Exhibit 10.3

 

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THIS DEBENTURE, AND THE SECURITIES INTO WHICH IT IS CONVERTIBLE (COLLECTIVELY,
THE “SECURITIES”), HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE.  THE
SECURITIES ARE BEING OFFERED PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER
REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“ACT”). THE SECURITIES ARE “RESTRICTED” AND MAY NOT BE OFFERED OR SOLD UNLESS
THE SECURITIES ARE REGISTERED UNDER THE ACT, PURSUANT TO REGULATION D OR
PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT
AND THE COMPANY WILL BE PROVIDED WITH OPINION OF COUNSEL OR OTHER SUCH
INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH EXEMPTIONS ARE
AVAILABLE.  HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY NOT BE MADE EXCEPT
IN COMPLIANCE WITH THE ACT.

 

CONVERTIBLE DEBENTURE

 

Date:

March 18, 2005

 

 

Maker:

APOLLO RESOURCES INTERNATIONAL, INC.

 

3001 Knox St., Suite 403, Dallas, TX 75205

 

 

Company:

JSC KALININGRADNEFT

 

ul. Portovaya 32a, 236039, Kaliningrad, Russia

 

 

Shareholders:

Collectively all of the Shareholders of Maker on the Date, by and through their
duly authorized representative (“Shareholders’ Representative”), and their
heirs, successors and assigns.

 

 

The Parties:

Maker and Shareholders

 

 

Shareholders’ Representative:

VLADIMIR KOVALSKI

 

Baltoil-Group

 

130, Dzerginskogo str., Kaliningrad, Russia

 

 

Principal:

EIGHTEEN MILLION, FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($18,500,000)

 

 

Annual Interest Rate on Unpaid Principal:

6.00%

 

 

Maturity Date:

March 18, 2006

 

 

Terms of Payment:

On or before the Maturity Date, Maker shall pay the outstanding principal and
accrued interest balance (“the Balance”) in one lump sum UNLESS either of the
parties elects to convert this Debenture under the Conversion Terms herein.

 

 

Obligation:

Maker promises to pay the Shareholders or convert this Debenture under the

 

Terms of Payment herein.

 

 

Ownership:

90% of the shares of the stock of Company, equal to

 

90% of the total equity ownership of Company.

 

 

Transaction Documents:

The Transaction Documents include the following and their Exhibits:

 

1.

This Debenture;

 

2.

The Bill of Sale between the parties on the same date hereof (“Bill of Sale”);
and

 

3.

The Stock Sale Agreement entered into between the parties on February 9, 2005.

 

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General Terms

 

1.                                       Conversion Terms.  Under the Terms of
Payment, either party may elect on the Maturity Date to convert the Balance of
this Debenture into common stock (the “Common Stock”) of Maker.  Such conversion
shall occur within ten (10) days of said party’s election to so convert.  Upon
such election, the Shareholders shall be entitled to receive the Calculated
Number (herein so called) of fully paid, non-assessable shares of Common Stock. 
The Calculated Number shall be equal to the number of common shares with a
publicly-reported per share value equal to the Balance.  For the share price
valuation required in the Conversion calculation, the share price shall be equal
to eighty percent (80%) of the average trading price of the Common Stock over
the 30 days before the Maturity Date, but in no event less than US$2.00 per
share.  The shares of Common Stock to be delivered upon conversion shall either
(a) be registered and free-trading as of the date of conversion or (b) be
registered by Maker so as to be free trading within a reasonable time (not to
exceed 90 days) following the date of conversion.

 

2.                                       Adjustments to Conversion.  If Maker is
recapitalized, consolidated with or merged into any other corporation, or sells
or conveys to any other corporation all or substantially all of the its property
as an entity, provision shall be made as part of the terms of any such
transaction so that the Shareholders may receive, in lieu of the Common Stock
otherwise issuable to the Shareholders upon conversion hereof, at the same
conversion ratio, the same kind and amount of securities or assets as may be
distributable upon the recapitalization, consolidation, merger, sale or
conveyance with respect to the Common Stock.

 

3.                                       Assignment.  This Debenture and the
obligations herein may not be assigned by Maker without prior written consent of
the Shareholders.  The Shareholders may freely assign all or any portion of
their right, title and interest in and to this Debenture.

 

4.                                       Maker’s Breach.  Maker shall be in
breach of this Debenture upon any of the following events:

a.               Maker’s material default or breach of any term of any of the
Transactions Documents; or

b.              The filing by Maker or Maker’s successor of an assignment for
the benefit of creditors, bankruptcy, or for relief under any provisions of the
Bankruptcy Code; or by suffering an involuntary petition in bankruptcy or
receivership not vacated within sixty days.

 

5.                                       Shareholders’ Breach.  The Shareholders
shall be in breach of this Debenture upon any of the following events:

a.               A default or breach by the Shareholders of any term of any of
the Transaction Documents; or

b.              A misstatement or misrepresentation by the Shareholders, by or
through the Transaction Documents, regarding the financial state or condition of
the Company, or regarding the Ownership.

 

6.                                       Maker’s Remedy.  Upon any Shareholders’
Breach hereunder, Maker’s sole remedy, at Maker’s sole option, shall be to
rescind the stock purchase transaction evidenced by the Transaction Documents,
and immediately deliver the Ownership back to the Shareholders, less all
improvements, investments, costs, expenses, obligations, and deposits made by
Maker on behalf of the Company after the date hereof.  In the event that Maker
is restricted from exercising the Company-owned government concession to
sub-surface minerals due to a change in the law governing such concession, Maker
may effect, jointly with Shareholders, an adjustment of the Consideration
contained in the Bill of Sale and the Principal Amount of this Debenture (in
each such event, the “Adjustment”).  If Maker and the Shareholders are unable,
for whatever reason, to agree upon the amount of the Adjustment, then Maker
shall appoint an appraiser, and the Shareholders shall appoint an appraiser, and
the two appraisers so selected shall in turn select a

 

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third, neutral appraiser.  The neutral appraiser shall determine the amount of
the Adjustment, and such determination shall be final and binding on the
parties.

 

7.                                       Shareholders’ Remedy.  If Maker
breaches hereunder, the Shareholders’ sole remedy, at the Shareholders’ sole
option, shall be to rescind the stock purchase transaction evidenced by the
Transaction Documents, and immediately receive the Ownership back from Maker,
less all improvements, investments, costs, expenses, obligations, and deposits
made by Maker on behalf of the Company after the date hereof.

 

8.                                       Notices.  Any notices required or
permitted to be given under this Debenture shall be delivered according to the
terms for Notice under the Bill of Sale.

 

9.                                       Tender.  All cash amounts payable
hereunder are payable in lawful money of the United States.

 

10.                                 Headings.  The article, paragraph and
subparagraph headings hereof are inserted for convenience of reference only and
shall not alter, define, or be used in construing the text of such articles,
paragraphs or subparagraphs.

 

11.                                 Plurality.  When the context requires,
singular nouns and pronouns include the plural.

 

12.                                 Governing Law and Jurisdiction.  This
Debenture shall be governed by and construed in accordance with the laws of the
United States of America, and more specifically the laws of the state of Texas,
without reference to its conflict of laws rules.  Jurisdiction and venue shall
reside exclusively in the United States courts in Dallas County, Texas.

 

13.                                 Severability.  If any provision of this
Debenture is held to be invalid or unenforceable by any court of competent
jurisdiction, it is the intent of all of the parties that all other provisions
of this Debenture be construed to remain fully valid, enforceable and binding on
the parties.

 

14.                                 Power to Bind.  Responsible officers of the
parties have read and understand the contents of this Agreement and are
empowered and duly authorized on behalf of their respective party to execute it.

 

15.                                 Counterparts.  This Agreement may be
executed in multiple counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.

 

16.                                 Shareholders’ Representative.  The
Shareholders’ Representative attests, warrants and pledges that he is fully
authorized to execute this Debenture of behalf of all of the Shareholders, and
that any failure as to this attestation and warranty will constitute a
Shareholders’ Breach under the terms hereof.

 

IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute this Convertible Debenture effective on the Date
first stated herein.

 

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MAKER:

 

 

/s/ Dennis G. McLaughlin, III

 

APOLLO RESOURCES INTERNATIONAL, INC.

Dennis G. McLaughlin, III, CEO

 

 

SHAREHOLDERS, BY AND THROUGH THEIR DULY AUTHORIZED REPRESENTATIVE:

 

 

/s/ Vladimir Kovalski

 

Vladimir Kovalski

SHAREHOLDERS’ REPRESENTATIVE

 

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