VARIABLE RATE CONVERTIBLE DEBENTURE DUE FEBRUARY 18, 2009
EXHIBIT
10.2
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: August 18, 2006
Original
Conversion Price (subject to adjustment herein): $1.00
VRCD
No.
________
$_______________
VARIABLE
RATE CONVERTIBLE DEBENTURE
DUE
FEBRUARY 18, 2009
THIS
VARIABLE RATE CONVERTIBLE DEBENTURE is one of a series of duly authorized and
validly issued Variable Rate Convertible Debentures of Spectre Gaming, Inc.,
a
Minnesota corporation, having its principal place of business at ▇▇▇▇▇
▇▇▇▇
▇▇▇▇▇▇
▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ (the “Company”),
designated as its Variable Rate Convertible Debenture due February 18, 2009
(this debenture, the “Debenture”
and,
collectively with the other such series of debentures, the “Debentures”).
FOR
VALUE
RECEIVED, the Company promises to pay to ________________________ or its
registered assigns (the “Holder”),
or
shall have paid pursuant to the terms hereunder, the principal sum of
$_______________ by February 18, 2009 (provided that, at the sole election
of
the Holder and upon written notice from the Holder to the Company prior to
February 18, 2009, such payment shall occur by August 18, 2011) (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 in
accordance with the provisions hereof. This Debenture is subject to the
following additional provisions:
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Section
1. Definitions.
For the
purposes hereof, in addition to the terms defined elsewhere in this Debenture,
(a) capitalized terms not otherwise defined herein shall have the meanings
set
forth in the Purchase Agreement and (b) the following terms shall have the
following meanings:
“Alternate
Consideration”
shall
have the meaning set forth in Section 5(e).
“Bankruptcy
Event”
means
any of the following events: (a) the Company or any Significant Subsidiary
(as
such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a
case
or other proceeding under any bankruptcy, reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation
or
similar law of any jurisdiction relating to the Company or any Significant
Subsidiary thereof; (b) there is commenced against the Company or any
Significant Subsidiary thereof any such case or proceeding that is not dismissed
within 60 days after commencement; (c) the Company or any Significant Subsidiary
thereof is adjudicated insolvent or bankrupt or any order of relief or other
order approving any such case or proceeding is entered; (d) the Company or
any
Significant Subsidiary thereof suffers any appointment of any custodian or
the
like for it or any substantial part of its property that is not discharged
or
stayed within 60 calendar days after such appointment; (e) the Company or any
Significant Subsidiary thereof makes a general assignment for the benefit of
creditors; (f) the Company or any Significant Subsidiary thereof calls a meeting
of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (g) the Company or any Significant Subsidiary
thereof, by any act or failure to act, expressly indicates its consent to,
approval of or acquiescence in any of the foregoing or takes any corporate
or
other action for the purpose of effecting any of the foregoing.
“Base
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 Redemption”
shall
have the meaning set forth in Section 6(b).
“Change
of Control Redemption Amount”
means
the sum of (i) 130% of the then-outstanding principal amount of this Debenture,
(ii) all accrued and unpaid interest on this Debenture and (iii) all other
amounts, costs, expenses and liquidated damages due in respect of this
Debenture.
“Change
of Control Redemption Date”
shall
have the meaning set forth in Section 6(b).
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“Change
of Control Redemption Notice”
shall
have the meaning set forth in Section 6(b).
“Change
of Control Redemption Notice Date”
shall
have the meaning set forth in Section 6(b).
“Change
of Control Transaction”
means
the occurrence after the date hereof of any of (i) an acquisition after the
date
hereof by an individual or legal entity or “group” (as described in Rule
13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company, by
contract or otherwise) of in excess of 33% of the voting securities of the
Company (other than by means of conversion or exercise of the Debentures and
the
Securities issued together with the Debentures), or (ii) the Company merges
into
or consolidates with any other Person, or any Person merges into or consolidates
with the Company and, after giving effect to such transaction, the stockholders
of the Company immediately prior to such transaction own less than 66% of the
aggregate voting power of the Company or the successor entity of such
transaction, or (iii) the Company sells or transfers all or substantially all
of
its assets to another Person and the stockholders of the Company immediately
prior to such transaction own less than 66% of the aggregate voting power of
the
acquiring entity immediately after the transaction, or (iv) a replacement at
one
time or within a three year period of more than one-half of the members of
the
Company’s board of directors which is not approved by a majority of those
individuals who are members of the board of directors on the date hereof (or
by
those individuals who are serving as members of the board of directors on any
date whose nomination to the board of directors was approved by a majority
of
the members of the board of directors who are members on the date hereof),
or
(v) the execution by the Company of an agreement to which the Company is a
party
or by which it is bound, providing for any of the events set forth in clauses
(i) through (iv) above.
“Common
Stock”
means
the common stock, par value $.01 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).
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“Effectiveness
Period”
shall
have the meaning set forth in the Registration Rights Agreement.
“Equity
Conditions”
shall
mean, during the period in question, (i)
the
Company shall have duly honored all conversions and redemptions scheduled to
occur or occurring by virtue of one or more Notices of Conversion of the Holder,
if any, (ii) the Company shall have paid all liquidated damages and other
amounts owing to the Holder in respect of this Debenture, (iii)
there is an effective Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the shares
issuable pursuant to the Transaction Documents (and the Company believes, in
good faith, that such effectiveness will continue uninterrupted for the
foreseeable future), (iv) the Common Stock is trading on a Trading Market and
all of the shares issuable pursuant to the Transaction Documents are listed
for
trading on such Trading Market (and the Company believes, in good faith, that
trading of the Common Stock on a Trading Market will continue uninterrupted
for
the foreseeable future), (v) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the issuance of
all
of the shares issuable pursuant to the Transaction Documents, (vi) there is
no
existing Event of Default or no existing event which, with the passage of time
or the giving of notice, would constitute an Event of Default, (vii) the
issuance of the shares in question (or, in the case of an Optional Redemption,
the shares issuable upon conversion in full of the Optional Redemption
Amount) to
the
Holder would not violate the limitations set forth in Section 4(c)(i) herein,
(viii)
there has been no public announcement of a pending or proposed Fundamental
Transaction or Change of Control Transaction that has not been consummated
and
(ix) the Holder is not in possession of any information furnished directly
or
indirectly by the Company that constitutes, or may constitute, material
non-public information.
“Event
of Default”
shall
have the meaning set forth in Section 8.
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
“Fundamental
Transaction”
shall
have the meaning set forth in Section 5(e).
“Interest
Conversion Rate”
means
the
lesser of (a) the Conversion Price or (b)
90% of
the lesser of (i) the average of the VWAPs for the 20 consecutive Trading Days
ending on the Trading Day that is immediately prior to the applicable Interest
Payment Date or (ii) the average of the VWAPs for the 20 consecutive Trading
Days ending on the Trading Day that is immediately prior to the date the
applicable Interest Conversion Shares are issued and delivered if after the
Interest Payment Date.
“Interest
Conversion Shares”
shall
have the meaning set forth in Section 2(a).
“Interest
Notice Period”
shall
have the meaning set forth in Section 2(a).
“Interest
Payment Date”
shall
have the meaning set forth in Section 2(a).
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“Interest
Period”
means,
initially, the period beginning on and including the Original Issue Date and
ending on and including December 31, 2006 and each successive period as follows:
the period beginning on and including January 1 and ending on and including
March 31; the
period beginning on and including April 1 and ending on and including June
30;
the period beginning on and including July 1 and ending on and including
September 30; and the period beginning on and including October 1 and ending
on
and including December 31.
“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).
“LIBOR”
means,
for each Interest Period, (i) the six-month London Interbank Offered Rate for
deposits in U.S. dollars, as shown on the Trading Day immediately prior to
the
beginning of such Interest Period in The Wall Street Journal (Eastern Edition)
under the caption "Money Rates - London Interbank Offered Rates (LIBOR)"; or
(ii) if The Wall Street Journal (Eastern Edition) does not publish such rate,
the offered one-month rate for deposits in U.S. dollars which appears on the
Reuters Screen LIBO Page as of 10:00 a.m., New York City time, on the Trading
Day immediately prior to the beginning of such Interest Period, provided that
if
at least two rates appear on the Reuters Screen LIBO Page on any such Trading
Day, the LIBOR for such day shall be the arithmetic mean of such
rates.
“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(a).
“Optional
Redemption Amount”
means
the sum of (i) (a) if the VWAP on the principal Trading Market exceeds $3.00
on
each Trading Day (subject to adjustment for forward and reverse stock splits,
recapitalizations and the like) during the 20 Trading Days prior to the
applicable Optional Redemption Notice Date and during the period from the
applicable Optional Redemption Notice Date until the applicable Optional
Redemption Date, 100% of the then-outstanding principal amount of this Debenture
or
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(b)
if
the VWAP on the principal Trading Market is equal to or less than $3.00 on
each
Trading Day (subject to adjustment for forward and reverse stock splits,
recapitalizations and the like) during the 20 Trading Days prior to the
applicable Optional Redemption Notice Date and during the period from the
applicable Optional Redemption Notice Date until the applicable Optional
Redemption Date, 135% of the then-outstanding principal amount of this
Debenture, (ii) all accrued and unpaid interest on this Debenture and (iii)
all
other amounts, costs, expenses and liquidated damages due in respect of this
Debenture.
“Optional
Redemption Date”
shall
have the meaning set forth in Section 6(a).
“Optional
Redemption Notice”
shall
have the meaning set forth in Section 6(a).
“Optional
Redemption Notice Date”
shall
have the meaning set forth in Section 6(a).
“Original
Issue Date”
means
the date of the first issuance of the Debentures, regardless of any transfers
of
any Debenture and regardless of the number of instruments which may be issued
to
evidence such Debentures.
“Permitted
Indebtedness”
means (a) the
Indebtedness existing on the Original Issue Date and set forth on Schedule
3.1(aa)
attached
to the Purchase Agreement, (b) lease obligations and purchase money indebtedness
of up to $50,000,000, in the aggregate, incurred in connection with the
acquisition of capital assets and lease obligations with respect to newly
acquired or leased assets and (c) indebtedness that (i) is expressly subordinate
to the Debentures pursuant to a written subordination agreement benefiting
all
Purchasers that is executed by Purchasers holding at least 55% in principal
amount of the outstanding Debentures and (ii) matures on a date which is more
than 90 calendar days after the Maturity Date.
“Permitted
Lien”
means
the individual and collective reference to the following: (a) Liens for taxes,
assessments and other governmental charges or levies not yet due or Liens for
taxes, assessments and other governmental charges or levies being contested
in
good faith and by appropriate proceedings for which adequate reserves (in the
good faith judgment of the management of the Company) have been established
in
accordance with GAAP; (b) Liens imposed by law which were incurred in the
ordinary course of the Company’s business, such as carriers’, warehousemen’s and
mechanics’ Liens, statutory landlords’ Liens, and other similar Liens arising in
the ordinary course of the Company’s business, and which (x) do not individually
or in the aggregate materially detract from the value of such property or assets
or materially impair the use thereof in the operation of the business of the
Company and its consolidated Subsidiaries or (y) are being contested in good
faith by appropriate proceedings, which proceedings have the effect of
preventing for the foreseeable future the forfeiture or sale of the property
or
asset subject to such Lien; (c) Liens incurred in connection with Permitted
Indebtedness under clause (a) thereunder; and (d) Liens incurred in connection
with Permitted Indebtedness under
-6-
clause
(b) thereunder, provided that such Liens are not secured by assets of the
Company or its Subsidiaries other than the assets so acquired or
leased.
“Person”
means
an individual or corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or other entity of any
kind.
“Purchase
Agreement”
means
the Securities Purchase Agreement, dated as of August 17, 2006, 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
Interest Conversion Shares 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.
“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.
“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 quoted for trading on the OTC
Bulletin Board and if prices for the Common Stock are then reported in the
“Pink
Sheets” published by Pink Sheets, LLC (or
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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 a rate per annum equal to
LIBOR for the applicable Interest Period plus 4.0% (subject to increase pursuant
to Section 8(b) herein) or such lesser rate as shall be the highest rate
permitted by applicable law, payable quarterly on January 1, April 1, July
1 and
October 1, commencing on December 31, 2006, 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), on each Change of Control 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, (ii) during the Interest Notice Period and through and including the
date such shares of Common Stock are issued to the Holder (a)
the
VWAP exceeds $2.00 (subject to adjustment for forward and reverse stock splits
and the like) on each Trading Day and (b) the daily trading volume, as measured
in U.S. dollars, for the Common Stock on the principal Trading Market exceeds
$100,000 on each Trading Day
(iii)
the Company shall have given the Holder notice in accordance with the notice
requirements set forth below and (iv) as to such Interest Payment Date, prior
to
such Interest Notice Period (but not more than 5 Trading Days prior to the
commencement of such Interest Notice Period), the Company shall have delivered
to the Holder’s account with The Depository Trust Company a number of shares of
Common Stock to be applied against such Interest Share Amount equal to the
quotient of (x) the applicable Interest Share Amount divided by (y) the then
Conversion Price (the “Interest
Conversion Shares”).
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
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
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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 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. The aggregate number of shares
of
Common Stock otherwise issuable to the Holder on an Interest Payment Date shall
be reduced by the number of Interest Conversion Shares previously issued to
the
Holder in connection with such Interest Payment Date.
c) Interest
Calculations.
Interest shall be calculated on the basis of a 360-day year and shall accrue
daily commencing on the Original Issue Date until payment in full of the
principal sum, 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 (other than the Interest Conversion Shares
issued prior to an Interest Notice Period) shall otherwise occur pursuant to
Section 4(d)(ii) herein and, solely for purposes of the payment of interest
in
shares, the Interest Payment Date shall be deemed the Conversion Date. Interest
shall cease to accrue with respect to any principal amount converted, provided
that the Company actually delivers the Conversion Shares within the time period
required by Section 4(d)(ii) 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 in connection with an Interest Payment Date the Company
has
elected to pay accrued interest in the form of Common Stock but has failed
to
satisfy the conditions for payment in Common Stock set forth in Section 2(a)
herein (the “Failed
Election”),
then
the Company shall (a) promptly notify the Holder of the Failed Election and
(b)
pay the regularly scheduled interest payment in cash; provided,
however,
that
upon
written notice from the Holder within 5 Trading Days following notification
by
the Company of the Failed Election, in
lieu
of paying
the regularly scheduled interest payment in cash, the Company 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
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Date
multiplied by (y) the highest VWAP during the period commencing on the Interest
Payment Date and ending on the Trading Day prior to the date such payment is
made. If any Interest Conversion Shares are issued to the Holder in connection
with an Interest Payment Date and are not applied against an Interest Share
Amount, then the Holder shall promptly return such excess shares to the
Company.
e) Prepayment.
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.
Section
3. Registration
of Transfers and Exchanges.
a) Different
Denominations.
This
Debenture is exchangeable for an equal aggregate principal amount of Debentures
of different authorized denominations, as requested by the Holder surrendering
the same. No service charge will be payable for such registration of transfer
or
exchange.
b) Investment
Representations.
This
Debenture has been issued subject to certain investment representations of
the
original Holder set forth in the Purchase Agreement and may be transferred
or
exchanged only in compliance with the Purchase Agreement and applicable federal
and state securities laws and regulations.
c) Reliance
on Debenture Register.
Prior
to due presentment for transfer to the Company of this Debenture, the Company
and any agent of the Company may treat the Person in whose name this Debenture
is duly registered on the Debenture Register as the owner hereof for the purpose
of receiving payment as herein provided and for all other purposes, whether
or
not this Debenture is overdue, and neither the Company nor any such agent shall
be affected by notice to the contrary.
Section
4. Conversion.
a) Voluntary
Conversion.
At any
time after the Original Issue Date until this Debenture is no longer
outstanding, this Debenture shall be convertible, in whole or in part, into
shares of Common Stock at the option of the Holder, at any time and from time
to
time (subject to the conversion limitations set forth in Section 4(c)
hereof). The Holder shall effect conversions by delivering to the Company a
Notice of Conversion, the form of which is attached hereto as Annex
A
(a
“Notice
of Conversion”),
specifying therein the principal amount of this Debenture to be converted and
the date on which such conversion shall be effected (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
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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. 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 $1.00
(subject
to adjustment herein) (the “Conversion
Price”).
c) Conversion
Limitations.
i. Holder’s
Restriction on Conversion.
The
Company shall not effect any conversion of this Debenture, and a Holder shall
not have the right to convert any portion of this Debenture, to the extent
that
after giving effect to the conversion set forth on the applicable Notice of
Conversion, such Holder (together with such Holder’s Affiliates, and any other
person or entity acting as a group together with such Holder or any of such
Holder’s Affiliates) would beneficially own in excess of the Beneficial
Ownership Limitation (as defined below). For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by such Holder
and its Affiliates shall include the number of shares of Common Stock issuable
upon conversion of this Debenture with respect to which such determination
is
being made, but shall exclude the number of shares of Common Stock which are
issuable upon (A) conversion of the remaining, unconverted principal amount
of
this Debenture beneficially owned by such Holder or any of its Affiliates and
(B) exercise or conversion of the unexercised or unconverted portion of any
other securities of the Company subject to a limitation on conversion or
exercise analogous to the limitation contained herein (including, without
limitation, any other Debentures 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)(i), beneficial ownership shall
be
calculated in accordance with Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder. To the extent that the limitation
contained in this Section 4(c)(i) applies, the determination of whether this
Debenture is convertible (in relation to other securities owned by such Holder
together with any Affiliates) and of which principal amount of this Debenture
is
convertible shall be in the sole discretion of such Holder, and the submission
of a Notice of Conversion shall be deemed to be such Holder’s determination of
whether this Debenture may be converted (in relation to other securities owned
by such Holder together with any Affiliates) and which principal amount of
this
Debenture is convertible, in each case subject to such aggregate percentage
limitations. To ensure compliance with this restriction, each Holder will be
deemed to represent to the Company each time it delivers a Notice of Conversion
that such Notice of Conversion has not violated the restrictions set forth
in
this paragraph and the Company shall have no obligation
-11-
to
verify
or confirm the accuracy of such determination. In
addition, a determination as to any group status as contemplated above shall
be
determined in accordance with Section 13(d) of the Exchange Act and
the
rules and regulations promulgated thereunder. For
purposes of this Section 4(c)(i), in determining the number of outstanding
shares of Common Stock, a Holder may rely on the number of outstanding shares
of
Common Stock as stated in the most recent of the following: (A) the Company’s
most recent Form 10-QSB or Form 10-KSB, as the case may be; (B) a more recent
public announcement by the Company; or (C) a more recent notice by the Company
or the 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)(i) may be waived by such Holder,
at
the election of such Holder, upon not less than 61 days’ prior notice to the
Company, to change the Beneficial Ownership Limitation to 9.99% of the number
of
shares of the Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock upon conversion of this Debenture held by
the
Holder and the provisions of this Section 4(c)(i) shall continue to apply.
Upon
such a change by a Holder of the Beneficial Ownership Limitation from such
4.99%
limitation to such 9.99% limitation, the Beneficial Ownership Limitation may
not
be further waived by such Holder. The provisions of this paragraph shall be
construed and implemented in a manner otherwise than in strict conformity with
the terms of this Section 4(c)(i) to correct this paragraph (or any portion
hereof) which may be defective or inconsistent with the intended Beneficial
Ownership Limitation herein contained or to make changes or supplements
necessary or desirable to properly give effect to such limitation.
The
limitations contained in this paragraph shall apply to a successor holder of
this
Debenture.
d) Mechanics
of Conversion.
i. Conversion
Shares Issuable Upon Conversion of Principal Amount.
The
number of shares of Common Stock issuable upon a conversion hereunder shall
be
equal to the quotient obtained by dividing (x) the outstanding principal amount
of this Debenture to be converted by (y) the Conversion Price.
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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 excluding for such
issuance the condition that the Company deliver Interest Conversion Shares
as to
such interest payment) and (B) a bank check in the amount of accrued and unpaid
interest (if the Company has elected or is required to pay accrued interest
in
cash). On or after the Effective Date, the Company shall, upon the request
of
the Holder, deliver any certificate or certificates required to be delivered
by
the Company under this Section 4 electronically through the Depository Trust
Company or another established clearing corporation performing similar
functions.
iii. Failure
to Deliver Certificates.
If in
the case of any Notice of Conversion such certificate or certificates are not
delivered to or as directed by the applicable Holder by the third Trading Day
after the Conversion Date, the Holder shall be entitled to elect by written
notice to the Company at any time on or before its receipt of such certificate
or certificates, to rescind such Conversion, in which event the Company shall
promptly return to the Holder any original Debenture delivered to the Company
and the Holder shall promptly return the Common Stock certificates representing
the principal amount of this Debenture tendered for conversion to the Company.
iv. Obligation
Absolute; Partial Liquidated Damages.
The
Company’s obligations to issue and deliver the Conversion Shares upon conversion
of this Debenture in accordance with the terms hereof are absolute and
unconditional, irrespective of any action or inaction by the Holder to enforce
the same, any waiver or consent with respect to any provision hereof, the
recovery of any judgment against any Person or any action to enforce the same,
or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other Person of any obligation
to
the Company or any violation or alleged violation of law by the Holder or any
other Person, and irrespective of any other circumstance which might otherwise
limit such obligation of the Company to the Holder in connection with the
issuance of such Conversion Shares; provided,
however,
that
such delivery shall not operate as a waiver by the Company of any such action
the Company may have against the Holder. In the event the Holder of this
Debenture shall elect to convert any or all of the outstanding principal amount
hereof, the Company may not refuse
-13-
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 150% 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
Holder’s right to pursue actual damages or declare an Event of Default pursuant
to Section 8 hereof for the Company’s failure to deliver Conversion Shares
within the period specified herein and such Holder shall have the right to
pursue all remedies available to it hereunder, at law or in equity including,
without limitation, a decree of specific performance and/or injunctive relief.
The exercise of any such rights shall not prohibit the Holder from seeking
to
enforce damages pursuant to any other Section hereof or under applicable
law.
v. Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion.
In
addition to any other rights available to the Holder, if the Company fails
for
any reason to deliver to the Holder such certificate or certificates by the
Share Delivery Date pursuant to Section 4(d)(ii), and if after such Share
Delivery Date the Holder is required by its brokerage firm to purchase (in
an
open market transaction or otherwise), or the Holder’s brokerage firm 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
-14-
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 Holder’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.
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
-15-
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, at
any time while this Debenture is outstanding, the Company: (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 shares of Common Stock issued by
the
Company upon conversion of, or payment of interest on, this Debenture), provided
that this clause (A) shall be deemed to not include any stock dividends payable
on the Series B Preferred Stock as
long
as the terms of such Series B Preferred Stock have not been materially amended
since the date of the Purchase Agreement;
(B)
subdivides outstanding shares of Common Stock into a larger number of shares;
(C) combines (including by way of a reverse stock split) outstanding shares
of
Common Stock into a smaller number of shares; or (D) issues, in the event of
a
reclassification of shares of the Common Stock, any shares of capital stock
of
the Company, then the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock (excluding
any
treasury shares of the Company) outstanding immediately before such event and
of
which the denominator shall be the number of shares of Common Stock outstanding
immediately after such event. Any adjustment made pursuant to this Section
shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.
b) Subsequent
Equity Sales.
If, 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 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
-16-
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 2 Business Days
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.
c) Subsequent
Rights Offerings.
If the
Company, at any time while the Debenture is outstanding, shall issue rights,
options or warrants to all holders of Common Stock (and not to Holders)
entitling them to subscribe for or purchase shares of Common Stock at a price
per share that is lower than the VWAP on the record date referenced below,
then
the Conversion Price shall be multiplied by a fraction of which the denominator
shall be the number of shares of the Common Stock outstanding on the date of
issuance of such rights or warrants plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the numerator
shall be the number of shares of the Common Stock outstanding on the date of
issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered (assuming
delivery to the Company in full of all consideration payable upon exercise
of
such rights, options or warrants) would purchase at such VWAP. Such adjustment
shall be made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants.
d) Pro
Rata Distributions.
If the
Company, at any time while this Debenture is outstanding, distributes to all
holders of Common Stock (and not to the Holders) evidences of its indebtedness
or assets (including cash and cash dividends) or rights or warrants to subscribe
for or purchase any security (other than the Common Stock, 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.
-17-
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 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
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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 ▇▇▇▇▇▇.
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. Redemption.
a) Optional
Redemption at Election of Company.
Subject
to the provisions of this Section 6, at any time after the 12 month anniversary
of the Effective Date, the Company may deliver a notice to the Holder (an
“Optional
Redemption Notice”
and
the
-19-
date
such
notice is deemed delivered hereunder, the “Optional
Redemption Notice Date”)
of its
irrevocable election to redeem up to, in the aggregate among all redemptions
under this Section 6(a), 50% of the original principal amount of this Debentures
for cash in an amount equal to the Optional Redemption Amount on the
20th
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, 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, (i) each
of
the Equity Conditions shall have been met and (ii) the daily trading volume,
as
measured in U.S. dollars, for the Common Stock on the principal Trading Market
exceeds $100,000. If any of the Equity Conditions or the volume requirement
in
clause (ii) above shall cease to be satisfied at any time during the 20 Trading
Day 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 or volume requirement 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.
b) Change
of Control Redemption at Election of Company.
Subject
to the provisions of this Section 6,
at any
time after the Original Issue Date, if the Company shall be a party to a
transaction described in clauses (ii) or (iii) under the definition of Change
of
Control Transaction, the Company may deliver a notice to the Holder (a
“Change
of Control Redemption Notice”)
of its
irrevocable election to redeem the Debentures, in full and in cash, at the
closing of such transaction described in clauses (ii) or (iii) under the
definition of Change of Control Transaction (the “Change
of Control Redemption”
and
the
date of such closing, the “Change
of Control Redemption Date”),
provided that such Change of Control Redemption Notice is given 30 Trading
Days
prior to the Change of Control Redemption Date (the “Change
of Control Redemption Notice Date”).
The
aggregate amount payable pursuant to a Change of Control Redemption shall be
equal to the Change of Control Redemption Amount and the Change of Control
Redemption Amount is payable in full on the Change of Control Redemption Date.
The Company may only effect a Change of Control Redemption if each of the Equity
Conditions shall have been met on each Trading Day during the period commencing
on the Change of Control Redemption Notice Date and concluding on the later
of
(i) the Change of Control Redemption Date and (ii) the date on which the Change
of Control Redemption Amount is actually paid 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 Change of Control Redemption Notice by notice
to
the Company within 3 Trading Days
-20-
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 Change of Control Redemption Notice shall be null and void,
ab initio.
Concurrently with the payment in full of the Change of Control Redemption
Amount, the Holder shall surrender this Debenture to or as directed by the
Company (or the successor company). The
Holder may elect to convert the outstanding principal amount of the Debenture
pursuant to Section 4 prior to actual payment in cash for the redemption under
this Section 6(b) by fax delivery of a Notice of Conversion to the Company
which
converted amounts shall be proportionally reduced from the Change of Control
Redemption Amount to be paid.
c) Redemption
Procedure.
The
payment of cash pursuant to an Optional Redemption or Change of Control
Redemption shall be payable on the Optional Redemption Date or Change of Control
Redemption Date. If any portion of the payment pursuant to an Optional
Redemption or Change of Control 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 or Change of
Control 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 or Change of Control Redemption,
ab initio,
and,
with respect to the Company’s failure to honor the Optional Redemption or Change
of Control Redemption, the Company shall have no further right to exercise
such
Optional Redemption or Change of Control Redemption. Notwithstanding anything
to
the contrary in this Section 6, the Company’s determination to redeem pursuant
to an Optional Redemption or Change of Control Redemption shall be applied
ratably among the Holders of Debentures.
The
Holder may elect to convert the outstanding principal amount of the Debenture
pursuant to Section 4 prior to actual payment in cash for any redemption under
this Section 6 by the delivery of a Notice of Conversion to the
Company.
Section
7. Negative
Covenants.
As long
as any portion of this Debenture remains outstanding, unless Purchasers holding
in the aggregate at least 55% of the principal amount of the then outstanding
Debentures shall otherwise consent in writing, the Company shall not, and shall
not permit any of its Subsidiaries to, directly or indirectly:
a) other
than Permitted Indebtedness, enter into, create, incur, assume, guarantee or
suffer to exist any indebtedness for borrowed money of any kind, including
but
not limited to, a guarantee, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or profits
therefrom;
-21-
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 articles 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 Securities 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) enter
into any agreement with respect to any of the foregoing;
or
f) pay
cash
dividends or distributions on any equity securities of the Company, provided
that cash dividends on the Series B Preferred Stock is permitted under this
clause (f) as long as the terms of such Series B Preferred Stock have not been
materially amended since the date of the Purchase Agreement.
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 materially 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
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Trading
Days after the Company has become or should have 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) (for avoidance of doubt, “material” in clause (B) means
that a default or event of default on such agreement, lease, document or
instrument shall have, or shall be likely to have, a material adverse effect
on
the financial condition or results of operations of the Company);
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 leasing or factoring arrangement that (a) involves an
obligation greater than $150,000, 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 a transaction described in clause (i), (iv) or,
as
applicable, (v) under the definition of Change of Control Transaction or a
Fundamental Transaction (which is not also a change of control which is subject
to a Change of Control Redemption) or shall agree to sell or dispose of all
or
in excess of 33% of its assets in one transaction or a series of related
transactions (whether or not such sale would constitute a Change of Control
Transaction);
ix. a
Registration Statement shall not have been declared effective by the Commission
on or prior to the 180th calendar
day after the Closing Date;
-23-
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
45 non-consecutive Trading Days during any 12 month period; provided,
however,
that if
the Company
is negotiating a merger, consolidation, acquisition or sale of all or
substantially all of its assets or a similar transaction and, in the written
opinion of counsel to the Company, the Registration Statement would be required
to be amended to include information concerning such pending transaction(s)
or
the parties thereto which information is not available or may not be publicly
disclosed at the time, the Company shall be permitted an additional 10
consecutive Trading Days during any 12 month period pursuant to this Section
8(a)(x);
xi. the
Company shall fail for any reason to deliver certificates to a Holder prior
to
the fifth Trading Day after a Conversion Date 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 $150,000, and such judgment, writ or similar final process
shall remain unvacated, unbonded or unstayed for a period of 45 calendar
days.
-24-
b) Remedies
Upon Event of Default.
If any
Event of Default occurs, the outstanding principal amount of this Debenture,
plus accrued but unpaid interest, liquidated damages and other amounts owing
in
respect thereof through the date of acceleration, shall become, at the Holder’s
election, immediately due and payable in cash at the Mandatory Default Amount.
Commencing 5 days after the occurrence of any Event of Default that results
in
the eventual acceleration of this Debenture, the interest rate on this Debenture
shall accrue at an interest rate equal to the lesser of 18% per annum or the
maximum rate permitted under applicable law. Upon the payment in full of the
Mandatory Default Amount, the Holder shall promptly surrender this Debenture
to
or as directed by the Company. In connection with such acceleration described
herein, the Holder need not provide, and the Company hereby waives, any
presentment, demand, protest or other notice of any kind, and the Holder may
immediately and without expiration of any grace period enforce any and all
of
its rights and remedies hereunder and all other remedies available to it under
applicable law. Such acceleration may be rescinded and annulled by ▇▇▇▇▇▇ at
any
time prior to payment hereunder and the Holder shall have all rights as a holder
of the Debenture until such time, if any, as the Holder receives
full payment pursuant to this Section 8(b). No such rescission or annulment
shall affect any subsequent Event of Default or impair any right consequent
thereon.
Section
9. Miscellaneous.
a) Notices.
Any and
all notices or other communications or deliveries to be provided by the Holder
hereunder, including, without limitation, any Notice of Conversion, shall be
in
writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service, addressed to the Company, at the address
set forth above, facsimile number (▇▇▇)
▇▇▇-▇▇▇▇, Attn: Chief Financial Officer or
such
other facsimile number or address as the Company may specify for such purpose
by
notice to the Holder delivered in accordance with this Section 9. Any and all
notices or other communications or deliveries to be provided by the Company
hereunder shall be in writing and delivered personally, by facsimile, or sent
by
a nationally recognized overnight courier service addressed to each Holder
at
the facsimile number or address of such ▇▇▇▇▇▇ appearing on the books of the
Company, or if no such facsimile number or address appears, at the principal
place of business of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date
of
transmission, if such notice or communication is delivered via facsimile at
the
facsimile number specified in this Section 9 prior to 5:30 p.m. (New York City
time), (ii) the date immediately following the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section 9 between 5:30 p.m. (New York City time) and 11:59
p.m. (New York City time) on any date, (iii) the second Business Day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to
be
given.
b) Absolute
Obligation.
Except
as expressly provided herein, no provision of this Debenture shall alter or
impair the obligation of the Company, which is absolute and unconditional,
to
pay the principal of, liquidated damages and accrued interest, as applicable,
on
this Debenture at the time, place, and rate, and in the coin or currency, herein
prescribed. This Debenture is a direct debt obligation of the Company. This
Debenture ranks pari passu
with all
other Debentures now or hereafter issued under the terms set forth
herein.
c) Lost
or Mutilated Debenture.
If this
Debenture shall be mutilated, lost, stolen or destroyed, the Company shall
execute and deliver, in exchange and substitution for and upon cancellation
of a
mutilated Debenture, or in lieu of or in substitution for a lost, stolen or
destroyed Debenture, a new Debenture for the principal amount of this Debenture
so mutilated, lost, stolen or destroyed, but only upon receipt of evidence
of
such loss, theft or destruction of such Debenture, and of the ownership hereof,
reasonably satisfactory to the Company.
-25-
d) Governing
Law.
All
questions concerning the construction, validity, enforcement and interpretation
of this Debenture shall be governed by and construed and enforced in accordance
with the internal laws of the State of New York, without regard to the
principles of conflict of laws thereof. Each party agrees that all legal
proceedings concerning the interpretation, enforcement and defense of the
transactions contemplated by any of the Transaction Documents (whether brought
against a party hereto or its respective Affiliates, directors, officers,
shareholders, employees or agents) shall be commenced in the state and federal
courts sitting in the City of New York, Borough of Manhattan (the “New
York Courts”).
Each
party hereto hereby irrevocably submits to the exclusive jurisdiction of the
New
York Courts for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction Documents),
and hereby irrevocably waives, and agrees not to assert in any suit, action
or
proceeding, any claim that it is not personally subject to the jurisdiction
of
such New York Courts, or such New York Courts are improper or inconvenient
venue
for such proceeding. Each party hereby irrevocably waives personal service
of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address
in
effect for notices to it under this Debenture and agrees that such service
shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any other manner permitted by applicable law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any
and
all right to trial by jury in any legal proceeding arising out of or relating
to
this Debenture or the transactions contemplated hereby. If either party shall
commence an action or proceeding to enforce any provisions of this Debenture,
then the prevailing party in such action or proceeding shall be reimbursed
by
the other party for its attorneys fees and other costs and expenses incurred
in
the investigation, preparation and prosecution of such action or
proceeding.
e) Waiver.
Any
waiver by the Company or the Holder of a breach of any provision of this
Debenture shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this
Debenture. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Debenture on one or more occasions shall not
be
considered a waiver or deprive that party of the right thereafter to insist
upon
strict adherence to that term or any other term of this Debenture. Any waiver
by
the Company or the Holder must be in writing.
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
-26-
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 impede the execution of any power herein granted to the Holder, but
will suffer and permit the execution of every such as though no such law has
been enacted.
g) Next
Business Day.
Whenever any payment or other obligation hereunder shall be due on a day other
than a Business Day, such payment shall be made on the next succeeding Business
Day.
h) Headings.
The
headings contained herein are for convenience only, do not constitute a part
of
this Debenture and shall not be deemed to limit or affect any of the provisions
hereof.
i) Assumption.
Any successor to the Company or any surviving entity in a Fundamental
Transaction shall (i) assume, prior to such Fundamental Transaction, all of
the
obligations of the Company under this Debenture and the other Transaction
Documents pursuant to written agreements in form and substance satisfactory
to
the Holder (such approval not to be unreasonably withheld or delayed) and (ii)
issue to the Holder a new debenture of such successor entity evidenced by a
written instrument substantially similar in form and substance to this
Debenture, including, without limitation, having a principal amount and interest
rate equal to the principal amount and the interest rate of this Debenture
and
having similar ranking to this Debenture, which shall be satisfactory to the
Holder (any such approval not to be unreasonably withheld or delayed). The
provisions of this Section 9(i) shall apply similarly and equally to successive
Fundamental Transactions and shall be applied without regard to any limitations
of this Debenture.
*********************
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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.
|
SPECTRE
GAMING, INC.
|
|
By:__________________________________________
Name:
▇▇▇▇▇ ▇. ▇▇▇▇▇
Title:
Chief Financial Officer
|
-28-
ANNEX
A
NOTICE
OF CONVERSION
The
undersigned hereby elects to convert principal under the Variable Rate
Convertible Debenture due February 18, 2009 of Spectre Gaming, Inc., a Minnesota
corporation (the “Company”),
into
shares of common stock, par value $.01 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
Variable Rate Convertible Debentures due on February 18, 2009 in the aggregate
principal amount of up to $14,700,000 are issued by Spectre Gaming, Inc., a
Minnesota corporation. This Conversion Schedule reflects conversions made under
Section 4 of the above referenced Debenture.
Dated:
|
Date
of Conversion
(or
for first entry,
Original
Issue Date)
|
Amount
of Conversion
|
Aggregate
Principal Amount Remaining Subsequent to Conversion
(or
original Principal Amount)
|
Company
Attest
|
|
|
|||
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