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: February 9, 2007
Original Conversion Price (subject to adjustment herein): $2.00
$_______________
FORM OF 8% SECURED CONVERTIBLE DEBENTURE
DUE FEBRUARY ___, 2010
THIS DEBENTURE is one of a series of duly authorized and validly issued 8%
Secured Convertible Debentures of Star Energy Corporation, a Nevada corporation,
(the "Company"), having its principal office at 000 Xxxxxxx Xxxxxx, 00xx Xxxxx,
Xxx Xxxx, XX, 00000, designated as its 8% Secured Convertible Debenture due
February ___, 2010 as the same may be supplemented, modified, amended, restated
or replaced from time to time in the manner provided herein, this "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 $_______________ on
February ___, 2010 (the "Maturity Date") or such earlier date as this Debenture
is required or permitted to be repaid as provided hereunder, and to pay interest
to the Holder on the aggregate unconverted and then outstanding principal amount
of this Debenture, all 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 or other
applicable Transaction Document (as such terms are defined herein), 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 general meeting of
all or substantially all of its creditors for the stated purpose of
arranging a composition, adjustment or restructuring of its debts; or (g)
the Company or any Significant Subsidiary thereof, by any act or document,
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 Conversion 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 40% 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 60% 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 60% 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 nominated or approved by a majority of those
individuals who are members of the board of directors or nominating
committee on the date hereof (or by those individuals who are serving as
members of the board of directors on any date whose position on the board
of directors was approved by a majority of the members of the board of
directors or nominating committee 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.
2
"Common Stock" means the common stock, par value $.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).
"Dilutive Issuance" shall have the meaning set forth in Section
5(b).
"Dilutive Issuance Notice" shall have the meaning set forth in
Section 5(b).
"Effectiveness Period" shall have the meaning set forth in the
Registration Rights Agreement.
"Equity Conditions" means, 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 Underlying 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
Underlying Shares issuable pursuant to the Transaction Documents are or
upon issuance will be listed or quoted 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
Underlying 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 reasonably constitute an
Event of Default, (vii) the issuance of the shares in question (or, in the
case of an Optional Redemption, the shares issuable upon conversion in
full of the Optional Redemption) to the Holder would not violate the
limitations set forth in Section 4(c) 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, (ix) the
Holder is not in possession of any information provided by the Company
that constitutes, or could reasonably be expected to constitute, material
non-public information and (x) for a period of 20 consecutive Trading Days
prior to the applicable date in question, the daily trading volume for the
Common Stock on the principal Trading Market exceeds 100,000 shares
(subject to adjustment for forward and reverse stock splits and the like)
per Trading Day.
3
"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(a).
"Forced Conversion Date" shall have the meaning set forth in Section
6(a).
"Forced Conversion Notice" shall have the meaning set forth in
Section 6(a).
"Forced Conversion Notice Date" shall have the meaning set forth in
Section 6(a).
"Fundamental Transaction" shall have the meaning set forth in
Section 5(e).
"Indebtedness" means (a) any liabilities for borrowed money or
similar amounts owed in excess of $50,000 (other than trade accounts
payable incurred in the ordinary course of business and inter-company
advances among the Company and its Subsidiaries), (b) all guaranties,
endorsements and other contingent obligations in respect of Indebtedness
of others, whether or not the same are or should be reflected in the
Company's balance sheet (or the notes thereto), except for (i) guaranties
by endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business and (ii)
guaranties of the Indebtedness or other obligations of the Company or any
Subsidiary by any other Subsidiary or the Company; and (c) the present
value of any lease payments in excess of $50,000 due under leases required
to be capitalized in accordance with GAAP.
"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 10
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 10 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.
4
"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).
"Interest Share Amount" shall have the meaning set forth in Section
2(a).
"Late Fees" shall have the meaning set forth in Section 2(d).
"Mandatory Default Amount" means the sum of (i) the greater of (A)
130% 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.
"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).
"Optional Redemption" shall have the meaning set forth in Section
6(b).
"Optional Redemption Amount" means the sum of (i) if the Optional
Redemption Date is on or prior to the second anniversary of the Original
Issue Date, 120% of the then outstanding principal amount of the Debenture
and if the Optional Redemption Date is after the second anniversary of the
Original Issue Date and prior to the Maturity Date, 110% 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.
"Optional Redemption Date" shall have the meaning set forth in
Section 6(b).
"Optional Redemption Notice" shall have the meaning set forth in
Section 6(b).
"Optional Redemption Notice Date" shall have the meaning set forth
in Section 6(b).
"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.
5
"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, (b) capital lease obligations, construction or
improvement financing and purchase money indebtedness incurred in
connection with the acquisition, construction or improvement of capital
assets and capital lease obligations with respect to newly acquired,
improved or leased assets (provided, that immediately following any such
transaction, the pro forma consolidated total Indebtedness of the Company
and its subsidiaries to their consolidated Total Asset ratio is not more
than 0.75 to 1); (c) up to $[___________ of additional Indebtedness
incurred by the Company in connection with raising capital for the
acquisition of another entity which is, itself or through its
subsidiaries, an operating company in a business synergistic with the
business of the Company (by merger, consolidation, the acquisition of all
or substantially of the assets of such entity or similar transaction)
provided that any Indebtedness incurred under this clause (c) is expressly
subordinate to the Debentures pursuant to a written subordination
agreement with the Purchasers that is acceptable to each Purchaser; (d)
the Indebtedness evidence by other Debentures, provided that the aggregate
original principal amount of all Debentures (whenever issued) shall not
exceed $___________; (e) up to $ _________ of additional senior
Indebtedness incurred by the Company from a strategic commercial lender
pursuant to a strategic commercial agreement; or (f) any continuation,
extension, renewal, modification, refinancing or replacement of any such
Permitted Indebtedness on overall terms that are generally no less
favorable than those applicable to the existing Permitted Indebtedness.
"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 and incurred in the
ordinary course of the Company's business, such as carriers',
warehousemen's and mechanics' Liens, statutory landlords' Liens, Liens
consisting of easements, right-of-way, restrictions, covenants or other
agreements of record or similar charges or encumbrances, 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; and (c) 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, constructed, improved or leased (and the products and
proceeds thereof, insurance therefor and warranty and other contract
rights related thereto); (d) Liens incurred in respect of judgments and
awards discharged within 30 days from the making thereof; (e) any cash
deposits made or bonds or letters of credit posted in the ordinary course
to secure performance under any contract or applicable law; (f) in the
case of any account, intangible, instrument, lease, agreement or document,
any contractual right, power, privilege, remedy, interest, defect,
restriction, covenant, claim, counterclaim, right of recoupment,
abatement, reduction or setoff, or defense of any account debtor or other
party thereto, whether now existing or hereafter arising, and whether
pursuant to the applicable contractual provisions or applicable law; (g)
Liens existing on the Original Issue Date and set forth on Schedule 3.1(n)
attached to the Purchase Agreement or (h) any renewal, continuation,
extension or replacement of any such Permitted Lien, provided that the
scope of the assets encumbered thereby shall not be thereby increased.
6
"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.
"Purchase Agreement" means the Securities Purchase Agreement, dated
as of February ___, 2007 among the Company and the original Holders, as
amended, modified or supplemented from time to time in accordance with its
terms.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date of the Purchase Agreement, among the
Company and the original Holders, 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 the shares of Common
Stock issuable in lieu of cash interest payments of the Holder, names such
Holder as a "selling stockholder" therein, and meets the requirements of
the Registration Rights Agreement.
"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(a).
"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 Global
Market, the Nasdaq Global Select Market, the New York Stock Exchange or
the OTC Bulletin Board.
"Transaction Documents" shall have the meaning set forth in the
Purchase Agreement.
7
"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 Common Stock
is not then listed or quoted for trading on a Trading Market 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 (c) 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.
Section 2. Interest.
a) Payment of Interest in Cash or Kind. The Company shall pay
interest to the Holder on the aggregate unconverted and then outstanding
principal amount of this Debenture at the rate of 8% per annum, payable
quarterly on January 1, April 1, July 1 and October 1, beginning on the
first such date after the Original Issue Date, on each Conversion Date (as
to that principal amount then being converted), on each Optional
Redemption Date (as to that principal amount then being redeemed) and on
the Maturity Date (each such date, an "Interest Payment Date") (if any
Interest Payment Date is not a Business Day, then the applicable payment
shall be due on the next succeeding Business Day), 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) all
of the Equity Conditions have been met (unless waived by the Holder in
writing) 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
and (ii) the Company shall have given the Holder notice in accordance with
the notice requirements set forth below.
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, shares of Common Stock or a combination thereof 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 (with any election to pay with shares of Common Stock, in
whole or in part, conditioned on compliance with the Equity Conditions
during the Interest Notice Period) 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 deliver such written notice to the Holder or failure to comply
with the Equity Conditions during the Interest Notice Period 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 pursuant to Rule 424
disclosing such election.
8
c) Interest Calculations. Interest shall be calculated on the basis
of a 360-day year, consisting of twelve 30 calendar day periods, and shall
accrue daily on the outstanding principal balance commencing on the
Original Issue Date until payment in full of the principal sum, together
with 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 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) herein. 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 such
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 permitted to pay accrued
interest in Common Stock because it fails to satisfy the conditions for
payment in Common Stock set forth in Section 2(a) herein, 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.
e) Prepayment. Except as otherwise set forth in this Debenture, the
Company may not prepay any portion of the principal amount of this
Debenture without the prior written consent of 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 (as
one of the "Securities" identified thereunder) 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 and irrespective
of any Equity Condition). 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 (such date, the "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.
10
b) Conversion Price. The conversion price in effect on any
Conversion Date shall be equal to $2.00, subject to adjustment herein (the
"Conversion Price").
c) Conversion Limitations. 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 or the Warrants) 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), 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) 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), 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 Company's
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 two 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 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) 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) 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) 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 along with the other provisions of
this Debenture) shall apply to a successor holder of this Debenture.
11
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
three 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 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 (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 (other than any
certificate that must bear any restrictive legend or trading
restriction required by the Purchase Agreement) electronically
through the Depository Trust Company or another established clearing
corporation performing similar functions.
12
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 sought and obtained, and the Company
posts a surety bond for the benefit of the Holder in the amount of
125% 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 third Trading Day after the Conversion
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 such third Trading Day 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.
13
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), or the
Holder's brokerage firm otherwise purchases, 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.
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,
the Debentures or the exercise of any Warrant); (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.
15
b) Subsequent Equity Sales. If, at any time while this Debenture is
outstanding, the Company or any Subsidiary, as applicable, sells or grants
any option to purchase or sells or grants any right to reprice, or
otherwise disposes of or issues (or announces any sale, grant or any
option to purchase or other disposition), any Common Stock or any Common
Stock Equivalents entitling any Person to acquire shares of Common Stock
at an effective price per share that is lower than the then Conversion
Price (such lower price, the "Base Conversion Price" and such issuances,
collectively, 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 Conversion Price, such issuance shall be deemed to
have occurred for less than the Conversion Price on such date of the
Dilutive Issuance), then the Conversion Price shall be reduced to equal
the Base Conversion Price. Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued. Notwithstanding the
foregoing, no adjustment will be made under this Section 5(b) in respect
of an Exempt Issuance, and for avoidance of doubt, Dilutive Issuances
shall not include any shares of Common Stock issued by the Company upon
conversion of, or payment of interest on, the Debentures or the exercise
of any Warrant. The Company shall notify the Holder in writing, no later
than 1 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 Conversion Price
on or after the date of such Dilutive Issuance, regardless of whether the
Holder accurately refers to the Base Conversion Price in the Notice of
Conversion.
16
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 the 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, which shall be subject
to Section 5(b)), 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
"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
17
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(e) 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
enters into a Variable Rate Transaction, despite the prohibition set
forth in the Purchase Agreement, the Company shall be deemed to have
issued Common Stock or Common Stock Equivalents at the lowest
possible conversion price at which such securities may be converted
or exercised.
18
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. Forced Conversion and Optional Redemption.
a) Forced Conversion. Notwithstanding anything herein to the
contrary, if after the 30th Trading Day following Effective Date, the VWAP
for each of any 20 out of 30 consecutive Trading Days, which period shall
have commenced only after the 30th Trading Day following the Effective
Date (such period the "Threshold Period"), exceeds $6.00 (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), the Company may, within 2 Trading Days
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
this Debenture plus, if so specified in the Forced Conversion Notice,
accrued but unpaid interest, liquidated damages and other amounts owing to
the Holder under this Debenture, it being agreed that the "Conversion
Date" for purposes of Section 4 shall be deemed to occur on the thirtieth
Trading Day following the Forced Conversion Notice Date (such thirtieth
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 (unless waived in writing by the Holder) on each Trading Day
occurring during the applicable Threshold Period through and including the
later of the Forced Conversion Date and the Trading Day after the date
such Conversion Shares pursuant to such conversion are 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.
19
b) Optional Redemption at Election of Company. Subject to the
provisions of this Section 6, at any time after the Effective Date, the
Company may deliver a notice to the Holder (an "Optional Redemption
Notice" and the date such notice is deemed delivered hereunder, the
"Optional Redemption Notice Date") of its irrevocable election to redeem
some or all of the then outstanding principal amount of this Debenture for
cash in an amount equal to the Optional Redemption Amount on the 22nd
Trading Day following the Optional Redemption Notice Date (such date, the
"Optional Redemption Date" and such redemption, the "Optional
Redemption"). The Optional Redemption Amount is payable in full on the
Optional Redemption Date. The Company may only effect an Optional
Redemption if each of the Equity Conditions shall have been met (unless
waived in writing by the Holder) on each Trading Day during the period
commencing on the Optional Redemption Notice Date through to the Optional
Redemption Date and through and including the date payment of the Optional
Redemption Amount is actually made in full. If any of the Equity
Conditions shall cease to be satisfied at any time during such period,
then the Holder may elect to nullify the Optional Redemption Notice by
notice to the Company within 3 Trading Days after the first day on which
any such Equity Condition has not been met (provided that if, by a
provision of the Transaction Documents, the Company is obligated to notify
the Holder of the non-existence of an Equity Condition, such notice period
shall be extended to the third Trading Day after proper notice from the
Company) in which case the Optional Redemption Notice shall be null and
void, ab initio. The Company covenants and agrees that it will honor all
Notices of Conversion tendered from the time of delivery of the Optional
Redemption Notice through the date all amounts owing thereon are due and
paid in full.
c) Redemption Procedure. The payment of cash pursuant to an Optional
Redemption shall be payable on the Optional Redemption Date. If any
portion of the payment pursuant to an Optional Redemption shall not be
paid by the Company by the applicable due date, interest shall accrue
thereon at an interest rate equal to the lesser of 18% per annum or the
maximum rate permitted by applicable law until such amount is paid in
full. Notwithstanding anything herein contained to the contrary, if any
portion of the Optional Redemption Amount remains unpaid after such date,
the Holder may elect, by written notice to the Company given at any time
thereafter, to invalidate such Optional Redemption, ab initio, and the
Company shall have no further right to exercise such Optional Redemption.
The Holder may elect to convert the outstanding principal amount of this
Debenture subject to a redemption under this Section 6 pursuant to Section
4 prior to actual payment in cash for such redemption by the delivery of a
Notice of Conversion to the Company.
20
Section 7. Negative Covenants. As long as any portion of this Debenture
remains outstanding, unless the holders of at least 51% in principal amount of
the then outstanding Debentures shall have otherwise given their written consent
or waiver, the Company shall not, and shall not permit any of its subsidiaries
(whether or not a Subsidiary on the Original Issue Date) 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, any guarantee of such
indebtedness;
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 materially and
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 other than as to (a) the Conversion Shares or
Warrant Shares as permitted or required under the Transaction Documents
and (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;
e) pay cash dividends or distributions on any equity securities of
the Company;
21
f) enter into any transaction with any Affiliate of the Company
(other than any of the Company or Subsidiary) that would be required to be
disclosed in any public filing with the Commission, except for (i) any
such transaction that 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), (ii) the
establishment, modification or payment of reasonable and customary fees to
Directors of the Company who are not officers or employees of any Company,
(iii) the establishment or modification of reasonable salaries, wages, and
compensation plans for any officer or employee of the Company or any of
its Subsidiaries, the making of payments to any of them thereunder, and
the making, extension or modification of any loan or advance to any of
them, provided that in the case of the executive officers of the Company
such salaries and compensation plans have been expressly approved by a
majority of the disinterested directors of the Company (even if less than
a quorum otherwise required for board approval), or (iv) the
establishment, modification or implementation of reasonable employment
arrangements, stock option and purchase plans, and benefit programs for
the directors, officers and employees of the Company and its Subsidiaries
expressly approved by a majority of the disinterested directors of the
Company (even if less than a quorum otherwise required for board approval)
and the resulting transactions thereunder; or
g) enter into any agreement effecting or committing to any of the
foregoing.
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):
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,
within the earlier to occur of (A) 5 Trading Days after notice of
such failure sent 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), which default is not cured, if possible to
cure, within the grace or cure period specified therein, or if none
is so specified, within the earlier to occur of (A) 5 Trading Days
after notice of such failure sent by the Holder or by any other
Holder and (B) 10 Trading Days after the Company has become aware of
such failure;
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iv. any representation or warranty made 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 capital lease or factoring arrangement that (a)
involves an obligation greater than $250,000, whether such
indebtedness now exists or shall hereafter be created, and (b)
results in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and
payable;
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 five
Trading Days;
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 40% 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);
23
xi. the Company shall fail for any reason to deliver
certificates to a Holder prior to the tenth 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; or
xii. 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 $250,000,
and such judgment, writ or similar final process shall remain
unpaid, unvacated, unbonded or unstayed for a period of 45 calendar
days.
b) Remedies Upon Event of Default. If any Event of Default occurs
and is continuing without being waived by the Holder or cured by the
Company, 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 Trading 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, subject to Section 5.17 of the Purchase Agreement. 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.
24
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 _______, Attention: _______________ 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 the Holder at the facsimile number or address of such Holder
appearing on the signature page of the Purchase Agreement or in any
transfer document delivered to the Company, as applicable, or such other
facsimile number or address as such Holder may specify for such purpose by
written notice to the Company delivered in accordance with Section 9.. 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 timely delivered to a nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to
whom such notice is required to be given. Refusal to accept delivery shall
constitute delivery.
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.
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, and a customary indemnity agreement reasonably
satisfactory to the Company.
d) Governing Law. All questions concerning the construction,
validity, enforcement and interpretation of this Debenture shall, to the
greatest extent permitted by applicable law, be governed by and construed
and enforced in accordance with the internal laws of the State of New York
and federal laws of the United States of America, without regard to any
principles of conflicts of law thereof that would defer to the substantive
laws of any other jurisdiction. 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. The preceding consents to New
York governing law and jurisdiction and venue in New York State's Supreme
25
Court have been made by the parties in reliance (at least in part) on
Sections 5-1401 and 5-1402 of the General Obligations Law of the State of
New York, as amended (as and to the extent applicable), and other
applicable law. 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. In any action, suit or proceeding in any jurisdiction brought by any
party against any other party, each party, knowingly and intentionally and
to the fullest extent permitted by applicable law, hereby absolutely,
unconditionally, irrevocably and expressly waives forever trial by jury.
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.
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.
26
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 and the other Debentures are (i) guarantied pursuant to the
Subsidiary Guarantee dated as of February __, 2007, from the Subsidiaries
of the Company to and with the Purchasers (as defined therein), as the
same may be supplemented, modified, amended, restated or replaced from
time to time in the manner provided therein (the "Subsidiary Guarantee"),
and (ii) secured (and the obligations of the Subsidiary Guarantee also are
secured) by substantially all personal assets and properties of the
Company and each Subsidiary pursuant to the Security Agreement dated as of
February __, 2007, between the Company, the Subsidiaries of the Company,
the Agent and the Secured Parties (as defined therein), as the same may be
supplemented, modified, amended, restated or replaced from time to time in
the manner provided therein (the "Security Agreement").
27
k) Purchase Agreement. This Debenture is one of the Debentures
referred to in the Purchase Agreement and other Transaction Documents. All
of the applicable provisions of the Purchase Agreement, including (without
limitation) any provision for limiting the maximum rate of interest
payable hereunder, are incorporated herein by reference and made a part
hereof. In the event that any specific provision of this Debenture
conflicts or is inconsistent with any specific term or provision contained
in the Purchase Agreement, the specific term or provision of the Purchase
Agreement shall control and be given effect. However, this Agreement
contains provisions that are in addition to those contained in the
Purchase Agreement, which each are cumulative with and not alternatives to
each other, and which shall not be deemed or construed to be in conflict
or inconsistent with the Purchase Agreement because they are not contained
in it.
l) Amendment; Holder is a Party. This Debenture may not be
supplemented, modified, amended, restated, waived, extended, discharged or
terminated orally. This Debenture may only be (i) supplemented, modified,
amended or restated in a writing signed by the Company and the Holder (or
in the case of a restated or replacement Debenture, consented to in a
separate writing by the Holder if the Holder elects not to sign such
Debenture) and (ii) waived, extended, discharged or terminated in a
writing signed by the party against whom such waiver, extension, discharge
or termination would have to be enforced. By accepting this Debenture, the
Holder acknowledges and agrees that the Holder (A) is a "party" and one of
the "parties" for the purposes of this Debenture and (A) is contractually
bound by the provisions hereof applicable to it as a party or one of the
parties.
*********************
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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.
STAR ENERGY CORPORATION
By:___________________________________
Name:
Title:
29
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 8% Secured
Convertible Debenture due February __, 2010 of Star Energy Corporation, a Nevada
corporation (the "Company"), into shares of common stock, par value $.001 per
share (the "Common Stock"), of the Company according to the conditions hereof,
as of the date written below. If shares of Common Stock 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 specified under Section 4 of this Debenture, as determined in
accordance with Section 13(d) of the Exchange Act.
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 8% Secured Convertible Debentures due on February ___, 2010 in the aggregate
principal amount of $____________ are issued by Star Energy Corporation. 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, Original Conversion
Issue Date) Amount of Conversion (or original Company Attest
Principal Amount)
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