THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM,
SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE
144 UNDER SAID ACT.
SECURED CONVERTIBLE DEBENTURE
Tacoma, Washington
January 24, 2002 $50,000
FOR VALUE RECEIVED, INSYNQ, INC., a Delaware corporation (hereinafter
called the "BORROWER"), hereby promises to pay to the order of AJW PARTNERS, LLC
or registered assigns (the "HOLDER") the sum of Fifty Thousand Dollars
($50,000), on January 24, 2003 (the "MATURITY DATE"), and to pay interest on the
unpaid principal balance hereof at the rate of twelve percent (12%) per annum
from January 24, 2002 (the "ISSUE DATE") until the same becomes due and payable,
whether at maturity or upon acceleration or by prepayment or otherwise. Any
amount of principal or interest on this Debenture which is not paid when due
shall bear interest at the rate of fifteen percent (15%) per annum from the due
date thereof until the same is paid ("DEFAULT INTEREST"). Interest shall
commence accruing on the issue date, shall be computed on the basis of a 365-day
year and the actual number of days elapsed and shall be payable, at the option
of the Holder, either quarterly on March 31, June 30, September 30 and December
31 of each year beginning on March 31, 2002, or at the time of conversion of the
principal to which such interest relates in accordance with Article I below. All
payments due hereunder (to the extent not converted into common stock, par value
$0.001 per share, of the Borrower (the "COMMON STOCK") in accordance with the
terms hereof) shall be made in lawful money of the United States of America.
Payments of interest shall be made, at the option of Borrower, in cash or shares
of Common Stock. In the event that the Company elects to make interest payments
due hereunder in Common Stock, such payments shall be made at the Conversion
Price then prevailing at the time such payment is made. All payments shall be
made at such address as the Holder shall hereafter give to the Borrower by
written notice made in accordance with the provisions of this Debenture.
Whenever any amount expressed to be due by the terms of this Debenture is due on
any day which is not a business day, the same shall instead be due on the next
succeeding day which is a business day and, in the case of any interest payment
date which is not the date on which this Debenture is paid in full, the
extension of the due date thereof shall not be taken into account for purposes
of determining the amount of interest due on such date. As used in this
Debenture, the term "business day" shall mean any day other than a Saturday,
Sunday or a day on which commercial banks in New York City, New York are
authorized or required by law or executive order to remain closed. This
Debenture shall be secured pursuant to the terms of that certain Security
Agreement by and between the Borrower and the Holder of even date herewith. Each
capitalized term used herein, and not otherwise defined, shall have the meaning
ascribed thereto in that certain Securities Purchase Agreement, dated January
24, 2002, pursuant to which this Debenture was originally issued (the "PURCHASE
AGREEMENT").
The following terms shall apply to this Debenture:
ARTICLE I. CONVERSION RIGHTS
1.1 CONVERSION RIGHT. The Holder shall have the right from time to time,
and at any time on or prior to the earlier of (i) the Maturity Date
and (ii) the date of payment of the Default Amount (as defined in
Article III) pursuant to Section 1.6(a) or Article III, the Optional
Prepayment Amount (as defined in Section 5.1) or any payments pursuant
to Section 1.7, each in respect of the remaining outstanding principal
amount of this Debenture, to convert all or any part of the
outstanding and unpaid principal amount of this Debenture into fully
paid and non-assessable shares of Common Stock, as such Common Stock
exists on the Issue Date, or any shares of capital stock or other
securities of the Borrower into which such Common Stock shall
hereafter be changed or reclassified at the conversion price (the
"CONVERSION PRICE") determined as provided herein (a "CONVERSION");
PROVIDED, HOWEVER, that in no event shall the Holder be entitled to
convert any portion of this Debenture) in excess of that portion of
this Debenture upon conversion of which the sum of (1) the number of
shares of Common Stock beneficially owned by the Holder and its
affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of
the Debentures or the unexercised or unconverted portion of any other
security of the Borrower (including, without limitation, the warrants
issued by the Borrower pursuant to the Purchase Agreement) subject to
a limitation on conversion or exercise analogous to the limitations
contained herein) and (2) the number of shares of Common Stock
issuable upon the conversion of the portion of this Debenture with
respect to which the determination of this proviso is being made,
would result in beneficial ownership by the Holder and its affiliates
of more than 4.9% of the outstanding shares of Common Stock. For
purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and
Regulations 13D-G thereunder, except as otherwise provided in clause
(1) of such proviso. The Holder of this Debenture may waive the
limitations set forth herein by sixty-one (61) days prior written
notice to the Company. The number of shares of Common Stock to be
issued upon each conversion of this Debenture shall be determined by
dividing the Conversion Amount (as defined below) by the applicable
Conversion Price then in effect on the date specified in the notice of
conversion, in the form attached hereto as Exhibit A (the "NOTICE OF
CONVERSION"), delivered to the Borrower by the Holder in accordance
with Section 1.4 below; provided that the Notice of Conversion is
submitted by facsimile (or by other means resulting in, or reasonably
expected to result in, notice) to the Borrower before 9:00 p.m., New
York City, New York time on such conversion date (the "CONVERSION
DATE"). The term "CONVERSION AMOUNT" means, with respect to any
conversion of this Debenture, the sum of (1) the principal amount of
this Debenture to be converted in such conversion PLUS (2) accrued and
unpaid interest, if any, on such principal amount at the interest
rates provided in this Debenture to the Conversion Date PLUS (3)
Default Interest, if any, on the amounts referred to in the
immediately preceding clauses (1) and/or (2) PLUS (4) at the Holder's
option, any amounts owed to the Holder pursuant to Sections 1.3 and
1.4(g) hereof or pursuant to Section 2(c) of that certain Registration
Rights Agreement, dated as of January 24, 2002, executed in connection
with the initial issuance of this Debenture and the other Debentures
issued on the Issue Date (the "REGISTRATION RIGHTS AGREEMENT").
1.2 CONVERSION PRICE.
(A) CALCULATION OF CONVERSION PRICE. The Conversion Price shall be
the lesser of (i) the Variable Conversion Price (as defined
herein) and (ii) the Fixed Conversion Price (as defined herein)
(subject, in each case, to equitable adjustments for stock
splits, stock dividends or rights offerings by the Borrower
relating to the Borrower's securities or the securities of any
subsidiary of the Borrower, combinations, recapitalization,
reclassifications, extraordinary distributions and similar
events). The "VARIABLE CONVERSION PRICE" shall mean the
Applicable Percentage (as defined herein) multiplied by the
Market Price (as defined herein). "MARKET PRICE" means the
average of the lowest three (3) Trading Prices (as defined below)
for the Common Stock during the twenty (20) Trading Day period
ending one Trading Day prior to the date the Conversion Notice is
sent by the Holder to the Borrower via facsimile (the "CONVERSION
DATE"). "TRADING PRICE" means, for any security as of any date,
the inter-day trading price on the Over-the-Counter Bulletin
Board (the "OTCBB") as reported by a reliable reporting service
mutually acceptable to and hereafter designated by Holders of a
majority in interest of the Debentures (the "REPORTING SERVICE")
or, if the OTCBB is not the principal trading market for such
security, the inter-day trading price of such security on the
principal securities exchange or trading market where such
security is listed or traded as reported by the Reporting Service
or, if no inter-day trading price of such security is available
in any of the foregoing manners, the average of the inter-day
trading prices of any market makers for such security that are
listed in the "pink sheets" by the National Quotation Bureau,
Inc. If the Trading Price cannot be calculated for such security
on such date in the manner provided above, the Trading Price
shall be the fair market value as mutually determined by the
Borrower and the Holders of a majority in interest of the
Debentures being converted for which the calculation of the
Trading Price is required in order to determine the Conversion
Price of such Debentures. "TRADING DAY" shall mean any day on
which the Common Stock is traded for any period on the OTCBB, or
on the principal securities exchange or other securities market
on which the Common Stock is then being traded. "APPLICABLE
PERCENTAGE" shall mean 50.0%. The "FIXED CONVERSION PRICE" shall
mean $.008.
(B) CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS. Notwithstanding
anything contained in Section 1.2(a) to the contrary, in the
event the Borrower (i) makes a public announcement that it
intends to consolidate or merge with any other corporation (other
than a merger in which the Borrower is the surviving or
continuing corporation and its capital stock is unchanged) or
sell or transfer all or substantially all of the assets of the
Borrower or (ii) any person, group or entity (including the
Borrower) publicly announces a tender offer to purchase 50% or
more of the Borrower's Common Stock (or any other takeover
scheme) (the date of the announcement referred to in clause (i)
or (ii) is hereinafter referred to as the "ANNOUNCEMENT DATE"),
then the Conversion Price shall, effective upon the Announcement
Date and continuing through the Adjusted Conversion Price
Termination Date (as defined below), be equal to the lower of (x)
the Conversion Price which would have been applicable for a
Conversion occurring on the Announcement Date and (y) the
Conversion Price that would otherwise be in effect. From and
after the Adjusted Conversion Price Termination Date, the
Conversion Price shall be determined as set forth in this Section
1.2(a). For purposes hereof, "ADJUSTED CONVERSION PRICE
TERMINATION DATE" shall mean, with respect to any proposed
transaction or tender offer (or takeover scheme) for which a
public announcement as contemplated by this Section 1.2(b) has
been made, the date upon which the Borrower (in the case of
clause (i) above) or the person, group or entity (in the case of
clause (ii) above) consummates or publicly announces the
termination or abandonment of the proposed transaction or tender
offer (or takeover scheme) which caused this Section 1.2(b) to
become operative.
1.3 AUTHORIZED SHARES. The Borrower covenants that during the period the
conversion right exists, the Borrower will reserve from its authorized and
unissued Common Stock a sufficient number of shares, free from preemptive
rights, to provide for the issuance of Common Stock upon the full
conversion of this Debenture and the other Debentures issued pursuant to
the Purchase Agreement. As of the date of issuance of this Debenture, a
sufficient number of authorized and unissued shares of Common Stock have
been duly reserved for issuance upon conversion of this Debenture and the
other Debentures issued pursuant to the Purchase Agreement (the "RESERVED
AMOUNT"). The Reserved Amount shall be increased from time to time in
accordance with the Borrower's obligations pursuant to Section 4(h) of the
Purchase Agreement. The Borrower represents that upon issuance, such shares
will be duly and validly issued, fully paid and non-assessable. In
addition, if the Borrower shall issue any securities or make any change to
its capital structure which would change the number of shares of Common
Stock into which the Debentures shall be convertible at the then current
Conversion Price, the Borrower shall at the same time make proper provision
so that thereafter there shall be a sufficient number of shares of Common
Stock authorized and reserved, free from preemptive rights, for conversion
of the outstanding Debentures. The Borrower (i) acknowledges that it has
irrevocably instructed its transfer agent to issue certificates for the
Common Stock issuable upon conversion of this Debenture, and (ii) agrees
that its issuance of this Debenture shall constitute full authority to its
officers and agents who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock in accordance with the terms and conditions of this Debenture.
If, at any time a Holder of this Debenture submits a Notice of Conversion,
and the Borrower does not have sufficient authorized but unissued shares of
Common Stock available to effect such conversion in accordance with the
provisions of this Article I (a "CONVERSION DEFAULT"), subject to Section
4.8, the Borrower shall issue to the Holder all of the shares of Common
Stock which are then available to effect such conversion. The portion of
this Debenture which the Holder included in its Conversion Notice and which
exceeds the amount which is then convertible into available shares of
Common Stock (the "EXCESS AMOUNT") shall, notwithstanding anything to the
contrary contained herein, not be convertible into Common Stock in
accordance with the terms hereof until (and at the Holder's option at any
time after) the date additional shares of Common Stock are authorized by
the Borrower to permit such conversion, at which time the Conversion Price
in respect thereof shall be the lesser of (i) the Conversion Price on the
Conversion Default Date (as defined below) and (ii) the Conversion Price on
the Conversion Date thereafter elected by the Holder in respect thereof. In
addition, the Borrower shall pay to the Holder payments ("CONVERSION
DEFAULT PAYMENTS") for a Conversion Default in the amount of (x) the SUM OF
(1) the then outstanding principal amount of this Debenture PLUS (2)
accrued and unpaid interest on the unpaid principal amount of this
Debenture through the Authorization Date (as defined below) PLUS (3)
Default Interest, if any, on the amounts referred to in clauses (1) and/or
(2), MULTIPLIED BY (y) .24, MULTIPLIED BY (z) (N/365), where N = the number
of days from the day the holder submits a Notice of Conversion giving rise
to a Conversion Default (the "CONVERSION DEFAULT DATE") to the date (the
"AUTHORIZATION DATE") that the Borrower authorizes a sufficient number of
shares of Common Stock to effect conversion of the full outstanding
principal balance of this Debenture. The Borrower shall use its best
efforts to authorize a sufficient number of shares of Common Stock as soon
as practicable following the earlier of (i) such time that the Holder
notifies the Borrower or that the Borrower otherwise becomes aware that
there are or likely will be insufficient authorized and unissued shares to
allow full conversion thereof and (ii) a Conversion Default. The Borrower
shall send notice to the Holder of the authorization of additional shares
of Common Stock, the Authorization Date and the amount of Holder's accrued
Conversion Default Payments. The accrued Conversion Default Payments for
each calendar month shall be paid in cash or shall be convertible into
Common Stock (at such time as there are sufficient authorized shares of
Common Stock) at the applicable Conversion Price, at the Holder's option,
as follows:
(A) In the event the Holder elects to take such payment in cash, cash
payment shall be made to Holder by the fifth (5th) day of the month
following the month in which it has accrued; and
(B) In the event the Holder elects to take such payment in Common Stock,
the Holder may convert such payment amount into Common Stock at the
Conversion Price (as in effect at the time of conversion) at any time
after the fifth (5th) day of the month following the month in which it
has accrued in accordance with the terms of this Article I (so long as
there is then a sufficient number of authorized shares of Common
Stock).
The Holder's election shall be made in writing to the Borrower at any
time prior to 9:00 p.m., New York City, New York time, on the third
day of the month following the month in which Conversion Default
payments have accrued. If no election is made, the Holder shall be
deemed to have elected to receive cash. Nothing herein shall limit the
Holder's right to pursue actual damages (to the extent in excess of
the Conversion Default Payments) for the Borrower's failure to
maintain a sufficient number of authorized shares of Common Stock, and
each holder shall have the right to pursue all remedies available at
law or in equity (including degree of specific performance and/or
injunctive relief).
1.4 METHOD OF CONVERSION.
(A) MECHANICS OF CONVERSION. Subject to Section 1.1, this Debenture may be
converted by the Holder in whole or in part (together with accrued and
unpaid interest thereon) at any time from time to time after the Issue
Date, by (A) submitting to the Borrower a Notice of Conversion (by
facsimile or other reasonable means of communication dispatched on the
Conversion Date prior to 9:00 p.m., New York City, New York time) and
(B) subject to Section 1.4(b), surrendering this Debenture at the
principal office of the Borrower.
(B) SURRENDER OF DEBENTURE UPON CONVERSION. Notwithstanding anything to
the contrary set forth herein, upon conversion of this Debenture in
accordance with the terms hereof, the Holder shall not be required to
physically surrender this Debenture to the Borrower unless the entire
unpaid principal amount of this Debenture is so converted. The Holder
and the Borrower shall maintain records showing the principal amount
so converted and the dates of such conversions or shall use such other
method, reasonably satisfactory to the Holder and the Borrower, so as
not to require physical surrender of this Debenture upon each such
conversion. In the event of any dispute or discrepancy, such records
of the Borrower shall be controlling and determinative in the absence
of manifest error. Notwithstanding the foregoing, if any portion of
this Debenture is converted as aforesaid, the Holder may not transfer
this Debenture unless the Holder first physically surrenders this
Debenture to the Borrower, whereupon the Borrower will forthwith issue
and deliver upon the order of the Holder a new Debenture of like
tenor, registered as the Holder (upon payment by the Holder of any
applicable transfer taxes) may request, representing in the aggregate
the remaining unpaid principal amount of this Debenture. 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 represented by this Debenture may
be less than the amount stated on the face hereof.
(C) PAYMENT OF TAXES.The Borrower shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issue
and delivery of shares of Common Stock or other securities or property
on conversion of this Debenture in a name other than that of the
Holder (or in street name), and the Borrower shall not be required to
issue or deliver any such shares or other securities or property
unless and until the person or persons (other than the Holder or the
custodian in whose street name such shares are to be held for the
Holder's account) requesting the issuance thereof shall have paid to
the Borrower the amount of any such tax or shall have established to
the satisfaction of the Borrower that such tax has been paid.
(D) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon receipt by the Borrower
from the Holder of a facsimile transmission (or other reasonable means
of communication) of a Notice of Conversion meeting the requirements
for conversion as provided in this Section 1.4, the Borrower shall
issue and deliver or cause to be issued and delivered to or upon the
order of the Holder certificates for the Common Stock issuable upon
such conversion within two (2) business days after such receipt (and,
solely in the case of conversion of the entire unpaid principal amount
hereof, surrender of this Debenture) (such second business day being
hereinafter referred to as the "DEADLINE") in accordance with the
terms hereof and the Purchase Agreement (including, without
limitation, in accordance with the requirements of Section 2(g) of the
Purchase Agreement that certificates for shares of Common Stock issued
on or after the effective date of the Registration Statement upon
conversion of this Debenture shall not bear any restrictive legend).
(E) OBLIGATION OF BORROWER TO DELIVER COMMON STOCK. Upon receipt by the
Borrower of a Notice of Conversion, the Holder shall be deemed to be
the holder of record of the Common Stock issuable upon such
conversion, the outstanding principal amount and the amount of accrued
and unpaid interest on this Debenture shall be reduced to reflect such
conversion, and, unless the Borrower defaults on its obligations under
this Article I, all rights with respect to the portion of this
Debenture being so converted shall forthwith terminate except the
right to receive the Common Stock or other securities, cash or other
assets, as herein provided, on such conversion. If the Holder shall
have given a Notice of Conversion as provided herein, the Borrower's
obligation to issue and deliver the certificates for Common Stock
shall be absolute and unconditional, irrespective of the absence of
any action by the Holder to enforce the same, any waiver or consent
with respect to any provision thereof, the recovery of any judgment
against any person or any action to enforce the same, any failure or
delay in the enforcement of any other obligation of the Borrower to
the holder of record, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the
Holder of any obligation to the Borrower, and irrespective of any
other circumstance which might otherwise limit such obligation of the
Borrower to the Holder in connection with such conversion. The
Conversion Date specified in the Notice of Conversion shall be the
Conversion Date so long as the Notice of Conversion is received by the
Borrower before 9:00 p.m., New York City, New York time, on such date.
(F) DELIVERY OF COMMON STOCK BY ELECTRONIC TRANSFER. In lieu of delivering
physical certificates representing the Common Stock issuable upon
conversion, provided the Borrower's transfer agent is participating in
the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the Holder and its
compliance with the provisions contained in Section 1.1 and in this
Section 1.4, the Borrower shall use its best efforts to cause its
transfer agent to electronically transmit the Common Stock issuable
upon conversion to the Holder by crediting the account of Holder's
Prime Broker with DTC through its Deposit Withdrawal Agent Commission
("DWAC") system.
(G) FAILURE TO DELIVER COMMON STOCK PRIOR TO DEADLINE. Without in any way
limiting the Holder's right to pursue other remedies, including actual
damages and/or equitable relief, the parties agree that if delivery of
the Common Stock issuable upon conversion of this Debenture is more
than two (2) days after the Deadline (other than a failure due to the
circumstances described in Section 1.3 above, which failure shall be
governed by such Section) the Borrower shall pay to the Holder $2,000
per day in cash, for each day beyond the Deadline that the Borrower
fails to deliver such Common Stock. Such cash amount shall be paid to
Holder by the fifth day of the month following the month in which it
has accrued or, at the option of the Holder (by written notice to the
Borrower by the first day of the month following the month in which it
has accrued), shall be added to the principal amount of this
Debenture, in which event interest shall accrue thereon in accordance
with the terms of this Debenture and such additional principal amount
shall be convertible into Common Stock in accordance with the terms of
this Debenture.
1.5 CONCERNING THE SHARES. The shares of Common Stock issuable upon conversion
of this Debenture may not be sold or transferred unless (i) such shares are
sold pursuant to an effective registration statement under the Act or (ii)
the Borrower or its transfer agent shall have been furnished with an
opinion of counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions) to the effect
that the shares to be sold or transferred may be sold or transferred
pursuant to an exemption from such registration or (iii) such shares are
sold or transferred pursuant to Rule 144 under the Act (or a successor
rule) ("RULE 144") or (iv) such shares are transferred to an "affiliate"
(as defined in Rule 144) of the Borrower who agrees to sell or otherwise
transfer the shares only in accordance with this Section 1.5 and who is an
Accredited Investor (as defined in the Purchase Agreement). Except as
otherwise provided in the Purchase Agreement (and subject to the removal
provisions set forth below), until such time as the shares of Common Stock
issuable upon conversion of this Debenture have been registered under the
Act as contemplated by the Registration Rights Agreement or otherwise may
be sold pursuant to Rule 144 without any restriction as to the number of
securities as of a particular date that can then be immediately sold, each
certificate for shares of Common Stock issuable upon conversion of this
Debenture that has not been so included in an effective registration
statement or that has not been sold pursuant to an effective registration
statement or an exemption that permits removal of the legend, shall bear a
legend substantially in the following form, as appropriate:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT,
OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR
OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT UNLESS SOLD PURSUANT TO RULE 144 UNDER
SAID ACT."
The legend set forth above shall be removed and the Borrower shall
issue to the Holder a new certificate therefor free of any transfer
legend if (i) the Borrower or its transfer agent shall have received
an opinion of counsel, in form, substance and scope customary for
opinions of counsel in comparable transactions, to the effect that a
public sale or transfer of such Common Stock may be made without
registration under the Act and the shares are so sold or transferred,
(ii) such Holder provides the Borrower or its transfer agent with
reasonable assurances that the Common Stock issuable upon conversion
of this Debenture (to the extent such securities are deemed to have
been acquired on the same date) can be sold pursuant to Rule 144 or
(iii) in the case of the Common Stock issuable upon conversion of this
Debenture, such security is registered for sale by the Holder under an
effective registration statement filed under the Act or otherwise may
be sold pursuant to Rule 144 without any restriction as to the number
of securities as of a particular date that can then be immediately
sold. Nothing in this Debenture shall (i) limit the Borrower's
obligation under the Registration Rights Agreement or (ii) affect in
any way the Holder's obligations to comply with applicable prospectus
delivery requirements upon the resale of the securities referred to
herein.
1.6 EFFECT OF CERTAIN EVENTS.
(A) EFFECT OF MERGER, CONSOLIDATION, ETC. At the option of the Holder, the
sale, conveyance or disposition of all or substantially all of the
assets of the Borrower, the effectuation by the Borrower of a
transaction or series of related transactions in which more than 33%
of the voting power of the Borrower is disposed of, or the
consolidation, merger or other business combination of the Borrower
with or into any other Person (as defined below) or Persons when the
Borrower is not the survivor shall either: (i) be deemed to be an
Event of Default (as defined in Article III) pursuant to which the
Borrower shall be required to pay to the Holder upon the consummation
of and as a condition to such transaction an amount equal to the
Default Amount (as defined in Article III) or (ii) be treated pursuant
to Section 1.6(b) hereof. "PERSON" shall mean any individual,
corporation, limited liability company, partnership, association,
trust or other entity or organization.
(B) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time when
this Debenture is issued and outstanding and prior to conversion of
all of the Debentures, there shall be any merger, consolidation,
exchange of shares, recapitalization, reorganization, or other similar
event, as a result of which shares of Common Stock of the Borrower
shall be changed into the same or a different number of shares of
another class or classes of stock or securities of the Borrower or
another entity, or in case of any sale or conveyance of all or
substantially all of the assets of the Borrower other than in
connection with a plan of complete liquidation of the Borrower, then
the Holder of this Debenture shall thereafter have the right to
receive upon conversion of this Debenture, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of
Common Stock immediately theretofore issuable upon conversion, such
stock, securities or assets which the Holder would have been entitled
to receive in such transaction had this Debenture been converted in
full immediately prior to such transaction (without regard to any
limitations on conversion set forth herein), and in any such case
appropriate provisions shall be made with respect to the rights and
interests of the Holder of this Debenture to the end that the
provisions hereof (including, without limitation, provisions for
adjustment of the Conversion Price and of the number of shares
issuable upon conversion of the Debenture) shall thereafter be
applicable, as nearly as may be practicable in relation to any
securities or assets thereafter deliverable upon the conversion
hereof. The Borrower shall not effect any transaction described in
this Section 1.6(b) unless (a) it first gives, to the extent
practicable, thirty (30) days prior written notice (but in any event
at least fifteen (15) days prior written notice) of the record date of
the special meeting of stockholders to approve, or if there is no such
record date, the consummation of, such merger, consolidation, exchange
of shares, recapitalization, reorganization or other similar event or
sale of assets (during which time the Holder shall be entitled to
convert this Debenture) and (b) the resulting successor or acquiring
entity (if not the Borrower) assumes by written instrument the
obligations of this Section 1.6(b). The above provisions shall
similarly apply to successive consolidations, mergers, sales,
transfers or share exchanges.
(C) ADJUSTMENT DUE TO DISTRIBUTION. If the Borrower shall declare or make
any distribution of its assets (or rights to acquire its assets) to
holders of Common Stock as a dividend, stock repurchase, by way of
return of capital or otherwise (including any dividend or distribution
to the Borrower's shareholders in cash or shares (or rights to acquire
shares) of capital stock of a subsidiary (i.e., a spin-off)) (a
"DISTRIBUTION"), then the Holder of this Debenture shall be entitled,
upon any conversion of this Debenture after the date of record for
determining shareholders entitled to such Distribution, to receive the
amount of such assets which would have been payable to the Holder with
respect to the shares of Common Stock issuable upon such conversion
had such Holder been the holder of such shares of Common Stock on the
record date for the determination of shareholders entitled to such
Distribution.
(D) ADJUSTMENT DUE TO DILUTIVE ISSUANCE. If, at any time when any
Debentures are issued and outstanding, the Borrower issues or sells,
or in accordance with this Section 1.6(d) hereof is deemed to have
issued or sold, any shares of Common Stock for no consideration or for
a consideration per share (before deduction of reasonable expenses or
commissions or underwriting discounts or allowances in connection
therewith) less than the Fixed Conversion Price in effect on the date
of such issuance (or deemed issuance) of such shares of Common Stock
(a "DILUTIVE ISSUANCE"), then immediately upon the Dilutive Issuance,
the Fixed Conversion Price will be reduced to the amount of the
consideration per share received by the Borrower in such Dilutive
Issuance; PROVIDED that only one adjustment will be made for each
Dilutive Issuance.
The Borrower shall be deemed to have issued or sold shares of Common
Stock if the Borrower in any manner issues or grants any warrants,
rights or options, whether or not immediately exercisable, to
subscribe for or to purchase Common Stock or other securities
convertible into or exchangeable for Common Stock, other than pursuant
to the Company's existing Long Term Incentive Plan and Executive Long
Term Incentive Plan ("CONVERTIBLE SECURITIES") (such warrants, rights
and options to purchase Common Stock or Convertible Securities are
hereinafter referred to as "OPTIONS") and the price per share for
which Common Stock is issuable upon the exercise of such Options is
less than the Fixed Conversion Price then in effect, then the Fixed
Conversion Price shall be equal to such price per share. For purposes
of the preceding sentence, the "price per share for which Common Stock
is issuable upon the exercise of such Options" is determined by
dividing (i) the total amount, if any, received or receivable by the
Borrower as consideration for the issuance or granting of all such
Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Borrower upon the exercise of
all such Options, plus, in the case of Convertible Securities issuable
upon the exercise of such Options, the minimum aggregate amount of
additional consideration payable upon the conversion or exchange
thereof at the time such Convertible Securities first become
convertible or exchangeable, by (ii) the maximum total number of
shares of Common Stock issuable upon the exercise of all such Options
(assuming full conversion of Convertible Securities, if applicable).
No further adjustment to the Conversion Price will be made upon the
actual issuance of such Common Stock upon the exercise of such Options
or upon the conversion or exchange of Convertible Securities issuable
upon exercise of such Options.
Additionally, the Borrower shall be deemed to have issued or sold
shares of Common Stock if the Borrower in any manner issues or sells
any Convertible Securities, whether or not immediately convertible
(other than where the same are issuable upon the exercise of Options),
and the price per share for which Common Stock is issuable upon such
conversion or exchange is less than the Fixed Conversion Price then in
effect, then the Fixed Conversion Price shall be equal to such price
per share. For the purposes of the preceding sentence, the "price per
share for which Common Stock is issuable upon such conversion or
exchange" is determined by dividing (i) the total amount, if any,
received or receivable by the Borrower as consideration for the
issuance or sale of all such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the
Borrower upon the conversion or exchange thereof at the time such
Convertible Securities first become convertible or exchangeable, by
(ii) the maximum total number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities. No
further adjustment to the Fixed Conversion Price will be made upon the
actual issuance of such Common Stock upon conversion or exchange of
such Convertible Securities.
(E) PURCHASE RIGHTS. If, at any time when any Debentures are issued and
outstanding, the Borrower issues any Convertible Securities or rights
to purchase stock, warrants, securities or other property (the
"PURCHASE RIGHTS") pro rata to the record holders of any class of
Common Stock, then the Holder of this Debenture will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such Holder could have acquired if
such Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Debenture (without regard to any
limitations on conversion contained herein) immediately before the
date on which a record is taken for the grant, issuance or sale of
such Purchase Rights or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights.
(F) NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment or
readjustment of the Conversion Price as a result of the events
described in this Section 1.6, the Borrower, at its expense, shall
promptly compute such adjustment or readjustment and prepare and
furnish to the Holder of a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Borrower shall, upon the
written request at any time of the Holder, furnish to such Holder a
like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price at the time in effect and (iii) the number
of shares of Common Stock and the amount, if any, of other securities
or property which at the time would be received upon conversion of the
Debenture.
1.7 TRADING MARKET LIMITATIONS. Unless permitted by the applicable rules and
regulations of the principal securities market on which the Common Stock is
then listed or traded, in no event shall the Borrower issue upon conversion
of or otherwise pursuant to this Debenture and the other Debentures issued
pursuant to the Purchase Agreement more than the maximum number of shares
of Common Stock that the Borrower can issue pursuant to any rule of the
principal United States securities market on which the Common Stock is then
traded (the "MAXIMUM SHARE AMOUNT"), which, as of the Issue Date shall be
10,402,669 shares (19.99% of the total shares outstanding on the Issue
Date), subject to equitable adjustment from time to time for stock splits,
stock dividends, combinations, capital reorganizations and similar events
relating to the Common Stock occurring after the date hereof. Once the
Maximum Share Amount has been issued (the date of which is hereinafter
referred to as the "MAXIMUM CONVERSION DATE"), if the Borrower fails to
eliminate any prohibitions under applicable law or the rules or regulations
of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Borrower or any of
its securities on the Borrower's ability to issue shares of Common Stock in
excess of the Maximum Share Amount (a "TRADING MARKET PREPAYMENT EVENT"),
in lieu of any further right to convert this Debenture, and in full
satisfaction of the Borrower's obligations under this Debenture, the
Borrower shall pay to the Holder, within fifteen (15) business days of the
Maximum Conversion Date (the "TRADING MARKET PREPAYMENT DATE"), an amount
equal to 130% TIMES the SUM of (a) the then outstanding principal amount of
this Debenture immediately following the Maximum Conversion Date, PLUS (b)
accrued and unpaid interest on the unpaid principal amount of this
Debenture to the Trading Market Prepayment Date, PLUS (c) Default Interest,
if any, on the amounts referred to in clause (a) and/or (b) above, PLUS (d)
any optional amounts that may be added thereto at the Maximum Conversion
Date by the Holder in accordance with the terms hereof (the then
outstanding principal amount of this Debenture immediately following the
Maximum Conversion Date, PLUS the amounts referred to in clauses (b), (c)
and (d) above shall collectively be referred to as the "REMAINING
CONVERTIBLE AMOUNT"). With respect to each Holder of Debentures, the
Maximum Share Amount shall refer to such Holder's PRO RATA share thereof
determined in accordance with Section 4.8 below. In the event that the sum
of (x) the aggregate number of shares of Common Stock issued upon
conversion of this Debenture and the other Debentures issued pursuant to
the Purchase Agreement PLUS (y) the aggregate number of shares of Common
Stock that remain issuable upon conversion of this Debenture and the other
Debentures issued pursuant to the Purchase Agreement, represents at least
one hundred percent (100%) of the Maximum Share Amount (the "TRIGGERING
EVENT"), the Borrower will use its best efforts to seek and obtain
Stockholder Approval (or obtain such other relief as will allow conversions
hereunder in excess of the Maximum Share Amount) as soon as practicable
following the Triggering Event and before the Maximum Conversion Date. As
used herein, "STOCKHOLDER APPROVAL" means approval by the stockholders of
the Borrower to authorize the issuance of the full number of shares of
Common Stock which would be issuable upon full conversion of the then
outstanding Debentures but for the Maximum Share Amount.
1.8 STATUS AS STOCKHOLDER. Upon submission of a Notice of Conversion by a
Holder, (i) the shares covered thereby (other than the shares, if any,
which cannot be issued because their issuance would exceed such Holder's
allocated portion of the Reserved Amount or Maximum Share Amount) shall be
deemed converted into shares of Common Stock and (ii) the Holder's rights
as a Holder of such converted portion of this Debenture shall cease and
terminate, excepting only the right to receive certificates for such shares
of Common Stock and to any remedies provided herein or otherwise available
at law or in equity to such Holder because of a failure by the Borrower to
comply with the terms of this Debenture. Notwithstanding the foregoing, if
a Holder has not received certificates for all shares of Common Stock prior
to the tenth (10th) business day after the expiration of the Deadline with
respect to a conversion of any portion of this Debenture for any reason,
then (unless the Holder otherwise elects to retain its status as a holder
of Common Stock by so notifying the Borrower) the Holder shall regain the
rights of a Holder of this Debenture with respect to such unconverted
portions of this Debenture and the Borrower shall, as soon as practicable,
return such unconverted Debenture to the Holder or, if the Debenture has
not been surrendered, adjust its records to reflect that such portion of
this Debenture has not been converted. In all cases, the Holder shall
retain all of its rights and remedies (including, without limitation, (i)
the right to receive Conversion Default Payments pursuant to Section 1.3 to
the extent required thereby for such Conversion Default and any subsequent
Conversion Default and (ii) the right to have the Conversion Price with
respect to subsequent conversions determined in accordance with Section
1.3) for the Borrower's failure to convert this Debenture.
ARTICLE II. CERTAIN COVENANTS
2.1 DISTRIBUTIONS ON CAPITAL STOCK. So long as the Borrower shall have any
obligation under this Debenture, the Borrower shall not without the
Holder's written consent (a) pay, declare or set apart for such payment,
any dividend or other distribution (whether in cash, property or other
securities) on shares of capital stock other than dividends on shares of
Common Stock solely in the form of additional shares of Common Stock or (b)
directly or indirectly or through any subsidiary make any other payment or
distribution in respect of its capital stock except for distributions
pursuant to any shareholders' rights plan which is approved by a majority
of the Borrower's disinterested directors.
2.2 RESTRICTION ON STOCK REPURCHASES. So long as the Borrower shall have any
obligation under this Debenture, the Borrower shall not without the
Holder's written consent redeem, repurchase or otherwise acquire (whether
for cash or in exchange for property or other securities or otherwise) in
any one transaction or series of related transactions any shares of capital
stock of the Borrower or any warrants, rights or options to purchase or
acquire any such shares.
2.3 BORROWINGS. So long as the Borrower shall have any obligation under this
Debenture, the Borrower shall not, without the Holder's written consent,
create, incur, assume or suffer to exist any liability for borrowed money,
except (a) borrowings in existence or committed on the date hereof and of
which the Borrower has informed Holder in writing prior to the date hereof,
(b) indebtedness to trade creditors or financial institutions incurred in
the ordinary course of business or (c) borrowings, the proceeds of which
shall be used to repay this Debenture.
2.4 SALE OF ASSETS. So long as the Borrower shall have any obligation under
this Debenture, the Borrower shall not, without the Holder's written
consent, sell, lease or otherwise dispose of any significant portion of its
assets outside the ordinary course of business. Any consent to the
disposition of any assets may be conditioned on a specified use of the
proceeds of disposition.
2.5 ADVANCES AND LOANS. So long as the Borrower shall have any obligation under
this Debenture, the Borrower shall not, without the Holder's written
consent, lend money, give credit or make advances to any person, firm,
joint venture or corporation, including, without limitation, officers,
directors, employees, subsidiaries and affiliates of the Borrower, except
loans, credits or advances (a) in existence or committed on the date hereof
and which the Borrower has informed Holder in writing prior to the date
hereof or (b) made in the ordinary course of business.
2.6 CONTINGENT LIABILITIES. So long as the Borrower shall have any obligation
under this Debenture, the Borrower shall not, without the Holder's written
consent, assume, guarantee, endorse, contingently agree to purchase or
otherwise become liable upon the obligation of any person, firm,
partnership, joint venture or corporation, except by the endorsement of
negotiable instruments for deposit or collection and except assumptions,
guarantees, endorsements and contingencies (a) in existence or committed on
the date hereof and which the Borrower has informed Holder in writing prior
to the date hereof, and (b) similar transactions in the ordinary course of
business.
ARTICLE III. EVENTS OF DEFAULT
If any of the following events of default (each, an "EVENT OF DEFAULT")
shall occur:
3.1 FAILURE TO PAY PRINCIPAL OR INTEREST. The Borrower fails to pay the
principal hereof or interest thereon when due on this Debenture, whether at
maturity, upon a Trading Market Prepayment Event pursuant to Section 1.7,
upon acceleration or otherwise;
3.2 CONVERSION AND THE SHARES. The Borrower fails to issue shares of Common
Stock to the Holder (or announces or threatens that it will not honor its
obligation to do so) upon exercise by the Holder of the conversion rights
of the Holder in accordance with the terms of this Debenture (for a period
of at least sixty (60) days, if such failure is solely as a result of the
circumstances governed by Section 1.3 and the Borrower is using its best
efforts to authorize a sufficient number of shares of Common Stock as soon
as practicable), fails to transfer or cause its transfer agent to transfer
(electronically or in certificated form) any certificate for shares of
Common Stock issued to the Holder upon conversion of or otherwise pursuant
to this Debenture as and when required by this Debenture or the
Registration Rights Agreement, or fails to remove any restrictive legend
(or to withdraw any stop transfer instructions in respect thereof) on any
certificate for any shares of Common Stock issued to the Holder upon
conversion of or otherwise pursuant to this Debenture as and when required
by this Debenture or the Registration Rights Agreement (or makes any
announcement, statement or threat that it does not intend to honor the
obligations described in this paragraph) and any such failure shall
continue uncured (or any announcement, statement or threat not to honor its
obligations shall not be rescinded in writing) for ten (10) days after the
Borrower shall have been notified thereof in writing by the Holder;
3.3 FAILURE TO MAINTAIN REGISTRATION. The Registration Statement lapses in
effect (or sales cannot otherwise be made thereunder effective, whether by
reason of the Borrower's failure to amend or supplement the prospectus
included therein in accordance with the Registration Rights Agreement or
otherwise) for more than ten (10) consecutive days or fifteen (15) days in
any twelve month period after the Registration Statement becomes effective;
3.4 BREACH OF COVENANTS. The Borrower breaches any material covenant or other
material term or condition contained in Sections 1.3, 1.6 or 1.7 of this
Debenture, or Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the Purchase
Agreement and such breach continues for a period of ten (10) days after
written notice thereof to the Borrower from the Holder;
3.5 BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation or warranty of
the Borrower made herein or in any agreement, statement or certificate
given in writing pursuant hereto or in connection herewith (including,
without limitation, the Purchase Agreement and the Registration Rights
Agreement), shall be false or misleading in any material respect when made
and the breach of which has (or with the passage of time will have) a
material adverse effect on the rights of the Holder with respect to this
Debenture, the Purchase Agreement or the Registration Rights Agreement;
3.6 RECEIVER OR TRUSTEE. The Borrower or any subsidiary of the Borrower shall
make an assignment for the benefit of creditors, or apply for or consent to
the appointment of a receiver or trustee for it or for a substantial part
of its property or business, or such a receiver or trustee shall otherwise
be appointed;
3.7 JUDGMENTS. Any money judgment, writ or similar process shall be entered or
filed against the Borrower or any subsidiary of the Borrower or any of its
property or other assets for more than $25,000, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless otherwise
consented to by the Holder, which consent will not be unreasonably
withheld;
3.8 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any
law for the relief of debtors shall be instituted by or against the
Borrower or any subsidiary of the Borrower;
3.9 DELISTING OF COMMON STOCK. The Borrower shall fail to maintain the listing
of the Common Stock on at least one of the OTCBB, the Nasdaq National
Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the
American Stock Exchange; or
3.10 DEFAULT UNDER OTHER DEBENTURES. An Event of Default has occurred and is
continuing under any of the other Debentures issued pursuant to the
Purchase Agreement;
then, upon the occurrence and during the continuation of any Event of
Default specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at
the option of the Holders of a majority of the aggregate principal amount
of the outstanding Debentures issued pursuant to the Purchase Agreement
exercisable through the delivery of written notice to the Borrower by such
Holders (the "DEFAULT NOTICE"), and upon the occurrence of an Event of
Default specified in Section 3.6 or 3.8, the Debentures shall become
immediately due and payable and the Borrower shall pay to the Holder, in
full satisfaction of its obligations hereunder, an amount equal to the
greater of (i) 130% TIMES the SUM of (w) the then outstanding principal
amount of this Debenture PLUS (x) accrued and unpaid interest on the unpaid
principal amount of this Debenture to the date of payment (the "MANDATORY
PREPAYMENT DATE") PLUS (y) Default Interest, if any, on the amounts
referred to in clauses (w) and/or (x) PLUS (z) any amounts owed to the
Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section
2(c) of the Registration Rights Agreement (the then outstanding principal
amount of this Debenture to the date of payment PLUS the amounts referred
to in clauses (x), (y) and (z) shall collectively be known as the "DEFAULT
SUM") or (ii) the "parity value" of the Default Sum to be prepaid, where
parity value means (a) the highest number of shares of Common Stock
issuable upon conversion of or otherwise pursuant to such Default Sum in
accordance with Article I, treating the Trading Day immediately preceding
the Mandatory Prepayment Date as the "Conversion Date" for purposes of
determining the lowest applicable Conversion Price, unless the Default
Event arises as a result of a breach in respect of a specific Conversion
Date in which case such Conversion Date shall be the Conversion Date),
MULTIPLIED BY (b) the highest Closing Price for the Common Stock during the
period beginning on the date of first occurrence of the Event of Default
and ending one day prior to the Mandatory Prepayment Date (the "DEFAULT
Amount") and all other amounts payable hereunder shall immediately become
due and payable, all without demand, presentment or notice, all of which
hereby are expressly waived, together with all costs, including, without
limitation, legal fees and expenses, of collection, and the Holder shall be
entitled to exercise all other rights and remedies available at law or in
equity. If the Borrower fails to pay the Default Amount within five (5)
business days of written notice that such amount is due and payable, then
the Holder shall have the right at any time, so long as the Borrower
remains in default (and so long and to the extent that there are sufficient
authorized shares), to require the Borrower, upon written notice, to
immediately issue, in lieu of the Default Amount, the number of shares of
Common Stock of the Borrower equal to the Default Amount divided by the
Conversion Price then in effect.
ARTICLE IV. MISCELLANEOUS
4.1 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise
thereof or of any other right, power or privileges. All rights and remedies
existing hereunder are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
4.2 NOTICES. Any notice herein required or permitted to be given shall be in
writing and may be personally served or delivered by courier or sent by
United States mail and shall be deemed to have been given upon receipt if
personally served (which shall include telephone line facsimile
transmission) or sent by courier or three (3) days after being deposited in
the United States mail, certified, with postage pre-paid and properly
addressed, if sent by mail. For the purposes hereof, the address of the
Holder shall be as shown on the records of the Borrower; and the address of
the Borrower shall be 1127 Broadway Plaza, Suite 10, Tacoma, Washington
98402 (facsimile number: (253) 284-2035). Both the Holder and the Borrower
may change the address for service by service of written notice to the
other as herein provided.
4.3 AMENDMENTS. This Debenture and any provision hereof may only be amended by
an instrument in writing signed by the Borrower and the Holder. The term
"Debenture" and all reference thereto, as used throughout this instrument,
shall mean this instrument (and the other Debentures issued pursuant to the
Purchase Agreement) as originally executed, or if later amended or
supplemented, then as so amended or supplemented.
4.4 ASSIGNABILITY. This Debenture shall be binding upon the Borrower and its
successors and assigns, and shall inure to be the benefit of the Holder and
its successors and assigns. Each transferee of this Debenture must be an
"accredited investor" (as defined in Rule 501(a) of the 1933 Act).
Notwithstanding anything in this Debenture to the contrary, this Debenture
may be pledged as collateral in connection with a BONA FIDE margin account
or other lending arrangement.
4.5 COST OF COLLECTION. If default is made in the payment of this Debenture,
the Borrower shall pay the Holder hereof costs of collection, including
reasonable attorneys' fees.
4.6 GOVERNING LAW. THIS DEBENTURE SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT
REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE BORROWER HEREBY SUBMITS
TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED
IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS
DEBENTURE, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE
THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR
PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY
MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE
SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING
HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE
JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE
ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER
LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING
UNDER THIS DEBENTURE SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES,
INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION
WITH SUCH DISPUTE.
4.7 CERTAIN AMOUNTS. Whenever pursuant to this Debenture the Borrower is
required to pay an amount in excess of the outstanding principal amount (or
the portion thereof required to be paid at that time) plus accrued and
unpaid interest plus Default Interest on such interest, the Borrower and
the Holder agree that the actual damages to the Holder from the receipt of
cash payment on this Debenture may be difficult to determine and the amount
to be so paid by the Borrower represents stipulated damages and not a
penalty and is intended to compensate the Holder in part for loss of the
opportunity to convert this Debenture and to earn a return from the sale of
shares of Common Stock acquired upon conversion of this Debenture at a
price in excess of the price paid for such shares pursuant to this
Debenture. The Borrower and the Holder hereby agree that such amount of
stipulated damages is not plainly disproportionate to the possible loss to
the Holder from the receipt of a cash payment without the opportunity to
convert this Debenture into shares of Common Stock.
4.8 ALLOCATIONS OF MAXIMUM SHARE AMOUNT AND RESERVED AMOUNT. The Maximum Share
Amount and Reserved Amount shall be allocated pro rata among the Holders of
Debentures based on the principal amount of such Debentures issued to each
Holder. Each increase to the Maximum Share Amount and Reserved Amount shall
be allocated pro rata among the Holders of Debentures based on the
principal amount of such Debentures held by each Holder at the time of the
increase in the Maximum Share Amount or Reserved Amount. In the event a
Holder shall sell or otherwise transfer any of such Holder's Debentures,
each transferee shall be allocated a pro rata portion of such transferor's
Maximum Share Amount and Reserved Amount. Any portion of the Maximum Share
Amount or Reserved Amount which remains allocated to any person or entity
which does not hold any Debentures shall be allocated to the remaining
Holders of Debentures, pro rata based on the principal amount of such
Debentures then held by such Holders.
4.9 DAMAGES SHARES. The shares of Common Stock that may be issuable to the
Holder pursuant to Sections 1.3 and 1.4(g) hereof and pursuant to Section
2(c) of the Registration Rights Agreement ("DAMAGES SHARES") shall be
treated as Common Stock issuable upon conversion of this Debenture for all
purposes hereof and shall be subject to all of the limitations and afforded
all of the rights of the other shares of Common Stock issuable hereunder,
including without limitation, the right to be included in the Registration
Statement filed pursuant to the Registration Rights Agreement. For purposes
of calculating interest payable on the outstanding principal amount hereof,
except as otherwise provided herein, amounts convertible into Damages
Shares ("DAMAGES AMOUNTS") shall not bear interest but must be converted
prior to the conversion of any outstanding principal amount hereof, until
the outstanding Damages Amounts is zero.
4.10 DENOMINATIONS. At the request of the Holder, upon surrender of this
Debenture, the Borrower shall promptly issue new Debentures in the
aggregate outstanding principal amount hereof, in the form hereof, in such
denominations of at least $50,000 as the Holder shall request.
4.11 PURCHASE AGREEMENT. By its acceptance of this Debenture, each Holder agrees
to be bound by the applicable terms of the Purchase Agreement.
4.12 NOTICE OF CORPORATE EVENTS. Except as otherwise provided below, the Holder
of this Debenture shall have no rights as a Holder of Common Stock unless
and only to the extent that it converts this Debenture into Common Stock.
The Borrower shall provide the Holder with prior notification of any
meeting of the Borrower's shareholders (and copies of proxy materials and
other information sent to shareholders). In the event of any taking by the
Borrower of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation, reclassification or
recapitalization) any share of any class or any other securities or
property, or to receive any other right, or for the purpose of determining
shareholders who are entitled to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the
Borrower or any proposed liquidation, dissolution or winding up of the
Borrower, the Borrower shall mail a notice to the Holder, at least twenty
(20) days prior to the record date specified therein (or thirty (30) days
prior to the consummation of the transaction or event, whichever is
earlier), of the date on which any such record is to be taken for the
purpose of such dividend, distribution, right or other event, and a brief
statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time. The
Borrower shall make a public announcement of any event requiring
notification to the Holder hereunder substantially simultaneously with the
notification to the Holder in accordance with the terms of this Section
4.12.
4.13 REMEDIES. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder, by vitiating the
intent and purpose of the transaction contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
under this Debenture will be inadequate and agrees, in the event of a
breach or threatened breach by the Company of the provisions of this
Debenture, that the Holder shall be entitled, in addition to all other
available remedies at law or in equity, and in addition to the penalties
assessable herein, to an injunction or injunctions restraining, preventing
or curing any breach of this Debenture and to enforce specifically the
terms and provisions thereof, without the necessity of showing economic
loss and without any bond or other security being required.
ARTICLE V. OPTIONAL PREPAYMENT
5.1. OPTIONAL PREPAYMENT. Notwithstanding anything to the contrary contained in
this Article V, for not more than thirty (30) days from the date hereof, so
long as (i) no Event of Default or Trading Market Prepayment Event shall
have occurred and be continuing, and (ii) the Borrower has a sufficient
number of authorized shares of Common Stock reserved for issuance upon full
conversion of the Debentures, then at any time after the Issue Date, the
Borrower shall have the right, exercisable on not less than ten (10)
Trading Days prior written notice to the Holders of the Debentures (which
notice may not be sent to the Holders of the Debentures until the Borrower
is permitted to prepay the Debentures pursuant to this Section 5.1), to
prepay all of the outstanding Debentures in accordance with this Section
5.1. Any notice of prepayment hereunder (an "OPTIONAL PREPAYMENT") shall be
delivered to the Holders of the Debentures at their registered addresses
appearing on the books and records of the Borrower and shall state (1) that
the Borrower is exercising its right to prepay all of the Debentures issued
on the Issue Date and (2) the date of prepayment (the "OPTIONAL PREPAYMENT
NOTICE"). On the date fixed for prepayment (the "OPTIONAL PREPAYMENT
DATE"), the Borrower shall make payment of the Optional Prepayment Amount
(as defined below) to or upon the order of the Holders as specified by the
Holders in writing to the Borrower at least one (1) business day prior to
the Optional Prepayment Date. If the Borrower exercises its right to prepay
the Debentures, the Borrower shall make payment to the holders of an amount
in cash (the "OPTIONAL PREPAYMENT AMOUNT") equal to 130% multiplied by the
sum of (w) the then outstanding principal amount of this Debenture PLUS (x)
accrued and unpaid interest on the unpaid principal amount of this
Debenture to the Optional Prepayment Date PLUS (y) Default Interest, if
any, on the amounts referred to in clauses (w) and (x) plus (z) any amounts
owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant
to Section 2(c) of the Registration Rights Agreement (the then outstanding
principal amount of this Debenture to the date of payment PLUS the amounts
referred to in clauses (x), (y) and (z) shall collectively be known as the
"OPTIONAL PREPAYMENT SUM"). Notwithstanding notice of an Optional
Prepayment, the Holders shall at all times prior to the Optional Prepayment
Date maintain the right to convert all or any portion of the Debentures in
accordance with Article I and any portion of Debentures so converted after
receipt of an Optional Prepayment Notice and prior to the Optional
Prepayment Date set forth in such notice and payment of the aggregate
Optional Prepayment Amount shall be deducted from the principal amount of
Debentures which are otherwise subject to prepayment pursuant to such
notice. If the Borrower delivers an Optional Prepayment Notice and fails to
pay the Optional Prepayment Amount due to the Holders of the Debentures
within two (2) business days following the Optional Prepayment Date, the
Borrower shall forever forfeit its right to redeem the Debentures pursuant
to this Section 5.1.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in its
name by its duly authorized officer this 24th day of January, 2002.
INSYNQ, INC.
By: ______________________________
John P. Gorst
Chief Executive Officer
A-1
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debentures)
The undersigned hereby irrevocably elects to convert $________ principal
amount of the Debenture (defined below) into shares of common stock, par value
$0.001 per share ("COMMON STOCK"), of Insynq, Inc., a Delaware corporation (the
"BORROWER") according to the conditions of the convertible debentures of the
Borrower dated as of January 24, 2002 (the "Debentures"), as of the date written
below. If securities 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. No fee will be charged to
the Holder for any conversion, except for transfer taxes, if any. A copy of each
Debenture is attached hereto (or evidence of loss, theft or destruction
thereof).
The Borrower shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee with DTC through its Deposit Withdrawal Agent Commission system ( "DWAC
TRANSFER").
Name of DTC Prime Broker:________________________________________
Account Number:__________________________________________________
In lieu of receiving shares of Common Stock issuable pursuant to this
Notice of Conversion by way of a DWAC Transfer, the undersigned hereby requests
that the Borrower issue a certificate or certificates for the number of shares
of Common Stock set forth below (which numbers are based on the Holder's
calculation attached hereto) in the name(s) specified immediately below or, if
additional space is necessary, on an attachment hereto:
Name:___________________________________
Address:________________________________
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Debentures shall be made pursuant to registration of the securities under the
Securities Act of 1933, as amended (the "ACT"), or pursuant to an exemption from
registration under the Act.
Date of Conversion:___________________________
Applicable Conversion Price:____________________
Number of Shares of Common Stock to be Issued
Pursuant to Conversion of the Debentures:______________
Signature:___________________________________
Name:______________________________________
Address:____________________________________
The Borrower shall issue and deliver shares of Common Stock to an overnight
courier not later than three business days following receipt of the original
Debenture(s) to be converted, and shall make payments pursuant to the Debentures
for the number of business days such issuance and delivery is late.