any portion of this Debenture is
outstanding (including principal or accrued interest), if the Obligor intends
to raise additional capital by the issuance or sale of capital stock of the
Obligor, including without limitation shares of any class of common stock,
any class of preferred stock, options, warrants or any other securities
convertible or exercisable into shares of common stock (whether the offering
is conducted by the Company, underwriter, placement agent or any third party)
the Obligor shall be obligated to offer to the Holder such issuance or sale
of capital stock, by providing in writing the principal amount of capital it
intends to raise and outline of the material terms of such capital raise,
prior to the offering such issuance or sale of capital stock to any third
parties including, but not limited to, current or former officers or
directors, current or former shareholders and/or investors of the obligor,
underwriters, brokers, agents or other third parties. The Holder shall have
ten (10) business days from receipt of such notice of the sale or issuance of
capital stock to accept or reject all or a portion of such capital raising
offer.
This Debenture is subject to the following additional provisions:
Section 1. 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.
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Section 2. Events of Default.
(a) An "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 the principal of, interest on
or other charges in respect of this Debenture, free of any claim of
subordination, as and when the same shall become due and payable (whether on
a Conversion Date or the Maturity Date or by acceleration or otherwise);
(ii) The Obligor shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any breach
or default of any provision of this Debenture (except as may be covered by
Section 2(a)(i) hereof) or any Transaction Document (as defined in Section 4)
which is not cured with in the time prescribed;
(iii) The Obligor or any subsidiary of the Obligor shall
commence, or there shall be commenced against the Obligor or any subsidiary
of the Obligor under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Obligor or any
subsidiary of the Obligor 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 Obligor or any subsidiary
of the Obligor or there is commenced against the Obligor or any subsidiary of
the Obligor any such bankruptcy, insolvency or other proceeding which remains
undismissed for a period of 61 days; or the Obligor or any subsidiary of the
Obligor is adjudicated insolvent or bankrupt; or any order of relief or other
order approving any such case or proceeding is entered; or the Obligor or any
subsidiary of the Obligor suffers any appointment of any custodian, private
or court appointed receiver or the like for it or any substantial part of its
property which continues undischarged or unstayed for a period of sixty one
(61) days; or the Obligor or any subsidiary of the Obligor makes a general
assignment for the benefit of creditors; or the Obligor or any subsidiary of
the Obligor 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 the
Obligor or any subsidiary of the Obligor shall call a meeting of its
creditors with a view to arranging a composition, adjustment or restructuring
of its debts; or the Obligor or any subsidiary of the Obligor shall by any
act or failure to act expressly indicate its consent to, approval of or
acquiescence in any of the foregoing; or any corporate or other action is
taken by the Obligor or any subsidiary of the Obligor for the purpose of
effecting any of the foregoing;
(iv) The Obligor or any subsidiary of the Obligor shall default
in any of its obligations under any other debenture or 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 Obligor or any
subsidiary of the Obligor in an amount exceeding $100,000, 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;
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(v) The Common Stock shall cease to be quoted for trading or
listed for trading on either the Nasdaq OTC Bulletin Board ("OTC"), Nasdaq
SmallCap Market, New York Stock Exchange, American Stock Exchange or the
Nasdaq National Market (each, a "Subsequent Market") and shall not again be
quoted or listed for trading thereon within five (5) Trading Days of such
delisting;
(vi) The Obligor or any subsidiary of the Obligor shall be a
party to any Change of Control Transaction (as defined in Section 4);
(vii) The Obligor shall fail to file the Underlying Shares
Registration Statement (as defined in Section 4) with the Commission (as
defined in Section 4), or the Underlying Shares Registration Statement shall
not have been declared effective by the Commission, in each case within the
time periods set forth in the Registration Rights Agreement of even date
herewith between the Obligor and the Holder;
(viii) If the effectiveness of the Underlying Shares
Registration Statement lapses for any reason or the Holder shall not be
permitted to resell the shares of Common Stock underlying this Debenture
under the Underlying Shares Registration Statement, in either case, for more
than five (5) consecutive Trading Days or an aggregate of eight Trading Days
(which need not be consecutive Trading Days);
(ix) The Obligor shall fail for any reason to deliver Common
Stock certificates to a Holder prior to the fifth (5th) Trading Day after a
Conversion Date or the Obligor 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 this Debenture in accordance with the terms
hereof;
(x) The Obligor shall fail for any reason to deliver the
payment in cash pursuant to a Buy-In (as defined herein) within three (3)
days after notice is claimed delivered hereunder;
(b) During the time that any portion of this Debenture is
outstanding, if any Event of Default has occurred, 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, provided however, the Holder may request
(but shall have no obligation to request) payment of such amounts in Common
Stock of the Obligor. In addition to any other remedies, the Holder shall
have the right (but not the obligation) to convert this Debenture at any time
after (x) an Event of Default or (y) the Maturity Date at the Conversion
Price then in-effect. The Holder need not provide and the Obligor 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. No such rescission or
annulment shall affect any subsequent Event of Default or impair any right
consequent thereon. Upon an Event of Default, notwithstanding any other
provision of this Debenture or any Transaction Document, the Holder shall
have no obligation to comply with or adhere to any limitations, if any, on
the conversion of this Debenture or the sale of the Underlying Shares.
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Section 3. Conversion.
(a) (i) Conversion at Option of Holder.
(A) 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, after the Original Issue Date (as defined in Section 4)
(subject to the limitations on conversion set forth in Section 3(a)(ii)
hereof). The number of shares of Common Stock issuable upon a conversion
hereunder equals the quotient obtained by dividing (x) the outstanding amount
of this Debenture to be converted by (y) the Conversion Price (as defined in
Section 3(c)(i)). The Obligor shall deliver Common Stock certificates to the
Holder prior to the Fifth (5th) Trading Day after a Conversion Date.
(B) Notwithstanding anything to the contrary contained herein,
if on any Conversion Date: (1) the number of shares of Common Stock at the
time authorized, unissued and unreserved for all purposes, or held as
treasury stock, is insufficient to pay principal and interest hereunder in
shares of Common Stock; (2) the Common Stock is not listed or quoted for
trading on the OTC or on a Subsequent Market; (3) the Obligor has failed to
timely satisfy its conversion; or (4) the issuance of such shares of Common
Stock would result in a violation of Section 3(a)(ii), then, at the option of
the Holder, the Obligor, in lieu of delivering shares of Common Stock
pursuant to Section 3(a)(i)(A), shall deliver, within three (3) Trading Days
of each applicable Conversion Date, an amount in cash equal to the product of
the outstanding principal amount to be converted plus any interest due
therein divided by the Conversion Price and multiplied by the highest closing
price of the stock from date of the conversion notice till the date that such
cash payment is made.
Further, if the Obligor shall not have delivered any cash due in
respect of conversion of this Debenture or as payment of interest thereon by
the fifth (5th) Trading Day after the Conversion Date, the Holder may, by
notice to the Obligor, require the Obligor to issue shares of Common Stock
pursuant to Section 3(c), except that for such purpose the Conversion Price
applicable thereto shall be the lesser of the Conversion Price on the
Conversion Date and the Conversion Price on the date of such Holder demand.
Any such shares will be subject to the provisions of this Section.
(C) The Holder shall effect conversions by delivering to the
Obligor a completed notice in the form attached hereto as Exhibit A (a
"Conversion Notice"). The date on which a Conversion Notice is delivered is
the "Conversion Date." Unless the Holder is converting the entire principal
amount outstanding under this Debenture, the Holder is not required to
physically surrender this Debenture to the Obligor in order to effect
conversions. Conversions hereunder shall have the effect of lowering the
outstanding principal amount of this Debenture plus all accrued and unpaid
interest thereon in an amount equal to the applicable conversion. The Holder
and the Obligor shall maintain records showing the principal amount converted
and the date of such conversions. In the event of any dispute or discrepancy,
the records of the Holder shall be controlling and determinative in the
absence of manifest error.
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(ii) Certain Conversion Restrictions.
(A) A Holder may not convert this Debenture or receive
shares of Common Stock as payment of interest hereunder to the extent such
conversion or receipt of such interest payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules promulgated
thereunder) in excess of 4.9% of the then issued and outstanding shares of
Common Stock, including shares issuable upon conversion of, and payment of
interest on, this Debenture held by such Holder after application of this
Section. Since the Holder will not be obligated to report to the Obligor the
number of shares of Common Stock it may hold at the time of a conversion
hereunder, unless the conversion at issue would result in the issuance of
shares of Common Stock in excess of 4.9% of the then outstanding shares of
Common Stock without regard to any other shares which may be beneficially
owned by the Holder or an affiliate thereof, the Holder shall have the
authority and obligation to determine whether the restriction contained in
this Section will limit any particular conversion hereunder and to the extent
that the Holder determines that the limitation contained in this Section
applies, the determination of which portion of the principal amount of this
Debenture is convertible shall be the responsibility and obligation of the
Holder. If the Holder has delivered a Conversion Notice for a principal
amount of this Debenture that, without regard to any other shares that the
Holder or its affiliates may beneficially own, would result in the issuance
in excess of the permitted amount hereunder, the Obligor shall notify the
Holder of this fact and shall honor the conversion for the maximum principal
amount permitted to be converted on such Conversion Date in accordance with
the periods described in Section 3(a)(i)(A) and, at the option of the Holder,
either retain any principal amount tendered for conversion in excess of the
permitted amount hereunder for future conversions or return such excess
principal amount to the Holder. The provisions of this Section may be waived
by a Holder (but only as to itself and not to any other Holder) upon not less
than 65 days prior notice to the Obligor. Other Holders shall be unaffected
by any such waiver.
(b) (i) Nothing herein shall limit a Holder's right to pursue
actual damages or declare an Event of Default pursuant to Section 2 herein
for the Obligor 's failure to deliver certificates representing shares of
Common Stock upon conversion 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, in each case without the need to post a bond or
provide other security. 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.
(ii) In addition to any other rights available to the Holder, if
the Obligor fails to deliver to the Holder such certificate or certificates
pursuant to Section 3(a)(i)(A) by the fifth (5th) Trading Day after the
Conversion Date, and if after such fifth (5th) Trading Day the Holder
purchases (in an open market transaction or otherwise) Common Stock to
deliver in satisfaction of a sale by such Holder of the Underlying Shares
which the Holder anticipated receiving upon such conversion (a "Buy-In"),
then the Obligor 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
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the conversion at issue multiplied by (2) the market price of the Common
Stock at the time of the sale giving rise to such purchase obligation and (B)
at the option of the Holder, either reissue a Debenture in the 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 Obligor timely complied with its delivery requirements under
Section 3(a)(i)(A). 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 Debentures with respect to which the market price of
the Underlying Shares on the date of conversion was a total of $10,000 under
clause (A) of the immediately preceding sentence, the Obligor shall be
required to pay the Holder $1,000. The Holder shall provide the Obligor
written notice indicating the amounts payable to the Holder in respect of the
Buy-In.
(c) (i) The Holder is entitled, at its option, to convert, and sell
on the same day, at any time, until payment in full of this Debenture, all or
any part of the principal amount of the Debenture, plus accrued interest,
into shares of the Company's Common Stock at the price per share equal to the
lesser of (a) the lowest Closing Bid Price of the Common Stock during the ten
(10) trading days immediately prior to the date the Obligor files the
Underlying Shares Registration Statement (the "Fixed Conversion Price") or
(b) eighty percent (80%) of the lowest Closing Bid Price, as quoted by
Bloomberg, LP (the "VWAP") of the Common Stock for the five (5) trading days
immediately preceding the Conversion Date. Subparagraphs (a) and (b) above
are individually referred to as a "Conversion Price" and may be adjusted
pursuant to the other terms of this Debenture.
(ii) If the Obligor, at any time while this Debenture is
outstanding, shall (a) pay a stock dividend or otherwise make a distribution
or distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock, (b) subdivide
outstanding shares of Common Stock into a larger number of shares, (c)
combine (including by way of reverse stock split) outstanding shares of
Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of the Common Stock any shares of capital stock of
the Obligor, 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 before such event and of which the
denominator shall be the number of shares of Common Stock outstanding 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.
(iii) If the Obligor, at any time while this Debenture is
outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to the Holder) entitling them to subscribe for or purchase
shares of Common Stock at a price per share less than the Closing Bid Price
at the record date mentioned below, then the Conversion Price shall be
multiplied by a fraction, of which the denominator shall be the number of
shares of the Common Stock (excluding treasury shares, if any) outstanding on
the date of issuance of such rights or warrants (plus the number of
additional shares of Common Stock offered for subscription or purchase), and
of which the numerator shall be the number of shares of the Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants, plus the number of shares which the aggregate
offering price of the total number of shares so offered would purchase at
such Closing Bid Price. Such adjustment shall be made whenever such rights or
warrants are issued, and shall become effective immediately after the record
date for the determination of stockholders entitled to receive such rights,
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options or warrants. However, upon the expiration of any such right, option
or warrant to purchase shares of the Common Stock the issuance of which
resulted in an adjustment in the Conversion Price pursuant to this Section,
if any such right, option or warrant shall expire and shall not have been
exercised, the Conversion Price shall immediately upon such expiration be
recomputed and effective immediately upon such expiration be increased to the
price which it would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the provisions of this Section after the
issuance of such rights or warrants) had the adjustment of the Conversion
Price made upon the issuance of such rights, options or warrants been made on
the basis of offering for subscription or purchase only that number of shares
of the Common Stock actually purchased upon the exercise of such rights,
options or warrants actually exercised.
(iv) If the Obligor or any subsidiary thereof, as applicable,
with respect to Common Stock Equivalents (as defined below), at any time
while this Debenture is outstanding, shall issue shares of Common Stock or
rights, warrants, options or other securities or debt that are convertible
into or exchangeable for shares of Common Stock ("Common Stock Equivalents")
entitling any Person to acquire shares of Common Stock, at a price per share
less than the Conversion Price (if the holder of the Common Stock or Common
Stock Equivalent 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 a price per share which is less than the
Conversion Price, such issuance shall be deemed to have occurred for less
than the Conversion Price), then, at the sole option of the Holder, the
Conversion Price shall be adjusted to mirror the conversion, exchange or
purchase price for such Common Stock or Common Stock Equivalents (including
any reset provisions thereof) at issue. Such adjustment shall be made
whenever such Common Stock or Common Stock Equivalents are issued. The
Obligor shall notify the Holder in writing, no later than one (1) business
day following the issuance of any Common Stock or Common Stock Equivalent
subject to this Section, indicating therein the applicable issuance price, or
of applicable reset price, exchange price, conversion price and other pricing
terms. No adjustment under this Section shall be made as a result of
issuances and exercises of options to purchase shares of Common Stock issued
for compensatory purposes pursuant to any of the Obligor's stock option or
stock purchase plans.
(v) If the Obligor, at any time while this Debenture is
outstanding, shall distribute to all holders of Common Stock (and not to the
Holder) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security, then in each such case the Conversion
Price at which this Debenture shall thereafter be convertible shall be
determined by multiplying the 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 Closing
Bid Price determined as of the record date mentioned above, and of which the
numerator shall be such Closing Bid Price 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.
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(vi) In case of any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, the Holder shall have the right
thereafter to, at its option, (A) convert the then outstanding principal
amount, together with all accrued but unpaid interest and any other amounts
then owing hereunder in respect of this Debenture into the shares of stock
and other securities, cash and property receivable upon or deemed to be held
by holders of the Common Stock following such reclassification or share
exchange, and the Holder of this Debenture shall be entitled upon such event
to receive such amount of securities, cash or property as the shares of the
Common Stock of the Obligor into which the then outstanding principal amount,
together with all accrued but unpaid interest and any other amounts then
owing hereunder in respect of this Debenture could have been converted
immediately prior to such reclassification or share exchange would have been
entitled, or (B) require the Obligor to prepay the outstanding principal
amount of this Debenture, plus all interest and other amounts due and payable
thereon. The entire prepayment price shall be paid in cash. This provision
shall similarly apply to successive reclassifications or share exchanges.
(vii) Within 30 days of the date hereof, the Obligor shall
maintain a share reserve of not less than 65,000,000 shares of Common Stock
issuable upon conversion of this Debenture; and within three (3) Business
Days following the receipt by the Obligor of a Holder's notice that such
minimum number of Underlying Shares is not so reserved, the Obligor shall
promptly reserve a sufficient number of shares of Common Stock to comply with
such requirement.
(viii) All calculations under this Section 3 shall be
rounded up to the nearest $0.001 of a share.
(ix) Whenever the Conversion Price is adjusted pursuant to
Section 3 hereof, the Obligor shall promptly mail to the Holder a notice
setting forth the Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment.
(x) If (A) the Obligor shall declare a dividend (or any other
distribution) on the Common Stock; (B) the Obligor shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock; (C) the
Obligor 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
Obligor shall be required in connection with any reclassification of the
Common Stock, any consolidation or merger to which the Obligor is a party,
any sale or transfer of all or substantially all of the assets of the
Obligor, of any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property; or (E) the Obligor shall
authorize the voluntary or involuntary dissolution, liquidation or winding up
of the affairs of the Obligor; then, in each case, the Obligor 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
address as it shall appear upon the stock books of the Obligor, at least
9
twenty (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 calendar
period commencing the date of such notice to the effective date of the event
triggering such notice.
(xi) In case of any (1) merger or consolidation of the Obligor
or any subsidiary of the Obligor with or into another Person, or (2) sale by
the Obligor or any subsidiary of the Obligor of more than one-half of the
assets of the Obligor in one or a series of related transactions, a Holder
shall have the right to (A) exercise any rights under Section 2(b), (B)
convert the aggregate amount of this Debenture then outstanding into the
shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of Common Stock following such merger,
consolidation or sale, and such Holder shall be entitled upon such event or
series of related events to receive such amount of securities, cash and
property as the shares of Common Stock into which such aggregate principal
amount of this Debenture could have been converted immediately prior to such
merger, consolidation or sales would have been entitled, or (C) in the case
of a merger or consolidation, require the surviving entity to issue to the
Holder a convertible Debenture with a principal amount equal to the aggregate
principal amount of this Debenture then held by such Holder, plus all accrued
and unpaid interest and other amounts owing thereon, which such newly issued
convertible Debenture shall have terms identical (including with respect to
conversion) to the terms of this Debenture, and shall be entitled to all of
the rights and privileges of the Holder of this Debenture set forth herein
and the agreements pursuant to which this Debentures were issued. In the case
of clause (C), the conversion price applicable for the newly issued shares of
convertible preferred stock or convertible Debentures shall be based upon the
amount of securities, cash and property that each share of Common Stock would
receive in such transaction and the Conversion Price in effect immediately
prior to the effectiveness or closing date for such transaction. The terms of
any such merger, sale or consolidation shall include such terms so as to
continue to give the Holder the right to receive the securities, cash and
property set forth in this Section upon any conversion or redemption
following such event. This provision shall similarly apply to successive such
events.
(d) The Obligor 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, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Obligor as to reservation of
such shares set forth in this Debenture) be issuable (taking into account the
adjustments and restrictions of Sections 2(b) and 3(c)) upon the conversion
of the outstanding principal amount of this Debenture and payment of interest
10
hereunder. The Obligor 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 Underlying Shares Registration
Statement has been declared effective under the Securities Act, registered
for public sale in accordance with such Underlying Shares Registration
Statement.
(e) Upon a conversion hereunder the Obligor 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 Closing Bid Price at such time. If the
Obligor 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.
(f) The issuance of certificates for shares of the Common Stock on
conversion of this Debenture shall be made without charge to the Holder
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the
Obligor 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 such Debenture so
converted and the Obligor 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 Obligor the amount of such tax or shall have
established to the satisfaction of the Obligor that such tax has been paid.
(g) Any notices, consents, waivers or other communications required
or permitted to be given under the terms hereof must be in writing and will
be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation
of transmission is mechanically or electronically generated and kept on file
by the sending party); or (iii) one (1) Trading Day after deposit with a
nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile
numbers for such communications shall be:
If to the Company, to: Compliance Systems Corporation
00 Xxxxx Xxxx
Xxxx Xxxx, XX 00000
Attention: Xxxx Xxxxxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
With a copy to: Xxxxxxxxxxx & Xxxxxxxx Xxxxxxxxx Xxxxxx, LLP
000 Xxxxx Xxxxxxxx Xxxxxxxxx, Xxxxx 0000
Xxxxx, Xxxxxxx 00000
Attention: Xxxxxxx X. Xxxxxx, Esq.
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
If to the Holder: Xxxxxxxxxx Equity Partners, Ltd.
000 Xxxxxx Xxxxxx, Xxxxx 0000
Xxxxxx Xxxx, XX 00000
Attention: Xxxx Xxxxxx
Telephone: (000) 000-0000
11
With a copy to: Xxxxx Xxxxxxxx, Esq.
000 Xxxxxx Xxxxxx - Xxxxx 0000
Xxxxxx Xxxx, XX 00000
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
or at such other address and/or facsimile number and/or to the attention of
such other person as the recipient party has specified by written notice
given to each other party three (3) business days prior to the effectiveness
of such change. Written confirmation of receipt (i) given by the recipient
of such notice, consent, waiver or other communication, (ii) mechanically or
electronically generated by the sender's facsimile machine containing the
time, date, recipient facsimile number and an image of the first page of such
transmission or (iii) provided by a nationally recognized overnight delivery
service, shall be rebuttable evidence of personal service, receipt by
facsimile or receipt from a nationally recognized overnight delivery service
in accordance with clause (i), (ii) or (iii) above, respectively.
Section 4. Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"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 are authorized or required by law or other government
action to close.
"Change of Control Transaction" means the occurrence of (a) 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 Obligor, by contract or otherwise) of in excess of fifty percent
(50%) of the voting securities of the Obligor (except that the acquisition of
voting securities by the Holder shall not constitute a Change of Control
Transaction for purposes hereof), (b) a replacement at one time or over time
of more than one-half of the members of the board of directors of the Obligor
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), (c) the merger,
consolidation or sale of fifty percent (50%) or more of the assets of the
Obligor or any subsidiary of the Obligor in one or a series of related
transactions with or into another entity, or (d) the execution by the Obligor
of an agreement to which the Obligor is a party or by which it is bound,
providing for any of the events set forth above in (a), (b) or (c).
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, par value $0.001, of the Obligor
and stock of any other class into which such shares may hereafter be changed
or reclassified.
12
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Funding Event" means any transaction or series of transactions closed
after the Original Issue Date in which the Obligor raises $1,000,000 or more
through the sale of their equity securities or securities exercisable or
convertible into equity securities.
"Original Issue Date" shall mean the date of the first issuance of this
Debenture regardless of the number of transfers and regardless of the number
of instruments, which may be issued to evidence such Debenture.
"Closing Bid Price" means the price per share in the last reported
trade of the Common Stock on the OTC or on the exchange which the Common
Stock is then listed as quoted by Bloomberg, LP.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Trading Day" means a day on which the shares of Common Stock are
quoted on the OTC or quoted or traded on such Subsequent Market on which the
shares of Common Stock are then quoted or listed; provided, that in the event
that the shares of Common Stock are not listed or quoted, then Trading Day
shall mean a Business Day.
"Transaction Documents" means the Securities Purchase Agreement or any
other agreement delivered in connection with the Securities Purchase
Agreement, including, without limitation, the Security Agreement, the Pledge
and Escrow Agreement, and the Investor Registration Rights Agreement.
"Underlying Shares" means the shares of Common Stock issuable upon
conversion of this Debenture or as payment of interest in accordance with the
terms hereof.
"Underlying Shares Registration Statement" means a registration
statement meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Underlying Shares
and naming the Holder as a "selling stockholder" thereunder.
Section 5. Except as expressly provided herein, no provision of this
Debenture shall alter or impair the obligations of the Obligor, which are
absolute and unconditional, to pay the principal of, interest and other
charges (if any) on, this Debenture at the time, place, and rate, and in the
coin or currency, herein prescribed. This Debenture is a direct obligation
of the Obligor. This Debenture ranks pari passu with all other Debentures now
or hereafter issued under the terms set forth herein. As long as this
Debenture is outstanding, the Obligor shall not and shall cause their
subsidiaries not to, without the consent of the Holder, (i) amend its
certificate of incorporation, bylaws or other charter documents so as to
adversely affect any rights of the Holder; (ii) repay, repurchase or offer to
repay, repurchase or otherwise acquire shares of its Common Stock or other
equity securities other than as to the Underlying Shares to the extent
permitted or required under the Transaction Documents; or (iii) enter into
any agreement with respect to any of the foregoing.
13
Section 6. This Debenture shall not entitle the Holder to any of the
rights of a stockholder of the Obligor, including without limitation, the
right to vote, to receive dividends and other distributions, or to receive
any notice of, or to attend, meetings of stockholders or any other
proceedings of the Obligor, unless and to the extent converted into shares of
Common Stock in accordance with the terms hereof.
Section 7. If this Debenture is mutilated, lost, stolen or destroyed,
the Obligor shall execute and deliver, in exchange and substitution for and
upon cancellation of the 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 Obligor.
Section 8. Except as set forth in the Disclosure Schedule attached to
the Securities Purchase Agreement, no indebtedness of the Obligor is senior
to this Debenture in right of payment, whether with respect to interest,
damages or upon liquidation or dissolution or otherwise. Without the
Holder's consent, the Obligor will not and will not permit any of their
subsidiaries to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any indebtedness 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 there from that is senior in any respect to
the obligations of the Obligor under this Debenture.
Section 9. This Debenture shall be governed by and construed in
accordance with the laws of the State of New Jersey, without giving effect to
conflicts of laws thereof. Each of the parties consents to the jurisdiction
of the Superior Courts of the State of New Jersey sitting in Xxxxxx County,
New Jersey and the U.S. District Court for the District of New Jersey
sitting in Newark, New Jersey in connection with any dispute arising under
this Debenture and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non conveniens to the
bringing of any such proceeding in such jurisdictions.
Section 10. If the Obligor fails to strictly comply with the terms of
this Debenture, then the Obligor shall reimburse the Holder promptly for all
fees, costs and expenses, including, without limitation, attorneys' fees and
expenses incurred by the Holder in any action in connection with this
Debenture, including, without limitation, those incurred: (i) during any
workout, attempted workout, and/or in connection with the rendering of legal
advice as to the Holder's rights, remedies and obligations, (ii) collecting
any sums which become due to the Holder, (iii) defending or prosecuting any
proceeding or any counterclaim to any proceeding or appeal; or (iv) the
protection, preservation or enforcement of any rights or remedies of the
Holder.
Section 11. Any waiver by 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 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.
14
Section 12. 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 shall violate applicable laws governing usury, the applicable rate
of interest due hereunder shall automatically be lowered to equal the maximum
permitted rate of interest. The Obligor 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
Obligor 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 Obligor (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.
Section 13. 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.
Section 14. THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY
WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
AGREEMENT OR ANY TRANSACTION DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY.
THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES' ACCEPTANCE OF THIS
AGREEMENT.
[SIGNATURE PAGE FOLLOWS; REMAINDER OF PAGE INTENTIONALLY BLANK]
15
IN WITNESS WHEREOF, the Obligor has caused this Secured Convertible
Debenture to be duly executed by a duly authorized officer as of the date set
forth above.
COMPLIANCE SYSTEMS CORPORATION
By:_____________________________
Name: Xxxx Xxxxxxxxx
Title: Chairman
16
EXHIBIT A
NOTICE OF CONVERSION
(To be executed by the Holder in order to convert the Debenture)
TO:
The undersigned hereby irrevocably elects to convert $__________________
of the principal amount of the above Debenture into Shares of Common Stock
of Compliance Systems Corporation, according to the conditions stated
therein, as of the Conversion Date written below.
Conversion Date:
------------------------------------------------
Applicable Conversion Price:
------------------------------------------------
Signature:
------------------------------------------------
Name:
------------------------------------------------
Address:
------------------------------------------------
Amount to be converted: $
------------------------------------------------
Amount of Debenture
unconverted: $
------------------------------------------------
Conversion Price per share: $
------------------------------------------------
Number of shares of Common
Stock to be issued:
------------------------------------------------
Please issue the shares of
Common Stock in the
following name and to the
following address:
------------------------------------------------
Issue to:
------------------------------------------------
Authorized Signature:
------------------------------------------------
Name:
------------------------------------------------
Title:
------------------------------------------------
Phone Number:
------------------------------------------------
Broker DTC Participant Code:
------------------------------------------------
Account Number:
