1
Exhibit 4(e)(3)
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND
CONVERSION SET FORTH IN A CONVERTIBLE DEBENTURE AND PREFERRED STOCK PURCHASE
AGREEMENT, DATED AS OF MAY 8, 1997, BETWEEN SUBSTANCE ABUSE TECHNOLOGIES, INC.
(THE "COMPANY") AND THE ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON
FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
No. 1 U.S. $50,000.00
SUBSTANCE ABUSE TECHNOLOGIES, INC.
14% CONVERTIBLE DEBENTURE DUE MAY 8, 2000
THIS DEBENTURE is one of a duly authorized issue of debentures of
Substance Abuse Technologies, Inc. a Delaware corporation, having a principal
place of business at 4517 N.W. 31st Avenue, Ft. Lauderdale, Florida 33309 (the
"Company"), designated as its 14% Convertible Debentures, due May 8, 2000 (the
"Debentures"), in an aggregate principal amount of up to $750,000.
FOR VALUE RECEIVED, the Company promises to pay to Southbrook
International Investments, Ltd., or registered assigns (the "Holder"), the
principal sum of Fifty Thousand Dollars ($50,000.00), on or prior to May 8, 2000
or such earlier date as the Debentures are required to be repaid as provided
hereunder (the "Maturity Date") and to pay interest to the Holder on the
principal sum at the rate of 14% per annum, payable upon conversion as provided
hereunder, or on the Maturity Date if not earlier converted. Interest shall
accrue daily commencing on the Original Issue Date (as defined in Section 7)
until payment in full of the principal sum, together with all accrued and unpaid
interest and other amounts which may become due hereunder, has been made.
Interest shall be calculated on the basis of a 360-day year and for the actual
number of days elapsed. Interest hereunder will be paid to the person in whose
name this Debenture (or one or more predecessor Debentures) is registered on the
records
2
of the Company regarding registration and transfers of the Debentures (the
"Debenture Register") on the Conversion Date (as defined below) or the Maturity
Date, as the case may be; provided, however, that the Company's obligation to a
transferee of this Debenture arises only if such transfer, sale or other
disposition is made in accordance with the terms and conditions hereof and of
the Convertible Debenture and Preferred Stock Purchase Agreement, dated as of
May 8, 1997, as amended from time to time (the "Purchase Agreement"), executed
by the original Holder. All overdue, accrued and unpaid interest and other
amounts due hereunder shall bear interest at the rate of 15% per annum from the
day of conversion hereunder or the Maturity Date or earlier date on which this
Debenture is accelerated through and including the date of payment. The
principal of, and interest on, this Debenture are payable in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts, at the address of the Holder
last appearing on the Debenture Register, except that interest due hereunder
may, at the Company's option, be paid in shares of the Common Stock (as defined
in Section 7) calculated based upon the average Per Share Market Value for the
five (5) Trading Days immediately preceding the Conversion Date or Maturity
Date, as the case may be. All amounts due hereunder other than interest shall be
paid in cash. Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of the Common Stock in payment of interest on the
principal amount if: (i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, or held as treasury stock,
is insufficient to pay interest hereunder in shares of Common Stock; (ii) the
shares of Common Stock to be issued in respect of interest hereunder are not
registered for resale pursuant to an effective registration statement that names
the recipient of such interest shares as a selling stockholder thereunder or may
not be sold without volume restrictions pursuant to Rule 144 promulgated under
the Securities Act of 1933, as amended (the "Securities Act") as determined by
counsel to the Company pursuant to a written opinion letter, addressed to the
holder, in form and substance acceptable to the holder; (iii) the shares of
Common Stock to be issued in respect of such interest are not listed on the
American Stock Exchange (or the Nasdaq National Market, Nasdaq SmallCap Market
or The New York Stock Exchange), and any other exchange on which the Common
Stock is then listed for trading; or (iv) the issuance of such shares would
result in the recipient thereof beneficially owning more than 4.9% of the issued
and outstanding shares of Common Stock. A transfer of the right to receive
principal and interest under this Debenture shall be transferable only through
an appropriate entry in the Debenture Register as provided herein.
This Debenture is subject to the following additional provisions:
Section 1. The Debentures are issuable in denominations of
Fifty Thousand Dollars ($50,000) and integral multiples of Fifty Thousand
Dollars ($50,000) in excess thereof. The Debentures are exchangeable for an
equal aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holder surrendering the same but shall not be
issuable in denominations of less than integral multiplies of Fifty Thousand
Dollars ($50,000). No service charge will be made for such registration of
transfer or exchange.
Section 2. [INTENTIONALLY DELETED]
-2-
3
Section 3. This Debenture has been issued subject to certain
investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the
Securities Act. Prior to due presentment to the Company for transfer of this
Debenture, the Company and any agent of the Company may treat the person in
whose name this Debenture is duly registered on the Debenture Register as the
owner hereof for the purpose of receiving payment as herein provided and for all
other purposes, whether or not this Debenture is overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary.
Section 4. Events of Default.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
(a) any default in the payment of the principal of or interest
on this Debenture as and when the same shall become due and payable on
the Conversion Date or the Maturity Date or by acceleration or
otherwise;
(b) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of, this Debenture, the Purchase Agreement, the Class B Exchange
Agreement or the Registration Rights Agreement, dated as of May 8,
1997, between the Company and the original Holder (the "Registration
Rights Agreement"), and such failure or breach shall not have been
remedied within 30 days after the date on which notice of such failure
or breach shall have been given;
(c) the Company or any of its subsidiaries shall commence a
voluntary case under the United States Bankruptcy Code or insolvency
laws as now or hereafter in effect or any successor thereto (the
"Bankruptcy Code"); or an involuntary case is commenced against the
Company under the Bankruptcy Code and the petition is not controverted
within 30 days, or is not dismissed within 60 days, after commencement
of such involuntary case; or a "custodian" (as defined in the
Bankruptcy Code) is appointed for, or takes charge of, all or any
substantial part of the property of the Company or the Company
commences any other proceeding under any reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter
in effect relating to the Company or there is commenced against the
Company any such proceeding which remains undismissed for a period of
60 days; or the Company is adjudicated insolvent or bankrupt; or any
order of relief or other order approving any such case or proceeding is
entered; or the Company suffers any appointment of any custodian or the
like for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the Company makes
a general assignment for the benefit of creditors; or the Company
-3-
4
shall fail to pay, or shall state that it is unable to pay, or shall be
unable to pay, its debts generally as they become due; or the Company
shall call a meeting of its creditors with a view to arranging a
composition or adjustment of its debts; or the Company shall by any act
or failure to act indicate its consent to, approval of or acquiescence
in any of the foregoing; or any corporate or other action is taken by
the Company for the purpose of effecting any of the foregoing;
(d) the Company shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement
or other instrument under which there may be issued, or by which there
may be secured or evidenced any indebtedness of the Company in an
amount exceeding one hundred thousand dollars ($100,000), whether such
indebtedness now exists or shall hereafter be created and such default
shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and
payable;
(e) the Common Stock shall be delisted from the American Stock
Exchange or other national securities exchange or market on which such
Common Stock is listed for trading or suspended from trading thereon
without being relisted or having such suspension lifted, as the case
may be, within five days; or
(f) the Company shall be a party to any merger or
consolidation pursuant to which the Company shall not be the surviving
entity or shall dispose of all or substantially all of its assets in
one or more transactions, or shall redeem more than 10,000 shares of
the Common Stock (other than redemptions of Underlying Shares issued
upon conversion of Debentures or exchange of Class B Preferred Stock
held by the original Holder at such time).
If during the time that any portion of this Debenture remains outstanding, any
Event of Default occurs and is continuing, and in every such case, then the
Holder may, by notice to the Company, declare the full principal amount of this
Debenture, together with all accrued but unpaid interest and other amounts owing
hereunder, to the date of acceleration, to be, plus the "Adjustment Amount" (as
defined in Section 7) whereupon the same shall become, immediately due and
payable in cash (notwithstanding anything herein contained to the contrary)
without presentment, demand, protest or other notice of any kind, all of which
are waived by the Company, notwithstanding anything herein contained to the
contrary, and the Holder may immediately and without expiration of any grace
period enforce any and all of its rights and remedies hereunder and all other
remedies available to it under applicable law. Such declaration may be rescinded
and annulled by Holder at any time prior to payment hereunder. No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.
-4-
5
Section 5. Conversion.
(a) (i) This Debenture shall be convertible into shares of
the Common Stock (subject to reduction pursuant to Section 5(a)(ii) below and
Section 4.10 of the Purchase Agreement at the option of the Holder in whole or
in part at any time and from time to time after the earlier to occur of (A) the
120th day after the Original Issue Date or (B) the date the Securities and
Exchange Commission (the "Commission") declares effective under the Securities
Act, the registration statement registering the resale of the shares of Common
Stock issuable upon conversion of the Debentures and payment of interest
hereunder and naming the Holder as a selling stockholder thereunder (the
"Underlying Shares Registration Statement") and prior to the close of business
on the Maturity Date. The Holder shall effect conversions by surrendering the
Debentures (or such portions thereof) to be converted to the Company, together
with the form of conversion notice attached hereto as Exhibit A (the "Conversion
Notice"). Each Conversion Notice shall specify the principal amount of
Debentures to be converted and the date on which such conversion is to be
effected, which date may not be prior to the date the Holder delivers such
Conversion Notice by facsimile (the "Conversion Date"). If no Conversion Date is
specified in a Conversion Notice, the Conversion Date shall be the date that the
Conversion Notice is deemed delivered pursuant to Section 5(h). Subject to
Sections 5(b) and 5(a)(ii) hereof and Section 4.10 of the Purchase Agreement,
each Conversion Notice, once given, shall be irrevocable. If the Holder is
converting less than all of the principal amount represented by the Debenture(s)
tendered by the Holder with the Conversion Notice, or if a conversion hereunder
cannot be effected in full for any reason, the Company shall honor such
conversion to the extent permissible hereunder and shall promptly deliver to
such Holder (in the manner and within the time set forth in Section 5(b)) a new
Debenture for such principal amount as have not been converted.
(ii) Certain Regulatory Approval. If on the Conversion
Date applicable to any conversion, (A) the Common Stock is then listed for
trading on the American Stock Exchange or the Nasdaq National Market or, if the
rules of the Nasdaq Stock Market are hereafter amended to extend Rule 4460(i)
promulgated thereby (or any successor or replacement provision thereof) to the
Nasdaq SmallCap Market and the Common Stock is then listed for trading on the
Nasdaq SmallCap Market (B) the Conversion Price then in effect is such that the
aggregate number of shares of the Common Stock that would then be issuable upon
conversion of the entire outstanding principal amount of Debentures, together
with any shares of the Common Stock previously issued upon conversion of
Debentures and in respect of payment of interest hereunder, and any shares of
Common Stock issued upon exchange of the Class B Preferred Stock and in payment
of dividends in respect thereof would equal or exceed 20% of the number of
shares of the Common Stock outstanding on the Original Issue Date (the "Issuable
Maximum"), and (C) the Company has not previously obtained the Stockholder
Approval (as defined below), then the Company shall issue to the Holder
requesting such conversion the Issuable Maximum and, with respect to any shares
of the Common Stock that otherwise would have been issuable to such holder in
respect of the Conversion Notice at issue or in respect of payment of interest
hereunder in excess of the Issuable Maximum, the Holder shall have the option to
require the Company to either (1) as promptly as possible, but in no event later
than
-5-
6
90 days after such Conversion Date, convene a meeting of the holders of the
Common Stock and use its best efforts to obtain the Stockholder Approval or (2)
repay, from funds legally available therefor at the time of such repayment, the
balance of the principal amount of the Debentures subject to such Conversion
Notice and the remaining aggregate principal amount of Debentures then
outstanding and held by such Holder at a price equal to the principal amount of
Debentures then outstanding and held by such Holder multiplied by the product of
(i) the average Per Share Market Value for the five (5) Trading Days immediately
preceding (1) the Conversion Date or (2) the date of payment in full by the
Company of such repayment price, whichever is greater, divided by (ii) the
Conversion Price calculated on the Conversion Date; provided, however, that if
the Holder has requested that the Company obtain Stockholder Approval under
paragraph (1) above and the Company fails for any reason to obtain such
Stockholder Approval within the time period set forth in (1) above, the Company
shall be obligated to repay Debentures in accordance with the provisions of
paragraph (2) above, and in such case the interest contemplated by the
immediately succeeding sentence shall be deemed to accrue from the Conversion
Date. If the Holder has requested that the Company repay Debentures pursuant to
this Section and the Company fails for any reason to pay the repayment price
under (2) above within seven days after the Conversion Date, the Company will
pay interest on such repayment price at a rate of 15% per annum to the
converting Holder, accruing from the Conversion Date until the repayment price
plus any accrued interest thereon is paid in full. The entire repayment price,
including interest thereon, shall be paid in cash. "Stockholder Approval" means
the approval by a majority of the total votes cast on the proposal, in person or
by proxy, at a meeting of the stockholders of the Company held in accordance
with the Company's Certificate of Incorporation and by-laws, of the issuance by
the Company of shares of the Common Stock exceeding the Issuable Maximum as a
consequence of the conversion of Debentures into the Common Stock at a price
less than the greater of the book or market value on the Original Issue Date as
and to the extent required pursuant to Rule 713 of the American Stock Exchange
or Rule 4460(i) of the Nasdaq Stock Market (or any successor or replacement
provision thereof), as applicable.
(b) Not later than three Trading Days after the Conversion
Date, the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other than
those required by Section 4.1(b) of the Purchase Agreement) representing the
number of shares of the Common Stock being acquired upon the conversion of
Debentures (subject to reduction pursuant to Section 5(a)(ii) hereof and Section
4.10 of the Purchase Agreement), (ii) Debentures in a principal amount equal to
the principal amount of Debentures not converted; (iii) a bank check in the
amount of all accrued and unpaid interest (if the Company has elected to pay
accrued interest in cash), together with all other amounts then due and payable
in accordance with the terms hereof, in respect of Debentures tendered for
conversion and (iv) if the Company has elected to pay accrued interest in shares
of the Common Stock, certificates, which shall be free of restrictive legends
and trading restrictions (other than those required by law), representing such
number of shares of the Common Stock as equals such interest divided by the
average Per Share Market Value for the five trading Days immediately preceding
the Conversion Date; provided, however, that the Company shall not be obligated
to issue certificates evidencing the shares of the Common Stock issuable upon
conversion of the principal amount of Debentures, until Debentures are either
delivered for conversion to the
-6-
7
Company or any transfer agent for the Debentures or the Common Stock, or the
Holder notifies the Company that such Debenture has been lost, stolen or
destroyed and provides a bond (or other adequate security) reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. The Company shall, upon request of the Holder, use
its best efforts to deliver any certificate or certificates required to be
delivered by the Company under this Section electronically through the
Depository Trust Corporation or another established clearing corporation
performing similar functions. If in the case of any Conversion Notice such
certificate or certificates, including for purposes hereof, any shares of the
Common Stock to be issued on the Conversion Date on account of accrued but
unpaid interest hereunder, are not delivered to or as directed by the applicable
Holder by the third Trading Day after the Conversion Date, the Holder shall be
entitled by written notice to the Company at any time on or before its receipt
of such certificate or certificates thereafter, to rescind such conversion, in
which event the Company shall immediately return the Debentures tendered for
conversion. If the Company fails to deliver to the Holder such certificate or
certificates pursuant to this Section, including for purposes hereof, any shares
of the Common Stock to be issued on the Conversion Date on account of accrued
but unpaid interest hereunder, prior to the fifth Trading Day after the
Conversion Date, the Company shall pay to such Holder, in cash, as liquidated
damages and not as a penalty, $1,500 for each day after such fifth Trading Day
until such certificates are delivered. If the Company fails to deliver to the
Holder such certificate or certificates pursuant to this Section prior to the
20th day after the Conversion Date, the Company shall, at the Holder's option
(i) repay, from funds legally available therefor at the time of such repayment,
the aggregate of the principal amount of Debentures then held by such Holder, as
requested by such Holder, and (ii) pay all accrued but unpaid interest on
account of the Debentures for which the Company shall have failed to issue the
Common Stock certificates hereunder, in cash. The repayment price shall be equal
to the sum of (A) the aggregate of all accrued but unpaid interest and other
non-principal amounts then payable in respect of all Debentures to be repaid
hereunder and for which repayment hereunder is demanded, plus (B) the aggregate
of the principal amount of Debentures then held by such Holder multiplied by (1)
the average Per Share Market Value for the five (5) Trading Days immediately
preceding (x) the Conversion Date or (y) the date of payment in full by the
Company of such repayment price, whichever is greater, divided by, (2) the
Conversion Price calculated on the Conversion Date. If the Holder has requested
that the Company repay Debentures pursuant to this Section and the Company fails
for any reason to pay the repayment price within seven days after such notice is
deemed delivered pursuant to Section 5(h), the Company will pay interest on the
repayment price at a rate of 15% per annum, in cash to such Holder, accruing
from such seventh day until the repayment price and any accrued interest thereon
is paid in full.
(c) (i) The conversion price (the "Conversion Price") in
effect on any Conversion Date shall be the lesser of (a) $1.25 (the "Initial
Conversion Price") or (b) 85% of the average Per Share Market Value for the five
(5) Trading Days immediately preceding the Conversion Date; provided that, (a)
if the Underlying Shares Registration Statement is not filed on or prior to July
7, 1997, or (b) the Company fails to file with the Commission a request for
acceleration in accordance with Rule 12d1-2 promulgated under the Securities
Exchange Act of 1934, as amended, within five (5) days of the date that the
Company is notified (orally or in
-7-
8
writing, whichever is earlier) by the Commission that an Underlying Shares
Registration Statement will not be "reviewed" or is not subject to further
review or comment, or (c) if the Underlying Shares Registration Statement is not
declared effective by the Commission on or prior to the 120th day after the
Original Issue Date (which period shall be extended to the 150 days after the
Original Issue Date in the event that the Commission notifies the Company that
the Underlying Shares Registration Statement can not be filed on Form S-3
promulgated under the Securities Act solely because the Debentures are
convertible prior to the 180th day after the Original Issue Date), or (d) if
such Underlying Shares Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities (as such term is defined in the Registration Rights
Agreement) at any time prior to the expiration of the "Effectiveness Period" (as
such term as defined in the Registration Rights Agreement), without being
succeeded by a subsequent Underlying Shares Registration Statement filed with
and declared effective by the Commission within 10 Business Days (as defined in
Section 7), or (e) if trading in the Common Stock shall be suspended for any
reason for more than three Trading Days, or (f) if the conversion rights of the
Holders of Debentures hereunder are suspended for any reason (any such failure
being referred to as an "Event," and for purposes of clauses (a), (c) and (f)
the date on which such Event occurs, or for purposes of clause (b) the date on
which such five (5) days period is exceeded, or for purposes of clause (d) the
date which such 10 Business Day-period is exceeded, or for purposes of clause
(e) the date on which such three Trading Day period is exceeded, being referred
to as "Event Date"), the Conversion Price shall be decreased by 2.5% each month
(i.e., 82.5% as of the Event Date and 80% as of the one month anniversary of the
Event Date) until the earlier to occur of the second month anniversary after the
Event Date and such time as the applicable Event is cured. Commencing the second
month anniversary after the Event Date, at the option of each Holder for each
applicable monthly period either (a) the Company shall pay to the Holders 2.5%
of the product of the principal amount of outstanding Debentures (each Holder
being entitled to receive such portion of such amount as equals its pro rata
portion of Debentures then outstanding), in cash or (b) the Conversion Price
shall be decreased by 2.5% for each additional such month (to be effective in
full on the monthly applicable Event Date) as liquidated damages, and not as a
penalty on the first day of each monthly anniversary of the Event Date in either
case until such time as the applicable Event is cured. Any decrease in the
Conversion Price pursuant to this Section shall remain in effect notwithstanding
the fact that the Event causing such decrease has been subsequently cured and
further monthly decreases have ceased. The provisions of this Section are not
exclusive and shall in no way limit the Company's obligations under the
Registration Rights Agreement. Notwithstanding anything to the contrary set
forth herein, the Company may not, without the prior written consent of the
Holders, pay liquidated damages hereunder in cash unless it shall have received
the prior written consent of all lenders, debt holders or holders of any class
of securities of the Company or its Affiliates that have the right to require
such consent or to subordinate any such cash payment, which consent shall
provide that the payment by the Company of any such liquidated damages hereunder
(and the retention of such sum by the receiving Holder) is not subject to any
applicable subordination rights of such lender or holders of such class of
securities.
-8-
9
(ii) If the Company, at any time while any Debentures are
outstanding, (a) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Junior Securities (as defined in Section 7)
payable in shares of the Common Stock, (b) subdivide outstanding shares of the
Common Stock into a larger number of shares, (c) combine outstanding shares of
the Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of the Common Stock any shares of capital stock of
the Company, the Initial Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of the Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of the Common Stock outstanding after
such event. Any adjustment made pursuant to this Section 5(c)(ii) shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.
(iii) If the Company, at any time while any Debentures are
outstanding, shall issue rights or warrants to all holders of the Common Stock
(and not to Holders of Debentures) entitling them to subscribe for or purchase
shares of the Common Stock at a price per share less than the Per Share Market
Value of the Common Stock at the record date mentioned below, the Initial
Conversion Price shall be multiplied by a fraction, of which the denominator
shall be the number of shares of the Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of the Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants plus the number of shares which the aggregate offering
price of the total number of shares so offered would purchase at such Per Share
Market Value. Such adjustment shall be made whenever such rights or warrants are
issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants.
However, upon the expiration of any right or warrant to purchase shares of the
Common Stock the issuance of which resulted in an adjustment in the Initial
Conversion Price pursuant to this Section 5(c)(iii), if any such right or
warrant shall expire and shall not have been exercised, the Initial Conversion
Price shall immediately upon such expiration be recomputed and effective
immediately upon such expiration be increased to the price which it would have
been (but reflecting any other adjustments in the Initial Conversion Price made
pursuant to the provisions of this Section 5 after the issuance of such rights
or warrants) had the adjustment of the Initial Conversion Price made upon the
issuance of such rights or warrants been made on the basis of offering for
subscription or purchase only that number of shares of the Common Stock actually
purchased upon the exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of the Common Stock (and not to
Holders of Debentures) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security (excluding those referred to
in Sections 5(c)(ii) and (iii) above), then in each such case the Initial
Conversion Price at which Debentures shall thereafter be convertible shall be
determined by
-9-
10
multiplying the Initial Conversion Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Per Share
Market Value of the Common Stock determined as of the record date mentioned
above, and of which the numerator shall be such Per Share Market Value of the
Common Stock on such record date less the then fair market value at such record
date of the portion of such assets or evidence of indebtedness so distributed
applicable to one outstanding share of the Common Stock as determined by the
Board of Directors in good faith; provided, however, that in the event of a
distribution exceeding ten percent (10%) of the net assets of the Company, such
fair market value shall be determined by a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
good faith by the holders of a majority in interest of Debentures then
outstanding; and provided, further, that the Company, after receipt of the
determination by such Appraiser shall have the right to select an additional
Appraiser, in good faith, in which case the fair market value shall be equal to
the average of the determinations by each such Appraiser. In either case the
adjustments shall be described in a statement provided to the holders of
Debentures of the portion of assets or evidences of indebtedness so distributed
or such subscription rights applicable to one share of the Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.
(v) All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Initial Conversion Price is adjusted
pursuant to Section 5(c)(ii),(iii) or (iv), the Company shall promptly mail to
each holder of Debentures, a notice setting forth the Initial Conversion Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment.
(vii) In case of any reclassification of the Common Stock or
any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, the Holder of this Debenture shall have
the right thereafter to, at its option, (A) convert the then outstanding
principal amount, together with all accrued but unpaid interest and any other
amounts then owing hereunder in respect of this Debenture only into the shares
of stock and other securities, cash and property receivable upon or deemed to be
held by holders of the Common Stock following such reclassification or share
exchange, and the Holders of the Debentures shall be entitled upon such event to
receive such amount of securities, cash or property as the shares of the Common
Stock of the Company into which the then outstanding principal amount, together
with all accrued but unpaid interest and any other amounts then owing hereunder
in respect of this Debenture could have been converted immediately prior to such
reclassification or share exchange would have been entitled or (B) require the
Company to repay, from funds legally available therefor at the time of such
repayment, all of its Debentures at a price equal to the sum of (i) the
aggregate of the principal amount of Debentures then held by the Holder
multiplied by (a) the average Per Share Market
-10-
11
Value for the five (5) Trading Days immediately preceding (1) the effective date
of the reclassification or share exchange triggering such repayment right or (2)
the date of payment in full by the Company of the repayment price hereunder,
whichever is greater, divided by (b) the Conversion Price calculated on such
effective date, plus (ii) the aggregate of all accrued but unpaid interest and
other amounts then payable in respect of all Debentures to be repaid hereunder.
The entire redemption price shall be paid in cash, and the terms of payment of
such redemption price shall be subject to the provisions set forth in Section
6(b). The terms of any such reclassification or share exchange shall include
such terms so as to continue to give to the Holder the right to receive the
securities, cash or property set forth in this Section 5(c)(vii) upon any
conversion following such event. This provision shall similarly apply to
successive reclassifications or share exchanges.
(viii) If:
A. the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
B. the Company shall declare a special
nonrecurring cash dividend on or a
redemption of its Common Stock; or
C. the Company shall authorize the granting to
all holders of the Common Stock rights or
warrants to subscribe for or purchase any
shares of capital stock of any class or of
any rights; or
D. the approval of any stockholders of the
Company shall be required in connection with
any reclassification of the Common Stock of
the Company, any consolidation or merger to
which the Company is a party, any sale or
transfer of all or substantially all of the
assets of the Company, of any compulsory
share of exchange whereby the Common Stock
is converted into other securities, cash or
property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or
winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of the Debentures, and shall cause to be mailed to the
Holders of Debentures at their last addresses as they shall appear upon the
stock books of the Company, at least 30 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of the
-11-
12
Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on which
such reclassification, consolidation, merger, sale, transfer or share exchange
is expected to become effective or close, and the date as of which it is
expected that holders of the Common Stock of record shall be entitled to
exchange their shares of the Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer or
share exchange; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice. Holders are entitled
to convert Debentures during the 30-day period commencing the date of such
notice to the effective date of the event triggering such notice.
(d) If at any time conditions shall arise by reason of action
taken by the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might materially and
adversely affect the rights of the Holders (different than or distinguished from
the effect generally on rights of holders of any class of the Company's capital
stock) or if at any time any such conditions are expected to arise by reason of
any action contemplated by the Company, the Company shall mail a written notice
briefly describing the action contemplated and the material adverse effects of
such action on the rights of the Holders at least 30 calendar days prior to the
effective date of such action, and an Appraiser selected by the Holders of
majority in interest of the Debentures shall give its opinion as to the
adjustment, if any (not inconsistent with the standards established in this
Section 5), of the Conversion Price (including, if necessary, any adjustment as
to the securities into which Debentures may thereafter be convertible) and any
distribution which is or would be required to preserve without diluting the
rights of the Holders; provided, however, that the Company, after receipt of the
determination by such Appraiser, shall have the right to select an additional
Appraiser, in good faith, in which case the adjustment shall be equal to the
average of the adjustments recommended by each such Appraiser. The Board of
Directors shall make the adjustment recommended forthwith upon the receipt of
such opinion or opinions or the taking of any such action contemplated, as the
case may be; provided, however, that no such adjustment of the Conversion Price
shall be made which in the opinion of the Appraiser(s) giving the aforesaid
opinion or opinions would result in an increase of the Conversion Price to more
than the Conversion Price then in effect.
(e) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued shares of the Common Stock
solely for the purpose of issuance upon conversion of the Debentures and payment
of interest on the Debentures, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(c)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder. The Company covenants that all shares of the Common Stock that shall
be so issuable shall, upon issue, be duly and validly authorized, issued and
fully paid,
-12-
13
nonassessable and, if the Underlying Shares Registration Statement has been
declared effective under the Securities Act, freely tradeable.
(f) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of the
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Value at such time.
If the Company elects not, or is unable, to make such a cash payment, the holder
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.
(g) The issuance of certificates for shares of the Common
Stock on conversion of the Debentures shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such Debentures so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(h) Any and all notices or other communications or deliveries
to be provided by the Holders of the Debentures hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the Company, at
4517 N.W. 31st Avenue, Ft. Lauderdale, Florida 33309 (facsimile number (954)
714-5049), attention Chief Executive Officer, or such other address or facsimile
number as the Company may specify for such purposes by notice to the Holders
delivered in accordance with this Section. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service or sent by certified or registered mail, postage
prepaid, addressed to each Holder of the Debentures at the facsimile telephone
number or address of such Holder appearing on the books of the Company, or if no
such facsimile telephone number or address appears, at the principal place of
business of the holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 4:30 p.m. (Eastern
Time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 4:30 p.m. (Eastern Time) on any date and
earlier than 11:59 p.m. (Eastern Time) on such date, (iii) four days after
deposit in the United States mails, (iv) the Business Day following the date of
mailing, if send by nationally recognized overnight courier service, or (v) upon
actual receipt by the party to whom such notice is required to be given.
-13-
14
Section 6. Repayments.
(a) The Company shall have the right, exercisable at any time
upon 20 Trading Days notice to the Holders of the Debentures given at any time
after the Original Issue Date to repay, from funds legally available therefor at
the time of such repayment, all or any portion of the outstanding principal
amount of the Debentures which have not previously been converted or repaid, at
a price equal to the sum of (A) the aggregate of the principal amount of the
Debentures to be repaid multiplied by (i) the average Per Share Market Value for
the five (5) Trading Days immediately preceding (1) the date of the repayment
notice referenced above or (2) the date of payment in full by the Company of the
repayment price hereunder, whichever is greater, divided by (ii) the Conversion
Price calculated on the date of such repayment notice and (B) the aggregate of
all accrued but unpaid interest and other amounts owing in respect of the
Debentures to be repaid. The entire repayment price shall be paid in cash.
Holders of the Debentures may convert the Debentures, including the Debentures
subject to a repayment notice given under this Section, during the period from
the date of such repayment notice through the 19th Trading Day thereafter.
(b) If any portion of the applicable repayment price under
Sections 6(a) shall not be paid by the Company within seven (7) calendar days
after the date due, interest shall accrue thereon at the rate of 15% per annum
until the repayment price plus all such interest is paid in full (which amount
shall be paid as liquidated damages and not as a penalty). In addition, if any
portion of such repayment price remains unpaid for more than 7 calendar days
after the date due, the Holder of the Debentures subject to such repayment may
elect, by written notice to the Company given within 30 days after the date due,
to either (i) demand conversion in accordance with the formula and the time
frame therefor set forth in Section 5 of all Debentures for which such repayment
price, plus accrued liquidated damages thereof, has not been paid in full (the
"Unpaid Repayment Shares"), in which event the Per Share Market Price for such
shares shall be the lower of the Per Share Market Price calculated on the date
such repayment price was originally due and the Per Share Market Price as of the
Holder's written demand for conversion, or (ii) invalidate ab initio such
repayment, notwithstanding anything herein contained to the contrary. If the
Holder elects option (i) above, the Company shall within three (3) Trading Days
of its receipt of such election deliver to the Holder the shares of the Common
Stock issuable upon conversion of the Unpaid Repayment Shares subject to such
Holder conversion demand and otherwise perform its obligations hereunder with
respect thereto; or, if the Holder elects option (ii) above, the Company shall
promptly, and in any event not later than three (3) Trading Days from receipt of
holder's notice of such election, return to the holder all of the Unpaid
Repayment Shares. Notwithstanding anything to the contrary contained herein, the
Company may not, without the written consent of the holder, repay Debentures
unless both the payment thereof and the retention of such paid cash by the
holder is consented to in writing free of any subordination prior thereto by all
lenders or holders of any indebtedness or class of securities of the Company who
have the right to consent to or force the subordination of such payment.
Section 7. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
-14-
15
"Adjustment Amount" is equal to (i) the aggregate principal
amount of Debentures then outstanding multiplied by (A) the average Per Share
Market Value for the five Trading Days immediately preceding (1) the applicable
Trigger Date or (2) the date of payment of all amounts due as a result of such
Event of Default, whichever is greater, divided by (B) the Conversion Price with
respect to the aggregate principal amount of Debentures then outstanding
calculated on the applicable Trigger Date, MINUS (ii) the aggregate principal
amount of Debentures then outstanding, plus all accrued and unpaid interest
thereon, and all other amounts due, except for those referred to in (i) above
pursuant to the terms hereof.
"Business Day" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"Class B Exchange Agreement" means the Class B Exchange
Agreement, dated May 8, 1997, between the Company and the original Holder
relating to the Class B Preferred Stock.
"Class B Preferred Stock" means the Company's Class B
Preferred Stock, par value $.01 per share.
"Common Stock" means the Company's common stock, $.01 par
value per share, of the Company and stock of any other class into which such
shares may hereafter have been reclassified or changed.
"Junior Securities" means the Common Stock and all other
equity securities of the Company and all other debt that is subordinated to the
Debentures by its terms.
"Original Issue Date" shall mean the date of the first
issuance of any Debentures regardless of the number of transfers of any
Debenture and regardless of the number of instruments which may be issued to
evidence such Debenture.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the American
Stock Exchange or other stock exchange or quotation system on which the Common
Stock is then listed or if there is no such price on such date, then the closing
bid price on such exchange or quotation system on the date nearest preceding
such date, or (b) if the Common Stock is not listed then on the American Stock
Exchange or any stock exchange or quotation system, the closing bid price for a
share of the Common Stock in the over-the-counter market, as reported by the
Nasdaq Stock Market or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the
close of business on such date, or (c) if the Common Stock is not then reported
by the National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" quotes for the relevant conversion period, as determined in good faith by
the holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share
-15-
16
of Common Stock as determined by an Appraiser selected in good faith by the
holders of a majority in interest of the Debentures; provided, however, that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in which case, the fair market value
shall be equal to the average of the determinations by each such Appraiser.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated May 8, 1997, between the Company and the original holder of
Debentures.
"Trading Day" means (a) a day on which the Common Stock is
traded on the American Stock Exchange or other stock exchange or market on which
the Common Stock has been listed, or (b) if the Common Stock is not listed on
the American Stock Exchange or any stock exchange or market, a day on which the
Common Stock is traded in the over-the-counter market, as reported by the OTC
Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin
Board, a day on which the Common Stock is quoted in the over-the-counter market
as reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices).
"Trigger Date" shall mean, (i) with respect to an Event of
Default caused by an event described in Section 4(a), the date the payment of
principal or interest at issue was due, (ii) with respect to an Event of Default
caused by an event described in Section 4(b), the date specified in any other
provision of this Debenture, the Purchase Agreement, the Class B Exchange
Agreement or the Registration Rights Agreement that require repayment of the
outstanding principal amount of this Debenture as a result of an event so
contemplated, if not, the date such event becomes an Event of Default pursuant
to Section 4(b), and (iii) with respect to an Event of Default caused by an
event described in Section 4(c), (d), (e) and (f), the date such event becomes
an Event of Default pursuant to such Sections.
"Underlying Shares" means the number of shares of Common Stock
into which the Shares are convertible in accordance with the terms hereof and
the Purchase Agreement.
Section 8. Except as expressly provided herein, no provision
of this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, and interest on, this
Debenture at the time, place, and rate, and in the coin or currency, herein
prescribed. This Debenture is a direct obligation of the Company. This Debenture
ranks pari passu with all other Debentures now or hereafter issued under the
terms set forth herein; provided, however, that this Debenture is subordinate in
right of payment to the outstanding Convertible Senior Promissory Notes due
November 8, 1999 of the Company. The Company may only prepay the outstanding
principal amount on the Debentures in accordance with Section 6 hereof.
-16-
17
Section 9. This Debenture shall not entitle the Holder to any
of the rights of a stockholder of the Company, including without limitation, the
right to vote, to receive dividends and other distributions, or to receive any
notice of, or to attend, meetings of stockholders or any other proceedings of
the Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
Section 10. If this Debenture shall be mutilated, lost, stolen
or destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Debenture, or in lieu of
or in substitution for a lost, stolen or destroyed debenture, a new Debenture
for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed but only upon receipt of evidence of such loss, theft or destruction
of such Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
Section 11. This Debenture shall be governed by and construed
in accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof.
Section 12. Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture. The failure of the Company or the Holder to
insist upon strict adherence to any term of this Debenture on one or more
occasions shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Debenture. Any waiver must be in writing.
Section 13. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
Section 14. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day (or, if such next succeeding Business Day falls
in the next calendar month, the preceding Business Day in the appropriate
calendar month).
-17-
18
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed by an officer thereunto duly authorized as of the date first
above indicated.
SUBSTANCE ABUSE TECHNOLOGIES, INC.
By:_______________________________
Name:
Title:
Attest:
By:___________________________
Name:
Title:
19
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert Debenture No. 1 into shares of Common
Stock, par value $.01 per share (the "Common Stock"), of Substance Abuse
Technologies, Inc. (the "Company") according to the conditions hereof, as of the
date written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations: ________________________________________________
Date to Effect Conversion
________________________________________________
Principal Amount of Debentures to be Converted
________________________________________________
Number of shares of Common Stock to be Issued
________________________________________________
Applicable Conversion Price
________________________________________________
Signature
________________________________________________
Name
________________________________________________
Address
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested hereby),
notify the converting holder by facsimile of the number of shares of Common
Stock outstanding on such date and the number of shares of Common Stock which
would be issuable to the holder if the conversion requested in this conversion
notice were effected in full, whereupon, if the Company determines that such
conversion would result in it owning in excess of 4.9% of the outstanding shares
of Common Stock on such date, the Company shall convert up to an amount equal to
4.9% of the outstanding shares of Common Stock and issue to the holder one or
more certificates representing Debentures which have not been converted as a
result of this provision.