Dated: November 30, 2005
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS
DEBENTURE IS 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.
No. MEP-l $600,000
COMPLIANCE SYSTEMS CORPORATION
Secured Convertible Debenture
Due November 30, 2007
This Secured Convertible Debenture (the "Debenture") is issued on November
30, 2005 ("Closing Date") by COMPLIANCE SYSTEMS. CORPORATION, a Delaware
corporation (the "Obligor"), to MONTGOMERY EQUITY PARTNERS, LTD (the "Holder"),
pursuant to that certain Securities Purchase Agreement (the "Securities Purchase
Agreement") of even date herewith.
FOR VALUE RECEIVED, the Obligor hereby promises to pay to the Holder or
its successors and assigns the principal sum of Six Hundred Thousand Dollars
($600,000), together with accrued but unpaid interest on or before two year
anniversary of the Closing Date (the "Maturity Date") in accordance with the
following terms:
Interest. Interest shall aecrue on the outstanding principal balance
hereof at an annual rate equal to ten percent (10%). Interest shall be
calculated on the basis of a 360-day year and the actual number of day~e1apsed,
to the extent permitted by applicable law. Interest hereunder will be paid to
the Holder or its assignee (as defined in Section 4) in whose name this
Debenture is registered on the records o~' the Obligor regarding registration
and transfers of Debentures (the "Debenture Register").
Right of Redemption. The Obligor at its option shall have the - right,
with three (3) business days advance written notice (the "Redemption Notice"),
to redeem a portion or all amounts outstanding under this Debenture prior to the
Maturity Date if the closing bid price of the of the Obligor's CommOn Stock, as
reported by Bloomberg, LP, is less than the Fixed Price at the time of the
Redemption Notice. The Obligor shall pay an amount equal to the principal amount
being redeemed and accrued interest, plus a redemption premium ("Redemption
Premium") equal to twenty percent (20%) of the amount being redeemed
(collectively referred to
as the "Redemption Amount"). The Obligor shall deliver to the Holder the
Redemption Amount on the third (3'S ) business day after the Redemption Notice.
Notwithstanding the foregoing in the event that the Obligor has elected to
redeem a portion of the outstanding principal amount and accrued interest under
this Debenture the Holder shall still be entitled to effectuate Conversions as
contemplated hereunder.
Security Agreement. This Debenture is secured by a Security Agreement (the
"Security. Agreement") of even date herewith between the Obligor and the Holder
and a Pledge and Escrow Agreement ("Pledge Agreement") of even date herewith
between the Obligor, the Holder, and the Escrow Agent.
Consent of Holder to Sell Capital Stock or Grant Security interests. So
long as any of the principal amount or interest on this Debenture remains
unpaid and unconverted, the Obligor shall not, without the prior consent of the
Holder, (i) issue or sell any shares of common stock or preferred stock without
consideration or for consideration per share less than the Closing Bid Price of
the common stock determined immediately prior to its issuance, (ii) issue or
sell any preferred stock, warrant, option, right, contract, call, or other
security or instrument granting the holder thereof the right to acquire common
stock without consideration or for consideration per
- - share less than the Closing Bid Price of the common stock determined
immediately prior to its issuance, (iii) enter into any security instrument
granting the holder a security interest in any of the assets of the Obligor
except in connection with the Company leasing or purchasing office equipment,
computer and networking equipment, co-location equipment and other equipment
and supplies in the ordinary course of the Company's business, provided such
equipment and supplies do not, in the aggregate, exceed fifty thousand dollars
($50,000.00) per annum, or (iv) file any registration statements on Form S-8.
Rights of First Refusal. So long as any portion of this Debenture is
outstanding (including principal or accrued interest), if the Obligor intends
to raise additional capital by the issuance or sale of capital stock of the
Obligor, including without limitation shares of any class of common stock, any
class of preferred stock, options, warrants or any other securities convertible
or exercisable into shares of common stock (whether the offering is conducted
by the Company, underwriter, placement agent or any third party) the Obligor
shall be obligated to offer to the Holder such issuance or sale of capital
stock, by providing in writing the principal amount of capital it intends to
raise and outline of the material terms of such capital raise, prior to the
offering such issuance or sale of capital stock to any third parties including,
but not limited to, current or former officers or directors, current or former
shareholders and/or investors of the obligor, underwriters, brokers, agents or
other third parties. The Holder shall have ten (10) business days from receipt
of such notice of the sale or issuance of capital stock to accept or reject all
or a portion of such capital raising offer.
This Debenture is subject to the following additional provisions:
Section 1. This Debenture is exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange.
Section 2. Events of Default.
(a) An "Event of Default", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment,
decree or order of any court, or any order, rule or regulation of any
administrative or governmental body):
(i) Any default in the payment of the principal of, interest on
or other charges in respect of this Debenture, 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);
(ii) The .Obligor shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any breach or
default of any provision of this Debenture (except as may be covered by Section
2(a)(i) hereof) or any Transaction Document (as defined in Section 4) which is
not cured with in the time prescribed;
(iii) The Obligor or any subsidiary of the Obligor shall
commence, or there shall be commenced against the Obligor or any subsidiary of
the Obligor under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Obligor or any subsidiary
of the Obligor 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 Obligor or any subsidiary of the Obligor or there is
commenced against the Obligor or any subsidiary of the Obligor any such
bankruptcy, insolvency or other proceeding which remains undismissed for a
period of 61 days; or the Obligor or any subsidiary of the Obligor is
adjudicated insolvent or bankrupt; or any order of relief or other order
approving any such case or proceeding is entered; or the Obligor or any
subsidiary of the Obligor suffers any appointment of any custodian, private or
court appointed receiver or the like for it or any substantial part of its
property which continues undischarged or unstayed for a period of sixty one
(61) days; or the Obligor or any subsidiary of the Obligor makes a general
assignment for the benefit of creditors; or the Obligor or any subsidiary of
the Obligor 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 Obligor
or any subsidiary of the Obligor shall call a meeting of its creditors with a
view to arranging a composition, adjustment or restructuring of its debts; or
the Obligor or any subsidiary of the Obligor 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 Obligor or any
subsidiary of the Obligor for the purpose of effecting any of the foregoing;
(iv) The Obligor or any subsidiary of the Obligor 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 Obligor or any subsidiary of the
Obligor in an amount exceeding $100,000, 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;
(v) The Common Stock shall cease to be quoted for trading or listed for
trading on either the Nasdaq OTC Bulletin Board ("OTC"), Nasdaq SmaliCap
Market, New York Stock Exchange, American Stock Exchange or the Nasdaq
National Market (each, a "Subsequent Market") and shall not again be quoted
or listed for trading thereon within five (5) Trading Days of such delisting;
(vi) The Obligor or any subsidiary of the Obligor shall be a
party to any Change of Control Transaction (as defined in Section- 4);
(yii) The Obligor shall fail to file the Underlying Shares
Registration Statement (as defmed in Section 4) with the Commission (as
defined in Section 4), or the Underlying Shares Registration Statement shall
not have been declared effective by the Commission, in each case within the
time periods set forth in the Registration Rights Agreement of even date
herewith between the Obligor and the Holder;
(viii) If the effectiveness of the Underlying Shares
Registration Statement lapses for any reason or the Holder shall not be
permitted to resell the shares of Common Stock underlying this Debenture
under the Underlying Shares Registration Statement, in either case, for more
than five (5) consecutive Trading Days or an aggregate of eight Trading Days
(which need not be consecutive Trading Days);
(ix) The Obligor shall fail for any reason to deliver Common
Stock certificates to a Holder prior to the fifth (5th) Trading Day after a
-Conversion Date or the Obligor 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 this Debenture in accordance
with the terms hereof~
(x) The Obligor shall fail for any reason to deliver the
payment in cash pursuant to a Buy-In (as defined herein) within three (3)
days after notice is claimed delivered hereunder; - -
(b) During the time that any portion of this Debenture is outstanding,
if any Event of Default has occurred, the full principal amount of this
Debenture, together with interest and other amounts owing in respect thereof,
to the date of acceleration shall become at the Holder's election,
immediately due and payable in cash, provided however, the Holder may request
(but shall have no obligation to request) payment of such amounts in Common
Stock of the Obligor. In addition to any other remedies, the Holder shall
have the right (but not the obligation) to convert this Debenture at any time
after (x) an Event of Default or (y) the Maturity Date at the Conversion
Price then in-effect. The Holder need not provide and the Obligor 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. No such rescission or
annulment shall affect any subsequent Event of Default or impair any right
consequent thereon.
- - Upon an Event of-- Default, notwithstanding any other provision of this
Debenture or any Transaction Document, the Holder shall have no obligation to
comply with or adhere to any limitations, if any, on the conversion of this
Debenture or the sale of the Underlying Shares.
(a) (i) Conversion at Option of Holder.
(A) 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, after the Original Issue Date (as defined in Section 4) (subject to the
limitations on conversion set forth in Section 3(a)(iz) hereof). The number of
shares of Common Stock issuable upon a conversion hereunder equals the quotient
obtained by dividing (x) the outstanding amount of this Debenture to be
converted by (y) the Conversion Price (as defined in Section 3(c)(i)). The
Obligor shall deliver Common Stock certificates to the Holder prior to the Fifth
(5th) Trading Day after a Conversion Date.
(B) Notwithstanding anything to the contrary contained herein, if on
any Conversion Date: (1) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, or held as treasury stock,
is insufficient to pay principal and interest hereunder in shares of Common
Stock; (2) the Common Stock is not listed or quoted for trading on the OTC or on
a Subsequent Market; (3) the Obligor has failed to timely satisf~' its
conversion; or (4) the issuance of such shares of Common Stock would result in a
violation of Section 3(a)(iz), then, at the option of the Holder, the Obligor,
in lieu of delivering shares of Common Stock pursuant to Section 3(a)(i)(A),
shall deliver, within three (3) Trading Days of each applicable Conversion Date,
an amount in cash equal to the product of the outstanding principal amount to be
converted plus --any interest due therein divided by the Conversion Price and
multiplied by the highest closing price of the stock from date of the conversion
notice till the date that such cash payment is made. -
Further, if the Obligor shall not have delivered any cash due in respect
of conversion of this Debenture or as payment of interest thereon by the fifth
(5t~~) Trading Day after the Conversion Date, the Holder may, by notice to the
Obligor, require the Obligor to issue shares of Common Stock pursuant to Section
3(c), except that for such purpose the Conversion Price applicable thereto shall
be the lesser of the Conversion Price on the Conversion Date and the Conversion
Price on the date of such Holder demand. Any such shares will be subject to the
provisions of this Section.
(C) The Holder shall effect conversions by delivering - to the
Obligor a completed notice in the form attached hereto as Exhibit A (a
"Conversion Notice"). The date on which a Conversion Notice is delivered is the
"Conversion Date." Unless the Holder is converting the entire principal amount
outstanding under this Debenture, the Holder is not required to physically
surrender this Debenture to the Obligor in order to effect conversions.
Conversions hereunder shall have the effect of lowering the outstanding
principal amount of this Debenture plus all accrued and unpaid interest thereon
in an amount equal to the applicable conversion. The Holder and the Obligor
shall maintain records showing the principal amount converted and the date of
such conversions. In the event of any dispute or discrepancy, the records of the
Holder shall be controlling and determinative in the absence of manifest error.
- - - (ii) Certain Conversion Restrictions. -
Section 3. Conversion.
---------- ----------
(A) A Holder may not convert- this Debenture or receive
shares of Common Stock as payment of interest hereunder to the extent such
conversion or receipt of such interest payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules promulgated
thereunder) in excess of 4.9% of the then issued and outstanding shares of
Common Stock, including shares issuable upon conversion of, and payment of
interest on, this Debenture held by such Holder after application of this
Section. Since the Holder will not be obligated to report to the Obligor the
number of shares of Common Stock it may hold at the time of a conversion
hereunder, unless the conversion at issue would result in the issuance of
shares of Common Stock in excess of 4.9% of the then outstanding shares of
Common Stock without regard to any other shares which may be beneficially owned
by the Holder or an affiliate thereof, the Holder shall have the authority and
obligation to determine whether the restriction contained in this Section will
limit any particular conversion hereunder and to the extent that the Holder
determines that the limitation contained in this Section applies, the
determination of which portion of the principal amount of this Debenture is
convertible, shall be the responsibility and obligation of the Holder. If the
Holder has delivered a Conversion Notice for a principal amount of this
Debenture that, without regard to any other shares that the Holder or its
affiliates may -beneficially own, would result in the issuance in excess of the
permitted amount hereunder, the Obligor shall notify the Holder of this fact
and shall honor the conversion for the maximum principal amount permitted to be
converted on such Conversion Date in accordance with the periods described in
Section 3(a)(i)(A) and, at the option of the Holder, either retain,any
principal amount tendered for conversion in excess of the permitted amount
hereunder for future conversions or return such excess principal amount to the
Holder. The provisions of this Section may be waived by a Holder (but only as
to itself and not to any other Holder) upon not less than 65 days prior notice
to the Obligor. -Other Holders shall be unaffected by any such waiver. -
(b) (i) Nothing herein shall limit a Holder's right to pursue actual
damages or declare an Event of Default pursuant to Section 2 herein for the
Obligor `s failure to deliver certificates representing shares of Common Stock
upon conversion 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,
in each case without the need to post a bond or provide other security. The
exercise of any such rights shall not prohibit the Holder from seeking to
enforce damages pursuant to any other Section hereof or under applicable law. -
(ii) In addition to any other rights available to the Holder, if
the Obligor fails to deliver to the Holder such certificate or certificates
pursuant to Section 3(a)(i)('A) by the fifth (5th) Trading Day after the
Conversion Date, and if after such fifth (5th) Trading Day the Holder
purchases (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
Obligor 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 market price of the Common Stock at
the time of the sale giving rise to such-purchase obligation and (B) at the
- -option of the Holder, either reissue a Debenture in the 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 Obligor timely
complied with its delivery requirements under Section 3(a)(z)(A). For
example, if the Holder purchases Common Stock
- having a total purchase price of $11,000 to oover a Buy-In with respect to
an attempted conversion of Debentures with respect to which the market price
of the Underlying Shares on the date of conversion was a total of $10,000
under clause (A) of the immediately preceding sentence, the Obligor shall be
required to pay the Holder $1,000. The Holder shall provide the Obligor
written notice indicating the amounts payable to the Holder in respect of the
Buy-In.
(c) (i) The Holder is entitled, at its option, to convert, and sell
on the same day, at any time, until payment in full of this Debenture, all or
any part of the principal amount of the Debenture, plus accrued interest, into
shares of the Company's Common Stock at the price per share equal to the lesser
of (a) the lowest Closing Bid Price of the Common Stock during the ten
(10) trading days immediately prior to the date the Obligor files the
Underlying Shares Registration Statement (the "Fixed Conversion Price") or (b)
eighty percent (80%) of the lowest Closing Bid Price, as quoted by Bloomberg,
LP (the "VWAP") of the Common Stock for the five (5) trading days immediately
preceding the Conversion Date. Subparagraphs (a) and (b) above are individually
referred to as a "Conversion Price" and may be adjusted pursuant to the other
terms of this Debenture.
(ii) If the Obligor, at any time while this LYebenture 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 Obligor, then the
Conversion Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator shall be the number
of shares of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification. -
(iii) If the Obligor, at any time while this Debenture is
outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to the Holder) entitling them to subscribe for or purchase
shares of Common Stock at a price per share less than the Closing Bid Price at
the record date mentioned below, then the Conversion Price shall be multiplied
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 such Closing Bid Price. Such adjustment
shall be made whenever such rights 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. However, upon
the expiration of any such right, option or warrant to purchase shares of the
Common Stock the issuance of which resulted in an adjustment in the
Conversion Price pursuant to this -Section, if any such right, option or
warrant shall expire and shall not have been exercised, the Conversion Price
shall immediately upon such expiration be recomputed and effective
immediately upon such expiration be increased to the price which it would
have been (but reflecting any other adjustments in the Conversion Price made
pursuant to the provisions of this Section after the issuance of such rights
or warrants) had the adjustment of the Conversion Price made upon the
issuance of such rights, options or warrants been made on the basis of
offering for subscription or purchase only that number of shares of the
Common Stock actually purchased upon the exercise of such rights, options or
warrants actually exercised.
(iv) If the Obligor or any subsidiary thereof, as applicable,
with respect to Common Stock Equivalents (as defined below), at any time while
this Debenture is outstanding, shall issue shares of Common Stock or rights,
warrants, options or other securities or debt that are convertible into or
exchangeable for shares of .Common Stock ("Common Stock Equivalents") entitling
any Person to acquire shares of Common Stock, at a price per share less than
the Conversion Price (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 suck issuance, be entitled to receive shares of Common Stock
at a price -per share which is less than the Conversion Price, - such issuance
shall
- - be deemed to have occurred for less than the Conversion Price), then, at the
sole option of the Holder, the Conversion Price shall be adjusted to mirror the
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 Obligor shall notify the Holder in writing, no later than one (1)
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. No adjustment under this Section shall be made as a result of
issuances and exercises of options to purchase shares of Common Stock issued
for compensatory purposes pursuant to any of the Obligor's stock option or
stock purchase plans.
(v) If the Obligor, at any time while this Debenture is
outstanding, shall distribute to all holders of Common Stock (and not to the
Holder) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security, then in each such case the Conversion
Price at which this Debenture shall thereafter be convertible shall be
determined by multiplying the Conversion 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
Bid Price determined as of the record date mentioned above, and of which the
numerator shall be such Closing Bid 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
Holder 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) In case of any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or--property, the Holder shall have the right thereafter
to, at its option, (A) convert the then outstanding principal amount, together
with all accrued but unpaid interest and any other amounts then owing hereunder
in respect of this Debenture into the shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of the Common
Stock following such reclassification or share exchange, and the Holder of
- -this Debenture shall be entitled upon such event to receive such amount of
securities, cash or prOperty as the shares of the Common Stock of the Obligor
into which the then outstanding principal amount, together with all accrued but
unpaid interest and any other amounts then owing hereunder in respect of this
Debenture could have been converted immediately prior to such reclassification
or share ~xchange would have been entitled, or (B) require the Obligor to
prepay the outstanding principal amount of this Debenture, plus all interest
and other amounts due and payable thereon. The entire prepayment price shall be
paid in cash. This provision shall similarly apply to successive
reclassifications or share exchanges. -
- (vii) Within 30 days of the date hereof, the Obligor shall
maintain a share reserve of not less than 65,000,000 shares of Common Stock
issuable upon conversion of this Debenture; and within three (3) Business Days
following the receipt by the Obligor of a Holder's notice that such minimum
number of Underlying Shares is not so reserved, the Obligor shall promptly
reserve a sufficient number of shares of Common Stock to comply with such
requirement. -
.(viii) All calculations under this Section 3 shall be rounded up
to the nearest $0.001 of a share.
- (ix) Whenever the Conversion Price is adjusted pursuant to Section
3 hereof, the Obligor shall promptly mail to the Holder a notice setting forth
the Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment.
(x) If (A) the Obligor shall declare a dividend (or any other
distribution) on the Common Stock; (B) the Obligor shall declare a- special
nonrecurring cash dividend on or a redemption of the Common Stock; (C) the
Obligor 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 Obligor
shall be required in connection with any reclassification of the Common Stock,
any consolidation or merger- to which the Obligor is a party, any sale or
transfer of all or-substantially all of the assets of the Obligor, of any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; or (E) the Obligor shall authorize the voluntary
or involuntary dissolution, liquidation or winding up of the affairs Of the
Obligor; then, in each case,- the Obligor shall cause to be filed at each
office or agency maintained for the purpose of conversion of this Debenture,
and shall cause to be mailed to the Holder at its last address as it shall
appear upon the stock bOoks of the Obligor, at least twenty (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. The
Holder is entitled to convert this Debenture during the 20-day calendar
period commencing the date of such noticeto the effective date of the event
triggering such notice. - -
(xi) In case of any (1) merger or consolidation of the Obligor or
any subsidiary of the Obligor with or into another Person, or (2) sale by the
Obligor or any subsidiary of the Obligor of more than one-half of the assets of
the Obligor in one or a series of related transactions, a Holder shall have the
right to (A) exercise any rights under Section 2(b), (B) convert the aggregate
amount of this Debenture then outstanding into the shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders
of Common Stock following such merger, consolidation or sale, and such Holder
shall be entitled upon such event or series of related events to receive such
amount of securities, cash and property as the shares of Common Stock into
which such aggregate principal amount of this Debenture could have been
converted immediately prior to such merger, consolidation or sales would have
been entitled, or (C) in the case of a merger or consolidation, require the
surviving entity to issue to the Holder a convertible Debenture with a
principal amount equal to the aggregate principal amount of this Debenture then
held by such Holder, plus all accrued and unpaid interest and other amounts
owing thereon, which such newly issued convertible Debenture shall have terms
identical (including with respect to conversion) to the terms of this
Debenture, and shall be entitled to all of the rights and privileges of the
Holder of this Debenture set forth herein and the agreements pursuant to which
- - this Debentures were issued. In the case of clause (C), the conversion price
applicable for the newly issued shares of convertible preferred stock or
convertible Debentures shall be based upon the amount of securities, cash and
property that each share of Common Stock would receive in such transaction and
the Conversion Price in effect immediately prior to the effectiveness or
closing date for such transaction. The terms of any such merger, sale or
consolidation shall include such terms so as to continue to give the Holder the
right to receive the securities, cash and property set forth in this Section
upon any conversion or redemption following such event. This provision shall
similarly apply to successive such events.
(d) The Obligor 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 this Debenture and payment of
interest on this Debenture, each as herein provided, free from preemptive
right~ or any other actual contingent purchase rights of persons other than the
Holder, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Obligor as to reservation of
such shares set forth in this Debenture) be issuable (taking into account the
adjustments and restrictions of Sections 2(b) and 3(c)) upon the conversion of
the- outstanding principal amount of this Debenture and payment of interest
hereunder. The Obligor covenants that all shares of Common Stock that shall be
so
issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and, if the Underlying Shares Registration Statement has
been declared effective under the Securities Act, registered for public sale
in accordance with such Underlying Shares Registration Statement. -
(e) Upon a conversion hereunder the Obligor 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 Bid Price at such time. If the Obligor
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.
(f) The issuance of certificates for shares of the Common Stock on
conversion of this Debenture shall be made without charge to the Holder 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 Obligor 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 Debenture so converted and the
Obligor 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 Obligor the amount of such tax or shall have established to the
satisfaction of the Obligor that such tax has been paid.
(g) Any notices, consents, waivers or other communications required or
permitted to be given under the terms hereof must be in writing and will be
deemed to have been delivered: (i) upon receipt, when delivered personally;
(ii) upon receipt, when sent by facsimile (provided confirmation ~of
transmission is mechanically or electronically generated and kept on file by
the sending party); or (iii) one (1) Trading Day after deposit with a
nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company, to: Compliance Systems Corporation -
90 Pratt Oval -
Glen Cove, NY 11542
Attention: Dean Garfinkel
Telephone: (516) 656-5155
Facsimile: (516) 676-2420
With a copy to: Kirkpatrick & Lockhart Nicholson Graham, LLP
201 South Biscayne Boulevard, Suite 2000
- Miami, Florida 33131
Attention: Clayton E. Parker, Esq.
Telephone: (305) 539-3306
Facsimile: (305) 328-7095
If to the Holder: Montgomery Equity Partners, Ltd. 101 Hudson
Street, Suite 3700
Jersey City, NJ 07303
Attention: Mark Angelo
Telephone: (201) 985-8300
With a copy to: - David Gonzalez, Esq.
101 Hudson Street -- Suite 3700
Jersey City, NJ 07302
Telephone: (201)985-8300
Facsimile: (201) 985-8266
or at such other address andlor facsimile number and/or to the attention of such
other person as the recipient party has specified by written notice given to
each other party three (3) business days prior to the effectiveness of such
change. Written confirmation of receipt (i) given by the recipient of such
notice, consent, waiver or other communication, (ii) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (iii) provided by a nationally recognized overnight delivery
service, shall be rebuttable evidence -of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
Section 4. Definitions. For the purposes hereof, 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 are authorized or required by law or other government action to
close.
"Change of Control Transaction" means the occurrence of (a) an acquisition
after the date hereof by an individual or legal entity or "group" (as described
in Rule I 3d-5(b)(1) promulgated under the Exchange Act) of effective control
(whether through legal or beneficial ownership of capital stock of the Obligor,
by contract or otherwise) of in excess of fifty percent (5 0%) of the voting
securities of the Obligor (except that the acquisition of voting securities by
the Holder shall not constitute a Change of Control Transaction for purposes
hereof); (b) a replacement at one time or over time of more than one-half of the
members of the board of directors of the Obligor 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), (c) the merger, consolidation or sale of fifty percent (50%) or more of
the assets of the Obligor or any subsidiary of the Obligor in one or a series of
related transactions with or into another entity, or (d) the execution by the
Obligor of an agreement to which the Obligor is a party or by which it is bound,
providing for any of the events setforth above in (a), (b) or (c). -
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, par value $0.00!, of the Obligor
and stock of any other class into which such shares may hereafter be changed or
reclassified.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Funding Event" means any transaction or series of transactions closed
after the Original Issue Date in which the Obligor raises $1,000,000 or more
through the sale of their equity securities or securities exercisable or
convertible into equity securities.
"Original Issue Date" shall mean the date of the first issuance of this
Debenture regardless of the number of transfers and regardless of the number
of instruments, which may be
issued to evidence such Debenture. - -
"Closing Bid Price" means the price per share in the last reported
trade of the Common Stock on the OTC or on the exchange which the Common
Stock is then listed as quoted by Bloomberg, LP.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Trading Day" means a day on which the shares of Common Stock are quoted
on the OTC or quoted or traded on such Subsequent Market on which the shares of
Common Stock are then quoted or listed; provided, that in the event.that the
shares of Common Stock are not listed or quoted, then Trading Day shall mean a
Business Day.
"Transaction Documents" means the Securities Purchase Agreement or any
other agreement delivered in connection with the Securities Purchase Agreement,
including, without limitation, the Security Agreement, the Pledge and Escrow
Agreement, and the Investor
Registration Rights Agreement. - -
"Underlying Shares" means the shares of Common Stock issuable upon
conversion of this Debenture or as payment of interest in accordance with the
terms hereof.
"Underlying Shares Registration Statement" means a registration
statement meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Underlying Shares and
naming the Holder as a "selling stockholder" thereunder.
Section 5. Except as expressly provided herein, no provision of this
Debenture shall alter or impair the obligations of the Obligor, which are
absolute and unconditional, to pay the principal of, interest and other charges
(if any) on, this Debenture at the time, place, and rate, and in the coin or
currency, herein prescribed. This Debenture is a direct obligation of the
Obligor. This Debenture ranks pan passu with all other Debentures now or
hereafter issued under the terms set forth herein. As long as this Debenture is
outstanding, the Obligor shall not and shall cause their subsidiaries not to,
without the consent of the Holder, (i) amend its certificate of incorporation,
bylaws or other charter documents so as to adversely affect any rights of the
Holder; (ii) 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 (iii) enter into
any agreement with respect to any of the foregoing~ - - -
Section 6. This Debenture shall not entitle the Holder to any of the
rights of a stockholder of the Obligor, including without limitation, the
right to vote, to receive dividends and other distributions, or to receive
any notice of, or to attend, meetings of stockholders or any other
proceedings of the Obligor, unless and to the extent converted into shares of
Common Stock in accordance with the terms hereof.
Section 7. If this Debenture is mutilated, lost, stolen or destroyed,
the Obligor shall execute and deliver, in exchange and substitution for and
upon cancellation of the 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 Obligor.
Section 8. Except as set forth in the Disclosure Schedule attached tO
the Securities Purchase Agreement, no indebtedness of the Obligor is senior to
this Debenture in right of payment, whether with respect to interest, damages
or upon liquidation or dissolution or otherwise. Without the Holder's consent,
the Obligor will not and will not permit any of their 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 there from that is senior in any respect to the obligations of the
Obligor under this Debenture.
Section 9. This Debenture shall be governed by and construed in
accordance with the laws of the State of New Jersey, without giving effect to
conflicts of laws thereof. Each of the parties -consents to the jurisdiction of
the Superior Courts of the State of New Jersey sitting in Hudson County, New
Jersey and the U.S. District Court for the District of New Jersey sitting in
Newark, New Jersey in connection with any dispute arising under this Debenture
and hereby waives, to the maximum extent permitted by law, any objection,
including any objection based on forum ~ conveniens to the bringing of any such
proceeding in such jurisdictions.
Section 10. If the Obligor fails to strictly comply with the terms of
this Debenture, then the Obligor shall reimburse the Holder promptly for all
fees, costs and expenses, including, without limitation, attorneys' fees and
expenses incurred by the Holder in any action in connection with this
Debenture, including, without limitation, those incurred: (i) during any
workout, attempted workout, and/or in connection with the rendering of legal
advice as to the Holder's rights, remedies and obligations, (ii) collecting any
sums which become due to the Holder, (iii) defending or prosecuting any
proceeding or any counterclaim to any proceeding or appeal; or (iv) the
protection, preservation or enforcement of any rights or remedies of the
Holder. -
- Section 11. Any waiver by 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 Qf the Holder to insist upon strict adherence to any
term of this Debenture on one or more occasions shall not be considered a
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Debenture. Any waiver must be
in writing.
Section 12. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to- any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder shall violate
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Obligor 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 Obligor from paying all or any portion of the
principal of or interest on 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 Obligor (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. - 1
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. -
Section 14. THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF,
UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION
DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALiNG, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION
IS A MATERIAL INDUCEMENT FOR THE PARTIES' ACCEPTANCE OF THIS
AGREEMENT. . -
[SIGNATURE PAGE FOLLOWS; REMAINDER OF PAGE INTENTIONALLY BLANK]
IN WITNESS WHEREOF, the Obligor has caused this Secured Convertible
Debenture to be duly executed by a duly authorized officer as of the date set
forth above.
- COMPLIANCE SYSTEMS CORPORATION
By:_____________
Name: Dean Garfinkel
Title: Chairman
TO:
EXHIBIT A
NOTICE OF CONVERSION
(To be executed by the Holder in order to convert the Debenture)
The undersigned hereby irrevocably elects to convert
$____________________________ of the principal amount of the above Debenture
into Shares of Common Stock of Compliance Systems Corporation, according to the
conditions stated therein, as of the Conversion Date written below.
Conversion Date:
Applicable Conversion Price:
Signature:
Name:
Address:
Amount to be converted:
Amount of Debenture
unconverted:
Conversion Price per share:
Number of shares of Common Stock to be issued:
Please issue the shares of Common Stock in the following name and to the
following -address:
Issue to:
Authorized Signature:
Name:
Title:
Phone Number:
Broker DTC Participant Code:
$