EXHIBIT 4.1
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
Original Issue Date: October 27, 2005
Original Conversion Price (subject to adjustment herein): $4.00
$1,800,000
10% CONVERTIBLE SECURED DEBENTURE
DUE APRIL 27, 2007
THIS 10% CONVERTIBLE SECURED DEBENTURE is one of a series of duly
authorized and issued 10% Convertible Secured Debentures of Velocity Asset
Management Inc., a Delaware corporation, having a principal place of business at
00 X. Xxxxxxxx Xxxxxxxx, Xxxxxx, XX 00000 (the "Company") and X. Xxxxxx Inc., a
New Jersey corporation, having a principal place of business at 0000 Xxxxx 000X,
Xxxx, Xxx Xxxxxx 00000 (the "JHolder", and the Company and the JHolder, each a
"Seller" and collectively the "Seller"), designated as, to each Seller, its 10%
Convertible Secured Debenture, due April 27, 2007 (this debenture, the
"Debenture" and collectively with the other such series of debentures, the
"Debentures").
FOR VALUE RECEIVED, the Sellers, jointly and severally, promise to pay
to DKR Soundshore Oasis Holding Fund Ltd. or its registered assigns (the
"Holder"), or shall have paid pursuant to the terms hereunder, the principal sum
of $1,800,000 by April 27, 2007, or such earlier date as this Debenture is
required or permitted to be repaid as provided hereunder (the "Maturity Date"),
and to pay interest to the Holder on the aggregate unconverted and then
outstanding principal amount of this Debenture in accordance with the provisions
hereof. This Debenture is subject to the following additional provisions:
Section 1. Definitions. For the purposes hereof, in addition to the
terms defined elsewhere in this Debenture: (a) capitalized terms not otherwise
defined herein have the meanings given to such terms in the Purchase Agreement,
and (b) the following terms shall have the following meanings:
"Alternate Consideration" shall have the meaning set forth in
Section 5(d).
"Asset Sale" means a sale by the Sellers of any asset or
Collateral (as defined in the Security Agreement), either real
property, personal property or otherwise, including, but not limited
to, the assets listed on Schedule 2 hereto, including receipt of
payment on any obligations owed to the Sellers on such assets (by way
of example, if a Seller receives payment on a third party obligation,
whether debt or otherwise owed to such Seller, such payment for
purposes of this Debenture shall constitute an Asset Sale).
"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 Sellers,
by contract or otherwise) of in excess of 33% of the voting securities
of the Company, or (ii) the Sellers merge into or consolidate with any
other Person, or any Person merges into or consolidates with a Seller
and, after giving effect to such transaction, the stockholders of the
applicable Seller immediately prior to such transaction own less than
66% of the aggregate voting power of the applicable Seller or the
successor entity of such transaction, or (iii) either Seller sells or
transfers its assets, as an entirety or substantially as an entirety,
to another Person and the stockholders of the Company immediately prior
to such transaction own less than 66% of the aggregate voting power of
the acquiring entity immediately after the transaction, (iv) a
replacement at one time or within a three year period of more than
one-half of the members of the Seller'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 a Seller of an agreement to which the Company
is a party or by which it is bound, providing for any of the events set
forth above in (i) through (iv).
"Common Stock" means the common stock, par value $.001 per
share, of the Company and stock of any other class of securities into
which such securities may hereafter have been reclassified or changed
into.
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"Conversion Date" shall have the meaning set forth in Section
4(a).
"Conversion Price" shall have the meaning set forth in Section
4(b).
"Conversion Shares" means the shares of Common Stock issuable
upon conversion of this Debenture or as payment of interest in
accordance with the terms.
"Debenture Register" shall have the meaning set forth in
Section 2(c).
"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" unless waived by a Holder as to a
particular event (which waiver shall apply only as to such event and
only as to such Holder) as of the date of such event, 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).
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"Interest Conversion Rate" means the lesser of 90% of (a) the
average of the 10 Closing Prices immediately prior to the applicable
Interest Payment Date and (b) the average of the 10 Closing Prices
immediately prior to the date the applicable interest payment shares
are issued and delivered if after the Interest Payment Date.
"Interest Conversion Shares" shall have the meaning set forth
in Section 2(a).
"Interest Notice Period" shall have the meaning set forth in
Section 2(a).
"Interest Payment Date" shall have the meaning set forth in
Section 2(a).
"Interest Share Amount" shall have the meaning set forth in
Section 2(a).
"Late Fees" shall have the meaning set forth in Section 2(d).
"Mandatory Default Amount" shall equal the sum of (i) the
greater of: (A) 130% of the principal amount of this Debenture to be
prepaid, plus all accrued and unpaid interest thereon, or (B) the
principal amount of this Debenture to be prepaid, plus all other
accrued and unpaid interest hereon, divided by the Conversion Price on
(x) the date the Mandatory Default Amount is demanded or otherwise due
or (y) the date the Mandatory Default Amount is paid in full, whichever
is less, multiplied by the Closing 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 greater, and
(ii) all other amounts, costs, expenses and liquidated damages due in
respect of this Debenture.
"Monthly Conversion Period" shall have the meaning set forth
in Section 6(b) hereof.
"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, as to a Monthly
Redemption, $150,000.
"Monthly Redemption Date" means the 1st of each month,
commencing on April 1, 2006 and ending upon the full redemption of this
Debenture.
"Monthly Redemption Notice" shall have the meaning set forth
in Section 6(b) hereof.
"Monthly Redemption Period" shall have the meaning set forth
in Section 6(b) hereof.
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"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).
"Optional Redemption" shall have the meaning set forth in
Section 6(a).
"Optional Redemption Amount" shall mean the sum of (i) 100% of
the principal amount of the Debenture then outstanding, (ii) accrued
but unpaid interest and (iii) all liquidated damages and other amounts
due in respect of the Debenture.
"Optional Redemption Date" shall have the meaning set forth in
Section 6(a).
"Optional Redemption Notice" shall have the meaning set forth
in Section 6(a).
"Optional Redemption Notice Date" shall have the meaning set
forth in Section 6(a).
"Original Issue Date" shall mean the date of the first
issuance of the Debentures regardless of the number of transfers of any
Debenture and regardless of the number of instruments which may be
issued to evidence such Debenture.
"Permitted Indebtedness" shall mean (a) the Indebtedness
existing on the Original Issue Date and set forth on Schedule 3.1(gg)
attached to the Purchase Agreement, (b) lease obligations and purchase
money Indebtedness of up to $2,000,000, in the aggregate, incurred in
connection with the acquisition of capital assets and lease obligations
with respect to newly acquired or leased assets and (c) Indebtedness
incurred after the Original Issue Date pursuant to which the holders
thereof shall have entered into a written subordination agreement
satisfactory to the Holder, which Indebtedness shall have a maturity
date after the Maturity Date hereof and shall have such other terms and
conditions as are reasonably satisfactory to the Holder.
"Permitted Lien" shall mean the individual and collective
reference to the following: (a) Liens for taxes, assessments and other
governmental charges (including, without limitation, in connection with
workers' compensation and unemployment insurance) or levies not yet due
or Liens for taxes, assessments and other governmental charges or
levies being contested in good faith and by appropriate proceedings for
which adequate reserves (in the good faith judgment of the management
of the Sellers) have been established in accordance with GAAP, (b)
Liens imposed by law which were incurred in the ordinary course of
business, such as carriers', warehousemen's and mechanics' Liens,
statutory landlords' Liens, and other similar Liens arising in the
ordinary course of business, and (x) which do not individually or in
the aggregate materially detract from the value of such property or
assets or materially impair the use thereof in the operation of the
business of the Sellers and its consolidated Subsidiaries or (y) which
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are being contested in good faith by appropriate proceedings, which
proceedings have the effect of preventing the forfeiture or sale of the
property or asset subject to such Lien, (c) Liens incurred in
connection with Permitted Indebtedness under clause (b) thereunder
provided that such Liens are not secured by assets of the Sellers or
its Subsidiaries other than the assets so acquired or leased and (d)
Liens incurred in connection with Permitted Indebtedness under clause
(a) thereunder.
"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(a) hereof.
"Purchase Agreement" means the Securities Purchase Agreement,
dated as of October 27, 2005, to which the Sellers and the original
Holder are parties, as amended, modified or supplemented from time to
time in accordance with its terms.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date of the Purchase Agreement, to which the
Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.
"Registration Statement" means a registration statement
meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Conversion
Shares and naming the Holder as a "selling stockholder" thereunder.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Subsidiary" shall have the meaning given to such term in the
Purchase Agreement.
"Trading Day" means a day on which the Common Stock is traded
on a Trading Market.
"Trading Market" means any of the following markets or
exchanges on which the Common Stock is listed or quoted for trading on
the date in question: the Nasdaq Capital 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.
Section 2. Interest.
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a) Payment of Interest in Cash or Kind. The Sellers shall pay
interest to the Holder on the aggregate unconverted and then outstanding
principal amount of this Debenture at the rate of 10% per annum, payable monthly
on first day of each calendar month, 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 Optional Redemption Date (as to the
principal amount in full 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, payment in shares of Common Stock may only occur if (i)
during the 10 Trading Days immediately prior to the applicable Interest Payment
Date (the "Interest Notice Period") and through and including the date such
shares of Common Stock are issued to the Holder all of the Equity Conditions,
unless waived by the Holder in writing, have been met and the Company shall have
given the Holder notice in accordance with the notice requirements set forth
below 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").
b) Company's Election to Pay Interest in Kind. Subject to the
terms and conditions herein, the decision whether to pay interest hereunder in
shares of Common Stock or cash shall be at the discretion of the Company. Prior
to the commencement of an Interest Notice Period, the Company shall provide the
Holder with written notice of its election to pay interest hereunder on the
applicable Interest Payment Date either in cash, shares of Common Stock or a
combination thereof (the Company may indicate in such notice that the election
contained in such notice shall continue for later periods until revised) and the
Interest Share Amount as to the applicable Interest Payment Date. During any
Interest Notice Period, the Company's election (whether specific to an Interest
Payment Date or continuous) shall be irrevocable as to such Interest Payment
Date. Subject to the aforementioned conditions, failure to timely provide such
written notice shall be deemed an election by the Company to pay the interest on
such Interest Payment Date in cash. At any time the Company delivers a notice to
the Holder of its election to pay the interest in shares of Common Stock, the
Company shall file a prospectus supplement pursuant to Rule 424 or shall file a
Current Report on Form 8-K disclosing such election. The aggregate number of
shares of Common Stock otherwise issuable to the Holder on an Interest Payment
Date shall be reduced by the number of Interest Conversion Shares previously
issued to the Holder in connection with such Interest Payment Date.
c) Interest Calculations. Interest shall be calculated on the
basis of a 360-day year and shall accrue daily commencing on the Original Issue
Date until payment in full of the principal sum, together with all accrued and
unpaid interest and other amounts which may become due hereunder, has been made.
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Payment of interest in shares of Common Stock (other than the Interest
Conversion Shares issued prior to an Interest Notice Period) shall otherwise
occur pursuant to Section 4(d)(ii) and only for purposes of the payment of
interest in shares, the Interest Payment Date shall be deemed the Conversion
Date. Interest shall cease to accrue with respect to any principal amount
converted, provided that the Company in fact delivers the Conversion Shares
within the time period required by Section 4(d)(ii). Interest hereunder will be
paid to the Person in whose name this Debenture is registered on the records of
the Company regarding registration and transfers of this Debenture (the
"Debenture Register"). Except as otherwise provided herein, if at any time the
Company pays interest partially in cash and partially in shares of Common Stock
to the holders of the Debentures, then such payment shall be distributed ratably
among the holders of the Debentures based on their (or their predecessor's) then
principal amount 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 the Sellers, in lieu
of delivering either shares of Common Stock pursuant to this Section 2 or paying
the regularly scheduled cash interest payment, shall deliver, within three
Trading Days of each applicable Interest Payment Date, an amount in cash equal
to the product of the number of shares of Common Stock otherwise deliverable to
the Holder in connection with the payment of interest due on such Interest
Payment Date and the highest VWAP during the period commencing on the Interest
Payment Date and ending on the Trading Day prior to the date such payment is
made. If any Interest Conversion Shares are issued to the Holder in connection
with an Interest Payment Date and are not applied against an Interest Share
Amount, then the Holder shall promptly return such excess shares to the Company.
e) Prepayment. Except as otherwise set forth in this Debenture
including, but not limited to, Section 6(a), the Sellers 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.
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
8
with the Purchase Agreement and applicable federal and state securities laws and
regulations.
c) Reliance on Debenture Register. Prior to due presentment to
the Sellers for transfer of this Debenture, the Sellers and any agent of the
Sellers 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 Sellers 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(d) 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 received 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 promptly, but in no event later than 2 Business Days after
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.
Subject to the Holder's right to rescind pursuant to Section 4(d)(iii), Notices
of Conversion shall be irrevocable.
b) Conversion Price. The conversion price in effect on any
Conversion Date shall be equal to (i) $4.00 from October 27, 2005 until March
31, 2006 and (ii) on and after April 1, 2006, $2.525 (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% of the number of shares of
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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)(ii),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder. To the extent
that the limitation contained in this section 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. 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. In addition,
a determination as to any group status as contemplated above shall be determined
in accordance with Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder. For purposes of this Section 4(c)(ii), 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-QSB or Form 10-KSB, 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). The provisions of this paragraph shall be implemented in a manner
otherwise than in strict conformity with the terms of this Section 4(c) to
correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended 4.99% beneficial ownership limitation herein
contained or to make changes or supplements necessary or desirable to properly
give effect to such 4.99% limitation. The limitations contained in this
paragraph shall apply to a successor holder of this Debenture. The holders of
Common Stock of the Company shall be third party beneficiaries of this Section
4(c) and the Company may not waive this Section 4(c) without the consent of
holders of a majority of its Common Stock.
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d) Mechanics of Conversion
-----------------------
i. Conversion Shares Issuable Upon Conversion of
Principal Amount. The number of shares of Common Stock issuable upon a
conversion hereunder shall be determined by the quotient obtained by
dividing (x) the outstanding principal amount of this Debenture to be
converted by (y) the Conversion Price.
ii. Delivery of Certificate Upon Conversion. Not later
than five 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 10 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 Sellers, jointly and
severally, shall pay to such Holder, in cash, as liquidated damages and
not as a penalty, for each $1000 of principal amount being converted,
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$10 per Trading Day (increasing to $20 per Trading Day after 5 Trading
Days after such damages begin to accrue) for each Trading Day after
such fifth Trading Day until such certificates are delivered. The
Company's obligations to issue and deliver the Conversion Shares upon
conversion of this Debenture in accordance with the terms hereof are
absolute and unconditional, irrespective of any action or inaction by
the Holder to enforce the same, any waiver or consent with respect to
any provision hereof, the recovery of any judgment against any Person
or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach
by the Holder or any other Person of any obligation to the Company or
any violation or alleged violation of law by the Holder or any other
person, and irrespective of any other circumstance which might
otherwise limit such obligation of the Company to the Holder in
connection with the issuance of such Conversion Shares; provided,
however, such delivery shall not operate as a waiver by the Company of
any such action the Company may have against the Holder. In the event
the Holder of this Debenture shall elect to convert any or all of the
outstanding principal amount hereof, the Company may not refuse
conversion based on any claim that the Holder or any one associated or
affiliated with the Holder has been engaged in any violation of law,
agreement or for any other reason, unless, an injunction from a court,
on notice, restraining and or enjoining conversion of all or part of
this Debenture shall have been sought and obtained and the Company
posts a surety bond for the benefit of the Holder in the amount of 150%
of the principal amount of this Debenture outstanding, which is subject
to the injunction, which bond shall remain in effect until the
completion of arbitration/litigation of the dispute and the proceeds of
which shall be payable to such Holder to the extent it obtains
judgment. In the absence of an injunction precluding the same, the
Company shall issue Conversion Shares or, if applicable, cash, upon a
properly noticed conversion. Nothing herein shall limit a Xxxxxx's
right to pursue actual damages or declare an Event of Default pursuant
to Section 8 herein for the Company's failure to deliver Conversion
Shares within the period specified herein and such Holder shall have
the right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief. The exercise of any such rights shall not prohibit
the Holder from seeking to enforce damages pursuant to any other
Section hereof or under applicable law.
v. Compensation for Buy-In on Failure to Timely Deliver
Certificates Upon Conversion. In addition to any other rights available
to the Holder, if the Company fails for any reason to deliver to the
Holder such certificate or certificates pursuant to Section 4(d)(ii) by
the fifth Trading Day after the Conversion Date, and if after such
third Trading Day the Holder is required by its brokerage firm to
purchase (in an open market transaction or otherwise) Common Stock to
deliver in satisfaction of a sale by such Holder of the Conversion
Shares which the Holder anticipated receiving upon such conversion (a
"Buy-In"), then the Sellers, jointly and severally, shall (A) pay in
cash to the Holder (in addition to any remedies available to or elected
12
by the Holder) the amount by which (x) the Holder's total purchase
price (including brokerage commissions, if any) for the Common Stock so
purchased exceeds (y) the product of (1) the aggregate number of shares
of Common Stock that such Holder anticipated receiving from the
conversion at issue multiplied by (2) the actual sale price of the
Common Stock at the time of the sale (including brokerage commissions,
if any) giving rise to such purchase obligation and (B) at the option
of the Holder, either reissue (if surrendered) this Debenture in a
principal amount equal to the principal amount of the attempted
conversion or deliver to the Holder the number of shares of Common
Stock that would have been issued had the Company timely complied with
its delivery requirements under Section 4(d)(ii). For example, if the
Holder purchases Common Stock having a total purchase price of $11,000
to cover a Buy-In with respect to an attempted conversion of this
Debenture with respect to which the actual sale price of the Conversion
Shares at the time of the sale (including brokerage commissions, if
any) giving rise to such purchase obligation was a total of $10,000
under clause (A) of the immediately preceding sentence, the Sellers
shall be required to pay the Holder $1,000. The Holder shall provide
the Sellers 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 a payment in
respect of a Buy-In for the failure to timely deliver certificates
hereunder and the Company timely pays in full such amount, the Company
shall not be required to pay such Holder partial 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 any additional requirements of the Company as to the
reservation of such shares and the terms and conditions set forth in
the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5) upon the conversion of the
outstanding principal amount of this Debenture and payment of interest
hereunder. The Company covenants that all shares of Common Stock that
shall be so issuable shall, upon issue, be duly and validly authorized,
issued and fully paid, nonassessable and, if the Registration Statement
is then effective under the Securities Act, registered for public sale
in accordance with such Registration Statement.
vii. Fractional Shares. Upon a conversion hereunder the
Company shall not be required to issue stock certificates representing
fractions of shares of the Common Stock, but may if otherwise
permitted, make a cash payment in respect of any final fraction of a
13
share based on the VWAP at such time. If the Company elects not, or is
unable, to make such a cash payment, the Holder shall be entitled to
receive, in lieu of the final fraction of a share, one whole share of
Common Stock.
viii. Transfer Taxes. The issuance of certificates for
shares of the Common Stock on conversion of this Debenture shall be
made without charge to the Holder hereof for any documentary stamp or
similar taxes that may be payable in respect of the issue or delivery
of such certificate, provided that the Company shall not be required to
pay any tax that may be payable in respect of any transfer involved in
the issuance and delivery of any such certificate upon conversion in a
name other than that of the Holder of this Debenture so converted and
the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof
shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been
paid.
Section 5. Certain Adjustments.
--------- -------------------
a) Stock Dividends and Stock Splits. If the Company, at any time
while this Debenture is outstanding: (A) pays a stock dividend or otherwise
makes a distribution or distributions on shares of its Common Stock or any other
equity or equity equivalent securities payable in shares of Common Stock (which,
for avoidance of doubt, shall not include any shares of Common Stock issued by
the Company pursuant to this Debenture, including as interest thereon), (B)
subdivides outstanding shares of Common Stock into a larger number of shares,
(C) combines (including by way of reverse stock split) outstanding shares of
Common Stock into a smaller number of shares, or (D) issues by reclassification
of shares of the Common Stock any shares of capital stock of the Company, then
the Conversion Price shall be multiplied by a fraction of which the numerator
shall be the number of shares of Common Stock (excluding treasury shares, if
any) outstanding immediately before such event and of which the denominator
shall be the number of shares of Common Stock outstanding immediately after such
event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
b) Subsequent Equity Sales. If the Company or any Subsidiary
thereof, as applicable, at any time while this Debenture is outstanding, shall
offer, sell, grant any option to purchase or offer, sell or grant any right to
reprice its securities, or otherwise dispose of or issue (or announce any offer,
sale, grant or any option to purchase or other disposition) any Common Stock or
Common Stock Equivalents entitling any Person to 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
14
Stock Equivalents so issued shall at any time, whether by operation of purchase
price adjustments, reset provisions, floating conversion, exercise or exchange
prices or otherwise, or due to warrants, options or rights per share which is
issued in connection with such issuance, be entitled to receive shares of Common
Stock at an effective price per share which is less than the Conversion Price,
such issuance shall be deemed to have occurred for less than the Conversion
Price on such date of the Dilutive Issuance), then the Conversion Price shall be
reduced to equal the Base Conversion Price. Such adjustment shall be made
whenever such Common Stock or Common Stock Equivalents are issued.
Notwithstanding the foregoing, no adjustment will be made under this Section
5(b) in respect of (i) an Exempt Issuance or (ii) the Secondary Offering if this
Debenture is subject to an Optional Redemption Notice delivered to the Holder
within 5 Trading Days of the Closing of the Secondary Offering; provided,
however, if this Debenture is not redeemed in full on the Optional Redemption
Date, an adjustment shall be made under this Section 5(b) in respect of the
Secondary Offering. The Company shall notify the Holder in writing, no later
than the Business Day following the issuance of any Common Stock or Common Stock
Equivalents subject to this section, indicating therein the applicable issuance
price, or of applicable reset price, exchange price, conversion price and other
pricing terms (such notice the "Dilutive Issuance Notice"). For purposes of
clarification, whether or not the Company provides a Dilutive Issuance Notice
pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance,
after the date of such Dilutive Issuance the Holder is entitled to receive a
number of Conversion Shares based upon the Base Conversion Price regardless of
whether the Holder accurately refers to the Base Conversion Price in the Notice
of Conversion.
c) Pro Rata Distributions. If the Company, at any time while this
Debenture is outstanding, shall distribute to all holders of Common Stock (and
not to the holders of the Debenture) evidences of its indebtedness or assets
(including cash and cash dividends) or rights or warrants to subscribe for or
purchase any security, then in each such case the Conversion Price shall be
adjusted by multiplying such Conversion Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the VWAP determined
as of the record date mentioned above, and of which the numerator shall be such
VWAP on such record date less the then fair market value at such record date of
the portion of such assets or evidence of indebtedness so distributed applicable
to one outstanding share of the Common Stock as determined by the Board of
Directors in good faith. In either case the adjustments shall be described in a
statement provided to the Holder of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above.
d) Fundamental Transaction. If, at any time while this Debenture
is outstanding, (A) the Company effects any merger or consolidation of the
Company with or into another Person, (B) the Company effects any sale of all or
substantially all of its assets in one or a series of related transactions, (C)
15
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 a Seller or surviving entity in such
Fundamental Transaction shall issue to the Holder a new debenture consistent
with the foregoing provisions and evidencing the Holder's right to convert such
debenture into Alternate Consideration. The terms of any agreement pursuant to
which a Fundamental Transaction is effected shall include terms requiring any
such successor or surviving entity to comply with the provisions of this
paragraph (d) and insuring that this Debenture (or any such replacement
security) will be similarly adjusted upon any subsequent transaction analogous
to a Fundamental Transaction.
e) Calculations. All calculations under this Section 5 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
For purposes of this Section 5, the number of shares of Common Stock deemed to
be issued and outstanding as of a given date shall be the sum of the number of
shares of Common Stock (excluding treasury shares, if any) issued and
outstanding.
f) Notice to the Holder.
--------------------
i. Adjustment to Conversion Price. Whenever the
Conversion Price is adjusted pursuant to any of this Section 5, the
Company shall promptly mail to each Holder a notice setting forth the
Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment. If the Company issues
a variable rate security, despite the prohibition thereon in the
Purchase Agreement, the Company shall be deemed to have issued Common
16
Stock or Common Stock Equivalents at the lowest possible conversion or
exercise price at which such securities may be converted or exercised
in the case of a Variable Rate Transaction (as defined in the Purchase
Agreement).
ii. Notice to Allow Conversion by Xxxxxx. If (A) the
Company shall declare a dividend (or any other distribution) on the
Common Stock; (B) the Company shall declare a special nonrecurring cash
dividend on or a redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock rights or
warrants to subscribe for or purchase any shares of capital stock of
any class or of any rights; (D) the approval of any stockholders of the
Company shall be required in connection with any reclassification of
the Common Stock, any consolidation or merger to which the Company is a
party, any sale or transfer of all or substantially all of the assets
of the Company, of any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or property; (E) the
Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company; then, in each
case, the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of this Debenture, and shall
cause to be mailed to the Holder at its last addresses as it shall
appear upon the stock books of the Company, at least 20 calendar days
prior to the applicable record or effective date hereinafter specified,
a notice stating (x) the date on which a record is to be taken for the
purpose of such dividend, distribution, redemption, rights or warrants,
or if a record is not to be taken, the date as of which the holders of
the Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or
(y) the date on which such reclassification, consolidation, merger,
sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the
Common Stock of record shall be entitled to exchange their shares of
the Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or
share exchange; provided, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity
of the corporate action required to be specified in such notice. The
Holder is entitled to convert this Debenture during the 20-day period
commencing the date of such notice to the effective date of the event
triggering such notice.
Section 6. Optional Redemption.
--------- -------------------
a) Optional Redemption at Election of Company. Subject to the
provisions of this Section 6, at any time after the Effective Date and prior to
March 31, 2006, directly and solely out of the proceeds raised in the Secondary
Offering, the Company may deliver a notice to the Holder (an "Optional
Redemption Notice" and the date such notice is deemed delivered hereunder, the
"Optional Redemption Notice Date") of its irrevocable election to redeem the
then outstanding Debentures in full for an amount, equal to the Optional
Redemption Amount on the 20th Trading Day following the Optional Redemption
17
Notice Date (such date, the "Optional Redemption Date" and such redemption, the
"Optional Redemption"). The Optional Redemption Amount is due in full on the
Optional Redemption Date. The Company may only effect an Optional Redemption if
during the period commencing on the Optional Redemption Notice Date through to
the Optional Redemption Date and through and including the date such shares of
Common Stock are issued to the Holder, each of the Equity Conditions shall have
been met. If any of the Equity Conditions shall cease to be satisfied at any
time during the required period, then the Holder may elect to nullify the
Optional Redemption Notice by notice to the Company within 3 Trading Days after
the first day on which any such Equity Condition has not been met (provided that
if, by a provision of the Transaction Documents, the Company is obligated to
notify the Holder of the non-existence of an Equity Condition, such notice
period shall be extended to the third Trading Day after proper notice from the
Company) in which case the Optional Redemption Notice shall be null and void, ab
initio. The Company covenants and agrees that it will honor all Notices of
Conversion tendered from the time of delivery of the Optional Redemption Notice
through the date all amounts owing thereon are due and paid in full.
b) Monthly Redemption. On each Monthly Redemption Date, the
Sellers, jointly and severally, 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"). The Monthly Redemption Amount due on each Monthly Redemption Date
shall be paid in cash; provided, however, as to any Monthly Redemption and upon
30 Trading Days' prior written irrevocable notice (the "Monthly Redemption
Notice" and the 30 Trading Day period immediately following the Monthly
Redemption Notice, the "Monthly Redemption Period"), in lieu of a cash
redemption payment the Company may elect to pay all or part of a 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 85% of the average of the three
lowest Closing Prices during the ten Trading Days immediately prior to the
Monthly Redemption Date, the "Monthly Conversion Price" and such period, the
"Monthly Conversion Period"); provided, further, that the Company may not pay
the Monthly Redemption Amount in Conversion Shares unless, (y) from the date the
Holder receives the duly delivered 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 and (z) as to such Monthly
Redemption, prior to such Monthly Redemption Period (but not more than 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
18
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 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 of the holders of the Debentures based on their
(or their predecessor's) initial purchases of Debentures pursuant to the
Purchase Agreement. At any time the Company delivers a notice to the Holder of
its election to pay the Monthly Redemption Amount in shares of Common Stock, the
Company shall file a prospectus supplement pursuant to Rule 424 disclosing such
election.
c) Holder Redemption Right. Upon written notice from the Sellers
to the Holder of an Asset Sale (a "Sale of Asset Notice" and the date such
notice is deemed delivered hereunder, the "Sale of Asset Notice Date"), the
Holder shall have the right to deliver a written notice to the Company (a
"Holder Redemption Notice" and the date such notice is deemed delivered
hereunder, the "Holder Redemption Notice Date") of its irrevocable election to
cause the Sellers use 100% of the proceeds of such sale to redeem all or part of
the then outstanding principal amount of this Debenture for an amount, in cash,
equal to (i) the principal amount of this Debenture then outstanding, (ii)
accrued but unpaid interest and (iii) all liquidated damages and other amounts
due in respect of this Debenture (the "Holder Redemption" and such amount the
"Holder Redemption Amount"). The Sellers must give a Sale of Asset Notice within
5 Trading Days of each Asset Sale. The Holder Redemption Notice must be
delivered within 10 Trading Days after the Sale of Asset Notice Date. The Holder
Redemption Amount is due and payable on, and contingent upon, the closing or
occurrence of the sale. Notwithstanding anything herein to the contrary, the
Sellers may elect to exclude up to, in the aggregate, $15,000 of Asset Sales in
any calendar quarter from the provisions of this Section 6(c).
d) Redemption Procedure. The payment of cash pursuant to an
Optional Redemption shall be made on the Optional Redemption Date. If any
portion of the cash payment for an Optional Redemption or Holder Redemption
shall not be paid by the Sellers by the respective due date, interest shall
accrue thereon at the rate of 18% per annum (or the maximum rate permitted by
applicable law, whichever is less) until the payment of the Optional Redemption
Amount or Holder Redemption Amount, as applicable, plus all amounts owing
thereon is paid in full. Alternatively, if any portion of the Optional
Redemption Amount or Holder Redemption Amount, as applicable, remains unpaid
19
after such date, the Holders subject to such redemption may elect, by written
notice to the Company given at any time thereafter, to invalidate ab initio such
redemption, notwithstanding anything herein contained to the contrary, and, with
respect the failure to honor the Optional Redemption as applicable, the Company
shall have no further right to exercise such Optional Redemption.
Notwithstanding anything to the contrary in this Section 6, the Company's
determination to redeem in cash or its elections under Section 6(b) shall be
applied among the Holders of Debentures ratably. The Holder may elect to convert
the outstanding principal amount of the Debenture pursuant to Section 4 prior to
actual payment in cash for any redemption under this Section 6 by fax delivery
of a Notice of Conversion to the Company.
Section 7. Negative Covenants. So long as any portion of this Debenture is
outstanding, the Sellers will not and will not permit any of its Subsidiaries to
directly or indirectly:
a) other than Permitted Indebtedness, except with the prior
written consent of the Agent (as defined in the Security Agreement), enter into,
create, incur, assume, guarantee or suffer to exist any indebtedness for
borrowed money of any kind, including but not limited to, a guarantee, on or
with respect to any of its property or assets now owned or hereafter acquired or
any interest therein or any income or profits therefrom;
b) other than Permitted Liens, enter into, create, incur, assume
or suffer to exist any liens of any kind, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom;
c) amend its certificate of incorporation, bylaws or other
charter documents so as to materially and adversely affect any rights of the
Holder other than amendments that effect all stakeholders equally and
proportionally;
d) repay, repurchase or offer to repay, repurchase or otherwise
acquire more than a de minimis number of its securities 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 Sellers.
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):
20
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, in each case 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) which default, solely in the case of an
interest payment or other default under clause (B) above, is not cured,
within 3 Trading Days;
ii. the Sellers shall fail to observe or perform any
other covenant or agreement contained in this Debenture or any other
Debenture (other than a breach by the Company of its obligations to
deliver shares of Common Stock to the Holder upon conversion which
breach is addressed in clause (xi) below) which failure is not cured,
if possible to cure, within the earlier to occur of (A) 5 Trading Days
after notice of such default sent by the Holder or by any other Holder
and (B)10 Trading Days after the Sellers 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 Sellers or any Subsidiary is bound;
iv. any representation or warranty made herein, in any
other Transaction Documents, in any written statement pursuant hereto
or thereto, or in any other report, financial statement or certificate
made or delivered to the Holder or any other holder of Debentures shall
be untrue or incorrect in any material respect as of the date when made
or deemed made;
v. (i) the Sellers or any of its Subsidiaries shall
commence a case, as debtor, a case under any applicable bankruptcy or
insolvency laws as now or hereafter in effect or any successor thereto,
or the Sellers or any Subsidiary commences any other proceeding under
any reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Sellers
or any Subsidiary thereof or (ii) there is commenced a case against the
Sellers or any Subsidiary thereof, under any applicable bankruptcy or
insolvency laws, as now or hereafter in effect or any successor thereto
which remains undismissed for a period of 60 days; or (iii) the Sellers
or any Subsidiary thereof is adjudicated by a court of competent
jurisdiction insolvent or bankrupt; or any order of relief or other
order approving any such case or proceeding is entered; or (iv) the
Sellers or any Subsidiary thereof suffers any appointment of any
custodian or the like for it or any substantial part of its property
which continues undischarged or unstayed for a period of 60 days; or
(v) the Sellers or any Subsidiary thereof makes a general assignment
for the benefit of creditors; or (vi) the Sellers shall fail to pay, or
21
shall state that it is unable to pay, or shall be unable to pay, its
debts generally as they become due; or (vii) the Sellers or any
Subsidiary thereof shall call a meeting of its creditors with a view to
arranging a composition, adjustment or restructuring of its debts; or
(viii) the Sellers or any Subsidiary thereof shall by any act or
failure to act expressly indicate its consent to, approval of or
acquiescence in any of the foregoing; or (ix) any corporate or other
action is taken by the Sellers or any Subsidiary thereof for the
purpose of effecting any of the foregoing;
vi. the Sellers or any Subsidiary shall default in any of
its obligations under any mortgage, credit agreement or other facility,
indenture agreement, factoring agreement or other instrument under
which there may be issued, or by which there may be secured or
evidenced any indebtedness for borrowed money or money due under any
long term leasing or factoring arrangement of the Sellers in an amount
exceeding $150,000, whether such indebtedness now exists or shall
hereafter be created and such default shall result in such indebtedness
becoming or being declared due and payable prior to the date on which
it would otherwise become due and payable;
vii. the Common Stock shall not be eligible for quotation
on or quoted for trading on a Trading Market and shall not again be
eligible for and quoted or listed for trading thereon within five
Trading Days;
viii. the Company shall be a party to any Change of Control
Transaction or Fundamental Transaction, shall agree to sell or dispose
of all or in excess of 33% of its assets in one or more transactions
(whether or not such sale would constitute a Change of Control
Transaction) or shall redeem or repurchase more than a de minimis
number of its outstanding shares of Common Stock or other equity
securities of the Sellers (other than redemptions of Conversion Shares
and repurchases of shares of Common Stock or other equity securities of
departing officers and directors of the Sellers; 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 180 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 60 consecutive Trading Days or 90
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
22
to the Company, the Registration Statement, would be required to be
amended to include information concerning such transactions or the
parties thereto that is not available or may not be publicly disclosed
at the time, the Company shall be permitted an additional 10
consecutive Trading Days during any 12 month period relating to such an
event; or
xi. a Seller 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, including by way of public
announcement, at any time, of its intention not to comply with requests
for conversions of any Debentures in accordance with the terms hereof.
xii. the Sellers shall fail to notify the Holder within 5
Trading Days of any Asset Sale; or
xiii. Within 5 Trading Days of the Original Issue Date, the
Sellers shall fail to deliver the documentation necessary to perfect
the Holder's security interest in the Collateral set forth on Schedule
2 attached hereto, including but not limited to, assignments of such
Collateral.
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 Sellers 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
23
personally, by facsimile, sent by a nationally recognized overnight courier
service, addressed to the Sellers, at the address set forth above, facsimile
number facsimile number (000) 000-0000, Attn: Xxxxx X. Xxxxxxxxx, CFO and Chief
Legal Officer or such other address or facsimile number as the Sellers 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 Sellers 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
Holder appearing on the books of the Sellers, or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 5:30 p.m. (New York City time), (ii) the date
after the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section later than
5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) the second Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or (iv)
upon actual receipt by the party to whom such notice is required to be given.
b) Absolute Obligation. Except as expressly provided herein, no
provision of this Debenture shall alter or impair the obligation of the Sellers,
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 Sellers. 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 Sellers and, pursuant to the Security Agreement, is secured by all of the
assets of the Sellers; provided, however, that such security shall be subject to
the terms and conditions of the Subordination Agreement with Xxxxx Fargo
Foothill, Inc.
d) Lost or Mutilated Debenture. If this Debenture shall be
mutilated, lost, stolen or destroyed, the Sellers 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 Sellers.
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,
24
enforcement and defense of the transactions contemplated by any of the
Transaction Documents (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be
commenced in the state and federal courts sitting in the City of New York,
Borough of Manhattan (the "New York Courts"). Each party hereto hereby
irrevocably submits to the exclusive jurisdiction of the --------------- New
York Courts for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction Documents),
and hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, or such New York Courts are improper or inconvenient venue for
such proceeding. Each party hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Debenture and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Each party hereto hereby irrevocably waives, to
the fullest extent permitted by applicable law, any and all right to trial by
jury in any legal proceeding arising out of or relating to this Debenture or the
transactions contemplated hereby. If either party shall commence an action or
proceeding to enforce any provisions of this Debenture, then the prevailing
party in such action or proceeding shall be reimbursed by the other party for
its attorneys' fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or proceeding.
f) Waiver. Any waiver by the Sellers 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 Sellers 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 Sellers covenant (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 Sellers 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 Sellers (to the extent
25
it may lawfully do so) hereby expressly waive 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.
j) Assumption. Any successor to the Sellers or surviving entity
in a Fundamental Transaction shall (i) assume in writing all of the obligations
of the Sellers under this Debenture and the other Transaction Documents pursuant
to written agreements in form and substance satisfactory to the Holder (such
approval not to be unreasonably withheld or delayed) prior to such Fundamental
Transaction and (ii) to issue to the Holder a new debenture of such successor
entity evidenced by a written instrument substantially similar in form and
substance to this Debenture, including, without limitation, having a principal
amount and interest rate equal to the principal amounts and the interest rates
of the Debentures held by the Holder and having similar ranking to this
Debenture, and satisfactory to the Holder (any such approval not to be
unreasonably withheld or delayed). The provisions of this Section 9(i) shall
apply similarly and equally to successive Fundamental Transactions and shall be
applied without regard to any limitations of this Debenture.
*********************
26
IN WITNESS WHEREOF, the Sellers have caused this Debenture to be duly
executed by a duly authorized officer as of the date first above indicated.
VELOCITY ASSET MANAGEMENT INC.
By:______________________________________
Name:
Title:
X. XXXXXX INC.
By:______________________________________
Name:
Title:
27
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 10%
Convertible Senior Secured Debenture of Velocity Asset Management Inc., a
Delaware corporation (the "Company"), and X. Xxxxxx Inc., a New Jersey
corporation (the "JHolder", and the Company and the JHolder, each a "Seller" and
collectively the "Sellers"), due on April 27, 2007, into shares of common stock,
par value $.001 per share (the "Common Stock"), of the Company according to the
conditions hereof, as of the date written below. If shares are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates and opinions as reasonably requested by the Sellers 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 Sellers that its ownership of the Common Stock does not
exceed the amounts determined in accordance with Section 13(d) of the Exchange
Act, specified under Section 4 of this Debenture.
The undersigned agrees to comply with the prospectus delivery
requirements under the applicable securities laws in connection with any
transfer of the aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debenture to be Converted:
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on Account of
Conversion at Issue.
Number of shares of Common Stock to be issued:
Signature:
Name:
Address:
28
Schedule 1
CONVERSION SCHEDULE
The 10% Convertible Senior Secured Debentures due on April 27, 2007, in the
aggregate principal amount of $1,800,000issued by Velocity Asset Management
Inc., a Delaware corporation (the "Company"), and X. Xxxxxx Inc., a New Jersey
corporation. 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 Company
Original Issue Date) Conversion Principal Amount) Attest
--------------------- -------------- ------------------------- -------------
--------------------- -------------- ------------------------- -------------
--------------------- -------------- ------------------------- -------------
--------------------- -------------- ------------------------- -------------
--------------------- -------------- ------------------------- -------------
--------------------- -------------- ------------------------- -------------
--------------------- -------------- ------------------------- -------------
--------------------- -------------- ------------------------- -------------
--------------------- -------------- ------------------------- -------------
--------------------- -------------- ------------------------- -------------
29
Schedule 2
----------------------------------------------------------------------------------------------------------------------------------
PROPERTY AMOUNT DATE
R&R FILE ADDRESS STATUS FUNDED ACQUIRED VALUATION
---------- ----------------- ----------------------------------------------- ---------------- ------------- ---------------
03831649 IN NURSING HOME TWO PURCHASE MONEY MORTGAGES 100% OWNED: $100,000.00 8/6/03 $230,000.00
PROPERTIES 0) X. 00XX XX. $184K @ 7% + INTEREST
DUE IN FULL 4/16/07.
2) 11223 E. SO. ST. & 000
XXXXX XXXX XXX. $46,425.54
@ 8%, INST. DUE 12/31/05 & FULL
BALANCE DUE 12/31/06.
---------- ----------------- ----------------------------------------------- ---------------- ------------- ---------------
05838313 0 XXXXXXXX XX., DEED - FEE SIMPLE INTEREST. IN CONTRACT. $107,900.00 4/1/05 $127,000.00
WEST MILFORD, NJ SALE IN NOVEMBER.
---------- ----------------- ----------------------------------------------- ---------------- ------------- ---------------
05838310 1316 RT. 33 MORTGAGE INTEREST. WRITS OF EXECUTION $130,000.00 5/1/05 $150,000.00
NEPTUNE, NJ HAVE BEEN SERVED. SALE DATES HAVE BEEN
REQUESTED FROM SHERIFF ON NEPTUNE AND
2 XXXXXX COUNTY, TRENTON, PROPERTIES.
---------- ----------------- ----------------------------------------------- ---------------- ------------- ---------------
05839457 000 XXXXXX XX., XXXXXXXX INTEREST. SETTLED @ $73,893.00, $ 34,402.94 5/31/05 $ 73,893.00
FREEHOLD, N.J. $15K PAID AND BALANCE W/IN 90 DAYS OR
REVERTS TO FULL AMOUNT OF
$84,806.44 AND FORECLOSE. DEFAULT DATE
IS 11/29/05.
---------- ----------------- ----------------------------------------------- ---------------- ------------- ---------------
05839471 000 XXXXX XXX., XXXXXXXX INTEREST. SETTLEMENT APPROVED $100,000.00 N/A $200,000.00
FRANKLIN LAKES W/BK TRUSTEE FOR 46% OF NET PROCEEDS OF
SALE OF HO-XX-XXX PROPERTY. TRUSTEE
APPLICATION FOR APPROVAL OF SALE @
$715K IS 10/17/05. CLOSE BEFORE 12/31/05.
---------- ----------------- ----------------------------------------------- ---------------- ------------- ---------------
05839641 700 XXXXXX XXXXX DEED INTEREST. UNDER REHAB AND IS FOR SALE. $116,500.00 6/2/05 $500,000.00
AVE., MELBOURNE, CLOSED ON $1MM CONST FINANCING; VALUATION
FLA. ASSUMES SALE AT $5.2 MM (48% PROFIT)
---------- ----------------- ----------------------------------------------- ---------------- ------------- ---------------
05840435 00 XXXX XX. DEED INTEREST. TAXES PAID AT $86,190.03. $375,649.86 7/5/05 $500,000.00
ALEXANDRIA, NJ WE HAVE DBTR FULL COOPORATION. LISTED FOR
SALE. UPDATING AND CLEANUP $4K.
---------- ----------------- ----------------------------------------------- ---------------- ------------- ---------------
30
----------------------------------------------------------------------------------------------------------------------------------
TX020412 00 XXXXX XX., XXXX ESCROW. $61,000.00 PROCEEDS IN $ 20,000.00 $ 61,000.00
NEWARK, N.J. ESCROW FOR TURN OVER 3/1/06 UPON
EXPIRATION OF FED TAX LIEN.
---------- ----------------- ----------------------------------------------- ---------------- ------------- ---------------
05840887 000 XXXXXXXX XX., CONTRACT TO PURCHASE PURCHASED DISTRESSED $ 23,000.00 9/16/05 $ 50,000.00
HACKETTSTOWN, NJ 1 FAMILY HOUSE TO REHAB & SELL. PRICE:
$229K. CLOSE IN OCT.
---------- ----------------- ----------------------------------------------- ---------------- ------------- ---------------
05840891 00 XXXXXX XX., BID/CONTRACT TO PURCHASE PURCHASED AT SH $240,000.00 9/30/05 $415,000.00
SADDLE RIVER, NJ FORECLOSURE SALE 9/30/05 FOR $1.169MM.
VALUE $1.5MM+. AWAITING DEED, ETC.
SEARCHES ORDERED. CLOSE IN NOVEMBER.
================================================================================================================================
31
