FORM OF 7% SECURED CONVERTIBLE DEBENTURE DUE OCTOBER ____, 2006
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: October ___,
2005
$_______________
FORM
OF
7%
SECURED CONVERTIBLE DEBENTURE
DUE
OCTOBER ____, 2006
THIS
7%
SECURED CONVERTIBLE DEBENTURE is one of a series of duly authorized and issued
Convertible Debentures of China Expert Technology Inc., a Nevada corporation,
having a principal place of business at Room ▇▇▇▇-▇, ▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇,
▇▇
▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇ (the “Company”),
designated as its 7% Secured Convertible Debenture, due October [___, 2006
(this
debenture, the “Debenture”
and
collectively with the other such series of debentures, 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
$_______________ by October [__, 2006 or such earlier date as this Debenture
is
required or permitted to be repaid as provided hereunder (the “Maturity
Date”),
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 have the meanings given
to
such terms 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(d).
“Base
Conversion Price”
shall
have the meaning set forth in Section 5(b).
“Business
Day”
means
any day except Saturday, Sunday and any day which shall be a federal legal
holiday in the United States or a day on which banking institutions in the
State
of New York are authorized or required by law or other government action
to
close.
“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, 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 its assets, as an entirety or substantially as an entirety, 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, (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 above in (i)
or
(iv).
“Common
Stock”
means
the common stock, par value $0.001 per share, of the Company and stock of
any
other class of securities into which such securities may hereafter have been
reclassified or changed into.
“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
the shares of Common Stock issuable upon conversion of this Debenture or
as
payment of interest in accordance with the terms.
2
“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 given to such term in the Registration Rights Agreement.
“Equity
Conditions”
shall
mean, 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 Notice of Conversions of the
Holder,
if any, (ii) all liquidated damages and other amounts owing to the Holder
in
respect of this Debenture shall have been paid; (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 the Trading Market
and
all of the shares issuable pursuant to the Transaction Documents are listed
for
trading on a 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 then
existing no Event of Default or 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 to the Holder would not violate the limitations set
forth
in Section 4(c)(ii) and (viii)
no
public announcement of a pending or proposed Fundamental Transaction, Change
of
Control Transaction or acquisition transaction has occurred that has not
been
consummated.
“Event
of Default”
shall
have the meaning set forth in Section 8.
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
“Fundamental
Transaction”
shall
have the meaning set forth in Section 5(d).
“Interest
Conversion Rate”
means
the
lesser of (a) the Conversion Price and (b) the
75%
of the lesser of (i) the average of the 5 Closing Prices for the 5 consecutive
Trading Days immediately prior to the applicable Interest Payment Date or
(ii)
the average of the 5 Closing Prices for the 5 consecutive Trading Days
immediately prior to the date the applicable interest payment shares are
issued
and delivered if after the Interest Payment Date.
3
“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”
shall
equal the sum of (i) the greater of: (A) 125% of the principal amount of
this
Debenture to be prepaid, plus all accrued and unpaid interest thereon, or
(B)
the principal amount of this Debenture to be prepaid, plus all other accrued
and
unpaid interest hereon, divided by the Conversion Price on (x) the date the
Mandatory Default Amount is demanded or otherwise due or (y) the date the
Mandatory Default Amount is paid in full, whichever is less, multiplied by
the
VWAP on (x) the date the Mandatory Default Amount is demanded or otherwise
due
or (y) the date the Mandatory Default Amount is paid in full, whichever is
greater, and (ii) all other amounts, costs, expenses and liquidated damages
due
in respect of this Debenture.
“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”
shall
mean the sum of (i) 125% of the principal amount of the Debenture then
outstanding, (ii) accrued but unpaid interest and (iii) all liquidated damages
and other amounts due in respect of the Debenture.
“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”
shall
mean the date of the first issuance of the Debentures regardless of the number
of transfers of any Debenture and regardless of the number of instruments
which
may be issued to evidence such Debenture.
“Permitted
Indebtedness”
shall
mean (a) the Indebtedness existing on the Original Issue Date and set forth
on
Schedule
3.1(gg)
attached
to the Purchase Agreement and (b) lease obligations and purchase money
Indebtedness of up to $1,000,000, in the aggregate, incurred in connection
with
the acquisition of capital assets and lease obligations with respect to newly
acquired or leased assets.
4
“Permitted
Liens”
shall
mean 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 business, such as carriers’, warehousemen’s and mechanics’
Liens, statutory landlords’ Liens, and other similar Liens arising in the
ordinary course of business, and (x) which 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) which are being contested
in
good faith by appropriate proceedings, which proceedings have the effect
of
preventing the forfeiture or sale of the property or asset subject to such
Lien
and (c) Liens incurred in connection with Permitted Indebtedness under clause
(b) thereunder provided that such Liens are not secured by assets of the
Company
or its Subsidiaries other than the assets so acquired or leased.
“Person”
means a
corporation, an association, a partnership, organization, a business, an
individual, a government or political subdivision thereof or a governmental
agency.
“Purchase
Agreement”
means
the Securities Purchase Agreement, dated as of October 10, 2005 to which
the
Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.
“Registration
Rights Agreement”
means
the Registration Rights Agreement, dated as of the date of the Purchase
Agreement, to which the Company and the original Holder are parties, as amended,
modified or supplemented from time to time in accordance with its
terms.
“Registration
Statement”
means a
registration statement meeting the requirements set forth in the Registration
Rights Agreement, covering among other things the resale of the Conversion
Shares and naming the Holder as a “selling stockholder” thereunder.
“Securities
Act”
means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
“Subsidiary”
shall
have the meaning given to such term in the Purchase Agreement.
“Trading
Day”
means a
day on which the Common Stock is traded on a Trading Market.
“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 Nasdaq SmallCap Market, the American
Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or
the
OTC Bulletin Board.
5
“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 as reported by Bloomberg Financial L.P. (based on a
Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b)
if
the Common Stock is not then listed or quoted on a Trading Market and if
prices
for the Common Stock are then quoted on the OTC Bulletin Board, 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
listed or quoted on the OTC Bulletin Board and if prices for the Common Stock
are then reported in the “Pink Sheets” published by the 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 7% per annum,
payable quarterly on January 1, April 1, July 1 and October 1, beginning
on the
first such date after the Original Issue Date, on each Conversion Date (as
to
that principal amount then being converted), on each Optional Redemption
Date
(as to that principal amount being redeemed) and on the Maturity Date (except
that, if any such date is not a Business Day, then such payment shall be
due on
the next succeeding Business Day) (each such date, an “Interest
Payment Date”),
in
cash or shares of Common Stock at the Interest Conversion Rate, or a combination
thereof (the amount to be paid in shares, the “Interest
Share Amount”);
provided,
however,
(i)
payment in shares of Common Stock may only occur if 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 issued to
the
Holder all of the Equity Conditions, unless waived by the Holder in writing,
have been met and the Company shall have given the Holder notice in accordance
with the notice requirements set forth below and (ii) as to such Interest
Payment Date, prior to the such Interest Notice Period (but not more 5 Trading
Days prior to the commencement of the 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”).
6
b) Company’s
Election to Pay Interest in Kind.
Subject
to the terms and conditions herein, the decision whether to pay interest
hereunder in shares of Common Stock or cash shall be at the discretion of
the
Company. Prior to the commencement of an Interest Notice Period, the Company
shall provide the Holder with 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 (the Company may indicate in such notice
that the election contained in such notice shall continue for later periods
until revised) and the Interest Share Amount as to the applicable Interest
Payment Date. 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 provide such written notice 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 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 and shall accrue
daily commencing on the Original Issue Date until payment in full of the
principal sum, together with all accrued and unpaid interest 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)
and
only 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 in fact
delivers the Conversion Shares within the time period required by Section
4(d)(ii). 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 shall be distributed ratably among the holders
of
the Debentures based on their (or their predecessor’s initial purchases of
Debentures pursuant to the Purchase Agreement.
d) Late
Fee.
All
overdue accrued and unpaid interest to be paid hereunder shall entail a late
fee
at the rate of 18% per annum (or such lower maximum amount of interest permitted
to be charged under applicable law) (“Late
Fees”)
which
will accrue daily, from the date such interest is due hereunder through and
including the date of payment. Notwithstanding anything to the contrary
contained herein, if on any Interest Payment Date the Company has elected
to pay
interest in Common Stock and is not able to pay accrued interest in the form
of
Common Stock because it does not then satisfy the conditions for payment
in the
form of Common Stock set forth above, 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 cash interest payment, shall deliver, within three
Trading Days of each applicable Interest Payment Date, an amount in cash
equal
to the product of 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 and 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
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.
7
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 made for such registration of transfer
or
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 to the Company for transfer of this Debenture, the Company
and any agent of the Company may treat the Person in whose name this Debenture
is duly registered on the Debenture Register as the owner hereof for the
purpose
of receiving payment as herein provided and for all other purposes, whether
or
not this Debenture is overdue, and neither the Company nor any such agent
shall
be affected by notice to the contrary.
Section
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 into shares of Common Stock
at
the option of the Holder, in whole or in part at any time and from time to
time
(subject to the limitations on conversion set forth in Section 4(c)
hereof). The Holder shall effect conversions by delivering to the Company
the
form of Notice of Conversion attached hereto as Annex
A
(a
“Notice
of Conversion”),
specifying therein the principal amount of this Debenture to be converted
and
the date on which such conversion is to be effected (a “Conversion
Date”).
If no
Conversion Date is specified in a Notice of Conversion, the Conversion Date
shall be the date that such Notice of Conversion is provided hereunder. To
effect conversions hereunder, the Holder shall not be required to physically
surrender 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 converted and the date of such conversions. The Company
shall deliver any objection to any Notice of Conversion within 1 Business
Day of
receipt of such notice. In the event of any dispute or discrepancy, the records
of the Holder shall be controlling and determinative in the absence of manifest
error. The Holder and any assignee, by acceptance of this Debenture, acknowledge
and agree that, by reason of the provisions of this paragraph, following
conversion of a portion of this Debenture, the unpaid and unconverted principal
amount of this Debenture may be less than the amount stated on the face
hereof.
8
b) Conversion
Price.
The
conversion price in effect on any Conversion Date shall be equal to the lesser
of (a) $1.80, subject to adjustment herein (the “Set Price”) and (b) 75% of the
average of the 5 consecutive VWAPs immediately prior to the applicable
Conversion Date (subject to adjustment herein)(the “Conversion
Price”).
c) Conversion
Limitations.
i. [RESERVED].
ii. Holder’s
Restriction on Conversion.
The
Company shall not effect any conversion of this Debenture, and the Holder
shall
not have the right to convert any portion of this Debenture, pursuant to
Section
4(a) or otherwise, to the extent that after giving effect to such conversion,
the Holder (together with the Holder’s affiliates), as set forth on the
applicable Notice of Conversion, would beneficially own in excess of 4.99%
of
the number of shares of the Common Stock outstanding immediately after giving
effect to such conversion. For purposes of the foregoing sentence,
the
number of shares of Common Stock beneficially owned by the Holder and its
affiliates shall include the number of shares of Common Stock issuable upon
conversion of this Debenture with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common
Stock
which would be issuable upon (A) conversion of the remaining, nonconverted
portion of this Debenture beneficially owned by the Holder or any of its
affiliates and (B) exercise or conversion of the unexercised or nonconverted
portion of any other securities of the Company (including, without limitation,
any other Debentures or the Warrants) subject to a limitation on conversion
or
exercise analogous to the limitation contained herein beneficially owned
by the
Holder or any of its affiliates. Except as set forth in the preceding
sentence, for purposes of this Section 4(c)(ii), 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 applies, the determination of whether this Debenture
is convertible (in relation to other securities owned by the Holder) and
of
which a portion of this Debenture is convertible shall be in the sole discretion
of such Holder. To ensure compliance with this restriction, the Holder will
be
deemed to represent to the Company each time it delivers a Notice of Conversion
that such Notice of Conversion has not violated the restrictions set forth
in
this paragraph and the Company shall have no obligation to verify or confirm
the
accuracy of such determination. 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)(ii), in determining the number of outstanding
shares of Common Stock, the Holder may rely on the number of outstanding
shares
of Common Stock as reflected in (x) the Company’s most recent Form 10-QSB or
Form 10-KSB, as the case may be, (y) a more recent public announcement by
the
Company or (z) any other notice by the Company or the Company’s Transfer Agent
setting forth the number of shares of Common Stock outstanding. Upon
the
written or oral request of the Holder, the Company shall within two Trading
Days
confirm orally and in writing to the Holder the number of shares of Common
Stock
then outstanding. In any case, the number of outstanding shares of
Common
Stock shall be determined after giving effect to the conversion or exercise
of
securities of the Company, including this Debenture, by the Holder or its
affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The provisions of this Section 4(c) may be waived
by
the Holder, at the election of the Holder, upon not less than 61 days’ prior
notice to the Company, and the provisions of this Section 4(c) shall continue
to
apply until such 61st day (or such later date, as determined by the Holder,
as
may be specified in such notice of waiver). The
provisions of this paragraph shall be 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
4.99% beneficial ownership limitation herein contained or to make changes
or
supplements necessary or desirable to properly give effect to such 4.99%
limitation. The limitations contained in this paragraph shall apply to a
successor holder of this Debenture. The holders of Common Stock of the Company
shall be third party beneficiaries of this Section 4(c) and the Company may
not
waive this Section 4(c) without the consent of holders of a majority of its
Common Stock.
9
d)
Mechanics
of Conversion
i. Conversion
Shares Issuable Upon Conversion of Principal Amount.
The
number of shares of Common Stock 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.
ii. Delivery
of Certificate Upon Conversion.
Not
later than three Trading Days after any Conversion Date, the Company will
deliver or cause to be delivered to the Holder (A) a certificate or certificates
representing the Conversion Shares which shall be free of restrictive legends
and trading restrictions (other than those required by the Purchase Agreement)
representing the number of shares of Common Stock being acquired upon the
conversion of 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 Payment 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 is required to pay
accrued
interest in cash). The Company shall, if available and if allowed under
applicable securities laws, use its best efforts to deliver any certificate
or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions.
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 a Conversion Date, the Holder shall be entitled by written notice to
the
Company at any time on or before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Company shall
immediately return the certificates representing the principal amount of
this
Debenture tendered for conversion.
iv. Obligation
Absolute; Partial Liquidated Damages.
If the
Company fails for any reason to deliver to the Holder such certificate or
certificates pursuant to Section 4(d)(ii) by the third Trading Day after
the
Conversion Date, the Company shall pay to such Holder, in cash, as liquidated
damages and not as a penalty, for each $1000 of principal amount being
converted, $10 per Trading Day (increasing to $20 per Trading Day after 5
Trading Days after such damages begin to accrue) for each Trading Day after
such
third Trading Day until such certificates are delivered. 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,
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 any
one 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, restraining and or enjoining conversion of all or part of this
Debenture shall have been sought and obtained and the Company posts a surety
bond for the benefit of the Holder in the amount of 150% of the principal
amount
of this Debenture outstanding, which is subject to the injunction, which
bond
shall remain in effect until the completion of arbitration/litigation of
the
dispute and the proceeds of which shall be payable to such Holder to the
extent
it obtains judgment. In the absence of an injunction precluding the same,
the
Company shall issue Conversion Shares or, if applicable, cash, upon a properly
noticed conversion. Nothing herein shall limit a Holder’s right to pursue actual
damages or declare an Event of Default pursuant to Section 8 herein for the
Company’s failure to deliver Conversion Shares within the period specified
herein and such Holder shall have the right to pursue all remedies available
to
it at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such rights shall
not
prohibit the Holder from seeking to enforce damages pursuant to any other
Section hereof or under applicable law.
10
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 pursuant
to
Section 4(d)(ii) by the third Trading Day after the Conversion Date, and
if
after such third Trading Day the Holder is required by its brokerage firm
to
purchase (in an open market transaction or otherwise) Common Stock to deliver
in
satisfaction of a sale by such Holder of the Conversion Shares which the
Holder
anticipated receiving upon such conversion (a “Buy-In”),
then
the Company shall (A) pay in cash to the Holder (in addition to any remedies
available to or elected by the Holder) the amount by which (x) the Holder’s
total purchase price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the aggregate number of
shares
of Common Stock that such Holder anticipated receiving from the conversion
at
issue multiplied by (2) the actual sale price of the Common Stock at the
time of
the sale (including brokerage commissions, if any) giving rise to such purchase
obligation and (B) at the option of the Holder, either reissue (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 had the Company timely complied with its
delivery requirements under Section 4(d)(ii). 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 at the time of the sale
(including brokerage commissions, if any) giving rise to such purchase
obligation was a total of $10,000 under clause (A) of the immediately preceding
sentence, the Company shall be required to pay the Holder $1,000. The Holder
shall provide the Company written notice indicating the amounts payable to
the
Holder in respect of the Buy-In. Notwithstanding anything contained herein
to
the contrary, if a Holder requires the Company to make payment in respect
of a
Buy-In for the failure to timely deliver certificates hereunder and the Company
timely pays in full such payment, the Company shall not be required to pay
such
Holder liquidated damages under Section 4(d)(iv) in respect of the certificates
resulting in such Buy-In.
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 solely for the purpose
of
issuance upon conversion of this Debenture and payment of interest on this
Debenture, each as herein provided, free from preemptive 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 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 and
restrictions 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 and validly authorized, issued and fully paid, nonassessable
and,
if the Registration Statement is then effective under the Securities Act,
registered for public sale in accordance with such Registration
Statement.
vii. Fractional
Shares.
Upon a
conversion hereunder the Company shall not be required to issue stock
certificates representing fractions of shares of the Common Stock, but may
if
otherwise permitted, make a cash payment in respect of any final fraction
of a
share based on the VWAP at such time. If the Company elects not, or is unable,
to make such a cash payment, the Holder shall be entitled to receive, in
lieu of
the final fraction of a share, one whole share of Common Stock.
11
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 certificate, provided that the Company shall not be required to pay
any
tax that may be payable in respect of any transfer involved in the issuance
and
delivery of any such certificate upon conversion in a name other than that
of
the Holder of this Debenture so converted and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount
of
such tax or shall have established to the satisfaction of the Company that
such
tax has been paid.
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 on shares of
its
Common Stock or any other equity or equity equivalent securities payable
in
shares of Common Stock (which, for avoidance of doubt, shall not include
any
shares of Common Stock issued by the Company pursuant to this Debenture,
including as interest thereon), (B) subdivides outstanding shares of Common
Stock into a larger number of shares, (C) combines (including by way of reverse
stock split) outstanding shares of Common Stock into a smaller number of
shares,
or (D) issues by reclassification of shares of the Common Stock any shares
of
capital stock of the Company, then the Set Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding 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 the
Company or any Subsidiary thereof, as applicable, at any time while this
Debenture is outstanding, shall offer, sell, grant any option to purchase
or
offer, sell or grant any right to reprice its securities, or otherwise dispose
of or issue (or announce any offer, sale, grant or any option to purchase
or
other disposition) any Common Stock or Common Stock Equivalents entitling
any
Person to acquire shares of Common Stock, at an effective price per share
less
than the then Set Price (such lower price, the “Base
Conversion Price”
and
such issuances collectively, a “Dilutive
Issuance”),
as
adjusted hereunder (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 is issued
in
connection with such issuance, be entitled to receive shares of Common Stock
at
an effective price per share which is less than the Set Price, such issuance
shall be deemed to have occurred for less than the Set Price on such date
of the
Dilutive Issuance), then the Set Price shall be reduced to equal the Base
Conversion Price. 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.
The
Company shall notify the Holder in writing, no later than the Business Day
following the issuance of any Common Stock or Common Stock Equivalents subject
to this section, indicating therein the applicable issuance price, or of
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, after the date of such Dilutive Issuance the Holder is
entitled to receive a number of Conversion Shares based upon the Base Conversion
Price regardless of whether the Holder accurately refers to the Base Conversion
Price in the Notice of Conversion.
12
c) Pro
Rata Distributions.
If the
Company, at any time while this Debenture is outstanding, shall distribute
to
all holders of Common Stock (and not to the holders of the Debenture) evidences
of its indebtedness or assets (including cash and cash dividends) or rights
or
warrants to subscribe for or purchase any security, then in each such case
the
Set Price shall be adjusted by multiplying such Set 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 one outstanding share of the Common Stock as
determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holder of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
d) 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 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 one 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 one 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 paragraph
(d) and insuring that this Debenture (or any such replacement security) will
be
similarly adjusted upon any subsequent transaction analogous to a Fundamental
Transaction.
13
e) 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
treasury shares, if any) issued and outstanding.
f) Notice
to the Holder.
i. Adjustment
to Set Price.
Whenever the Set Price is adjusted pursuant to any of this Section 5, the
Company shall promptly mail to each Holder a notice setting forth the Set
Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment. If the Company issues a variable rate security, despite
the
prohibition thereon in the Purchase Agreement, the Company shall be deemed
to
have issued Common Stock or Common Stock Equivalents at the lowest possible
conversion or exercise price at which such securities may be converted or
exercised in the case of a Variable Rate Transaction (as defined in the Purchase
Agreement).
ii. Notice
to Allow Conversion by ▇▇▇▇▇▇.
If (A)
the Company shall declare a dividend (or any other distribution) on the Common
Stock; (B) the Company shall declare a special nonrecurring cash dividend
on or
a redemption of the Common Stock; (C) the Company shall authorize the granting
to all holders of the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any rights; (D) the
approval of any stockholders of the Company shall be required in connection
with
any reclassification of the Common Stock, any consolidation or merger to
which
the Company is a party, any sale or transfer of all or substantially all
of the
assets of the Company, of any compulsory share exchange whereby the Common
Stock
is converted into other securities, cash or property; (E) the
Company shall authorize the voluntary or involuntary dissolution, liquidation
or
winding up of the affairs of the Company; then, in each case, the Company
shall
cause to be filed at each office or agency maintained for the purpose of
conversion of this Debenture, and shall cause to be mailed
to
the Holder at its last addresses as it shall appear upon the stock
books of
the
Company, at least 20 calendar days prior to the applicable record or effective
date hereinafter specified, a notice stating (x)
the
date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken,
the date as of which the holders of the Common Stock of record to be entitled
to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective
or
close, and the date as of which it is expected that holders of the Common
Stock
of record shall be entitled to exchange their shares of the Common Stock
for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided,
that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. The Holder is entitled to convert this Debenture during the
20-day period commencing the date of such notice to the effective date of
the
event triggering such notice.
14
Section
6.
Redemption.
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 Debentures,
for an amount, in cash, equal to the Optional Redemption Amount on the
30th
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 due in full on the Optional Redemption Date.
The
Company may only effect an Optional Redemption if during the period commencing
on the Optional Redemption Notice Date through to the Optional Redemption
Date
and
through and including the date such shares of Common Stock are issued to
the
Holder,
each of
the Equity Conditions shall have been met. If any of the Equity Conditions
shall
cease to be satisfied at any time during the required 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 Notice of Conversions
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) Redemption
Procedure.
The
payment of cash pursuant to an Optional Redemption shall be made on the Optional
Redemption Date. If any portion of the cash payment for an Optional Redemption
shall not be paid by the Company by the respective due date, interest shall
accrue thereon at the rate of 18% per annum (or the maximum rate permitted
by
applicable law, whichever is less) until the payment of the Optional Redemption
Amount, plus all amounts owing thereon is paid in full. Alternatively, if
any
portion of the Optional Redemption Amount remains unpaid after such date,
the
Holders subject to such redemption may elect, by written notice to the Company
given at any time thereafter, to invalidate ab initio
such
redemption, notwithstanding anything herein contained to the contrary, and,
with
respect the failure to honor the Optional Redemption as applicable, the Company
shall have no further right to exercise such Optional Redemption.
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 among the Holders of Debentures ratably.
The
Holder may elect to convert the outstanding principal amount of the Debenture
subject to an Optional Redemption pursuant to Section 4 prior to actual payment
in cash for any redemption under this Section 6 by fax delivery of a Notice
of
Conversion to the Company.
Section
7. Negative
Covenants.
So long
as any portion of this Debenture is outstanding, the Company will not and
will
not permit any of its Subsidiaries to directly or indirectly:
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;
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
certificate of incorporation, bylaws or other charter documents so as to
materially and adversely affect any rights of the Holder;
d) repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a
de
minimis
number
of shares of its Common Stock or Common Stock Equivalents other than as to
the
Conversion Shares to the extent permitted or required under the Transaction
Documents or as otherwise permitted by the Transaction Documents;
15
e) enter
into any agreement with respect to any of the foregoing;
or
f) pay
cash
dividends or distributions on any equity securities of the Company.
Section
8. Events
of Default.
a) “Event
of Default”,
wherever used herein, means any one of the following events (whatever the
reason
and whether it shall be voluntary or involuntary or effected by operation
of law
or pursuant to any judgment, decree or order of any court, or any order,
rule or
regulation of any administrative or governmental body):
i. any
default in the payment of (A) the principal amount of any Debenture, or (B)
interest (including Late Fees) on, or liquidated damages in respect of, 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 10 calendar days;
ii. the
Company shall fail to observe or perform any other covenant or agreement
contained in this Debenture or any other Debenture (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
10
Trading
Days after notice of such default sent by the Holder or by any other
Holder;
iii. a
default
or event of default (subject to any grace or cure period provided for 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 bound, which failure
is not
cured, if possible to cure, within
10
Trading Days after notice of such default sent by the Holder or by any other
Holder;
iv. any
representation or warranty made herein,
in any
other Transaction Documents, in any written statement pursuant hereto or
thereto, or in any other report, financial statement or certificate made
or
delivered to the Holder or any other holder of Debentures shall
be
untrue or incorrect in any material respect as of the date when made or deemed
made;
16
v. (i)
the
Company or any of its Subsidiaries shall commence a case, as debtor, a case
under any applicable bankruptcy or insolvency laws as now or hereafter in
effect
or any successor thereto, or the Company or any Subsidiary commences any
other
proceeding under any reorganization, arrangement, adjustment of debt, relief
of
debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or
any
Subsidiary thereof or (ii) there is commenced a case against the Company
or any
Subsidiary thereof, under any applicable bankruptcy or insolvency laws, as
now
or hereafter in effect or any successor thereto which remains undismissed
for a
period of 60 days; or (iii) the Company or any Subsidiary thereof is adjudicated
by a court of competent jurisdiction insolvent or bankrupt; or any order
of
relief or other order approving any such case or proceeding is entered; or
(iv)
the Company or any Subsidiary thereof suffers any appointment of any custodian
or the like for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or (v) the Company or any
Subsidiary thereof makes a general assignment for the benefit of creditors;
or
(vi) the Company shall fail to pay, or shall state that it is unable to pay,
or
shall be unable to pay, its debts generally as they become due; or (vii)
the
Company or any Subsidiary thereof shall call a meeting of its creditors with
a
view to arranging a composition, adjustment or restructuring of its debts;
or
(viii) the Company or any Subsidiary thereof shall by any act or failure
to act
expressly indicate its consent to, approval of or acquiescence in any of
the
foregoing; or (ix) any corporate or other action is taken by the Company
or any
Subsidiary thereof for the purpose of effecting any of the
foregoing;
vi. the
Company or any Subsidiary shall default in 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 of the Company in an
amount
exceeding $75,000, whether such indebtedness now exists or shall hereafter
be
created and such default shall result in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable;
vii. the
Company shall not comply with the listing or quotation requirements of the
Trading Market, the Company shall have received notification from the Trading
Market that it does not comply with the listing or quotation requirements
of the
Trading Market or the Common Stock shall not be eligible for quotation on
or,
for any reason, including by order of the Commission or the Trading Market,
quoted for trading on a Trading Market and shall not again be eligible for
and
quoted or listed for trading thereon within three Trading Days;
17
viii. the
Company shall be a party to any Change of Control Transaction or Fundamental
Transaction, shall agree to sell or dispose of all or in excess of 33% of
its
assets in one or more transactions (whether or not such sale would constitute
a
Change of Control Transaction) or shall redeem or repurchase more than a
de
minimis number of its outstanding shares of Common Stock or other equity
securities of the Company (other than redemptions of Conversion Shares and
repurchases of shares of Common Stock or other equity securities of departing
officers and directors of the Company; provided such repurchases shall not
exceed $100,000, in the aggregate, for all officers and directors during
the
term of this Debenture);
ix. a
Registration Statement shall not have been declared effective by the Commission
on or prior to the 200th calendar
day after the Closing Date;
x. if,
during the Effectiveness Period (as defined in the Registration Rights
Agreement), the effectiveness of the Registration Statement lapses for any
reason or the Holder shall not be permitted to resell Registrable Securities
(as
defined in the Registration Rights Agreement) under the Registration Statement,
in either case, for more than 20 consecutive Trading Days or 30 non-consecutive
Trading Days during any 12 month period; provided,
however,
that in
the event that 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 transactions or the
parties
thereto that 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 relating to such an event;
xi. the
Company shall fail for any reason to deliver certificates to a Holder prior
to
the third Trading Day after a Conversion Date pursuant to and in accordance
with
Section 4(d) or the Company shall provide notice to the Holder, including
by way
of public announcement, at any time, of its intention not to comply with
requests for conversions of any Debentures in accordance with the terms hereof;
xii. any
monetary judgment, writ or similar final process shall be entered or filed
against the Company or any of its property or other assets for than $50,000,
and
shall remain unvacated, unbonded or unstayed for a period of 45 calendar
days;
or
xiii. any
Person shall breach the lock up agreement delivered to the initial Holders
pursuant to Section 2.2(a)(x) of the Purchase Agreement.
18
b) Remedies
Upon Event of Default.
If any
Event of Default occurs, the full principal amount of this Debenture, together
with interest and other amounts owing in respect thereof, to the date of
acceleration shall become, at the Holder’s election, immediately due and payable
in cash. The aggregate amount payable upon an Event of Default shall be equal
to
the Mandatory Default Amount. Notwithstanding the foregoing, the Company
may pay
the Mandatory Default Amount in shares of Common Stock subject to the
requirements set forth in this subsection. The price per shares at which
shares
of Common Stock issuable in lieu of cash hereunder shall be payable shall
equal
the lesser of (x) the average of the 5 consecutive VWAPs immediately prior
to
the date such Event of Default occurs, (y) the average of the 5 consecutive
VWAPs immediately prior to the date such shares are issued or (z) the then
applicable Conversion Price. Notwithstanding anything herein to the contrary,
payment in shares of Common Stock may only occur if (i) during the period
from
the applicable Event of Default until such issuance is made in full all of
the
Equity Conditions have been met and the Company shall have given the Holder
written irrevocable notice within 2 Trading Days of the Holder’s election to
accelerate of its determination to pay such Mandatory Default Amount in shares
of Common Stock and (ii) the daily trading volume for the Common Stock on
each
Trading Day during the period from the date of the applicable Event of Default
through the date such shares are issued shall be equal to at least $1,000,000.
Subject to the aforementioned conditions, failure to timely provide such
written
notice shall be deemed an election by the Company to pay the Mandatory Default
Amount upon such Event of Default in cash. If at any time the Company pays
a
Mandatory Default Amount partially in cash and partially in shares of Common
Stock, then such payment shall be distributed ratably among the Holders based
upon the Subscription Amount paid by each Holder. 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 the rate
of
18% per annum, or such lower maximum amount of interest permitted to be charged
under applicable law. Upon the payment in full of the Mandatory Default Amount
on this entire Debenture the Holder shall promptly surrender this Debenture
to
or as directed by the Company. The Holder need not provide and the Company
hereby waives any presentment, demand, protest or other notice of any kind,
and
the Holder may immediately and without expiration of any grace period enforce
any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Such declaration may be rescinded and
annulled by ▇▇▇▇▇▇ at any time prior to payment hereunder and the Holder
shall
have all rights as a Debenture holder until such time, if any, as the full
payment under this Section shall have been received by it. No such rescission
or
annulment shall affect any subsequent Event of Default or impair any right
consequent thereon.
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, sent by a nationally recognized
overnight courier service, addressed to the Company, at the address set forth
above, facsimile number 011-852-2583-9222, Attn: ▇▇▇▇▇ ▇▇▇ or
such
other address or facsimile number as the Company may specify for such purposes
by notice to the Holder delivered in accordance with this Section. Any and
all
notices or other communications or deliveries to be provided by the Company
hereunder shall be in writing and delivered personally, by facsimile, sent
by a
nationally recognized overnight courier service addressed to each Holder
at the
facsimile telephone number or address of such ▇▇▇▇▇▇ appearing on the books
of
the Company, or if no such facsimile telephone number or address appears,
at the
principal place of business of the Holder. Any notice or other communication
or
deliveries hereunder shall be deemed given and effective on the earliest
of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior
to
5:30 p.m. (New York City time), (ii) the date after the date of transmission,
if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 5:30 p.m. (New York
City
time) on any date and earlier than 11:59 p.m. (New York City time) on such
date,
(iii) the second Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt
by
the party to whom such notice is required to be given.
19
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, interest and liquidated damages (if any) on, this
Debenture at the time, place, and rate, and in the coin or currency, herein
prescribed. This Debenture is a direct debt obligation of the Company. This
Debenture ranks pari passu
with all
other Debentures now or hereafter issued under the terms set forth
herein.
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,
and indemnity, if requested, all 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 conflicts of law thereof. Each party agrees that all legal
proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by any of the Transaction Documents (whether brought
against a party hereto or its respective affiliates, directors, officers,
shareholders, employees or agents) shall be commenced in the state and federal
courts sitting in the City of New York, Borough of Manhattan (the “New
York Courts”).
Each
party hereto hereby irrevocably submits to the exclusive jurisdiction of
the New
York Courts for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction Documents),
and hereby irrevocably waives, and agrees not to assert in any suit, action
or
proceeding, any claim that it is not personally subject to the jurisdiction
of
any such court, or such New York Courts are improper or inconvenient venue
for
such proceeding. Each party hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address
in
effect for notices to it under this Debenture and agrees that such service
shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Each party hereto hereby irrevocably waives,
to
the fullest extent permitted by applicable law, any and all right to trial
by
jury in any legal proceeding arising out of or relating to this Debenture
or the
transactions contemplated hereby. If either party shall commence an action
or
proceeding to enforce any provisions of this Debenture, then the prevailing
party in such action or proceeding shall be reimbursed by the other party
for
its attorneys fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such action or proceeding.
20
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
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 applicable laws governing usury,
the applicable rate of interest due hereunder shall automatically be lowered
to
equal the maximum permitted rate of interest. The Company covenants (to the
extent that it may lawfully do so) that it shall not at any time insist upon,
plead, or in any manner whatsoever claim or take the benefit or advantage
of,
any stay, extension or usury law or other law which would prohibit or forgive
the Company from paying all or any portion of the principal of 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.
21
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 surviving entity in a Fundamental Transaction
shall (i) assume in writing 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) prior to such Fundamental Transaction and
(ii)
to 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 amounts and the interest rates of the Debentures
held by the Holder and having similar ranking to this Debenture, and
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.
*********************
22
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.
| CHINA EXPERT TECHNOLOGY INC. | ||
| |
|
|
| By: | ||
|
Name:
Title:
|
||
23
ANNEX
A
NOTICE
OF CONVERSION
The
undersigned hereby elects to convert principal under the 7% Secured Convertible
Debenture of China Expert Technology Inc., a Nevada corporation (the
“Company”),
due
on October [__, 2006 into shares of common stock, par value $0.001 per share
(the “Common
Stock”),
of
the Company according to the conditions hereof, as of the date written below.
If
shares are to be issued in the name of a person other than the undersigned,
the
undersigned will pay all transfer taxes payable with respect thereto and
is
delivering herewith such certificates and opinions as reasonably requested
by
the Company in accordance therewith. No fee will be charged to the holder
for
any conversion, except for such transfer taxes, if any.
By
the
delivery of this Notice of Conversion the undersigned represents and warrants
to
the Company that its ownership of the Common Stock does not exceed the amounts
determined in accordance with Section 13(d) of the Exchange Act, specified
under
Section 4 of this Debenture.
The
undersigned agrees to comply with the prospectus delivery requirements under
the
applicable securities laws in connection with any transfer of the aforesaid
shares of Common Stock.
Conversion
calculations:
Date
to
Effect Conversion:
Principal
Amount of 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:
24
Schedule
1
CONVERSION
SCHEDULE
The
7%
Secured Convertible Debentures due on October [___, 2006, in the aggregate
principal amount of $____________ issued by China Expert Technology Inc.
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
|
|
|
|||
25