Exhibit 10.21
NEITHER THIS CONVERTIBLE DEBENTURE NOR THE SECURITIES ISSUABLE UPON CONVERSION
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR THE SECURITIES LAWS OF ANY STATE AND SUCH SECURITIES MAY NOT BE SOLD
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT AND LAWS UNLESS INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT THAT SUCH
REGISTRATION IS NOT REQUIRED.
CLASS A SECURED CONVERTIBLE DEBENTURE
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December 31, 2001
FOR VALUE RECEIVED, Integrated Business Systems and Services, Inc., a
South Carolina corporation (the "Company"), promises to pay to the order of IBSS
Class A Investors, a Michigan co-partnership, whose address is c/o Seyburn,
Kahn, Ginn, Bess and Serlin, P.C., 2000 Town Center, Suite 1500, Southfield,
Michigan 48075, Attention: Bruce H. Seyburn, Esq. ("Payee"; Payee and any
subsequent holder(s) hereof are individually and collectively referred to as the
"Holder"), the sum of Nine Hundred Twenty Eight Thousand Two Hundred Forty One
and NO/100 Dollars ($ 928,241), together with interest thereon, all as
hereinafter provided.
1. Issue. This Debenture is a duly authorized issue of the Company
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(the "Debenture") in the aggregate principal amount of $928,241.
2. Interest and Principal Payments and Prepayments.
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2.1 Principal. The outstanding principal amount hereunder shall be
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paid on the earlier to occur of: (i) January 1, 2004 ; and, (ii) the date of the
closing of a Liquidity Event (as and to the extent defined below) (the "Maturity
Date").
In the event the Company obtains further investor funding after the
completion of the sale by the Company of the series of Class A and Class B
Debentures substantially in the form hereof (the "Completion Date") (whether in
exchange for promissory notes, convertible debentures, warrants, equity
securities or instruments of any nature whatsoever) (a "Liquidity Event"),
promptly following the closing of such Liquidity Event, the Company shall pay to
all Holders of the Company's Class A Secured Convertible Debentures (the "Class
A Debenture holders") and all holders of the Company's Class B Secured
Convertible Debentures (the "Class B Debenture holders") (pro rata within each
Class of Debenture in accord with the relative principal amounts of each
Debenture, and in priority as between the Class A Secured Convertible Debentures
and Class B Secured Convertible Debentures as set forth in an Inter-Creditor
Agreement of even date herewith) the following amounts:
(a) Out of the first One Million ($1,000,000) Dollars of such funding
(computed on a cumulative basis, taking into account all rounds
of funding completed after the Completion Date), zero (0%)
percent shall be paid to the Class A and Class B Debenture
holders;
(b) Out of the second One Million Dollars (i.e., between $1 million
and $2 million) of such funding (computed on a cumulative basis,
taking into account all rounds of funding completed after the
Completion Date), an aggregate thirty (30%) percent shall be paid
to the Class A and Class B Debenture holders, and applied against
the accrued but unpaid interest and the unpaid principal hereof;
(c) Out of the third One Million Dollars (i.e., between $2 million
and $3 million) (computed on a cumulative basis, taking into
account all rounds of funding completed after the Completion
Date), an aggregate forty (40%) percent shall be paid to the
Class A and Class B Debenture holders, and applied against the
accrued but unpaid interest and the unpaid principal hereof; and,
(d) Out of all funding in excess of Three Million Dollars (computed
on a cumulative basis, taking into account all rounds of funding
completed after the Completion Date), an aggregate fifty (50%)
percent shall be paid to the Class A and Class B Debenture
holders, and applied against the accrued but unpaid interest and
the unpaid principal hereof.
2.2 Interest. From the date hereof to and including the date that this
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Debenture is paid in full, the unpaid principal amount of this Debenture shall
bear simple interest at a rate per annum equal to the Interest Rate (defined
below), with such rate computed based on a year of 360 days; provided, however,
that during any period of default hereunder, the foregoing rate shall be
increased to twenty-two percent (22.0%). Interest on the unpaid principal amount
of this Debenture shall accrue from the date hereof and be payable in arrears on
January 1, 2003, and on the Maturity Date.
Interest Rate. The Interest Rate under this Debenture shall be
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equal to nine percent (9%) per annum during the first ninety (90) days after the
date hereof. During each consecutive ninety-day interval thereafter, the
Interest Rate shall increase by one (1.00) percentage point (e.g., during the
second ninety-day period hereunder, interest shall accrue at 10.0% per annum,
during the third ninety-day period hereunder interest shall accrue at 11.0% per
annum, etc.). Notwithstanding anything herein to the contrary, the Interest Rate
shall not exceed twenty-two percent (22.0%) per annum (the default rate of
interest).
Notwithstanding the foregoing escalation in the Interest Rate if
no default or Event of Default has occurred hereunder, and if the outstanding
principal balance hereof and the accrued and unpaid interest thereon is paid in
full on or before January 1, 2003, the Interest Rate under this Debenture shall
be equal to nine (9.0%) percent per annum.
2.3 Payment in U.S. Dollars. All payments of principal and interest
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shall be made in lawful money of the United States of America except as provided
in Section 4 and shall be made to Holder at Holder's address set forth in
Section 9.2 or at such other place as Holder may designate to the Company in
writing.
2.4 Maximum Rate of Interest. Regardless of any other provision of
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this Debenture or in any documents otherwise relating hereto, no Holder of this
Debenture shall ever be entitled to receive, collect or apply as interest on the
principal of this Debenture any amount in excess of the maximum rate of interest
allowable under applicable law, and if any Holder ever receives, collects or
applies as interest hereon any such excess, such amount that would be excessive
interest shall be deemed as partial prepayment of principal and shall be treated
as such, and if the principal is paid in full, any remaining excess shall
forthwith be paid to the Company. In determining whether the interest paid or
payable on the principal outstanding under this Debenture exceeds the maximum
rate of interest allowable under applicable law, the Company and Holder shall,
to the maximum extent permitted under applicable law, (a) characterize any
non-principal payment as an expense, fee or premium rather than as interest, (b)
exclude voluntary prepayments and the effects thereof and (c) spread the total
amount of interest throughout the entire contemplated term hereof; provided,
that if the indebtedness evidenced hereby is paid and performed in full prior to
the end of the full contemplated term thereof, and if the interest received for
the actual period of existence thereof exceeds the maximum rate of interest
allowable under applicable law, Holder shall either apply or refund to the
Company the amount of such excess as herein provided, and in such event, Holder
shall not be subject to any penalties provided by any laws for contracting for,
charging, or receiving interest in excess of the maximum rate of interest
allowable under applicable law.
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2.5 Prepayment. This Debenture may be prepaid prior to maturity, in
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whole but not in part, at the election of the Company without the prior written
consent of Holder, but only upon sixty (60) days prior written notice
("Prepayment Notice") to Holder (during which period Holder may exercise the
conversion rights set forth herein).
If Holder waives its conversion rights in writing (or fails to exercise the
same within sixty (60) days following the Prepayment Notice), then Holder shall
retain all amounts tendered with the Prepayment Notice (such amounts to be
applied against amounts due under this Debenture); if Holder exercises its
conversion rights within said sixty-day period following the Prepayment Notice,
Holder may use a portion of the amounts tendered to pay the Conversion Price,
and shall apply the balance, if any, of the amount tendered toward payment of
this Debenture.
3. Lost, Stolen, Destroyed or Mutilated Debenture. Upon receipt of
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evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of this Debenture and, in case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the Company
or, in the case of any such mutilation, upon surrender and cancellation of this
Debenture, the Company will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Debenture, a new Debenture bearing interest at the rate
set forth herein of like tenor and unpaid principal amount of this Debenture so
lost, stolen, destroyed or mutilated.
4. Conversion of Debenture, Conversion Procedure, Reservation of
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Shares and Taxes.
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4.1 (a) Conversion Into Shares. Subject to the provisions of Section
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2.5, Holder shall have the right, at such Holder's option, to convert all or
part of the then outstanding principal amount of this Debenture, into shares of
the Company's common stock, no par value per share (the "Common Stock"), at the
conversion price equal to the lesser of: (i) of One Dollar ($1.00) per share or
(ii) 50% multiplied by the average daily closing quote for the Common Stock
(averaged over the thirty (30) day period prior to conversion); in case an
adjustment of such conversion price has taken place pursuant to the provisions
of Sections 4.4 and 4.5, then at the conversion price as last adjusted (referred
to herein as the "Conversion Price").
(b) Conversion Into Royalty. Subject to the provisions of Section 2.5,
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Holder shall have the right, in lieu of the conversion rights set forth in
Section 4.1(a) hereinabove, at such Holder's option, to convert all of the then
outstanding principal amount of this Debenture into a right to receive a
quarterly royalty payment (the "Royalty") from the Company.
(i) The Royalty shall be equal to two percent (2.0%) (the
"Applicable Percentage")of the gross income of the Company for each $500,000 in
outstanding principal that is converted hereunder (e.g., if $750,000 of this
Debenture is converted, the Applicable Percentage is 3.0%, if $100,000 is
converted, the Applicable Percentage is 1.0%). Gross income as used herein shall
mean all income of the Company from whatever source derived including, but not
limited to, income and/or gain from services, commissions, licenses, royalty
arrangements, consulting arrangements, patent, trademark, or copyright
assignments, the sale of goods, the sale of assets or other property, dividends
and interest.
(ii) The Royalty shall be computed and paid to Holder on a
quarterly basis for a period of three (3) years from the date of conversion. The
Royalty shall be due and payable on April 15, July 15, October 15 and January 15
for the previous calendar quarter (or partial calendar quarter for the initial
and final quarters). In the event payment is not timely made, in addition to
being a default hereunder, the Applicable Percentage shall double for the period
covered by the late payment, and shall remain doubled for subsequent periods,
until such time as the Royalty is again current.
(iii) The Company hereby covenants and agrees that it will keep
proper books of account in a manner satisfactory to Holder, and will make timely
filings of its Forms 10-QSB. Such statements shall accurately report the true
condition of the Company for each fiscal quarter and shall be filed with the
Securities and Exchange Commission.
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(iv) The Company authorizes the Holder to inspect the Company's
books, records and papers at any time and the Holder shall have the right to
make copies and abstracts thereof. Holder may audit such books and records for
the purpose of confirming that the correct amount of Royalty has been paid. The
Company shall be entitled to demand that Holder execute an appropriate
confidentiality agreement with the Company as a pre-condition to such
inspection.
(v) In the event the Company is sold (or merged), either via a
sale of a majority of its stock or substantially all of its assets, the Company
may redeem the Royalty by paying to Holder in cash an amount equal to two times
the principal amount converted into the Royalty. In the event of such a sale (or
merger), or a default by the Company of any term governing the Royalty herein,
in addition to any other remedies, Holder may, at its election, require the
Company to redeem the Royalty for such amount.
(vi) The Royalty shall be assignable by the Holder without
approval by the Company but shall not be assignable by the Company.
4.2 Conversion Procedure. In order to convert this Debenture into
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shares of Common Stock as provided in Section 4.1(a) or into the Royalty set
forth in 4.1(b), Holder shall surrender this Debenture, at or prior to the
Maturity Date, to the Company at the office of the Company designated pursuant
to Section 9.2 at any time during usual business hours, together with written
notice (hereinafter referred to as "Conversion Notice" or "Royalty Conversion
Notice"), that Holder elects to convert this Debenture into such Common Stock or
Royalty in accordance with the provisions of this Section 4, and specifying the
name or names in which the shares of Common Stock issuable upon such conversion
shall be registered, or to whom the Royalty shall be paid, together with the
addresses and social security or federal tax identification numbers of the
persons so named, and, if so required by the Company, accompanied by a written
instrument or instruments of transfer in form satisfactory to the Company duly
executed by the registered Holder's attorney duly authorized in writing.
4.3 Issuance of Common Stock Upon Conversion. As promptly as
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practicable after the surrender, as herein provided, of this Debenture for
conversion and the receipt of the Conversion Notice relating thereto, the
Company shall deliver or cause to be delivered to or upon the written order of
the Holder of this Debenture so surrendered a certificate or certificates
representing the number of fully paid and nonassessable shares of Common Stock
into which this Debenture was converted in accordance with the provisions of
this Section 4. Subject to the following provisions of this Section 4.3, such
conversion shall be deemed to have been made as of the date of the Conversion
Notice, the person or persons entitled to receive the shares of Common Stock
upon conversion of this Debenture shall be treated for all purposes as having
become the record holder or holders of such shares be treated for all purposes
as having become the record holder or holders of such shares of Common Stock at
such time, and such conversion shall be at the Conversion Price in effect at
such time. If the date of the Conversion Notice shall not be a business day,
then such conversion shall be in effect on the next preceding business day. All
accrued but unpaid interest to the date of conversion shall be paid in cash as
soon as practical following the conversion of this Debenture.
4.4(a) Adjustment for Subdivisions and Certain Dividends and
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Distributions. If the Company shall at any time (i) make subdivision of shares
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of Common Stock outstanding or (ii) pay a dividend or make a distribution in
shares of Common Stock, the Conversion Price in effect immediately prior to such
action shall be proportionately decreased, and in case the Company shall at any
time reduce the number of shares of Common Stock outstanding, by combination or
otherwise, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased. Any adjustment made pursuant to this Section
4.4(a) shall, in the case of a subdivision or combination, become effective as
of the effective date thereof, and shall, in the case of a dividend or
distribution, become effective as of the close of business of the record date
for the determination of shareholders entitled thereto.
(b) Adjustment for Other Dividends and Distributions. In the event the
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Company at any time or from time to time shall make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in securities of the Company other than
shares of Common Stock, then and in each such event provision shall be made so
that the Holder of this
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Debenture shall receive upon conversion of this Debenture the amount of
securities of the Company that it would have received had this Debenture been
converted into Common Stock on the date of such event and had hereafter, during
the period from the date of such event to and including the conversion date,
retained such securities receivable by it as aforesaid during such period,
giving application to all other adjustments called for during such period under
this Section 4.4 with respect to the rights of the Holder of this Debenture.
(c) Adjustment for Reorganizations, Reclassifications and Other
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Changes. If the Common Stock issuable upon the conversion of this Debenture
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shall be changed into the same or a different number of shares of any class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a merger, consolidation or sale of assets as provided in
Section 4.4(d) below, or a subdivision or combination of shares or stock
dividend provided for in Section 4.4(a) above, or a reorganization provided for
in Section 4.4(d) below), then and in each such event the Holder of this
Debenture shall have the right thereafter to convert this Debenture into the
kind and amounts of shares of stock and other securities and property receivable
upon such reorganization, reclassification or other change, by holders of the
number of shares of Common Stock into which this Debenture might have been
converted immediately prior to such reorganization, reclassification or change,
all subject to further adjustment as provided herein.
(d) Adjustment for Mergers, Considerations or Sales of Assets. If at
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any time or from time to time there shall be a capital reorganization of the
Company's capital stock (other than a subdivision, combination, reclassification
or exchange of shares provided for elsewhere in this Section 4.4) or a merger or
consolidation of the Company with or into another corporation, or the sale of
all or substantially all the Company's properties and assets to any other
person, then, as a part of such reorganization, merger, consolidation or sale,
provision shall be made so that the Holder of this Debenture shall thereafter be
entitled to receive upon conversion of this Debenture, the number of shares of
stock or other securities of property of the Company, or of the successor
corporation resulting from such merger or consolidation or sale, to which a
holder of that number of shares of Common Stock deliverable upon conversion of
this Debenture would have been entitled on such capital reorganization, merger,
consolidation or sale. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section 4.4 with respect to the rights
of the Holder of this Debenture after the reorganization, merger, consolidation
or sale to the end that the provisions of this Section 4.4 (including adjustment
of the Conversion Price then in effect and the number of shares issuable upon
conversion of this Debenture) shall be applicable after that event as nearly
equivalent as may be practicable.
(e) Adjustment for Sales Below Conversion Price. For purposes of this
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Section 4.4(e), "Additional Shares of Common Stock" shall mean all shares of
Common Stock issued or deemed issued by the Company after the date hereof,
whether or not subsequently reacquired or retired by the Company, excluding (i)
shares of Common Stock issued upon conversion of this Debenture; and (ii) up to
4,882,776 shares of Common Stock (as adjusted for all stock dividends, stock
splits, subdivisions and combinations) issued to employees, officers, directors,
consultants or other persons performing services for the Company (if so issued
solely because of any such person's status as an officer, director, employee,
consultant or other person performing services for the Company and not as part
of any offering of the Company's securities) pursuant to any warrant, stock
option plan, stock purchase plan, management incentive plan, consulting
agreement or arrangement or other contract or undertaking approved by the Board.
(1) If at any time or from time to time the Company shall issue or
sell Additional Shares of Common Stock, other than pursuant to Sections 4.4(a),
(b), (c) or (d) above, for a consideration per share less than the then existing
Conversion Price, then and in each case the then existing Conversion Price shall
be reduced, as of the opening of business on the date of such issue or sale, to
a price determined by multiplying the existing Conversion Price by a fraction
(A) the numerator of which shall be (x) the number of shares of Common Stock
outstanding immediately prior to such issue or sale, plus (y) the number of
shares of Common Stock that the aggregate consideration received by the Company
for the total number of Additional Shares of Common Stock so issued would
purchase at such Conversion Price, and (B) the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to such issue or
sale plus the number of such Additional Shares of Common Stock so issued.
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(2) For the purpose of making any adjustment in the Conversion Price
or number of shares of Common Stock purchasable on conversion of this Debenture
as provided above, the consideration received by the Company for any issue or
sale of securities shall:
(A) to the extent it consists of cash, be computed at the net
amount of cash received by the Company after deduction of any
underwriting or similar commissions, concessions or compensation paid
or allowed by the Company in connection with such issue or sale;
(B) to the extent it consists of services or property other than
cash, be computed at the fair value of such services or property as
determined in good faith by the Board; and
(C) if Additional Shares of Common Stock, Convertible Securities
(as hereinafter defined), or rights or options to purchase either
Additional Shares of Common Stock or Convertible Securities are issued
or sold together with other stock or securities or other assets of the
Company for a consideration that covers both, be computed as the
portion of the consideration so received that may be reasonably
determined in good faith by the Board to be allocable to such
Additional Shares of Common Stock, Convertible Securities or rights or
options.
(3) For the purpose of the adjustment provided in Section 4.4(e)(1),
if the Company shall issue any rights or options for the purchase of, or stock
or other securities convertible into, Additional Shares of Common Stock (such
convertible stock or securities being hereinafter referred to as "Convertible
Securities"), then, in each case, if the Effective Price (as hereinafter
defined) of such rights, options or Convertible Securities shall be less than
the then existing Conversion Price, the Company shall be deemed to have issued
at the time of the issuance of such rights or options or Convertible Securities
the maximum number of Additional Shares of Common Stock issuable upon exercise
or conversion thereof and to have received as consideration for the issuance of
such shares an amount equal to the total amount of the consideration, if any,
received by the Company for the issuance of such rights or options or
Convertible Securities, plus, in the case of such options or rights, the minimum
amounts of consideration, if any, payable to the Company upon exercise or
conversion of such options or rights. For purposes of the foregoing, "Effective
Price" shall mean the quotient determined by dividing the total of all such
consideration by such maximum number of Additional Shares of Common Stock. No
further adjustment of the Conversion Price adjusted upon the issuance of such
rights, options or Convertible Securities shall be made as a result of the
actual issuance of Additional Shares of Common Stock on the exercise of any such
rights or options or the conversion of any such Convertible Securities. If any
such rights or options or the conversion privilege represented by any such
Convertible Securities shall expire without having been exercised, the
Conversion Price adjusted upon the issuance of such rights, options or
Convertible Securities shall be readjusted to the Conversion Price that would
have been in effect had an adjustment been made on the basis that the only
Additional Shares of Common Stock so issued were the Additional Shares of Common
Stock, if any, actually issued or sold on the exercise of such rights or
options, or rights of conversion of such Convertible Securities, and such
Additional Shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Company upon such exercise, plus the
consideration, if any, actually received by the Company for the granting of all
such rights and options, whether or not exercised, plus the consideration
received for issuing or selling the Convertible Securities actually converted
plus the consideration, if any, actually received by the Company on the
conversion of such Convertible Securities.
(4) For the purpose of the adjustment provided for in Section
4.4(e)(1), if the Company shall issue any rights or options for the purchase of
Convertible Securities, then in each such case, if the Effective Price thereof
is less than the existing Conversion Price, the Company shall be deemed to have
issued at the time of the issuance of such rights or options the maximum number
of Additional Shares of Common Stock issuable upon conversion of the total
amount of Convertible Securities covered by such rights or options and to have
received as consideration for the issuance of such Additional Shares of Common
Stock
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an amount equal to the amount of consideration, if any, received by the Company
for the issuance of such rights or options, plus the minimum amounts of
consideration, if any, payable to the Company upon the conversion of such
Convertible Securities. For the purposes of the foregoing, "Effective Price"
shall mean the quotient determined by dividing the total amount of such
consideration by such maximum number of Additional Shares of Common Stock. No
further adjustment of such Conversion Price adjusted upon the issuance of such
rights or options shall be made as a result of the actual issuance of the
Convertible Securities upon the exercise of such rights or options or upon the
actual issuance of Additional Shares of Common Stock upon the conversion of such
Convertible Securities. The provisions of Section 4.4(e)(3) for the readjustment
of such Conversion Price upon the expiration of rights or options or the rights
of conversion of Convertible Securities, shall apply mutatis mutandis to the
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rights, options and Convertible Securities referred to in this Section
4.4(e)(4).
4.5 Accountant's Certificate as to Adjustments. In the case of any
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adjustment or readjustment in the Conversion Price in accordance with Section
4.4, the Company at its expense will promptly cause independent certified public
accountants of recognized standing selected by the Company to compute such
adjustment or readjustment in accordance with the terms of this Debenture and
prepare a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based,
including a statement of (a) the consideration received or receivable by the
Company for any additional shares of Common Stock issued or sold or deemed to
have been issued or sold, (b) the number of shares of Common Stock outstanding
or deemed to be outstanding, and (c) the Conversion Price in effect and number
of shares of Common Stock for which this Debenture was convertible immediately
prior to such issue or sale and as each is adjusted and readjusted on account
thereof. The Company will forthwith mail a copy of each such certificate to
Holder.
4.6 Fractional Share Payment. No fractional shares or script
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representing fractional shares shall be issued upon the conversion of this
Debenture and if the conversion of this Debenture results in a fraction, in lieu
of any such fractional share the Company shall pay cash equal to such fraction
multiplied by the then effective Conversion Price.
4.7 Reservation of Common Stock Issuable Upon Exercise of Debenture.
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The Company covenants that it will at all times reserve and keep available out
of its authorized Common Stock, solely for the purpose of issuance upon
conversion of this Debenture as herein provided, such number of shares of Common
Stock as shall then be issuable upon the conversion of this Debenture. As a
condition precedent to the taking of any action that would cause an adjustment
to the Conversion Price, the Company will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient in order
that it may validly and legally issue the shares of its Common Stock issuable
upon conversion of this Debenture based upon such adjusted Conversion Price. The
Company covenants that all shares of Common Stock that shall be so issuable
shall be duly and validly issued and fully paid and nonassessable.
4.8 Taxes. The issuance of certificates for shares of Common Stock
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upon the conversion of this Debenture shall be made without charge to the
converting Holder for any tax in respect of the issuance of such certificates,
and such certificates shall be issued in the respective names of, or in such
names as may be directed by, the Holder of this Debenture; provided, however,
that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificate in the name other than that of the Holder of this Debenture
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
establish to the satisfaction of the Company that such tax has been paid.
4.9 Covenant Against Short Sales. Holder acknowledges that on the date
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hereof and at no time since Holder's execution of any subscription or other
document contemplating the purchase of this Debenture, Holder has not held or
caused to be held, directly or indirectly, a "short" position in the Common
Stock, and Holder agrees that, during the Restricted Period, Holder will not
(directly or indirectly through any other person or entity) hold or maintain a
short position in or undertake a short sale of any of the Company's
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equity securities or equity-linked securities. The Restricted Period shall begin
on the date of this Debenture and shall continue so long as this Debenture
remains in effect (and, if this Debenture is converted under Section 4.1(a),
then during the period which ends sixty (60) days after the earlier of: (i) the
effectiveness of a Registration Statement as to the shares of Common Stock into
which this Debenture has been converted, or, (ii) the Registration Deadline.
5. Registration Rights, Procedure; Indemnification. The Company shall
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within sixty (60) days following delivery of a Conversion Notice prepare and
file at its expense with all applicable federal, state and stock exchange
authorities, and use its best efforts to cause to become effective as soon as
possible (but in any event within six months after its filing) (the
"Registration Deadline"), a registration statement with respect to the Common
Stock issuable by the Company in connection with the conversion of this
Debenture such that, upon conversion by the Holder of this Debenture, Holder
shall receive shares of Common Stock in the Company which shall be immediately
freely tradable on the Nasdaq Stock Market or the Over-the-Counter Bulletin
Board.. At its expense, the Company will keep such registration effective for so
long as Holder holds shares of Common Stock (or, if earlier, until such time as
Holder may sell all of its stock in a single transaction on the Nasdaq Stock
Market or the Over-the-Counter Bulletin Board without registration pursuant to
Rule 144 of the Securities Act of 1933). The Company shall indemnify the Holder
against any losses, claims, damages or expenses (including reasonable attorney
fees) arising out of any untrue statement or alleged untrue statement of any
material fact contained in any registration statement filed by the Company
pursuant to this Debenture (except for erroneous information supplied to the
Company by Holder).
6. [ Reserved ]
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7. Reporting Requirements. Prior to the exercise or expiration of the
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right to convert this Debenture, to the extent the following documents and/or
information is not, at the times indicated below (including any extension of
such times as permitted under the regulations of the Securities and Exchange
Commission), available publicly through the Internet or through the EDGAR filing
system accessible through the Securities and Exchange Commission's web site at
(http://www.sec.gov), the Company shall furnish to the Holder:
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(a) Within 45 days after the end of each of the first three
calendar quarterly accounting periods in each fiscal year of the
Company unaudited consolidated income statements of the Company and
its subsidiaries for each such quarterly period and for the six-month
and nine-month periods, as applicable, from the beginning of the
applicable fiscal year to the end of the applicable calendar quarter,
and a consolidated balance sheet of the Company and its subsidiaries
as of the end of each such quarterly period, setting forth in each
case comparisons to the corresponding period(s) in the preceding
fiscal year, all such statements having been prepared in accordance
with generally accepted accounting principles, consistently applied;
and, to the extent requested by Holder, comparisons in each case to
the Company's quarterly budget for the corresponding quarterly period;
provided, however, that where the Company or its counsel reasonably
deems such budget information to constitute material non-public
information under applicable federal or state securities laws, then
the Company shall have no obligation to deliver such budget
information hereunder unless and until Holder has executed such
confidentiality and public trading lock-up agreements as shall be
deemed satisfactory to the Company and its legal counsel.
(b) Within 90 days after the end of each fiscal year of the
Company, consolidated statements of income and changes in financial
position of the Company and its subsidiaries for such fiscal year, and
a consolidated balance sheet of the Company and its subsidiaries as of
the end of such fiscal year, setting forth in each case comparisons to
the preceding fiscal year, all prepared in accordance with generally
accepted accounting principles, consistently applied; and accompanied
by (i) a copy of the opinion received by the Company from an
independent accounting firm of recognized standing acceptable to
Holder, (ii) to the extent requested by Holder, a certificate from
such accounting firm, addressed to the Company's board of directors,
stating that in the course of its examination nothing came to its
attention that caused it to believe that there was any default by the
Company or any of its subsidiaries in the fulfillment of or compliance
with any of the terms, covenants, provisions or conditions of any
material agreement to which the Company or any such subsidiary is a
party or, if such accountants have reason to believe any such default
by the Company or any such subsidiary
exists, a certificate specifying the nature and period of existence
thereof, (iii) to the extent requested by Holder, a copy of such
firm's annual management letter to the board of directors; and (iv) to
the extent requested by Holder, comparisons of the Company's
statements of income to the Company's annual budget for the
corresponding annual period; provided, however, that where the Company
or its counsel reasonably deems such budget information to constitute
material non-public information under applicable federal or state
securities laws, then the Company shall have no obligation to deliver
such budget information hereunder unless and until Holder; has
executed such confidentiality and public trading lock-up agreements as
shall be deemed satisfactory to the Company and its legal counsel.
(c) Promptly following receipt thereof, any additional reports,
management letters or other detailed information concerning
significant aspects of the Company's operations and financial affairs
given to the Company by its independent accountants (and not otherwise
contained in other materials provided hereunder);
(d) At least 30 days but not more than 90 days prior to the end
of each fiscal year of the Company, to the extent requested by Holder,
an annual budget prepared on a monthly basis for the Company and its
subsidiaries for the succeeding fiscal year (displaying anticipated
statements of income and balance sheets), and promptly upon
preparation thereof any other significant budgets which the Company
prepares and any revisions of such annual or other budgets; provided,
however, that where the Company or its counsel reasonably deems such
budget information to constitute material non-public information under
applicable federal or state securities laws, then the Company shall
have no obligation to deliver such budget information hereunder unless
and until Holder has executed such confidentiality and public trading
lock-up agreements as shall be deemed satisfactory to the Company and
its legal counsel.
(e) Within ten days after transmission thereof, copies of all
financial statements, proxy statements, reports and any other general
written communications which the Company sends to its stockholders and
copies of all registration statements and all regular, special or
periodic reports which it files, or any of its officers or directors
file with respect to the Company, with the Securities and Exchange
Commission or with any securities exchange on which any of the
Company's securities are then listed, and copies of all press releases
and other statements made available generally by the Company to the
public concerning material developments in the Company's business.
(f) With reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as any
person entitled to receive information under this Section 7 may
reasonably request.
(g) Accompanying the financial statements referred to in
subparagraph (a) above, to the extent requested by Holder, an
Officer's Certificate from the Chief Financial Officer of the Company
stating that neither the Company nor any of its subsidiaries is in
default under any of its other material agreements or, if any such
default exists, specifying the nature and period of existence thereof,
and what actions the Company and its subsidiaries have taken and
propose to take with respect thereto.
Each of the financial statements referred to in subparagraph (a) and (b)
above will be true and correct in all material respects as of the dates and for
the periods stated therein, subject in the case of the unaudited financial
statements to changes resulting from normal year-end audit adjustments.
The Company shall permit Holder, or agents thereof, at any reasonable time
and from time to time to examine and make copies of and extracts from the
records and books of account of, and visit the properties of, the Company and
any of its subsidiaries, and to discuss the affairs, finances, and accounts of
the Company and any of the subsidiaries with any of their officers or directors
and independent accountants. Holder's rights under this sub-paragraph shall be
conditioned upon the prior execution by Holder and delivery to the Company of an
appropriate confidentiality and public trading lock-up agreement with the
Company.
8. Defaults. The following events are hereby defined as "Defaults" for
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all purposes of this Debenture (whatever the reason for the occurrence thereof
and whether such event shall be voluntary or involuntary or come about or be
effected by operation of law or pursuant to or in compliance with any judgment,
order or decree of any court or any order, rule or regulation of any
governmental or administrative body):
(a) The Company shall fail to pay any amount (whether principal
or interest) when due under this Debenture and such failure continues for
fifteen (15) days after the due date;
(b) The Company shall fail to perform or observe any of the other
covenants or agreements contained in this Debenture and such failure shall not
have been remedied or cured within thirty (30) days after written notice
thereof, requesting the same to be remedied, shall have been received by the
Company from Holder;
(c) The Company shall institute proceedings for an order for
relief, or shall consent to the institution of such a proceeding against it, or
shall file a petition or consent seeking reorganization or arrangement under,
the federal bankruptcy laws, or shall consent to the appointment of a receiver
or trustee or assignee in bankruptcy of it or its property, or shall make an
assignment for the benefit of creditors, or shall cease to operate in the
ordinary course of its business; or
(d) An involuntary order for relief under the federal bankruptcy
laws shall have been entered or a decree or order of a court having jurisdiction
in the premises shall have been entered approving as properly filed a petition
seeking reorganization of the Company under the federal bankruptcy laws or any
other similar applicable Federal or state laws, and such decree or order shall
have continued undischarged or unstayed for a period of ninety (90) days; or a
decree or order of a court having jurisdiction in the premises for the
appointment of a receiver or trustee or assignee in bankruptcy or insolvency of
the Company or of substantially all of the property of the Company or for the
sequestration of substantially all of the property of the Company, or for the
winding up or liquidation in insolvency or bankruptcy of its affairs, shall have
been entered, and such decree or order shall have remained in force undischarged
and unstayed for a period of ninety (90) days.
(e) The Company commits a default under the Investment Agreement
between the parties executed contemporaneously herewith.
If one or more Defaults shall have occurred and be continuing, Holder
may at Holder's option by written notice to the Company declare all outstanding
principal and accrued interest under this Debenture to be due and payable, and
upon such declaration this Debenture shall thereupon become forthwith due and
payable, together with interest accrued hereon. Upon such declaration, Holder
may thereupon proceed to protect and enforce its rights either by suit in equity
or by action of law or by other appropriate proceedings, whether for specific
performance of any covenant or agreement contained herein or proceed to enforce
the payment of this Debenture or to enforce any other legal or equitable right
of Holder.
9. Security. This Debenture is secured by, and the Company hereby
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grants to Holder, a lien on the Company's accounts receivable (whether now owned
or hereafter acquired) and Synapse software (together with all documentation,
user manuals and user codes attributable thereto), as more fully described in
the Security Agreement between the parties of even date herewith. Company hereby
authorizes Holder to file a UCC-1 Financing Statement with all appropriate
government office(s) in order to perfect this security interest, and shall enter
into a Security Agreement with Holder contemporaneously herewith. Holder agrees
to subordinate its lien in Company's accounts receivable to the lien of any
current or future institutional lenders (or comparable business entities)
providing loans to the Company, and upon request Payee shall sign and deliver to
such lenders subordination agreements in a form satisfactory to such lenders. In
addition, Payee agrees to enter into intercreditor agreements with the holders
of other secured debentures issued by the Company, to the effect that such other
debenture holders shall have equal priority with Holder in the Company's
accounts receivable (now owned or hereafter acquired) and Synapse software
(together with all
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documentation, user manuals and user codes attributable thereto) utilized to
secure such other debenture holders' indebtedness.
10. Miscellaneous.
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10.1 Amendment. The Company may amend or supplement this Debenture
---------
only with the written consent of Holder. Holder may waive (either generally or
in a particular instance and either retroactively or prospectively) compliance
by the Company with any provision of this Debenture.
10.2 Assignment; Notices. Without the prior written consent of the
----------
Company, Holder may not sell, assign, negotiate or otherwise transfer, in whole
or in part, this Debenture, or grant any participation or other right or
interest in, any or all of his rights hereunder. Any purported sale, assignment,
negotiation or other transfer of this Debenture by Holder shall be null and void
and of no force or effect whatsoever.
(i) If to Holder, to Holder at Holder's address shown above)
(ii) If to the Company to:
Integrated Business Systems and Services, Inc.
Suite 228, 115 Atrium Way
Columbia, South Carolina 29223
Attention: Chief Financial Officer and General Counsel
(iii)If to any other holder other than Payee, to such address as
may have been designated with the foregoing.
The Company or Holder may designate a different address by notice given in
accordance with the foregoing.
10.3 Collection Fees. In the event this Debenture is placed in the
---------------
hands of an attorney for collection or for enforcement, the Company agrees to
pay all reasonable attorneys' fees incurred by Holder (based on regular billing
rates and time actually spent) and all court and other reasonable costs of any
good faith collection efforts.
10.4 Liability of Affiliates. A parent corporation, subsidiary,
-----------------------
affiliate, director, officer, employee or other shareholder, as such, of the
Company shall not have liability for any obligations of the Company under this
Debenture or for any claim based on, in respect of or by reason of such
obligations or their creation. Each Holder by accepting this Debenture waives
and releases all such liability.
10.5 Governing Law. This Debenture and the rights and obligations of
-------------
the parties hereunder shall be governed by, and construed and interpreted in
accordance with, the laws of the State of Michigan (without regard to principles
of conflicts of laws) and applicable Federal law.
11. Consent to Jurisdiction. The Company hereby irrevocably submits to
-----------------------
the jurisdiction of the state courts of the State of Michigan and any United
States federal court sitting in the State of Michigan in any action or
proceeding arising out of or relating to this Debenture or any other agreement
or transaction contemplated hereby, and the Company hereby irrevocably agrees
that all claims in respect of such action or proceeding may be heard and
determined in any such state or federal court. The Company hereby irrevocably
waives, to the fullest extent it may effectively do so, the defense of an
inconvenient forum to the maintenance of such action or proceeding. The Company
hereby irrevocably consents to the service of any and all process in any such
action or proceeding at its address set forth on the first page hereof or any
place of business of the Company in the State of Michigan. Nothing in this
Section shall affect the right of the holder of this
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Debenture to serve legal process in any other manner permitted by law or affect
the right of the holder to bring any action or proceeding against the other
party or its property in courts of any other jurisdictions.
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IN WITNESS WHEREOF, the Company has caused this Debenture to be
executed in its corporate name by the undersigned officer, thereunto duly
authorized, to be effective as of the date first set forth above.
INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
By: /s/ GEORGE E. MENDENHALL
----------------------------------------------------
George E. Mendenhall
Chief Executive Officer
Accepted and Agreed by Holder effective as of the date first set forth above:
IBSS CLASS A INVESTORS, a Michigan co-partnership
- -------------------------------------------------
Holder
By: /s/
----------------------------
Its:
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