EXHIBIT 10(A)
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID
ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR
OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER SAID
ACT.
SECURED CONVERTIBLE DEBENTURE
San Diego, California
January 22, 2002 $500,000
FOR VALUE RECEIVED, IMAGING TECHNOLOGIES CORPORATION, a Delaware
corporation (hereinafter called the "BORROWER"), hereby promises to pay to the
order of BRISTOL INVESTMENT FUND, LTD. or registered assigns (the "HOLDER") the
sum of Five Hundred Thousand Dollars ($500,000), on January 22, 2003 (the
"MATURITY DATE"), and to pay interest on the unpaid principal balance hereof at
the rate of eight percent (8%) per annum from January 22, 2002 (the "ISSUE
DATE") until the same becomes due and payable, whether at maturity or upon
acceleration or by prepayment or otherwise. Any amount of principal or interest
on this Debenture which is not paid when due shall bear interest at the rate of
fifteen percent (15%) per annum from the due date thereof until the same is paid
("DEFAULT INTEREST"). Interest shall commence accruing on the issue date, shall
be computed on the basis of a 365-day year and the actual number of days elapsed
and shall be payable, at the option of the Holder, either quarterly on March 31,
June 30, September 30 and December 31 of each year beginning on March 31, 2002,
or at the time of conversion of the principal to which such interest relates in
accordance with Article I below. All payments due hereunder (to the extent not
converted into common stock, par value $0.005 per share, of the Borrower (the
"COMMON STOCK") in accordance with the terms hereof) shall be made in lawful
money of the United States of America or, at the option of the Holder, in whole
or in part, in shares of Common Stock of the Borrower valued at the then
applicable Conversion Price (as defined herein). All payments shall be made at
such address as the Holder shall hereafter give to the Borrower by written
notice made in accordance with the provisions of this Debenture. Whenever any
amount expressed to be due by the terms of this Debenture is due on any day
which is not a business day, the same shall instead be due on the next
succeeding day which is a business day and, in the case of any interest payment
date which is not the date on which this Debenture is paid in full, the
extension of the due date thereof shall not be taken into account for purposes
of determining the amount of interest due on such date. As used in this
Debenture, the term "business day" shall mean any day other than a Saturday,
Sunday or a day on which commercial banks in the city of Los Angeles, California
are authorized or required by law or executive order to remain closed. Each
capitalized term used herein, and not otherwise defined, shall have the meaning
ascribed thereto in that certain Securities Purchase Agreement, dated January
22, 2002, pursuant to which this Debenture was originally issued (the "PURCHASE
AGREEMENT").
This Debenture is free from all taxes, liens, claims and encumbrances with
respect to the issue thereof and shall not be subject to preemptive rights or
other similar rights of stockholders of the Borrower and will not impose
personal liability upon the holder thereof. The obligations of the Borrower
under this Debenture shall be secured by that certain Security Agreement dated
by and between the Borrower and the Holder of even date herewith.
The following terms shall apply to this Debenture:
ARTICLE I. CONVERSION RIGHTS
1.1 CONVERSION RIGHT. The Holder shall have the right from time to
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time, and at any time on or prior to the earlier of (i) the Maturity Date and
(ii) the date of payment of the Default Amount (as defined in Article III)
pursuant to Section 1.6(a) or Article III, the Optional Prepayment Amount (as
defined in Section 5.1 or any payments pursuant to Section 1.7, each in respect
of the remaining outstanding principal amount of this Debenture to convert all
or any part of the outstanding and unpaid principal amount of this Debenture
into fully paid and non-assessable shares of Common Stock, as such Common Stock
exists on the Issue Date, or any shares of capital stock or other securities of
the Borrower into which such Common Stock shall hereafter be changed or
reclassified at the conversion price (the "CONVERSION PRICE") determined as
provided herein (a "CONVERSION"); provided, however, that in no event shall the
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Holder be entitled to convert any portion of this Debenture in excess of that
portion of this Debenture upon conversion of which the sum of (1) the number of
shares of Common Stock beneficially owned by the Holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of the Debentures or the
unexercised or unconverted portion of any other security of the Borrower
(including, without limitation, the warrants issued by the Borrower pursuant to
the Purchase Agreement) subject to a limitation on conversion or exercise
analogous to the limitations contained herein) and (2) the number of shares of
Common Stock issuable upon the conversion of the portion of this Debenture with
respect to which the determination of this proviso is being made, would result
in beneficial ownership by the Holder and its affiliates of more than 4.9% of
the outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulations 13D-G thereunder, except as otherwise provided in
clause (1) of such proviso. The Holder of this Debenture may waive the
limitations set forth herein by sixty-one (61) days written notice to the
Borrower. The number of shares of Common Stock to be issued upon each
conversion of this Debenture shall be determined by dividing the Conversion
Amount (as defined below) by the applicable Conversion Price then in effect on
the date specified in the notice of conversion, in the form attached hereto as
Exhibit A (the "NOTICE OF CONVERSION"), delivered to the Borrower by the Holder
in accordance with Section 1.4 below; provided that the Notice of Conversion is
submitted by facsimile (or by other means resulting in, or reasonably expected
to result in, notice) to the Borrower before 3:00 p.m., Los Angeles, California
time on such conversion date (the "CONVERSION DATE"). The term "CONVERSION
AMOUNT" means, with respect to any conversion of this Debenture, the sum of (1)
the principal amount of this Debenture to be converted in such conversion plus
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(2) accrued and unpaid interest, if any, on such principal amount at the
interest rates provided in this Debenture to the Conversion Date plus (3)
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Default Interest, if any, on the amounts referred to in the immediately
preceding clauses (1) and/or (2) plus (4) at the Holder's option, any amounts
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owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to
Section 2(c) of that certain Registration Rights Agreement, dated as of January
22, 2002, executed in connection with the initial issuance of this Debenture and
the other Debentures issued on the Issue Date and the Additional Debentures (as
defined in the Purchase Agreement) (the "REGISTRATION RIGHTS AGREEMENT").
1.2 CONVERSION PRICE.
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(A) CALCULATION OF CONVERSION PRICE. The Conversion Price shall be
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the lesser of (i) the Variable Conversion Price (as defined herein) and (ii) the
Fixed Conversion Price (as defined herein) (subject, in each case, to equitable
adjustments for stock splits, stock dividends or rights offerings by the
Borrower relating to the Borrower's securities or the securities of any
subsidiary of the Borrower, combinations, recapitalization, reclassifications,
extraordinary distributions and similar events). The "VARIABLE CONVERSION
PRICE" shall mean the Applicable Percentage (as defined herein) multiplied by
the Market Price (as defined herein). "MARKET PRICE" means the average of the
lowest three (3) Trading Prices (as defined below) for the Common Stock during
the thirty (30) Trading Day period ending one Trading Day prior to the date the
Conversion Notice is sent by the Holder to the Borrower via facsimile (the
"CONVERSION DATE"). "TRADING PRICE" means, for any security as of any date, the
intraday trading price on the Over-the-Counter Bulletin Board (the "OTCBB") as
reported by a reliable reporting service mutually acceptable to and hereafter
designated by Holders of a majority in interest of the Debentures and the
Borrower or, if the OTCBB is not the principal trading market for such security,
the intraday trading price of such security on the principal securities exchange
or trading market where such security is listed or traded or, if no intraday
trading price of such security is available in any of the foregoing manners, the
average of the intraday trading prices of any market makers for such security
that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If
the Trading Price cannot be calculated for such security on such date in the
manner provided above, the Trading Price shall be the fair market value as
mutually determined by the Borrower and the holders of a majority in interest of
the Debentures being converted for which the calculation of the Trading Price is
required in order to determine the Conversion Price of such Debentures.
"TRADING DAY" shall mean any day on which the Common Stock is traded for any
period on the OTCBB, or on the principal securities exchange or other securities
market on which the Common Stock is then being traded. "APPLICABLE PERCENTAGE"
shall mean 70%. The "FIXED CONVERSION PRICE" shall mean $.0166.
(B) CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS. Notwithstanding
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anything contained in Section 1.2(a) to the contrary, in the event the Borrower
(i) makes a public announcement that it intends to consolidate or merge with any
other corporation (other than a merger in which the Borrower is the surviving or
continuing corporation and its capital stock is unchanged) or sell or transfer
all or substantially all of the assets of the Borrower or (ii) any person, group
or entity (including the Borrower) publicly announces a tender offer to purchase
50% or more of the Borrower's Common Stock (or any other takeover scheme) (the
date of the announcement referred to in clause (i) or (ii) is hereinafter
referred to as the "ANNOUNCEMENT DATE"), then the Conversion Price shall,
effective upon the Announcement Date and continuing through the Adjusted
Conversion Price Termination Date (as defined below), be equal to the lower of
(x) the Conversion Price which would have been applicable for a Conversion
occurring on the Announcement Date and (y) the Conversion Price that would
otherwise be in effect. From and after the Adjusted Conversion Price Termination
Date, the Conversion Price shall be determined as set forth in this Section
1.2(a). For purposes hereof, "ADJUSTED CONVERSION PRICE TERMINATION DATE"
shall mean, with respect to any proposed transaction or tender offer (or
takeover scheme) for which a public announcement as contemplated by this Section
1.2(b) has been made, the date upon which the Borrower (in the case of clause
(i) above) or the person, group or entity (in the case of clause (ii) above)
consummates or publicly announces the termination or abandonment of the proposed
transaction or tender offer (or takeover scheme) which caused this Section
1.2(b) to become operative.
1.3 AUTHORIZED SHARES. Subject to Section 4(n) of the Purchase
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Agreement, the Borrower covenants that during the period the conversion right
exists, the Borrower will reserve from its authorized and unissued Common Stock
a sufficient number of shares, free from preemptive rights, to provide for the
issuance of Common Stock upon the full conversion of this Debenture and the
Additional Debentures to be issued pursuant to the Purchase Agreement. Subject
to Section 4(n) of the Purchase Agreement, the Borrower is required at all times
to have authorized and reserved two times the number of shares that is actually
issuable upon full conversion of the Debentures (based on the Conversion Price
of the Debentures or the Exercise Price of the Warrants in effect from time to
time) (the "RESERVED AMOUNT"). The Reserved Amount shall be increased from time
to time in accordance with the Borrower's obligations pursuant to Section 4(h)
of the Purchase Agreement. The Borrower represents that upon issuance, such
shares will be duly and validly issued, fully paid and non-assessable. In
addition, if the Borrower shall issue any securities or make any change to its
capital structure which would change the number of shares of Common Stock into
which the Debentures shall be convertible at the then current Conversion Price,
the Borrower shall at the same time make proper provision so that thereafter
there shall be a sufficient number of shares of Common Stock authorized and
reserved, free from preemptive rights, for conversion of the outstanding
Debentures. The Borrower (i) acknowledges that it has irrevocably instructed
its transfer agent to issue certificates for the Common Stock issuable upon
conversion of this Debenture, and (ii) agrees that its issuance of this
Debenture shall constitute full authority to its officers and agents who are
charged with the duty of executing stock certificates to execute and issue the
necessary certificates for shares of Common Stock in accordance with the terms
and conditions of this Debenture.
If, at any time a Holder of this Debenture submits a Notice of Conversion,
and the Borrower does not have sufficient authorized but unissued shares of
Common Stock available to effect such conversion in accordance with the
provisions of this Article I (a "CONVERSION DEFAULT"), subject to Section 4.8,
the Borrower shall issue to the Holder all of the shares of Common Stock which
are then available to effect such conversion. The portion of this Debenture
which the Holder included in its Conversion Notice and which exceeds the amount
which is then convertible into available shares of Common Stock (the "EXCESS
AMOUNT") shall, notwithstanding anything to the contrary contained herein, not
be convertible into Common Stock in accordance with the terms hereof until (and
at the Holder's option at any time after) the date additional shares of Common
Stock are authorized by the Borrower to permit such conversion, at which time
the Conversion Price in respect thereof shall be the lesser of (i) the
Conversion Price on the Conversion Default Date (as defined below) and (ii) the
Conversion Price on the Conversion Date thereafter elected by the Holder in
respect thereof. In addition, the Borrower shall pay to the Holder payments
("CONVERSION DEFAULT PAYMENTS") for a Conversion Default in the amount of (x)
the sum of (1) the then outstanding principal amount of this Debenture plus (2)
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accrued and unpaid interest on the unpaid principal amount of this Debenture
through the Authorization Date (as defined below) plus (3) Default Interest, if
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any, on the amounts referred to in clauses (1) and/or (2), multiplied by (y)
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.24, multiplied by (z) (N/365), where N = the number of days from the day the
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holder submits a Notice of Conversion giving rise to a Conversion Default (the
"CONVERSION DEFAULT DATE") to the date (the "AUTHORIZATION DATE") that the
Borrower authorizes a sufficient number of shares of Common Stock to effect
conversion of the full outstanding principal balance of this Debenture. The
Borrower shall use its best efforts to authorize a sufficient number of shares
of Common Stock as soon as practicable following the earlier of (i) such time
that the Holder notifies the Borrower or that the Borrower otherwise becomes
aware that there are or likely will be insufficient authorized and unissued
shares to allow full conversion thereof and (ii) a Conversion Default. The
Borrower shall send notice to the Holder of the authorization of additional
shares of Common Stock, the Authorization Date and the amount of Holder's
accrued Conversion Default Payments. The accrued Conversion Default Payments
for each calendar month shall be paid in cash or shall be convertible into
Common Stock (at such time as there are sufficient authorized shares of Common
Stock) at the applicable Conversion Price, at the Holder's option, as follows:
(A) In the event Holder elects to take such payment in cash, cash
payment shall be made to Holder by the fifth (5th) day of the month following
the month in which it has accrued; and
(B) In the event Holder elects to take such payment in Common Stock,
the Holder may convert such payment amount into Common Stock at the Conversion
Price (as in effect at the time of conversion) at any time after the fifth day
of the month following the month in which it has accrued in accordance with the
terms of this Article I (so long as there is then a sufficient number of
authorized shares of Common Stock).
The Holder's election shall be made in writing to the Borrower at any time
prior to 6:00 p.m., Los Angeles time, on the third day of the month following
the month in which Conversion Default payments have accrued. If no election is
made, the Holder shall be deemed to have elected to receive cash. Nothing
herein shall limit the Holder's right to pursue actual damages (to the extent in
excess of the Conversion Default Payments) for the Borrower's failure to
maintain a sufficient number of authorized shares of Common Stock, and each
holder shall have the right to pursue all remedies available at law or in equity
(including degree of specific performance and/or injunctive relief).
1.4 METHOD OF CONVERSION.
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(A) MECHANICS OF CONVERSION. Subject to Section 1.1, this Debenture
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may be converted by the Holder in whole or in part at any time from time to time
after the Issue Date, by (A) submitting to the Borrower a Notice of Conversion
(by facsimile or other reasonable means of communication dispatched on the
Conversion Date prior to 3:00 p.m., Los Angeles, California time) and (B)
subject to Section 1.4(b), surrendering this Debenture at the principal office
of the Borrower.
(B) SURRENDER OF DEBENTURE UPON CONVERSION. Notwithstanding anything
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to the contrary set forth herein, upon conversion of this Debenture in
accordance with the terms hereof, the Holder shall not be required to physically
surrender this Debenture to the Borrower unless the entire unpaid principal
amount of this Debenture is so converted. The Holder and the Borrower shall
maintain records showing the principal amount so converted and the dates of such
conversions or shall use such other method, reasonably satisfactory to the
Holder and the Borrower, so as not to require physical surrender of this
Debenture upon each such conversion. In the event of any dispute or
discrepancy, such records of the Borrower shall be controlling and determinative
in the absence of manifest error. Notwithstanding the foregoing, if any portion
of this Debenture is converted as aforesaid, the Holder may not transfer this
Debenture unless the Holder first physically surrenders this Debenture to the
Borrower, whereupon the Borrower will forthwith issue and deliver upon the order
of the Holder a new Debenture of like tenor, registered as the Holder (upon
payment by the Holder of any applicable transfer taxes) may request,
representing in the aggregate the remaining unpaid principal amount of this
Debenture. The Holder and any assignee, by acceptance of this Debenture,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of this Debenture, the unpaid and unconverted
principal amount of this Debenture represented by this Debenture may be less
than the amount stated on the face hereof.
(C) PAYMENT OF TAXES. The Borrower shall not be required to pay any
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tax which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock or other securities or property on conversion
of this Debenture in a name other than that of the Holder (or in street name),
and the Borrower shall not be required to issue or deliver any such shares or
other securities or property unless and until the person or persons (other than
the Holder or the custodian in whose street name such shares are to be held for
the Holder's account) requesting the issuance thereof shall have paid to the
Borrower the amount of any such tax or shall have established to the
satisfaction of the Borrower that such tax has been paid.
(D) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon receipt by the
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Borrower from the Holder of a facsimile transmission (or other reasonable means
of communication) of a Notice of Conversion meeting the requirements for
conversion as provided in this Section 1.4, the Borrower shall cause its
transfer agent to issue and deliver or cause to be issued and delivered to or
upon the order of the Holder certificates for the Common Stock issuable upon
such conversion within three (3) business days after such receipt (and, solely
in the case of conversion of the entire unpaid principal amount hereof,
surrender of this Debenture) (such third business day being hereinafter referred
to as the "DEADLINE") in accordance with the terms hereof and the Purchase
Agreement (including, without limitation, in accordance with the requirements of
Section 2(g) of the Purchase Agreement that certificates for shares of Common
Stock issued on or after the effective date of the Registration Statement upon
conversion of this Debenture shall not bear any restrictive legend, as permitted
by law).
(E) OBLIGATION OF BORROWER TO DELIVER COMMON STOCK. Upon receipt by
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the Borrower of a Notice of Conversion, the Holder shall be deemed to be the
holder of record of the Common Stock issuable upon such conversion, the
outstanding principal amount and the amount of accrued and unpaid interest on
this Debenture shall be reduced to reflect such conversion, and, unless the
Borrower defaults on its obligations under this Article I, all rights with
respect to the portion of this Debenture being so converted shall forthwith
terminate except the right to receive the Common Stock or other securities, cash
or other assets, as herein provided, on such conversion. If the Holder shall
have given a Notice of Conversion as provided herein, the Borrower's obligation
to issue and deliver the certificates for Common Stock shall be absolute and
unconditional, irrespective of the absence of any action by the Holder to
enforce the same, any waiver or consent with respect to any provision thereof,
the recovery of any judgment against any person or any action to enforce the
same, any failure or delay in the enforcement of any other obligation of the
Borrower to the holder of record, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the Holder of any
obligation to the Borrower, and irrespective of any other circumstance which
might otherwise limit such obligation of the Borrower to the Holder in
connection with such conversion. The Conversion Date specified in the Notice of
Conversion shall be the Conversion Date so long as the Notice of Conversion is
received by the Borrower before 3:00 p.m., Los Angeles, California time, on such
date.
(F) DELIVERY OF COMMON STOCK BY ELECTRONIC TRANSFER. In lieu of
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delivering physical certificates representing the Common Stock issuable upon
conversion, provided the Borrower's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST")
program, upon request of the Holder and its compliance with the provisions
contained in Section 1.1 and in this Section 1.4, the Borrower shall use its
best efforts to cause its transfer agent to electronically transmit the Common
Stock issuable upon conversion to the Holder by crediting the account of
Holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission
("DWAC") system. In the event that Borrower's transfer agent is not eligible or
is not currently participating in the DTC FAST program, Borrower will cause its
transfer agent to take whatever action is necessary to become eligible to
participate in the DTC FAST program within ten (10) business days following the
Issue Date.
(G) FAILURE TO DELIVER COMMON STOCK PRIOR TO DEADLINE. Without in any
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way limiting the Holder's right to pursue other remedies, including actual
damages and/or equitable relief, the parties agree that if delivery of the
Common Stock issuable upon conversion of this Debenture is more than two (2)
business days after the Deadline (other than a failure due to the circumstances
described in Section 1.3 above, which failure shall be governed by such Section)
the Borrower shall pay to the Holder $2,000 per day in cash, for each day beyond
the Deadline that the Borrower fails to deliver such Common Stock. Such cash
amount shall be paid to Holder by the fifth day of the month following the month
in which it has accrued or, at the option of the Holder (by written notice to
the Borrower by the first day of the month following the month in which it has
accrued), shall be added to the principal amount of this Debenture, in which
event interest shall accrue thereon in accordance with the terms of this
Debenture and such additional principal amount shall be convertible into Common
Stock in accordance with the terms of this Debenture.
1.5 CONCERNING THE SHARES. The shares of Common Stock issuable upon
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conversion of this Debenture may not be sold or transferred unless (i) such
shares are sold pursuant to an effective registration statement under the Act or
(ii) the Borrower or its transfer agent shall have been furnished with an
opinion of counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions) to the effect that
the shares to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration or (iii) such shares are sold or transferred
pursuant to Rule 144 under the Act (or a successor rule) ("RULE 144") or (iv)
such shares are transferred to an "affiliate" (as defined in Rule 144) of the
Borrower who agrees to sell or otherwise transfer the shares only in accordance
with this Section 1.5 and who is an Accredited Investor (as defined in the
Purchase Agreement). Except as otherwise provided in the Purchase Agreement
(and subject to the removal provisions set forth below), until such time as the
shares of Common Stock issuable upon conversion of this Debenture have been
registered under the Act as contemplated by the Registration Rights Agreement or
otherwise may be sold pursuant to Rule 144 without any restriction as to the
number of securities as of a particular date that can then be immediately sold,
each certificate for shares of Common Stock issuable upon conversion of this
Debenture that has not been so included in an effective registration statement
or that has not been sold pursuant to an effective registration statement or an
exemption that permits removal of the legend, shall bear a legend substantially
in the following form, as appropriate:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.
THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN
OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF
COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER SAID ACT."
The legend set forth above shall be removed and the Borrower shall issue to
the Holder a new certificate therefor free of any transfer legend, as permitted
by law, if (i) the Borrower or its transfer agent shall have received an opinion
of counsel, in form, substance and scope customary for opinions of counsel in
comparable transactions, to the effect that a public sale or transfer of such
Common Stock may be made without registration under the Act and the shares are
so sold or transferred, (ii) such Holder provides the Borrower or its transfer
agent with reasonable assurances that the Common Stock issuable upon conversion
of this Debenture (to the extent such securities are deemed to have been
acquired on the same date) can be sold pursuant to Rule 144 or (iii) in the case
of the Common Stock issuable upon conversion of this Debenture, such security is
registered for sale by the Holder under an effective registration statement
filed under the Act or otherwise may be sold pursuant to Rule 144 without any
restriction as to the number of securities as of a particular date that can then
be immediately sold. Nothing in this Debenture shall (i) limit the Borrower's
obligation under the Registration Rights Agreement or (ii) affect in any way the
Holder's obligations to comply with applicable prospectus delivery requirements
upon the resale of the securities referred to herein.
1.6 EFFECT OF CERTAIN EVENTS.
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(A) EFFECT OF MERGER, CONSOLIDATION, ETC. At the option of the Holder,
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the sale, conveyance or disposition of all or substantially all of the assets of
the Borrower, the effectuation by the Borrower of a transaction or series of
related transactions in which more than 50% of the voting power of the Borrower
is disposed of, or the consolidation, merger or other business combination of
the Borrower with or into any other Person (as defined below) or Persons when
the Borrower is not the survivor shall either: (i) be deemed to be an Event of
Default (as defined in Article III) pursuant to which the Borrower shall be
required to pay to the Holder upon the consummation of and as a condition to
such transaction an amount equal to the Default Amount (as defined in Article
III) or (ii) be treated pursuant to Section 1.6(b) hereof. "PERSON" shall mean
any individual, corporation, limited liability company, partnership,
association, trust or other entity or organization.
(B) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time
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when this Debenture is issued and outstanding and prior to conversion of all of
the Debentures, there shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event, as a result of which
shares of Common Stock of the Borrower shall be changed into the same or a
different number of shares of another class or classes of stock or securities of
the Borrower or another entity, or in case of any sale or conveyance of all or
substantially all of the assets of the Borrower other than in connection with a
plan of complete liquidation of the Borrower, then the Holder of this Debenture
shall thereafter have the right to receive upon conversion of this Debenture,
upon the basis and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock immediately theretofore issuable upon conversion,
such stock, securities or assets which the Holder would have been entitled to
receive in such transaction had this Debenture been converted in full
immediately prior to such transaction (without regard to any limitations on
conversion set forth herein), and in any such case appropriate provisions shall
be made with respect to the rights and interests of the Holder of this Debenture
to the end that the provisions hereof (including, without limitation, provisions
for adjustment of the Conversion Price and of the number of shares issuable upon
conversion of the Debenture) shall thereafter be applicable, as nearly as may be
practicable in relation to any securities or assets thereafter deliverable upon
the conversion hereof. The Borrower shall not effect any transaction described
in this Section 1.6(b) unless (a) it first gives, to the extent practicable,
thirty (30) days prior written notice (but in any event at least fifteen (15)
days prior written notice) of the record date of the special meeting of
stockholders to approve, or if there is no such record date, the consummation
of, such merger, consolidation, exchange of shares, recapitalization,
reorganization or other similar event or sale of assets (during which time the
Holder shall be entitled to convert this Debenture) and (b) the resulting
successor or acquiring entity (if not the Borrower) assumes by written
instrument the obligations of this Section 1.6(b). The above provisions shall
similarly apply to successive consolidations, mergers, sales, transfers or share
exchanges.
(C) ADJUSTMENT DUE TO DISTRIBUTION. If the Borrower shall declare
--------------------------------
or make any distribution of its assets (or rights to acquire its assets) to
holders of Common Stock as a dividend, stock repurchase, by way of return of
capital or otherwise (including any dividend or distribution to the Borrower's
shareholders in cash or shares (or rights to acquire shares) of capital stock of
a subsidiary (i.e., a spin-off)) (a "DISTRIBUTION"), then the Holder of this
Debenture shall be entitled, upon any conversion of this Debenture after the
date of record for determining shareholders entitled to such Distribution, to
receive the amount of such assets which would have been payable to the Holder
with respect to the shares of Common Stock issuable upon such conversion had
such Holder been the holder of such shares of Common Stock on the record date
for the determination of shareholders entitled to such Distribution.
(D) PURCHASE RIGHTS. If, at any time when any Debentures are issued
---------------
and outstanding, the Borrower issues any convertible securities or rights to
purchase stock, warrants, securities or other property (the "PURCHASE RIGHTS")
pro rata to the record holders of any class of Common Stock, then the Holder of
this Debenture will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Debenture (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
(E) NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment
-----------------------
or readjustment of the Conversion Price as a result of the events described in
this Section 1.6, the Borrower, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to the Holder of a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Borrower
shall, upon the written request at any time of the Holder, furnish to such
Holder a like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price at the time in effect and (iii) the number of shares
of Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of the Debenture.
1.7 TRADING MARKET LIMITATIONS. Unless permitted or not prohibited by
---------------------------
the applicable rules and regulations of the principal securities market on which
the Common Stock is then listed or traded, in no event shall the Borrower issue
upon conversion of or otherwise pursuant to this Debenture and the other
Debentures issued pursuant to the Purchase Agreement (including upon exercise of
the Investment Options) more than the maximum number of shares of Common Stock
that the Borrower can issue pursuant to any rule of the principal United States
securities market on which the Common Stock is then traded (the "MAXIMUM SHARE
AMOUNT"), which, as of the Issue Date shall be 48,505,682 shares (19.99% of the
total shares outstanding on the Issue Date), subject to equitable adjustment
from time to time for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring after
the date hereof. Once the Maximum Share Amount has been issued (the date of
which is hereinafter referred to as the "MAXIMUM CONVERSION DATE"), if the
Borrower fails to eliminate any prohibitions under applicable law or the rules
or regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Borrower or any of its
securities on the Borrower's ability to issue shares of Common Stock in excess
of the Maximum Share Amount (a "TRADING MARKET PREPAYMENT EVENT"), in lieu of
any further right to convert this Debenture, and in full satisfaction of the
Borrower's obligations under this Debenture, the Borrower shall pay to the
Holder, within fifteen (15) business days of the Maximum Conversion Date (the
"TRADING MARKET PREPAYMENT DATE"), an amount equal to 130% times the sum of (a)
----- ---
the then outstanding principal amount of this Debenture immediately following
the Maximum Conversion Date, plus (b) accrued and unpaid interest on the unpaid
----
principal amount of this Debenture to the Trading Market Prepayment Date, plus
----
(c) Default Interest, if any, on the amounts referred to in clause (a) and/or
(b) above, plus (d) any optional amounts that may be added thereto at the
----
Maximum Conversion Date by the Holder in accordance with the terms hereof (the
then outstanding principal amount of this Debenture immediately following the
Maximum Conversion Date, plus the amounts referred to in clauses (b), (c) and
----
(d) above shall collectively be referred to as the "REMAINING CONVERTIBLE
AMOUNT"). With respect to each Holder of Debentures, the Maximum Share Amount
shall refer to such Holder's pro rata share thereof determined in accordance
--- ----
with Section 4.8 below. In the event that the sum of (x) the aggregate number
of shares of Common Stock issued upon conversion of this Debenture and the other
Debentures issued pursuant to the Purchase Agreement (including upon exercise of
the Investment Options) plus (y) the aggregate number of shares of Common Stock
----
that remain issuable upon conversion of this Debenture and the other Debentures
issued pursuant to the Purchase Agreement (including upon exercise of the
Investment Options), represents at least one hundred percent (100%) of the
Maximum Share Amount (the "TRIGGERING EVENT"), the Borrower will use its best
efforts to seek and obtain Stockholder Approval (or obtain such other relief as
will allow conversions hereunder in excess of the Maximum Share Amount) as soon
as practicable following the Triggering Event and before the Maximum Conversion
Date. As used herein, "STOCKHOLDER APPROVAL" means approval by the stockholders
of the Borrower to authorize the issuance of the full number of shares of Common
Stock which would be issuable upon full conversion of the then outstanding
Debentures (including upon exercise of the Investment Options) but for the
Maximum Share Amount.
1.8 STATUS AS STOCKHOLDER. Upon submission of a Notice of Conversion
-----------------------
by a Holder, (i) the shares covered thereby (other than the shares, if any,
which cannot be issued because their issuance would exceed such Holder's
allocated portion of the Reserved Amount or Maximum Share Amount) shall be
deemed converted into shares of Common Stock and (ii) the Holder's rights as a
Holder of such converted portion of this Debenture shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
and to any remedies provided herein or otherwise available at law or in equity
to such Holder because of a failure by the Borrower to comply with the terms of
this Debenture. Notwithstanding the foregoing, if a Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Deadline with respect to a conversion of any
portion of this Debenture for any reason, then (unless the Holder otherwise
elects to retain its status as a holder of Common Stock by so notifying the
Borrower) the Holder shall regain the rights of a Holder of this Debenture with
respect to such unconverted portions of this Debenture and the Borrower shall,
as soon as practicable, return such unconverted Debenture to the Holder or, if
the Debenture has not been surrendered, adjust its records to reflect that such
portion of this Debenture has not been converted. In all cases, the Holder
shall retain all of its rights and remedies (including, without limitation, (i)
the right to receive Conversion Default Payments pursuant to Section 1.3 to the
extent required thereby for such Conversion Default and any subsequent
Conversion Default and (ii) the right to have the Conversion Price with respect
to subsequent conversions determined in accordance with Section 1.3) for the
Borrower's failure to convert this Debenture.
ARTICLE II. CERTAIN COVENANTS
2.1 DISTRIBUTIONS ON CAPITAL STOCK. So long as the Borrower shall have
------------------------------
any obligation under this Debenture, the Borrower shall not, without the
Holder's written consent (such consent not to be unreasonably withheld), (a)
pay, declare or set apart for such payment, any dividend or other distribution
(whether in cash, property or other securities) on shares of capital stock other
than dividends on shares of Common Stock solely in the form of additional shares
of Common Stock or (b) directly or indirectly or through any subsidiary make any
other payment or distribution in respect of its capital stock except for
distributions pursuant to any shareholders' rights plan which is approved by a
majority of the Borrower's disinterested directors.
2.2 RESTRICTION ON STOCK REPURCHASES. So long as the Borrower shall
-----------------------------------
have any obligation under this Debenture, the Borrower shall not, without the
Holder's written consent (such consent not to be unreasonably withheld), redeem,
repurchase or otherwise acquire (whether for cash or in exchange for property or
other securities or otherwise) in any one transaction or series of related
transactions any shares of capital stock of the Borrower or any warrants, rights
or options to purchase or acquire any such shares.
2.3 BORROWINGS. So long as the Borrower shall have any obligation
----------
under this Debenture, the Borrower shall not, without the Holder's written
consent (such consent not to be unreasonably withheld), create, incur, assume or
suffer to exist any liability for borrowed money, except (a) borrowings in
existence or committed on the date hereof and of which the Borrower has informed
Holder in writing prior to the date hereof, (b) indebtedness to trade creditors
or financial institutions incurred in the ordinary course of business or (c)
borrowings, the proceeds of which shall be used to repay this Debenture.
2.4 SALE OF ASSETS. So long as the Borrower shall have any obligation
---------------
under this Debenture, the Borrower shall not, without the Holder's written
consent (such consent not to be unreasonably withheld), sell, lease or otherwise
dispose of any significant portion of its assets outside the ordinary course of
business. Any consent to the disposition of any assets may be conditioned on a
specified use of the proceeds of disposition.
2.5 ADVANCES AND LOANS. So long as the Borrower shall have any
--------------------
obligation under this Debenture, the Borrower shall not, without the Holder's
written consent (such consent not to be unreasonably withheld), lend money, give
credit or make advances to any person, firm, joint venture or corporation,
including, without limitation, officers, directors, employees, subsidiaries and
affiliates of the Borrower, except loans, credits or advances (a) in existence
or committed on the date hereof and which the Borrower has informed Holder in
writing prior to the date hereof, (b) made in the ordinary course of business or
(c) not in excess of $50,000.
2.6 CONTINGENT LIABILITIES. Other than in connection with a merger or
-----------------------
acquisition of the Company, so long as the Borrower shall have any obligation
under this Debenture, the Borrower shall not, without the Holder's written
consent, assume, guarantee, endorse, contingently agree to purchase or otherwise
become liable upon the obligation of any person, firm, partnership, joint
venture or corporation, except by the endorsement of negotiable instruments for
deposit or collection and except assumptions, guarantees, endorsements and
contingencies (a) in existence or committed on the date hereof and which the
Borrower has informed Holder in writing prior to the date hereof, and (b)
similar transactions in the ordinary course of business.
ARTICLE III. EVENTS OF DEFAULT
If any of the following events of default (each, an "EVENT OF DEFAULT")
shall occur:
3.1 FAILURE TO PAY PRINCIPAL OR INTEREST. The Borrower fails to pay
---------------------------------------
the principal hereof or interest thereon when due on this Debenture, whether at
maturity, upon a Trading Market Prepayment Event pursuant to Section 1.7, upon
acceleration or otherwise.
3.2 CONVERSION AND THE SHARES. The Borrower fails to issue shares of
---------------------------
Common Stock to the Holder (or announces or threatens that it will not honor its
obligation to do so) upon exercise by the Holder of the conversion rights of the
Holder in accordance with the terms of this Debenture (provided that, if such
failure is solely as a result of the circumstances governed by Section 1.3 and
the Borrower is using its best efforts to authorize a sufficient number of
shares of Common Stock as soon as practicable, such failure shall continue for a
period of sixty (60) days), fails to transfer or cause its transfer agent to
transfer (electronically or in certificated form) any certificate for shares of
Common Stock issued to the Holder upon conversion of or otherwise pursuant to
this Debenture or upon exercise of as and when required by this Debenture or the
Registration Rights Agreement, or fails to remove any restrictive legend (or to
withdraw any stop transfer instructions in respect thereof) on any certificate
for any shares of Common Stock, as permitted by law, issued to the Holder upon
conversion of or otherwise pursuant to this Debenture or upon exercise of as and
when required by this Debenture or the Registration Rights Agreement (or makes
any announcement, statement or threat that it does not intend to honor the
obligations described in this paragraph) and any such failure shall continue
uncured (or any announcement, statement or threat not to honor its obligations
shall not be rescinded in writing) for ten (10) days after the Borrower shall
have been notified thereof in writing by the Holder.
3.3 FAILURE TO TIMELY FILE REGISTRATION OR EFFECT REGISTRATION. The
-------------------------------------------------------------
Borrower fails to file the Registration Statement within forty-five (45) days
following the Filing Date (as defined in the Registration Rights Agreement) or
obtain effectiveness with the Securities and Exchange Commission of the
Registration Statement within one hundred five (105) days following the Filing
Date or such Registration Statement lapses in effect (or sales cannot otherwise
be made thereunder effective, whether by reason of the Borrower's failure to
amend or supplement the prospectus included therein in accordance with the
Registration Rights Agreement or otherwise) for more than thirty (30)
consecutive days or forty-five (45) days in any twelve month period after the
Registration Statement becomes effective;
3.4 BREACH OF COVENANTS. The Borrower breaches any material covenant
---------------------
or other material term or condition contained in Sections 1.3, 1.6 or 1.7 of
this Debenture, or Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the Purchase
Agreement and such breach continues for a period of ten (10) business days after
written notice thereof to the Borrower from the Holder;
3.5 BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation or
-------------------------------------------
warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Purchase Agreement and the Registration
Rights Agreement), shall be false or misleading in any material respect when
made and the breach of which has (or with the passage of time will have) a
material adverse effect on the rights of the Holder with respect to this
Debenture, the Purchase Agreement or the Registration Rights Agreement;
3.6 RECEIVER OR TRUSTEE. The Borrower or any subsidiary of the
---------------------
Borrower shall make an assignment for the benefit of creditors, or apply for or
consent to the appointment of a receiver or trustee for it or for a substantial
part of its property or business, or such a receiver or trustee shall otherwise
be appointed, other than an operational receiver appointed pursuant to
California law, provided that such operational receiver does not serve for more
than sixty (60) days;
3.7 JUDGMENTS. Any money judgment, writ or similar process shall be
---------
entered or filed against the Borrower or any subsidiary of the Borrower or any
of its property or other assets for more than $100,000, and shall remain
unvacated, unbonded or unstayed for a period of thirty (30) days unless
otherwise consented to by the Holder, which consent will not be unreasonably
withheld;
3.8 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
----------
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Borrower or any
subsidiary of the Borrower; or
3.9 DELISTING OF COMMON STOCK. The Borrower shall fail to maintain the
-------------------------
listing of the Common Stock on at least one of the OTCBB, the Nasdaq National
Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American
Stock Exchange;
3.10 DEFAULT UNDER OTHER DEBENTURES OR SENIOR DEBT. An Event of
---------------------------------------------------
Default has occurred and is continuing under any of the other Debentures issued
pursuant to the Purchase Agreement, including the Additional Debentures, or
under the Senior Debt (as defined in the Security Agreement).
then, upon the occurrence and during the continuation of any Event of Default
specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at the option
of the Holders of a majority of the aggregate principal amount of the
outstanding Debentures issued pursuant to the Purchase Agreement exercisable
through the delivery of written notice to the Borrower by such Holders (the
"DEFAULT NOTICE"), and upon the occurrence of an Event of Default specified in
Section 3.6 or 3.8, the Debentures shall become immediately due and payable and
the Borrower shall pay to the Holder, in full satisfaction of its obligations
hereunder, an amount equal to the greater of (i) 135% times the sum of (w) the
----- ---
then outstanding principal amount of this Debenture plus (x) accrued and unpaid
----
interest on the unpaid principal amount of this Debenture to the date of payment
(the "MANDATORY PREPAYMENT DATE") plus (y) Default Interest, if any, on the
----
amounts referred to in clauses (w) and/or (x) plus (z) any amounts owed to the
----
Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of
the Registration Rights Agreement (the then outstanding principal amount of this
Debenture to the date of payment plus the amounts referred to in clauses (x),
----
(y) and (z) shall collectively be known as the "DEFAULT SUM") or (ii) the
"parity value" of the Default Sum to be prepaid, where parity value means (a)
the highest number of shares of Common Stock issuable upon conversion of or
otherwise pursuant to such Default Sum in accordance with Article I, treating
the Trading Day immediately preceding the Mandatory Prepayment Date as the
"Conversion Date" for purposes of determining the lowest applicable Conversion
Price, unless the Default Event arises as a result of a breach in respect of a
specific Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (b) the highest Closing Price for the Common
--------------
Stock during the period beginning on the date of first occurrence of the Event
of Default and ending one day prior to the Mandatory Prepayment Date (the
"DEFAULT AMOUNT") and all other amounts payable hereunder shall immediately
become due and payable, all without demand, presentment or notice, all of which
hereby are expressly waived, together with all costs, including, without
limitation, legal fees and expenses, of collection, and the Holder shall be
entitled to exercise all other rights and remedies available at law or in
equity. If the Borrower fails to pay the Default Amount within five (5)
business days of written notice that such amount is due and payable, then the
Holder shall have the right at any time, so long as the Borrower remains in
default (and so long and to the extent that there are sufficient authorized
shares), to require the Borrower, upon written notice, to immediately issue, in
lieu of the Default Amount, the number of shares of Common Stock of the Borrower
equal to the Default Amount divided by the Conversion Price then in effect.
ARTICLE IV. MISCELLANEOUS
4.1 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part
---------------------------------
of the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privileges. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
4.2 NOTICES. Any notice herein required or permitted to be given shall
-------
be in writing and may be personally served or delivered by courier or sent by
United States mail and shall be deemed to have been given upon receipt if
personally served (which shall include telephone line facsimile transmission) or
sent by courier or three (3) days after being deposited in the United States
mail, certified, with postage pre-paid and properly addressed, if sent by mail.
For the purposes hereof, the address of the Holder shall be as shown on the
records of the Borrower; and the address of the Borrower shall be 15175
Innovation Drive, San Diego, California 92128, facsimile number: 858-207-6505.
Both the Holder and the Borrower may change the address for service by service
of written notice to the other as herein provided.
4.3 AMENDMENTS. This Debenture and any provision hereof may only be
----------
amended by an instrument in writing signed by the Borrower and the Holder. The
term "Debenture" and all reference thereto, as used throughout this instrument,
shall mean this instrument (and the other Debentures issued pursuant to the
Purchase Agreement, including the Additional Debentures) as originally executed,
or if later amended or supplemented, then as so amended or supplemented.
4.4 ASSIGNABILITY. This Debenture shall be binding upon the Borrower
-------------
and its permitted successors and assigns, and shall inure to be the benefit of
the Holder and its successors and assigns. Each transferee of this Debenture
must be an affiliate of the Holder and an "accredited investor" (as defined in
Rule 501(a) of the 1933 Act). Notwithstanding anything in this Debenture to the
contrary, this Debenture may be pledged as collateral in connection with a bona
----
fide margin account or other lending arrangement.
- ----
4.5 COST OF COLLECTION. If default is made in the payment of this
--------------------
Debenture, the Borrower shall pay the Holder hereof costs of collection,
including reasonable attorneys' fees.
4.6 GOVERNING LAW. THIS DEBENTURE SHALL BE ENFORCED, GOVERNED BY AND
--------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICT OF LAWS. THE BORROWER HEREBY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK,
NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS DEBENTURE, THE
AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT
FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE
THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED
IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR
PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS
IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL
NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND
MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER
LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER
THIS DEBENTURE SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING
ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH
DISPUTE.
4.7 CERTAIN AMOUNTS. Whenever pursuant to this Debenture the Borrower
----------------
is required to pay an amount in excess of the outstanding principal amount (or
the portion thereof required to be paid at that time) plus accrued and unpaid
interest plus Default Interest on such interest, the Borrower and the Holder
agree that the actual damages to the Holder from the receipt of cash payment on
this Debenture may be difficult to determine and the amount to be so paid by the
Borrower represents stipulated damages and not a penalty and is intended to
compensate the Holder in part for loss of the opportunity to convert this
Debenture and to earn a return from the sale of shares of Common Stock acquired
upon conversion of this Debenture at a price in excess of the price paid for
such shares pursuant to this Debenture. The Borrower and the Holder hereby
agree that such amount of stipulated damages is not plainly disproportionate to
the possible loss to the Holder from the receipt of a cash payment without the
opportunity to convert this Debenture into shares of Common Stock.
4.8 ALLOCATIONS OF MAXIMUM SHARE AMOUNT AND RESERVED AMOUNT. The
-------------------------------------------------------------
Maximum Share Amount and Reserved Amount shall be allocated pro rata among the
Holders of Debentures based on the principal amount of such Debentures issued to
each Holder. Each increase to the Maximum Share Amount and Reserved Amount
shall be allocated pro rata among the Holders of Debentures based on the
principal amount of such Debentures held by each Holder at the time of the
increase in the Maximum Share Amount or Reserved Amount. In the event a Holder
shall sell or otherwise transfer any of such Holder's Debentures, each
transferee shall be allocated a pro rata portion of such transferor's Maximum
Share Amount and Reserved Amount. Any portion of the Maximum Share Amount or
Reserved Amount which remains allocated to any person or entity which does not
hold any Debentures shall be allocated to the remaining Holders of Debentures,
pro rata based on the principal amount of such Debentures then held by such
Holders.
4.9 DAMAGES SHARES. The shares of Common Stock that may be issuable to
--------------
the Holder pursuant to Sections 1.3 and 1.4(g) hereof and pursuant to Section
2(c) of the Registration Rights Agreement ("DAMAGES SHARES") shall be treated as
Common Stock issuable upon conversion of this Debenture for all purposes hereof
and shall be subject to all of the limitations and afforded all of the rights of
the other shares of Common Stock issuable hereunder, including without
limitation, the right to be included in the Registration Statement filed
pursuant to the Registration Rights Agreement. For purposes of calculating
interest payable on the outstanding principal amount hereof, except as otherwise
provided herein, amounts convertible into Damages Shares ("DAMAGES AMOUNTS")
shall not bear interest but must be converted prior to the conversion of any
outstanding principal amount hereof, until the outstanding Damages Amounts is
zero.
4.10 DENOMINATIONS. At the request of the Holder, upon surrender of
-------------
this Debenture, the Borrower shall promptly issue new Debentures in the
aggregate outstanding principal amount hereof, in the form hereof, in such
denominations of at least $50,000 as the Holder shall request.
4.11 PURCHASE AGREEMENT. By its acceptance of this Debenture, each
-------------------
Holder agrees to be bound by the applicable terms of the Purchase Agreement.
4.12 NOTICE OF CORPORATE EVENTS. Except as otherwise provided below,
----------------------------
the Holder of this Debenture shall have no rights as a Holder of Common Stock
unless and only to the extent that it converts this Debenture into Common Stock.
The Borrower shall provide the Holder with prior notification of any meeting of
the Borrower's shareholders (and copies of proxy materials and other information
sent to shareholders). In the event of any taking by the Borrower of a record
of its shareholders for the purpose of determining shareholders who are entitled
to receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation,
reclassification or recapitalization) any share of any class or any other
securities or property, or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Borrower or any proposed liquidation, dissolution or winding up of the
Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20)
days prior to the record date specified therein (or thirty (30) days prior to
the consummation of the transaction or event, whichever is earlier), of the date
on which any such record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such dividend, distribution, right or other event to the extent
known at such time. The Borrower shall make a public announcement of any event
requiring notification to the Holder hereunder substantially simultaneously with
the notification to the Holder in accordance with the terms of this Section
4.12.
4.13 REMEDIES. The Borrower acknowledges that a breach by it of its
--------
obligations hereunder will cause irreparable harm to the Holder, by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly, the
Borrower acknowledges that the remedy at law for a breach of its obligations
under this Debenture will be inadequate and agrees, in the event of a breach or
threatened breach by the Borrower of the provisions of this Debenture, that the
Holder shall be entitled, in addition to all other available remedies at law or
in equity, and in addition to the penalties assessable herein, to an injunction
or injunctions restraining, preventing or curing any breach of this Debenture
and to enforce specifically the terms and provisions thereof, without the
necessity of showing economic loss and without any bond or other security being
required.
ARTICLE V. OPTIONAL PREPAYMENT
5.1. OPTIONAL PREPAYMENT. Notwithstanding anything to the contrary
--------------------
contained in this Article V, so long as (i) no Event of Default or Trading
Market Prepayment Event shall have occurred and be continuing, and (ii) the
Borrower has a sufficient number of authorized shares of Common Stock reserved
for issuance upon full conversion of the Debentures, then at any time after the
Issue Date, the Borrower shall have the right, exercisable on not less than ten
(10) Trading Days prior written notice to the Holders of the Debentures (which
notice may not be sent to the Holders of the Debentures until the Borrower is
permitted to prepay the Debentures pursuant to this Section 5.1), to prepay all
of the outstanding Debentures in accordance with this Section 5.1. Any notice
of prepayment hereunder (an "OPTIONAL PREPAYMENT") shall be delivered to the
Holders of the Debentures at their registered addresses appearing on the books
and records of the Borrower and shall state (1) that the Borrower is exercising
its right to prepay all of the Debentures issued on the Issue Date and (2) the
date of prepayment (the "OPTIONAL PREPAYMENT NOTICE"). On the date fixed for
prepayment (the "OPTIONAL PREPAYMENT DATE"), the Borrower shall make payment of
the Optional Prepayment Amount (as defined below) to or upon the order of the
Holders as specified by the Holders in writing to the Borrower at least one (1)
business day prior to the Optional Prepayment Date. If the Borrower exercises
its right to prepay the Debentures, the Borrower shall make payment to the
holders of an amount in cash (the "OPTIONAL PREPAYMENT AMOUNT") equal to 135%
multiplied by the sum of (w) the then outstanding principal amount of this
Debenture plus (x) accrued and unpaid interest on the unpaid principal amount of
----
this Debenture to the Optional Prepayment Date plus (y) Default Interest, if
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any, on the amounts referred to in clauses (w) and (x) plus (z) any amounts owed
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to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section
2(c) of the Registration Rights Agreement (the then outstanding principal amount
of this Debenture to the date of payment plus the amounts referred to in clauses
----
(x), (y) and (z) shall collectively be known as the "OPTIONAL PREPAYMENT SUM").
Notwithstanding notice of an Optional Prepayment, the Holders shall at all times
prior to the Optional Prepayment Date maintain the right to convert all or any
portion of the Debentures in accordance with Article I and any portion of
Debentures so converted after receipt of an Optional Prepayment Notice and prior
to the Optional Prepayment Date set forth in such notice and payment of the
aggregate Optional Prepayment Amount shall be deducted from the principal amount
of Debentures which are otherwise subject to prepayment pursuant to such notice.
If the Borrower delivers an Optional Prepayment Notice and fails to pay the
Optional Prepayment Amount due to the Holders of the Debentures within two (2)
business days following the Optional Prepayment Date, the Borrower shall forever
forfeit its right to redeem the Debentures pursuant to this Section 5.1.
IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in its
name by its duly authorized officer this 22nd day of January, 2002.
IMAGING TECHNOLOGIES CORPORATION
By: ______________________________
Brian Bonar
President and Chief Executive Officer
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debentures)
The undersigned hereby irrevocably elects to convert
$________principal amount of the Debenture (defined below) into shares of common
stock, par value $0.005 per share ("COMMON STOCK"), of Imaging Technologies
Corporation, a Delaware corporation (the "BORROWER") according to the conditions
of the convertible debentures of the Borrower dated as of January 22, 2002 (the
"Debentures"), as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates. No fee will be charged to the Holder for any conversion, except
for transfer taxes, if any. A copy of each Debenture is attached hereto (or
evidence of loss, theft or destruction thereof).
The Borrower shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee with DTC through its Deposit Withdrawal Agent Commission system ( "DWAC
TRANSFER").
Name of DTC Prime Broker:
Account Number:
In lieu of receiving shares of Common Stock issuable pursuant to this
Notice of Conversion by way of a DWAC Transfer, the undersigned hereby requests
that the Borrower issue a certificate or certificates for the number of shares
of Common Stock set forth below (which numbers are based on the Holder's
calculation attached hereto) in the name(s) specified immediately below or, if
additional space is necessary, on an attachment hereto:
Name:
Address:
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Debentures shall be made pursuant to registration of the securities under the
Securities Act of 1933, as amended (the "ACT"), or pursuant to an exemption from
registration under the Act.
Date of Conversion:___________________________
Applicable Conversion Price:____________________
Number of Shares of Common Stock to be Issued Pursuant to
conversion of the Debentures: ____________________
Signature:___________________________________
Name:______________________________________
Address:____________________________________
The Borrower shall issue and deliver shares of Common Stock to an overnight
courier not later than three business days following receipt of the original
Debenture(s) to be converted, and shall make payments pursuant to the Debentures
for the number of business days such issuance and delivery is late.