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 OR REGULATION S UNDER SAID ACT.
SECURED CONVERTIBLE DEBENTURE
Tacoma, Washington
January 31, 2003 $20,000
FOR VALUE RECEIVED, Insynq, Inc., a Nevada corporation (hereinafter
called the "BORROWER"), hereby promises to pay to the order of AJW Partners, LLC
or its registered assigns (the "HOLDER") the sum of Twenty Thousand Dollars
($20,000), on January 31, 2004 (the "MATURITY DATE"), and to pay interest on the
unpaid principal balance hereof at the rate of twelve percent (12%) per annum
from January 31, 2003 (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, 2003, 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, $.001 par
value 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 or,
at the option of the Borrower, in whole or in part, in shares of Common Stock of
the Borrower valued at the then applicable Conversion Price (as defined herein).
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 the city of New York, New
York are authorized or required by law or executive order to remain closed. Each
capitalized term used herein, and not otherwise defined, shall have the meaning
ascribed thereto in that certain Securities Purchase Agreement, dated September
27, 2002, pursuant to which this Debenture was originally issued (the "PURCHASE
AGREEMENT").
This Debenture is free from all taxes, liens, claims and encumbrances
with respect to the issue thereof and shall not be subject to preemptive rights
or other similar rights of shareholders of the Borrower and will not impose
personal liability upon the holder thereof. The obligations of the Borrower
under this Debenture shall be secured by that certain Security Agreement dated
by and between the Borrower and the Holder of even date herewith.
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 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 6:00 p.m., New York, 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 September 27, 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
intraday 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 and the Borrower or, if the OTCBB is not the
principal trading market for such security, the intraday trading price
of such security on the principal securities exchange or trading market
where such security is listed or traded or, if no intraday trading
price of such security is available in any of the foregoing manners,
the average of the intraday 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 $.30.
(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. The Borrower is required at all times to have authorized and reserved
two times the number of shares that is actually issuable upon full conversion of
the Debentures (based on the Conversion Price of the Debentures or the Exercise
Price of the Warrants in effect from time to time) (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 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 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 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 6:00 p.m., New York, 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 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 6:00 p.m.,
New York, 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
6:00 p.m., New York, 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 OR REGULATION S 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 50% 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
shareholders 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 ("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 no
more than 19.99% of the total shares outstanding on the Closing Date (as defined
in the Purchase Agreement), 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 Shareholder 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, "SHAREHOLDER APPROVAL"
means approval by the shareholders 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 SHAREHOLDER. 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, (b) made
in the ordinary course of business or (c) not in excess of $50,000.
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 TIMELY FILE REGISTRATION OR EFFECT REGISTRATION. The
Borrower fails to file the Registration Statement within ten (10) days following
the Filing Date (as defined in the Registration Rights Agreement) or obtain
effectiveness with the Securities and Exchange Commission of the Registration
Statement within ten (10) days following the Effectiveness Deadline (as defined
in the Registration Rights Agreement) or such 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 twenty (20) consecutive days or forty (40) 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 $50,000, 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; or
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 or an equivalent
replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap Market,
the New York Stock Exchange, or the American Stock Exchange;
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 1101 Broadway
Plaza, Tacoma, Washington 98498, 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 Borrower 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
Borrower 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 Borrower 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 thirty (30) days following the Issue Date, 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 150%
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 31th day of January, 2003.
INSYNQ, INC.
By: ______________________________
John P. Gorst
Chief Executive Officer
PHL_A #1715429 v1 23
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 $.001 per share ("COMMON STOCK"), of Insynq, a Nevada
corporation (the "BORROWER") according to the conditions of the convertible
debentures of the Borrower dated as of January 31, 2003 (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.