EXHIBIT A
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: _________ __, 2004
$_______________
CONVERTIBLE DEBENTURE
DUE __________ __, 200__1
THIS DEBENTURE is one of a series of duly authorized and issued
Convertible Debentures of QT 5, Inc., a Delaware corporation, having a principal
place of business at 5655 Lindero Canyon Road, Suite 120, West Lake Village,
California 91362 (the "Company"), designated as its Convertible Debenture, due
__________ __, 200__ (the "Debentures").
FOR VALUE RECEIVED, the Company promises to pay to
________________________ or its registered assigns (the "Holder"), the principal
sum of $_______________ on ___________ __, 200__ or such earlier date as the
Debentures are required or permitted to be repaid as provided hereunder (the
"Maturity Date"). 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:
- -----------------
1 24 months from the Original Issue Date.
1
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.
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, or
liquidated damages in respect of, any Debentures, free of any claim
of subordination, as and when the same shall become due and payable
(whether on a Conversion Date or the Maturity Date or by
acceleration or otherwise) which default is not cured, if possible
to cure, within 15 days of 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 which breach is addressed in clause
(x) below) which is not cured, if possible to cure, within 10 days
of 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;
2
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 $150,000, whether such indebtedness
now exists or shall hereafter be created and such default shall
result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and
payable, which default is not cured, if possible to cure, within 15
days of notice of such default sent by the Holder;
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 seven
Trading Days;
vi) the Company shall be a party to any Change of Control
Transaction , shall agree to sell or dispose of all or in excess of
40% 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) a Registration Statement shall not have been declared
effective by the Commission on or prior to the 150th calendar day
after the Original Issue Date;
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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 15 consecutive
Trading Days or 25 non-consecutive Trading Days during any 12 month
period;
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 a 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));
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; or
(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.
b) If any Event of Default occurs and is continuing, the full
principal amount of this Debenture, together with any 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.
4
Section 4. Conversion.
a) i) At any time after the Original Issue Date until this Debenture
is no longer outstanding, 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 "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 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) 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 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).
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ii) Underlying Shares Issuable Upon Conversion. 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 five 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 the number of shares of Common Stock
being acquired upon the conversion of Debentures. 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.
6
ii) If the Company fails for any reason to deliver to the
Holder such certificate or certificates pursuant to Section 4(b)(i)
by the fifth Trading Day after the Conversion Date, the Company
shall pay to such Holder, in cash, as liquidated damages and not as
a penalty, 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) for each Trading Day after
such third Trading Day until such certificates are delivered. 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 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. 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. 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 (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 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.
7
(c) i) The conversion price in effect on any Conversion Date shall
be equal to $0.01 (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), (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.
8
iii) If the Company, at any time while Debentures are
outstanding, shall issue rights, options or warrants to all holders
of Common Stock (and not to Holders) entitling them to subscribe for
or purchase shares of Common Stock or other securities exercisable,
convertible into or exchangeable for Common Stock (the "Common Stock
Equivalents") at a price per share less than the Closing Price at
the record date mentioned below, then the Set Price shall be
adjusted by multiplying the Set Price in effect immediately prior to
such record date by a fraction, of which the denominator shall be
the number of shares of the Common Stock (excluding treasury shares,
if any) outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of Common Stock
offered for subscription or purchase, and of which the numerator
shall be the number of shares of the Common Stock (excluding
treasury shares, if any) outstanding on the date of issuance of such
rights or warrants plus the number of shares which the aggregate
offering price of the total number of shares so offered would
purchase at the Closing Price on the record date. Such adjustment
shall be made whenever such rights, options or warrants are issued,
and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights,
options or warrants.
iv) 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 Common Stock or Common Stock 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 Common Stock or Common
Stock 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 the Set Price shall be reduced to equal the effective
conversion, exchange or purchase price for such Common Stock or
Common Stock Equivalents (including any reset provisions thereof) at
issue. Such adjustment shall be made whenever such Common Stock or
Common Stock Equivalents are issued. The Company shall notify the
Holder in writing, no later than the 3rd business day following the
issuance of any Common Stock or Common Stock Equivalent subject to
this section, indicating therein the applicable issuance price, or
of applicable reset price, exchange price, conversion price and
other pricing terms.
9
v) 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 Closing Price
determined as of the record date mentioned above, and of which the
numerator shall be such Closing Price 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.
vi) 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
deemed to be outstanding as of a given date shall be the sum of the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding on a fully diluted basis.
vii) 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.
viii) 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.
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ix) 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 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.
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(x) 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 consultants of the Company pursuant to any stock
option plan agreement or arrangement 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
Common Stock 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, or (D) issuance of
securities in connection with acquisitions, strategic investments,
or strategic partnering arrangements, the primary purpose of which
is not to raise capital.
(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, 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. 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 Registration Statement has been declared effective under the
Securities Act, registered for public sale in accordance with such
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 Closing Price at such time. If
the Company elects not, or is unable, to make such a cash payment, the
Holder shall be entitled to receive, in lieu of the final fraction of a
share, one whole share of Common Stock.
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(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. Reserved.
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.
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"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 40% 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.
"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 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 Closing 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 greater, and (ii) all other amounts, costs,
expenses and liquidated damages due in respect of such Debentures.
"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.
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"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 February __, 2004, 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.
"Registration Statement" means the registration statement to be
filed by the Company pursuant to the Registration Rights Agreement.
"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).
"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 in accordance with the terms hereof.
Section 7. Except as expressly provided herein, no provision of this
Debenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, and 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. As long as this Debenture is outstanding, the
Company shall not and shall cause it subsidiaries not to, without the consent of
the Holders, (a) amend its certificate of incorporation, bylaws or other charter
documents so as to adversely affect any rights of the Holders; (b) repay,
repurchase or offer to repay, repurchase or otherwise acquire 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.
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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. Except as provided below in this 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.
Notwithstanding the foregoing and anything else to the contrary in this
Debenture or any other Transaction Document, the Company shall have the right in
its sole and absolute discretion to enter into one or more factoring agreements
and/or other type of receivables financing with any party or parties on terms
acceptable to the Company so long as it shall first offer such factoring
agreement and terms (the "Factoring Proposal") on a pro rata basis to the
Purchasers, who shall have a right of first refusal with respect thereto. The
Company shall send each Factoring Proposal, if any, to the Purchasers via
facsimile and the Purchasers shall have 2 Business Days in which to deliver a
binding written commitment accepting such Factoring Proposal. Failure to respond
within such time shall be deemed a waiver of such right of refusal and the
Company shall have the right to enter into the Factoring Proposal with a party
or parties other than the Purchasers. To the extent the Purchasers exercise
their right of first refusal, they may apportion the factoring amongst
themselves in any manner, so long as in the aggregate the amount and terms of
factoring provided is equal to or more favorable to the Company than the
Factoring Proposal.
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 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 reasonable attorneys' fees and other costs and expenses
incurred with the investigation, preparation and prosecution of such action or
proceeding.
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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 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 this Debenture 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.
QT 5, INC.
By:_________________________________________
Name:
Title:
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ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 6% Convertible
Debenture of QT 5, Inc. (the "Company"), due on __________ __, 2008, into shares
of common stock, $0.001 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:
Number of shares of Common Stock to be issued:
Signature:
Name:
Address:
SCHEDULE 1
CONVERSION SCHEDULE
6% Convertible Debentures due on ____________________ ___, 2008, in the
aggregate principal amount of $____________ issued by QT 5, 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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