<PAGE>
EXHIBIT 10.2
6% CONVERTIBLE DEBENTURE
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON
CONVERSION HEREOF HAVE BEEN REGISTERED WITH THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION
OF ANY STATE OR UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). THE SECURITIES ARE RESTRICTED AND MAY NOT BE OFFERED,
RESOLD, PLEDGED OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION
FROM SUCH REGISTRATION REQUIREMENTS.
No. 1 $1,000,000 Principal Amount
Stan Lee Media, Inc.
6% CONVERTIBLE DEBENTURE DUE NOVEMBER 30, 2003
THIS DEBENTURE is issued by Stan Lee Media, Inc., a Colorado corporation
(the "Company"), and is part of an issue of an aggregate of up to $2,200,000
principal amount of 6% Convertible Debentures due November 30, 2003 (the
"Convertible Debentures").
FOR VALUE RECEIVED, the Company promises to pay to Bond Street Partners,
L.P., or permitted assigns (the "Holder"), the principal sum of One Million and
------
00/100 (US $1,000,000) Dollars on November 30, 2003 (the "Maturity Date") and to
-------------
pay interest on the principal sum outstanding from time to time at the rate of
6% per annum accruing from the date of initial issuance. Accrual of interest
shall commence on the first business day to occur after the date of initial
issuance and continue daily on the basis of a 360 day year until payment in full
of the principal sum has been made or duly provided for. If the Maturity Date
is not a business day in the State of California, then such payment shall be
made on the next succeeding business day. Subject to the provisions of Section
4 below, principal and accrued interest on this Debenture are payable in cash on
the Maturity Date, at the address last appearing on the Debenture Register of
the Company as designated in writing by the Holder from time to time. The
Company will pay the principal of and any accrued but unpaid interest due upon
this Debenture on the Maturity Date, less any amounts required by law to be
deducted, to the registered holder of this Debenture as of the tenth day prior
to the Maturity Date and addressed to such holder at the last address appearing
on the Debenture register maintained by the Company (the "Debenture Register").
The forwarding of such check shall constitute a payment of principal and
interest hereunder and shall satisfy and discharge the
<PAGE>
liability for principal and interest on this Debenture to the extent of the sum
represented by such check, plus any amounts so deducted.
This Debenture is subject to the following additional provisions:
1. Withholding and Issuance Taxes. The Company shall be entitled to
------------------------------
withhold from all payments of principal of, and interest on, this Debenture any
amounts required to be withheld under the applicable provisions of the United
States income tax laws or other applicable laws at the time of such payments,
and Holder shall execute and deliver all required documentation in connection
therewith. The issuance of certificates for shares of common stock, no par
value (the "Common Stock"), of the Company upon conversion of this Debenture
shall be made without charge to the Holder for any United States issuance tax in
respect thereof, 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 certificate in a name other than that of the Holder of this
Debenture.
2. Transfer of Debenture. This Debenture has been issued subject to
---------------------
investment representations of the original purchaser hereof and may be
transferred or exchanged only in compliance with the Securities Act of 1933, as
amended (the "Securities Act"), and other applicable state and foreign
--------------
securities laws. The Holder shall deliver written notice to the Company of any
proposed transfer of this Debenture. In the event of any proposed transfer of
this Debenture, the Company may require, prior to issuance of a new Debenture in
the name of such other person, that it receive reasonable transfer documentation
including legal opinions that the issuance of the Debenture in such other name
does not and will not cause a violation of the Securities Act or any applicable
state or foreign securities laws. Prior to due presentment for transfer of
this Debenture, the Company and any agent of the Company may treat the person in
whose name this Debenture is duly registered on the Company's Debenture Register
as the owner hereof for the purpose of receiving payment as herein provided and
for all other purposes, whether or not this Debenture be overdue, and neither
the Company nor any such agent shall be affected by notice to the contrary. This
Debenture has been executed and delivered pursuant to the Securities Purchase
Agreement dated as of November 30, 2000 between the Company and the original
Holder (the "Purchase Agreement"), and is subject to the terms and conditions of
------------------
the Purchase Agreement, which are, by this reference, incorporated herein and
made a part hereof. Capitalized terms used and not otherwise defined herein
shall have the meanings set forth for such terms in the Purchase Agreement.
3. Conversion. The Holder of this Debenture is entitled, at its option,
----------
to convert, at any time after the initial issuance of the Convertible
Debentures, the Principal Amount of this Debenture or any portion thereof,
together with accrued and unpaid interest on such Principal Amount, into shares
of Common Stock as follows:
<PAGE>
(a) Right to Convert.
----------------
(i) Subject to the terms, conditions, and restrictions of this
Section 3, at any time after the initial issuance of the Convertible Debentures,
the Holder of this Debenture shall have the right to convert all or any portion
of the Principal Amount of this Debenture, together with the accrued and unpaid
interest on such Principal Amount so converted, into that number of fully-paid
and nonassessable shares of Common Stock (rounded to the nearest whole share in
accordance with Subsection 3(e)), at the Conversion Rate (as defined below).
(ii) Anything in Subsection 3(a)(i) to the contrary notwithstanding,
in no event shall any Holder be entitled to convert all or any portion of the
Principal Amount of this Debenture in excess of that amount of the Principal
Amount of this Debenture that, upon giving effect to such conversion, would
cause the aggregate number of shares of Common Stock beneficially owned by the
Holder and its "affiliates" (as defined in Rule 405 under the Securities Act) to
----------
exceed 4.99% of the outstanding shares of the Common Stock following such
conversion. For purposes of this Subsection, the aggregate number of shares of
Common Stock beneficially owned by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of this Debenture
with respect to which the determination is being made, but shall exclude the
number of shares of Common Stock that would be issuable upon (i) conversion of
the remaining, nonconverted portion of the Principal Amount of this Debenture
beneficially owned by the Holder and its affiliates and (ii) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company (including, without limitation, any warrants or convertible
preferred stock) subject to a limitation on conversion or exercise analogous to
the limitation contained herein beneficially owned by the Holder and its
affiliates. Except as set forth in the preceding sentence, for purposes of this
Subsection 3(a)(ii), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
--------
Act"). For purposes of this Subsection, in determining the number of
---
outstanding shares of Common Stock, a Holder may rely on the number of
outstanding shares of Common Stock as reflected in (1) the Company's most recent
Form 10-QSB or Form 10-KSB, as the case may be, (2) a more recent public
announcement by the Company or (3) any other notice by the Company or its
transfer agent setting forth the number of shares of Common Stock outstanding.
For any reason at any time, upon the written or oral request of a Holder, the
Company shall promptly confirm orally and in writing to any such Holder the
number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares Common Stock shall be determined after giving effect to
conversions of this Debenture by such Holder since the date as of which such
number of outstanding shares of Common Stock was reported. To the extent that
the limitation contained in this Subsection 3(a)(ii) applies, the determination
of whether such portion of this Debenture is convertible (in relation to other
securities owned by a Holder) and of what portion of this Debenture is
convertible shall be in the sole discretion of such Holder, and (subject to the
restriction set forth below) the submission of this Debenture for conversion
shall be deemed to be such Holder's determination of whether such portion of
this Debenture is convertible (in relation to other securities owned by such
Holder) and of what portion of this Debenture is convertible, in each case
subject to such aggregate percentage limitation, and the Company shall have no
obligation or right to verify or confirm the accuracy of such determination.
Nothing contained herein shall be deemed to restrict the right of a Holder to
convert such portion of this Debenture at such time as such conversion will not
violate the
<PAGE>
provisions of this Subsection. A Holder of this Debenture may waive the
provisions of this Subsection 3(a)(ii) as to itself (and solely as to itself)
upon not less than 75 days' prior notice to the Company, and the provisions of
this Subsection 3(a)(ii) shall continue to apply until such 75/th/ day (or such
later date as may be specified in such notice of waiver). No conversion in
violation of this Subsection 3(a)(ii), but otherwise in accordance with this
Debenture, shall affect the status of the Common Stock issued upon such
conversion as validly issued, fully-paid and nonassessable. Subsection 3(g)
below sets forth additional limitations on the Company's obligation to issue
shares of Common Stock upon conversion of this Debenture.
(b) Conversion Rate and Other Definitions. The number of shares of Common
-------------------------------------
Stock issuable upon conversion of all or any portion of the Principal Amount of
this Debenture pursuant to Subsection (3)(a) shall be determined according to
the following formula (the "Conversion Rate"):
---------------
Conversion Amount
-----------------
Conversion Price
For purposes of this Debenture, the following terms shall have the
following meanings:
"Change of Control" means:
-----------------
(i) The acquisition by any Person (as defined below) of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 40% or more of either (x) the then outstanding shares of Common Stock of the
Company (the "Outstanding Company Common Stock") or (y) the combined voting
--------------------------------
power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
--------------------------
Securities"); provided, however, that for purposes of this subsection (i), the
----------
following acquisitions of stock shall not result in a Change of Control: (A)
any acquisition directly from the Company, (B) any acquisition by the Company,
(C) any acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (D)
any acquisition by any corporation pursuant to a transaction that complies with
clauses (A), (B), and (C) of subsection (iii) of this definition; or
(ii) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
---------------
of the Incumbent Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election, by the Company's shareholders was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Incumbent Board; or
(iii) Consummation of a reorganization, merger, or consolidation or
sale or other disposition of all or substantially all of the assets of the
Company (a "Business Combination"), in
--------------------
<PAGE>
each case, unless following such Business Combination, (A) all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and Outstanding Company
Voting Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 50% of, respectively, the outstanding
shares of common stock and the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Business Combination,
including, without limitation, a corporation that as a result of such
transaction owns the Company or all or substantially all of the Company's assets
either directly or through one or more subsidiaries (any such corporation being
referred to herein as a "Resulting Company"), in substantially the same
-----------------
proportions as their ownership of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, immediately prior to
such Business Combination, (B) no Person (excluding any employee benefit plan
(or related trust) of the Company or a Resulting Company) beneficially owns,
directly or indirectly, 40% or more of, respectively, the outstanding shares of
common stock of the Resulting Company or the combined voting power of the then
outstanding voting securities of such Resulting Company except to the extent
that such ownership existed prior to the Business Combination, and (C) at least
a majority of the members of the board of directors of the Resulting Company
were members of the Incumbent Board (or were approved by at least a majority of
the Incumbent Board) at the time of the execution of the initial agreement, or
of the action of the Board, providing for such Business Combination; or
(iv) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Corporation.
"Closing Bid Price" or "Closing Ask Price" means, for any security as of
----------------- -----------------
any date, the last closing bid or ask price, as the case may be, for such
security on the Principal Market (as defined below) as reported by Bloomberg
L.P. ("Bloomberg"), or, if the Principal Market is not the principal securities
---------
exchange or trading market for such security, the last closing bid or ask price
of such security on the principal securities exchange or trading market where
such security is listed or traded as reported by Bloomberg, or if the foregoing
do not apply, the last closing bid or ask price of such security in the over-
the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no closing bid or ask price is reported for such
security by Bloomberg, the last closing trade price of such security as reported
by Bloomberg, or, if no last closing trade price is reported for such security
by Bloomberg, the average of the bid or ask prices of any market makers for such
security as reported in the "pink sheets" by the National Quotation Bureau, Inc.
If the Closing Bid Price or Closing Ask Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid Price or
Closing Ask Price of such security on such date shall be the fair market value
as mutually determined by the Company and the holders of a majority of the
currently outstanding Principal Amount of all Convertible Debentures. If the
Company and the Holders of the Convertible Debentures are unable to agree upon
the fair market value of the Common Stock, then such dispute shall be resolved
pursuant to Subsection 3 (h). (All such determinations are to be appropriately
adjusted for any stock dividend, stock split or other similar transaction during
such period).
<PAGE>
"Conversion Amount" means that portion of this Debenture being converted by
-----------------
such Holder.
"Conversion Price" means, as of any Conversion Date or other date of
----------------
determination, 85% of the Market Price, but in no event more than the lower of
(x ) $2.0625 per share and (y) 110% of the average of the two lowest Closing Bid
Prices of the Common Stock on the Principal Market as reported by Bloomberg for
the ten Trading Days immediately preceding the Closing Date (the "Maximum
-------
Conversion Price").
----------------
"Market Price" means the average of the two lowest Closing Bid Prices of
------------
the Common Stock on the Principal Market as reported by Bloomberg for the five
Trading Days immediately preceding the date of determination.
"Principal Market" means the American Stock Exchange, the New York Stock
----------------
Exchange, the NASDAQ National Market, or the NASDAQ SmallCap Market, whichever
is at the time the principal trading exchange or market for the Common Stock,
based upon share volume.
"Registration Rights Agreement" means that certain Registration Rights
-----------------------------
Agreement among the Company and the initial holders of the Convertible
Debentures concerning the registration of the resale of the shares of Common
Stock issuable upon conversion of the Convertible Debentures.
"Trading Day" means any day during which the Principal Market shall be open
-----------
for business.
(c) Conversion Notice. The Holder of this Debenture may exercise its
-----------------
conversion right by giving a written conversion notice in the form of Exhibit A
hereto (the "Conversion Notice") to the Company's transfer agent for its Common
-----------------
Stock, as designated by the Company from time to time (the "Transfer Agent"),
--------------
(x) by facsimile or (y) by registered mail or overnight delivery service, with a
copy by facsimile to the Company and the Company's outside counsel as specified
from time to time by written notice to the holders of the Convertible
Debentures. Upon receipt of a conversion notice from the Holder, the Company
shall make a notation on the Debenture Register as to the remaining outstanding
principal amount of the Debentures registered in the name of the Holder which
shall be conclusive and binding upon the Holder. Promptly, but in no event more
than five (5) Trading Days after the receipt of a Conversion Notice converting
the entire unpaid Principal Amount of this Debenture, the Holder of this
Debenture shall surrender this Debenture to the Company (or such other office or
agency of the Company as the Company may designate by notice in writing to the
holders of the Convertible Debentures).
<PAGE>
(d) Issuance of Certificates; Time Conversion Effected.
--------------------------------------------------
(i) Promptly, but in no event more than three (3) Trading Days after
the receipt of the Conversion Notice referred to in Subsection 3(c), the
Transfer Agent shall issue and deliver, or the Company shall cause to be issued
and delivered, to the Holder, registered in such name or names as the Holder may
direct, a certificate or certificates for the number of whole shares of Common
Stock into which this Debenture has been converted. In the alternative, if the
Transfer Agent is a participant in the electronic book transfer program, the
Transfer Agent shall credit such aggregate number of shares of Common Stock to
which the Holder shall be entitled to the Holder's or its designee's balance
account with The Depository Trust Company. Such conversion shall be deemed to
have been effected, and the Conversion Date shall be deemed to have occurred, on
the date on which such Conversion Notice shall have been received by the
Transfer Agent. The rights of the Holder of this Debenture shall cease, and the
person or persons in whose name or names any certificate or certificates for
shares of Common Stock shall be issuable upon such conversion shall be deemed to
have become the Holder or Holders of record of the shares represented thereby,
on the Conversion Date. Issuance of shares of Common Stock issuable upon
conversion that are requested to be registered in a name other than that of the
registered Holder shall be subject to compliance with all applicable federal and
state securities laws.
(ii) The Company understands that a delay in the issuance of the
shares of Common Stock beyond three (3) Trading Days after the Conversion Date
could result in economic loss to the Holder of this Debenture. As compensation
to the Holder for such loss, the Company agrees to pay late payments to the
Holder for late issuance of shares of Common Stock upon conversion in accordance
with the following schedule (where "No. Trading Days Late" means the number of
---------------------
Trading Days after three (3) Trading Days from the date of receipt by the
Transfer Agent of the Conversion Notice to and including the date of the
Holder's or its designees' receipt of such shares):
<TABLE>
<CAPTION>
No. Trading Days Late Late Payment For Each
$5,000 of Conversion Amount of
Principal Amount Being Converted
----------------------------------------- -----------------------------------------------
<S> <C>
1 $ 100
2 $ 200
3 $ 300
4 $ 400
5 $ 500
6 $ 600
7 $ 700
8 $ 800
9 $ 900
10 $1,000
*10 $1,000 + $200 for each Trading Day
late after 10 Trading Days
</TABLE>
* more than
<PAGE>
The Company shall make all payments due under this Subsection 3(d)(ii) in
immediately available funds upon demand. Nothing herein shall limit the
Holder's right to pursue injunctive relief and/or actual damages for the
Company's failure to issue and deliver (or to cause its Transfer Agent to issue
and deliver) Common Stock to the Holder as required by Subsection 3(d)(i),
including, without limitation, the Holder's actual losses occasioned by any
"buy-in" of Common Stock necessitated by such late delivery. Furthermore, in
addition to any other remedies that may be available to the Holder, if the
Company fails for any reason to effect delivery of such shares of Common Stock
within five (5) Trading Days after the Conversion Date, the Holder will be
entitled to revoke the relevant Conversion Notice by delivering a notice to such
effect to the Transfer Agent, with a copy by facsimile to the Company and the
Company's outside counsel. Upon delivery of such notice of revocation, the
Company and the Holder shall each be restored to their respective positions
immediately prior to delivery of such Conversion Notice, except that the Holder
shall retain the right to receive both the late payment amounts set forth above
plus the actual cost of any "buy-in."
(iii) If, at any time, (a) the Company challenges, disputes or denies the
right of the Holder to effect the conversion of this Debenture into Common Stock
or otherwise dishonors or rejects, or causes the Transfer Agent to dishonor or
reject, any Conversion Notice properly delivered in accordance with this Section
3 or (b) any third party who is not and has never been an affiliate of the
Holder obtains a judgment or order from any court or public or governmental
authority that denies, enjoins, limits, modifies, or delays the right of the
Holder to effect the conversion of this Debenture into Common Stock, then the
Holder shall have the right, by written notice to the Company, to require the
Company to promptly redeem this Debenture in accordance with Section 4. Under
any of the circumstances set forth above, the Company shall indemnify the Holder
against and hold it harmless from, and be responsible for the payment of, all
costs and expenses of the Holder, including its reasonable legal fees and
expenses, as and when incurred in disputing any such action or pursuing its
rights hereunder (in addition to any other rights of the Holder), unless the
Company or third party prevails. The Company shall not refuse to honor, or cause
the Transfer Agent to refuse to honor, any Conversion Notice unless the Company
or the Transfer Agent, as the case may be, has actually been enjoined by a court
of competent jurisdiction from doing so and, if so enjoined, the Company shall
post with such court a performance bond equal to 135% of the Conversion Amount
of this Debenture sought to be converted by the Holder that is the subject of
such injunction.
(iv) The Holder of this Debenture shall be entitled to exercise its
conversion privilege notwithstanding the commencement of any case under 11
U.S.C. (S) 101 et seq. (the "Bankruptcy Code"). The Company hereby waives to
-- ---- ---------------
the fullest extent permitted any rights to relief it may have under 11 U.S.C.
(S) 362 in respect of the Holder's conversion privilege, if the Company becomes
a debtor under the Bankruptcy Code. The Company agrees to take or consent to any
and all action necessary to effectuate relief under 11 U.S.C. (S) 362 without
cost or expense to the Holder.
(e) Fractional Shares. The Company shall not, nor shall it cause the
-----------------
Transfer Agent to, issue any fraction of a share of Common Stock upon any
conversion. All shares of Common Stock (including fractions thereof) issuable
upon conversion of this Debenture by the Holder shall be aggregated for purposes
of determining whether the conversion would result in the issuance of a fraction
of a share of Common Stock. If, after such aggregation, the issuance would
result in the
<PAGE>
issuance of a fraction of a share of Common Stock, the Company shall cause the
Transfer Agent to issue one whole share of Common Stock in respect of such
fraction of a share of Common Stock.
(f) Adjustment to Conversion Price; Dilution and Other Events. In order to
---------------------------------------------------------
prevent dilution of the rights granted under this Debenture, the Conversion
Price will be subject to adjustment from time to time as provided in this
Subsection 3(f).
(i) Adjustment of Conversion Price upon Issuance of Common Stock. If
------------------------------------------------------------
the Company issues or sells, or is deemed to have issued or sold, any shares of
Common Stock (other than Conversion Shares (as defined in the Purchase
Agreement) and shares of Common Stock deemed to have been issued by the Company
in connection with Approved Issuances (as defined below)) for a consideration
per share (the "Applicable Price") less than the Conversion Price as in effect
----------------
immediately prior to such time (an "Offering"), then immediately after such
--------
issue or sale, the Conversion Price shall be reduced to an amount equal to (X)
the sum of (A) the product of the Conversion Price in effect immediately prior
to such issue or sale and the number of shares of Common Stock Deemed
Outstanding (as defined below) immediately prior to such issue or sale, and (B)
the consideration, if any, received by the Company upon such issue or sale
divided by (Y) the number of shares of Common Stock Deemed Outstanding
immediately after such issuance or sale. For purposes of determining the
adjusted Maximum Conversion Price under this Subsection 3(f)(i), the following
shall be applicable:
(A) Issuance of Options. If the Company in any manner grants any
-------------------
rights or options to subscribe for or to purchase Common Stock (other than
in connection with an Approved Issuance or upon conversion of this
Debenture) or any stock or other securities convertible into or
exchangeable for Common Stock (such rights or options being herein called
"Options" and such convertible or exchangeable stock or securities being
-------
herein called "Convertible Securities") and the price per share for which
----------------------
Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities is less than the
Applicable Price, then the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities issuable upon
the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Company for such price per share.
Notwithstanding anything to the contrary in the foregoing, upon the
expiration or other termination of such Options if any thereof shall not
have been exercised or upon the expiration or termination of the right to
convert or exchange such Convertible Securities, the number of shares of
Common Stock deemed to be issued and outstanding pursuant to this
Subsection 3(f)(i)A) shall be reduced by such number of shares of Common
Stock as to which Options shall have expired or terminated unexercised or
as to which the conversion or exchange rights of Convertible Securities
shall have expired or terminated unexercised, and such number of share of
Common Stock shall no longer be deemed to be issued and outstanding, and
the Maximum Conversion Price then in effect shall forthwith be readjusted
and thereafter be the price which it would have been had adjustment been
made on the basis of the issuance only of shares of Common Stock actually
issued or issuable upon the exercise of those Options as to which the
exercise rights shall not have expired or terminated unexercised or upon
conversion or exercise of those Convertible
<PAGE>
Securities as to which the conversion or exchange rights shall not have
expired or terminated unexercised. For purposes of this Subsection
3(f)(i)(A), the "price per share for which Common Stock is issuable upon
exercise of such Options or upon conversion or exchange of such Convertible
Securities" is determined by dividing (I) the total amount, if any,
received or receivable by the Company as consideration for the granting of
such Options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such Options, plus in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable to the
Company upon the issuance or sale of such Convertible Securities and the
conversion or exchange thereof, by (II) the total maximum number of shares
of Common Stock issuable upon exercise of such Options or upon the
conversion or exchange of all such Convertible Securities issuable upon the
exercise of such Options. No adjustment of the Maximum Conversion Price
shall be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange of such
Convertible Securities. Notwithstanding the foregoing, no adjustment shall
be made pursuant to this Subsection 3(f)(i)(A) to the extent that such
adjustment is based solely on the fact that the Convertible Securities
issuable upon exercise of such Option are convertible into or exchangeable
for Common Stock at a price that varies with the market price of the Common
Stock.
(B) Issuance of Convertible Securities. If the Company in any manner
----------------------------------
issues or sells any Convertible Securities and the price per share for
which Common Stock is issuable upon such conversion or exchange is less
than the Applicable Price, then the maximum number of shares of Common
Stock issuable upon conversion or exchange of such Convertible Securities
shall be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. Notwithstanding anything to the contrary
in the foregoing, upon the expiration or other termination of the right to
convert or exchange such Convertible Securities (whether by reason of
redemption or otherwise), the number of shares of Common Stock deemed to be
issued and outstanding pursuant to this Subsection 3(f)(i)(B) shall be
reduced by such number of shares of Common Stock as to which the conversion
or exchange rights shall have expired or terminated unexercised, and such
number of shares of Common Stock shall no longer be deemed to be issued and
outstanding, and the Maximum Conversion Price then in effect shall
forthwith be readjusted and thereafter be the price which it would have
been had adjustment been made on the basis of the issuance only of the
shares of Common Stock actually issued or issuable upon the conversion or
exchange of those Convertible Securities as to which the conversion or
exchange rights shall not have expired or terminated unexercised. No
adjustment will be made pursuant to this Subsection 3(f)(i)(B) upon the
issuance by the Company of any Convertible Securities pursuant to the
exercise of any Option therefor, to the extent that adjustments in respect
of such Options were previously made pursuant to the provisions of
Subsection 3(f)(i)(A). For the purposes of this Subsection 3(f)(i)(B), the
"price per share for which Common Stock is issuable upon such conversion or
exchange" is determined by dividing (I) the total amount received or
receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or
exchange
<PAGE>
thereof, by (II) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible
Securities. No adjustment of the Maximum Conversion Price shall be made
upon the actual issue of such Common Stock upon conversion or exchange of
such Convertible Securities, and if any such issue or sale of such
Convertible Securities is made upon exercise of any Options for which
adjustment of the Maximum Conversion Price had been or are to be made
pursuant to other provisions of this Subsection 3(f)(i), no further
adjustment of the Maximum Conversion Price shall be made by reason of such
issue or sale. Notwithstanding the foregoing, no adjustment shall be made
pursuant to this Subsection 3(f)(i)(B) to the extent that such adjustment
is based solely on the fact that such Convertible Securities are
convertible into or exchangeable for Common Stock at a price that varies
with the market price of the Common Stock.
(C) Change in Option Price or Rate of Conversion. If the purchase
---------------------------------------------
price provided for in any Options, the additional consideration, if any,
payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock change at any time, the Maximum
Conversion Price in effect at the time of such change shall be readjusted
to the Maximum Conversion Price that would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for
such changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold;
provided that no adjustment shall be made if such adjustment would result
in an increase of the Maximum Conversion Price then in effect.
(D) Certain Definitions. For purposes of determining the adjusted
-------------------
Maximum Conversion Price under this Subsection 3(f)(i), the following terms
have meanings set forth below:
(I) "Approved Issuances" shall mean (i) the issuance of
------------------
securities upon exercise or conversion of the Company's options, warrants
or other convertible securities outstanding as of the date hereof, (ii) the
grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option plan, restricted stock plan,
stock purchase plan or other plan or written compensation contract for the
benefit of the Company's employees, directors or consultants in effect on
the date hereof or any similar compensatory plans adopted after the date
hereof approved by stockholders of the Company which provide for stock
awards or stock options at not less than fair market value on the date of
award or grant in respect of not more than an aggregate of ___ shares of
Common Stock, or (iii) the issuance of securities to a bona fide strategic
investor of the Company who is engaged in a business related or
complementary to that of the Company and which is not a public or private
investment company or other financial institution or an investment advisor
or manager.
(II) "Common Stock Deemed Outstanding" means, at any given
-------------------------------
time, the number of shares of Common Stock actually outstanding at such
time, plus the number of shares of Common Stock deemed to be outstanding
pursuant to Sections 3(f)(i)(A) and 3(f)(i)(B) hereof regardless of whether
the Options or Convertible Securities
<PAGE>
are actually exercisable at such time, but excluding any shares of Common Stock
issuable upon conversion of the Convertible Debentures.
(E) Effect of Certain Events on Maximum Conversion Price. For purposes of
----------------------------------------------------
determining the adjusted Maximum Conversion Price under this Section 3(f), the
following shall be applicable:
(I) Calculation of Consideration Received. If any Common
-------------------------------------
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefore will be
deemed to be the amount received by the Company therefore, before deduction of
reasonable commissions, underwriting discounts or allowances or other reasonable
expenses paid or incurred by the Company in connection with such issuance or
sale. In case any Common Stock, Options or Convertible Securities are issued or
sold for a consideration other than cash, the amount of the consideration other
than cash received by the Company will be the fair value of such consideration,
except where such consideration consists of securities, in which case the amount
of consideration received by the Company will be the arithmetic average of the
Closing Bid Prices of such security for the five consecutive Trading Days
immediately preceding the date of the agreement. In case any Common Stock,
Options or Convertible Securities are issued to the owners of the non-surviving
entity in connection with any merger in which the Company is the surviving
entity the amount of consideration therefor will be deemed to be the fair value
of the assets and business of the non-surviving entity as is attributable to
such Common Stock, Options or Convertible Securities, as the case may be. The
fair value of any consideration other than cash or securities will be determined
by the Company's board of directors in good faith. If the holders constituting
more than 50% of the principal amount of the Convertible Debentures then
outstanding disagree with such determination they may, within ten (10) days
after the occurrence of an event requiring valuation (the "Valuation Event"),
---------------
have the fair value of such consideration determined within forty-eight (48)
hours of the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser selected by the Company. The determination of such appraiser
shall be deemed binding upon all parties absent manifest error. In the event
that such appraisal does not result in a value that is at least 5% greater than
that assigned by the Board, the holders requesting such appraisal shall pay the
costs thereof.
(II) Integrated Transactions. In case any Option is issued in
-----------------------
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for the consideration allocated by the parties for purposes of
determining tax basis.
(III) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time does not include shares owned or held by or for
the account of the Company, and the disposition of any shares so owned or held
will be considered an issue or sale of Common Stock.
<PAGE>
(IV) Record Date. If the Company takes a record of the holders
-----------
of Common Stock for the purpose of entitling them (1) to receive a dividend or
other distribution payable in Common Stock, Options or Convertible Securities or
(2) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
(ii) Adjustment of Maximum Conversion Price upon Subdivision or
----------------------------------------------------------
Combination of Common Stock. If the Company at any time subdivides (by any
---------------------------
stock split, stock dividend, recapitalization or otherwise) one or more classes
of its outstanding shares of Common Stock into a greater number of shares, the
Maximum Conversion Price in effect immediately prior to such subdivision will be
proportionately reduced. If the Company at any time combines (by combination,
reverse stock split or otherwise) one or more classes of its outstanding shares
of Common Stock into a smaller number of shares, the Maximum Conversion Price in
effect immediately prior to such combination will be proportionately increased.
(iii) Adjustment of Conversion Price upon Issuance of Convertible
-----------------------------------------------------------
Securities. If the Company in any manner issues or sells Convertible Securities
----------
that are convertible into Common Stock at a price that varies with the market
price of the Common Stock (the formulation for such variable price being herein
referred to as, the "Variable Price") and such Variable Price is not calculated
--------------
using the same formula used to calculate the Variable Conversion Price in effect
immediately prior to the time of such issue or sale, the Company shall provide
written notice thereof via facsimile and overnight courier to each holder of
this Debenture ("Variable Notice") on the date of issuance of such Convertible
---------------
Securities. If the Holder of this Debenture provides written notice via
facsimile and overnight courier (the "Variable Price Election Notice") to the
------------------------------
Company within five (5) business days of receiving a Variable Notice that the
Holder desires to replace the Conversion Price then in effect with the Variable
Price described in such Variable Notice, then from and after the date of the
Company's receipt of the Variable Price Election Notice, the Conversion Price
will automatically be replaced with the Variable Price (together with such
modifications to this Debenture as may be required to give full effect to the
substitution of the Variable Price for the Conversion Price). The Holder's
delivery of a Variable Price Election Notice shall serve as the consent required
to amend this Debenture. In the event that the Holder delivers a Conversion
Notice at any time after the Company's issuance of Convertible Securities with a
Variable Price but before the Holder's receipt of the Company's Variable Notice,
then such holder shall have the option by written notice to the Company to
rescind such Conversion Notice or to have the Conversion Price be equal to such
Variable Price for the conversion effected by such Conversion Notice.
(iv) Reorganization, Reclassification, Consolidation, Merger or
----------------------------------------------------------
Sale. Any recapitalization, reorganization, reclassification, consolidation,
----
merger, sale of all or substantially all of the Company's assets to another
Person (as defined below) or other transaction which is effected in such a way
that holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as an "Organic Change." Prior to
--------------
the consummation of any
<PAGE>
Organic Change, the Company will make appropriate provision (in form and
substance reasonably satisfactory to the Holder) to insure that the Holder will
thereafter have the right to acquire and receive in lieu of or in addition to
(as the case may be) the shares of Common Stock otherwise acquirable and
receivable upon the conversion of this Debenture, such shares of stock,
securities or assets as would have been issued or payable in such Organic Change
with respect to or in exchange for the number of shares of Common Stock that
would have been acquirable and receivable had this Debenture been converted into
shares of Common Stock immediately prior to such Organic Change (without taking
into account any limitations or restrictions on the timing or amount of
conversions). In any such case, the Company will make appropriate provision (in
form and substance reasonably satisfactory to the Holder) with respect to the
Holder's rights and interests to insure that the provisions of this Section 3(f)
will thereafter be applicable to this Debenture (including, in the case of any
such consolidation, merger or sale in which the successor entity or purchasing
entity is other than the Company, an immediate adjustment of the Maximum
Conversion Price in accordance with Subsection 3(f)(i) using the value for the
Common Stock reflected by the terms of such consolidation, merger or sale, if
the value so reflected is less than the Maximum Conversion Price in effect
immediately prior to such consolidation, merger or sale). The Company will not
effect any such consolidation, merger or sale, unless prior to the consummation
thereof, the successor entity (if other than the Company) resulting from
consolidation or merger or the entity purchasing such assets assumes, by written
instrument (in form and substance reasonably satisfactory to the holders of a
more than fifty percent (50%) of Principal Amount of the Convertible Debentures
then outstanding), the obligation to deliver to each holder of Convertible
Debentures such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holder may be entitled to acquire. "Person" shall
------
mean an individual, a limited liability company, a partnership, a joint venture,
a corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.
(v) Certain Events. If any event occurs of the type contemplated
by the provisions of this Subsection 3(f) 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 Holders this Debenture and
the other holders of Convertible Debentures; provided, however, that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 3(f).
(g) Limitation on Number of Conversion Shares. Notwithstanding any
-----------------------------------------
other provision herein, the Company shall not be obligated to issue any shares
of Common Stock upon conversion of the Convertible Debentures if the issuance of
such shares of Common Stock plus shares of Common Stock issued upon the exercise
of the Warrants issued under the Securities Purchase Agreement would exceed
19.9% of the shares of Common Stock issued and outstanding on the date of the
Purchase Agreement (the "Exchange Cap") without the Company's violating the
------------
corporate governance rules of the Nasdaq Stock Market, except that such
limitation shall not apply in the event that the Company (i) obtains the
approval of its stockholders as required by the corporate governance rules of
the Nasdaq Stock Market for issuances of Common Stock in excess of the Exchange
Cap, or (ii) obtains a written opinion from outside counsel to the Company that
such approval is not required, which opinion shall be reasonably satisfactory to
the holders of more
<PAGE>
than fifty percent (50%) of the Principal Amount of the Convertible Debentures
then outstanding. Until such approval or written opinion is obtained or such
action has been taken by the required number of holders, no purchaser of
Convertible Debentures pursuant to the Purchase Agreement, collectively, (the
"Investors" and, individually, an "Investor") shall be issued, upon conversion
--------- --------
of Convertible Debentures, shares of Common Stock in an amount greater than the
product of (x) the Exchange Cap amount multiplied by (y) a fraction, the
numerator of which is the Principal Amount of Convertible Debentures purchased
by such Investor pursuant to the Purchase Agreement and the denominator of which
is the aggregate Principal Amount of all the Convertible Debentures purchased by
the Investors pursuant to the Purchase Agreement (the "Cap Allocation Amount").
---------------------
In the event that any Investor shall sell or otherwise transfer any of such
Investor's Convertible Debentures, the transferee shall be allocated a pro rata
portion of such Investor's Cap Allocation Amount. In the event that any holder
of a Convertible Debenture shall convert all of such holder's Convertible
Debenture into a number of shares of Common Stock that, in the aggregate, is
less than such holder's Cap Allocation Amount, then the difference between such
holder's Cap Allocation Amount and the number of shares of Common Stock actually
issued to such holder shall be allocated to the respective Cap Allocation
Amounts of the remaining holders of Convertible Debentures on a pro rata basis
in proportion to the Principal Amount of Convertible Debentures then held by
each such Holder.
(h) Dispute Resolution. In the case of a dispute as to the
------------------
determination of the Closing Ask Price or Closing Bid Price of any security or
the arithmetic calculation of the Conversion Rate, the Company shall, or shall
cause the Transfer Agent to, promptly issue to the Holder the number of shares
of Common Stock that is not disputed and shall submit the disputed
determinations or arithmetic calculations to the Holder via facsimile within one
(1) business day of receipt of the Holder's Conversion Notice. If the Holder and
the Company are unable to agree upon the determination of such Closing Ask Price
or Closing Bid Price, as the case may be, or the arithmetic calculation of the
Conversion Rate within one (1) business day of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall
within one (1) business day following such date of delivery submit via facsimile
(A) the disputed determination of the Closing Ask Price or Closing Bid Price, as
the case may be, to an independent, reputable investment bank or (B) the
disputed arithmetic calculation of the Conversion Rate to its independent
certified public accounting firm. The Company shall cause the investment bank or
the accounting firm, as the case may be, to perform the determinations or
calculations and notify the Company and the Holder of the results no later than
forty-eight (48) hours from the time it receives the disputed determinations or
calculations. Such investment bank's or accounting firm's determination or
calculation, as the case may be, shall be binding upon all parties absent
manifest error.
4. Redemption.
----------
(a) Redemption at the Option of the Holder if Company Cannot Fully
--------------------------------------------------------------
Convert or Holder Cannot Sell Without Restriction. If, (i) upon the Transfer
-------------------------------------------------
Agent's receipt of a Conversion Notice, the Transfer Agent fails to issue shares
of Common Stock as contemplated by Subsection 3(d)(i) or cannot issue shares of
Common Stock registered for resale under the registration statement required to
be filed under the Registration Rights Agreement with respect to the shares of
Common Stock issuable upon conversion of this Debenture (the "Registration
------------
<PAGE>
Statement") (or which are exempt from the registration requirements under the
---------
Securities Act pursuant to Rule 144(k) under the Securities Act) for any reason,
including, without limitation, because the Company (x) does not have a
sufficient number of shares of Common Stock authorized and available, (y) is
otherwise prohibited by applicable law or by the rules or regulations of any
stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Company or its securities, including
without limitation the Exchange Cap, from issuing all of the Common Stock that
is to be issued to the Holder of this Debenture pursuant to a Conversion Notice
or (z) fails to have a sufficient number of shares of Common Stock registered
for resale under the Registration Statement, or (ii) a Registration Default (as
defined in the Registration Rights Agreement) shall have occurred and be
continuing, the Company shall have defaulted in the payment of any Funded Debt
(as hereinafter defined) for a period in excess of any cure period thereunder
(regardless of whether the creditor of such Funded Debt shall have declared a
default), or (iii) the Common Stock is delisted from the Nasdaq SmallCap Market
and not immediately listed on a Principal Market or other national securities
exchange, then in the case of clause (i), the Company shall, or shall cause the
Transfer Agent to, issue as many shares of Common Stock as it is able to issue
in accordance with such holder's Conversion Notice (if the holder shall have
given such a Conversion Notice) and pursuant to the provisions of Section 3(d),
and with respect to all or any part of the unconverted Principal Amount of this
Debenture held by such Holder, the Holder, solely at such Holder's option, can
elect to:
(A) require the Company to redeem from such Holder all or any part of
its remaining Principal Amount of this Debenture ("Holder Requested Redemption")
at a premium equal to the greater of (I) the sum of: (a) 135% of such Principal
Amount and (b) the accrued interest thereon or (II) the product of (a) the
Conversion Rate on the date of such Holder's delivery of an Election Response
Notice (as defined below) and (b) the greater of (i) the Closing Ask Price of
the Common Stock on the Trading Day immediately preceding the event giving rise
to such redemption or (ii) the Closing Ask Price of the Common Stock on the date
of the Holder's delivery to the Company of a notice of redemption or, if such
date of delivery is not a Trading Day, the next date on which the exchange or
market on which the Common Stock is traded is open (the "Holder Requested
Redemption Price");
(B) if the Company's inability to fully convert this Debenture is
pursuant to clause (a)(i)(z) of this Subsection 4(a) above, require the Company
to, or cause the Transfer Agent to, issue restricted shares of Common Stock in
accordance with such Holder's Conversion Notice;
(C) void its Conversion Notice and retain the Principal Amount of
this Debenture that was to be converted pursuant to such Holder's Conversion
Notice (provided that the Holder's voiding its Conversion Notice shall not
affect the Company's obligations to make any payments that have accrued prior to
the date of such notice); or
(D) if the Company's inability to fully convert this Debenture is
pursuant to clause (a)(i)(y) of this Subsection 4(a) above, require the Company
to, or cause the Transfer Agent to, issue shares of Common Stock in accordance
with such Holder's Conversion Notice and pursuant to Section 4(d) at a
Conversion Price equal to the average of the Closing Bid Prices of the
<PAGE>
Common Stock for the five consecutive Trading Days preceding such Holder's
Election Response Notice or such other market price that satisfies the
applicable exchange or trading market.
For purposes hereof, "Funded Debt" means all (a) indebtedness for borrowed money
-----------
or for the deferred purchase price of property or services (other than trade
liabilities and accrued expenses incurred in the ordinary course of business and
payable in accordance with customary practices), whether on open account or
evidenced by a note, bond, debenture or similar instrument or otherwise, (b)
obligations under capital leases, (c) reimbursement obligations for letters of
credit, banker's acceptances or other credit accommodations, (d) contingent
obligations and (e) obligations secured by any lien on the Company's property,
even if the Company has not assumed such obligations.
(b) Mechanics of Fulfilling Holder's Election. The Company shall
-----------------------------------------
within one (1) business day send via facsimile to the Holder of this Debenture,
upon receipt of a facsimile copy of a Conversion Notice from such Holder that
cannot be fully satisfied as described in Subsection 4(a), a notice of the
Company's inability to fully satisfy such Holder's Conversion Notice (the
"Inability to Fully Convert Notice"). Such Inability to Fully Convert Notice
---------------------------------
shall indicate (i) the reason why the Company is unable to fully satisfy such
Holder's Conversion Notice, (ii) the Principal Amount of this Debenture that
cannot be converted and (iii) the applicable Redemption Price. The Holder shall
notify the Company of its election pursuant to Subsection 4(a) above by
delivering written notice via facsimile to the Company (the "Election Response
-----------------
Notice").
------
(c) Payment of Holder Requested Redemption Price. If the Holder shall
--------------------------------------------
elect to have this Debenture redeemed pursuant to Subsection 4(a)(i), the
Company shall pay the Holder Requested Redemption Price to such Holder in cash
by wire transfer of immediately available funds in accordance with such Holder's
written wire transfer instructions within five (5) days after the Company's
receipt of the Holder's Election Response Notice. If the Company shall fail to
pay the applicable Holder Requested Redemption Price to such holder within such
five (5) day period (other than pursuant to a dispute as to the determination of
the arithmetic calculation of the Holder Requested Redemption Price), in
addition to any remedy the Holder of this Debenture may have hereunder, or under
the Securities Purchase Agreement and the Registration Rights Agreement, such
unpaid amount shall bear interest at the rate of 3.0% per month (prorated for
partial months) until paid in full. Until the Holder Requested Redemption Price
is paid in full to such Holder, such Holder may void the Holder Requested
Redemption with respect to Principal Amount of this Debenture for which the full
Holder Requested Redemption Price has not been paid and receive back a
Convertible Debenture representing such Principal Amount. Notwithstanding the
foregoing, if the Company fails to pay the applicable Holder Requested
Redemption Price within such period of five (5) days due to a dispute as to the
determination of the Holder Requested Redemption Price, such dispute shall be
resolved pursuant to Section 3(h) with the term "Holder Requested Redemption
Price" being substituted for the term "Conversion Rate."
(d) Pro-rata Conversion and Redemption. If the Company or the
----------------------------------
Transfer Agent receives a Conversion Notice or Election Response Notice electing
a Holder Requested Redemption from more than one holder of Convertible
Debentures on the same day, and the Company can convert and/or redeem some, but
not all, of such Convertible Debentures pursuant to
<PAGE>
this Section 4, the Company shall convert and/or redeem from each holder of
Convertible Debentures electing to have its Convertible Debenture converted
and/or redeemed at such time an amount equal to such holder's pro-rata amount
(based on the Principal Amount of Convertible Debentures held by such holder
relative to the Principal Amount of Convertible Debentures sought to be
converted) of all Convertible Debentures being converted and/or redeemed at such
time.
(e) Redemption at the Option of the Company. At any time after the
---------------------------------------
initial issuance of the Convertible Debentures, the Company, upon notice
delivered to the holders of the then outstanding Convertible Debentures in the
manner provided in Subsection 4(f), may redeem all (but not less then all) the
Convertible Debentures (but only with respect to the Principal Amount as to
which such holders have not theretofore furnished a Conversion Notice in
compliance with Subsection 3(c), at a price (the "Optional Redemption Price")
equal to the greater of (i) the sum of (a) 135% of the Principal Amount and (b)
the accrued interest thereon, or (ii) the product of (a) the Conversion Rate, as
determined as of the date of the notice of redemption and (b) the Closing Ask
Price of the Common Stock on the Trading Day immediately preceding the date of
the notice of redemption.
(f) Notice of Redemption. (i) Notice of redemption pursuant to
--------------------
Subsection 4(e) (the "Optional Redemption Notice") shall be provided by the
Company to the Holder in writing (by registered mail or overnight courier at the
Holder's last address appearing in the Debenture Register not less than ten (10)
nor more than thirty (30) days prior to the date stipulated by the Company for
the redemption of the Convertible Debentures (the "Optional Redemption Date"),
which notice shall specify the Optional Redemption Date and refer to Subsection
4(e) and this Subsection 4(f).
(ii) Upon receipt of the Optional Redemption Notice, the Holder shall
have the option, at its sole election, to specify what portion of the
Convertible Debentures called for redemption in the Optional Redemption Notice
shall be redeemed as provided in Subsection 4(e) or converted into Common Stock
in the manner provided in Subsection 3(a). If the Holder elects to convert any
portion of the Convertible Debentures, then such conversion shall take place on
the Conversion Date specified by the Holder, but in no event after the Optional
Redemption Date, in accordance with the terms of Subsection 3(a).
(g) Surrender of Convertible Debentures. Upon any redemption of this
-----------------------------------
Convertible Debenture pursuant to Subsection 4(e), the Holder shall either
deliver the Convertible Debenture by hand to the Company at its principal
executive offices or surrender the same to the Company at such address by
express courier. Payment of the Optional Redemption Price specified in
Subsection 4(e) shall be made by the Company to the Holder against receipt of
the Convertible Debentures by wire transfer of immediately available funds to
such account(s) as the Holder shall specify in writing to the Company. If
payment of such Optional Redemption Price is not made in full by the Optional
Redemption Date, the Holder shall again have the right to convert the
Convertible Debentures as provided in Section 3(a) hereof.
5. Notices. In case at any time:
-------
<PAGE>
(a) the Company shall declare any dividend upon its Common Stock
payable in cash or stock or make any other pro rata distribution to the holders
of its Common Stock; or
(b) the Company shall offer for subscription pro rata to the holders
--- ----
of its Common Stock any additional shares of stock of any class or other rights;
or
(c) there shall be any capital reorganization or reclassification of
the capital stock of the Company, or a consolidation or merger of the Company
with or into, or a sale of all or substantially all its assets to, another
entity or entities; or
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give, by first class
mail, postage prepaid, or by telex or facsimile or by recognized overnight
delivery service, addressed to the Holder at the address of the Holder as shown
on the books of the Company, (i) at least 10 days' prior written notice of the
date on which the books of the Company shall close or a record shall be taken
for such dividend, distribution or subscription rights or for determining rights
to vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up and (ii) in the case of any
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 10 days' prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause (i) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto and (ii) shall also specify the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the case
may be.
6. Stock to be Reserved. The Company has a sufficient number of shares
--------------------
of Common Stock available to reserve for issuance upon the conversion of all
outstanding Convertible Debentures, assuming immediate conversion. The Company
will at all times reserve and keep available out of its authorized Common Stock,
solely for the purpose of issuance upon the conversion of all of its Convertible
Debentures as herein provided, such number of shares of Common Stock as shall
then be issuable upon the conversion of all Convertible Debentures. The Company
covenants that all shares of Common Stock that shall be so issued shall be duly
and validly issued, fully-paid and non assessable. The Company will take all
such action as may be so taken without violation of any applicable law or
regulation to have a sufficient number of authorized but unissued shares of
Common Stock to issue upon conversion of all Convertible Debentures. The Company
will not take any action that results in any adjustment of the conversion rights
if the total number of shares of Common Stock issued and issuable after such
action upon conversion of this Debenture would exceed the total number of shares
of Common Stock then authorized by the Company's Articles of Incorporation.
7. Default and Remedies.
--------------------
<PAGE>
(a) Event of Default. Each of the following shall constitute an
----------------
"Event of Default":
----------------
(i) the Company shall default in the payment of principal or
interest on this Debenture and same shall continue for a period of three
(3) days; or
(ii) any of the representations or warranties made by the
Company herein, in the Purchase Agreement, in the Registration Rights
Agreement, or in any agreement, certificate or financial or other written
statements heretofore or hereafter furnished by the Company in connection
with the execution and delivery of this Debenture or the Purchase
Agreement, shall be false or misleading in any material respect at the time
made; or
(iii) a default or an event of default shall have occurred and
be continuing with respect to any Funded Debt; or
(iv) the Company shall (A) admit in writing its inability to
pay its debts generally as they mature; (B) make an assignment for the
benefit of creditors or commence proceedings for its dissolution; or (C)
apply for or consent to the appointment of a trustee, liquidator or
receiver for its or for a substantial part of its property or business; or
(v) a trustee, liquidator or receiver shall be appointed for
the Company or for a substantial part of its property or business without
its consent and shall not be discharged within sixty (60) days after such
appointment; or
(vi) any governmental agency or any court of competent
jurisdiction at the instance of any governmental agency shall assume
custody or control of the whole or any substantial portion of the
properties or assets of the Company and shall not be dismissed within sixty
(60) days thereafter; or
(vii) any money judgment, writ or warrant of attachment, or
similar process in excess of One Hundred Thousand ($100,000) Dollars in the
aggregate shall be entered or filed against the Company or any of its
properties or other assets and shall remain unpaid, unvacated, unbonded or
unstayed for a period of sixty (60) days or in any event later than five
(5) days prior to the date of any proposed sale thereunder; or
(viii) bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against
the Company and, if instituted against the Company, shall not be
dismissed within sixty (60) days after such institution or the Company
shall by any action or answer approve of, consent to, or acquiesce in
any such proceedings or admit the material allegations of, or default
in answering, a petition filed in any such proceeding.
<PAGE>
(b) Remedies. Upon the occurrence and during the continuance of any Event
--------
of Default, the Holder may declare this Debenture immediately due and payable,
without presentment, demand, protest or notice of any kind, all of which are
hereby expressly waived, anything herein or in any note or other instruments
contained to the contrary notwithstanding, and the Holder may immediately
enforce any and all of the Holder's rights and remedies provided herein or any
other rights or remedies afforded by law; provided, that any payment of this
Debenture in connection with an Event of Default shall be made at the fair
market value of the shares of Common Stock that would be issued at the
Conversion Price on the date the Debenture becomes due and payable pursuant to
this provision. Such payment shall be made within three (3) Trading Days of such
demand, and if not paid within such period, the Company shall pay the holder
liquidated damages of three percent (3%) per month of such amount until paid,
pro-rated for any partial months.
8. Payment Obligation Unconditional. 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 or shares of Common Stock,
herein prescribed. This Debenture is a direct obligation of the Company.
9. No Recourse to Stockholders, etc. No recourse shall be had for the
---------------------------------
payment of the principal of, or the interest on, this Debenture, or for any
claim based hereon, or otherwise in respect hereof, against any incorporator,
shareholder, employee, officer or director, as such, past, present or future, of
the Company or any successor corporation, whether by virtue of any statute or
rule of law, or by the enforcement of any assessment or penalty or otherwise,
all such liability being, by the acceptance hereof and as part of the
consideration for the issue hereof, expressly waived and released.
10. No Rights as Stockholder. No provision of this Debenture shall be
------------------------
construed as conferring upon the Holder the right to vote or to receive
dividends or to consent or receive notice as a stockholder in respect of any
meeting of stockholders or any rights whatsoever as a stockholder of the
Company, unless and to the extent converted in accordance with the terms hereof.
11. Definitions. As used in this Debenture, the term "Common Stock" shall
-----------
mean and include the Company's authorized common stock, no par value, as
constituted on the issuance date of this Debenture, and shall also include any
capital stock of any class of the Company thereafter authorized that shall
neither be limited to a fixed sum or percentage of par value in respect of the
rights of the holders thereof to participate in dividends nor entitled to a
preference in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Company; provided that the shares
of Common Stock receivable upon conversion of this Debenture shall include only
shares designated as Common Stock of the Company on the issuance date of this
Debenture, or in case of any reorganization, reclassification, or stock split of
the outstanding shares thereof, the stock, securities or assets
<PAGE>
provided for in Sections 3(f) and (g). Any capitalized terms used in this
Debenture but not defined herein shall have the meanings set forth in the
Purchase Agreement.
12. Loss, Theft, Destruction of Debenture. Upon receipt of evidence
-------------------------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Debenture and, in the case of any such loss, theft or destruction, upon
receipt of indemnity reasonably satisfactory to the Company (which shall not
include the posting of any bond), or, in the case of any such mutilation, upon
surrender and cancellation of this Debenture, the Company shall make, issue and
deliver, in lieu of such lost, stolen, destroyed or mutilated Debenture, one or
more new Debentures of like tenor. This Debenture shall be held and owned upon
the express condition that the provisions of this Section 12 are exclusive with
respect to the replacement of mutilated, destroyed, lost or stolen Debentures
and shall preclude any and all other rights and remedies notwithstanding any law
or statute existing or hereafter enacted to the contrary with respect to the
replacement of negotiable instruments or other securities without the surrender
thereof.
13. Record Owner. The Company may deem the person in whose name this
------------
Debenture shall be registered upon the registry books of the Company to be, and
may treat such person as, the absolute owner of this Debenture for the purpose
of conversion of this Debenture and for all other purposes, and the Company
shall not be affected by any notice to the contrary. All such payments and such
conversion shall be valid and effective to satisfy and discharge the liability
upon this Debenture to the extent of the sum or sums so paid or the conversion
so made.
14. Register. The Company shall maintain a transfer agent, which may be
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the transfer agent for the Common Stock or the Company itself, for the
registration of Convertible Debentures. Upon any transfer of this Debenture in
accordance with the provisions hereof, the Company shall register or cause the
transfer agent to register such transfer on the Convertible Debenture register.
15. Remedies, Characterizations, Other Obligations, Breaches and
------------------------------------------------------------
Injunctive Relief. The remedies provided in this Debenture shall be cumulative
-----------------
and in addition to all other remedies available under this Debenture, at law or
in equity (including a decree of specific performance and/or other injunctive
relief). No remedy contained herein shall be deemed a waiver of compliance with
the provisions giving rise to such remedy and nothing herein shall limit a
Holder's right to pursue actual damages for any failure by the Company to comply
with the terms of this Debenture. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder hereof and shall not, except as
expressly provided herein, be subject to any other obligation of the Company (or
the performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holders of this
Debenture and that the remedy at law for any such breach may be inadequate. The
Company therefore agrees that, in the event of any such breach or threatened
breach, the Holders of this Debenture shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
<PAGE>
16. Construction. This Debenture shall be deemed to be jointly drafted by
------------
the Company and the initial Holders of the Convertible Debentures and shall not
be construed against any person as the drafter hereof.
17. Failure or Indulgence Not Waiver. No failure or delay on the part of
--------------------------------
the Holder of this Debenture in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof (except to the extent that such
power, right or privilege must, in accordance with the terms of this Debenture,
be exercised within a specified period of time and such period of time has
lapsed without such power, right or privilege being exercised), nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege.
18. Governing Law. This Debenture shall be governed by and construed in
-------------
accordance with the laws of the State of California. Each of the parties
consents to the jurisdiction of the Federal courts whose districts encompass any
part of the City of Los Angeles, California or the state courts of the State of
California sitting in the City of Los Angeles in connection with any dispute
arising under this Agreement and hereby waives, to the maximum extent permitted
by law, any objection, including any objection based on forum non conveniens, to
the bringing of any such proceeding in such jurisdictions.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: November 30, 2000 STAN LEE MEDIA, INC.
By: /s/
------------------------------------------
Name: Stephen Gordon
Title: Executive Vice President-Operations
Attest:
/s/
-----------------------------
Rick C. Madden
Secretary
