Enigma unable to meet obligations on convertible debentures sold to Dutchess

By Devika Patel

Knoxville, Tenn., March 27 - Enigma Software Group, Inc. was notified on March 26 by Dutchess Private Equities Fund, Ltd. that it is in default on the $1.5 million in secured convertible debentures it issued to Dutchess in June 2006 and July 2007, according to an 8-K filed Thursday with the Securities and Exchange Commission.

According to the filing, the default notice is due to the company's failure to make regular monthly interest payments and payments of principal on the 2006 debenture, which is for $1 million, and failure to make required interest payments on the 2007 debenture, which is for $500,000.

For the 2006 debenture's default, the company is obligated to pay interest at 12% on a monthly basis and amortizing monthly cash payments of $104,166.67.

For the 2007 debenture's default, the company is obligated to pay Dutchess 12% in interest, compounded daily, on a monthly basis.

The company's payment obligations under both notes were accelerated and became immediately due.

As of March 24, according to the filing, the company owed Dutchess $1.64 million under both notes, including principal, interest and certain penalties and liquidated damages. Because the company is not able to pay its obligations, Dutchess now is entitled to take possession of all of the company's assets.

Enigma said in the filing that it is in negotiations with Dutchess to resolve the default and that the two companies have etched out a plan under which Dutchess would waive the penalties and liquidated damages and rescind acceleration of the debentures but would take control of company through a share purchase plan and control of Enigma's board, after the plan forces the company's current board members to resign.

Enigma noted in the filing that stockholders will not have an opportunity to vote on this plan. It also said the company's management believes this plan is the only viable alternative to realize significant value for stockholders.

Based in Stamford, Conn., Enigma develops security software products.

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