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PATRIOT SCIENTIFIC CORPORATION
FORM 8-K
Current Report
EXHIBIT NO. 4.4
Form of 5% Convertible Term Debenture
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[EXECUTION COPY]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN FORM,
SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE
TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933, AS AMENDED OR UNLESS SOLD PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OF
1933, AS AMENDED.
CONVERTIBLE TERM DEBENTURE
June 2, 1997 $1,850,000
FOR VALUE RECEIVED, PATRIOT SCIENTIFIC CORPORATION, a Delaware
corporation (hereinafter called the "Borrower" or the "Company"), hereby
promises to pay to the order of CC Investments, LDC or registered assigns or
transferees of all or any portion hereof (each a "Holder" and, collectively,
"Holders") the aggregate sum of One Million Eight Hundred Fifty Thousand Dollars
($1,850,000) on June 2, 1999 (the "Scheduled Maturity Date"), and to pay
interest on the unpaid principal balance hereof at the rate of five percent (5%)
per annum from the date hereof (hereinafter called the "Issue Date") until the
same becomes due and payable (which interest shall accrue on a daily basis based
on a 360 day year), whether at maturity or upon acceleration or otherwise.
Interest shall commence accruing on the Issue Date and shall be payable on the
date the principal amount in respect of which it has accrued is paid, whether at
maturity, upon acceleration or conversion or by prepayment or otherwise. All
payments shall be made at such address as Holders shall hereafter give to the
Borrower by written notice made in accordance with the provisions of this
Debenture. As used herein, "First Closing Date" means June 2, 1997.
ARTICLE I
PREPAYMENT
1.1 Limited Right to Prepay. Upon the occurrence of an Event of Failure
(as defined herein), this Debenture shall be prepaid by the Borrower at the
option of the Holder in accordance with the provisions of Article VI hereof.
Except as provided in Section 1.2 of this Article I and
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Article VI hereof, this
Debenture may not be prepaid without the prior written consent of all Holders.
1.2 Prepayment at Borrower's Option.
(a) So long as no Event of Failure shall have occurred and
provided the Borrower is not in material violation of any of its obligations
under that certain Securities Purchase Agreement, dated as of June 2, 1997,
between Borrower and Holder (the "Securities Purchase Agreement"), the
Registration Rights Agreement, dated as of June 2, 1997, among the Company and
the other signatories thereto (the "Registration Rights Agreement"), the Patriot
Scientific Corporation Stock Purchase Warrant, dated as of June 2, 1997, or this
Debenture, then the Borrower shall have the right to prepay ("Prepayment at
Borrower's Election") all or any portion of the then outstanding Debentures
(other than Debentures which are the subject of a Notice of Conversion delivered
prior to the delivery date of the Optional Prepayment Notice (as herein
defined)) for the Optional Prepayment Amount (as herein defined), which right
shall be exercisable any time during the term of this Debenture by the Borrower
in increments of Five Hundred Thousand Dollars ($500,000) (provided that such
right may be exercised for less than such amount if the outstanding principal
amount of this Debenture is less than such amount and the Company is electing to
effect redemption of the full amount remaining) by delivery of an Optional
Prepayment Notice in accordance with the prepayment procedures set forth below.
Any Prepayment at Borrower's Election pursuant to this Section 1.2 shall be made
ratably among Holders in proportion to the principal amount of Debentures then
outstanding. Holders may convert all or any part of their Debentures selected
for prepayment hereunder into Common Stock at the Conversion Price by delivering
a Notice of Conversion to the Borrower at any time prior to the Effective Time
of Prepayment (as herein defined). The "Optional Prepayment Amount" with respect
to each Debenture means the greater of (a) the Benefit of the Bargain (as herein
defined) as of the delivery date of the Optional Prepayment Notice and (b) the
Applicable Prepayment Percentage (as herein defined) multiplied by the sum of
the principal amount being prepaid plus all accrued and unpaid interest thereon
and accrued and unpaid Conversion Failure Payments (if any) through the
Effective Time of Prepayment.
(i) The "Benefit of the Bargain" means an amount equal to:
A X M
---
CP
where:
"A" means the principal amount of this Debenture being prepaid
plus all accrued and unpaid interest thereon and accrued and unpaid
Conversion Failure Payments (if any) through the Effective Time of
Prepayment;
"CP" means the Conversion Price in effect on the delivery date
of the Optional Prepayment Notice; and,
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"M" means the average Closing Bid Price of the Company's
Common Stock during the ten trading day period ending on the day
immediately preceding the date on which the Optional Prepayment Notice
is delivered to Holder.
(ii) The "Applicable Prepayment Percentage" means (A) 130% if
the Effective Time of Prepayment is prior to the date which is 545 days
following the Issue Date (the "First Redemption Price Termination
Date") and (B) 125% if the Effective Time of Prepayment follows the
First Redemption Price Termination Date but is prior to the Scheduled
Maturity Date.
(b) The Borrower may not deliver an Optional Prepayment Notice
to a Holder unless on or prior to the date of delivery of such Optional
Prepayment Notice, the Borrower shall have deposited with an escrow agent
reasonably satisfactory to such Holder, as a trust fund, cash sufficient in
amount to pay all amounts to which Holders are entitled upon such prepayment
pursuant to Subsection (a) of this Section 1.2, with irrevocable instructions
and authority to such escrow agent to complete the prepayment thereof in
accordance with this Section 1.2. Any Optional Prepayment Notice delivered in
accordance with the immediately preceding sentence shall be accompanied by a
statement executed by a duly authorized officer of its escrow agent, certifying
the amount of funds which have been deposited with such transfer agent or escrow
agent and that the transfer agent or escrow agent has been instructed and agrees
to act as prepayment agent hereunder.
(c) The Borrower shall effect the Prepayment at Borrower's
Election under this Section 1.2 by giving prior written notice (the "Optional
Prepayment Notice"), which notice may only be delivered on a business day during
the period commencing 395 days following the Issue Date, of the date on which
such prepayment is to become effective (the "Effective Time of Prepayment") to
Holders of Debentures selected for prepayment at the address and facsimile
number of such Holder appearing in the Borrower's register for the Debentures.
The Optional Prepayment Notice shall indicate the Debentures selected for
prepayment and the Optional Prepayment Amount. The Optional Prepayment Notice
shall be deemed to have been delivered to a Holder: (i) if such fax is received
by such holder on or prior to 3:00 p.m. Chicago time, on the time and date of
transmission of Borrower's fax; and (ii) if such fax is received by Holder after
3:00 p.m. Chicago time, on the next business day following the date of
transmission of Borrower's fax; provided that, for any notice required under
this subsection 1.2(c) to be valid, a copy of such notice must be sent to the
Holders on the same day by overnight courier.
(d) The Optional Prepayment Amount shall be paid to each
Holder whose Debentures are being prepaid at the Effective Time of Prepayment;
provided, however, that the Borrower shall not be obligated to deliver any
portion of the Optional Prepayment Amount until either the Debentures being
prepaid are delivered to the office of the Borrower or the transfer agent as
provided in this subsection, or such Holder notifies the Borrower or the
transfer agent that such Debentures have been lost, stolen or destroyed and
delivers documentation in accordance with Section 8.8 hereof. Notwithstanding
anything herein to the contrary, in the event that the Debentures being prepaid
are not delivered to the Borrower or the transfer agent prior to
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the second business day following the Effective Time of Prepayment, the
prepayment of the Debentures pursuant to this Section 1.2 shall still be deemed
effective as of the Effective Time of Prepayment and the Optional Prepayment
Amount shall be paid to each Holder whose Debentures are being prepaid by 5:00
p.m., Chicago time, on the next business day following the date on which the
Debentures are actually delivered to the Borrower or the transfer agent.
(e) If the Borrower fails to pay, when due and owing, any
Optional Prepayment Amount, then each Holder entitled to receive such Optional
Prepayment Amount shall have the right, at any time and from time to time, to
require the Borrower, upon written notice, to immediately convert (in accordance
with the terms of Section 3.1) any or all of the Debentures which are the
subject of Prepayment at Borrower's Election into shares of Common Stock at the
lowest Conversion Price in effect during the twenty trading days following the
Effective Time of Prepayment. In addition, if the Borrower fails to pay an
Optional Prepayment Amount when due and owing, the Borrower shall thereafter
forfeit its rights under this Article I to effect Prepayment at Borrower's
Election.
ARTICLE II
CERTAIN DEFINITIONS
2.1 The following terms shall have the following meanings:
(a) "Closing Bid Price" means, for any security as of any date,
the closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Company and reasonably acceptable to Holders of a majority of
the aggregate principal amount represented by the then outstanding Debentures
("Majority Holders") if Bloomberg Financial Markets is not then reporting
closing bid prices of such security (collectively, "Bloomberg"), or if the
foregoing does not apply, the last reported sale price of such security in the
over-the-counter market on the electronic bulletin board of such security as
reported by Bloomberg, or, if no sale price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the
Closing Bid Price cannot be calculated for such security on such date on any of
the foregoing bases, the Closing Bid Price of such security on such date shall
be the fair market value as reasonably determined by an investment banking firm
selected by the Company and reasonably acceptable to the Majority Holders, with
the costs of such appraisal to be borne by the Company.
(b) "Conversion Amount" means (i) the portion of the principal
amount of this Debenture elected by Holder to be converted (the "Selected
Amount"), which amount may be all or any portion of the principal amount of this
Debenture plus (ii) accrued and unpaid Conversion Failure Payments relating
thereto (if any) plus (iii) an amount equal to the product of (A) N divided by
365 times (B) .05 times (C) the Selected Amount.
(c) "Conversion Date" means, for any Optional Conversion, the
date specified in the Notice of Conversion, or if no date is specified therein,
the date the Notice of Conversion is
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faxed or otherwise delivered to the Company; provided, however, that the
Conversion Date shall not be prior to the date of delivery of the Notice of
Conversion and any Notice of Conversion delivered to the Company after 5:00 p.m.
San Diego time shall be deemed delivered as of the next following business day.
(d) "Conversion Percentage" shall have the following meaning and
shall be subject to adjustment as provided herein:
If the Conversion Date is a Then the
Number of Days after the First Conversion
Closing Date within the Following Range: Percentage is:
---------------------------------------- --------------
121-180 91%
181-270 85%
271-360 79%
361-450 76%
more than 450 75%
(e) "Conversion Price" means the lesser of the Fixed Conversion
Price and the Variable Conversion Price.
(f) "Fixed Conversion Price" means $1.16460, subject to
adjustment as provided herein.
(g) "N" means the number of days from the Issue Date to and
including the Conversion Date, subject to Section 3.2 hereof, as specified in
the notice of conversion in the form attached hereto (the "Notice of
Conversion").
(h) "Variable Conversion Price" means, as of any Conversion
Date, the amount obtained by multiplying the Conversion Percentage then in
effect by the average of the Closing Bid Prices for the Common Stock for the ten
(10) consecutive trading days ending on the trading day immediately preceding
such Conversion Date (subject to equitable adjustment for any stock splits,
stock dividends, reclassifications or similar events during such ten (10)
trading day period), subject to adjustment as provided herein.
ARTICLE III
CONVERSION
3.1 Conversion at the Option of the Holder. Subject to the limitations
on conversions contained in Section 3.7 hereof, the Holder may, at any time and
from time to time, convert (an "Optional Conversion") a Conversion Amount into a
number of fully paid and nonassessable shares of Common Stock determined by
dividing such Conversion Amount by the Conversion Price.
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3.2 Mechanics of Conversion. In order to effect an Optional Conversion,
a Holder (a "Converting Holder") shall: (x) fax (or otherwise deliver) a copy of
the fully executed Notice of Conversion to the Company for the Common Stock and
(y) surrender or cause to be surrendered, this Debenture, duly endorsed, along
with a copy of the Notice of Conversion, as soon as practicable thereafter. Upon
receipt by the Company of a facsimile copy of a Notice of Conversion from a
Converting Holder, the Company shall immediately send, via facsimile, a
confirmation to the Converting Holder stating that the Notice of Conversion has
been received, the date upon which the Company expects to deliver the Common
Stock upon conversion and the name and telephone number of a contact person at
the Company regarding the conversion.
3.3 Delivery of Common Stock Upon Conversion. Subject to Section 3.6
hereof, upon the delivery of a Notice of Conversion, the Company shall, not
later than the later of (a) the day that is three business days following the
Conversion Date and (b) the day that is the first business day following the
date of surrender of this Debenture (or delivery of documentation in accordance
with Section 8.8) (the "Delivery Period"), issue and deliver to the Converting
Holder (x) that number of shares of Common Stock issuable upon conversion of the
portion of this Debenture being converted and (y) a new Debenture in the form
hereof representing the balance of the principal amount hereof not being
converted, if any. Delivery under this Section may be made personally or by
reputable overnight courier.
3.4 Taxes. The Company shall pay any and all taxes (other than transfer
taxes) which may be imposed upon it with respect to the issuance and delivery of
the shares of Common Stock upon the conversion of this Debenture.
3.5 No Fractional Shares. No fractional shares of Common Stock are to be
issued upon the conversion of this Debenture, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Conversion Price of a share of
Common Stock (as determined for conversion of this Debenture into whole shares
of Common Stock).
3.6 Conversion Disputes. In the case of any dispute with respect to a
conversion, the Company shall promptly issue such number of shares of Common
Stock as are not disputed in accordance with Sections 3.1 and 3.3 hereof. If
such dispute only involves the calculation of the Conversion Price, the Company
shall submit the disputed calculations to an independent accounting firm of
national standing (selected by the Converting Holder; provided that the
Converting Holder currently does not have a client relationship with such
accounting firm) via facsimile within two (2) business days of receipt of the
Notice of Conversion. The accountant shall audit the calculations and notify the
Company and the Converting Holder of the results no later than two (2) business
days from the date it receives the disputed calculations. The accountant's
calculation shall be deemed conclusive, absent manifest error. The Company shall
then issue the appropriate number of shares of Common Stock in accordance with
Section 3.3 above.
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3.7 Limitations on Conversions. The conversion of this Debenture shall
be subject to the following limitations (each of which limitations shall be
applied independently):
(a) Holding and Increment Restrictions. No Holder may effect an
Optional Conversion prior to the date which is 120 days following the
First Closing Date. Optional Conversions must be effected in increments
of Ten Thousand Dollars ($10,000); provided that Optional Conversions
may be effected for less than such amount if the sum of all outstanding
principal of this Debenture plus all accrued interest thereon and
Conversion Failure Payments (if any) through the Conversion Date is less
than such amount and the Converting Holder is electing to effect the
Optional Conversion of the full amount remaining.
(b) No Five Percent Holders. Notwithstanding anything to the
contrary contained herein, the Debentures shall not be convertible by a
Holder to the extent (but only to the extent) that, if convertible by
such Holder, such Holder would beneficially own in excess of 4.9% of the
shares of Common Stock. To the extent the above limitation applies, the
determination of whether Debentures shall be convertible (vis-a-vis
other securities owned by such Holder) and of which Debentures shall be
convertible shall be in the sole discretion of the Holder and submission
of the Debentures for conversion shall be deemed to be the Holder's
determination of whether such Debentures are convertible and of which
Debentures are convertible, subject to such aggregate percentage
limitation. No prior inability to convert Debentures pursuant to this
paragraph shall have any effect on the applicability of the provisions
of this subsection with respect to any subsequent determination of
convertibility. For the purposes of this subsection, beneficial
ownership and all calculations, including without limitation, with
respect to calculations of percentage ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13D and G thereunder. The provisions of this
subsection may be waived and/or implemented in a manner otherwise than
strictly in conformity with the foregoing provisions of this subsection
3.7(b) with the approval of the Board of Directors of the Corporation
and the holders of a majority in interest in the then outstanding
Debentures and Warrants (voting together as a single class): (i) with
respect to any matter to cure any ambiguity herein, to correct this
subsection (or any portion thereof) which may be defective or
inconsistent with the intended 4.9% beneficial ownership limitation
herein contained or to make changes or supplements necessary or
desirable to properly give effect to such 4.9% limitation; and (ii) with
respect to any other matter, with the further consent of the holders of
majority of the then outstanding shares of Common Stock. The limitations
contained in this subsection shall apply to a successor Holder of
Debenture if, and to the extent, elected by such successor Holder
concurrently with its acquisition of such Debentures, such election to
be promptly confirmed in writing to the Company (provided no transfer or
series of transfers to a successor Holder or holders shall be used by a
Holder to evade the limitations contained in this subsection).
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3.8. Required Conversion at Maturity. Provided all shares of Common
Stock issuable upon conversion of all outstanding Debentures are then (i)
authorized and reserved for issuance, (ii) registered under the Securities Act
for resale by all Holders thereof and (iii) eligible to be traded on the OTC
Bulletin Board, the Nasdaq Small Cap Market ("NASDAQ"), the Nasdaq National
Market System ("NMS"), the New York Stock Exchange ("NYSE") or the American
Stock Exchange ("AMEX"), each Debenture outstanding on the Scheduled Maturity
Date automatically shall be converted into shares of Common Stock on such date
in accordance with the conversion formulas set forth in Section 3.1 (the
"Required Conversion at Maturity"). If the Required Conversion at Maturity
occurs, the Borrower and the Holders shall follow the applicable conversion
procedures set forth in Article III; provided, however, that a Notice of
Conversion shall be deemed to be delivered to the Borrower or its transfer agent
on the Scheduled Maturity Date. If Borrower fails to effect the Required
Conversion at Maturity in accordance with the terms hereof, then each Holder
shall have the right, at any time and from time to time, to require the
Borrower, upon written notice, to immediately effect a repayment of all or any
part of their Debentures (in accordance with the terms of Article VI).
ARTICLE IV
RESERVATION OF SHARES OF COMMON STOCK
4.1 Reserved Amount. At Closing, the Company shall have authorized and
reserved and keep available for issuance 4,000,000 shares of Common Stock (the
"Reserved Amount") solely for the purpose of effecting the conversion of the
Debentures and exercise of the warrants to acquire Common Stock (the
"Warrants"), in the form attached to the Securities Purchase Agreement as
Exhibit B, issued or to be issued pursuant to the terms of the Securities
Purchase Agreement. The Company shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock a sufficient number of
shares of Common Stock to provide for the full conversion of all outstanding
Debentures and issuance of the shares of Common Stock in connection therewith
and the full exercise of the Warrants and issuance of the shares of Common Stock
in connection therewith.
4.2 Share Authorization. The board of directors of the Company shall
approve and shall use its best efforts to obtain authorization by the
shareholders of the Company of an increase of the number of authorized shares of
capital stock of the Company (the "Share Authorization") to sixty million
(60,000,000) shares by the earlier of September 30, 1997 and the date of the
Company's next annual meeting of shareholders. Immediately following the Share
Authorization (as herein defined), the Reserved Amount shall be one and one-half
(1.5) times the number of shares of Common Stock issuable upon conversion of
this Debenture and exercise of the Warrants.
4.3 Increases to Reserved Amount. Without limiting any other provision
of this Article IV, following the Share Authorization, if the Reserved Amount
for any three (3) consecutive trading days (the last of such three (3) trading
days being the "Authorization Trigger Date") shall be less than 125% of the
number of shares of Common Stock issuable upon conversion of this Debenture and
exercise of the Warrants on such trading days, the Company
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shall immediately notify all Holders of such occurrence and shall take action as
soon as possible, but in any event within sixty (60) days after an Authorization
Trigger Date (including, if necessary, seeking shareholder approval to authorize
the issuance of additional shares of Common Stock) to increase the Reserved
Amount to 150% of the number of shares of Common Stock then issuable upon
conversion of this Debenture and exercise of the Warrants.
4.4 Reduction of Reserved Amount Under Certain Circumstances. Prior to
complete conversion of this Debenture, the Company shall not reduce the number
of shares required to be reserved for issuance under this Article IV without the
written consent of all Holders except for a reduction proportionate to a reverse
stock split effected for a business purpose other than affecting the obligations
of Borrower under this Article IV, which reverse stock split affects all shares
of Common Stock equally. Following complete conversion of this Debenture, the
Company may, with fifteen (15) days prior written notice to Holder, reduce the
Reserved Amount to 125% of the number of shares of Common Stock issuable upon
the full exercise of the Warrants; provided, however, that the Reserved Amount
shall continue to be subject to increase pursuant to Section 4.3 hereof.
4.5 Allocation of Reserved Amount. Each increase to the Reserved Amount
shall be allocated pro rata among the Holders based on the number of Debentures
and Warrants held by each Holder at the time of the establishment of or increase
in the Reserved Amount. In the event a Holder shall sell or otherwise transfer
any of such Holder's Debentures or Warrants, each transferee shall be allocated
a pro rata portion of such transferor's Reserved Amount. Any portion of the
Reserved Amount which remains allocated to any person or entity which does not
hold any Debentures shall be allocated to the remaining Holders, pro rata based
on the number of Debentures and Warrants then held by such Holders.
ARTICLE V
FAILURE TO SATISFY CONVERSIONS
5.1 Conversion Failure Payments. If, at any time, (x) a Holder submits a
Notice of Conversion (or is deemed to submit such notice pursuant to Section 3.8
hereof) and the Company fails for any reason to deliver, on or prior to the
expiration of the Delivery Period for such conversion, such number of shares of
Common Stock to which such Converting Holder is entitled upon such conversion,
or (y) the Company provides notice to Holder at any time of its intention not to
issue shares of Common Stock upon exercise by Holder of its conversion rights in
accordance with the terms of the Debentures (each of (x) and (y) being a
"Conversion Failure"), then the Company shall pay to such Holder damages in an
amount equal to the lower of: (i) the product of (A) the Damages Amount times
(B) D times (C) .01 and (ii) the highest interest rate permitted by applicable
law, where:
"D" means the number of days beginning the date of the Conversion
Failure through and including the Cure Date with respect to such Conversion
Failure;
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"Damages Amount" means the amount of the Debenture subject to conversion
plus all accrued and unpaid interest thereon as of the first day of the
Conversion Failure.
"Cure Date" means (i) with respect to a Conversion Failure described in
clause (x) of its definition, the date the Company effects the conversion of the
portion of this Debenture submitted for conversion and (ii) with respect to a
Conversion Failure described in clause (y) of its definition, the date the
Company undertakes in writing to issue Common Stock in satisfaction of all
conversions of Debentures in accordance with their terms.
The payments to which a Holder shall be entitled pursuant to this
Section are referred to herein as "Conversion Failure Payments." A Holder may
elect to receive accrued Conversion Failure Payments in cash or to convert all
or any portion of such accrued Conversion Failure Payments, at any time, into
Common Stock at the lowest Conversion Price in effect during the period
beginning on the date of the Conversion Failure through the Cure Date for such
Conversion Failure. In the event a Holder elects to receive any Conversion
Failure Payments in cash, it shall so notify the Company in writing. In the
event a Holder elects to convert all or any portion of the Conversion Failure
Payments, such Holder shall indicate on a Notice of Conversion such portion of
the Conversion Failure Payments which such Holder elects to so convert and such
conversion shall otherwise be effected in accordance with the provisions of
Article III.
5.2 Buy-In Cure. Unless a Conversion Failure described in clause (y) of
Section 5.1 hereof has occurred with respect to such a Holder, if (i) the
Company fails for any reason to deliver during the Delivery Period shares of
Common Stock to a Holder upon a conversion of this Debenture and (ii) after the
applicable Delivery Period with respect to such conversion, a Holder purchases
(in an open market transaction or otherwise) shares of Common Stock to make
delivery upon a sale by a Holder of the shares of Common Stock (the "Sold
Shares") which such Holder anticipated receiving upon such conversion (a
"Buy-In"), the Company shall pay such Holder (in addition to any other remedies
available to Holder) the amount by which (x) such Holder's total purchase price
(including brokerage commission, if any) for the shares of Common Stock so
purchased exceeds (y) the net proceeds received by such Holder from the sale of
the Sold Shares. For example, if a Holder purchases shares of Common Stock
having a total purchase price of $11,000 to cover a Buy-In with respect to
shares of Common Stock sold for $10,000, the Company will be required to pay
such Holder $1,000. A Holder shall provide the Company written notification
indicating any amounts payable to Holder pursuant to this Section 5.2. The
Company shall make any payments required pursuant to this Section 5.2 in
accordance with and subject to Section 8.10.
5.3 Adjustment to Conversion Price. If a Holder has not received
certificates for all shares of Common Stock within two business days following
the expiration of the Delivery Period with respect to a conversion of any
portion of any of such Holder's Debentures for any reason, then the Fixed
Conversion Price shall thereafter be the lesser of (i) the Fixed Conversion
Price on the Conversion Date specified in the Notice of Conversion which
resulted in the Conversion Failure and (ii) the lowest Conversion Price in
effect during the period beginning on, and including, such Conversion Date
through and including the Cure Date. If there shall occur a
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Conversion Failure of the type described in clause (y) of Section 5.1, then the
Fixed Conversion Price with respect to any conversion thereafter shall be the
lowest Conversion Price in effect at any time during the period beginning on,
and including, the date of the occurrence of such Conversion Failure through and
including the Cure Date. The Fixed Conversion Price shall thereafter be subject
to further adjustment for any events described in Article VII.
ARTICLE VI
EVENTS OF FAILURE
6.1 Holder's Option to Demand Prepayment. Upon the occurrence of an
Event of Failure (as herein defined), each Holder shall have the right to elect
at any time and from time to time prior to the cure by Borrower of such Event of
Failure to have all or any portion of such Holder's then outstanding Debentures
prepaid by the Company for an amount equal to the Holder Demand Prepayment
Amount (as herein defined).
(a) The right of a Holder to elect prepayment shall be exercisable upon
the occurrence of an Event of Failure by such Holder in its sole
discretion by delivery of a Demand Prepayment Notice (as herein defined)
in accordance with the procedures set forth in this Article VI.
Notwithstanding the exercise of such right, the Holder shall be entitled
to exercise all other rights and remedies available under the provisions
of this Debenture and at law or in equity.
(b) A Holder shall effect each demand for prepayment under this Article
VI by giving at least two (2) business days prior to written notice (the
"Demand Prepayment Notice") of the date which such prepayment is to
become effective (the "Effective Date of Demand of Prepayment"), the
Debentures selected for prepayment and the Holder Demand Prepayment
Amount to the Borrower at the address and facsimile number provided in
Section 8.2, which Demand Prepayment Notice shall be deemed to have been
delivered on the business day after the date of transmission of Holder's
fax (with a copy sent by overnight courier to the Borrower) of such
notice.
(c) The Holder Demand Prepayment Amount shall be paid to a Holder whose
Debentures are being prepaid within one (1) business day following the
Effective Date of Demand of Prepayment; provided, however, that the
Borrower shall not be obligated to deliver any portion of the Holder
Demand Prepayment Amount until one (1) business day following either the
date on which the Debentures being prepaid are delivered to the office
of the Borrower or the transfer agent, or the date on which the Holder
notifies the Borrower or the transfer agent that such Debentures have
been lost, stolen or destroyed and delivers the documentation required
in accordance with Section 8.8 hereof.
6.2 Holder Demand Prepayment Amount. The "Holder Demand Prepayment
Amount" means the greater of: (a) 1.5 times the aggregate amount of the
principal amount of this Debenture for which demand is being made (the "Stated
Value"), plus all accrued and unpaid
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interest thereon and accrued and unpaid Conversion Failure Payments (if any)
through the date of prepayment and (b) the product of (1) the highest price at
which the Common Stock is traded on the date of the Event of Failure (or the
most recent highest closing bid price if the Common Stock is not traded on such
date) divided by the Conversion Price as of the date of the Event of Failure,
and (2) the sum of the Stated Value plus all accrued and unpaid interest thereon
and all accrued and unpaid Conversion Failure Payments (if any) through the date
of prepayment.
6.3 Events of Failure. An "Event of Failure" means any one of the
following:
(a) a Conversion Failure described in Section 5.1 hereof occurs and is
not cured by the Company within two (2) business days after its occurrence;
(b) the Company fails, and such failure continues uncured for three (3)
business days after the Company has been notified thereof in writing by a
Holder, to satisfy the requirements of Article IV hereof;
(c) the Company fails to maintain an effective registration statement as
required by Section 2.1 and Section 3.1 of the Registration Rights Agreement
except where such failure lasts no longer than three consecutive trading days
and is caused solely by failure of the Securities and Exchange Commission to
timely review the customary submission of or respond to the customary requests
of the Company;
(d) for three consecutive trading days or for an aggregate of ten (10)
trading days in any nine (9) month period, the Common Stock (including any of
the shares of Common Stock issuable upon conversion of this Debenture and
exercise of the Warrants) is (i) suspended from trading on any of NASDAQ, NMS,
NYSE, AMEX or the OTC Bulletin Board, or (ii) is not qualified for trading on at
least one of, NASDAQ, NMS, NYSE, AMEX or the OTC Bulletin Board;
(e) the Company fails, and such failure continues uncured for three (3)
business days after the Company has been notified thereof in writing by a
Holder, to remove any restrictive legend on any certificate for any shares of
Common Stock issued to a Holder upon conversion of any Debenture or exercise of
any Warrant as and when required by the Debentures, the Warrants, the Securities
Purchase Agreement or the Registration Rights Agreement;
(f) the Company breaches, and such breach continues uncured for three
(3) business days after the Company has been notified thereof in writing by a
Holder, any significant covenant or other material term or condition of this
Debenture, the Securities Purchase Agreement, the Warrants or the Registration
Rights Agreement;
(g) any representation or warranty of the Company made herein or in any
agreement, statement or certificate given in writing pursuant hereto or in
connection herewith (including, without limitation, the Securities Purchase
Agreement and the Registration Rights Agreement), shall be false or misleading
in any material respect when made;
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(h) the Company or any subsidiary of the Company 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; or
(i) 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 Company or any subsidiary of
the Company (and such proceedings shall continue unstayed for thirty (30) days).
6.4 Failure to Pay Damages Amount. If the Company fails to pay the
Holder Demand Prepayment Amount within five (5) business days of its receipt of
a Demand Prepayment Notice, then such Holder shall have the right, at any time
and from time to time prior to the payment of the Holder Demand Prepayment
Amount, to require the Company, upon written notice, to immediately convert (in
accordance with the terms of Section 3.1) all or any portion of the Holder
Demand Prepayment Amount, into shares of Common Stock at the then current
Conversion Price, provided that if the Company has not delivered the full number
of shares of Common Stock issuable upon such conversion within two (2) business
days after Holder delivers written notice of such conversion, the Conversion
Price with respect to such Holder Demand Prepayment Amount shall thereafter be
deemed to be the lower of the Variable Conversion Price on the date of the Event
of Failure and the Variable Conversion Price on the date on which the Company
delivers to the Holder the full number of freely tradable shares of Common Stock
issuable upon such conversion. In the event the Company is not able to pay all
amounts due and payable with respect to all Debentures subject to Holder Demand
Prepayment Notices, the Company shall pay the Holders such amounts pro rata,
based on the total amounts payable to such Holder relative to the total amounts
payable to all Holders.
ARTICLE VII
ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time as
follows:
7.1 Stock Splits, Stock Dividends, Etc. If at any time on or after the
date of issuance of this Debenture, the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend, combination,
reclassification or other similar event, the Fixed Conversion Price shall be
proportionately reduced, or if the number of outstanding shares of Common Stock
is decreased by a reverse stock split, combination or reclassification of
shares, or other similar event, the Fixed Conversion Price shall be
proportionately increased. In such event, the Company shall notify the Company's
transfer agent of such change on or before the effective date thereof.
7.2 Major Transactions. If the Company shall consolidate with or merge
into any corporation or reclassify its outstanding shares of Common Stock (other
than by way of subdivision or reduction of such shares) (each a "Major
Transaction"), then each Holder shall
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thereafter be entitled to receive consideration, in exchange for such Debenture,
equal to the greater of, as determined in the sole discretion of such Holder:
(i) the number of shares of stock or securities or property of the Company, or
of the entity resulting from such consolidation or merger (the "Major
Transaction Consideration"), to which a Holder of the number of shares of Common
Stock delivered upon conversion of such Debenture would have been entitled upon
such Major Transaction had the Holder of such Debenture exercised its right of
conversion (without regard to any limitations on conversion herein contained) on
the trading date immediately preceding the public announcement of the
transaction resulting in such Major Transaction and had such Common Stock been
issued and outstanding and had such Holder been the holder of record of such
Common Stock at the time of such Major Transaction, and the Company shall make
lawful provision therefor as a part of such consolidation, merger or
reclassification; and (ii) 125% of the principal amount of such Debenture in
cash. No sooner than ten (10) days nor later than five (5) days prior to the
consummation of the Major Transaction, but not prior to the public announcement
of such Major Transaction, the Company shall deliver written notice ("Notice of
Major Transaction") to each Holder, which Notice of Major Transaction shall be
deemed to have been delivered one (1) business day after the Company's sending
such notice by telecopy (provided that the Company sends a confirming copy of
such notice on the same day by overnight courier) of such Notice of Major
Transaction. Such Notice of Major Transaction shall indicate the amount and type
of the Major Transaction Consideration which such Holder would receive under
clause (i) of this Section 7.2. If the Major Transaction Consideration does not
consist entirely of United States currency, such Holder may elect to receive
United States currency in an amount equal to the value of the Major Transaction
Consideration in lieu of the Major Transaction Consideration by delivering
notice of such election to the Company within five (5) days of the Holder's
receipt of the Notice of Major Transaction.
7.3 Adjustment Due to Distribution. If the Company shall declare or make
any distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a partial liquidating dividend, by way of return of capital or
otherwise (including any dividend or distribution to the Company's shareholders
in cash or shares (or rights to acquire shares) of capital stock of a
subsidiary) (a "Distribution") any time after the Issue Date, then the Holder
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 (or rights) which would have been payable to the
Holder had Holder with respect to the shares of Common Stock issuable upon such
conversion and the shares of Common Stock issuable upon exercise of the Warrants
(in each case without regard to any limitations on conversion or exercise herein
or elsewhere contained) been the holder of such shares of Common Stock on the
record date for the determination of shareholders entitled to such Distribution.
7.4 Purchase Rights. If the Company 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
Holders will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which each 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 or
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exercise herein or elsewhere contained) 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 grants, issue or sale of such Purchase Rights.
7.5 No Adjustment for Certain Warrants. Anything in this Article VII to
the contrary notwithstanding, no adjustment shall be made to the Conversion
Price upon any issuance to Swartz Investments, LLC of warrants to purchase
Common Stock in consideration of its services in connection with the Securities
Purchase Agreement and the transactions contemplated thereby so long as such
warrants are not exercisable, in the aggregate, for more than 220,000 shares of
Common Stock.
7.6 Notices of Adjustment. Upon the occurrence of any event which
requires any adjustment of the Conversion Price, then, and in each such case,
the Company shall give notice thereof to all Holders, which notice shall state
the Conversion Price resulting from such adjustment and the increase or decrease
in the number of shares of Common Stock purchasable at such price upon
conversion, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
ARTICLE VIII
MISCELLANEOUS
8.1 Failure or Indulgency Not Waiver. No failure or delay on the part of
a 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 privilege.
8.2 Notice. Any notice herein required or permitted to be given shall be
in writing and may be personally served or delivered by courier or by confirmed
telecopy and shall be deemed to have been given at the time and date of receipt
(which shall include telephone line facsimile transmission). The addresses for
such communications shall be:
If to the Company:
Patriot Scientific Corporation
10989 Via Frontera
San Diego, California 92127
Telecopy: (619) 674-5005
Attention: Lowell W. Giffhorn
with a copy to:
Luce, Forward, Hamilton & Scripps LLP
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600 West Broadway, Suite 2600
San Diego, California 92101
Telecopy: (619) 232-8311
Attention: Otto E. Sorensen
and with a copy to:
Robert Putnam
13112 Evening Creek Drive South
San Diego, California 92128
Telecopy: (619) 679-0545
If to Holder:
CC Investments, LDC
Corporate Centre, West Bay Road
P.O. Box 31106 SMB
Grand Cayman, Cayman Islands
with a copy to:
Castle Creek Partners, LLC
440 South LaSalle Street
Suite 700
Chicago, IL 60605
Telecopy: (312) 362-4500
Attention: John D. Ziegelman
and with a copy to:
Altheimer & Gray
10 South Wacker Drive
Suite 4000
Chicago, IL 60606
Telecopy: (312) 715-4800
Attention: Kenneth M. Crane
If to any other Holder, to such address set forth under Holder's name on
the signature page hereto executed by Holder.
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8.3 Amendment Provision. Except as provided in Section 3.7(b) hereof,
this Debenture and any provision hereof may only be amended by an instrument in
writing signed by the Company and the Majority Holders. The term "Debenture" and
all references thereto, as used throughout this instrument, shall mean this
instrument as originally executed, or if later amended or supplemented, then as
so amended or supplemented.
8.4 Assignability. This Debenture shall be binding upon the Company and
its successors and assigns and shall inure to the benefit of each Holder and its
successors and assigns. The Holder shall notify the Company upon the assignment
of this Debenture.
8.5 Cost of Collection. If default or failure is made in any manner with
respect to this Debenture, the Company shall pay the Holder hereof costs of
collection, including reasonable attorneys' fees.
8.6 Governing Law. This Debenture shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed in the State of Delaware. The Company irrevocably consents
to the jurisdiction of the United States federal courts located in the County of
New Castle in any suit or proceeding based on or arising under this Agreement
and irrevocably agrees that all claims in respect of such suit or proceeding may
be determined in such courts. The Company irrevocably waives the defense of an
inconvenient forum to the maintenance of such suit or proceeding. The Company
further agrees that service of process upon the Company, mailed by first class
mail shall be deemed in every respect effective service of process upon the
Company in any such suit or proceeding. Nothing herein shall affect each
Holder's right to serve process in any other manner permitted by law. The
Company agrees 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.
8.7 Denominations. At the request of a Holder, upon surrender of this
Debenture, the Company shall promptly issue new Debentures in the aggregate
outstanding principal amount hereof, in the form hereof, in such denominations
as such Holder shall request.
8.8 Lost or Stolen Debentures. Upon receipt by the Company of (i)
evidence of the loss, theft, destruction or mutilation of this Debenture and
(ii) (y) in the case of loss, theft or destruction, or an indemnity reasonably
satisfactory to the Company, or (z) in the case of mutilation, upon surrender
and cancellation of this Debenture, the Company shall execute and deliver new
Debentures, in the form hereof, in such denominations as a Holder may request.
However, the Company shall not be obligated to reissue such lost or stolen
Debentures if such Holder contemporaneously requests the Company to convert this
Debenture.
8.9 Statements of Available Shares. Upon request, the Company shall
deliver to a Holder a written report notifying such Holder of any occurrence
which prohibits the Company from issuing Common Stock upon any such conversion.
The report shall also specify (i) the total
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principal amount of all outstanding Debentures as of the date of the request,
(ii) the total number or shares of Common Stock issued upon all conversions of
Debentures through the date of the request, (iii) the total number of shares of
Common Stock issued upon exercise of all Warrants through the date of the
request, (iv) the total number of shares of Common Stock which are reserved for
issuance upon conversion of Debentures and exercise of Warrants as of the date
of the request and (v) the total number of shares of Common Stock which may
thereafter be issued by the Company upon conversion of Debentures and exercise
of Warrants before the Company would exceed the Reserved Amount. The Company
shall provide, within fifteen (15) days after delivery to the Company of a
written request by Holder, all of the information enumerated in clauses (i) -
(v) of this Section 8.9.
8.10 Status as Debenture Holder. Upon submission of a Notice of
Conversion by Holder, the principal amount of this Debenture and the interest
thereon covered thereby shall be deemed converted into shares of Common Stock
and the holder's rights with respect thereto 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 Holder because of a failure by the Company to comply with the terms of this
Debenture. Notwithstanding the foregoing, if Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion for
any reason, then (unless Holder otherwise elects to retain its status as a
Holder of Common Stock) the portion of the principal amount and interest thereon
subject to such conversion shall be deemed outstanding under this Debenture and
the Company shall, as soon as practicable, return this Debenture to the Holder.
In all cases, Holder shall retain all of its rights and remedies for the
Company's failure to convert this Debenture.
8.11 Remedies Cumulative. The remedies provided in this Debenture shall
be cumulative and in addition to all other remedies available under this
Debenture, at law or in equity (including a decree of specific performance
and/or other injunctive relief), and nothing herein shall limit Holder's right
to pursue actual damages for any failure by the Company to comply with the terms
of this Debenture. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees, in the event of any such breach or threatened breach, the Holder shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, with the necessity of showing economic loss and without
any bond or other security being required.
* * *
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IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in
its name by its duly authorized officer as of the date first written above.
PATRIOT SCIENTIFIC CORPORATION
By: /s/ ELWOOD G. NORRIS
------------------------
Name: Elwood G. Norris
Title: Chairman and a Director
By: /s/ MICHAEL A. CARENZO
--------------------------
Name: Michael A. Carenzo
Title: President, Chief Executive Officer and a
Director
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NOTICE OF CONVERSION
The undersigned hereby irrevocably elects to convert (the "Conversion")
$__________ principal amount of the Debenture plus all accrued and unpaid
interest on such principal amount (i.e., $_________) plus all accrued and unpaid
Conversion Failure Payments relating thereto (if any) (each as defined in the
Convertible Term Debenture dated June 2, 1997 (the "Debenture")), into shares of
common stock ("Common Stock") of Patriot Scientific Corporation (the "Company")
according to the conditions of the Debenture, 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. No fee
will be charged to the Holder for any conversion except as provided herein.
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of
this Debenture shall be made pursuant to registration of the Common Stock under
the Securities Act of 1933, as amended (the "Act"), or pursuant to an exemption
from registration under the Act.
In the event of partial exercise, please reissue an appropriate Debenture(s) for
the principal balance which shall not have been converted.
Date of Conversion: __________________
Applicable Conversion Price:____________
Amount of Conversion Failure Payments
to be Converted, if any: ________________
Number of Shares of
Common Stock to be Issued: ____________
Signature: ___________________________
Name: ______________________________
Address: ___________________________
ACKNOWLEDGED AND AGREED:
PATRIOT SCIENTIFIC CORPORATION
BY:____________________________
NAME:__________________________
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TITLE: ___________________________ DATE: ______________
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