CONVERTIBLE DEBENTURE
EXHIBIT
4.4
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 15, 2007
Original
Conversion Price (subject to adjustment herein): $0.1375
$714,500
CONVERTIBLE
DEBENTURE
THIS
CONVERTIBLE DEBENTURE is one of a series of duly authorized and issued
Convertible Debentures of Fellows Energy Ltd., a Nevada corporation, having
a
principal place of business at 000 Xxxxxxxxxxx Xxxxxxxxx, Xxxxx 000, Xxxxxxxxxx,
XX 00000 (the “Company”),
designated as its Convertible Debenture (this debenture, the “Debenture”
and
collectively with the other such series of debentures, the “Debentures”).
FOR
VALUE
RECEIVED, the Company promises to pay to Palisades Master Fund L.P. or its
registered assigns (the “Holder”),
or
shall have paid pursuant to the terms hereunder, the principal sum of $714,500
by September 7, 2007, or such earlier date as this Debenture is required or
permitted to be repaid as provided hereunder (the “Maturity
Date”).
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 have the meanings given
to
such terms 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(d).
“Base
Conversion Price”
shall
have the meaning set forth in Section 5(b).
“Business
Day”
means
any day except Saturday, Sunday and any day which shall be a federal legal
holiday in the United States or a day on which banking institutions in the
State
of New York are authorized or required by law or other government 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, 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 its assets, as an entirety or substantially as an entirety, 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, (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 above in (i) or
(iv).
“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 PM (New York 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 PM (New York 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 Holders of a majority in
interest of the outstanding principal amount of the Debentures.
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“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 have been
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
the shares of Common Stock issuable upon conversion of this
Debenture.
“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 given to such term in the Registration Rights Agreement.
“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.
“Fundamental
Transaction”
shall
have the meaning set forth in Section 5(d).
“Mandatory
Default Amount”
shall
equal the sum of (i) the greater of: (A) 130% of the principal amount of this
Debenture to be prepaid, or (B) the principal amount of this Debenture to be
prepaid, divided by the Conversion Price on (x) the date the Mandatory Default
Amount is demanded or otherwise due or (y) the date the Mandatory Default Amount
is paid in full, whichever is less, multiplied by the Closing Price on (x)
the
date the Mandatory Default Amount is demanded or otherwise due or (y) the date
the Mandatory Default Amount is paid in full, whichever is greater, 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).
“Original
Issue Date”
shall
mean the date of the first issuance of the Debentures regardless of the number
of transfers of any Debenture and regardless of the number of instruments which
may be issued to evidence such Debenture.
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“Person”
means
a
corporation, an association, a partnership, organization, a business, an
individual, a government or political subdivision thereof or a governmental
agency.
“Purchase
Agreement”
means
the Securities Purchase Agreement, dated as of February 15, 2007, to which
the
Company and the original Holder are parties, 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, to which the Company and the original Holder are parties, as amended,
modified or supplemented from time to time in accordance with its
terms.
“Registration
Statement”
means
a
registration statement meeting the requirements set forth in the Registration
Rights Agreement, covering among other things the resale of the Conversion
Shares and naming the Holder as a “selling stockholder” thereunder.
“Securities
Act”
means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
“Subsidiary”
shall
have the meaning given to such term in the Purchase Agreement.
“Trading
Day”
means
a
day on which the Common Stock is traded on a Trading Market.
“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 Nasdaq SmallCap Market, the American
Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or
the
OTC Bulletin Board.
“Transaction
Documents”
shall
have the meaning set forth in the Purchase Agreement.
Section
2. Interest.
a) No
Payment of Interest.
This
Debenture was issued for an Original Issue Discount. No interest payments shall
be due and payable to the Holder hereunder.
b) 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.
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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 made 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 to the Company for transfer 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 into shares of Common Stock
at
the option of the Holder, in whole or in part at any time and from time to
time
(subject to the limitations on conversion set forth in Section 4(c)
hereof). The Holder shall effect conversions by delivering to the Company the
form of Notice of Conversion 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 is to 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 provided 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 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 converted and the date of such
conversions. The Company shall deliver any objection to any Notice of Conversion
within 1 Business Day of receipt of such notice. 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.
b) Conversion
Price.
The
conversion price in effect on any Conversion Date shall be equal to $0.1375
(subject
to adjustment herein)(the “Conversion
Price”).
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c) Xxxxxx’s
Restriction on Conversion.
The
Company shall not effect any conversion of this Debenture, and the Holder shall
not have the right to convert any portion of this Debenture, pursuant to Section
4(a) or otherwise, to the extent that after giving effect to such conversion,
the Holder (together with the Holder’s affiliates), as set forth on the
applicable Notice of Conversion, would beneficially own in excess of 4.99%
of
the number of shares of the Common Stock outstanding immediately after giving
effect to such conversion. For purposes of the foregoing sentence, the
number of shares of Common Stock beneficially owned by the Holder and its
affiliates shall include the number of shares of Common Stock issuable upon
conversion of this Debenture with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (A) conversion of the remaining, nonconverted
portion of this Debenture beneficially owned by the Holder or any of its
affiliates and (B) exercise or conversion of the unexercised or nonconverted
portion of any other securities of the Company (including, without limitation,
any other debentures or warrants) subject to a limitation on conversion or
exercise analogous to the limitation contained herein beneficially owned by
the
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. To the extent
that the limitation contained in this section applies, the determination of
whether this Debenture is convertible (in relation to other securities owned
by
the Holder) and of which a portion of this Debenture is convertible shall be
in
the sole discretion of such Holder. To ensure compliance with this restriction,
the 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. For purposes
of this Section 4(c), in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (x) the Company’s most recent Form 10-QSB or Form 10-KSB, as the
case may be, (y) a more recent public announcement by the Company or (z) any
other 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 the Holder, the Company shall within two Trading Days confirm orally
and in writing to the 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 the Holder or its
affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The provisions of this Section 4(c) may be waived
by
the Holder, at the election of the Holder, upon not less than 61 days’ prior
notice to the Company, and the provisions of this Section 4(c) shall continue
to
apply until such 61st day (or such later date, as determined by the Holder,
as
may be specified in such notice of waiver).
d) Mechanics
of Conversion
6
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 any Conversion Date, the Company will
deliver or cause to be delivered to the Holder a certificate or certificates
representing the Conversion Shares which shall be free of restrictive legends
and trading restrictions (other than those required by the Purchase Agreement)
representing the number of shares of Common Stock being acquired upon the
conversion of this Debenture. The Company shall, if available and if allowed
under applicable securities laws, use its best efforts to deliver any
certificate or certificates required to be delivered by the Company under this
Section electronically through the Depository Trust Corporation 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 a Conversion Date, the Holder shall be entitled by written notice to
the
Company at any time on or before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Company shall
immediately return the certificates representing the principal amount of this
Debenture tendered for conversion.
iv. Obligation
Absolute; Partial Liquidated Damages.
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 after 5
Trading Days after such damages begin to accrue) for each Trading Day after
such
third Trading Day until such certificates are delivered. 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,
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
7
amount
hereof, the Company may not refuse conversion based on any claim that the Holder
or any one 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, 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 150% of the principal
amount of this Debenture outstanding, which is subject to the injunction, which
bond shall remain in effect until the completion of arbitration/litigation
of
the dispute and the proceeds of which shall be payable to such Holder to the
extent it obtains judgment. In the absence of an injunction precluding the
same,
the Company shall issue Conversion Shares or, if applicable, cash, upon a
properly noticed conversion. Nothing herein shall limit a Holder’s right to
pursue actual damages or declare an Event of Default pursuant to Section 8
herein 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 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 pursuant
to
Section 4(d)(ii) by the third Trading Day after the Conversion Date, and if
after such third Trading Day the Holder is required by its brokerage firm to
purchase (in an open market transaction or otherwise) Common Stock to deliver
in
satisfaction of a sale by such Holder of the Conversion Shares which the Holder
anticipated receiving upon such conversion (a “Buy-In”),
then
the Company shall (A) pay in cash to the Holder (in addition to any remedies
available to or elected by the Holder) the amount by which (x) the Holder’s
total purchase price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the aggregate number of shares
of Common Stock that such Holder anticipated receiving from the conversion
at
issue multiplied by (2) the actual sale price of the Common Stock at the time
of
the sale (including brokerage commissions, if any) giving rise to such purchase
obligation 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 had the Company 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 at the time of the
sale (including
brokerage commissions, if any) giving rise to such purchase obligation was
a total of $10,000 under clause (A) of the immediately preceding
sentence,
8
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.
Notwithstanding anything contained herein to the contrary, if a Holder requires
the Company to make payment in respect of a Buy-In for the failure to timely
deliver certificates hereunder and the Company timely pays in full such payment,
the Company shall not be required to pay such Holder liquidated damages under
Section 4(d)(iv) in respect of the certificates resulting in such
Buy-In.
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 solely for the purpose of
issuance upon conversion of this Debenture, 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 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 hereunder. The Company covenants that all shares of
Common Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and, if the Registration
Statement is then effective under the Securities Act, 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 the Common Stock, but may
if
otherwise permitted, make a cash payment in respect of any final fraction of
a
share based on the Closing Price 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, one 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 certificate, 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.
9
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 on shares of its
Common Stock or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company pursuant to this Debenture), (B)
subdivides outstanding shares of Common Stock into a larger number of shares,
(C) combines (including by way of reverse stock split) outstanding shares of
Common Stock into a smaller number of shares, or (D) issues by 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 treasury shares, if
any) 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, shall offer, sell, grant any option to purchase or
offer, sell or grant any right to reprice its securities, or otherwise dispose
of or issue (or announce any offer, sale, grant or any 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 less
than the then Conversion Price (such lower price, the “Base
Conversion Price”
and
such issuances collectively, a “Dilutive
Issuance”),
as
adjusted hereunder (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 is issued
in
connection with such issuance, be entitled to receive shares of Common Stock
at
an effective price per share which is less 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.
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, indicating therein the applicable issuance price, or of
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, after the date of such Dilutive Issuance the Holder is
entitled to receive a number of Conversion Shares based upon the Base Conversion
Price regardless of whether the Holder accurately refers to the Base Conversion
Price in the Notice of Conversion.
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c) Pro
Rata Distributions.
If the
Company, at any time while this Debenture is outstanding, shall distribute
to
all holders of Common Stock (and not to the holders of the Debentures) evidences
of its indebtedness or assets (including cash and cash dividends) or rights
or
warrants to subscribe for or purchase any security, 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 Closing Price determined as of the record date
mentioned above, and of which the numerator shall be such Closing Price 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 one
outstanding share of the Common Stock as determined by the Board of Directors
in
good faith. In either case the adjustments shall be described in a statement
provided to the Holder of the portion of assets or evidences of indebtedness
so
distributed or such subscription rights applicable to one 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.
d) 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 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 one 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 one 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
11
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 paragraph (d) and insuring that this Debenture
(or
any such replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.
e) 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
treasury shares, if any) issued and outstanding.
f) Notice
to the Holder.
i. Adjustment
to Conversion Price.
Whenever the Conversion Price is adjusted pursuant to any 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).
ii. Notice
to Allow Conversion by Xxxxxx.
If (A)
the Company shall declare a dividend (or any other distribution) 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 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; (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 mailed
to
the Holder at its last address as it shall appear upon the stock
books of
the
Company, 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 mail such notice or any defect therein or in the mailing 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 the date of such notice to the effective date of the
event triggering such notice and such conversion shall not limit any other
conversion right of the Holder.
12
Section
6. RESERVED.
Section
7. Negative
Covenants.
So long
as any portion of this Debenture is outstanding, the Company will not and will
not permit any of its Subsidiaries to directly or indirectly:
a) 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 any interest therein
or
any income or profits therefrom unless this Debenture is paid off in connection
with such lien and pursuant to Section 6(b) herein;
b) amend
its
certificate of incorporation, bylaws or other charter documents so as to
materially and adversely affect any rights of the Holder;
c) 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
the
Conversion Shares to the extent permitted or required under the Transaction
Documents or as otherwise permitted by the Transaction Documents;
d) enter
into any agreement with respect to any of the foregoing;
or
e) pay
cash
dividends or distributions on any equity securities of the Company.
Section
8. Events
of Default.
a) “Event
of Default”,
wherever used herein, means any one of the following events (whatever the reason
and whether it 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):
13
i. any
default in the payment of (A) the principal amount of any Debenture, or (B)
liquidated damages in respect of, 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 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 this Debenture or any other Debenture (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 default sent by the Holder or by any other
Holder
and
(B)10 Trading Days after the Company shall become or should have become aware
of
such failure;
iii. a
default
or event of default (subject to any grace or cure period provided for 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 bound;
iv. any
representation or warranty made herein,
in any
other Transaction Documents, in any written statement pursuant hereto or
thereto, or in any other report, financial statement or certificate made or
delivered to the Holder or any other holder of Debentures shall
be
untrue or incorrect in any material respect as of the date when made or deemed
made;
v. (i)
the
Company or any of its Subsidiaries shall commence a case, as debtor, a case
under any applicable bankruptcy or insolvency laws as now or hereafter in effect
or any successor thereto, or the Company or any Subsidiary commences any other
proceeding under any reorganization, arrangement, adjustment of debt, relief
of
debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or
any
Subsidiary thereof or (ii) there is commenced a case against the Company or
any
Subsidiary thereof, under any applicable bankruptcy or insolvency laws, as
now
or hereafter in effect or any successor thereto which remains undismissed for
a
period of 60 days; or (iii) the Company or any Subsidiary thereof is adjudicated
by a court of competent jurisdiction insolvent or bankrupt; or any order of
relief or other order approving any such case or proceeding is entered; or
(iv)
the Company or any Subsidiary thereof suffers any appointment of any custodian
or the like for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or (v) the Company or any
Subsidiary thereof makes a general assignment for the benefit of creditors;
or
(vi) the Company shall fail to pay, or shall state that it is unable
to
pay, or shall be unable to pay, its debts generally as they become due; or
(vii)
the Company or any Subsidiary thereof shall call a meeting of its creditors
with
a view to arranging a composition, adjustment or restructuring of its debts;
or
(viii) the Company or any Subsidiary thereof shall by any act or failure to
act
expressly indicate its consent to, approval of or acquiescence in any of the
foregoing; or (ix) any corporate or other action is taken by the Company or
any
Subsidiary thereof for the purpose of effecting any of the
foregoing;
14
vi. the
Company or any Subsidiary shall default in 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 of the Company in an amount
exceeding $150,000, whether such indebtedness now exists or shall hereafter
be
created and such default shall result 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 quotation on or quoted for trading on
a
Trading Market and shall not again be eligible for and quoted or listed for
trading thereon within five Trading Days;
viii. the
Company shall be a party to any Change of Control Transaction or Fundamental
Transaction, shall agree to sell or dispose of all or in excess of 33% of its
assets in one or more transactions (whether or not such sale would constitute
a
Change of Control Transaction) or shall redeem or repurchase more than a de
minimis number of its outstanding shares of Common Stock or other equity
securities of the Company (other than redemptions of Conversion Shares and
repurchases of shares of Common Stock or other equity securities of departing
officers and directors of the Company; provided such repurchases shall not
exceed $100,000, in the aggregate, for all officers and directors during the
term of this Debenture);
ix. a
Registration Statement shall not have been declared effective by the Commission
on or prior to the 180th calendar
day after the Closing Date;
x. if,
during the Effectiveness Period (as defined in the Registration Rights
Agreement), the effectiveness of the Registration Statement lapses for any
reason or the Holder shall not be permitted to resell Registrable Securities
(as
defined in the Registration Rights Agreement) under the Registration Statement,
in either case, for more than 10 consecutive Trading Days or 15 non-consecutive
Trading Days during any 12 month period; provided,
however,
that in
the event that 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 transactions or the parties thereto
that
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 relating to such an event; and
15
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 and in accordance with Section 4(d) or the Company shall provide
notice to the Holder, including by way of public announcement, at any time,
of
its intention not to comply with requests for conversions of any Debentures
in
accordance with the terms hereof.
b) Remedies
Upon Event of Default.
If any
Event of Default occurs, the full principal amount of this Debenture, together
with other amounts owing in respect thereof, to the date of acceleration shall
become, at the Holder’s election, immediately due and payable in cash. The
aggregate amount payable upon an Event of Default shall be equal to 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 the rate of 18% per annum,
or
such lower maximum amount of interest permitted to be charged under applicable
law. Upon the payment in full of the Mandatory Default Amount on this entire
Debenture, the Holder shall promptly surrender this Debenture to or as directed
by the Company. 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 declaration may be rescinded and annulled by Xxxxxx at
any
time prior to payment hereunder and the Holder shall have all rights as a
Debenture holder until such time, if any, as the full payment under this Section
shall have been received by it. 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, sent by a nationally recognized
overnight courier service, addressed to the Company, at the address set forth
above, facsimile number 303.327.1526,
Attn: Xxxxxx Xxxxx or
such
other address or facsimile number as the Company may specify for such purposes
by notice to the Holder delivered in accordance with this Section. 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, sent
by a
nationally recognized overnight courier service addressed to each Holder at
the
facsimile telephone number or address of such Xxxxxx appearing on the books
of
the Company, or if no such facsimile telephone 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 telephone number specified in this
Section prior to 5:30 p.m. (New York City time), (ii) the date after the date
of
transmission, if such notice or communication is delivered via facsimile at
the
facsimile telephone number specified in this Section later than 5:30 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time)
on
such 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.
16
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 and liquidated damages (if any) 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 indemnity, if requested, all 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 conflicts of law thereof. Each party agrees that all legal
proceedings concerning the interpretations, 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
any such court, 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 manner permitted by 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 with the investigation,
preparation and prosecution of such action or
proceeding.
17
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
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 applicable laws governing usury,
the applicable rate of interest due hereunder shall automatically be lowered
to
equal the maximum permitted rate of interest. 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.
18
i) Assumption.
Any successor to the Company or surviving entity in a Fundamental Transaction
shall (i) assume in writing 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) prior to such Fundamental Transaction and
(ii)
to 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 amounts and the interest rates of the Debentures
held by the Holder and having similar ranking to this Debenture, and
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.
*********************
19
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.
| |
|
|
| By: | /s/ XXXXXX X. XXXXX | |
|
Xxxxxx X. Xxxxx |
||
| Chief Executive Officer | ||
