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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES
MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF
COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN
COMPARABLE TRANSACTIONS THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
SECURED CONVERTIBLE DEBENTURE
Tustin, California
December 7, 2000 $500,000
FOR VALUE RECEIVED, ESYNCH CORPORATION, a Delaware corporation
(hereinafter called the "Borrower"), hereby promises to pay to the order of
Bristol Investment Fund, Ltd. or registered assigns (the "HOLDER") the sum of
Five Hundred Thousand Dollars ($500,000), on December 7, 2003 (the "MATURITY
DATE"), and to pay interest on the unpaid principal balance hereof at the rate
of eight percent (8%) per annum from December 7, 2000 (the "ISSUE DATE") until
the same becomes due and payable, whether at maturity or upon acceleration or by
prepayment or otherwise. Any amount of principal or interest on this Debenture
which is not paid when due shall bear interest at the rate of fifteen percent
(15%) per annum from the due date thereof until the same is paid ("DEFAULT
INTEREST"). Interest shall commence accruing on the issue date, shall be
computed on the basis of a 365-day year and the actual number of days elapsed
and shall be payable, at the option of the Holder, either quarterly on March 1,
June 1, September 1 and December 1 of each year beginning on March 1, 2001, or
at the time of conversion of the principal to which such interest relates in
accordance with Article I below. All payments due hereunder (to the extent not
converted into common stock, par value $0.001 per share, of the Borrower (the
"COMMON STOCK") in accordance with the terms hereof) shall be made in lawful
money of the United States of America or, at the option of the Holder, in whole
or in part, in shares of Common Stock of the Borrower valued at the then
applicable Conversion Price (as defined herein). All payments shall be made at
such address as the Holder shall hereafter give to the Borrower by written
notice made in accordance with the provisions of this Debenture. Whenever any
amount expressed to be due by the terms of this Debenture is due on any day
which is not a business day, the same shall instead be due on the next
succeeding day which is a business day and, in the case of any interest payment
date which is not the date on which this Debenture is paid in full, the
extension of the due date thereof shall
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not be taken into account for purposes of determining the amount of interest
due on such date. As used in this Debenture, the term "business day" shall
mean any day other than a Saturday, Sunday or a day on which commercial banks
in the city of Los Angeles, California are authorized or required by law or
executive order to remain closed. This Debenture shall be secured pursuant to
the terms of that certain Security Agreement by and between the Borrower and
the Holder of even date herewith. Each capitalized term used herein, and not
otherwise defined, shall have the meaning ascribed thereto in that certain
Securities Purchase Agreement, dated December 7, 2000, pursuant to which this
Debenture was originally issued (the "PURCHASE AGREEMENT").
The following terms shall apply to this Debenture:
ARTICLE I. CONVERSION RIGHTS
1.1 CONVERSION RIGHT.
The Holder shall have the right from time to time, and at any
time on or prior to the earlier of (i) the Maturity Date and (ii) the date of
payment of the Default Amount (as defined in Article III) pursuant to Section
1.6(a) or Article III, the Optional Prepayment Amount (as defined in Section 5.1
or any payments pursuant to Section 1.7, each in respect of the remaining
outstanding principal amount of this Debenture to convert all or any part of the
outstanding and unpaid principal amount of this Debenture into fully paid and
non-assessable shares of Common Stock, as such Common Stock exists on the Issue
Date, or any shares of capital stock or other securities of the Borrower into
which such Common Stock shall hereafter be changed or reclassified at the
conversion price (the "CONVERSION PRICE") determined as provided herein (a
"CONVERSION"); PROVIDED, HOWEVER, that in no event shall the Holder be entitled
to convert any portion of this Debenture in excess of that portion of this
Debenture upon conversion of which the sum of (1) the number of shares of Common
Stock beneficially owned by the Holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the Debentures or the unexercised or unconverted portion
of any other security of the Borrower (including, without limitation, the
warrants issued by the Borrower pursuant to the Purchase Agreement) subject to a
limitation on conversion or exercise analogous to the limitations contained
herein) and (2) the number of shares of Common Stock issuable upon the
conversion of the portion of this Debenture with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by the Holder and its affiliates of more than 4.9% of the outstanding
shares of Common Stock. For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulations 13D-G
thereunder, except as otherwise provided in clause (1) of such proviso. The
Holder of this Debenture may waive the limitations set forth herein by written
notice to the Company. The number of shares of Common Stock to be issued upon
each conversion of this Debenture shall be determined by dividing the Conversion
Amount (as defined below) by the applicable Conversion Price then in effect on
the date specified in the notice of conversion, in the form attached hereto as
Exhibit A (the "NOTICE OF CONVERSION"), delivered to the Borrower by the Holder
in accordance with Section 1.4 below;
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provided that the Notice of Conversion is submitted by facsimile (or by other
means resulting in, or reasonably expected to result in, notice) to the
Borrower before 3:00 p.m., Los Angeles, California time on such conversion
date (the "CONVERSION DATE"). The term "CONVERSION AMOUNT" means, with
respect to any conversion of this Debenture, the sum of (1) the principal
amount of this Debenture to be converted in such conversion PLUS (2) accrued
and unpaid interest, if any, on such principal amount at the interest rates
provided in this Debenture to the Conversion Date PLUS (3) Default Interest,
if any, on the amounts referred to in the immediately preceding clauses (1)
and/or (2) PLUS (4) at the Holder's option, any amounts owed to the Holder
pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of
that certain Registration Rights Agreement, dated as of December 7, 2000,
executed in connection with the initial issuance of this Debenture and the
other Debentures issued on the Issue Date (the "REGISTRATION RIGHTS
AGREEMENT").
1.2 CONVERSION PRICE.
(a) CALCULATION OF CONVERSION PRICE. The Conversion Price
shall be the lesser of (i) the Variable Conversion Price (as defined herein)
and (ii) the Fixed Conversion Price (as defined herein) (subject, in each
case, to equitable adjustments for stock splits, stock dividends or rights
offerings by the Borrower relating to the Borrower's securities or the
securities of any subsidiary of the Borrower, combinations, recapitalization,
reclassifications, extraordinary distributions and similar events). The
"VARIABLE CONVERSION PRICE" shall mean the Applicable Percentage (as defined
herein) multiplied by the Market Price (as defined herein). "MARKET PRICE"
means the average of the lowest three (3) Closing Bid Prices (as defined
below) for the Common Stock during the twenty (20) Trading Day period ending
one Trading Day prior to the date the Conversion Notice is sent by the Holder
to the Borrower via facsimile (the "CONVERSION DATE"). "CLOSING BID PRICE"
means, for any security as of any date, the closing bid price on the
Over-the-Counter Bulletin Board (the "OTCBB") as reported by Bloomberg
Financial Markets or an equivalent, reliable reporting service mutually
acceptable to and hereafter designated by Holders of a majority in interest
of the Debentures and the Borrower ("BLOOMBERG") or, if the OTCBB is not the
principal trading market for such security, the closing bid price of such
security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg or, if no closing bid
price of such security is available in any of the foregoing manners, the
average of the bid prices of any market makers for such security that are
listed in the "pink sheets" by the National Quotation Bureau, Inc. If the
Closing Bid Price cannot be calculated for such security on such date in the
manner provided above, the Closing Bid Price shall be the fair market value
as mutually determined by the Corporation and the holders of a majority in
interest of the Debentures being converted for which the calculation of the
Closing Bid Price is required in order to determine the Conversion Price of
such Debentures. "TRADING DAY" shall mean any day on which the Common Sock is
traded for any period on the OTCBB, or on the principal securities exchange
or other securities market on which the Common Stock is then being traded.
"APPLICABLE PERCENTAGE" shall mean 78.0%. The "FIXED CONVERSION PRICE" shall
mean $1.375.
(b) CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS.
Notwithstanding anything contained in Section 1.2(a) to the contrary, in the
event the Borrower (i) makes a public announcement that it intends to
consolidate or merge with any other
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corporation (other than a merger in which the Borrower is the surviving or
continuing corporation and its capital stock is unchanged) or sell or
transfer all or substantially all of the assets of the Borrower or (ii) any
person, group or entity (including the Borrower) publicly announces a tender
offer to purchase 50% or more of the Borrower's Common Stock (or any other
takeover scheme) (the date of the announcement referred to in clause (i) or
(ii) is hereinafter referred to as the "ANNOUNCEMENT DATE"), then the
Conversion Price shall, effective upon the Announcement Date and continuing
through the Adjusted Conversion Price Termination Date (as defined below), be
equal to the lower of (x) the Conversion Price which would have been
applicable for a Conversion occurring on the Announcement Date and (y) the
Conversion Price that would otherwise be in effect. From and after the
Adjusted Conversion Price Termination Date, the Conversion Price shall be
determined as set forth in this Section 1.2(a). For purposes hereof,
"ADJUSTED CONVERSION PRICE TERMINATION DATE" shall mean, with respect to any
proposed transaction or tender offer (or takeover scheme) for which a public
announcement as contemplated by this Section 1.2(b) has been made, the date
upon which the Borrower (in the case of clause (i) above) or the person,
group or entity (in the case of clause (ii) above) consummates or publicly
announces the termination or abandonment of the proposed transaction or
tender offer (or takeover scheme) which caused this Section 1.2(b) to become
operative.
1.3 AUTHORIZED SHARES. The Borrower covenants that during the period
the conversion right exists, the Borrower will reserve from its authorized and
unissued Common Stock a sufficient number of shares, free from preemptive
rights, to provide for the issuance of Common Stock upon the full conversion of
this Debenture and the other Debentures issued pursuant to the Purchase
Agreement. As of the date of issuance of this Debenture, 932,400 (2x currently
required) authorized and unissued shares of Common Stock have been duly reserved
for issuance upon conversion of this Debenture and the other Debentures issued
pursuant to the Purchase Agreement (the "RESERVED AMOUNT"). The Reserved Amount
shall be increased from time to time in accordance with the Borrower's
obligations pursuant to Section 4(h) of the Purchase Agreement. The Borrower
represents that upon issuance, such shares will be duly and validly issued,
fully paid and non-assessable. In addition, if the Borrower shall issue any
securities or make any change to its capital structure which would change the
number of shares of Common Stock into which the Debentures shall be convertible
at the then current Conversion Price, the Borrower shall at the same time make
proper provision so that thereafter there shall be a sufficient number of shares
of Common Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Debentures. The Borrower (i) acknowledges that it
has irrevocably instructed its transfer agent to issue certificates for the
Common Stock issuable upon conversion of this Debenture and (ii) agrees that its
issuance of this Debenture shall constitute full authority to its officers and
agents who are charged with the duty of executing stock certificates to execute
and issue the necessary certificates for shares of Common Stock in accordance
with the terms and conditions of this Debenture.
If, at any time a Holder of this Debenture submits a Notice of
Conversion, and the Borrower does not have sufficient authorized but unissued
shares of Common Stock available to effect such conversion in accordance with
the provisions of this Article I (a "CONVERSION DEFAULT"), subject to Section
4.8, the Borrower shall issue to the Holder all of the shares of Common Stock
which are then available to effect such conversion. The portion of this
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Debenture which the Holder included in its Conversion Notice and which
exceeds the amount which is then convertible into available shares of Common
Stock (the "EXCESS AMOUNT") shall, notwithstanding anything to the contrary
contained herein, not be convertible into Common Stock in accordance with the
terms hereof until (and at the Holder's option at any time after) the date
additional shares of Common Stock are authorized by the Borrower to permit
such conversion, at which time the Conversion Price in respect thereof shall
be the lesser of (i) the Conversion Price on the Conversion Default Date (as
defined below) and (ii) the Conversion Price on the Conversion Date
thereafter elected by the Holder in respect thereof. In addition, the
Borrower shall pay to the Holder payments ("CONVERSION DEFAULT PAYMENTS") for
a Conversion Default in the amount of (x) the SUM OF (1) the then outstanding
principal amount of this Debenture PLUS (2) accrued and unpaid interest on
the unpaid principal amount of this Debenture through the Authorization Date
(as defined below) PLUS (3) Default Interest, if any, on the amounts referred
to in clauses (1) and/or (2), MULTIPLIED BY (y) .24, MULTIPLIED BY (z)
(N/365), where N = the number of days from the day the holder submits a
Notice of Conversion giving rise to a Conversion Default (the "CONVERSION
DEFAULT DATE") to the date (the "AUTHORIZATION DATE") that the Borrower
authorizes a sufficient number of shares of Common Stock to effect conversion
of the full outstanding principal balance of this Debenture. The Borrower
shall use its best efforts to authorize a sufficient number of shares of
Common Stock as soon as practicable following the earlier of (i) such time
that the Holder notifies the Borrower or that the Borrower otherwise becomes
aware that there are or likely will be insufficient authorized and unissued
shares to allow full conversion thereof and (ii) a Conversion Default. The
Borrower shall send notice to the Holder of the authorization of additional
shares of Common Stock, the Authorization Date and the amount of Holder's
accrued Conversion Default Payments. The accrued Conversion Default Payments
for each calendar month shall be paid in cash or shall be convertible into
Common Stock (at such time as there are sufficient authorized shares of
Common Stock) at the applicable Conversion Price, at the Holder's option, as
follows:
(a) In the event Holder elects to take such payment in
cash, cash payment shall be made to Holder by the fifth (5th) day of the
month following the month in which it has accrued; and
(b) In the event Holder elects to take such payment in
Common Stock, the Holder may convert such payment amount into Common Stock at
the Conversion Price (as in effect at the time of conversion) at any time
after the fifth day of the month following the month in which it has accrued
in accordance with the terms of this Article I (so long as there is then a
sufficient number of authorized shares of Common Stock).
The Holder's election shall be made in writing to the Borrower at
any time prior to 6:00 p.m., Los Angeles time, on the third day of the month
following the month in which Conversion Default payments have accrued. If no
election is made, the Holder shall be deemed to have elected to receive cash.
Nothing herein shall limit the Holder's right to pursue actual damages (to
the extent in excess of the Conversion Default Payments) for the Borrower's
failure to maintain a sufficient number of authorized shares of Common Stock,
and each holder shall have the right to pursue all remedies available at law
or in equity (including degree of specific performance and/or injunctive
relief).
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1.4 METHOD OF CONVERSION.
(a) MECHANICS OF CONVERSION. Subject to Section 1.1, this
Debenture may be converted by the Holder in whole or in part (provided such
partial conversion is at least $50,000, or such lesser amount as shall remain
unpaid at the time of the conversion (together with accrued and unpaid
interest thereon)) at any time from time to time after the Issue Date, by (A)
submitting to the Borrower a Notice of Conversion (by facsimile or other
reasonable means of communication dispatched on the Conversion Date prior to
3:00 p.m., Los Angeles, California time) and (B) subject to Section 1.4(b),
surrendering this Debenture at the principal office of the Borrower.
(b) SURRENDER OF DEBENTURE UPON CONVERSION. Notwithstanding
anything to the contrary set forth herein, upon conversion of this Debenture
in accordance with the terms hereof, the Holder shall not be required to
physically surrender this Debenture to the Borrower unless the entire unpaid
principal amount of this Debenture is so converted. The Holder and the
Borrower shall maintain records showing the principal amount so converted and
the dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Borrower, so as not to require physical
surrender of this Debenture upon each such conversion. In the event of any
dispute or discrepancy, such records of the Borrower shall be controlling and
determinative in the absence of manifest error. Notwithstanding the
foregoing, if any portion of this Debenture is converted as aforesaid, the
Holder may not transfer this Debenture unless the Holder first physically
surrenders this Debenture to the Borrower, whereupon the Borrower will
forthwith issue and deliver upon the order of the Holder a new Debenture of
like tenor, registered as the Holder (upon payment by the Holder of any
applicable transfer taxes) may request, representing in the aggregate the
remaining unpaid principal amount of this Debenture. The Holder and any
assignee, by acceptance of this Debenture, acknowledge and agree that, by
reason of the provisions of this paragraph, following conversion of a portion
of this Debenture, the unpaid and unconverted principal amount of this
Debenture represented by this Debenture may be less than the amount stated on
the face hereof.
(c) PAYMENT OF TAXES.The Borrower shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issue and delivery of shares of Common Stock or other securities or property
on conversion of this Debenture in a name other than that of the Holder (or
in street name), and the Borrower shall not be required to issue or deliver
any such shares or other securities or property unless and until the person
or persons (other than the Holder or the custodian in whose street name such
shares are to be held for the Holder's account) requesting the issuance
thereof shall have paid to the Borrower the amount of any such tax or shall
have established to the satisfaction of the Borrower that such tax has been
paid.
(d) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon receipt
by the Borrower from the Holder of a facsimile transmission (or other
reasonable means of communication) of a Notice of Conversion meeting the
requirements for conversion as provided in this Section 1.4, the Borrower
shall issue and deliver or cause to be issued and delivered to or upon the
order of the Holder certificates for the Common Stock issuable upon such
conversion within two (2) business days after such receipt (and, solely in
the case of conversion of the entire
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unpaid principal amount hereof, surrender of this Debenture) (such second
business day being hereinafter referred to as the "DEADLINE") in accordance
with the terms hereof and the Purchase Agreement (including, without
limitation, in accordance with the requirements of Section 2(g) of the
Purchase Agreement that certificates for shares of Common Stock issued on or
after the effective date of the Registration Statement upon conversion of
this Debenture shall not bear any restrictive legend).
(e) OBLIGATION OF BORROWER TO DELIVER COMMON STOCK. Upon
receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed
to be the holder of record of the Common Stock issuable upon such conversion,
the outstanding principal amount and the amount of accrued and unpaid
interest on this Debenture shall be reduced to reflect such conversion, and,
unless the Borrower defaults on its obligations under this Article I, all
rights with respect to the portion of this Debenture being so converted shall
forthwith terminate except the right to receive the Common Stock or other
securities, cash or other assets, as herein provided, on such conversion. If
the Holder shall have given a Notice of Conversion as provided herein, the
Borrower's obligation to issue and deliver the certificates for Common Stock
shall be absolute and unconditional, irrespective of the absence of any
action by the Holder to enforce the same, any waiver or consent with respect
to any provision thereof, the recovery of any judgment against any person or
any action to enforce the same, any failure or delay in the enforcement of
any other obligation of the Borrower to the holder of record, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder of any obligation to the Borrower, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Borrower to the Holder in connection with such conversion. The Conversion
Date specified in the Notice of Conversion shall be the Conversion Date so
long as the Notice of Conversion is received by the Borrower before 3:00
p.m., Los Angeles, California time, on such date.
(f) DELIVERY OF COMMON STOCK BY ELECTRONIC TRANSFER. In
lieu of delivering physical certificates representing the Common Stock
issuable upon conversion, provided the Borrower's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer ("FAST") program, upon request of the Holder and its
compliance with the provisions contained in Section 1.1 and in this Section
1.4, the Borrower shall use its best efforts to cause its transfer agent to
electronically transmit the Common Stock issuable upon conversion to the
Holder by crediting the account of Holder's Prime Broker with DTC through its
Deposit Withdrawal Agent Commission ("DWAC") system.
(g) FAILURE TO DELIVER COMMON STOCK PRIOR TO DEADLINE.
Without in any way limiting the Holder's right to pursue other remedies,
including actual damages and/or equitable relief, the parties agree that if
delivery of the Common Stock issuable upon conversion of this Debenture is
more than two (2) days after the Deadline (other than a failure due to the
circumstances described in Section 1.3 above, which failure shall be governed
by such Section) the Borrower shall pay to the Holder $2,000 per day in cash,
for each day beyond the Deadline that the Borrower fails to deliver such
Common Stock. Such cash amount shall be paid to Holder by the fifth day of
the month following the month in which it has accrued or, at the option of
the Holder (by written notice to the Borrower by the first day of the month
following the month in which it has accrued), shall be added to the principal
amount of this Debenture, in
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which event interest shall accrue thereon in accordance with the terms of
this Debenture and such additional principal amount shall be convertible into
Common Stock in accordance with the terms of this Debenture.
1.5 CONCERNING THE SHARES. The shares of Common Stock issuable upon
conversion of this Debenture may not be sold or transferred unless (i) such
shares are sold pursuant to an effective registration statement under the Act or
(ii) the Borrower or its transfer agent shall have been furnished with an
opinion of counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions) to the effect that
the shares to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration or (iii) such shares are sold or transferred
pursuant to Rule 144 under the Act (or a successor rule) ("RULE 144") or (iv)
such shares are transferred to an "affiliate" (as defined in Rule 144) of the
Borrower who agrees to sell or otherwise transfer the shares only in accordance
with this Section 1.5 and who is an Accredited Investor (as defined in the
Purchase Agreement). Except as otherwise provided in the Purchase Agreement (and
subject to the removal provisions set forth below), until such time as the
shares of Common Stock issuable upon conversion of this Debenture have been
registered under the Act as contemplated by the Registration Rights Agreement or
otherwise may be sold pursuant to Rule 144 without any restriction as to the
number of securities as of a particular date that can then be immediately sold,
each certificate for shares of Common Stock issuable upon conversion of this
Debenture that has not been so included in an effective registration statement
or that has not been sold pursuant to an effective registration statement or an
exemption that permits removal of the legend, shall bear a legend substantially
in the following form, as appropriate:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN
FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE
TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT."
The legend set forth above shall be removed and the Borrower shall
issue to the Holder a new certificate therefor free of any transfer legend if
(i) the Borrower or its transfer agent shall have received an opinion of
counsel, in form, substance and scope customary for opinions of counsel in
comparable transactions, to the effect that a public sale or transfer of such
Common Stock may be made without registration under the Act and the shares are
so sold or transferred, (ii) such Holder provides the Borrower or its transfer
agent with reasonable assurances that the Common Stock issuable upon conversion
of this Debenture (to the extent such securities are deemed to have been
acquired on the same date) can be sold pursuant to Rule 144 or (iii) in the case
of the Common Stock issuable upon conversion of this Debenture, such security is
registered for sale by the Holder under an effective registration statement
filed under the Act or otherwise may be sold pursuant to Rule 144 without any
restriction as to the number of securities as of a particular date that can then
be immediately sold. Nothing in this Debenture
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shall (i) limit the Borrower's obligation under the Registration Rights
Agreement or (ii) affect in any way the Holder's obligations to comply with
applicable prospectus delivery requirements upon the resale of the securities
referred to herein.
1.6 EFFECT OF CERTAIN EVENTS.
(a) EFFECT OF MERGER, CONSOLIDATION, ETC. At the option of
the Holder, the sale, conveyance or disposition of all or substantially all
of the assets of the Borrower, the effectuation by the Borrower of a
transaction or series of related transactions in which more than 50% of the
voting power of the Borrower is disposed of, or the consolidation, merger or
other business combination of the Borrower with or into any other Person (as
defined below) or Persons when the Borrower is not the survivor shall either:
(i) be deemed to be an Event of Default (as defined in Article III) pursuant
to which the Borrower shall be required to pay to the Holder upon the
consummation of and as a condition to such transaction an amount equal to the
Default Amount (as defined in Article III) or (ii) be treated pursuant to
Section 1.6(b) hereof. "PERSON" shall mean any individual, corporation,
limited liability company, partnership, association, trust or other entity or
organization.
(b) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at
any time when this Debenture is issued and outstanding and prior to
conversion of all of the Debentures, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Borrower
shall be changed into the same or a different number of shares of another
class or classes of stock or securities of the Borrower or another entity, or
in case of any sale or conveyance of all or substantially all of the assets
of the Borrower other than in connection with a plan of complete liquidation
of the Borrower, then the Holder of this Debenture shall thereafter have the
right to receive upon conversion of this Debenture, upon the basis and upon
the terms and conditions specified herein and in lieu of the shares of Common
Stock immediately theretofore issuable upon conversion, such stock,
securities or assets which the Holder would have been entitled to receive in
such transaction had this Debenture been converted in full immediately prior
to such transaction (without regard to any limitations on conversion set
forth herein), and in any such case appropriate provisions shall be made with
respect to the rights and interests of the Holder of this Debenture to the
end that the provisions hereof (including, without limitation, provisions for
adjustment of the Conversion Price and of the number of shares issuable upon
conversion of the Debenture) shall thereafter be applicable, as nearly as may
be practicable in relation to any securities or assets thereafter deliverable
upon the conversion hereof. The Borrower shall not effect any transaction
described in this Section 1.6(b) unless (a) it first gives, to the extent
practicable, thirty (30) days prior written notice (but in any event at least
fifteen (15) days prior written notice) of the record date of the special
meeting of stockholders to approve, or if there is no such record date, the
consummation of, such merger, consolidation, exchange of shares,
recapitalization, reorganization or other similar event or sale of assets
(during which time the Holder shall be entitled to convert this Debenture)
and (b) the resulting successor or acquiring entity (if not the Borrower)
assumes by written instrument the obligations of this Section 1.6(b). The
above provisions shall similarly apply to successive consolidations, mergers,
sales, transfers or share exchanges.
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(c) ADJUSTMENT DUE TO DISTRIBUTION. If the Borrower shall
declare or make any distribution of its assets (or rights to acquire its
assets) to holders of Common Stock as a dividend, stock repurchase, by way of
return of capital or otherwise (including any dividend or distribution to the
Borrower's shareholders in cash or shares (or rights to acquire shares) of
capital stock of a subsidiary (i.e., a spin-off)) (a "DISTRIBUTION"), then
the Holder of this Debenture shall be entitled, upon any conversion of this
Debenture after the date of record for determining shareholders entitled to
such Distribution, to receive the amount of such assets which would have been
payable to the Holder with respect to the shares of Common Stock issuable
upon such conversion had such Holder been the holder of such shares of Common
Stock on the record date for the determination of shareholders entitled to
such Distribution.
(d) PURCHASE RIGHTS. If, at any time when any Debentures
are issued and outstanding, the Borrower issues any convertible securities or
rights to purchase stock, warrants, securities or other property (the
"PURCHASE RIGHTS") pro rata to the record holders of any class of Common
Stock, then the Holder of this Debenture will be entitled to acquire, upon
the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such Holder could have acquired if such Holder had held the number of
shares of Common Stock acquirable upon complete conversion of this Debenture
(without regard to any limitations on conversion contained herein)
immediately before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights or, if no such record is taken, the
date as of which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.
(e) NOTICE OF ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price as a result of the events
described in this Section 1.6, the Borrower, at its expense, shall promptly
compute such adjustment or readjustment and prepare and furnish to the Holder
of a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Borrower shall, upon the written request at any time of the Holder, furnish
to such Holder a like certificate setting forth (i) such adjustment or
readjustment, (ii) the Conversion Price at the time in effect and (iii) the
number of shares of Common Stock and the amount, if any, of other securities
or property which at the time would be received upon conversion of the
Debenture.
1.7 TRADING MARKET LIMITATIONS. Unless permitted by the applicable
rules and regulations of the principal securities market on which the Common
Stock is then listed or traded, in no event shall the Borrower issue upon
conversion of this Debenture and the other Debentures issued pursuant to the
Purchase Agreement more than the maximum number of shares of Common Stock that
the Borrower can issue pursuant to any rule of the principal United States
securities market on which the Common Stock is then traded (the "MAXIMUM SHARE
AMOUNT"), which, as of the Issue Date shall be 2,868,899 shares (19.99% of the
total shares outstanding on the Issue Date), subject to equitable adjustment
from time to time for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring after
the date hereof. Once the Maximum Share Amount has been issued (the date of
which is hereinafter referred to as the "MAXIMUM CONVERSION DATE"), if the
Borrower fails to eliminate any prohibitions under applicable law or the rules
or regulations of
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any stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Borrower or any of its securities on
the Borrower's ability to issue shares of Common Stock in excess of the
Maximum Share Amount (a "TRADING MARKET PREPAYMENT EVENT"), in lieu of any
further right to convert this Debenture, and in full satisfaction of the
Borrower's obligations under this Debenture, the Borrower shall pay to the
Holder, within fifteen (15) business days of the Maximum Conversion Date (the
"TRADING MARKET PREPAYMENT DATE"), an amount equal to 120% TIMES the SUM of
(a) the then outstanding principal amount of this Debenture immediately
following the Maximum Conversion Date, PLUS (b) accrued and unpaid interest
on the unpaid principal amount of this Debenture to the Trading Market
Prepayment Date, PLUS (c) Default Interest, if any, on the amounts referred
to in clause (a) and/or (b) above, PLUS (d) any optional amounts that may be
added thereto at the Maximum Conversion Date by the Holder in accordance with
the terms hereof (the then outstanding principal amount of this Debenture
immediately following the Maximum Conversion Date, PLUS the amounts referred
to in clauses (b), (c) and (d) above shall collectively be referred to as the
"REMAINING CONVERTIBLE AMOUNT"). With respect to each Holder of Debentures,
the Maximum Share Amount shall refer to such Holder's PRO RATA share thereof
determined in accordance with Section 4.8 below. In the event that the sum of
(x) the aggregate number of shares of Common Stock issued upon conversion of
this Debenture and the other Debentures issued pursuant to the Purchase
Agreement PLUS (y) the aggregate number of shares of Common Stock that remain
issuable upon conversion of this Debenture and the other Debentures issued
pursuant to the Purchase Agreement, represents at least one hundred percent
(100%) of the Maximum Share Amount (the "TRIGGERING EVENT"), the Borrower
will use its best efforts to seek and obtain Stockholder Approval (or obtain
such other relief as will allow conversions hereunder in excess of the
Maximum Share Amount) as soon as practicable following the Triggering Event
and before the Maximum Conversion Date. As used herein, "STOCKHOLDER
APPROVAL" means approval by the stockholders of the Borrower to authorize the
issuance of the full number of shares of Common Stock which would be issuable
upon full conversion of the then outstanding Debentures but for the Maximum
Share Amount.
1.8 STATUS AS STOCKHOLDER. Upon submission of a Notice of Conversion by
a Holder, (i) the shares covered thereby (other than the shares, if any, which
cannot be issued because their issuance would exceed such Holder's allocated
portion of the Reserved Amount or Maximum Share Amount) shall be deemed
converted into shares of Common Stock and (ii) the Holder's rights as a Holder
of such converted portion of this Debenture shall cease and terminate, excepting
only the right to receive certificates for such shares of Common Stock and to
any remedies provided herein or otherwise available at law or in equity to such
Holder because of a failure by the Borrower to comply with the terms of this
Debenture. Notwithstanding the foregoing, if a Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Deadline with respect to a conversion of any
portion of this Debenture for any reason, then (unless the Holder otherwise
elects to retain its status as a holder of Common Stock by so notifying the
Borrower) the Holder shall regain the rights of a Holder of this Debenture with
respect to such unconverted portions of this Debenture and the Borrower shall,
as soon as practicable, return such unconverted Debenture to the holder or, if
the Debenture has not been surrendered, adjust its records to reflect that such
portion of this Debenture has not been converted. In all cases, the Holder shall
retain all of its rights and remedies (including, without limitation, (i) the
right to receive Conversion
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Default Payments pursuant to Section 1.3 to the extent required thereby for
such Conversion Default and any subsequent Conversion Default and (ii) the
right to have the Conversion Price with respect to subsequent conversions
determined in accordance with Section 1.3) for the Borrower's failure to
convert this Debenture.
ARTICLE II. CERTAIN COVENANTS
2.1 DISTRIBUTIONS ON CAPITAL STOCK. So long as the Borrower shall have
any obligation under this Debenture, the Borrower shall not without the Holder's
written consent (a) pay, declare or set apart for such payment, any dividend or
other distribution (whether in cash, property or other securities) on shares of
capital stock other than dividends on shares of Common Stock solely in the form
of additional shares of Common Stock or (b) directly or indirectly or through
any subsidiary make any other payment or distribution in respect of its capital
stock except for distributions pursuant to any shareholders' rights plan which
is approved by a majority of the Borrower's disinterested directors.
2.2 RESTRICTION ON STOCK REPURCHASES. So long as the Borrower shall
have any obligation under this Debenture, the Borrower shall not without the
Holder's written consent redeem, repurchase or otherwise acquire (whether for
cash or in exchange for property or other securities or otherwise) in any one
transaction or series of related transactions any shares of capital stock of the
Borrower or any warrants, rights or options to purchase or acquire any such
shares, except for any such repurchases made by the Borrower in connection with
the termination of employment of any of its employees, PROVIDED that such
repurchases are made pursuant to a written employment agreement between the
Borrower and an officer of the Borrower, which agreement is in existence on the
date of this Debenture, or (i) do not exceed $50,000 to any individual employee
and (ii) are approved by a majority of the Borrower's disinterested directors.
2.3 BORROWINGS. So long as the Borrower shall have any obligation under
this Debenture, the Borrower shall not, without the Holder's written consent,
create, incur, assume or suffer to exist any liability for borrowed money,
except (a) borrowings in existence or committed on the date hereof and of which
the Borrower has informed Holder in writing prior to the date hereof, (b)
indebtedness to trade creditors or financial institutions incurred in the
ordinary course of business or (c) borrowings, the proceeds of which shall be
used to repay this Debenture.
2.4 SALE OF ASSETS. So long as the Borrower shall have any obligation
under this Debenture, the Borrower shall not, without the Holder's written
consent, sell, lease or otherwise dispose of any significant portion of its
assets outside the ordinary course of business. Any consent to the disposition
of any assets may be conditioned on a specified use of the proceeds of
disposition.
2.5 ADVANCES AND LOANS. So long as the Borrower shall have any
obligation under this Debenture, the Borrower shall not, without the Holder's
written consent, lend money, give credit or make advances to any person, firm,
joint venture or corporation, including, without limitation, officers,
directors, employees, subsidiaries and affiliates of the Borrower, except
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loans, credits or advances (a) in existence or committed on the date hereof
and which the Borrower has informed Holder in writing prior to the date
hereof, (b) made in the ordinary course of business, (c) which do not exceed
$100,000 or (d) which are approved by a majority of the Borrower's interested
directors.
2.6 CONTINGENT LIABILITIES. So long as the Borrower shall have any
obligation under this Debenture, the Borrower shall not, without the Holder's
written consent, assume, guarantee, endorse, contingently agree to purchase or
otherwise become liable upon the obligation of any person, firm, partnership,
joint venture or corporation, except by the endorsement of negotiable
instruments for deposit or collection and except assumptions, guarantees,
endorsements and contingencies (a) in existence or committed on the date hereof
and which the Borrower has informed Holder in writing prior to the date here of,
and (b) similar transactions in the ordinary course of business.
ARTICLE III. EVENTS OF DEFAULT
If any of the following events of default (each, an "EVENT OF DEFAULT")
shall occur:
3.1 FAILURE TO PAY PRINCIPAL OR INTEREST. The Borrower fails to pay the
principal hereof or interest thereon when due on this Debenture, whether at
maturity, upon a Trading Market Prepayment Event pursuant to Section 1.7, upon
acceleration or otherwise.
3.2 CONVERSION AND THE SHARES. The Borrower fails to issue shares of
Common Stock to the Holder (or announces or threatens that it will not honor its
obligation to do so) upon exercise by the Holder of the conversion rights of the
Holder in accordance with the terms of this Debenture (for a period of at least
sixty (60) days, if such failure is solely as a result of the circumstances
governed by Section 1.3 and the Borrower is using its best efforts to authorize
a sufficient number of shares of Common Stock as soon as practicable), fails to
transfer or cause its transfer agent to transfer (electronically or in
certificated form) any certificate for shares of Common Stock issued to the
Holder upon conversion of this Debenture as and when required by this Debenture
or the Registration Rights Agreement, or fails to remove any restrictive legend
(or to withdraw any stop transfer instructions in respect thereof) on any
certificate for any shares of Common Stock issued to the Holder upon conversion
of this Debenture as and when required by this Debenture or the Registration
Rights Agreement (or makes any announcement, statement or threat that it does
not intend to honor the obligations described in this paragraph) and any such
failure shall continue uncured (or any announcement, statement or threat not to
honor its obligations shall not be rescinded in writing) for ten (10) days after
the Borrower shall have been notified thereof in writing by the Holder.
3.3 FAILURE TO EFFECT REGISTRATION. The Borrower fails to obtain
effectiveness with the Securities and Exchange Commission of the Registration
Statement prior to March 15, 2001 or such Registration Statement lapses in
effect (or sales cannot otherwise be made thereunder effective, whether by
reason of the Borrower's failure to amend or supplement the prospectus included
therein in accordance with the Registration Rights Agreement or
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otherwise) for more than thirty (30) consecutive days or sixty (60) days in
any twelve month period after the Registration Statement becomes;
3.4 BREACH OF COVENANTS. The Borrower breaches any material covenant or
other material term or condition contained in Sections 1.3, 1.6 or 1.7 of this
Debenture, or Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the Purchase
Agreement and such breach continues for a period of ten (10) days after written
notice thereof to the Borrower from the Holder;
3.5 BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation or
warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Purchase Agreement and the Registration
Rights Agreement), shall be false or misleading in any material respect when
made and the breach of which has (or with the passage of time will have) a
material adverse effect on the rights of the Holder with respect to this
Debenture, the Purchase Agreement or the Registration Rights Agreement;
3.6 RECEIVER OR TRUSTEE. The Borrower or any subsidiary of the Borrower
shall make an assignment for the benefit of creditors, or apply for or consent
to the appointment of a receiver or trustee for it or for a substantial part of
its property or business, or such a receiver or trustee shall otherwise be
appointed;
3.7 JUDGMENTS. Any money judgment, writ or similar process shall be
entered or filed against the Borrower or any subsidiary of the Borrower or any
of its property or other assets for more than $50,000, and shall remain
unvacated, unbonded or unstayed for a period of twenty (20) days unless
otherwise consented to by the Holder, which consent will not be unreasonably
withheld;
3.8 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Borrower or any
subsidiary of the Borrower; or
3.9 DELISTING OF COMMON STOCK. The Borrower shall fail to maintain the
listing of the Common Stock on at least one of the OTCBB, the Nasdaq National
Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American
Stock Exchange;
3.10 DEFAULT UNDER OTHER DEBENTURES. An Event of Default has occurred
and is continuing under any of the other Debentures issued pursuant to the
Purchase Agreement.
then, upon the occurrence and during the continuation of any Event of Default
specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at the option
of the Holders of a majority of the aggregate principal amount of the
outstanding Debentures issued pursuant to the Purchase Agreement exercisable
through the delivery of written notice to the Borrower by such Holders (the
"DEFAULT NOTICE"), and upon the occurrence of an Event of Default specified in
Section 3.6 or 3.8, the Debentures shall become immediately due and payable and
the Borrower shall pay to the Holder, in full satisfaction of its obligations
hereunder, an amount equal to the greater of (i) 120% TIMES the SUM of (w) the
then outstanding principal amount of this Debenture PLUS (x)
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accrued and unpaid interest on the unpaid principal amount of this Debenture
to the date of payment (the "MANDATORY PREPAYMENT DATE") PLUS (y) Default
Interest, if any, on the amounts referred to in clauses (w) and/or (x) PLUS
(z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof
or pursuant to Section 2(c) of the Registration Rights Agreement (the then
outstanding principal amount of this Debenture to the date of payment PLUS
the amounts referred to in clauses (x), (y) and (z) shall collectively be
known as the "DEFAULT SUM") or (ii) the "parity value" of the Default Sum to
be prepaid, where parity value means (a) the highest number of shares of
Common Stock issuable upon conversion of such Default Sum in accordance with
Article I, treating the Trading Day immediately preceding the Mandatory
Prepayment Date as the "Conversion Date" for purposes of determining the
lowest applicable Conversion Price, unless the Default Event arises as a
result of a breach in respect of a specific Conversion Date in which case
such Conversion Date shall be the Conversion Date), MULTIPLIED BY (b) the
highest Closing Price for the Common Stock during the period beginning on the
date of first occurrence of the Event of Default and ending one day prior to
the Mandatory Prepayment Date (the "DEFAULT AMOUNT") and all other amounts
payable hereunder shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived,
together with all costs, including, without limitation, legal fees and
expenses, of collection, and the Holder shall be entitled to exercise all
other rights and remedies available at law or in equity. If the Borrower
fails to pay the Default Amount within five (5) business days of written
notice that such amount is due and payable, then the Holder shall have the
right at any time, so long as the Borrower remains in default (and so long
and to the extent that there are sufficient authorized shares), to require
the Borrower, upon written notice, to immediately issue, in lieu of the
Default Amount, the number of shares of Common Stock of the Borrower equal to
the Default Amount divided by the Conversion Price then in effect.
ARTICLE IV. MISCELLANEOUS
4.1 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part
of the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privileges. All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.
4.2 NOTICES. Any notice herein required or permitted to be given shall
be in writing and may be personally served or delivered by courier or sent by
United States mail and shall be deemed to have been given upon receipt if
personally served (which shall include telephone line facsimile transmission) or
sent by courier or three (3) days after being deposited in the United States
mail, certified, with postage pre-paid and properly addressed, if sent by mail.
For the purposes hereof, the address of the Holder shall be as shown on the
records of the Borrower; and the address of the Borrower shall be 15502 Mosher
Avenue, Tustin, California 92780, facsimile number: 714-258-7177). Both the
Holder and the Borrower may change the address for service by service of written
notice to the other as herein provided.
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4.3 AMENDMENTS. This Debenture and any provision hereof may only be
amended by an instrument in writing signed by the Borrower and the Holder. The
term "Debenture" and all reference thereto, as used throughout this instrument,
shall mean this instrument (and the other Debentures issued pursuant to the
Purchase Agreement) as originally executed, or if later amended or supplemented,
then as so amended or supplemented.
4.4 ASSIGNABILITY. This Debenture shall be binding upon the Borrower
and its successors and assigns, and shall inure to be the benefit of the Holder
and its successors and assigns. Each transferee of this Debenture must be an
"accredited investor" (as defined in Rule 501(a) of the 1933 Act).
Notwithstanding anything in this Debenture to the contrary, this Debenture may
be pledged as collateral in connection with a BONA FIDE margin account or other
lending arrangement.
4.5 COST OF COLLECTION. If default is made in the payment of this
Debenture, the Borrower shall pay the Holder hereof costs of collection,
including reasonable attorneys' fees.
4.6 GOVERNING LAW. THIS DEBENTURE SHALL BE ENFORCED, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICT OF LAWS. THE BORROWER HEREBY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN LOS
ANGELES, CALIFORNIA WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS DEBENTURE,
THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN
INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES
FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL
SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN
ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO
SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A
FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE
AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY
OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING
UNDER THIS DEBENTURE SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING
ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH
DISPUTE.
4.7 CERTAIN AMOUNTS. Whenever pursuant to this Debenture the Borrower
is required to pay an amount in excess of the outstanding principal amount (or
the portion thereof required to be paid at that time) plus accrued and unpaid
interest plus Default Interest on such interest, the Borrower and the Holder
agree that the actual damages to the Holder from the receipt of cash payment on
this Debenture may be difficult to determine and the amount to be so paid by the
Borrower represents stipulated damages and not a penalty and is intended to
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compensate the Holder in part for loss of the opportunity to convert this
Debenture and to earn a return from the sale of shares of Common Stock
acquired upon conversion of this Debenture at a price in excess of the price
paid for such shares pursuant to this Debenture. The Borrower and the Holder
hereby agree that such amount of stipulated damages is not plainly
disproportionate to the possible loss to the Holder from the receipt of a
cash payment without the opportunity to convert this Debenture into shares of
Common Stock.
4.8 ALLOCATIONS OF MAXIMUM SHARE AMOUNT AND RESERVED AMOUNT. The
Maximum Share Amount and Reserved Amount shall be allocated pro rata among the
holders of Debentures based on the principal amount of such Debentures issued to
each holder. Each increase to the Maximum Share Amount and Reserved Amount shall
be allocated pro rata among the holders of Debentures based on the principal
amount of such Debentures held by each holder at the time of the increase in the
Maximum Share Amount or Reserved Amount. In the event a holder shall sell or
otherwise transfer any of such holder's Debentures, each transferee shall be
allocated a pro rata portion of such transferor's Maximum Share Amount and
Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount
which remains allocated to any person or entity which does not hold any
Debentures shall be allocated to the remaining holders of Debentures, pro rata
based on the principal amount of such Debentures then held by such holders.
4.9 DAMAGES SHARES. The shares of Common Stock that may be issuable to
the Holder pursuant to Sections 1.3 and 1.4(g) hereof and pursuant to Section
2(c) of the Registration Rights Agreement ("DAMAGES SHARES") shall be treated as
Common Stock issuable upon conversion of this Debenture for all purposes hereof
and shall be subject to all of the limitations and afforded all of the rights of
the other shares of Common Stock issuable hereunder, including without
limitation, the right to be included in the Registration Statement filed
pursuant to the Registration Rights Agreement. For purposes of calculating
interest payable on the outstanding principal amount hereof, except as otherwise
provided herein, amounts convertible into Damages Shares ("DAMAGES AMOUNTS")
shall not bear interest but must be converted prior to the conversion of any
outstanding principal amount hereof, until the outstanding Damages Amounts is
zero.
4.10 DENOMINATIONS. At the request of the Holder, upon surrender of
this Debenture, the Borrower shall promptly issue new Debentures in the
aggregate outstanding principal amount hereof, in the form hereof, in such
denominations of at least $50,000 as the Holder shall request.
4.11 PURCHASE AGREEMENT. By its acceptance of this Debenture, each
Holder agrees to be bound by the applicable terms of the Purchase Agreement.
4.12 NOTICE OF CORPORATE EVENTS. Except as otherwise provided below,
the Holder of this Debenture shall have no rights as a Holder of Common Stock
unless and only to the extent that it converts this Debenture into Common Stock.
The Borrower shall provide the Holder with prior notification of any meeting of
the Borrower's shareholders (and copies of proxy materials and other information
sent to shareholders). In the event of any taking by the Borrower of a record of
its shareholders for the purpose of determining shareholders who are
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entitled to receive payment of any dividend or other distribution, any right
to subscribe for, purchase or otherwise acquire (including by way of merger,
consolidation, reclassification or recapitalization) any share of any class
or any other securities or property, or to receive any other right, or for
the purpose of determining shareholders who are entitled to vote in
connection with any proposed sale, lease or conveyance of all or
substantially all of the assets of the Borrower or any proposed liquidation,
dissolution or winding up of the Borrower, the Borrower shall mail a notice
to the Holder, at least twenty (20) days prior to the record date specified
therein (or thirty (30) days prior to the consummation of the transaction or
event, whichever is earlier), of the date on which any such record is to be
taken for the purpose of such dividend, distribution, right or other event,
and a brief statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time. The
Borrower shall make a public announcement of any event requiring notification
to the Holder hereunder substantially simultaneously with the notification to
the Holder in accordance with the terms of this Section 4.12.
4.13 REMEDIES. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder, by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
under this Debenture will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Debenture, that the
Holder shall be entitled, in addition to all other available remedies at law or
in equity, and in addition to the penalties assessable herein, to an injunction
or injunctions restraining, preventing or curing any breach of this Debenture
and to enforce specifically the terms and provisions thereof, without the
necessity of showing economic loss and without any bond or other security being
required.
ARTICLE V. OPTIONAL PREPAYMENT
5.1. OPTIONAL PREPAYMENT. Notwithstanding anything to the contrary
contained in this Article V, so long as (i) no Event of Default or Trading
Market Prepayment Event shall have occurred and be continuing, (ii) the
Registration Statement is then in effect and has been in effect and sales can be
made thereunder for at least twenty (20) days prior to the Optional Prepayment
Date (as defined below) and (iii) the Borrower has a sufficient number of
authorized shares of Common Stock reserved for issuance upon full conversion of
the Debentures, then at any time after the Issue Date, the Borrower shall have
the right, exercisable on not less than ten (10) Trading Days prior written
notice to the Holders of the Debentures (which notice may not be sent to the
holders of the Debentures until the Borrower is permitted to prepay the
Debentures pursuant to this Section 5.1), to prepay all of the outstanding
Debentures in accordance with this Section 5.1. Any notice of prepayment
hereunder (an "OPTIONAL PREPAYMENT") shall be delivered to the Holders of the
Debentures at their registered addresses appearing on the books and records of
the Borrower and shall state (1) that the Borrower is exercising its right to
prepay all of the Debentures issued on the Issue Date and (2) the date of
prepayment (the "OPTIONAL PREPAYMENT NOTICE"). On the date fixed for prepayment
(the "OPTIONAL PREPAYMENT DATE"), the Borrower shall make payment of the
Optional Prepayment Amount (as defined below) to or upon the order of the
Holders as specified by the Holders in
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writing to the Borrower at least one (1) business day prior to the Optional
Prepayment Date. If the Borrower exercises its right to prepay the
Debentures, the Borrower shall make payment to the holders of an amount in
cash (the "OPTIONAL PREPAYMENT AMOUNT") equal to 120% multiplied by the sum
of (w) the then outstanding principal amount of this Debenture PLUS (x)
accrued and unpaid interest on the unpaid principal amount of this Debenture
to the Optional Prepayment Date PLUS (y) Default Interest, if any, on the
amounts referred to in clauses (w) and (x) PLUS (z) any amounts owed to the
Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c)
of the Registration Rights Agreement (the then outstanding principal amount
of this Debenture to the date of payment PLUS the amounts referred to in
clauses (x), (y) and (z) shall collectively be known as the "OPTIONAL
PREPAYMENT SUM"). Notwithstanding notice of an Optional Prepayment, the
Holders shall at all times prior to the Optional Prepayment Date maintain the
right to convert all or any portion of the Debentures in accordance with
Article I and any portion of Debentures so converted after receipt of an
Optional Prepayment Notice and prior to the Optional Prepayment Date set
forth in such notice and payment of the aggregate Optional Prepayment Amount
shall be deducted from the principal amount of Debentures which are otherwise
subject to prepayment pursuant to such notice. If the Borrower delivers an
Optional Prepayment Notice and fails to pay the Optional Prepayment Amount
due to the Holders of the Debentures within two (2) business days following
the Optional Prepayment Date, the Borrower shall forever forfeit its right to
redeem the Debentures pursuant to this Section 5.1.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in
its name by its duly authorized officer this 7th day of December, 2000.
ESYNCH CORPORATION
By:
------------------------------
Thomas Hemingway
Chairman and Chief Executive Officer
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<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
OF CONVERTIBLE DEBENTURE
TO: ESYNCH CORPORATION
(1) Pursuant to the terms of the attached Convertible
Debenture (the "DEBENTURE"), the undersigned hereby elects to convert
$__________ principal amount of the Debenture into shares of Common Stock of
eSynch Corporation, a Delaware corporation (the "BORROWER"). Capitalized
terms used herein and not otherwise defined herein have the respective
meanings provided in the Debenture.
(2) The Borrower shall electronically transmit the Common
Stock issuable pursuant to this Notice of Conversion to the account of the
undersigned or its nominee with DTC through its Deposit Withdrawal Agent
Commission system ("DWAC TRANSFER").
Name of DTC Prime Broker:
Account Number:
---------------------------------------
/ / In lieu of receiving shares of Common Stock issuable pursuant to this
Notice of Conversion by way of a DWAC Transfer, the undersigned hereby
requests that the Borrower issue a certificate or certificates for the
number of shares of Common Stock set forth above (which numbers are
based on the Holder's calculation attached hereto) in the name(s)
specified immediately below or, if additional space is necessary, on an
attachment hereto:
Name:
--------------------------------------
Address:
-----------------------------------
-----------------------------------
(3) Holder acknowledges and affirms that the Common Stock
issued pursuant to this Notice of Conversion has been or will be sold in
accordance with the requirements of the 1933 Act, if applicable, or pursuant to
an exemption under the 1933 Act.
Date:
------------------------ ------------------------------------
Signature of Registered Holder (must
be signed exactly as name appears in
the Debenture, if applicable).
