THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, ("ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS DEBENTURE MAY NOT
BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT REGISTRATION UNDER THE ACT AND
ANY APPLICABLE STATE SECURITIES LAWS OR DELIVERY TO RICKS CABARET INTERNATIONAL,
INC. OF AN OPINION OF LEGAL COUNSEL SATISFACTORY TO RICKS CABARET INTERNATIONAL,
INC. THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR ANY APPLICABLE
STATE SECURITIES LAWS.
CERTIFICATE -RCI-C.D. NO. 100
CONVERTIBLE DEBENTURE
OF
RICKS CABARET INTERNATIONAL, INC.
FOR VALUE RECEIVED, RICKS CABARET INTERNATIONAL, INC., a Texas corporation
with its principal office located at 3113 Bering, Houston, Texas 77056 (the
"Company"), unconditionally promises to pay to Ralph McElroy, whose address is
1211 Choquette, Austin, Texas, 78757, or the registered assignee, upon
presentation of this Debenture (the "Debenture") by the registered holder hereof
("Registered Holder") at the office of the Company, the principal sum of
$366,000, together with the accrued and unpaid interest thereon and other sums
as hereinafter provided.
1. INTEREST. Interest on the principal amount outstanding hereunder
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shall be paid monthly, in arrears, at the rate of twelve percent (12%) per annum
from the date of issuance commencing with the first monthly payment due
September 1, 1998 and monthly payments thereafter due on the first day of each
successive month ("Interest Payment Date"), to the person in whose name(s) such
Debenture is registered at the close of business on the 15th day immediately
preceding such Interest Payment Date (the "Record Date").
2. MATURITY. The principal amount of this Debenture and all interest
--------
accrued thereon but not yet paid shall become immediately due and payable on the
date (the "Maturity Date") on which the first event specified below occurs:
a. The Company in its sole discretion chooses to redeem all outstanding
Debentures in accordance with Section 4 hereof; or
b. July 31, 2004.
3. PAYMENT. Payment of any sums due to the Holder under the terms of
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this Debenture shall be made in United States Dollars by check or wire transfer
at the option of the Company. Payment shall be made to any account or address
designated by the Holder any time prior to any payment due hereunder. If any
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payment hereunder would otherwise become due and payable on a day on which banks
are closed or permitted to be closed in Houston, Texas, such payment shall
become due and payable on the next succeeding day on which banks are open and
not permitted to be closed in Houston, Texas ("Business Day"). The Company may
prepay all or any part of the principal of this Debenture before maturity
without penalty, and interest shall immediately cease to accrue on any amount so
prepaid.
4. COMPANY'S OPTION TO REDEEM. The Debenture will be subject to
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redemption at the option of the Company, in whole or in part, at 100% of the
principal face amount of the Debenture redeemed plus any accrued and unpaid
interest on the redemption date, at any time and from time to time, upon not
less than 30 nor more than 60 days notice, if the Closing Price of the common
stock of the Company shall have equalled or exceeded $8.50 per share of common
stock for ten (10) consecutive trading days. The Closing Price on a given date
shall equal either (i) the average of the high and low bid prices of the Common
Stock, as reported by the National Association of Securities Dealers Automated
Quotation System on such date; or (ii) if the Common Stock is then listed on a
national securities exchange or the national market system of the
over-the-counter market, the closing price of the Common Stock on such exchange
on such date.
Notice of redemption shall be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each Holder of Debentures to
be redeemed at the Holder's registered address. If any Debenture is to be
redeemed in part only, the notice of redemption that relates to such Debenture
shall state the portion of the principal amount thereof to be redeemed, the date
fixed for redemption and the redemption price at which the Debentures are to be
redeemed. A new Debenture in the principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder upon cancellation of
the original Debenture. After the redemption date, unless the Company shall
default in the payment of the redemption price, interest will cease to accrue on
Debentures or portions thereof called for redemption.
5. SECURITY. This Debenture is secured by a Deed of Trust and Security
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Agreement on certain real estate as set forth therein, a copy of which is
attached hereto as Exhibit "A".
6. CONVERSION RIGHTS.
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(a) The Holder of this Debenture will have the right, at the Holder's
option, to convert any portion of the principal amount hereof and/or the accrued
and unpaid interest hereon, into shares of Common Stock at any time prior to
maturity (unless earlier redeemed) at the Conversion Price of $2.75 per share
(subject to adjustment as described below). The right to convert a Debenture
and the accrued and unpaid interest thereon called for redemption will terminate
at the close of business on the business day prior to the redemption date for
such Debenture, unless the Company subsequently fails to pay the applicable
redemption price.
The Holder of this Debenture shall be entitled to convert all or any
portion of the principal face amount of the Debenture plus the accrued and
unpaid interest thereon into shares of Common Stock by (i) giving written notice
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to the Company that such Holder elects to convert into Common Stock, (ii)
stating in such written notice the denominations in which such Holder wishes the
certificate or certificates for Common Stock to be issued and (iii) surrendering
this Debenture to the Company. The Company will, as soon as practicable
thereafter, cause to be issued and delivered to such Holder certificates for the
number of full shares of Common Stock to which such Holder shall be entitled as
aforesaid and, if necessary, a new Debenture representing any unconverted
portion of this Debenture. The Company shall not issue fractional shares of
Common Stock upon conversion, but the number of shares of Common Stock to be
received by any Holder upon conversion shall be rounded down to the next whole
number and the Holder shall be entitled to payment of the remaining principal
amount in cash.
(b) In the case of any Debenture which has been mandatorily or
voluntarily converted after any Record Date, but on or before the next Interest
Payment Date, the interest due on such Interest Payment Date, shall be payable
on such Interest Payment Date notwithstanding such conversion. The interest
shall be paid in cash on the Interest Payment Date, unless prior thereto the
Holder elects by written notice to the Company to convert such interest into
shares of Common Stock at the conversion price of $2.75 per share.
(c) In case of any reclassification, consolidation or merger of the
Company with or into another entity or any merger of another entity with or into
the Company, or in the case of any sale, transfer or conveyance of all or
substantially all of the assets of the Company (computed on a consolidated
basis), each Debenture then outstanding will, without the consent of any Holder,
become convertible only into the kind and amount of securities, cash or other
property receivable upon such reclassification, consolidation, merger, sale,
transfer or conveyance by a Holder of the number of shares of Common Stock into
which such Debenture and the accrued and unpaid interest thereon was convertible
immediately prior thereto, after giving effect to any adjustment event.
(d) The Company shall at all times reserve for issuance and maintain
available, out of its authorized but unissued Common Stock, solely for the
purpose of effecting the conversion of the Debenture, the full number of shares
of Common Stock deliverable upon the conversion of the Debenture from time to
time outstanding. The Company shall from time to time (subject to obtaining
necessary director and stockholder action), in accordance with the laws of the
State of Texas, increase the authorized number of shares of its Common Stock
if at any time the authorized number of shares of its Common Stock remaining
unissued shall not be sufficient to permit the conversion of the Debenture.
7. CONVERSION RATE OF THE DEBENTURES. In the event the Company shall
-----------------------------------
(i) subdivide outstanding shares of the Company's Common Stock into a greater
number of shares, (ii) combine outstanding shares of the Company's Common Stock
into a smaller number of shares, or (iii) issue by reclassification of shares of
the Company's Common Stock, the exchange rate in effect immediately prior
thereto shall be proportionately adjusted so that the Holder of any Debenture
thereafter surrendered in exchange shall be entitled to receive the number and
kind of shares of Common Stock (in addition to any cash or portion thereto)
which he would have owned or have been entitled to receive after the happening
3
of any of the events described above had such Debenture been exchanged
immediately prior to the effective date of such event. Such adjustments shall
be made whenever any of the events listed above shall occur and shall become
effective immediately after the close of business on the effective date in case
of the events listed above. No adjustment is to be made on conversion of any
Debenture for interest accrued thereon during the period commencing on the date
after the last interest payment or for any dividends on the Common Stock issued
prior to exercise of the Holder's conversion right.
8. EVENTS OF DEFAULTS AND REMEDIES. The following are deemed to be an
--------------------------------
event of default ("Event of Default") hereunder: (i) the failure by the Company
to pay any installment of interest on the Debenture as and when due and payable
and the continuance of any such failure for 10 days, (ii) the failure by the
Company to pay all or any part of the principal on the Debenture when and as the
same become due and payable at maturity, by acceleration or otherwise, (iii) the
failure of the Company to perform any conversion of Debentures required under
the Debenture and the continuance of any such failure for 10 days, (iv) the
failure by the Company to observe or perform any other covenant or agreement
contained in the Debenture and the continuance of such failure for a period of
10 days after the written notice is given to the Company by the Holders, (v) the
assignment by the Company for the benefit of creditors, or an application by the
Company to any tribunal for the appointment of a trustee or receiver of a
substantial part of the assets of the Company, or the commencement of any
proceedings relating to the Company under any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debts, dissolution or other liquidation
law of any jurisdiction; or the filing of such application, or the commencement
of any such proceedings against the Company and an indication of consent by the
Company to such proceedings, or the appointment of such trustee or receiver, or
an adjudication of the Company bankrupt or insolvent, or approval of the
petition in any such proceedings, and such order remains in effect for 60 days;
or (vi) a default in the payment of principal or interest when due which extends
beyond any stated period of grace applicable thereto or an acceleration for any
other reason of maturity of any indebtedness for borrowed money of the Company
with an aggregate principal amount in excess of $1,000,000 and (vii) final
unsatisfied judgments not covered by insurance aggregating in excess of
$1,000,000, at any one time rendered against the Company and not stayed, bonded
or discharged within 75 days.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (v) above with respect to the Company), then in
every such case, unless the principal or all of the Debentures shall have
already become due and payable, the Holders of the Debentures then outstanding,
by notice in writing to the Company (an "Acceleration Notice"), may declare all
principal and accrued and unpaid interest thereon to be due and payable
immediately. If an Event of Default specified in clause (v) above occurs with
respect to the Company, all principal and accrued and unpaid interest thereon
will be immediately due and payable on all outstanding Debentures without any
declaration or other act on the part of the Holder. The Holder is authorized to
rescind such acceleration if all existing Events of Default, other than the
non-payment of the principal and interest on the Debentures which have become
due solely by such acceleration, have been cured or waived.
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9. LIMITATION ON MERGER, SALE OR CONSOLIDATION. The Company may not,
---------------------------------------------
directly or indirectly, consolidate with or merge into another person or sell,
lease, convey or transfer all or substantially all of its assets (computed on a
consolidated basis), whether in a single transaction or a series of related
transactions, to another person or group of affiliated persons, unless either
(a) in the case of a merger or consolidation, the Company is the surviving
entity or (b) the resulting, surviving or transferee entity is a corporation or
limited liability company organized under the laws of any state of the United
States and expressly assumes by supplemental agreement all of the obligations of
the Company in connection with the Debentures.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, the successor
corporation or limited liability company formed by such consolidation or into
which the Company is merged or to which such transfer is made, shall succeed to,
and be substituted for, and may exercise every right and power of the Company
under the Debenture with the same effect as if such successor corporation or
limited liability company had been named therein as the Company, and the Company
will be released from its obligations under the Debentures, except as to any
obligations that arise from or as a result of such transaction.
10. REGISTRATION RIGHTS.
---------------------
(a) In the event that the Company files a Registration Statement
to register shares of its Common Stock with the Securities and Exchange
Commission ("SEC") on Form S-3 or other similar form (except for Form S-8 or
Form S-4) than the Company will undertake to use its best efforts to register
for resale from time to time by the Holder all of the shares into which the
Debenture may be converted under the same Registration Statement. The Company
shall use its best efforts to cause the Registration Statement to become
effective under the Securities Act of 1933, as amended (the "Act") as promptly
as is practicable and to keep the Registration Statement continuously effective
under the Act for a period of the earlier of (i) two years from the effective
date or (ii) until all of the shares which were registered for resale have been
sold.
(b) From time to time, the Company shall prepare and file with the
SEC a post-effective amendment to the Registration Statement or a supplement to
the related Prospectus or a supplement or amendment to any document incorporated
therein by reference or any other required document, so that such Registration
Statement will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and so that, as thereafter delivered to
purchasers of the securities being sold thereunder, such Prospectus will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provide
the Holder copies of any documents filed in such numbers as the Holder shall
reasonably request; and inform the Holder that the Company has complied with its
obligations and that the Registration Statement and related Prospectus may be
used for the purpose of selling all or any of such securities (or that, if the
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Company has filed a post-effective amendment to the Registration Statement which
has not yet been declared effective, the Company will notify the Holder to that
effect, will use its best efforts to secure promptly the effectiveness of such
post-effective amendment and will immediately so notify the Holder when the
amendment has become effective).
11. NO PERSONAL LIABILITY OF SHAREHOLDERS, OFFICERS, DIRECTORS. No
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recourse shall be had for the payment of the principal or the interest on this
Debenture, or for any claim based thereon, or otherwise in respect thereof, or
based on or in respect of any Debenture supplemental thereto, against any
incorporator, stockholder, officer, or director (past, present, or future) of
the Company, whether by virtue of any constitution, statute, or rule of law, or
by the enforcement of any assessment or penalty or otherwise, all such liability
being by the acceptance hereof, and as part of the consideration for the issue
hereof, expressly waived and released.
12. LISTING OF REGISTERED HOLDER OF DEBENTURES. This Debenture will be
------------------------------------------
registered as to principal in the Holder's name on the books of the Company at
its principal office in Houston, Texas, after which no transfer hereof shall be
valid unless made on the Company's books at the office of the Company, by the
Holder hereof, in person, or by attorney duly authorized in writing, and
similarly noted hereon.
13. GOVERNING LAW; CONSENT TO JURISDICTION. This Debenture shall be
-----------------------------------------
governed by and construed in accordance with the laws of the State of Texas
without regard to the conflict of laws provisions thereof.
14. AMENDMENT AND WAIVER. Any waiver or amendment hereto shall be in
----------------------
writing signed by the Holder. No failure on the part of the Holder to exercise,
and no delay in exercising, any right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise by the Holder of any right
hereunder preclude any other or further exercise thereof or the exercise of any
other rights. The remedies herein provided are cumulative and not exclusive of
any other remedies provided by law.
15. RESTRICTIONS AGAINST TRANSFER OR ASSIGNMENT.
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(a) This Debenture may not be sold, transferred, assigned, pledged,
hypothecated or otherwise disposed of by the registered Holder hereof, in whole
or in part, unless and until either (i) the Debenture has been duly and
effectively registered for resale under the Act and under any then applicable
state securities laws; or (ii) the registered Holder delivers to the Company a
written opinion acceptable to its counsel that an exemption from such
registration requirements is then available with respect to any such proposed
sale or disposition. The Company has the absolute right, in its sole
discretion, to approve or disapprove such transfer. Any transfer otherwise
permissible hereunder shall be made only at the principle office of the Company
upon surrender of this Debenture for cancellation and upon the payment of any
transfer tax or other government charge connected therewith, and upon any such
transfer a new Debenture or Debentures will be issued to the transferee in
exchange therefor. The transferee of this Debenture shall be bound by the
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provisions of this Debenture. The register of the transfer of this Debenture
shall occur upon the delivery of this Debenture, endorsed by the registered
Holder or his duly authorized attorney, signature guaranteed, to the Company or
its transfer agent. Each Debenture instrument issued upon the transfer of this
Debenture shall have the restrictive legend contained herein conspicuously
imprinted on it.
(b) In the event the Company successfully effects registration of the
Common Stock into which this Debenture is convertible, the Company may stop or
prevent the transfer of such Common Stock for a period not to exceed 60 days in
the event the Company files a registration statement for the sale of its
securities, and for an indefinite period of time if the Company, in its sole
discretion, believes that such security holder has material non-public
information.
16. ENTIRE AGREEMENT; HEADINGS. This Debenture constitutes the entire
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agreement between the Holder and the Company pertaining to the subject matter
hereof and supersedes all prior and contemporaneous agreements, representations
and understandings, written or oral, of such parties. The headings are for
reference purposes only and shall not be used in construing or interpreting this
Debenture.
17. NOTICES. All notices and other communications provided for herein
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shall be in writing and shall be deemed to have been duly given if delivered
personally, transmitted by facsimile transmission (fax) or sent by registered or
certified mail, return receipt requested, postage prepaid, or overnight air
courier guaranteeing next day delivery:
(a) If to the Company, to it at the following address:
3113 Bering
Houston, Texas 77056
Attn: Robert Watters
(fax) 713-785-2593
(b) If to registered Holder, then to the address listed on the front of
this Debenture, unless changed, by notice in writing as provided for herein.
A notice or communication will be effective (i) if delivered in person or by
overnight courier, on the business day it is delivered, (ii) if transmitted by
telecopier, on the business day of actual confirmed receipt by the addressee
thereof, and (iii) if sent by registered or certified mail, three (3) business
days after dispatch.
IN WITNESS WHEREOF, Rick's Cabaret International, Inc. has caused this
Debenture to be duly executed in its corporate name by the manual signature of
its President, and a facsimile of its corporate seal to be impressed, imprinted
or engraved hereon, attested by the manual signature of its Secretary.
Dated: August 11, 1998.
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RICK'S CABARET INTERNATIONAL, INC.
/s/ Robert Watters
-----------------------------------------
Robert Watters,
President and Chief Executive Officer
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