EXHIBIT 10.29
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: August 9, 2006
Set Price (subject to adjustment herein): $0.08
$500,000.00
9% SECURED CONVERTIBLE DEBENTURE
DUE FEBRUARY __ 2008
THIS DEBENTURE is one of a series of duly authorized and validly issued
Secured Convertible Debentures of Sonoma College, Inc., a California
corporation, having its principal place of business at
_____________________________ (the "COMPANY"), designated as its 9% Secured
Convertible Debenture, due February 8 2008 (this debenture, the "DEBENTURE" and
collectively with the other such series of debentures, the "Debentures").
FOR VALUE RECEIVED, the Company promises to pay to Harborview Master
Fund LP or its registered assigns (the "HOLDER"), or shall have paid pursuant to
the terms hereunder, the principal sum of $500,000 by February 8, 2008, 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 shall have the meanings set forth 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(e).
"BANKRUPTCY EVENT" means any of the following events: (a) the
Company or any Significant Subsidiary (as such term is defined in Rule
1-02(w) of Regulation S-X) thereof commences a case or other proceeding
under any bankruptcy, reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar
law of any jurisdiction relating to the Company or any Significant
Subsidiary thereof; (b) there is commenced against the Company or any
Significant Subsidiary thereof any such case or proceeding that is not
dismissed within 60 days after commencement; (c) the Company or any
Significant Subsidiary thereof is adjudicated insolvent or bankrupt or
any order of relief or other order approving any such case or
proceeding is entered; (d) the Company or any Significant Subsidiary
thereof suffers any appointment of any custodian or the like for it or
any substantial part of its property that is not discharged or stayed
within 60 calendar days after such appointment; (e) the Company or any
Significant Subsidiary thereof makes a general assignment for the
benefit of creditors; (f) the Company or any Significant Subsidiary
thereof calls a meeting of its creditors with a view to arranging a
composition, adjustment or restructuring of its debts; or (g) the
Company or any Significant Subsidiary thereof, by any act or failure to
act, expressly indicates its consent to, approval of or acquiescence in
any of the foregoing or takes any corporate or other action for the
purpose of effecting any of the foregoing.
"BASE CONVERSION PRICE" shall have the meaning set forth in
Section 5(b).
"BUSINESS DAY" means any day except Saturday, Sunday, any day
which shall be a federal legal holiday in the United States or any day
on which banking institutions in the State of New York are authorized
or required by law or other governmental 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 50% of the voting securities
of the Company (other than by means of conversion or exercise of the
Debentures and the Securities issued together with the Debentures), or
(ii) the Company merges into or consolidates with any other Person, or
any Person merges into or consolidates with the Company and, after
giving effect to such transaction, the stockholders of the Company
immediately prior to such transaction own less than 50% of the
aggregate voting power of the Company or the successor entity of such
transaction, or (iii) the Company sells or transfers all or
substantially all of its assets to another Person and the stockholders
of the Company immediately prior to such transaction own less than 50%
of the aggregate voting power of the acquiring entity immediately after
the transaction, or (iv) a replacement at one time or within a three
year period of more than one-half of the
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members of the Company's board of directors which is not approved by a
majority of those individuals who are members of the board of directors
on the date hereof (or by those individuals who are serving as members
of the board of directors on any date whose nomination to the board of
directors was approved by a majority of the members of the board of
directors who are members on the date hereof), or (v) the execution by
the Company of an agreement to which the Company is a party or by which
it is bound, providing for any of the events set forth in clauses (i)
through (iv) above.
"COMMON STOCK" means the common stock, par value $.0001 per
share, of the Company and stock of any other class of securities into
which such securities may hereafter be reclassified or changed into.
"COMPANY OPTIONAL REDEMPTION" shall have the meaning set forth
in Section 6(b).
"COMPANY OPTIONAL REDEMPTION AMOUNT" means the sum of (i) (A)
if all Equity Conditions have been met on each Trading Day during the
period commencing on the Company Optional Redemption Notice Date
through to the Company Optional Redemption Date and through and
including the date payment of the Company Optional Redemption Amount is
actually made, 130% of the principal amount of the Debenture then
outstanding or (B) if all Equity Conditions have not been met as set
forth in the preceding clause (A), 140% of the principal amount of the
Debenture then outstanding, plus (ii) accrued but unpaid interest, plus
(iii) all liquidated damages and other amounts due in respect of the
Debenture.
"COMPANY OPTIONAL REDEMPTION DATE" shall have the meaning set
forth in Section 6(b).
"COMPANY OPTIONAL REDEMPTION NOTICE" shall have the meaning
set forth in Section 6(b).
"COMPANY OPTIONAL REDEMPTION NOTICE DATE" shall have the
meaning set forth in Section 6(b).
"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, collectively, the shares of Common
Stock issuable upon conversion of this Debenture in accordance with the
terms hereof.
"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).
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"EFFECTIVENESS PERIOD" shall have the meaning set forth 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 Notices of
Conversion of the Holder, if any, (ii) the Company shall have paid all
liquidated damages and other amounts owing to the Holder in respect of
this Debenture, (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 a Trading Market and all
of the shares issuable pursuant to the Transaction Documents are listed
for trading on such 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 no existing Event
of Default or no existing 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 an Optional
Redemption, the shares issuable upon conversion in full of the Optional
Redemption Amount) to the Holder would not violate the limitations set
forth in Section 4(c) herein, (viii) there has been no public
announcement of a pending or proposed Fundamental Transaction or Change
of Control Transaction that has not been consummated and (ix) the
Holder is not in possession of any information that constitutes, or may
constitute, material non-public information.
"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.
"EXEMPT ISSUANCE" shall have the meaning set forth in the
Purchase Agreement.
"FORCED CONVERSION" shall have the meaning set forth in
Section 6(d).
"FORCED CONVERSION DATE" shall have the meaning set forth in
Section 6(d).
"FORCED CONVERSION NOTICE" shall have the meaning set forth in
Section 6(d).
"FORCED CONVERSION NOTICE DATE" shall have the meaning set
forth in Section 6(d).
"FUNDAMENTAL TRANSACTION" shall have the meaning set forth in
Section 5(e).
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"INTEREST CONVERSION RATE" means the lesser of (i) 85% of the
average of the VWAPs for the 5 consecutive Trading Days ending on the
Trading Day that is immediately prior to the applicable Interest
Payment Date or (ii) 85% of the average of the VWAPs for the 5
consecutive Trading Days ending on the Trading Day that is immediately
prior to the date the applicable Interest Conversion 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" means the sum of (i) the greater of
(A) 130% of the outstanding principal amount of this Debenture, plus
all accrued and unpaid interest hereon, or (B) the outstanding
principal amount of this Debenture, plus all accrued and unpaid
interest hereon, divided by the Conversion Price on the date the
Mandatory Default Amount is either (a) demanded (if demand or notice is
required to create an Event of Default) or otherwise due or (b) paid in
full, whichever has a lower Conversion Price, multiplied by the VWAP on
the date the Mandatory Default Amount is either (x) demanded or
otherwise due or (y) paid in full, whichever has a higher VWAP, and
(ii) all other amounts, costs, expenses and liquidated damages due in
respect of this Debenture.
"NEW YORK COURTS" shall have the meaning set forth in Section
9(d).
"NOTICE OF CONVERSION" shall have the meaning set forth in
Section 4(a).
"OPTIONAL REDEMPTION" shall have the meaning set forth in
Section 6(a).
"OPTIONAL REDEMPTION AMOUNT" means the sum of (i) 120% of the
principal amount of the Debenture then outstanding, (ii) accrued but
unpaid interest and (iii) all liquidated damages and other amounts due
in respect of the Debenture.
"OPTIONAL REDEMPTION DATE" shall have the meaning set forth in
Section 6(a).
"OPTIONAL REDEMPTION NOTICE" shall have the meaning set forth
in Section 6(a).
"OPTIONAL REDEMPTION NOTICE DATE" shall have the meaning set
forth in Section 6(a).
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"ORIGINAL ISSUE DATE" means the date of the first issuance of
the Debentures, regardless of any transfers of any Debenture and
regardless of the number of instruments which may be issued to evidence
such Debentures.
"PERMITTED INDEBTEDNESS" means (a) the Indebtedness existing
on the Original Issue Date and set forth on SCHEDULE 3.1(AA) attached
to the Purchase Agreement, (b) lease obligations and purchase money
indebtedness of up to $150,000, 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) up to $408,275
of additional non-equity linked Indebtedness incurred by the Company
for purposes of obtaining (or maintaining) certification for Title IV
Programs from the US Department of Education, under a letter of credit
agreement with a bank or other nationally recognized and regulated
commercial lender whose primary business is not investing in
securities.
"PERMITTED LIEN" means the individual and collective reference
to the following: (a) Liens for taxes, assessments and other
governmental charges or levies not yet due or Liens for taxes,
assessments and other governmental charges or levies being contested in
good faith and by appropriate proceedings for which adequate reserves
(in the good faith judgment of the management of the Company) have been
established in accordance with GAAP, and (b) Liens imposed by law which
were incurred in the ordinary course of the Company's business, such as
carriers', warehousemen's and mechanics' Liens, statutory landlords'
Liens, and other similar Liens arising in the ordinary course of the
Company's business, and which: (x) do not individually or in the
aggregate materially detract from the value of such property or assets
or materially impair the use thereof in the operation of the business
of the Company and its consolidated Subsidiaries, or (y) are being
contested in good faith by appropriate proceedings, which proceedings
have the effect of preventing for the foreseeable future the forfeiture
or sale of the property or asset subject to such Lien.
"PERSON" means an individual or corporation, partnership,
trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an
agency or subdivision thereof) or other entity of any kind.
"PURCHASE AGREEMENT" means the Securities Purchase Agreement
among the Company and the original Holders, dated as of August __, 2006
as amended, modified or supplemented from time to time in accordance
with its terms.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement among the Company and the original Holders, dated as of the
date of the Purchase Agreement, as amended, modified or supplemented
from time to time in accordance with its terms.
"REGISTRATION STATEMENT" means a registration statement that
registers the resale of all Conversion Shares, Interest Conversion
Shares and Warrant Shares of the Holder, who shall be named as a
"selling stockholder" therein, and meets the requirements of the
Registration Rights Agreement.
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"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"SHARE DELIVERY DATE" shall have the meaning set forth in
Section 4(d).
"SUBSIDIARY" shall have the meaning set forth in the Purchase
Agreement.
"THRESHOLD PERIOD" shall have the meaning set forth in Section
6(c).
"TRADING DAY" means a day on which the principal Trading
Market is open for business.
"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 American Stock Exchange, the Nasdaq Capital Market, the
Nasdaq National Market, the New York Stock Exchange or the OTC Bulletin
Board.
"TRANSACTION DOCUMENTS" shall have the meaning set forth in
the Purchase Agreement.
"VWAP" means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Trading Market, the daily volume weighted average
price of the Common Stock for such date (or the nearest preceding date)
on the Trading Market on which the Common Stock is then listed or
quoted for trading as reported by Bloomberg L.P. (based on a Trading
Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
time); (b) if the OTC Bulletin Board is not a Trading Market, the
volume weighted average price of the Common Stock for such date (or the
nearest preceding date) on the OTC Bulletin Board; (c) if the Common
Stock is not then quoted for trading on the OTC Bulletin Board and if
prices for the Common Stock are then reported in the "Pink Sheets"
published by 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 (d) in all other
cases, the fair market value of a share of Common Stock as determined
by an independent appraiser selected in good faith by the Holder and
reasonably acceptable to the Company.
SECTION 2. INTEREST.
a) PAYMENT OF INTEREST IN CASH OR KIND. The Company
shall pay interest to the Holder on the aggregate unconverted and then
outstanding principal amount of this Debenture at the rate of 9% per
annum, payable annually on August __, 2007, on each Conversion Date (as
to that principal amount then being converted), on each Optional
Redemption Date (as to that principal amount then being redeemed) and
on the Maturity Date (except that, if any such date is not a Business
Day, then such payment shall be due on the next succeeding Business
Day) (each such date, an "INTEREST PAYMENT DATE"), in
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cash or duly authorized, validly issued, fully paid and non-assessable
shares of Common Stock at the Interest Conversion Rate (the amount to
be paid in shares, the "INTEREST SHARE AMOUNT"), or a combination
thereof; PROVIDED, HOWEVER, that (i) payment in shares of Common Stock
may only occur if during the 20 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 have been met (unless waived
by the Holder in writing), (ii) the Company shall have given the Holder
notice in accordance with the notice requirements set forth below, and
(iii) as to such Interest Payment Date, prior to such Interest Notice
Period (but not more than 5 Trading Days prior to the commencement of
such 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 cash or shares of Common Stock shall be at the
discretion of the Company. Prior to the commencement of any Interest
Notice Period, the Company shall deliver to the Holder a 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 and the Interest Share Amount as to the applicable Interest
Payment Date, provided that the Company may indicate in such notice
that the election contained in such notice shall apply to future
Interest Payment Dates until revised by a subsequent notice. 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 timely file a prospectus supplement pursuant to Rule 424
disclosing such election. The aggregate number of shares of Common
Stock otherwise issuable to the Holder on an Interest Payment Date
shall be reduced by the number of Interest Conversion Shares previously
issued to the Holder in connection with such Interest Payment Date.
c) INTEREST CALCULATIONS. Interest shall be calculated
on the basis of a 360-day year and shall accrue daily commencing on the
Original Issue Date until payment in full of the principal sum,
together with all accrued and unpaid interest, liquidated damages and
other amounts which may become due hereunder, has been made. Payment of
interest in shares of Common Stock (other than the Interest Conversion
Shares issued prior to an Interest Notice Period) shall otherwise occur
pursuant to Section 4(d)(ii) herein and, solely 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 actually
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
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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
then-outstanding Debentures based on their (or their predecessor's)
initial purchases of Debentures pursuant to the Purchase Agreement.
d) LATE FEE. All overdue accrued and unpaid interest to
be paid hereunder shall entail a late fee at an interest rate equal to
the lesser of 18% per annum or the maximum rate permitted by applicable
law ("LATE FEES") which shall accrue daily from the date such interest
is due hereunder through and including the date of payment in full.
Notwithstanding anything to the contrary contained herein, if on any
Interest Payment Date the Company has elected to pay accrued interest
in the form of Common Stock but the Company is not able to pay accrued
interest in Common Stock because it fails to satisfy the conditions for
payment in 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
interest payment in cash, shall deliver, within three Trading Days of
each applicable Interest Payment Date, an amount in cash equal to the
product of: (x) 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, multiplied by (y) the highest VWAP
during the period commencing on the Interest Payment Date and ending on
the Trading Day prior to the date such payment is made. If any Interest
Conversion Shares are issued to the Holder in connection with an
Interest Payment Date and are not applied against an Interest Share
Amount, then the Holder shall promptly return such excess shares to the
Company.
e) PREPAYMENT. Except as otherwise set forth in this
Debenture, the Company may not prepay any portion of the principal
amount of this Debenture without the prior written consent of the
Holder.
SECTION 3. REGISTRATION OF TRANSFERS AND EXCHANGES.
a) DIFFERENT DENOMINATIONS. This Debenture is
exchangeable for an equal aggregate principal amount of Debentures of
different authorized denominations, as requested by the Holder
surrendering the same. No service charge will be payable 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 for transfer to the Company 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
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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, in whole or in part, into shares of
Common Stock at the option of the Holder, at any time and from time to
time (subject to the conversion limitations set forth in Section 4(c)
hereof). The Holder shall effect conversions by delivering to the
Company a Notice of Conversion, the form of which is 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 shall 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 deemed delivered
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(s) converted and the date of such conversion(s). The Company may
deliver an objection to any Notice of Conversion within 2 Business Days
of delivery of such Notice of Conversion. 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 the lesser of (a) $0.08, subject
to adjustment herein (the "SET PRICE") and (b) 75% of the average of
the 3 lowest Closing Prices during the 20 Trading Days immediately
prior to the applicable Conversion Date (subject to adjustment
herein)(the "CONVERSION PRICE").
As used herein, "CLOSING PRICE" means on any particular date
(a) the last reported closing bid price per share of Common Stock on
such date on the Trading Market (as reported by Bloomberg L.P. at 4:15
PM (New York time)), or (b) if there is no such price on such date,
then the closing bid price on the Trading Market on the date nearest
preceding such date (as reported by Bloomberg L.P. at 4:15 PM (New York
time)), or (c) if the Common Stock is not then listed or quoted on the
Trading Market and if prices for the Common Stock are then reported in
the "pink sheets" published by 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 (d) if the shares of Common Stock are not then publicly
traded the fair market value of a share of Common Stock as determined
by an appraiser selected in good faith by the Holder.
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c) CONVERSION LIMITATIONS.
i. HOLDER'S RESTRICTION ON CONVERSION. The
Company shall not effect any conversion of this Debenture, and
a Holder shall not have the right to convert any portion of
this Debenture, to the extent that after giving effect to the
conversion set forth on the applicable Notice of Conversion,
such Holder (together with such Holder's Affiliates, and any
other person or entity acting as a group together with such
Holder or any of such Holder's Affiliates) would beneficially
own in excess of the Beneficial Ownership Limitation (as
defined below). For purposes of the foregoing sentence, the
number of shares of Common Stock beneficially owned by such
Holder and its Affiliates shall include the number of shares
of Common Stock issuable upon conversion of this Debenture
with respect to which such determination is being made, but
shall exclude the number of shares of Common Stock which are
issuable upon (A) conversion of the remaining, unconverted
principal amount of this Debenture beneficially owned by such
Holder or any of its Affiliates and (B) exercise or conversion
of the unexercised or unconverted portion of any other
securities of the Company subject to a limitation on
conversion or exercise analogous to the limitation contained
herein (including, without limitation, any other Debentures or
the Warrants) beneficially owned by such Holder or any of its
Affiliates. Except as set forth in the preceding sentence, for
purposes of this Section 4(c)(i), beneficial ownership shall
be calculated in accordance with Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder. To
the extent that the limitation contained in this Section
4(c)(i) applies, the determination of whether this Debenture
is convertible (in relation to other securities owned by such
Holder together with any Affiliates) and of which principal
amount of this Debenture is convertible shall be in the sole
discretion of such Holder, and the submission of a Notice of
Conversion shall be deemed to be such Holder's determination
of whether this Debenture may be converted (in relation to
other securities owned by such Holder together with any
Affiliates) and which principal amount of this Debenture is
convertible, in each case subject to such aggregate percentage
limitations. To ensure compliance with this restriction, each
Holder will be deemed to represent to the Company each time it
delivers a Notice of Conversion that such Notice of Conversion
has not violated the restrictions set forth in this paragraph
and the Company shall have no obligation to verify or confirm
the accuracy of such determination. In addition, a
determination as to any group status as contemplated above
shall be determined in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated
thereunder. For purposes of this Section 4(c)(i), in
determining the number of outstanding shares of Common Stock,
a Holder may rely on the number of outstanding shares of
Common Stock as stated in the most recent of the following:
(A) the Company's most recent Form 10-QSB or Form 10-KSB, as
the case may be; (B) a more recent public announcement by the
Company; or (C) a more recent 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
11
request of a Holder, the Company shall within two Trading Days
confirm orally and in writing to such Holder the number of
shares of Common Stock then outstanding. In any case, the
number of outstanding shares of Common Stock shall be
determined after giving effect to the conversion or exercise
of securities of the Company, including this Debenture, by
such Holder or its Affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The
"Beneficial Ownership Limitation" shall be 4.99% of the number
of shares of the Common Stock outstanding immediately after
giving effect to the issuance of shares of Common Stock
issuable upon conversion of this Debenture held by the Holder.
The Beneficial Ownership Limitation provisions of this Section
4(c)(i) may be waived by such Holder, at the election of such
Holder, upon not less than 61 days' prior notice to the
Company, to change the Beneficial Ownership Limitation to
9.99% of the number of shares of the Common Stock outstanding
immediately after giving effect to the issuance of shares of
Common Stock upon conversion of this Debenture held by the
Holder and the provisions of this Section 4(c)(i) shall
continue to apply. Upon such a change by a Holder of the
Beneficial Ownership Limitation from such 4.99% limitation to
such 9.99% limitation, the Beneficial Ownership Limitation may
not be further waived by such Holder. The provisions of this
paragraph shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this
Section 4(c)(i) to correct this paragraph (or any portion
hereof) which may be defective or inconsistent with the
intended Beneficial Ownership Limitation herein contained or
to make changes or supplements necessary or desirable to
properly give effect to such limitation. The limitations
contained in this paragraph shall apply to a successor holder
of this Debenture.
d) MECHANICS OF CONVERSION.
i. CONVERSION SHARES ISSUABLE UPON CONVERSION
OF PRINCIPAL AMOUNT. The number of shares of Common Stock
issuable upon a conversion hereunder shall be determined by
the quotient obtained by dividing (x) the outstanding
principal amount of this Debenture to be converted by (y) the
Conversion Price.
ii. DELIVERY OF CERTIFICATE UPON CONVERSION. Not
later than three Trading Days after each Conversion Date (the
"SHARE DELIVERY DATE"), the Company shall deliver, or cause to
be delivered, to the Holder (A) a certificate or certificates
representing the Conversion Shares which, on or after the
Effective Date, shall be free of restrictive legends and
trading restrictions (other than those which may then be
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
12
is the 20 Trading Days period immediately prior to the date on
which the Conversion Notice is delivered to the Company and
excluding for such issuance the condition that the Company
deliver Interest Conversion Shares as to such interest
payment) and (B) a bank check in the amount of accrued and
unpaid interest (if the Company has elected or is required to
pay accrued interest in cash). On or after the Effective Date,
the Company shall use its best efforts to deliver any
certificate or certificates required to be delivered by the
Company under this Section 4 electronically through the
Depository Trust Company or another established clearing
corporation performing similar functions.
iii. FAILURE TO DELIVER CERTIFICATES. If in the
case of any Notice of Conversion such certificate or
certificates are not delivered to or as directed by the
applicable Holder by the third Trading Day after the
Conversion Date, the Holder shall be entitled to elect by
written notice to the Company at any time on or before its
receipt of such certificate or certificates, to rescind such
Conversion, in which event the Company shall promptly return
to the Holder any original Debenture delivered to the Company
and the Holder shall promptly return the Common Stock
certificates representing the principal amount of this
Debenture tendered for conversion to the Company.
iv. OBLIGATION ABSOLUTE; PARTIAL LIQUIDATED
DAMAGES. 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, that 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 anyone 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 to Holder, 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
outstanding principal amount of this Debenture, which is
subject to the injunction, which bond shall remain in effect
until the completion of arbitration/litigation of the
underlying dispute and the proceeds of which shall be payable
to such Holder to the extent it obtains judgment. In the
absence of such injunction, the Company shall issue Conversion
Shares or, if
13
applicable, cash, upon a properly noticed conversion. If the
Company fails for any reason to deliver to the Holder such
certificate or certificates pursuant to Section 4(d)(ii) by
the fifth Trading Day after the Conversion Date, the Company
shall pay to such Holder, in cash, as liquidated damages and
not as a penalty, for each $1000 of principal amount being
converted, $10 per Trading Day (increasing to $20 per Trading
Day on the fifth Trading Day after such liquidated damages
begin to accrue) for each Trading Day after such fifth Trading
Day until such certificates are delivered. Nothing herein
shall limit a Xxxxxx's right to pursue actual damages or
declare an Event of Default pursuant to Section 8 hereof 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 hereunder, 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 by the Share Delivery Date pursuant to Section
4(d)(ii), and if after such Share Delivery Date the Holder is
required by its brokerage firm to purchase (in an open market
transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by such Holder of the Conversion Shares
which the Holder was entitled to receive upon the conversion
relating to such Share Delivery Date (a "BUY-IN"), then the
Company shall: (A) pay in cash to the Holder (in addition to
any other remedies available to or elected by the Holder) the
amount by which (x) the Holder's total purchase price
(including any brokerage commissions) for the Common Stock so
purchased exceeds (y) the product of: (1) the aggregate number
of shares of Common Stock that such Holder was entitled to
receive from the conversion at issue multiplied by (2) the
actual sale price at which the sell order giving rise to such
purchase obligation was executed (including any brokerage
commissions), 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 if the Company had 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 (including any
brokerage commissions) 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 and, upon request of the Company, evidence of
the amount of such loss. Nothing herein shall limit a Xxxxxx's
right to pursue any
14
other remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the
Company's failure to timely deliver certificates representing
shares of Common Stock upon conversion of this Debenture as
required pursuant to the terms hereof.
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 for the sole 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 aggregate number of shares of
the Common Stock as shall (subject to the terms and conditions
set forth in the Purchase Agreement) be issuable (taking into
account the adjustments and restrictions of Section 5) upon
the conversion of the outstanding principal amount of this
Debenture and payment of interest hereunder. The Company
covenants that all shares of Common Stock that shall be so
issuable shall, upon issue, be duly authorized, validly
issued, fully paid and nonassessable and, if the Registration
Statement is then effective under the Securities Act, shall be
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 Common Stock,
but may if otherwise permitted, make a cash payment in respect
of any final fraction of a share based on the VWAP at such
time. If the Company elects not, or is unable, to make such a
cash payment, the Holder shall be entitled to receive, in lieu
of the final fraction of a share, 1 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 certificates,
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
15
distributions payable in shares of Common Stock on shares of Common
Stock or any Common Stock Equivalents (which, for avoidance of doubt,
shall not include any shares of Common Stock issued by the Company upon
conversion of, or payment of interest on, this Debenture); (B)
subdivides outstanding shares of Common Stock into a larger number of
shares; (C) combines (including by way of a reverse stock split)
outstanding shares of Common Stock into a smaller number of shares; or
(D) issues, in the event of a reclassification of shares of the Common
Stock, any shares of capital stock of the Company, then the Set Price
shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock (excluding any treasury shares of the
Company) 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, sells or grants any option to purchase or sells or grants
any right to reprice its securities, or otherwise disposes of or issues
(or announces any 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 that is lower than the then Set Price (such lower price, the
"BASE CONVERSION PRICE" and such issuances collectively, a "DILUTIVE
ISSUANCE") (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 are issued in connection with such issuance,
be entitled to receive shares of Common Stock at an effective price per
share that is lower than the Set Price, such issuance shall be deemed
to have occurred for less than the Set Price on such date of the
Dilutive Issuance), then the Set Price shall be reduced to equal the
Base Conversion Price. Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued. Notwithstanding
the foregoing, no adjustment will be made under this Section 5(b) in
respect of an Exempt Issuance. The Company shall notify the Holder in
writing, no later than the Business Day following the issuance of any
Common Stock or Common Stock Equivalents subject to this Section 5(b),
indicating therein the applicable issuance price, or 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, the
Holder is entitled to receive a number of Conversion Shares based upon
the Base Conversion Price on or after the date of such Dilutive
Issuance, regardless of whether the Holder accurately refers to the
Base Conversion Price in the Notice of Conversion.
c) SUBSEQUENT RIGHTS OFFERINGS. If the Company, at any
time while the Debenture is outstanding, shall issue rights, options or
warrants to all holders of Common
16
Stock (and not to Holders) entitling them to subscribe for or purchase
shares of Common Stock at a price per share that is lower than the VWAP
on the record date referenced below, then the Set Price shall be
multiplied by a fraction of which the denominator shall be the number
of shares of the Common Stock outstanding on the date of issuance of
such rights or warrants plus the number of additional shares of Common
Stock offered for subscription or purchase, and of which the numerator
shall be the number of shares of the Common Stock outstanding on the
date of issuance of such rights or warrants plus the number of shares
which the aggregate offering price of the total number of shares so
offered (assuming delivery to the Company in full of all consideration
payable upon exercise of such rights, options or warrants) would
purchase at such VWAP. Such adjustment shall be made whenever such
rights or warrants are issued, and shall become effective immediately
after the record date for the determination of stockholders entitled to
receive such rights, options or warrants.
d) PRO RATA DISTRIBUTIONS. If the Company, at any time
while this Debenture is outstanding, distributes to all holders of
Common Stock (and not to the Holders) evidences of its indebtedness or
assets (including cash and cash dividends) or rights or warrants to
subscribe for or purchase any security (other than the Common Stock,
which shall be subject to Section 5(b)), then in each such case the Set
Price shall be adjusted by multiplying such Set 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 1 outstanding share of the Common Stock as determined by
the Board of Directors of the Company in good faith. In either case the
adjustments shall be described in a statement delivered to the Holder
describing the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to 1 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.
e) 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 transaction or a series of related transactions, (C) any tender
offer or exchange offer (whether by the Company or another Person) is
completed pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, cash or property,
or (D) the Company effects any reclassification of the Common Stock or
any compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or
property (in any such case, a "FUNDAMENTAL TRANSACTION"), then, upon
any subsequent conversion of this Debenture, the Holder shall have the
right to receive, for each Conversion Share that would have been
issuable upon such conversion immediately prior to the occurrence of
such Fundamental Transaction, the same kind and amount of securities,
cash or property as it would have been entitled to receive upon the
occurrence of such Fundamental
17
Transaction if it had been, immediately prior to such Fundamental
Transaction, the holder of 1 share of Common Stock (the "ALTERNATE
CONSIDERATION"). For purposes of any such conversion, the determination
of the Set Price shall be appropriately adjusted to apply to such
Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of 1 share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Set 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 Section 5(e) and
insuring that this Debenture (or any such replacement security) will be
similarly adjusted upon any subsequent transaction analogous to a
Fundamental Transaction.
f) 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 any
treasury shares of the Company) issued and outstanding.
g) NOTICE TO THE HOLDER.
i. ADJUSTMENT TO SET PRICE. Whenever the Set
Price is adjusted pursuant to any provision of this Section 5,
the Company shall promptly mail to each Holder a notice
setting forth the Set Price after such adjustment and setting
forth a brief statement of the facts requiring such
adjustment. If the Company issues a variable rate security,
despite the prohibition thereon in the Purchase Agreement, the
Company shall be deemed to have issued Common Stock or Common
Stock Equivalents at the lowest possible conversion or
exercise price at which such securities may be converted or
exercised in the case of a Variable Rate Transaction (as
defined in the Purchase Agreement).
ii. NOTICE TO ALLOW CONVERSION BY HOLDER. If (A)
the Company shall declare a dividend (or any other
distribution in whatever form) 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 of
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
18
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, or (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 delivered
to the Holder at its last address as it shall appear upon the
Debenture Register, 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 deliver such notice or any defect
therein or in the delivery 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 on the date of such notice
through the effective date of the event triggering such
notice.
SECTION 6. REDEMPTION AND FORCED CONVERSION.
a) OPTIONAL REDEMPTION AT ELECTION OF THE HOLDER.
Subject to the provisions of this Section 6(a), at any time after the
date hereof, in the event of a Change of Control Transaction that
results in an non-Affiliated third party acquiring more than 50% of the
voting securities of the Company in one transaction or a series of
related transactions, in addition to any other rights hereunder, the
Holder may deliver a notice to the Company (an "OPTIONAL REDEMPTION
NOTICE" and the date such notice is deemed delivered hereunder, the
"OPTIONAL REDEMPTION NOTICE DATE") of its irrevocable election to cause
the Company redeem some or all of the then outstanding amounts owed
under this Debenture, for an amount, in cash, or, subject to the
conditions set forth below, at the Company's option, in shares of
registered Common Stock, equal to the Optional Redemption Amount on the
20th Trading Day following the Optional Redemption Notice Date (such
date, the "OPTIONAL REDEMPTION DATE" and such redemption, the "OPTIONAL
REDEMPTION"). The Company shall deliver notice of its election to pay
the Optional Redemption Amount in shares of Common Stock within 1
Trading Day of its receipt of an Optional Redemption Notice. Failure to
so deliver a notice to pay an Option Redemption Amount in shares of
Common Stock within 1 Trading Day shall be deemed an election by the
Company to pay such amount in cash. The Optional Redemption Amount is
due in full on the Optional Redemption Date. If the Company elects to
pay an
19
Optional Redemption Amount in shares of Common Stock, such shares shall
be based on a conversion price equal to the lesser of (i) the then
Conversion Price and (ii) 85% of the average of the VWAPs for the 5
consecutive Trading Days ending on the Trading Day that is immediately
prior to the applicable Optional Redemption Date. The Company may only
elect to pay the Optional Redemption Amount in shares of Common Stock
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 or require the Company to pay such
Optional Redemption Amount in cash. The Company covenants and agrees
that it will honor all Notices of Conversion tendered in accordance
with this Debenture from the time of delivery of the Optional
Redemption Notice through the date all amounts owing thereon are due
and paid in full.
b) OPTIONAL REDEMPTION AT ELECTION OF COMPANY. Subject
to the provisions of this Section 6, at any time after the Original
Issue Date, the Company may deliver a notice to the Holder (an "COMPANY
OPTIONAL REDEMPTION NOTICE" and the date such notice is deemed
delivered hereunder, the "COMPANY OPTIONAL REDEMPTION NOTICE DATE") of
its irrevocable election to redeem the Debentures for cash in an amount
equal to the Company Optional Redemption Amount on the 10th Trading Day
following the Company Optional Redemption Notice Date (such date, the
"COMPANY OPTIONAL REDEMPTION DATE" and such redemption, the "COMPANY
OPTIONAL REDEMPTION"). The Company Optional Redemption Amount is
payable in full on the Company Optional Redemption Date. The Company
covenants and agrees that it will honor all Notices of Conversion
tendered from the time of delivery of the Company Optional Redemption
Notice through the date all amounts owing thereon are due and paid in
full. In addition, if any portion of the Company Optional Redemption
Amount remains unpaid after the Company Optional Redemption Date, the
Holder may elect, by written notice to the Company given at any time
thereafter, to invalidate AB INITIO such redemption.
c) REDEMPTION PROCEDURE. The payment of cash pursuant to
an Optional Redemption or Company Optional Redemption shall be made on
the Optional Redemption Date or Company Optional Redemption Date, as
applicable. If any portion of the cash payment for an Optional
Redemption or Company Optional Redemption shall not be paid by the
Company by the respective due date, interest shall accrue thereon at
the rate of 18% per annum (or the maximum rate permitted by applicable
law, whichever is less) until the such payment, plus all amounts owing
thereon, is paid in full.
20
d) FORCED CONVERSION. Notwithstanding anything herein to
the contrary, if after the Effective Date, (i) the closing bid prices
for each of any 10 consecutive Trading Days, which period shall have
commenced only after the Effective Date, such period the "THRESHOLD
PERIOD")) exceeds 200% of the Set Price (subject to adjustment for
reverse and forward stock splits, stock dividends, stock combinations
and other similar transactions of the Common Stock that occur after the
Original Issue Date) and (ii) the average daily volume for such
Threshold Period exceeds 100,000 shares of Common Stock per Trading Day
(subject to adjustment for reverse and forward stock splits, stock
dividends, stock combinations and other similar transactions of the
Common Stock that occur after the Original Issue Date), the Company
may, within 1 Trading Day after the end of any such Threshold Period,
deliver a written notice to the Holder (a "FORCED CONVERSION NOTICE"
and the date such notice is delivered to the Holder, the "FORCED
CONVERSION NOTICE DATE") to cause the Holder to convert all or part of
the then outstanding principal amount of Debentures plus, if so
specified in the Forced Conversion Notice, accrued but unpaid interest
owing to the Holder pursuant to Section 4, it being agreed that the
"Conversion Date" for purposes of Section 4 shall be deemed to occur on
the third Trading Day following the Forced Conversion Notice Date (such
third Trading Day, the "FORCED CONVERSION DATE"). The Company may not
deliver a Forced Conversion Notice, and any Forced Conversion Notice
delivered by the Company shall not be effective, unless all of the
Equity Conditions are met on each Trading Day occurring during the
applicable Threshold Period through and including the later of each
Forced Conversion Date and the Trading Day such Conversion Shares
pursuant to such conversion are delivered to the Holder. Any Forced
Conversion Notices shall be applied ratably to all Holders in
proportion to each Holder's initial purchases of Debentures, provided
that any voluntary conversions by a Holder shall be applied against
such Holder's pro-rata allocation, thereby decreasing the aggregate
amount forcibly converted hereunder if only a portion of this Debenture
is forcibly converted. For purposes of clarification, a Forced
Conversion shall be subject to all of the provisions of Section 4,
including, without limitation, the provision requiring payment of
liquidated damages and limitations on conversions.
SECTION 7. NEGATIVE COVENANTS. As long as 10% or more of the
original principal amount of this Debenture remains outstanding, the Company
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly, without the prior written consent of the Holder:
a) other than Permitted Indebtedness, enter into,
create, incur, assume, guarantee or suffer to exist any indebtedness
for borrowed money of any kind, including but not limited to, a
guarantee, on or with respect to any of its property or assets now
owned or hereafter acquired or any interest therein or any income or
profits therefrom;
b) other than Permitted Liens, enter into, create,
incur, assume or suffer to exist any Liens of any kind, on or with
respect to any of its property or assets now owned or hereafter
acquired or any interest therein or any income or profits therefrom;
21
c) amend its charter documents, including without
limitation, the certificate of incorporation and bylaws, in any manner
that materially and adversely affects any rights of the Holder;
d) repay, repurchase or offer to repay, repurchase or
otherwise acquire more than a DE MINIMIS number of shares of its Common
Stock or Common Stock Equivalents other than as to (a) the Conversion
Shares or Warrant Shares as permitted or required under the Transaction
Documents and (b) repurchases of Common Stock or Common Stock
Equivalents of departing officers and directors of the Company,
provided that such repurchases shall not exceed an aggregate of
$100,000 for all officers and directors during the term of this
Debenture);
e) enter into any agreement with respect to any of the
foregoing; or
f) pay cash dividends or distributions on any equity
securities of the Company.
SECTION 8. EVENTS OF DEFAULT.
a) "EVENT OF DEFAULT" means, wherever used herein, any
of the following events (whatever the reason for such event and whether
such event 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, liquidated
damages and other amounts owing to a Holder on any Debenture,
as and when the same shall become due and payable (whether on
a Conversion Date or the Maturity Date or by acceleration or
otherwise) which default, solely in the case of an interest
payment or other default under clause (B) above, is not cured
within 5 Trading Days;
ii. the Company shall fail to observe or perform
any other covenant or agreement contained in the Debentures
(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 failure sent by the
Holder or by any other Holder and (B) 10 Trading Days after
the Company has become or should have become aware of such
failure;
iii. a default or event of default (subject to
any grace or cure period provided in the applicable agreement,
document or instrument) shall occur under (A) any of the
Transaction Documents or (B) any other material agreement,
lease, document or instrument to which the Company or any
Subsidiary is obligated (and not covered by clause (vi)
below);
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iv. any representation or warranty made in this
Debenture, any other Transaction Documents, any written
statement pursuant hereto or thereto or any other report,
financial statement or certificate made or delivered to the
Holder or any other Holder shall be untrue or incorrect in any
material respect as of the date when made or deemed made;
v. the Company or any Significant Subsidiary
shall be subject to a Bankruptcy Event;
vi. the Company or any Subsidiary shall default
on 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 that (a) involves an obligation greater
than $150,000, whether such indebtedness now exists or shall
hereafter be created, and (b) results 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
listing or quotation for trading on a Trading Market and shall
not be eligible to resume listing or quotation for trading
thereon within five Trading Days;
viii. the Company shall be a party to any Change
of Control Transaction or Fundamental Transaction or shall
agree to sell or dispose of all or in excess of 33% of its
assets in one transaction or a series of related transactions
(whether or not such sale would constitute a Change of Control
Transaction);
ix. a Registration Statement shall not have been
declared effective by the Commission on or prior to the 180th
calendar day after the Closing Date;
x. if, during the Effectiveness Period (as
defined in the Registration Rights Agreement), either (a) the
effectiveness of the Registration Statement lapses for any
reason or (b) the Holder shall not be permitted to resell
Registrable Securities (as defined in the Registration Rights
Agreement) under the Registration Statement for a period of
more than 20 consecutive Trading Days or 30 non-consecutive
Trading Days during any 12 month period; PROVIDED, HOWEVER,
that if 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
pending transaction(s) or the parties thereto which
information is not available or may not be publicly disclosed
at the time, the Company shall be permitted an additional 10
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consecutive Trading Days during any 12 month period pursuant
to this Section 8(a)(x);
xi. the Company shall fail for any reason to
deliver certificates to a Holder prior to the fifth Trading
Day after a Conversion Date or any Forced Conversion Date
pursuant to Section 4(d) or the Company shall provide at any
time notice to the Holder, including by way of public
announcement, of the Company's intention to not honor requests
for conversions of any Debentures in accordance with the terms
hereof; or
xii. any monetary judgment, writ or similar final
process shall be entered or filed against the Company, any
Subsidiary or any of their respective property or other assets
for more than $100,000, and such judgment, writ or similar
final process shall remain unvacated, unbonded or unstayed for
a period of 45 calendar days.
b) REMEDIES UPON EVENT OF DEFAULT. If any Event of
Default occurs, the outstanding principal amount of this Debenture,
plus accrued but unpaid interest, liquidated damages and other amounts
owing in respect thereof through the date of acceleration, shall
become, at the Holder's election, immediately due and payable in cash
at 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 an
interest rate equal to the lesser of 18% per annum or the maximum rate
permitted under applicable law. Upon the payment in full of the
Mandatory Default Amount, the Holder shall promptly surrender this
Debenture to or as directed by the Company. In connection with such
acceleration described herein, 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 acceleration may be rescinded and annulled by Xxxxxx at any time
prior to payment hereunder and the Holder shall have all rights as a
holder of the Debenture until such time, if any, as the Holder receives
full payment pursuant to this Section 8(b). No such rescission or
annulment shall affect any subsequent Event of Default or impair any
right consequent thereon.
SECTION 9. MISCELLANEOUS.
a) NOTICES. Any and all notices or other communications
or deliveries to be provided by the Holder hereunder, including,
without limitation, any Notice of Conversion, shall be in writing and
delivered personally, by facsimile, or sent by a nationally recognized
overnight courier service, addressed to the Company, at the address set
forth above, facsimile number ______________, ATTN:
______________________________________or such other facsimile number or
address as the Company may specify for such purpose by notice to the
Holder delivered in accordance with this Section 9. Any and all notices
or other communications or
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deliveries to be provided by the Company hereunder shall be in writing
and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service addressed to each Holder at the
facsimile number or address of such Holder appearing on the books of
the Company, or if no such facsimile 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
number specified in this Section 9 prior to 5:30 p.m. (New York City
time), (ii) the date immediately following the date of transmission, if
such notice or communication is delivered via facsimile at the
facsimile number specified in this Section 9 between 5:30 p.m. (New
York City time) and 11:59 p.m. (New York City time) on any 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, liquidated damages and accrued interest, as
applicable, on this Debenture at the time, place, and rate, and in the
coin or currency, herein prescribed. This Debenture is a direct debt
obligation of the Company. This Debenture ranks PARI PASSU with all
other Debentures now or hereafter issued under the terms set forth
herein.
c) LOST OR MUTILATED DEBENTURE. If this Debenture shall
be mutilated, lost, stolen or destroyed, the Company shall execute and
deliver, in exchange and substitution for and upon cancellation of a
mutilated Debenture, or in lieu of or in substitution for a lost,
stolen or destroyed Debenture, a new Debenture for the principal amount
of this Debenture so mutilated, lost, stolen or destroyed, but only
upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, 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 conflict of laws thereof. Each party agrees that all
legal proceedings concerning the interpretation, 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 such New
25
York Courts, 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 other manner permitted by applicable 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 in the investigation, preparation and prosecution of such
action or proceeding.
e) WAIVER. Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be
construed to be a waiver of any other breach of such provision or of
any breach of any other provision of this Debenture. The failure of the
Company or the Holder to insist upon strict adherence to any term of
this Debenture on one or more occasions shall not be considered a
waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Debenture. Any
waiver by the Company or the Holder 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 the applicable law
governing usury, the applicable rate of interest due hereunder shall
automatically be lowered to equal the maximum rate of interest
permitted under applicable law. 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.
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h) HEADINGS. The headings contained herein are for
convenience only, do not constitute a part of this Debenture and shall
not be deemed to limit or affect any of the provisions hereof.
i) ASSUMPTION. Any successor to the Company or any
surviving entity in a Fundamental Transaction shall: (i) assume, prior
to such Fundamental Transaction, all of the obligations of the Company
under this Debenture and the other Transaction Documents pursuant to
written agreements in form and substance satisfactory to the Holder
(such approval not to be unreasonably withheld or delayed) and (ii)
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 amount and the interest
rate of this Debenture and having similar ranking to this Debenture,
which shall be 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.
*********************
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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.
SONOMA COLLEGE, INC.
By: /s/
-----------------------------------------
Name: Xxxxxxx Xxxxxx
Title: CEO
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