Document:

PREFERRED APARTMENT COMMUNITIES, INC.

2011 CLASS B UNIT

AWARD AGREEMENT

 

This 2011 Class B Unit Award Agreement ("Agreement") made as of the date set forth below among Preferred Apartment Communities, Inc., a Maryland corporation (the "Company"), its subsidiary, Preferred Apartment Communities Operating Partnership, L.P., a Delaware limited partnership and the entity through which the Company conducts substantially all of its operations (the "Partnership"), and the person identified below as the grantee (the "Grantee").

 

Recitals

 

A.          Grantee is an officer of the Company and provides services to the Partnership.

 

B.           The Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board") approved this award (this "Award") pursuant to the Third Amended and Restated Agreement of Limited Partnership of the Partnership dated as of November 18, 2011, as amended, restated and supplemented from time to time hereafter (the "Partnership Agreement"), to provide officers of the Company,  including the Grantee, in connection with their service, with the incentive compensation described in this Agreement, and thereby provide additional incentive for them to promote the progress and success of the business of the Company and its affiliates, including the Partnership. This Award was approved by the Committee pursuant to authority delegated to it by the Board as set forth in the Partnership Agreement to make grants of Class B Units (as defined in the Partnership Agreement).

 

C.           This Agreement evidences an award of Class B Units that have been authorized for issuance under the Partnership Agreement.

 

D.           Effective as of the Effective Date, the Committee has made an award to the Grantee of the number of Class B Units (the "Award Class B Units") set forth in Schedule A in lieu of any reimbursement for annual cash compensation for 2011 and the number of Award Class B Units was determined based on the anticipated reimbursement amount of annual cash compensation otherwise payable for the benefit of Grantee.

 

E.           Grantee has agreed to accept the Award Class B Units in lieu of receiving any annual cash compensation for 2011 for services rendered for the benefit of the Company and/or the Partnership.

 

NOW, THEREFORE, the Company, the Partnership and the Grantee agree as follows:

 

1.           Administration.  This Award shall be administered by the Committee which has the powers and authority as delegated by the Board.

 

2.           Definitions.  Capitalized terms used herein without definitions shall have the meanings given to those terms in the Partnership Agreement.  In addition, as used herein:

 

"Accounting Firm" has the meaning set forth in Section 8(n).

 

"Additional Valuation Date" means the last day of each calendar quarter following the Initial Valuation Date.

 

"Average Capital Account Balance" has the meaning provided in the Partnership Agreement.

 

"Award Class B Units" has the meaning set forth in the Recitals.

  

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"Baseline Value" means (a) the Initial Baseline Value until the Initial Valuation Date; and (b) thereafter, the Market Capitalization as of the immediately prior Valuation Date.

 

"Capital Account" has the meaning provided in the Partnership Agreement.

 

"Change of Control" means:

 

(i)           Individuals who, as of the Effective Date, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors;

 

(ii)          Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case unless, following such reorganization, merger or consolidation, (A) more than sixty percent (60%) of the combined voting power of the then outstanding voting securities of the corporation resulting from such reorganization, merger or consolidation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the Company's outstanding voting securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their beneficial ownership, immediately prior to such reorganization, merger or consolidation, of the Company's outstanding voting securities, and (B) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation;

 

(iii)         Approval by the stockholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition (x) more than sixty percent (60%) of the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the Company's outstanding voting securities entitled to vote generally in the election of directors immediately prior to such sale or other disposition in substantially the same proportion as their beneficial ownership, immediately prior to such sale or other disposition, of the Company's outstanding voting securities, and (y) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board of Directors of the Company providing for such sale or other disposition of assets of the Company;

 

(iv)         The Third Amended and Restated Management Agreement among the Company, the Partnership and Preferred Apartment Advisors, LLC dated May 13, 2011 (as the same may be amended or modified) is terminated for any reason or no reason; or

 

(v)          The Company's Common Stock no longer being listed on the NYSE/AMEX or other national U.S. stock exchange.

 

"Class B Units" means the Class B Units authorized pursuant to the Partnership Agreement.

 

"Code" means the Internal Revenue Code of 1986, as amended.

  

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"Common Stock" means the Company's common stock, par value $0.01 per share, either currently existing or authorized hereafter.

 

"Continuous Service" means the continuous service to the Company as an officer, without interruption or termination.  Continuous Service shall not be considered interrupted in the case of:  (A) any approved leave of absence; or (B) any change in status as long as the individual remains an officer of the Company.  An approved leave of absence shall include sick leave, military leave, or any other authorized personal leave.

 

"Determination" has the meaning set forth in Section 8(n).

 

"Disability" means, with respect to the Grantee, a "permanent and total disability" as defined in Section 22(e)(3) of the Code.

 

"Earned Class B Units" means those Vested Class B Units that have been determined by the Committee to have been earned on a Valuation Date based on the extent to which the Market Capitalization Goal Percentage has been achieved as set forth in Section 3(c) or have otherwise been earned under Section 4.

 

"Effective Date" means the close of business on [_______________], 2011.

 

"Ending Common Stock Price" means, as of a particular date, the volume weighted average of the closing per share prices of the Common Stock reported by NYSE/AMEX (or other national U.S. stock exchange) for the five (5) consecutive trading days ending on (and including) such date; provided, however, that if such date is the date upon which a Change of Control occurs, the Ending Common Stock Price as of such date shall be equal to the fair value, as determined by the Committee, of the total consideration paid or payable in the transaction resulting in the Change of Control for one share of Common Stock.

 

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

 

"Excise Tax" has the meaning set forth in Section 8(n).

 

"Excise Tax Gross-Up Payment" has the meaning set forth in Section 8(n).

 

"Family Member" has the meaning set forth in Section 7.

 

"Forfeited Units" means the aggregate number of Class B Units that were granted to all grantees on the Effective Date that have been forfeited as of a particular date.

 

"Forfeited Units Percentage" means the percentage calculated by following quotient: (A) the Total Award Units less the Forfeited Units; divided by (B) the Total Award Units.

 

"Initial Baseline Value" means the Market Capitalization on the Effective Date.

 

"Initial Valuation Date" means the earlier of (A) [_____________], 2012, or (B) the date upon which a Change of Control shall occur.

 

"Market Capitalization" means the product of (A) the total number of shares of Common Stock issued and outstanding on the Effective Date as reported by the Company's transfer agent, as adjusted for stock splits, stock dividends, reverse stock splits, recapitalizations and the like that have occurred since the Effective Date, and (B) the Ending Common Stock Price as of the Valuation Date.

 

"Market Capitalization Goal Percentage" means, as of a particular Valuation Date, the percentage calculated by following quotient: (A) the Market Capitalization on the Valuation Date less the Baseline Value; divided by (B) the Target Increase.

  

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"Partial Service Factor" means a factor carried out to the sixth decimal to be used in calculating the Earned Class B Units pursuant to Section 4 in the event of a Qualified Termination of the Grantee's Continuous Service, determined by dividing the number of calendar days that have elapsed since the Effective Date to and including the date of the Grantee's Qualified Termination by 365.

 

"Partnership Units" or "Units" has the meaning provided in the Partnership Agreement.

 

"Payment" has the meaning set forth in Section 8(n).

 

"Person" means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization, other entity or "group" (as defined in the Exchange Act).

 

"Plan" means the 2011 Stock Incentive Plan of the Company, as amended.

 

"Qualified Termination" has the meaning set forth in Section 4(b).

 

"Securities Act" means the Securities Act of 1933, as amended.

 

"Separation from Service" means "separation from service" from the Company (within the meaning of Section 409A(a)(2)(A)(i) of the Code, and Treasury Regulation Section 1.409A-1(h)).

 

"Target Increase" means $[___________] multiplied by the Forfeited Units Percentage.

 

"Total Award Units" means the total number of Class B Units granted on the Effective Date as set forth in Schedule A.

 

"Transfer" has the meaning set forth in Section 7.

 

"Valuation Date" means each of (i) the Initial Valuation Date; (ii) the last business day of each calendar quarter after the Initial Valuation Date until all Award Class B Units have either become Earned Class B Units or have been forfeited pursuant to Section 4 of this Agreement and (iii) the date of a Change of Control if any of the Award Class B Units have not yet become Earned Class B Units for any reason.

 

"Vested Class B Units" means those Award Class B Units that have fully vested in accordance with the time-based vesting conditions of Section 3(d) or have vested on an accelerated basis under Section 4.

 

3.           Award.

 

(a)          The Grantee is granted as of the Effective Date, the number of Class B Units set forth on Schedule A which are subject to forfeiture provided in this Section 3 and Section 4.  The Class B Units will be forfeited unless within ten (10) business days from the Effective Date the Grantee executes and delivers a fully executed copy of this Agreement and such other documents that the Company and/or the Partnership reasonably request in order to comply with all applicable legal requirements, including, without limitation, federal and state securities laws.

 

(b)         Award Class B Units may become Vested Class B Units and Vested Class B Units may become Earned Class B Units in the amounts and upon the conditions set forth in this Section 3 and in Section 4, provided that, except as otherwise expressly set forth in this Agreement, the Continuous Service of the Grantee continues through and on each applicable vesting date.

 

(c)          As soon as practicable following each Valuation Date, but as of the applicable Valuation Date, the Committee will determine:

 

(i)           the Market Capitalization Goal Percentage;

  

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(ii)          the number of Earned Class B Units to which the Grantee is entitled as of the applicable Valuation Date by multiplying the Market Capitalization Goal Percentage by the number of Vested Class B Units (with the resulting number being rounded to the nearest whole Class B Unit or, in the case of 0.5 of a Class B Unit, up to the next whole Class B Unit) and reducing that product by the aggregate number of Earned Class B Units to which the Grantee was entitled prior to the current Valuation Date; and

 

(iii)         the Committee shall cause the Partnership to credit the Capital Account (as defined in the Partnership Agreement) attributable to all newly Earned Class B Units with an amount equal to the Average Capital Account Balance under the Partnership Agreement on the Valuation Date.

 

If the aggregate number of Earned Class B Units under this Agreement is less than the number of Award Class B Units under this Agreement after any such determination, then the Committee will repeat the process in this Section 3(c) on each subsequent Valuation Date until all Vested Class B Units have either become Earned Class B Units or have been forfeited pursuant to Section 4 of this Agreement.

 

(d)         All of the Award Class B Units shall become Vested Class B Units on the Initial Valuation Date, provided that the Continuous Service of the Grantee continues through the Initial Valuation Date.

 

4.           Termination of Grantee's Employment; Death and Disability; Change of Control.

 

(a)         If the Grantee ceases to be an officer of the Company, the provisions of Sections 4(b) through Section 4(e) shall govern the treatment of the Grantee's Award Class B Units exclusively.  If a Change of Control occurs, Section 4(c) shall govern the treatment of the Grantee's Award Class B Units exclusively, notwithstanding the other provisions of this Agreement.

 

(b)         In the event of termination of the Grantee's Continuous Service before the Initial Valuation Date by Grantee's death or Disability (each a "Qualified Termination"), the Grantee will not forfeit the Award Class B Units upon such termination, but the following provisions of this Section 4(b) shall modify the treatment of the Award Class B Units:

 

(i)           the calculations provided in Section 3(c) shall be performed as of each Valuation Date as if the Qualified Termination had not occurred;

 

(ii)          the Grantee's Award Class B Units shall be multiplied by the Partial Service Factor (with the resulting number being rounded to the nearest whole Class B Unit or, in the case of 0.5 of a Class B Unit, up to the next whole Class B Unit), and such adjusted number of Award Class B Units shall be deemed the Grantee's Award Class B Units for all purposes under this Agreement, and , as of the Initial Valuation Date, shall become Vested Class B Units and shall no longer be subject to forfeiture pursuant to Section 3(e); and

 

(iii)         the number of Earned Class B Units calculated pursuant to Section 3(c) shall be determined using the number of Award Class B Units as adjusted pursuant to  Section 4(b)(ii);

 

(c)         If the calculations provided in Section 3(c) are triggered by a Change of Control prior to the Initial Valuation Date, the Grantee's Award Class B Units shall become Vested Class B Units immediately and automatically as of the date of the Change of Control.

 

(d)         Notwithstanding the foregoing, in the event any payment to be made hereunder after giving effect to this Section 4 is determined to constitute "nonqualified deferred compensation" subject to Section 409A of the Code, then, to the extent the Grantee is a "specified employee" under Section 409A of the Code subject to the six-month delay thereunder, any such payments to be made during the six-month period commencing on the Grantee's "separation from service" (as defined in Section 409A of the Code) shall be delayed until the expiration of such six-month period.

  

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(e)          Upon termination of Continuous Service before the Initial Valuation Date other than a Qualified Termination or a termination that is related to a Change of Control, all Award Class B Units shall, without payment of any consideration by the Partnership, automatically and without notice terminate, be forfeited and be and become null and void, and neither the Grantee nor any of his or her successors, heirs, assigns, or personal representatives will thereafter have any further rights or interests in such Award Class B Units; provided, however, that the Committee may determine, in its sole discretion, that all or any portion of the Award Class B Units or the Vested Class B Units otherwise forfeited, shall become Earned Class B Units pursuant to Section 3(c) of this Agreement and shall not be forfeited by Grantee.

 

(f)          Upon termination of Continuous Service after the Initial Valuation Date, other than in the event of Change of Control, any Vested Class B Units that have not become Earned Class B Units pursuant to Section 3(c) shall, without payment of any consideration by the Partnership, automatically and without notice be forfeited and be and become null and void, and neither the Grantee nor any of his or her successors, heirs, assigns, or personal representatives will thereafter have any further rights or interests in such Vested Class B Units.

 

5.           Conditions for Award Recipients. The Grantee shall have no rights with respect to this Agreement (and the Award evidenced hereby) unless he or she shall have accepted this Agreement prior to the close of business on the date described in Section 3(a) by (a)  signing and delivering to the Partnership a copy of this Agreement and (b) unless the Grantee is already a Limited Partner (as defined in the Partnership Agreement), signing, as a Limited Partner, and delivering to the Partnership a counterpart signature page to the Partnership Agreement (attached as Exhibit A). Upon acceptance of this Agreement by the Grantee, the Partnership Agreement shall be amended to reflect the issuance to the Grantee of the Class B Units so accepted. Thereupon, the Grantee shall have all the rights of a Limited Partner of the Partnership with respect to the number of Class B Units, as set forth in the Partnership Agreement, subject, however, to the restrictions and conditions specified herein. Class B Units constitute and shall be treated for all purposes as the property of the Grantee, subject to the terms of this Agreement and the Partnership Agreement.

 

6.           Distributions.

 

(a)           The holders of Award Class B Units and Vested Class B Units shall not be entitled to receive distributions from the Partnership until they become Earned Class B Units.

 

(b)           All distributions paid with respect to Earned Class B Units shall be fully vested and non-forfeitable when declared.

 

7.           Restrictions on Transfer.

 

(a)           Except as otherwise permitted by the Committee in its sole discretion, none of the Award Class B Units, Earned Class B Units, Vested Class B Units or Partnership Units into which Earned Class B Units have been converted shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed or encumbered, whether voluntarily or by operation of law (each such action a "Transfer"); provided that Earned Class B Units and Vested Class B Units may be Transferred to the Grantee's Family Members (as defined below) by gift, bequest or domestic relations order; and provided further that the transferee agrees in writing with the Company and the Partnership to be bound by all the terms and conditions of this Agreement and that subsequent transfers shall be prohibited except those in accordance with this Section 7.  Additionally, all such Transfers must be in compliance with all applicable securities laws (including, without limitation, the Securities Act) and the applicable terms and conditions of the Partnership Agreement. In connection with any such Transfer, the Partnership may require the Grantee to provide an opinion of counsel, satisfactory to the Partnership, that such Transfer is in compliance with all federal and state securities laws (including, without limitation, the Securities Act).  Any attempted Transfer not in accordance with the terms and conditions of this Section 7 shall be null and void, and neither the Partnership nor the Company shall reflect on its records any change in record ownership of any Earned Class B Units or Vested Class B Units as a result of any such Transfer, shall otherwise refuse to recognize any such Transfer and shall not in any way give effect to any such Transfer.  Except as provided in this Section 7, this Agreement is personal to the Grantee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution.

  

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(b)         For purposes of this Agreement, "Family Member" of a Grantee, means the Grantee's child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Grantee's household (other than a tenant of the Grantee), a trust in which one or more of these persons (or the Grantee) own more than 50 percent of the beneficial interests, and a partnership or limited liability company in which one or more of these persons (or the Grantee) own more than 50 percent of the voting interests.

 

8.           Miscellaneous.

 

(a)         Amendments. This Agreement may be amended or modified only with the consent of the Company and the Partnership acting through the Committee; provided that any such amendment or modification which materially adversely affects the rights of the Grantee hereunder must be consented to by the Grantee to be effective as against him or her. Notwithstanding the foregoing, this Agreement may be amended in writing signed only by the Company and the Partnership to correct any errors or ambiguities in this Agreement and/or to make such changes that do not materially adversely affect the Grantee's rights hereunder. This grant shall in no way affect the Grantee's participation or benefits under any other plan or benefit program maintained or provided by the Company or the Partnership or any of their subsidiaries or affiliates.

 

(b)         Committee Determinations.  The Committee will make the determinations and certifications required by this Award as promptly as reasonably practicable following the occurrence of the event or events necessitating such determinations or certifications. In the event of a Change of Control, the Committee will make such determinations within a period of time that enables the Company to make any payments due hereunder not later than the date of consummation of the Change of Control.

 

(c)          Status of Class B Units. The Class B Units are equity interests in the Partnership. The number of shares of Common Stock reserved for issuance underlying outstanding Award Class B Units will be determined by the Committee in light of all applicable circumstances, including calculations made or to be made under Section 3, vesting, capital account allocations and/or balances under the Partnership Agreement, and the exchange ratio in effect between Partnership Units and shares of Common Stock. The Company will have the right at its option, as set forth in the Partnership Agreement, to issue shares of Common Stock in exchange for Partnership Units in accordance with the Partnership Agreement, subject to certain limitations set forth in the Partnership Agreement, and such shares of Common Stock, if issued, will be issued under the Plan. The Grantee acknowledges that the Grantee will have no right to approve or disapprove such determination by the Committee.

 

(d)         Legend.  The records of the Partnership evidencing the Class B Units shall bear an appropriate legend, as determined by the Partnership in its sole discretion, to the effect that such Class B Units are subject to restrictions as set forth herein and in the Partnership Agreement.

 

(e)         Compliance With Law.  The Partnership and the Grantee will make reasonable efforts to comply with all applicable securities laws. In addition, notwithstanding any provision of this Agreement to the contrary, no Award Class B Units will become Earned Class B Units at a time that such vesting would result in a violation of any such law.

  

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(f)         Grantee Representations; Registration.

 

(i)           The Grantee hereby represents and warrants that (A) he or she understands that he or she is responsible for consulting his or her own tax advisor with respect to the application of the U.S. federal income tax laws, and the tax laws of any state, local or other taxing jurisdiction to which the Grantee is or by reason of this Award may become subject, to his or her particular situation; (B) the Grantee has not received or relied upon business or tax advice from the Company, the Partnership or any of their respective employees, agents, consultants or advisors, in their capacity as such; (C) the Grantee provides services to the Partnership on a regular basis and in such capacity has access to such information, and has such experience of and involvement in the business and operations of the Partnership, as the Grantee believes to be necessary and appropriate to make an informed decision to accept this Award; (D) Class B Units are subject to substantial risks; (E) the Grantee has been furnished with, and has reviewed and understands, information relating to this Award; (F) the Grantee has been afforded the opportunity to obtain such additional information as he or she deemed necessary before accepting this Award; and (G) the Grantee has had an opportunity to ask questions of representatives of the Partnership and the Company, or persons acting on their behalf, concerning this Award.

 

(ii)          The Grantee hereby acknowledges that: (A) there is no public market for  Class  B Units or Partnership Units into which Earned Class B Units will be converted and neither the Partnership nor the Company has any obligation or intention to create such a market; (B) sales of Class B Units and Partnership Units are subject to restrictions under the Securities Act and applicable state securities laws; (C) because of the restrictions on transfer or assignment of Class B Units and Partnership Units set forth in the Partnership Agreement and in this Agreement, the Grantee may have to bear the economic risk of his or her ownership of the Class B Units covered by this Award for an indefinite period of time; (D) shares of Common Stock issued under the Plan in exchange for Partnership Units, if any, are expected to be covered by a Registration Statement on Form S-8 (or a successor form under applicable rules and regulations of the Securities and Exchange Commission) under the Securities Act, to the extent that the Grantee is eligible to receive such shares under the Plan at the time of such issuance and such registration Statement is then effective under the Securities Act; (E) resales of shares of Common Stock issued under the Plan in exchange for Partnership Units, if any, shall only be made in compliance with all applicable restrictions (including in certain cases "blackout periods" forbidding sales of Company securities) set forth in the then applicable Company employee manual or insider trading policy and in compliance with the registration requirements of the Securities Act or pursuant to an applicable exemption therefrom.

 

(g)         Section 83(b) Election.  The Grantee hereby agrees to make an election to include the Award Class B Units in gross income in the year in which the Award Class B Units are issued pursuant to Section 83(b) of the Code substantially in the form attached as Exhibit B and to supply the necessary information in accordance with the regulations promulgated thereunder. The Grantee agrees to file such election (or to permit the Partnership to file such election on the Grantee's behalf) within thirty (30) days after the Effective Date with the IRS Service Center where the Grantee files his or her personal income tax returns, and to file a copy of such election with the Grantee's U.S. federal income tax return for the taxable year in which the Award Class B Units are issued to the Grantee. So long as the Grantee holds any Award Class B Units, the Grantee shall disclose to the Partnership in writing such information as may be reasonably requested with respect to ownership of Class B Units as the Partnership may deem reasonably necessary to ascertain and to establish compliance with provisions of the Code applicable to the Partnership or to comply with requirements of any other appropriate taxing authority.

 

(h)         Tax Consequences.  The Grantee acknowledges that (i) neither the Company nor the Partnership has made any representations or given any advice with respect to the tax consequences of acquiring, holding, selling or converting Partnership Units or making any tax election (including the election pursuant to Section 83(b) of the Code) with respect to the Class B Units and (ii) the Grantee is relying upon the advice of his or her own tax advisor in determining such tax consequences.

  

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(i)           Severability.  If, for any reason, any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not so held invalid, and each such other provision shall to the full extent consistent with law continue in full force and effect. If any provision of this Agreement shall be held invalid in part, such invalidity shall in no way affect the rest of such provision not held so invalid, and the rest of such provision, together with all other provisions of this Agreement, shall to the full extent consistent with law continue in full force and effect.

 

(j)           Governing Law.  This Agreement is made under, and will be construed in accordance with, the laws of the State of Delaware, without giving effect to the principles of conflict of laws of such state.

 

(k)          No Obligation to Continue Position as an Employee, Consultant or Advisor.  Neither the Company nor any affiliate is obligated by or as a result of this Agreement to continue to have the Grantee as an employee, consultant or advisor and this Agreement shall not interfere in any way with the right of the Company or any affiliate to terminate the Grantee's employment at any time.

 

(l)           Notices.  Any notice to be given to the Company shall be addressed to the Secretary of the Company at 3625 Cumberland Boulevard, Suite 400, Atlanta, Georgia 30339 and any notice to be given to the Grantee shall be addressed to the Grantee at the Grantee's address as it appears on the records of the Company, or at such other address as the Company or the Grantee may hereafter designate in writing to the other.

 

(m)         Withholding and Taxes.  No later than the date as of which an amount first becomes includible in the gross income of the Grantee for income tax purposes or subject to the Federal Insurance Contributions Act withholding with respect to this Award, the Grantee will pay to the Company or, if appropriate, any of its affiliates, or make arrangements satisfactory to the Committee regarding the payment of any United States federal, state or local or foreign taxes of any kind required by law to be withheld with respect to such amount; provided, however, that if any Class B Units or Partnership Units are withheld (or returned), the number of Class B Units or Partnership Units so withheld (or returned) shall be limited to the number which have a fair market value on the date of withholding equal to the aggregate amount of such liabilities based on the minimum statutory withholding rates for federal, state, local and foreign income tax and payroll tax purposes that are applicable to such supplemental taxable income. The obligations of the Company under this Agreement will be conditional on such payment or arrangements, and the Company and its affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Grantee.

 

(n)         Excise Tax Gross-Up Payment.

 

(i)          In the event it shall be determined that any payment or distribution to Grantee or for Grantee's benefit which is in the nature of compensation and is contingent on a change in the ownership or effective control of the Company or the ownership of a substantial portion of the assets of the Company (within the meaning of Section 280G(b)(2) of the Code), paid or payable pursuant to this Agreement (a "Payment"), would be subject (in whole or in part) to the excise tax imposed by Section 4999 of the Code (together with any interest or penalties imposed with respect to such excise tax, the "Excise Tax"), then Grantee shall be entitled to receive an additional payment (the "Excise Tax Gross-Up Payment") in an amount such that, after payment by Grantee of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes and Excise Tax imposed upon the Excise Tax Gross-Up Payment, Grantee retains an amount of the Excise Tax Gross-Up Payment equal to the Excise Tax imposed upon the Payments.  The Company’s obligation to make Excise Tax Gross-Up Payments under this Section 8(n) shall not be conditioned upon Grantee's Separation from Service. For purposes of determining the amount of any Excise Tax Gross-Up Payment, Grantee shall be considered to pay federal income tax at Grantee's actual marginal rate of federal income taxation in the calendar year in which the Excise Tax Gross-Up Payment is to be made, and state and local income taxes at Grantee's actual marginal rate of taxation in the state and locality of Grantee's residence on the date on which the Excise Tax Gross-Up Payment is calculated, for purposes of this Section 8(n), net of Grantee's actual reduction in federal income taxes which could be obtained from deduction of such state and local taxes, and taking into consideration the phase-out of Grantee's itemized deductions under federal income tax law.

  

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(ii)         All determinations required to be made under this Section 8(n), including whether and when an Excise Tax Gross-Up Payment is required, the amount of such Excise Tax Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by such nationally recognized accounting firm as may be selected by the Board as constituted immediately prior to the change in control transaction (the "Accounting Firm"), provided, that the Accounting Firm’s determination shall be made based upon "substantial authority" within the meaning of Section 6662 of the Code. The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation, to Grantee and the Company within 15 business days following the date of termination if applicable, or such other time as requested by you (provided that Grantee reasonably believes that any of the Payments may be subject to the Excise Tax) or the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Excise Tax Gross-Up Payment, as determined pursuant to this Section 8(n), shall be paid by the Company to you no later than the later of (i) 15 business days following the receipt of the Accounting Firm’s Determination or (ii) 15 business days preceding the date the Excise Tax becomes payable; provided, however, that in no event shall any such Excise Tax Gross-Up Payment or any payment of any income or other taxes to be paid by the Company under this Section 8(n) be made later than the end of Grantee's taxable year next following Grantee's taxable year in which Grantee remits the related taxes. Any costs and expenses incurred by the Company on behalf of Grantee under this Section 8(n) due to any tax contest, audit or litigation will be paid by the Company by the end of Grantee's taxable year following Grantee's taxable year in which the taxes that are the subject of the tax contest, audit or litigation are remitted to the taxing authority, or where as a result of such tax contest, audit or litigation no taxes are remitted, the end of Grantee's taxable year following Grantee's taxable year in which the audit is completed or there is a final and non-appealable settlement or other resolution of the contest or litigation.

 

(iii)        Grantee shall immediately notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Excise Tax Gross-Up Payment. Grantee shall not pay such claim prior to the expiration of the 30-day period following the date on which Grantee gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Grantee in writing prior to the expiration of such period that the Company desires to contest such claim, Grantee shall give the Company all information reasonably requested by the Company relating to such claim, cooperate with the Company and take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, and permit the Company to participate in and control any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses incurred in connection with such contest, and shall indemnify and hold Grantee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and contest.

 

(o)         Headings.  The headings of paragraphs of this Agreement are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.

 

(p)         Counterparts.  This Agreement may be executed in multiple counterparts with the same effect as if each of the signing parties had signed the same document. All counterparts shall be construed together and constitute the same instrument.

 

(q)         Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the parties and any successors to the Company and the Partnership, on the one hand, and any successors to the Grantee, on the other hand, by will or the laws of descent and distribution, but this Agreement shall not otherwise be assignable or otherwise subject to hypothecation by the Grantee.

  

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(r)          Section 409A.  This Agreement shall be construed, administered and interpreted in accordance with a good faith interpretation of Section 409A of the Code, to the extent applicable.  Any provision of this Agreement that is inconsistent with applicable provisions of Section 409A of the Code, or that may result in penalties under Section 409A of the Code, shall be amended, with the reasonable cooperation of the Grantee and the Company and the Partnership, to the extent necessary to exempt this Agreement from, or bring it into compliance with, Section 409A of the Code.

 

[signature page follows]

  

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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed as of the Effective Date.

 

	  	
PREFERRED APARTMENT COMMUNITIES, INC., a Maryland corporation

	  	  	  
	  	
By:

	  
	  	
Name:

	  
	  	
Title:

	  
	  	  	  
	  	
PREFERRED APARTMENT COMMUNITIES OPERATING PARTNERSHIP, L.P., a Delaware limited partnership

	  	  
	  	  	
By:

	
Preferred Apartment Communities, Inc., a Maryland corporation, its general partner

	  	  	  	  
	  	
By:

	  
	  	
Name:

	  
	  	
Title:

	  
	  	  	  
	  	
GRANTEE

	  	  	  
	  	  
	  	
Name:

	  

  

  

  

EXHIBIT A

 

FORM OF LIMITED PARTNER SIGNATURE PAGE

 

The Grantee, desiring to become one of the within named Limited Partners of Preferred Apartment Communities Operating Partnership, L.P., hereby accepts all of the terms and conditions of and becomes a party to, the Third Amended and Restated Agreement of Limited Partnership, dated as of November 18, 2011, of Preferred Apartment Communities Operating Partnership, L.P. as amended through this date (the "Partnership Agreement"). The Grantee agrees that this signature page may be attached to any counterpart of the Partnership Agreement.

 

	  	
Signature Line for Limited Partner:

	  	  
	  	  
	  	  
	  	
Name: 

	  
	  	  	  
	  	
Date:

	  
	  	  
	  	
Address of Limited Partner:

  

  

  

EXHIBIT B

 

ELECTION TO INCLUDE IN GROSS INCOME IN YEAR OF TRANSFER OF

PROPERTY PURSUANT TO SECTION 83(b) OF THE INTERNAL REVENUE CODE

 

The undersigned hereby makes an election pursuant to Section 83(b) of the Internal Revenue Code with respect to the property described below and supplies the following information in accordance with the regulations promulgated thereunder:

 

	
1.

	
The name, address and taxpayer identification number of the undersigned are:

 

Name:                                                                                                             (the "Taxpayer")

 

Address:

 

Social Security No./Taxpayer Identification No.:       -      -

 

	
2.

	
Description of property with respect to which the election is being made:  Class B Units ("Class B Units") in Preferred Apartment Communities Operating Partnership, L.P. (the "Partnership").

  

	
3.

	
The date on which the Class B Units were issued is                , 2011.  The taxable year to which this election relates is calendar year 2011.

  

	
4.

	
Nature of restrictions to which the Class B Units are subject:

 

	 	
(a) 

	
With limited exceptions, until the Class B Units vest, the Taxpayer may not transfer in any manner any portion of the Class B Units without the consent of the Partnership.

  

	 	
(b)

	
The Taxpayer's Class B Units are subject to forfeiture until they vest in accordance with the provisions in the applicable Award Agreement and Partnership Agreement.

  

	
5.

	
The fair market value at time of issue (determined without regard to any restrictions other than restrictions which by their terms will never lapse) of the Class B Units with respect to which this election is being made was $         per Class B Unit.

  

	
6. 

	
The amount paid by the Taxpayer for the Class B Units was $0.00 per Class B Unit.

 

	
7.

	
A copy of this statement has been furnished to the Partnership and Preferred Apartment Communities, Inc.

 

	
Dated:

	  	  	  
	  	  
	  	  
	  	
Name:

  

  

  

SCHEDULE A TO 2011 CLASS B UNIT

AWARD AGREEMENT

 

Award Date:                                                       , 2011

 

Name of Grantee:

 

Number of Award Class B Units to Grantee:

Aggregate Number of Class B Units on Award Date:Unassociated Document

NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE.  THESE SECURITIES HAVE BEEN SOLD 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.

 

CARBONICS CAPITAL CORPORATION

 

Secured Convertible Debenture

 

Principal Amount: $910,000

Debenture Issuance Date:  December 6, 2011

Debenture Number: CICS-9

FOR VALUE RECEIVED, CARBONICS CAPITAL CORPORATION, a Delaware corporation (the "Company"), hereby promises to pay to the order of YA Global Investments, L.P., a Cayman Islands exempt limited partnership, or its registered assigns (the "Holder") the amount set out above as the Principal Amount (as reduced pursuant to the terms hereof pursuant to redemption, conversion or otherwise, the "Principal") when due, whether upon the Maturity Date (as defined below), acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay interest ("Interest") on any outstanding Principal at the applicable Interest Rate from the date set out above as the Debenture Issuance Date (the "Issuance Date") until the same becomes due and payable, whether upon an Interest Date (as defined below), the Maturity Date or acceleration, conversion, redemption or otherwise (in each case in accordance with the terms hereof).  This Secured Convertible Debenture (including all debentures issued in exchange, transfer or replacement hereof, this "Debenture") is issued pursuant to the Securities Purchase Agreement dated August 17, 2010, as supplement by the agreements dated May 25, 2011 and December 6, 2011 (collectively, the “Securities Purchase Agreement”) between the Holder and the Company.  Certain capitalized terms used herein are defined in Section 17.

 

(1)          GENERAL TERMS

 

(a)           Payment of Principal.  On the Maturity Date, the Company shall pay to the Holder an amount in cash representing all outstanding Principal, accrued and unpaid Interest.  The "Maturity Date" shall be December 31, 2013, as may be extended at the option of the Holder (i) in the event that, and for so long as, an Event of Default (as defined below) shall have occurred and be continuing on the Maturity Date (as may be extended pursuant to this Section 1) or any event shall have occurred and be continuing on the Maturity Date (as may be extended pursuant to this Section 1) that with the passage of time and the failure to cure would result in an Event of Default.  Other than as specifically permitted by this Debenture, the Company may not prepay or redeem any portion of the outstanding Principal without the prior written consent of the Holder.

 

  

  

  

 

(b)           Interest.  Interest shall accrue on the outstanding principal balance hereof at an annual rate equal to nine percent (9%) (“Interest Rate”).  Interest shall be calculated on the basis of a 365-day year and the actual number of days elapsed, to the extent permitted by applicable law.  Interest hereunder shall be paid on the Maturity Date (or sooner as provided herein) to the Holder or its assignee in whose name this Debenture is registered on the records of the Company regarding registration and transfers of Debentures in cash, or, provided that the Equity Conditions are then satisfied, and with the consent of the Holder, converted into Common Stock at the Conversion Price on the Trading Day it is paid.

 

(c)           Security.  This Debenture is secured by the “Security Documents,” as such term is defined in the Securities Purchase Agreement.

 

(2)           EVENTS OF DEFAULT.

 

(a)           An “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)           the Company's failure to pay to the Holder any amount of Principal, Interest, or other amounts when and as due under this Debenture (including, without limitation, the Company's failure to pay any redemption payments or amounts hereunder) or any other Transaction Document;

 

(ii)           The Company or any subsidiary of the Company shall commence, or there shall be commenced against the Company or any subsidiary of the Company under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company or any subsidiary of the Company 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 of the Company or there is commenced against the Company or any subsidiary of the Company any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 61 days; or the Company or any subsidiary of the Company is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any subsidiary of the Company suffers any appointment of any custodian, private or court appointed receiver or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of sixty one (61) days; or the Company or any subsidiary of the Company makes a general assignment for the benefit of creditors; or the Company or any subsidiary of 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 the Company or any subsidiary of the Company shall call a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or the Company or any subsidiary of the Company shall by any act or failure to act expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company or any subsidiary of the Company for the purpose of effecting any of the foregoing;

 

  

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(iii)           The Company or any subsidiary of the Company shall default in any of its obligations under any other debenture or 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 or any subsidiary of the Company in an amount exceeding $100,000, 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;

 

(iv)          The Common Stock shall cease to be quoted or listed for trading, fail to have a bid price or VWAP, or fail to maintain a trading market on any Primary Market, for a period of five (5) consecutive Trading Days;

 

(v)           The Company or any subsidiary of the Company shall be a party to any Change of Control Transaction (as defined in Section 6) unless in connection with such Change of Control Transaction this Debenture is retired;

 

(vi)          the Company's (A) failure to cure a Conversion Failure by delivery of the required number of shares of Common Stock within five (5) Business Days after the applicable Conversion Failure or (B) notice, written or oral, to any holder of the Debentures, including by way of public announcement, at any time, of its intention not to comply with a request for conversion of any Debentures into shares of Common Stock that is tendered in accordance with the provisions of the Debentures, other than pursuant to Section 4(c);

 

(vii)         The Company shall fail for any reason to deliver the payment in cash pursuant to a Buy-In (as defined herein) within three (3) Business Days after such payment is due;

 

(viii)        The Company shall fail to observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any breach or default of any provision of this Debenture (except as may be covered by Section 2(a)(i) through 2(a)(vii) hereof) or any Transaction Document (as defined in Section 17) which is not cured within the time prescribed.

 

(ix)           any Event of Default (as defined in the Other Debentures) occurs with respect to any Other Debentures.

 

(b)          During the time that any portion of this Debenture is outstanding, if any Event of Default has occurred, the full unpaid Principal amount of this Debenture, together with interest and other amounts owing in respect thereof, to the date of acceleration shall become at the Holder's election, immediately due and payable in cash.  Furthermore, in addition to any other remedies, the Holder shall have the right (but not the obligation) to convert this Debenture at any time after (x) an Event of Default or (y) the Maturity Date at the Conversion Price.  The Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind, (other than required notice of conversion) 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. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.

 

  

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(3)           COMPANY REDEMPTION.  The Company at its option shall have the right to redeem (“Optional Redemption”) a portion or all amounts outstanding under this Debenture prior to the Maturity Date with prior written notice to the Holder.  The Company shall pay an amount equal to the principal amount being redeemed plus a redemption premium equal to 20% of the principal amount being redeemed, plus all accrued and unpaid Interest, (collectively referred to as the “Redemption Amount”).  In order to make a redemption pursuant to this Section, the Company shall first provide written notice to the Holder of its intention to make a redemption (the “Redemption Notice”) setting forth the amount of Principal it desires to redeem.  After receipt of the Redemption Notice the Holder shall have three (3) Business Days to elect to convert all or any portion of this Debenture, subject to the limitations set forth in Section 4(b).  On the fourth (4th) Business Day after the Redemption Notice, the Company shall deliver to the Holder the Redemption Amount with respect to the Principal amount redeemed after giving effect to conversions effected during the three (3) Business Day period.

 

(4)           CONVERSION OF DEBENTURE. This Debenture shall be convertible into shares of the Company's Common Stock, on the terms and conditions set forth in this Section 4.

 

(a)           Conversion Right.  Subject to the provisions of Section 4(c), at any time or times on or after the Issuance Date, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount (as defined below) into fully paid and nonassessable shares of Common Stock in accordance with Section 4(b), at the Conversion Rate (as defined below).  The number of shares of Common Stock issuable upon conversion of any Conversion Amount pursuant to this Section 4(a) shall be determined by dividing (x) such Conversion Amount by (y) the Conversion Price (the "Conversion Rate").  The Company shall not issue any fraction of a share of Common Stock upon any conversion.  If the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up to the nearest whole share.  The Company shall pay any and all transfer, stamp and similar taxes that may be payable with respect to the issuance and delivery of Common Stock upon conversion of any Conversion Amount.

 

(i)           "Conversion Amount" means the portion of the Principal and accrued Interest to be converted, redeemed or otherwise with respect to which this determination is being made.

 

(ii)           "Conversion Price" means, as of any Conversion Date (as defined below) or other date of determination, the lesser of (a) $0.003 (the “Fixed Conversion Price”), or (b) 90% of the lowest daily VWAP during the 10 consecutive Trading Days immediately preceding the Conversion Date or other date of determination (the “Market Conversion Price”).  The Conversion Price shall be adjusted from time to time pursuant to the other terms and conditions of this Debenture.

 

  

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(b)          Mechanics of Conversion.

 

(i)           Optional Conversion.  To convert any Conversion Amount into shares of Common Stock on any date (a "Conversion Date"), the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice of conversion in the form attached hereto as Exhibit I (the "Conversion Notice") to the Company and (B) if required by Section 4(b)(iv), surrender this Debenture to a nationally recognized overnight delivery service for delivery to the Company (or an indemnification undertaking reasonably satisfactory to the Company with respect to this Debenture in the case of its loss, theft or destruction).  On or before the third Business Day following the date of receipt of a Conversion Notice (the "Share Delivery Date"), the Company shall (X) if legends are not required to be placed on certificates of Common Stock and provided that the Transfer Agent is participating in the Depository Trust Company's ("DTC") Fast Automated Securities Transfer Program, credit such aggregate number of shares of Common Stock to which the Holder shall be entitled to the Holder's or its designee's balance account with DTC through its Deposit Withdrawal Agent Commission system or (Y) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program, issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled which certificates shall not bear any restrictive legends unless required pursuant to rules and regulations of the Commission.  If this Debenture is physically surrendered for conversion and the outstanding Principal of this Debenture is greater than the Principal portion of the Conversion Amount being converted, then the Company shall as soon as practicable and in no event later than three (3) Business Days after receipt of this Debenture and at its own expense, issue and deliver to the holder a new Debenture representing the outstanding Principal not converted.  The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of this Debenture shall be treated for all purposes as the record holder or holders of such shares of Common Stock upon the transmission of a Conversion Notice.

 

(ii)           Company's Failure to Timely Convert.  If within three (3) Trading Days after the Company's receipt of the facsimile copy of a Conversion Notice the Company shall fail to issue and deliver a certificate to the Holder or credit the Holder's balance account with DTC for the number of shares of Common Stock to which the Holder is entitled upon such holder's conversion of any Conversion Amount (a "Conversion Failure"), and if on or after such Trading Day the Holder purchases (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by the Holder of Common Stock issuable upon such conversion that the Holder anticipated receiving from the Company (a "Buy-In"), then the Company shall, within three (3) Business Days after the Holder's request and in the Holder's discretion, either (i) pay cash to the Holder in an amount equal to the Holder's total purchase price (including brokerage commissions and other out of pocket expenses, if any) for the shares of Common Stock so purchased (the "Buy-In Price"), at which point the Company's obligation to deliver such certificate (and to issue such Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder a certificate or certificates representing such Common Stock and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Closing Bid Price on the Conversion Date.

 

  

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(iii)           Book-Entry. Notwithstanding anything to the contrary set forth herein, upon conversion of any portion of this Debenture in accordance with the terms hereof, the Holder shall not be required to physically surrender this Debenture to the Company unless (A) the full Conversion Amount represented by this Debenture is being converted or (B) the Holder has provided the Company with prior written notice (which notice may be included in a Conversion Notice) requesting reissuance of this Debenture upon physical surrender of this Debenture.  The Holder and the Company shall maintain records showing the Principal and Interest converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Debenture upon conversion.

 

(c)      Limitations on Conversions.

 

(i)           Beneficial Ownership.  The Company shall not effect any conversions of this Debenture and the Holder shall not have the right to convert any portion of this Debenture or receive shares of Common Stock as payment of interest hereunder to the extent that after giving effect to such conversion or receipt of such interest payment, the Holder, together with any affiliate thereof, would beneficially own (as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion or receipt of shares as payment of interest.    Since the Holder will not be obligated to report to the Company the number of shares of Common Stock it may hold at the time of a conversion hereunder, unless the conversion at issue would result in the issuance of shares of Common Stock in excess of 4.99% of the then outstanding shares of Common Stock without regard to any other shares which may be beneficially owned by the Holder or an affiliate thereof, the Holder shall have the authority and obligation to determine whether the restriction contained in this Section will limit any particular conversion hereunder and to the extent that the Holder determines that the limitation contained in this Section applies, the determination of which portion of the principal amount of this Debenture is convertible shall be the responsibility and obligation of the Holder.  If the Holder has delivered a Conversion Notice for a principal amount of this Debenture that, without regard to any other shares that the Holder or its affiliates may beneficially own, would result in the issuance in excess of the permitted amount hereunder, the Company shall notify the Holder of this fact and shall honor the conversion for the maximum principal amount permitted to be converted on such Conversion Date in accordance with Section 4(a) and, any principal amount tendered for conversion in excess of the permitted amount hereunder shall remain outstanding under this Debenture. The provisions of this Section may be waived by a Holder (but only as to itself and not to any other Holder) upon not less than 65 days prior notice to the Company. Other Holders shall be unaffected by any such waiver.

 

  

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(d)      Other Provisions.

 

(i)           The Company shall at all times reserve and keep available out of its authorized Common Stock the full number of shares of Common Stock issuable upon conversion of all outstanding amounts under this Debenture; and within three (3) Business Days following the receipt by the Company of a Holder's notice that such minimum number of Underlying Shares is not so reserved, the Company shall promptly reserve a sufficient number of shares of Common Stock to comply with such requirement.

 

(ii)           All calculations under this Section 4 shall be rounded to the nearest $0.0001 or whole share.

 

(iii)           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 this Debenture and payment of interest on this Debenture, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder, not less than such number of shares of the Common Stock as shall be issuable (taking into account the adjustments and restrictions set forth herein) upon the conversion of the outstanding principal amount of this Debenture and payment of interest hereunder. 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 Underlying Shares Registration Statement has been declared effective under the Securities Act, registered for public sale in accordance with such Underlying Shares Registration Statement.

 

(iv)           Nothing herein shall limit a Holder's right to pursue actual damages or declare an Event of Default pursuant to Section 2 herein for the Company 's failure to deliver certificates representing shares of Common Stock upon conversion 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, in each case without the need to post a bond or provide other security. The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.

 

(5)      Adjustments to Conversion Price

 

(a)      Adjustment of Conversion Price upon Issuance of Common Stock.  If the Company, at any time while this Debenture is outstanding, issues or sells, or in accordance with this Section 5(a) is deemed to have issued or sold, any shares of Common Stock, excluding shares of Common Stock deemed to have been issued or sold by the Company in connection with any Excluded Securities, for a consideration per share (the “New Issuance Price”) less than a price equal to the Fixed Conversion Price in effect immediately prior to such issue or sale (such price the "Applicable Price") (the foregoing a "Dilutive Issuance"), then immediately after such Dilutive Issuance the Fixed Conversion Price then in effect shall be reduced to an amount equal to the New Issuance Price. For purposes of determining the adjusted Fixed Conversion Price under this Section 5(a), the following shall be applicable:

 

  

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(i)            Issuance of Options.  If the Company in any manner grants or sells any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share.  For purposes of this Section, the "lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such Option" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon granting or sale of the Option, upon exercise of the Option and upon conversion or exchange or exercise of any Convertible Security issuable upon exercise of such Option.  No further adjustment of the Conversion Price shall be made upon the actual issuance of such share of Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange or exercise of such Convertible Securities.

 

(ii)           Issuance of Convertible Securities.  If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange or exercise thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share.  For the purposes of this Section, the "lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange or exercise" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the issuance or sale of the Convertible Security and upon the conversion or exchange or exercise of such Convertible Security.  No further adjustment of the Conversion Price shall be made upon the actual issuance of such share of Common Stock upon conversion or exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Price had been or are to be made pursuant to other provisions of this Section, no further adjustment of the Conversion Price shall be made by reason of such issue or sale.

 

(iii)           Change in Option Price or Rate of Conversion.  If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold.  For purposes of this Section, if the terms of any Option or Convertible Security that was outstanding as of the Issuance Date are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change.  No adjustment shall be made if such adjustment would result in an increase of the Conversion Price then in effect.

 

  

8

  

 

(iv)          Calculation of Consideration Received.  In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options will be deemed to have been issued for the difference of (x) the aggregate fair market value of such Options and other securities issued or sold in such integrated transaction, less (y) the fair market value of the securities other than such Option, issued or sold in such transaction and the other securities issued or sold in such integrated transaction will be deemed to have been issued or sold for the balance of the consideration received by the Company.  If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the gross amount raised by the Company; provided, however, that such gross amount is not greater than 110% of the net amount received by the Company therefor.  If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the Closing Bid Price of such securities on the date of receipt.  If any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be.  The fair value of any consideration other than cash or securities will be determined jointly by the Company and the Holder.  If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the "Valuation Event"), the fair value of such consideration will be determined within five (5) Business Days after the tenth (10th) day following the Valuation Event by an independent, reputable appraiser jointly selected by the Company and the Holder.  The determination of such appraiser shall be deemed binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company.

 

(v)           Record Date.  If the Company takes a record of the holders of Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (B) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.

 

(b)      Adjustment of Conversion Price upon Subdivision or Combination of Common Stock.  If the Company, at any time while this Debenture is outstanding, shall (a) 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, (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 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.

 

  

9

  

 

(c)      Purchase Rights.  If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Debenture (without taking into account any limitations or restrictions on the convertibility of this Debenture) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.

 

(d)      Other Events.  If any event occurs of the type contemplated by the provisions of this Section 4 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's Board of Directors will make an appropriate adjustment in the Conversion Price so as to protect the rights of the Holder under this Debenture; provided that no such adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 5.

 

(e)      Other Corporate Events.  In addition to and not in substitution for any other rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which holders of shares of Common Stock are entitled to receive securities or other assets with respect to or in exchange for shares of Common Stock (a "Corporate Event"), the Company shall make appropriate provision to insure that the Holder will thereafter have the right to receive upon a conversion of this Debenture, at the Holder's option, (i) in addition to the shares of Common Stock receivable upon such conversion, such securities or other assets to which the Holder would have been entitled with respect to such shares of Common Stock had such shares of Common Stock been held by the Holder upon the consummation of such Corporate Event (without taking into account any limitations or restrictions on the convertibility of this Debenture) or (ii) in lieu of the shares of Common Stock otherwise receivable upon such conversion, such securities or other assets received by the holders of shares of Common Stock in connection with the consummation of such Corporate Event in such amounts as the Holder would have been entitled to receive had this Debenture initially been issued with conversion rights for the form of such consideration (as opposed to shares of Common Stock) at a conversion rate for such consideration commensurate with the Conversion Rate.  Provision made pursuant to the preceding sentence shall be in a form and substance satisfactory to the Required Holders.  The provisions of this Section shall apply similarly and equally to successive Corporate Events and shall be applied without regard to any limitations on the conversion or redemption of this Debenture.

 

(f)      Whenever the Conversion Price is adjusted pursuant to Section 5 hereof, the Company shall promptly mail to the Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

 

  

10

  

 

(g)      In case of any (1) merger or consolidation of the Company or any subsidiary of the Company with or into another Person, or (2) sale by the Company or any subsidiary of the Company of more than one-half of the assets of the Company in one or a series of related transactions, a Holder shall have the right to (A) exercise any rights under Section 2(b), (B) convert the aggregate amount of this Debenture then outstanding into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and such Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the shares of Common Stock into which such aggregate principal amount of this Debenture could have been converted immediately prior to such merger, consolidation or sales would have been entitled, or (C) in the case of a merger or consolidation, require the surviving entity to issue to the Holder a convertible Debenture with a principal amount equal to the aggregate principal amount of this Debenture then held by such Holder, plus all accrued and unpaid interest and other amounts owing thereon, which such newly issued convertible Debenture shall have terms identical (including with respect to conversion) to the terms of this Debenture, and shall be entitled to all of the rights and privileges of the Holder of this Debenture set forth herein and the agreements pursuant to which this Debentures were issued. In the case of clause (C), the conversion price applicable for the newly issued shares of convertible preferred stock or convertible Debentures shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such transaction and the Conversion Price in effect immediately prior to the effectiveness or closing date for such transaction. The terms of any such merger, sale or consolidation shall include such terms so as to continue to give the Holder the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events.

 

(6)          REISSUANCE OF THIS DEBENTURE.

 

(a)           Transfer.  If this Debenture is to be transferred, the Holder shall surrender this Debenture to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Debenture (in accordance with Section 6(d)), registered in the name of the registered transferee or assignee, representing the outstanding Principal being transferred by the Holder and, if less then the entire outstanding Principal is being transferred, a new Debenture (in accordance with Section 6(d)) to the Holder representing the outstanding Principal not being transferred.  The Holder and any assignee, by acceptance of this Debenture, acknowledge and agree that, by reason of the provisions of Section 4(b)(iii) following conversion or redemption of any portion of this Debenture, the outstanding Principal represented by this Debenture may be less than the Principal stated on the face of this Debenture.

 

(b)           Lost, Stolen or Mutilated Debenture.  Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Debenture, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this Debenture, the Company shall execute and deliver to the Holder a new Debenture (in accordance with Section 6(d)) representing the outstanding Principal.

 

  

11

  

 

(c)           Debenture Exchangeable for Different Denominations.  This Debenture is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for a new Debenture or Debentures (in accordance with Section 6(d)) representing in the aggregate the outstanding Principal of this Debenture, and each such new Debenture will represent such portion of such outstanding Principal as is designated by the Holder at the time of such surrender.

 

(d)           Issuance of New Debentures.  Whenever the Company is required to issue a new Debenture pursuant to the terms of this Debenture, such new Debenture (i) shall be of like tenor with this Debenture, (ii) shall represent, as indicated on the face of such new Debenture, the Principal remaining outstanding (or in the case of a new Debenture being issued pursuant to Section 6(a) or Section 6(c), the Principal designated by the Holder which, when added to the principal represented by the other new Debentures issued in connection with such issuance, does not exceed the Principal remaining outstanding under this Debenture immediately prior to such issuance of new Debentures), (iii) shall have an issuance date, as indicated on the face of such new Debenture, which is the same as the Issuance Date of this Debenture, (iv) shall have the same rights and conditions as this Debenture, and (v) shall represent accrued and unpaid Interest from the Issuance Date.

 

(7)           NOTICES.        Any notices, consents, waivers or other communications required or permitted to be given under the terms hereof must be in writing and will be deemed to have been delivered:  (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) Trading Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same.  The addresses and facsimile numbers for such communications shall be:

 

	
If to the Company, to:

	
Carbonics Capital Corporation

	  	
100 Overlook Capital, 2nd Floor

	  	
Princeton, NJ 08540

	  	
Attn:                     Chief Executive Officer

	  	
Telephone:           (609) 375-2239

	  	
Facsimile:             (609) 498-7029

	  	  
	
If to the Holder:

	
YA Global Investments, L.P.

	  	
101 Hudson Street, Suite 3700

	  	
Jersey City, NJ  07302

	  	
Attention:             Mark Angelo

	  	
Telephone:           (201) 985-8300

	  	  
	
With a copy to:

	
David Gonzalez, Esq.

	  	
101 Hudson Street, Suite 3700

	  	
Jersey City, NJ  07302

	  	
Telephone:           (201) 985-8300

	  	
Facsimile:             (201) 985-8266

 

  

12

  

 

or at such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party three (3) Business Days prior to the effectiveness of such change.  Written confirmation of receipt (i) given by the recipient of such notice, consent, waiver or other communication, (ii) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (iii) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.

 

(8)           Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligations of the Company, which are absolute and unconditional, to pay the principal of, interest and other charges (if any) on, this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed.  This Debenture is a direct obligation of the Company. As long as this Debenture is outstanding, the Company shall not and shall cause their subsidiaries not to, without the consent of the Holder, (i) amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the Holder; (ii) repay, repurchase or offer to repay, repurchase or otherwise acquire shares of its Common Stock or other equity securities; or (iii) enter into any agreement with respect to any of the foregoing.

 

(9)           This Debenture shall not entitle the Holder to any of the rights of a stockholder of the Company, including without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof.

 

(10)         No indebtedness of the Company is senior to this Debenture in right of payment, whether with respect to interest, damages or upon liquidation or dissolution or otherwise.  Without the Holder’s consent, the Company will not and will not permit any of their subsidiaries to, directly or indirectly, enter into, create, incur, assume or suffer to exist any indebtedness 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 there from that is senior in any respect to the obligations of the Company under this Debenture.

 

(11)         This Debenture shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to conflicts of laws thereof.  Each of the parties consents to the jurisdiction of the Superior Courts of the State of New Jersey sitting in Hudson County, New Jersey and the U.S. District Court for the District of New Jersey sitting in Newark, New Jersey in connection with any dispute arising under this Debenture and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens to the bringing of any such proceeding in such jurisdictions.

 

  

13

  

 

(12)         If the Company fails to strictly comply with the terms of this Debenture, then the Company shall reimburse the Holder promptly for all fees, costs and expenses, including, without limitation, attorneys’ fees and expenses incurred by the Holder in any action in connection with this Debenture, including, without limitation, those incurred: (i) during any workout, attempted workout, and/or in connection with the rendering of legal advice as to the Holder’s rights, remedies and obligations, (ii) collecting any sums which become due to the Holder, (iii) defending or prosecuting any proceeding or any counterclaim to any proceeding or appeal; or (iv) the protection, preservation or enforcement of any rights or remedies of the Holder.

 

(13)         Any waiver by 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 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.

 

(14)         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 shall violate 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 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.

 

(15)         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.

 

(16)         THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY.  THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES’ ACCEPTANCE OF THIS AGREEMENT.

 

  

14

  

 

(17)         CERTAIN DEFINITIONS   For purposes of this Debenture, the following terms shall have the following meanings:

 

(a)           “Approved Stock Plan” means a stock option plan that has been approved by the Board of Directors of the Company, pursuant to which the Company’s securities may be issued only to any employee, officer, or director for services provided to the Company.

 

(b)           "Bloomberg" means Bloomberg Financial Markets.

 

(c)           “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 are authorized or required by law or other government action to close.

 

(d)           “Change of Control Transaction” means the occurrence of (a) 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 fifty percent (50%) of the voting securities of the Company (except that the acquisition of voting securities by the Holder or any other current holder of convertible securities of the Company shall not constitute a Change of Control Transaction for purposes hereof), (b) a replacement at one time or over time of more than one-half of the members of the board of directors of the Company 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), (c) the merger, consolidation or sale of fifty percent (50%) or more of the assets of the Company or any subsidiary of the Company in one or a series of related transactions with or into another entity, or (d) 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 (a), (b) or (c).

 

(e)           “Closing Bid Price” means the price per share in the last reported trade of the Common Stock on a Primary Market or on the exchange  which the Common Stock is then listed as quoted by Bloomberg.

 

(f)           “Convertible Securities” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for Common Stock.

 

(g)           “Commission” means the Securities and Exchange Commission.

 

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

 

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

 

  

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(j)           “Excluded Securities” means, (a) shares issued or deemed to have been issued by the Company pursuant to an Approved Stock Plan (b) shares of Common Stock issued or deemed to be issued by the Company upon the conversion, exchange or exercise of any right, option, obligation or security outstanding on the date prior to date of the Original Issue Date, provided that the terms of such right, option, obligation or security are not amended or otherwise modified on or after such date, and provided that the conversion price, exchange price, exercise price or other purchase price is not reduced, adjusted or otherwise modified and the number of shares of Common Stock issued or issuable is not increased (whether by operation of, or in accordance with, the relevant governing documents or otherwise) on or after the such date, (c) shares issued in connection with any acquisition by the Company, whether through an acquisition of stock or a merger of any business, assets or technologies, leasing arrangement or any other transaction the primary purpose of which is not to raise equity capital, and (d) the shares of Common Stock issued or deemed to be issued by the Company upon conversion of this Debenture, the Other Debentures, or any future debenture issued to Holder, New Earthshell Corporation, or any of their affiliates or in connection with any warrant or option issued to Holder, New Earthshell Corporation, or any of their affiliates.

 

(k)           “Fundamental Transaction” means any of the following: (1) the Company effects any merger or consolidation of the Company with or into another Person and the Company is the non-surviving company (other than a merger or consolidation with a wholly owned subsidiary of the Company for the purpose of redomiciling the Company), (2) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (3) 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 (4) 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

 

(l)           “Other Debentures” means the following debentures issued by the Obligor, as may be amended: (a) Convertible Debenture (No. CCP-4) issued to YA Global Investments, L.P. on February 8, 2008 in the original principal amount of $3,050,369, (b) Convertible Debenture (No. CCP-3) issued to YA Global Investments, L.P. on October 12, 2005 in the original principal amount of $1,475,000, (c) Convertible Debenture (No. GSHF-3-1) issued to YA Global Investments, L.P. on June 26, 2007 in the original principal amount of $570,000, (d) Convertible Debenture (No. CICS-5) issued to YA Global Investments, L.P. on June 30, 2009 in the original principal amount of $4,000,000, (e) Convertible Debenture (No. CICS-6) issued to New Earthshell Corporation on August 17, 2011 in the original principal amount of $27,640,712, (f) Convertible Debenture (No. CICS-7) issued to YA Global Investments, L.P. on August 17, 2010 in the original principal amount of $650,000, (g) Convertible Debenture (No. CICS-8) issued to YA Global Investments, L.P. on May 26, 2011 in the original principal amount of $120,000 and (h) any other debentures, notes, or other instruments issued in exchange, replacement, or modification of the foregoing.

 

(m)           “Options” means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible Securities.

 

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

  

16

  

 

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

 

(p)           “Primary Market” means any of (a) the NYSE Amex (b) the New York Stock Exchange, (c) the Nasdaq Stock Market, (d) the Nasdaq Capital Market, (e) Pink OTC Markets, Inc. (including any of the OTCQX, OTC Bulletin Board, and the Pink Sheets) or (f) any successor to any of the foregoing markets or exchanges.

 

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

 

(r)           “Security Documents” shall have the meaning set forth in the Securities Purchase Agreement.

 

(s)           “Trading Day” means a day on which the shares of Common Stock are quoted or traded on a Primary Market on which the shares of Common Stock are then quoted or listed; provided, that in the event that the shares of Common Stock are not listed or quoted, then Trading Day shall mean a Business Day.

 

(t)           “Transaction Document(s)” shall mean this Debenture, along with the Securities Purchase Agreement, the Security Documents, and any other documents or agreements entered into in connection with the foregoing.

 

(u)           “Underlying Shares” means the shares of Common Stock issuable upon conversion of this Debenture or as payment of interest in accordance with the terms hereof.

 

(v)           "VWAP" means, for any security as of any date, the daily dollar volume-weighted average price for such security on the Primary Market as reported by Bloomberg through its “Historical Prices – Px Table with Average Daily Volume” functions, or, if no dollar volume-weighted average price is reported for such security by Bloomberg, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the "pink sheets" by Pink Sheets LLC.

 

[Signature Page Follows]

 

  

17

  

IN WITNESS WHEREOF, the Company has caused this Secured Convertible Debenture to be duly executed by a duly authorized officer as of the date set forth above.

	  	
COMPANY:

	  	
CARBONICS CAPITAL CORPORATION

	  	  
	  	
By:

	 
/s/ Stephen Schoepfer

	  	
Name:

	
Stephen Schoepfer

	  	
Title:

	
Chief Executive Officer

 

  

  

  

 

EXHIBIT I

CONVERSION NOTICE

 

(To be executed by the Holder in order to Convert the Debenture)

 

TO:

The undersigned hereby irrevocably elects to convert $_____________________ of the principal amount of Debenture No. CICS-9 into Shares of Common Stock of CARBONICS CAPITAL CORPORATION, according to the conditions stated therein, as of the Conversion Date written below.

 

	
Conversion Date:

	_____________________________________  
	 	 
	
Conversion Amount to be converted:

	
$____________________________________

	
Conversion Price:

	
$____________________________________

	
Number of shares of Common Stock to be issued:

	_____________________________________  
	  	  
	
Please issue the shares of Common Stock in the following name and to the following address:

	
Issue to:

	 
	  	  
	
Authorized Signature:

	_____________________________________  
	
Name:

	_____________________________________  
	
Title:

	_____________________________________  
	
Broker DTC Participant Code:

	  
	
Account Number:

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