EX-4.2



 







Exhibit 4.2



NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR
TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS
SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.



Original Issue Date: [                                                            



Original Conversion Price (subject to adjustment herein): $0.10




$                                        




ORIGINAL ISSUE DISCOUNT SECURED CONVERTIBLE DEBENTURE

DUE JULY___, 2009




          THIS DEBENTURE is one of a series of duly authorized and validly issued Original Issue
Discount Secured Convertible Debentures of Hartville Group, Inc., a Nevada corporation, having its
principal place of business at                                                              (the “Company”), designated as
its Original Issue Discount Secured Convertible Debentures, due July ___, 2009 (this debenture, the
“Debenture” and collectively with the other such series of debentures, the
“Debentures”).




     
     FOR VALUE RECEIVED, the Company promises
to pay to           
            
             
             
     
        or its registered
assigns (the “Holder”), or shall
have paid pursuant to the terms hereunder, the principal
sum of $                                         on July ___, 2009, or such earlier date as this Debenture is required to be
repaid as provided hereunder (the “Maturity Date”). This Debenture is subject to the
following additional provisions:




          Section 1. Definitions. For the purposes hereof, in addition to the terms
defined elsewhere in this Debenture, (a) capitalized terms not otherwise defined herein shall have
the meanings set forth in the Purchase Agreement and (b) the following terms shall have the
following meanings:





     “Alternate Consideration” shall have the meaning set forth in Section 5(e).



1









 






     “Bankruptcy Event” means any of the following events: (a) the Company or any
Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof
commences a case or other proceeding under any bankruptcy, reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law
of any jurisdiction relating to the Company or any Significant Subsidiary thereof; (b) there
is commenced against the Company or any Significant Subsidiary thereof any such case or
proceeding that is not dismissed within 60 days after commencement; (c) the Company or any
Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief
or other order approving any such case or proceeding is entered; (d) the Company or any
Significant Subsidiary thereof suffers any appointment of any custodian or the like for it
or any substantial part of its property that is not discharged or stayed within 60 calendar
days after such appointment; (e) the Company or any Significant Subsidiary thereof makes a
general assignment for the benefit of creditors; (f) the Company or any Significant
Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or (g) the Company or any Significant Subsidiary
thereof, by any act or failure to act, expressly indicates its consent to, approval of or
acquiescence in any of the foregoing or takes any corporate or other action for the purpose
of effecting any of the foregoing.




     “Base Conversion Price” shall have the meaning set forth in Section 5(b).




     “Business Day” means any day except Saturday, Sunday, any day which shall be a
federal legal holiday in the United States or any day on which banking institutions in the
State of New York are authorized or required by law or other governmental action to close.




     “Buy-In” shall have the meaning set forth in Section 4(d)(v).




     “Change of Control Transaction” means the occurrence after the date hereof of
any of (i) an acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control
(whether through legal or beneficial ownership of capital stock of the Company, by contract
or otherwise) of in excess of 40% of the voting securities of the Company (other than by
means of conversion or exercise of the Debentures and the Securities issued together with
the Debentures), or (ii) the Company merges into or consolidates with any other Person, or
any Person merges into or consolidates with the Company and, after giving effect to such
transaction, the stockholders of the Company immediately prior to such transaction own less
than 60% of the aggregate voting power of the Company or the successor entity of such
transaction, or (iii) the Company sells or transfers all or substantially all of its assets
to another Person and the stockholders of the Company immediately prior to such transaction
own less than 60% of the aggregate voting power of the acquiring entity immediately after
the transaction, or (iv) a replacement at one time or within a three year period of more
than one-half of the members of the Company’s board of directors which is not approved by a
majority of



2









 







those individuals who are members of the board of directors on the date hereof (or by
those individuals who are serving as members of the board of directors on any date whose
nomination to the board of directors was approved by a majority of the members of the board
of directors who are members on the date hereof), or (v) the execution by the Company of an
agreement to which the Company is a party or by which it is bound, providing for any of the
events set forth in clauses (i) through (iv) above.




     “Common Stock” means the common stock, par value $0.001 per share, of the
Company and stock of any other class of securities into which such securities may hereafter
be reclassified or changed into.




     “Conversion Date” shall have the meaning set forth in Section 4(a).




     “Conversion Price” shall have the meaning set forth in Section 4(b).




     “Conversion Shares” means, collectively, the shares of Common Stock issuable
upon conversion of this Debenture in accordance with the terms hereof.




     “Debenture Register” shall have the meaning set forth in Section 2(c).




     “Dilutive Issuance” shall have the meaning set forth in Section 5(b).




     “Dilutive Issuance Notice” shall have the meaning set forth in Section 5(b).




     “Effectiveness Period” shall have the meaning set forth in the Registration
Rights Agreement.




     “Event of Default” shall have the meaning set forth in Section 8.




     “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.




     “Fundamental Transaction” shall have the meaning set forth in Section 5(e).




     “Late Fees” shall have the meaning set forth in Section 2(d).




     “Mandatory Default Amount” means the sum of (i) the greater of (A) 110% of the
outstanding principal amount of this Debenture, or (B) the outstanding principal amount of
this Debenture divided by the Conversion Price on the date the Mandatory Default Amount is
either (a) demanded (if demand or notice is required to create an Event of Default) or
otherwise due or (b) paid in full, whichever has a lower Conversion Price, multiplied by the
VWAP on the date the Mandatory Default Amount is either (x) demanded or otherwise due or (y)
paid in full, whichever has a higher VWAP, and (ii) all other amounts, costs, expenses and
liquidated damages due in respect of this Debenture.




     “New York Courts” shall have the meaning set forth in Section 9(d).



3









 






     “Notice of Conversion” shall have the meaning set forth in Section 4(a).




     “Original Issue Date” means the date of the first issuance of the Debentures,
regardless of any transfers of any Debenture and regardless of the number of instruments
which may be issued to evidence such Debentures.




     “Permitted Indebtedness” means (a) the Indebtedness existing on the Original
Issue Date and set forth on Schedule 3.1(aa) attached to the Purchase Agreement and
(b) lease obligations and purchase money indebtedness of up to $250,000, in the aggregate,
incurred in connection with the acquisition of capital assets and lease obligations with
respect to newly acquired or leased assets.




     “Permitted Lien” means the individual and collective reference to the
following: (a) Liens for taxes, assessments and other governmental charges or levies not yet
due or Liens for taxes, assessments and other governmental charges or levies being contested
in good faith and by appropriate proceedings for which adequate reserves (in the good faith
judgment of the management of the Company) have been established in accordance with GAAP;
(b) Liens imposed by law which were incurred in the ordinary course of the Company’s
business, such as carriers’, warehousemen’s and mechanics’ Liens, statutory landlords’
Liens, and other similar Liens arising in the ordinary course of the Company’s business, and
which (x) do not individually or in the aggregate materially detract from the value of such
property or assets or materially impair the use thereof in the operation of the business of
the Company and its consolidated Subsidiaries or (y) are being contested in good faith by
appropriate proceedings, which proceedings have the effect of preventing for the foreseeable
future the forfeiture or sale of the property or asset subject to such Lien; and (c) Liens
incurred in connection with Permitted Indebtedness under clause (b) thereunder, provided
that such Liens are not secured by assets of the Company or its Subsidiaries other than the
assets so acquired or leased.




     “Person” means an individual or corporation, partnership, trust, incorporated
or unincorporated association, joint venture, limited liability company, joint stock
company, government (or an agency or subdivision thereof) or other entity of any kind.




     “Purchase Agreement” means the Securities Purchase Agreement among the Company
and the original Holders, dated as of July ___, 2006, as amended, modified or supplemented
from time to time in accordance with its terms.




     “Registration Rights Agreement” means the Registration Rights Agreement among
the Company and the original Holders, dated as of the date of the Purchase Agreement, as
amended, modified or supplemented from time to time in accordance with its terms.




     “Registration Statement” means a registration statement that registers the
resale of all Conversion Shares of the Holder, who shall be named as a “selling stockholder”
therein, and meets the requirements of the Registration Rights Agreement.



4









 






     “Securities Act” means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.




     “Share Delivery Date” shall have the meaning set forth in Section 4(d).




     “Subsidiary” shall have the meaning set forth in the Purchase Agreement.




     “Trading Day” means a day on which the principal Trading Market is open for
business.




     “Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the American Stock Exchange,
the Nasdaq Capital Market, the Nasdaq National Market, the New York Stock Exchange or the
OTC Bulletin Board.




     “Transaction Documents” shall have the meaning set forth in the Purchase
Agreement.




     “VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
the daily volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the Trading Market on which the Common Stock is then listed or quoted for
trading as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City
time) to 4:02 p.m. (New York City time); (b) if the OTC Bulletin Board is not a Trading
Market, the volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then quoted for
trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in
the “Pink Sheets” published by Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per share of the
Common Stock so reported; or (d) in all other cases, the fair market value of a share of
Common Stock as determined by an independent appraiser selected in good faith by the Holder
and reasonably acceptable to the Company.



          Section 2. Interest and Prepayment.





     a) Interest. No interest shall be payable on this Debenture, it being
understood that such Debenture has been purchased at an original issue discount in lieu of
interest.




     b) Prepayment. Except as otherwise set forth in this Debenture, the Company
may not prepay any portion of the principal amount of this Debenture without the prior
written consent of the Holder.



          Section 3. Registration of Transfers and Exchanges.




5









 









     a) Different Denominations. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations, as requested
by the Holder surrendering the same. No service charge will be payable for such
registration of transfer or exchange.




     b) Investment Representations. This Debenture has been issued subject to
certain investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement
and applicable federal and state securities laws and regulations.




     c) Reliance on Debenture Register. Prior to due presentment for transfer to the
Company of this Debenture, the Company and any agent of the Company may treat the Person in
whose name this Debenture is duly registered on the Debenture Register as the owner hereof
for the purpose of receiving payment as herein provided and for all other purposes, whether
or not this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.



          Section 4. Conversion.





     a) Voluntary Conversion. At any time after the Original Issue Date until this
Debenture is no longer outstanding, this Debenture shall be convertible, in whole or in
part, into shares of Common Stock at the option of the Holder, at any time and from time to
time (subject to the conversion limitations set forth in Section 4(c) hereof). The Holder
shall effect conversions by delivering to the Company a Notice of Conversion, the form of
which is attached hereto as Annex A (a “Notice of Conversion”), specifying
therein the principal amount of this Debenture to be converted and the date on which such
conversion shall be effected (a “Conversion Date”). If no Conversion Date is
specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice
of Conversion is deemed delivered hereunder. To effect conversions hereunder, the Holder
shall not be required to physically surrender this Debenture to the Company unless the
entire principal amount of this Debenture has been so converted. Conversions hereunder shall
have the effect of lowering the outstanding principal amount of this Debenture in an amount
equal to the applicable conversion. The Holder and the Company shall maintain records
showing the principal amount(s) converted and the date of such conversion(s). The Company
may deliver an objection to any Notice of Conversion within 2 Business Days of delivery of
such Notice of Conversion. In the event of any dispute or discrepancy, the records of the
Holder shall be controlling and determinative in the absence of manifest error. The Holder,
and any assignee by acceptance of this Debenture, acknowledge and agree that, by reason of
the provisions of this paragraph, following conversion of a portion of this Debenture, the
unpaid and unconverted principal amount of this Debenture may be less than the amount stated
on the face hereof.




     b) Conversion Price. The conversion price in effect on any Conversion Date
shall be equal to $0.10 (subject to adjustment herein) (the “Conversion Price”).



6









 






     c) Intentionally Omitted.




     d) Mechanics of Conversion.




     i. Conversion Shares Issuable Upon Conversion of Principal Amount. The
number of shares of Common Stock issuable upon a conversion hereunder shall be
determined by the quotient obtained by dividing (x) the outstanding principal amount
of this Debenture to be converted by (y) the Conversion Price.




     ii. Delivery of Certificate Upon Conversion. Not later than three
Trading Days after each Conversion Date (the “Share Delivery Date”), the
Company shall deliver, or cause to be delivered, to the Holder a certificate or
certificates representing the Conversion Shares which, on or after the Effective
Date, shall be free of restrictive legends and trading restrictions (other than
those which may then be required by the Purchase Agreement) representing the number
of shares of Common Stock being acquired upon the conversion of this Debenture. On
or after the Effective Date, the Company shall use its best efforts to deliver any
certificate or certificates required to be delivered by the Company under this
Section 4 electronically through the Depository Trust Company or another established
clearing corporation performing similar functions.




     iii. Failure to Deliver Certificates. If in the case of any Notice of
Conversion such certificate or certificates are not delivered to or as directed by
the applicable Holder by the third Trading Day after the Conversion Date, the Holder
shall be entitled to elect by written notice to the Company at any time on or before
its receipt of such certificate or certificates, to rescind such Conversion, in
which event the Company shall promptly return to the Holder any original Debenture
delivered to the Company and the Holder shall promptly return the Common Stock
certificates representing the principal amount of this Debenture tendered for
conversion to the Company.




     iv. Obligation Absolute; Partial Liquidated Damages. The Company’s
obligations to issue and deliver the Conversion Shares upon conversion of this
Debenture in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any waiver
or consent with respect to any provision hereof, the recovery of any judgment
against any Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the Holder
or any other Person of any obligation to the Company or any violation or alleged
violation of law by the Holder or any other Person, and irrespective of any other
circumstance which might otherwise limit such obligation of the Company to the
Holder in connection with the issuance of such Conversion Shares; provided,
however, that such delivery shall not operate as a waiver by the Company of
any such action the Company may have against the



7









 







Holder. In the event the Holder of this Debenture shall elect to convert any
or all of the outstanding principal amount hereof, the Company may not refuse
conversion based on any claim that the Holder or anyone associated or affiliated
with the Holder has been engaged in any violation of law, agreement or for any other
reason, unless an injunction from a court, on notice to Holder, restraining and or
enjoining conversion of all or part of this Debenture shall have been sought and
obtained, and the Company posts a surety bond for the benefit of the Holder in the
amount of 150% of the outstanding principal amount of this Debenture, which is
subject to the injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the underlying dispute and the proceeds of which shall be
payable to such Holder to the extent it obtains judgment. In the absence of such
injunction, the Company shall issue Conversion Shares or, if applicable, cash, upon
a properly noticed conversion. If the Company fails for any reason to deliver to
the Holder such certificate or certificates pursuant to Section 4(d)(ii) by the
third Trading Day after the Conversion Date (other than as to any disputed amounts
in accordance with Section 4(a), the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, for each $1000 of principal amount being
converted, $10 per Trading Day (increasing to $20 per Trading Day on the fifth
Trading Day after such liquidated damages begin to accrue) for each Trading Day
after such third Trading Day until such certificates are delivered. Nothing
herein shall limit a Holder’s right to pursue actual damages or declare an Event of
Default pursuant to Section 8 hereof for the Company’s failure to deliver Conversion
Shares within the period specified herein and such Holder shall have the right to
pursue all remedies available to it hereunder, at law or in equity including,
without limitation, a decree of specific performance and/or injunctive relief. The
exercise of any such rights shall not prohibit the Holder from seeking to enforce
damages pursuant to any other Section hereof or under applicable law.




     v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. In addition to any other rights available to the Holder, if the
Company fails for any reason to deliver to the Holder such certificate or
certificates by the Share Delivery Date pursuant to Section 4(d)(ii), and if after
such Share Delivery Date the Holder is required by its brokerage firm to purchase
(in an open market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by such Holder of the Conversion Shares which the Holder was
entitled to receive upon the conversion relating to such Share Delivery Date (a
“Buy-In”), then the Company shall (A) pay in cash to the Holder (in addition
to any other remedies available to or elected by the Holder) the amount by which (x)
the Holder’s total purchase price (including any brokerage commissions) for the
Common Stock so purchased exceeds (y) the product of (1) the aggregate number of
shares of Common Stock that such Holder was entitled to receive from the conversion
at issue multiplied by (2) the actual sale price at which the sell order giving rise
to such purchase obligation was executed (including any brokerage commissions) and
(B) at the option of the Holder, either



8









 







reissue (if surrendered) this Debenture in a principal amount equal to the
principal amount of the attempted conversion or deliver to the Holder the number of
shares of Common Stock that would have been issued if the Company had timely
complied with its delivery requirements under Section 4(d)(ii). For example, if the
Holder purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted conversion of this Debenture with respect to
which the actual sale price of the Conversion Shares (including any brokerage
commissions) giving rise to such purchase obligation was a total of $10,000 under
clause (A) of the immediately preceding sentence, the Company shall be required to
pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In and, upon
request of the Company, evidence of the amount of such loss. Nothing herein shall
limit a Holder’s right to pursue any other remedies available to it hereunder, at
law or in equity including, without limitation, a decree of specific performance
and/or injunctive relief with respect to the Company’s failure to timely deliver
certificates representing shares of Common Stock upon conversion of this Debenture
as required pursuant to the terms hereof.




     vi. Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will at all times after it has received shareholder approval to
increase its authorized capital, or when otherwise available, reserve and keep
available out of its authorized and unissued shares of Common Stock for the sole
purpose of issuance upon conversion of this Debenture, each as herein provided, free
from preemptive rights or any other actual contingent purchase rights of Persons
other than the Holder (and the other holders of the Debentures), not less than such
aggregate number of shares of the Common Stock as shall (subject to the terms and
conditions set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5) upon the conversion of the outstanding
principal amount of this Debenture. The Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly authorized, validly
issued, fully paid and nonassessable and, if the Registration Statement is then
effective under the Securities Act, shall be registered for public sale in
accordance with such Registration Statement.




     vii. Fractional Shares. Upon a conversion hereunder the Company shall
not be required to issue stock certificates representing fractions of shares of
Common Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the VWAP at such time. If the Company elects
not, or is unable, to make such a cash payment, the Holder shall be entitled to
receive, in lieu of the final fraction of a share, 1 whole share of Common Stock.




     viii. Transfer Taxes. The issuance of certificates for shares of the
Common Stock on conversion of this Debenture shall be made without charge to the
Holder hereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificates, provided that the Company



9









 







     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 of this Debenture so converted
and the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid to
the Company the amount of such tax or shall have established to the satisfaction of
the Company that such tax has been paid.



          Section 5. Certain Adjustments.





     a) Stock Dividends and Stock Splits. If the Company, at any time while this
Debenture is outstanding: (A) pays a stock dividend or otherwise makes a distribution or
distributions payable in shares of Common Stock on shares of Common Stock or any Common
Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common
Stock issued by the Company upon conversion of this Debenture); (B) subdivides outstanding
shares of Common Stock into a larger number of shares; (C) combines (including by way of a
reverse stock split) outstanding shares of Common Stock into a smaller number of shares; or
(D) issues, in the event of a reclassification of shares of the Common Stock, any shares of
capital stock of the Company, then the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock (excluding any treasury
shares of the Company) outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding immediately after such
event. Any adjustment made pursuant to this Section shall become effective immediately
after the record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.




     b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as
applicable, at any time while this Debenture is outstanding, sells or grants any option to
purchase or sells or grants any right to reprice its securities, or otherwise disposes of or
issues (or announces any sale, grant or any option to purchase or other disposition) any
Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common
Stock at an effective price per share that is lower than the then Conversion Price (such
lower price, the “Base Conversion Price” and such issuances collectively, a
“Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents
so issued shall at any time, whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights per share which are issued in connection with such issuance, be
entitled to receive shares of Common Stock at an effective price per share that is lower
than the Conversion Price, such issuance shall be deemed to have occurred for less than the
Conversion Price on such date of the Dilutive Issuance), then the Conversion Price shall be
reduced to equal the Base Conversion Price. Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no
adjustment will be made under this Section 5(b) in



10









 







respect of an Exempt Issuance. The Company shall notify the Holder in writing, no
later than the Business Day following the issuance of any Common Stock or Common Stock
Equivalents subject to this Section 5(b), indicating therein the applicable issuance price,
or applicable reset price, exchange price, conversion price and other pricing terms (such
notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or
not the Company provides a Dilutive Issuance Notice pursuant to this Section 5(b), upon the
occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of
Conversion Shares based upon the Base Conversion Price on or after the date of such Dilutive
Issuance, regardless of whether the Holder accurately refers to the Base Conversion Price in
the Notice of Conversion.




     c) Subsequent Rights Offerings. If the Company, at any time while the
Debenture is outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to Holders) entitling them to subscribe for or purchase shares of Common
Stock at a price per share that is lower than the VWAP on the record date referenced below,
then the Conversion Price shall be multiplied by a fraction of which the denominator shall
be the number of shares of the Common Stock outstanding on the date of issuance of such
rights or warrants plus the number of additional shares of Common Stock offered for
subscription or purchase, and of which the numerator shall be the number of shares of the
Common Stock outstanding on the date of issuance of such rights or warrants plus the number
of shares which the aggregate offering price of the total number of shares so offered
(assuming delivery to the Company in full of all consideration payable upon exercise of such
rights, options or warrants) would purchase at such VWAP. Such adjustment shall be made
whenever such rights or warrants are issued, and shall become effective immediately after
the record date for the determination of stockholders entitled to receive such rights,
options or warrants.




     d) Pro Rata Distributions. If the Company, at any time while this Debenture is
outstanding, distributes to all holders of Common Stock (and not to the Holders) evidences
of its indebtedness or assets (including cash and cash dividends) or rights or warrants to
subscribe for or purchase any security (other than the Common Stock, which shall be subject
to Section 5(b)), then in each such case the Conversion Price shall be adjusted by
multiplying such Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a fraction of which
the denominator shall be the VWAP determined as of the record date mentioned above, and of
which the numerator shall be such VWAP on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so distributed
applicable to 1 outstanding share of the Common Stock as determined by the Board of
Directors of the Company in good faith. In either case the adjustments shall be described
in a statement delivered to the Holder describing the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to 1 share of Common
Stock. Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.



11









 






     e) Fundamental Transaction. If, at any time while this Debenture is
outstanding, (A) the Company effects any merger or consolidation of the Company with or into
another Person, (B) the Company effects any sale of all or substantially all of its assets
in one transaction or a series of related transactions, (C) any tender offer or exchange
offer (whether by the Company or another Person) is completed pursuant to which holders of
Common Stock are permitted to tender or exchange their shares for other securities, cash or
property, or (D) the Company effects any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is effectively converted into
or exchanged for other securities, cash or property (in any such case, a “Fundamental
Transaction”), then, upon any subsequent conversion of this Debenture, the Holder shall
have the right to receive, for each Conversion Share that would have been issuable upon such
conversion immediately prior to the occurrence of such Fundamental Transaction, the same
kind and amount of securities, cash or property as it would have been entitled to receive
upon the occurrence of such Fundamental Transaction if it had been, immediately prior to
such Fundamental Transaction, the holder of 1 share of Common Stock (the “Alternate
Consideration”). For purposes of any such conversion, the determination of the
Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration
based on the amount of Alternate Consideration issuable in respect of 1 share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price
among the Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration. If holders of Common Stock are
given any choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any conversion of this Debenture following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions, any successor
to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder
a new debenture consistent with the foregoing provisions and evidencing the Holder’s right
to convert such debenture into Alternate Consideration. The terms of any agreement pursuant
to which a Fundamental Transaction is effected shall include terms requiring any such
successor or surviving entity to comply with the provisions of this Section 5(e) and
insuring that this Debenture (or any such replacement security) will be similarly adjusted
upon any subsequent transaction analogous to a Fundamental Transaction.




     f) Calculations. All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this
Section 5, the number of shares of Common Stock deemed to be issued and outstanding as of a
given date shall be the sum of the number of shares of Common Stock (excluding any treasury
shares of the Company) issued and outstanding.




     g) Notice to the Holder.




     i. Adjustment to Conversion Price. Whenever the Conversion Price is
adjusted pursuant to any provision of this Section 5, the Company shall promptly
mail to each Holder a notice setting forth the Conversion Price after



12









 







such adjustment and setting forth a brief statement of the facts requiring such
adjustment. If the Company issues a variable rate security, despite the prohibition
thereon in the Purchase Agreement, the Company shall be deemed to have issued Common
Stock or Common Stock Equivalents at the lowest possible conversion or exercise
price at which such securities may be converted or exercised in the case of a
Variable Rate Transaction (as defined in the Purchase Agreement).




     ii. Notice to Allow Conversion by Holder. If (A) the Company shall
declare a dividend (or any other distribution in whatever form) on the Common Stock,
(B) the Company shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock, (C) the Company shall authorize the granting to all
holders of the Common Stock of rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any rights, (D) the approval of any
stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the assets
of the Company, of any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property or (E) the Company shall authorize
the voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Company, then, in each case, the Company shall cause to be filed at each
office or agency maintained for the purpose of conversion of this Debenture, and
shall cause to be delivered to the Holder at its last address as it shall appear
upon the Debenture Register, at least 20 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as of
which the holders of the Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the date
on which such reclassification, consolidation, merger, sale, transfer or share
exchange is expected to become effective or close, and the date as of which it is
expected that holders of the Common Stock of record shall be entitled to exchange
their shares of the Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share exchange,
provided that the failure to deliver such notice or any defect therein or in the
delivery thereof shall not affect the validity of the corporate action required to
be specified in such notice. The Holder is entitled to convert this Debenture
during the 20-day period commencing on the date of such notice through the effective
date of the event triggering such notice.




a) Section 6. Intentionally Omitted.



          Section 7. Negative Covenants. As long as any portion of this Debenture
remains outstanding, the Company shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly:




13









 









     a) other than Permitted Indebtedness, except with the prior written consent of the
Agent (as defined in the Security Agreement), enter into, create, incur, assume, guarantee
or suffer to exist any indebtedness for borrowed money of any kind, including but not
limited to, a guarantee, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom;




     b) other than Permitted Liens, enter into, create, incur, assume or suffer to exist any
Liens of any kind, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom;




     c) amend its charter documents, including without limitation, the certificate of
incorporation and bylaws, in any manner that materially and adversely affects any rights of
the Holder;




     d) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a
de minimis number of shares of its Common Stock or Common Stock Equivalents
other than as to (a) the Conversion Shares or Warrant Shares as permitted or required under
the Transaction Documents and (b) repurchases of Common Stock or Common Stock Equivalents of
departing officers and directors of the Company, provided that such repurchases shall not
exceed an aggregate of $100,000 for all officers and directors during the term of this
Debenture);




     e) enter into any agreement with respect to any of the foregoing; or




     f) pay cash dividends or distributions on any equity securities of the Company.



          Section 8. Events of Default.





     a) “Event of Default” means, wherever used herein, any of the following events
(whatever the reason for such event and whether such event shall be voluntary or involuntary
or effected by operation of law or pursuant to any judgment, decree or order of any court,
or any order, rule or regulation of any administrative or governmental body):




     i. any default in the payment of (A) the principal amount of any Debenture or
(B) liquidated damages and other amounts owing to a Holder on any Debenture, as and
when the same shall become due and payable (whether on a Conversion Date or the
Maturity Date or by acceleration or otherwise) which default, solely in the case of
a default under clause (B) above, is not cured within 3 Trading Days;




     ii. the Company shall fail to observe or perform any other covenant or
agreement contained in the Debentures (other than a breach by the Company of its
obligations to deliver shares of Common Stock to the Holder upon conversion,



14









 







which breach is addressed in clause (xi) below) which failure is not cured, if
possible to cure, within the earlier to occur of (A) 5 Trading Days after notice of
such failure sent by the Holder or by any other Holder and (B) 10 Trading Days after
the Company has become or should have become aware of such failure;




     iii. a default or event of default (subject to any grace or cure period
provided in the applicable agreement, document or instrument) shall occur under (A)
any of the Transaction Documents or (B) any other material agreement, lease,
document or instrument to which the Company or any Subsidiary is obligated (and not
covered by clause (vi) below);




     iv. any representation or warranty made in this Debenture, any other
Transaction Documents, any written statement pursuant hereto or thereto or any other
report, financial statement or certificate made or delivered to the Holder or any
other Holder shall be untrue or incorrect in any material respect as of the date
when made or deemed made;




     v. the Company or any Significant Subsidiary shall be subject to a Bankruptcy
Event;




     vi. the Company or any Subsidiary shall default on any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there may
be secured or evidenced, any indebtedness for borrowed money or money due under any
long term leasing or factoring arrangement that (a) involves an obligation greater
than $150,000, whether such indebtedness now exists or shall hereafter be created,
and (b) results in such indebtedness becoming or being declared due and payable
prior to the date on which it would otherwise become due and payable;




     vii. the Common Stock shall not be eligible for listing or quotation for
trading on a Trading Market and shall not be eligible to resume listing or quotation
for trading thereon within five Trading Days;




     viii. the Company shall be a party to any Change of Control Transaction or
Fundamental Transaction or shall agree to sell or dispose of all or in excess of 33%
of its assets in one transaction or a series of related transactions (whether or not
such sale would constitute a Change of Control Transaction);




     ix. Intentionally Omitted;




     x. if, during the Effectiveness Period (as defined in the Registration Rights
Agreement), either (a) the effectiveness of the Registration Statement lapses for
any reason or (b) the Holder shall not be permitted to resell Registrable Securities
(as defined in the Registration Rights Agreement) under the



15









 







Registration Statement for a period of more than 30 consecutive Trading Days or
60 non-consecutive Trading Days during any 12 month period; provided,
however, that if the Company is negotiating a merger, consolidation,
acquisition or sale of all or substantially all of its assets or a similar
transaction and, in the written opinion of counsel to the Company, the Registration
Statement would be required to be amended to include information concerning such
pending transaction(s) or the parties thereto which information is not available or
may not be publicly disclosed at the time, the Company shall be permitted an
additional 10 consecutive Trading Days during any 12 month period pursuant to this
Section 8(a)(x);




     xi. the Company shall fail for any reason to deliver certificates to a Holder
prior to the tenth Trading Day after a Conversion Date pursuant to Section 4(d) or
the Company shall provide at any time notice to the Holder, including by way of
public announcement, of the Company’s intention to not honor requests for
conversions of any Debentures in accordance with the terms hereof;




     xii. any monetary judgment, writ or similar final process shall be entered or
filed against the Company, any Subsidiary or any of their respective property or
other assets for more than $100,000, and such judgment, writ or similar final
process shall remain unvacated, unbonded or unstayed for a period of 45 calendar
days.




     b) Remedies Upon Event of Default. If any Event of Default occurs, the
outstanding principal amount of this Debenture, liquidated damages and other amounts owing
in respect thereof through the date of acceleration, shall become, at the Holder’s election,
immediately due and payable in cash at the Mandatory Default Amount. Upon the payment in
full of the Mandatory Default Amount, the Holder shall promptly surrender this Debenture to
or as directed by the Company. In connection with such acceleration described herein, the
Holder need not provide, and the Company hereby waives, any presentment, demand, protest or
other notice of any kind, and the Holder may immediately and without expiration of any grace
period enforce any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Such acceleration may be rescinded and annulled by
Holder at any time prior to payment hereunder and the Holder shall have all rights as a
holder of the Debenture until such time, if any, as the Holder receives full payment
pursuant to this Section 8(b). No such rescission or annulment shall affect any subsequent
Event of Default or impair any right consequent thereon.



          Section 9. Miscellaneous.




     a) Notices. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Notice of Conversion,
shall be in writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service, addressed to the Company, at the address



16









 







set forth above, facsimile number                     , Attn:
                                                                        
        or such other facsimile number or address as the
Company may specify for such purpose by notice to the Holder delivered in accordance with
this Section 9. Any and all notices or other communications or deliveries to be provided by
the Company hereunder shall be in writing and delivered personally, by facsimile, or sent by
a nationally recognized overnight courier service addressed to each Holder at the facsimile
number or address of such Holder appearing on the books of the Company, or if no such
facsimile number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given and effective on
the earliest of (i) the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile number specified in this Section 9 prior to 5:30 p.m. (New
York City time), (ii) the date immediately following the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number specified in this
Section 9 between 5:30 p.m. (New York City time) and 11:59 p.m. (New York City time) on any
date, (iii) the second Business Day following the date of mailing, if sent by nationally
recognized overnight courier service, or (iv) upon actual receipt by the party to whom such
notice is required to be given.




     b) Absolute Obligation. Except as expressly provided herein, no provision of
this Debenture shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, liquidated damages, as applicable, on this Debenture
at the time, place, and rate, and in the coin or currency, herein prescribed. This
Debenture is a direct debt obligation of the Company. This Debenture ranks pari
passu with all other Debentures now or hereafter issued under the terms set forth
herein.




     c) Lost or Mutilated Debenture. If this Debenture shall be mutilated, lost,
stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for
and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost,
stolen or destroyed Debenture, a new Debenture for the principal amount of this Debenture so
mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft
or destruction of such Debenture, and of the ownership hereof, reasonably satisfactory to
the Company.




     d) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York, without regard to
the principles of conflict of laws thereof. Each party agrees that all legal proceedings
concerning the interpretation, enforcement and defense of the transactions contemplated by
any of the Transaction Documents (whether brought against a party hereto or its respective
Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in
the state and federal courts sitting in the City of New York, Borough of Manhattan (the
“New York Courts”). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or



17









 







discussed herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of such New York
Courts, or such New York Courts are improper or inconvenient venue for such proceeding.
Each party hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by mailing a copy thereof via registered
or certified mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Debenture and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any other manner
permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest
extent permitted by applicable law, any and all right to trial by jury in any legal
proceeding arising out of or relating to this Debenture or the transactions contemplated
hereby. If either party shall commence an action or proceeding to enforce any provisions of
this Debenture, then the prevailing party in such action or proceeding shall be reimbursed
by the other party for its attorneys fees and other costs and expenses incurred in the
investigation, preparation and prosecution of such action or proceeding.




     e) Waiver. Any waiver by the Company or the Holder of a breach of any
provision of this Debenture shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this Debenture. The
failure of the Company or the Holder to insist upon strict adherence to any term of this
Debenture on one or more occasions shall not be considered a waiver or deprive that party of
the right thereafter to insist upon strict adherence to that term or any other term of this
Debenture. Any waiver by the Company or the Holder must be in writing.




     f) Severability. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any provision is
inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all
other Persons and circumstances. If it shall be found that any interest or other amount
deemed interest due hereunder violates the applicable law governing usury, the applicable
rate of interest due hereunder shall automatically be lowered to equal the maximum rate of
interest permitted under applicable law. The Company covenants (to the extent that it may
lawfully do so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or
other law which would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on this Debenture as contemplated herein, wherever enacted, now or
at any time hereafter in force, or which may affect the covenants or the performance of this
indenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all
benefits or advantage of any such law, and covenants that it will not, by resort to any such
law, hinder, delay or impeded the execution of any power herein granted to the Holder, but
will suffer and permit the execution of every such as though no such law has been enacted.



18









 






     g) Next Business Day. Whenever any payment or other obligation hereunder shall
be due on a day other than a Business Day, such payment shall be made on the next succeeding
Business Day.




     h) Headings. The headings contained herein are for convenience only, do not
constitute a part of this Debenture and shall not be deemed to limit or affect any of the
provisions hereof.




     i) Assumption. Any successor to the Company or any surviving entity in a
Fundamental Transaction shall (i) assume, prior to such Fundamental Transaction, all of the
obligations of the Company under this Debenture and the other Transaction Documents pursuant
to written agreements in form and substance satisfactory to the Holder (such approval not to
be unreasonably withheld or delayed) and (ii) issue to the Holder a new debenture of such
successor entity evidenced by a written instrument substantially similar in form and
substance to this Debenture, including, without limitation, having a principal amount and
interest rate equal to the principal amount and the interest rate of this Debenture and
having similar ranking to this Debenture, which shall be satisfactory to the Holder (any
such approval not to be unreasonably withheld or delayed). The provisions of this Section
9(i) shall apply similarly and equally to successive Fundamental Transactions and shall be
applied without regard to any limitations of this Debenture.



*********************




19









 








          IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly
authorized officer as of the date first above indicated.




	 	 	 	 	 
	 	HARTVILLE GROUP, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 



20









 






	 	 	 	 	 



ANNEX A




NOTICE OF CONVERSION




          The undersigned hereby elects to convert principal under the Original Issue Discount Secured
Convertible Debenture of Hartville Group, Inc., a Nevada corporation (the “Company”), due
on July ___, 2009, into shares of common stock, par value $0.001 per share (the “Common
Stock”), of the Company according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect thereto and is delivering herewith such certificates
and opinions as reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if any.




          By the delivery of this Notice of Conversion the undersigned represents and warrants to the
Company that its ownership of the Common Stock does not exceed the amounts determined in accordance
with Section 13(d) of the Exchange Act, specified under Section 4 of this Debenture.




          The undersigned agrees to comply with the prospectus delivery requirements under the
applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock.



Conversion calculations:




Date to Effect Conversion:




Principal Amount of Debenture to be Converted:




Number of shares of Common Stock to be issued:




Signature:




Name:




Address:





21









 





Schedule 1




CONVERSION SCHEDULE



The Original Issue Discount Convertible Debentures due on July ___, 2009 in the aggregate principal
amount of $                     issued by Hartville Group, Inc. This Conversion Schedule reflects
conversions made under Section 4 of the above referenced Debenture.




Dated:




	 	 	 	 	 	 	 
	 	 	 	 	Aggregate	 	 
	 	 	 	 	Principal	 	 
	Date of Conversion	 	 	 	Amount	 	 
	(or for first entry,	 	Amount of	 	Remaining	 	 
	Original Issue Date)	 	Conversion	 	Subsequent to	 	Company Attest
	 	 	 	 	Conversion	 	 
	 	 	 	 	(or original	 	 
	 	 	 	 	Principal	 	 
	 	 	 	 	Amount)	 	 
	 

	 	 
	 	 
	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 
	 	 
	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 
	 	 
	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 
	 	 
	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 
	 	 
	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 
	 	 
	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 
	 	 
	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 
	 	 
	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 
	 	 
	 	 






22