Exhibit 10.23
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE
SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT,
OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR
OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 OR
REGULATION S UNDER SAID ACT.
SECURED CONVERTIBLE DEBENTURE
Hempstead, New York
April 16, 2003 $16,668
FOR VALUE RECEIVED, TORBAY HOLDINGS, INC., a Delaware
corporation (hereinafter called the "Borrower"), hereby promises to pay to the
order of AJW Partners, LLC or registered assigns (the "Holder") the sum of
Sixteen Thousand Six Hundred Sixty-Eight Dollars ($16,668), on April 16, 2004
(the "Maturity Date"), and to pay interest on the unpaid principal balance
hereof at the rate of twelve percent (12%) per annum from April 16, 2003 (the
"Issue Date") until the same becomes due and payable, whether at maturity or
upon acceleration or by prepayment or otherwise. Any amount of principal or
interest on this Debenture which is not paid when due shall bear interest at the
rate of fifteen percent (15%) per annum from the due date thereof until the same
is paid ("Default Interest"). Interest shall commence accruing on the issue
date, shall be computed on the basis of a 365-day year and the actual number of
days elapsed and shall be payable, at the option of the Holder, either quarterly
on March 31, June 30, September 30 and December 31 of each year beginning on
June 30, 2003, or at the time of conversion of the principal to which such
interest relates in accordance with Article I below. All payments due hereunder
(to the extent not converted into common stock, $.0001 par value per share, of
the Borrower (the "Common Stock") in accordance with the terms hereof) shall be
made in lawful money of the United States of America or, at the option of the
Holder, in whole or in part, in shares of Common Stock of the Borrower valued at
the then applicable Conversion Price (as defined herein). All payments shall be
made at such address as the Holder shall hereafter give to the Borrower by
written notice made in accordance with the provisions of this Debenture.
Whenever any amount expressed to be due by the terms of this Debenture is due on
any day which is not a business day, the same shall instead be due on the next
succeeding day which is a business day and, in the case of any interest payment
date which is not the date on which this Debenture is paid in full, the
extension of the due date thereof shall not be taken into account for purposes
of determining the amount of interest due on such date. As used in this
Debenture, the term "business day" shall mean any day other than a Saturday,
Sunday or a day on which commercial banks in the city of New York, New York are
authorized or required by law or executive order to remain closed. Each
capitalized term used herein, and not otherwise defined, shall have the meaning
ascribed thereto in that certain Securities Purchase Agreement, dated April 16,
2003, pursuant to which this Debenture was originally issued (the "Purchase
Agreement").
This Debenture is free from all taxes, liens, claims and
encumbrances with respect to the issue thereof and shall not be subject to
preemptive rights or other similar rights of stockholders of the Borrower and
will not impose personal liability upon the holder thereof. The obligations of
the Borrower under this Debenture shall be secured by that certain Security
Agreement dated by and between the Borrower and the Holder of even date
herewith.
The following terms shall apply to this Debenture:
ARTICLE I. CONVERSION RIGHTS
1.1 Conversion Right. Subject to the Stockholder Approval (as defined in
Section 4(1) of the Purchase Agreement), the Holder shall have the right from
time to time, and at any time on or prior to the earlier of (i) the Maturity
Date and (ii) the date of payment of the Default Amount (as defined in Article
III) pursuant to Section 1.6(a) or Article III, the Optional Prepayment Amount
(as defined in Section 5.1 or any payments pursuant to Section 1.7, each in
respect of the remaining outstanding principal amount of this Debenture to
convert all or any part of the outstanding and unpaid principal amount of this
Debenture into fully paid and non-assessable shares of Common Stock, as such
Common Stock exists on the Issue Date, or any shares of capital stock or other
securities of the Borrower into which such Common Stock shall hereafter be
changed or reclassified at the conversion price (the "Conversion Price")
determined as provided herein (a "Conversion"); provided, however, that in no
event shall the Holder be entitled to convert any portion of this Debenture in
excess of that portion of this Debenture upon conversion of which the sum of (1)
the number of shares of Common Stock beneficially owned by the Holder and its
affiliates (other than shares of Common Stock which may be deemed beneficially
owned through the ownership of the unconverted portion of the Debentures or the
unexercised or unconverted portion of any other security of the Borrower
(including, without limitation, the warrants issued by the Borrower pursuant to
the Purchase Agreement) subject to a limitation on conversion or exercise
analogous to the limitations contained herein) and (2) the number of shares of
Common Stock issuable upon the conversion of the portion of this Debenture with
respect to which the determination of this proviso is being made, would result
in beneficial ownership by the Holder and its affiliates of more than 4.9% of
the outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulations 13D-G thereunder, except as otherwise provided in
clause (1) of such proviso. The Holder of this Debenture may waive the
limitations set forth herein by sixty-one (61) days written notice to the
Company. The number of shares of Common Stock to be issued upon each conversion
of this Debenture shall be determined by dividing the Conversion Amount (as
defined below) by the applicable Conversion Price then in effect on the date
specified in the notice of conversion, in the form attached hereto as Exhibit A
(the "Notice of Conversion"), delivered to the Borrower by the Holder in
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accordance with Section 1.4 below; provided that the Notice of Conversion is
submitted by facsimile (or by other means resulting in, or reasonably expected
to result in, notice) to the Borrower before 6:00 p.m., New York, New York time
on such conversion date (the "Conversion Date"). The term "Conversion Amount"
means, with respect to any conversion of this Debenture, the sum of (1) the
principal amount of this Debenture to be converted in such conversion plus (2)
accrued and unpaid interest, if any, on such principal amount at the interest
rates provided in this Debenture to the Conversion Date plus (3) Default
Interest, if any, on the amounts referred to in the immediately preceding
clauses (1) and/or (2) plus (4) at the Holder's option, any amounts owed to the
Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of
that certain Registration Rights Agreement, dated as of April 16, 2003, executed
in connection with the initial issuance of this Debenture and the other
Debentures issued on the Issue Date (the "Registration Rights Agreement").
1.2 Conversion Price.
(a) Calculation of Conversion Price. The Conversion Price shall be the
lesser of (i) the Variable Conversion Price (as defined herein) and (ii) the
Fixed Conversion Price (as defined herein) (subject, in each case, to equitable
adjustments for stock splits, stock dividends or rights offerings by the
Borrower relating to the Borrower's securities or the securities of any
subsidiary of the Borrower, combinations, recapitalization, reclassifications,
extraordinary distributions and similar events). The "Variable Conversion Price"
shall mean the Applicable Percentage (as defined herein) multiplied by the
Market Price (as defined herein). "Market Price" means the average of the lowest
three (3) Trading Prices (as defined below) for the Common Stock during the
twenty (20) Trading Day period ending one Trading Day prior to the date the
Conversion Notice is sent by the Holder to the Borrower via facsimile (the
"Conversion Date"). "Trading Price" means, for any security as of any date, the
intraday trading price on the Over-the-Counter Bulletin Board (the "OTCBB") as
reported by a reliable reporting service mutually acceptable to and hereafter
designated by Holders of a majority in interest of the Debentures and the
Borrower or, if the OTCBB is not the principal trading market for such security,
the intraday trading price of such security on the principal securities exchange
or trading market where such security is listed or traded or, if no intraday
trading price of such security is available in any of the foregoing manners, the
average of the intraday trading prices of any market makers for such security
that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If
the Trading Price cannot be calculated for such security on such date in the
manner provided above, the Trading Price shall be the fair market value as
mutually determined by the Borrower and the holders of a majority in interest of
the Debentures being converted for which the calculation of the Trading Price is
required in order to determine the Conversion Price of such Debentures. "Trading
Day" shall mean any day on which the Common Stock is actually traded for any
period on the OTCBB, or on the principal securities exchange or other securities
market on which the Common Stock is then being traded. "Applicable Percentage"
shall mean 50.0%. The "Fixed Conversion Price" shall mean $.05.
(b) Conversion Price During Major Announcements. Notwithstanding anything
contained in Section 1.2(a) to the contrary, in the event the Borrower (i) makes
a public announcement that it intends to consolidate or merge with any other
corporation (other than a merger in which the Borrower is the surviving or
continuing corporation and its capital stock is unchanged) or sell or transfer
all or substantially all of the assets of the Borrower or (ii) any
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person, group or entity (including the Borrower) publicly announces a tender
offer to purchase 50% or more of the Borrower's Common Stock (or any other
takeover scheme) (the date of the announcement referred to in clause (i) or (ii)
is hereinafter referred to as the "Announcement Date"), then the Conversion
Price shall, effective upon the Announcement Date and continuing through the
Adjusted Conversion Price Termination Date (as defined below), be equal to the
lower of (x) the Conversion Price which would have been applicable for a
Conversion occurring on the Announcement Date and (y) the Conversion Price that
would otherwise be in effect. From and after the Adjusted Conversion Price
Termination Date, the Conversion Price shall be determined as set forth in this
Section 1.2(a). For purposes hereof, "Adjusted Conversion Price Termination
Date" shall mean, with respect to any proposed transaction or tender offer (or
takeover scheme) for which a public announcement as contemplated by this Section
1.2(b) has been made, the date upon which the Borrower (in the case of clause
(i) above) or the person, group or entity (in the case of clause (ii) above)
consummates or publicly announces the termination or abandonment of the proposed
transaction or tender offer (or takeover scheme) which caused this Section
1.2(b) to become operative.
1.3 Authorized Shares. Subject to the Stockholder Approval (as defined in
Section 4(1) of the Purchase Agreement), the Borrower covenants that during the
period the conversion right exists, the Borrower will reserve from its
authorized and unissued Common Stock a sufficient number of shares, free from
preemptive rights, to provide for the issuance of Common Stock upon the full
conversion of this Debenture and the other Debentures issued pursuant to the
Purchase Agreement. The Borrower is required at all times to have authorized and
reserved two times the number of shares that is actually issuable upon full
conversion of the Debentures (based on the Conversion Price of the Debentures or
the Exercise Price of the Warrants in effect from time to time) (the "Reserved
Amount"). The Reserved Amount shall be increased from time to time in accordance
with the Borrower's obligations pursuant to Section 4(h) of the Purchase
Agreement. The Borrower represents that upon issuance, such shares will be duly
and validly issued, fully paid and non-assessable. In addition, if the Borrower
shall issue any securities or make any change to its capital structure which
would change the number of shares of Common Stock into which the Debentures
shall be convertible at the then current Conversion Price, the Borrower shall at
the same time make proper provision so that thereafter there shall be a
sufficient number of shares of Common Stock authorized and reserved, free from
preemptive rights, for conversion of the outstanding Debentures. The Borrower
(i) acknowledges that it has irrevocably instructed its transfer agent to issue
certificates for the Common Stock issuable upon conversion of this Debenture,
and (ii) agrees that its issuance of this Debenture shall constitute full
authority to its officers and agents who are charged with the duty of executing
stock certificates to execute and issue the necessary certificates for shares of
Common Stock in accordance with the terms and conditions of this Debenture.
If, at any time a Holder of this Debenture submits a Notice of Conversion,
and the Borrower does not have sufficient authorized but unissued shares of
Common Stock available to effect such conversion in accordance with the
provisions of this Article I (a "Conversion Default"), subject to Section 4.8,
the Borrower shall issue to the Holder all of the shares of Common Stock which
are then available to effect such conversion. The portion of this Debenture
which the Holder included in its Conversion Notice and which exceeds the amount
which is then convertible into available shares of Common Stock (the "Excess
Amount") shall, notwithstanding anything to the contrary contained herein, not
be convertible into Common
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Stock in accordance with the terms hereof until (and at the Holder's option at
any time after) the date additional shares of Common Stock are authorized by the
Borrower to permit such conversion, at which time the Conversion Price in
respect thereof shall be the lesser of (i) the Conversion Price on the
Conversion Default Date (as defined below) and (ii) the Conversion Price on the
Conversion Date thereafter elected by the Holder in respect thereof. In
addition, the Borrower shall pay to the Holder payments ("Conversion Default
Payments") for a Conversion Default in the amount of (x) the sum of (1) the then
outstanding principal amount of this Debenture plus (2) accrued and unpaid
interest on the unpaid principal amount of this Debenture through the
Authorization Date (as defined below) plus (3) Default Interest, if any, on the
amounts referred to in clauses (1) and/or (2), multiplied by (y) .24, multiplied
by (z) (N/365), where N = the number of days from the day the holder submits a
Notice of Conversion giving rise to a Conversion Default (the "Conversion
Default Date") to the date (the "Authorization Date") that the Borrower
authorizes a sufficient number of shares of Common Stock to effect conversion of
the full outstanding principal balance of this Debenture. The Borrower shall use
its best efforts to authorize a sufficient number of shares of Common Stock as
soon as practicable following the earlier of (i) such time that the Holder
notifies the Borrower or that the Borrower otherwise becomes aware that there
are or likely will be insufficient authorized and unissued shares to allow full
conversion thereof and (ii) a Conversion Default. The Borrower shall send notice
to the Holder of the authorization of additional shares of Common Stock, the
Authorization Date and the amount of Holder's accrued Conversion Default
Payments. The accrued Conversion Default Payments for each calendar month shall
be paid in cash or shall be convertible into Common Stock (at such time as there
are sufficient authorized shares of Common Stock) at the applicable Conversion
Price, at the Holder's option, as follows:
(a) In the event Holder elects to take such payment in cash, cash payment
shall be made to Holder by the fifth (5th) day of the month following the month
in which it has accrued; and
(b) In the event Holder elects to take such payment in Common Stock, the
Holder may convert such payment amount into Common Stock at the Conversion Price
(as in effect at the time of conversion) at any time after the fifth day of the
month following the month in which it has accrued in accordance with the terms
of this Article I (so long as there is then a sufficient number of authorized
shares of Common Stock).
The Holder's election shall be made in writing to the Borrower at any time
prior to 6:00 p.m., New York, New York time, on the third day of the month
following the month in which Conversion Default payments have accrued. If no
election is made, the Holder shall be deemed to have elected to receive cash.
Nothing herein shall limit the Holder's right to pursue actual damages (to the
extent in excess of the Conversion Default Payments) for the Borrower's failure
to maintain a sufficient number of authorized shares of Common Stock, and each
holder shall have the right to pursue all remedies available at law or in equity
(including degree of specific performance and/or injunctive relief).
1.4 Method of Conversion.
(a) Mechanics of Conversion. Subject to Section 1.1, this Debenture may be
converted by the Holder in whole or in part at any time from time to time after
the Issue
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Date, by (A) submitting to the Borrower a Notice of Conversion (by facsimile or
other reasonable means of communication dispatched on the Conversion Date prior
to 6:00 p.m., New York, New York time) and (B) subject to Section 1.4(b),
surrendering this Debenture at the principal office of the Borrower.
(b) Surrender of Debenture Upon Conversion. Notwithstanding anything to the
contrary set forth herein, upon conversion of this Debenture in accordance with
the terms hereof, the Holder shall not be required to physically surrender this
Debenture to the Borrower unless the entire unpaid principal amount of this
Debenture is so converted. The Holder and the Borrower shall maintain records
showing the principal amount so converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the Holder and the
Borrower, so as not to require physical surrender of this Debenture upon each
such conversion. In the event of any dispute or discrepancy, such records of the
Borrower shall be controlling and determinative in the absence of manifest
error. Notwithstanding the foregoing, if any portion of this Debenture is
converted as aforesaid, the Holder may not transfer this Debenture unless the
Holder first physically surrenders this Debenture to the Borrower, whereupon the
Borrower will forthwith issue and deliver upon the order of the Holder a new
Debenture of like tenor, registered as the Holder (upon payment by the Holder of
any applicable transfer taxes) may request, representing in the aggregate the
remaining unpaid principal amount of this Debenture. 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
represented by this Debenture may be less than the amount stated on the face
hereof.
(c) Payment of Taxes. The Borrower shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock or other securities or property on conversion
of this Debenture in a name other than that of the Holder (or in street name),
and the Borrower shall not be required to issue or deliver any such shares or
other securities or property unless and until the person or persons (other than
the Holder or the custodian in whose street name such shares are to be held for
the Holder's account) requesting the issuance thereof shall have paid to the
Borrower the amount of any such tax or shall have established to the
satisfaction of the Borrower that such tax has been paid.
(d) Delivery of Common Stock Upon Conversion. Upon receipt by the Borrower
from the Holder of a facsimile transmission (or other reasonable means of
communication) of a Notice of Conversion meeting the requirements for conversion
as provided in this Section 1.4, the Borrower shall issue and deliver or cause
to be issued and delivered to or upon the order of the Holder certificates for
the Common Stock issuable upon such conversion within two (2) business days
after such receipt (and, solely in the case of conversion of the entire unpaid
principal amount hereof, surrender of this Debenture) (such second business day
being hereinafter referred to as the "Deadline") in accordance with the terms
hereof and the Purchase Agreement (including, without limitation, in accordance
with the requirements of Section 2(g) of the Purchase Agreement that
certificates for shares of Common Stock issued on or after the effective date of
the Registration Statement upon conversion of this Debenture shall not bear any
restrictive legend).
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(e) Obligation of Borrower to Deliver Common Stock. Upon receipt by the
Borrower of a Notice of Conversion, the Holder shall be deemed to be the holder
of record of the Common Stock issuable upon such conversion, the outstanding
principal amount and the amount of accrued and unpaid interest on this Debenture
shall be reduced to reflect such conversion, and, unless the Borrower defaults
on its obligations under this Article I, all rights with respect to the portion
of this Debenture being so converted shall forthwith terminate except the right
to receive the Common Stock or other securities, cash or other assets, as herein
provided, on such conversion. If the Holder shall have given a Notice of
Conversion as provided herein, the Borrower's obligation to issue and deliver
the certificates for Common Stock shall be absolute and unconditional,
irrespective of the absence of any action by the Holder to enforce the same, any
waiver or consent with respect to any provision thereof, the recovery of any
judgment against any person or any action to enforce the same, any failure or
delay in the enforcement of any other obligation of the Borrower to the holder
of record, or any setoff, counterclaim, recoupment, limitation or termination,
or any breach or alleged breach by the Holder of any obligation to the Borrower,
and irrespective of any other circumstance which might otherwise limit such
obligation of the Borrower to the Holder in connection with such conversion. The
Conversion Date specified in the Notice of Conversion shall be the Conversion
Date so long as the Notice of Conversion is received by the Borrower before 6:00
p.m., New York, New York time, on such date.
(f) Delivery of Common Stock by Electronic Transfer. In lieu of delivering
physical certificates representing the Common Stock issuable upon conversion,
provided the Borrower's transfer agent is participating in the Depository Trust
Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon
request of the Holder and its compliance with the provisions contained in
Section 1.1 and in this Section 1.4, the Borrower shall use its best efforts to
cause its transfer agent to electronically transmit the Common Stock issuable
upon conversion to the Holder by crediting the account of Holder's Prime Broker
with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system.
(g) Failure to Deliver Common Stock Prior to Deadline. Without in any way
limiting the Holder's right to pursue other remedies, including actual damages
and/or equitable relief, the parties agree that if delivery of the Common Stock
issuable upon conversion of this Debenture is more than two (2) days after the
Deadline (other than a failure due to the circumstances described in Section 1.3
above, which failure shall be governed by such Section) the Borrower shall pay
to the Holder $2,000 per day in cash, for each day beyond the Deadline that the
Borrower fails to deliver such Common Stock. Such cash amount shall be paid to
Holder by the fifth day of the month following the month in which it has accrued
or, at the option of the Holder (by written notice to the Borrower by the first
day of the month following the month in which it has accrued), shall be added to
the principal amount of this Debenture, in which event interest shall accrue
thereon in accordance with the terms of this Debenture and such additional
principal amount shall be convertible into Common Stock in accordance with the
terms of this Debenture.
1.5 Concerning the Shares. The shares of Common Stock issuable upon
conversion of this Debenture may not be sold or transferred unless (i) such
shares are sold pursuant to an effective registration statement under the Act or
(ii) the Borrower or its transfer agent shall have been furnished with an
opinion of counsel (which opinion shall be in form,
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substance and scope customary for opinions of counsel in comparable
transactions) to the effect that the shares to be sold or transferred may be
sold or transferred pursuant to an exemption from such registration or (iii)
such shares are sold or transferred pursuant to Rule 144 under the Act (or a
successor rule) ("Rule 144") or (iv) such shares are transferred to an
"affiliate" (as defined in Rule 144) of the Borrower who agrees to sell or
otherwise transfer the shares only in accordance with this Section 1.5 and who
is an Accredited Investor (as defined in the Purchase Agreement). Except as
otherwise provided in the Purchase Agreement (and subject to the removal
provisions set forth below), until such time as the shares of Common Stock
issuable upon conversion of this Debenture have been registered under the Act as
contemplated by the Registration Rights Agreement or otherwise may be sold
pursuant to Rule 144 without any restriction as to the number of securities as
of a particular date that can then be immediately sold, each certificate for
shares of Common Stock issuable upon conversion of this Debenture that has not
been so included in an effective registration statement or that has not been
sold pursuant to an effective registration statement or an exemption that
permits removal of the legend, shall bear a legend substantially in the
following form, as appropriate:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES
MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION
OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF
COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER
SAID ACT."
The legend set forth above shall be removed and the Borrower
shall issue to the Holder a new certificate therefor free of any transfer legend
if (i) the Borrower or its transfer agent shall have received an opinion of
counsel, in form, substance and scope customary for opinions of counsel in
comparable transactions, to the effect that a public sale or transfer of such
Common Stock may be made without registration under the Act and the shares are
so sold or transferred, (ii) such Holder provides the Borrower or its transfer
agent with reasonable assurances that the Common Stock issuable upon conversion
of this Debenture (to the extent such securities are deemed to have been
acquired on the same date) can be sold pursuant to Rule 144 or (iii) in the case
of the Common Stock issuable upon conversion of this Debenture, such security is
registered for sale by the Holder under an effective registration statement
filed under the Act or otherwise may be sold pursuant to Rule 144 without any
restriction as to the number of securities as of a particular date that can then
be immediately sold. Nothing in this Debenture shall (i) limit the Borrower's
obligation under the Registration Rights Agreement or (ii) affect in any way the
Holder's obligations to comply with applicable prospectus delivery requirements
upon the resale of the securities referred to herein.
1.6 Effect of Certain Events.
(a) Effect of Merger, Consolidation, Etc. At the option of the Holder, the
sale, conveyance or disposition of all or substantially all of the assets of the
Borrower, the effectuation by the Borrower of a transaction or series of related
transactions in
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which more than 50% of the voting power of the Borrower is disposed of, or the
consolidation, merger or other business combination of the Borrower with or into
any other Person (as defined below) or Persons when the Borrower is not the
survivor shall either: (i) be deemed to be an Event of Default (as defined in
Article III) pursuant to which the Borrower shall be required to pay to the
Holder upon the consummation of and as a condition to such transaction an amount
equal to the Default Amount (as defined in Article III) or (ii) be treated
pursuant to Section 1.6(b) hereof. "Person" shall mean any individual,
corporation, limited liability company, partnership, association, trust or other
entity or organization.
(b) Adjustment Due to Merger, Consolidation, Etc. If, at any time when this
Debenture is issued and outstanding and prior to conversion of all of the
Debentures, there shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event, as a result of which
shares of Common Stock of the Borrower shall be changed into the same or a
different number of shares of another class or classes of stock or securities of
the Borrower or another entity, or in case of any sale or conveyance of all or
substantially all of the assets of the Borrower other than in connection with a
plan of complete liquidation of the Borrower, then the Holder of this Debenture
shall thereafter have the right to receive upon conversion of this Debenture,
upon the basis and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock immediately theretofore issuable upon conversion,
such stock, securities or assets which the Holder would have been entitled to
receive in such transaction had this Debenture been converted in full
immediately prior to such transaction (without regard to any limitations on
conversion set forth herein), and in any such case appropriate provisions shall
be made with respect to the rights and interests of the Holder of this Debenture
to the end that the provisions hereof (including, without limitation, provisions
for adjustment of the Conversion Price and of the number of shares issuable upon
conversion of the Debenture) shall thereafter be applicable, as nearly as may be
practicable in relation to any securities or assets thereafter deliverable upon
the conversion hereof. The Borrower shall not effect any transaction described
in this Section 1.6(b) unless (a) it first gives, to the extent practicable,
thirty (30) days prior written notice (but in any event at least fifteen (15)
days prior written notice) of the record date of the special meeting of
stockholders to approve, or if there is no such record date, the consummation
of, such merger, consolidation, exchange of shares, recapitalization,
reorganization or other similar event or sale of assets (during which time the
Holder shall be entitled to convert this Debenture) and (b) the resulting
successor or acquiring entity (if not the Borrower) assumes by written
instrument the obligations of this Section 1.6(b). The above provisions shall
similarly apply to successive consolidations, mergers, sales, transfers or share
exchanges.
(c) Adjustment Due to Distribution. If the Borrower shall declare or make
any distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a dividend, stock repurchase, by way of return of capital or
otherwise (including any dividend or distribution to the Borrower's stockholders
in cash or shares (or rights to acquire shares) of capital stock of a subsidiary
(i.e., a spin-off)) (a "Distribution"), then the Holder of this Debenture shall
be entitled, upon any conversion of this Debenture after the date of record for
determining stockholders entitled to such Distribution, to receive the amount of
such assets which would have been payable to the Holder with respect to the
shares of Common Stock issuable upon such conversion had such Holder been the
holder of such shares of Common Stock on the record date for the determination
of stockholders entitled to such Distribution.
9
(d) Adjustment Due to Dilutive Issuance. If, at any time when any
Debentures are issued and outstanding, the Borrower issues or sells, or in
accordance with this Section 1.6(d) hereof is deemed to have issued or sold, any
shares of Common Stock for no consideration or for a consideration per share
(before deduction of reasonable expenses or commissions or underwriting
discounts or allowances in connection therewith) less than the Fixed Conversion
Price in effect on the date of such issuance (or deemed issuance) of such shares
of Common Stock (a "Dilutive Issuance"), then immediately upon the Dilutive
Issuance, the Fixed Conversion Price will be reduced to the amount of the
consideration per share received by the Borrower in such Dilutive Issuance;
provided that only one adjustment will be made for each Dilutive Issuance.
The Borrower shall be deemed to have issued or sold shares of Common Stock
if the Borrower in any manner issues or grants any warrants, rights or options,
whether or not immediately exercisable, to subscribe for or to purchase Common
Stock or other securities convertible into or exchangeable for Common Stock
("Convertible Securities") (such warrants, rights and options to purchase Common
Stock or Convertible Securities are hereinafter referred to as "Options") and
the price per share for which Common Stock is issuable upon the exercise of such
Options is less than the Fixed Conversion Price then in effect, then the Fixed
Conversion Price shall be equal to such price per share. For purposes of the
preceding sentence, the "price per share for which Common Stock is issuable upon
the exercise of such Options" is determined by dividing (i) the total amount, if
any, received or receivable by the Borrower as consideration for the issuance or
granting of all such Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Borrower upon the exercise of all such
Options, plus, in the case of Convertible Securities issuable upon the exercise
of such Options, the minimum aggregate amount of additional consideration
payable upon the conversion or exchange thereof at the time such Convertible
Securities first become convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise of all such Options
(assuming full conversion of Convertible Securities, if applicable). No further
adjustment to the Conversion Price will be made upon the actual issuance of such
Common Stock upon the exercise of such Options or upon the conversion or
exchange of Convertible Securities issuable upon exercise of such Options.
Additionally, the Borrower shall be deemed to have issued or sold shares of
Common Stock if the Borrower in any manner issues or sells any Convertible
Securities, whether or not immediately convertible (other than where the same
are issuable upon the exercise of Options), and the price per share for which
Common Stock is issuable upon such conversion or exchange is less than the Fixed
Conversion Price then in effect, then the Fixed Conversion Price shall be equal
to such price per share. For the purposes of the preceding sentence, the "price
per share for which Common Stock is issuable upon such conversion or exchange"
is determined by dividing (i) the total amount, if any, received or receivable
by the Borrower as consideration for the issuance or sale of all such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Borrower upon the conversion or exchange
thereof at the time such Convertible Securities first become convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No
further adjustment to the Fixed Conversion Price will be made upon the actual
issuance of such Common Stock upon conversion or exchange of such Convertible
Securities.
10
(e) Purchase Rights. If, at any time when any Debentures are issued and
outstanding, the Borrower issues any convertible securities or rights to
purchase stock, warrants, securities or other property (the "Purchase Rights")
pro rata to the record holders of any class of Common Stock, then the Holder of
this Debenture will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Debenture (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
(f) Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price as a result of the events described in this
Section 1.6, the Borrower, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to the Holder of a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Borrower
shall, upon the written request at any time of the Holder, furnish to such
Holder a like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price at the time in effect and (iii) the number of shares
of Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of the Debenture.
1.7 Trading Market Limitations. Unless permitted by the applicable rules
and regulations of the principal securities market on which the Common Stock is
then listed or traded, in no event shall the Borrower issue upon conversion of
or otherwise pursuant to this Debenture and the other Debentures issued pursuant
to the Purchase Agreement more than the maximum number of shares of Common Stock
that the Borrower can issue pursuant to any rule of the principal United States
securities market on which the Common Stock is then traded (the "Maximum Share
Amount"), which, as of the Issue Date shall be 5,940,949 shares (19.99% of the
total shares outstanding on the Issue Date), subject to equitable adjustment
from time to time for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring after
the date hereof. Once the Maximum Share Amount has been issued (the date of
which is hereinafter referred to as the "Maximum Conversion Date"), if the
Borrower fails to eliminate any prohibitions under applicable law or the rules
or regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Borrower or any of its
securities on the Borrower's ability to issue shares of Common Stock in excess
of the Maximum Share Amount (a "Trading Market Prepayment Event"), in lieu of
any further right to convert this Debenture, and in full satisfaction of the
Borrower's obligations under this Debenture, the Borrower shall pay to the
Holder, within fifteen (15) business days of the Maximum Conversion Date (the
"Trading Market Prepayment Date"), an amount equal to 130% times the sum of (a)
the then outstanding principal amount of this Debenture immediately following
the
11
Maximum Conversion Date, plus (b) accrued and unpaid interest on the unpaid
principal amount of this Debenture to the Trading Market Prepayment Date, plus
(c) Default Interest, if any, on the amounts referred to in clause (a) and/or
(b) above, plus (d) any optional amounts that may be added thereto at the
Maximum Conversion Date by the Holder in accordance with the terms hereof (the
then outstanding principal amount of this Debenture immediately following the
Maximum Conversion Date, plus the amounts referred to in clauses (b), (c) and
(d) above shall collectively be referred to as the "Remaining Convertible
Amount"). With respect to each Holder of Debentures, the Maximum Share Amount
shall refer to such Holder's pro rata share thereof determined in accordance
with Section 4.8 below. In the event that the sum of (x) the aggregate number of
shares of Common Stock issued upon conversion of this Debenture and the other
Debentures issued pursuant to the Purchase Agreement plus (y) the aggregate
number of shares of Common Stock that remain issuable upon conversion of this
Debenture and the other Debentures issued pursuant to the Purchase Agreement,
represents at least one hundred percent (100%) of the Maximum Share Amount (the
"Triggering Event"), the Borrower will use its best efforts to seek and obtain
Stockholder Approval (or obtain such other relief as will allow conversions
hereunder in excess of the Maximum Share Amount) as soon as practicable
following the Triggering Event and before the Maximum Conversion Date. As used
herein, "Stockholder Approval" means approval by the stockholders of the
Borrower to authorize the issuance of the full number of shares of Common Stock
which would be issuable upon full conversion of the then outstanding Debentures
but for the Maximum Share Amount.
1.8 Status as Stockholder. Upon submission of a Notice of Conversion by a
Holder, (i) the shares covered thereby (other than the shares, if any, which
cannot be issued because their issuance would exceed such Holder's allocated
portion of the Reserved Amount or Maximum Share Amount) shall be deemed
converted into shares of Common Stock and (ii) the Holder's rights as a Holder
of such converted portion of this Debenture shall cease and terminate, excepting
only the right to receive certificates for such shares of Common Stock and to
any remedies provided herein or otherwise available at law or in equity to such
Holder because of a failure by the Borrower to comply with the terms of this
Debenture. Notwithstanding the foregoing, if a Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Deadline with respect to a conversion of any
portion of this Debenture for any reason, then (unless the Holder otherwise
elects to retain its status as a holder of Common Stock by so notifying the
Borrower) the Holder shall regain the rights of a Holder of this Debenture with
respect to such unconverted portions of this Debenture and the Borrower shall,
as soon as practicable, return such unconverted Debenture to the Holder or, if
the Debenture has not been surrendered, adjust its records to reflect that such
portion of this Debenture has not been converted. In all cases, the Holder shall
retain all of its rights and remedies (including, without limitation, (i) the
right to receive Conversion Default Payments pursuant to Section 1.3 to the
extent required thereby for such Conversion Default and any subsequent
Conversion Default and (ii) the right to have the Conversion Price with respect
to subsequent conversions determined in accordance with Section 1.3) for the
Borrower's failure to convert this Debenture.
ARTICLE II. CERTAIN COVENANTS
2.1 Distributions on Capital Stock. So long as the Borrower shall have any
obligation under this Debenture, the Borrower shall not without the Holder's
written consent (a) pay, declare or set apart for such payment, any dividend or
other distribution (whether in cash, property or other securities) on shares of
capital stock other than dividends on shares of Common Stock solely in the form
of additional shares of Common Stock or (b) directly or indirectly or through
any subsidiary make any other payment or distribution in respect of its capital
stock
12
except for distributions pursuant to any shareholders' rights plan which is
approved by a majority of the Borrower's disinterested directors.
2.2 Restriction on Stock Repurchases. So long as the Borrower shall have
any obligation under this Debenture, the Borrower shall not without the Holder's
written consent redeem, repurchase or otherwise acquire (whether for cash or in
exchange for property or other securities or otherwise) in any one transaction
or series of related transactions any shares of capital stock of the Borrower or
any warrants, rights or options to purchase or acquire any such shares.
2.3 Borrowings. So long as the Borrower shall have any obligation under
this Debenture, the Borrower shall not, without the Holder's written consent,
create, incur, assume or suffer to exist any liability for borrowed money,
except (a) borrowings in existence or committed on the date hereof and of which
the Borrower has informed Holder in writing prior to the date hereof, (b)
indebtedness to trade creditors or financial institutions incurred in the
ordinary course of business or (c) borrowings, the proceeds of which shall be
used to repay this Debenture.
2.4 Sale of Assets. So long as the Borrower shall have any obligation under
this Debenture, the Borrower shall not, without the Holder's written consent,
sell, lease or otherwise dispose of any significant portion of its assets
outside the ordinary course of business. Any consent to the disposition of any
assets may be conditioned on a specified use of the proceeds of disposition.
2.5 Advances and Loans. So long as the Borrower shall have any obligation
under this Debenture, the Borrower shall not, without the Holder's written
consent, lend money, give credit or make advances to any person, firm, joint
venture or corporation, including, without limitation, officers, directors,
employees, subsidiaries and affiliates of the Borrower, except loans, credits or
advances (a) in existence or committed on the date hereof and which the Borrower
has informed Holder in writing prior to the date hereof, (b) made in the
ordinary course of business or (c) not in excess of $50,000.
2.6 Contingent Liabilities. So long as the Borrower shall have any
obligation under this Debenture, the Borrower shall not, without the Holder's
written consent, assume, guarantee, endorse, contingently agree to purchase or
otherwise become liable upon the obligation of any person, firm, partnership,
joint venture or corporation, except by the endorsement of negotiable
instruments for deposit or collection and except assumptions, guarantees,
endorsements and contingencies (a) in existence or committed on the date hereof
and which the Borrower has informed Holder in writing prior to the date hereof,
and (b) similar transactions in the ordinary course of business.
ARTICLE III. EVENTS OF DEFAULT
If any of the following events of default (each, an "Event of Default")
shall occur:
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3.1 Failure to Pay Principal or Interest. The Borrower fails to pay the
principal hereof or interest thereon when due on this Debenture, whether at
maturity, upon a Trading Market Prepayment Event pursuant to Section 1.7, upon
acceleration or otherwise.
3.2 Conversion and the Shares. The Borrower fails to issue shares of Common
Stock to the Holder (or announces or threatens that it will not honor its
obligation to do so) upon exercise by the Holder of the conversion rights of the
Holder in accordance with the terms of this Debenture (for a period of at least
sixty (60) days, if such failure is solely as a result of the circumstances
governed by Section 1.3 and the Borrower is using its best efforts to authorize
a sufficient number of shares of Common Stock as soon as practicable), fails to
transfer or cause its transfer agent to transfer (electronically or in
certificated form) any certificate for shares of Common Stock issued to the
Holder upon conversion of or otherwise pursuant to this Debenture as and when
required by this Debenture or the Registration Rights Agreement, or fails to
remove any restrictive legend (or to withdraw any stop transfer instructions in
respect thereof) on any certificate for any shares of Common Stock issued to the
Holder upon conversion of or otherwise pursuant to this Debenture as and when
required by this Debenture or the Registration Rights Agreement (or makes any
announcement, statement or threat that it does not intend to honor the
obligations described in this paragraph) and any such failure shall continue
uncured (or any announcement, statement or threat not to honor its obligations
shall not be rescinded in writing) for ten (10) days after the Borrower shall
have been notified thereof in writing by the Holder.
3.3 Failure to Timely File Registration or Effect Registration. The
Borrower fails to file the Registration Statement within forty-five (45) days
following the Filing Date (as defined in the Registration Rights Agreement) or
obtain effectiveness with the Securities and Exchange Commission of the
Registration Statement within one hundred five (105) days following the Filing
Date or such Registration Statement lapses in effect (or sales cannot otherwise
be made thereunder effective, whether by reason of the Borrower's failure to
amend or supplement the prospectus included therein in accordance with the
Registration Rights Agreement or otherwise) for more than twenty (20)
consecutive days or forty (40) days in any twelve month period after the
Registration Statement becomes effective;
3.4 Breach of Covenants. The Borrower breaches any material covenant or
other material term or condition contained in Sections 1.3, 1.6 or 1.7 of this
Debenture, or Sections 4(c), 4(e), 4(h), 4(i), 4(j), 4(l), 4(m) or 5 of the
Purchase Agreement and such breach continues for a period of ten (10) days after
written notice thereof to the Borrower from the Holder;
3.5 Breach of Representations and Warranties. Any representation or
warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Purchase Agreement and the Registration
Rights Agreement), shall be false or misleading in any material respect when
made and the breach of which has (or with the passage of time will have) a
material adverse effect on the rights of the Holder with respect to this
Debenture, the Purchase Agreement or the Registration Rights Agreement;
14
3.6 Receiver or Trustee. The Borrower or any subsidiary of the Borrower
shall make an assignment for the benefit of creditors, or apply for or consent
to the appointment of a receiver or trustee for it or for a substantial part of
its property or business, or such a receiver or trustee shall otherwise be
appointed;
3.7 Judgments. Any money judgment, writ or similar process shall be entered
or filed against the Borrower or any subsidiary of the Borrower or any of its
property or other assets for more than $50,000, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless otherwise consented
to by the Holder, which consent will not be unreasonably withheld;
3.8 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Borrower or any
subsidiary of the Borrower;
3.9 Delisting of Common Stock. The Borrower shall fail to maintain the
listing of the Common Stock on at least one of the OTCBB, the Nasdaq National
Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American
Stock Exchange; or
3.10 Default Under Other Debentures. An Event of Default has occurred and
is continuing under any of the other Debentures issued pursuant to the Purchase
Agreement,
then, upon the occurrence and during the continuation of any Event of Default
specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at the option
of the Holders of a majority of the aggregate principal amount of the
outstanding Debentures issued pursuant to the Purchase Agreement exercisable
through the delivery of written notice to the Borrower by such Holders (the
"Default Notice"), and upon the occurrence of an Event of Default specified in
Section 3.6 or 3.8, the Debentures shall become immediately due and payable and
the Borrower shall pay to the Holder, in full satisfaction of its obligations
hereunder, an amount equal to the greater of (i) 130% times the sum of (w) the
then outstanding principal amount of this Debenture plus (x) accrued and unpaid
interest on the unpaid principal amount of this Debenture to the date of payment
(the "Mandatory Prepayment Date") plus (y) Default Interest, if any, on the
amounts referred to in clauses (w) and/or (x) plus (z) any amounts owed to the
Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of
the Registration Rights Agreement (the then outstanding principal amount of this
Debenture to the date of payment plus the amounts referred to in clauses (x),
(y) and (z) shall collectively be known as the "Default Sum") or (ii) the
"parity value" of the Default Sum to be prepaid, where parity value means (a)
the highest number of shares of Common Stock issuable upon conversion of or
otherwise pursuant to such Default Sum in accordance with Article I, treating
the Trading Day immediately preceding the Mandatory Prepayment Date as the
"Conversion Date" for purposes of determining the lowest applicable Conversion
Price, unless the Default Event arises as a result of a breach in respect of a
specific Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (b) the highest Closing Price for the Common
Stock during the period beginning on the date of first occurrence of the Event
of Default and ending one day prior to the Mandatory Prepayment Date (the
"Default Amount") and all other amounts payable hereunder shall immediately
become due and payable, all without demand, presentment or notice, all of which
hereby are expressly waived, together with all costs, including, without
limitation, legal fees and
15
expenses, of collection, and the Holder shall be entitled to exercise all other
rights and remedies available at law or in equity. If the Borrower fails to pay
the Default Amount within five (5) business days of written notice that such
amount is due and payable, then the Holder shall have the right at any time, so
long as the Borrower remains in default (and so long and to the extent that
there are sufficient authorized shares), to require the Borrower, upon written
notice, to immediately issue, in lieu of the Default Amount, the number of
shares of Common Stock of the Borrower equal to the Default Amount divided by
the Conversion Price then in effect.
ARTICLE IV. MISCELLANEOUS
4.1 Failure or Indulgence Not Waiver. No failure or delay on the part of
the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privileges. All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.
4.2 Notices. Any notice herein required or permitted to be given shall be
in writing and may be personally served or delivered by courier or sent by
United States mail and shall be deemed to have been given upon receipt if
personally served (which shall include telephone line facsimile transmission) or
sent by courier or three (3) days after being deposited in the United States
mail, certified, with postage pre-paid and properly addressed, if sent by mail.
For the purposes hereof, the address of the Holder shall be as shown on the
records of the Borrower; and the address of the Borrower shall be 4 Mulford
Place, Suite 2G, Hempstead, New York 11550, facsimile number: 509-472-4654. Both
the Holder and the Borrower may change the address for service by service of
written notice to the other as herein provided.
4.3 Amendments. This Debenture and any provision hereof may only be amended
by an instrument in writing signed by the Borrower and the Holder. The term
"Debenture" and all reference thereto, as used throughout this instrument, shall
mean this instrument (and the other Debentures issued pursuant to the Purchase
Agreement) as originally executed, or if later amended or supplemented, then as
so amended or supplemented.
4.4 Assignability. This Debenture shall be binding upon the Borrower and
its successors and assigns, and shall inure to be the benefit of the Holder and
its successors and assigns. Each transferee of this Debenture must be an
"accredited investor" (as defined in Rule 501(a) of the 1933 Act).
Notwithstanding anything in this Debenture to the contrary, this Debenture may
be pledged as collateral in connection with a bona fide margin account or other
lending arrangement.
4.5 Cost of Collection. If default is made in the payment of this
Debenture, the Borrower shall pay the Holder hereof costs of collection,
including reasonable attorneys' fees.
4.6 Governing Law. THIS DEBENTURE SHALL BE ENFORCED, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
16
STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY
WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE
BORROWER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES
FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING
UNDER THIS DEBENTURE, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE
DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING.
BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST
CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON
THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER
PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH
PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR
PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY
SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT
PREVAIL IN ANY DISPUTE ARISING UNDER THIS DEBENTURE SHALL BE RESPONSIBLE FOR ALL
FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY
IN CONNECTION WITH SUCH DISPUTE.
4.7 Certain Amounts. Whenever pursuant to this Debenture the Borrower is
required to pay an amount in excess of the outstanding principal amount (or the
portion thereof required to be paid at that time) plus accrued and unpaid
interest plus Default Interest on such interest, the Borrower and the Holder
agree that the actual damages to the Holder from the receipt of cash payment on
this Debenture may be difficult to determine and the amount to be so paid by the
Borrower represents stipulated damages and not a penalty and is intended to
compensate the Holder in part for loss of the opportunity to convert this
Debenture and to earn a return from the sale of shares of Common Stock acquired
upon conversion of this Debenture at a price in excess of the price paid for
such shares pursuant to this Debenture. The Borrower and the Holder hereby agree
that such amount of stipulated damages is not plainly disproportionate to the
possible loss to the Holder from the receipt of a cash payment without the
opportunity to convert this Debenture into shares of Common Stock.
4.8 Allocations of Maximum Share Amount and Reserved Amount. The Maximum
Share Amount and Reserved Amount shall be allocated pro rata among the Holders
of Debentures based on the principal amount of such Debentures issued to each
Holder. Each increase to the Maximum Share Amount and Reserved Amount shall be
allocated pro rata among the Holders of Debentures based on the principal amount
of such Debentures held by each Holder at the time of the increase in the
Maximum Share Amount or Reserved Amount. In the event a Holder shall sell or
otherwise transfer any of such Holder's Debentures, each transferee shall be
allocated a pro rata portion of such transferor's Maximum Share Amount and
Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount
which remains allocated to any person or entity which does not hold any
Debentures shall be allocated to the remaining Holders of Debentures, pro rata
based on the principal amount of such Debentures then held by such Holders.
17
4.9 Damages Shares. The shares of Common Stock that may be issuable to the
Holder pursuant to Sections 1.3 and 1.4(g) hereof and pursuant to Section 2(c)
of the Registration Rights Agreement ("Damages Shares") shall be treated as
Common Stock issuable upon conversion of this Debenture for all purposes hereof
and shall be subject to all of the limitations and afforded all of the rights of
the other shares of Common Stock issuable hereunder, including without
limitation, the right to be included in the Registration Statement filed
pursuant to the Registration Rights Agreement. For purposes of calculating
interest payable on the outstanding principal amount hereof, except as otherwise
provided herein, amounts convertible into Damages Shares ("Damages Amounts")
shall not bear interest but must be converted prior to the conversion of any
outstanding principal amount hereof, until the outstanding Damages Amounts is
zero.
4.10 Denominations. At the request of the Holder, upon surrender of this
Debenture, the Borrower shall promptly issue new Debentures in the aggregate
outstanding principal amount hereof, in the form hereof, in such denominations
of at least $50,000 as the Holder shall request.
4.11 Purchase Agreement. By its acceptance of this Debenture, each Holder
agrees to be bound by the applicable terms of the Purchase Agreement.
4.12 Notice of Corporate Events. Except as otherwise provided below, the
Holder of this Debenture shall have no rights as a Holder of Common Stock unless
and only to the extent that it converts this Debenture into Common Stock. The
Borrower shall provide the Holder with prior notification of any meeting of the
Borrower's stockholders (and copies of proxy materials and other information
sent to stockholders). In the event of any taking by the Borrower of a record of
its stockholders for the purpose of determining stockholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation,
reclassification or recapitalization) any share of any class or any other
securities or property, or to receive any other right, or for the purpose of
determining stockholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Borrower or any proposed liquidation, dissolution or winding up of the
Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20)
days prior to the record date specified therein (or thirty (30) days prior to
the consummation of the transaction or event, whichever is earlier), of the date
on which any such record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such dividend, distribution, right or other event to the extent
known at such time. The Borrower shall make a public announcement of any event
requiring notification to the Holder hereunder substantially simultaneously with
the notification to the Holder in accordance with the terms of this Section
4.12.
4.13 Remedies. The Borrower acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder, by vitiating the intent and
purpose of the transaction contemplated hereby. Accordingly, the Borrower
acknowledges that the remedy at law for a breach of its obligations under this
Debenture will be inadequate and agrees, in the event of a breach or threatened
breach by the Borrower of the provisions of this Debenture, that the Holder
shall be entitled, in addition to all other available remedies at law or
18
in equity, and in addition to the penalties assessable herein, to an injunction
or injunctions restraining, preventing or curing any breach of this Debenture
and to enforce specifically the terms and provisions thereof, without the
necessity of showing economic loss and without any bond or other security being
required.
ARTICLE V. OPTIONAL PREPAYMENT
5.1 Optional Prepayment. Notwithstanding anything to the contrary contained
in this Article V, for not more than thirty (30) days from the date hereof, so
long as (i) no Event of Default or Trading Market Prepayment Event shall have
occurred and be continuing, and (ii) the Borrower has a sufficient number of
authorized shares of Common Stock reserved for issuance upon full conversion of
the Debentures, then at any time after the Issue Date, the Borrower shall have
the right, exercisable on not less than ten (10) Trading Days prior written
notice to the Holders of the Debentures (which notice may not be sent to the
Holders of the Debentures until the Borrower is permitted to prepay the
Debentures pursuant to this Section 5.1), to prepay all of the outstanding
Debentures in accordance with this Section 5.1. Any notice of prepayment
hereunder (an "Optional Prepayment") shall be delivered to the Holders of the
Debentures at their registered addresses appearing on the books and records of
the Borrower and shall state (1) that the Borrower is exercising its right to
prepay all of the Debentures issued on the Issue Date and (2) the date of
prepayment (the "Optional Prepayment Notice"). On the date fixed for prepayment
(the "Optional Prepayment Date"), the Borrower shall make payment of the
Optional Prepayment Amount (as defined below) to or upon the order of the
Holders as specified by the Holders in writing to the Borrower at least one (1)
business day prior to the Optional Prepayment Date. If the Borrower exercises
its right to prepay the Debentures, the Borrower shall make payment to the
holders of an amount in cash (the "Optional Prepayment Amount") equal to 150%
multiplied by the sum of (w) the then outstanding principal amount of this
Debenture plus (x) accrued and unpaid interest on the unpaid principal amount of
this Debenture to the Optional Prepayment Date plus (y) Default Interest, if
any, on the amounts referred to in clauses (w) and (x) plus (z) any amounts owed
to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section
2(c) of the Registration Rights Agreement (the then outstanding principal amount
of this Debenture to the date of payment plus the amounts referred to in clauses
(x), (y) and (z) shall collectively be known as the "Optional Prepayment Sum").
Notwithstanding notice of an Optional Prepayment, the Holders shall at all times
prior to the Optional Prepayment Date maintain the right to convert all or any
portion of the Debentures in accordance with Article I and any portion of
Debentures so converted after receipt of an Optional Prepayment Notice and prior
to the Optional Prepayment Date set forth in such notice and payment of the
aggregate Optional Prepayment Amount shall be deducted from the principal amount
of Debentures which are otherwise subject to prepayment pursuant to such notice.
If the Borrower delivers an Optional Prepayment Notice and fails to pay the
Optional Prepayment Amount due to the Holders of the Debentures within two (2)
business days following the Optional Prepayment Date, the Borrower shall forever
forfeit its right to redeem the Debentures pursuant to this Section 5.1.
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19
IN WITNESS WHEREOF, Borrower has caused this Debenture to be
signed in its name by its duly authorized officer this 16th day of April, 2003.
TORBAY HOLDINGS, INC.
By: ______________________________
William Thomas Large
President and Chief Executive Officer
20
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debentures)
The undersigned hereby irrevocably elects to convert
$________principal amount of the Debenture (defined below) into shares of common
stock, par value $.0001 per share ("Common Stock"), of Torbay Holdings, Inc., a
Delaware corporation (the "Borrower") according to the conditions of the
convertible debentures of the Borrower dated as of April 16, 2003 (the
"Debentures"), as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates. No fee will be charged to the Holder for any conversion, except
for transfer taxes, if any. A copy of each Debenture is attached hereto (or
evidence of loss, theft or destruction thereof).
The Borrower shall electronically transmit the Common Stock
issuable pursuant to this Notice of Conversion to the account of the undersigned
or its nominee with DTC through its Deposit Withdrawal Agent Commission system (
"DWAC Transfer").
Name of DTC Prime Broker:_________________________________________
Account Number:___________________________________________________
In lieu of receiving shares of Common Stock issuable pursuant
to this Notice of Conversion by way of a DWAC Transfer, the undersigned hereby
requests that the Borrower issue a certificate or certificates for the number of
shares of Common Stock set forth below (which numbers are based on the Holder's
calculation attached hereto) in the name(s) specified immediately below or, if
additional space is necessary, on an attachment hereto:
Name:_____________________________________________________________
Address:__________________________________________________________
The undersigned represents and warrants that all offers and
sales by the undersigned of the securities issuable to the undersigned upon
conversion of the Debentures shall be made pursuant to registration of the
securities under the Securities Act of 1933, as amended (the "Act"), or pursuant
to an exemption from registration under the Act.
Date of Conversion:_______________________________
Applicable Conversion Price:______________________
Number of Shares of Common Stock to be Issued Pursuant to
Conversion of the Debentures:_____________________
Signature:________________________________________
Name:_____________________________________________
Address:__________________________________________
The Borrower shall issue and deliver shares of Common Stock to
an overnight courier not later than three business days following receipt of the
original Debenture(s) to be converted, and shall make payments pursuant to the
Debentures for the number of business days such issuance and delivery is late.
A-1