Exhibit 4.2
IN THE EVENT THAT THE SHAREHOLDERS OF THE COMPANY DO NOT APPROVE AN INCREASE IN
ITS AUTHORIZED SHARE CAPITAL AT THE COMPANY'S ANNUAL GENERAL MEETING THAT WILL
TAKE PLACE ON DECEMBER 10, 2004, THE COMPANY HAS COMMITTED TO REDEEM THE
CONVERTIBLE DEBENTURE PLUS A 5% PENALTY WITHIN 90 DAYS FROM THE DATE OF THE
DEBENTURE.
EVEN THOUGH THE COMPANY HAS RESERVED 30 MILLION SHARES FOR INVESTORS TO BE
UTILIZED UPON CONVERSION OF THE CONVERTIBLE DEBENTURES, A PRICE DECLINE IN THE
COMPANY'S SHARES WOULD RESULT IN THE COMPANY HAVING INSUFFICIENT SHARES FOR THE
CONVERSION OF YOUR CONVERTIBLE DEBENTURE.
THERE IS A RISK THAT THE COMPANY WILL NOT BE ABLE TO REDDEM YOUR CONVERTIBLE
DEBENTURE AS COMMITTED AS THE COMPANY CURRENTLY DOES NOT HAVE SUFFICIENT FUNDS
TO REDEEM YOUR CONVERTIBLE DEBENTURE AND IT IS UNLIKELY THAT IS WILL GENERATE
SUFFICIENT CASH FROM OPERATIONS TO REDEEM YOUR CONVERTIBLE DEBENTURE. AS SUCH,
IF REQUIRED TO REDEEM YOUR CONVERTIBLE DEBENTURE, THE COMPANY WILL BE REQUIRED
TO RAISE ADDITIONAL CAPITAL TO FUND THE REDEMPTION OF YOUR CONVERTIBLE
DEBENTURE.
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") OR ANY STATE SECURITIES LAWS AND NEITHER THIS DEBENTURE NOR ANY
INTEREST THEREIN NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE MAY
BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND SUCH LAWS OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS WHICH, IN THE OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY, IS AVAILABLE.
5% SECURED CONVERTIBLE DEBENTURE
$________ December 15, 2004
FOR VALUE RECEIVED, SMARTIRE SYSTEMS, INC., a Yukon Territory
corporation (the "Company"), hereby promises to pay to ____________________ (the
"Holder") having an address at _______________________, two years after the date
hereof, or earlier upon prepayment of this Debenture as provided herein, the
principal sum of _______________ Dollars ($__________), together with simple
interest (computed on the basis of a 360-day year of twelve 30-day months) on
the unpaid balance at the rate of five percent (5%) per annum beginning six (6)
months from the date of the last closing of this Offering in arrears until the
principal hereof shall have been paid.
The Company shall pay interest semi-annually in arrears beginning six
(6) months from the date of the last closing of this Offering and the last day
of every subsequent sixth (6) month of each year that any portion of the
principal balance is unpaid.
All payments of principal and interest shall be made to the Holder in
lawful currency of the United States of America to the address set forth above
or such other address as to which the Holder shall notify the Company in writing
ten (10) days prior to the due date of any payment or upon any prepayment of
this Debenture as provided herein.
Subject to and in compliance with the provisions hereof, the Holder
may, at its option, convert all or any portion of the outstanding principal
balance of this Debenture, and all or any portion of the interest accrued hereon
to such date, into shares of common stock of the Company, par value $.01 (the
"Common Stock") at a conversion price (the "Conversion Price") equal to the
lesser of 80% of the lowest closing prices of the Common Stock for the 5 trading
days preceding the date on which the notice of conversion is sent via facsimile
to the Company or 120% of the closing bid price of the Common Stock as reported
by Bloomberg, L.P. for the OTC Bulletin Board for the trading day immediately
preceding the date that the Holder's funds are released from escrow by the
escrow agent to the Company. The Holder hereof shall communicate its intention
to convert all or any portion of the principal amount of this Debenture and all
or any portion of interest accrued through such conversion date by surrendering
this Debenture, with the Form of Notice of Election to Convert attached as
EXHIBIT "A" hereto duly completed and signed, to the Company at its address for
notice set forth elsewhere herein.
The Holder shall not be entitled to convert such amount of the
Debenture in connection with such number of shares of Common Stock which would
be in excess of the sum of (i) the number of shares of Common Stock beneficially
owned by the Holder and its affiliates on a conversion date, and (ii) the number
of shares of Common Stock issuable upon the conversion of the Debenture which
would result in beneficial ownership by the Holder and its affiliates of more
than 4.99% of the outstanding shares of common stock of the Company on such
conversion date. For purposes of the preceding sentence, beneficial ownership
shall be determined in accordance with Section 13(d) of the Securities and
Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to
the foregoing, the Holder shall not be limited to aggregate conversions of only
4.99% and aggregate conversions by the Holder may exceed 4.99%. The Holder may
void the conversion limitation described in this paragraph upon and effective
after 61 days prior written notice to the Company. The Holder may allocate which
of the equity of the Company deemed beneficially owned by the Holder shall be
included in the 4.99% amount described in this paragraph and which shall be
allocated to the excess above 4.99%.
The Company may, at its option, redeem all or any portion of the
Debentures with 3 business days advanced notice.
If the Holder elects to convert less than the entire principal amount
of this Debenture and interest accrued to the date of such conversion, the
Company shall issue or cause to be issued and delivered to the Holder, at its
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expense, a new Debenture evidencing the outstanding amount of principal due
hereunder after giving effect to the amount applied to the conversion, which
such Debenture shall, except as to the principal amount thereof, be identical to
this Debenture in all respects.
If the Company, at any time while this Debenture is outstanding shall
(a) 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, (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 Conversion Price shall be adjusted to
offset any of the aforementioned. 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.
If the Company shall (i) fail to make a payment of principal or
interest when due; or (ii) make an assignment for the benefit of creditors,
files a petition in bankruptcy, be adjudicated insolvent or bankrupt, suffers an
order for relief under any federal bankruptcy law, petition or apply to any
tribunal for the appointment of a custodian, receiver or any trustee for the
Company or any substantial part of its assets, or (iii) commence any proceeding
under any bankruptcy, reorganization, arrangement, readjustment of debt,
dissolution or liquidation law or statue of any jurisdiction, whether now or
hereafter in effect; or (iv) have been filed any such petition or application,
or any such proceeding shall have been commenced against the Company, which
remains undismissed, unstayed or unbonded for a period of thirty (30) days or
more; or (v) by any act or omission shall indicate consent to, approve or
acquiescence in any such petition, application or proceeding or the appointment
of a custodian, receiver or any trustee for all or any substantial part of its
properties, or (vi) allow such custodianship, receivership, or trusteeship to
continue undischarged, unstayed or unbonded for a period of thirty (30) days or
more, or (vii) violate any term or provision of this Debenture then and in any
such event, the outstanding principal amount of this Debenture, together with
all accrued and unpaid interest thereon, shall be and become immediately due and
payable.
All notices and other communications provided for herein shall be sent
by certified mail, return receipt requested, or by personal delivery or by a
nationally recognized overnight courier to the Holder or the Company, at their
respective addresses as set forth herein, or to such other address as to which
either party may advise the other by notice given in accordance with this
provision. All such notices shall be deemed given upon the earlier of receipt or
within five (5) business days of mailing if receipt is refused.
Notwithstanding any other provision of this Debenture, interest under
this Debenture shall not exceed the maximum rate permitted by law; and if any
amount is paid under this Debenture as interest in excess of such maximum rate,
then the amount so paid will not constitute interest but will constitute a
prepayment on account of the principal amount of this Debenture. If at any time
the interest rate under this Debenture would, but for the provision of the
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preceding sentence, exceed the maximum rate permitted by law, then the
outstanding principal balance of this Debenture shall, on demand by the Holder
of this Debenture, become and be due and payable.
All payments under this Debenture shall be made without deduction for
any taxes of any nature now or hereafter imposed.
The provisions of this Debenture shall in all respects be construed
according to, and the rights and liabilities of the parties hereto and shall in
all respects be governed by, the laws of the Province of British Columbia. This
Debenture shall be deemed a contract made under the laws of the Province of
British Columbia to be fully performed therein, and the validity of this
Debenture and all rights and liabilities hereunder shall be determined under the
laws of said Province without reference to the conflicts of laws provisions
thereof. For purposes of any proceeding involving this Debenture, the Company
and the Holder hereby submit to the exclusive jurisdiction of the courts of the
Province of British Columbia and of Canada having jurisdiction, and agree not to
raise and waive any objection to or defense based upon the venue of any such
court or based upon forum non conveniens.
In the event this Debenture is placed in the hands of an attorney for
collection or for enforcement or protection of the security, or if Holder incurs
any costs incident to the collection of the indebtedness evidenced hereby or the
enforcement or protection of the security, the Company agrees to pay to Holder
all reasonable attorneys' fees so incurred, all court and other costs and the
reasonable costs of any other collection efforts, including all costs incurred
in collecting any judgment and in any appellate or bankruptcy proceeding. The
Company agrees to pay any documentary stamp taxes, intangible taxes or other
taxes which may now or hereafter apply to this Debenture or any payment made in
respect of this Debenture.
No delay or omission on the part of the Holder in the exercise of any
right hereunder shall operate as a waiver of such right or of any other right
under this Debenture. A waiver by the Holder of any right or remedy conferred to
it hereunder on any one occasion shall not be construed as a bar to, or waiver
of, any such right and/or remedy as to any future occasion. The Company and all
persons now or hereafter becoming obligated or liable for the payment hereof do
jointly and severally waive demand, notice of non-payment, protest, notice of
dishonor and presentment. No failure to accelerate the indebtedness evidenced
hereby by reason of default hereunder, acceptance of a past-due installment or
other indulgences granted from time to time, shall be construed as a novation of
this Debenture or as a waiver of such right of acceleration or of the right of
the Holder thereafter to insist upon strict compliance with the terms of this
Debenture or to prevent the exercise of such right of acceleration or any other
right granted hereunder or by applicable law.
This Debenture may be amended only by a written instrument executed by
the Company and the Holder.
THE COMPANY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE
RIGHT WHICH IT MAY HAVE TO A TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE
OF ACTION BASED HEREON, OR ARISING OUT OF, UNDER OR IN ANY WAY CONNECTED WITH
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THE DEALINGS BETWEEN THE HOLDER AND THE COMPANY, THIS DEBENTURE, OR ANY
DOCUMENTS EXECUTED IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO OR
THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN
CONTRACT, TORT, EQUITY OR OTHERWISE. THIS PROVISION IS A MATERIAL INDUCEMENT FOR
THE HOLDERS EXTENDING THE LOAN EVIDENCED BY THIS DEBENTURE.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS
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IN WITNESS WHEREOF, SMARTIRE SYSTEMS, INC. has caused this 5% Secured
Convertible Debenture to be executed in its corporate name by its President,
thereunto duly authorized.
Dated: December 15, 2004
THE COMPANY:
SMARTIRE SYSTEMS, INC.
By: /s/Robert Rudman
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HOLDER:
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EXHIBIT "A"
NOTICE OF CONVERSION
(To be Executed by the Holder
in order to Convert this Debenture)
The undersigned hereby elects to convert the attached 5% Secured Convertible
Debenture into shares of common stock, par value $.01 (the "Common Stock"), of
SmarTire Systems, Inc. (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.
Conversion calculations: ---------------------------------------
Date to Effect Conversion
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Principal Amount of Debenture to be Converted
Payment of Interest in Kind |_| Yes
|_| No
If yes, $ _______ of Interest Accrued on
Account of Conversion at
Issue
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Number of shares of Common Stock to be Issued
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Applicable Conversion Price
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Signature
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Name
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Address