EX-4.7 8 ex_4-7.txt EX-4.7 6.5% CONVERTIBLE JUNIOR DEBENTURE 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 6.5% Convertible Junior Subordinated Debenture Due April 23, 2003 US$75,000.00 Telenetics Corporation, a California corporation (the "Issuer"), for value received, hereby promises to pay to Michael Taglich, or registered assigns, the principal sum of Seventy-Five Thousand Dollars (US$75,000.00) due April 23, 2003 (the "Maturity Date"), and to pay interest thereon from January 23, 2001 or from the most recent Interest Payment Date (as hereinafter defined) to which interest has been paid, quarterly, in arrears, on January 23, April 23, July 23 and October 23 in each year (each an "Interest Payment Date"), commencing on April 23, 2001 at the rate of six and one half (6.5%) percent per annum until the principal hereof is paid. In the event that the Issuer does not make a quarterly interest payment within fifteen (15) days after the applicable Interest Payment Date, the interest rate for such quarterly 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 quarterly 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 January 10, April 10, July 10 or October 10 (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 its existing unsecured 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. -2- (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 provision hereof applicable to such Registered Holder. The Registered Holder -3- 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 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 -4- 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 Holder'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. (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 -5- registration of transfers of Debentures. As of the date this Debenture was originally issued, such principal executive offices of the Issuer were located at 25111 Arctic Ocean, Lake Forest, California 92630. 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. (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 -6- 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 23, 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. (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. -7- (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: (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; -8- (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; (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; -9- (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 $75,000 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. 8. REGISTRATION RIGHTS. (a) As soon as possible, but in no event later than April 23, 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 April 23, 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 April 23, 2001 until the registration statement covering the Registrable Securities is filed with the SEC. -10- 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 June 23, 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 June 23, 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. (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; -11- 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 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 -12- 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. (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. -13- 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. (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. -14- 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. 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. -15- 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. (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. -16- 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 $0.68 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. (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. -17- (d) The Initial Conversion Price is $0.68 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 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 23, 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 -18- 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 23, 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 Terry S. Parker; or (vi) the grant of 500,000 options to Michael Armani. (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 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. -19- (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. 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 23, 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. -20- (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 Debenture 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. (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 Debenture 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. -21- 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 (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 -22- (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 23, 2001. 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. -23- 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, 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. -24- "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). "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. -25- IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed. TELENETICS CORPORATION By:/s/ Terry S. Parker ------------------------ Name: Terry S. Parker Title: President and Chief Executive Officer Dated: January 23, 2001 -26-