THIS SECURED DEBENTURE, AND THE SECURITIES INTO WHICH IT IS
CONVERTIBLE (COLLECTIVELY, THE "SECURITIES"), HAVE NOT BEEN REGISTERED
WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE. THE SECURITIES ARE BEING OFFERED
PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER REGULATION D
PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT").
THE SECURITIES ARE "RESTRICTED" AND MAY NOT BE OFFERED OR SOLD UNLESS
THE SECURITIES ARE REGISTERED UNDER THE ACT, PURSUANT TO REGULATION D
OR PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS
OF THE ACT AND THE COMPANY WILL BE PROVIDED WITH OPINION OF COUNSEL OR
OTHER SUCH INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT
SUCH EXEMPTIONS ARE AVAILABLE. FURTHER HEDGING TRANSACTIONS INVOLVING
THE SECURITIES MAY NOT BE MADE EXCEPT IN COMPLIANCE WITH THE ACT.
SECURED DEBENTURE
TELCO-TECHNOLOGY, INC.
5% Secured Convertible Debenture
Due October 21, 2007
No. CCP-1 $500,000
This Secured Debenture is issued by Telco-Technology, Inc., a
Delaware corporation (the "Company"), to Cornell Capital Partners L.P.
(together with its permitted successors and assigns, the "Holder")
pursuant to exemptions from registration under the Securities Act of
1933, as amended.
ARTICLE I.
Section 1.01 Principal and Interest. For value received,
on October 21, 2007, the Company hereby promises to pay to the order
of the Holder in lawful money of the United States of America and in
immediately available funds the principal sum of Five Hundred Thousand
Dollars ($500,000), together with interest on the unpaid principal of
this Debenture at the rate of five percent (5%) per year (computed on
the basis of a 365-day year and the actual days elapsed) from the date
of this Debenture until paid. At the Company's option, the entire
principal amount and all accrued interest shall be either (a) paid to
the Holder on the second (2nd) year anniversary from the date hereof
or (b) converted in accordance with Section 1.02 herein provided,
however, that in no event shall the Holder be entitled to convert this
Debenture for a number of shares of Common Stock in excess of that
number of shares of Common Stock which, upon giving effect to such
conversion, would cause the aggregate number of shares of Common Stock
beneficially owned by the Holder and its affiliates to exceed 4.99% of
the outstanding shares of the Common Stock following such conversion
(which provision may be waived by the Investor by written notice from
the Investor to the Company, which notice shall be effective 61 days
after the date of such notice). This limitation shall not apply to an
automatic conversion pursuant to Section 4.03 hereof.
-1-
Section 1.02 Optional Conversion. The Holder is entitled,
at its option, to convert, and sell on the same day, at any time and
from time to time, until payment in full of this Debenture, all or any
part of the principal amount of the Debenture, plus accrued interest,
into shares (the "Conversion Shares") of the Company's common stock,
par value $0.001 per share ("Common Stock"), at the price per share
(the "Conversion Price") equal to the lesser of (a) an amount equal to
one hundred twenty percent (120%) of the final closing bid price of
the Common Stock, as quoted by Bloomberg, LP, on the Conversion Date,
as defined herein (the "Fixed Price"), or (b) an amount equal to
eighty percent (80%) of the lowest closing bid price of the Company's
Common Stock, as quoted by Bloomberg, LP , for the five (5) trading
days immediately preceding the Conversion Date (as defined herein).
Subparagraphs (a) and (b) above are individually referred to as a
"Conversion Price". As used herein, "Principal Market" shall mean The
National Association of Securities Dealers Inc.'s Over-The-Counter
Bulletin Board, Nasdaq SmallCap Market, or American Stock Exchange.
If the Common Stock is not traded on a Principal Market, the Closing
Bid Price shall mean the reported Closing Bid Price for the Common
Stock, as furnished by the National Association of Securities Dealers,
Inc., for the applicable periods. No fraction of shares or scrip
representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded to the nearest whole share.
To convert this Debenture, the Holder hereof shall deliver written
notice thereof, substantially in the form of Exhibit "A" to this
Debenture, with appropriate insertions (the "Conversion Notice"), to
the Company at its address as set forth herein. The date upon which
the conversion shall be effective (the "Conversion Date") shall be
deemed to be the date set forth in the Conversion Notice.
Section 1.03 Reservation of Common Stock. The Company
shall reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the
conversion of this Debenture, such number of shares of Common Stock as
shall from time to time be sufficient to effect such conversion, based
upon the Conversion Price. If at any time the Company does not have a
sufficient number of Conversion Shares authorized and available, then
the Company shall call and hold a special meeting of its stockholders
within thirty (30) days of that time for the sole purpose of
increasing the number of authorized shares of Common Stock.
Section 1.04 Right of Redemption. The Company at its
option shall have the right to redeem, with three (3) days advance
written notice (the "Redemption Notice"), a portion or all outstanding
convertible debenture. The redemption price shall be the Fixed Price,
as defined herein.
In the event the Company exercises a redemption of either all or
a portion the Convertible Debenture, the Holder shall receive a
warrant to purchase fifty thousand (50,000) shares of the Company's
Common Stock for every One Hundred Thousand Dollars ($100,000)
redeemed, pro rata (the "Warrant"). The Warrant shall be exercisable
on a "cash basis" and have an exercised price equal to the Fixed
Price. The Warrant shall have "piggy-back" and demand registration
rights and shall survive for two (2) years from the Closing Date.
Section 1.05 Registration Rights. The Company is obligated
to register the resale of the Conversion Shares under the Securities
Act of 1933, as amended, pursuant to the terms of a Registration
Rights Agreement of even date herewith between the Company and the
Holder (the "Investor Registration Rights Agreement").
-2-
Section 1.06 Interest Payments. Accrued interest shall be
paid at the time of maturity or conversion to the person in whose name
this Debenture is registered. At the time such interest is payable,
the Holder, in its sole discretion, may elect to receive the interest
in cash (via wire transfer or certified funds) or in the form of
Common Stock. In the event of default, as described in Article III
Section 3.01 hereunder, the Holder may elect that the interest be paid
in cash (via wire transfer or certified funds) or in the form of
Common Stock. If paid in the form of Common Stock, the amount of
stock to be issued will be calculated as follows: the value of the
stock shall be the Conversion Price on: (i) the date the interest
payment is due; or (ii) if the interest payment is not made when due,
the date the interest payment is made. A number of shares of Common
Stock with a value equal to the amount of interest due shall be
issued. No fractional shares will be issued; therefore, in the event
that the value of the Common Stock per share does not equal the total
interest due, the Company will pay the balance in cash.
Section 1.07 Paying Agent and Registrar. Initially, the
Company will act as paying agent and registrar. The Company may
change any paying agent, registrar, or Company-registrar by giving the
Holder not less than ten (10) business days' written notice of its
election to do so, specifying the name, address, telephone number and
facsimile number of the paying agent or registrar. The Company may
act in any such capacity.
Section 1.08 Secured Nature of Debenture. This Debenture
is secured by certain assets and property of the Company, as more
fully described in the Security Agreement of even date herewith
between the Company and the Holder.
ARTICLE II.
Section 2.01 Amendments and Waiver of Default. The
Debenture may not be amended without the consent of the Holder.
Notwithstanding the above, without the consent of the Holder, the
Debenture may be amended to cure any ambiguity, defect or
inconsistency, to provide for assumption of the Company obligations to
the Holder or to make any change that does not adversely affect the
rights of the Holder.
ARTICLE III.
Section 3.01 Events of Default. An Event of Default is
defined as follows: (a) failure by the Company to pay amounts due
hereunder within fifteen (15) days of the date of maturity of this
Debenture; (b) failure by the Company to comply with the terms of the
Irrevocable Transfer Agent Instructions; (c) failure by the Company's
transfer agent to issue freely tradeable Common Stock to the Holder
within five (5) days of the Company's receipt of the attached Notice
of Conversion from Holder; (d) failure by the Company for ten (10)
days after notice to it to comply with any of its other agreements in
the Debenture; (e) if the Company files for relief under the United
States Bankruptcy Code (the "Bankruptcy Code") or under any other
state or federal bankruptcy or insolvency law, or files an assignment
for the benefit of creditors, or if an involuntary proceeding under
the Bankruptcy Code or under any other federal or state bankruptcy or
insolvency law is commenced against the Company; (f) a breach by the
Company of its obligations under the Securities Purchase Agreement,
the Escrow Agreement, the Security Agreement, the Investor
Registration Rights Agreement or any other agreement entered into on
the date hereof between the Company and the Holder which is not cured
by the Company within ten (10) days after receipt of written notice
thereof. Upon the occurrence of an Event of Default, the Holder may,
in its sole discretion, accelerate full repayment of all debentures
outstanding and accrued interest thereon or may, notwithstanding any
limitations contained in this Debenture and/or the Securities Purchase
Agreement of even date herewith between the Company and Cornell
Capital Partners, L.P. (the "Securities Purchase Agreement"), convert
all debentures outstanding and accrued interest thereon into shares of
Common Stock pursuant to Section 1.02 herein.
-3-
Section 3.02 Failure to Issue Unrestricted Common Stock. As
indicated in Article III Section 3.01, a breach by the Company of its
obligations under the Investor Registration Rights Agreement shall be
deemed an Event of Default, which if not cured within ten (10) days,
shall entitle the Holder to accelerate full repayment of all
debentures outstanding and accrued interest thereon or,
notwithstanding any limitations contained in this Debenture and/or the
Securities Purchase Agreement, to convert all debentures outstanding
and accrued interest thereon into shares of Common Stock pursuant to
Section 1.02 herein. The Company acknowledges that failure to honor a
Notice of Conversion shall cause irreparable harm to the Holder.
ARTICLE IV.
Section 4.01 Rights and Terms of Conversion. This
Debenture, in whole or in part, may be converted at any time following
the date of closing into shares of Common Stock at a price equal to
the Conversion Price as described in Section 1.02 above.
Section 4.02 Re-issuance of Debenture. When the Holder
elects to convert a part of the Debenture, then the Company shall
reissue a new Debenture in the same form as this Debenture to reflect
the new principal amount.
Section 4.03 Termination of Conversion Rights. The
Holder's right to convert the Debenture into the Common Stock in
accordance with paragraph 4.01 shall terminate on the date that is the
second (2nd) year anniversary from the date hereof and this Debenture
shall be automatically converted on that date in accordance with the
formula set forth in Section 4.01 hereof, and the appropriate shares
of Common Stock and amount of interest shall be issued to the Holder.
ARTICLE V.
Section 5.01 Anti-dilution. In the event that the Company
shall at any time subdivide the outstanding shares of Common Stock, or
shall issue a stock dividend on the outstanding Common Stock, the
Conversion Price in effect immediately prior to such subdivision or
the issuance of such dividend shall be proportionately decreased, and
in the event that the Company shall at any time combine the
outstanding shares of Common Stock, the Conversion Price in effect
immediately prior to such combination shall be proportionately
increased, effective at the close of business on the date of such
subdivision, dividend or combination as the case may be.
Section 5.02 Consent of Holder to Sell Capital Stock or
Grant Security Interests. Except for the Standby Equity Distribution
Agreement dated the date hereof between the Company and Cornell
Capital Partners, LP. so long as any of the principal of or interest
on this Note remains unpaid and unconverted, the Company shall not,
without the prior consent of the Holder, issue or sell (i) any Common
Stock or Preferred Stock without consideration or for a consideration
per share less than its fair market value determined immediately prior
to its issuance, (ii) issue or sell any Preferred Stock, warrant,
option, right, contract, call, or other security or instrument
granting the holder thereof the right to acquire Common Stock without
consideration or for a consideration per share less than such Common
Stock's fair market value determined immediately prior to its
issuance, or (iii (iv) file any registration statement on Form S-8.
-4-
ARTICLE VI.
Section 6.01 Notice. Notices regarding this Debenture
shall be sent to the parties at the following addresses, unless a
party notifies the other parties, in writing, of a change of address:
If to the Company, to:
Telco-Technology, Inc.
James Grainer, President and Chief Financial Officer
411 Hackensack Ave
Hackensack, New Jersey 07601
Telephone: (201) 626-1000
Facsimile: (201) 646-1084
With a copy to:
Richard Lambert, Esq.
Dunn Lamber, L.L.C.
The Atrium
East 80 Route 4
Paramus, New Jersey 07652
Telephone: (201) 291-0700
Facsimile: (201) 291-0140
If to the Holder:
Cornell Capital Partners, LP
101 Hudson Street, Suite 3700
Jersey City, NJ 07303
Attention: Mark Angelo
Telephone: (201) 985-8300
Facsimile: (201) 985-8266
With a copy to:
Cornell Capital Partners, LP
101 Hudson Street, Suite 3700
Jersey City, NJ 07303
Attention: Troy J. Rillo, Esq.
Telephone: (201) 985-8300
Facsimile: (201) 985-8266
Section 6.02 Governing Law. This Debenture shall be deemed
to be made under and shall be construed in accordance with the laws of
the State of New Jersey without giving effect to the principals of
conflict of laws thereof. Each of the parties consents to the
exclusive jurisdiction of the U.S. District Court sitting in the
District of the State of New Jersey or the state courts of the State
of New Jersey sitting in Hudson County, New Jersey in connection with
any dispute arising under this Debenture and hereby waives, to the
maximum extent permitted by law, any objection, including any
objection based on forum non conveniens to the bringing of any such
proceeding in such jurisdictions.
Section 6.03 Severability. The invalidity of any of the
provisions of this Debenture shall not invalidate or otherwise affect
any of the other provisions of this Debenture, which shall remain in
full force and effect.
Section 6.04 Entire Agreement and Amendments. This
Debenture represents the entire agreement between the parties hereto
with respect to the subject matter hereof and there are no
representations, warranties or commitments, except as set forth
herein. This Debenture may be amended only by an instrument in
writing executed by the parties hereto.
-5-
Section 6.05 Counterparts. This Debenture may be executed
in multiple counterparts, each of which shall be an original, but all
of which shall be deemed to constitute on instrument.
IN WITNESS WHEREOF, with the intent to be legally bound hereby,
the Company as executed this Debenture as of the date first written
above.
TELCO-TECHNOLOGY, INC.
By: /s/ James Grainer
---------------------------
Name: James Grainer
Title: President and Chief
Financial Officer
* * * * * * * * *
EXHIBIT "A"
NOTICE OF CONVERSION
(To be executed by the Holder in order to Convert the Debenture)
TO:
The undersigned hereby irrevocably elects to convert $
of the principal amount of the above Debenture into Shares of
Common Stock of Telco-Technology, Inc., according to the conditions stated
therein, as of the Conversion Date written below.
Conversion Date:
Applicable Conversion Price:
-------------------------------
Signature:
-------------------------------
Name:
-------------------------------
Address:
-------------------------------
Amount to be converted: $
------------------------------
Amount of Debenture
unconverted: $
------------------------------
Conversion Price per
share: $
------------------------------
Number of shares of
Common Stock to be
issued: ------------------------------
Please issue the shares
of Common Stock in the
following name and to the
following address:
------------------------------
Issue to:
Authorized Signature:
------------------------------
A-1
PAGE>
Name:
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Title:
------------------------------
Phone Number:
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Broker DTC Participant Code:
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Account Number:
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