EX-4.1 FORM OF 6% SENIOR UNSECURED CONVERTIBLE DEB



 






EXHIBIT 4.1




Exhibit A to the

Securities Purchase Agreement



THIS DEBENTURE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS DEBENTURE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE
SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE OR SOLD UNLESS A REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS SHALL BE EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION
FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN
CONNECTION WITH SUCH OFFER OR SALE.



THIS DEBENTURE DOES NOT REQUIRE PHYSICAL SURRENDER HEREOF IN ORDER TO EFFECT A PARTIAL PAYMENT,
REDEMPTION OR CONVERSION HEREOF. ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS DEBENTURE
MAY BE LESS THAN THE PRINCIPAL AMOUNT SHOWN BELOW.




VERSO TECHNOLOGIES, INC.




6% SENIOR UNSECURED CONVERTIBLE DEBENTURE




			
	New York, New York
	 	$___
	Issue Date: February 4, 2005	 	 






          FOR VALUE RECEIVED, VERSO TECHNOLOGIES, INC., a Minnesota corporation (the “Company”),
hereby promises to pay to the order of ___or its permitted successors or assigns
(the “Holder”) the sum of ___($___) in same day funds, on
February 3, 2009 (the “Maturity Date”) or such earlier date on which amounts due under this
Debenture are required or permitted to be repaid as provided herein. The Holder may convert amounts
of principal of this Debenture into shares (“Conversion Shares”) of the Company’s common
stock, par value $.01 per share (the “Common Stock”), on the terms and subject to the
conditions set forth herein.



          The Company has issued this Debenture pursuant to a Securities Purchase Agreement, dated as of
February 4, 2005 (the “Securities Purchase Agreement”). The debentures issued by the
Company pursuant to the Securities Purchase Agreement, including this Debenture, are collectively
referred to herein as the “Debentures”.



 









 





          The following terms shall apply to this Debenture:



1. DEFINITIONS.




               “Affiliate” means, as to any Person (the “subject Person”), any other Person
(a) that directly or indirectly through one or more intermediaries controls or is controlled by, or
is under direct or indirect common control with, the subject Person, (b) that directly or
indirectly beneficially owns or holds ten percent (10%) or more of any class of voting equity of
the subject Person, or (c) ten percent (10%) or more of the voting equity of which is directly or
indirectly beneficially owned or held by the subject Person. For the purposes of this definition,
“control” when used with respect to any Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership of voting
securities, through representation on such Person’s board of directors or other management
committee or group, by contract or otherwise.



               “Business Day” means any day other than a Saturday, a Sunday or a day on which the New
York Stock Exchange is closed or on which banks are authorized by law to close in New York, New
York.



               “Cap Amount” means 19.99% of the number of shares of Common Stock outstanding on the
Issue Date (subject to adjustment upon a stock split, stock dividend or similar event).



               “Change of Control” means the existence or occurrence of any of the following: (a) the
sale, conveyance or disposition of all or substantially all of the assets of the Company; (b) the
effectuation of a transaction or series of transactions in which more than fifty percent (50%) of
the voting power of the Company is disposed of; (c) the consolidation, merger or other business
combination of the Company with or into any other entity, immediately following which the prior
shareholders of the Company fail to own, directly or indirectly, at least fifty percent (50%) of
the surviving entity; (d) a transaction or series of transactions in which any Person or group
acquires more than fifty percent (50%) of the voting equity of the Company; and (e) the Continuing
Directors do not at any time constitute at least a majority of the Board of Directors of the
Company.



               “Continuing Director” means at any date a member of the Company’s Board of Directors
(i) who was a member of such board on the date of the Securities Purchase Agreement or (ii) who was
nominated or elected by at least a majority of the directors who were Continuing Directors at the
time of such nomination or election or whose election to the Company’s Board of Directors was
recommended or endorsed by at least a majority of the directors who were Continuing Directors at
the time of such nomination or election or such lesser number comprising a majority of a nominating
committee if authority for such nominations or elections has been delegated to a nominating
committee whose authority and composition have been approved by at least a majority of the
directors who were Continuing Directors at the time such committee was formed.



               “Conversion Price” means fifty cents ($.50), subject to adjustment as provided herein.



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               “Debt” means as to any Person at any time: (a) all indebtedness, liabilities and
obligations of such Person for borrowed money; (b) all indebtedness, liabilities and obligations of
such Person to pay the deferred purchase price of Property or services (except trade accounts
payable, accrued compensation, accrued expenses, and unearned revenue and customer deposits of such
Person that, in any such case, arise in the ordinary course of business and are not more than
ninety (90) days past due, and accrued costs of the MCK acquisition and the liabilities of
discontinued operations); (c) all capital lease obligations of such Person; (d) all Debt of others
guaranteed by such Person; (e) all indebtedness, liabilities and obligations secured by a Lien
(other than a Permitted Lien) existing on Property owned by such Person, whether or not the
indebtedness, liabilities or obligations secured thereby have been assumed by such Person or are
non-recourse to such Person; (f) all reimbursement obligations of such Person (whether contingent
or otherwise) in respect of letters of credit, bankers’ acceptances, surety or other bonds and
similar instruments; and (g) all liabilities and obligations of such Person to redeem or retire
shares of capital stock of such Person (other than the Company’s obligation to redeem the
Securities under the circumstances specified therein). Debt shall not include any liability for (i)
federal, state, local or other taxes imposed by a Governmental Authority, (ii) endorsements of
negotiable instruments for deposit or collection or similar transactions in the ordinary course of
business or (iii) any indebtedness that has been fully and finally defeased in accordance with the
terms of the documents governing such indebtedness.



               “Default Interest Rate” means the lower of twelve (12%) and the maximum rate permitted
by applicable law or by the applicable rules or regulations of any governmental agency or of any
stock exchange or other self-regulatory organization having jurisdiction over the Company or the
trading of its securities.



               “Fed Funds Rate” means, as of a particular date, the rate most recently announced on
or prior to such date by the Federal Open Market Committee as the target for the federal funds
rate.



               “Forced Conversion Condition” means each of the following:




          (i) the Registration Statement has been declared effective, is not the subject
of any stop order, is available to the Holder, and covers the number of Registrable
Securities required by the Registration Rights Agreement; provided, however, that if
the Company is no longer required to maintain the effectiveness of the Registration
Statement under the Registration Rights Agreement, the events described in this
clause (i) shall no longer constitute a “Forced Conversion Condition”;




          (ii) the Common Stock is listed on the Nasdaq National Market, the Nasdaq
SmallCap Market or the New York Stock Exchange and trading in the Common Stock on
such market or exchange shall not have been suspended;



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          (iii) an Event of Default (as defined below), or an event that with the passage
of time or giving of notice, or both, would constitute an Event of Default, has not
occurred and is continuing;




          (iv) the Market Price is greater than one dollar $1.00 (subject to proportional
adjustment for stock splits, stock dividends and similar events); and




          (v) Shareholder Approval has been obtained.



               “Governmental Authority” means any nation or government, any state, provincial or
political subdivision thereof and any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government, including without limitation
any stock exchange, securities market or self-regulatory organization.



               “Issue Date” means the date on which this Debenture is issued pursuant to the
Securities Purchase Agreement.



               “Lien” and “Permitted Lien” shall have the respective meanings set forth in
the Securities Purchase Agreement.



               “Liquidation Event” means the (x) institution of any insolvency or bankruptcy
proceedings, or any receivership, liquidation, reorganization or other similar proceedings in
connection therewith, relative to the Company, any Subsidiary of the Company or to its or their
creditors, as such, or to its or their assets, or (y) the dissolution or other winding up of the
Company or a Subsidiary of the Company, whether voluntary or involuntary and whether or not
involving insolvency or bankruptcy proceedings, or (z) any assignment for the benefit of creditors
or any marshalling of the material assets or material liabilities of the Company or any Subsidiary
of the Company; provided, however, that for purposes of this definition, the term “Subsidiary”
shall not include an entity that has no material assets or operations as of the Issue Date.



               “Major Transaction” means a merger, consolidation, business combination, tender offer,
exchange of shares, recapitalization, reorganization, redemption or other similar event, as a
result of which shares of Common Stock shall be changed into the same or a different number of
shares of the same or another class or classes of stock or securities or other assets of the
Company or another entity or the Company shall sell all or substantially all of its assets.



               “Market Price” means, as of a particular date, the average of daily VWAP for each of
the five (5) consecutive Trading Days occurring immediately prior to (but not including) such date.



               “Material Adverse Effect” means an effect that is material and adverse to (i) the
consolidated business, operations, properties, financial condition, prospects or results of
operations of the Company and its Subsidiaries taken as a whole, or (ii) the ability of the Company
to perform its obligations under this Debenture or the other Transaction Documents (as defined
below).



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               “Person” means any individual, corporation, trust, association, company, partnership,
joint venture, limited liability company, joint stock company, Governmental Authority or other
entity.



               “Principal Market” means the principal securities exchange or market on which the
Common Stock is listed or traded.



               “Registrable Securities” has the meaning set forth in the Registration Rights
Agreement.



               “Registration Rights Agreement” means the agreement between the Holder (and the other
Holders listed therein) and the Company pursuant to which the Company has agreed to register the
shares of Common Stock issuable under the Debentures and the Warrants.



               “Registration Statement” means the Registration Statement (as defined in the
Registration Rights Agreement) covering the resale of the Conversion Shares issuable under this
Debenture.



               “Scheduled Interest Payment Date” means each April 1, July 1, October 1 and January 1
following the Issue Date, with the first Scheduled Interest Payment Date occurring on April 1,
2005, provided, that if any such date is not a Business Day, then the Scheduled Interest Payment
Date shall be the Business Day immediately following such date.



               “Shareholder Approval” means (i) the affirmative vote of the holders of the number of
shares of outstanding Common Stock required under the Minnesota Business Corporation Code to
approve an amendment to the Company’s Articles of Incorporation to increase the number of
authorized shares of Common Stock at least 150% of the number of shares sufficient to permit the
exercise in full of the Series B Warrants (without regard to any restriction on such exercise) and
(ii) the affirmative vote of the holders of such number of votes cast at a meeting of shareholders
approving the issuance of Common Stock in excess of the Cap Amount as may be required under the
applicable listing requirements of the Principal Market.



               “Stock Payment Condition” means each of the following:




          (i) the Registration Statement has been declared effective, is not the subject
of any stop order, is available to the Holder, and covers the number of Registrable
Securities required by the Registration Rights Agreement; provided, however, that if
the Company is no longer required to maintain the effectiveness of the Registration
Statement under the Registration Rights Agreement, the events described in this
clause (i) shall no longer constitute a “Stock Payment Condition”;




          (ii) the Common Stock is listed on the Nasdaq National Market, the Nasdaq
SmallCap Market, the New York Stock Exchange or the



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American Stock Exchange and trading in the Common Stock on such market or exchange
shall not have been suspended;




          (iii) an Event of Default (as defined below), or an event that with the passage
of time or giving of notice, or both, would constitute an Event of Default, has not
occurred and is continuing; and




          (iv) Shareholder Approval has been obtained.



               “Subsidiary” means, with respect to any Person, any corporation or other entity of
which at least a majority of the outstanding shares of stock or other ownership interests having by
the terms thereof ordinary voting power to elect a majority of the board of directors (or Persons
performing similar functions) of such corporation or entity (regardless of whether or not at the
time, in the case of a corporation, stock of any other class or classes of such corporation shall
have or might have voting power by reason of the happening of any contingency) is at the time
directly or indirectly owned or controlled by such Person or one or more of its Subsidiaries or by
such Person and one or more of its Subsidiaries.



               “Trading Day” means a Business Day on which shares of Common Stock is purchased and
sold on the Principal Market.



               “VWAP” on a Trading Day means the volume weighted average price of the Common Stock
for such Trading Day on the Principal Market as reported by Bloomberg Financial Markets or, if
Bloomberg Financial Markets is not then reporting such prices, by a comparable reporting service of
national reputation selected by the Holders and reasonably satisfactory to the Company. If VWAP
cannot be calculated for the Common Stock on such Trading Day on any of the foregoing bases, then
the Company shall submit such calculation to an independent investment banking firm of national
reputation reasonably acceptable to the Investors, and shall cause such investment banking firm to
perform such determination and notify the Company and the Investors of the results of determination
no later than two (2) Business Days from the time such calculation was submitted to it by the
Company. All such determinations shall be appropriately adjusted for any stock dividend, stock
split or other similar transaction during such period.



               “Warrants” means the warrants issued pursuant to the Securities Purchase Agreement.



          All definitions contained in this Debenture are equally applicable to the singular and plural
forms of the terms defined. The words “hereof”, “herein” and “hereunder” and words of similar
import referring to this Debenture refer to this Debenture as a whole and not to any particular
provision of this Debenture. Any capitalized term used but not defined herein has the meaning
specified in the Securities Purchase Agreement.



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1A. SUBORDINATION.




     Notwithstanding any other provisions of this Debenture to the contrary, by its acceptance of
this Debenture, the Holder agrees as follows:



          (a) The principal of and interest on this Debenture (and all extensions and renewals thereof
and replacements therefor) and all premiums, fees, costs, expenses and all other sums now or
hereafter due in connection with the foregoing (collectively, the “Debenture Obligations”)
are subordinate in right of payment to the payment to Silicon Valley Bank (the “Senior
Lender”, which term shall include any other institutional lender which hereafter replaces the
Senior Lender as a lender to the Company), in full in cash, of all present and future indebtedness
for borrowed money of the Company to the Senior Lender and all interest thereon, and all
liabilities, guarantees and other obligations of the Company to the Senior Lender in connection
therewith, now existing or hereafter arising, including without limitation any interest accruing
after the commencement of any bankruptcy, arrangement, or reorganization proceeding with respect to
Company (but only to the extent that such interest is recoverable
from the Company or
allowed in any such proceeding), costs, expenses, penalties, indemnities, and reimbursement
obligations (collectively, the “Senior Debt”). Notwithstanding the foregoing, the Holder
may accept payment of the following amounts on the Debenture Obligations: (i) regularly scheduled
payments of principal as set forth herein on the date hereof, (ii) regularly scheduled payments of
interest as set forth herein on the date hereof and (iii) amounts to which Holder is entitled under
the Collateral Agreement as in effect on the date hereof (the payments under subclauses (i), (ii)
and (iii) above being collectively referred to herein as the “Permitted Payments”). Unless
and until all of the Senior Debt has been indefeasibly paid in full, in cash, and as long as this
Debenture is not in default, the Holder agrees not to do any of the following, directly or
indirectly: ask for or accept payment of all or any part of the Debenture Obligations (except for
the Permitted Payments as provided for above), in cash or other property or by set-off or in any
other manner, demand, sue for, accelerate the maturity of, or otherwise enforce any of the
Debenture Obligations, enforce any guaranty of any of the Debenture Obligations, take, hold or
claim any collateral or security for any of the Debenture Obligations (other than amounts held in
the Collateral Account), exercise any rights or remedies with respect to the Debenture Obligations,
judicially or non-judicially (including without limitation the commencement of any bankruptcy or
insolvency proceeding against the Company), or attempt to do any of the foregoing (collectively,
“Collection Action”); provided, however, that upon a default under this
Debenture, the Holder shall be entitled to take any Collection Action that it deems necessary or
appropriate in its sole discretion, but only after the Senior Lender has received at least ninety
(90) days’ prior written notice thereof from the Holder (except that such notice shall not be
required with respect to (x) a Collection Action relating to amounts held in the Collateral
Account, (y) any claim or filing that the Holder may have or be entitled to make in connection with
a bankruptcy or insolvency proceeding (subject to the terms of paragraph (b) below), or (z)
following the commencement of any suit or action by the Company against the Holder, and upon ten
(10) Business Days’ prior written notice to the Senior Lender, any compulsory or mandatory
counterclaim that may then be available to the Holder. All proceeds received by the Holder from
the exercise of any of its rights and remedies hereunder shall be remitted to the Senior Lender to
be applied to the Senior Debt, until the Senior Debt has been paid and performed in full;
provided, however, so long as no default or event of default has occurred under any
document,



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instrument or agreement evidencing, securing or relating to the Senior Debt, all proceeds of
Permitted Payments may be retained by the Holder; provided, further, that any
amounts to which the Holder is entitled under the Collateral Agreement in effect on the date hereof
which the Holder receives may be retained by the Holder regardless of whether or not a default or
event of default has occurred with respect to the Senior Debt. Upon the payment and performance in
full of all of the Senior Debt, Holder shall be subrogated, without any further action by the
Holder or the Senior Lender, to all rights, privileges and claims of the Senior Lender with respect
to the Senior Debt against which any such remittances are applied, including, without limitation,
the rights of the Senior Lender as a secured party under any security agreement or arrangement with
the Company (collectively, “Subrogation”); provided, however, nothing in
this sentence shall impair or affect any of the Senior Lender’s rights under paragraph (c) below.
Notwithstanding anything herein to the contrary, nothing contained herein shall prevent the Holder
from converting this Debenture into Common Stock as provided herein.




          (b) The Holder agrees that upon any distribution of the assets or readjustment of the
indebtedness of the Company whether by reason of liquidation, composition, bankruptcy,
receivership, assignment for the benefit of creditors or any other action or proceeding involving
the readjustment of all or any of the Debenture Obligations, or the application of the assets of
the Company to the payment or liquidation thereof, the Senior Lender shall be entitled to receive
payment in full in cash of all of the Senior Debt prior to the payment of all or any part of the
Debenture Obligations, and in order to enable the Senior Lender to enforce its rights hereunder in
any such action or proceeding, the Senior Lender is hereby irrevocably authorized and empowered in
its sole discretion (but without any obligation on its part) to make and present for and on behalf
of the Holder such proofs of claim against the Company on account of the Debenture Obligations (but
only if the Holder does not do so at least 10 days prior to the expiration of the time to file such
proofs of claim in such proceeding) as the Senior Lender may deem expedient or proper and, if the
Senior Lender has received written confirmation from the Holder that the Holder does not intend to
vote or if the Senior Lender has not received such confirmation from the Holder at least ten (10)
days prior to any deadline for voting such proofs of claim, to vote such proofs of claim in any
such proceeding and to receive and collect any and all dividends or other payments or disbursements
made thereon in whatever form the same may be paid or issued, to apply same on account of the
Senior Debt until the Senior Debt is paid in full and to remit any balance to the Holder. The
Holder further agrees to execute and deliver to the Senior Lender such assignments or other
instruments as reasonably may be required by the Senior Lender in order to enable the Senior Lender
to enforce any and all such claims and to collect any and all dividends or other payments or
disbursements which may be made at any time on account of all and any of the Debenture Obligations.
Any amounts received by the Holder contrary to the provisions of this Section shall be held in
trust by the Holder for the benefit of the Senior Lender and shall forthwith be paid over to the
Senior Lender to be applied to the Senior Debt in such order as the Senior Lender in its sole
discretion shall determine, without limiting any other right of the Senior Lender hereunder or
otherwise and without otherwise affecting the liability of the Holder. Upon the payment and
performance in full of all of the Senior Debt, the Holder shall be entitled to Subrogation with
respect to any amounts received, collected or paid to the Senior Lender under this paragraph (b).



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          (c) The Holder agrees that, in addition to any other rights that the Senior Lender may have at
law or in equity, the Senior Lender may at any time, and from time to time, without the Holder’s
consent and without notice to the Holder, renew, extend or increase any of the Senior Debt or that
of any other person at any time directly or indirectly liable for the payment of any Senior Debt,
accept partial payments of the Senior Debt, settle, release (by operation of law or otherwise),
compound, compromise, collect or liquidate any of the Senior Debt, make loans or advances to the
Company secured in whole or in part by collateral or unsecured or refrain from making any loans or
advances to the Company, change, waive, alter or vary the interest charge on, or any other terms or
provisions of the Senior Debt or any present or future instrument, document or agreement between
the Senior Lender and the Company, release, exchange, fail to perfect, delay the perfection of,
fail to resort to, or realize upon any collateral (other than amounts held in the Collateral
Account), and take any other action or omit to take any other action with respect to the Senior
Debt or any such collateral as the Senior Lender deems necessary or advisable in the Senior
Lender’s sole discretion.



          (d) In the event of any financing of the Company by the Senior Lender during a bankruptcy or
reorganization of Company, the Holder agrees that the term “Senior Debt” shall include without
limitation all indebtedness, liabilities and obligations incurred in any such proceeding, and the
Holder agrees to take such actions and execute such documents in such proceedings as may be
reasonably necessary in order to effectuate the foregoing.



          (e) The Holder agrees not to contest (i) the validity, perfection, priority or enforceability
of the Senior Debt or the Senior Lender’s security interest in any collateral (other than amounts
held in the Collateral Account) or (ii) whether any interest accruing after the commencement of any
bankruptcy or reorganization proceeding with respect to the Company is recoverable from the Company
or allowable or provable in any such proceeding. The Senior Lender agrees not to contest the
enforceability of the Collateral Agreement or the Holder’s exclusive rights (subject to the express
terms of the Collateral Agreement) to any amounts held in the Collateral Account.



          (f) If, after payment of the Senior Debt, any payment made on the Senior Debt shall for any
reason be set aside, the provisions of this Section 1A shall thereupon in all respects
become effective with respect to such reinstated Senior Debt, without the necessity of any further
act or agreement between the Senior Lender and the Holder.



          (g) In the event of any litigation between the Senior Lender and the Holder based upon or
arising out of the provisions this Section 1A, the prevailing party shall be entitled to
recover all of its reasonable costs and expenses (including without limitation reasonable attorneys
fees) from the non-prevailing party.



          (h) The Senior Lender is a third-party beneficiary of the provisions of this Section 1A and
none of the provisions of this Section 1A may be changed without the prior written consent
of the Senior Lender.



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2. INTEREST AND PRINCIPAL PAYMENTS.




          (a) Interest Accrual. This Debenture shall bear interest on the unpaid principal
amount hereof (“Interest”) at an annual rate equal to six (6.0%), computed on the basis of
a 360-day year and calculated using the actual number of days elapsed since the Issue Date or the
date on which Interest was most recently paid, as the case may be, and if not timely paid as
provided herein, compounded quarterly on each Scheduled Interest Payment Date. The Company shall
make payments of accrued and unpaid Interest (each, an “Interest Payment”) in cash (i) on
each Scheduled Interest Payment Date, (ii) on the Maturity Date and (iii) on any date on which the
entire principal amount of this Debenture is paid in full (whether through conversion or otherwise)
(each of (i), (ii) and (iii) being referred to herein as an “Interest Payment Date”).



          (b) Adjustment to Interest Rate. If, on the date that is the one-year anniversary of
the Issue Date, the Fed Funds Rate is equal to or greater than 3.25%, then the rate of Interest
payable hereunder shall, effective as of such date and at all times thereafter, automatically
increase to an annual rate of six and three-quarters percent (6.75%).



          (c) Quarterly Principal Payments. Beginning on the eighteen (18) month anniversary
of the Issue Date, the Company shall make quarterly payments of principal (each, a “Principal
Payment”), as follows: (A) during the period beginning on such eighteen month anniversary and
ending on the last day of the third year following the Issue Date, the Company shall pay to the
Holder each quarter an amount equal to 1/4 of the original principal amount of this Debenture
times .25, and (B) during the fourth year following the Issue Date, the Company shall pay
to the Holder each quarter an amount equal to 1/4 of the original principal amount of this
Debenture times .50, until the outstanding principal balance of this Debenture has been
paid in full. The Company shall make Principal Payments on the first Business Day of each calendar
quarter commencing with the partial quarter beginning on August 1, 2006 (with the Principal Payment
payable on such date to be in an amount equal to two-third (2/3) of the amount calculated pursuant
to clause (c)(A) above) and thereafter on each October 1, January 1, April 1 and July 1 or, if any
such date is not a Business Day, on the next succeeding Business Day (each such Business Day, a
“Principal Payment Date”). Conversions of principal effected during a calendar quarter
shall not affect the amount of any Principal Payment otherwise payable hereunder.



          (d) Payments in Common Stock. The Company shall make Interest Payments and Principal
Payments in cash by wire transfer of immediately available funds; provided, however, that, subject
to the satisfaction of all of the Stock Payment Conditions as specified in paragraph (e)
below, the Company may elect to pay all or a portion of the Interest due on a Scheduled Interest
Payment Date or principal due on a Principal Payment Date, as the case may be, in shares of Common
Stock (the “Stock Option”). Interest or principal payments that are due in cash and not
paid within five (5) Business Days of the due date therefor shall bear interest until paid at the
Default Interest Rate.



          (e) Conditions to Interest Payment in Common Stock. The Company shall be entitled to
exercise the Stock Option with respect to a Scheduled Interest Payment Date or Principal Payment
Date only if, on such date and on each of the twenty (20) Trading Days immediately preceding such
date, (i) all of the Stock Payment Conditions are satisfied in full and (ii) the number



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of shares of Common Stock authorized and reserved for issuance pursuant to the Debentures and the
Series A Warrants (and, following Shareholder Approval, the Series B Warrants) is equal to or
greater than (A) the number of shares of Common Stock issuable upon the conversion or exercise of
the Debentures and the Series A Warrants (and, following Shareholder Approval, the Series B
Warrants), without giving effect to any restrictions on such conversion or exercise, plus
(B) the number of shares of Common Stock issuable on such Scheduled Interest Payment Date or
Principal Payment Date. In the event that any condition specified in (i) or (ii) above is not
satisfied as of the applicable Scheduled Interest Payment Date or Principal Payment Date, as the
case may be, and each such Trading Day, the Company shall not be permitted to exercise the Stock
Option and must pay all amounts due on such Scheduled Interest Payment Date or Principal Payment
Date, as the case may be, in cash by wire transfer of immediately available funds.




          (f) Stock Option Notice. In order to exercise the Stock Option with respect to a
Scheduled Interest Payment Date or Principal Payment Date, the Company must deliver, on or before
the tenth (10th) Trading Day immediately prior to such date, written notice to the
Holder stating that the Company wishes to exercise such option and the amount of Interest or
principal to be paid in shares of Common Stock (a “Stock Option Notice”). A Stock Option
Notice, once delivered by the Company, shall be irrevocable (although still subject to the
conditions specified in paragraph (e) above). In the event that the Company does not deliver a
Stock Option Notice on or before such tenth Trading Day, the Company will be deemed to have elected
to pay the amount then due in cash.



          (g) Delivery of Shares. On or before the third (3rd) Business Day
following a Scheduled Interest Payment Date or Principal Payment Date with respect to which the
Company has validly exercised the Stock Option (each a “Stock Option Delivery Date”), the
Company must deliver to the Holder a number of shares of Common Stock equal to (A) the amount of
Interest or Principal due on such date divided by (B) ninety-five percent (95%) of the
Market Price in effect on such date. The Company must deliver such shares of Common Stock to the
Holder in accordance with the provisions of paragraph 3(d) below, with the Stock Option
Delivery Date being deemed the Delivery Date, and in the event of the Company’s failure to effect
such delivery on the applicable Delivery Date therefor (determined in accordance with paragraph
3(d)), the Holder shall have the remedies specified in paragraph 3(e) below.



3. CONVERSION.




          (a) Right to Convert. Subject to the conditions and limitations specifically provided
herein or in the Securities Purchase Agreement, the Holder shall have the right to convert, at any
time and from time to time after the Issue Date, (i) all or any part of the outstanding and unpaid
principal amount of this Debenture and (ii) at the same time that it converts such principal, at
the Holder’s option in its sole discretion, all or any part of accrued and unpaid Interest hereon,
into such number of fully paid and non-assessable Conversion Shares as is determined in accordance
with the terms hereof (a “Conversion”). In the event that the Holder elects to convert all
or any Interest accrued hereon, the amount of Interest otherwise due and payable hereunder shall be
reduced by the amount so converted.



          (b) Conversion Notice. In order to convert principal of (and, if the Holder so
elects, Interest accrued on) this Debenture, the Holder shall send by facsimile transmission, at



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any time prior to 5:00 p.m., eastern time, on the Business Day on which the Holder wishes to
effect such Conversion (the “Conversion Date”), a properly completed notice of conversion
to the Company, in the form set forth on Annex I hereto, stating the amount of principal
(and accrued Interest, if applicable) to be converted and a calculation of the number of shares of
Common Stock issuable upon such Conversion (a “Conversion Notice”). The Conversion Notice
shall also state the name or names (with address) in which the shares of Common Stock that are
issuable on such conversion shall be issued. The Holder shall not be required to physically
surrender this Debenture to the Company in order to effect a Conversion. The Company shall
maintain a record showing, at any given time, the unpaid principal amount of this Debenture and the
date of each Conversion or other payment of principal hereof. The Holder shall amend Annex
II hereto upon any such Conversion or payment of principal to reflect the unpaid principal
amount hereof. In the case of a dispute as to the number of Conversion Shares issuable upon a
Conversion (including without limitation as a result of adjustments to the Conversion Price made in
accordance with Section 4 below), the Company shall promptly issue to the Holder the number
of Conversion Shares that are not disputed and shall submit the disputed calculations to its
independent accountants within two (2) Business Days of receipt of the Holder’s Conversion Notice.
The Company shall use its best efforts to cause such accountants to calculate the Conversion Price
as provided herein and to notify the Company and the Holder of the results in writing no later than
two (2) Business Days following the day on which such accountant received the disputed calculations
(the “Dispute Procedure”). Such accountant’s calculation shall be deemed conclusive absent
manifest error. The fees of any such accountant shall be borne by the party whose calculations are
most at variance with those of such accountant.




          (c) Number of Conversion Shares; Conversion Price. The number of Conversion Shares to
be delivered by the Company pursuant to a Conversion shall be equal to the principal amount of
(and, if the Holder so elects, Interest accrued on) this Debenture being converted divided
by the Conversion Price.



          (d) Delivery of Common Stock Upon Conversion. Upon receipt of a Conversion Notice,
the Company shall, no later than the close of business on the third (3rd) Business Day following
the Conversion Date set forth in such Conversion Notice (the “Delivery Date”), issue and
deliver or cause to be delivered to the Holder the number of Conversion Shares determined pursuant
to paragraph 3(c) above, provided, however, that any Conversion Shares that are the subject
of a Dispute Procedure shall be delivered no later than the close of business on the third (3rd)
Business Day following the determination made pursuant thereto. The Company shall effect delivery
of Conversion Shares to the Holder, as long as the Company’s designated transfer agent or
co-transfer agent in the United States for the Common Stock (the “Transfer Agent”)
participates in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer
program (“FAST”) and no restrictive legend is required pursuant to the terms of this
Debenture or the Securities Purchase Agreement, by crediting the account of the Holder or its
nominee at DTC (as specified in the applicable Conversion Notice) with the number of Conversion
Shares required to be delivered, no later than the close of business on such Delivery Date. In the
event that the Transfer Agent is not a participant in FAST or if the Holder so specifies in a
Conversion Notice or otherwise in writing on or before the Conversion Date, the Company shall
effect delivery of Conversion Shares by delivering to the Holder or its nominee physical
certificates representing such Conversion Shares, no later than the close of business on such
Delivery Date. If



-12-









 




any Conversion would create a fractional Conversion Share, such fractional Conversion Share
shall be disregarded and the number of Conversion Shares issuable upon such Conversion, in the
aggregate, shall be the nearest whole number of Conversion Shares. Conversion Shares delivered to
the Holder shall not contain any restrictive legend unless such legend is required pursuant to the
terms of the Securities Purchase Agreement.




          (e) Failure to Deliver Conversion Shares.



               (i) In the event that the Company fails for any reason to deliver to the Holder the number of
Conversion Shares specified in a Conversion Notice (without any restrictive legend to the extent
permitted by the terms of the Securities Purchase Agreement) on or before the second (2d) Business
Day following the Delivery Date therefor (a “Conversion Default”), (A) the Company shall
forfeit its right to require a Forced Conversion (as defined in Section 5 below) of the
Debentures thereafter, and (B) the Holder shall have the right to receive from the Company an
amount equal to (x) (N/365) multiplied by (y) the principal amount of this Debenture
represented by the Conversion Shares which remain the subject of such Conversion Default
multiplied by (z) the Default Interest Rate, where “N” equals the number of days elapsed
between the original Delivery Date of such Conversion Shares and the date on which such Conversion
Default has been cured. In the event that shares of Common Stock are purchased by or on behalf of
the Holder in order to make delivery on a sale effected in anticipation of receiving Conversion
Shares upon a Conversion, the Holder shall have the right to receive from the Company, in addition
to the foregoing amounts, (I) the aggregate amount paid by or on behalf of the Holder for such
shares of Common Stock minus (II) the aggregate amount of net proceeds, if any, received by
the Holder from the sale of the Conversion Shares issued by the Company pursuant to such
Conversion. Amounts payable under this paragraph (e)(i) shall be paid to the Holder in
immediately available funds on or before the fifth (5th) Business Day following written notice from
the Holder to the Company specifying the amount owed to it by the Company pursuant to this
paragraph (e)(i).



               (ii) In addition to its rights under paragraph (e)(i) above, the Holder shall have the
right to pursue all other remedies available to it at law or in equity (including, without
limitation, a decree of specific performance and/or injunctive relief).



          (f) Limitations on Right to Convert. In no event shall the Holder be permitted to
convert principal of or Interest on this Debenture if, upon such conversion, either:



               (i) (x) the number of Conversion Shares to be issued pursuant to such Conversion plus
(y) the number of shares of Common Stock beneficially owned by the Holder (other than Common Stock
which may be deemed beneficially owned except for being subject to a limitation on conversion or
exercise analogous to the limitation contained in this paragraph (f)(i)) would exceed 4.99%
of the number of shares of Common Stock then issued and outstanding, it being the intent of the
Company and the Holder that the Holder not be deemed at any time to have the power to vote or
dispose of greater than 4.99% of the number of shares of Common Stock issued and outstanding at any
time. Nothing contained herein shall be deemed to restrict the right of the Holder to convert such
excess principal amount at such time as such Conversion will not violate the provisions of this
paragraph (f)(i). As used herein, beneficial ownership shall be determined in accordance
with Section 13(d) of the Securities Exchange Act of



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1934, as amended (the “Exchange Act”), and the rules thereunder. To the extent that
the limitation contained in this paragraph (f)(i) applies (and without limiting any rights
the Company may otherwise have), the Company may rely on the Holder’s determination of whether this
Debenture is convertible pursuant to the terms hereof, the Company shall have no obligation
whatsoever to verify or confirm the accuracy of such determination, and the submission of a
Conversion Notice by the Holder shall be deemed to be the Holder’s representation that this
Debenture is convertible pursuant to the terms hereof. The Company shall have no liability to any
person if the Holder’s determination of whether this Debenture is convertible pursuant to the terms
hereof is incorrect. The holders of Common Stock are to be deemed third-party beneficiaries of the
limitation imposed hereby and, accordingly, this paragraph may not be amended without the consent
of the holders of a majority of the shares of Common Stock then outstanding; provided, however,
that the Holder shall have the right, upon sixty (60) days’ prior written notice to the Company, to
waive the provisions of this paragraph (f)(i) in the event that either a Change of Control
or Liquidation Event is announced or occurs, without obtaining such consent; or




               (ii) the number of Conversion Shares that the Holder would receive upon such conversion, when
added to the number of Conversion Shares and Warrant Shares previously received by the Holder
pursuant to this Debenture and such Holder’s Warrants, would exceed the product of (A) the Cap
Amount multiplied by (B) a fraction, the numerator of which is the number of Conversion
Shares originally issuable under this Debenture and the denominator of which is the aggregate
number of Conversion Shares originally issuable under all of the Debentures (such product, the
“Allocation Amount”), provided, that this paragraph (ii) shall not apply if
Shareholder Approval has been obtained. In the event that any Investor to which this Debenture was
originally issued shall sell or otherwise transfer any part of this Debenture, the remaining
Conversion Shares constituting such transferring Investor’s Allocation Amount shall be allocated
between the transferring Investor and the transferee in proportion to amount of this Debenture
being transferred. In the event that, at any time, the aggregate number of Conversion Shares
issued and issuable under this Debenture exceeds eighty percent (80%) of the Holder’s Allocation
Amount, the Company shall, upon the written request of the Holder, hold as promptly as reasonably
practicable (but in no event later than the sixtieth (60) day following such request) a special
meeting of its shareholders for the purpose of obtaining, and use its best efforts to obtain,
Shareholder Approval. In the event that the shareholders do not approve such transactions at such
meeting, the Company shall continue to use its best efforts to seek such approval as soon as
practicable after such meeting, but no less frequently than annually thereafter.



4. ADJUSTMENTS TO CONVERSION PRICE.




          (a) Stock Splits, Stock Interests, Etc. If, at any time on or after the Issue Date,
the number of outstanding shares of Common Stock is increased by a stock split, stock dividend,
combination, reclassification or other similar event, the Conversion Price shall be proportionately
reduced, or if the number of outstanding shares of Common Stock is decreased by a reverse stock
split, combination, reclassification or other similar event, the Conversion Price shall be
proportionately increased. In such event, the Company shall notify the Company’s transfer agent of
such change on or before the effective date thereof.



          (b) Major Transactions. If, at any time after the Issue Date, any Major Transaction
shall occur, then the Holder shall thereafter have the right to receive upon



-14-









 




Conversion, in lieu of the shares of Common Stock otherwise issuable, such shares of stock,
securities and/or other property as would have been issued or payable upon such Major Transaction
with respect to or in exchange for the number of shares of Common Stock which would have been
issuable upon Conversion had such Major Transaction not taken place (without giving effect to any
limitations on such Conversion contained in this Debenture or the Securities Purchase Agreement).
The Company shall not effect any Major Transaction unless (i) the Holder has received written
notice of such transaction at least thirty (30) days prior thereto (which period shall be increased
to sixty one (61) days if, at such time, without giving effect to the limitation on conversion
contained in paragraph 3(f)(i) hereof, the Holder would, upon conversion, beneficially own
more than 4.9% of the Common Stock then outstanding, and the Holder has notified the Company in
writing of such circumstance) but in no event later than fifteen (15) days prior to the record date
for the determination of shareholders entitled to vote with respect thereto; provided, however,
that the Company shall publicly disclose the material terms of any such Major Transaction on or
before the date on which it delivers notice of a Major Transaction to the Holder, and (ii) the
resulting successor or acquiring entity (if not the Company) assumes by written instrument (in form
and substance reasonable satisfactory to the Holder) the obligations of the Company under this
Debenture (including, without limitation, the obligation to make payments of Interest accrued but
unpaid through the date of such consolidation, merger or sale and accruing thereafter). The above
provisions shall apply regardless of whether or not there would have been a sufficient number of
shares of Common Stock authorized and available for issuance upon conversion of this Debenture as
of the date of such transaction, and shall similarly apply to successive Major Transactions.




          (c) Distributions. If, at any time after the Issue Date, the Company declares or
makes any distribution of cash or any other assets (or rights to acquire such assets) to holders of
Common Stock, including without limitation any dividend or distribution to the Company’s
shareholders in shares (or rights to acquire shares) of capital stock of a Subsidiary) (a
“Distribution”), the Company shall deliver written notice of such Distribution (a
“Distribution Notice”) to the Holder at least fifteen (15) days prior to the earlier to
occur of (i) the record date for determining shareholders entitled to such Distribution (the
“Record Date”) and (ii) the date on which such Distribution is made (the “Distribution
Date”)(the earlier of such dates being referred to as the “Determination Date”). In
the Distribution Notice to the Holder, the Company shall indicate whether the Company has elected
(A) to deliver to the Holder, at the same time that it makes such Distribution to its shareholders,
the same amount and type of assets (including, without limitation, cash) being distributed as
though the Holder were, on the Determination Date, a holder of a number of shares of Common Stock
into which this Debenture is convertible as of such Determination Date (such number of shares to be
determined without giving effect to any limitations on such conversion) or (B) to reduce the
Conversion Price applicable to such Conversion by reducing the Conversion Price in effect on the
Business Day immediately preceding the Record Date by an amount equal to the fair market value of
the assets to be distributed divided by the number of shares of Common Stock as to which
such Distribution is to be made, such fair market value to be reasonably determined in good faith
by the independent members of the Company’s Board of Directors. If the Company does not notify the
Holder of its election pursuant to the preceding sentence on or before the fifteenth day
immediately prior to the Determination Date, the Company shall be deemed to have elected clause (A)
of the preceding sentence.



-15-









 





          (d) Convertible Securities; Purchase Rights. If, at any time after the Issue Date,
the Company issues any securities or other instruments which are convertible into or exercisable or
exchangeable for Common Stock (“Convertible Securities”) or options, warrants or other
rights to purchase or subscribe for Common Stock or Convertible Securities (“Purchase
Rights”) to the record holders of the Common Stock, whether or not such Convertible Securities
or Purchase Rights are immediately convertible, exercisable or exchangeable, then the Company shall
deliver to the Holder, at the same time that it issues such Convertible Securities or Purchase
Rights to its shareholders, the same amount of Convertible Securities or Purchase Rights and on the
same terms as though the Holder were, on the record date, a holder of a number of shares of Common
Stock into which this Debenture is convertible as of such record date (such number of shares to be
determined without giving effect to any limitations on such conversion).



          (e) Dilutive Issuances.




               (i) Adjustment Upon Dilutive Issuance. If, at any time after the Issue Date,
the Company issues or sells, or in accordance with subparagraph (ii) of this
paragraph (e) is deemed to have issued or sold, any shares of Common Stock for no
consideration or for a consideration per share less than the Conversion Price on the date of
such issuance or sale (or deemed issuance or sale) (a “Dilutive Issuance”), then the
Conversion Price shall be adjusted so as to equal an amount determined by multiplying such
Conversion Price by the following fraction:



     N0 + N1

     N0 + N2



          where:



	 	 	 	 	 
	

	 	N0 =
	 	the number of shares of Common Stock outstanding
immediately prior to the issuance, sale or deemed issuance or sale of
such additional shares of Common Stock in such Dilutive Issuance
(without taking into account any shares of Common Stock issuable upon
conversion, exchange or exercise of any Convertible Securities or
Purchase Rights, including the Debentures and Warrants);
	 
	

	 	N1 =
	 	the number of shares of Common Stock which the aggregate
consideration, if any, received or receivable by the Company for the
total number of such additional shares of Common Stock so issued, sold
or deemed issued or sold in such Dilutive Issuance (which, in the case
of a deemed issuance or sale, shall be calculated in accordance with
subparagraph (ii) below) would purchase at the Conversion Price
in effect immediately prior to such Dilutive Issuance; and
	 
	

	 	N2 =
	 	the number of such additional shares of Common Stock so
issued, sold or deemed issued or sold in such Dilutive Issuance.






-16-









 







                    Notwithstanding the foregoing, no adjustment shall be made pursuant hereto if such
adjustment would result in an increase in the Conversion Price.



               (ii) Effect On Conversion Price Of Certain Events. For purposes of determining the
adjusted Conversion Price under subparagraph (i) of this paragraph (e), the
following will be applicable:




                    (A) Issuance Of Purchase Rights. If the Company issues or sells any Purchase
Rights, whether or not immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such Purchase Rights (and the price of any conversion
of Convertible Securities, if applicable) is less than the Conversion Price in effect on the
date of issuance or sale of such Purchase Rights, then the maximum total number of shares of
Common Stock issuable upon the exercise of all such Purchase Rights (assuming full
conversion, exercise or exchange of Convertible Securities, if applicable) shall, as of the
date of the issuance or sale of such Purchase Rights, be deemed to be outstanding and to
have been issued and sold by the Company for such price per share. For purposes of the
preceding sentence, the “price per share for which Common Stock is issuable upon the
exercise of such Purchase Rights” shall be determined by dividing (x) the total amount, if
any, received or receivable by the Company as consideration for the issuance or sale of all
such Purchase Rights, plus the minimum aggregate amount of additional consideration, if any,
payable to the Company upon the exercise of all such Purchase Rights, plus, in the
case of Convertible Securities issuable upon the exercise of such Purchase Rights, the
minimum aggregate amount of additional consideration payable upon the conversion, exercise
or exchange thereof (determined in accordance with the calculation method set forth in
subparagraph (ii)(B) below) at the time such Convertible Securities first become
convertible, exercisable or exchangeable, by (y) the maximum total number of shares of
Common Stock issuable upon the exercise of all such Purchase Rights (assuming full
conversion, exercise or exchange of Convertible Securities, if applicable). No further
adjustment to the Conversion Price shall be made upon the actual issuance of such Common
Stock upon the exercise of such Purchase Rights or upon the conversion, exercise or exchange
of Convertible Securities issuable upon exercise of such Purchase Rights. To the extent that
 shares of Common Stock or Convertible Securities are not delivered pursuant to such Purchase
Rights, upon the expiration or termination of such Purchase Rights, the Conversion Price
shall be readjusted to the Conversion Price that would then be in effect had the adjustments
made upon the issuance of such Purchase Rights been made on the basis of delivery of only
the number of shares of Common Stock actually delivered.




                    (B) Issuance Of Convertible Securities. If the Company issues or sells any
Convertible Securities, whether or not immediately convertible, exercisable or exchangeable,
and the price per share for which Common Stock is issuable upon such conversion, exercise or
exchange is less than the Conversion Price in effect on the date of issuance or sale of such
Convertible Securities, then the maximum total number of shares of Common Stock issuable
upon the conversion, exercise or exchange of all such Convertible Securities shall, as of
the date of the issuance or sale of such Convertible Securities, be deemed to be outstanding
and to have been issued and sold by the Company for such price per share. If the Convertible
Securities so issued or sold do not



-17-









 






 have a fluctuating conversion or exercise price or exchange ratio, then for the
purposes of the immediately preceding sentence, the “price per share for which Common Stock
is issuable upon such conversion, exercise or exchange” shall be determined by dividing (A)
the total amount, if any, received or receivable by the Company as consideration for the
issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the conversion, exercise or
exchange thereof (determined in accordance with the calculation method set forth in this
subparagraph (ii)(B)) at the time such Convertible Securities first become
convertible, exercisable or exchangeable, by (B) the maximum total number of shares of
Common Stock issuable upon the exercise, conversion or exchange of all such Convertible
Securities. If the Convertible Securities so issued or sold have a fluctuating conversion or
exercise price or exchange ratio (a “Variable Rate Convertible Security”); provided,
however, that if the conversion or exercise price or exchange ratio of a Convertible
Security may fluctuate solely as a result of provisions designed to protect against
dilution, such Convertible Security shall not be deemed to be a Variable Rate Convertible
Security, then for purposes of the first sentence of this subparagraph (b), the
“price per share for which Common Stock is issuable upon such conversion, exercise or
exchange” shall be deemed to be the lowest price per share which would be applicable
(assuming all holding period and other conditions to any discounts contained in such
Variable Rate Convertible Security have been satisfied) if the conversion price of such
Variable Rate Convertible Security on the date of issuance or sale thereof were seventy-five
percent (75%) of the actual conversion price on such date (the “Assumed Variable Market
Price”), and, further, if the conversion price of such Variable Rate Convertible
Security at any time or times thereafter is less than or equal to the Assumed Variable
Market Price last used for making any adjustment under this paragraph (e) with
respect to any Variable Rate Convertible Security, the Conversion Price in effect at such
time shall be readjusted to equal the Conversion Price which would have resulted if the
Assumed Variable Market Price at the time of issuance of the Variable Rate Convertible
Security had been seventy-five percent (75%) of the actual conversion price of such Variable
Rate Convertible Security existing at the time of the adjustment required by this sentence.
No further adjustment to the Conversion Price shall be made upon the actual issuance of such
Common Stock upon conversion, exercise or exchange of such Convertible Securities. To the
extent that shares of Common Stock are not delivered pursuant to conversion of such
Convertible Securities, upon the expiration or termination of the right to convert such
Convertible Securities into Common Stock, the Conversion Price shall be readjusted to the
Conversion Price that would then be in effect had the adjustments made upon the issuance of
such Convertible Securities been made on the basis of delivery of only the number of shares
of Common Stock actually delivered.




                    (C) Change In Option Price Or Conversion Rate. If there is a change at any
time in (x) the amount of additional consideration payable to the Company upon the exercise
of any Purchase Rights; (y) the amount of additional consideration, if any, payable to the
Company upon the conversion, exercise or exchange of any Convertible Securities; or (z) the
rate at which any Convertible Securities are convertible into or exercisable or exchangeable
for Common Stock (in each such case, other than under or by reason of provisions designed to
protect against dilution), the Conversion Price in effect at the time of such change shall
be readjusted to the Conversion Price which would



-18-









 





have been in effect at such time had such Purchase Rights or Convertible Securities
still outstanding provided for such changed additional consideration or changed conversion,
exercise or exchange rate, as the case may be, at the time initially issued or sold.




                    (D) Calculation Of Consideration Received. If any Common Stock, Purchase
Rights or Convertible Securities are issued or sold for cash, the consideration received
therefor will be the amount received by the Company therefor. In case any Common Stock,
Purchase Rights or Convertible Securities are issued or sold for a consideration part or all
of which shall be other than cash, including in the case of a strategic or similar
arrangement in which the other entity will provide services to the Company, purchase
services from the Company or otherwise provide intangible consideration to the Company, the
amount of the consideration other than cash received by the Company (including the net
present value of the consideration expected by the Company for the provided or purchased
services) shall be the fair market 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 average of the last sale prices thereof on the principal market for
such securities during the period of ten Trading Days immediately preceding the date of
receipt. In case any Common Stock, Purchase Rights or Convertible Securities are issued in
connection with any merger or consolidation in which the Company is the surviving
corporation, the amount of consideration therefor will be deemed to be the fair market value
of such portion of the net assets and business of the non-surviving corporation as is
attributable to such Common Stock, Purchase Rights or Convertible Securities, as the case
may be. Notwithstanding anything else herein to the contrary, if Common Stock, Purchase
Rights or Convertible Securities are issued or sold in conjunction with each other as part
of a single transaction or in a series of related transactions, the Holder may elect to
determine the amount of consideration deemed to be received by the Company therefor by
deducting the fair value of any type of securities (the “Disregarded Securities”)
issued or sold in such transaction or series of transactions. If the holder makes an
election pursuant to the immediately preceding sentence, no adjustment to the Conversion
Price shall be made pursuant to this paragraph (e) for the issuance of the
Disregarded Securities or upon any conversion, exercise or exchange thereof. The independent
members of the Company’s Board of Directors shall calculate reasonably and in good faith,
using standard commercial valuation methods appropriate for valuing such assets, the fair
market value of any consideration other than cash or securities.




                    (E) Issuances Pursuant To Existing Securities. If the Company issues (or
becomes obligated to issue) shares of Common Stock pursuant to any antidilution or similar
adjustments (other than as a result of stock splits, stock dividends and the like) contained
in any Convertible Securities or Purchase Rights outstanding as of the date hereof but not
specifically disclosed in a schedule to the Securities Purchase Agreement, then all shares
of Common Stock so issued shall be deemed to have been issued for no consideration. If the
Company issues (or becomes obligated to issue) shares of Common Stock pursuant to any
antidilution or similar adjustments contained in any Convertible Securities or Purchase
Rights specifically disclosed in a schedule to the Securities Purchase Agreement as a result
of the issuance of the Debentures or Warrants and the number of shares that the Company
issues (or is obligated to issue) as a result of such



-19-









 





initial issuance exceeds the amount specified in such schedule, such excess shares
shall be deemed to have been issued for no consideration.



          (iii) Exceptions To Adjustment Of Conversion Price. Notwithstanding the foregoing, no
adjustment to the Conversion Price shall be made pursuant to this paragraph (e) upon the
issuance of any Excluded Securities. For purposes hereof, “Excluded Securities” means (I)
securities purchased under the Securities Purchase Agreement; (II) securities issued upon
conversion or exercise of the Debentures or the Warrants; (III) shares of Common Stock issuable or
issued to (x) employees, consultants or directors from time to time upon the exercise of options,
in such case granted or to be granted in the discretion of the Board of Directors pursuant to one
or more stock option plans or restricted stock plans in effect as of the Issue Date or adopted
after the Issue Date by the independent members of the Board of Directors with substantially the
same terms as such plans in effect as of the Issue Date, or (y) vendors pursuant to warrants to
purchase Common Stock that are outstanding on the date hereof or issued hereafter, provided such
issuances are approved by the Board of Directors; (IV) the equity component of a commercial lending
transaction with a federally-insured financial institution that is approved by the independent
members of the Board of Directors, provided that the fair market value of such equity component,
including warrants, options or other rights to purchase capital stock and other interests
convertible into capital stock of the Company, does not exceed ten percent (10%) of the amount
borrowed; (V) shares of Common Stock issued in connection with any stock split, stock dividend or
recapitalization of the Company; (VI) shares of Common Stock issued in connection with the
acquisition by the Company of any corporation or other entity occurring after the Effective Date,
provided that, if in connection with such acquisition, the Company will issue a number of shares
equal to or greater than 20% of the number of shares of Common Stock issued and outstanding
immediately prior to the consummation of such acquisition, the Company shall obtain a fairness
opinion with respect to such acquisition from an investment bank of national recognition; (VII)
shares of Common Stock issued in connection with any Convertible Securities or Purchase Rights
outstanding on the date hereof (and not amended, changed or restated after the date hereof) and
disclosed in a schedule to the Securities Purchase Agreement; and (VIII) shares issued to Persons
with whom the Company is entering into a joint venture, strategic alliance or other commercial
relationship in connection with the operation of the Company’s business and not in connection with
a transaction the purpose of which is to raise equity capital.



          (iv) Notice Of Adjustments. Upon the occurrence of each adjustment or readjustment of
the Conversion Price pursuant to this paragraph (e) resulting in a change in the Conversion
Price by more than one percent (1%), or any change in the number or type of stock, securities
and/or other property issuable upon Conversion of this Debenture, the Company, at its expense,
shall promptly compute such adjustment, readjustment or change and prepare and furnish to the
Holder a certificate setting forth such adjustment, readjustment or change and showing in detail
the facts upon which such adjustment, readjustment or change is based. The Company shall, upon the
written request at any time of the Holder, furnish to the Holder a like certificate setting forth
(i) such adjustment, readjustment or change, (ii) the Conversion Price at the time in effect and
(iii) the number of shares of Common Stock and the amount, if any, of other securities or property
which at the time would be received upon Conversion of this Debenture.



-20-









 





5. FORCED CONVERSION.




          (a) Forced Conversion. The Company shall have the right in the event that all of the
Forced Conversion Conditions are satisfied on each of twenty (20) Trading Days during a period of
thirty (30) consecutive Trading Days commencing after the Effective Date (a “Forced Conversion
Period”) and on the Forced Conversion Date, to require Conversion of this Debenture (a
“Forced Conversion”). In the event of a Forced Conversion, the Company and the Holder
shall follow the procedures for Conversion set forth in Section 3 above, with the Forced
Conversion Date (as defined below) deemed to be the Conversion Date for purposes of Section
3, except that the Holder shall not be required to send a Conversion Notice as contemplated by
paragraph (b) of Section 3.



          (b) Forced Conversion Notice; Number of Conversion Shares. In order to effect a Forced
Conversion hereunder, the Company must deliver to the Holder written notice thereof (a “Forced
Conversion Notice”) on or before 5:00 p.m. (eastern time) on the Business Day immediately
following the last Trading Day of the Forced Conversion Period (such Business Day, the “Forced
Conversion Date”) and, at the same time that it delivers such notice, the Company shall send a
copy of such notice by email as long as the Holder has provided an email address to the Company. A
Forced Conversion Notice shall specify the aggregate principal amount of the Debentures that the
Company elects to submit to a Forced Conversion; provided, however, that to the extent that the
aggregate number of Conversion Shares issuable pursuant to such Forced Conversion would exceed (i)
the aggregate trading volume for the Common Stock on the Principal Market during the twenty (20)
Trading Days immediately prior to the Forced Conversion Date and/or (ii) any limitation on
Conversion contained herein or in the Securities Purchase Agreement (in either such case, the
“Maximum Forced Conversion Amount”), then only such portion of the Debentures shall be
converted on such Forced Conversion Date as would not result in the Maximum Forced Conversion
Amount being exceeded. The principal amount of the Debentures subject to a Forced Conversion shall
be allocated among the holders of the Debentures on a pro rata basis. Notwithstanding the delivery
by the Company of a Forced Conversion Notice, nothing contained herein shall be deemed to limit in
any way (x) the right of the Holder to convert all or any part of this Debenture prior to the
Forced Conversion Date or (y) the availability of any and all remedies that are provided to the
Holder hereunder, including without limitation in the event that the Company fails to deliver
Conversion Shares upon a Forced Conversion as required by the terms of Section 3 hereof,
provided, that, in the event of such failure, the Forced Conversion shall be terminated with
respect to the Holder upon the delivery of written notice thereof by the Holder to the Company, and
the Company shall forfeit its right to require a Forced Conversion of this Debenture or any other
Debentures thereafter. On the Forced Conversion Date, an amount of principal of this Debenture
equal to (A) the Holder’s pro rata share of the aggregate principal amount specified in the Forced
Conversion Notice minus (B) the amount of principal of this Debenture converted by the Holder
during the twenty-two (22) Trading Days immediately preceding the Forced Conversion Date will be
converted into Conversion Shares. In the event of multiple Forced Conversions, at least sixty (60)
days must elapse between Forced Conversion Dates.



          (c) Upon any Forced Conversion, the Company shall pay to the Holder on the Forced Conversion
Date (i) accrued and unpaid interest through the Forced Conversion Date on



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the principal amount of the Debenture so converted and (ii) in the event of a Forced Conversion
Date occurring prior to the second anniversary of the Issue Date, an amount equal to the Interest
that, but for such Forced Conversion, would have accrued on this Debenture (or portion thereof so
converted) over the two (2) years following such Issue Date. Such Interest shall be paid in cash
or, at the election of the Company (subject to the satisfaction of the Stock Payment Conditions and
otherwise on the terms and conditions set forth in Section 2 for the payment of Interest in
Common Stock, with the Forced Conversion Date being substituted for the Scheduled Interest Payment
Date), in shares of Common Stock.




6. EVENTS OF DEFAULT; MANDATORY REDEMPTION.




          (a) Mandatory Redemption. In the event that an Event of Default (as defined below)
occurs, the Holder shall have the right, upon written notice to the Company (a “Mandatory
Redemption Notice”), to have all or any portion of the unpaid principal amount of this
Debenture, plus all accrued and unpaid Interest thereon, redeemed by the Company (a “Mandatory
Redemption”) at the Mandatory Redemption Price (as defined below) in same day funds. The
Mandatory Redemption Notice shall specify the effective date of such Mandatory Redemption (the
“Mandatory Redemption Date”), which date must be at least five (5) Business Days following
the Business Day on which the Mandatory Redemption Notice is delivered to the Company, and the
amount of principal and Interest to be redeemed. In order to effect a Mandatory Redemption
hereunder, the Holder must deliver a Mandatory Redemption Notice no later than the close of
business on the Business Day immediately following the first Business Day on which an Event of
Default is no longer continuing; provided, however, that with respect to an Event of Default that
is a Change of Control, the Holder must deliver a Mandatory Redemption Notice no later than the
close of business on the third (3rd) Business Day following the date on which the Change
of Control is effected.



          (b) Mandatory Redemption Price. For purposes hereof, “Mandatory Redemption
Price” shall mean (i) the unpaid principal hereof multiplied by the Mandatory
Redemption Percentage plus (ii) all accrued and unpaid Interest hereon. For purposes hereof,
“Mandatory Redemption Percentage” means (x) where the Event of Default (as defined below)
constitutes a Change of Control, one hundred and twenty percent (120%) during the first year
following the Issue Date, one hundred and fifteen percent (115%) during the second year following
the Issue Date and one hundred and ten percent (110%) at all times following the second
(2nd) anniversary of the Issue Date, and (y) for all other Events of Default, one
hundred and one percent (101%).



          (c) Payment of Mandatory Redemption Price.



               (i) The Company shall pay the Mandatory Redemption Price to the Holder within five (5)
Business Days of the Mandatory Redemption Date. In the event that the Company redeems the entire
remaining unpaid principal amount of this Debenture, and pays to the Holder all Interest accrued
thereon and all other amounts due in connection therewith, the Holder shall return this Debenture
to the Company for cancellation.



               (ii) If the Company fails to pay the Mandatory Redemption Price to the Holder within five (5)
Business Days of the Mandatory Redemption Date, the Holder shall be



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entitled to interest thereon at the Default Interest Rate from the Mandatory Redemption Date
until the date on which Mandatory Redemption Price has been paid in full.




          (d) Events of Default. Each of the following events shall be deemed an “Event of
Default”:



               (i) a Liquidation Event or a Change of Control occurs or is publicly announced;



               (ii) the Company breaches or provides notice of its intent to breach, in a material respect,
any covenant or other material term or condition of this Debenture (including without limitation
any payment obligation hereunder), the Securities Purchase Agreement, Registration Rights Agreement
or any other Transaction Document, including but not limited to the Company’s failure to deliver
Conversion Shares and Warrant Shares on or before the required delivery date therefor, and such
breach continues for a period of five (5) Business Days following written notice thereof from the
Holder;



               (iii) any breach by the Company of any representation or warranty made by the Company in this
Debenture, the Securities Purchase Agreement, the Registration Rights Agreement or any other
Transaction Document which breach has had, or could reasonably be expected to have, a material
adverse effect on (x) the consolidated business, operations, properties, financial condition,
prospects or results of operations of the Company and its Subsidiaries taken as a whole, (y) the
ability of the Company to perform its obligations under this Debenture or the other Transaction
Documents (as defined below) or (z) the ability of a Holder to exercise its rights under this
Debenture;



               (iv) a default occurs or is declared and is not cured within any applicable grace period, or
any amounts are accelerated, under or with respect to any instrument that evidences Debt of the
Company or any of its Subsidiaries in a principal amount exceeding $250,000;



               (v) the Company’s Common Stock ceases to be registered under the Exchange Act or to be listed
on the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange or the
American Stock Exchange; and



               (vi) a Governmental Authority renders a final judgment (whether pursuant to an adjudication,
arbitration, regulatory proceeding or otherwise) against the Company in an amount exceeding
$250,000, and the Company fails to pay such amount when it becomes due.



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7. PREPAYMENT.




          The Company shall not be entitled to prepay principal of this Debenture without the prior
written consent of the Holder, which consent may be withheld for any reason (or for no reason)
within the sole discretion of the Holder.



8. MISCELLANEOUS.




          (a) Failure to Exercise Rights not Waiver. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power, right or privilege preclude
any other or further exercise thereof. All rights and remedies of the Holder hereunder are
cumulative and not exclusive of any rights or remedies otherwise available.



          (b) Notices. Any notice, demand or request required or permitted to be given by the
Company or the Holder pursuant to the terms of this Debenture shall be in writing and shall be
deemed delivered (i) when delivered personally or by verifiable facsimile transmission, unless such
delivery is made on a day that is not a Business Day, in which case such delivery will be deemed to
be made on the next succeeding Business Day, (ii) on the next Business Day after timely delivery to
an overnight courier and (iii) on the Business Day actually received if deposited in the U.S. mail
(certified or registered mail, return receipt requested, postage prepaid), addressed as follows:



	 	 	 
	

	 	If to the Company:
	 
	 	 
	

	 	Verso Technologies, Inc.
	

	 	400 Galleria Parkway, Suite 300
	

	 	Atlanta, GA 30339
	

	 	Attn: Chief Financial Officer
	

	 	Tel: (678) 589-3500
	

	 	Fax: (678) 589-3780
	 
	 	 
	

	 	with a copy (which shall not constitute notice) to:
	 
	 	 
	

	 	Rogers & Hardin LLP
	

	 	2700 International Tower
	

	 	229 Peachtree Street NE
	

	 	Atlanta, GA 30303
	

	 	Attn: Robert C. Hussle, Esq.
	

	 	Tel: (404) 522-4700
	

	 	Fax: (404) 525-2224





and if to the Holder, at such address as the Holder shall have furnished the Company in writing.




          (c) Amendments; Waivers. No amendment, modification or other change to this Debenture
may be made unless such amendment, modification or change is (A) set forth in writing and is signed
by the Company and the Holder and (B) agreed to in writing by the holders



-24-









 




of at least a majority of the unpaid principal amount of the Debentures, it being understood
that, notwithstanding anything to the contrary contained in any Debenture, upon the satisfaction of
the conditions described in (A) and (B) above, each Debenture (including any Debenture held by the
Holder who did not execute the agreement specified in (B) above) shall be deemed to incorporate any
amendment, modification or change effected thereby as of the effective date thereof.
Notwithstanding the foregoing, no Debenture shall be amended, modified or otherwise changed without
the written consent of the Holder thereof if such amendment, modification or change (i) does not
apply to all Holders in the same fashion or (ii) adversely affects such Holder’s rights under such
Debenture with respect to the payment of Principal or Interest, such Holder’s Conversion rights,
any Event of Default or the Mandatory Redemption of such Debenture upon any such Event of Default.
No provision of this Debenture may be waived other than in a writing signed by the holder hereof.




          (d) Transfer of Debenture. The Holder may sell, transfer or otherwise dispose of all
or any part of this Debenture (including without limitation pursuant to a pledge) to any person or
entity as long as such sale, transfer or disposition is the subject of an effective registration
statement under the Securities Act of 1933, as amended, and applicable state securities laws, or is
exempt from registration thereunder, and is otherwise made in accordance with the applicable
provisions of the Securities Purchase Agreement. From and after the date of any such sale,
transfer or disposition, the transferee hereof shall be deemed to be the holder of a Debenture in
the principal amount acquired by such transferee, and the Company shall, as promptly as
practicable, issue and deliver to such transferee a new debenture identical in all respects to this
Debenture, in the name of such transferee. The Company shall be entitled to treat the original
Holder as the holder of this entire Debenture unless and until it receives written notice of the
sale, transfer or disposition hereof.



          (e) Lost or Stolen Debenture. Upon receipt by the Company of evidence of the loss,
theft, destruction or mutilation of this Debenture, and (in the case of loss, theft or destruction)
of indemnity or security reasonably satisfactory to the Company, and upon surrender and
cancellation of the Debenture, if mutilated, the Company shall execute and deliver to the Holder a
new Debenture identical in all respects to this Debenture.



          (f) Governing Law. This Debenture shall be governed by and construed in accordance
with the laws of the State of New York applicable to contracts made and to be performed entirely
within the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction
of the state and federal courts sitting in the City and County of New York for the adjudication of
any dispute hereunder or in connection herewith or with any transaction contemplated hereby 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 any such court, that such suit, action or
proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding
is improper. 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 to such party
at the address in effect for notices to it under this Agreement 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 manner permitted by law.



-25-









 





          (g) Successors and Assigns. The terms and conditions of this Debenture shall inure to
the benefit of and be binding upon the respective successors (whether by merger or otherwise) and
permitted assigns of the Company and the Holder. The Company may not assign its rights or
obligations under this Debenture except as specifically required or permitted pursuant to the terms
hereof.



          (h) Usury. At no time shall the Company be required to pay interest under this
Debenture at a rate that is in excess of the maximum interest rate permitted by applicable law. If
the Company is at any time required to pay interest hereunder at a rate in excess of such maximum
rate, such rate shall be deemed reduced to such maximum rate and all prior interest payments in
excess of such maximum rate shall be applied against the principal balance of this Debenture.



[Signature Page to Follow]




-26-









 







IN WITNESS WHEREOF, the Company has caused this Debenture to be signed in its name by its duly
authorized officer on the date first above written.




VERSO TECHNOLOGIES, INC.




	 	 	 
	By:
	 	 
	

	 	

	

	 	Name:
	

	 	Title:







-27-









 








ANNEX I




NOTICE OF CONVERSION



The undersigned hereby elects to convert principal of the 6% Senior Unsecured Convertible Debenture
(the “Debenture”) issued by VERSO TECHNOLOGIES, INC. (the “Corporation”) into shares of
common stock (“Common Stock”) of the Company according to the terms and conditions of the
Debenture. Capitalized terms used herein and not otherwise defined shall have the respective
meanings set forth in the Debenture.




	 	 	 
	

	 	Date of Conversion: 

	 
	 	 
	

	 	Principal Amount of

Debenture to be Converted: 

	 
	 	 
	

	 	Amount of Interest

to be Converted: 

	 
	 	 
	

	 	Number of Shares of

Common Stock to be Issued: 







	 	 	 	 	 
	

	 	Name of Holder:
	 	

	

	 	Address:
	 	

	

	 	Signature:
	 	

	

	 	 	 	Name:
	

	 	 	 	Title:






Holder Requests Delivery to be made: (check one)




	 	 	 
	o

	 	By Delivery of Physical Certificates to the Above Address
	o

	 	Through Depository Trust Corporation
	

	 	(Account_________ )






 









 






ANNEX II




Schedule of

Decreases

of Principal Amount




	 	 	 	 	 
	Principal	 	Amount of	 	 
	Balance	 	Decrease	 	Date
	 	 	 	 	 
	$[ ],000,000