THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES
ACT OF 1933, AS AMENDED (THE "1933 ACT") AND APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM.
TELENETICS CORPORATION
7.0% Convertible Subordinated Debenture Due January 2, 2003
US$2,115,000.00
Telenetics Corporation, a California corporation (the "Issuer"), for
value received, hereby promises to pay to Dolphin Offshore Partners, L.P., or
registered assigns, the principal sum of Two Million One Hundred Fifteen
Thousand Dollars (US$2,115,000.00) due January 2, 2003 (the "Maturity Date"),
and to pay interest thereon from January 2, 2001 or from the most recent
Interest Payment Date (as hereinafter defined) to which interest has been paid,
semiannually, in arrears, on January 2 and July 2 in each year (each an
"Interest Payment Date"), commencing on July 2, 2001 at the rate of seven (7.0%)
percent per annum until the principal hereof is paid. In the event that the
Issuer does not make a semiannual interest payment within fifteen (15) days
after the applicable Interest Payment Date, the interest rate for such
semiannual period (to the extent that the payment of such interest shall be
legally enforceable) shall be fifteen (15%) percent per annum (or at such higher
rate as provided in Section 14 below) on any overdue principal and on any
overdue installment of interest, which amount shall accrue daily, from the date
such interest is due hereunder (i.e. the beginning of the semiannual period in
which such interest payment is due) through and including the date of payment.
The interest so payable, and punctually paid, on any Interest Payment Date will
be paid to the person (the "Registered Holder") in whose name this Debenture is
registered at the address registered with the Issuer for such Registered Holder
at the close of business on June 15 or December 15 (whether or not a business
day) as the case may be (each a "Regular Record Date"), next preceding such
Interest Payment Date. Interest shall be computed on the basis of the actual
number of days elapsed and the actual number of days in the relevant period.
If this Debenture is converted into shares of common stock, no
par value per share, of Issuer (the "Common Stock") pursuant to Sections 9 or 10
below: (A) on or prior to the initial Regular Record Date, interest shall be
calculated through and including the date of conversion and shall be paid on
such date for that portion of the Debentures converted; or (B) after any (i)
Interest Payment Date and on or prior to the next Regular Record Date, interest
shall be calculated through and including the date of conversion and shall be
paid for that portion of the Debentures converted on the date of conversion to
the Person in whose name the Debentures are registered at the close of business
on the date of conversion; or (ii) Regular Record Date and on or prior to the
next succeeding Interest Payment Date, interest shall be paid for that portion
of the Debentures converted on such Interest Payment Date calculated, however,
only through the date of conversion, notwithstanding such conversion, and such
interest shall be paid to the Person in whose name this Debenture is registered
at the close of business on such Regular Record Date.
Principal of this Debenture shall be payable at the earliest
of the Maturity Date, Redemption Date or Acceleration Date (each as hereinafter
defined) against surrender hereof at the principal executive offices of the
Issuer in the United States. Payments of principal and of any interest on this
Debenture shall be made in such coin or currency of the United States of America
as at the time of payment is legal tender for payment of public and private
debts. Payments of principal of this Debenture shall be made against surrender
hereof, and payments of interest on this Debenture shall be made, in accordance
with the foregoing and subject to applicable laws and regulations, by check
mailed on or before the due date for such payment to the person entitled thereto
at such person's address appearing on the Security Register (as hereinafter
defined) or to such other address as the Registered Holder may have previously
given notice to the Issuer in writing. Interest shall accrue and be payable on
this Debenture through the earlier of the Maturity Date, Conversion Date or
Redemption Date. If the principal on this Debenture is accelerated, interest
shall accrue and be payable until the date of payment. The Issuer covenants that
until this Debenture has been delivered to it for cancellation, or monies
sufficient to pay the principal of and interest in this Debenture have been made
available for payment and paid, it will at all times maintain at its principal
executive offices in the United States an office or agency for the payment of
the principal of and interest on this Debenture as herein provided.
1. SUBORDINATION.
(a) The obligations of the Issuer hereunder are not
secured by any mortgage, pledge, encumbrance, security agreement or other
security device and only the full faith and credit of the Issuer are pledged for
the payment of all principal and interest due under this Debenture. The
Debentures are direct, unconditional and general obligations of the Issuer.
(b) The Debentures will be subordinate and inferior
to Issuer's existing secured debt and any secured debt the Issuer may incur in
the future excluding any indebtedness owed to affiliates of the Issuer
(collectively, "Senior Indebtedness"). The Issuer for itself, its successors and
assigns, covenants and agrees and each Registered Holder of this Debenture, its
successors and assigns, by its acceptance of this Debenture likewise covenants
and agrees, that to the extent provided below the payment of the principal of
and interest on this Debenture is hereby expressly subordinated and junior in
right of payment to the extent and in the manner hereinafter set forth, to all
Senior Indebtedness.
(c) Upon the acceleration of any Senior Indebtedness
or upon the maturity of the entire principal amount of any Senior Indebtedness
by lapse of time, acceleration or otherwise, all such Senior Indebtedness which
has been so accelerated or matured shall first indefeasibly be paid in full
before any payment is made by the Issuer or any person acting on behalf of the
Issuer on account of any obligations evidenced by this Debenture.
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(d) The Issuer shall not pay any principal portion of
this Debenture before the scheduled due date thereof or pay any interest payable
under this Debenture if there exists a Default or Event of Default (as such
terms are defined in the instruments evidencing Senior Indebtedness) with
respect to any Senior Indebtedness (hereinafter referred to as a "Blockage
Event").
(e) The Issuer shall have the right to pay any
principal portion of this Debenture before the scheduled due date thereof and
shall resume payment of interest payable under this Debenture and a Blockage
Event shall be deemed to have terminated:
(i) when such Default or Event of Default on
Senior Indebtedness, as applicable, is cured or waived;
(ii) when the Registered Holder hereof shall
have cured any such Default or Event of Default on Senior Indebtedness to the
extent such Default or Event of Default can be cured by payment of money, which
amount shall be added to the principal amount owing to the Registered Holder
pursuant to this Debenture; or
(iii) 180 days after the occurrence of such
Default or Event of Default, provided, that at the end of such 180 days, if any
of the following events exists or occurs, the Blockage Event shall continue: (A)
a Default in payment of any amount with respect to the Senior Indebtedness; (B)
an acceleration of the Senior Indebtedness; or (C) the occurrence of an event of
the type described below in subsection 1(k) hereof, provided, further, that a
Blockage Event with respect to a single specified Default or Event of Default
may be deemed to occur only once for each 360 day period.
(f) At any time there exists a Blockage Event, (i)
the Issuer shall not, directly or indirectly, make any payment of any part of
this Debenture, (ii) the Registered Holder hereof shall not demand or accept
from the Issuer or any other person any such payment or cancel, set-off or
otherwise discharge any part of the indebtedness represented by this Debenture,
and (iii) neither the Issuer nor the Registered Holder hereof shall otherwise
take or permit any action prejudicial to or inconsistent with the priority
position of any holder of Senior Indebtedness over the Registered Holder of this
Debenture. Notwithstanding the foregoing or any other provision of this
Debenture to the contrary, the occurrence and continuance of a Blockage Event
shall not limit or in any other manner affect the exercise of the Registered
Holder's conversion rights pursuant to Section 9.
(g) Any holder of Senior Indebtedness is hereby
authorized to demand specific performance of this Debenture, whether or not the
Issuer shall have complied with the provisions hereof applicable to it, at any
time when the Registered Holder hereof shall have failed to comply with any
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provision hereof applicable to such Registered Holder. The Registered Holder
hereby irrevocably waives any defense based on the adequacy of a remedy at law
which might be asserted as a bar to the remedy of specific performance hereof in
any action brought therefor by any holder of Senior Indebtedness. The Registered
Holder further (i) waives presentment, demand, notice and protest in connection
with all negotiable instruments evidencing Senior Indebtedness, notice of any
loan made, extension granted or other action taken in reliance hereon and all
demands and notices of every kind in connection with this Debenture or Senior
Indebtedness; and (ii) assents to any renewal, extension or postponement of the
time of payment of Senior Indebtedness or any other indulgence with respect
thereto, to any substitution, exchange or release of collateral therefor and to
the addition or release of any person primarily or secondarily liable thereon.
(h) No right of any holder of Senior Indebtedness to
enforce the subordination of the obligations shall be impaired by any act or
failure to act by the Issuer or the Registered Holder or by their failure to
comply with this Debenture or any other agreement or document evidencing,
related to or securing the obligations hereunder. Without in any way limiting
the generality of the preceding sentence, the holders of Senior Indebtedness
may, at any time and from time to time, without the consent of or notice to the
Registered Holder, without incurring responsibility to the Registered Holder and
without impairing or releasing the subordination provided in this Debenture or
the obligations of the Registered Holder hereof to the holders of Senior
Indebtedness, do any one or more of the following: (i) change the manner, place
or terms of payment of, or renew or alter, any Senior Indebtedness, or otherwise
amend or supplement in any manner, any Senior Indebtedness, or any instrument
evidencing the same or any agreement under which Senior Indebtedness is
outstanding; (ii) sell, exchange, release or otherwise deal with any property
pledged, mortgaged or otherwise securing any Senior Indebtedness; (iii) release
any Person or entity liable in any manner for the collection of any Senior
Indebtedness; and (iv) exercise or refrain from exercising any rights against
the Issuer or any other Person or entity.
(i) In the event that the Issuer shall make any
payment or prepayment to the Registered Holder on account of the obligations
under this Debenture which is prohibited by this Section 1, such payment shall
be held by the Registered Holder, in trust for the benefit of, and shall be paid
forthwith over and delivered to, the holders of Senior Indebtedness (pro rata as
to each of such holders on the basis of the respective amounts and priorities of
Senior Indebtedness held by them) to the extent necessary to pay all Senior
Indebtedness due to such holders of Senior Indebtedness in full in accordance
with its terms (whether or not such Senior Indebtedness is due and owing), after
giving effect to any concurrent payment or distribution to or for the holders of
such Senior Indebtedness.
(j) After all Senior Indebtedness indefeasibly is
paid in full and until the obligations under the Debenture are paid in full, the
Registered Holder shall be subrogated to the rights of holders of Senior
Indebtedness to the extent that distributions otherwise payable to the
Registered Holder have been applied to the payment of Senior Indebtedness. For
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purposes of such subrogation, no payments or distributions to holders of such
Senior Indebtedness of any cash, property or securities to which the Registered
Holder would be entitled except for the provisions of this Section 1 and no
payment over pursuant to the provisions of this Section 1 to holders of such
Senior Indebtedness by the Registered Holder, shall, as between the Issuer, its
creditors other than holders of such Senior Indebtedness, and the Registered
Holder, be deemed to be a payment by the Issuer to or on account of such Senior
Indebtedness, it being understood that the provisions of this Section 1 are
solely for the purpose of defining the relative rights of the holders of such
Senior Indebtedness, on the one hand and the Registered Holder hereof, on the
other hand.
(k) In any insolvency, receivership, bankruptcy,
dissolution, liquidation or reorganization proceeding, or in any other
proceeding, whether voluntary or involuntary, by or against the Issuer under any
bankruptcy or insolvency law or laws relating to relief of debtors, to
compositions, extensions or readjustments of indebtedness:
(i) the claims of any holders of Senior
Indebtedness against the Issuer shall be paid indefeasibly in full in cash
before any payment is made to the Registered Holder;
(ii) until all Senior Indebtedness is
indefeasibly paid in full in cash any distribution to which the Registered
Holder would be entitled but for this Section 1 shall be made to holders of
Senior Indebtedness; and
(iii) the holders of Senior Indebtedness
shall have the right to enforce, collect and receive every such payment or
distribution and give acquittance therefor. In furtherance of the foregoing, in
the event that the Issuer shall file or have filed against it a petition under
any chapter or Title 11 of the United States Code or any comparable statute,
with the result that the Issuer is excused from the obligation to pay all or any
part of the amount otherwise payable in respect of the Senior Indebtedness
during the period subsequent to the commencement of such proceedings, the
Registered Holder agrees that all or such part of such amount shall be payable
out of, and to that extent diminish and be at the expense of, the Registered
▇▇▇▇▇▇'s reorganization dividends or other distributions in respect of any claim
filed by it as a creditor or interest holder. In the event the holders of Senior
Indebtedness receive amounts in excess of payment in full (cash) of amounts
outstanding in respect of Senior Indebtedness (without giving effect to whether
claims in respect of the Senior Indebtedness are allowed in any insolvency
proceeding), the holders of the Senior Indebtedness shall pay such excess
amounts to the Registered Holder.
2. DENOMINATIONS. The Debentures are issuable only in fully
registered form and in integral multiples of $1,000.
3. TRANSFER.
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(a) So long as any Debentures remain Outstanding (as
hereinafter defined), the Issuer shall maintain at its principal executives
offices in the United States an office or agency where Debentures may be
presented or surrendered for payment, where Debentures may be surrendered for
registration of transfer or exchange, where Debentures may be surrendered for
conversion pursuant to Sections 9 or 10 hereof, and where notices and demands to
or upon the Issuer in respect of the Debentures may be served. The Issuer will
at all times act as its own security registrar and paying and transfer agent for
such purposes and agrees to cause to be kept at such office a register (the
"Security Register") in which, subject to such reasonable regulations as it may
prescribe, the Issuer will provide for the registration of Debentures and
registration of transfers of Debentures. As of the date this Debenture was
originally issued, such principal executive offices of the Issuer were located
at ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇. The Issuer shall not
change the location of its principal executive offices unless Issuer provides
all Registered Holders with no less than thirty (30) days prior written notice.
(b) The transfer of a Debenture is registrable on the
Security Register upon surrender of such Debenture at the principal executive
offices of Issuer duly endorsed by, or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Issuer duly executed by the
Registered Holder thereof, or the Registered Holder's attorney duly authorized
in writing, together with any certifications and representations which Issuer
may reasonably require to reflect compliance with all applicable securities
laws, rules and regulations and the due authorization of the transaction. Upon
such surrender of this Debenture for registration of transfer, the Issuer shall
execute and deliver, in the name of the designated transferee or transferees,
one or more new Debentures, dated the date of the execution thereof, of any
authorized denominations and of a like tenor, form and aggregate principal
amount.
(c) At the option of the Registered Holder, upon
request confirmed in writing, Debentures may be exchanged for Debentures of any
authorized denominations and of a like tenor, form and aggregate principal
amount upon surrender of the Debentures to be exchanged at the principal
executive offices of the Issuer. Whenever any Debentures are so surrendered for
exchange, the Issuer shall execute and deliver the Debentures which the
Registered Holder making the exchange is entitled to receive. Any registration
of transfer or exchange will be effected only upon the Issuer being reasonably
satisfied with the documents of title and identity of the person making the
request and subject to compliance with applicable Federal and state securities
laws.
(d) All Debentures issued upon any registration of
transfer or exchange of Debentures shall be the valid obligations of the Issuer,
evidencing the same debt, and entitled to the same benefits, as the Debentures
surrendered upon such registration of transfer or exchange. No service or other
charges shall be made for any registration of transfer or exchange, but the
Issuer may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
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(e) Prior to due presentment of this Debenture for
registration of transfer, the Issuer may treat the person in whose name this
Debenture is registered as the owner hereof for all purposes, whether or not
this Debenture be overdue, and the Issuer shall not be affected by notice to the
contrary.
4. PAYMENTS WHEN BANKING INSTITUTIONS ARE CLOSED. In any case
where the due date for the payment of the principal of or interest on any
Debenture shall be at any place of payment a day on which banking institutions
are authorized or obligated by law to close, then payment of principal or
interest, as the case may be, need not be made on such date at such place but
may be made on the next succeeding day at such place which is not a day on which
banking institutions are authorized or obligated by law to close, with the same
force and effect as if made on the date for such payment, and interest shall
accrue and be paid for the period through and including the date of payment.
5. TAXES.
(a) The Issuer shall pay all stamp and other duties
and taxes, if any, which may be imposed by the United States or any political
subdivision thereof, any state or any political subdivision thereof or any other
taxing authority with respect to the issuance of the Debentures.
(b) Except as specifically provided in this
Debenture, the Issuer shall not be required to make any payment with respect to
any tax, assessment or other governmental charge imposed by any government or
any political subdivision or taxing authorities thereof or therein.
6. REPRESENTATIONS AND WARRANTIES OF THE ISSUER. The Issuer
represents and warrants to the Registered Holder as of January 2, 2001 as
follows:
(a) Issuer is a corporation duly organized, existing
and in good standing under the laws of its state of incorporation and has the
corporate power to conduct the business which it conducts and proposes to
conduct.
(b) The execution, delivery and performance of the
Debentures by the Issuer has been duly approved by the Board of Directors of
Issuer and all other actions required to authorize and effect the offer and sale
of the Debentures have been duly taken and approved.
(c) The Company does not have a sufficient number of
authorized and unissued shares of Common Stock which are not otherwise reserved
to cover the conversion of the Debentures until such time, if any, it obtains
shareholder approval to increase the authorized shares of Common Stock, at which
time the Company will reserve for issuance a sufficient number of shares of
Common Stock to allow for the conversion of the Debentures.
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(d) The Debentures have been duly and validly
authorized. The Debentures and Common Stock issuable upon conversion of the
Debentures (the "Conversion Shares"), when issued (assuming compliance with
Section 7(a) hereof) and paid for in accordance with the terms hereof, will be
fully paid and non-assessable and valid and binding obligations of the Issuer
enforceable in accordance with their respective terms.
(e) Issuer has obtained all licenses, permits and
other governmental authorizations necessary to the conduct of its business; such
licenses, permits and other governmental authorizations obtained are in full
force and effect; and Issuer is in all material respects complying therewith.
(f) Except as disclosed in the documents listed in
Section 7(h) below, Issuer knows of no pending or threatened legal or
governmental proceedings to which Issuer is a party which could materially
adversely affect the business, property, financial condition or operations of
the Issuer.
(g) Issuer is not in violation of or default under,
nor will the execution and delivery of the Debentures, the issuance of the
Common Stock upon conversion of the Debentures in accordance with Section 9
hereof (and assuming compliance with Section 7(a) hereof) and the incurrence of
the obligations herein and therein set forth and the consummation of the
transactions herein or therein contemplated, result in a violation of, or
constitute a default under the articles of incorporation or by-laws, the
performance or observance of any material obligations, agreement, covenant or
condition contained in any bond, debenture, note or other evidence of
indebtedness or in any material contract, indenture, mortgage, loan agreement,
lease, joint venture or other agreements or instrument to which the Issuer is a
party or by which it or any of its properties may be bound or in violation of
any material order, rule, regulation, writ, injunction or decree of any
government, governmental instrumentality or court, domestic or foreign;
PROVIDED, HOWEVER, that the failure to comply herewith shall not be deemed a
breach hereof unless such failure would have a material adverse effect on the
business, financial condition or results of operations of Issuer and its
subsidiaries, taken as a whole (a "Material Adverse Effect").
(h) The financial information contained in the
Issuer's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1999, the Issuer's Quarterly Report on Form 10-QSB for the fiscal quarter ended
March 31, 2000, as amended by the Issuer's Form 10- QSB/A dated July 25, 2000,
the Issuer's Quarterly Report on Form 10-QSB for the fiscal quarter ended June
30, 2000 and the Issuer's Quarterly Report on Form 10-QSB for the fiscal quarter
ended September 30, 2000, presents fairly the financial condition of the Issuer
as of the dates and for the periods indicated.
7. COVENANTS OF THE ISSUER. Issuer hereby covenants and agrees
that for so long as any of the Debentures shall remain Outstanding:
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(a) it shall use its best efforts to gain shareholder
approval of its proposal to increase the number of authorized shares of Common
Stock from 25,000,000 shares to 50,000,000 shares at its upcoming special
meeting of shareholders, scheduled for January 26, 2001 and which shall occur no
later than July 2, 2001;
(b) at all times after its upcoming special meeting
of shareholders, assuming the foregoing shareholder proposal is approved and
following the filing of the amendment to its articles of incorporation, it shall
have authorized and reserved a sufficient number of shares of Common Stock to
provide for the conversion of the Debentures into shares of Common Stock;
(c) it will duly and punctually pay the principal of
and any interest on the Debentures in accordance with the terms hereof;
(d) it will do or cause to be done all things
necessary to preserve and keep in full force and effect its existence, rights
(charters and statutory) and franchises;
(e) it will cause all material properties used or
useful in the conduct of its business to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the reasonable judgment of
Issuer may be necessary so that the business carried on in connection therewith
may be properly and advantageously conducted at all times; PROVIDED, HOWEVER,
that the foregoing shall not prevent the Issuer from discontinuing the operation
or maintenance of any such properties if such discontinuance is, in the
reasonable judgment of Issuer, desirable in the conduct of its business or the
business of any of its subsidiaries, and not disadvantageous in any material
respect to the holders of Debentures; and, PROVIDED, FURTHER, that the failure
to comply herewith shall not be deemed a breach hereof unless such failure would
have a Material Adverse Effect;
(f) it will pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, (i) all taxes, assessments
and governmental charges levied or imposed upon the Issuer or upon the income,
profits or property of the Issuer, and (ii) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a lien upon the
property of the Issuer; PROVIDED, HOWEVER, that the Issuer shall not be required
to pay or discharge or cause to be paid or discharged any such tax, assessment,
charge or claim whose amount, applicability or validity is being contested in
good faith by appropriate proceedings; and, PROVIDED, FURTHER, that the failure
to comply herewith shall not be deemed a breach if it would not have a Material
Adverse Effect;
(g) it shall furnish to each Registered Holder of
Debentures a copy of all documents it is required to send to its shareholders at
the time the same are sent to shareholders, including, without limitation,
annual reports and proxy statements;
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(h) as soon as it becomes aware of the same, it shall
give written notice to each Registered Holder of Debentures of any event or
occurrence which by itself or with notice or lapse of time or both would entitle
the holders of the Debentures to declare the principal of and any interest on
the Debentures immediately due and payable pursuant to Section 14 hereof;
(i) it will promptly obtain and maintain from time to
time all authorizations, permits, approvals, consents, licenses and exemptions
which are required under any applicable law or regulation to enable it to
perform all of its payment, conversion and other material obligations under the
Debentures or which may be required for the validity or enforceability of the
Debentures; provided, however, that the failure to obtain and maintain such
authorizations, permits, approvals, consents, licenses and exemptions as to
material obligations other than payment and conversion shall not constitute a
breach of this provision unless such non- compliance materially adversely
affects the Issuer's ability to comply with its obligations under the
Debentures;
(j) it will duly and punctually comply with and
observe all statutes now or hereafter in force and all ordinances, regulation
and by-laws thereunder and all requirements and orders of any government or
other public authority; PROVIDED, HOWEVER, that any non- compliance with any
such statute, ordinance, regulation or by-law shall not constitute a breach of
this provision unless such non-compliance materially adversely affects the
Issuer's ability to comply with its obligations under the Debentures;
(k) it shall permit any representative of any
Registered Holder or Holders of at least $250,000 aggregate principal amount of
the Debentures to make inspections of (during regular business hours and subject
to reasonable confidentiality restrictions), and to report on, the property of,
and business operations being carried out by, the Issuer or any of its
subsidiaries;
(l) it shall maintain and keep in force with
reputable insurers and in adequate amounts, property, casualty, third party
liability and all such other insurances as would prudently be effected and
maintained in the case of a company carrying on a business similar to that of
the Issuer;
(m) it shall not:
(i) declare or pay any cash dividends on its
Common Stock (unless the Company provides the holders of the Debentures written
notice of at least thirty (30) days prior to the record date for the cash
dividend, that the Company intends to declare a cash dividend) or purchase,
redeem or otherwise acquire or retire for value any shares of Common Stock
(other than under the terms of the Issuer's stock option plan); or
(ii) consolidate with or merge into any
other Person, where the Issuer is not the surviving corporation, or convey,
transfer, lease or otherwise dispose of all or substantially all of its assets,
except in compliance with the terms and conditions set forth in Section 11
below.
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8. REGISTRATION RIGHTS.
(a) As soon as possible, but in no event later than
March 31, 2001, Issuer shall, at its sole cost and expense, file a registration
statement on the appropriate form under the 1933 Act with the Securities and
Exchange Commission ("SEC") covering all of the Conversion Shares (collectively,
the "Registrable Securities"), time being of the essence. Issuer will use its
best efforts to have such registration statement declared effective as soon as
possible thereafter, and shall keep such registration statement current and
effective for at least three (3) years from the effective date thereof or until
such earlier date as all of the Registrable Securities registered pursuant to
such registration statement shall have been sold or otherwise transferred. If
the registration statement is not filed by March 31, 2001, the Company shall pay
in cash to the Registered Holders an amount equal to three (3%) percent of the
face value of the Outstanding Debentures (as defined below) for each thirty (30)
day period, or any part thereof, beyond March 31, 2001 until the registration
statement covering the Registrable Securities is filed with the SEC.
Notwithstanding anything to the contrary contained herein, and in addition to
the adjustments set forth in the preceding sentence, if the registration
statement shall not be declared effective by May 31, 2001, the Company shall pay
in cash to the Registered Holders an amount equal to two (2%) percent of the
face value of the Outstanding Debentures for each thirty (30) day period, or any
part thereof, beyond May 31, 2001 until the registration statement covering the
Registrable Securities is declared effective. Notwithstanding the foregoing, the
Company shall not pay more than thirty-six (36%) percent in the aggregate.
(b) In the event Issuer effects any registration
under the 1933 Act of any Registrable Securities pursuant to Sections 8(a) above
or 8(g) below, the Issuer shall indemnify, to the extent permitted by law, and
hold harmless any Registered Holder whose Registrable Securities are included in
such registration statement (each, a "Seller"), any underwriter, any officer,
director, employee or agent of any Seller or underwriter, and each other person,
if any, who controls any Seller or underwriter within the meaning of Section 15
of the 1933 Act, against any losses, claims, damages or liabilities, judgment,
fines, penalties, costs and expenses, joint or several, or actions in respect
thereof (collectively, the "Claims"), to which each such indemnified party
becomes subject, under the 1933 Act or otherwise, insofar as such Claims arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the registration statement or prospectus or any
amendment or supplement thereto or any document filed under a state securities
or blue sky law (collectively, the "Registration Documents") or insofar as such
Claims arise out of or are based upon the omission or alleged omission to state
in any Registration Document a material fact required to be stated therein or
necessary to make the statements made therein not misleading, and will reimburse
any such indemnified party for any legal or other expenses reasonably incurred
by such indemnified party in investigating or defending any such Claim; provided
that the Issuer shall not be liable in any such case to the extent such Claim is
based upon an untrue statement or alleged untrue statement of a material fact or
omission or alleged omission of a material fact made in any Registration
Document in reliance upon and in conformity with written information furnished
to Issuer by or on behalf of any indemnified party specifically for use in the
preparation of such Registration Document.
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(c) In connection with any registration statement in
which any Seller is participating, each Seller, severally and not jointly, shall
indemnify, to the extent permitted by law, and hold harmless Issuer, each of its
directors, each of its officers who have signed the registration statement, each
other person, if any, who controls Issuer within the meaning of Section 15 of
the 1933 Act, each other Seller and each underwriter, any officer, director,
employee or agent of any such other Seller or underwriter and each other person,
if any, who controls such other Seller or underwriter within the meaning of
Section 15 of the 1933 Act against any Claims to which each such indemnified
party may become subject under the 1933 Act or otherwise, insofar as such Claims
(or actions in respect thereof) are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Document, or
insofar as any Claims are based upon the omission or alleged omission to state
in any Registration Document a material fact required to be stated therein or
necessary to make the statements made therein not misleading, and will reimburse
any such indemnified party for any legal or other expenses reasonably incurred
by such indemnified party in investigating or defending any such claim;
provided, however, that such indemnification or reimbursement shall be payable
only if, and to the extent that, any such Claim arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged omission
made in any Registration Document in reliance upon and in conformity with
written information furnished to Issuer by the Seller specifically for use in
the preparation thereof.
(d) Any person entitled to indemnification under
Sections 8(b) or 8(c) above shall notify promptly the indemnifying party in
writing of the commencement of any Claim if a claim for indemnification in
respect thereof is to be made against an indemnifying party under this Section
8(d), but the omission of such notice shall not relieve the indemnifying party
from any liability which it may have to any indemnified party otherwise than
under Section 8(b) or 8(c) above, except to the extent that such failure shall
materially adversely affect any indemnifying party or its rights hereunder. In
case any action is brought against the indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in, and, to the extent that it chooses, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified party;
and, after notice from the indemnifying party to the indemnified party that it
so chooses, the indemnifying party shall not be liable for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
that (i) if the indemnifying party fails to take reasonable steps necessary to
defend diligently the Claim within twenty (20) days after receiving notice from
the indemnified party that the indemnified party believes it has failed to do
so; (ii) if the indemnified party who is a defendant in any action or proceeding
which is also brought against the indemnifying party reasonably shall have
concluded that there are legal defenses available to the indemnified party which
are not available to the indemnifying party; or (iii) if representation of both
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parties by the same counsel is otherwise inappropriate under applicable
standards of professional conduct, the indemnified party shall have the right to
assume or continue its own defense as set forth above (but with no more than one
firm of counsel for all indemnified parties in each jurisdiction, except to the
extent any indemnified party or parties reasonably shall have concluded that
there are legal defenses available to such party or parties which are not
available to the other indemnified parties or to the extent representation of
all indemnified parties by the same counsel is otherwise inappropriate under
applicable standards of professional conduct) and the indemnifying party shall
be liable for any reasonable expenses therefor; provided, that no indemnifying
party shall be subject to any liability for any settlement of a Claim made
without its consent (which may not be unreasonably withheld, delayed or
conditioned). If the indemnifying party assumes the defense of any Claim
hereunder, such indemnifying party shall not enter into any settlement without
the consent of the indemnified party if such settlement attributes liability to
the indemnified party (which consent may not be unreasonably withheld, delayed
or conditioned).
(e) If for any reason the indemnity provided in
Section 8(b) or 8(c) above is unavailable, or is insufficient to hold harmless,
an indemnified party, then the indemnifying party shall contribute to the amount
paid or payable by the indemnified party as a result of any Claim in such
proportion as is appropriate to reflect the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other from
the transactions contemplated by this Agreement. If, however, the allocation
provided in the immediately preceding sentence is not permitted by applicable
law, or if the indemnified party failed to give the notice required by Section
8(d) above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
indemnifying party and the indemnified party as well as any other relevant
equitable considerations. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party or their respective representatives and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable in respect of any Claim shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such Claim.
Notwithstanding the foregoing, no underwriter or controlling person thereof, if
any, shall be required to contribute, in respect of such underwriter's
participation as an underwriter in the offering, any amount in excess of the
amount by which the total price at which the Registrable Securities underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The obligation
of any underwriters to contribute pursuant to this subsection (e) shall be
several in proportion to their respective underwriting commitments and not
joint.
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(f) The provisions of Sections 8(b) through 8(e)
hereof shall be in addition to any other rights to indemnification or
contribution which any indemnified party may have pursuant to law or contract
and shall remain operative and in full force and effect regardless of any
investigation made or omitted by or on behalf of any indemnified party and shall
survive the transfer of the Registrable Securities by any such party.
(g) If the registration statement as filed pursuant
to Section 8(a) above is not then effective, then Registered Holders shall have
certain "piggy-back" registration rights.
A. If at any time after the issuance of this
Debenture or a predecessor instrument, Issuer shall file with the SEC a
registration statement under the 1933 Act registering any shares of Common Stock
owned by any person or entity, Issuer shall give written notice to each
Registered Holder thereof prior to such filing.
B. Within fifteen (15) days after such
notice from Issuer, each Registered Holder shall give written notice to Issuer
whether or not the Registered Holder desires to have all of the Registered
Holder's Registrable Securities included in the registration statement. If a
Registered Holder fails to give such notice within such period, such Registered
Holder shall not have the right to have such Registered Holder's Registrable
Securities registered pursuant to such registration statement. If a Registered
Holder gives such notice, then Issuer shall include such Registered Holder's
Registrable Securities in the registration statement, at Issuer's sole cost and
expense, subject to the remaining terms of this Section 8(g).
C. If the registration statement relates to
an underwritten offering, and the underwriter shall determine in writing that
the total number of shares of Common Stock to be included in the offering,
including the Registrable Securities, shall exceed the amount which the
underwriter deems to be appropriate for the offering, the number of shares of
the Registrable Securities shall be reduced in the same proportion as the
remainder of the shares in the offering and each Registered Holder's Registrable
Securities included in such registration statement will be reduced
proportionately. For this purpose, if other securities in the registration
statement are derivative securities, their underlying shares shall be included
in the computation. The Registered Holders shall enter into such agreements as
may be reasonably required by the underwriters and the Registered Holders shall
pay to the underwriters commissions relating to the sale of their respective
Registrable Securities.
D. The Registered Holders shall have two (2)
opportunities to have the Registrable Securities registered under this Section
8(g).
E. The Registered Holder shall furnish in
writing to Issuer such information as Issuer shall reasonably require in
connection with a registration statement.
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(h) If and whenever Issuer is required by the
provisions of this Section 8 to use its best efforts to register any Registrable
Securities under the 1933 Act, Issuer shall, as expeditiously as possible under
the circumstances:
A. Prepare and file with the SEC a
registration statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become effective as soon as
possible and remain effective.
B. Prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement current and to comply with the provisions of the 1933 Act, and any
regulations promulgated thereunder, with respect to the sale or disposition of
all Registrable Securities covered by the registration statement required to
effect the distribution of the securities, but in no event shall Issuer be
required to do so for a period of more than three (3) years following the
effective date of the registration statement.
C. Furnish to the Sellers participating in
the offering, copies (in reasonable quantities) of summary, preliminary, final,
amended or supplemented prospectuses, in conformity with the requirements of the
1933 Act and any regulations promulgated thereunder, and other documents as
reasonably may be required in order to facilitate the disposition of the
securities, but only while Issuer is required under the provisions hereof to
keep the registration statement current.
D. Use its best efforts to register or
qualify the Registrable Securities covered by such registration statement under
such other securities or blue sky laws of such jurisdictions of the United
States as the Sellers participating in the offering shall reasonably request,
and do any and all other acts and things which may be reasonably necessary to
enable each participating Seller to consummate the disposition of the
Registrable Securities in such jurisdictions.
E. Notify each Seller selling Registrable
Securities, at any time when a prospectus relating to any such Registrable
Securities covered by such registration statement is required to be delivered
under the 1933 Act, of Issuer's becoming aware that the prospectus included in
such registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing, and promptly prepare and furnish to each
such Seller selling Registrable Securities a reasonable number of copies of a
prospectus supplemented or amended so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing.
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F. As soon as practicable after the
effective date of the registration statement, and in any event within eighteen
(18) months thereafter, make generally available to Sellers participating in the
offering an earnings statement (which need not be audited) covering a period of
at least twelve (12) consecutive months beginning after the effective date of
the registration statement which earnings statement shall satisfy the provisions
of Section 11(a) of the 1933 Act, including, at Issuer's option, Rule 158
thereunder. To the extent that Issuer files such information with the SEC in
satisfaction of the foregoing, Issuer need not deliver the above referenced
earnings statement to Seller.
G. Upon request, deliver promptly to counsel
of each Seller participating in the offering copies of all correspondence
between the SEC and Issuer, its counsel or auditors and all memoranda relating
to discussions with the SEC or its staff with respect to the registration
statement and permit each such Seller to do such investigation at such Seller's
sole cost and expense, upon reasonable advance notice, with respect to
information contained in or omitted from the registration statement as it deems
reasonably necessary. Each Seller agrees that it will use its best efforts not
to interfere unreasonably with Issuer's business when conducting any such
investigation and each Seller shall keep any such information received pursuant
to this Subsection G confidential.
H. Provide a transfer agent and registrar
located in the United States for all such Registrable Securities covered by such
registration statement not later than the effective date of such registration
statement.
I. List the Registrable Securities covered
by such registration statement on such exchanges and/or the NASDAQ as the Common
Stock is then currently listed, if any.
J. Pay all Registration Expenses (as
hereinafter defined) incurred in connection with a registration of Registrable
Securities, whether or not such registration statement shall become effective;
provided that each Seller shall pay all underwriting discounts, commissions and
transfer taxes, and their own counsel fees, if any, relating to the sale or
disposition of such Seller's Registrable Securities pursuant to a registration
statement. As used herein, "Registration Expenses" means any and all reasonable
and customary expenses incident to performance of or compliance with the
registration rights set forth herein, including, without limitation, (i) all
SEC, stock exchange and National Association of Securities Dealers, Inc.
registration and filing fees, (ii) all fees and expenses of complying with state
securities or blue sky laws (including reasonable fees and disbursements of
counsel for the underwriters in connection with blue sky qualifications of the
Registrable Securities but no other expenses of the underwriters or their
counsel), (iii) all printing, messenger and delivery expenses, and (iv) the
reasonable fees and disbursements of counsel for Issuer and Issuer's independent
public accountants.
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(i) Issuer acknowledges that there is no adequate
remedy at law for failure by it to comply with the provisions of this Section 8
and that such failure would not be adequately compensable in damages, and
therefore agrees that its agreements contained in this Section 8 may be
specifically enforced. In the event that Issuer shall fail to file such
registration statement when required pursuant to Section 8(a) above or to keep
any registration statement effective as provided in this Section or otherwise
fails to comply with its obligations and agreements in this Section 8, then, in
addition to any other rights or remedies the Registered Holders may have at law
or in equity, including without limitation, the right of rescission, the Issuer
shall indemnify and hold harmless the Registered Holders from and against any
and all manner or loss which they may incur as a result of such failure. In
addition, the Issuer shall also reimburse the Registered Holders for any and all
reasonable legal fees and expenses incurred by them in enforcing their rights
pursuant to this Section 8, regardless of whether any litigation was commenced.
9. VOLUNTARY CONVERSION.
(a) Each Registered Holder of Debentures may at any
time convert all or any amount of the principal amount of the Debentures then
owned by such Registered Holder into shares of Common Stock of Issuer at a
conversion price equal to $0.67 per share of Common Stock, subject to adjustment
as provided in this Section 9. If there is an insufficient number of authorized,
unissued and unreserved shares of Common Stock when such Registered Holder
converts, such Registered Holder shall receive all available authorized and
unissued shares of Common Stock not otherwise reserved until such time that
there is an increase in the authorized Common Stock, at which point the Company,
at the option of the Registered Holder, shall issue to such Registered Holder
those shares of Common Stock necessary to make such Registered Holder whole
(i.e. the amount of shares of Common Stock such Registered Holder would have
received if the conversion occurred after the increase of the Company's
authorized Common Stock.)
(b) The conversion right granted in Section 9(a)
hereof may be exercised only by a Registered Holder of Debentures, in whole or
in part, by the surrender of the certificate or certificates representing the
Debentures to be converted at the principal executive offices of the Issuer
against delivery of that number of shares of whole Common Stock as shall be
computed by dividing the face amount of the Debentures being converted by the
Conversion Price on the Conversion Date. At the time of conversion of
Debentures, the Issuer shall pay in cash to the Registered Holder thereof an
amount equal to all accrued and unpaid interest for that portion of the
Debentures converted, if any, to and including the Conversion Date. Each
Debenture surrendered for conversion shall be endorsed by the Registered Holder.
Issuer will transmit the Common Stock certificates issuable upon conversion of
any Debentures and a certificate representing the balance of the Debentures to
the Registered Holder via express courier within three (3) business days after
the Conversion Date. The term "Conversion Date" shall mean the date the original
Notice of Conversion and Debentures being converted are received by the Issuer.
The term "Notice of Conversion" shall mean the written notice from the
Registered Holder to the Issuer.
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(c) All Common Stock which may be issued upon
conversion of the Debentures will, upon issuance, be duly issued, fully paid and
non-assessable and free from all taxes, liens, and charges with respect to the
issue thereof. At all times that are Outstanding Debentures, Issuer shall have
authorized and reserved for the purpose of issuance upon such conversion into
Common Stock of all Debentures, a sufficient number of shares of Common Stock to
provide for the conversion of all Outstanding Debentures at the then effective
Conversion Price; provided, however, that there will not be a sufficient amount
of authorized and unissued shares of Common Stock not otherwise reserved for the
conversion of all Outstanding Debentures until (at the earliest) the Issuer's
upcoming special meeting of shareholders, where a proposal to increase the
amount of authorized shares of Common Stock will be voted on by the Issuer's
shareholders. If the shareholders of the Issuer do not approve the foregoing
proposal by July 2, 2001, the Outstanding Debentures will be deemed in default
and the Registered Holders will have those rights provided for in Section 14
herein. Without limiting the generality of the foregoing, if, at any time, the
Conversion Price is decreased or increased, the number of shares of Common Stock
authorized and reserved for issuance by Issuer upon the conversion of the
Debentures shall be proportionately increased or decreased, as the case may be.
(d) The Initial Conversion Price is $0.67 per share
of Common Stock ("Initial Conversion Price"). The Initial Conversion Price shall
be adjusted as provided for below in this Section 9(d) (the Initial Conversion
Price and the Initial Conversion Price, as thereafter then adjusted, shall be
referred to as the "Conversion Price") and the Conversion Price from time to
time shall be further adjusted as provided for below in this Section 9(d). Upon
each adjustment of the Conversion Price, the Registered Holders of the
Debentures shall thereafter be entitled to receive upon conversion, at the
Conversion Price resulting from such adjustment, the number of shares of Common
Stock obtained by dividing the face amount of the Debentures being converted by
the Conversion Price, as then adjusted. The Conversion Price shall be adjusted
as follows:
(i) In the case of any amendment to the
Articles of Incorporation of Issuer to change the designation of the Common
Stock or the rights, privileges, restrictions or conditions in respect to the
Common Stock or division of the Common Stock, the Debentures shall be adjusted
so as to provide that upon conversion thereof the Registered Holder shall
receive, in lieu of each share of Common Stock theretofore issuable upon such
conversion, the kind and amount of shares, other securities, money and property
receivable upon such designation, change or division by such holder issuable
upon such conversion had the conversion occurred immediately prior to such
designation, change or division. The Debentures shall be deemed thereafter to
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 9. The provisions of
this Subsection 9(d)(i) shall apply in the same manner to successive
reclassifications, changes, consolidations and mergers.
(ii) If Issuer shall at any time subdivide
its outstanding shares of Common Stock into a greater number of shares of Common
Stock, or declare a dividend or make any other distribution upon the Common
Stock payable in shares of Common Stock, the Conversion Price in effect
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immediately prior to such subdivision or dividend or other distribution shall be
proportionately reduced, and conversely, in case the outstanding shares of
Common Stock shall be combined into a smaller number of shares of Common Stock,
the Conversion Price in effect immediately prior to such combination shall be
proportionately increased.
(iii) If the Issuer shall at any time issue
or otherwise sell or distribute shares of Common Stock for a consideration per
share in cash or property, or the Issuer shall issue options or warrants to
purchase Common Stock (other than options granted pursuant to the Issuer's
directors' and employee stock option and stock purchase plans existing as of
January 2, 2001) that are exercisable at, or the Issuer shall issue or otherwise
sell or distribute rights to subscribe for or securities convertible into or
exchangeable for Common Stock, at a price less than the then effective
Conversion Price (the "Lower Price"), the Conversion Price then in effect shall
automatically be reduced to Lower Price. Notwithstanding anything herein to the
contrary, no adjustment shall be made to the Conversion Price upon: (i) the
exercise of options to purchase Common Stock granted pursuant to existing
directors' and employee stock option and stock purchase plans; (ii) shares or
options issued in connection with an acquisition of another entity (regardless
of whether such acquisition is consummated by the purchase of assets or equity
securities); (iii) the exercise of any outstanding options, warrants or other
rights to purchase Common Stock or upon conversion of any securities or other
rights convertible into Common Stock, which options, warrants, securities or
other rights were outstanding prior to January 2, 2001; (iv) the issuance, sale
or distribution of up to 250,000 shares of Common Stock in the aggregate
(regardless of price); (v) the grant of 750,000 options to ▇▇▇▇▇ ▇. ▇▇▇▇▇▇; or
(vi) the grant of 500,000 options to ▇▇▇▇▇▇▇ ▇▇▇▇▇▇.
(iv) If any capital reorganization or
reclassification of the capital stock of the Issuer, or any consolidation or
merger of the Issuer with another corporation or entity, or the sale of all or
substantially all of the Issuer's assets to another corporation or other entity
shall be effected in such a way that holders of shares of Common Stock shall be
entitled to receive stocks, securities, other evidence of equity ownership or
assets with respect to or in exchange for shares of Common Stock, then, as a
condition of such reorganization, reclassification, consolidation, merger or
sale (except as otherwise provided below in this Section 9), lawful and adequate
provisions shall be made whereby the Registered Holder shall thereafter have the
right to receive upon the basis and upon the terms and conditions specified
herein, such shares of stock, securities, other evidence of equity ownership or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the number of shares of
Common Stock immediately theretofore purchasable and receivable upon the
conversion of this Debenture under this Section 9 had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in any such
case appropriate provisions shall be made with respect to the rights and
interests of such Registered Holder to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Conversion
Price and of the number of shares of Common Stock receivable upon the conversion
of this Debenture) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities, other evidence of equity ownership
or assets thereafter deliverable upon the conversion hereof (including an
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immediate adjustment, by reason of such consolidation or merger, of the
Conversion Price to the value for the Common Stock reflected by the terms of
such consolidation or merger if the value so reflected is less than the
Conversion Price in effect immediately prior to such consolidation or merger).
Subject to the terms of this Debenture, in the event of a merger or
consolidation of the Issuer with or into another corporation or other entity as
a result of which the number of shares of common stock of the surviving
corporation or other entity issuable to holders of Common Stock of the Issuer,
is greater or lesser than the number of shares of Common Stock of the Issuer
outstanding immediately prior to such merger or consolidation, then the
Conversion Price in effect immediately prior to such merger or consolidation
shall be adjusted in the same manner as though there were a subdivision or
combination of the outstanding shares of Common Stock of the Issuer. The Issuer
shall not effect any such consolidation, merger or sale, unless, prior to the
consummation thereof, the successor corporation (if other than the Issuer)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume by written instrument executed and mailed or delivered to
the Registered Holder, the obligation to deliver to the Registered Holder such
shares of stock, securities, other evidence of equity ownership or assets as, in
accordance with the foregoing provisions, the Registered Holder may be entitled
to receive or otherwise acquire. If a purchase, tender or exchange offer is made
to and accepted by the holders of more than fifty (50%) percent of the
outstanding shares of Common Stock of the Issuer, the Issuer shall not effect
any consolidation, merger or sale with the Person having made such offer or with
any Affiliate of such Person, unless prior to the consummation of such
consolidation, merger or sale the Registered Holder of this Debenture shall have
been given a reasonable opportunity to then elect to receive upon the conversion
of this Debenture the amount of stock, securities, other evidence of equity
ownership or assets then issuable with respect to the number of shares of Common
Stock of the Issuer in accordance with such offer.
(e) Whenever the Conversion Price shall be adjusted
pursuant to Section 9(d) hereof, Issuer shall issue a certificate signed by its
President or Vice President and by its Treasurer, Assistant Treasurer, Secretary
or Assistant Secretary, setting forth, in reasonable detail, the event requiring
the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated (including a description of the basis on which the
Board of Directors of Issuer made any determination hereunder), and the
Conversion Price after giving effect to such adjustment, and shall cause copies
of such certificates to be mailed (by first-class mail, postage prepaid) to each
Registered Holder of Debentures. Issuer shall make such certificate and mail it
to each such holder promptly after each adjustment.
(f) No fractional Common Stock shall be issued in
connection with any conversion (or forced conversion, if applicable) of
Debentures, but in lieu of such fractional shares, the Issuer shall make a cash
payment therefor equal in amount to the product of the applicable fraction
multiplied by the Conversion Price then in effect.
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10. FORCED CONVERSION. All, but not less than all, of the
principal amount of the outstanding Debentures (the "Outstanding Debentures")
are convertible, at the option of Issuer, into shares of Common Stock at the
Conversion Price at any time after August 2, 2001, provided that on the day that
the Forced Conversion Notice (as hereinafter defined) is given by Issuer to all
Registered Holders and on the Forced Conversion Date (as hereinafter defined),
the following conditions are satisfied: (i) the Conversion Shares have been
registered by Issuer pursuant to the 1933 Act as provided for in Section 8 above
and such registration is then currently effective; and (ii) the average of the
closing bid price per share of the Common Stock, as listed or such exchange or
the NASDAQ as the Common Stock then trades, during a period of twenty (20)
consecutive trading days ending five (5) trading days prior to the date the
Forced Conversion Notice is sent, is at least $2.00. Any notice of conversion
("Forced Conversion Notice") must be given by Issuer to all Registered Holders
no less than five (5) days nor more than fifteen (15) days prior to the date set
forth for conversion (the "Forced Conversion Date"). The Forced Conversion
Notice shall remain effective only if the registration statement provided for in
Section 8 remains effective continually throughout the notice period. On the
Forced Conversion Date, the Issuer shall pay to all Registered Holders of
Debentures, all accrued and unpaid interest on the Debentures through and
including the Forced Conversion Date.
11. CHANGE OF CONTROL.
(a) In the event that there is a "Change of Control
Event" of the Issuer, the Issuer shall immediately notify each holder hereof.
Each holder may: (i) within fifteen (15) days after written notice from the
Issuer, elect to accelerate the maturity date of the Debentures owned by such
holder to a date not less than 30 but not more than 45 days after the date of
such notice from Issuer ("Redemption Date"); or (ii) convert the Debentures
owned by such holder into shares of Common Stock immediately prior to the Change
of Control Event.
(b) For purposes hereof, a "Change of Control Event"
shall be deemed to have occurred if (i) any "person" (as such term is defined at
Section 13(d) of the Securities Exchange Act of 1934) other than the Issuer or
an entity then controlled by the Issuer is or becomes the beneficial owner,
directly or indirectly of securities of the Issuer representing fifty (50%)
percent or more of the combined voting power of the Issuer's then outstanding
securities, including securities such person may have acquired directly from the
Issuer; (ii) the Issuer merges or consolidates with another corporation and an
entity controlled by the Issuer immediately prior to the merger or consolidation
is not the surviving entity or if the Issuer is the surviving entity, holders of
eighty (80%) percent or more of the voting power of the Issuer immediately prior
to the merger or consolidation do not own, immediately after the merger or
consolidation, sixty-five (65%) percent or more of the voting power of the
surviving entity; or (iii) a sale, lease, exchange or other disposition of all
or substantially all of the assets of the Issuer takes place.
12. ISSUANCE OF NEW DEBENTURES.
(a) If any mutilated ▇▇▇▇▇▇▇▇▇ is surrendered to the
Issuer, the Issuer shall execute and deliver in exchange therefor a new
Debenture of like tenor and principal amount, bearing a number not
contemporaneously outstanding.
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(b) If there is delivered to the Issuer (a) evidence
to its reasonable satisfaction of the destruction, loss or theft of any
Debenture and (b) such reasonable security or indemnity as may be required by it
to save it harmless, then, in the absence of notice to the Issuer that such
▇▇▇▇▇▇▇▇▇ has been acquired by a bona fide purchaser, the Issuer shall execute
and deliver in lieu of any such destroyed, lost or stolen Debenture a new
Debenture of like tenor and principal amount and bearing a number not
contemporaneously outstanding.
(c) Upon the issuance of any new Debenture under this
Section 12, the Issuer may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto and any
other expenses connected therewith.
(d) Any new Debenture delivered pursuant to this
Section 12 shall be so dated that neither gain nor loss in interest shall result
from such exchange.
(e) The provisions of this Section 12 are exclusive
and shall preclude (to the extent lawful) all other rights and remedies with
respect to the replacement or payment of mutilated, destroyed, lost or stolen
Debentures.
13. NOTICE. Where the terms of the Debentures provide for
notice to the holders of any event, such notice shall be sufficiently given if
given in writing and mailed, first class postage prepaid, to each Registered
Holder affected by such event, at his address as it appears in the register for
the Debentures. Any notice may be waived in writing by the Person entitled
thereto, either before or after the event, and such waiver shall be equivalent
of such notice.
14. EVENTS OF DEFAULT. In the event of:
(a) the failure of the Issuer's shareholders to
approve the proposal to increase the amount of authorized shares of Common Stock
of the Issuer from 25,000,000 shares to 50,000,000 shares at the Issuer's
upcoming 2001 special meeting of shareholders, which will occur no later than
July 2, 2001; or
(b) default in the payment of any interest on any
Debenture for a period of ten (10) days after any Interest Payment Date; or
(c) default in the payment of the principal of any
Debenture at Maturity; or
(d) the breach by the Issuer of any of the
representations and warranties set forth in Section 6 of the Debentures; or
(e) default in the performance or breach of any other
material covenant or agreement contained in the Debentures for a period of
thirty (30) days after the date on which written notice of such default
requiring the Issuer to remedy the same and stating that such notice is a
"Notice of Default", shall first have been given to the Issuer by a Registered
Holder or Holder(s) owning fifteen (15%) percent or more of Debentures; or
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(f) default under one or more bonds, debentures,
notes or other evidence of Indebtedness in excess of $500,000 in the aggregate,
whether such Indebtedness is secured or unsecured and whether such Indebtedness
now exists or shall hereinafter be created, which has not been cured within a
period of thirty (30) days; or
(g) the entry by a court having jurisdiction of (i) a
decree or order for relief in respect of the Issuer in an involuntary case or
proceeding under any applicable bankruptcy, insolvency, reorganization or other
similar law or (ii) a decree or order adjudging the Issuer a bankrupt or
insolvent, or approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Issuer under any
applicable law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Issuer or of any
substantial part of the property of the Issuer, or ordering the winding up or
liquidation of the affairs of the Issuer, and any such decree or order for
relief or any such other decree or order shall continue unstayed and in effect
for a period of sixty (60) consecutive days; or
(h) commencement by any Issuer of a voluntary case or
proceeding under any applicable bankruptcy, insolvency, reorganization or other
similar law or of any other case or proceeding to be adjudicated a bankrupt or
insolvent, or the consent by the Issuer to the entry of a decree or order for
relief in respect of the Issuer in an involuntary case or proceeding under any
applicable bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against the
Issuer, or the filing by the Issuer of a petition or answer or consent seeking
reorganization or relief under any such applicable law, or the consent by the
Issuer to the filing of such petition or to the appointment of or the taking
possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator
or other similar official of the Issuer or of any substantial part of its
property, or the making by the Issuer of an assignment for the benefit of
creditors, or the taking of action by the Issuer in furtherance of any such
action;
then a Registered Holder or Registered Holders owning fifteen (15%) percent or
more of the Debentures may, at their option, declare the principal of this
Debenture and the interest accrued hereon to be due and payable immediately
(such date being the "Acceleration Date") by written notice to the Issuer at its
principal executive offices, and unless all such defaults shall have been cured
by the Issuer prior to receipt of such written notice, the principal of this
Debenture and the interest accrued thereon shall become and be immediately due
and payable. Notwithstanding any of the foregoing, if an Event of Default occurs
under Subsection (a) of this Section 14, at each Registered Holder's option, the
Debentures shall become immediately due and payable, and the annual interest
rate of the Debentures will be automatically increased to twenty (20%) percent
(or to the maximum amount permitted by law, whichever is less) retroactively
applied from January 2, 2001.
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15. AMENDMENTS AND MODIFICATIONS. In the event that any of the
terms of this Agreement are modified or amended, other than the date of issuance
and face value of the Debenture, at any time after one or more Closings, the
Issuer shall notify each Lender, in writing, of such modification(s) or
amendment(s). Each Registered Holder in debentures may accept all such terms, at
the sole discretion of such Registered Holder by providing written notice to the
Issuer within fifteen (15) days after having received such notification from the
Issuer. If no such acceptance is received by the Issuer within said fifteen (15)
days, the term of this Debenture shall remain unmodified by such modification(s)
or amendment(s).
16. GOVERNING LAW; JURISDICTION. This Debenture shall be
governed by and construed in accordance with the laws of New York without regard
to the conflicts-of-laws principles thereof. The Issuer hereby irrevocably (a)
submits to the exclusive jurisdiction of, and agrees that any action, suit or
other proceeding at law, in equity or otherwise, shall only be brought in the
Supreme Court, New York County, or Federal District Court for the Southern
District of New York, for the purpose of any such suit, action or other
proceeding arising out of or based upon this Agreement or the transactions
contemplated hereby ("Action"); (b) waives, to the extent not prohibited by
applicable law, rule or regulation, and agrees not to assert, by way of motion,
as a defense or otherwise, in any such Action, any claim that any such person is
not subject personally to the jurisdiction of the aforementioned courts, that
its property is exempt or immune from attachment or execution, that any such
action brought in the aforementioned court is brought in an inconvenient forum,
that the venue of any such action brought in the aforementioned court is
improper, or that this Agreement, or the transactions contemplated hereby
enforced in or by such court, and (c) consents to service of process in any such
Action by recognized overnight courier service. Nothing herein shall affect the
right to serve process in any other manner permitted by law.
17. DEFINITIONS. The following terms shall have the meaning
ascribed to them below:
"Affiliate" means any Person directly or indirectly
controlling, controlled by or under direct or indirect control with another
Person.
"Contingent Obligations", as applied to any Person,
means any direct or indirect liability, contingent or otherwise, of that Person
(i) with respect to any Indebtedness, lease, dividend or other obligation of
another if the primary purpose or intent thereof by the Person incurring the
Contingent Obligation is to provide assurance to the obligee of such obligation
of another that such obligation of another will be paid or discharged, or that
any agreements relating thereto will be complied with, or that the holders of
such obligation will be protected (in whole or in part) against loss in respect
thereof, (ii) with respect to any letter of credit issued for the account of
that person, unpaid bankers' acceptances, bankers' assurances or guarantees or
similar items, or (iii) under any Interest Rate Protection Agreement or any
long- term foreign currency exchange contract, currency swap agreement, currency
futures contract, currency option contract, synthetic capital or similar
arrangement designed to protect the Person entering into the same against
fluctuations in currency values. Contingent Obligations shall include, without
limitation, (A) the direct or indirect guaranty, endorsement, co-making,
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discounting with recourse or sale with recourse by such Person of the obligation
of another, (B) the obligation to make take-or-pay or similar payments if
required regardless of non-performance by any other party or parties to an
agreement, and (C) any liability of such Person for the obligations of another
through any agreement (contingent or otherwise) (x) to purchase, repurchase or
otherwise acquire such obligation or any security therefor, or to provide funds
for the payment or discharge of such obligation (whether in the form of loans,
advances, stock purchases, capital contributions or otherwise), (y) to maintain
the solvency, any balance sheet item, level of income or financial condition of
another, or (z) to make take-or-pay or similar payments if required regardless
of non-performance by any other party or parties to an agreement (provided that,
in the case of any agreement described under Sub-clauses (C)(x) or (C)(y) of
this sentence, the primary purpose or intent thereof is as described in the
preceding sentence). The amount of any Contingent Obligation of a Person shall
be equal to the amount of the obligation so guaranteed or otherwise supported,
subject to any limitation as to amount contained in the instrument or agreement
creating or evidencing such Contingent Obligation; or in the case of Contingent
Obligations referred to in clause (iii) above, the mark-to-market value of such
Contingent Obligation at the relevant date of determination.
"Control" means possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise.
"Indebtedness" of any Person means, at any date of
determination, without duplication, (i) all obligations of such Person for
borrowed money, (ii) that portion of obligations with respect to capital leases
that is properly classified as a liability on a balance sheet of such Person in
conformity with GAAP, (iii) notes payable and drafts accepted of such Person
representing extensions of credit whether or not representing obligations for
borrowed money, (iv) any obligation of such Person owed for all or any part of
the deferred price of the property or services, which price or obligation is (x)
due more than (or has not been discharged prior to) three (3) months from the
date of incurrence of the obligation in respect thereof, or (y) evidenced by a
note, instrument or other written agreement, (v) all Contingent Obligations of
such Person, and (vi) all indebtedness of the type described in clauses (i)
through (v) above that is secured by any Lien on any property or asset owned or
held by such person (provided that the amount of such indebtedness included as
Indebtedness under this clause (vi) shall not exceed the market value of the
property or asset subject to such Lien).
"Lien" means any mortgage, pledge, hypothecation,
security interest, encumbrance, charge or lien (statutory or otherwise) or
assignment, deposit arrangement or other preferential arrangement in respect of
an interest in property intended to secure, support or otherwise assure payment
of an obligation (including, without limitation, any conditional sale or other
title retention agreement and any lease having substantially the same economic
effect as the foregoing).
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"Maturity" when used with respect to any Debenture,
means the date on which the principal of such Debenture or an installment of
principal becomes due and payable as therein or herein provided, whether at the
Stated Maturity or by declaration or acceleration, call for redemption or
otherwise.
"Person" means any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, institution, public benefit corporation, entity or government
(whether Federal, state, county, city, municipal or otherwise, including without
limitation, any instrumentality, division, agency, body or department thereof).
"Stated Maturity" when used with respect to any
Debenture or any installment of interest thereon, means the date specified in
such Debenture as the fixed date on which the principal of such Debenture or
such installment of interest is due and payable.
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IN WITNESS WHEREOF, the Issuer has caused this instrument to
be duly executed.
TELENETICS CORPORATION
By:/s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
------------------------
Name: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: President
Dated: January 2, 2001
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