8% SENIOR SECURED CONVERTIBLE DEBENTURE
EXHIBIT
A
NEITHER
THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY 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 AS
EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE
SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF
THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT
OR
OTHER LOAN SECURED BY SUCH SECURITIES.
Original
Issue Date:
Original
Conversion Price (subject to adjustment herein):
$0.82
$_______________
8%
SENIOR SECURED CONVERTIBLE DEBENTURE
THIS
DEBENTURE is one of a series of
duly authorized and validly issued 8% Senior Secured Convertible Debentures
of
Guangzhou Global Telecom, Inc., a Florida corporation (the “Company”),
having its principal place of business at APT 29D, Block E, ▇▇.▇▇ ▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇ ▇▇ ▇▇▇▇ ▇▇▇▇, YiZhou Road, HaiZhu District, Guangzhou China,
510310, designated as its 8% Senior Secured Convertible Debenture (this
debenture, the “Debenture” and, collectively with the other debentures of
such series, the “Debentures”).
FOR
VALUE
RECEIVED, the Company promises to pay to ________________________ or its
registered assigns (the “Holder”), or shall have paid pursuant to the
terms hereunder, the principal sum of $_______________ on July __, 2009 (the
“Maturity Date”) or such earlier date as this Debenture is required or
permitted to be repaid as provided hereunder, and to pay interest to the Holder
on the aggregate unconverted and then outstanding principal amount of this
Debenture in accordance with the provisions hereof. This Debenture is
subject to the following additional provisions:
Section
1. Definitions. For the purposes
hereof, in addition to the terms defined elsewhere in this Debenture, (a)
capitalized terms not otherwise defined herein shall have the meanings set
forth
in the Purchase Agreement and (b) the following terms shall have the following
meanings:
1
“Alternate
Consideration” shall have the meaning set forth in Section
5(e).
“Bankruptcy
Event” means any of the following events: (a) the Company or any Significant
Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof
commences a case or other proceeding under any bankruptcy, reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency
or
liquidation or similar law of any jurisdiction relating to the Company or any
Significant Subsidiary thereof; (b) there is commenced against the Company
or
any Significant Subsidiary thereof any such case or proceeding that is not
dismissed within 60 days after commencement; (c) the Company or any Significant
Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief
or other order approving any such case or proceeding is entered; (d) the Company
or any Significant Subsidiary thereof suffers any appointment of any custodian
or the like for it or any substantial part of its property that is not
discharged or stayed within 60 calendar days after such appointment; (e) the
Company or any Significant Subsidiary thereof makes a general assignment for
the
benefit of creditors; (f) the Company or any Significant Subsidiary thereof
calls a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or (g) the Company or any Significant
Subsidiary thereof, by any act or failure to act, expressly indicates its
consent to, approval of or acquiescence in any of the foregoing or takes any
corporate or other action for the purpose of effecting any of the
foregoing.
“Base
Conversion Price” shall have the meaning set forth in Section
5(b).
“Business
Day” means any day except any Saturday, any Sunday, any day which shall be a
federal legal holiday in the United States or any day on which banking
institutions in the State of New York are authorized or required by law or
other
governmental action to close.
“Buy-In”
shall have the meaning set forth in Section 4(d)(v).
“Change
of Control Transaction” means the occurrence after the date hereof of any of
(i) an acquisition after the date hereof by an individual or legal entity or
“group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company (other than by means of conversion or exercise
of the Debentures and the Securities issued together with the Debentures),
or
(ii) the Company merges into or consolidates with any other Person, or any
Person merges into or consolidates with the Company and, after giving effect
to
such transaction, the stockholders of the Company immediately prior to such
transaction own less than 66% of the aggregate voting power of the Company
or
the successor entity of such transaction, or (iii) the Company sells or
transfers all or substantially all of its assets to another Person and the
stockholders of the Company immediately prior to such transaction own less
than
66% of the aggregate voting power of the acquiring entity immediately after
the
transaction, or
2
(iv)
a
replacement at one time or within a three year period of more than one-half
of
the members of the Company’s board of directors which is not approved by a
majority of those individuals who are members of the board of directors on
the
date hereof (or by those individuals who are serving as members of the board
of
directors on any date whose nomination to the board of directors was approved
by
a majority of the members of the board of directors who are members on the
date
hereof), or (v) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the
events set forth in clauses (i) through (iv) above.
“Conversion
Date” shall have the meaning set forth in Section 4(a).
“Conversion
Price” shall have the meaning set forth in Section 4(b).
“Conversion
Shares” means, collectively, the shares of Common Stock issuable upon
conversion of this Debenture in accordance with the terms hereof.
“Debenture
Register” shall have the meaning set forth in Section 2(c).
“Dilutive
Issuance” shall have the meaning set forth in Section 5(b).
“Dilutive
Issuance Notice” shall have the meaning set forth in Section
5(b).
“Effectiveness
Period” shall have the meaning set forth in the Registration Rights
Agreement.
“Equity
Conditions” means, during the
period in question,
(i) the Company shall have duly honored all conversions and redemptions
scheduled to occur or occurring by virtue of one or more Notices of Conversion
of the Holder, if any, (ii) the Company shall have paid all liquidated damages
and other amounts owing to the Holder in respect of this Debenture, (iii) there is an effective
Registration Statement pursuant to which the Holder is permitted to utilize
the
prospectus thereunder to resell all of the shares issuable pursuant to the
Transaction Documents (and the Company believes, in good faith, that such
effectiveness will continue uninterrupted for the foreseeable future), (iv)
the
Common Stock is trading on a Trading Market and all of the shares issuable
pursuant to the Transaction Documents are listed or quoted for trading on such
Trading Market (and the Company believes, in good faith, that trading of the
Common Stock on a Trading Market will continue uninterrupted for the foreseeable
future), (v) there is a sufficient number of authorized but unissued and
otherwise unreserved shares of Common Stock for the issuance of all of the
shares issuable pursuant to the Transaction Documents, (vi) there is no existing
Event of Default or no existing event which, with the passage of time or the
giving of notice, would constitute an Event of Default, (vii) the issuance
of
the shares in question (or, in the case of an Optional or Monthly Redemption,
the shares issuable upon conversion in full of the Optional or Monthly
Redemption Amount) to
the Holder would not violate the
limitations set forth in Section 4(c) herein, (viii) there has been no
public announcement of a pending or proposed Fundamental Transaction or Change
of Control Transaction that has not been consummated, (ix) the Holder is not
in
possession of any information provided by the Company that constitutes, or
may
constitute, material non-public information and (x) for each Trading Day in
a
period of 20 consecutive Trading Days prior to the applicable date in question,
the daily trading volume for the Common Stock on the principal Trading Market
exceeds $200,000 of shares (subject to adjustment for forward and reverse stock
splits and the like) per Trading Day.
3
“Event
of Default” shall have
the meaning set forth in Section 8.
“Forced
Conversion” shall have the meaning set forth in Section 6(d).
“Forced
Conversion Date” shall
have the meaning set forth in Section 6(d).
“Forced
Conversion Notice” shall have the meaning set forth in Section
6(d).
“Forced
Conversion Notice Date” shall have the meaning set forth in Section
6(d).
“Fundamental
Transaction” shall have the meaning set forth in Section 5(e).
“Interest
Conversion Rate” means the lesser of (a) the Conversion Price or (b) 85% of
the average of the VWAPs for the 10 consecutive Trading Days ending on the
Trading Day that is immediately prior to the applicable Interest Payment
Date.
“Interest
Conversion Shares” shall have the meaning set forth in Section
2(a).
“Interest
Notice Period” shall have the meaning set forth in Section
2(a).
“Interest
Payment Date” shall have the meaning set forth in Section 2(a).
“Interest
Share Amount” shall have the meaning set forth in Section 2(a).
“Late
Fees” shall have the meaning set forth in Section 2(d).
“Mandatory
Default Amount” means the sum of (i) the greater of (A) 130% of
the outstanding principal amount of this Debenture, plus 100% of accrued and
unpaid interest hereon, or (B) the outstanding principal amount of this
Debenture, plus all accrued and unpaid interest hereon, divided by the
Conversion Price on the date the Mandatory Default Amount is either (a) demanded
(if demand or notice is required to create an Event of Default) or otherwise
due
or (b) paid in full, whichever has a lower Conversion Price, multiplied by
the
VWAP on the date the Mandatory Default Amount is either (x) demanded or
otherwise due or (y) paid in full, whichever has a higher VWAP, and (ii) all
other amounts, costs, expenses and liquidated damages due in respect of this
Debenture.
4
“Monthly
Conversion Period” shall have the meaning set forth in Section 6(b)
hereof.
“Monthly
Conversion Price” shall have the meaning set forth in Section 6(b)
hereof.
“Monthly
Redemption” means the redemption of this Debenture pursuant to Section 6(b)
hereof.
“Monthly
Redemption Amount” means, as to a Monthly Redemption, $______1, plus accrued but unpaid interest,
liquidated
damages and any other amounts then owing to the Holder in respect of this
Debenture.
“Monthly
Redemption Date” means the 1st of each month, commencing on February 1, 2008
and terminating upon the full redemption of this Debenture.
“Monthly
Redemption Notice” shall have the meaning set forth in Section 6(b)
hereof.
“New
York Courts” shall have the meaning set forth in Section 9(d).
“Notice
of Conversion” shall have the meaning set forth in Section
4(a).
“Optional
Redemption” shall have the meaning set forth in Section 6(a).
“Optional
Redemption Amount” means the sum of (i) 120% of the then outstanding
principal amount of the Debenture, (ii) accrued but unpaid interest and (iii)
all liquidated damages and other amounts due in respect of the
Debenture.
“Optional
Redemption Date” shall have the meaning set forth in Section
6(a).
“Optional
Redemption Notice” shall have the meaning set forth in Section
6(a).
“Optional
Redemption Notice Date” shall have the meaning set forth in Section
6(a).
“Original
Issue Date” means the date of the first issuance of the Debentures,
regardless of any transfers of any Debenture and regardless of the number of
instruments which may be issued to evidence such Debentures.
“Permitted
Indebtedness” means (a) the indebtedness evidenced by the Debentures, (b)
the Indebtedness existing on the Original Issue Date and set forth on
Schedule 3.1(aa) attached to the Purchase Agreement, (c) lease
obligations and purchase money indebtedness of up to $100,000, in the aggregate,
incurred in connection with the acquisition of capital assets and lease
obligations with respect to newly acquired or leased assets and (d) indebtedness
that (i) is expressly subordinate to the Debentures pursuant to a written
subordination agreement with the Purchasers that is acceptable to each Purchaser
in its sole and absolute discretion and (ii) matures at a date later than the
Maturity Date).
______________________________
1 1/18th
of the original
Principal Amount.
5
“Permitted
Lien” means the individual and collective reference to the following: (a)
Liens for taxes, assessments and other governmental charges or levies not yet
due or Liens for taxes, assessments and other governmental charges or levies
being contested in good faith and by appropriate proceedings for which adequate
reserves (in the good faith judgment of the management of the Company) have
been
established in accordance with GAAP; (b) Liens imposed by law which were
incurred in the ordinary course of the Company’s business, such as carriers’,
warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and other
similar Liens arising in the ordinary course of the Company’s business, and
which (x) do not individually or in the aggregate materially detract from the
value of such property or assets or materially impair the use thereof in the
operation of the business of the Company and its consolidated Subsidiaries
or
(y) are being contested in good faith by appropriate proceedings, which
proceedings have the effect of preventing for the foreseeable future the
forfeiture or sale of the property or asset subject to such Lien; (c) Liens
incurred in connection with Permitted Indebtedness under clauses (a) and (b)
thereunder; and (d) Liens incurred in connection with Permitted Indebtedness
under clause (c) thereunder, provided that such Liens are not secured by assets
of the Company or its Subsidiaries other than the assets so acquired or
leased.
“Pre-Redemption
Conversion Shares” shall have the meaning set forth in Section 6(b)
hereof.
“Purchase
Agreement” means the Securities Purchase Agreement, dated as of July 31,
2007, among the Company and the original Holders, as amended, modified or
supplemented from time to time in accordance with its terms.
“Registration
Rights Agreement” means the Registration Rights Agreement, dated as of the
date of the Purchase Agreement, among the Company and the original Holders,
as
amended, modified or supplemented from time to time in accordance with its
terms.
“Registration
Statement” means a registration statement that registers the resale of all
Conversion Shares and Interest Conversion Shares of the Holder, names the Holder
as a “selling stockholder” therein, and meets the requirements of the
Registration Rights Agreement.
“Securities
Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
“Share
Delivery Date” shall have the meaning set forth in Section
4(d).
“Subsidiary”
shall have the meaning set forth in the Purchase Agreement.
6
“Threshold
Period” shall have the meaning set forth in Section 6(d).
“Trading
Day” means a day on which the principal Trading Market is open for
business.
“Trading
Market” means the following markets or exchanges on which the Common Stock
is listed or quoted for trading on the date in question: the American Stock
Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global
Select Market, the New York Stock Exchange or the OTC Bulletin
Board.
“Transaction
Documents” shall have the meaning set forth in the Purchase
Agreement.
“VWAP”
means, for any date, the price determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted on a Trading
Market, the daily volume weighted average price of the Common Stock for such
date (or the nearest preceding date) on the Trading Market on which the Common
Stock is then listed or quoted for trading as reported by Bloomberg L.P. (based
on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York
City
time)); (b) if the OTC Bulletin Board is not a Trading Market, the volume
weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then
quoted for trading on the OTC Bulletin Board and if prices for the Common Stock
are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a
similar organization or agency succeeding to its functions of reporting prices),
the most recent bid price per share of the Common Stock so reported; or
(d) in all other cases, the fair market value of a share of Common Stock as
determined by an independent appraiser selected in good faith by the Holder
and
reasonably acceptable to the Company.
Section
2. Interest.
a) Payment
of Interest in Cash or Kind. The Company shall pay interest to the Holder on
the aggregate unconverted and then outstanding principal amount of this
Debenture at the rate of 8% per annum, payable quarterly on November 1, February
1, May 1 and August 1, beginning on the first such date after the Original
Issue
Date, on each Monthly Redemption Date (as to that principal amount then being
redeemed), on each Conversion Date (as to that principal amount then being
converted), on each Optional Redemption Date (as to that principal amount then
being redeemed) and on the Maturity Date (each such date, an “Interest
Payment Date”) (if any Interest Payment Date is not a Business Day, then the
applicable payment shall be due on the next succeeding Business Day), in cash
or, at the Company’s option, in duly authorized, validly issued, fully paid and
non-assessable shares of Common Stock at the Interest Conversion Rate (the
dollar amount to be paid in shares, the “Interest Share Amount”) or a
combination thereof; provided, however, that payment in shares of
Common Stock may only occur if
7
(i)
all
of the Equity Conditions have been met (unless waived by the Holder in writing)
during the 20 Trading Days immediately prior to the applicable Interest Payment
Date (the “Interest Notice Period”) and through and including
the date such shares of Common Stock are actually issued to the Holder, (ii)
the
Company shall have given the Holder notice in accordance with the notice
requirements set forth below and (iii) as to such Interest Payment Date, prior
to such Interest Notice Period (but not more than 5 Trading Days prior to the
commencement of such Interest Notice Period), the Company shall have delivered
to the Holder’s account with The Depository Trust Company a number of shares of
Common Stock to be applied against such Interest Share Amount equal to the
quotient of (x) the applicable Interest Share Amount divided by (y) the then
Conversion Price (the “Interest Conversion Shares”).
b) Company’s
Election to Pay Interest in Kind. Subject to the terms and
conditions herein, the decision whether to pay interest hereunder in cash,
shares of Common Stock or a combination thereof shall be at the discretion
of
the Company. Prior to the commencement of any Interest Notice Period,
the Company shall deliver to the Holder a written notice of its election to
pay
interest hereunder on the applicable Interest Payment Date either in cash,
shares of Common Stock or a combination thereof and the Interest Share Amount
as
to the applicable Interest Payment Date, provided that the Company may indicate
in such notice that the election contained in such notice shall apply to future
Interest Payment Dates until revised by a subsequent notice. During
any Interest Notice Period, the Company’s election (whether specific to an
Interest Payment Date or continuous) shall be irrevocable as to such Interest
Payment Date. Subject to the aforementioned conditions, failure to
timely deliver such written notice to the Holder shall be deemed an election
by
the Company to pay the interest on such Interest Payment Date in
cash. At any time the Company delivers a notice to the Holder of its
election to pay the interest in shares of Common Stock, the Company shall timely
file a prospectus supplement pursuant to Rule 424 disclosing such
election. The aggregate number of shares of Common Stock otherwise
issuable to the Holder on an Interest Payment Date shall be reduced by the
number of Interest Conversion Shares previously issued to the Holder in
connection with such Interest Payment Date.
c) Interest
Calculations. Interest shall be calculated on the basis of a 360-day year,
consisting of twelve 30 calendar day periods, and shall accrue daily commencing
on the Original Issue Date until payment in full of the outstanding principal,
together with all accrued and unpaid interest, liquidated damages and other
amounts which may become due hereunder, has been made. Payment of
interest in shares of Common Stock (other than the Interest Conversion Shares
issued prior to an Interest Notice Period) shall otherwise occur pursuant to
Section 4(d)(ii) herein and, solely for purposes of the payment of interest
in
shares, the Interest Payment Date shall be deemed the Conversion
Date. Interest shall cease to accrue with respect to any principal
amount converted, provided that the Company actually delivers the Conversion
Shares within the time period required by Section 4(d)(ii)
herein. Interest hereunder will be paid to the Person in whose name
this Debenture is registered on the records of the Company regarding
registration and transfers of this Debenture (the “Debenture Register”).
Except as otherwise provided herein, if at any time the Company pays interest
partially in cash and partially in shares of Common Stock to the holders of
the
Debentures, then such payment of cash shall be distributed ratably among the
holders of the then-outstanding Debentures based on their (or their
predecessor’s) initial purchases of Debentures pursuant to the Purchase
Agreement.
8
d) Late
Fee. All overdue accrued and unpaid interest to be paid hereunder
shall entail a late fee at an interest rate equal to the lesser of 18% per
annum
or the maximum rate permitted by applicable law (“Late Fees”) which shall
accrue daily from the date such interest is due hereunder through and including
the date of actual payment in full. Notwithstanding anything to the contrary
contained herein, if on any Interest Payment Date the Company has elected to
pay
accrued interest in the form of Common Stock but the Company is not permitted
to
pay accrued interest in Common Stock because it fails to satisfy the conditions
for payment in Common Stock set forth in Section 2(a) herein, then, at the
option of the Holder, the Company, in lieu of delivering either shares of Common
Stock pursuant to this Section 2 or paying the regularly scheduled interest
payment in cash, shall deliver, within three Trading Days of each applicable
Interest Payment Date, an amount in cash equal to the product of (x) the number
of shares of Common Stock otherwise deliverable to the Holder in connection
with
the payment of interest due on such Interest Payment Date multiplied by (y)
the
highest VWAP during the period commencing on the Interest Payment Date and
ending on the Trading Day prior to the date such payment is actually
made. If any Interest Conversion Shares are issued to the Holder in
connection with an Interest Payment Date and are not applied against an Interest
Share Amount, then the Holder shall promptly return such excess shares to the
Company.
e) Prepayment. Except
as otherwise set forth in this Debenture, the Company may not prepay any portion
of the principal amount of this Debenture without the prior written consent
of
the Holder.
Section
3.
Registration of Transfers and Exchanges.
a) Different
Denominations. 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 payable for such registration of exchange.
b) Investment
Representations. This Debenture has been issued subject to certain
investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the
Purchase Agreement and applicable federal and state securities laws and
regulations.
c) Reliance
on Debenture Register. Prior to due presentment for transfer to the Company
of this Debenture, the Company and any agent of the Company may treat the Person
in whose name this Debenture is duly registered on the Debenture Register as
the
owner hereof for the purpose of receiving payment as herein provided and for
all
other purposes, whether or not this Debenture is overdue, and neither the
Company nor any such agent shall be affected by notice to the
contrary.
9
Section
4.
Conversion.
a) Voluntary
Conversion. At any time after the Original Issue Date until this Debenture
is no longer outstanding, this Debenture shall be convertible, in whole or
in
part, into shares of Common Stock at the option of the Holder, at any time
and
from time to time (subject to the conversion limitations set forth in
Section 4(c) hereof). The Holder shall effect conversions by
delivering to the Company a Notice of Conversion, the form of which is attached
hereto as Annex A (a “Notice of Conversion”), specifying therein
the principal amount of this Debenture to be converted and the date on which
such conversion shall be effected (such date, the “Conversion
Date”). If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of Conversion
is deemed delivered hereunder. To effect conversions hereunder, the
Holder shall not be required to physically surrender this Debenture to the
Company unless the entire principal amount of this Debenture, plus all accrued
and unpaid interest thereon, has been so converted. Conversions hereunder shall
have the effect of lowering the outstanding principal amount of this Debenture
in an amount equal to the applicable conversion. The Holder and the
Company shall maintain records showing the principal amount(s) converted and
the
date of such conversion(s). The Company may deliver an objection to
any Notice of Conversion within 1 Business Day of delivery of such Notice of
Conversion. In the event of any dispute or discrepancy, the records
of the Holder shall be controlling and determinative in the absence of manifest
error. The Holder, and any assignee by acceptance of this Debenture,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of this Debenture, the unpaid and unconverted
principal amount of this Debenture may be less than the amount stated on the
face hereof.
b) Conversion
Price. The conversion price in effect on any Conversion Date
shall be equal to $0.82, subject to adjustment herein (the
“Conversion Price”).
c) ▇▇▇▇▇▇’s
Restriction on Conversion. The Company shall not effect any conversion of
this Debenture, and a Holder shall not have the right to convert any portion
of
this Debenture, to the extent that after giving effect to the conversion set
forth on the applicable Notice of Conversion, the Holder (together with the
Holder’s Affiliates, and any other person or entity acting as a group together
with the Holder or any of the Holder’s Affiliates) would beneficially own in
excess of the Beneficial Ownership Limitation (as defined below). For
purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its Affiliates shall include the number
of
shares of Common Stock issuable upon conversion of this Debenture with respect
to which such determination is being made, but shall exclude the number of
shares of Common Stock which are issuable upon (A) conversion of the remaining,
unconverted principal amount of this Debenture beneficially owned by the Holder
or any of its Affiliates and (B) exercise or conversion of the unexercised
or
unconverted portion of any other securities of the Company subject to
a limitation on conversion or exercise analogous to the limitation contained
herein (including, without limitation, any other Debentures or the Warrants)
beneficially owned by the Holder or any of its Affiliates.
10
Except
as
set forth in the preceding sentence, for purposes of this Section 4(c),
beneficial ownership shall be calculated in accordance with Section 13(d) of
the
Exchange Act and the rules and regulations promulgated thereunder. To
the extent that the limitation contained in this Section 4(c) applies, the
determination of whether this Debenture is convertible (in relation to other
securities owned by the Holder together with any Affiliates) and of which
principal amount of this Debenture is convertible shall be in the sole
discretion of the Holder, and the submission of a Notice of Conversion shall
be
deemed to be the Holder’s determination of whether this Debenture may be
converted (in relation to other securities owned by the Holder together with
any
Affiliates) and which principal amount of this Debenture is convertible, in
each
case subject to the Beneficial Ownership Limitation. To ensure compliance with
this restriction, the Holder will be deemed to represent to the Company each
time it delivers a Notice of Conversion that such Notice of Conversion has
not
violated the restrictions set forth in this paragraph and the Company shall
have
no obligation to verify or confirm the accuracy of such
determination. In
addition, a determination as to any group status as contemplated above shall
be
determined in accordance with Section 13(d) of the Exchange Act and the rules
and
regulations promulgated thereunder. For purposes of
this Section 4(c), in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as stated in the most recent of the following: (A) the Company’s most recent
Form 10-QSB or Form 10-KSB, as the case may be; (B) a more recent public
announcement by the Company; or (C) a more recent notice by the Company or
the
Company’s transfer agent setting forth the number of shares of Common Stock
outstanding. Upon the written or oral request of a Holder, the Company
shall within two Trading Days confirm orally and in writing to the Holder the
number of shares of Common Stock then outstanding. In any case, the number
of outstanding shares of Common Stock shall be determined after giving effect
to
the conversion or exercise of securities of the Company, including this
Debenture, by the Holder or its Affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The “Beneficial
Ownership Limitation” shall be 4.99% of the number of shares of the Common
Stock outstanding immediately after giving effect to the issuance of shares
of
Common Stock issuable upon conversion of this Debenture held by the
Holder. The Beneficial Ownership Limitation provisions of this
Section 4(c) may be waived by the Holder, at the election of the Holder, upon
not less than 61 days’ prior notice to the Company, to change the Beneficial
Ownership Limitation to 9.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to the issuance of shares of Common
Stock upon conversion of this Debenture held by the Holder and the provisions
of
this Section 4(c) shall continue to apply. Upon such a change by a
Holder of the Beneficial Ownership Limitation from such 4.99% limitation to
such
9.99% limitation, the Beneficial Ownership Limitation may not be further waived
by the Holder. The provisions of this paragraph shall be construed
and implemented in a manner otherwise than in strict conformity with the terms
of this Section 4(c) to correct this paragraph (or any portion hereof) which
may
be defective or inconsistent with the intended Beneficial Ownership Limitation
herein contained or to make changes or supplements necessary or desirable to
properly give effect to such limitation. The limitations contained
in this
paragraph shall apply to a successor holder of this Debenture.
11
|
d)
|
Mechanics
of Conversion.
|
i. Conversion
Shares Issuable Upon Conversion of Principal Amount. The number
of Conversion Shares issuable upon a conversion hereunder shall be determined
by
the quotient obtained by dividing (x) the outstanding principal amount of this
Debenture to be converted by (y) the Conversion Price.
i.
ii. Delivery
of Certificate Upon Conversion. Not later than three Trading Days after each
Conversion Date (the “Share Delivery Date”), the Company shall deliver,
or cause to be delivered, to the Holder (A) a certificate or certificates
representing the Conversion Shares which, on or after the Effective Date, shall
be free of restrictive legends and trading restrictions (other than those which
may then be required by the Purchase Agreement) representing the number of
Conversion Shares being acquired upon the conversion of this Debenture
(including, if the Company has given continuous notice pursuant to Section
2(b)
for payment of interest in shares of Common Stock at least 20 Trading Days
prior
to the date on which the Conversion Notice is delivered to the Company, shares
of Common Stock representing the payment of accrued interest otherwise
determined pursuant to Section 2(a) but assuming that the Interest Notice Period
is the 20 Trading Days period immediately prior to the date on which the
Conversion Notice is delivered to the Company and excluding for such issuance
the condition that the Company deliver Interest Conversion Shares as to such
interest payment) and (B) a bank check in the amount of accrued and unpaid
interest (if the Company has elected or is required to pay accrued interest
in
cash). On or after the Effective Date, the Company shall use its best efforts
to
deliver any certificate or certificates required to be delivered by the Company
under this Section 4 electronically through the Depository Trust Company or
another established clearing corporation performing similar
functions.
iii. Failure
to Deliver Certificates. If in the case of any Notice of
Conversion such certificate or certificates are not delivered to or as directed
by the applicable Holder by the third Trading Day after the Conversion Date,
the
Holder shall be entitled to elect by written notice to the Company at any time
on or before its receipt of such certificate or certificates, to rescind such
Conversion, in which event the Company shall promptly return to the Holder
any
original Debenture delivered to the Company and the Holder shall promptly return
to the Company the Common Stock certificates representing the principal amount
of this Debenture unsuccessfully tendered for conversion to the
Company.
12
iv. Obligation
Absolute; Partial Liquidated Damages. The Company’s obligations
to issue and deliver the Conversion Shares upon conversion of this Debenture
in
accordance with the terms hereof are absolute and unconditional, irrespective
of
any action or inaction by the Holder to enforce the same, any waiver or consent
with respect to any provision hereof, the recovery of any judgment against
any
Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder or any other Person of any obligation to the Company or any violation
or
alleged violation of law by the Holder or any other Person, and irrespective
of
any other circumstance which might otherwise limit such obligation of the
Company to the Holder in connection with the issuance of such Conversion Shares;
provided, however, that such delivery shall not operate as a
waiver by the Company of any such action the Company may have against the
Holder. In the event the Holder of this Debenture shall elect to
convert any or all of the outstanding principal amount hereof, the Company
may
not refuse conversion based on any claim that the Holder or anyone associated
or
affiliated with the Holder has been engaged in any violation of law, agreement
or for any other reason, unless an injunction from a court, on notice to Holder,
restraining and or enjoining conversion of all or part of this Debenture shall
have been sought and obtained, and the Company posts a surety bond for the
benefit of the Holder in the amount of 150% of the outstanding principal amount
of this Debenture, which is subject to the injunction, which bond shall remain
in effect until the completion of arbitration/litigation of the underlying
dispute and the proceeds of which shall be payable to the Holder to the extent
it obtains judgment. In the absence of such injunction, the Company
shall issue Conversion Shares or, if applicable, cash, upon a properly noticed
conversion. If the Company fails for any reason to deliver to the
Holder such certificate or certificates pursuant to Section 4(d) by the third
Trading Day after the Conversion Date, the Company shall pay to the Holder,
in
cash, as liquidated damages and not as a penalty, for each $1000 of principal
amount being converted, $10 per Trading Day (increasing to $20 per Trading
Day
on the fifth Trading Day after such liquidated damages begin to accrue) for
each
Trading Day after such third Trading Day until such certificates are
delivered. Nothing herein shall limit a ▇▇▇▇▇▇’s right to
pursue actual damages or declare an Event of Default pursuant to Section 8
hereof for the Company’s failure to deliver Conversion Shares within the period
specified herein and the Holder shall have the right to pursue all remedies
available to it hereunder, at law or in equity including, without limitation,
a
decree of specific performance and/or injunctive relief. The exercise
of any such rights shall not prohibit the Holder from seeking to enforce damages
pursuant to any other Section hereof or under applicable law.
v. Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon Conversion. In
addition to any other rights available to the Holder, if the Company fails
for
any reason to deliver to the Holder such certificate or certificates by the
Share Delivery Date pursuant to Section 4(d)(ii), and if after such Share
Delivery Date the Holder is required by its brokerage firm to purchase (in
an
open market transaction or otherwise), or the Holder’s brokerage firm otherwise
purchases, shares of Common Stock to deliver in satisfaction of a sale by the
Holder of the Conversion Shares which the Holder was entitled to receive upon
the conversion relating to such Share Delivery Date (a “Buy-In”), then
the Company shall (A) pay in cash to the Holder (in addition to any other
remedies available to or elected by the Holder) the amount by which (x) the
Holder’s total purchase price (including any brokerage commissions) for the
Common Stock so purchased exceeds (y) the product of (1) the aggregate number
of
shares of Common Stock that the Holder was entitled to receive from the
conversion at issue multiplied by (2) the actual sale price at which the sell
order giving rise to such purchase obligation was executed (including any
brokerage commissions) and (B) at the option of the Holder, either reissue
(if
surrendered) this Debenture in a 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 if the Company had timely complied
with
its delivery requirements under Section 4(d)(ii).
13
For
example, if the Holder purchases Common Stock having a total purchase price
of
$11,000 to cover a Buy-In with respect to an attempted conversion of this
Debenture with respect to which the actual sale price of the Conversion Shares
(including any brokerage commissions) giving rise to such purchase obligation
was a total of $10,000 under clause (A) of the immediately preceding sentence,
the Company shall be required to pay the Holder $1,000. The Holder
shall provide the Company written notice indicating the amounts payable to
the
Holder in respect of the Buy-In and, upon request of the Company, evidence
of
the amount of such loss. Nothing herein shall limit a Holder’s right
to pursue any other remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver
certificates representing shares of Common Stock upon conversion of this
Debenture as required pursuant to the terms hereof.
vi. Reservation
of Shares Issuable Upon Conversion. The Company covenants that it will at
all times reserve and keep available out of its authorized and unissued shares
of Common Stock for the sole purpose of issuance upon conversion of this
Debenture and payment of interest on this Debenture, each as herein provided,
free from preemptive rights or any other actual contingent purchase rights
of
Persons other than the Holder (and the other holders of the Debentures), not
less than such aggregate number of shares of the Common Stock as shall (subject
to the terms and conditions set forth in the Purchase Agreement) be issuable
(taking into account the adjustments of Section 5) upon the conversion of the
outstanding principal amount of this Debenture and payment of interest
hereunder. The Company covenants that all shares of Common Stock that
shall be so issuable shall, upon issue, be duly authorized, validly issued,
fully paid and nonassessable and, if the Registration Statement is then
effective under the Securities Act, shall be registered for public sale in
accordance with such Registration Statement.
vii. Fractional
Shares. No fractional shares or scrip representing fractional shares shall
be issued upon the conversion of this Debenture. As to any fraction
of a share which Holder would otherwise be entitled to purchase upon such
conversion, the Company shall at its election, either pay a cash adjustment
in
respect of such final fraction in an amount equal to such fraction multiplied
by
the Conversion Price or round up to the next whole share.
14
viii. Transfer
Taxes. The issuance of certificates for shares of the Common
Stock on conversion of this Debenture shall be made without charge to the Holder
hereof for any documentary stamp or similar taxes that may be payable in respect
of the issue or delivery of such certificates, provided that the Company shall
not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion
in
a name other than that of the Holder of this Debenture and the Company shall
not
be required to issue or deliver such certificates unless or until the person
or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
Section
5. Certain
Adjustments.
a) Stock
Dividends and Stock Splits. If the Company, at any time while
this Debenture is outstanding: (A) pays a stock dividend or otherwise makes
a
distribution or distributions payable in shares of Common Stock on shares of
Common Stock or any Common Stock Equivalents (which, for avoidance of doubt,
shall not include any shares of Common Stock issued by the Company upon
conversion of, or payment of interest on, the Debentures); (B) subdivides
outstanding shares of Common Stock into a larger number of shares; (C) combines
(including by way of a reverse stock split) outstanding shares of Common Stock
into a smaller number of shares; or (D) issues, in the event of a
reclassification of shares of the Common Stock, any shares of capital stock
of
the Company, then the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock (excluding
any
treasury shares of the Company) outstanding immediately before such event and
of
which the denominator shall be the number of shares of Common Stock outstanding
immediately 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.
b) Subsequent
Equity Sales. If, at any time while this Debenture is
outstanding, the Company or any Subsidiary, as applicable, sells or
grants any option to purchase or sells or grants any right to reprice, or
otherwise disposes of or issues (or announces any sale, grant or any option
to
purchase or other disposition), any Common Stock or Common Stock Equivalents
entitling any Person to acquire shares of Common Stock at an effective price
per
share that is lower than the then Conversion Price (such lower price, the
“Base Conversion Price” and such issuances, collectively, a “Dilutive
Issuance”) (if the holder of the Common Stock or Common Stock Equivalents 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 are issued in connection
with such issuance, be entitled to receive shares of Common Stock at an
effective price per share that is lower than the Conversion Price, such issuance
shall be deemed to have occurred for less than the Conversion Price on such
date
of the Dilutive Issuance), then the Conversion Price shall be reduced to equal
the Base Conversion Price.
15
Such
adjustment shall be made whenever such Common Stock or Common Stock Equivalents
are issued. Notwithstanding the foregoing, no adjustment will be made
under this Section 5(b) in respect of an Exempt Issuance. If the
Company enters into a Variable Rate Transaction, despite the prohibition set
forth in the Purchase Agreement, the Company shall be deemed to have issued
Common Stock or Common Stock Equivalents at the lowest possible conversion
price
at which such securities may be converted or exercised. The Company shall notify
the Holder in writing, no later than 1 Business Day following the issuance
of
any Common Stock or Common Stock Equivalents subject to this Section 5(b),
indicating therein the applicable issuance price, or applicable reset price,
exchange price, conversion price and other pricing terms (such notice, the
“Dilutive Issuance Notice”). For purposes of clarification,
whether or not the Company provides a Dilutive Issuance Notice pursuant to
this
Section 5(b), upon the occurrence of any Dilutive Issuance, the Holder is
entitled to receive a number of Conversion Shares based upon the Base Conversion
Price on or after the date of such Dilutive Issuance, regardless of whether
the
Holder accurately refers to the Base Conversion Price in the Notice of
Conversion.
c) Subsequent
Rights Offerings. If the Company, at any time while the Debenture
is outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to Holders) entitling them to subscribe for or purchase shares
of
Common Stock at a price per share that is lower than the VWAP on the record
date
referenced 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
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
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 (assuming delivery to the Company in full of all consideration payable
upon exercise of such rights, options or warrants) would purchase at such
VWAP. 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.
d) Pro
Rata Distributions. If the Company, at any time while this Debenture is
outstanding, distributes to all holders of Common Stock (and not to the Holders)
evidences of its indebtedness or assets (including cash and cash dividends)
or
rights or warrants to subscribe for or purchase any security (other than the
Common Stock, which shall be subject to Section 5(b)), then in each such case
the Conversion Price shall be adjusted by multiplying such 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 VWAP determined as of the record date mentioned above,
and of which the numerator shall be such VWAP 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 1 outstanding share of the Common
Stock as determined by the Board of Directors of the Company in good
faith.
16
In
either
case the adjustments shall be described in a statement delivered to the Holder
describing the portion of assets or evidences of indebtedness so distributed
or
such subscription rights applicable to 1 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.
e) Fundamental
Transaction. If, at any time while this Debenture is outstanding, (A) the
Company effects any merger or consolidation of the Company with or into another
Person, (B) the Company effects any sale of all or substantially all of its
assets in one transaction or a series of related transactions, (C) any tender
offer or exchange offer (whether by the Company or another Person) is completed
pursuant to which holders of Common Stock are permitted to tender or exchange
their shares for other securities, cash or property, or (D) the Company effects
any reclassification of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is effectively converted into or exchanged
for other securities, cash or property (in any such case, a “Fundamental
Transaction”), then, upon any subsequent conversion of this Debenture, the
Holder shall have the right to receive, for each Conversion Share that would
have been issuable upon such conversion immediately prior to the occurrence
of
such Fundamental Transaction, the same kind and amount of securities, cash
or
property as it would have been entitled to receive upon the occurrence of such
Fundamental Transaction if it had been, immediately prior to such Fundamental
Transaction, the holder of 1 share of Common Stock (the “Alternate
Consideration”). For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted to apply
to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of 1 share of Common Stock in such Fundamental Transaction,
and the Company shall apportion the Conversion Price among the Alternate
Consideration in a reasonable manner reflecting the relative value of any
different components of the Alternate Consideration. If holders of
Common Stock are given any choice as to the securities, cash or property to
be
received in a Fundamental Transaction, then the Holder shall be given the same
choice as to the Alternate Consideration it receives upon any conversion of
this
Debenture following such Fundamental Transaction. To the extent
necessary to effectuate the foregoing provisions, any successor to the Company
or surviving entity in such Fundamental Transaction shall issue to the Holder
a
new debenture consistent with the foregoing provisions and evidencing the
Holder’s right to convert such debenture into Alternate Consideration. The terms
of any agreement pursuant to which a Fundamental Transaction is effected shall
include terms requiring any such successor or surviving entity to comply with
the provisions of this Section 5(e) and insuring that this Debenture (or any
such replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.
17
f) Calculations. All
calculations under this Section 5 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be. For purposes of this
Section 5, the number of shares of Common Stock deemed to be issued and
outstanding as of a given date shall be the sum of the number of shares of
Common Stock (excluding any treasury shares of the Company) issued and
outstanding.
g) Notice
to the Holder.
i. Adjustment
to Conversion Price. Whenever the Conversion Price is adjusted
pursuant to any provision of this Section 5, the Company shall promptly deliver
to each Holder a notice setting forth the Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring such
adjustment.
ii. Notice
to Allow Conversion by ▇▇▇▇▇▇. If (A) the Company shall declare a
dividend (or any other distribution in whatever form) on the Common Stock,
(B)
the Company shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock, (C) the Company shall authorize the granting
to
all holders of the Common Stock of rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any rights, (D) the
approval of any stockholders of the Company shall be required in connection
with
any reclassification of the Common Stock, any consolidation or merger to which
the Company is a party, any sale or transfer of all or substantially all of
the
assets of the Company, of any compulsory share exchange whereby the Common
Stock
is converted into other securities, cash or property or (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or winding
up of
the affairs of the Company, then, in each case, the Company shall cause to
be
filed at each office or agency maintained for the purpose of conversion of
this
Debenture, and shall cause to be delivered to the Holder at its last address
as
it shall appear upon the Debenture Register, at least 20 calendar days prior
to
the applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled
to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange, provided that the
failure to deliver such notice or any defect therein or in the delivery 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 period commencing on the date of such notice through the
effective date of the event triggering such notice.
18
Section
6. Redemption
and Forced Conversion.
a) Optional
Redemption at Election of Company. Subject to the provisions of
this Section 6, at any time after the Effective Date, the Company may deliver
a
notice to the Holder (an “Optional Redemption Notice” and the date such
notice is deemed delivered hereunder, the “Optional Redemption Notice
Date”) of its irrevocable election to redeem some or all of the then
outstanding principal amount of this Debenture for cash in an amount equal
to
the Optional Redemption Amount on the 10th Trading
Day
following the Optional Redemption Notice Date (such date, the “Optional
Redemption Date” and such redemption, the “Optional
Redemption”). The Optional Redemption Amount is payable in full
on the Optional Redemption Date. The Company may only effect an
Optional Redemption if each of the Equity Conditions shall have been met (unless
waived in writing by the Holder) on each Trading Day during the period
commencing on the Optional Redemption Notice Date through to the Optional
Redemption Date and through and including the date payment of the Optional
Redemption Amount is actually made in full. If any of the Equity
Conditions shall cease to be satisfied at any time during the 10 Trading Day
period, then the Holder may elect to nullify the Optional Redemption Notice
by
notice to the Company within 3 Trading Days after the first day on which any
such Equity Condition has not been met (provided that if, by a provision of
the
Transaction Documents, the Company is obligated to notify the Holder of the
non-existence of an Equity Condition, such notice period shall be extended
to
the third Trading Day after proper notice from the Company) in which case the
Optional Redemption Notice shall be null and void,
ab initio. The Company covenants and agrees that
it will honor all Notices of Conversion tendered from the time of delivery
of
the Optional Redemption Notice through the date all amounts owing thereon are
due and paid in full.
b) Monthly
Redemption. On each Monthly Redemption Date, the Company shall
redeem the Monthly Redemption Amount (the “Monthly Redemption”). The
Monthly Redemption Amount payable on each Monthly Redemption Date shall be
paid
in cash; provided, however, as to any Monthly Redemption and upon
10 Trading Days’ prior written irrevocable notice (the “Monthly Redemption
Notice”), in lieu of a cash redemption payment the Company may elect to pay
all or part of a Monthly Redemption Amount in Conversion Shares based on a
conversion price equal to the lesser of (i) the then Conversion Price and (ii)
85% of the average of the VWAPs for the 10 consecutive Trading Days ending
on
the Trading Day that is immediately prior to the applicable Monthly Redemption
Date (subject to adjustment for any stock dividend, stock split, stock
combination or other similar event affecting the Common Stock during such 10
Trading Day period) (the price calculated during the 10 Trading Day period
immediately prior to the Monthly Redemption Date, the “Monthly Conversion
Price” and such 10 Trading Day period, the “Monthly Conversion
Period”); provided, further, that the Company may not pay the
Monthly Redemption Amount in Conversion Shares unless (y) from the date the
Holder receives the duly delivered Monthly Redemption Notice through and until
the date such Monthly Redemption is paid in full, the Equity Conditions have
been satisfied, unless waived in writing by the Holder, and (z) as to such
Monthly Redemption, prior to such Monthly Conversion Period (but not more than
5
Trading Days prior to the commencement of the Monthly Conversion Period), the
Company shall have delivered to the Holder’s account with The Depository Trust
Company a number of shares of Common Stock to be applied against such Monthly
Redemption Amount equal to the quotient of (x) the applicable Monthly Redemption
Amount divided by (y) Monthly Conversion Price assuming for such purposes that
the Monthly Conversion Period ended 5 Trading Days prior to the actual Monthly
Conversion Period for such Monthly Conversion (the “Pre-Redemption Conversion
Shares”).
19
The
Holder may convert, pursuant to Section 4(a), any principal amount of this
Debenture subject to a Monthly Redemption at any time prior to the date that
the
Monthly Redemption Amount, plus accrued but unpaid interest, liquidated damages
and any other amounts then owing to the Holder are due and paid in
full. Unless otherwise indicated by the Holder in the applicable
Notice of Conversion, any principal amount of this Debenture converted during
the applicable Monthly Conversion Period until the date the Monthly Redemption
Amount is paid in full shall be first applied to the principal amount subject
to
the Monthly Redemption Amount payable in cash and then to the Monthly
Redemption Amount payable in Conversion Shares. Any
principal amount of this Debenture converted during the applicable Monthly
Conversion Period in excess of the Monthly Redemption Amount shall be applied
against the last principal amount of this Debenture scheduled to be redeemed
hereunder, in reverse time order from the Maturity Date; provided,
however, if any such conversion is applied against such Monthly
Redemption Amount, the Pre-Redemption Conversion Shares, if any were issued
in
connection with such Monthly Redemption or were not already applied to such
conversions, shall be first applied against such conversion. The
Company covenants and agrees that it will honor all Notice of Conversions
tendered up until such amounts are paid in full. The Company’s
determination to pay a Monthly Redemption in cash, shares of Common Stock or
a
combination thereof shall be applied ratably to all of the holders of the then
outstanding Debentures based on their (or their predecessor’s) initial purchases
of Debentures pursuant to the Purchase Agreement. At any time the
Company delivers a notice to the Holder of its election to pay the Monthly
Redemption Amount in shares of Common Stock, the Company shall file a prospectus
supplement pursuant to Rule 424 disclosing such election.
c) Redemption
Procedure. The payment of cash or issuance of Common Stock, as
applicable, pursuant to an Optional or Monthly Redemption shall be payable
on
the Optional or Monthly Redemption Date. If any portion of the
payment pursuant to an Optional or Monthly Redemption shall not be paid by
the
Company by the applicable due date, interest shall accrue thereon at an interest
rate equal to the lesser of 18% per annum or the maximum rate permitted by
applicable law until such amount is paid in full. Notwithstanding
anything herein contained to the contrary, if any portion of the Optional or
Monthly Redemption Amount remains unpaid after such date, the Holder may elect,
by written notice to the Company given at any time thereafter,
to invalidate such Optional or Monthly Redemption, abinitio,
and, with respect to the Company’s failure to honor the Optional Redemption, the
Company shall have no further right to exercise such Optional
Redemption.
20
Notwithstanding
anything to the contrary in this Section 6, the Company’s determination to
redeem in cash or its elections under Section 6(b) shall be applied ratably
among the Holders of Debentures. The Holder may elect to convert the outstanding
principal amount of the Debenture pursuant to Section 4 prior to actual payment
in cash for any redemption under this Section 6 by the delivery of a Notice
of
Conversion to the Company.
d) Forced
Conversion. Notwithstanding anything herein to the contrary, if after the
Effective Date, the VWAP for each of any 20 out of any 30 consecutive Trading
Days, which period shall have commenced only after the Effective Date (such
period the “Threshold Period”), exceeds $____2 (subject to adjustment for
reverse and forward
stock splits, stock dividends, stock combinations and other similar transactions
of the Common Stock that occur after the Original Issue Date), the Company
may,
within 1 Trading Day after the end of any such Threshold Period, deliver a
written notice to the Holder (a “Forced Conversion Notice” and the date
such notice is delivered to the Holder, the “Forced Conversion Notice
Date”) to cause the Holder to convert all or part of the then outstanding
principal amount of this Debenture plus, if so specified in the Forced
Conversion Notice, accrued but unpaid interest, liquidated damages and other
amounts owing to the Holder under this Debenture, it being agreed that the
“Conversion Date” for purposes of Section 4 shall be deemed to occur on the
third Trading Day following the Forced Conversion Notice Date (such third
Trading Day, the “Forced Conversion Date”). The Company may
not deliver a Forced Conversion Notice, and any Forced Conversion Notice
delivered by the Company shall not be effective, unless all of the Equity
Conditions are met (unless waived in writing by the Holder) on each Trading
Day
occurring during the applicable Threshold Period through and including the
later
of the Forced Conversion Date and the Trading Day after the date such Conversion
Shares pursuant to such conversion are delivered to the Holder. Any
Forced Conversion shall be applied ratably to all Holders based on their initial
purchases of Debentures pursuant to the Purchase Agreement, provided that any
voluntary conversions by a Holder shall be applied against the Holder’s pro rata
allocation, thereby decreasing the aggregate amount forcibly converted hereunder
if only a portion of this Debenture is forcibly converted. For
purposes of clarification, a Forced Conversion shall be subject to all of the
provisions of Section 4, including, without limitation, the provision requiring
payment of liquidated damages and limitations on conversions.
Section
7. Negative
Covenants. As long as any portion of this Debenture remains outstanding,
unless the holders of at least 75% in principal amount of the then outstanding
Debentures shall have otherwise given prior written consent, the Company shall
not, and shall not permit any of its subsidiaries (whether or not a Subsidiary
on the Original Issue Date) to, directly or indirectly:
a) other
than Permitted Indebtedness, enter into, create, incur, assume, guarantee or
suffer to exist any indebtedness for borrowed money of any kind, including
but
not limited to, a guarantee, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or profits
therefrom;
____________________________________
2 250%
of the Conversion Price on the Initial Issue Date.
21
b) other
than Permitted Liens, enter into, create, incur, assume or suffer to exist
any
Liens of any kind, on or with respect to any of its property or assets now
owned
or hereafter acquired or any interest therein or any income or profits
therefrom;
c) amend
its
charter documents, including, without limitation, its certificate of
incorporation and bylaws, in any manner that materially and adversely affects
any rights of the Holder;
d) repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a
deminimis number of shares of its Common Stock or Common Stock
Equivalents other than as to (a) the Conversion Shares or Warrant Shares as
permitted or required under the Transaction Documents and (b) repurchases of
Common Stock or Common Stock Equivalents of departing officers and directors
of
the Company, provided that such repurchases shall not exceed an aggregate of
$100,000 for all officers and directors during the term of this
Debenture;
e) pay
cash
dividends or distributions on any equity securities of the Company;
f) enter
into any transaction with any Affiliate of the Company which would be required
to be disclosed in any public filing with the Commission, unless such
transaction is made on an arm’s-length basis and expressly approved by a
majority of the disinterested directors of the Company (even if less than a
quorum otherwise required for board approval); or
g) enter
into any agreement with respect
to any of the foregoing.
Section
8. Events
of Default.
a) “Event
of Default” means, wherever used herein, any of the following events
(whatever the reason for such event and whether such event 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 (A) the principal amount of any Debenture or (B)
interest, liquidated damages and other amounts owing to a Holder on any
Debenture, as and when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or otherwise) which
default, solely in the case of an interest payment or other default under clause
(B) above, is not cured within 3 Trading Days;
22
ii. the
Company shall fail to observe or perform any other covenant or agreement
contained in the Debentures (other than a breach by the Company of its
obligations to deliver shares of Common Stock to the Holder upon conversion,
which breach is addressed in clause (xi) below) which failure is not cured,
if
possible to cure, within the earlier to occur of (A) 5 Trading Days after notice
of such failure sent by the Holder or by any other Holder and (B) 10 Trading
Days after the Company has become or should have become aware of such
failure;
iii. a
default
or event of default (subject to any grace or cure period provided in the
applicable agreement, document or instrument) shall occur under (A) any of
the
Transaction Documents or (B) any other material agreement, lease, document
or
instrument to which the Company or any Subsidiary is obligated (and not covered
by clause (vi) below);
iv. any
representation or warranty made in this Debenture, any other Transaction
Documents, any written statement pursuant hereto or thereto or any other report,
financial statement or certificate made or delivered to the Holder or any other
Holder shall be untrue or incorrect in any material respect as of the date
when
made or deemed made;
v. the
Company or any Significant Subsidiary shall be subject to a Bankruptcy
Event;
vi. the
Company or any Subsidiary shall default on any of its obligations under 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 that (a) involves an
obligation greater than $150,000, whether such indebtedness now exists or shall
hereafter be created, and (b) results in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable;
vii. the
Common Stock shall not be eligible for listing or quotation for trading on
a
Trading Market and shall not be eligible to resume listing or quotation for
trading thereon within five Trading Days;
viii. the
Company shall be a party to any Change of Control Transaction or Fundamental
Transaction or shall agree to sell or dispose of all or in excess of 33% of
its
assets in one transaction or a series of related transactions (whether or not
such sale would constitute a Change of Control Transaction);
ix. the
Initial Registration Statement (as defined in the Registration Rights Agreement)
shall not have been declared effective by the Commission on or prior to the
180th calendar
day
after the Closing Date;
23
x. if,
during the Effectiveness Period (as defined in the Registration Rights
Agreement), either (a) the effectiveness of the Registration Statement lapses
for any reason or (b) the Holder shall not be permitted to resell Registrable
Securities (as defined in the Registration Rights Agreement) under the
Registration Statement for a period of more than 20 consecutive Trading Days
or
30 non-consecutive Trading Days during any 12 month period; provided,
however, that if the Company is negotiating a merger, consolidation,
acquisition or sale of all or substantially all of its assets or a similar
transaction and, in the written opinion of counsel to the Company, the
Registration Statement would be required to be amended to include information
concerning such pending transaction(s) or the parties thereto which information
is not available or may not be publicly disclosed at the time, the Company
shall
be permitted an additional 10 consecutive Trading Days during any 12 month
period pursuant to this Section 8(a)(x);
xi. the
Company shall fail for any reason to deliver certificates to a Holder prior
to
the fifth Trading Day after a Conversion Date or any Forced Conversion Date
pursuant to Section 4(d) or the Company shall provide at any time notice to
the
Holder, including by way of public announcement, of the Company’s intention to
not honor requests for conversions of any Debentures in accordance with the
terms hereof; or
xii. any
monetary judgment, writ or similar final process shall be entered or filed
against the Company, any subsidiary or any of their respective property or
other
assets for more than $50,000, and such judgment, writ or similar final process
shall remain unvacated, unbonded or unstayed for a period of 45 calendar
days.
b) Remedies
Upon Event of Default. If any Event of Default occurs, the outstanding
principal amount of this Debenture, plus accrued but unpaid interest, liquidated
damages and other amounts owing in respect thereof through the date of
acceleration, shall become, at the Holder’s election, immediately due and
payable in cash at the Mandatory Default Amount. Commencing 5 days
after the occurrence of any Event of Default that results in the eventual
acceleration of this Debenture, the interest rate on this Debenture shall accrue
at an interest rate equal to the lesser of 18% per annum or the maximum rate
permitted under applicable law. Upon the payment in full of the
Mandatory Default Amount, the Holder shall promptly surrender this Debenture
to
or as directed by the Company. In connection with such acceleration
described herein, the Holder need not provide, and the Company hereby waives,
any presentment, demand, protest or other notice of any kind, and the Holder
may
immediately and without expiration of any grace period enforce any and all
of
its rights and remedies hereunder and all other remedies available to it under
applicable law. Such acceleration may be rescinded and annulled by
▇▇▇▇▇▇ at any time prior to payment hereunder and the Holder shall have all
rights as a holder of the Debenture until such time, if any, as the Holder
receives full payment pursuant to this Section 8(b). No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.
24
Section
9. Miscellaneous.
a) Notices. Any
and all notices or other communications or deliveries to be provided by the
Holder hereunder, including, without limitation, any Notice of Conversion,
shall
be in writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service, addressed to the Company, at the address
set forth above, or such other facsimile number or address as the Company may
specify for such purpose by notice to the Holder delivered in accordance with
this Section 9. Any and all notices or other communications or
deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, or sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile number or address
of
the Holder appearing on the books of the Company, or if no such facsimile number
or address appears, at the principal place of business of the
Holder. Any notice or other communication or deliveries hereunder
shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at
the
facsimile number specified in this Section 9 prior to 5:30 p.m. (New York City
time), (ii) the date immediately following the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section 9 between 5:30 p.m. (New York City time) and 11:59
p.m. (New York City time) on any date, (iii) the second Business Day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to
be
given.
b) Absolute
Obligation. Except as expressly provided herein, no provision of this
Debenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, liquidated damages and accrued
interest, as applicable, on this Debenture at the time, place, and rate, and
in
the coin or currency, herein prescribed. This Debenture is a direct
debt obligation of the Company. This Debenture ranks
paripassu with all other Debentures now or hereafter issued under
the terms set forth herein.
c) Lost
or Mutilated Debenture. If this Debenture shall be mutilated,
lost, stolen or destroyed, the Company shall execute and deliver, in exchange
and substitution for and upon cancellation of a mutilated Debenture, or in
lieu
of or in substitution for a lost, stolen or destroyed Debenture, a new Debenture
for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed, but only upon receipt of evidence of such loss, theft or destruction
of such Debenture, and of the ownership hereof, reasonably satisfactory to
the
Company.
d) Governing
Law. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of
New
York, without regard to the principles of conflict of laws
thereof.
25
Each
party agrees that all legal proceedings concerning the interpretation,
enforcement and defense of the transactions contemplated by any of the
Transaction Documents (whether brought against a party hereto or its respective
Affiliates, directors, officers, shareholders, employees or agents) shall be
commenced in the state and federal courts sitting in the City of New York,
Borough of Manhattan (the “New York Courts”). Each party
hereto hereby irrevocably submits to the exclusive jurisdiction of the New
York
Courts for the adjudication of any dispute hereunder or in connection herewith
or with any transaction contemplated hereby or discussed herein (including
with
respect to the enforcement of any of the Transaction Documents), and hereby
irrevocably waives, and agrees not to assert in any suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of such New
York
Courts, or such New York Courts are improper or inconvenient venue for such
proceeding. Each party hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address
in
effect for notices to it under this Debenture and agrees that such service
shall
constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way
any right to serve process in any other manner permitted by applicable law.
Each
party hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Debenture or the transactions contemplated
hereby. If either party shall commence an action or proceeding to enforce any
provisions of this Debenture, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its attorneys fees and
other costs and expenses incurred in the investigation, preparation and
prosecution of such action or proceeding.
e) Waiver. Any
waiver by the Company or the Holder of a breach of any provision of this
Debenture shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this
Debenture. The failure of the Company or the Holder to insist upon
strict adherence to any term of this Debenture on one or more occasions shall
not be considered a waiver or deprive that party of the right thereafter to
insist upon strict adherence to that term or any other term of this
Debenture. Any waiver by the Company or the Holder must be in
writing.
f) Severability. 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 violates
the applicable law governing usury, the applicable rate of interest due
hereunder shall automatically be lowered to equal the maximum rate of interest
permitted under applicable law.
26
The
Company covenants (to the extent that it may lawfully do so) that it shall
not
at any time insist upon, plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of 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 Company (to the extent
it may lawfully do so) hereby expressly waives all benefits or advantage of
any
such law, and covenants that it will not, by resort to any such law, hinder,
delay or impeded the execution of any power herein granted to the Holder, but
will suffer and permit the execution of every such as though no such law has
been enacted.
g) Next
Business Day. 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.
h) Headings. The
headings contained herein are for convenience only, do not constitute a part
of
this Debenture and shall not be deemed to limit or affect any of the provisions
hereof.
i) Assumption.
Any successor to the Company or any surviving entity in a Fundamental
Transaction shall (i) assume, prior to such Fundamental Transaction, all of
the
obligations of the Company under this Debenture and the other Transaction
Documents pursuant to written agreements in form and substance satisfactory
to
the Holder (such approval not to be unreasonably withheld or delayed) and (ii)
issue to the Holder a new debenture of such successor entity evidenced by a
written instrument substantially similar in form and substance to this
Debenture, including, without limitation, having a principal amount and interest
rate equal to the principal amount and the interest rate of this Debenture
and
having similar ranking to this Debenture, which shall be satisfactory to the
Holder (any such approval not to be unreasonably withheld or delayed). The
provisions of this Section 9(i) shall apply similarly and equally to successive
Fundamental Transactions and shall be applied without regard to any limitations
of this Debenture.
j) Secured
Obligation. The obligations of the Company under this Debenture
are secured by all assets of the Company and each Subsidiary pursuant to the
Security Agreement, dated as of July __, 2007, between the Company, the
Subsidiaries of the Company and the Secured Parties (as defined
therein).
*********************
27
IN
WITNESS WHEREOF, the Company has caused this Debenture to be duly executed
by a
duly authorized officer as of the date first above indicated.
|
|
|
By:
/s/ ▇▇ ▇▇▇▇▇▇▇
Name:
▇▇ ▇▇▇▇▇▇▇
Title:
Chief Executive Officer
▇▇▇▇▇▇▇▇▇
▇▇. for delivery of Notices: (▇▇▇) ▇▇▇-▇▇▇▇ c/o ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
▇▇▇.,
▇▇▇▇▇▇ & ▇▇▇▇▇▇, LLP
|
28
ANNEX
A
NOTICE
OF CONVERSION
The
undersigned hereby elects to
convert principal under the 8% Senior Secured Convertible Debentures of
Guangzhou Global Telecom, Inc., a Florida corporation (the “Company”),
into shares of common stock (the Common Stock”), of the Company according
to the conditions hereof, as of the date written below. If shares of
Common Stock are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
By
the delivery of this Notice of
Conversion the undersigned represents and warrants to the Company that its
ownership of the Common Stock does not exceed the amounts specified under
Section 4 of this Debenture, as determined in accordance with Section 13(d)
of
the Exchange Act.
The
undersigned agrees to comply with
the prospectus delivery requirements under the applicable securities laws in
connection with any transfer of the aforesaid shares of Common
Stock.
Conversion
calculations:
Date
to
Effect Conversion:
Principal
Amount of Debenture to be Converted:
Payment
of Interest in Common Stock __ yes __ no
If
yes,
$_____ of Interest Accrued on Account of Conversion at Issue.
Number
of
shares of Common Stock to be issued:
Signature:
Name:
Address
for Delivery of Common Stock Certificates:
Or
DWAC
Instructions:
Broker
No: ________________________
Account
No: ______________________
29
Schedule
1
CONVERSION
SCHEDULE
The
8%
Senior Secured Convertible Debentures of Guangzhou Global Telecom, Inc., a
Florida corporation, in the aggregate principal amount of
$____________. This Conversion Schedule reflects conversions made
under Section 4 of the above referenced Debenture.
Dated:
|
Date
of Conversion
(or
for first entry, Original Issue Date)
|
Amount
of Conversion
|
Aggregate
Principal Amount Remaining Subsequent to Conversion
(or
original Principal Amount)
|
Company
Attest
|
30