Document:

SECURITIES AND EXCHANGE COMMISSION

EXHIBIT

10.16

 

MEMORANDUM OF UNDERSTANDING (“MOU”)

Between Paul G. Kokx (“Kokx”) and VitriSeal, Inc. (“VTSL” or “Company”)

February 8, 2002

 

 

This MOU is occasioned by

the fact that Paul Kokx has not, as of the date of this MOU, received paychecks

for the bi-weekly pay periods ending January 13, 2002 and January 27,

2002.  Moreover, it is uncertain when

the Company will be able to meet these obligations and its further obligations

for pay for subsequent pay periods.  By

their signatures below, Kokx and Liquitek Enterprises, Inc. (“LEI”), the parent

company of VitriSeal, Inc., agree to the following terms for going forward.

 

1.             The Company is, in fact, in default on its obligations

under the Kokx employment contract that has governed his employment since February

1, 2000, and Kokx therefore has the right to terminate the agreement under the

provisions of paragraph 4.3 of said agreement. 

The parties agree to proceed in their employment relationship as

outlined below.

 

2.             The parties recognize each other’s objectives under the

current situation as follows:

 

A.            Kokx objectives

 

i.              To obtain the full value of all that is due him under

the existing employment agreement.

ii.             To have a security interest in

Company assets that will protect his right to receive the values mentioned in

item 2.A.i. above.

iii.            To continue helping the Company to

sustain its identity and realize its potential for achieving its operating

plans.

 

B.            VTSL objectives

 

i.              To conserve scarce cash resources.

ii.             To accrue further compensation only

for work performed to the benefit of the Company, not just for the passage of

time while the Company is unable to productively use Kokx’s time because of its

cash shortage.

iii.            To have Kokx continue doing tasks

that will sustain the viability of the business until funding is raised or the

business is sold or liquidated.

iv.            To retain the potential for Kokx to

function as the President of a successfully functioning VitriSeal, Inc.

 

3.             It is recognized by both parties that LEI faces a

critical deadline with respect to other facets of its business, namely the

possibility of a rescission of the Distech Ltd. acquisition if certain funding

obligations are not met by March 31, 2002. 

The Distech parties have until April 30, 2002 to exercise their rights

if the 

 

 

14

 

funding is not

achieved.  If the former shareholders of

Distech Ltd. were to rescind the acquisition transaction, such meaning that LEI

would have not raised adequate capital to go forward with its planned

operations, it is expected that LEI would also move to sell or liquidate VTSL

as a step toward the ultimate dissolution of LEI.  On the other hand, if the rescission is avoided, it will be

because of the adequacy of capital formation, which is expected to leave the

Company in a position to come current in its obligations to Kokx and carry

forward the operations of VTSL as has been planned.  That period of time between now and either the exercise of the

Distech rescission or the elimination of the Distech rescission rights,

whichever eventually materializes, shall be known hereafter in this MOU as the

“interim period.”

 

4.             In order to best meet the objectives of both parties as

cited above, it is agreed that the existing employment agreement is, at least

for the time being, considered terminated as of the end of the current pay

period, i.e., February 10, 2002. 

Accordingly, VTSL owes Kokx for the following items:

 

A.            Three pay periods during which he worked, i.e., those

ending 1/13/02, 1/27/02 and 2/10/02.

B.            Any earned but unused vacation days through 2/10/02.

C.            Any as yet unpaid expense reimbursement claims.

D.            The health insurance premium for February 2002, plus that

for future months as may be obligated under the provisions of paragraph 4.3(g)

of the employment contract.

E.             One year’s salary as a severance allowance.

 

There are no bonuses

payable for past or present periods, as neither VTSL nor LEI has met the

operating objectives on which such bonuses are to be founded.  The remainder of Kokx’s options obtained

under his employment agreement are deemed to be fully vested.

 

Items 4.A through 4.D

above are to be paid as soon as funds are available to make such payments.  Item 4.E above is to be paid upon the sale

or liquidation of the Company.

 

5.             During the interim period as defined above, Kokx is

hereby permitted to seek consulting arrangements with other parties in order to

maintain a personal income stream while the Company seeks to resolve its

capital deficiency.  His consultancy

practice may (and from LEI’s point of view is encouraged to) be operated out of

the VitriSeal, Inc. facilities in Commerce Township.  Such consultancies must not be in conflict with the business of

VitriSeal, Inc. and should be of a short term nature so that Kokx’s energies

may be reapplied at the 100% level to the interests of VitriSeal, Inc. if LEI

succeeds in eliminating the Distech rescission rights.  In that event, Kokx will have a reasonable

allowance of time to conclude any consultancies with third parties existing at

that time.

 

Kokx will also maintain a

consulting relationship with the Company during this interim period at a rate

of $85.00 per hour for work done on Company projects, so 

 

 

15

 

long as the Company remains

current in the payment of consulting fees. 

Kokx will render bi-weekly reports of his consulting hours on the same

schedule as used by the Company’s payroll system, and the consulting fees

therefore will be paid through the payroll system on a current basis.  The operations of the Company will be

reduced to a bare minimum during this period. 

Kokx will be expected to maintain those minimum essential operations

that will keep the revival of our business viable once funding has been

obtained, as though he were still employed as the President of the

Company.  This will include maintaining

communication with and serving prospective customers with whom Kokx has

fostered relationships up to this time. 

It does not require the development of new relationships unless such is

mutually agreed as an expansion of his consultancy with the Company.  Should any potential new relationships that

might have long term favorable implications for the Company come to Kokx’s

attention during the interim period, he is to make these known to LEI so they

can make a decision whether or not to expand his consultancy responsibilities.

 

6.             Should the Distech rescission be avoided through LEI

succeeding in raising the necessary capital, the Kokx employment agreement for

the 2/1/00 through 1/31/04 period will be reinstated.  The funding that eliminates the rescission rights will be used,

in part, to pay off any remaining obligations for items 4.A, 4.C and 4.D above.

Any unused vacation time that has not been paid off will be restored to the

books as available vacation time.  The

severance allowance accrued to the end of the interim period under this

circumstance will be rescinded.  And

finally, the options granted under the original employment agreement will be

replaced with a more favorable option package recognizing the conditions that

have prevailed and the then-current expectations for future performance of LEI

and its stock.

 

7.             Should the Distech rescission be effected, LEI will have

30 days (for purposes of this agreement) to decide to sell/liquidate VTSL or to

operate VTSL. Should LEI decide to operate VTSL after the Distech rescission,

their relationship with Kokx will be as described under the avoidance of

rescission discussion in item 6 above, as a decision to further operate is presumed

to be based on the presence of enough funds to satisfy remaining obligations to

Kokx and fund ongoing operations. 

Should LEI decide to sell or liquidate VTSL, Kokx will, in his

consulting capacity, help to sell or liquidate the Company.  Liquitek Enterprises, Inc. will then be

responsible for honoring all of the remaining obligations of VTSL under item 4

above.  It is expected that these

obligations would be met out of the proceeds from the sale or liquidation of

the Company.  The Company hereby promises

to not dispose of any of its assets prior to the avoidance or exercise of the

Distech rescission without Kokx’s express written consent.  The Company warrants that all tax

obligations on its assets have been met, and no other liens on these assets exist.  LEI also promises to grant Kokx a lien, to

be perfected with an appropriate UCC-1 filing, on all of the assets of the

Company to secure these obligations to Kokx at such time as the Distech

rescission is effected and the decision to sell or liquidate VitriSeal, Inc. is

reached.  The lien will provide LEI with

a period of 6 months to sell/liquidate VTSL at its initiative; thereafter Kokx

may foreclose on liened properties at his initiative to 

 

 

16

 

achieve his satisfaction

of the Company’s obligations to him.  It

is acknowledged that this arrangement gives LEI a better chance to raise the

funds needed to avoid the Distech rescission and the sale or liquidation of VitriSeal,

Inc. while giving Kokx protection in the event of selling or liquidating the

Company.

 

By their signatures

below, the parties to this MOU acknowledge their agreement with the foregoing.

 

 

	

  PAUL G. KOKX, an

  individual

  	

   

  	

   

  	

  VITRISEAL, INC.

  
	

   

  	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  
	

  /s/ Paul G. Kokx

  	

  2/8/02

  	

   

  	

   

  	

  by 

  	

  /s/ John W. Nagel

  	

  2/8/02

  
	

  Paul G. Kokx

  	

   

  	

  date

  	

   

  	

   

  	

  John W. Nagel,

  	

   

  	

  date

  
	

   

  	

   

  	

   

  	

  President of Liquitek

  Enterprises, Inc., the Parent company of VitriSeal, Inc.

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
										

 

 
17SECURITIES AND EXCHANGE COMMISSION

EXHIBIT

10.17

 

	

  No.      

  	

  $      

  

 

LIQUITEK ENTERPRISES, INC.

 

12% Convertible Secured Debenture Due 2004

 

                Liquitek

Enterprises, Inc., a corporation duly organized and existing under the laws of

the State of Nevada (the “Company”), for value received, hereby promises to pay

to                                                                                                                          

, or registered assigns, the principal sum of $                                   at the

executive office of the Company in the City of Draper, Utah

on                                  ,

2004, in such coin or currency of the United States of America as at the time

of payment shall be legal tender for the payment of public and private debts,

and to pay interest at maturity on said principal sum at said office in like

coin or currency, at the rate of 12% per annum (the “Debenture” or

“Debentures”), all as more specifically provided in this Debenture.  This Debenture is one of a duly authorized

issue of Debentures of the Company designated as its 12% Convertible Secured

Debentures Due 2004 and limited in aggregate principal amount to

$5,000,000.  The Debentures are

convertible into shares of common stock of the Company (the “Conversion

Shares”) at the option of the holder at any time 15 days prior to maturity,

unless previously redeemed, at the rate of $.50 per share.

 

ARTICLE

ONE.

 

Definitions.

 

                Section 1.01. Definitions.   The terms defined in this Section 1.01 (except as herein otherwise

expressly provided or unless the context otherwise requires) for all purposes

of this Debenture shall have the respective meanings specified in this Section

1.01.

 

                Board of Directors:  The term “Board of Directors” shall mean the

Board of Directors of the Company or the Executive Committee of such Board.

 

                Business Day:  The term “business day” shall mean a day which in the City of

Newport Beach, California is neither a legal holiday nor a day on which banking

institutions are authorized by law to close.

 

                Common Stock:  The term “Common Stock” shall mean all shares now or hereafter

authorized of the class of Common Stock, par value $.001 per share, of the

Company presently authorized and stock of any other class into which such

shares may hereafter have been changed.

 

                Company: 

The term “Company” shall mean Liquitek Enterprises, Inc., a Nevada

corporation, and, unless the context otherwise requires, shall be deemed to

mean and include all of the Company’s Subsidiaries. Unless specifically stated

 

18

 

to the contrary herein, all references to the Company and all

representations, warranties and covenants of the Company shall be deemed to

include and apply with equal force and effect to the Subsidiaries and, subject

to the provisions of Article Eleven, shall include any successors and assigns

of either the Company or its Subsidiaries.

 

                Debenture or

Debentures; Outstanding:  The

terms “Debenture” or “Debentures” shall mean any Debenture or Debentures, as

the case may be, limited in aggregate principal amount to a maximum of

$5,000,000. The term “Outstanding”, when used with reference to Debentures,

shall mean, as of any particular time, all Debentures except:

 

                                (a)           Debentures

theretofore canceled or delivered to the Company for cancellation;

 

                                (b)

          Debentures, or portions thereof,

for the payment or redemption of which moneys in the necessary amount shall

have been set aside and segregated in trust by the Company, provided that if

such Debentures are to be redeemed prior to the maturity thereof, notice of

such redemption shall have been given as in Article Three provided;

 

                                (c)           Debentures

in lieu of or in substitution for which other Debentures shall have been

authenticated and delivered or which shall have been paid pursuant to the terms

of Section 2.04, unless proof satisfactory to the Company is presented that any

of such Debentures are held by persons in whose hands any of such Debentures

are valid, binding, and legal obligations of the Company; and

 

                                (d)           Debentures

converted into Common Stock pursuant to Article Eleven.

 

                Debentureholder:  The terms “Debentureholder,” “holder of Debentures,” or other

similar terms, shall mean any person in whose name at the time a particular

Debenture is registered on the Debenture register kept for that purpose in

accordance with the terms hereof.

 

                Event of Default:  The term “Event of Default” shall mean any

event specified in Section 6.01, continued for the period of time, if any, and

after the giving of the notice, if any, therein designated.

 

                Officers’ Certificate:  The term “Officers’ Certificate” shall mean

a certificate signed by the Chairman of the Board, the President, or any Vice

President and by the Treasurer, any Assistant Treasurer, the Controller, any

Assistant Controller, the Secretary, or any Assistant Secretary of the

Company.  Each such certificate shall

include the statements provided for in Section 6.05 if and to the extent

required by the provisions of such Section.

 

19

 

                Record Date:  The term “Record Date” as used in Section 2.02 with respect to

any regular interest payment date shall mean the last day of the calendar month

preceding such interest payment date.

 

                Redemption Date:  The term “Redemption Date”, when used with respect to any

Debenture to be redeemed, shall mean the date fixed for such redemption by or

pursuant to this Debenture.

 

                Redemption Price:  The term “Redemption Price”, when used with

respect to any Debenture to be redeemed, shall mean the price at which it is to

be redeemed pursuant to this Debenture.

 

                Senior Indebtedness:  The term “Senior Indebtedness” of the

Company and its Subsidiaries shall mean (i) the principal of and accrued and

unpaid interest (whether or not accruing on or after the filing of any petition

in bankruptcy or for reorganization relating to the Company) on all

indebtedness of the Company and its Subsidiaries outstanding on the date of

issuance of this Debenture that is secured in accordance with the Uniform

Commercial Code as enacted in the State of Utah; and (ii) any modifications,

renewals, extensions, deferrals, and refundings of any such indebtedness,

liabilities, or obligations; provided, however, that Senior Indebtedness shall

not be deemed to include any obligation of the Company or any Subsidiary in

connection with extensions of credit by trade creditors and suppliers.

 

                Subsidiary:  The term “Subsidiary” shall mean any corporation of which the

Company, or the Company and one or more Subsidiaries, or any one or more

Subsidiaries, directly or indirectly own voting securities sufficient to

entitle the holders thereof to elect a majority of the directors, either at all

times or so long as there is no default or contingency which permits the

holders of any other class or classes of securities to vote for the election of

one or more directors.

 

ARTICLE

TWO.

 

Issue,

Description, Execution, Registration

and

Exchange of Debentures.

 

                Section 2.01.        Designation,

Amount, and Issue of Debentures.  The Debentures shall be designated as hereinabove set forth.  Debentures offered in the maximum aggregate

principal amount of $5,000,000, may from time to time be executed and delivered

by the Company in exchange for the payment to the Company of the aggregate

principal amount thereof.  Nothing

herein shall limit the amount of other debentures the Company may issue or debt

the Company may incur.

 

                Section 2.02.        Date and Denomination of Debentures; Payment of Interest.  The Debentures shall be issuable Debentures

registered with the Company without coupons in the minimum denomination of

$25,000 and any integral multiple of $5,000 in excess of the minimum investment

of $25,000, and

 

20

 

shall be numbered, lettered, or otherwise distinguished in such manner

or in accordance with such plan as the officers of the Company executing the

same may determine.  The Company may, in

its sole discretion, elect to accept less than $25,000 as the minimum

denomination of Debentures issuable.

 

                Each Debenture shall be dated the date of its issuance

and, except as otherwise provided in this Section 2.02, shall bear interest,

payable at maturity, from the date of such Debenture until payment of the

principal sum of such Debenture has been made or duly provided for. Interest

shall be computed on the basis of a 360-day year of twelve 30-day months.

 

                The person in whose name a Debenture (or any Debenture

evidencing the same debt) was registered at the close of business on any Record

Date with respect to any interest payment date shall be entitled to receive the

interest payable, accrued through the Record Date, on such interest payment

date notwithstanding the cancellation of such Debenture upon any registration

of transfer or exchange subsequent to the Record Date and prior to such

interest payment date; provided, however, that if and to the extent the Company

shall default in the payment of the interest due on such interest payment date,

such defaulted interest shall be paid to the persons in whose names outstanding

Debentures are registered at the close of business on a subsequent Record Date

established by notice given by mail by or on behalf of the Company to the

holders of Debentures not less than 15 days preceding such subsequent Record

Date, such Record Date to be not less than ten days preceding the date of

payment of such defaulted interest.

 

                In the case of any Debenture which is converted after

any Record Date and on or prior to the next succeeding interest payment date,

interest whose stated maturity is on such interest payment date shall be

payable on such interest payment date notwithstanding such conversion, and such

interest (whether or not punctually paid or duly provided for) shall be paid to

the person in whose name that Debenture is registered at the close of business

on such Record Date.

 

                The Company may,

in its sole discretion, elect to add accrued interest to the principal amount

of the Debenture in lieu of payment of accrued interest in cash for interest

due on any Record Date prior to maturity. 

The Company may, in its sole discretion, elect to pay interest in shares

of Common Stock of the Company at a rate equal to a 25% discount of the 20-day

average closing price of the Company’s Common Stock as quoted on the OTC

Bulletin Board or the Nasdaq Small Cap Market within any 30-day period.

 

                Section 2.03.        Exchange and

Registration of Transfer of Debentures.  Debentures may be exchanged for a like

aggregate principal amount of Debentures of other authorized

denominations.  Debentures to be exchanged

shall be surrendered at the executive office of the Company, and the Company

shall execute, register, and deliver in exchange therefor the Debenture or

Debentures which the Debentureholder making the exchange shall be entitled to

receive.

 

21

 

                The Company shall keep a Debenture register in which,

subject to such reasonable regulations as it may prescribe, the Company shall

register Debentures and shall register the transfer of Debentures as in this

Article Two.  Such register shall be in

written form or in any other form capable of being converted into written form

within a reasonable time.  Upon due

presentment for registration of transfer of any Debenture, the Company shall

execute, register, and deliver in the name of the transferee or transferees a

new Debenture or Debentures for an equal aggregate principal amount.

 

                All Debentures presented for registration of transfer

shall be duly endorsed by, or be accompanied by a written instrument or

instruments of transfer in form satisfactory to the Company duly executed by,

the holder or his attorney duly authorized in writing.

 

                No service charge shall be made for any exchange or

registration of transfer of Debentures, but the Company may require payment of

a sum sufficient to cover any tax or other governmental charge that may be

imposed in connection therewith.

 

                The Company shall not be required to exchange or

register a transfer of (a) any Debentures for a period of 15 days next

preceding any selection of Debentures to be redeemed, or (b) any Debentures

selected, called or being called for redemption except, in the case of any

Debentures to be redeemed in part, the portion thereof not so to be redeemed.

 

                Section 2.04.        Mutilated,

Destroyed, Lost, or Stolen Debentures.  In case any temporary or definitive Debenture shall become

mutilated or be destroyed, lost, or stolen, the Company in its discretion may

execute, register, and deliver a new Debenture, bearing a number not contemporaneously

outstanding, in exchange and substitution for the mutilated Debenture, or in

lieu of and in substitution for the Debenture so destroyed, lost, or stolen. In

every case the applicant for a substituted Debenture shall furnish to the

Company such security or indemnity as may be required by the Company to save

the Company harmless, and, in every case of destruction, loss, or theft, the

applicant shall also furnish to the Company evidence to its satisfaction of the

destruction, loss, or theft of such Debenture and of the ownership thereof.

 

                Upon the issuance of any substituted Debenture, the

Company 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.  In case

any Debenture which has matured or is about to mature shall become mutilated or

be destroyed, lost, or stolen, the Company may, but only with the consent of

the holder thereof in the case of a Debenture as to which the right to convert

provided in Section 11.01 shall not have terminated, instead of issuing a

substitute Debenture, pay or authorize the payment of the same (without

surrender thereof except in the case of a mutilated Debenture) if the applicant

for such payment shall furnish to the Company such security or indemnity as may

be required by them to save the Company harmless and, in case of destruction,

loss,

 

22

 

or theft, evidence satisfactory to the Company of the destruction,

loss, or theft of such Debenture and of the ownership thereof.

 

                Every substituted Debenture issued pursuant to the

provisions of this Section 2.04 by virtue of the fact that any Debenture is

destroyed, lost, or stolen shall constitute an additional contractual obligation

of the Company, whether or not the destroyed, lost, or stolen Debenture shall

be found at any time, equally and proportionately with any and all other

Debentures executed and delivered by the Company.  All Debentures shall be held and owned upon the express condition

that the foregoing provisions are exclusive with respect to the replacement or

payment of mutilated, destroyed, lost, or stolen Debentures and shall preclude

any and all other rights or remedies notwithstanding any law or statute

existing or hereafter enacted to the contrary with respect to the replacement

or payment of negotiable instruments or other securities without their

surrender.

 

23

 

                Section 2.05.        Cancellation

of Debentures.  All Debentures

surrendered for the purpose of payment, redemption, exchange, registration of

transfer, or conversion, shall, if surrendered to the Company, be promptly

canceled by the Company, and no Debentures shall be issued in lieu thereof

except as expressly permitted by any of the provisions of this Debenture.

 

ARTICLE

THREE.

 

Redemption

of Debentures.

 

                Section 3.01.        Right of

Redemption.  The

Debentures may be redeemed prior to maturity without penalty at the option of

the Company at any time after the closing price of the Company’s Common Stock,

as reported on the OTC Bulletin Board or the Nasdaq Small Cap Market has

exceeded $1.50 per share for 20 days within any 30-day period, subject to the

right of the Debentureholder to convert the Debenture into shares of Common

Stock as provided in Article Eleven, at a price which shall be 100% of the

principal amount thereof, plus in each case interest accrued to, and not paid

on or before, the date fixed for redemption of such Debentures.

 

                Section 3.02.        Selection by

Company of Debentures to Be Redeemed.  In case of any redemption at the election of the Company of less

than all of the Debentures, the Company shall, at least 30 days prior to the

Redemption Date fixed by the Company, select the particular Debentures to be

redeemed from the Outstanding Debentures not previously called for redemption,

by such method as the Company shall deem fair and appropriate and which may

provide for the selection for redemption of portions (equal to $1,000 or any

integral multiple thereof) of the principal amount of Debentures.

 

                If any Debenture selected for partial redemption is

converted in part before termination of the conversion right with respect to

the portion of the Debenture so selected, the converted portion of such Debenture

shall be deemed (so far as may be) to be the portion selected for

redemption.  Debentures which have been

converted during a selection of Debentures to be redeemed shall be treated as

Outstanding for the purpose of such selection.

 

                Section 3.03.        Notice of

Redemption.  Notice of

redemption shall be given by first-class mail, postage prepaid, mailed not less

than 30 nor more than 90 days prior to the Redemption Date, to each holder of

Debentures to be redeemed, at his address appearing in the Debenture register.  All notices of redemption shall state:

 

                                (a)           the

Redemption Date;

 

                                (b)           the

Redemption Price;

 

24

 

                                (c)           if

less than all the Outstanding Debentures are to be  redeemed, the identification (and, in the case of partial

redemption, the principal amounts) of the particular Debentures to be redeemed;

 

                                (d)           that

on the Redemption Date the Redemption Price will become due and payable upon

each such Debenture to be redeemed and that interest thereon will cease to

accrue on and after said date;

 

                                (e)           the

Conversion Price, the date on which the right to convert the principal of the

Debentures to be redeemed will terminate (which shall be on the 15th day prior

to the Redemption Date) and the place or places where such Debentures may be

surrendered for conversion; and

 

                                (f)            the

place or places where such Debentures are to be surrendered for payment of the

Redemption Price.

 

                Notice of redemption of Debentures to be redeemed at

the election of the Company shall be given by the Company at the expense of the

Company.

 

                Section 3.04.        Deposit of

Redemption Price.  Prior

to any Redemption Date, the Company shall deposit into a segregated account an

amount of money sufficient to pay the Redemption Price of, and (except if the

Redemption Date shall be an interest payment date) accrued interest on, all the

Debentures which are to be redeemed on that date other than any Debentures

called for redemption on that date which have been converted prior to the date

of such deposit.

 

                If any Debenture called for redemption is converted,

any money deposited for the redemption of such Debenture shall (subject to any

right of the holder of such Debenture to receive interest as provided in the

last paragraph of Section 2.02) be discharged from such account.

 

                Section 3.05.        Debentures

Payable on Redemption Date. 

Notice of redemption having been given as aforesaid, the Debentures so

to be redeemed shall, on the Redemption Date, become due and payable at the

Redemption Price therein specified, and from and after such date (unless the

Company shall default in the payment of the Redemption Price and accrued

interest) such Debentures shall cease to bear interest. Upon surrender of any

such Debenture for redemption in accordance with said notice, such Debenture

shall be paid by the Company at the Redemption Price, together with accrued

interest to the Redemption Date; provided, however, that installments of

interest whose stated maturity is on or prior to the Redemption Date shall be

payable to the holders of such Debentures, registered as such at the close of

business on the relevant record dates according to their terms and the

provisions of Section 2.02.

 

                If any Debenture called for redemption shall not be so

paid upon surrender thereof for redemption, the principal shall, until paid,

bear interest from the Redemption Date at the rate borne by the Debenture.

 

25

 

                Section 3.06.        Debentures

Redeemed in Part.  Any

Debenture which is to be redeemed only in part shall be surrendered at the

executive office of the Company (with, if the Company so requires, due

endorsement by, or a written instrument of transfer in form satisfactory to the

Company duly executed by, the holder thereof or his attorney duly authorized in

writing), and the Company shall execute, register, and deliver to the holder of

such Debenture without service charge, a new Debenture or Debentures, of any

authorized denomination as requested by such holder, in aggregate principal

amount equal to and in exchange for the unredeemed portion of the principal of

the Debenture so surrendered.

 

ARTICLE

FOUR.

 

Particular

Covenants of the Company.

 

                Section 4.01.        Payment of

Principal and Interest. 

The Company covenants and agrees that it will duly and punctually pay or

cause to be paid the principal of and interest on each of the Debentures at the

place, at the respective times and in the manner provided in the

Debentures.  The principal of and

interest on the Debentures shall be payable at the executive office of the

Company; provided, however, that interest may be payable, at the option of the

Company, by check mailed to the address of the person entitled thereto as such

address shall appear on the Debenture register.

 

                Section 4.02.        Office for

Transfer, Exchange, Conversion, Notices and Payments, Etc.  Presentation and demand may be made and

notice may be served in respect of the Debentures at the principal office of

the Company.

 

                Section 4.03.        No Interest Extension.  In order to prevent any accumulation of

claims for interest after maturity thereof, the Company will not directly or

indirectly extend or consent to the extension of the time for the payment of

any claim for interest on any of the Debentures and will not directly or

indirectly be a party to or approve any such arrangement by the purchase or

funding of said claims for interest or in any other matter. No claim for

interest, the time of payment of which shall have been so extended or which

shall have been so purchased or funded, shall be entitled in case of an Event

of Default to the rights and remedies provided hereunder except after the prior

payment in full of the principal of all the Debentures and claims for interest

not so extended, purchased or funded; provided, however, that this Section 4.03

shall not apply in any case where an extension shall be made pursuant to a plan

proposed by the Company to the holders of all the Debentures then outstanding.

 

                Section 4.04.        Company as

Paying Agent.  The

Company shall act as its own paying agent, and will, on or before each due date

of the principal if any, or interest on the Debentures, set aside, segregate

and hold in trust for the benefit of the holders of the Debentures a sum

sufficient to pay such principal or interest so becoming due and will notify

each holder of any of the Debentures of any failure to take such action and of

any failure by the Company (or by any other obligor under the Debentures) to

make any payment of the principal of or interest on the

 

26

 

Debentures when the same shall become due and payable.  Anything in this Section 4.04 to the

contrary notwithstanding, the agreement to hold sums in trust as provided in

this Section 4.04 is subject to the provisions of Article Twelve.

 

                Section 4.05.        Corporate

Existence.  Subject to

Article Nine, the Company will do or cause to be done all things necessary to

preserve and keep in full force and effect its corporate existence.

 

                Section 4.06.        Dividends and

Repurchase of Shares. 

Without the prior written consent of the holders of record of not less

than 51% in principal amount of the Debentures then outstanding, the Company

will not directly or indirectly, through any of its Subsidiaries or otherwise,

pay or declare any dividends (other than dividends payable in capital stock of

the Company) or apply any of its property or assets to the purchase, redemption

or other retirement of, or set apart any sum for the payment of any dividends

on, or for the purchase, redemption or retirement of, or make any distribution

by reduction of capital or otherwise in respect of, or permit any Subsidiary or

the Company to purchase any shares of, any class of the capital stock of the

Company.  However, the Company shall not

be precluded from repurchasing any of its shares of Common Stock pursuant to an

obligation to repurchase such shares from the proceeds of any life insurance

policy on the life of an employee, officer or director of the Company.

 

                Section 4.07.        Maintenance of

Registration of the Common Stock under Section 12(g) of the Exchange Act.  The Company covenants and agrees that it will

take all necessary steps and use its best efforts to cause the Common Stock to

continue to be registered under Section 12(g) of the Securities Exchange Act of

1934, as amended, and to be approved for quotation on the OTC Bulletin until

such time as it may be approved for listing on Board Nasdaq SmallCap Market or

a national stock exchange.

 

ARTICLE

FIVE.

 

Debentureholders

Lists and Reports by the Company.

 

                Section 5.01.        Debentureholders

Lists.  The Company

covenants and agrees that it will at all times maintain, or cause its transfer

agent to maintain, a list of the names and addresses of the holders of

Debentures, in as current a form as is reasonably practicable.

 

 

                Section 5.02.        Reports by

the Company.  The Company

covenants and agrees to mail to each registered holder of a Debenture, copies

of the annual reports and other information as are furnished to shareholders of

the Company from time to time.

 

ARTICLE

SIX.

 

Remedies

of the Debentureholders on Event of Default.

 

27

 

                Section 6.01.        Events of

Default.  In case one or

more of the following Events of Default shall have occurred and be continuing:

 

                                (a)           default

in the payment of the principal and interest of any of the Debentures as and

when the same shall become due and payable either at maturity, upon redemption,

by declaration or otherwise; or

 

                                (b)           failure

on the part of the Company to duly observe or perform any other of the

covenants or agreements on the part of the Company contained in this Debenture

for a period of 90 days after the date on which written notice of such failure,

stating that such failure is a “Notice of Default” hereunder and requiring the

same to be remedied, shall have been given to the Company, by registered mail,

by the holders of at least 40% in aggregate principal amount of the Debentures

at the time outstanding; or

 

                                (c)           default

in the payment of principal or interest on any Senior Indebtedness, or on any

other indebtedness for borrowed money in the aggregate principal amount

$500,000 or more, in either case if such default shall continue for a period of

30 days; or

 

                                (d)           the

entry of a decree or order for relief by a court having jurisdiction in the

premises with respect to the Company in an involuntary case under any

applicable bankruptcy, insolvency or other similar law now or hereafter in

effect or the appointing of a receiver, liquidator, assignee, custodian,

trustee, sequestrator (or other similar official) of the Company or of all or

substantially all of its property, or ordering the winding up or liquidation of

its affairs, and the continuance of any such decree or order unstayed and in effect

for a period of 120 consecutive days; or

 

                                (e)           the

institution by the Company of proceedings under Title 11 of the United States

Code or to be adjudged insolvent, or the consent by it to the institution of

bankruptcy or insolvency or other similar proceedings against it or the consent

by it to the entry of an order for relief in an involuntary case or to the

appointment of or taking possession by a receiver, liquidator, assignee,

trustee, custodian, sequestrator (or other similar official) of the Company or

of all or substantially all of its property, or the making by it of an

arrangement for the benefit of creditors, or the admission by it in writing of

the failure generally by it to pay its debts as they become due or the taking

of corporate action by the Company in furtherance of any such action; then and

in each and every such case, unless the principal of all of the Debentures

shall have already become due and payable, the holders of not less than 25% in

aggregate principal amount of the Debentures then outstanding hereunder, by

notice in writing to the Company, may declare the principal of this Debenture

and the interest accrued thereon to be due and payable immediately, and upon

any such declaration the same shall become and shall be immediately due and

payable, anything contained in this Debenture to the contrary

notwithstanding.  This provision,

however, is subject to the condition that if, at any time after the principal

of the Debentures shall have been

 

28

 

so declared due and payable, and before any judgment or decree for the

payment of the moneys due shall have been obtained or entered as hereinafter

provided, the Company shall have paid all matured installments of interest upon

all of the Debentures and the principal of any and all Debentures which shall

have become due otherwise than by acceleration (with interest on overdue

installments of interest to the extent that payment of such interest is

enforceable under applicable law and on such principal at the rate borne by the

Debentures, to the date of such payment or deposit), and any and all defaults

under this Debenture other than the nonpayment of principal of and accrued

interest on Debentures which shall have become due by acceleration, shall have

been cured or shall have been waived in accordance with Section 6.04; then, and

in every such case, the holders of at least 60% in aggregate principal amount

of the Debentures then outstanding, by written notice to the Company, may

rescind and annul such declaration and its consequences; but no such rescission

and annulment shall extend to or shall affect any subsequent default, or shall

impair any right consequent thereon.

 

                Section 6.02.        Proceedings

by Debentureholder.  In

case of an Event of Default hereunder, the holder of this Debenture shall be

entitled to institute any actions or proceedings at law or in equity for the

collection of all sums due and payable on this Debenture for principal or

interest, or both, as the case may be, with interest upon the overdue

principal, and (to the extent that payment of such interest is enforceable

under applicable law) upon the overdue installments of interest at the rate

borne by the Debentures, and such further reasonable amount as shall be

sufficient to cover the costs and expenses of collection, including attorneys’

fees, and may prosecute any such action or proceeding to judgment or final

decree, and may enforce any such judgment or final decree against the Company

and collect in the manner provided by law out of the property of the Company

wherever situated the moneys adjudged or decreed to be payable, it being

understood and intended, and being expressly covenanted by the taker and holder

of every Debenture with every other taker and holder that no one or more

holders of Debentures shall have any right in any manner whatsoever by virtue

of or by availing of any provision of the Debentures to affect, disturb or

prejudice the rights of any other holder of such Debentures, or to obtain or

seek to obtain priority over or preference to any other such holder, or to

enforce any right under this Debenture, except in the manner herein provided

and for the equal, ratable and common benefit of all holders of

Debentures.  Notwithstanding any other

provisions in this  Debenture, the right

of any holder of any Debenture to receive payment of the principal of and

interest on such Debenture, on or after the respective due dates expressed in

such Debenture, and to convert such Debenture in accordance with the provisions

hereof or to institute suit for the enforcement of any such payment on or after

such respective dates or to compel conversion shall not be impaired or affected

without the consent of such holder.

 

                Section 6.03.        Remedies

Cumulative and Continuing.  Except as provided in Section 6.02, all powers and remedies given

by this Article Six to the Debentureholders shall, to the extent permitted by

law, be deemed cumulative and not exclusive of any thereof or of any other

powers and remedies available to the holders of the Debentures, by judicial

proceedings or otherwise, to enforce the

 

29

 

performance or observance of the covenants and agreements contained in

this Debenture, and no delay or omission of any holder of any of the Debentures

to exercise any right or power accruing upon any default occurring and

continuing as aforesaid shall impair any such right or power, or shall be

construed to be a waiver of any such default or an acquiescence therein; and,

subject to the provisions of Section 6.02, every power and remedy given by this

Article Six or by law to the Debentureholders may be exercised from time to

time, and as often as shall be deemed expedient, by any of the

Debentureholders.

 

                Section 6.04.        Waiver of Defaults

by Debentureholders.  The

holders of 60% in aggregate principal amount of the Debentures at the time

outstanding may on behalf of the holders of all of the Debentures waive any

past default or Event of Default hereunder and its consequences except a

default in the payment of interest on, or the principal of, the Debentures or a

default in respect of a covenant or provision hereof which cannot be modified

or amended without the consent of the holder of each Debenture affected.  Upon any such waiver the Company and the

holders of the Debentures shall be restored to their former positions and

rights hereunder, respectively; but no such waiver shall extend to any

subsequent or other default or Event of Default or impair any right consequent

thereon.  Whenever any default or Event

of Default hereunder shall have been waived as permitted by this Section 6.04,

said Event of Default shall for all purposes of the Debentures be deemed to

have been cured and to be not continuing.

 

                Section 6.05.        Undertaking

to Pay Costs.  Each

holder of any Debenture by his acceptance thereof shall be deemed to have

agreed that any court may in its discretion require, in any suit for the

enforcement of any right or remedy under the Debentures, the filing by any

party litigant in such suit of an undertaking to pay the costs of such suit,

and that such court may in its discretion assess reasonable costs, including

reasonable attorneys’ fees, against any party litigant in such suit, having due

regard to the merits and good faith of the claims or defenses made by such

party litigant; but the provisions of this Section 6.05 shall not apply to any

suit instituted by any Debentureholder, or group of Debentureholders, holding

in the aggregate more than 20% in principal amount of the Debentures

outstanding, or to any suit instituted by any Debentureholder for the

enforcement of the payment of the principal or interest on any Debenture

against the Company on or after the due date expressed in such Debenture.

 

 ARTICLE SEVEN.

 

Concerning

the Debentureholders.

 

                Section 7.01.        Action by

Debentureholders.  Whenever in this Debenture it is provided that the holders of a

specified percentage in aggregate principal amount of the Debentures may take

any action (including the making of any demand or request, the giving of any

notice, consent or waiver or the taking of any other action) the fact that at

the time of taking any such action the holders of such specified percentage

have joined therein may be evidenced (a) by any instrument or any number of

instruments of similar tenor executed by

 

30

 

Debentureholders in person or by agent or proxy appointed in writing,

or (b) by the record of the holders of Debentures voting in favor thereof at

any meeting of Debentureholders duly called and held in accordance with the

provisions of Article Eight, or (c) by a combination of such instrument or

instruments and any such record of such a meeting of Debentureholders.

 

                Section 7.02.        Proof of

Execution by Debentureholders. 

Subject to the provisions of Section 8.04, proof of the execution of any

instrument by a Debentureholder or his agent or proxy shall be sufficient if

made in accordance with such reasonable rules and regulations as may be

prescribed by the Company or in such manner as shall be satisfactory to the

Company.  The ownership of Debentures

shall be proved by the Debenture register. The record of any Debentureholders’

meeting shall be proved in the manner provided in Section 8.05.

 

                Section 7.03.        Who Are

Deemed Absolute Owners. 

The Company deems the person in whose name such Debenture shall be

registered upon the Debenture register to be, and may treat him as, the

absolute owner of such Debenture (whether or not such Debenture shall be overdue

and notwithstanding any notation of ownership or other writing thereon made by

anyone other than the Company) for the purpose of receiving payment of or on

account of the principal and (subject to Section 2.02) interest on such

Debenture and for all other purposes; and the Company shall not be affected by

any notice to the contrary.  All such

payments so made to any holder for the time being or upon his order shall be

valid and to the extent of the sum or sums so paid, effectual to satisfy and

discharge the liability for moneys payable upon any such Debenture.

 

                Section 7.04.        Company-Owned

Debentures Disregarded. 

In determining whether the holders of the requisite aggregate principal

amount of Debentures have concurred in any direction or consent under the

Debentures, Debentures which are owned by the Company or any other obligor on

the Debentures or by any person directly or indirectly controlling or

controlled by or under direct or indirect common control with the Company or

any other obligor on the Debentures shall be disregarded and deemed not to be

outstanding for the purpose of any such determination.  Debentures so owned which have been pledged

in good faith may be regarded as outstanding for the purposes of this Section

7.04 if the pledgee shall establish to the satisfaction of the Company the

pledgee’s right to vote such Debentures and that the pledgee is not a person

directly or indirectly controlling or controlled by or under direct or indirect

common control with the Company or any such other obligor. In the case of a

dispute as to such right, any decision by the Company based upon the advice of

counsel shall be full protection to the Company.

 

                Section 7.05.        Revocation of

Consents; Future Holders Bound. 

At any time prior to (but not after) the taking of any action by the

holders of the percentage in aggregate principal amount of the Debentures

specified herein in connection with such action, any holder of a Debenture

which is shown by the evidence to be included in the Debentures the holders of

which have consented to

 

31

 

or are bound by consents to such action may, by filing written notice

with the Company at its principal office and upon proof of holding as provided

in Section 7.02, revoke such action so far as concerns such Debenture.  Except as aforesaid, any such action taken

by the holder of any Debenture shall be conclusive and binding upon such holder

and upon all future holders and owners of such Debenture and of any Debenture

issued in exchange or substitution therefor, irrespective of whether or not any

notation in regard thereto is made upon any such Debenture.

 

                Section 7.06.        Waiver of

Provisions of Debentures. 

Any and all provisions, covenants, conditions, or restrictions relating

to the Debentures may be waived by the affirmative vote, at a meeting duly held

in accordance with Article Eight hereof, or by written consent obtained by the

Company, of the holders of 60% of the aggregate principal amount of the

Debentures registered and outstanding as of the date of such meeting or the

date on which such consent is requested in writing.

 

ARTICLE

EIGHT.

 

Debentureholders’

Meetings.

 

                Section 8.01.        Purposes of

Meetings.  A meeting of

Debentureholders may be called at any time and from time to time pursuant to

the provisions of this Article Eight to give any notice to the Company, or to

give any directions to the Company, or to consent to the waiving of any default

hereunder and its consequences, or to take any other action authorized to be

taken by Debentureholders pursuant to any of the provisions of Article Six, and

to take any other action authorized to be taken by or on behalf of the holders

of any specified aggregate principal amount of the Debentures under any other

provision of this Debenture or under applicable law.

 

                Section 8.02.        Call of

Meetings by the Company or Debentureholders.  The Company, pursuant to a resolution of its

Board of Directors, or the holders of at least 12% in aggregate principal

amount of the Debentures then outstanding, shall be entitled to call a meeting

of Debentureholders, by the giving of notice thereof in writing, setting forth

the time and the place of such meeting and in general terms the action proposed

to be taken at such meeting, which shall be mailed to holders of Debentures at

their addresses as they shall appear on the Debenture register. Such notice

shall be mailed not less than 20 nor more than 90 days prior to the date fixed

for the meeting.

 

                Section 8.03.        Qualifications

for Voting.  To be

entitled to vote at any meeting of Debentureholders a person shall (i) be a

holder of one or more Debentures, or (ii) be a person appointed by an

instrument in writing as proxy by a holder of one or more Debentures.  The only persons who shall be entitled to be

present or to speak at any meeting of Debentureholders shall be the persons

entitled to vote at such meeting and their counsel and any representatives of

the Company and its counsel.

 

32

 

                Section 8.04.        Regulations.  Notwithstanding any other provisions of this

Debenture, the Company may make such reasonable regulations as it may deem

advisable for any meeting of Debentureholders, in regard to proof of the

holding of Debentures and of the appointment of proxies, and in regard to the

appointment and duties of inspectors of votes, the submission and examination

of proxies, certificates and other evidence of the right to vote, and such

other matters concerning the conduct of the meeting as it shall think fit.

 

                The Company or the Debentureholders calling the

meeting, as the case may be, shall appoint a temporary chairman for the

meeting.  A permanent chairman and a

secretary of the meeting shall be elected by majority vote of the meeting.

 

                At any meeting each Debentureholder or proxy shall be

entitled to one vote for each $1,000 principal amount of Debentures held or

represented by him; provided, however, that no vote shall be cast or counted at

any meeting in respect of any Debenture challenged as not outstanding and ruled

by the chairman of the meeting to be not outstanding.  The chairman of the meeting shall have no right to vote other

than by virtue of Debentures held by him or instruments in writing as aforesaid

duly designating him as the person to vote on behalf of other

Debentureholders.  Any meeting of

Debentureholders duly called pursuant to the provisions of Section 8.02 may be

adjourned from time to time by a majority vote of the meeting, whether or not

constituting a quorum, and the meeting may be held as so adjourned without

further notice.

 

                Section 8.05.        Voting.  The vote upon any resolution submitted to

any meeting of Debentureholders shall be by written ballots on which shall be

subscribed the signatures of the holders of Debentures or of their representatives

by proxy and the principal amount of the Debentures voted. The permanent

chairman of the meeting shall appoint two inspectors of votes who shall count

all votes cast at the meeting for or against any resolution and who shall make

and file with the secretary of the meeting their verified written reports in

duplicate of all votes cast at the meeting. 

A record in duplicate of the proceedings of each meeting of

Debentureholders shall be prepared by the secretary of the meeting and there

shall be attached to said record the original reports of the inspectors of

votes on any vote by ballot taken thereat and affidavits by one or more persons

having knowledge of the facts setting forth a copy of the notice of the meeting

and showing that said notice was mailed as provided in Section 8.02.

 

                The record shall be signed and verified by the

affidavits of the permanent chairman and secretary of the meeting and one of

the duplicates shall be delivered to the Company to be preserved by the

Company.  Any record so signed and

verified shall be conclusive evidence of the matters therein stated.

 

                Section 8.06.        No Delay of

Rights by Meeting. 

Nothing in this Article Eight contained shall be deemed or construed to

authorize or permit, by reason of any call of a meeting of Debentureholders or

any rights expressly or impliedly

 

33

 

conferred hereunder to make such call, any hindrance or delay in the

exercise of any right or rights conferred upon or reserved to the Debentureholders

under any of the provisions of the Debentures.

 

ARTICLE

NINE.

 

Consolidation,

Merger, Sale, Conveyance and Lease.

 

                Section 9.01.        Company May

Consolidate, etc., on Certain Terms.  Nothing contained in any of the Debentures shall prevent (i) any

consolidation or merger of the Company with or into any other corporation or

corporations (whether or not affiliated with the Company), or successive

consolidations or mergers in which the Company or its successor or successors

shall be a party or parties, provided that the corporation or successive

acquiring corporations shall have a class of equity securities registered under

Section 12(g) of the Securities Exchange Act of 1934, as amended, and that the

Debentures shall thereafter be convertible into such class of equity

securities, or (ii) any sale, or conveyance of assets not exceeding 12% of the

consolidated net tangible assets of the Company, the assumption of otherwise

prohibited liens or sale and leaseback of assets owned by the Company as of the

date of this Debenture, or, provided that the aggregate amount of the otherwise

prohibited liens and the present value of the sale and leaseback transactions

does not exceed 25% of the consolidated net tangible assets of the Company, to

any other corporation (whether or not affiliated with the Company) authorized

to acquire and operate the same; provided, however, that in the event of a sale

or conveyance of assets the Company hereby covenants and agrees that upon any

such sale or conveyance, and upon any such merger or consolidation in which the

Company is not the surviving corporation, the due and punctual payment of the

principal and interest on all of the Debentures, according to their tenor, and

the due and punctual performance and observance of all of the covenants and

conditions of the Debentures to be performed by the Company, shall be expressly

assumed by the corporation (if other than the Company) formed by such

consolidation, or into which the Company shall have been merged, or by the

corporation which shall have acquired such property, and immediately after such

consolidation, merger, or acquisition, the Company, its Subsidiaries, or such

successor corporation, as the case may be, shall not be or become in violation

of any of the terms, covenants or conditions of the Debentures.  In case of any such consolidation, merger,

sale, or conveyance, changes in phraseology and form (but not in substance) may

be made in the Debentures thereafter to be issued as may be appropriate.

ARTICLE

TEN.

 

Immunity

of Incorporators, Shareholders, Officers and Directors.

 

                Section 10.01.      Debentures

Solely Corporate Obligations. 

No recourse for the payment of the principal of or interest on any

Debenture, or for any claim based thereon or otherwise in respect thereof, and

no recourse under or upon any obligation, covenant or agreement of the Company

in any Debenture, or because

 

34

 

of the creation of any indebtedness represented thereby, shall be had

against any incorporator, shareholder, officer or director, as such, past,

present or future, of the Company or of any successor corporation, either

directly or through the Company or any successor corporation, whether by virtue

of any constitution, statute or rule of law, or by the enforcement of any

assessment or penalty or otherwise; it being expressly understood that all such

liability is hereby expressly waived and released as a condition of, and as a

consideration for, the issue of the Debentures.

 

ARTICLE

ELEVEN.

 

Conversion

of Debentures.

 

                Section 11.01.      Conversion

Privilege.  Subject to

and upon compliance with the provisions of this Article Eleven, at the option

of the holder thereof, any Debenture or any portion of the principal amount

thereof which is $1,000 or an integral multiple of $1,000 may, at any time on

or prior to the close of business on the 15th day preceding the maturity date,

or in case such Debenture or portion thereof shall have been called for

redemption prior to such date, then in respect of such Debenture or portion

thereof until and including, but (unless the Company shall default in payment

due upon the redemption thereof) not after, the close of business on the 15th

day prior to such Redemption Date, be converted into duly authorized, validly

issued, fully paid and non-assessable shares of Common Stock of the Company.

The Debentures shall automatically convert into Common Stock at any time up to

15 days prior to maturity after the closing price of the Company’s Common

Stock, as reported on the OTC Bulletin Board or the Nasdaq Small Cap Market has

exceeded $1.50 per share for 20 days within any 30-day period. The number of

shares of Common Stock issuable upon conversion shall be equal to the principal

amount of such Debenture, or such portion thereof, divided by the Conversion

Price (determined as hereinafter provided) in effect at the time of conversion

and rounded to the nearest one-hundredth of a share.  The price at which shares of Common Stock shall be delivered upon

conversion (herein called the “Conversion Price”) shall be $.50 per share of

Common Stock.

 

                Section 11.02.      Manner of

Exercise of Conversion Privilege.  In order to exercise the conversion privilege, the holder of any

Debenture to be converted shall surrender such Debenture during regular

business hours to the executive office of the Company in accordance with

Section 4.02, accompanied by written notice to the Company at said office that

the holder elects to convert such Debenture or, if less than the entire

principal amount of the Debenture is to be converted, the portion thereof to be

converted.  Such notice shall also state

the name or names (with address and tax identification number) in which the

certificate or certificates for shares of Common Stock issuable upon such

conversion shall be issued. Debentures surrendered for conversion shall be

accompanied by proper assignments thereof to the Company or in blank for

transfer. As promptly as practicable after the receipt of such notice and the

surrender of such Debenture as aforesaid, but subject to Section 11.03, the

Company shall deliver or cause to be delivered at said office or agency to such

 

35

 

holder, or on his written order, a certificate or certificates for the

number of full shares of Common Stock 

issuable upon the conversion of such Debenture (or specified portion

thereof) and provision shall be made in respect of any fractional interest as

provided in Section 11.03. Such conversion shall be deemed to have been

effected immediately prior to the close of business on the date on which such

notice shall have been received by the Company and such Debenture shall have

been surrendered as aforesaid, and at such time the rights of the holder of

such Debenture as such holder shall cease and the person or persons in whose

name or names any certificate or certificates for shares of Common Stock shall

be issuable upon such conversion shall be deemed to have become the holder or

holders of record of the shares represented thereby.

 

                Subject to the requirement for a payment provided in

Section 2.02 in the event of conversion after the close of business on the

record date preceding an interest payment date, no payment or adjustment shall

be made upon any conversion on account of any interest accrued on the

Debentures delivered for conversion or on account of any dividends on the

shares of Common Stock issued upon such conversion.

 

                In case any Debenture is converted in part only, upon

such conversion the Company shall execute, register and deliver to the holder

thereof, at the expense of the Company, a new Debenture or Debentures of

authorized denominations in principal amount equal to the unconverted portion

of such Debenture.

 

                Section 11.03.      Cash

Adjustment Upon Conversion. 

No fractional shares of Common Stock shall be issued upon conversions of

Debentures. If more than one Debenture shall be surrendered for conversion at

one time by the same holder, the number of full shares which shall be issuable

upon conversion thereof shall be computed on the basis of the aggregate

principal amount of the Debentures (or specified portions thereof to the extent

permitted hereby) so surrendered. 

Instead of any fractional share of Common Stock which would otherwise be

issuable upon conversion of any Debenture or Debentures or specified portions

thereof, the Company shall pay a cash adjustment in respect of such fraction in

an amount equal to the same fraction of the closing bid price of the Common

Stock as reported by Nasdaq, or the last sale price if the Common Stock is then

traded on a national securities exchange, at the close of business on the

business day which next precedes the day of conversion.

 

                Section 11.04.      Adjustment of

Conversion Price.  The

Conversion Price in effect at any time shall be subject to adjustment as

follows:

 

                                (a)           In

case the Company shall (i) declare a dividend on its Common Stock in shares of

its capital stock, (ii) subdivide its outstanding shares of Common  Stock, (iii) combine its outstanding shares

of Common Stock into a smaller number of shares, or (iv) issue by

reclassification of its Common Stock (including any such reclassification in

connection with a consolidation or merger in which the Company is the

continuing corporation) any shares of its capital stock, the Conversion Price

in effect at the time of the record date for such

 

36

 

dividend or of the effective date of such subdivision, combination or

reclassification shall be proportionately adjusted so that the holder of any

Debenture surrendered for conversion after such time shall be entitled to

receive the kind and number of shares which he would have owned or have been

entitled to receive had such Debenture been converted immediately prior to such

time. Such adjustment shall be made successively whenever any event listed

above shall occur.

 

                                (b)           In

case the Company shall issue any Common Stock, or any rights, options or

warrants to all holders of its Common Stock after the date of issuance of any

outstanding Debenture entitling them to subscribe for or purchase, or which are

convertible into, shares of Common Stock at a price per share less than the

current Conversion Price in effect on the date immediately prior to the date of

such issue, other than an issuance pursuant to subsection (a) immediately

above, the issuance of Common Stock upon conversion of any of the Debentures,

the grant of options to purchase and the subsequent issuance upon exercise of

such options, of a maximum of 1,000,000 shares of Common Stock to employees of

and consultants to the Company pursuant to the Company’s existing stock option

plans or other outstanding options or arrangements approved by the Company’s

Board of Directors.  The Conversion

Price shall be adjusted to an amount derived by dividing the sum of (i) the

number of shares of Common Stock outstanding at the close of business on the

date immediately prior to such issuance multiplied by the then existing

Conversion Price, (ii) the number of shares of Common Stock issuable upon conversion

or exercise of any outstanding rights, warrants, options or convertible

securities of the Company outstanding immediately prior to such issuance

multiplied by the then existing Conversion Price, and (iii) the aggregate

consideration received by the Company upon such issuance, by the number of

shares of Common Stock outstanding immediately following such issuance, such

reduction to become effective immediately after the opening of business on the

day following the date fixed for such determination.  For these purposes, all shares of Common Stock issuable upon the

conversion or exercise of a right, warrant, option or convertible security

shall be deemed issued as of the date of issuance of such right, warrant,

option or convertible security, and the amount of the consideration received by

the Company for such shares of Common Stock shall be deemed to be the total of

the amount of consideration received upon the issuance of such right, warrant,

option or convertible security plus the minimum aggregate additional

consideration, if any, receivable by the Company upon such conversion or

exercise, except in adjustment of dividends. 

If any such right, warrant, option or convertible security is not

converted or exercised prior to the expiration of the right to convert or

exercise the same, the Conversion Price shall revert to the Conversion Price in

effect immediately prior to the issuance of such right, warrant, option or

convertible security, subject only to adjustments attributable to other events

subsequently occurring which may have had the effect of causing an adjustment

to the Conversion Price in accordance with the provisions of the Section 11.04.

                                (c) 

         In case the Company shall

distribute to all holders of its Common Stock (including any such distribution

made in connection with a

 

37

 

consolidation or merger in which the Company is the continuing

corporation) evidences of its indebtedness or assets (excluding dividends or

other distributions paid out of earned surplus) or subscription rights or

warrants (excluding those referred to in subsection (b) immediately above), the

Conversion Price shall be adjusted so that the same shall equal the price

determined by multiplying the Conversion Price in effect immediately prior to

the close of business on the date fixed for the determination of stockholders

entitled to receive such distribution by a fraction of which the numerator

shall be the current Conversion Price on the date fixed for such determination

less the then fair market value (as determined by the Board of Directors, whose

determination shall be conclusive) of the portion of the assets or evidences of

indebtedness so distributed applicable to one share of Common Stock and the

denominator shall be such current Conversion Price, such adjustment to become

effective immediately prior to the opening of business on the day following the

date fixed for the determination of stockholders entitled to receive such

distribution.

 

                                (d)           For

the purpose of any computation under subsections (b) and (c) immediately, the

current Conversion Price on any date shall be deemed to be the Conversion Price

as in effect immediately prior to the transaction giving rise to such

computation, after taking into account all previous adjustments of the

Conversion Price in accordance with the provisions of this Article Eleven.

 

                                (e) 

         All calculations under

this Article Eleven shall be made to the nearest cent or to the nearest

one-hundredth of a share, as the case may be.

 

                                (f) 

          In case of any

consolidation or merger of the Company with or into any other corporation

(other than a consolidation or merger in which the Company is the continuing

corporation), or in case of any sale or transfer of all or substantially all

the assets of the Company, the holder of each Debenture shall after such

consolidation, merger, sale or transfer have the right to convert such

Debenture into the kind and number of shares of stock and other securities and

property which such holder would have been entitled to receive upon such

consolidation, merger, sale or transfer if he had held the Common Stock

issuable upon the conversion of such Debenture immediately prior to such

consolidation, merger, sale or transfer.

 

                                (g) 

         In the event that at any

time, as a result of an adjustment made pursuant to subsection (a) above, the

holder of any Debenture thereafter surrendered for conversion shall become

entitled to receive any securities other than shares of Common Stock,

thereafter the amount of such other securities so receivable upon conversion of

any Debenture shall be subject to adjustment from time to time in a manner and

on terms as nearly equivalent as  

practicable to the provisions with respect to the Common Stock contained

in subsection (a) through (f), inclusive, above, and the provisions of this

Article Eleven with respect to the Common Stock shall apply on like terms to

any such other securities.

 

                                (h) 

         No adjustment in the

Conversion Price shall be required unless such adjustment would require a change

of at least 1% in such price;

 

38

 

provided, however, that any adjustments which by reason of this

subsection (h) are not required to be made shall be carried forward and taken

into account in any subsequent adjustment.

 

                Section 11.05.      Company to

Give Notice of Adjustment. 

Whenever the Conversion Price is adjusted as herein provided:

 

                                (a)           the

Company shall obtain a certificate of a firm of independent public accountants

selected by the Board of Directors (who may be the regular accountants employed

by the Company) setting forth the adjusted Conversion Price and showing in

reasonable detail the facts upon which such adjustment is based, and such

certificate shall forthwith be filed at the office or agency maintained for the

purpose of conversion of Debentures pursuant to Section 4.02, and

 

                                (b)           a

notice stating that the Conversion Price has been adjusted and setting forth

the adjusted Conversion Price shall forthwith be required, and as soon as practicable

after it is required, such notice shall be mailed by the Company to the holders

of the Debentures at their last address as they shall appear upon the Debenture

register provided for in Section 5.01, provided, however, that if within ten

days after the mailing of such a notice, an additional notice is required, such

additional notice shall be deemed to be required pursuant to this clause (b) as

of the opening of business on the tenth day after such mailing and shall set

forth the Conversion Price as adjusted at such opening of business, and upon

the mailing of such additional notice no other notice need be given of any

adjustment in the Conversion Price occurring at or prior to such opening of

business and after the time that the next preceding notice given by mailing

became required.

 

                Section 11.06.      Company to

Give Notice of Certain Events.  

In case:

 

                                (a)           the

Company shall authorize the distribution to all holders of its Common Stock of

evidence of its indebtedness or assets (other than dividends or other

distributions paid out of earned surplus); or

 

                                (b)           the

Company shall authorize the granting to the holders of its Common Stock of

rights to subscribe for or purchase any shares of capital stock of any class or

of any other rights; or

 

                                (c)           of

any reclassification of the Common Stock of the Company (other than a

subdivision or combination of its outstanding shares of Common Stock), or of

any consolidation or merger to which the Company is a party and for which

approval of any stockholders of the Company is required, or of the sale or

transfer of all or substantially all the assets of the Company; or

 

                                (d)           of

the voluntary or involuntary dissolution, liquidation or winding up of the

Company;  then the Company shall cause

to be filed at the office or agency maintained for the purpose of conversion of

Debentures pursuant

 

39

 

to Section 4.02, and shall cause to be mailed, first class postage

prepaid, to the holders of Debentures at their last addresses as they shall

appear upon the Debenture register provided for in Section 5.01, at least 20

days (or 10 days in any case specified in clause (a) or (b) above) prior to the

applicable record date hereinafter specified, a notice stating (i) the date on

which a record is to be taken for the purpose of such distribution or rights,

or, if a record is not to be taken, the date as of which the holders of Common

Stock of record to be entitled to such distribution or rights are to be

determined, or (ii) the date on which such reclassification, consolidation,

merger, sale, transfer, dissolution, liquidation or winding up is expected to

become effective, and the date as of which it is expected that holders of

Common Stock of record shall be entitled to exchange their Common Stock for

securities or other property deliverable upon such reclassification,

consolidation, merger, sale, transfer, dissolution, liquidation or winding up.

 

                Section 11.07.      Reservation of

Common Stock.  The

Company shall at all times reserve and keep available, free from preemptive

rights, out of its authorized but unissued Common Stock, for the purpose of

effecting the conversion of Debentures, the full number of shares of Common

Stock then issuable upon the conversion of all Outstanding Debentures. For the

purpose of this Section 11.07, the full number of shares of Common Stock

issuable upon the conversion of all Outstanding Debentures shall be computed as

if at the time of computation of such number of shares of Common Stock all Outstanding

Debentures were held by a single holder. The Company covenants and agrees that,

if any shares of Common Stock required to be reserved for issuance upon

conversion of Debentures hereunder require registration with or approval of any

governmental authority under any Federal or State law, before such shares may

be issued upon such conversions, the Company will in good faith and as

expeditiously as possible endeavor to cause such shares to be so registered or

approved.

 

                Section 11.08.      Taxes on

Conversions.  The Company

will pay any and all documentary or transfer taxes that may be payable in

respect of the issue or delivery of shares of Common Stock on conversion of

Debentures pursuant hereto. The Company shall not, however, be required to pay

any such tax which may be payable in respect of any transfer involved in the

issue or transfer and delivery of shares of Common Stock in a name other than

that of the holder of the Debenture or Debentures to be converted, and no such

issue or delivery shall be made unless and until the person requesting such

issue has paid to the Company the amount of any such tax or has established to

the satisfaction of the Company that such tax has been paid.

 

                Section 11.09.      Absence of

Preemptive Rights.  The

Company covenants that all authorized but unissued shares of Common Stock which

may at any time be reserved pursuant to Section 11.07 for issuance upon

conversions of Debentures will be free from preemptive rights and duly and

validly authorized for issuance upon such conversions; and that all shares of

Common Stock which may at any time be issued upon conversions of Debentures in

accordance with the

 

40

 

terms of this Debenture will upon such issuance be free from preemptive

rights, duly and validly authorized and issued, fully paid and non-assessable.

 

                Section 11.10.      Debentures

Converted.  All

Debentures delivered for conversion shall be delivered to the Company to be

canceled by or at the direction of the Company, who shall dispose of the same

as provided in Section 2.05.

 

                Section 11.11.      Effect of

Consolidation, Merger or Sale. 

In case of any consolidation or merger of the Company with or into any

other corporation (other than a consolidation or merger in which the Company is

the continuing corporation), or in case of any sale or transfer of all or

substantially all the assets of the Company, the corporation formed by such

consolidation or the corporation into which the Company shall have been merged

or the corporation which shall have acquired such assets, as the case may be,

shall execute and deliver to each Debentureholder a written undertaking

providing that the holder of each Debenture then outstanding shall have the

right thereafter to convert such Debenture as provided in Paragraph (f) of

Section 11.04, and that such corporation shall assume all of the other rights

and obligations of the Debenture.  The

provisions of this Section 11.11 shall similarly apply to successive consolidations,

mergers, sales or transfers.

 

ARTICLE

TWELVE.

 

Miscellaneous

Provisions.

 

                Section 12.01.      Provisions

Binding on Company’s Successors.  All the covenants, stipulations, promises and agreements in this

Debenture contained by the Company shall bind its successors and assigns

whether so expressed or not.

 

                Section 12.02.      Debentures for

Sole Benefit of Company and Debentureholders.  Nothing in the Debentures, expressed or

implied, shall give or be construed to give to any person, firm or corporation,

other than the parties hereto and the holders of the Debentures, any legal or

equitable right, remedy or claim under or in respect of this Debenture, or

under any covenant, condition or provision herein contained; all such

covenants, conditions and provisions being for the sole benefit of the parties

hereto and the holders of the Debentures.

 

                Section 12.03.      Addresses for

Notices, Etc.  Any notice

or demand which by any provision of the Debentures is required or permitted to

be given or served by the holders of Debentures on the Company may be given or

served by being deposited postage prepaid by registered or certified mail in a

post office letter box addressed (until notified of another address by the

Company) to Liquitek Enterprises, Inc., 2 Corporate Plaza, Suite 125, Newport

Beach, California  92660, Attention:

Secretary.  Any notice, report or other

instrument required by any of the provisions of the Debentures to be given by

the Company to the Debentureholders shall be deemed to have been sufficiently

given for all purposes if mailed by first class mail to the Debentureholder at

the last address for such holder appearing in the Debenture register.

 

41

 

                Section 12.04.      Utah Contract.  This Debenture and each other Debenture

executed and delivered by the Company shall be deemed to be a contract made

under the laws of the State of Utah and for all purposes shall be construed in

accordance with the laws of said State.

 

                Section 12.05.      Legal

Holidays.  In any case

where the date of maturity of interest on or principal of or interest on the

Debentures or the date fixed for redemption of any Debenture will not be a

business day, then payment of such interest on or principal of the Debentures

need not be made on such date but may be made on the next succeeding business

day with the same force and effect as if made on such date of maturity or the

date fixed for redemption and no interest shall accrue for the period from and

after such prior date.

 

                Section 12.06.      No Security

Interest Created.  Nothing in the Debentures, expressed or implied, shall be

construed to constitute a security interest under the Uniform Commercial Code

or similar legislation, as now or hereafter enacted and in effect, in any

jurisdiction where property of the Company or its Subsidiaries is located.

 

                Section 12.07.      Table of

Contents, Headings, Etc. 

The table of contents and the titles and headings of the articles and

sections of the Debentures have been inserted for convenience of reference

only, are not to be considered a part hereof, and shall in no way modify or

restrict any of the terms or provisions hereof.

 

                IN WITNESS

WHEREOF, Liquitek Enterprises, Inc. has caused this Debenture to be

signed and acknowledged by its President, or a Vice President, and its

corporate seal to be affixed hereunto, and the same to be attested by its

Secretary or an Assistant Secretary, as of the day and year first written

above.

 

	

   

  	

   

  	

   

  	

  LIQUITEK

  
	

  ENTERPRISES,

  INC.

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

  a Nevada corporation

  
	

   

  	

   

  	

   

  	

   

  
	

  By:

  	

   

  	

   

  	

   

  
	

   

  	

  John W. Nagel, President

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

  Attest:

  	

   

  	

   

  	

   

  
	

   

  	

  Bruce H. Haglund, Secretary

  	

   

  	

   

  

 
42

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00039-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00039-of-00352.parquet"}]]