EXHIBIT 5
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION 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.
THIS DEBENTURE DOES NOT REQUIRE PHYSICAL SURRENDER OF THE DEBENTURE IN THE EVENT
OF A PARTIAL REDEMPTION OR CONVERSION. AS A RESULT, FOLLOWING ANY CONVERSION OF
ANY PORTION OF THIS DEBENTURE, THE OUTSTANDING PRINCIPAL AMOUNT REPRESENTED BY
THIS DEBENTURE MAY BE LESS THAN THE PRINCIPAL AMOUNT AND ACCRUED INTEREST SET
FORTH BELOW.
THE SECURITIES ISSUABLE UPON EXERCISE OR CONVERSION OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE LISTED ON THE TORONTO STOCK EXCHANGE;
HOWEVER, THE SAID SECURITIES CAN NOT BE TRADED THROUGH THE FACILITIES OF SUCH
EXCHANGE SINCE THEY ARE NOT FREELY TRANSFERABLE, AND CONSEQUENTLY ANY
CERTIFICATE REPRESENTING SUCH SECURITIES IS NOT "GOOD DELIVERY" IN SETTLEMENT OF
TRANSACTIONS ON THE TORONTO STOCK EXCHANGE.
UNLESS PERMITTED UNDER SECURITIES LEGISLATION, THE HOLDER OF THIS SECURITY MAY
NOT TRADE THE SECURITY BEFORE DECEMBER 28, 2004.
8 7/8% SENIOR CONVERTIBLE DEBENTURE DUE AUGUST 28, 2009
OF
INTEROIL CORPORATION
DEBENTURE NO.: ____ ORIGINAL PRINCIPAL AMOUNT: U.S. $[___]
ORIGINAL ISSUANCE DATE: AUGUST 27, 2004 NEW YORK, NEW YORK
THIS DEBENTURE ("DEBENTURE") is one of a duly authorized issue of
debentures of INTEROIL CORPORATION, a corporation duly organized and existing
under the laws of the Province of New Brunswick, Canada (the "COMPANY"),
designated as the Company's 8 7/8% Senior Convertible Debentures Due August 28,
2009 ("MATURITY DATE") in an aggregate principal amount (when taken together
with the original principal amounts of all other Debentures) which does not
exceed Forty Million U.S. Dollars (U.S.$40,000,000) (the "DEBENTURES"). All
references herein to "$" or "dollars" shall refer to U.S. dollars.
FOR VALUE RECEIVED, the Company hereby promises to pay to the order of
___________________________ or its registered assigns or successors-in-interest
("HOLDER") the initial principal sum of [AMOUNT] (U.S.$_________) (the "INITIAL
PRINCIPAL AMOUNT") together with all accrued but unpaid interest thereon, if
any, when due, whether upon the Maturity Date or upon acceleration, redemption
or otherwise (in each case in accordance with the terms hereof) to the extent
such principal amount and interest has not been converted into the Company's
Common Shares, no par value (the "COMMON SHARES"), in accordance with the terms
hereof. Interest on the unpaid principal balance hereof shall accrue at the rate
of 8 7/8%
per annum from the original date of issuance, August 27, 2004 (the "ISSUANCE
DATE"), until the same becomes due and payable on the Maturity Date, on any
Interest Payment Date (as defined below), or such earlier date upon acceleration
or by conversion or redemption in accordance with the terms hereof or of the
other Transaction Documents. Interest on this Debenture shall accrue daily
commencing on the Issuance Date, shall be compounded quarterly and shall be
computed on the basis of a 360-day year, 30-day months and actual days elapsed
and shall be payable in accordance with Section 1 hereof. Notwithstanding
anything contained herein, this Debenture shall bear interest on the due and
unpaid Principal Amount from and after the occurrence and during the continuance
of an Event of Default pursuant to Section 4(a), at the rate (the "DEFAULT
RATE") equal to the lower of fifteen percent (15%) per annum or the highest rate
permitted by law. Unless otherwise agreed or required by applicable law,
payments will be applied first to any unpaid collection costs, then to unpaid
interest and fees and any remaining amount to principal.
Except as provided in Section 1 below, all payments of principal and
interest on this Debenture shall be made in lawful money of the United States of
America by wire transfer of immediately available funds to such account as the
Holder may from time to time designate by written notice in accordance with the
provisions of this Debenture or by Company check. This Debenture may not be
prepaid in whole or in part except as otherwise provided herein or in the
Transaction Documents. Whenever any amount expressed to be due by the terms of
this Debenture is due on any day which is not a Business Day (as defined below),
the same shall instead be due on the next succeeding day which is a Business
Day.
Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Securities Purchase Agreement dated on or about the
August 26, 2004 pursuant to which the Debentures were originally issued (the
"PURCHASE AGREEMENT"). For purposes hereof the following terms shall have the
meanings ascribed to them below:
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control", when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"AVERAGE CONSOLIDATED EBITDA" means, as of the end of any fiscal
quarter, the average of the EBITDA for the two consecutive fiscal quarters
ending on the date of calculation. If the refinery owned by the Company's
subsidiary does not reach Practical Completion by December 31, 2004, the
calculation of the earnings interest expense, taxes, depreciation, depletion and
amortization comprising EBITDA will be calculated on a pro forma basis as if
Practical Completion occurred on December 31, 2004.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a
day on which commercial banks in the City of New York are authorized or required
by law or executive order to remain closed.
"CHANGE IN CONTROL TRANSACTION" will be deemed to exist if (i) there
occurs any consolidation, merger or other business combination of the Company
with or into any other
2
corporation or other Person (whether or not the Company is the surviving
corporation), or any other corporate reorganization or transaction or series of
related transactions in which in any of such events the existing voting
stockholders of the Company prior to such event cease to own 50% or more of the
voting stock, or corresponding voting equity interests, of the surviving
corporation after such event (including without limitation any "going private"
transaction or tender offer by the Company for 20% or more of the Company's
Common Shares), (ii) any Person together with its affiliates and associates
beneficially owns or is deemed to beneficially own in excess of 50% of the
Company's voting power, (iii) there is a replacement of more than one-half of
the members of the Company's Board of Directors which is not approved by those
individuals who are members of the Company's Board of Directors on the date
thereof, or (iv) in one or a series of related transactions, there is a sale or
transfer of all or substantially all of the assets of the Company, determined on
a consolidated basis, (v) a transaction occurs as a result of which the Common
Shares ceases to be listed on the Principal Market, or (vi) the occurrence of
the closing by the Company pursuant to an agreement to which the Company is a
party or which it is bound providing for an event set forth in (i), (ii), (iii),
(iv), or (v) above.
"CONVERSION RATIO" means, at any time, a fraction, of which the
numerator is the entire outstanding Principal Amount of this Debenture (or such
portion thereof that is being redeemed or repurchased), and of which the
denominator is the Conversion Price.
"CONVERSION PRICE" shall equal U.S.$20.16, as adjusted pursuant to the
terms hereof.
"CONVERTIBLE SECURITIES" means any convertible securities, warrants,
options or other rights to subscribe for or to purchase or exchange for, shares
of Common Shares.
"DEBT" shall mean indebtedness of any kind.
"EBITDA" means for any fiscal quarter, earnings for such quarter plus
the sum of the following for such quarter to the extent deducted in calculating
earnings for such quarter: interest expense, taxes, depreciation, depletion and
amortization, in each case (i) calculated in accordance with Canadian GAAP and
consistent with past practice including the allocation of all corporate costs,
and (ii) excluding results attributable to the Company's oil and gas exploration
and production business.
"EFFECTIVE DATE" means the date on which both the registration
statement under the Securities Act and the Prospectus filed with the Ontario
Securities Commission, in each case covering the Underlying Shares, shall have
been declared effective by the applicable securities authorities.
"EQUITY CONDITIONS" means each of the following: (i) the Company is in
compliance with all requirements of the applicable U.S. and Canadian federal,
state and provincial securities regulators, including, without limitation, all
disclosure requirements; (ii) the Company shall be in compliance with its
obligations under the Registration Rights Agreement; (iii) during the period
beginning on the Initial Closing Date and ending on and including the applicable
date of determination, there shall not have occurred an event of default under
Section 4(a)(iv) hereof; (iv) on each day during the period beginning on the
Initial Closing Date and ending on and including the applicable date of
determination, the Common Shares (including the Underlying Shares and the
Warrant Shares) shall be listed on the Principal Market and delisting or
3
suspension by such market or exchange shall not have been threatened either (A)
in writing by such market or exchange or (B) by falling below for at least the
requisite period the applicable minimum listing maintenance requirements of such
market or exchange; (v) on the applicable date of determination the registration
statement or registration statements required pursuant to the Registration
Rights Agreement shall be effective and available for the sale for all of the
Registerable Securities in accordance with the terms of the Registration Rights
Agreement; (vi) the Company shall have no knowledge of any fact that would cause
the registration statements required pursuant to the Registration Rights
Agreement not to be effective and available for the sale of at least all of the
Registerable Securities in accordance with the terms of the Registration Rights
Agreement and (vii) on the applicable date of determination, the Underlying
Shares and the Warrant Shares may be sold in Canada either pursuant to a
qualified prospectus or without any restriction.
"MARKET PRICE" shall equal the arithmetic mean of each of the daily
VWAP's during the twenty (20) Trading Days immediately preceding the date as of
which such Market Price is being determined. The VWAP's used to determine the
Market Price shall be appropriately and equitably adjusted for any stock splits,
stock dividends, recapitalizations and the like.
"PERSON" means an individual, partnership, corporation, limited
liability company, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof.
"PRACTICAL COMPLETION" has the meaning given to it in the Conditions of
Contract, Engineering, Procurement & Equipment Refurbishment and Construction of
InterOil Refinery at Napa Napa Papau New Guinea between InterOil Limited and
Clough Niugini Limited dated as of March 26, 2002.
"PRINCIPAL AMOUNT" shall refer to the sum of (i) the outstanding
principal amount of this Debenture, (ii) all accrued but unpaid interest
hereunder, and (iii) any default payments owing under the Transaction Documents
(other than payment provided in Section 4(b) hereof) but not previously paid or
added to the Principal Amount.
"PRINCIPAL MARKET" shall mean the Toronto Stock Exchange.
"REMEDY CONVERSION AMOUNT" shall mean an amount equal to 10% of the
Principal Amount when first calculated pursuant to Section 3(c)(ii).
"REMEDY CONVERSION DATE" shall mean the 25th day of each of the ten
consecutive calendar months immediately following the month in which a Remedy
Triggering Event shall have been publicly reported; provided, that if such day
is not a Trading Day, then the Remedy Conversion Date shall be the next Trading
Day.
"SECURITIES ACT" shall mean the U.S. Securities Act of 1933, as
amended.
"SENIOR DEBT" shall mean Indebtedness of the Company described in
clauses (A) through (F) and clause (H) in the definition of Permitted
Indebtedness. Notwithstanding the foregoing, if the Company is not liable for
such Indebtedness either directly or pursuant to a guarantee or other Contingent
Obligation, such Indebtedness shall not be Senior Debt.
4
"SPECIAL CONVERSION AMOUNT" shall mean an amount equal to 5.56% of the
Initial Principal Amount (including all accrued but unpaid interest thereon),
subject to the adjustments set forth in Section 3(a) and in Section 3(c)(iv).
"SPECIAL CONVERSION DATE" shall mean each of the following dates: (i)
June 25, 2006, (ii) July 25, 2006, (iii) August 25, 2006, (iv) September 25,
2006, (v) October 25, 2006, (vi) June 25, 2007, (vii) July 25, 2007, (viii)
August 25, 2007, (ix) September 25, 2007, (x) October 25, 2007, (xi) June 25,
2008, (xii) July 25, 2008, (xiii) August 25, 2008, (xiv) September 25, 2008,
(xv) October 25, 2008, (xvi) June 25, 2009, (xvii) July 25, 2009 and (xviii) the
Maturity Date; provided, that if such day is not a Trading Day, then the Special
Conversion Date shall be the next Trading Day.
"SPECIAL CONVERSION PRICE" shall mean the lesser of (i) the Conversion
Price and (ii) 90% of the Market Price.
"TRADING DAY" shall mean a day on which there is trading on the
Principal Market.
"UNDERLYING SHARES" means the Common Shares which may be issued upon
conversion of, or otherwise under, the Debenture in accordance with the terms
hereof and the Purchase Agreement.
"VWAP" shall mean the daily volume weighted average of: 1) the daily
volume weighted average price of the Common Shares on the Principal Market,
expressed in US dollars based upon the most current Bank of Canada buy rate on
the date such price is determined and 2) the daily volume weighted average price
of the Common Shares on the Approved Market , where 1) and 2) are as reported by
Bloomberg Financial L.P. (based on a trading day from 9:30 a.m. Eastern Time to
4:00 p.m. Eastern Time) using the "Volume at Price" function on the date in
question. If the foregoing does not apply, the dollar volume-weighted average
price of such security in the over-the-counter market on the electronic bulletin
board for such security during the period beginning at 9:30:01 a.m., New York
City Time (or such other time as the Principal Market and the Approved Market
publicly announces is the official open of trading), and ending at 4:00:00 p.m.,
New York City Time (or such other time as the Principal Market publicly
announces is the official close of trading) as reported by Bloomberg.
The following terms and conditions shall apply to this Debenture:
SECTION 1. PAYMENTS OF PRINCIPAL AND INTEREST.
(a) Interest. Accrued interest on this Debenture shall be paid
quarterly, on the first day of each calendar quarter, commencing on October 1,
2004 (each such payment date, an "INTEREST PAYMENT DATE"). Subject to the terms
hereof, the Company shall, at its option, have the right to pay interest on each
Interest Payment Date either in cash or Common Shares or a combination thereof.
In order to exercise such right, the Company shall deliver to all the Holders of
Debentures a written irrevocable notice in the form of Exhibit B attached hereto
electing to pay such interest in full on such Interest Payment Date in either
cash or Common Shares or a combination thereof ("INTEREST ELECTION NOTICE").
Such Interest Election Notice shall be delivered at least forty (40) calendar
days prior to the applicable Interest Payment Date but no more than sixty (60)
calendar days prior to such Interest Payment Date (the date of such notice
5
being hereinafter referred to as the "INTEREST NOTICE DATE"). If the Company is
electing to pay a combination of cash and Common Shares it shall specify the
percentages of cash and Common Shares in the Interest Election Notice. If such
Interest Election Notice is not delivered within the prescribed period set forth
in the preceding sentence, then such payment shall be paid in cash. If the
Company elects to pay any interest in shares of Common Shares (such Common
Shares, the "INTEREST SHARES"), the number of such Interest Shares to be issued
for such Interest Payment Date shall be the number determined by dividing (x)
amount of interest, by (y) 90% of the Market Price as of such Interest Payment
Date. Such Interest Shares shall be issued and delivered within three (3)
Trading Days following such Interest Payment Date and shall be duly authorized,
validly issued, fully paid, non-assessable and free and clear of all
encumbrances, other than transfer restrictions imposed by applicable securities
laws. If the Holder does not receive the requisite number of Interest Shares
within such three Trading Day period, the Company shall (a) if the Holder is
required by its broker to purchase (in an open market transaction or otherwise)
Common Shares to deliver in satisfaction of a sale by the Holder of the Interest
Shares which the Holder anticipated receiving upon such interest payment, then
(1) pay in cash to the Holder the amount by which (x) the Holder's total
purchase price (including brokerage commissions, if any) for the Common Shares
so purchased exceeds (y) the amount obtained by multiplying (A) the number of
Interest Shares that the Company was required to deliver to the Holder in
connection with the exercise at issue by (B) the price at which the sell order
giving rise to such purchase obligation was executed, and (2) at the option of
the Holder, either pay in cash the full amount of the interest due or deliver to
the Holder the number of Interest Shares that would have been issued had the
Company timely complied with its delivery obligations hereunder, and (b) if the
Holder so requests, then deem the election (whether by the Company or the
Holder) to be cancelled and shall pay the full amount of interest due hereunder
(together with any Default Interest) or such portion as the Holder specified is
to be paid in cash instead of Interest Shares within two (2) Business Days of
such request by the Holder. Except as otherwise provided in this Section 1, all
holders of Debentures must be treated equally with respect to such payment of
interest in Interest Shares.
(b) Gross-up.
(i) All payments by the Company under this Debenture shall be
made free and clear of and without deduction or withholding for any and all
taxes unless required by law, rule, regulation or the interpretation of such
law, rule or regulation, by the relevant governmental authority ("Governmental
Authority"). If the Company shall be so required to deduct or withhold any such
taxes from or in respect of any amount payable under this Debenture,
(A) the amount payable shall be increased by such
additional amount as may be necessary so that after making all required
deductions or withholdings (including deductions or withholdings
applicable to additional amounts paid under this Section 1.1(b), the
Holder receives a net amount equal to the full amount it would have
received if no deduction or withholding had been made;
(B) the Company shall make such required deductions or
withholdings;
6
(C) the Company shall pay the full amount deducted or
withheld to the relevant taxation or other governmental authority in
accordance with and within the time required by applicable law; and
(D) the Company shall deliver to the Holder, as soon as
practicable after it has made such payment to the applicable authority
(x) a copy of such receipt as issued by such authority evidencing the
remittance of all amounts required to be deducted or withheld from the
sum payable under this Debenture, or (y) if such a receipt is not
available from such authority, notice of the payment of such amount
deducted or withheld;
provided that, the obligations of the Company to pay additional amounts pursuant
to this Section shall not apply with respect to taxes imposed on the Holder
("EXCLUDED TAXES") that are income, capital or franchise taxes imposed on (or
measured by) net income or capital by the jurisdiction under the laws of which
the Holder is organized or in which its principal office is located, are branch
profits taxes or similar taxes imposed by any jurisdiction in which any Holder
is located, or arise by virtue of the Holder not dealing at arm's length with
the Company for purposes of the Income Tax Act (Canada).
(ii) Without prejudice to Section 1.1(b)(i), if the Holder is
required at any time (whether before or after the Company has discharged all of
its other obligations under this Debenture) to make any payment on account of
any tax which the Company is required to withhold in accordance with Section
1.1(b)(i) or for which an Obligor is otherwise required to indemnify the Holder
pursuant to Sections 1.1(b)(i), or 1.1(b)(iii), or if any liability in respect
of any such payment is asserted, imposed, levied or assessed against the Holder,
the Company shall, within 30 days of written demand of the Holder, promptly
indemnify the Holder against such payment or liability, together with interest,
penalties and expenses payable or incurred in connection with such payment or
liability, including, without limitation, any tax imposed by any jurisdiction on
or in relation to any amounts paid to or for the account of such Holder pursuant
to this Section 1.1(b). On intending to make a claim pursuant to this Section
1.1(b), the Holder shall notify the Company of the event in respect of which it
believes it is entitled to make such claim and supply reasonable supporting
evidence including a copy of the relevant portion of any written assessment.
(iii) If the Company fails to pay any taxes required to be
paid by it pursuant to this Section 1.1(b) when due to the appropriate
governmental authority or fails to remit to the Holder the required receipts or
other documentary evidence required by Section 1.1(b), the Company shall
indemnify the Holder for any incremental taxes, interest or penalties that may
become payable by the Holder as a result of any such failure.
(iv) The agreements and obligations contained in Section
1.1(b) shall survive the payment in full of principal, interest, fees and any
other amounts payable under this Debenture and the termination of this
Debenture.
(c) Equity Conditions. Notwithstanding anything to the contrary
herein, the Company shall be prohibited from exercising its right to issue
Interest Shares (and must deliver cash in respect thereof) on the applicable
Interest Payment Date if at any time from and including the Interest Notice Date
until the time at which the Holders receive such Interest Shares (i) any
7
of the Equity Conditions are not satisfied or (ii) an Event of Default hereunder
exists or occurs, or any event which, with the passage of time or notice or
both, would constitute an Event of Default, unless otherwise waived in writing
by the Holder in whole or in part at the Holder's option.
(d) Ownership/Issuance Limitations. Notwithstanding anything to
the contrary herein, the Company shall be prohibited from exercising its right
to pay interest in Interest Shares (and must deliver cash in respect thereof) on
the applicable Interest Payment Date to the extent, and only to the extent, that
such payment in Interest Shares would result in the Holder hereof exceeding the
limitations contained in Section 3(k) below. In such event, (i) the Company on
the Interest Payment Date, shall pay such portion of interest, in Interest
Shares as may be effected without exceeding such limitations, and (ii) the
balance of the interest shall be paid in cash. In connection with the delivery
of any notices by the Holder, the Company may request, and the Holder shall
confirm, that in connection with receiving any applicable Common Shares pursuant
thereto whether or not, after giving effect to receipt of the applicable Common
Shares, such Holder, together with its Affiliates, will have beneficial
ownership of a number of Common Shares which exceeds the Maximum Percentage.
SECTION 2. SENIORITY.
(a) The Company covenants and agrees, and each Holder of a
Debenture, by his acceptance thereof, likewise covenants and agrees, for the
benefit of the holders, from time to time, of Senior Indebtedness, that, to the
extent and in the manner hereinafter set forth in this Section, the Indebtedness
represented by the Debenture and the payment of the principal of (and premium,
if any, on) and interest on each and all of the Debentures are hereby expressly
made subordinate and subject in right of payment as provided in this Section to
the prior payment in full of all Senior Indebtedness, whether outstanding on the
date of hereof or thereafter created, incurred, assumed or guaranteed; provided,
however, that the Debentures, the Indebtedness represented thereby and the
payment of the principal of (and premium, if any, on) and interest on the
Debentures in all respects shall rank equally with, or prior to, all existing
and future unsecured indebtedness (including, without limitation, Indebtedness)
of the Company that is subordinated to Senior Indebtedness.
(b) In the event of any bankruptcy, insolvency or liquidation
proceeding with respect to the Company, upon any distribution of assets or other
property of the Company or payment on behalf of the Company with respect to the
Debentures:
(i) the holders of Senior Indebtedness shall be entitled to
receive payment in full of such Senior Indebtedness, or provision must be made
for such payment, before the Holders of the Debentures are entitled to receive
any direct or indirect payment or distribution of any kind or character, whether
in cash, property or securities on account of principal of (or premium, if any,
on) or interest on the Debentures or on account of the purchase or redemption or
other acquisition of Debentures (including pursuant to a Change of Control); and
(ii) any direct or indirect payment or distribution of assets
or other property of the Company of any kind or character, whether in cash,
property or securities, by set-off or otherwise, or which the Holders would be
entitled but for the provisions of this Section
8
shall be paid by the Company or by any liquidating trustee or agent or other
Person making such payment or distribution, whether a trustee in bankruptcy, a
receiver or liquidating trustee or otherwise, directly to the holders of Senior
Indebtedness or their representative or representatives or to the trustee or
trustees under any indenture under which any instruments evidencing any of such
Senior Indebtedness may have been issued, ratably according to the aggregate
amounts remaining unpaid on account of the Senior Indebtedness held or
represented by each, to the extent necessary to make payment in full of all
Senior Indebtedness after giving effect to any concurrent payment or
distribution to the holders of such Senior Indebtedness; and
(iii) in the event that, notwithstanding the foregoing
provisions of this Section, the Holder of any Debenture shall have received any
payment or distribution of assets or other property of the Company of any kind
or character, whether in cash, property or securities, by set-off or otherwise,
in respect of principal of (and premium, if any, on) or interest on the
Debenture before all Senior Indebtedness is paid or provided for in full, then
and in such event such payment or distribution shall be received and held in
trust for and shall be paid over or delivered forthwith to the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other
Person making payment or distribution of assets of the Company, to the extent
necessary to pay all Senior Indebtedness in full, after giving effect to any
concurrent payment or distribution to or for the holders of Senior Indebtedness.
(c) Upon (1) the occurrence of an event of default on any Senior
Indebtedness caused by the failure to pay the principal or interest on such
Senior Indebtedness, when scheduled or upon acceleration, and (2) receipt by a
Holder of written notice of such occurrence, then no payment or distribution of
any properties of the Company of any kind or character shall be made by the
Company on account of principal of (or premium, if any, on) or interest on the
Debentures or on account of the purchase or redemption or other acquisition of
Debentures unless and until such event of default shall have been cured or
waived in writing or shall have ceased to exist or such Senior Indebtedness
shall have been paid in full or otherwise discharged. Nothing in the foregoing
shall be construed to prohibit: (i) the issuance of any Common Shares to Holder
upon conversion or as payment of interest; or (ii) the accrual of any interest
or other amounts due pursuant to the terms of the Debenture.
(d) In the event that, notwithstanding the foregoing, the Company
shall make any payment to the Holder of any Debenture prohibited by the
foregoing provisions of this Section 2, then and in such event such payment
shall be paid over and delivered forthwith to the Company.
(e) Notwithstanding anything in this Debenture to the contrary, no
Person shall have any rights senior to the Holder with respect to the Collateral
Account (as defined in the Securities Purchase Agreement).
SECTION 3. CONVERSION.
(a) Conversion Right. Subject to the terms hereof and restrictions
and limitations contained herein, the Holder shall have the right, at such
Holder's option, at any time and from time to time to convert the outstanding
Principal Amount under this Debenture in whole or in part by delivering to the
Company a fully executed notice of conversion in the form of conversion notice
attached hereto as Exhibit A (the "CONVERSION NOTICE"), which may be
9
transmitted by facsimile. Such conversions of Principal Amount under this
Section 3(a), shall be applied, as specified by the Holder (as set forth in
writing to the Company) to reduce (x) the amount of Special Conversion Amounts
that may be converted on pursuant to Section 3(c) commencing with the next
Special Conversion Amount; (y) the Special Conversion Amounts starting with the
last Special Conversion Amount, or (z) all remaining Special Conversion Amounts
pro rata. In addition, the Holder may specify that conversions of Principal
Amounts be applied first to reduce any remaining Principal Amount due on the
Maturity Date (net of remaining Special Conversion Amounts) and thereafter to
reduce the Special Conversion Amounts starting with the last Special Conversion
Amount. In the event that no option is selected by the Holder, the amount
converted pursuant to this Section 3(a) shall be applied to reduce any remaining
Principal Amount due on the Maturity Date and thereafter the last Special
Conversion Amount.
(b) Common Shares Issuance Upon Conversion.
(i) Conversion Date Procedures. Upon conversion of this
Debenture pursuant to Section 3(a) above, the outstanding Principal Amount
hereunder shall be converted into such number of fully paid, validly issued and
non-assessable Common Shares, free of any liens, claims and encumbrances, as is
determined by dividing the outstanding Principal Amount being converted by the
Conversion Price. The date of any Conversion Notice hereunder shall be referred
to herein as the "CONVERSION DATE". If a conversion under this Debenture cannot
be effected in full for any reason, or if the Holder is converting less than all
of the outstanding Principal Amount hereunder pursuant to a Conversion Notice,
if the Holder so elects, the Company shall promptly deliver to the Holder (but
no later than five Trading Days after the Conversion Date) a Debenture for such
outstanding Principal Amount as has not been converted if this Debenture has
been surrendered to the Company for partial conversion. The Holder shall not be
required to physically surrender this Debenture to the Company upon any
conversion hereunder unless the full outstanding Principal Amount represented by
this Debenture is being converted or repaid. The Holder and the Company shall
maintain records showing the outstanding Principal Amount so converted and
repaid and the dates of such conversions or repayments or shall use such other
method, reasonably satisfactory to the Holder and the Company, so as not to
require physical surrender of this Debenture upon each such conversion or
repayment.
(ii) Stock Certificates. The Company will deliver to the
Holder not later than three (3) Trading Days after the Conversion Date, a
certificate or certificates which shall be free of restrictive legends and
trading restrictions except as provided in the Purchase Agreement, representing
the number of Common Shares being acquired upon the conversion of this
Debenture. In lieu of delivering physical certificates representing the Common
Shares issuable upon conversion of this Debenture, provided the Company's
transfer agent is participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer ("FAST") program, upon request of the Holder, the
Company shall use commercially reasonable efforts to cause its transfer agent to
electronically transmit such shares issuable upon conversion to the Holder (or
its designee), by crediting the account of the Holder's (or such designee's)
prime broker with DTC through its Deposit Withdrawal Agent Commission system
(provided that the same time periods herein as for stock certificates shall
apply). If in the case of any conversion hereunder, such certificate or
certificates are not delivered to or as directed by the
10
Holder by the third Trading Day after the 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 this Debenture tendered for
conversion. If the Company fails to deliver to the Holder such certificate or
certificates (or shares through DTC) pursuant to this Section 3(b) (free of any
restrictions on transfer) in accordance herewith, prior to the third Trading Day
after the Conversion Date, the Company shall pay to the Holder, in cash, an
amount equal to 2% of the Principal Amount per month until such shares are
delivered.
(c) Additional Conversion Rights.
(i) In addition to the conversion rights get set forth in
Section 3(a) above, the Holder shall have the right, exercisable as set forth
below, (A) to convert the Special Conversion Amount on each of the Special
Conversion Dates (such conversion right, the "SPECIAL CONVERSION RIGHT") and (B)
if there has occurred a Remedy Triggering Event at any time, then to convert the
Remedy Conversion Amount on a Remedy Conversion Date (such conversion right, the
"REMEDY CONVERSION RIGHT" and together with the Special Conversion Right, the
"ADDITIONAL CONVERSION RIGHTS"). Notwithstanding the foregoing, in no event
shall the Holder be permitted to exercise both the Special Conversion Right and
the Remedy Conversion Right in the same month.
(ii) For purposes of this Section 3(c), a "REMEDY TRIGGERING
EVENT" shall mean the occurrence of any of the following events: (A) the Average
Consolidated EBITDA of the Company for the period ending June 30, 2005 is less
than U.S.$5 million, (B) the Average Consolidated EBITDA of the Company for the
period ending September 30, 2005 is less than U.S.$6.25 million, (C) the Average
Consolidated EBITDA for any period ending on or after December 31, 2005 is less
than U.S.$7.5 million, or (D) an Event of Default shall have occurred.
Immediately upon the first occurrence of any Remedy Triggering Event, the
Principal Amount (including all accrued but unpaid interest thereon) shall be
automatically adjusted to an amount equal to 110% of such Principal Amount.
(iii) Not less than twenty-five (25) Trading Days nor more
than thirty (30) Trading Days preceding each Special Conversion Date or Remedy
Conversion Date, the Company shall give the Holder written notice (each, a
"COMPANY NOTICE") of the Company's irrevocable election to satisfy its
obligations with respect to the applicable Special Conversion Amount or Remedy
Conversion Amount by payment in full in cash or shares of such Special
Conversion Amount or Remedy Conversion Amount (as the case may be) on such
Special Conversion Date or Remedy Conversion Date as applicable upon the
Holder's exercise of the applicable Additional Conversion Right. If the
applicable Company Notice is not delivered within the foregoing prescribed
period, then the Company shall be deemed to have elected to irrevocably pay the
Special Conversion Amount or Remedy Conversion Amount (as the case may be) in
full in cash and such applicable Special Conversion Amount or Remedy Conversion
Amount shall be paid in cash on the applicable Special Conversion Date or Remedy
Conversion Date if the Holder shall have exercised the applicable Additional
Conversion Right.
(iv) Within five (5) Trading Days of receipt of the Company's
notice pursuant to Section 3(c)(iii) above, the Holder shall deliver written
notice (a "HOLDER NOTICE") of
11
exercise of its applicable Additional Conversion Right. If the Holder's Notice
is not received by the Company within the preceding time frame, the Holder shall
be deemed to have waived the applicable Additional Conversion Right for such
Special Conversion Date or the Remedy Conversion Date, as the case may be. If
the Company elects to pay the applicable Conversion Amount in Common Shares,
then the Company shall within three (3) Trading Days following the Special
Conversion Date or the Remedy Conversion Date (as the case may be), issue to the
Holder such number of Common Shares as shall be obtained by dividing the Special
Conversion Amount or the Remedy Conversion Amount (as the case may be) by the
Special Conversion Price. Notwithstanding the foregoing, (A) in the event that
the number of Common Shares issued to the Holder would cause the limitations in
Section 3(k) to be exceeded, that portion of the Special Conversion Amount or
the Remedy Conversion Amount (as the case may be) that would cause such limit to
be exceeded shall instead be paid in cash and (B) if there is a failure to
maintain to satisfy any Equity Condition on each Trading Day during the period
from the giving of the Holder's notice to convert until the Special Conversion
Date or the Remedy Conversion Date (as the case may be), then unless waived by
the Holder, the Special Conversion Amount or the Remedy Conversion Amount (as
the case may be) shall be paid in cash. If the Holder does not receive the
requisite number of Common Shares in the form required above within such three
(3) Trading Day period, the Company shall (a) if the Holder is required by its
broker to purchase (in an open market transaction or otherwise) Common Shares to
deliver in satisfaction of a sale by the Holder of the Common Shares which the
Holder anticipated receiving upon exercise of such Special Conversion Right,
then (1) pay in cash to the Holder the amount by which (x) the Holder's total
purchase price (including brokerage commissions, if any) for the Common Shares
so purchased exceeds (y) the amount obtained by multiplying (A) the number of
Common Shares that the Company was required to deliver to the Holder in
connection with the conversion at issue by (B) the price at which the sell order
giving rise to such purchase obligation was executed, and (2) at the option of
the Holder, either reinstate that portion of the Principal Amount, the
conversion of which was not honored, or deliver to the Holder the number of
Common Shares that would have been issued had the Company timely complied with
its delivery obligations hereunder, and (b) if the Holder so requests, then
shall pay the Special Conversion Amount due hereunder (together with any Default
Interest) or such portion as the Holder specified is to be paid in cash instead
of Common Shares within two (2) Business Days of such request by the Holder. All
holders of Debentures must be treated equally with respect to the Company's
election to satisfy the Special Conversion Amount in cash.
(v) Notwithstanding the foregoing, the Holder shall retain
all rights pursuant to Section 3(a) above, at any time until the Special
Conversion Date or the Remedy Conversion Date (as the case may be) to convert
any portion of the applicable Special Conversion Amount or the Remedy Conversion
Amount (as the case may be) at the Conversion Price.
(d) Mandatory Conversion.
(i) If, commencing on the date which is twelve (12) months
after the Effective Date, (A) the daily VWAP of the Common Shares has been at or
above 140% of the Conversion Price for at least 30 consecutive Trading Days (any
such 30 Trading Day period being a "TRIGGER PERIOD"), and (B) the aggregate
number of Common Shares traded on the Principal Market and the Approved Markets
shall be at least 65,000 shares per day (as adjusted
12
for stock splits, reverse splits, stock divided, and reorganizations) during
each Trading Day of the Trigger Period, then the Company shall have the right to
require the Holder to convert this Debenture in whole, as set forth and subject
to the conditions set forth below; provided that this election must apply to all
Debentures equally.
(ii) To exercise its right to require the Holder to convert
this Debenture following a Trigger Period, the Company must give to the Holder a
written notice (a "MANDATORY CONVERSION NOTICE") which notice must be given
within three Trading Days of the end of any Trigger Period, which notice shall
specify the date (the "MANDATORY CONVERSION DATE") on which this Debenture shall
be converted, which date shall be not less than ten Trading Days nor more than
20 Trading Days from the date such notice is received by the Holder, and on the
Mandatory Conversion Date, (i) the outstanding Principal Amount hereunder shall
be converted into such number of fully paid, validly issued and non-assessable
Common Shares, as is determined by dividing the outstanding Principal Amount
being converted by the then Conversion Price and (ii) the rights of the Holders
under the Debentures shall cease and the Holder shall be treated for all
purposes as having become an owner of Common Shares. Notwithstanding the
foregoing, the Company's right to require the conversion of this Debenture shall
be subject to the following conditions: at all times during the Trigger Period
and from the date of the Mandatory Conversion Notice to the Mandatory Conversion
Date, (A) all of the Equity Conditions have been satisfied, (B) the Common
Shares shall have been continually listed (and not suspended from trading) on
the Principal Market or an Approved Market; and (C) no Event of Default or event
which, with the giving of notice or the passage of time or both, would
constitute an Event of Default, shall have occurred.
(e) Conversion Price Adjustments.
(i) Stock Dividends, Splits and Combinations. If the Company
or any of its subsidiaries, at any time while the Debentures are outstanding (A)
shall pay a stock dividend or otherwise make a distribution or distributions on
any equity securities (including instruments or securities convertible into or
exchangeable for such equity securities) in Common Shares, (B) subdivide
outstanding Common Shares into a larger number of shares, or (C) combine
outstanding Common Shares into a smaller number of shares, then each Affected
Conversion Price (as defined below) shall be multiplied by a fraction, the
numerator of which shall be the number of shares of Common Shares outstanding
before such event and the denominator of which shall be the number of shares of
Common Shares outstanding after such event. Any adjustment made pursuant to this
Section 3(e)(i) 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 or combination.
As used herein, the Affected Conversion Prices (each an "AFFECTED
CONVERSION PRICE") shall refer to: (i) the Conversion Price; (ii) each reported
daily closing price of the Common Shares on the Principal Market occurring on
any Trading Day included in the period used for determining the Market Price,
which Trading Day occurred before the record date in the case of events referred
to in clause (A) of this subparagraph 3(e)(i) and before the effective date in
the case of the events referred to in clauses (B) and (C) of this subparagraph
3(e)(i).
13
(ii) Distributions. If the Company or any of its
subsidiaries, at any time while the Debentures are outstanding, shall distribute
to all holders of Common Shares evidences of its indebtedness or assets or cash
or rights or warrants to subscribe for or purchase any security of the Company
or any of its subsidiaries (excluding those referred to in Section 3(e)(i)
above), then concurrently with such distributions to holders of Common Shares,
the Company shall distribute to holders of the Debentures the amount of such
indebtedness, assets, cash or rights or warrants which the holders of Debentures
would have received had all their Debentures been converted into Common Shares
at the Conversion Price immediately prior to the record date for such
distribution.
(iii) Other Corporate Events. Prior to the consummation of
any recapitalization, reorganization, consolidation, merger, spin-off or other
business combination (other than a Change of Control) pursuant to which holders
of Common Shares are entitled to receive securities or other assets with respect
to or in exchange for Common Shares (a "CORPORATE EVENT"), the Company shall
make appropriate provision to insure that the Holder will thereafter have the
right to receive upon a conversion of this Debenture at the Conversion Price,
(i) in addition to the Common Shares receivable upon such conversion, such
securities or other assets to which the Holder would have been entitled with
respect to such Common Shares had such Common Shares been held by the Holder
upon the consummation of such Corporate Event or (ii) in lieu of the Common
Shares otherwise receivable upon such conversion, such securities or other
assets received by the holder of Common Shares in connection with the
consummation of such Corporate Event in such amounts as the Holder would have
been entitled to receive had this Debenture initially been issued with a
conversion rights for the form of such consideration (as opposed to shares of
Common Shares) at a conversion ratio for such consideration commensurate with
the Conversion Ratio. Provision made pursuant to the preceding sentence shall be
in a form and substance satisfactory to the Holder.
(iv) Rounding of Adjustments. All calculations under this
Section 3 or Section 1 shall be made to the nearest cent or the nearest 1/100th
of a share, as the case may be.
(v) Notice of Adjustments. Whenever any Affected Conversion
Price is adjusted pursuant to Section 3(d)(iii) above, the Company shall
promptly deliver to each holder of the Debentures, a notice setting forth the
Affected Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment, provided that any failure to
so provide such notice shall not affect the automatic adjustment hereunder.
(vi) Change in Control Transactions. If a Change in Control
Transaction occurs, the Company shall notify the Holder of such Change in
Control Transaction promptly, but in no event more than 5 Trading Days,
following such Change in Control Transaction. If a Change in Control Transaction
occurs, the Holder shall have the right, at its option, (A) to convert this
Debenture, in whole or in part, at the Special Conversion Price in effect as of
the day before the closing date of the Change in Control Transaction, into the
shares of stock or other securities, cash and/or property, if any, receivable by
Holders of Common Shares following such Change in Control Transaction, or (B) to
require the Company or its successor to redeem this Debenture in cash at 115% of
the Principal Amount (including accrued but unpaid interest). The Holder may
exercise its rights by sending notice to the Company within 10 Trading Days
following the receipt of the notice of the Change in Control from the
14
Company. If Holder does not notify the Company of its election within such 10
Trading Days, the Holder shall be deemed to have waived its rights under this
Section. If the Holder elects to convert all or a portion of this Debenture
under clause (A) of this paragraph, the Company or its successor shall promptly
deliver to the Holder the securities, cash and/or property to which the Holder
is entitled and if the Holder elects to cause the redemption of the Debenture
under clause (B) of this paragraph then the Company or its successor shall
promptly, but in no event more than 10 Trading Days after such election, pay the
redemption price to the Holder. In addition, if the Change of Control involves
the issuance by the surviving company of securities, cash and/or property, in
exchange for Common Shares, the Company shall make appropriate provision (in
form and substance reasonably satisfactory to the Holder of not less than 60% of
the aggregate Principal Amount of all Debentures then outstanding) to ensure
that this Debenture is convertible into such securities, cash and/or property
based on the exchange ratio for the Common Shares in the Change of Control
Transaction. This provision shall similarly apply to successive Change of
Control Transactions.
(vii) Other Events. If any event occurs of the type
contemplated by the provisions of this Section 3(e) but not expressly provided
for by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company's Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the Holder under this Debenture;
provided that no such adjustment will increase the Conversion Price as otherwise
determined pursuant to this Section 3(e).
(viii) Notice of Certain Events. If:
(A) the Company shall declare a dividend (or any other
distribution) on its Common Shares; or
(B) the Company shall declare a special nonrecurring
cash dividend on or a redemption of its Common Shares; or
(C) the Company shall authorize the granting to all
Holders of the Common Shares rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any rights; or
(D) the approval of any shareholders of the Company
shall be required in connection with any reclassification of the Common
Shares of the Company, 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 of exchange whereby the
Common Shares are 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 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 books of the Company, on
or prior to the date notice to the Company's stockholders generally is given, a
notice stating (x) the date on which a record is to be taken for
15
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 Common
Shares 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 Common Shares of record shall be entitled to exchange their
shares of Common Shares for securities, cash or other property deliverable upon
such reclassification, consolidation, merger, sale, transfer or share exchange.
(f) Reservation and Issuance of Underlying Securities. The Company
shall at all times reserve and keep available out of its authorized and unissued
Common Shares solely for the purpose of issuance upon conversion of this
Debenture (including repayments in stock), free from preemptive rights or any
other actual contingent purchase rights of Persons other than the Holders of the
Debentures, such number of its Common Shares as shall from time to time be
sufficient to effect the conversion of all Debentures; provided, however, that
the Company shall not be required to issue more than 4,000,000 Common Shares (as
adjusted for stock dividend, stock splits and other events described in Section
3) pursuant to the conversion of interest and principal repayment provisions of
the Debentures or exercise of the Warrants. The Company covenants that all
Common Shares that shall be so issuable shall, upon issue, be duly authorized,
validly issued, fully paid, nonassessable and freely tradeable, other than
transfer restrictions of applicable securities laws.
(g) No Fractions. Upon a conversion hereunder the Company shall not be
required to issue share certificates representing fractions of Common Shares,
but may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the closing price of a Common Shares 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 Common Share.
(h) Charges, Taxes and Expenses. Issuance of certificates for Common
Shares upon the conversion of this Debenture (including repayment in stock)
shall be made without charge to the holder hereof for any issue or transfer tax
or other incidental expense in respect of the issuance of such certificate, all
of which taxes and expenses shall be paid by the Company, and such certificates
shall be issued in the name of the Holder or in such name or names as may be
directed by the Holder; provided, however, that in the event certificates for
Common Shares are to be issued in a name other than the name of the Holder, this
Debenture when surrendered for conversion shall be accompanied by an assignment
form; and provided further, that the Company shall not be required to pay any
tax or taxes which may be payable in respect of any such transfer.
(i) Cancellation. After all of the Principal Amount (including accrued
but unpaid interest and default payments at any time owed on this Debenture)
have been paid in full or converted into Common Shares, this Debenture shall
automatically be deemed canceled and the Holder shall promptly surrender the
Debenture to the Company at the Company's principal executive offices.
16
(j) Notices Procedures. Any and all notices or other communications or
deliveries to be provided by the Holder hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by confirmed facsimile, or by a nationally recognized overnight courier service
to the Company at the facsimile telephone number or address of the principal
place of business of the Company as set forth in the Purchase Agreement. 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 by a
nationally recognized overnight courier service addressed to the Holder at the
facsimile telephone number or address of the Holder 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 delivered (i) upon receipt, when delivered
personally, (ii) when sent by facsimile, upon receipt if received on a Business
Day prior to 5:00 p.m. (Eastern Time), or on the first Business Day following
such receipt if received on a Business Day after 5:00 p.m. (Eastern Time) or
(iii) upon receipt, when deposited with a nationally recognized overnight
courier service.
(k) 9.99% Conversion Limitations. (i) The Company shall not effect the
conversion of this Debenture, and no Holder of this Debenture shall have the
right to convert this Debenture, to the extent that after giving effect to such
conversion, the number of Common Shares that may be acquired by the Holder upon
conversion (other than pursuant to a mandatory conversion in Section 3(d)) or
pursuant to the payment of interest in Common Shares, pursuant to the terms
hereof shall not exceed a number that, when added to the total number of Common
Shares deemed beneficially owned by such Holder, directly or indirectly (as
determined pursuant to the Securities Act (Ontario), as amended from time to
time), and to those Common Shares over which the Holder exercises control or
direction give the Holder beneficial ownership, directly or indirectly (as
determined pursuant to the Securities Act (Ontario), as amended from time to
time) or control or direction over, or a combination of both carrying more than
9.99% of the voting rights attached to voting securities of the Company for time
being outstanding (the "RESTRICTED OWNERSHIP PERCENTAGE").
(ii) After the Common Shares have been listed on an Approved
Market, the Company shall not effect any conversion of this Debenture (other
than pursuant to a mandatory conversion in Section 3(d)), and the Holder of this
Debenture shall not have the right to convert any portion of this Debenture, to
the extent that after giving effect to such conversion, the Holder (together
with the Holder's Affiliates) would beneficially own in excess of the Restricted
Ownership Percentage 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 Common Shares issuable
upon conversion of this Debenture with respect to which the determination of
such sentence is being made, but shall exclude the number of Common Shares 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 other 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 3(k)(ii), beneficial ownership shall be calculated in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended (the "1934
17
ACT"). For purposes of this Section 3(k)(ii), in determining the number of
outstanding Common Shares, the Holder may rely on the number of outstanding
Common Shares as reflected in (x) the Company's most recent Form 20-F, (y) a
more recent public announcement by the Company or (z) any other notice by the
Company or its transfer agent setting forth the number of Common Shares
outstanding. Upon the written or oral request of the Holder, the Company shall
within one Business Day confirm orally and in writing to the Holder the number
of Common Shares then outstanding. In any case, the number of outstanding Common
Shares 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 Common Shares
was reported.
(l) Reorganization. Notwithstanding any other provision of this
Debenture, on a reorganization of capital, the number of Common Shares into
which this Debenture may be converted and the Conversion Price, or both, must be
reorganized so that the Holder will not receive a benefit that holders of Common
Shares do not receive.
SECTION 4. DEFAULTS AND REMEDIES.
(a) Events of Default. An "EVENT OF DEFAULT" is: (i) the
suspension from trading or failure of the Common Shares to be listed on the
Principal Market for a period of five consecutive days or for more than an
aggregate of 10 days in any 365-day period; (ii) at any time following the tenth
consecutive Business Day that the number of shares reserved for issuance under
this Debenture is less than the number of shares of Common Shares that the
Holder would be entitled to receive upon a conversion of the full Principal
Amount of this Debenture (without regard to any limitations on conversion set
forth in Section 3(i)); (iii) in the case of a default in payment of the
principal amount or accrued but unpaid interest thereon continuing for at least
5 days of any of the Debentures on or after the date such payment is due (to the
extent such principal and/or amount has not been converted into Common Shares in
accordance with the terms hereof), including without limitation payments due on
any Interest Payment Date, Special Conversion Date or Remedy Conversion Date
where the Company has exercised its right to pay in cash; (iv) a default in the
timely issuance of Underlying Shares upon and in accordance with the terms
hereof, which default continues for five business days after the Company has
received written notice informing the Company that it has failed to issue shares
or deliver stock certificates within the fifth day following the Conversion
Date; (v) failure by the Company for ten (10) days after written notice has been
received by the Company to comply with any other material provision of any of
the Debentures, the Purchase Agreement, the Warrants or the Registration Rights
Agreement (including without limitation, the covenants contained in Section 3 of
the Purchase Agreement); (vi) a breach by the Company of its material
representations or warranties in the Purchase Agreement; (vii) any default after
any cure period under, or acceleration prior to maturity of, any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any indebtedness for money borrowed by the Company or any
of its subsidiaries for in excess of $500,000 or for money borrowed the
repayment of which is guaranteed by the Company or any of its Subsidiaries for
in excess of $500,000, whether such indebtedness or guarantee now exists or
shall be created hereafter; (viii) a final judgment or judgments for the payment
of money aggregating in excess of $2,500,000 are rendered against the Company or
any of its Subsidiaries and which judgments are not, within 60 days after the
entry hereof, bonded, discharged or stayed pending appeal, or are not discharged
18
within 60 days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a credit worthy
party shall not be included in calculating the $2,500,000 amount set forth above
so long as the Company provides the Holder a written statement from such insurer
or indemnity provider (which written statement shall be reasonably satisfactory
to the Holder) to the effect that such judgment is covered by insurance or an
indemnity and the Company will receive the proceeds of such insurance or
indemnity within 60 days of the issuance of such judgment; or (x) if the Company
or any of its Subsidiaries is subject to any Bankruptcy Event (as defined
below).
"BANKRUPTCY EVENT" means any of the following events: (a) the Company
or any subsidiary 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 subsidiary thereof; (b) there is commenced against the Company or
any subsidiary any such case or proceeding that is not dismissed within 60 days
after commencement; (c) the Company or any subsidiary 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 subsidiary 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 days; (e) the Company or any subsidiary
makes a general assignment for the benefit of creditors; (f) the Company or any
subsidiary fails to pay, or states that it is unable to pay or is unable to pay,
its debts generally as they become due; (g) the Company or any subsidiary calls
a meeting of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (h) the Company or any subsidiary, 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.
(b) Remedies. If an Event of Default occurs and is continuing with
respect to any of the Debentures, the Holder may declare all of the then
outstanding Principal Amount of this Debenture and all other Debentures held by
the Holder, including any interest due thereon, to be due and payable
immediately in cash, except that in the case of an Event of Default arising from
events described in clauses (viii) and (x) of Section 4(a), this Debenture shall
become due and payable without further action or notice. In the event of an
acceleration, the amount due and owing to the Holder shall be the greater of (1)
115% of the Principal Amount of the Debentures (including all accrued and unpaid
interest, if any) held by the Holder and (2) the product of (A) the highest
closing price for the Common Shares on the Principal Market for the twenty (20)
Trading days immediately preceding the Holder's acceleration and (B) the
Conversion Ratio. In either case the Company shall pay interest on such amount
in cash at the Default Rate to the Holder if such amount is not paid within
seven days of Holder's request. The remedies under this Debenture shall be
cumulative.
SECTION 5. COMPANY'S OPTION TO EFFECT COVENANT DEFEASANCE.
(a) The Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to Sections 3.13, 3.14 and
3.15 of the Purchase Agreement ("COVENANT DEFEASANCE") and thereafter any
omission to comply with such obligations shall not constitute an Event of
Default with respect to the Debentures. Other than as
19
set forth above, none of the other rights and obligations of the parties under
the Transaction Documents shall be affected.
(b) The following shall be the conditions to application of
Covenant Defeasance:
(i) the Company must irrevocably deposit in the Collateral
Account, for the benefit of the Holders of Debentures, cash in U.S. dollars,
non-callable U.S. Government Obligations (as defined below), or a combination
thereof, in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal of all
of the Debentures on the stated date for payment thereof or on the redemption
date, as the case may be;
(ii) the Company shall have delivered to the Holders an
Opinion of Counsel in the United States reasonably acceptable to the Holders
confirming that the Holders will not recognize income, gain or loss for federal
or Canadian income tax purposes as a result of such Covenant Defeasance and will
be subject to federal and Canadian income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(iii) such Covenant Defeasance shall not result in a breach
or violation of, or constitute a default under this Debenture, the Purchase
Agreement or any other material agreement or instrument to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(iv) the Company shall have delivered to the Holders an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others;
(v) the Company shall have delivered to the Holders an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for or relating to the Covenant Defeasance have
been complied with; and
(vi) No event or condition shall exist that would prevent the
Company from making payments of the principal of, premium, if any, and interest
on the Debentures on the date of such deposit on the date of such deposit.
(c) All money and U.S. Government Obligations (including the
proceeds thereof) deposited with the Trustee pursuant to this Section 5 in
respect of the outstanding Debentures shall be held in trust and applied by the
Trustee, in accordance with the provisions of the Debentures and the Purchase
Agreement, to the payment, either directly or through any paying agent
(including the Company acting as its own paying agent) as the Trustee may
determine, to the Holders of such Debentures of all sums due and to become due
thereon in respect of principal (and premium, if any) and interest, but such
money need not be segregated from other funds except to the extent required by
law.
20
(d) If the Trustee or any Paying Agent is unable to apply any
money in accordance with paragraph (c) of this Section 5 by reason of any order
or judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, then the Company's obligations under
this Debenture and the Purchase Agreement shall be revived and reinstated as
though no deposit had occurred pursuant to this Section 5 until such time as the
Trustee or Paying Agent is permitted to apply all such money in accordance with
paragraph (c) of this Section 5, and the Company shall execute all documents
reasonably satisfactory to the Holders evidencing such revival and
reinstatement.
(e) If the amount deposited in the Collateral Account, the Trustee
shall return to the Company the difference, if positive, between the balance in
the Collateral Account and the Principal Amount.
(f) For purposes of this Section, the following definitions apply:
"OFFICER'S CERTIFICATE" means a certificate signed by the chief
executive officer, the president or the chief financial officer of the Company.
"OPINION OF COUNSEL" means a written opinion of counsel, who may
be an officer, counsel or employee of the Company, and who shall be reasonably
acceptable to the Trustee.
"TRUSTEE" means a national bank with combined capital and surplus
in excess of $50,000,000.
"U.S. GOVERNMENT OBLIGATIONS" means securities that are (i) direct
obligations of the United States for the timely payment of which its full faith
and credit is pledged or (ii) obligations of a Person controlled or supervised
by and acting as an agency or instrumentality of the United States, the timely
payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States, which, in either case, are not callable or
redeemable at the option of the issuer thereof and shall also include a
depository receipt issued by a bank (as defined in Section 3(a)(2) of the
Securities Act) as custodian with respect to any such U.S. Government Obligation
or a specific payment of principal of or interest on any such U.S. Government
Obligation held by such custodian for the account of the holder of such
depository receipt; provided that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depository receipt from any amount received by the custodian in respect of
the U.S. Government Obligation or the specific payment of principal of or
interest on the U.S. Government Obligation evidenced by such depository receipt.
SECTION 6. GENERAL.
(a) Payment of Expenses. The Company agrees to pay all reasonable
charges and expenses, including attorneys' fees and expenses, which may be
incurred by the Holder in successfully enforcing this Debenture and/or
collecting any amount due under this Debenture.
(b) Savings Clause. In case any provision of this Debenture is
held by a court of competent jurisdiction to be excessive in scope or otherwise
invalid or unenforceable, such
21
provision shall be adjusted rather than voided, if possible, so that it is
enforceable to the maximum extent possible, and the validity and enforceability
of the remaining provisions of this Debenture will not in any way be affected or
impaired thereby. In no event shall the amount of interest paid hereunder exceed
the maximum rate of interest on the unpaid principal balance hereof allowable by
applicable law. If any sum is collected in excess of the applicable maximum
rate, the excess collected shall be applied to reduce the principal debt. If the
interest actually collected hereunder is still in excess of the applicable
maximum rate, the interest rate shall be reduced so as not to exceed the maximum
allowable under law.
(c) Assignment, Etc. Subject to compliance with applicable
securities laws, the Holder may assign or transfer this Debenture to any
transferee only with the prior written consent of the Company, which may not be
unreasonably withheld or delayed, provided that (i) the Holder may assign or
transfer this Debenture to any of such Holder's Affiliates without the consent
of the Company and (ii) upon any Event of Default, the Holder may assign or
transfer this Debenture without the consent of the Company. The Holder shall
notify the Company of any such assignment or transfer promptly. This Debenture
shall be binding upon the Company and its successors and shall inure to the
benefit of the Holder and its successors and permitted assigns.
(d) No Waiver. No failure on the part of the Holder to exercise,
and no delay in exercising any right, remedy or power hereunder shall operate as
a waiver thereof, nor shall any single or partial exercise by the Holder of any
right, remedy or power hereunder preclude any other or future exercise of any
other right, remedy or power. Each and every right, remedy or power hereby
granted to the Holder or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the Holder
from time to time.
(e) Governing Law; Jurisdiction.
(i) Governing Law. THIS DEBENTURE WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
ANY CONFLICTS OF LAWS PROVISIONS THEREOF THAT WOULD OTHERWISE REQUIRE THE
APPLICATION OF THE LAW OF ANY OTHER JURISDICTION.
(ii) Jurisdiction. The Company irrevocably submits to the
exclusive jurisdiction of any State or Federal Court sitting in the State of New
York, County of New York, over any suit, action, or proceeding arising out of or
relating to this Debenture. The Company irrevocably waives, to the fullest
extent permitted by law, any objection which it may now or hereafter have to the
laying of the venue of any such suit, action, or proceeding brought in such a
court and any claim that suit, action, or proceeding has been brought in an
inconvenient forum.
The Company agrees that the service of process upon it mailed
by certified or registered mail (and service so made shall be deemed complete
three days after the same has been posted as aforesaid) or by personal service
shall be deemed in every respect effective service of process upon it in any
such suit or proceeding. Nothing herein shall affect Holder's right to serve
process in any other manner permitted by law. The Company agrees that
22
a final non-appealable judgment in any such suit or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on such judgment
or in any other lawful manner.
(iii) No Jury Trial. The Company hereby knowingly and
voluntarily waives any and all rights it may have to a trial by jury with
respect to any litigation based on, or arising out of, under, or in connection
with, this Debenture.
(f) Replacement Debentures. This Debenture may be exchanged by
Holder at any time and from time to time for a Debenture or Debentures with
different denominations representing an equal aggregate outstanding Principal
Amount, as reasonably requested by Holder, upon surrendering the same. No
service charge will be made for such registration or exchange. In the event that
Holder notifies the Company that this Debenture has been lost, stolen or
destroyed, a replacement Debenture identical in all respects to the original
Debenture (except for registration number and principal amount, if different
than that shown on the original Debenture), shall be issued to the Holder,
provided that the Holder executes and delivers to the Company an agreement
reasonably satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection with the Debenture.
(g) (i) Subject to Section 6(g)(iii), until December ___, 2004,
any certificate representing Debentures issued on a transfer or exchange of this
Debenture and any certificate representing Underlying Shares shall be issued
with and bear the following legend:
UNLESS PERMITTED UNDER SECURITIES LEGISLATION, THE HOLDER OF THIS
SECURITY MUST NOT TRADE THE SECURITY BEFORE DECEMBER ___, 2004.
(ii) The Holder acknowledges that, while any certificate
representing Underlying Shares contains legends restricting their transfer, (i)
such securities cannot be traded through the facilities of the Toronto Stock
Exchange since the certificate is not freely transferable and consequently is
not "good delivery" in settlement of transactions on the Toronto Stock Exchange;
and (ii) that the Toronto Stock Exchange would deem the selling securityholder
to be responsible for any loss incurred on a sale made by him in such
securities. As such, at any such time that there is a restrictive legend on any
certificate representing Underlying Shares, such certificate shall also bear the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE LISTED ON THE
TORONTO STOCK EXCHANGE; HOWEVER, THE SAID SECURITIES CANNOT BE TRADED THROUGH
THE FACILITIES OF SUCH EXCHANGE SINCE THEY ARE NOT FREELY TRANSFERABLE, AND
CONSEQUENTLY ANY CERTIFICATE REPRESENTING SUCH SECURITIES IS "GOOD DELIVERY" IN
SETTLEMENT OF TRANSACTIONS ON THE TORONTO STOCK EXCHANGE.
(iii) The Company agrees to reissue certificates representing
Debentures or Underlying Shares, as the case may be, without the legends set
forth above in Section 6(g)(i) and Section 6(g)(ii) at such time as (i) such
securities are qualified for distribution under a prospectus in Ontario (it
being acknowledged that there must be a trade of such security) or (ii) such
securities are sold to a purchaser or purchasers in a transaction that meets the
requirements of (A)
23
Section 2.5 of Multilateral Instrument 45-102 - Resale of Securities (in the
opinion of counsel to the seller or the holder, in form and substance reasonably
satisfactory to the Company and its counsel) and (B) the requirements of the
Toronto Stock Exchange, if any; provided, that, the legend set forth above in
Section 6.2(b) may only be removed if there is no other restrictive legend on
the certificate representing such securities.
[Signature Page Follows]
24
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed on August 27, 2004.
INTEROIL CORPORATION
By:
----------------------------------
Name:
Title:
EXHIBIT A
FORM OF CONVERSION NOTICE
(To be Executed by the Holder
in order to Convert a Debenture)
The undersigned hereby elects to convert the aggregate outstanding Principal
Amount (as defined in the Debenture) indicated below of this Debenture into
Common Shares, no par value (the "Common Shares"), of INTEROIL CORPORATION. (the
"Company") according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any.
Conversion information:
-------------------------------------------------------
Date to Effect Conversion
-------------------------------------------------------
Aggregate Principal Amount of Debenture Being Converted
-------------------------------------------------------
Number of Common Shares to be Issued
-------------------------------------------------------
Conversion Price
The Principal Amount converted shall be applied as
follows:
- to reduce the Special Conversion Amount
commencing with the next one
- to reduce the Special Conversion Amount(s)
commencing with the last one
- to reduce pro-rata all remaining Special
Conversion Amounts
- to reduce any remaining Principal Amount due on
the Maturity Date (after subtracting all
remaining Special Conversion Amounts) and
thereafter any Special Conversion Amounts
commencing with the last one
-------------------------------------------------------
Signature
-------------------------------------------------------
Name
-------------------------------------------------------
Address
EXHIBIT B
FORM OF INTEREST PAYMENT ELECTION NOTICE
To: [HOLDER AT HOLDER'S ADDRESS]
Pursuant to Section 1(a) of Debenture No. ______ of INTEROIL
CORPORATION (the "Company") issued on August 27, 2004, we hereby notify you that
the Company is irrevocably electing to pay the accrued interest due on the
Interest Payment Date (as defined in the Debenture) which occurs on ______, 20__
(check one):
In full in cash on such Interest Payment Date.
________ In full in Interest Shares within three (3) Trading
Days following such Interest Payment Date.
________ In a combination of cash and Interest Shares within
three (3) Trading Days following such Interest
Payment Date in the following percentages:
_____% of cash
_____% of Interest Shares
INTEROIL CORPORATION
By:
-------------------------------------
Name:
Title:
EXHIBIT C
FORM OF SPECIAL CONVERSION AND
REMEDY CONVERSION NOTICE ELECTION NOTICE
To: [HOLDER AT HOLDER'S ADDRESS]
Pursuant to Section 3(c)(iii) of Debenture No. ______ of INTEROIL
CORPORATION issued on August 27, 2004, we hereby notify you that we are
irrevocably electing to pay the applicable outstanding Special Conversion Amount
or Remedy Conversion Amount (as defined in the Debenture) due on the applicable
Special Conversion Date or Remedy Conversion Date (as defined in the Debenture)
which occurs on ______, 20__ (check one) (the "Date"):
_________ In full in cash on the Date.
_________ Will honor in Common Shares within three (3)
Trading Days following the Date.
INTEROIL CORPORATION
By:
---------------------------------------
Name:
Title: