DEBENTURE
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
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 RULE 504 OF REGULATION D PROMULGATED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES LAWS.
US $400,000 December 31, 2005
8% CONVERTIBLE DEBENTURE DUE DECEMBER 31, 2008
THIS DEBENTURE of Mendocino Capital Partners, Inc., a Delaware
corporation (the "Company") in the aggregate principal amount of Four Hundred
Thousand Dollars (US $400,000), is designated as its $400,000, 8% Convertible
Debenture due December 31, 2005 (the "Debentures").
FOR VALUE RECEIVED, the Company promises to pay to Arrakis Select,
Ltd.or its registered assigns (the "Holder"), the principal sum of Four Hundred
Thousand Dollars (US $400,000), on or prior to December 31, 2005 (the "Maturity
Date") and to pay interest to the Holder on the principal sum at the rate of
eight percent (8%) per annum. Interest shall accrue daily commencing on the
Original Issuance Date (as defined in Section 1 below) in the form of cash or
common stock of the Company selected by the Holder subject to the provisions of
Section 2(b) hereof, until payment in full of the principal sum, together with
all accrued and unpaid interest, has been made or duly provided for. If at any
time after the Original Issuance Date an Event of Default has occurred and is
continuing, interest shall accrue at the rate of fifteen percent (15%) per annum
from the date of the Event of Default and the applicable cure period through and
including the date of payment. Interest due and payable hereunder shall be paid
to the person in whose name this Debenture (or one or more successor Debentures)
is registered on the records of the Company regarding registration and transfers
of the Debentures (the "Debenture Register"); provided, however, that the
Company's obligation to a transferee of this Debenture shall arise only if such
transfer, sale or other disposition is made in accordance with the terms and
conditions hereof and of applicable securities laws. A transfer of the right to
receive principal and interest under this Debenture shall be transferable only
through an appropriate entry in the Debenture Register as provided herein.
If the Company in order to consummate a merger (the "Merger") enters
into a merger agreement or similar agreement with other parties (the "Merger
Partners"), the Merger Partners will effective upon the consummation of any such
Merger assume all of the obligations, jointly and severally, with the Company,
under this Debenture and substitute the Company's Common Stock, into which this
Debenture is convertible, for common stock of such Merger Partner ("MP Common
Stock"). If the Merger occurs, then (i) references herein to Company Common
Stock shall be references to MP Common Stock and (ii) any references the Company
shall be read as references to the MP that issued the MP Common Stock as if this
Debenture were issued on the date hereof by the MP that issued the MP Common
Stock and the Company shall have no further obligations to issue shares of
Common Stock hereunder. For the benefit of the Holder, the Company shall use its
best efforts to effectuate the intentions of this paragraph.
If there is a Merger all of the provisions of this Debenture
(specifically including Section 4) shall be read and interpreted as if this
Debenture was issued by the Merger Partner issuing the MP Common Stock on the
date hereof and this Debenture was initially convertible into MP Common Stock.
This Debenture is subject to the following additional provisions:
Section 1. Definitions. As used in this Agreement, the
following terms shall have the following
meanings:
"Adjusted Conversion Price" means the lesser of the Fixed Conversion
Price or the Floating Conversion Price one day prior to the record date set for
the determination of stockholders entitled to receive dividends, distributions,
rights or warrants as provided for in Sections 4(c)(ii), (iii) and (iv).
"Company" shall mean the Company or in the event there is a Merger,
shall mean such Merger Partner that issues the MP Common Stock.
"Common Stock" shall mean the Common Stock of the Company, par value
$.001, and in the event there is a Merger, shall mean the MP Common Stock (as
adjusted for any reverse splits, forward splits, combination, reclassification
or stock dividend).
"Conversion Date" shall have the meaning set forth in Section 4(a)
hereof.
"Conversion Ratio" means, at any time, a fraction, the numerator of
which is the then outstanding principal amount represented by the Debentures
plus accrued but unpaid interest thereon, and the denominator of which is the
conversion price at such time.
"Fixed Conversion Price" shall have the meaning set forth in Section
4(c)i hereof.
"Floating Conversion Price" shall have the meaning set forth in Section
4(c)i hereof.
"Maximum Conversion" shall have the meaning set forth in Section
4(c)(i) hereof.
"Notice of Conversion" shall have the meaning set forth in Section
4(a) hereof.
"Original Issuance Date" shall mean the date of the first issuance of
this Debenture regardless of the number of transfers hereof.
Section 2. Denominations of Debentures; Interest on Debentures. The
Debentures are exchangeable for an equal aggregate principal amount of
Debentures of different authorized denominations, as requested by the Holder
surrendering the same, but shall not be issuable in denominations of less than
integral multiplies of One Thousand Dollars (US$1,000.00). No service charge to
the Holder will be made for such registration of transfer or exchange.
Section 3. Events of Default and Remedies.
I. "Event of Default," when used herein, means any one of the following
events (whatever the reason and whether any 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):
(a) any default in the payment of the principal of or interest on this
Debenture as and when the same shall become due and payable either at the
Maturity Date, by acceleration, conversion, or otherwise;
(b) the Company shall fail to observe or perform any other covenant,
agreement or warranty contained in, or otherwise commit any breach of, this
Debenture, and such failure or breach shall not have been remedied within five
(5) Business Days of its receipt of notice of such failure or breach;
(c) the occurrence of any event or breach or default by the Company
hereunder and , if there is a cure period, such failure or breach shall not have
been remedied within the cure period provided for therein;
(d) the Company or any of its Subsidiaries shall commence a voluntary
case under the United States Bankruptcy Code as now or hereafter in effect or
any successor thereto (the "Bankruptcy Code"); or an involuntary case is
commenced against the Company under the Bankruptcy Code and the petition is not
controverted within thirty (30) days, or is not dismissed within sixty (60)
days, after commencement of the case; or a "custodian" (as defined in the
Bankruptcy Code) is appointed for, or takes charge of, all or any substantial
part of the property of the Company or the Company commences any other
proceeding under any reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or there
is commenced against the Company any such proceeding which remains undismissed
for a period of sixty (60) days; or the Company is adjudicated insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or the Company suffers any appointment of any custodian
or the like for it or any substantial part of its property which continues
undischarged or unstayed for a period of thirty (30) days; or the Company makes
a general assignment for the benefit of creditors; or the Company shall fail to
pay, or shall state in writing that it is unable to pay its debts generally as
they become due; or the Company shall call a meeting of its creditors with a
view to arranging a composition or adjustment of its debts; or the Company shall
by any act or failure to act indicate its consent to, approval of or
acquiescence in any of the foregoing; or any corporate or other action is taken
by the Company for the purpose of effecting any of the foregoing;
(e) the Company shall default in any of its obligations under any
mortgage, indenture or instrument under which there may be issued, or by which
there may be secured or evidenced, any indebtedness of the Company in an amount
exceeding One Hundred Thousand Dollars ($100,000.00), whether such indebtedness
now exists or shall hereafter be created and such default shall result in such
indebtedness becoming or being declared due and payable prior to the date on
which it would otherwise become due and payable;
(f) the Company shall have its Common Stock deleted or delisted, as the
case may be, from the American Stock Exchange, OTCBB or other national
securities exchange or market on which such Common Stock is listed for trading
or suspended from trading thereon, and shall not have its Common Stock relisted
or have such suspension lifted, as the case may be, within ten (10) Trading Days
of such deletion or delisting;
(g) notwithstanding anything herein to the contrary, but subject to the
limitations set forth in the Debentures, the Company shall fail to deliver share
certificates representing the shares of Common Stock to be issued upon
conversion of the Debentures within three (3) Business Days after to the
Company's receipt of notice;
(h) the Company shall issue a press release, or otherwise make publicly
known, that it is not honoring a properly executed and duly delivered Notice of
Conversion complying with the terms of this Debenture, for any reason
whatsoever; and
(i) the Company issues or enters into an agreement to issue any
convertible security, any equity line of credit, or any security issued pursuant
to Rule 504 of Regulation D promulgated under the Securities Act, other than to
the Purchaser or any of its Affiliates or assigns, during the period commencing
on the date hereof and ending on the five year anniversary of the Post-Closing
Date.
II. (a) If any Event of Default occurs, and continues beyond a cure
period, if any, then the Holder may, by written notice to the Company,
accelerate all of the payments due under this Debenture by declaring all amounts
so due under this Debenture, whereupon the same shall become immediately due and
payable without presentment, demand, protest or other notice of any kind, all of
which are waived by the Company, notwithstanding anything contained herein to
the contrary, and the Holder may immediately and without expiration of any
additional grace period enforce any and all of its rights and remedies hereunder
and all other remedies available to it under applicable law. Such declaration
may be rescinded and annulled by the Holder at any time prior to payment
hereunder. No such rescission or annulment shall affect any subsequent Event of
Default or impair any right consequent thereon. This shall include, but not be
limited to the right to temporary, preliminary and permanent injunctive relief
without the requirement of posting any bond or undertaking.
(b) The Holder may thereupon proceed to protect and enforce its rights
either by suit in equity and/or by action at law or by other appropriate
proceedings whether for the specific performance (to the extent permitted by
law) of any covenant or agreement contained in this Debenture or in aid of the
exercise of any power granted in this Debenture, and proceed to enforce the
payment of any of the Debentures held by it, and to enforce any other legal or
equitable right of such Holder.
(c) Except as expressly provided for herein, the Company specifically
(i) waives all rights it may have (A) to notice of nonpayment, notice of
default, demand, presentment, protest and notice of protest with respect to any
of the obligations hereunder or the shares of Common Stock and (B) notice of
acceptance hereof or of any other action taken in reliance hereon, notice and
opportunity to be heard before the exercise by the Holder of the remedies of
self-help, set-off, or other summary procedures and all other demands and
notices of any type or description except for cure periods, if any; and (ii)
releases the Holder, its officers, directors, agents, employees and attorneys
from all claims for loss or damage caused by any act or failure to act on the
part of the Holder, its officers, attorneys, agents, directors and employees
except for gross negligence or willful misconduct.
(d) As a non-exclusive remedy, upon the occurrence of an Event of
Default, the Holder may convert the remaining principal amount of the Debentures
and accrued interest thereon at the lesser of the Fixed Conversion Price or the
Floating Conversion Price upon giving a Notice of Conversion to the Company.
Except as otherwise provided herein, the Company shall not have the right to
object to the conversion or the calculation of the applicable conversion price,
absent manifest error.
III. To effectuate the terms and provision of this Debenture, the
Holder may give notice of any default to the Attorney-in-Fact as set forth
herein and give a copy of such notice to the Company and its counsel,
simultaneously, and request the Attorney-in-Fact to comply with the terms of
this Debenture and all agreements entered into on behalf of the Company.
Section 4. Conversion.
(a) The unpaid principal amount of this Debenture shall be convertible
into shares of Common Stock at the Conversion Ratio as defined above, and
subject to the Limitation on Conversion described in subsection (k), at the
option of the Holder, in whole or in part, at any time, commencing on the
Original Issuance Date. Such shares of Common Stock shall be under restriction
pursuant to Rule 144 of the Securities Act. Any conversion under this Section
4(a) shall be for a minimum principal amount of $1,000.00 of the Debentures plus
the interest accrued and due thereon. The Holder shall effect conversions by
surrendering the Debenture to be converted to the Company Agent, together with
the form of notice attached hereto as Appendix I ("Notice of Conversion") in the
manner set forth in Section 4(j) hereof. Each Notice of Conversion shall specify
the principal amount of Debentures to be converted and the date on which such
conversion is to be effected (the "Conversion Date") which date shall not be
less than two (2) Business Days after the date on which the Notice of Conversion
is delivered to the Company. Subject to the last paragraph of Section 4(b)
hereof, each Notice of Conversion, once given, shall be irrevocable. If the
Holder is converting less than all of the principal amount represented by the
Debentures tendered by the Holder in the Notice of Conversion, the Company shall
deliver to the Holder a new Debenture for such principal amount as has not been
converted within two (2) Business Days of the Conversion Date. Upon conversion
in full of the Debentures or upon the Maturity Date, the Holder shall return the
Debentures to the Company for cancellation.
(b) Not later than two (2) Business Days after the Conversion Date, the
Company shall deliver to the Holder (i) a certificate or certificates
representing the number of shares of Common Stock being acquired upon the
conversion of the Debentures, and once the Debentures so converted in part shall
have been surrendered to the Company, the Company shall deliver to the Holder
Debentures in the principal amount of the Debentures not yet converted;
provided, however, that the Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of the
Debentures, until the Debentures are either delivered for conversion to the
Company or any transfer agent for the Debentures or Common Stock, or the Holder
notifies the Company that such Debentures have been lost, stolen or destroyed
and provides an affidavit of loss and an agreement reasonably acceptable to the
Company indemnifying the Company from any loss incurred by it in connection with
such loss, theft or destruction. In the case of a conversion pursuant to a
Notice of Conversion, if such certificate or certificates are not delivered by
the date required under this Section 4(b), the Holder shall be entitled, upon
providing written notice to the Company at any time on or before its receipt of
such certificate or certificates thereafter, to rescind such conversion, in
which event, the Company shall immediately return the Debentures tendered for
conversion.
(c) The conversion price for the Debentures in effect on any Conversion
Date shall be the lesser of (a) $0.01 (the "Fixed Conversion Price") and (b) one
hundred percent (100%) of the average of the three (3) lowest closing bid prices
per share of the Common Stock during the forty (40) Trading Days immediately
preceding the Conversion Date (the "Floating Conversion Price"); provided,
however, that the aggregate maximum number of shares of Common Stock that the
First Debenture and Second Debenture may be converted into shall be Three
Million (3,000,000) shares (the "Maximum Conversion"); and further provided,
however, that upon the Maximum Conversion, the Company may, at its option (a)
increase the Maximum Conversion or redeem the unconverted amount of the
Debentures in whole or in part at one hundred twenty five percent (125%) of the
unconverted amount of such Debentures being redeemed plus accrued interest
thereon. For purposes of determining the closing bid price on any day, reference
shall be to the closing bid price for a share of Common Stock on such date on
the OTCBB (or such other exchange, market, or other system that the Common Stock
is then traded on), as reported on Bloomberg, L.P. (or similar organization or
agency succeeding to its functions of reporting prices).
(ii) If the Company, at any time while any of the Debentures
are outstanding, (a) shall pay a stock dividend or otherwise make a distribution
or distributions on shares of its Common Stock payable in shares of its capital
stock (whether payable in shares of its Common Stock or of capital stock of any
class), (b) subdivide outstanding shares of Common Stock into a larger number of
shares, (c) combine outstanding shares of Common Stock into a smaller number of
shares, or (d) issue by reclassification any shares of capital stock of the
Company, the Fixed Conversion Price as applied in Section 4(c)(i) shall be
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock of the Company outstanding immediately before such event and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately after giving effect to such event. Any adjustment made pursuant to
this Section 4(c)(ii) 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 reclassification, provided that no
adjustment shall be made if the Company does not complete such dividend,
distribution, subdivision, combination or reclassification.
(iii) If, at any time while any of the Debentures are
outstanding, the Company issues or sells shares of Common Stock, or options,
warrants or other rights to subscribe for or purchase shares of Common Stock
(excluding shares of Common Stock issuable upon the conversion of the Debentures
or upon the exercise of options, warrants or conversion rights granted prior to
the date hereof) and at a price per share less than the Per Share Market Value
of the Common Stock at the issue date mentioned below, the Fixed Conversion
Price shall be multiplied by a fraction, the numerator of which shall be the
number of shares of Common Stock (excluding treasury shares, if any) outstanding
on the date of issuance of such shares, options, warrants or rights plus the
number of shares which the aggregate offering price of the total number of
shares so offered would purchase at such Per Share Market Value, and the
denominator of which shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding on the date of issuance of such options,
rights or warrants plus the number of additional shares of Common Stock offered
for subscription or purchase. Such adjustment shall be made whenever such
options, rights or warrants are issued (and if such adjustment is made, no
further adjustment will be made when such options, rights or warrants are
exercised), and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such options, rights or
warrants. However, upon the expiration of any options, right or warrant to
purchase Common Stock, the issuance of which resulted in an adjustment in the
conversion price designated in Section 4(c)(i) hereof pursuant to this Section
4(c)(iii), if any such options, right or warrant shall expire and shall not have
been exercised, the Fixed Conversion Price shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the conversion price made pursuant to the provisions of this
Section 4 after the issuance of such rights or warrants) had the adjustment of
the conversion price made upon the issuance of such options, rights or warrants
been made on the basis of offering for subscription or purchase only that number
of shares of Common Stock actually purchased upon the exercise of such options,
rights or warrants actually exercised. There will be no adjustment under this
Section 4(c)(iii) if Common Stock is issued due to the exercise of (x) employee
stock options that were issued to such employee, or (y) other options, warrants
or rights to subscribe for or purchase that, in any case, are issued at an
exercise or subscription price equal to Per Share Market Value.
(iv) If, at any time while Debentures are outstanding, the
Company distributes to all holders of Common Stock (and not to holders of
Debentures) evidences of Company indebtedness or assets, or rights or warrants
to subscribe for or purchase any security (excluding those referred to in
Section 4(c)(iii) hereof), then, in each such case, the conversion price at
which each Debenture then outstanding shall thereafter be convertible shall be
determined by multiplying (A) the Fixed Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction, the numerator of which shall be the Per
Share Market Value of the Common Stock determined as of the record date
mentioned above less the then fair market value at such record date of the
portion of such assets or evidence of indebtedness so distributed applicable to
one outstanding share of Common Stock as determined by the Board of Directors in
good faith and the denominator of which shall be the Per Share Market Value of
the Common Stock on such record date; provided, however, that in the event of a
distribution exceeding ten percent (10%) of the net assets of the Company, such
fair market value shall be determined by a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of nationally recognized standing (which may be the firm that
regularly examines the financial statements of the Company) (an "Appraiser")
selected in good faith by the holders of a majority of the principal amount of
the Debentures then outstanding; and provided, further, that the Company, after
receipt of the determination by such Appraiser, shall have the right to select
an additional Appraiser, in which case such fair market value shall be equal to
the average of the determinations by each such Appraiser. In either case the
adjustments shall be described in a statement provided to the Holder and all
other holders of Debentures of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above. The Company shall pay all fees and expenses of any Appraiser selected
under this Section 4(c)(iv).
(v) All calculations under this Section 4 shall be made to the
nearest 1/1000th of a cent or the nearest 1/1000th of a share, as the case may
be. Any calculation equal to or over .005 shall be rounded up to the next cent
or share and any calculation less than .005 shall be rounded down to the
previous cent or share.
(vi) In the event the conversion price is not adjusted
pursuant to Section 4(c)(ii) or (v), within two (2) Business Days following the
occurrence of an event described therein and, in the case of Section 4c(iv),
within three (3) Business Days following the determination of the fair market
value by the Appraiser(s), the Holder shall have the right to require the
Company to redeem the Debentures at 125% of the Purchase Price and
simultaneously pay such amount and all accrued interest and dividends to the
Holder pursuant to the written instructions provided by the Holder. The Company
will have two (2) Business Days to make the appropriate adjustment from the time
the Company is provided with written notice from the Holder of a failure to
comply with this Section 4.
(vii) Whenever the Fixed Conversion Price is adjusted pursuant
to Section 4(c)(ii),(iii) or (iv), the Company shall within two (2) Business
Days after the determination of the new Fixed Conversion Price mail and fax (in
the manner set forth in Section 4(j) hereof) to the Holder and to each other
holder of Debentures, a notice ("Company Notice of Conversion Price Adjustment")
setting forth the Fixed Conversion Price after such adjustment and setting forth
a brief statement of the facts requiring such adjustment.
(viii) In case of any reclassification of the Common Stock,
any consolidation or merger of the Company with or into another person, the sale
or transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then each holder of Debentures then
outstanding shall have the right thereafter to convert such Debentures only into
the shares of stock and other securities and property receivable upon or deemed
to be held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange (except in the event the
property is cash, then the Holder shall have the right to convert the Debentures
and receive cash in the same manner as other stockholders), and the Holder shall
be entitled upon such event to receive such amount of securities or property as
the holder of shares of the Common Stock into which such Debentures could have
been converted immediately prior to such reclassification, consolidation,
merger, sale, transfer or share exchange would have been entitled. The terms of
any such consolidation, merger, sale, transfer or share exchange shall include
such terms so as to continue to give to the Holder the right to receive the
securities or property set forth in this Section 4(c)(viii) upon any conversion
following such consolidation, merger, sale, transfer or share exchange. This
provision shall similarly apply to successive reclassifications, consolidations,
mergers, sales, transfers or share exchanges;
(ix) If:
(A) the Company shall declare a dividend (or any
other distribution) on its Common
Stock; or
(B) the Company shall declare a special non-recurring
cash dividend redemption of its
Common Stock; or
(C) the Company shall authorize the grant to all
holders of the Common Stock rights or warrants
to subscribe for or purchase any shares of
capital stock of any class or of any rights; or
(D) the approval of any stockholders of the Company
shall be required in connection with any
reclassification of the Common Stock of the
Company (other than a subdivision or combination
of the outstanding shares of 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,
or 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 the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Debentures, and shall cause to be mailed and faxed
to the Holder and each other holder of the Debentures at their last addresses
and facsimile number set forth in the Debenture Register at least twenty (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 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, share exchange, dissolution, liquidation
or winding-up is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding-up; provided, however, that the failure to
mail such notice or any defect therein or in the mailing thereof shall not
affect the validity of the corporate action required to be specified in such
notice.
(d) If at any time conditions shall arise by reason of action or
failure to act by the Company, which action or failure to act, in the opinion of
the Board of Directors of the Company, is not adequately covered by the other
provisions hereof and which might materially and adversely affect the rights of
the Holder and all other holders of Debentures (different or distinguishable
from the effect generally on rights of holders of any class of the Company's
capital stock), the Company shall, at least twenty (20) calendar days prior to
the effective date of such action, mail and fax a written notice to each holder
of Debentures briefly describing the action contemplated, and an Appraiser
selected by the holders of majority in principal amount of the outstanding
Debentures shall give its opinion as to the adjustment, if any (not inconsistent
with the standards established in this Section 4 and the Debentures), of the
conversion price (including, if necessary, any adjustment as to the securities
into which Debentures may thereafter be convertible) and any distribution which
is or would be required to preserve without diluting the rights of the holders
of Debentures; provided, however, that the Company, after receipt of the
determination by such Appraiser, shall have the right to select an additional
Appraiser, in which case the adjustment shall be equal to the average of the
adjustments recommended by each such Appraiser. The Company shall pay all fees
and expenses of any Appraiser selected under this Section 4(d). The Board of
Directors of the Company shall make the adjustment recommended forthwith upon
the receipt of such opinion or opinions or the taking of any such action
contemplated, as the case may be; provided, however, that no such adjustment of
the conversion price shall be made which, in the opinion of the Appraiser(s)
giving the aforesaid opinion or opinions, would result in an increase of the
conversion price above the conversion price then in effect.
(e) Subject to the terms and limitations set forth in the Debentures
including without limitation, Sections 4.14 and 4.28 thereof, the Company
covenants and agrees that it shall, at all times, reserve and keep available out
of its authorized and unissued Common Stock solely for the purpose of issuance
upon conversion of the Debentures as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holder of the Debentures, two (2) times such number of shares of Common Stock as
shall be issuable (taking into account the adjustments and restrictions of
Section 4(c) and Section 4(d) hereof) upon the conversion of the aggregate
principal amount of the outstanding Debentures. The Company covenants that,
subject to the limitations set forth in this Section 4(e), all shares of Common
Stock that shall be issuable upon conversion of the Debentures shall, upon
issuance, be duly and validly authorized and issued and fully paid and
non-assessable.
(f) No fractional shares of Common Stock shall be issuable upon a
conversion hereunder and the number of shares to be issued shall be rounded up
to the nearest whole share. If a fractional share interest arises upon any
conversion hereunder, the Company shall eliminate such fractional share interest
by issuing to the Holder an additional full share of Common Stock.
(g) The issuance of a certificate or certificates for shares of Common
Stock upon conversion of the Debentures shall be made without charge to the
Holder for any documentary stamp or similar taxes that may be payable in respect
of the issuance or delivery of such certificate, provided that the Company shall
not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion in
a name other than that of the Holder 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.
(h) The Debentures converted into Common Stock shall be canceled
upon conversion.
(i) On the Maturity Date, the unconverted principal amount of the
Debentures and all interest due thereon shall either be paid off in full by the
Company or, if payment in full is not received within two (2) Business Days
after the Maturity Date, convert automatically into shares of Common Stock at
the lesser of the Fixed Conversion Price and the Floating Conversion Price as
set forth in Section 4(c)(i).
(j) Each Notice of Conversion shall be given by facsimile no later than
4:00 pm California time on any Business Day. Any such notice shall be deemed
given and effective upon the transmission of such facsimile at the facsimile
telephone of the Company (with printed confirmation of transmission). In the
event that the Company receives the Notice of Conversion after 6:00 p.m.
California time on such day, or the Holder receives the Company Notice of
Conversion Price Adjustment after 6:00 p.m. California time, any such notice
shall be deemed to have been given on the next Business Day.
(k) the conversion rights of the Purchaser set forth in the
Debentures shall be limited, solely to the extent required, from time to time,
such that, unless the Purchaser gives written notice 75 days in advance to the
Company of the Purchaser's intention to exceed the Limitation on Conversion as
defined herein, with respect to all or a specified amount of the Debentures and
the corresponding number of the Underlying Shares in no instance shall the
Purchaser (singularly, together with any Persons who in the determination of the
Purchaser, together with the Purchaser, constitute a group as defined in Rule
13d-5 of the Exchange Act) be entitled to convert the Debentures to the extent
such conversion would result in the Purchaser beneficially owning more than five
percent (5%) of the outstanding shares of Common Stock of the Company. For these
purposes, beneficial ownership shall be defined and calculated in accordance
with Rule 13d-3, promulgated under the Exchange Act (the foregoing being herein
referred to as the "Limitation on Conversion"); provided, however, that the
Limitation on Conversion shall not apply to any forced or automatic conversion
pursuant to this Agreement or the Debentures; and provided, further that if the
Purchaser shall have declared an Event of Default and, if a cure period is
provided, the Company shall not have properly and fully cured such Event of
Default within any such cure period, the provisions of this Section 4.18 shall
be null and void from and after such date. The Company shall, promptly upon its
receipt of a Notice of Conversion tendered by the Purchaser (or its sole
designee) for the Debentures, as applicable, notify the Purchaser by telephone
and by facsimile (the "Debenture Notice") of the number of shares of Common
Stock outstanding on such date and the number of Underlying Shares, which would
be issuable to the Purchaser (or its sole designee, as the case may be) if the
conversion requested in such Notice of Conversion were effected in full and the
number of shares of Common Stock outstanding giving full effect to such
conversion whereupon, in accordance with the Debentures, notwithstanding
anything to the contrary set forth in the Debentures, the Purchaser may, by
notice to the Company within one (1) Business Day of its receipt of the
Debenture Notice by facsimile, revoke such conversion to the extent (in whole or
in part) that such Purchaser determines that such conversion would result in the
ownership by such Purchaser of shares of Common Stock in excess of the
Limitation on Conversion. The Debenture Notice shall begin the 75 day advance
notice required in this subsection (k).
Section 5. Redemption of Debentures. (a) At any time after the
Execution Date, so long as no Event of Default has occurred and, if a cure
period is provided, has not been cured, the Company shall have the option to
redeem any unconverted amount of the Debentures, either in part or whole, upon
no less than thirty (30) days written notice thereof given to the Holder (the
"Redemption Notice"), at one hundred twenty five percent (125%) of the
unconverted amount of the Debentures plus accrued interest thereon (the
"Redemption Price"). Notwithstanding anything contained herein to the contrary,
if the Company decides to redeem the outstanding principal amount of the
Debenture under the second proviso in the first sentence of Section 4(c)(i) of
this Debenture, the Company shall have three (3) Business Days from their
decision to redeem the Debenture in order to effectuate the redemption of such
principal amount of the outstanding Debenture.
(b) Within three (3) Business Days prior to the date fixed for
redemption in the Redemption Notice, the Company shall deposit the Redemption
Price by wire transfer to the Company's transfer agent. Upon receipt of the
Redemption Price, on such redemption date, the transfer agent shall release the
Redemption Price to the Holder and return the remaining Debentures to the
Company.
(c) In the event that the Company fails to deposit the Redemption Price
in the transfer agent's account within the time allocated in Section 5(b)
hereof, then the redemption shall be declared null and void.
Section 6. Intentionally Omitted.
Section 7. Absolute Payment Obligation; Limitation on Prepayment.
Except as expressly provided herein, no provision of this Debenture shall alter
or impair the obligation of the Company, which is absolute and unconditional, to
pay the principal of, and interest on, this Debenture at the time, place, and
rate, and in the coin or currency, herein prescribed. This Debenture is a direct
obligation of the Company. This Debenture ranks pari passu with all other
Debentures now or hereafter issued under the terms set forth herein. The Company
may not prepay any portion of the outstanding principal amount on the Debentures
except in accordance with Sections 4(c)(i) or 5 hereof.
Section 8. No Rights of Stockholders. Except as otherwise provided
herein, this Debenture shall not entitle the Holder to any of the rights of a
stockholder of the Company, including without limitation, the right to vote on
or consent to any action, to receive dividends and other distributions, or to
receive any notice of, or to attend, meetings of stockholders or any other
proceedings of the Company, unless and to the extent converted into shares of
Common Stock in accordance with the terms hereof.
Section 9. Loss, Theft, Mutilation or Destruction. 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 an affidavit of
such loss, theft or destruction of such Debenture, and, if requested by the
Company, an agreement to indemnity the Company in form reasonably acceptable to
the Company.
Section 10. Governing Law. This Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of
California without regard to the principles of conflicts of law thereof. Any
action to enforce the terms of this Debenture, or any other Transaction Document
shall be exclusively brought in the state and/or federal courts in the state and
county of California. Service of process in any action by the Holder to enforce
the terms of this Debenture may be made by serving a copy of the summons and
complaint, in addition to any other relevant documents, by commercial overnight
courier to the Company at its principal address.
Section 11. Notices. Any notice, request, demand, waiver, consent,
approval or other communication which is required or permitted to be given to
any party hereunder shall be in writing and shall be deemed duly given only if
delivered to the party personally or sent to the party by facsimile upon
electronic confirmation receipt (promptly followed by a hard-copy delivered in
accordance with this Section 12) or three days after being mailed by registered
or certified mail (return receipt requested), with postage and registration or
certification fees thereon prepaid, or if sent by nationally recognized
overnight courier, one day after being mailed, addressed to the party at its
principal address or such other address as may be designated hereafter by notice
given pursuant to the terms of this Section 11.
Section 12. 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
in any other occasion. Any waiver must be in writing.
Section 13. Invalidity. If any provision of this Debenture is held to
be invalid, illegal or unenforceable, the balance of this Debenture shall remain
in effect, and if any provision is held to be inapplicable to any person or
circumstance, it shall nevertheless remain applicable to all other persons and
circumstances.
Section 14. Payment Dates. 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 following Business Day.
Section 15. Transfer; Assignment. This Debenture may not be
transferred or assigned, in whole or in part, at any time, except in
compliance by the transferor and the transferee with applicable federal and
state securities laws.
Section 16. Future Financing. If, at any time this Debenture is
outstanding, the Company, or its successors in interest due to mergers,
consolidations and/or acquisitions (the "Successors-in-Interest"), is funded an
amount equal to or exceeding Five Million United States dollars ($5,000,000),
the Company or the Successors-in-Interest, as the case may be, agrees to pay the
Purchaser an amount equal to One Hundred Fifty Percent (150%) of the then
outstanding Debenture (the "Lump Sum Payment"). Upon the Purchaser's receipt of
the Lump Sum Payment, any and all remaining obligations then outstanding between
the Company or the Successors-in-Interest, as the case may be, and this
Debenture shall be deem satisfied, and this Debenture shall be terminated. This
provision shall survive both Closing and Post-Closing.
Section 17. Fees of Enforcement. In the event any Party commences legal
action to enforce its rights under this Debenture, the non-prevailing party
shall pay all reasonable costs and expenses (including but not limited to
reasonable attorney's fees, accountant's fees, appraiser's fees and
investigative fees) incurred in enforcing such rights.
[Signature Page Follows]
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized as of the date first above
indicated.
Mendocino Capital Partners, Inc.
Attest: ______________________ By: ______________________________
Name:
Title: Chief Executive Officer
APPENDIX I
NOTICE OF CONVERSION
AT THE ELECTION OF THE HOLDER
(To be Executed by the Registered Holder
in order to Convert the Debentures)
Except as provided by Section 4(b) of the Debentures, the undersigned hereby
irrevocably elects to convert the attached Debenture into shares of Common
Stock, par value [$0.001] per share (the "Common Stock"), of Mendocino Capital
Partners, Inc. (the "Company"), or, if a Merger (as defined in the Debenture)
has occurred, into shares of MP Common Stock (as defined in the Debenture)
according to the provisions hereof, as of the date written below. If shares are
to be issued in the name of a person other than 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 fees will be charged to the Holder, except for
transfer taxes, if any.
Conversion calculations:
Date to Effect Conversion
Principal Amount of Debentures to be Converted
Interest to be Converted or Paid
Applicable Conversion Price (Pursuant to Section 4(c)(v))
Number of Shares to be Issued Upon
Conversion
Signature
Name
Address
APPENDIX I
NOTICE OF CONVERSION
AT THE ELECTION OF THE HOLDER
(To be Executed by the Registered Holder
in order to Convert the Debentures)
Except as provided by Section 4(b) of the Debentures, the undersigned hereby
irrevocably elects to convert the attached Debenture into shares of Common
Stock, par value $0.00] per share (the "Common Stock"), of Mendocino Capital
Partners, Inc. (the "Company"), or, if a Merger (as defined in the Debenture)
has occurred, into shares of MP Common Stock (as defined in the Debenture)
according to the provisions hereof, as of the date written below. If shares are
to be issued in the name of a person other than 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 fees will be charged to the Holder, except for
transfer taxes, if any.
Conversion calculations:
Date to Effect Conversion
Principal Amount of Debentures to be Converted
Interest to be Converted or Paid
Applicable Conversion Price (Pursuant to Section 4(c)(v))
Number of Shares to be Issued Upon Conversion
Signature
Name
Address