EXHIBIT 10.3
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
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 AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
Date of Issuance: September __, 2003
$_______________
8% CONVERTIBLE DEBENTURE
DUE FEBRUARY 20, 2006
THIS DEBENTURE is one of a series of duly authorized and issued 8%
Convertible Debentures of The Singing Machine Company, Inc., a Delaware
corporation, having a principal place of business at 6601 Lyons Road, Building
A-7, Coconut Creek, FL 33073 (the "Company"), designated as its 8% Convertible
Debenture, due February __, 2006 (the "Debentures").
FOR VALUE RECEIVED, the Company promises to pay to
________________________ or its registered assigns (the "Holder"), the principal
sum of $_______________ on February __, 2006 or such earlier date as the
Debentures are required or permitted to be repaid as provided hereunder (the
"Maturity Date"), and to pay interest to the Holder on the aggregate unconverted
and then outstanding principal amount of this Debenture at the rate of 8% per
annum, payable quarterly on March 1, June 1, September 1 and December 1,
beginning on the first such date after the Original Issue Date and on each
Conversion Date (as to that principal amount then being converted) and on the
Maturity Date (except that, if any such date is not a Business Day, then such
payment shall be due on the next succeeding Business Day) (each such date, an
"Interest Payment Date"), in cash or shares of Common Stock at the Interest
Conversion Rate, or a combination thereof; provided, however, payment in shares
of Common
Stock may only occur if: (i) there is an effective Underlying Shares
Registration Statement pursuant to which the Holder is permitted to utilize the
prospectus thereunder to resell all of the shares of Common Stock to be issued
in lieu of cash (and the Company believes, in good faith, that such
effectiveness will continue uninterrupted for the foreseeable future), (ii) the
Common Stock is listed for trading on a Principal Market (and the Company
believes, in good faith, that trading of the Common Stock on a Principal Market
will continue uninterrupted for the foreseeable future), (iii) there is a
sufficient number of authorized but unissued and otherwise unreserved shares of
Common Stock for the issuance of all of the shares issuable pursuant to the
Transaction Documents, including the shares to be issued for interest in lieu of
cash and (iv) there is then existing no Event of Default or event which, with
the passage of time or the giving of notice, would constitute and Event of
Default, and (v) the issuance of such shares, when added to the shares issued or
issuable upon conversion of the Debentures in full and issued and issuable upon
exercise of the Warrants in full would violate the limitations set forth in
Section 4(a)(ii). Subject to the terms and conditions herein, the decision
whether to pay interest hereunder in shares of Common Stock or cash shall be at
the discretion of the Company. Not less than 20 Trading Days prior to each
Interest Payment Date, the Company shall provide the Holder with written notice
of its election to pay interest hereunder either in cash or shares of Common
Stock (the Company may indicate in such notice that the election contained in
such notice shall continue for later periods until revised). Within 20 Trading
Days prior to an Interest Payment Date, the Company's election (whether specific
to an Interest Payment Date or continuous) shall be irrevocable as to such
Interest Payment Date. Subject to the aforementioned conditions, failure to
timely provide such written notice shall be deemed an election by the Company to
pay the interest on such Interest Payment Date in cash. Interest shall be
calculated on the basis of a 360-day year and shall accrue daily commencing on
the Original Issue Date 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. Payment of interest in shares of Common Stock shall
otherwise occur pursuant to Section 4(b) and only for purposes of the payment of
interest in shares, the Interest Payment Date shall be deemed the Conversion
Date. Interest shall cease to accrue with respect to any principal amount
converted, provided that the Company in fact delivers the Underlying Shares
within the time period required by Section 4(b)(i). Interest hereunder will be
paid to the Person in whose name this Debenture is registered on the records of
the Company regarding registration and transfers of Debentures (the "Debenture
Register"). Except as otherwise provided herein, if at anytime the Company pays
interest partially in cash and partially in shares of Common Stock, then such
payment shall be distributed ratably among the Holders based upon the principal
amount of Debentures held by each Holder. All overdue accrued and unpaid
interest to be paid hereunder shall entail a late fee at the rate of 18% per
annum (or such lower maximum amount of interest permitted to be charged under
applicable law) ("Late Fee") which will accrue daily, from the date such
interest is due hereunder through and including the date of payment.
Notwithstanding anything to the contrary contained herein, if on any Interest
Payment Date the Company has elected to pay interest in Common Stock and is not
able to pay accrued interest in the form of Common Stock because it does not
then satisfy the conditions for payment in the form of Common Stock set forth
above, then, at the option of the Holder, the Company, in lieu of delivering
either shares of Common Stock pursuant to this
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Section 4 or paying the regularly scheduled cash interest payment, shall
deliver, within three Trading Days of each applicable Interest Payment Date, an
amount in cash equal to the product of the number of shares of Common Stock
otherwise deliverable to the Holder in connection with the payment of interest
due such Interest Payment Date and the highest VWAP during the period commencing
on the Interest Payment Date and ending on the Trading Day prior to the date
such payment is made. EXCEPT AS SET FORTH IN SECTION 5, THE COMPANY MAY NOT
PREPAY ANY PORTION OF THE PRINCIPAL AMOUNT OF THIS DEBENTURE WITHOUT THE PRIOR
WRITTEN CONSENT OF THE HOLDER.
This Debenture is subject to the following additional provisions:
Section 1. This Debenture is exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange. THIS DEBENTURE IS ALSO SUBJECT TO
THE TERMS AND CONDITIONS OF A SUBORDINATION AGREEMENT (THE "LASALLE
SUBORDINATION AGREEMENT") THAT THE HOLDER HAS SIGNED WITH LASALLE BUSINESS
CREDIT, LLC, THE COMPANY'S COMMERCIAL LENDER, ON ABOUT THE DATE HEREOF AND ANY
FUTURE SUBORDINATION AGREEMENTS THAT IT IS REQUIRED TO SIGN DURING THE TIME
PERIOD THAT THE COMPANY HAS ANY OBLIGATIONS UNDER THE TRANSACTION DOCUMENTS
(COLLECTIVELY, ANY OR ALL SUCH AGREEMENTS SHALL BE REFERRED TO AS THE
"SUBORDINATION AGREEMENT"). ANY INCONSISTENCIES BETWEEN THIS DEBENTURE AND THE
SUBORDINATION AGREEMENT WILL BE RESOLVED IN FAVOR OF THE TERMS OF THE
SUBORDINATION AGREEMENT.
Section 2. 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 Purchase Agreement
and applicable federal and state securities laws and regulations. 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 3. Events of Default.
(a) "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):
(i) any default in the payment of the principal of,
interest (including Late Fees) on, or liquidated damages in
respect of, any Debentures, free of any claim of
subordination, as and when the same shall become due and
payable
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(whether on a Conversion Date or the Maturity Date or
by acceleration or otherwise) which default is not cured, if
possible to cure, within 5 days of written notice of such
default sent by the Holder;
(ii) the Company shall fail to observe or perform any
other covenant, agreement or warranty contained in, or
otherwise commit any breach of any of the Transaction
Documents (other than a breach by the Company of its
obligations to deliver shares of Common Stock to the Holder
upon conversion or interest payment which breach is addressed
in clause (x) below) which is not cured, if possible to cure,
within 5 days of written notice of such default sent by the
Holder;
(iii) the Company or any of its subsidiaries shall
commence, or there shall be commenced against the Company or
any such subsidiary a case under any applicable bankruptcy or
insolvency laws as now or hereafter in effect or any successor
thereto, 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 any subsidiary thereof or there is
commenced against the Company or any subsidiary thereof any
such bankruptcy, insolvency or other proceeding which remains
undismissed for a period of 60 days; or the Company or any
subsidiary thereof is adjudicated insolvent or bankrupt; or
any order of relief or other order approving any such case or
proceeding is entered; or the Company or any subsidiary
thereof 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 or any subsidiary thereof makes a general assignment
for the benefit of creditors; or the Company 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 or any subsidiary thereof shall call a meeting of its
creditors with a view to arranging a composition, adjustment
or restructuring of its debts; or the Company or any
subsidiary thereof shall by any act or failure to act
expressly indicate its consent to, approval of or acquiescence
in any of the foregoing; or any corporate or other action is
taken by the Company or any subsidiary thereof for the purpose
of effecting any of the foregoing;
(iv) the Company shall default in any of its
obligations under any other Debenture or any mortgage, credit
agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued,
or by which there may be secured or evidenced any indebtedness
for borrowed money or money due under any long term leasing or
factoring arrangement of the Company in an amount exceeding
$500,000, whether such indebtedness now exists or shall
hereafter be created and such default shall result
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in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become
due and payable;
(v) the Common Stock shall not be eligible for
quotation on or quoted for trading on a Principal Market and
shall not again be eligible for and quoted or listed for
trading thereon within five Trading Days;
(vi) the Company shall agree to sell or dispose of all
or in excess of 51% of its assets in one or more transactions
(whether or not such sale would constitute a Change of Control
Transaction) or shall redeem or repurchase more than a de
minimis number of its outstanding shares of Common Stock or
other equity securities of the Company (other than redemptions
of Underlying Shares and repurchases of shares of Common Stock
or other equity securities of departing officers and directors
of the Company; provided no repurchase shall exceed $100,000
for any officer or director);
(vii) an Underlying Shares Registration Statement
shall not have been declared effective by the Commission on or
prior to the 180th calendar day after the Original Issue Date;
(viii) if, during the Effectiveness Period (as defined
in the Registration Rights Agreement), the effectiveness of
the Underlying Shares Registration Statement lapses for any
reason or the Holder shall not be permitted to resell
Registrable Securities (as defined in the Registration Rights
Agreement) under the Underlying Shares Registration Statement,
in either case, for more than 20 consecutive Trading Days or
30 non-consecutive Trading Days during any 12 month period;
provided, however, that in the event that the Company is
negotiating a merger, consolidation, acquisition or sale of
all or substantially all of its assets or a similar
transaction or other fundamental event and in the written
opinion of counsel to the Company, the Underlying Shares
Registration Statement, would be required to be amended to
include information concerning such transactions or the
parties thereto that is not available or may not be publicly
disclosed at the time, the Company shall be permitted an
additional 20 consecutive Trading Days during any 12 month
period relating to such an event;
(ix) an Event (as defined in the Registration Rights
Agreement) shall not have been cured to the satisfaction of
the Holder prior to the expiration of thirty days from the
Event Date (as defined in the Registration Rights Agreement)
relating thereto (other than an Event resulting from a failure
of an Underlying Shares Registration Statement to be declared
effective by the Commission on or prior to the Effectiveness
Date (as defined in the Registration Rights Agreement), which
shall be covered by Section 3(a)(vii));
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(x) the Company shall fail for any reason to deliver
certificates to a Holder prior to the seventh Trading Day
after a Conversion Date pursuant to and in accordance with
Section 4(b) or the Company shall provide notice to the
Holder, including by way of public announcement, at any time,
of its intention not to comply with requests for conversions
of any Debentures in accordance with the terms hereof;
(xi) the Company shall fail for any reason to deliver
the payment in cash pursuant to a Buy-In (as defined herein)
within five days after notice thereof is delivered hereunder;
or
(xii) any Person shall breach the agreements
delivered to the initial Holders pursuant to Section 2.2(a)(v)
of the Purchase Agreement and the Company does not obtain
Shareholder Approval.
b) If any Event of Default occurs and is continuing, the full principal
amount of this Debenture, together with interest and other amounts owing in
respect thereof, to the date of acceleration shall become at the Holder's
election, immediately due and payable in cash. The aggregate amount payable upon
an Event of Default shall be equal to the Mandatory Prepayment Amount. Interest
shall accrue on the Mandatory Prepayment Amount hereunder from the fifth (5th)
day after such amount is due (being the date of an Event of Default) through the
date of prepayment in full thereof in an amount equal to the Late Fee, to accrue
daily from the date such payment is due hereunder through and including the date
of payment. All Debentures for which the full prepayment price hereunder shall
have been paid in accordance herewith shall promptly be surrendered to or as
directed by the Company. The Holder need not provide and the Company hereby
waives any presentment, demand, protest or other notice of any kind, 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 and the Holder shall have all
rights as a Debenture holder until such time, if any, as the full payment under
this Section shall have been received by it. No such rescission or annulment
shall affect any subsequent Event of Default or impair any right consequent
thereon. All the remedies set forth in this paragraph are subject to the terms
and conditions of the Subordination Agreement.
Section 4. Conversion.
(a) (i) At any time after the Closing Date, this Debenture shall be
convertible into shares of Common Stock at the option of the Holder, in whole or
in part at any time and from time to time (subject to the limitations on
conversion set forth in Section 4(a)(ii) hereof). The Holder shall effect
conversions by delivering to the Company the form of Notice of Conversion
attached hereto as Annex A (a
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"Notice of Conversion"), specifying therein the principal amount of
Debentures to be converted and the date on which such conversion is to
be effected (a "Conversion Date"). If no Conversion Date is specified
in a Notice of Conversion, the Conversion Date shall be the date that
such Notice of Conversion is provided hereunder. To effect conversions
hereunder, the Holder shall not be required to physically surrender
Debentures to the Company unless the entire principal amount of this
Debenture plus all accrued and unpaid interest thereon has been so
converted. Conversions hereunder shall have the effect of lowering the
outstanding principal amount of this Debenture in an amount equal to
the applicable conversion. The Holder and the Company shall maintain
records showing the principal amount converted and the date of such
conversions. The Company shall deliver any objection to any Notice of
Conversion within 1 Business Day of receipt of such notice. In the
event of any dispute or discrepancy, the records of the Holder shall be
controlling and determinative in the absence of manifest error. The
Holder and any assignee, by acceptance of this Debenture, acknowledge
and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of this Debenture, the unpaid and
unconverted principal amount of this Debenture may be less than the
amount stated on the face hereof.
(ii) Conversion Limitations.
(A) Notwithstanding anything herein to the contrary,
if the Company has not obtained Shareholder Approval (as
defined below), if required by the applicable rules and
regulations of the Principal Market (or any successor entity),
then the Company may not issue upon conversion of the
Debentures, in the aggregate, in excess of (1) 19.999% of the
number of shares of Common Stock outstanding on the Trading
Day immediately preceding the Original Issue Date, (2) less
any shares of Common Stock issued as payment of interest or
upon exercise of the Warrants issued Holders of the Debentures
on the Original Issue Date pursuant to the Purchase Agreement
(such number of shares, the "Issuable Maximum"). Each Holder
shall be entitled to a portion of the Issuable Maximum equal
to the quotient obtained by dividing (x) the aggregate
principal amount of the Debenture(s) issued and sold to such
Holder on the Original Issue Date by (y) the aggregate
principal amount of all Debentures issued and sold by the
Company on the Original Issue Date. If any Holder shall no
longer hold the Debenture(s), then such Holder's remaining
portion of the Issuable Maximum shall be allocated pro-rata
among the remaining Holders. If on any Conversion Date: (1)
the applicable Set Price then in effect is such that the
shares issuable under this Debenture on any Conversion Date
together with the aggregate number of shares of Common Stock
that would then be issuable upon conversion in full of all
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then outstanding Debentures would exceed the Issuable Maximum,
and (2) the Company's shareholders shall not have previously
approved the transactions contemplated by the Transaction
Documents, as may be required by the applicable rules and
regulations of the Principal Market (or any successor entity),
if any (the "Shareholder Approval"), then the Company shall
issue to the Holder requesting a conversion a number of shares
of Common Stock equal to such Holder's pro-rata portion (which
shall be calculated pursuant to the terms hereof) of the
Issuable Maximum and, with respect to the remainder of the
aggregate principal amount of the Debentures (including any
accrued interest) then held by such Holder for which a
conversion in accordance with the applicable conversion price
would result in an issuance of shares of Common Stock in
excess of such Holder's pro-rata portion (which shall be
calculated pursuant to the terms hereof) of the Issuable
Maximum (the "Excess Principal"), the Company shall be
prohibited from converting such Excess Principal, and shall
notify the Holder of the reason therefor. This Debenture shall
thereafter be unconvertible until and unless Shareholder
Approval is subsequently obtained or is otherwise not
required, but this Debenture shall otherwise remain in full
force and effect. The Company and the Holder understand and
agree that shares of Common Stock issued to and then held by
the Holder as a result of conversions of Debentures shall not
be entitled to cast votes on any resolution to obtain
Shareholder Approval pursuant hereto. Additionally, this
Debenture is subject to that certain letter agreement by and
among the initial Holders of the Debentures and the Company
relating to the restriction on the issuance of shares of
Common Stock until the Company obtains approval of the
transaction from the Principal Market.
(B) The Company shall not effect any conversion of
this Debenture, and the Holder shall not have the right to
convert any portion of this Debenture, pursuant to Section
4(a)(i), Section 5b) or otherwise, to the extent that after
giving effect to such conversion, the Holder (together with
the Holder's affiliates), as set forth on the applicable
Notice of Conversion, would beneficially own in excess of
4.99% of the number of shares of the Common Stock outstanding
immediately after giving effect to such conversion. For
purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by the Holder and its
affiliates shall include the number of shares of Common Stock
issuable upon conversion of this Debenture with respect to
which the determination of such sentence is being made, but
shall exclude the number of shares of Common Stock which would
be issuable upon (A) conversion of the remaining, nonconverted
portion of this Debenture beneficially owned by the Holder or
any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of
the
8
Company (including, without limitation, any other Debentures
or the Warrants) subject to a limitation on conversion or
exercise analogous to the limitation contained herein
beneficially owned by the Holder or any of its affiliates.
Except as set forth in the preceding sentence, for purposes of
this Section 4(a)(ii), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Exchange
Act. To the extent that the limitation contained in this
section applies, the determination of whether this Debenture
is convertible (in relation to other securities owned by the
Holder) and of which a portion of this Debenture is
convertible shall be in the sole discretion of such Holder. To
ensure compliance with this restriction, the Holder will be
deemed to represent to the Company each time it delivers a
Notice of Conversion that such Notice of Conversion has not
violated the restrictions set forth in this paragraph and the
Company shall have no obligation to verify or confirm the
accuracy of such determination. For purposes of this Section
4(a)(ii), in determining the number of outstanding shares of
Common Stock, the Holder may rely on the number of outstanding
shares of Common Stock as reflected in (x) the Company's most
recent Form 10-Q or Form 10-K, as the case may be, (y) a more
recent public announcement by the Company or (z) any other
notice by the Company or the Company's Transfer Agent setting
forth the number of shares of Common Stock outstanding. Upon
the written or oral request of the Holder, the Company shall
within two Trading Days confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding.
In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to the conversion or
exercise of securities of the Company, including this
Debenture, by the Holder or its affiliates since the date as
of which such number of outstanding shares of Common Stock was
reported. The provisions of this Section 4(a)(ii) may be
waived by the Holder upon, at the election of the Holder, not
less than 61 days' prior notice to the Company, and the
provisions of this Section 4(a)i) shall continue to apply
until such 61st day (or such later date, as determined by the
Holder, as may be specified in such notice of waiver).
(ii) Underlying Shares Issuable Upon Conversion of Principal
Amount. The number of shares of Common Stock issuable upon a conversion
shall be determined by the quotient obtained by dividing (x) the
outstanding principal amount of this Debenture to be converted by (y)
the Set Price.
(b) (i) Not later than three Trading Days after any Conversion Date,
the Company will deliver to the Holder a certificate or certificates
representing the Underlying Shares which shall be free of restrictive
legends and trading restrictions (other than those required by the
Purchase Agreement) representing
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the number of shares of Common Stock being acquired upon the conversion
of Debentures (including, if so timely elected by the Company, shares
of Common Stock representing the payment of accrued interest) and (B) a
bank check in the amount of accrued and unpaid interest (if the Company
is required to pay accrued interest in cash). The Company shall, if
available and if allowed under applicable securities laws, 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 Notice
of Conversion such certificate or certificates are not delivered to or
as directed by the applicable Holder by the fifth Trading Day after a
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 certificates representing the
principal amount of Debentures tendered for conversion.
(ii) Subject to the terms of the Subordination Agreement, if the
Company fails for any reason to deliver to the Holder such certificate
or certificates pursuant to Section 4(b)(i) by the third Trading Day
after the Conversion Date, the Company shall pay to such Holder, in
cash, as liquidated damages and not as a penalty, for each $5,000 of
principal amount being converted, $50 per Trading Day (increasing to
$100 per Trading Day after 3 Trading Days after such damages begin to
accrue and increasing to $200 per Trading Day 6 Trading Days after such
after such damages begin to accrue) for each Trading Day after such
third Trading Day until such certificates are delivered. The Company's
obligations to issue and deliver the Underlying Shares upon conversion
of this Debenture in accordance with the terms hereof are absolute and
unconditional, irrespective of any action or inaction by the Holder to
enforce the same, any waiver or consent with respect to any provision
hereof, the recovery of any judgment against any Person or any action
to enforce the same, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the
Holder or any other Person of any obligation to the Company or any
violation or alleged violation of law by the Holder or any other
person, and irrespective of any other circumstance which might
otherwise limit such obligation of the Company to the Holder in
connection with the issuance of such Underlying Shares; provided,
however, such delivery shall not operate as a waiver by the Company of
any such action the Company may have against the Holder. In the event a
Holder of this Debenture shall elect to convert any or all of the
outstanding principal amount hereof, the Company may not refuse
conversion based on any claim that the Holder or any one associated or
affiliated with the Holder of has been engaged in any violation of law,
agreement or for any other reason, unless, an injunction from a court,
on notice, restraining and or enjoining conversion of all or part of
this Debenture shall have been sought and obtained and the Company
posts a surety bond for the
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benefit of the Holder in the amount of 150% of the principal amount of
this Debenture outstanding, which is subject to the injunction, which
bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall
be payable to such Holder to the extent it obtains judgment. In the
absence of an injunction precluding the same, the Company shall issue
Conversion Shares or, if applicable, cash, upon a properly noticed
conversion. Subject to the terms of the Subordination Agreement,
nothing herein shall limit a Holder's right to pursue actual damages or
declare an Event of Default pursuant to Section 3 herein for the
Company's failure to deliver Conversion Shares within the period
specified herein and such Holder shall have the right to pursue all
remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief.
Subject to the terms of the Subordination Agreement, the exercise of
any such rights shall not prohibit the Holders from seeking to enforce
damages pursuant to any other Section hereof or under applicable law.
(iii) In addition to any other rights available to the Holder, if the
Company fails for any reason to deliver to the Holder such certificate
or certificates pursuant to Section 4(b)(i) by the third Trading Day
after the Conversion Date, and if after such third Trading Day the
Holder is required by its brokerage firm to purchase (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction of a
sale by such Holder of the Underlying Shares which the Holder
anticipated receiving upon such conversion (a "Buy-In"), then the
Company shall, subject to the terms in the Subordination Agreement, (A)
pay in cash to the Holder (in addition to any remedies available to or
elected by the Holder) the amount by which (x) the Holder's total
purchase price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the aggregate number
of shares of Common Stock that such Holder anticipated receiving from
the conversion at issue multiplied by (2) the actual sale price of the
Common Stock at the time of the sale (including brokerage commissions,
if any) giving rise to such purchase obligation and (B) at the option
of the Holder, either reissue Debentures in principal amount equal to
the principal amount of the attempted conversion or deliver to the
Holder the number of shares of Common Stock that would have been issued
had the Company timely complied with its delivery requirements under
Section 4(b)(i). For example, if the Holder purchases Common Stock
having a total purchase price of $11,000 to cover a Buy-In with respect
to an attempted conversion of Debentures with respect to which the
actual sale price of the Underlying Shares at the time of the sale
(including brokerage commissions, if any) giving rise to such purchase
obligation was a total of $10,000 under clause (A) of the immediately
preceding sentence, the Company shall be required to pay the Holder
$1,000. The Holder shall provide the Company written notice indicating
the amounts payable to the Holder in respect of the Buy-In.
Notwithstanding anything contained herein to the
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contrary, if a Holder requires the Company to make payment in respect
of a Buy-In for the failure to timely deliver certificates hereunder
and the Company timely pays in full such payment, the Company shall not
be required to pay such Holder liquidated damages under Section
4(b)(ii) in respect of the certificates resulting in such Buy-In.
(c) (i) The conversion price in effect on any Conversion Date shall be
equal to $3.85 (subject to adjustment herein)(the "Set Price").
(ii) If the Company, at any time while the Debentures are outstanding:
(A) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or
equity equivalent securities payable in shares of Common Stock (which,
for avoidance of doubt, shall not include any shares of Common Stock
issued by the Company pursuant to this Debenture, including as interest
thereon), (B) subdivide outstanding shares of Common Stock into a
larger number of shares, (C) combine (including by way of reverse stock
split) outstanding shares of 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, then the Set Price shall be
multiplied by a fraction of which the numerator shall be the number of
shares of Common Stock (excluding treasury shares, if any) outstanding
before such event and of which the denominator shall be the number of
shares of Common Stock outstanding after such event. Any adjustment
made pursuant to this Section 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 or any subsidiary thereof, as applicable, at any
time while Debentures are outstanding, shall offer, sell, grant any
option to purchase or offer, sell or grant any right to reprice its
securities, or otherwise dispose of or issue (or announce any offer,
sale, grant or any option to purchase or other disposition) any Capital
Shares or Capital Shares Equivalent entitling any Person to acquire
shares of Common Stock, at an effective price per share less than the
then Set Price ("Dilutive Issuance"), as adjusted hereunder (if the
holder of the Capital Shares or Capital Shares Equivalent so issued
shall at any time, whether by operation of purchase price adjustments,
reset provisions, floating conversion, exercise or exchange prices or
otherwise, or due to warrants, options or rights per share which is
issued in connection with such issuance, be entitled to receive shares
of Common Stock at an effective price per share which is less than the
Set Price, such issuance shall be deemed to have occurred for less than
the Set Price), then, (A) if such Dilutive Issuance occurs on or prior
to the first anniversary of the Original Issue Date, the Set Price
shall be reduced by an amount equal to 75% of the difference between
the Set Price and the effective conversion, exchange or purchase price
for such Capital Shares or Capital Shares Equivalents (including any
reset provisions thereof) at issue and (B) if such Dilutive Issuance
occurs after the first anniversary of the Original Issue Date, the Set
Price shall be reduced by an amount equal to 50% of the difference
between the Set Price and the effective conversion, exchange or
12
purchase price for such Capital Shares or Capital Shares Equivalents
(including any reset provisions thereof) at issue. Such adjustment
shall be made whenever such Capital Shares or Capital Shares
Equivalents are issued. The Company shall notify the Holder in writing,
no later than the business day following the issuance of any Capital
Shares or Capital Shares Equivalent subject to this section, indicating
therein the applicable issuance price, or of applicable reset price,
exchange price, conversion price and other pricing terms.
(iv) If the Company, at any time while Debentures are outstanding,
shall distribute to all holders of Common Stock (and not to Holders)
evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security, then in each such case the Set
Price shall be determined by multiplying such 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 VWAP determined as of the record
date mentioned above, and of which the numerator shall be such VWAP 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. In either case the adjustments
shall be described in a statement provided to the Holders of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of 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 4 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be. For
purposes of this Section 4, the number of shares of Common Stock
outstanding as of a given date shall be the sum of the number of shares
of Common Stock (excluding treasury shares, if any) outstanding.
(vi) Whenever the Set Price is adjusted pursuant to any of Section
4(c)(ii) - (v), the Company shall promptly mail to each Holder a notice
setting forth the Set Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment. If the Company
issues a variable rate security, despite the prohibition thereon in the
Purchase Agreement, the Company shall be deemed to have issued Capital
Shares or Capital Shares Equivalents at the lowest possible conversion
or exercise price at which such securities may be converted or
13
exercised in the case of a Variable Rate Transaction (as defined in the
Purchase Agreement), or the lowest possible adjustment price in the
case of an MFN Transaction (as defined in the Purchase Agreement).
(vii) If (A) the Company shall declare a dividend (or any other
distribution) on the Common Stock; (B) the Company shall declare a
special nonrecurring cash dividend on or a redemption of the Common
Stock; (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; (D) the approval
of any stockholders of the Company shall be required in connection with
any reclassification of the Common Stock, 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
exchange whereby the Common Stock is converted into other securities,
cash or property; (E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of
the Company; then, in each case, 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 at their last
addresses as they shall appear upon the stock books of the Company, at
least 20 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 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, 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 20-day period commencing the
date of such notice to the effective date of the event triggering such
notice.
viii) If, at any time while this Debenture is outstanding, (A) the
Company effects any merger or consolidation of the Company with or into
another Person, (B) the Company effects any sale of all or
substantially all of its assets in one or a series of related
transactions, (C) any tender offer or exchange offer (whether by the
Company or another Person) is completed pursuant to which holders of
Common Stock are permitted to tender or exchange their shares for other
securities, cash or property, or (D) the Company effects any
reclassification of the Common Stock or any compulsory share exchange
pursuant to which the
14
Common Stock is effectively converted into or exchanged for other
securities, cash or property (in any such case, a "Fundamental
Transaction"), then upon any subsequent conversion of this Debenture,
the Holder shall have the right to receive, for each Underlying Share
that would have been issuable upon such conversion absent such
Fundamental Transaction, the same kind and amount of securities, cash
or property as it would have been entitled to receive upon the
occurrence of such Fundamental Transaction if it had been, immediately
prior to such Fundamental Transaction, the holder of one share of
Common Stock (the "Alternate Consideration"). For purposes of any such
conversion, the determination of the Set Price shall be appropriately
adjusted to apply to such Alternate Consideration based on the amount
of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company shall apportion
the Set Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the
Alternate Consideration. If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a
Fundamental Transaction, then the Holder shall be given the same choice
as to the Alternate Consideration it receives upon any conversion of
this Debenture following such Fundamental Transaction. To the extent
necessary to effectuate the foregoing provisions, any successor to the
Company or surviving entity in such Fundamental Transaction shall issue
to the Holder a new debenture consistent with the foregoing provisions
and evidencing the Holder's right to convert such debenture into
Alternate Consideration. The terms of any agreement pursuant to which a
Fundamental Transaction is effected shall include terms requiring any
such successor or surviving entity to comply with the provisions of
this paragraph (c) and insuring that this Debenture (or any such
replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction. If any Fundamental
Transaction constitutes or results in a Change of Control Transaction,
then at the request of the Holder delivered before the 90th day after
such Fundamental Transaction, the Company (or any such successor or
surviving entity) will purchase the Debenture from the Holder for a
purchase price, payable in cash within five Trading Days after such
request (or, if later, on the effective date of the Fundamental
Transaction), equal to the 100% of the remaining unconverted principal
amount of this Debenture on the date of such request, plus all accrued
and unpaid interest thereon, plus all other accrued and unpaid amounts
due hereunder. Notwithstanding anything in this Debenture to the
Contrary, if any Change of Control occurs, including a Fundamental
Transaction that constitutes or results in a Change of Control
Transaction, then at the request of the Holder delivered before the
90th day after such Change of Control event, the Company (or any such
successor or surviving entity) will purchase the Debenture from the
Holder for a purchase price, payable in cash within five Trading Days
after such request (or, if later, on the effective date of the Change
of Control), equal to the 100% of the remaining unconverted principal
amount of this
15
Debenture on the date of such request, plus all accrued and unpaid
interest thereon, plus all other accrued and unpaid amounts due
hereunder.
(ix) Notwithstanding the foregoing, no adjustment will be made under
this paragraph (c) in respect of (A) the granting or issuance of shares
of capital stock or of options to employees, officers, directors and
key consultants of the Company pursuant to any stock option plan
agreement or other compensation agreement duly adopted or approved by a
majority of the non-employee members of the Board of Directors of the
Company or a majority of the members of a committee of non-employee
directors established for such purpose, (B) upon the exercise of this
Debenture or any other Debenture of this series or of any other series
or security issued by the Company in connection with the offer and sale
of this Company's securities pursuant to the Purchase Agreement, or (C)
upon the exercise of or conversion of any Capital Shares Equivalents,
rights, options or warrants issued and outstanding on the Original
Issue Date, provided such securities have not been amended since the
date of the Purchase Agreement except as a result of the Purchase
Agreement, (D) issuance of securities in connection with acquisitions,
strategic investments, or strategic partnering arrangements, the
primary purpose of which is not to raise capital, or (E) the granting
of stock, stock options and/or warrants to an investment group in
connection with the advancement of $1 million to the Company, which
transaction is described in Item 13 of the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2003.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued shares of Common Stock solely for
the purpose of issuance upon conversion of the Debentures and payment of
interest on the Debenture, 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 4(b)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder. The Company covenants that all shares of Common Stock that shall be
so issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and, if the Underlying Shares Registration Statement is then
effective under the Securities Act, registered for public sale in accordance
with such Underlying Shares Registration Statement.
(e) 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 VWAP at such time. If the Company elects not,
or is unable, to make such a
16
cash payment, the Holder shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
(f) 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.
(g) Any and all notices or other communications or deliveries to be
provided by the Holders hereunder, including, without limitation, any Notice of
Conversion, shall be in writing and delivered personally, by facsimile, sent by
a nationally recognized overnight courier service, addressed to the Company, at
the address set forth above, facsimile number (____) ___-_______, ATTN:
_____________ 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
addressed to each Holder 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 5:30 p.m. (New York City 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
5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) the second Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or (iv)
upon actual receipt by the party to whom such notice is required to be given.
Section 5. Redemption.
(a) Optional Redemption by the Company. If after the Effective Date
each of the Closing Prices for any 15 consecutive Trading Days (such period
commencing only after the Effective Price) exceeds the then Set Price by 200%,
the Company shall have the right to redeem no less than the entire principal
amount of this Debenture then held by the Holder, at a cash price equal to the
100% of the principal amount outstanding plus any
17
accrued but unpaid interest and fees owing thereon (the "Optional Redemption
Price"). The Company may only effect an Optional Redemption Notice if each of
the following shall be true: (i) the Company shall have duly honored all
conversions occurring by virtue of one or more Conversion Notices prior to the
Forced Conversion Date, (ii) there is an effective Underlying Shares
Registration Statement pursuant to which the Holder is permitted to utilize the
prospectus thereunder to resell all of the Underlying Shares issued to the
Holder and all of the Underlying Shares as are issuable to the Holder upon
conversion in full of this Debenture subject to the Forced Conversion Notice
(and the Company believes, in good faith, that such effectiveness will continue
uninterrupted for the foreseeable future), (iii) the Common Stock is listed for
trading on a Principal Market (and the Company believes, in good faith, that
trading of the Common Stock on a Principal Market will continue uninterrupted
for the foreseeable future), (iv) all liquidated damages and other amounts owing
in respect of the Debentures and Underlying Shares shall have been paid or will,
concurrently with the issuance of the Underlying Shares, be paid in cash; (v)
there is a sufficient number of authorized but unissued and otherwise unreserved
shares of Common Stock for the issuance of all the Underlying Shares as are
issuable to the Holder upon conversion in full of the Debentures subject to the
Forced Conversion Notice; (vi) no Event of Default nor any event that with the
passage of time would constitute an Event of Default has occurred and is
continuing; (vii) the issuance of such shares upon conversion of the Debentures
in full and issued and issuable upon exercise of the Warrants in full would
violate the limitations set forth in Section 4(a)(ii)and (viii) no public
announcement of a pending or proposed Change of Control Transaction or
Fundamental Transaction has occurred that has not been consummated. If any of
the foregoing conditions shall cease to be in effect during the period between
the Notice Date and the date the Optional Redemption Price is paid in full, then
the Holders subject to such redemption may elect, by written notice to the
Company given at any time after any of the foregoing conditions shall cease to
be in effect, to invalidate ab initio such redemption, notwithstanding anything
herein contained to the contrary. In any case, the Holders may convert any
portion of the outstanding principal amount of the Debentures subject to an
Optional Redemption Notice prior to the date that the Optional Redemption Price
is due and paid in full.
(b) Redemption Procedure. The Optional Redemption Price is due on the
20th Trading Day following the Notice Date. If any portion of the Optional
Redemption Price shall not be paid by the Company by the date such payment is
due, interest shall accrue thereon at the rate of 18% per annum (or the maximum
rate permitted by applicable law, whichever is less) until such redemption price
plus all such interest is paid in full. In addition, if any portion of the
Optional Redemption Price remains unpaid after such date, the Holders subject to
such redemption may elect, by written notice to the Company given at any time
thereafter, to invalidate ab initio such redemption, notwithstanding anything
herein contained to the contrary. If a Holder elects to invalidate such
redemption the Company shall promptly, and, in any event, not later than 3
Trading Days
18
from receipt of such Holder's notice of such election, return to such Holder all
of the Debentures for which the Optional Redemption Price shall not have been
paid in full.
Section 6. Definitions. For the purposes hereof, in addition to the
terms defined elsewhere in this Debenture: (a) capitalized terms not otherwise
defined herein have the meanings given to such terms in the Purchase Agreement,
and (b) the following terms shall have the following meanings:
"Business Day" means any day except Saturday, Sunday and any
day which shall be a federal legal holiday in the United States 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.
"Change of Control Transaction" means the occurrence after the
date hereof of any of (i) an acquisition after the date hereof by an
individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company,
by contract or otherwise) of in excess of 33% of the voting securities
of the Company, or (ii) a replacement at one time or within a three
year period of more than one-half of the members of the Company's board
of directors which is not approved by a majority of those individuals
who are members of the board of directors on the date hereof (or by
those individuals who are serving as members of the board of directors
on any date whose nomination to the board of directors was approved by
a majority of the members of the board of directors who are members on
the date hereof), or (iii) the execution by the Company of an agreement
to which the Company is a party or by which it is bound, providing for
any of the events set forth above in (i) or (ii).
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, $0.001 par value per
share, of the Company and stock of any other class into which such
shares may hereafter have been reclassified or changed.
"Conversion Date" shall have the meaning set forth in Section
4(a)(i) hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Interest Conversion Rate" means the lesser of (i) the Set
Price and (ii) 90% of the lesser of (a) the average of the 20 VWAPs
immediately prior to the applicable Interest Payment Date or (b) the
average of the 20 VWAPs immediately prior to the date the applicable
interest payment shares are issued and delivered if after the Interest
Payment Date.
19
"Late Fees" shall have the meaning set forth in the second
paragraph to this Debenture.
"Mandatory Prepayment Amount" for any Debentures shall equal
the sum of (i) the greater of: (A) 130% of the principal amount of
Debentures to be prepaid, plus all accrued and unpaid interest thereon
and all other accrued and unpaid amounts due hereunder, or (B) the
principal amount of Debentures to be prepaid, plus all other accrued
and unpaid interest hereon and other amounts due hereunder, divided by
the Set Price on (x) the date the Mandatory Prepayment Amount is
demanded or otherwise due or (y) the date the Mandatory Prepayment
Amount is paid in full, whichever is less, multiplied by the VWAP on
(x) the date the Mandatory Prepayment Amount is demanded or otherwise
due or (y) the date the Mandatory Prepayment Amount is paid in full,
whichever is greater, and (ii) all other amounts, costs, expenses and
liquidated damages due in respect of such Debentures.
"Notice Date" shall have the meaning set forth in Section
5(a).
"Optional Redemption Notice" shall have the meaning set forth
in Section 5(a).
"Optional Redemption Price" shall have the meaning set forth
in Section 5(a).
"Original Issue Date" shall mean the date of the first
issuance of the 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.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"Purchase Agreement" means the Securities Purchase Agreement,
dated as of September 20, 2003, to which the Company and the original
Holder are parties, as amended, modified or supplemented from time to
time in accordance with its terms.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date of the Purchase Agreement, to which the
Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Set Price" shall have the meaning set forth in Section
4(c)(i).
20
"Trading Day" means (a) a day on which the shares of Common
Stock are traded on a Principal Market on which the shares of Common
Stock are then listed or quoted, or (b) if the shares of Common Stock
are not quoted on a Principal Market, a day on which the shares of
Common Stock are 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); provided, that
in the event that the shares of Common Stock are not listed or quoted
as set forth in (a), (b) and (c) hereof, then Trading Day shall mean a
Business Day.
"Transaction Documents" shall have the meaning set forth in
the Purchase Agreement.
"Underlying Shares" means the shares of Common Stock issuable
upon conversion of Debentures or as payment of interest in accordance
with the terms hereof.
"Underlying Shares Registration Statement" means a
registration statement meeting the requirements set forth in the
Registration Rights Agreement, covering among other things the resale
of the Underlying Shares and naming the Holder as a "selling
stockholder" thereunder.
"VWAP" means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Trading Market, the daily volume weighted average
price of the Common Stock for such date (or the nearest preceding date)
on the Trading Market on which the Common Stock is then listed or
quoted as reported by Bloomberg Financial L.P. (based on a trading day
from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the
Common Stock is not then listed or quoted on a Trading Market and if
prices for the Common Stock are then quoted on the OTC Bulletin Board,
the volume weighted average price of the Common Stock for such date (or
the nearest preceding date) on the OTC Bulletin Board; (c) if the
Common Stock is not then listed or quoted on the OTC Bulletin Board and
if prices for the Common Stock are then reported in the "Pink Sheets"
published by the National Quotation Bureau Incorporated (or a similar
organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so
reported; or (d) in all other cases, the fair market value of a share
of Common Stock as determined by an independent appraiser selected in
good faith by the Purchasers and reasonably acceptable to the Company.
Section 7. Except as expressly provided herein and in the Subordination
Agreement, no provision of this Debenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the principal of,
interest and liquidated damages (if any) on, this Debenture at the time, place,
and rate, and in the coin or currency, herein prescribed. This Debenture is a
direct debt obligation of the Company. This Debenture ranks pari passu with all
other Debentures now or hereafter issued under the terms set forth herein and is
subordination to
21
the Company's credit agreement with LaSalle Business Credit, Inc. which is
outstanding as of the date of this Debenture and any other senior secured credit
facilities that the Company may enter into after the date hereof with another
reputable commercial lender in place of such credit agreement. As long as this
Debenture is outstanding, the Company shall not and shall cause it subsidiaries
not to, without the consent of the Holder, (a) amend its certificate of
incorporation, bylaws or other charter documents so as to adversely affect any
rights of the Holder; (b) repay, repurchase or offer to repay, repurchase or
otherwise acquire more than a de minimis number of shares of its Common Stock or
other equity securities other than as to the Underlying Shares to the extent
permitted or required under the Transaction Documents or as otherwise permitted
by the Transaction Documents; or (c) enter into any agreement with respect to
any of the foregoing.
Section 8. 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 9. So long as any portion of this Debenture is outstanding, the
Company will not and will not permit any of its subsidiaries to, directly or
indirectly, enter into, create, incur, assume or suffer to exist any
indebtedness of any kind, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or profits
therefrom that is senior in any respect to the Company's obligations under the
Debentures without the prior consent of the Holder, which consent shall not be
unreasonably withheld.
Section 10. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all legal proceedings concerning the interpretations, enforcement
and defense of the transactions contemplated by any of the Transaction Documents
(whether brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the state and
federal courts sitting in the City of New York, Borough of Manhattan (the "New
York Courts"). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of any such court, or such New York Courts are improper or
inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Debenture and agrees that such
service shall constitute good and sufficient service
22
of process and notice thereof. Nothing contained herein shall be deemed to limit
in any way any right to serve process in any manner permitted by law. Each party
hereto hereby irrevocably waives, to the fullest extent permitted by applicable
law, any and all right to trial by jury in any legal proceeding arising out of
or relating to this Debenture or the transactions contemplated hereby. If either
party shall commence an action or proceeding to enforce any provisions of this
Debenture, then the prevailing party in such action or proceeding shall be
reimbursed by the other party for its attorneys fees and other costs and
expenses incurred with the investigation, preparation and prosecution of such
action or proceeding.
Section 11. 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 12. 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. If it shall be found
that any interest or other amount deemed interest due hereunder violates
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on the Debentures as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect the
covenants or the performance of this indenture, and the Company (to the extent
it may lawfully do so) hereby expressly waives all benefits or advantage of any
such law, and covenants that it will not, by resort to any such law, hinder,
delay or impeded the execution of any power herein granted to the Holder, but
will suffer and permit the execution of every such as though no such law has
been enacted.
Section 13. 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.
*********************
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IN WITNESS WHEREOF, the Company has caused this Convertible Debenture
to be duly executed by a duly authorized officer as of the date first above
indicated.
THE SINGING MACHINE COMPANY, INC.
By:_________________________________________
Name:
Title:
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ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 8% Convertible
Debenture of The Singing Machine Company, Inc. (the "Company"), due on February
__, 2006, into shares of common stock, $____ par value per share (the "Common
Stock"), of 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 the
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.
By the delivery of this Notice of Conversion the undersigned represents and
warrants to the Company that its ownership of the Company's Common Stock does
not exceed the amounts determined in accordance with Section 13(d) of the
Exchange Act, specified under Section 4 of this Debenture.
The undersigned agrees to comply with the prospectus delivery requirements under
the applicable securities laws in connection with any transfer of the aforesaid
shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debentures to be Converted:
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on
Account of Conversion at Issue.
Number of shares of Common Stock to be issued:
Signature:
Name:
Address:
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Schedule 1
CONVERSION SCHEDULE
8% Convertible Debentures due on February ___, 2006, in the aggregate principal
amount of $____________ issued by The Singing Machine Company, Inc. This
Conversion Schedule reflects conversions made under Section 4 of the above
referenced Debenture.
Dated:
=============================== ------------------------- ======================= ------------------------------
Aggregate Principal
Amount Remaining
Date of Conversion Subsequent to
(or for first entry, Original Conversion
Issue Date) Amount of Conversion (or original Company Attest
Principal Amount)
=============================== ------------------------- ======================= ------------------------------
- ------------------------------- ------------------------- ----------------------- ------------------------------
- ------------------------------- ------------------------- ----------------------- ------------------------------
- ------------------------------- ------------------------- ----------------------- ------------------------------
- ------------------------------- ------------------------- ----------------------- ------------------------------
- ------------------------------- ------------------------- ----------------------- ------------------------------
- ------------------------------- ------------------------- ----------------------- ------------------------------
- ------------------------------- ------------------------- ----------------------- ------------------------------
- ------------------------------- ------------------------- ----------------------- ------------------------------
=============================== ------------------------- ======================= ------------------------------
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