EXHIBIT A
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
Original Issue Date: July __, 2006
Original Conversion Price (subject to adjustment herein): $1.36
$_____________
VARIABLE RATE ORIGINAL ISSUE DISCOUNT
CONVERTIBLE SECURED DEBENTURE
DUE July __, 2008
THIS VARIABLE RATE ORIGINAL ISSUE DISCOUNT CONVERTIBLE SECURED DEBENTURE is
one of a series of duly authorized and validly issued Variable Rate Original
Issue Discount Convertible Secured Debentures of Consolidated Energy, Inc., a
Wyoming corporation, having its principal place of business at 00 Xxxxxx Xxxx,
Xxxxx Xxxxx, Xxxxxxxx 00000 (the "Company"), designated as its Variable Rate
Original Issue Discount Convertible Secured Debenture, due July __, 2008 (this
debenture, the "Debenture" and collectively with the other such series of
debentures, the "Debentures").
FOR VALUE RECEIVED, the Company promises to pay to _________________ or its
registered assigns (the "Holder"), or shall have paid pursuant to the terms
hereunder, the principal sum of $_______________ by July __, 2008, or such
earlier date as this Debenture is required or permitted to be repaid as provided
hereunder (the "Maturity Date"), and to pay interest to the Holder on the
aggregate unconverted and then outstanding principal amount of this Debenture in
accordance with the provisions hereof. This Debenture is subject to the
following additional provisions:
Section 1. Definitions. For the purposes hereof, in addition to the terms
defined elsewhere in this Debenture, (a) capitalized terms not otherwise defined
herein shall have the meanings set forth in the Purchase Agreement and (b) the
following terms shall have the following meanings:
"Alternate Consideration" shall have the meaning set forth in Section
5(e).
"Bankruptcy Event" means any of the following events: (a) the Company
or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of
Regulation S-X) thereof commences a case or other proceeding under any
bankruptcy, reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction relating to the Company or any Significant Subsidiary thereof;
(b) there is commenced against the Company or any Significant Subsidiary
thereof any such case or proceeding that is not dismissed within 60 days
after commencement; (c) the Company or any Significant Subsidiary thereof
is adjudicated insolvent or bankrupt or any order of relief or other order
approving any such case or proceeding is entered; (d) the Company or any
Significant Subsidiary thereof suffers any appointment of any custodian or
the like for it or any substantial part of its property that is not
discharged or stayed within 60 calendar days after such appointment; (e)
the Company or any Significant Subsidiary thereof makes a general
assignment for the benefit of creditors; (f) the Company or any Significant
Subsidiary thereof calls a meeting of its creditors with a view to
arranging a composition, adjustment or restructuring of its debts; or (g)
the Company or any Significant Subsidiary thereof, by any act or failure to
act, expressly indicates its consent to, approval of or acquiescence in any
of the foregoing or takes any corporate or other action for the purpose of
effecting any of the foregoing.
"Base Price" shall have the meaning set forth in Section 5(b).
"Business Day" means any day except Saturday, Sunday, any day which
shall be a federal legal holiday in the United States or any day on which
banking institutions in the State of New York are authorized or required by
law or other governmental action to close.
"Buy-In" shall have the meaning set forth in Section 4(d)(v).
"Change of Control Transaction" means the occurrence after the date
hereof of any of (i) an acquisition after the date hereof by an individual
or legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated
under the Exchange Act) of effective control (whether through legal or
beneficial ownership of capital stock of the Company, by contract or
otherwise) of in excess of 33% of the voting securities of the Company
(other than by means of conversion or exercise of the Debentures and the
Securities issued together with the Debentures), or (ii) the Company merges
into or consolidates with any other Person, or any Person merges into or
consolidates with the Company and, after giving effect to such transaction,
the stockholders of the Company immediately prior to such transaction own
less than 66% of the aggregate voting power of the Company or the successor
entity of such transaction, or (iii) the Company sells or transfers all or
substantially all of its assets to another Person and the stockholders of
the Company immediately prior to such transaction own less than 66% of the
aggregate voting power of the acquiring entity immediately after the
transaction, or (iv) a replacement at one time or within a three year
period of more than one-half of the members of the Company's board of
directors which is not approved by a majority of those individuals who are
members of the board of directors on the date hereof (or by those
individuals who are serving as members of the board of directors on any
date whose nomination to the board of directors was approved by a majority
of the members of the board of directors who are members on the date
hereof), or (v) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events
set forth in clauses (i) through (iv) above.
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"Closing Price" means on any particular date (a) the last reported
closing bid price per share of Common Stock on such date on the Trading
Market (as reported by Bloomberg L.P. at 4:15 p.m. (New York City time), or
(b) if there is no such price on such date, then the closing bid price on
the Trading Market on the date nearest preceding such date (as reported by
Bloomberg L.P. at 4:15 p.m. (New York City time) for the closing bid price
for regular session trading on such day), or (c) if the Common Stock is not
then listed or quoted on the Trading Market and if prices for the Common
Stock are then reported in the "Pink Sheets" published by the Pink Sheets,
LLC (or a similar organization or agency succeeding to its functions of
reporting prices), the most recent bid price per share of the Common Stock
so reported, or (d) if the shares of Common Stock are not then publicly
traded the fair market value of a share of Common Stock as determined by a
qualified independent appraiser selected in good faith by the Purchasers of
a majority in interest of the outstanding principal amount of the
Debentures.
"Common Stock" means the common stock, par value $0.001 per share, of
the Company and stock of any other class of securities into which such
securities may hereafter be reclassified or changed into.
"Conversion Date" shall have the meaning set forth in Section 4(a).
"Conversion Price" shall have the meaning set forth in Section 4(b).
"Conversion Shares" means, collectively, the shares of Common Stock
issuable upon conversion of this Debenture in accordance with the terms
hereof.
"Debenture Register" shall have the meaning set forth in Section 2(c).
"Effectiveness Period" shall have the meaning set forth in the
Registration Rights Agreement.
3
"Equity Conditions" shall mean, during the period in question, (i) the
Company shall have duly honored all conversions and redemptions scheduled
to occur or occurring by virtue of one or more Notices of Conversion of the
Holder, if any, (ii) the Company shall have paid all liquidated damages and
other amounts owing to the Holder in respect of this Debenture, (iii) there
is an effective Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the shares
issuable pursuant to the Transaction Documents (and the Company believes,
in good faith, that such effectiveness will continue uninterrupted for the
foreseeable future), (iv) the Common Stock is trading on a Trading Market
and all of the shares issuable pursuant to the Transaction Documents are
listed for trading on such Trading Market (and the Company believes, in
good faith, that trading of the Common Stock on a Trading Market will
continue uninterrupted for the foreseeable future), (v) there is a
sufficient number of authorized but unissued and otherwise unreserved
shares of Common Stock for the issuance of all of the shares issuable
pursuant to the Transaction Documents, (vi) there is no existing Event of
Default or no existing event which, with the passage of time or the giving
of notice, would constitute an Event of Default, (vii) the issuance of the
shares in question (or, in the case of a Forced Conversion, the shares
issuable upon conversion of the principal amount set forth in the Forced
Conversion Notice) to the Holder would not violate the limitations set
forth in Section 4(c)(i) herein, (viii) there has been no public
announcement of a pending or proposed Fundamental Transaction or Change of
Control Transaction that has not been consummated and (ix) the Holder is
not in possession of any information furnished by the Company that
constitutes, or may constitute, material non-public information.
"Event of Default" shall have the meaning set forth in Section 8.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Forced Conversion" shall have the meaning set forth in Section 6(c).
"Forced Conversion Date" shall have the meaning set forth in Section
6(c).
"Forced Conversion Notice" shall have the meaning set forth in Section
6(c).
"Forced Conversion Notice Date" shall have the meaning set forth in
Section 6(c).
"Fundamental Transaction" shall have the meaning set forth in Section
5(e).
"Interest Conversion Rate" means the lesser of (a) the Conversion
Price or (b) 85% of the lesser of (i) the average of the VWAPs for the 20
consecutive Trading Days ending on the Trading Day that is immediately
prior to the applicable Interest Payment Date or (ii) the average of the
VWAPs for the 20 consecutive Trading Days ending on the Trading Day that is
immediately prior to the date the applicable Interest Conversion Shares are
issued and delivered if after the Interest Payment Date.
"Interest Conversion Shares" shall have the meaning set forth in
Section 2(a).
"Interest Notice Period" shall have the meaning set forth in Section
2(a).
"Interest Payment Date" shall have the meaning set forth in Section
2(a).
4
"Interest Share Amount" shall have the meaning set forth in Section
2(a).
"Interest Period" means (i) as an initial Interest Period, the period
commencing on and including the Original Issue Date and terminating on and
including July 31, 2006 and (ii) as each subsequent Interest Period until
the Maturity Date, the period commencing on and including the first day of
each calendar month and terminating on and including the last day of such
calendar month.
"Late Fees" shall have the meaning set forth in Section 2(d).
"Mandatory Default Amount" means the sum of (i) the greater of (A)
120% of the outstanding principal amount of this Debenture, plus all
accrued and unpaid interest hereon, or (B) the outstanding principal amount
of this Debenture, plus all accrued and unpaid interest hereon, divided by
the Conversion Price on the date the Mandatory Default Amount is either (a)
demanded (if demand or notice is required to create an Event of Default) or
otherwise due or (b) paid in full, whichever has a lower Conversion Price,
multiplied by the VWAP on the date the Mandatory Default Amount is either
(x) demanded or otherwise due or (y) paid in full, whichever has a higher
VWAP, and (ii) all other amounts, costs, expenses and liquidated damages
due in respect of this Debenture.
"Monthly Redemption" means the redemption of this Debenture pursuant
to Section 6(a) hereof.
"Monthly Redemption Amount" means, as to a Monthly Redemption, the sum
of (i) $___,(1) (ii) accrued but unpaid interest and (iii) all liquidated
damages and other amounts due in respect of the Debenture.
"Monthly Redemption Date" means the 1st of each month, commencing upon
the 120th day after the Closing Date.
"New York Courts" shall have the meaning set forth in Section 9(d).
"Notice of Conversion" shall have the meaning set forth in Section
4(a).
"Original Issue Date" means the date of the first issuance of the
Debentures, regardless of any transfers of any Debenture and regardless of
the number of instruments which may be issued to evidence such Debentures.
"Permitted Indebtedness" means (a) the Indebtedness existing on the
Original Issue Date and set forth on Schedule 3.1(aa) attached to the
Purchase Agreement and (b) capital lease obligations and purchase money
indebtedness of up to $500,000, in the aggregate, incurred in connection
with the acquisition of capital assets and lease obligations with respect
to newly acquired or leased assets.
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(1) 1/20 of the Principal Amount as of the Closing Date.
5
"Permitted Lien" means the individual and collective reference to the
following: (a) Liens for taxes, assessments and other governmental charges
or levies not yet due or Liens for taxes, assessments and other
governmental charges or levies being contested in good faith and by
appropriate proceedings for which adequate reserves (in the good faith
judgment of the management of the Company) have been established in
accordance with GAAP; (b) Liens imposed by law which were incurred in the
ordinary course of the Company's business, such as carriers',
warehousemen's and mechanics' Liens, statutory landlords' Liens, and other
similar Liens arising in the ordinary course of the Company's business, and
which (x) do not individually or in the aggregate materially detract from
the value of such property or assets or materially impair the use thereof
in the operation of the business of the Company and its consolidated
Subsidiaries or (y) are being contested in good faith by appropriate
proceedings, which proceedings have the effect of preventing for the
foreseeable future the forfeiture or sale of the property or asset subject
to such Lien; (c) Liens incurred in connection with Permitted Indebtedness
under clause (a) thereunder; or (d) Liens incurred in connection with
Permitted Indebtedness under clause (b) thereunder, provided that such
Liens are not secured by assets of the Company or its Subsidiaries other
than the assets so acquired or leased.
"Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind.
"Prepayment Amount" means the sum of (i) 105% of the then outstanding
principal amount of the Debenture, (ii) accrued but unpaid interest and
(iii) all liquidated damages and other amounts due in respect of the
Debenture.
"Prime Rate" means, for each Interest Period, (i) the prime rate as
shown on such Trading Day immediately prior to the beginning of such
Interest Period in The Wall Street Journal (Eastern Edition) under the
caption "Money Rates - Prime Rate", or (ii) if The Wall Street Journal
(Eastern Edition) does not publish such rate, the rate of interest publicly
announced by Citibank N.A. as its prime rate on the Trading Day immediately
prior to the beginning of such Interest Period.
"Purchase Agreement" means the Securities Purchase Agreement among the
Company and the original Holders, dated as of June 30, 2006, as amended,
modified or supplemented from time to time in accordance with its terms.
"Registration Rights Agreement" means the Registration Rights
Agreement among the Company and the original Holders, dated as of the date
of the Purchase Agreement, as amended, modified or supplemented from time
to time in accordance with its terms.
"Registration Statement" means a registration statement that registers
the resale of all Conversion Shares and Interest Conversion Shares of the
Holder, who shall be named as a "selling stockholder" therein, and meets
the requirements of the Registration Rights Agreement.
6
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Share Delivery Date" shall have the meaning set forth in Section
4(d).
"Subsidiary" shall have the meaning set forth in the Purchase
Agreement.
"Threshold Period" shall have the meaning set forth in Section 6(c).
"Trading Day" means a day on which the principal Trading Market is
open for business.
"Trading Market" means the following markets or exchanges on which the
Common Stock is listed or quoted for trading on the date in question: the
American Stock Exchange, the Nasdaq Capital Market, the Nasdaq National
Market, the New York Stock Exchange or the OTC Bulletin Board.
"Transaction Documents" shall have the meaning set forth in the
Purchase Agreement.
"VWAP" means, for any date, the price determined by the first of the
following clauses that applies: (a) if the Common Stock is then listed or
quoted on a Trading Market, the daily volume weighted average price of the
Common Stock for such date (or the nearest preceding date) on the Trading
Market on which the Common Stock is then listed or quoted for trading as
reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York
City time) to 4:02 p.m. (New York City time); (b) if the OTC Bulletin Board
is not a Trading Market, the volume weighted average price of the Common
Stock for such date (or the nearest preceding date) on the OTC Bulletin
Board; (c) if the Common Stock is not then quoted for trading on the OTC
Bulletin Board and if prices for the Common Stock are then reported in the
"Pink Sheets" published by Pink Sheets, LLC (or a similar organization or
agency succeeding to its functions of reporting prices), the most recent
bid price per share of the Common Stock so reported; or (d) in all other
cases, the fair market value of a share of Common Stock as determined by an
independent appraiser selected in good faith by the Holder and reasonably
acceptable to the Company.
7
Section 2. Interest.
a) Payment of Interest in Cash or Kind. The Company shall pay interest
in arrears to the Holder on the aggregate unconverted and then outstanding
principal amount of this Debenture at the rate per annum equal to the
higher of (a) 12% or (b) the Prime Rate during the applicable Interest
Period plus 4%, payable monthly on first day of each calendar month,
commencing on the first such date after the Original Issue Date, on each
Monthly Redemption Date (as to that principal amount then being redeemed),
on each Conversion Date (as to that principal amount then being converted),
on each Forced Conversion Date (as to that principal amount then being
converted) and on the Maturity Date (except that, if any such date is not a
Business Day, then such payment shall be due on the next succeeding
Business Day) (each such date, an "Interest Payment Date), in cash or duly
authorized, validly issued, fully paid and non-assessable shares of Common
Stock at the Interest Conversion Rate (the dollar amount to be paid in
shares, the "Interest Share Amount"), or a combination thereof; provided,
however, that payment in shares of Common Stock may only occur if (i)
during the 20 Trading Days immediately prior to the applicable Interest
Payment Date (the "Interest Notice Period") and through and including the
date such shares of Common Stock are issued to the Holder all of the Equity
Conditions have been met (unless waived by the Holder in writing), (ii) on
each Trading Day during the Interest Notice Period, the daily trading
volume of the Common Stock, as measured in dollars, is at least $25,000,
(iii) the Company shall have given the Holder notice in accordance with the
notice requirements set forth below and (iv) as to such Interest Payment
Date, prior to such Interest Notice Period (but not more than 5 Trading
Days prior to the commencement of such Interest Notice Period), the Company
shall have delivered to the Holder a number of shares of Common Stock to be
applied against such Interest Share Amount equal to the quotient of (x) the
applicable Interest Share Amount divided by (y) the then Conversion Price
(the "Interest Conversion Shares"); provided, further, that,
notwithstanding anything herein to the contrary, on any given Interest
Payment Date the Interest Share Amount payable to the Holder shall not
exceed an amount equal to ____.(2)
b) Company's Election to Pay Interest in Kind. Subject to the terms
and conditions herein, the decision whether to pay interest hereunder in
cash or shares of Common Stock shall be at the discretion of the Company.
Prior to the commencement of any Interest Notice Period, the Company shall
deliver to the Holder a written notice of its election to pay interest
hereunder on the applicable Interest Payment Date either in cash, shares of
Common Stock or a combination thereof and the Interest Share Amount as to
the applicable Interest Payment Date, provided that the Company may
indicate in such notice that the election contained in such notice shall
apply to future Interest Payment Dates until revised by a subsequent
notice. During any Interest Notice Period, the Company's election (whether
specific to an Interest Payment Date or continuous) shall be irrevocable as
to such Interest Payment Date. Subject to the aforementioned conditions,
failure to timely provide such written notice shall be deemed an election
by the Company to pay the interest on such Interest Payment Date in cash.
At any time the Company delivers a notice to the Holder of its election to
pay the interest in shares of Common Stock, the Company shall timely file a
prospectus supplement to the Registration Statement pursuant to Rule 424
under the Securities Act disclosing such election. The aggregate number of
shares of Common Stock otherwise issuable to the Holder on an Interest
Payment Date shall be reduced by the number of Interest Conversion Shares
previously issued to the Holder in connection with such Interest Payment
Date.
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(2) The product of (a) (i) the Holder's Subscription Amount divided by (ii) the
aggregate Subscription Amounts paid hereunder and (b) 20% of the average weekly
trading volume of the Common Stock, as measured in dollars, for the 4 weeks
immediately preceding the applicable Interest Payment Date.
8
c) Interest Calculations. Interest shall be calculated on the basis of
a 360-day year and shall accrue daily commencing on the Original Issue Date
until payment in full of the principal sum, plus all accrued and unpaid
interest, liquidated damages and other amounts which may become due
hereunder, has been made. Payment of interest in shares of Common Stock
(other than the Interest Conversion Shares issued prior to an Interest
Notice Period) shall otherwise occur pursuant to Section 4(d)(ii) herein
and, solely for purposes of the payment of interest in shares, the Interest
Payment Date shall be deemed the Conversion Date. Interest shall cease to
accrue with respect to any principal amount converted, provided that the
Company actually delivers the Conversion Shares within the time period
required by Section 4(d)(ii). Interest hereunder will be paid to the Person
in whose name this Debenture is registered on the records of the Company
regarding registration and transfers of this Debenture (the "Debenture
Register"). Except as otherwise provided herein, if at any time the Company
pays interest partially in cash and partially in shares of Common Stock to
the holders of the Debentures, then the payment of cash shall be
distributed ratably among the holders of the then-outstanding Debentures
based on their (or their predecessor's) initial purchases of Debentures
pursuant to the Purchase Agreement.
d) Late Fee. All overdue accrued and unpaid interest to be paid
hereunder shall entail a late fee at an interest rate equal to the lesser
of 18% per annum or the maximum rate permitted by applicable law ("Late
Fees") which shall accrue daily from the date such interest is due
hereunder through and including the date of payment in full.
Notwithstanding anything to the contrary contained herein, if on any
Interest Payment Date the Company has elected to pay accrued interest in
the form of Common Stock but the Company is not able to pay accrued
interest in Common Stock because it fails to satisfy the conditions for
payment in Common Stock set forth above, then, at the option of the Holder,
the Company, in lieu of delivering either shares of Common Stock pursuant
to this Section 2 or paying the regularly scheduled interest payment in
cash, shall deliver, within three Trading Days of each applicable Interest
Payment Date, an amount in cash equal to the product of (x) the number of
shares of Common Stock otherwise deliverable to the Holder in connection
with the payment of interest due on such Interest Payment Date multiplied
by (y) the highest VWAP during the period commencing on the Interest
Payment Date and ending on the Trading Day prior to the date such payment
is made. If any Interest Conversion Shares are issued to the Holder in
connection with an Interest Payment Date and are not applied against an
Interest Share Amount, then the Holder shall promptly return such excess
shares to the Company.
e) Prepayment. The Company may prepay all or any portion of the
principal amount of this Debenture for an amount in cash equal to the
Prepayment Amount, at any time after the one year anniversary of the
Original Issue Date, without the prior written consent of the Holder;
provided, however, that (i) the Company shall deliver a written notice to
the Holder at least 10 Trading Days prior to a full or partial prepayment
of this Debenture, which notice shall specify the date of prepayment and
amount of prepayment of this Debenture and (ii) the Company shall honor any
Notice of Conversion delivered by the Holder up to the later of (a) 10
Trading Days following the written notice of prepayment and (b) the date on
which the prepayment amount is actually received by the Holder.
9
Section 3. Registration of Transfers and Exchanges.
a) Different Denominations. This Debenture is exchangeable for an
equal aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holder surrendering the same. No service
charge will be payable for such registration of transfer or exchange.
b) Investment Representations. This Debenture has been issued subject
to certain investment representations of the original Holder set forth in
the Purchase Agreement and may be transferred or exchanged only in
compliance with the Purchase Agreement and applicable federal and state
securities laws and regulations.
c) Reliance on Debenture Register. Prior to due presentment for
transfer to the Company of this Debenture, the Company and any agent of the
Company may treat the Person in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or
not this Debenture is overdue, and neither the Company nor any such agent
shall be affected by notice to the contrary.
Section 4. Conversion.
a) Voluntary Conversion. At any time after the Original Issue Date
until this Debenture is no longer outstanding, this Debenture shall be
convertible, in whole or in part, into shares of Common Stock at the option
of the Holder, at any time and from time to time (subject to the conversion
limitations set forth in Section 4(c) hereof). The Holder shall effect
conversions by delivering to the Company a Notice of Conversion, the form
of which is attached hereto as Annex A (a "Notice of Conversion"),
specifying therein the principal amount of this Debenture to be converted
and the date on which such conversion shall be effected (a "Conversion
Date"). If no Conversion Date is specified in a Notice of Conversion, the
Conversion Date shall be the date that such Notice of Conversion is deemed
delivered hereunder. To effect conversions hereunder, the Holder shall not
be required to physically surrender this Debenture to the Company unless
the entire principal amount of this Debenture plus all accrued and unpaid
interest thereon has been so converted. Conversions hereunder shall have
the effect of lowering the outstanding principal amount of this Debenture
in an amount equal to the applicable conversion. The Holder and the Company
shall maintain records showing the principal amount(s) converted and the
date of such conversion(s). The Company may deliver an objection to any
Notice of Conversion within 1 Business Day of delivery of such Notice of
Conversion. In the event of any dispute or discrepancy, the records of the
Holder shall be controlling and determinative in the absence of manifest
error. The Holder, and any assignee by acceptance of this Debenture,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of this Debenture, the unpaid and
unconverted principal amount of this Debenture may be less than the amount
stated on the face hereof.
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b) Conversion Price. The conversion price in effect on any Conversion
Date shall be equal to $1.36 (subject to adjustment herein) (the
"Conversion Price").
c) Conversion Limitations.
i. Holder's Restriction on Conversion. The Company shall not
effect any conversion of this Debenture, and a Holder shall not have
the right to convert any portion of this Debenture, to the extent that
after giving effect to the conversion set forth on the applicable
Notice of Conversion, such Holder (together with such Holder's
Affiliates, and any other person or entity acting as a group together
with such Holder or any of such Holder's Affiliates) would
beneficially own in excess of the Beneficial Ownership Limitation (as
defined below). For purposes of the foregoing sentence, the number of
shares of Common Stock beneficially owned by such Holder and its
Affiliates shall include the number of shares of Common Stock issuable
upon conversion of this Debenture with respect to which such
determination is being made, but shall exclude the number of shares of
Common Stock which are issuable upon (A) conversion of the remaining,
unconverted principal amount of this Debenture beneficially owned by
such Holder or any of its Affiliates and (B) exercise or conversion of
the unexercised or unconverted portion of any other securities of the
Company subject to a limitation on conversion or exercise analogous to
the limitation contained herein (including, without limitation, any
other Debentures) beneficially owned by such Holder or any of its
Affiliates. Except as set forth in the preceding sentence, for
purposes of this Section 4(c)(i), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder. To the extent that
the limitation contained in this Section 4(c)(i) applies, the
determination of whether this Debenture is convertible (in relation to
other securities owned by such Holder together with any Affiliates)
and of which principal amount of this Debenture is convertible shall
be in the sole discretion of such Holder, and the submission of a
Notice of Conversion shall be deemed to be such Holder's determination
of whether this Debenture may be converted (in relation to other
securities owned by such Holder together with any Affiliates) and
which principal amount of this Debenture is convertible, in each case
subject to such aggregate percentage limitations. To ensure compliance
with this restriction, each Holder will be deemed to represent to the
Company each time it delivers a Notice of Conversion that such Notice
of Conversion has not violated the restrictions set forth in this
paragraph and the Company shall have no obligation to verify or
confirm the accuracy of such determination. In addition, a
determination as to any group status as contemplated above shall be
determined in accordance with Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder. For purposes of this
Section 4(c)(i), in determining the number of outstanding shares of
Common Stock, a Holder may rely on the number of outstanding shares of
Common Stock as stated in the most recent of the following: (A) the
Company's most recent Form 10-QSB or Form 10-KSB, as the case may be;
(B) a more recent public announcement by the Company; or (C) a more
recent notice by the Company or the Transfer Agent setting forth the
number of shares of Common Stock outstanding. Upon the written or oral
request of a Holder, the Company shall within 2 Trading Days confirm
orally and in writing to such Holder the number of shares of Common
Stock then outstanding. In any case, the number of outstanding shares
of Common Stock shall be determined after giving effect to the
conversion or exercise of securities of the Company, including this
Debenture, by such Holder or its Affiliates since the date as of which
11
such number of outstanding shares of Common Stock was reported. The
"Beneficial Ownership Limitation" shall be 4.99% of the number of
shares of the Common Stock outstanding immediately after giving effect
to the issuance of shares of Common Stock issuable upon conversion of
this Debenture held by the Holder. The Beneficial Ownership Limitation
provisions of this Section 4(c)(i) may be waived by such Holder, at
the election of such Holder, upon not less than 61 days' prior notice
to the Company, to change the Beneficial Ownership Limitation to 9.99%
of the number of shares of the Common Stock outstanding immediately
after giving effect to the issuance of shares of Common Stock upon
conversion of this Debenture held by the Holder and the provisions of
this Section 4(c)(i) shall continue to apply. Upon such a change by a
Holder of the Beneficial Ownership Limitation from such 4.99%
limitation to such 9.99% limitation, the Beneficial Ownership
Limitation may not be further waived by such Holder. The provisions of
this paragraph shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this Section
4(c)(i) to correct this paragraph (or any portion hereof) which may be
defective or inconsistent with the intended Beneficial Ownership
Limitation herein contained or to make changes or supplements
necessary or desirable to properly give effect to such limitation. The
limitations contained in this paragraph shall apply to a successor
holder of this Debenture.
d) Mechanics of Conversion.
i. Conversion Shares Issuable Upon Conversion of Principal
Amount. The number of shares of Common Stock issuable upon a
conversion hereunder shall be determined by the quotient obtained by
dividing (x) the outstanding principal amount of this Debenture to be
converted by (y) the Conversion Price.
ii. Delivery of Certificate Upon Conversion. Not later than 3
Trading Days after each Conversion Date (the "Share Delivery Date"),
the Company shall deliver, or cause to be delivered, to the Holder (A)
a certificate or certificates representing the Conversion Shares
which, on or after the Effective Date, shall be free of restrictive
legends and trading restrictions (other than those which may then be
required by the Purchase Agreement) representing the number of shares
of Common Stock being acquired upon the conversion of this Debenture
(including, if the Company has given continuous notice pursuant to
Section 2(b) for payment of interest in shares of Common Stock at
least 20 Trading Days prior to the date on which the Conversion Notice
12
is delivered to the Company, shares of Common Stock representing the
payment of accrued interest otherwise determined pursuant to Section
2(a) but assuming that the Interest Payment Period is the 20 Trading
Days period immediately prior to the date on which the Conversion
Notice is delivered to the Company and excluding for such issuance the
condition that the Company deliver Interest Conversion Shares as to
such interest payment) and (B) a bank check in the amount of accrued
and unpaid interest (if the Company has elected or is required to pay
accrued interest in cash). On or after the Effective Date, the Company
shall use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section 4
electronically through the Depository Trust Company or another
established clearing corporation performing similar functions.
iii. Failure to Deliver Certificates. If in the case of any
Notice of Conversion such certificate or certificates are not
delivered to or as directed by the applicable Holder by the third
Trading Day after the Conversion Date, the Holder shall be entitled to
elect by written notice to the Company at any time on or before its
receipt of such certificate or certificates, to rescind such
Conversion, in which event the Company shall promptly return to the
Holder any original Debenture delivered to the Company and the Holder
shall promptly return the Common Stock certificates representing the
principal amount of this Debenture tendered for conversion to the
Company.
iv. Obligation Absolute; Partial Liquidated Damages. The
Company's obligations to issue and deliver the Conversion Shares upon
conversion of this Debenture in accordance with the terms hereof are
absolute and unconditional, irrespective of any action or inaction by
the Holder to enforce the same, any waiver or consent with respect to
any provision hereof, the recovery of any judgment against any Person
or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach
by the Holder or any other Person of any obligation to the Company or
any violation or alleged violation of law by the Holder or any other
Person, and irrespective of any other circumstance which might
otherwise limit such obligation of the Company to the Holder in
connection with the issuance of such Conversion Shares; provided,
however, that such delivery shall not operate as a waiver by the
Company of any such action the Company may have against the Holder. In
the event the Holder of this Debenture shall elect to convert any or
all of the outstanding principal amount hereof, the Company may not
refuse conversion based on any claim that the Holder or anyone
associated or affiliated with the Holder has been engaged in any
violation of law, agreement or for any other reason, unless an
injunction from a court, on notice to Holder, restraining and or
enjoining conversion of all or part of this Debenture shall have been
13
sought and obtained, and the Company posts a surety bond for the
benefit of the Holder in the amount of 110% of the outstanding
principal amount of this Debenture, which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the underlying dispute and the proceeds of
which shall be payable to such Holder to the extent it obtains
judgment. In the absence of such injunction, the Company shall issue
Conversion Shares or, if applicable, cash, upon a properly noticed
conversion. If the Company fails for any reason to deliver to the
Holder such certificate or certificates pursuant to Section 4(d)(ii)
by the Share Delivery Date, the Company shall pay to such Holder, in
cash, as liquidated damages and not as a penalty, for each $1000 of
principal amount being converted, $10 per Trading Day (increasing to
$20 per Trading Day on the fifth Trading Day after such liquidated
damages begin to accrue) for each Trading Day after the second Trading
Day following the Share Delivery Date until such certificates are
delivered. Nothing herein shall limit a Xxxxxx's right to pursue
actual damages or declare an Event of Default pursuant to Section 8
hereof for the Company's failure to deliver Conversion Shares within
the period specified herein and such Holder shall have the right to
pursue all remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief. The exercise of any such rights shall not prohibit
the Holder from seeking to enforce damages pursuant to any other
Section hereof or under applicable law.
v. Compensation for Buy-In on Failure to Timely Deliver
Certificates Upon Conversion. In addition to any other rights
available to the Holder, if the Company fails for any reason to
deliver to the Holder such certificate or certificates by the Share
Delivery Date pursuant to Section 4(d)(ii), and if after such Share
Delivery Date the Holder is required by its brokerage firm to purchase
(in an open market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by such Holder of the Conversion
Shares which the Holder was entitled to receive upon the conversion
relating to such Share Delivery Date (a "Buy-In"), then the Company
shall (A) pay in cash to the Holder (in addition to any other remedies
available to or elected by the Holder) the amount by which (x) the
Holder's total purchase price (including any brokerage commissions)
for the Common Stock so purchased exceeds (y) the product of (1) the
aggregate number of shares of Common Stock that such Holder was
entitled to receive from the conversion at issue multiplied by (2) the
actual sale price at which the sell order giving rise to such purchase
obligation was executed (including any brokerage commissions) and (B)
at the option of the Holder, either reissue (if surrendered) this
Debenture in a principal amount equal to the principal amount of the
attempted conversion or deliver to the Holder the number of shares of
Common Stock that would have been issued if the Company had timely
complied with its delivery requirements under Section 4(d)(ii). For
example, if the Holder purchases Common Stock having a total purchase
price of $11,000 to cover a Buy-In with respect to an attempted
conversion of this Debenture with respect to which the actual sale
price of the Conversion Shares (including any brokerage commissions)
giving rise to such purchase obligation was a total of $10,000 under
clause (A) of the immediately preceding sentence, the Company shall be
required to pay the Holder $1,000. The Holder shall provide the
Company written notice indicating the amounts payable to the Holder in
respect of the Buy-In and, upon request of the Company, evidence of
the amount of such loss. Nothing herein shall limit a Xxxxxx's right
to pursue any other remedies available to it hereunder, at law or in
equity including, without limitation, a decree of specific performance
and/or injunctive relief with respect to the Company's failure to
timely deliver certificates representing shares of Common Stock upon
conversion of this Debenture as required pursuant to the terms hereof.
14
vi. Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will at all times reserve and keep available out of
its authorized and unissued shares of Common Stock for the sole
purpose of issuance upon conversion of this Debenture and payment of
interest on this Debenture, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of
Persons other than the Holder (and the other holders of the
Debentures), not less than such aggregate number of shares of the
Common Stock as shall (subject to the terms and conditions set forth
in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5) upon the conversion of the
outstanding principal amount of this Debenture and payment of interest
hereunder. The Company covenants that all shares of Common Stock that
shall be so issuable shall, upon issue, be duly authorized, validly
issued, fully paid and nonassessable and, if the Registration
Statement is then effective under the Securities Act, shall be
registered for public sale in accordance with such Registration
Statement.
vii. Fractional Shares. Upon a conversion hereunder the Company
shall not be required to issue stock certificates representing
fractions of shares of Common Stock, but may if otherwise permitted,
make a cash payment in respect of any final fraction of a share based
on the VWAP at such time. If the Company elects not, or is unable, to
make such a cash payment, the Holder shall be entitled to receive, in
lieu of the final fraction of a share, 1 whole share of Common Stock.
viii. Transfer Taxes. The issuance of certificates for shares of
the Common Stock on conversion of this Debenture shall be made without
charge to the Holder hereof for any documentary stamp or similar taxes
that may be payable in respect of the issue or delivery of such
certificates, provided that the Company shall not be required to pay
any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a
name other than that of the Holder of this Debenture so converted and
the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax
or shall have established to the satisfaction of the Company that such
tax has been paid.
15
Section 5. Certain Adjustments.
a) Stock Dividends and Stock Splits. If the Company, at any time while
this Debenture is outstanding: (A) pays a stock dividend or otherwise makes
a distribution or distributions payable in shares of Common Stock on shares
of Common Stock or any Common Stock Equivalents (which, for avoidance of
doubt, shall not include any shares of Common Stock issued by the Company
upon conversion of, or payment of interest on, this Debenture or other
convertible debentures outstanding at the Closing Date or the issuance of
Common Stock pursuant to the exercise of common stock purchase warrants
outstanding as of the Closing Date); (B) subdivides outstanding shares of
Common Stock into a larger number of shares; (C) combines (including by way
of a reverse stock split) outstanding shares of Common Stock into a smaller
number of shares; or (D) issues, in the event of a reclassification of
shares of the Common Stock, any shares of capital stock of the Company,
then the Conversion Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock (excluding any
treasury shares of the Company) outstanding immediately before such event
and of which the denominator shall be the number of shares of Common Stock
outstanding immediately after such event. Any adjustment made pursuant to
this Section shall become effective immediately after the record date for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision, combination or re-classification.
b) Subsequent Equity Sales. If the Company or any Subsidiary thereof,
as applicable, at any time while this Debenture is outstanding, sells or
grants any option to purchase, or sells or grants any right to reprice, any
of the Company's securities, or otherwise disposes of or issues (or
announces any sale, grant or option to purchase or other disposition) any
Common Stock or Common Stock Equivalents entitling any Person to acquire
shares of Common Stock at an effective price per share that is lower than
$0.90 (such lower price, the "Base Price" and each such issuance, a
"Dilutive Issuance") (if the holder of the Common Stock or Common Stock
Equivalents so issued shall at any time, whether by operation of purchase
price adjustments, reset provisions, floating conversion, exercise or
exchange prices or otherwise, or due to warrants, options or rights per
share which are issued in connection with such issuance be entitled to
receive shares of Common Stock at an effective price per share that is
lower than the Base Price, such issuance shall be deemed to have occurred
for less than the Base Price on the date of such Dilutive Issuance), then
the Conversion Price shall be reduced to equal the Base Price. Such
16
adjustment shall be made whenever such Common Stock or Common Stock
Equivalents are issued. The Company shall notify the Holder in writing, no
later than the Business Day following the issuance of any Common Stock or
Common Stock Equivalents subject to this Section 5(b), indicating therein
the applicable issuance price, or applicable reset price, exchange price,
conversion price and other pricing terms (such notice, the "Dilutive
Issuance Notice"). For purposes of clarification, whether or not the
Company provides a Dilutive Issuance Notice pursuant to this Section 5(b),
upon the occurrence of any Dilutive Issuance, the Holder is entitled to
receive a number of Conversion Shares based upon the Base Price on or after
the date of such Dilutive Issuance, regardless of whether the Holder
accurately refers to the Base Price in the Notice of Conversion.
c) Subsequent Rights Offerings. If the Company, at any time while the
Debenture is outstanding, shall issue rights, options or warrants to all
holders of Common Stock (and not to Holders) entitling them to subscribe
for or purchase shares of Common Stock at a price per share that is lower
than the VWAP on the record date referenced below, then the Conversion
Price shall be multiplied by a fraction of which the denominator shall be
the number of shares of the Common Stock outstanding on the date of
issuance of such rights or warrants plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the
numerator shall be the number of shares of the Common Stock outstanding on
the date of issuance of such rights or warrants plus the number of shares
which the aggregate offering price of the total number of shares so offered
(assuming delivery to the Company in full of all consideration payable upon
exercise of such rights, options or warrants) would purchase at such VWAP.
Such adjustment shall be made whenever such rights or warrants are issued,
and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights, options or
warrants.
d) Pro Rata Distributions. If the Company, at any time while this
Debenture is outstanding, distributes to all holders of Common Stock (and
not to the Holders) evidences of its indebtedness or assets (including cash
and cash dividends) or rights or warrants to subscribe for or purchase any
security (other than the Common Stock), then in each such case the
Conversion Price shall be adjusted by multiplying such Conversion Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which
the denominator shall be the VWAP determined as of the record date
mentioned above, and of which the numerator shall be such VWAP on such
record date less the then fair market value at such record date of the
portion of such assets or evidence of indebtedness so distributed
applicable to 1 outstanding share of the Common Stock as determined by the
Board of Directors of the Company in good faith. In either case the
adjustments shall be described in a statement delivered to the Holder
describing the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to 1 share of Common
Stock. Such adjustment shall be made whenever any such distribution is made
and shall become effective immediately after the record date mentioned
above.
e) Fundamental Transaction. If, at any time while this Debenture is
outstanding, (A) the Company effects any merger or consolidation of the
Company with or into another Person, (B) the Company effects any sale of
all or substantially all of its assets in one transaction or a series of
related transactions, (C) any tender offer or exchange offer (whether by
the Company or another Person) is completed pursuant to which holders of
Common Stock are permitted to tender or exchange their shares for other
securities, cash or property, or (D) the Company effects any
reclassification of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such case, a
17
"Fundamental Transaction"), then, upon any subsequent conversion of this
Debenture, the Holder shall have the right to receive, for each Conversion
Share that would have been issuable upon such conversion immediately prior
to the occurrence of such Fundamental Transaction, the same kind and amount
of securities, cash or property as it would have been entitled to receive
upon the occurrence of such Fundamental Transaction if it had been,
immediately prior to such Fundamental Transaction, the holder of 1 share of
Common Stock (the "Alternate Consideration"). For purposes of any such
conversion, the determination of the Conversion Price shall be
appropriately adjusted to apply to such Alternate Consideration based on
the amount of Alternate Consideration issuable in respect of 1 share of
Common Stock in such Fundamental Transaction, and the Company shall
apportion the Conversion Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different components
of the Alternate Consideration. If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a
Fundamental Transaction, then the Holder shall be given the same choice as
to the Alternate Consideration it receives upon any conversion of this
Debenture following such Fundamental Transaction. To the extent necessary
to effectuate the foregoing provisions, any successor to the Company or
surviving entity in such Fundamental Transaction shall issue to the Holder
a new debenture consistent with the foregoing provisions and evidencing the
Holder's right to convert such debenture into Alternate Consideration. The
terms of any agreement pursuant to which a Fundamental Transaction is
effected shall include terms requiring any such successor or surviving
entity to comply with the provisions of this Section 5(d) and insuring that
this Debenture (or any such replacement security) will be similarly
adjusted upon any subsequent transaction analogous to a Fundamental
Transaction.
f) Calculations. All calculations under this Section 5 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
For purposes of this Section 5, the number of shares of Common Stock deemed
to be issued and outstanding as of a given date shall be the sum of the
number of shares of Common Stock (excluding any treasury shares of the
Company) issued and outstanding.
g) Notice to the Holder.
i. Adjustment to Conversion Price. Whenever the Conversion Price
is adjusted pursuant to any provision of this Section 5, the Company
shall promptly mail to each Holder a notice setting forth the
Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment. If the Company
issues a variable rate security, despite the prohibition thereon in
the Purchase Agreement, the Company shall be deemed to have issued
Common Stock or Common Stock Equivalents at the lowest possible
conversion or exercise price at which such securities may be converted
or exercised in the case of a Variable Rate Transaction (as defined in
the Purchase Agreement).
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ii. Notice to Allow Conversion by Xxxxxx. If (A) the Company
shall declare a dividend (or any other distribution in whatever form)
on the Common Stock, (B) the Company shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock, (C)
the Company shall authorize the granting to all holders of the Common
Stock of rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights, (D) the approval of any
stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to
which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, of any compulsory
share exchange whereby the Common Stock is converted into other
securities, cash or property or (E) the Company shall authorize the
voluntary or involuntary dissolution, liquidation or winding up of the
affairs of the Company, then, in each case, the Company shall cause to
be filed at each office or agency maintained for the purpose of
conversion of this Debenture, and shall cause to be delivered to the
Holder at its last address as it shall appear upon the Debenture
Register, at least 20 calendar days prior to the applicable record or
effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of the Common Stock of
record to be entitled to such dividend, distributions, redemption,
rights or warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share
exchange is expected to become effective or close, and the date as of
which it is expected that holders of the Common Stock of record shall
be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share
exchange, provided that the failure to deliver such notice or any
defect therein or in the delivery thereof shall not affect the
validity of the corporate action required to be specified in such
notice. The Holder is entitled to convert this Debenture during the
20-day period commencing on the date of such notice through the
effective date of the event triggering such notice.
Section 6. Monthly Redemption and Forced Conversion.
a) Monthly Redemption. On each Monthly Redemption Date, the Company
shall redeem the Monthly Redemption Amount (the "Monthly Redemption"). The
Monthly Redemption Amount payable on each Monthly Redemption Date shall be
paid to the Holder in cash via wire transfer. The Holder may convert,
pursuant to Section 4(a), any principal amount of this Debenture subject to
a Monthly Redemption at any time prior to the date that the Monthly
Redemption Amount is due and paid in full. The Company covenants and agrees
that it will honor all Notice of Conversions tendered up until the Monthly
Redemption Amount is paid in full.
19
b) Redemption Procedure. The payment of cash pursuant to a Monthly
Redemption shall be made on the Monthly Redemption Date. If any portion of
the payment pursuant to a Monthly Redemption shall not be paid by the
Company by the applicable due date, interest shall accrue thereon until
such amount is paid in full at an interest rate equal to the lesser of 18%
per annum or the maximum rate permitted by applicable law. Notwithstanding
anything herein contained to the contrary, if any portion of the Monthly
Redemption Amount remains unpaid after such date, the Holder may elect, by
written notice to the Company given at any time thereafter until payment is
made in full, to invalidate ab initio such Monthly Redemption. The Holder
may elect to convert the outstanding principal amount of the Debenture
pursuant to Section 4 prior to actual payment in cash for any Monthly
Redemption under this Section 6 by the delivery of a Notice of Conversion
to the Company.
c) Forced Conversion. Notwithstanding anything herein to the contrary,
if, at any time after the 12 month anniversary of the Effective Date, the
Closing Price for each of any 90 consecutive Trading Days (such period, the
"Threshold Period") exceeds 200% of the Conversion Price (subject to
adjustment for reverse and forward stock splits, stock dividends, stock
combinations and other similar transactions of the Common Stock that occur
after the Original Issue Date) and the daily trading volume of the Common
Stock, as measured in dollars, on each Trading Day during such Threshold
Period is at least $500,000, the Company may, within 1 Trading Day after
the end of any such Threshold Period, deliver a written notice to the
Holder (a "Forced Conversion Notice" and the date such notice is delivered
to the Holder, the "Forced Conversion Notice Date") to cause the Holder to
convert all or part of the then outstanding principal amount of Debentures
(but such Forced Conversion Notice shall not apply to accrued but unpaid
interest, liquidated damages or other amounts owing to the Holder pursuant
to Section 4 herein) (the "Forced Conversion"), it being agreed that the
"Conversion Date" for purposes of Section 4 shall be deemed to occur on the
third Trading Day following the Forced Conversion Notice Date (such third
Trading Day, the "Forced Conversion Date"). The Company may not deliver a
Forced Conversion Notice, and any Forced Conversion Notice delivered by the
Company shall not be effective, unless all of the Equity Conditions are met
on each Trading Day during the applicable Threshold Period through and
including the later of (i) the Forced Conversion Date and (ii) the Trading
Day after the date such Conversion Shares pursuant to such conversion are
actually delivered to the Holder. Any Forced Conversion shall be applied
ratably to all Holders based on their initial purchases of Debentures
pursuant to the Purchase Agreement, provided that any voluntary conversions
by a Holder shall be applied against such Holder's pro-rata allocation,
thereby decreasing the aggregate amount forcibly converted hereunder if
only a portion of this Debenture is forcibly converted. For purposes of
clarification, a Forced Conversion shall be subject to all of the
provisions of Section 4, including, without limitation, the provision
requiring payment of liquidated damages and limitations on conversions.
Section 7. Negative Covenants. As long as any portion of this Debenture
remains outstanding, the Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly:
a) other than Permitted Indebtedness, enter into, create, incur,
assume, guarantee or suffer to exist any indebtedness for borrowed money of
any kind, including but not limited to, a guarantee, on or with respect to
any of its property or assets now owned or hereafter acquired or any
interest therein or any income or profits therefrom;
20
b) other than Permitted Liens, enter into, create, incur, assume or
suffer to exist any Liens of any kind, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein
or any income or profits therefrom;
c) amend its charter documents, including without limitation, the
certificate of incorporation and bylaws, in any manner that adversely
affects any rights of the Holder;
d) repay, repurchase or offer to repay, repurchase or otherwise
acquire more than a de minimis number of shares of its Common Stock or
Common Stock Equivalents or debt securities of the Company other than as to
(a) the Conversion Shares as permitted or required under the Transaction
Documents, (b) repurchases of Common Stock or Common Stock Equivalents of
departing officers and directors of the Company, provided that such
repurchases shall not exceed an aggregate of $100,000 for all officers and
directors during the term of this Debenture) and (c) repayment of debt
securities which are due in accordance with their terms, provided that such
repayment is in compliance with the terms of the Intercreditor Agreement
and Subordination Agreement;
e) enter into any transaction with any Affiliate of the Company which
would be required to be disclosed in any public filing with the Commission,
unless such transaction is made on an arm's-length basis and expressly
approved by a majority of the disinterested directors of the Company (even
if less than a quorum otherwise required for board approval);
f) enter into any agreement with respect to any of the foregoing;
g) maintain a balance of cash and equivalents of less than $500,000
(which amount may include any funds held in the Control Account);
h) pay cash dividends or distributions on any equity securities of the
Company; or
i) incur any past-due taxes imposed by any federal, state or local
government, other than those which are the subject of a bona fide dispute
and as to which lawful procedures for contesting the same are being
diligently pursued. .
Section 8. Events of Default.
a) "Event of Default" means, wherever used herein, any of the
following events (whatever the reason for such event and whether such event
shall be voluntary or involuntary or effected by operation of law or
pursuant to any judgment, decree or order of any court, or any order, rule
or regulation of any administrative or governmental body):
21
i. any default in the payment of (A) the principal amount of any
Debenture or (B) interest, liquidated damages and other amounts owing
to a Holder on any Debenture, as and when the same shall become due
and payable (whether on a Conversion Date or the Maturity Date or by
acceleration or otherwise) which default, solely in the case of an
interest payment or other default under clause (B) above, is not cured
within 3 Trading Days;
ii. the Company shall fail to observe or perform any other
covenant or agreement contained in the Debentures (other than a breach
by the Company of its obligations to deliver shares of Common Stock to
the Holder upon conversion, which breach is addressed in clause (xi)
below) which failure is not cured, if possible to cure, by the earlier
of (A) 5 Trading Days after notice of such failure delivered by the
Holder or by any other Holder and (B) 10 Trading Days after the
Company has become aware of such failure;
iii. a default or event of default (subject to any grace or cure
period provided in the applicable agreement, document or instrument)
shall occur under (A) any of the Transaction Documents or (B) any
other material agreement, lease, document or instrument to which the
Company or any Subsidiary is obligated (and not covered by clause (vi)
below);
iv. any representation or warranty made by the Company in this
Debenture, any other Transaction Documents, any written statement
pursuant hereto or thereto, or any other report, financial statement
or certificate made or delivered to the Holder or any other Holder
shall be untrue or incorrect in any material respect as of the date
when made or deemed made;
v. the Company or any Significant Subsidiary shall be subject to
a Bankruptcy Event;
vi. the Company or any Subsidiary shall default on any of its
obligations under any mortgage, credit agreement or other facility,
indenture agreement, factoring agreement or other instrument under
which there may be issued, or by which there may be secured or
evidenced, any indebtedness for borrowed money or money due under any
long term leasing or factoring arrangement that involves an obligation
greater than $150,000, whether such indebtedness now exists or shall
hereafter be created;
vii. the Common Stock shall not be eligible for listing or
quotation for trading on a Trading Market and shall not be eligible to
resume listing or quotation for trading thereon within 5 Trading Days;
22
viii. the Company shall be a party to any Change of Control
Transaction or Fundamental Transaction or shall agree to sell or
dispose of all or in excess of 33% of its assets in one transaction or
a series of related transactions (whether or not such sale would
constitute a Change of Control Transaction);
ix. a Registration Statement shall not have been declared
effective by the Commission on or prior to the 210th calendar day
after the Closing Date;
x. if, during the Effectiveness Period (as defined in the
Registration Rights Agreement), either (a) the effectiveness of the
Registration Statement lapses for any reason or (b) the Holder shall
not be permitted to resell Registrable Securities (as defined in the
Registration Rights Agreement) under the Registration Statement for a
period of more than 20 consecutive Trading Days or 30 non-consecutive
Trading Days during any 12 month period; provided, however, that if
the Company is negotiating a merger, consolidation, acquisition or
sale of all or substantially all of its assets or a similar
transaction and, in the written opinion of counsel to the Company, the
Registration Statement would be required to be amended to include
information concerning such pending transaction(s) or the parties
thereto which information is not available or may not be publicly
disclosed at the time, the Company shall be permitted an additional 10
consecutive Trading Days during any 12 month period pursuant to this
Section 8(a)(x);
xi. the Company shall fail for any reason to deliver certificates
to a Holder prior to the fifth Trading Day after a Conversion Date or
any Forced Conversion Date pursuant to Section 4(d) or the Company
shall provide at any time notice to the Holder, including by way of
public announcement, of the Company's intention to not honor requests
for conversions of any Debentures in accordance with the terms hereof;
xii. any Person shall breach any agreement delivered to the
initial Holders pursuant to Section 2.2(a)(ix) of the Purchase
Agreement; or
xiii. any monetary judgment, writ or similar final process shall
be entered or filed against the Company, any Subsidiary or any of
their respective property or other assets for more than $50,000, and
such judgment, writ or similar final process shall remain unvacated,
unbonded or unstayed for a period of 45 calendar days.
23
b) Remedies Upon Event of Default. If any Event of Default occurs, the
outstanding principal amount of this Debenture, plus accrued but unpaid
interest, liquidated damages and other amounts owing in respect thereof
through the date of acceleration, shall become, at the Holder's election,
immediately due and payable in cash at the Mandatory Default Amount.
Commencing 5 days after the occurrence of any Event of Default that results
in the eventual acceleration of this Debenture, the interest rate on this
Debenture shall accrue at an interest rate equal to the lesser of 18% per
annum or the maximum rate permitted under applicable law. Upon the payment
in full of the Mandatory Default Amount, the Holder shall promptly
surrender this Debenture to or as directed by the Company. In connection
with such acceleration described herein, the Holder need not provide, and
the Company hereby waives, any presentment, demand, protest or other notice
of any kind, and the Holder may immediately and without expiration of any
grace period enforce any and all of its rights and remedies hereunder and
all other remedies available to it under applicable law. Such acceleration
may be rescinded and annulled by Xxxxxx at any time prior to payment
hereunder and the Holder shall have all rights as a holder of the Debenture
until such time, if any, as the Holder receives full payment pursuant to
this Section 8(b). No such rescission or annulment shall affect any
subsequent Event of Default or impair any right consequent thereon.
Section 9. Miscellaneous.
a) Notices. Any and all notices or other communications or deliveries
to be provided by the Holder hereunder, including, without limitation, any
Notice of Conversion, shall be in writing and delivered personally, by
facsimile, or sent by a nationally recognized overnight courier service,
addressed to the Company, at the address set forth above, facsimile number
(000) 000-0000, Attention: President, or such other facsimile number or
address as the Company may specify for such purpose by notice to the Holder
delivered in accordance with this Section 9. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall
be in writing and delivered personally, by facsimile, or sent by a
nationally recognized overnight courier service addressed to each Holder at
the facsimile number or address of such Xxxxxx appearing on the books of
the Company, or if no such facsimile number or address appears, at the
principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified
in this Section 9 prior to 5:30 p.m. (New York City time), (ii) the date
immediately following the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified
in this Section 9 between 5:30 p.m. (New York City time) and 11:59 p.m.
(New York City time) on any date, (iii) the second Business Day following
the date of mailing, if sent by nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.
b) Absolute Obligation. Except as expressly provided herein, no
provision of this Debenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of,
liquidated damages and accrued interest, as applicable, on this Debenture
at the time, place, and rate, and in the coin or currency, herein
prescribed. This Debenture is a direct debt obligation of the Company. This
Debenture ranks pari passu with all other Debentures now or hereafter
issued under the terms set forth herein.
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c) Lost or Mutilated Debenture. If this Debenture shall be mutilated,
lost, stolen or destroyed, the Company shall execute and deliver, in
exchange and substitution for and upon cancellation of a mutilated
Debenture, or in lieu of or in substitution for a lost, stolen or destroyed
Debenture, a new Debenture for the principal amount of this Debenture so
mutilated, lost, stolen or destroyed, but only upon receipt of evidence of
such loss, theft or destruction of such Debenture, and of the ownership
hereof, reasonably satisfactory to the Company.
d) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflict of laws thereof.
Each party agrees that all legal proceedings concerning the interpretation,
enforcement and defense of the transactions contemplated by any of the
Transaction Documents (whether brought against a party hereto or its
respective Affiliates, directors, officers, shareholders, employees or
agents) shall be commenced in the state and federal courts sitting in the
City of New York, Borough of Manhattan (the "New York Courts"). Each party
hereto hereby irrevocably submits to the exclusive jurisdiction of the New
York Courts for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of such New York Courts, or such New York Courts are
improper or inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with
evidence of delivery) to such party at the address in effect for notices to
it under this Debenture and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in
any other manner permitted by applicable law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any
and all right to trial by jury in any legal proceeding arising out of or
relating to this Debenture or the transactions contemplated hereby. If
either party shall commence an action or proceeding to enforce any
provisions of this Debenture, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its attorneys' fees
and other costs and expenses incurred in the investigation, preparation and
prosecution of such action or proceeding.
e) Waiver. Any waiver by the Company or the Holder of a breach of any
provision of this Debenture shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Debenture. The failure of the Company or the Holder to
insist upon strict adherence to any term of this Debenture on one or more
occasions shall not be considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence to that term or any other
term of this Debenture. Any waiver by the Company or the Holder must be in
writing.
25
f) Severability. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in
effect, and if any provision is inapplicable to any Person or circumstance,
it shall nevertheless remain applicable to all other Persons and
circumstances. If it shall be found that any interest or other amount
deemed interest due hereunder violates the applicable law governing usury,
the applicable rate of interest due hereunder shall automatically be
lowered to equal the maximum rate of interest permitted under applicable
law. The Company covenants (to the extent that it may lawfully do so) that
it shall not at any time insist upon, plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay, extension or usury law
or other law which would prohibit or forgive the Company from paying all or
any portion of the principal of or interest on this Debenture as
contemplated herein, wherever enacted, now or at any time hereafter in
force, or which may affect the covenants or the performance of this
indenture, and the Company (to the extent it may lawfully do so) hereby
expressly waives all benefits or advantage of any such law, and covenants
that it will not, by resort to any such law, hinder, delay or impeded the
execution of any power herein granted to the Holder, but will suffer and
permit the execution of every such as though no such law has been enacted.
g) Next Business Day. Whenever any payment or other obligation
hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day.
h) Headings. The headings contained herein are for convenience only,
do not constitute a part of this Debenture and shall not be deemed to limit
or affect any of the provisions hereof.
i) Assumption. Any successor to the Company or any surviving entity in
a Fundamental Transaction shall (i) assume, prior to such Fundamental
Transaction, all of the obligations of the Company under this Debenture and
the other Transaction Documents pursuant to written agreements in form and
substance satisfactory to the Holder (such approval not to be unreasonably
withheld or delayed) and (ii) issue to the Holder a new debenture of such
successor entity evidenced by a written instrument substantially similar in
form and substance to this Debenture, including, without limitation, having
a principal amount and interest rate equal to the principal amount and the
interest rate of this Debenture and having similar ranking to this
Debenture, which shall be satisfactory to the Holder (any such approval not
to be unreasonably withheld or delayed). The provisions of this Section
9(i) shall apply similarly and equally to successive Fundamental
Transactions and shall be applied without regard to any limitations of this
Debenture.
j) Secured Obligation. The obligations of the Company under this
Debenture are secured by a first priority security interest in the
Equipment and a subordinated security interest in all assets of the Company
as set forth in the Security Agreement.
26
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IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed by a duly authorized officer as of the date first above indicated.
CONSOLIDATED ENERGY, INC.
By:__________________________________________
Name: Xxxxx Xxxxxxx
Title: President
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ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the Variable Rate
Original Issue Discount Convertible Secured Debenture of Consolidated Energy,
Inc., a Wyoming corporation (the "Company"), due on July __, 2008, into shares
of common stock, par value $0.001 per share (the "Common Stock"), of the Company
according to the conditions hereof, as of the date written below. If shares are
to be issued in the name of a person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as reasonably requested by the Company
in accordance therewith. No fee will be charged to the holder for any
conversion, except for such transfer taxes, if any.
By the delivery of this Notice of Conversion the undersigned represents and
warrants to the Company that its ownership of the Common Stock does not exceed
the amounts determined in accordance with Section 13(d) of the Exchange Act,
specified under Section 4 of this Debenture.
The undersigned agrees to comply with the prospectus delivery requirements
under the applicable securities laws in connection with any transfer of the
aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debenture to be Converted:
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on Account of
Conversion at Issue.
Number of shares of Common Stock to be issued:
Signature:
Name:
Address:
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Schedule 1
CONVERSION SCHEDULE
The Variable Rate Original Issue Discount Convertible Debentures due on July __,
2008, in the aggregate principal amount of $______ issued by Consolidated
Energy, Inc. This Conversion Schedule reflects conversions made under Section 4
of the above referenced Debenture.
Dated:
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Aggregate Principal
Amount Remaining
Date of Conversion Subsequent to
(or for first entry, Conversion
Original Issue Date) Amount of Conversion (or original Company Attest
Principal Amount)
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