EXHIBIT 4.2
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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: June 8, 2005
Original Conversion Price (subject to adjustment herein): $2.00
$_______________
SERIES A VARIABLE RATE SECURED CONVERTIBLE DEBENTURE
THIS SERIES A VARIABLE RATE SECURED CONVERTIBLE DEBENTURE is one of a
series of duly authorized and issued Series A Variable Rate Secured Convertible
Debentures of Western Power & Equipment Corp., a Delaware Company (the
"Company"), having a principal place of business at 0000 X.X. 00xx Xxxxxx,
Xxxxxxxxx, Xxxxxxxxxx 00000, designated as its Series A Variable Rate Secured
Convertible Debentures (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 $_______________, due June 7, 2010 (except
that, upon the Company timely honoring the Holder Optional Redemption pursuant
to Section 6(c) if exercised by the Holder, such date shall be June 7, 2011), 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
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meanings given to such terms in the Purchase Agreement, and (b) the following
terms shall have the following meanings:
"Alternate Consideration" shall have the meaning set forth in
Section 5(d).
"Base Conversion Price" shall have the meaning set forth in
Section 5(b).
"Business Day" means any day except Saturday, Sunday and any
day which shall be a federal legal holiday in the United States or a
day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"Buy-In" shall have the meaning set forth in Section 4(d)(v).
"Change of Control Transaction" means the occurrence after the
date hereof of any of (i) an acquisition after the date hereof by an
individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company,
by contract or otherwise) of in excess of 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) or (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.
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"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 (or, in the case of a redemption, the shares
issuable upon conversion in full of the redemption amount) to the
Holder would not violate the limitations set forth in Section 4(c) 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.
"Fundamental Transaction" shall have the meaning set forth in
Section 5(d).
"Holder Optional Redemption" shall have the meaning set forth
in Section 6(a).
"Holder Optional Redemption Amount" shall mean the sum of (i)
100% of the principal amount of this Debenture then outstanding, (ii)
accrued but unpaid interest thereon and (iii) all liquidated damages
and other amounts due in respect of this Debenture.
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"Holder Optional Redemption Notice" shall have the meaning set
forth in Section 6(a).
"Holder Optional Redemption Notice Date" shall have the
meaning set forth in Section 6(a).
"Interest Conversion Rate" means the lesser of (a) the
Conversion Price and (b) 90% of the lesser of (i) the arithmetic
average of the 20 VWAPs immediately prior to the applicable Interest
Payment Date or (ii) the arithmetic average of the 20 VWAPs immediately
prior to the date the applicable interest payment shares are issued and
delivered if after the Interest Payment Date.
"Interest Payment Date" 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 June
30, 2005 and each successive period as follows: the period beginning on
and including July 1 and ending on and including September 30; the
period beginning on and including October 1 and ending on and including
December 31; the period beginning on and including January 1 and ending
on and including March 31; and the period beginning on and including
April 1 and ending on and including June 30.
"Inventory Floor Plan Financing Agreement" means that certain
Wholesale Financing and Security Agreement, dated November 17, 1992,
between the Company, Case Corporation, and Case Credit Corporation, as
amended prior to the Original Issue Date, granting Case Corporation and
Case Credit Corporation a security interest on inventory purchased by
the Company for resale from Case Corporation.
"Late Fees" shall have the meaning set forth in Section 2(d).
"LIBOR" means, for each Interest Period (i) the six-month
London Interbank Offered Rate for deposits in U.S. dollars, as shown on
such the Trading Day immediately prior to the beginning of such
Interest Period in The Wall Street Journal (Eastern Edition) under the
caption "Money Rates - London Interbank Offered Rates (LIBOR)"; or (ii)
if The Wall Street Journal does not publish such rate, the offered
one-month rate for deposits in U.S. dollars which appears on the
Reuters Screen LIBO Page as of 10:00 a.m., New York time, the Trading
Day immediately prior to the beginning of such Interest Period,
provided that if at least two rates appear on the Reuters Screen LIBO
Page on any such Trading Day, the "LIBOR" for such day shall be the
arithmetic mean of such rates.
"Mandatory Default Amount" shall equal the sum of (i) the
greater of: (A) 120% of the principal amount of this Debenture to be
prepaid, plus all accrued and unpaid interest thereon, or (B) the
principal amount of this Debenture to be prepaid, plus all other
accrued and unpaid interest hereon, divided by the Conversion Price on
(x) the date the Mandatory Default Amount is demanded or otherwise due
or (y) the date the Mandatory Default Amount is paid in full, whichever
is less, multiplied by the VWAP on
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(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.
"Monthly Conversion Price" shall have the meaning set forth in
Section 6(b) hereof.
"Monthly Redemption" shall mean the redemption of this
Debenture pursuant to Section 6(b) hereof.
"Monthly Redemption Amount" shall mean $_____________(1);
provided, however, upon the Company timely honoring a Holder Optional
Redemption pursuant to Section 6(c), if exercised by the Holder, the
Monthly Redemption Amount thereafter shall be equal to the outstanding
principal amount of this Debenture at the time such Holder Optional
Redemption is honored divided by the number of months (based on the 1st
of the month) remaining until June 7, 2011.
"Monthly Redemption Date" means the 1st of each month,
commencing on the 7th month after the Original Issue Date and ending
upon the full redemption of this Debenture.
"Monthly Redemption Period" shall have the meaning set forth
in Section 6(b) hereof.
"Monthly Redemption Share Amount" shall have the meaning set
forth in Section 6(b) hereof.
"New York Courts" shall have the meaning set forth in Section
9(d).
"Notice of Conversion" shall have the meaning set forth in
Section 4(a).
"Original Issue Date" shall mean the date of the first
issuance of the Debentures regardless of the number of transfers of any
Debenture and regardless of the number of instruments which may be
issued to evidence such Debenture.
"Permitted Indebtedness" shall mean the individual and
collective reference to the following: (a) Indebtedness incurred
pursuant to the Series A Debentures and the Series B Debentures, (b)
Existing Indebtedness as it exists on the date of the Purchase
Agreement but excluding any Existing Indebtedness paid off at the
Closing, including the GE Facility and the APM Purchase Note, (c)
additional Indebtedness to Case Corporation pursuant to the Inventory
Floor Plan Financing Agreement, (d) additional Indebtedness incurred in
connection with the acquisition of capital assets and obligations under
sale-leaseback arrangements with respect to newly acquired or leased
assets to Persons, other than Case Corporation, up to, in the aggregate
at any one time outstanding, and together
__________________
(1) 1/54th of the original principal amount of this Debenture.
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with any then outstanding Existing Indebtedness, a maximum of
$3,200,000 from the Original Issue Date until the 18 month anniversary
of the Original Issue Date (with no such obligation (other than
Existing Indebtedness as it exists on the date of the Purchase
Agreement but excluding any Existing Indebtedness paid off at the
Closing, including the GE Facility) individually exceeding $100,000);
provided such aggregate maximum aggregate (subject still to the
$100,000 individual maximum amount) shall increase to $4,100,000 during
the period following such 18 month anniversary to the 30 month
anniversary of the Original Issue Date and to $5,000,000 after the 30
month anniversary of the Original Issue Date until this Debenture is no
longer outstanding and (e) Indebtedness incurred by the Company that
does not mature or require payments of principal prior to the four year
anniversary of the Original Issue Date and is made expressly
subordinate in right of payment to the Indebtedness evidenced by this
Xxxxxxxxx, as reflected in a written agreement acceptable to the Holder
and approved by the Holder in writing.
"Permitted Lien" shall mean the individual and collective
reference to the following: (a) Liens for taxes, assessments and other
governmental charges or levies not yet due or Liens for taxes,
assessments and other governmental charges or levies being contested in
good faith and by appropriate proceedings for which adequate reserves
(in the good faith judgment of the management of the Company) have been
established in accordance with GAAP; (b) any Liens incurred in
connection with Permitted Indebtedness under clause (d) in the
definition of Permitted Indebtedness above, provided that such liens
are not secured by assets of the Company or its Subsidiaries other than
the assets so acquired or leased; (c) 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 Company and its
consolidated Subsidiaries or (y) which are being contested in good
faith by appropriate proceedings, which proceedings have the effect of
preventing the forfeiture or sale of the property or asset subject to
such Lien; (d) Liens created in favor of the Purchasers pursuant to the
Security Documents and (e) Existing Liens as they exist on the date of
the Purchase Agreement, but excluding any Existing Liens on Existing
Indebtedness paid off at the Closing, including Liens on the GE
Facility.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"Pre-Redemption Conversion Shares" shall have the meaning set
forth in Section 6(b) hereof.
"Purchase Agreement" means the Securities Purchase Agreement,
dated as of June 8, 2005, to which the Company and the original Holder
are parties, as amended, modified or supplemented from time to time in
accordance with its terms.
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"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date of the Purchase Agreement, to which the
Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.
"Registration Statement" means a registration statement
meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Conversion
Shares and naming the Holder as a "selling stockholder" thereunder.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Subsidiary" shall have the meaning given to such term in the
Purchase Agreement.
"Trading Day" means a day on which the Common Stock is traded
on a Trading Market.
"Trading Market" means the following markets or exchanges on
which the Common Stock is listed or quoted for trading on the date in
question: the Nasdaq SmallCap Market, the American Stock Exchange, the
New York Stock Exchange, the Nasdaq National Market or the OTC Bulletin
Board.
"Transaction Documents" shall have the meaning set forth in
the Purchase Agreement.
"VWAP" means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Trading Market, the daily volume weighted average
price of the Common Stock for such date (or the nearest preceding date)
on the primary 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. EST to 4:02 p.m. Eastern Time) using the VAP
function; (b) if the Common Stock is not then listed or quoted on the
Trading Market 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 a nationally recognized-independent
appraiser selected in good faith by Purchasers holding a majority of
the principal amount of Debentures then outstanding.
Section 2. Interest.
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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 LIBOR for the applicable Interest Period plus
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6.0% or such lesser rate as shall be the highest rate permitted by
applicable law (the "Debenture Interest Rate"), payable quarterly on
April 1, July 1, October 1 and January 1, beginning on the first such
date after the Original Issue Date, on each Monthly Redemption Date (as
to that principal amount then being redeemed), on each Conversion Date
(as to that principal amount then being converted), on each Holder
Optional Redemption Date (as to that principal amount 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
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 20 Trading Days immediately prior to
the applicable Interest Payment Date ("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 and
(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").
Notwithstanding anything herein to the contrary, immediately after the
Company has redeemed, pursuant to a Holder Optional Redemption as
defined in Section 6(a) or a Monthly Redemption as set forth in Section
6(b), a principal amount of outstanding Debentures in one or more
redemptions, in the aggregate, equal to (i) greater than $10,000,000,
the Debenture Interest Rate shall be reduced to equal LIBOR for the
applicable Interest Period plus 5.25% and (ii) greater than
$20,000,000, the Debenture Interest Rate shall be reduced to equal
LIBOR for the applicable Interest Period plus 4.0%.
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. 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.
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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
Debentures (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 average 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.
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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.
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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.
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a) Voluntary Conversion. At any time after the Original
Issue Date until this Debenture is no longer outstanding, this
Debenture shall be convertible into shares of Common Stock at the
option of the Holder, in whole or in part at any time and from time to
time (subject to the limitations on conversion set forth in Section
4(c) hereof). The Holder shall effect conversions by delivering to the
Company the form of Notice of Conversion attached hereto as Annex A (a
"Notice of Conversion"), specifying therein the principal amount of
this Debenture to be converted and the date on which such conversion is
to be effected (a "Conversion Date"). If no Conversion Date is
specified in a Notice of Conversion, the Conversion Date shall be the
date that such Notice of Conversion is provided hereunder. To effect
conversions hereunder, the Holder shall not be required to physically
surrender this Debenture to the Company unless the entire principal
amount of this Debenture plus all accrued and unpaid interest thereon
has been so converted. Conversions hereunder shall have the effect of
lowering the outstanding principal amount of this Debenture in an
amount equal to the applicable conversion. The Holder and the Company
shall maintain records showing the principal amount converted and the
date of such conversions. The Company shall deliver any objection to
any Notice of Conversion within 1 Business Day of receipt of such
notice. In the event of any dispute or discrepancy, the records of the
Holder shall be controlling and determinative in the absence of
manifest error. The Holder and any assignee, by acceptance of this
Debenture, acknowledge and agree that, by reason of the provisions of
this paragraph, following conversion of a portion of this Debenture,
the unpaid and unconverted principal amount of this Debenture may be
less than the amount stated on the face hereof.
b) Conversion Price. The conversion price in effect on any
Conversion Date shall be equal to $2.00 (subject to adjustment
herein)(the "Conversion Price").
c) Xxxxxx's Restriction on Conversion. The Company shall
not effect any conversion of this Debenture, and the Holder shall not
have the right to convert any portion of this Debenture, pursuant to
Section 4(a) or otherwise, to the extent that after giving effect to
such conversion, the Holder (together with the Holder's affiliates), as
set forth on the applicable Notice of Conversion, would beneficially
own in excess of 4.99%
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of the number of shares of the Common Stock outstanding immediately
after giving effect to such conversion. For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by
the 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 portion of this
Debenture beneficially owned by the 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 the 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. To the extent that the limitation contained
in this section applies, the determination of whether this Debenture is
convertible (in relation to other securities owned by the Holder) and
of which a portion of this Debenture is convertible shall be in the
sole discretion of such Holder, absent manifest error by the Holder. To
ensure compliance with this restriction, the 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. For purposes of
this Section 4(c), in determining the number of outstanding shares of
Common Stock, the Holder may rely on the number of outstanding shares
of Common Stock as reflected in (x) the Company's most recent Form 10-Q
or Form 10-K, as the case may be, (y) a more recent public announcement
by the Company or (z) 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 the Holder, the
Company shall within two Trading Days confirm orally and in writing to
the 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 the Holder or
its affiliates since the date as of which such number of outstanding
shares of Common Stock was reported. The provisions of this Section
4(c) may be waived by the Holder, at the election of the Holder, upon
not less than 61 days' prior notice to the Company, and the provisions
of this Section 4(c) shall continue to apply until such 61st day (or
such later date, as determined by the Holder, as may be specified in
such notice of waiver).
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.
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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 best efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions.
iii. Failure to Deliver Certificates. If in the case of
any Notice of Conversion such certificate or certificates are not
delivered to or as directed by the applicable Holder by the fifth
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
12
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 a 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 the Holder's
right to pursue actual damages or declare an Event of Default pursuant
to Section 8 herein for the Company's failure to deliver Conversion
Shares within the period specified herein and such Holder shall have
the right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief. The exercise of any such rights shall not prohibit
the Holder from seeking to enforce damages pursuant to any other
Section hereof or under applicable law.
v. Compensation for Buy-In on Failure to Timely Deliver
Certificates Upon Conversion. In addition to any other rights available
to the Holder, if the Company fails for any reason to deliver to the
Holder such certificate or certificates pursuant to Section 4(d)(ii) by
the fifth Trading Day after the Conversion Date, and if after such
fifth Trading Day the Holder is required by its 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
13
Common Stock having a total purchase price of $11,000 to cover a Buy-In
with respect to an attempted conversion of this Debenture with respect
to which the actual sale price of the Conversion Shares at the time of
the sale (including brokerage commissions, if any) giving rise to such
purchase obligation was a total of $10,000 under clause (A) of the
immediately preceding sentence, the Company shall be required to pay
the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
Notwithstanding anything contained herein to the contrary, if 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, with particular reference to Section 4.12(b) thereof) 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
14
name other than that of the Holder and the Company shall not be
required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to
the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
Section 5. Certain Adjustments.
---------- --------------------
a) Stock Dividends and Stock Splits. If the Company, at
any time while this Debenture is outstanding: (A) pays a stock dividend
or otherwise makes a distribution or distributions on shares of its
Common Stock or any other equity or equity equivalent securities
payable in shares of Common Stock (which, for avoidance of doubt, shall
not include any shares of Common Stock issued by the Company pursuant
to this Debenture, including as interest thereon), (B) subdivides
outstanding shares of Common Stock into a larger number of shares, (C)
combines (including by way of reverse stock split) outstanding shares
of Common Stock into a smaller number of shares, or (D) issues by
reclassification of shares of the Common Stock any shares of capital
stock of the Company, then the Conversion Price shall be multiplied by
a fraction of which the numerator shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding
immediately before such event and of which the denominator shall be the
number of shares of Common Stock outstanding immediately after such
event. Any adjustment made pursuant to this Section shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and
shall become effective immediately after the effective date in the case
of a subdivision, combination or re-classification.
b) Subsequent Equity Sales. If the Company or any
Subsidiary of the Company 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 (i) if the Dilutive Issuance occurred on or prior to the 18 month
anniversary of the Original Issue Date, the Conversion Price shall be
reduced to equal the Base Conversion Price, (ii) if the Dilutive
Issuance occurred after the 18 month anniversary of the Original Issue
Date and on or prior to the 24 month anniversary of the Original Issue
Date, the Conversion Price as to 75% of the principal amount of this
Debenture then outstanding shall be reduced to equal the Base
Conversion
15
Price, (iii) if the Dilutive Issuance occurred after the 24 month
anniversary of the Original Issue Date and on or prior to the 30 month
anniversary of the Original Issue Date, the Conversion Price as to 50%
of the principal amount of this Debenture then outstanding shall be
reduced to equal the Base Conversion Price and (iv) if the Dilutive
Issuance occurred after the 30 month anniversary of the Original Issue
Date, the Conversion Price as to 25% of the principal amount of this
Debenture then outstanding shall be reduced to equal the Base
Conversion Price. Such adjustment shall be made whenever such Common
Stock or Common Stock Equivalents are issued and, for purposes of
calculating any such adjustments, any resets, amendments or other
adjustments to the securities issued in a Dilutive Issuance resulting
in a reduction of the Base Conversion Price and occurring subsequent to
the Dilutive Issuance shall be deemed to have occurred on the date of
the Dilutive Issuance. In the event portions of the principal amount of
this Debenture have different Conversion Prices as a result of this
Section 5(b), the Holder, in its sole discretion, shall determine which
portions of this Debenture and their respective Conversion Prices are
subject to any Notices of Conversions or redemptions hereunder.
Notwithstanding the foregoing, no adjustment will be made under this
Section 5(b) in respect of an Exempt Issuance. The Company shall notify
the Holder in writing, no later than the Business Day following the
issuance of any Common Stock or Common Stock Equivalents subject to
this section, indicating therein the applicable issuance price, or of
applicable reset price, exchange price, conversion price and other
pricing terms (such notice the "Dilutive Issuance Notice"). For
purposes of clarification, whether or not the Company provides a
Dilutive Issuance Notice pursuant to this Section 5(b), upon the
occurrence of any Dilutive Issuance, after the date of such Dilutive
Issuance the Holder is entitled to receive a number of Conversion
Shares based upon the Base Conversion Price regardless of whether the
Holder accurately refers to the Base Conversion Price in the Notice of
Conversion.
c) Pro Rata Distributions. If the Company, at any time
while this Debenture is outstanding, shall distribute to all holders of
Common Stock (and not to holders of the Debentures) 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.
16
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 (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
this Debenture 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 shall apply
similarly and equally to successive Fundamental Transactions and shall
be applied without regard to any limitations on the conversion or
redemption of this Debenture.
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.
17
f) Notice to the Holder.
i. Adjustment to Conversion Price. Whenever the
Conversion Price is adjusted pursuant to any of this Section 5, the
Company shall promptly mail to each Holder a notice setting forth the
Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment. If the Company issues
a variable rate security, despite the prohibition thereon in the
Purchase Agreement, the Company shall be deemed to have issued Common
Stock or Common Stock Equivalents at the lowest possible conversion or
exercise 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 the 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 Monthly Redemption.
---------- -------------------------------------------
18
a) Optional Redemption at Election of Holder. Subject to
the provisions of this Section 6, at any time after the 36-month
anniversary of the Original Issue Date, the Holder may deliver a notice
to the Company (a "Holder Optional Redemption Notice" and the date such
notice is deemed delivered hereunder, the "Holder Optional Redemption
Notice Date") of its election to require the Company to redeem up to
50% of the then outstanding principal amount of this Debenture, for an
amount, in cash, equal to the Holder Optional Redemption Amount (such
redemption, the "Holder Optional Redemption"). The Holder Optional
Redemption Amount is due in full on the 5th Trading Day immediately
following the Holder Optional Redemption Notice Date (the "Holder
Optional Redemption Date").
b) Monthly Redemption. On each Monthly Redemption Date,
the Company shall redeem the Monthly Redemption Amount plus accrued but
unpaid interest, the sum of all liquidated damages and any other
amounts then owing to such Holder in respect of this Debenture. The
Monthly Redemption Amount due on each Monthly Redemption Date shall be
paid in cash; provided, however, as to any Monthly Redemption and upon
25 Trading Days' prior written irrevocable notice ("Monthly Redemption
Notice"), in lieu of a cash redemption payment the Company may elect to
pay up to 50% of the Monthly Redemption Amount in Conversion Shares
(such dollar amount to be paid on a Monthly Redemption Date in
Conversion Shares, the "Monthly Redemption Share Amount") based on a
conversion price equal to the lesser of (i) the then Conversion Price
and (ii) 90% of the average of the 20 VWAPs during the 20 consecutive
Trading Days immediately prior to the applicable Monthly Redemption
Date (subject to adjustment for any stock dividend, stock split, stock
combination or other similar event affecting the Common Stock during
such 20 Trading Day period, such period, the "Monthly Redemption
Period" and such price, the "Monthly Conversion Price"); provided,
further, that the Company may not pay up to 50% of such Monthly
Redemption Amount in Conversion Shares unless (i) from the date the
Holder receives the Monthly Redemption Notice through and until the
date such Monthly Redemption is paid in full, the Equity Conditions,
unless waived in writing by the Holder, have been satisfied, (ii) the
daily trading volume for the Common Stock exceeds $100,000 per Trading
Day for the applicable Monthly Redemption Period and (iii) as to such
Monthly Redemption, prior to such Monthly Redemption Period (but not
more 5 Trading Days prior to the commencement of the Monthly Redemption
Period), the Company shall have delivered to the Holder's account with
The Depository Trust Company a number of shares of Common Stock to be
applied against such Monthly Redemption Share Amount equal to the
quotient of (x) the applicable Monthly Redemption Share Amount divided
by (y) the then Conversion Price (the "Pre-Redemption Conversion
Shares"). The Holder may convert, pursuant to Section 4(a), any
principal amount of this Debenture subject to a Monthly Redemption at
any time prior to the date that the Monthly Redemption Amount and all
amounts owing thereon are due and paid in full. Unless otherwise
indicated by the Holder in the applicable Notice of Conversion, any
principal amount of this Debenture converted during the applicable
Monthly Redemption Period until the date the Monthly Redemption Amount
is paid in full shall be first applied to the principal amount
19
subject to the Monthly Redemption Amount payable in cash and then to
the Monthly Redemption Share Amount. Any principal amount of this
Debenture converted during the applicable Monthly Redemption Period in
excess of the Monthly Redemption Amount shall be applied against the
last principal amount of this Debenture scheduled to be redeemed
hereunder, in reverse time order from the Maturity Date; provided,
however, if any such conversion is applied to such Monthly Redemption
Amount, the Pre-Redemption Conversion Shares, if any were issued in
connection with such Monthly Redemption or were not already applied to
such conversions, shall be first applied against such conversion. The
Company covenants and agrees that it will honor all Notice of
Conversions tendered up until such amounts are paid in full. The
Company's determination to pay a Monthly Redemption in cash, shares of
Common Stock or a combination thereof shall be applied ratably to all
holders of the Debentures based on their (or their predecessor's)
initial purchases of Debentures pursuant to the Purchase Agreement.
Within 1 Trading Day of the Company notifying the Holder of its
election to issue the Holder Conversion Shares in lieu of a cash
redemption payment hereunder, the Company shall file with the
Commission a prospectus supplement to the Registration Statement
pursuant to Rule 424 under the Securities Act disclosing the material
terms of the Company's election make such payments in shares.
c) Redemption Procedure. The payment of cash and/or
issuance of Common Stock (other than the Pre-Redemption Conversion
Shares), as the case may be, pursuant to a Monthly Redemption or the
payment of cash pursuant to a Holder Optional Redemption shall be made
on the Monthly Redemption Date or the Holder Optional Redemption Date,
as applicable. The aggregate number of Conversion Shares otherwise
issuable to the Holder pursuant to a Monthly Redemption on a Monthly
Redemption Date shall be reduced by the number of Pre-Redemption
Conversion Shares issued to the Holder in connection with such Monthly
Redemption (adjusted appropriately for any such shares applied to
conversion during the Monthly Redemption Period). If any portion of the
cash payment and/or issuance of Common Stock, as the case may be, for a
Monthly Redemption or the payment of cash pursuant to a Holder Optional
Redemption, as applicable, 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 Monthly Redemption Amount, or the
Holder Optional Redemption Amount, as applicable, plus all amounts
owing thereon is paid in full. Alternatively, if any portion of the
Monthly Redemption Amount or the Holder Optional Redemption Amount, as
applicable, remains unpaid after such date, the Holder 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 the Holder's right to exercise a Holder
Optional Redemption in the future shall be restored. The Holder may
elect to convert the outstanding principal amount of this 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. If any Pre-Redemption Conversion Shares are
issued to the Holder in connection with a Monthly Redemption and are
not applied against either the Monthly Redemption Amount
20
or against optional conversions during the Monthly Redemption Period,
then the Holder shall promptly return such excess shares to the
Company.
Section 7. Negative Covenants. So long as any portion of this
Debenture is outstanding, the Company will not and will not permit any of its
Subsidiaries to directly or indirectly:
a) except in connection with Permitted Indebtedness, enter
into, create, incur, assume, guarantee or suffer to exist any
Indebtedness;
b) except in connection with Permitted Liens, enter into,
create, incur, assume or suffer to exist any Lien;
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.
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 15 calendar 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) 10
21
calendar days after notice of such default sent by the Holder or by any
other Holder and (B)10 Trading Days after the Company shall become or
should have become aware of such failure;
iii. a default or event of default (subject to any
grace or cure period provided for in the applicable agreement, document
or instrument) shall occur under (A) any of the Transaction Documents,
or (B) any other material agreement, lease, document or instrument to
which the Company or any Subsidiary of the Company is bound;
iv. any representation or warranty made herein, in any
other Transaction Documents, in any written statement pursuant hereto
or thereto, or in any other report, financial statement or certificate
made or delivered to the Holder or any other holder of Debentures shall
be untrue or incorrect in any material respect as of the date when made
or deemed made;
v. if (i) the Company or any of its material
Subsidiaries shall commence a case, as debtor, or there shall be
commenced against the Company or any material Subsidiary of the
Company, a case under any applicable bankruptcy or insolvency laws as
now or hereafter in effect or any successor thereto, or the Company or
any such material Subsidiary of the Company 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 such Subsidiary of the Company or (ii) there is
commenced against the Company or any material Subsidiary of the Company
any such bankruptcy, insolvency or other proceeding which remains
undismissed for a period of 60 days; or (iii) the Company or any
material Subsidiary of the Company 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 material Subsidiary of the Company 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 material Subsidiary of the
Company 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 material Subsidiary of the Company 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 of the Company 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 material Subsidiary of the
Company for the purpose of effecting any of the foregoing;
22
vi. the Company or any Subsidiary of the Company 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 $300,000, 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 15 consecutive Trading Days or 25
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 15
consecutive Trading Days during any 12 month period relating to such an
event; or
xi. the Company shall fail for any reason to deliver
certificates to a Holder prior to the fifth Trading Day after a
Conversion Date pursuant to and in accordance with Section 4(d) or the
Company shall provide notice to the Holder,
23
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.
b) Remedies Upon Event of Default. If any Event of Default
occurs, the full principal amount of this Debenture, together with
interest and other amounts owing in respect thereof, to the date of
acceleration shall become, at the Holder's election, immediately due
and payable in cash. The aggregate amount payable upon an Event of
Default shall be equal to the Mandatory Default Amount. Commencing 5
days after the occurrence of any Event of Default that results in the
eventual acceleration of this Debenture, the interest rate on this
Debenture shall accrue at the rate of 18% per annum, or such lower
maximum amount of interest permitted to be charged under applicable
law. Upon the payment in full of the Mandatory Default Amount on this
entire Debenture the Holder shall promptly surrender this Debenture to
or as directed by the Company. The Holder need not provide and the
Company hereby waives any presentment, demand, protest or other notice
of any kind, and the Holder may immediately and without expiration of
any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable law.
Such declaration may be rescinded and annulled by Xxxxxx at any time
prior to payment hereunder and the Holder shall have all rights as a
Debenture holder until such time, if any, as the full payment under
this Section shall have been received by it. No such rescission or
annulment shall affect any subsequent Event of Default or impair any
right consequent thereon.
Section 9. Miscellaneous.
---------- --------------
a) Notices. Any and all notices or other communications or
deliveries to be provided by the Holder hereunder, including, without
limitation, any Notice of 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: CHIEF EXECUTIVE OFFICER
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
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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) Security Interest. This Debenture is a direct debt
obligation of the Company and pursuant to the Security Agreement shall
be secured by a perfected security interest in all of the assets of the
Company for the benefit of the holders of the Series A Debentures and
Series B Debentures.
d) 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.
e) 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
25
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.
f) 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.
g) 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.
h) 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.
i) 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.
*********************
26
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.
WESTERN POWER & EQUIPMENT CORP.
By: ___________________________
Name:
Title:
27
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the Variable
Rate Secured Convertible Debenture of Western Power & Equipment Corp., a
Delaware corporation (the "Company"), due on June 7, 2010, into shares of common
stock, par value $0.001 per share (the "Common Stock"), of the Company according
to the conditions hereof, as of the date written below. If shares are to be
issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect thereto and is delivering herewith
such certificates and opinions as reasonably requested by the Company in
accordance therewith. No fee will be charged to the holder for any conversion,
except for such transfer taxes, if any.
By the delivery of this Notice of Conversion the undersigned represents
and warrants to the Company that its ownership of the Common Stock does not
exceed the amounts determined in accordance with Section 13(d) of the Exchange
Act, specified under Section 4 of this Debenture.
The undersigned agrees to comply with the prospectus delivery
requirements under the applicable securities laws in connection with any
transfer of the aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debenture to be Converted:
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on Account of
Conversion at Issue.
Conversion Price: $_________
Number of shares of Common Stock to be issued:
Signature:
Name:
Address:
28
SCHEDULE 1
CONVERSION SCHEDULE
The Variable Rate Secured Convertible Debenture due on June 7, 2010, in the
aggregate principal amount of $____________ issued by Western Power & Equipment
Corp. This Conversion Schedule reflects conversions made under Section 4 of the
above referenced Debenture.
Dated:
==================== ================ =================== ================
Aggregate Principal
Amount Remaining
Subsequent to
Date of Conversion Conversion
(or for first entry, Amount of (or original
Original Issue Date) Conversion Principal Amount) Company Attest
==================== ================ =================== ================
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