EX-4.1



 






EXHIBIT 4.1



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: September 30, 2005

Original Conversion Price (subject to adjustment herein): $0.20




$_______________




CONVERTIBLE DEBENTURE

DUE NOVEMBER [11/26], 2006




     THIS DEBENTURE is one of a series of duly authorized and issued Convertible Debentures of
Hartville Group, Inc., a Nevada corporation, having a principal place of business at 3840 Greentree
Ave. SW, Canton, OH 44706 (the “Company”), designated as its Convertible Debenture, due
November [11/26], 2006 (the “Debenture(s)”).



     FOR VALUE RECEIVED, the Company promises to pay to                                          or its registered
assigns (the “Holder”), the principal sum of $                     on November [11/26], 2006 or
such earlier date as the Debentures are required or permitted 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 have the
meanings given to such terms 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(d).




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




     “Business Day” means any day except Saturday, Sunday and any day which shall be
a federal legal holiday in the United States or a day on which banking institutions in the
State of New York are authorized or required by law or other government 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 33% of the voting securities of the Company, or (ii) 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 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 (iii) 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
above in (i) or (ii).




     “Closing Price” means on any particular date (a) the last reported closing bid
price per share of Common Stock on such date on the Trading Market (as reported by Bloomberg
L.P. at 4:15 PM (New York time), or (b) if there is no such price on such date, then the
closing bid price on the Trading Market on the date nearest preceding such date (as reported
by Bloomberg L.P. at 4:15 PM (New York time) for the closing bid price for regular session
trading on such day), or (c) if the Common Stock is not then listed or quoted on the Trading
Market and if prices for the Common Stock are then reported in the “pink sheets” published
by the National Quotation Bureau Incorporated (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) if the shares of Common Stock are not then publicly traded
the fair market value of a share of Common Stock as determined by a qualified independent
appraiser selected in good faith by the Purchasers of a majority in interest of the
principal amount of Debentures then outstanding.




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




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




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



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     “Conversion Shares” means the shares of Common Stock issuable upon conversion
of Debentures.




     “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 given to such term in the
Registration Rights Agreement.




     “Equity Conditions” shall mean, during the period in question, (i) the Company
shall have duly honored all conversions and redemptions scheduled to occur or occurring by
virtue of one or more Notice of Conversions, if any, (ii) all liquidated damages and other
amounts owing in respect of the Debentures shall have been paid; (iii) there is an
effective Registration Statement pursuant to which the Holder is permitted to utilize the
prospectus thereunder to resell all of the shares issuable pursuant to the Transaction
Documents (and the Company believes, in good faith, that such effectiveness will continue
uninterrupted for the foreseeable future), (iv) the Common Stock is trading on the Trading
Market and all of the shares issuable pursuant to the Transaction Documents are listed for
trading on a Trading Market (and the Company believes, in good faith, that trading of the
Common Stock on a Trading Market will continue uninterrupted for the foreseeable future),
(v) there is a sufficient number of authorized but unissued and otherwise unreserved shares
of Common Stock for the issuance of all of the shares issuable pursuant to the Transaction
Documents, (vi) there is then existing no Event of Default or event which, with the passage
of time or the giving of notice, would constitute an Event of Default, (vii) all of the
            shares issued or issuable pursuant to the transaction proposed would not violate the
limitations set forth in Section 4(c) and (viii) no public announcement of a pending or
proposed Fundamental Transaction, Change of Control Transaction or acquisition transaction
has occurred that has not been consummated.




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




     “Exchange Act” means the Securities Exchange Act of 1934, as amended.




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




     “Mandatory Prepayment Amount” for any Debentures shall equal the sum of (i) the
greater of: (A) 130% of the principal amount of Debentures to be prepaid, or (B) the
principal amount of Debentures to be prepaid, divided by the Conversion Price on (x) the
date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date the
Mandatory Prepayment Amount is paid in full, whichever is less, multiplied by the Closing
Price on (x) the date the Mandatory Prepayment Amount is demanded or otherwise due or (y)
the date the Mandatory Prepayment Amount is paid in full, whichever is greater, and (ii) all
other amounts, costs, expenses and liquidated damages due in respect of such Debentures.



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




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




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




     “Person” means a corporation, an association, a partnership, organization, a
business, an individual, a government or political subdivision thereof or a governmental
agency.




     “Purchase Agreement” means the Securities Purchase Agreement, dated as of
November [11/26], 2004, to which the Company and the original Holder are parties, as
amended, modified or supplemented from time to time in accordance with its terms.




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




     “Registration Statement” means a registration statement meeting the
requirements set forth in the Registration Rights Agreement, covering among other things the
resale of the Conversion Shares and naming the Holder as a “selling stockholder” thereunder.




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




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




     “Subsidiary” shall have the meaning given to such term in the Purchase
Agreement.




     “Trading Day” means a day on which the Common Stock is traded on a Trading
Market.




     “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 Nasdaq SmallCap Market,
the American Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or the
OTC Bulletin Board.




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



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     Section 2. Interest.




     a) No Payment of Interest. Except as specifically set forth in this Debenture,
the Holder acknowledges and agrees that the Company shall not pay interest to the Holder on
this Debenture.




     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.




     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 made 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 to the Company for
transfer of this Debenture, the Company and any agent of the Company may treat the Person in
whose name this Debenture is duly registered on the 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 into shares of
Common Stock at the option of the Holder, in whole or in part at any time and from time to
time (subject to the limitations on conversion set forth in Section 4(c) hereof). The
Holder shall effect conversions by delivering to the Company the form of Notice of
Conversion attached hereto as Annex A (a “Notice of Conversion”), specifying
therein the principal amount of Debentures to be converted and the date on which such
conversion is to 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 provided hereunder. To effect conversions hereunder, the Holder shall not
be required to physically surrender Debentures 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 converted and the date of such conversions. The Company



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shall deliver any objection to any Notice of Conversion within 1 Business Day of
receipt of such notice. 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 the lesser of $0.20 (subject to adjustment herein)(the “Conversion
Price”).




     c) Holder’s Restriction on Conversion. The Company shall not effect any
conversion of this Debenture, and the Holder shall not have the right to convert any portion
of this Debenture, pursuant to Section 4(a) or otherwise, to the extent that after giving
effect to such conversion, the Holder (together with the Holder’s affiliates), as set forth
on the applicable Notice of Conversion, would beneficially own in excess of 4.99% of the
number of shares of the Common Stock outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its affiliates shall include the number of shares of
Common Stock issuable upon conversion of this Debenture with respect to which the
determination of such sentence is being made, but shall exclude the number of shares of
Common Stock which would be issuable upon (A) conversion of the remaining, nonconverted
portion of this Debenture beneficially owned by the Holder or any of its affiliates and (B)
exercise or conversion of the unexercised or nonconverted portion of any other securities of
the Company (including, without limitation, any other Debentures or the Warrants) subject to
a limitation on conversion or exercise analogous to the limitation contained herein
beneficially owned by the Holder or any of its affiliates. Except as set forth in the
preceding sentence, for purposes of this Section 4(c), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Exchange Act. To the extent that the
limitation contained in this section applies, the determination of whether this Debenture is
convertible (in relation to other securities owned by the Holder) and of which a portion of
this Debenture is convertible shall be in the sole discretion of such Holder. To ensure
compliance with this restriction, the Holder will be deemed to represent to the Company each
time it delivers a Notice of Conversion that such Notice of Conversion has not violated the
restrictions set forth in this paragraph and the Company shall have no obligation to verify
or confirm the accuracy of such determination. For purposes of this Section 4(c), in
determining the number of outstanding shares of Common Stock, the Holder may rely on the
number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent
Form 10-QSB or Form 10-KSB, as the case may be, (y) a more recent public announcement by the
Company or (z) any other notice by the Company or the Company’s Transfer Agent setting forth
the number of shares of Common Stock outstanding. Upon the written or oral request of the
Holder, the Company shall within two Trading Days confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after



9









 







giving effect to the conversion or exercise of securities of the Company, including
this Debenture, by the Holder or its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported. The provisions of this Section 4(c) may be
waived by the Holder upon, at the election of the Holder, not less than 61 days’ prior
notice to the Company, and the provisions of this Section 4(c) shall continue to apply until
such 61st day (or such later date, as determined by the Holder, as may be specified in such
notice of waiver).




     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 any Conversion Date, the Company will deliver to the Holder a
certificate or certificates representing the Conversion Shares which shall be free
of restrictive legends and trading restrictions (other than those required by the
Purchase Agreement) representing the number of shares of Common Stock being acquired
upon the conversion of Debentures. The Company shall, if available and if allowed
under applicable securities laws, use its best efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation 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 a Conversion Date, the Holder
shall be entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such conversion,
in which event the Company shall immediately return the certificates representing
the principal amount of Debentures tendered for conversion.




     iv. Obligation Absolute; Partial Liquidated Damages. 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, 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 after 5 Trading Days after such damages begin to
accrue) for each Trading Day after such third Trading Day until such certificates
are delivered. 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



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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, such delivery
shall not operate as a waiver by the Company of any such action the Company may have
against the Holder. In the event a 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 any one associated or affiliated
with the Holder of has been engaged in any violation of law, agreement or for any
other reason, unless, an injunction from a court, on notice, 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 principal amount of this Debenture outstanding, which is
subject to the injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable to
such Holder to the extent it obtains judgment. In the absence of an injunction
precluding the same, the Company shall issue Conversion Shares or, if applicable,
cash, upon a properly noticed conversion. Nothing herein shall limit a Holder’s
right to pursue actual damages or declare an Event of Default pursuant to Section 8
herein 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 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 Holders 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 pursuant to Section 4(d)(ii) by the third Trading Day after the
Conversion Date, and if after such third Trading Day the Holder is required by its
brokerage firm to purchase (in an open market transaction or otherwise) Common Stock
to deliver in satisfaction of a sale by such Holder of the Conversion Shares which
the Holder anticipated receiving upon such conversion (a “Buy-In”), then the
Company shall (A) pay in cash to the Holder (in addition to any remedies available
to or elected by the Holder) the amount by which (x) the Holder’s total purchase
price (including brokerage commissions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock that
such Holder anticipated receiving from the conversion at issue multiplied by (2) the
actual sale price of the Common Stock at the time of the sale (including brokerage
commissions, if any) giving rise to such purchase obligation and (B) at the option
of the Holder, either reissue Debentures in principal amount equal to the principal
amount of the attempted conversion or



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deliver to the Holder the number of shares of Common Stock that would have been
issued had the Company 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
Debentures with respect to which the actual sale price of the Conversion Shares at
the time of the sale (including brokerage commissions, if any) 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. Notwithstanding anything contained herein to
the contrary, if a Holder requires the Company to make payment in respect of a
Buy-In for the failure to timely deliver certificates hereunder and the Company
timely pays in full such payment, the Company shall not be required to pay such
Holder liquidated damages under Section 4(d)(iv) in respect of the certificates
resulting in such Buy-In.




     vi. Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will at all times reserve and keep available out of its authorized
and unissued shares of Common Stock solely for the purpose of issuance upon
conversion of the Debentures free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holders, not less than such
number of shares of the Common Stock as shall (subject to any additional
requirements of the Company as to reservation of such shares 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 the Debentures. The Company covenants that all shares of Common Stock that shall
be so issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and, if the Registration Statement is then effective under the
Securities Act, 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 the
Common Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Closing Price 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, one whole share of Common
Stock.




     viii. Transfer Taxes. The issuance of certificates for shares of the
Common Stock on conversion of the Debentures shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion in a
name other than that of the Holder of such Debentures so



12









 







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 the
Debentures are outstanding: (A) shall pay a stock dividend or otherwise make a distribution
or distributions on shares of its Common Stock or any other equity or equity equivalent
securities payable in shares of Common Stock (which, for avoidance of doubt, shall not
include any shares of Common Stock issued by the Company pursuant to this Debenture), (B)
subdivide outstanding shares of Common Stock into a larger number of shares, (C) combine
(including by way of reverse stock split) outstanding shares of Common Stock into a smaller
number of shares, or (D) issue by reclassification of shares of the Common Stock any shares
of capital stock of the Company, then each of the Conversion Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the denominator shall be
the number of shares of Common Stock outstanding 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 Debentures are outstanding, shall offer, sell, grant any
option to purchase or offer, sell or grant any right to reprice its securities, or otherwise
dispose of or issue (or announce any offer, 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 less than the then Conversion Price
(such lower price, the “Base Conversion Price” and such issuances collectively, a
“Dilutive Issuance”), as adjusted hereunder (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 is issued in connection
with such issuance, be entitled to receive shares of Common Stock at an effective price per
share which is less than the Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price), 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. 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, indicating therein the applicable issuance price, or of
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



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Notice pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance,
after the date of such Dilutive Issuance the Holder is entitled to receive a number of
Conversion Shares based upon the Conversion Price using the Base Conversion Price regardless
of whether the Holder accurately refers to the Base Conversion Price in the Notice of
Conversion.




     c) Pro Rata Distributions. If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of Common Stock (and not to Holders) evidences
of its indebtedness or assets or rights or warrants to subscribe for or purchase any
security, then in each such case each of the Conversion Price shall be determined by
multiplying each of 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 Closing Price determined as of the record date
mentioned above, and of which the numerator shall be such Closing Price 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 one outstanding share of the Common
Stock as determined by the Board of Directors in good faith. In either case the adjustments
shall be described in a statement provided to the Holders of the portion of assets or
evidences of indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution is made and
shall become effective immediately after the record date mentioned above.




     d) 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 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 absent
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 one share of
Common Stock (the “Alternate Consideration”). For purposes of any such conversion,
the determination of each 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 one share of Common Stock in such Fundamental Transaction, and the Company shall
apportion each of 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



14









 







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
paragraph (c) and insuring that this Debenture (or any such replacement security) will be
similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction.




      




     e) 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. The number of shares of
Common Stock outstanding at any given time shall not includes shares of Common Stock owned
or held by or for the account of the Company, and the description of any such shares of
Common Stock shall be considered on issue or sale of Common Stock. 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 treasury
shares, if any) issued and outstanding.




     f) Exempt Issuance. Notwithstanding the foregoing, no adjustment will be made
under this Section 5 in respect of an Exempt Issuance.




     g) Notice to Holders.




     i. Adjustment to Conversion Price. Whenever the Conversion Price is
adjusted pursuant to any of this Section 5, the Company shall promptly mail to each
Holder a notice setting forth the Conversion Price after 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), or the lowest possible adjustment price in
the case of an MFN 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) 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 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



15









 







compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; (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 the Debentures, and shall cause to be
mailed to the Holders at their last addresses as they shall appear upon the stock
books of the Company, 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 mail such notice or any defect therein or in
the mailing thereof shall not affect the validity of the corporate action required
to be specified in such notice. Holders are entitled to convert Debentures during
the 20-day period commencing the date of such notice to the effective date of the
event triggering such notice.



     Section 6. RESERVED.



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




     a) enter into, create, incur, assume or suffer to exist any indebtedness or 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 that is senior to, or
pari passu with, in any respect, the Company’s obligations under the Debentures;




     b) amend its certificate of incorporation, bylaws or to her charter documents so as to
adversely affect any rights of the Holder;




     c) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a
de minimis number of shares of its Common Stock or other equity or debt securities
other than as to the Conversion Shares to the extent permitted or required under the
Transaction Documents or as otherwise permitted by the Transaction Documents; or




     d) enter into any agreement with respect to any of the foregoing.



     Section 8. Events of Default.



16









 






     a) “Event of Default”, wherever used herein, means any one of the following
events (whatever the reason and whether it 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 the principal amount or liquidated damages in
respect of, any Debenture, in each case free of any claim of subordination, 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, is not cured, if
possible to cure, within 3 Trading Days;





     ii. the Company shall fail to observe or perform any other covenant or
agreement contained in this Debenture or any of the other Transaction Documents
(other than a breach by the Company of its obligations to deliver shares of Common
Stock to the Holder upon conversion which breach is addressed in clause (xii) below)
which failure is not cured, if possible to cure, within the earlier to occur of (A)
5 Trading Days after notice of such default sent by the Holder or by any other
Holder and (B)10 Trading Days after the Company shall become or should have become
aware of such failure;




     iii. a default or event of default (subject to any grace or cure period
provided for in the applicable agreement, document or instrument) shall occur under
(A) any of the Transaction Documents other than the Debentures, or (B) any other
material agreement, lease, document or instrument to which the Company or any
Subsidiary is bound;




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




     v. (i) the Company or any of its Subsidiaries shall commence, or there shall be
commenced against the Company or any such Subsidiary, a case under any applicable
bankruptcy or insolvency laws as now or hereafter in effect or any successor
thereto, or the Company or any Subsidiary commences any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction whether now or
hereafter in effect relating to the Company or any Subsidiary thereof or (ii) there
is commenced against the Company or any Subsidiary thereof any such bankruptcy,
insolvency or other proceeding which remains undismissed for a period of 60 days; or
(iii) the Company or any Subsidiary thereof is adjudicated by a court of competent
jurisdiction insolvent or bankrupt; or any order of relief or other order approving
any such case or proceeding is entered; or (iv) the Company or any Subsidiary
thereof suffers any appointment of any custodian or the like for it or any
substantial part of its property which continues



17









 







undischarged or unstayed for a period of 60 days; or (v) the Company or any
Subsidiary thereof makes a general assignment for the benefit of creditors; or (vi)
the Company shall fail to pay, or shall state that it is unable to pay, or shall be
unable to pay, its debts generally as they become due; or (vii) the Company or any
Subsidiary thereof shall call a meeting of its creditors with a view to arranging a
composition, adjustment or restructuring of its debts; or (viii) the Company or any
Subsidiary thereof shall by any act or failure to act expressly indicate its consent
to, approval of or acquiescence in any of the foregoing; or (ix) any corporate or
other action is taken by the Company or any Subsidiary thereof for the purpose of
effecting any of the foregoing;




     vi. the Company or any Subsidiary shall default in 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 of the Company in an amount exceeding
$150,000, whether such indebtedness now exists or shall hereafter be created and
such default shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and payable;




     vii. the Common Stock shall not be eligible for quotation on or quoted for
trading on a Trading Market and shall not again be eligible for and quoted or listed
for trading thereon within five Trading Days;




     viii. the Company shall be a party to any Change of Control Transaction or
Fundamental Transaction, shall agree to sell or dispose of all or in excess of 33%
of its assets in one or more transactions (whether or not such sale would constitute
a Change of Control Transaction) or shall redeem or repurchase more than a de
minimis number of its outstanding shares of Common Stock or other equity securities
of the Company (other than redemptions of Conversion Shares and
repurchases of shares of Common Stock or other equity securities of departing officers and
directors of the Company; provided such repurchases shall not exceed $100,000, in
the aggregate, for all officers and directors during the term of this Debenture);




     ix. the Company has not used its best efforts to determine the most efficient
and effective method of providing free transferability of the Registerable
Securities including, if, when, and how to pursue the filing of a Registration
Statement and the number of Registerable Securities to be included in one or more
Registration Statements;




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



18









 







in either case, for more than 10 consecutive Trading Days or 15 non-consecutive
Trading Days during any 12 month period; provided, however, that in
the event that 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 transactions or the
parties thereto that is not available or may not be publicly disclosed at the time,
the Company shall be permitted an additional 10 consecutive Trading during any 12
month period relating to such an event;




     xi. an Event (as defined in the Registration Rights Agreement) shall not have
been cured to the satisfaction of the Holder prior to the expiration of thirty days
from the Event Date (as defined in the Registration Rights Agreement) relating
thereto (other than an Event resulting from a failure of an Registration Statement
to be declared effective by the Commission on or prior to the Effectiveness Date (as
defined in the Registration Rights Agreement), which shall be covered by Section
8(a)(ix);




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




     xiii. the Company shall fail for any reason to pay in full the amount of cash
due pursuant to a Buy-In within 5 Trading Days after notice therefor is delivered
hereunder or shall fail to pay all amounts owed on account of an Event of Default
within five days of the date due.




     b) Remedies Upon Event of Default. If any Event of Default occurs, the full
principal amount of this Debenture, together other amounts owing in respect thereof, to the
date of acceleration shall become, at the Holder’s election, immediately due and payable in
cash. The aggregate amount payable upon an Event of Default shall be equal to the
Mandatory Prepayment Amount. Commencing 5 days after the occurrence of any Event of Default
that results in the eventual acceleration of this Debenture, the interest rate on this
Debenture shall accrue at the rate of 18% per annum, or such lower maximum amount of
interest permitted to be charged under applicable law. All Debentures for which the full
Mandatory Prepayment Amount hereunder shall have been paid in accordance herewith shall
promptly be surrendered to or as directed by the Company. 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 declaration may be rescinded and annulled by Holder at any time prior to payment
hereunder and the Holder shall have all rights as a Debenture holder until such time, if
any, as the full payment



19









 







under this Section shall have been received by it. 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 Holders hereunder, including, without limitation, any Notice of Conversion,
shall be in writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service, addressed to the Company, at the address set forth above,
facsimile number 330-484-8081, Attn: Dennis Rushovich and Christopher R. Sachs or such other
address or facsimile number as the Company may specify for such purposes by notice to the
Holders delivered in accordance with this Section. 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, sent by a nationally recognized overnight courier
service addressed to each Holder at the facsimile telephone number or address of such Holder
appearing on the books of the Company, or if no such facsimile telephone 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 telephone number specified in this Section prior to 5:30 p.m. (New York City
time), (ii) the date after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this Section later
than 5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such 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 and liquidated damages (if any) 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, and indemnity, if requested,
all 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



20









 







the principles of conflicts of law thereof. Each party agrees that all legal
proceedings concerning the interpretations, 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 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 any such court, 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 manner permitted by 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 with 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 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 applicable laws governing usury, the applicable rate
of interest due hereunder shall automatically be lowered to equal the maximum permitted rate
of interest. 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



21









 







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.




     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.



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




22









 








     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:  	 	 



23









 






	 	 	 	 	 



ANNEX A




NOTICE OF CONVERSION





     The undersigned hereby elects to convert principal under the Convertible Debenture of
Hartville Group, Inc., a Nevada corporation (the “Company”), due on November ___, 2006,
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 Debentures to be Converted:




Number of shares of Common Stock to be issued:




Signature:




Name:




Address:




24









 





Schedule 1




CONVERSION SCHEDULE



The Convertible Debentures due on November ___, 2006, in the aggregate principal amount of
$                     issued by Hartville Group, Inc., a Nevada corporation. This Conversion Schedule
reflects conversions made under Section 4 of the above referenced Debenture.




Dated:




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

	 	 
	 	 
	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 





25