EXHIBIT 10.5
FORM OF DEBENTURE
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
Original Issue Date: December ___, 2004
Original Conversion Price (subject to adjustment herein): $2.00
$---------------
6% SECURED CONVERTIBLE DEBENTURE
DUE DECEMBER ___, 2007
THIS DEBENTURE is one of a series of duly authorized and issued 6%
Secured Convertible Debentures of Tarrant Apparel Group, a California
corporation, having a principal place of business at 0000 Xxxx Xxxxxxxxxx
Xxxxxxxxx, Xxx Xxxxxxx, Xxxxxxxxxx 00000 (the "COMPANY"), designated as its 6%
Secured Convertible Debenture, due December ___, 2007 (the "DEBENTURE(S)").
FOR VALUE RECEIVED, the Company promises to pay to
________________________ or its registered assigns (the "HOLDER"), the principal
sum of $_______________ on December ___, 2007 or such earlier date as the
Debentures are 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:
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"ALTERNATE CONSIDERATION" shall have the meaning set forth in
Section 5(d).
"BASE CONVERSION PRICE" shall have the meaning set forth in
Section 5(b).
"BUSINESS DAY" means any day except Saturday, Sunday and any
day which shall be a federal legal holiday in the United States or a
day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"BUY-IN" shall have the meaning set forth in Section 4(d)(v).
"CHANGE OF CONTROL TRANSACTION" means the occurrence after the
date hereof of any of (i) an acquisition after the date hereof by an
individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company,
by contract or otherwise) of in excess of 33% of the voting securities
of the Company, or (ii) 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 (iii) 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 (ii); provided, however, a
Change of Control shall not have been deemed to occur on account of the
purchase by the potential investor identified in the Disclosure
Schedules, or any of such investor's affiliates, of up to 10,000,000
shares (adjusted for any stock splits, reverse splits and the like) of
Common Stock or securities convertible or exercisable into Common
Stock, or a combination of both.
"CLOSING PRICE" 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 closing bid
price of the Common Stock for such date (or the nearest preceding date)
on the Trading Market on which the Common Stock is then listed or
quoted as reported by Bloomberg Financial L.P. (based on a Trading Day
from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the
Common Stock is not then listed or quoted on a Trading Market and if
prices for the Common Stock are then reported in the "Pink Sheets"
published by the Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid
price per share of the Common Stock so reported; or (c) in all other
cases, the fair market value of a share of Common Stock as determined
by an independent appraiser selected in good faith by the Holders and
reasonably acceptable to the Company.
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"COMMON STOCK" means the common stock, no par value per share,
of the Company and stock of any other class into which such shares may
hereafter have been reclassified or changed.
"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 Debentures 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" 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, if any, (ii) all liquidated damages and other amounts
owing in respect of the Debentures for which written demand has been
made by the Holder 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)
all of the shares issued or issuable pursuant to the transaction
proposed would not violate the limitations set forth in Sections
4(c)(i) and 4(c)(ii) and (viii) no public announcement of a pending or
proposed Fundamental Transaction or Change of Control Transaction has
occurred that has not been consummated or terminated.
"EVENT OF DEFAULT" shall have the meaning set forth in Section
8.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FUNDAMENTAL TRANSACTION" shall have the meaning set forth in
Section 5(d).
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"FORCED CONVERSION NOTICE" shall have the meaning set forth in
Section 4(e).
"FORCE CONVERSION NOTICE DATE" shall have the meaning set
forth in Section 4(e).
"INTEREST CONVERSION RATE" means 100% of the Closing Price
immediately prior to the applicable Interest Payment Date.
"INTEREST PAYMENT DATE" shall have the meaning set forth in
Section 2(a).
"LATE FEES" shall have the meaning set forth in Section 2(d).
"MANDATORY PREPAYMENT AMOUNT" for any Debentures shall equal
the sum of (i) the greater of: (A) 120% of the principal amount of
Debentures to be prepaid, plus all accrued and unpaid interest thereon,
or (B) the principal amount of Debentures to be prepaid, plus all other
accrued and unpaid interest hereon, divided by the Conversion Price on
(x) the date the Mandatory Prepayment Amount is demanded or otherwise
due or (y) the date the Mandatory Prepayment Amount is paid in full,
whichever is less, multiplied by the Closing Price on (x) the date the
Mandatory Prepayment Amount is demanded or otherwise due or (y) the
date the Mandatory Prepayment Amount is paid in full, whichever is
greater, and (ii) all other amounts, costs, expenses and liquidated
damages due in respect of such Debentures. Notwithstanding anything
herein to the contrary, if at the time the Holder delivers to the
Company a notice of an Event of Default (I) the Company has and is duly
honoring all conversions, if any, (II) 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), (III) 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), (IV)
there exists no other reason (other than the discretion of the Holder
or market conditions) which would otherwise deprive the Holder from
receiving (other than Section 4(c)(ii)) Conversion Shares or disposing
of the Conversion Shares on the Trading Market and (V) the Company
takes no action thereafter to directly or indirectly cause clauses (I)
through (IV) above to no longer be exist, then clause (B) above shall
not be available for the purpose of calculating the Mandatory
Prepayment Amount as to such notice of an Event of Default.
"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.
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"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Securities Purchase Agreement,
dated as of December 6, 2004, to which the Company and the original
Holder are parties, as amended, modified or supplemented from time to
time in accordance with its terms.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the date of the Purchase Agreement, to which the
Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.
"REGISTRATION STATEMENT" means a registration statement
meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Conversion
Shares and naming the Holder as a "selling stockholder" thereunder.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"SHAREHOLDER APPROVAL" shall have the meaning given to such
term in the Purchase Agreement.
"SUBSIDIARY" shall have the meaning given to such term in the
Purchase Agreement.
"THRESHOLD PERIOD" shall have the meaning given to such term
in Section 4(e).
"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.
SECTION 2. INTEREST.
a) PAYMENT OF INTEREST IN CASH OR KIND. The Company shall pay
interest to the Holder on the aggregate unconverted and then
outstanding principal amount of this Debenture at the rate of 6% per
annum, payable quarterly, in arrears, on March 31, June 30, September
30 and December 31, beginning on the first such date after the Original
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Issue Date and on each Conversion Date (as to that principal amount
then being converted) and on the Maturity Date (except that, if any
such date is not a Business Day, then such payment shall be due on the
next succeeding Business Day) (each such date, an "INTEREST PAYMENT
DATE"), in cash or shares of Common Stock at the Interest Conversion
Rate, or a combination thereof; PROVIDED, HOWEVER, payment in shares of
Common Stock may only occur if (i) during the 20 Trading Days
immediately prior to the applicable Interest Payment Date all of the
Equity Conditions have been met, (ii) the Company shall have given the
Holder notice in accordance with the notice requirements set forth
below and (iii) the Interest Conversion Rate is equal to or exceeds
$1.95, subject to adjustment for reverse and forward stock splits,
stock dividends, stock combinations and other similar transactions of
the Common Stock that occur after the date of the Purchase Agreement.
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. Not less than 20 Trading Days prior to each Interest
Payment Date, the Company shall provide the Holder with written notice
of its election to pay interest hereunder either in cash or shares of
Common Stock (the Company may indicate in such notice that the election
contained in such notice shall continue for later periods until
revised). Within 20 Trading Days prior to an Interest Payment Date, 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.
c) INTEREST CALCULATIONS. Interest shall be calculated on the
basis of a 360-day year and shall accrue daily commencing on the
Original Issue Date until payment in full of the principal sum,
together with all accrued and unpaid interest and other amounts which
may become due hereunder, has been made. Payment of interest in shares
of Common Stock shall otherwise occur pursuant to Section 4(d)(ii) and
only for purposes of the payment of interest in shares, the Interest
Payment Date shall be deemed the Conversion Date. Interest shall cease
to accrue with respect to any principal amount converted, provided that
the Company in fact delivers the Conversion Shares within the time
period required by Section 4(d)(ii). 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, then such payment shall be distributed ratably
among the Holders based upon the principal amount of Debentures held by
each Holder.
d) LATE FEE. All overdue accrued and unpaid interest to be
paid hereunder shall entail a late fee at the rate of 15% 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
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payment. Notwithstanding anything to the contrary contained herein, if
on any Interest Payment Date the Company has elected to pay interest in
Common Stock and is not able to pay accrued interest in the form of
Common Stock because it does not then satisfy the conditions for
payment in the form of Common Stock set forth above, then, at the
option of the Holder, the Company, in lieu of delivering either shares
of Common Stock pursuant to this Section 2 or paying the regularly
scheduled cash interest payment, shall deliver, within three Trading
Days of each applicable Interest Payment Date, an amount in cash equal
to the product of the number of shares of Common Stock otherwise
deliverable to the Holder in connection with the payment of interest
due on such Interest Payment Date and the highest Closing Price during
the period commencing on the Interest Payment Date and ending on the
Trading Day prior to the date such payment is made.
e) PREPAYMENT. Except as otherwise set forth in this
Debenture, the Company may not prepay any portion of the principal
amount of this Debenture without the prior written consent of the
Holder.
SECTION 3. REGISTRATION OF TRANSFERS AND EXCHANGES.
a) DIFFERENT DENOMINATIONS. This Debenture is exchangeable for
an equal aggregate principal amount of Debentures of different
authorized denominations, as requested by the Holder surrendering the
same. No service charge will be made for such registration of transfer
or exchange.
b) INVESTMENT REPRESENTATIONS. This Debenture has been issued
subject to certain investment representations of the original Holder
set forth in the Purchase Agreement and may be transferred or exchanged
only in compliance with the Purchase Agreement and applicable federal
and state securities laws and regulations.
c) RELIANCE ON DEBENTURE REGISTER. Prior to due presentment to
the Company for transfer of this Debenture, the Company and any agent
of the Company may treat the Person in whose name this Debenture is
duly registered on the Debenture Register as the owner hereof for the
purpose of receiving payment as herein provided and for all other
purposes, whether or not this Debenture is overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary.
SECTION 4. CONVERSION.
a) VOLUNTARY CONVERSION. At any time after the Original Issue
Date until this Debenture is no longer outstanding, this Debenture
shall be convertible into shares of Common Stock at the option of the
Holder, in whole or in part at any time and from time to time (subject
to the limitations on conversion set forth in Section 4(c) hereof). The
Holder shall effect conversions by delivering to the Company the form
of Notice of Conversion attached hereto as ANNEX A (a "NOTICE OF
CONVERSION"), specifying therein the principal amount of Debentures to
be converted and the date on which such conversion is to be effected (a
"CONVERSION DATE"). If no Conversion Date is specified in
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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
Debentures 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) CONVERSION LIMITATIONS.
i. [INTENTIONALLY DELETED]
ii. HOLDER'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 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. 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,
8
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)(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-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)(ii) may be waived by the
Holder upon, at the election of the Holder, not less than 61
days' prior notice to the Company, and the provisions of this
Section 4(c)(ii) 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.
ii. DELIVERY OF CERTIFICATE UPON CONVERSION. Not
later than three Trading Days after any Conversion Date, the
Company will deliver 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 Debentures (including, if so timely elected by
the Company, shares of Common Stock representing the payment
of accrued interest) 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
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Holder shall be entitled by written notice to the Company at
any time on or before the Holder's 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 Debentures
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 $2,000 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; PROVIDED, HOWEVER, that
the Company shall not be obligated to pay any per Trading Day
liquidated damages with respect to delays directly caused by a
Force Majeure; PROVIDED, FURTHER, the Company shall use best
efforts to remedy or overcome such failures as promptly as
possible. 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 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 of 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
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performance and/or injunctive relief. The exercise of any such
rights shall not prohibit the Holders 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 seventh
Trading Day after the Conversion Date, and if after such
seventh 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 Debentures in 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 Debentures 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 the Debentures and payment of interest on the
Debenture, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of
persons other than the Holders, not less than such number of
shares of the Common Stock as shall (subject to any additional
requirements of the Company as to reservation of such shares
set forth in the Purchase
11
Agreement) be issuable (taking into account the adjustments
and restrictions of Section 5) upon the conversion of the
outstanding principal amount of the Debentures 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 Closing Price 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 the Debentures
shall be made without charge to the Holders thereof for any
documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided
that the 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 such Debentures 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.
e) FORCED CONVERSION. Notwithstanding anything herein to the
contrary and subject to the conditions hereunder, if after the 12 month
anniversary of the date of the Purchase Agreement, the Closing Price
for each of any 20 consecutive Trading Days ("THRESHOLD PERIOD"), which
20 consecutive Trading Day period shall have commenced only after such
anniversary date, exceeds $3.50 and (ii) the average daily trading
volume for the same period exceeds 100,000 shares (both (i) and (ii)
hereof adjusted for any stock splits, reverse splits and the like
occurring after the Original Issue Date), then the Company may, within
two Trading Days of the end of any such period, deliver a notice to the
Holder (a "FORCED CONVERSION NOTICE" and the date such notice is
received by the Holder, the "FORCED CONVERSION NOTICE Date") to cause
the Holder to immediately convert all of the then outstanding principal
amount of Debentures pursuant to Section 4. The Company may only effect
a Forced Conversion Notice if all of the Equity Conditions are met
through the applicable Threshold Period until the date of the
applicable Forced Conversion. Any Forced Conversion shall be applied
ratably to all Holders based on their initial purchases of Debentures
pursuant to the Purchase Agreement. Notwithstanding anything herein to
the contrary, in the event the Company issues a Forced Conversion
Notice and, because of any limitation on issuance, it is unable to
force
12
the Holder to convert all of the outstanding principal amount of the
Debenture, the Company shall not have the right to issue another Forced
Conversion Notice for at least 30 days and at such time all conditions
hereunder must again be met, including the pricing condition and the
Equity Conditions. In addition, notwithstanding anything in this
Section 4(e) to the contrary, in the event the Company issues a Forced
Conversion Notice and, because of the limitation on issuance set forth
in Section 4(c)(ii), it is unable to force the Holder to convert all of
the outstanding principal amount of the Debenture, then: (i) the
portion of the unpaid principal amount of the Debenture that cannot be
converted (the "BLOCKED AMOUNT") shall remain outstanding (and the
Maturity Date with respect thereto shall be extended, if applicable)
until such time as the Holder converts the Blocked Amount into Common
Stock in accordance with this Debenture or the Company repays the
Blocked Amount or converts the Blocked Amount into Common Stock in
accordance with this Debenture; (ii) interest on the Blocked Amount
shall cease to accrue from and after the Forced Conversion Notice Date;
(iii) the Holder shall continue to have the right to convert the
Blocked Amount into Common Stock from and after the Forced Conversion
Notice Date in accordance with the terms of this Debenture; and (iv)
the Company shall have the right to convert the Blocked Amount, or
portion thereof, into shares of Common Stock in accordance with the
terms of this Debenture upon written notice to the Holder the first
moment after the Forced Conversion Notice Date when Section 4(c)(ii)
would not prevent such conversion, subject to the Equity Conditions.
SECTION 5. CERTAIN ADJUSTMENTS.
a) STOCK DIVIDENDS AND STOCK SPLITS. If the Company, at any
time while the Debentures are outstanding: (A) shall pay a stock
dividend or otherwise make a distribution or distributions on shares of
its Common Stock or any other equity or equity equivalent securities
payable in shares of Common Stock (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) subdivide
outstanding shares of Common Stock into a larger number of shares, (C)
combine (including by way of reverse stock split) outstanding shares of
Common Stock into a smaller number of shares, or (D) issue by
reclassification of shares of the Common Stock any shares of capital
stock of the 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 before
such event and of which the denominator shall be the number of shares
of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the
record date for the determination of stockholders entitled to receive
such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
b) SUBSEQUENT EQUITY SALES. From the Original Issue Date until
the 18 month anniversary of the date of the Purchase Agreement, if the
Company or any Subsidiary thereof, as applicable, at any time while
Debentures are outstanding, shall offer, sell, grant any option to
purchase or offer, sell or grant any right to reprice the Company's
13
(but not the Subsidiary's) 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, but excluding adjustments resulting from customary
price-based anti-dilution provisions, 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), then the Conversion Price shall be
reduced by multiplying the Conversion Price by a fraction, the
numerator of which is the number of shares of Common Stock issued and
outstanding immediately prior to the Dilutive Issuance plus the number
of shares of Common Stock and Common Stock Equivalents which the
aggregate consideration received or receivable by the Corporation in
connection with such Dilutive Issuance would purchase at the then
effective Conversion Price, and the denominator of which shall be the
sum of the number of shares of Common Stock issued and outstanding
immediately prior to the Dilutive Issuance plus the number of shares of
Common Stock and Common Stock Equivalents so issued or issuable in
connection with the Dilutive Issuance; PROVIDED, HOWEVER, prior to the
date the Company obtains Shareholder Approval in accordance with the
rules and regulations of the Trading Market, in no event shall the
Conversion Price be adjusted under this Section 5(b) to less than
$1.95, subject to adjustment for reverse and forward stock splits,
stock dividends, stock combinations and other similar transactions of
the Common Stock that occur after the date of this Agreement (the
"FLOOR PRICE"). The Company shall notify the Holder in writing, no
later than the third 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
Debentures are outstanding, shall distribute to all holders of Common
Stock (and not to Holders) evidences of its indebtedness or assets or
rights or warrants to subscribe for or purchase any security, then in
each such case the Conversion Price shall be determined 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
14
the denominator shall be the Closing Price determined as of the record
date mentioned above, and of which the numerator shall be such Closing
Price on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness
so distributed applicable to one outstanding share of the Common Stock
as determined by the Board of Directors in good faith. In either case
the adjustments shall be described in a statement provided to the
Holders of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of
Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the
record date mentioned above.
d) FUNDAMENTAL TRANSACTION. If, at any time while this
Debenture is outstanding, (A) the Company effects any merger or
consolidation of the Company with or into another Person, (B) the
Company effects any sale of all or substantially all of its assets in
one or a series of related transactions, (C) any tender offer or
exchange offer (whether by the Company or another Person) is completed
pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, cash or property, or (D)
the Company effects any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or
property (in any such case, a "FUNDAMENTAL TRANSACTION"), then upon any
subsequent conversion of this Debenture, the Holder shall have the
right to receive, for each Conversion Share that would have been
issuable upon such conversion absent such Fundamental Transaction, the
same kind and amount of securities, cash or property as it would have
been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental
Transaction, the holder of one share of Common Stock (the "ALTERNATE
CONSIDERATION"). For purposes of any such conversion, the determination
of the Conversion Price shall be appropriately adjusted to apply to
such Alternate Consideration based on the amount of Alternate
Consideration issuable in respect of one share of Common Stock in such
Fundamental Transaction, and the Company shall apportion the Conversion
Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the
Alternate Consideration. If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a
Fundamental Transaction, then the Holder shall be given the same choice
as to the Alternate Consideration it receives upon any conversion of
this Debenture following such Fundamental Transaction. To the extent
necessary to effectuate the foregoing provisions, any successor to the
Company or surviving entity in such Fundamental Transaction shall issue
to the Holder a new debenture consistent with the foregoing provisions
and evidencing the Holder's right to convert such debenture into
Alternate Consideration. The terms of any agreement pursuant to which a
Fundamental Transaction is effected shall include terms requiring any
such successor or surviving entity to comply with the provisions of
this paragraph (c) and insuring that this Debenture (or any such
replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.
15
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. The number of shares of Common Stock outstanding at any
given time shall not includes shares of Common Stock owned or held by
or for the account of the Company, and the description of any such
shares of Common Stock shall be considered on issue or sale of Common
Stock. 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) EXEMPT ISSUANCE. Notwithstanding the foregoing, no
adjustment will be made under this Section 5 in respect of an Exempt
Issuance.
g) NOTICE TO HOLDERS.
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.
ii. NOTICE TO ALLOW CONVERSION BY HOLDER. 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 the Debentures, and shall cause to be mailed to
the Holders at their last addresses as they 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,
16
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.
Holders are entitled to convert Debentures during the 20-day
period commencing the date of such notice to the effective
date of the event triggering such notice.
SECTION 6. RESERVED.
SECTION 7. NEGATIVE COVENANTS. So long as any portion of this Debenture
is outstanding, the Company will not, directly or indirectly:
a) amend its certificate of incorporation, bylaws or other
charter documents so as to adversely affect any rights of the Holder;
b) except as permitted by Holders of a majority in principal
amount of all of the Debentures then outstanding, repay, repurchase or
offer to repay, repurchase or otherwise acquire more than a DE MINIMIS
number of shares of its Common Stock or other equity 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; or
c) enter into any agreement with respect to any of the
foregoing.
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, 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 10
calendar days after notice of such default sent by the Holder
or by any other Holder;
ii. the Company shall materially fail to observe or
perform any other covenant or agreement contained in this
Debenture (other than a breach addressed separately under this
Section 8(a) as an Event of Default) which failure is not
cured, if possible to cure, within 25 calendar days after
notice of such default sent by the Holder or by any other
Holder;
17
iii. 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;
iv. (i) the Company or any of its Subsidiaries
incorporated or organized outside of Mexico (each, a
"NON-MEXICO SUBSIDIARY") shall commence, or there shall be
commenced against the Company or any such Non-Mexico
Subsidiary, a case under any applicable bankruptcy or
insolvency laws as now or hereafter in effect or any successor
thereto, or the Company or any Non-Mexico Subsidiary commences
any other proceeding under any reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency
or liquidation or similar law of any jurisdiction whether now
or hereafter in effect relating to the Company or any
Non-Mexico Subsidiary thereof or (ii) there is commenced
against the Company or any Non-Mexico Subsidiary thereof any
such bankruptcy, insolvency or other proceeding which remains
undismissed for a period of 60 days; or (iii) the Company or
any Non-Mexico Subsidiary thereof is adjudicated by a court of
competent jurisdiction insolvent or bankrupt; or any order of
relief or other order approving any such case or proceeding is
entered; or (iv) the Company or any Non-Mexico Subsidiary
thereof suffers any appointment of any custodian or the like
for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or (v) the
Company or any Non-Mexico Subsidiary thereof makes a general
assignment for the benefit of creditors; or (vi) the Company
shall fail to pay, or shall state that it is unable to pay, or
shall be unable to pay, its debts generally as they become
due; or (vii) the Company or any Non-Mexico Subsidiary thereof
shall call a meeting of its creditors with a view to arranging
a composition, adjustment or restructuring of its debts; or
(viii) the Company or any Non-Mexico Subsidiary thereof shall
by any act or failure to act expressly indicate its consent
to, approval of or acquiescence in any of the foregoing; or
(ix) any corporate or other action is taken by the Company or
any Non-Mexico Subsidiary thereof for the purpose of effecting
any of the foregoing;
v. the Company or any Non-Mexico Subsidiary shall
default in any of its obligations under any mortgage, credit
agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued,
or by which there may be secured or evidenced any indebtedness
for borrowed money or money due under any long term leasing or
factoring arrangement of the Company in an amount exceeding
$3,000,000, 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;
18
vi. 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;
vii. the Company shall be a party to any Change of
Control Transaction or shall agree to sell or dispose of all
or in excess of 45% 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 to the
extent approved by Holders of a majority in principal amount
of all of the Debentures then outstanding, and 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 $250,000, in the aggregate, for all officers and
directors during the term of this Debenture);
viii. a Registration Statement shall not have been
declared effective by the Commission on or prior to the 210th
calendar day after the Closing Date;
ix. 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 20
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 10 consecutive Trading Days during
any 12 month period relating to such an event; and
x. the Company shall fail for any reason to deliver
certificates to a Holder prior to the tenth Trading Day after
a Conversion Date pursuant to and in accordance with Section
4(d) or the Company shall provide notice to the Holder,
including by way of public announcement, at any time, of its
intention not to comply with requests for conversions of any
Debentures in accordance with the terms hereof.
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 delivered at any
time within 30 days of written notice by the Company or public
disclosure by the Company of the occurrence of such an Event of
Default, immediately
19
due and payable in cash. The aggregate amount payable upon an Event of
Default shall be equal to the Mandatory Prepayment 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 15% per annum, or such lower
maximum amount of interest permitted to be charged under applicable
law. All Debentures for which the full Mandatory Prepayment Amount
hereunder shall have been made in accordance herewith shall promptly be
surrendered 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 Holders 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 FINANCIAL OFFICER
or such other address or facsimile number as the Company may specify
for such purposes by notice to the Holders delivered in accordance with
this Section. Any and all notices or other communications or deliveries
to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, sent by a nationally recognized
overnight courier service addressed to each Holder at the facsimile
telephone number or address of such Xxxxxx appearing on the books of
the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the Holder. Any notice
or other communication or deliveries hereunder shall be deemed given
and effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:30 p.m. (New York
City time), (ii) the date after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 5:30 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the second Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or
(iv) upon actual receipt by the party to whom such notice is required
to be given.
b) ABSOLUTE OBLIGATION. Except as expressly provided herein,
no provision of this Debenture shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal
of, interest and liquidated damages (if any) on, this Debenture at the
time, place, and rate, and in the coin or currency, herein prescribed.
20
This Debenture is a direct debt obligation of the Company. This
Debenture ranks PARI PASSU with all other Debentures now or hereafter
issued under the terms set forth herein.
c) LOST OR MUTILATED DEBENTURE. If this Debenture shall be
mutilated, lost, stolen or destroyed, the Company shall execute and
deliver, in exchange and substitution for and upon cancellation of a
mutilated Debenture, or in lieu of or in substitution for a lost,
stolen or destroyed Debenture, a new Debenture for the principal amount
of this Debenture so mutilated, lost, stolen or destroyed but only upon
receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested,
all reasonably satisfactory to the Company.
d) GOVERNING LAW. All questions concerning the construction,
validity, enforcement and interpretation of this Debenture shall be
governed by and construed and enforced in accordance with the internal
laws of the State of New York, without regard to the principles of
conflicts of law thereof. Each party agrees that all legal proceedings
concerning the interpretations, enforcement and defense of the
transactions contemplated by any of the Transaction Documents (whether
brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the
state and federal courts sitting in the City of New York, Borough of
Manhattan (the "NEW YORK COURTS"). Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the New York Courts for the
adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein (including with
respect to the enforcement of any of the Transaction Documents), and
hereby irrevocably waives, and agrees not to assert in any suit, action
or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, or such New York Courts are improper or
inconvenient venue for such proceeding. Each party hereby irrevocably
waives personal service of process and consents to process being served
in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it
under this Debenture and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Each party hereto hereby irrevocably
waives, to the fullest extent permitted by applicable law, any and all
right to trial by jury in any legal proceeding arising out of or
relating to this Debenture or the transactions contemplated hereby. If
either party shall commence an action or proceeding to enforce any
provisions of this Debenture, then the prevailing party in such action
or proceeding shall be reimbursed by the other party for its attorneys
fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such action or proceeding.
e) WAIVER. Any waiver by the Company or the Holder of a breach
of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach
of any other provision of this Debenture. The failure of the Company or
the Holder to insist upon strict adherence to any term of this
Debenture on one or more occasions shall not be considered a waiver or
deprive that
21
party of the right thereafter to insist upon strict adherence to that
term or any other term of this Debenture. Any waiver must be in
writing.
f) SEVERABILITY. If any provision of this Debenture is
invalid, illegal or unenforceable, the balance of this Debenture shall
remain in effect, and if any provision is inapplicable to any person or
circumstance, it shall nevertheless remain applicable to all other
persons and circumstances. If it shall be found that any interest or
other amount deemed interest due hereunder violates applicable laws
governing usury, the applicable rate of interest due hereunder shall
automatically be lowered to equal the maximum permitted rate of
interest. The Company covenants (to the extent that it may lawfully do
so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay,
extension or usury law or other law which would prohibit or forgive the
Company from paying all or any portion of the principal of or interest
on this Debenture as contemplated herein, wherever enacted, now or at
any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may
lawfully do so) hereby expressly waives all benefits or advantage of
any such law, and covenants that it will not, by resort to any such
law, hinder, delay or impeded the execution of any power herein granted
to the Holder, but will suffer and permit the execution of every such
as though no such law has been enacted.
g) NEXT BUSINESS DAY. Whenever any payment or other obligation
hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day.
h) HEADINGS. The headings contained herein are for convenience
only, do not constitute a part of this Debenture and shall not be
deemed to limit or affect any of the provisions hereof.
i) SECURITY INTEREST. This Debenture is a direct debt
obligation of the Company and, pursuant to the Security Agreement is
secured by the collateral identified in the Security Agreement for the
benefit of the Holders.
*********************
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IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed by a duly authorized officer as of the date first above indicated.
TARRANT APPAREL GROUP
By:__________________________________________
Name: Xxxxxxx Xxxxx
Title: Chief Financial Officer
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ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 6% Secured
Convertible Debenture of Tarrant Apparel Group, a California corporation (the
"COMPANY"), due on December __, 2007, into shares of common stock, no par value
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 Debentures to be Converted:
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on
Account of Conversion at Issue.
Number of shares of Common Stock to
be issued:
Signature:
Name:
Address:
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SCHEDULE 1
CONVERSION SCHEDULE
The 6% Secured Convertible Debentures due on December __, 2007, in the aggregate
principal amount of $____________ issued by Tarrant Apparel Group, a California
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
Original Issue Date) Conversion Principal Amount) Company Attest
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