Document:

Exhibit 4.1

 

EXECUTION COPY

 

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

 

Original Issue Date: February
      , 2005

Original Conversion Price (subject to
adjustment herein): $0.75

 

$                                  

 

 

8% CONVERTIBLE DEBENTURE

DUE FEBRUARY      ,
2008

 

THIS DEBENTURE is one of a series of duly authorized and issued 8% Convertible Debentures of Vistula Communications Services, Inc., a Delaware corporation, having a principal place of business at                                                      (the “Company”), designated as its 8% Senior Convertible Debenture, due February        , 2008 (the “Debenture(s)”).

 

FOR VALUE RECEIVED, the Company promises to pay to
                                        
or its registered assigns (the “Holder”), the principal sum of
$                                
on February     ,
2008 or such earlier date as the Debentures are required or permitted to
be repaid as provided hereunder (the “Maturity Date”), and to pay
interest to the Holder on the aggregate unconverted and then outstanding
principal amount of this Debenture in accordance with the provisions
hereof.  This Debenture is subject to the
following additional provisions:

 

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

 

1

 

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

 

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

 

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

 

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

 

“Change of Control Transaction” means
the occurrence after the date hereof of any of (i) an acquisition after the
date hereof by an individual or legal entity or “group” (as described in Rule
13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company, by
contract or otherwise) of in excess of 33% of the voting securities of the
Company, or (ii) the Company merges into or consolidates with any other Person,
or any Person merges into or consolidates with the Company and, after giving
effect to such transaction, the stockholders of the Company immediately prior
to such transaction own less than 33% of the aggregate voting power of the
Company or the successor entity of such transaction, or (iii) the Company sells
or transfers its assets, as an entirety or substantially as an entirety, to
another Person and the stockholders of the Company immediately prior to such
transaction own less than 33% of the aggregate voting power of the acquiring
entity immediately after the transaction, (iv) a replacement at one time or
within a three year period of more than one-half of the members of the
Company’s board of directors which is not approved by a majority of those
individuals who are members of the board of directors on the date hereof (or by
those individuals who are serving as members of the board of directors on any
date whose nomination to the board of directors was approved by a majority of
the members of the board of directors who are members on the date hereof), or
(v) the execution by the Company of an agreement to which the Company  is a party or by which it is bound, providing
for any of the events set forth above in (i) or (iv).

 

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

 

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

 

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

 

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

 

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

 

2

 

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

 

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

 

“Effectiveness Period” shall have the
meaning given to such term in the Registration Rights Agreement.

 

“Equity Conditions” shall mean, during the period in question,
(i) the Company shall have duly honored all conversions and redemptions
scheduled to occur or occurring by virtue of one or more Notice of Conversions,
if any, (ii) all liquidated damages and other amounts owing in respect of the
Debentures shall have been paid; (iii) there is an effective Registration
Statement pursuant to which the Holder is permitted to utilize the prospectus
thereunder to resell all of the shares issuable pursuant to the Transaction
Documents (and the Company believes, in good faith, that such effectiveness
will continue uninterrupted for the foreseeable future), (iv) the Common Stock
is trading on the Trading Market and all of the shares issuable pursuant to the
Transaction Documents are listed for trading on a Trading Market (and the
Company believes, in good faith, that trading of the Common Stock on a Trading
Market will continue uninterrupted for the foreseeable future), (v) there is a
sufficient number of authorized but unissued and otherwise unreserved shares of
Common Stock for the issuance of all of the shares issuable pursuant to the
Transaction Documents, (vi) there is then existing no Event of Default or event
which, with the passage of time or the giving of notice, would constitute an
Event of Default, (vii) all of the shares issued or issuable pursuant to the
transaction proposed would not violate the limitations set forth in Sections
4(c); (viii) no public announcement of a pending or proposed Fundamental
Transaction, Change of Control Transaction or acquisition transaction has
occurred that has not been consummated; and (ix) the average of the VWAPs for
the Common Stock for the 20 Trading Days 
(or Threshold Period, as applicable) prior to the  date of a Forced Conversion, as applicable,
is equal to at least 115% of the then applicable Conversion Price.

 

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

 

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

 

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

 

“Forced Conversion Notice” shall have
the meaning set forth in Section 6(c).

 

“Force Conversion Notice Date” shall
have the meaning set forth in Section 6(c).

 

“Interest Payment Date” shall have the
meaning set forth in Section 2(a).

 

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

 

3

 

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

 

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

 

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

 

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

 

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

 

“Purchase Agreement” means the
Securities Purchase Agreement, dated as of 
February 18, 2005 to
which the Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.

 

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

 

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

 

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

 

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

 

“Threshold Period” shall have the
meaning given to such term in Section 6(d).

 

4

 

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

 

“Trading Market” means, as applicable, the following markets or
exchanges on which the Common Stock is listed or quoted for trading on the date
in question: the American Stock Exchange, the New York Stock Exchange, the
Nasdaq National Market, the Nasdaq SmallCap Market, the OTC Bulletin Board or
the “Pink Sheets” published by the Pink Sheets LLC.

 

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

 

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

 

Section 2.               Interest.

 

a)             Payment
of Interest in Cash. The Company shall pay interest to the Holder on the
aggregate unconverted and then outstanding principal amount of this Debenture
at the rate of 8% per annum, payable quarterly on March 31, June 30, September
30 and December 31, beginning on the first such date after the Original Issue
Date and on each Conversion Date (solely as to that principal amount then being
converted) and on the Maturity Date (except that, if any such date is not a
Business Day, then such payment shall be due on the next succeeding Business
Day) (each such date, an “Interest Payment Date”), in cash

 

b)            Interest
Calculations. Interest shall be calculated on the basis of a 360-day year
and shall accrue daily commencing on the Original Issue Date until payment in
full of the principal sum or conversion of this Debenture in full, together
with all accrued and unpaid interest and other amounts which may become due
hereunder, has been made.  .

 

5

 

Interest shall cease to accrue with respect to any principal amount
converted, provided that the Company in fact delivers the Conversion Shares
within the time period required by Section 4(d)(ii).  Interest hereunder will be paid to the Person
in whose name this Debenture is registered on the records of the Company
regarding registration and transfers of Debentures (the “Debenture Register”).
..

 

c)             Late
Fee.  All overdue accrued and unpaid
interest to be paid hereunder shall entail a late fee at the rate of 18% per
annum (or such lower maximum amount of interest permitted to be charged under
applicable law) (“Late Fees”) which will accrue daily, from the date
such interest is due hereunder through and including the date of payment. .

 

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

 

Section 3.              
Registration of Transfers and Exchanges.

 

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

 

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

 

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

 

Section 4.                 Conversion.

 

a)             Voluntary
Conversion. At any time after the Original Issue Date until this Debenture
is no longer outstanding, this Debenture shall be convertible into shares of
Common Stock at the option of the Holder, in whole or in part at any time and
from time to time (subject to the limitations on conversion set forth in
Section 4(c) hereof).  The Holder
shall effect conversions by delivering to the Company the form of Notice of
Conversion attached hereto as Annex A (a “Notice of Conversion”),
specifying therein the principal amount of Debentures to be converted and the
date on which such conversion is to be effected (a “Conversion Date”).  If no Conversion Date is specified in

 

6

 

a Notice of Conversion, the Conversion Date shall be the date that such
Notice of Conversion is provided hereunder. 
To effect conversions hereunder, the Holder shall not be required to
physically surrender Debentures to the Company unless the entire principal
amount of this Debenture  has been so
converted. Conversions hereunder shall have the effect of lowering the
outstanding principal amount of this Debenture in an amount equal to the
applicable conversion.  The Holder and
the Company shall maintain records showing the principal amount converted and
the date of such conversions.  The
Company shall deliver any objection to any Notice of Conversion within 1
Business Day of receipt of such notice. 
In the event of any dispute or discrepancy, the records of the Holder
shall be controlling and determinative in the absence of manifest error. The
Holder and any assignee, by acceptance of this Debenture, acknowledge and agree
that, by reason of the provisions of this paragraph, following conversion of a
portion of this Debenture, the unpaid and unconverted principal amount of this
Debenture may be less than the amount stated on the face hereof.

 

b)            Conversion
Price.  The conversion price in
effect on any Conversion Date shall be equal to $0.75 (subject to adjustment
herein)(the “Conversion Price”).

 

c)             Conversion
Limitations; Holder’s Restriction on Conversion. The Company shall
not effect any conversion of this Debenture, and the Holder shall not have the
right to convert any portion of this Debenture, pursuant to Section 4(a),
Section 6(b) or otherwise, to the extent that after giving effect to such
conversion, the Holder (together with the Holder’s affiliates), as set forth on
the applicable Notice of Conversion, would beneficially own in excess of 4.99%
or 9.99% (depending on the Holder’s blocker provision election set forth on
such Holder’s signature page to the Purchase Agreement) of the number of shares
of the Common Stock outstanding immediately after giving effect to such
conversion.  For purposes of the foregoing sentence, the number of shares
of Common Stock beneficially owned by the Holder and its affiliates shall
include the number of shares of Common Stock issuable upon conversion of this
Debenture with respect to which the determination of such sentence is being
made, but shall exclude the number of shares of Common Stock which would be
issuable upon (A) conversion of the remaining, nonconverted portion of this
Debenture beneficially owned by the Holder or any of its affiliates and (B) exercise
or conversion of the unexercised or nonconverted portion of any other
securities of the Company (including, without limitation, any other Debentures
or the Warrants) subject to a limitation on conversion or exercise analogous to
the limitation contained herein beneficially owned by the Holder or any of its
affiliates.  Except as set forth in the preceding sentence, for purposes
of this Section 4(c), beneficial ownership shall be calculated in accordance
with Section 13(d) of the Exchange Act. 
To the extent that the limitation contained in this section applies, the
determination of whether this Debenture is convertible (in relation to other
securities owned by the Holder) and of which a portion of this Debenture is
convertible shall be in the sole discretion of such Holder. To ensure
compliance with this restriction, the Holder will be deemed to represent to the
Company each time it delivers a Notice of Conversion that such Notice of
Conversion has not violated the restrictions set forth in this paragraph and
the Company shall have no obligation to verify or confirm the accuracy of such

 

7

 

determination.  For purposes of
this Section 4(c), in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (x) the Company’s most recent Form 10-QSB or Form 10-KSB, as
the case may be, (y) a more recent public announcement by the Company or (z)
any other notice by the Company or the Company’s Transfer Agent setting forth
the number of shares of Common Stock outstanding.  Upon the written or
oral request of the Holder, the Company shall within two Trading Days confirm
orally and in writing to the Holder the number of shares of Common Stock then
outstanding.  In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Debenture, by the Holder or its
affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.  The
provisions of this Section 4(c) may be waived by the Holder upon, at the
election of the Holder, not less than 61 days’ prior notice to the Company, and
the provisions of this Section 4(c) shall continue to apply until such 61st day
(or such later date, as determined by the Holder, as may be specified in such
notice of waiver).

 

d)            Mechanics
of Conversion

 

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

 

ii.             Delivery
of Certificate Upon Conversion. Not later than three Trading Days after any
Conversion Date, the Company will deliver to the Holder (A) a certificate or
certificates representing the Conversion Shares which shall be free of
restrictive legends and trading restrictions (other than those required by the
Purchase Agreement) representing the number of shares of Common Stock being
acquired upon the conversion of Debentures and (B) a bank check in the amount
of accrued and unpaid interest (if the Company is required to pay accrued
interest in cash). The Company shall, if available and if allowed under
applicable securities laws, use its best efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions.

 

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

 

8

 

iv.            Obligation
Absolute; Partial Liquidated Damages. 
If the Company fails for any reason to deliver to the Holder such
certificate or certificates pursuant to Section 4(d)(ii) by the third Trading
Day after the Conversion Date, the Company shall pay to such Holder, in cash,
as liquidated damages and not as a penalty, for each $1000 of principal amount
being converted, $10 per Trading Day (increasing to $20 per Trading Day after 5
Trading Days after such damages begin to accrue) for each Trading Day after
such third Trading Day until such certificates are delivered.  The Company’s obligations to issue and
deliver the Conversion Shares upon conversion of this Debenture in accordance
with the terms hereof are absolute and unconditional, irrespective of any
action or inaction by the Holder to enforce the same, any waiver or consent
with respect to any provision hereof, the recovery of any judgment against any
Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder or any other Person of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other person, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Company to the Holder in connection with the issuance of such Conversion
Shares; provided, however, such delivery shall not operate as a
waiver by the Company of any such action the Company may have against the
Holder.  In the event a Holder of this
Debenture shall elect to convert any or all of the outstanding principal amount
hereof, the Company may not refuse conversion based on any claim that the
Holder or any one associated or affiliated with the Holder of has been engaged
in any violation of law, agreement or for any other reason, unless, an
injunction from a court, on notice, restraining and or enjoining conversion of
all or part of this Debenture shall have been sought and obtained and the
Company posts a surety bond for the benefit of the Holder in the amount of 150%
of the principal amount of this Debenture outstanding, which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be
payable to such Holder to the extent it obtains judgment.  In the absence of an injunction precluding
the same, the Company shall issue Conversion Shares or, if applicable, cash,
upon a properly noticed conversion. 
Nothing herein shall limit a Holder’s right to pursue actual damages or
declare an Event of Default pursuant to Section 8 herein for the Company’s
failure to deliver Conversion Shares within the period specified herein and
such Holder shall have the right to pursue all remedies available to it at law
or in equity including, without limitation, a decree of specific performance
and/or injunctive relief.  The exercise
of any such rights shall not prohibit the Holders from seeking to enforce
damages pursuant to any other Section hereof or under applicable law.

 

v.             Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon Conversion. In
addition to any other rights available to the Holder, if the Company fails for
any reason to deliver to the Holder such certificate or

 

9

 

certificates pursuant to Section 4(d)(ii) by the third Trading Day
after the Conversion Date, and if after such third Trading Day the Holder is
required by its brokerage firm to purchase (in an open market transaction or
otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of
the Conversion Shares which the Holder anticipated receiving upon such
conversion (a “Buy-In”), then the Company shall (A) pay in cash to the
Holder (in addition to any remedies available to or elected by the Holder) the
amount by which (x) the Holder’s total purchase price (including brokerage
commissions, if any) for the Common Stock so purchased exceeds (y) the product
of (1) the aggregate number of shares of Common Stock that such Holder
anticipated receiving from the conversion at issue multiplied by (2) the actual
sale price of the Common Stock at the time of the sale (including brokerage
commissions, if any) giving rise to such purchase obligation and (B) at the
option of the Holder, either reissue Debentures in principal amount equal to
the principal amount of the attempted conversion or deliver to the Holder the
number of shares of Common Stock that would have been issued had the Company
timely complied with its delivery requirements under Section 4(d)(ii).  For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect
to an attempted conversion of Debentures with respect to which the actual sale
price of the Conversion Shares at the time of the sale (including brokerage
commissions, if any) giving rise to such purchase obligation was a total of
$10,000 under clause (A) of the immediately preceding sentence, the Company
shall be required to pay the Holder $1,000. 
The Holder shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In.  Notwithstanding anything contained herein to
the contrary, if a Holder requires the Company to make payment in respect of a
Buy-In for the failure to timely deliver certificates hereunder and the Company
timely pays in full such payment, the Company shall not be required to pay such
Holder liquidated damages under Section 4(d)(iv) in respect of the certificates
resulting in such Buy-In.

 

vi.            Reservation
of Shares Issuable Upon Conversion. The Company covenants that it will at
all times reserve and keep available out of its authorized and unissued shares
of Common Stock solely for the purpose of issuance upon conversion of the
Debentures and payment of interest on the Debenture, each as herein provided,
free from preemptive rights or any other actual contingent purchase rights of
persons other than the Holders, not less than such number of shares of the
Common Stock as shall (subject to any additional requirements of the Company as
to reservation of such shares set forth in the Purchase Agreement) be issuable
(taking into account the adjustments and restrictions of Section 5) upon the
conversion of the outstanding principal amount of the Debentures 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 Registration

 

10

 

Statement is then effective under the Securities Act, registered for
public sale in accordance with such Registration Statement.

 

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

 

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

 

Section 5.               Certain
Adjustments.

 

a)             Stock
Dividends and Stock Splits.  If the
Company, at any time while the Debentures are outstanding: (A) shall pay a
stock dividend or otherwise make a distribution or distributions on shares of
its Common Stock or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company pursuant to this Debenture,
including as interest thereon), (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
adjusted to the amount obtained by multiplying the then Current Conversion
Price  by a fraction  the numerator of which shall be the number of
shares of Common Stock (excluding treasury shares, if any) outstanding before
such event and  the denominator of which
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.

 

11

 

b)            Subsequent
Equity Sales.  If the Company or any
Subsidiary thereof, as applicable, at any time while Debentures are
outstanding, shall offer, sell, grant any option to purchase or offer, sell or
grant any right to reprice its securities, or otherwise dispose of or issue (or
announce any offer, sale, grant or any option to purchase or other disposition)
any Common Stock or Common Stock Equivalents entitling any Person as of the
date of issuance of such Common Stock or Common Stock Equivalents to acquire
shares of Common Stock, at an effective price per share less than the then
Conversion Price (such lower price, the “Base Conversion Price” and such
issuances collectively, a “Dilutive Issuance”), as adjusted hereunder
(if the holder of the Common Stock or Common Stock Equivalents so issued shall
at any time, whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices or otherwise
(other than in connection with a stock dividend, stock split, combination or
similar event), or due to warrants, options or rights per share which is issued
in connection with such issuance, be entitled to receive shares of Common Stock
at an effective price per share which is less than the Conversion Price, such
issuance shall be deemed to have occurred for less than the Conversion Price as
of the effective date on which such entitlement accrues), then the Conversion
Price shall be reduced to equal the Base Conversion Price.  Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued.  The Company shall notify the Holder in writing,
no later than the Business Day following the issuance of any Common Stock or
Common Stock Equivalents subject to this section, indicating therein the
applicable issuance price, or of applicable reset price, exchange price,
conversion price and other pricing terms (such notice the “Dilutive Issuance
Notice”).  For purposes of
clarification, whether or not the Company provides a Dilutive Issuance Notice
pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance,
after the date of such Dilutive Issuance the Holder is entitled to receive a
number of Conversion Shares based upon the Base Conversion Price regardless of
whether the Holder accurately refers to the Base Conversion Price in the Notice
of Conversion.

 

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

 

12

 

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

 

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

 

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

 

13

 

g)            Notice
to Holders.

 

i.              Adjustment to
Conversion Price.  Whenever the
Conversion Price is adjusted pursuant to any of this Section 5, the Company
shall promptly mail to each Holder a notice setting forth the Conversion Price
after such adjustment and setting forth a brief statement of the facts
requiring such adjustment. If the Company issues a variable rate security,
despite the prohibition thereon in the Purchase Agreement, the Company shall be
deemed to have issued Common Stock or Common Stock Equivalents at the lowest
possible conversion or exercise price at which such securities may be converted
or exercised in the case of a Variable Rate Transaction (as defined in the
Purchase Agreement), or the lowest possible adjustment price in the case of an
MFN Transaction (as defined in the Purchase Agreement).

 

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

 

14

 

commencing the date of such notice to the effective date of the event
triggering such notice.

 

iii.            Re-Adjustment
of Conversion Price.  If the
Conversion Price has been adjusted based on the issuance of a right, option,
warrant and/or Common Stock Equivalent and all of such right, option, warrant
and/or Common Stock Equivalent expires pursuant to its own terms before it is
exercised, exchanged and/or converted, an upward adjustment will be made such
that the Conversion Price will no longer reflect the issuance of such right,
option, warrant and/or Common Stock Equivalent.

 

Section 6.               Forced Conversion.  Notwithstanding anything herein to the
contrary, if after the 12 month anniversary of the Original Issue Date (A) the
VWAP for the Common Stock for any 30 consecutive Trading Days (such period
commencing only after the Effective Date, such period the “Threshold Period”))
exceeds $1.25 (subject to adjustment for forward and reverse stock splits,
stock dividends and the like) and (B) the average daily dollar trading volume
of the Common Stock during the Threshold Period is greater than or equal to
$200,000, the Company may, within 2 Trading Days of the end of any such period,
deliver a notice to the Holder (a “Forced Conversion Notice” and the
date such notice is received by the Holder, the “Forced Conversion Notice
Date”) to cause the Holder to immediately convert all or part of the then
outstanding principal amount of Debentures pursuant to Section 4(a).  The Company may only effect a Forced
Conversion Notice if all of the Equity Conditions are met through the
applicable Threshold Period until the date of the applicable Forced
Conversion.  Any Forced Conversion shall
be applied ratably to all Holders based on their initial purchases of
Debentures pursuant to the Purchase Agreement.

 

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

 

a)             enter into, create,
incur or assume any indebtedness (including, without limitation, the guaranty
of any third party indebtedness) for borrowed money or liens of any kind, on or
with respect to any of its property or assets now owned or hereafter acquired
or any interest therein or any income or profits therefrom that is senior to,
or pari passu with, in any respect, the Company’s obligations under the
Debentures other than capital leases which are not secured by any assets of the
Company or any Subsidiary other than the asset so leased, or debt incurred for
money borrowed from an institutional lender licensed as such by a governmental
agency;

 

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

 

15

 

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

 

d)            make any cash
distributions on any equity or debt securities of the Company other than to the
extent permitted or required under the Transaction Documents; or

 

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

 

Section 8.               Events of Default.

 

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

 

i.              any default in the
payment of (A) the principal amount of any Debenture, or (B) interest
(including Late Fees) on, or liquidated damages in respect of, any Debenture,
in each case free of any claim of subordination, as and when the same shall
become due and payable (whether on a Conversion Date or the Maturity Date or by
acceleration or otherwise) which default, solely in the case of an interest
payment or other default under clause (B) above, is not cured, within 3 Trading
Days of written notice of such default sent by the Holder;

 

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

 

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

 

iv.            any representation
or warranty made herein, in any other Transaction Documents, in any written
statement pursuant hereto or thereto, or in any other report, financial
statement or certificate made or delivered by the

 

16

 

Company
to the Holder or any other holder of Debentures shall be untrue or incorrect in
any material respect as of the date when made or deemed made;

 

v.             (i) the Company or
any of its Subsidiaries shall commence, or there shall be commenced against the
Company or any such Subsidiary, a case under any applicable bankruptcy or
insolvency laws as now or hereafter in effect or any successor thereto, or the
Company or any Subsidiary commences any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect relating to the Company or any Subsidiary
thereof or (ii) there is commenced against the Company or any Subsidiary
thereof any such bankruptcy, insolvency or other proceeding which remains
undismissed for a period of 60 days; or (iii) the Company or any Subsidiary
thereof is adjudicated by a court of competent jurisdiction insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or (iv) the Company or any Subsidiary thereof suffers
any appointment of any custodian or the like for it or any substantial part of
its property which continues undischarged or unstayed for a period of 60 days;
or (v) the Company or any Subsidiary thereof makes a general assignment for the
benefit of creditors; or (vi) the Company shall fail to pay, or shall state
that it is unable to pay, or shall be unable to pay, its debts generally as
they become due; or (vii) the Company or any Subsidiary thereof shall call a
meeting of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (viii) the Company or any Subsidiary thereof
shall by any act or failure to act expressly indicate its consent to, approval
of or acquiescence in any of the foregoing; or (ix) any corporate or other
action is taken by the Company or any Subsidiary thereof for the purpose of
effecting any of the foregoing;

 

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

 

vii.           the Company shall
be a party to any Change of Control Transaction or Fundamental Transaction,
shall agree to sell or dispose of all or in excess of 33% of its assets in one
or more transactions (whether or not such sale would constitute a Change of
Control Transaction) or shall redeem or repurchase more than a de minimis
number of its outstanding shares of Common Stock or other equity securities of
the Company (other than redemptions of Conversion

 

17

 

Shares
and repurchases of shares of Common Stock or other equity securities of
departing officers and directors of the Company; provided such repurchases
shall not exceed $100,000, in the aggregate, for all officers and directors
during the term of this Debenture);

 

viii.          a Registration
Statement shall not have been declared effective by the Commission on or prior
to the 150th calendar day after the Closing Date;

 

ix.            if, during the
Effectiveness Period (as defined in the Registration Rights Agreement), the
effectiveness of the Registration Statement lapses for any reason or the Holder
shall not be permitted to resell Registrable Securities (as defined in the
Registration Rights Agreement) under the Registration Statement, in either
case, for more than 15 consecutive Trading Days or 25 non-consecutive Trading
Days during any 12 month period; provided, however, that in the
event that the Company is negotiating a merger, consolidation, acquisition or
sale of all or substantially all of its assets or a similar transaction and in
the written opinion of counsel to the Company, the Registration Statement,
would be required to be amended to include information concerning such
transactions or the parties thereto that is not available or may not be
publicly disclosed at the time, the Company shall be permitted an additional 15
consecutive Trading Days during any 12 month period relating to such an event;
and provided further; that in the event the Registration Statement is
declared effective prior to the date on which the Company files its Form 10-KSB
for the fiscal year ended December 31, 2004 with the Commission, it shall not
be an Event of Default hereunder if the effectiveness of such Registration Statement
is suspended while the Commission reviews the post-effective amendment to the
Registration Statement required in connection therewith as provided in the
Registration Rights Agreement (and the Trading Days during which the
Registration Statement is so suspended shall not count towards the number of
Trading Days during which the Registration Statement is not effective for the
purposes of this Section 8(a)(ix); and

 

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

 

 

b)            Remedies
Upon Event of Default. If any Event of Default occurs, the full 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.  
The aggregate amount payable upon an Event of Default shall be equal to
the Mandatory Prepayment Amount. 
Commencing 5 days after

 

18

 

the occurrence of any Event of Default that
results in the eventual acceleration of this Debenture, the interest rate on
this Debenture shall accrue at the rate of 18% per annum, or such lower maximum
amount of interest permitted to be charged under applicable law.  All Debentures for which the full Mandatory
Prepayment Amount hereunder shall have been paid in accordance herewith shall
promptly be surrendered to or as directed by the Company.  The Holder need not provide and the Company hereby
waives any presentment, demand, protest or other notice of any kind, and the
Holder may immediately and without expiration of any grace period enforce any
and all of its rights and remedies hereunder and all other remedies available
to it under applicable law.  Such
declaration may be rescinded and annulled by Holder at any time prior to
payment hereunder and the Holder shall have all rights as a Debenture holder
until such time, if any, as the full payment under this Section shall have been
received by it.  No such rescission or
annulment shall affect any subsequent Event of Default or impair any right
consequent thereon.

 

Section 9.               Miscellaneous.  

 

a)             Notices.  Any and all notices or other communications
or deliveries to be provided by the Holders hereunder, including, without
limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service, addressed to the Company, at the address set forth above, facsimile number  +44 (0) 20 7487 4001, Attn: Chief Executive Officer or
such other address or facsimile number as the Company may specify for such
purposes by notice to the Holders delivered in accordance with this
Section.  Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be
in writing and delivered personally, by facsimile, sent by a nationally
recognized overnight courier service addressed to each Holder at the facsimile
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. 
Any notice or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:30 p.m. (New York City
time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 5:30 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such date, (iii) the second
Business Day following the date of mailing, if sent by nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to whom
such notice is required to be given.

 

b)            Absolute
Obligation. Except as expressly provided herein, no provision of this
Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, interest and liquidated
damages (if any) on, this Debenture at the time, place, and rate, and in the
coin or currency, herein prescribed.  

 

19

 

This Debenture is a direct debt obligation of
the Company.  This Debenture ranks pari
passu with all other Debentures now or hereafter issued under the terms
set forth herein.

 

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

 

d)            Governing
Law.  All questions concerning the
construction, validity, enforcement and interpretation of this Debenture shall
be governed by and construed and enforced in accordance with the internal laws
of the State of New York, without regard to the principles of conflicts of law
thereof.  Each party agrees that all
legal proceedings concerning the interpretations, enforcement and defense of
the transactions contemplated by any of the Transaction Documents (whether
brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the state
and federal courts sitting in the City of New York, Borough of Manhattan (the “New
York Courts”).  Each party hereto
hereby irrevocably submits to the exclusive jurisdiction of the New York Courts
for the adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein (including with respect
to the enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or such
New York Courts are improper or inconvenient venue for such proceeding.  Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit,
action or proceeding by mailing a copy thereof via registered or certified mail
or overnight delivery (with evidence of delivery) to such party at the address
in effect for notices to it under this Debenture and agrees that such service
shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law.
Each party hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Debenture or the transactions contemplated
hereby. If either party shall commence an action or proceeding to enforce any
provisions of this Debenture, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its attorneys fees and
other costs and expenses incurred with the investigation, preparation and
prosecution of such action or proceeding.

 

e)             Waiver.  Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture.  The
failure of the Company or the Holder to insist upon strict adherence to any
term of

 

20

 

this Debenture on one or more occasions shall
not be considered a waiver or deprive that party of the right thereafter to
insist upon strict adherence to that term or any other term of this Debenture.  Any waiver must be in writing.

 

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

 

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

 

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

 

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

 

21

 

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

 

 

	
   

  	
  VISTULA COMMUNICATIONS SERVICES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

22

 

ANNEX
A

 

NOTICE
OF CONVERSION

 

The undersigned hereby elects to convert
principal under the 8% Convertible Debenture of Vistula Communications
Services, Inc., a Delaware corporation
(the “Company”), due on February     
, 2005, into shares of
common stock, par value $0.001 per
share (the “Common Stock”), of the Company according to the conditions
hereof, as of the date written below.  If
shares are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith.  No
fee will be charged to the holder for any conversion, except for such transfer
taxes, if any.

 

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

 

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

 

Conversion calculations:

Date to Effect Conversion:

 

Principal Amount of Debentures
to be Converted:

 

 

Number of shares of Common Stock
to be issued:

 

 

Signature:

 

Name:

 

Address:

 

23

 

Schedule
1

 

CONVERSION
SCHEDULE

 

The 8%
Convertible Debentures due on February
       , 2005, in the aggregate principal
amount of
$                      
issued by Vistula Communications Services, Inc.  This Conversion Schedule
reflects conversions made under Section 4 of the above referenced Debenture.

 

Dated:

 

 

	
  Date of Conversion

  (or for first entry,

  Original Issue Date)

  	
   

  	
  Amount of

  Conversion

  	
   

  	
  Aggregate

  Principal

  Amount

  Remaining

  Subsequent to

  Conversion

  (or original

  Principal

  Amount)

  	
   

  	
  Company Attest

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

24Exhibit 4.2

 

EXECUTION
COPY

 

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

 

COMMON STOCK PURCHASE WARRANT

 

To Purchase                 
Shares of Common Stock of

 

VISTULA COMMUNICATION SERVICES, INC.

 

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”)
certifies that, for value received,                            
(the “Holder”), is entitled, upon the terms and subject to the
limitations on exercise and the conditions hereinafter set forth, at any time
on or after the date hereof (the “Initial Exercise Date”) and on or
prior to the close of business on the fifth anniversary of the Initial Exercise
Date (the “Termination Date”) but not thereafter, to subscribe for and
purchase from Vistula Communication Services, Inc., a Delaware corporation (the
“Company”), up to               
shares (the “Warrant Shares”) of Common Stock, par value $0.001 per share,
of the Company (the “Common Stock”). 
The purchase price of one share of Common Stock under this Warrant shall
be equal to the Exercise Price, as defined in Section 2(b).

 

Section 1.                                            Definitions.  Capitalized
terms used and not otherwise defined herein shall have the meanings set forth
in that certain Securities Purchase Agreement (the “Purchase Agreement”),
dated February 18, 2005, among the Company and the purchasers signatory
thereto.

 

Section 2.                                            Exercise.

 

a)                                      Exercise
of Warrant.  Exercise of the purchase
rights represented by this Warrant may be made at any time or times on or after
the Initial Exercise Date and on or before the Termination Date by delivery to
the Company of a duly executed facsimile copy of the Notice of Exercise annexed  hereto (or such other office or agency of the

 

1

 

Company as it may
designate by notice in writing to the registered Holder at the address of such
Holder appearing on the books of the Company); provided, however,
within 5 Trading Days of the date said Notice of Exercise is delivered to the
Company, the Holder shall have surrendered this Warrant to the Company and the
Company shall have received  payment of
the aggregate Exercise Price of the shares thereby purchased by wire transfer
or cashier’s check drawn on a United States bank.

 

b)                                     Exercise Price.  The exercise price of the Common Stock under
this Warrant shall be $1.00, subject to adjustment hereunder (the “Exercise
Price”).

 

c)                                      Cashless
Exercise.  If at any time after one
year from the date of issuance of this Warrant there is no effective
Registration Statement registering, or no current prospectus available for, the
resale of the Warrant Shares by the Holder, then this Warrant may also be
exercised at such time by means of a “cashless exercise” in which the Holder
shall be entitled to receive a certificate for the number of Warrant Shares
equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

 

(A) =
the Volume Weighted Average Price (“VWAP”) on the Trading Day
immediately preceding the date of such election;

 

(B) =
the Exercise Price of this Warrant, as adjusted; and

 

(X) =
the number of Warrant Shares issuable upon exercise of this Warrant in
accordance with the terms of this Warrant by means of a cash exercise rather
than a cashless exercise.

 

Notwithstanding
anything herein to the contrary, on the Termination Date, this Warrant shall be
automatically exercised via cashless exercise pursuant to this Section 2(c).

 

d)                                     Exercise
Limitations; Holder’s Restrictions. 
The Holder shall not have the right to exercise any portion of this
Warrant, pursuant to Section 2(c) or otherwise, to the extent that after giving
effect to such issuance after exercise, the Holder (together with the Holder’s
affiliates), as set forth on the applicable Notice of Exercise, would
beneficially own in excess of 4.99% or 9.99% (depending on the Holder’s blocker
provision election set forth on such Holder’s signature page to the Purchase
Agreement) of the number of shares of the Common Stock outstanding immediately
after giving effect to such issuance.  For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by the Holder
and its affiliates shall include the number of shares of Common Stock issuable
upon exercise of this Warrant with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (A) exercise of the remaining, nonexercised
portion of this Warrant beneficially owned by the Holder or any of its
affiliates and (B) exercise or conversion of the unexercised or nonconverted
portion of any other securities of the Company (including, without limitation,
any other Debentures or Warrants) subject to a limitation on conversion or
exercise analogous to the limitation contained herein beneficially owned by the
Holder or any of its affiliates.  Except as set

 

2

 

forth in the
preceding sentence, for purposes of this Section 2(d), beneficial ownership
shall be calculated in accordance with Section 13(d) of the Exchange Act, it
being acknowledged by Holder that the Company is not representing to Holder
that such calculation is in compliance with Section 13(d) of the Exchange Act
and Holder is solely responsible for any schedules required to be filed in
accordance therewith.   To the extent
that the limitation contained in this Section 2(d) applies, the determination
of whether this Warrant is exercisable (in relation to other securities owned
by the Holder) and of which a portion of this Warrant is exercisable shall be
in the sole discretion of such Holder, and the submission of a Notice of
Exercise shall be deemed to be such Holder’s determination of whether this Warrant
is exercisable (in relation to other securities owned by such Holder) and of
which portion of this Warrant is exercisable, in each case subject to such
aggregate percentage limitation, and the Company shall have no obligation to
verify or confirm the accuracy of such determination.  For purposes of this Section 2(d), in
determining the number of outstanding shares of Common Stock, the Holder may
rely on the number of outstanding shares of Common Stock as reflected in (x)
the Company’s most recent Form 10-QSB or Form 10-KSB, as the case may be, (y) a
more recent public announcement by the Company or (z) any other notice by the
Company or the Company’s Transfer Agent setting forth the number of shares of
Common Stock outstanding.  Upon the written or oral request of the Holder,
the Company shall within two Trading Days confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding.  In any
case, the number of outstanding shares of Common Stock shall be determined
after giving effect to the conversion or exercise of securities of the Company,
including this Warrant, by the Holder or its affiliates since the date as of
which such number of outstanding shares of Common Stock was reported.  The provisions of this Section 2(d) may be
waived by the Holder upon, at the election of the Holder, not less than 61 days’
prior notice to the Company, and the provisions of this Section 2(d) shall
continue to apply until such 61st day (or such later date, as
determined by the Holder, as may be specified in such notice of waiver).

 

e)                                      Mechanics
of Exercise.

 

i.                                          Authorization
of Warrant Shares.  The Company
covenants that all Warrant Shares which may be issued upon the exercise of the
purchase rights represented by this Warrant will, upon exercise of the purchase
rights represented by this Warrant, be duly authorized, validly issued, fully
paid and nonassessable and free from all taxes, liens and charges in respect of
the issue thereof (other than taxes in respect of any transfer occurring contemporaneously
with such issue).

 

ii.                                       Delivery
of Certificates Upon Exercise.  Certificates
for shares purchased hereunder shall be transmitted by the transfer agent of
the Company to the Holder by crediting the account of the Holder’s prime broker
with the Depository Trust Company through its Deposit Withdrawal Agent
Commission (“DWAC”) system if the Company is a participant in such
system, and otherwise by physical delivery to the address specified by the
Holder in the Notice of Exercise within 3 Trading Days from the delivery to the
Company of the executed Notice of

 

3

 

Exercise,
surrender of this Warrant and payment of the aggregate Exercise Price as set
forth above (“Warrant Share Delivery Date”).  This Warrant shall be deemed to have been
exercised on the date the Exercise Price is received by the Company.  The Warrant Shares shall be deemed to have
been issued, and Holder or any other person so designated to be named therein
shall be deemed to have become a holder of record of such shares for all
purposes, as of the date the Warrant has been exercised by payment to the
Company of the Exercise Price and all taxes required to be paid by the Holder,
if any, pursuant to Section 2(e)(vii) prior to the issuance of such shares,
have been paid.

 

iii.                                    Delivery
of New Warrants Upon Exercise.  If
this Warrant shall have been exercised in part, the Company shall, at the time
of delivery of the certificate or certificates representing Warrant Shares,
deliver to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased Warrant Shares called for by this Warrant, which new Warrant shall
in all other respects be identical with this Warrant.

 

iv.                                   Rescission
Rights.  If the Company fails to cause
its transfer agent to transmit to the Holder a certificate or certificates
representing the Warrant Shares pursuant to this Section 2(e)(iv) by the
Warrant Share Delivery Date, then the Holder will have the right to rescind
such exercise.

 

v.                                      Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon Exercise.  In addition to any other rights available to
the Holder, if the Company fails to cause its transfer agent to transmit to the
Holder a certificate or certificates representing the Warrant Shares pursuant
to an exercise on or before the Warrant Share Delivery Date, and if after such
date the Holder is required by its broker to purchase (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of
a sale by the Holder of the Warrant Shares which the Holder anticipated
receiving upon such exercise (a “Buy-In”), then the Company shall (1)
pay in cash to the Holder the amount by which (x) the Holder’s total purchase
price (including brokerage commissions, if any) for the shares of Common Stock
so purchased exceeds (y) the amount obtained by multiplying (A) the number of
Warrant Shares that the Company was required to deliver to the Holder in
connection with the exercise at issue times (B) the price at which the sell order
giving rise to such purchase obligation was executed, and (2) at the option of
the Holder, either reinstate the portion of the Warrant and equivalent number
of Warrant Shares for which such exercise was not honored or deliver to the
Holder the number of shares of Common Stock that would have been issued had the
Company timely complied with its exercise and delivery obligations
hereunder.  For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted exercise of shares of Common Stock with an

 

4

 

aggregate
sale price giving rise to such purchase obligation of $10,000, under clause (1)
of the immediately preceding sentence the Company shall be required to pay the
Holder $1,000. The Holder shall provide the Company written notice indicating
the amounts payable to the Holder in respect of the Buy-In, together with
applicable confirmations and other evidence reasonably requested by the Company.  Nothing herein shall limit a Holder’s right
to pursue any other remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver
certificates representing shares of Common Stock upon exercise of the Warrant
as required pursuant to the terms hereof.

 

vi.                                   No
Fractional Shares or Scrip.  No
fractional shares or scrip representing fractional shares shall be issued upon
the exercise of this Warrant.  As to any
fraction of a share which Holder would otherwise be entitled to purchase upon
such exercise, the Company shall pay a cash adjustment in respect of such final
fraction in an amount equal to such fraction multiplied by the Exercise Price.

 

vii.                                Charges,
Taxes and Expenses.  Issuance of
certificates for Warrant Shares shall be made without charge to the Holder for
any issue or transfer tax or other incidental expense in respect of the
issuance of such certificate, all of which taxes and expenses shall be paid by
the Company, and such certificates shall be issued in the name of the Holder or
in such name or names as may be directed by the Holder; provided, however,
that in the event certificates for Warrant Shares are to be issued in a name
other than the name of the Holder, this Warrant when surrendered for exercise
shall be accompanied by the Assignment Form attached hereto duly executed by
the Holder; and the Company may require, as a condition thereto, the payment of
a sum sufficient to reimburse it for any transfer tax incidental thereto.

 

viii.                             Closing
of Books.  The Company will not close
its stockholder books or records in any manner which prevents the timely
exercise of this Warrant, pursuant to the terms hereof.

 

Section 3.                                            Certain Adjustments.

 

a)                                      Stock
Dividends and Splits. If the Company, at any time while this Warrant is
outstanding: (A) pays a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock (which, for avoidance
of doubt, shall not include any shares of Common Stock issued by the Company
pursuant to this Warrant), (B) subdivides outstanding shares of Common Stock
into a larger number of shares, (C)

 

5

 

combines
(including by way of reverse stock split) outstanding shares of Common Stock
into a smaller number of shares, or (D) issues by reclassification of shares of
the Common Stock any shares of capital stock of the Company, then in each case
the Exercise 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 and the number of
shares issuable upon exercise of this Warrant shall be proportionately adjusted.  Any adjustment made pursuant to this Section
3(a) shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of
a subdivision, combination or re-classification.

 

b)                                     Subsequent
Equity Sales. From the Initial Exercise Date until the three year
anniversary of the Original Issue Date, if the Company or any Subsidiary
thereof, as applicable, at any time while this Warrant is outstanding, shall
offer, sell, grant any option to purchase or offer, sell or grant any right to
reprice its securities, or otherwise dispose of or issue (or announce any
offer, sale, grant or any option to purchase or other disposition) any Common
Stock or Common Stock Equivalents entitling any Person to acquire shares of
Common Stock, at an effective price per share less than the then Exercise Price
(such lower price, the “Base Share Price” and such issuances
collectively, a “Dilutive Issuance”), as adjusted hereunder (if the
holder of the Common Stock or Common Stock Equivalents so issued shall at any
time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights per share which is issued in connection with such
issuance, be entitled to receive shares of Common Stock at an effective price
per share which is less than the Exercise Price, such issuance shall be deemed
to have occurred for less than the Exercise Price), then, the Exercise Price
shall be reduced to equal the Base Share Price and the number of Warrant Shares
issuable hereunder shall be increased such that the aggregate Exercise Price
payable hereunder, after taking into account the decrease in the Exercise
Price, shall be equal to the aggregate Exercise Price prior to such adjustment.
Such adjustment shall be made whenever such Common Stock or Common Stock
Equivalents are issued; provided, however, if the Exercise Price
is adjusted due to the issuance of Common Stock Equivalents and all of such
Common Stock Equivalents expire pursuant to their own terms before they are
exercised, exchanged and/or converted, an upward adjustment will be made such
that the Exercise Price will no longer reflect the issuance of such Common
Stock Equivalents.  The Company shall
notify the Holder in writing, no later than the Trading Day following the
issuance of any Common Stock or Common Stock Equivalents subject to this
section, indicating therein the applicable issuance price, or of applicable
reset price, exchange price, conversion price and other pricing terms (such
notice the “Dilutive Issuance Notice”). 
For purposes of clarification, whether or not the Company provides a
Dilutive Issuance Notice pursuant to this Section 3(b), upon the occurrence of
any Dilutive Issuance, after the date of such Dilutive Issuance the Holder is
entitled to receive a number of Warrant Shares based upon the Base Share Price
regardless of whether the Holder accurately refers to the Base Share Price in
the Notice of Exercise.

 

6

 

c)                                      Pro
Rata Distributions.  If the Company,
at any time prior to the Termination Date, shall distribute to all holders of
Common Stock (and not to Holders of the Warrants) evidences of its indebtedness
or assets or rights or warrants to subscribe for or purchase any security other
than the Common Stock (which shall be subject to Section 3(b)), then in each
such case the Exercise Price shall be adjusted by multiplying the Exercise
Price in effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the VWAP determined as of the record date mentioned above,
and of which the numerator shall be such VWAP on such record date less the then
per share fair market value at such record date of the portion of such assets
or evidence of indebtedness so distributed applicable to one outstanding share
of the Common Stock as determined by the Board of Directors in good faith.  In either case the adjustments shall be
described in a statement provided to the Holders of the portion of assets or
evidences of indebtedness so distributed or such subscription rights applicable
to one share of Common Stock.  Such
adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.

 

d)                                     Fundamental
Transaction. If, at any time while this Warrant is outstanding, (A) the
Company effects any merger or consolidation of the Company with or into another
Person, (B) the Company effects any sale of all or substantially all of its
assets in one or a series of related transactions, (C) any tender offer or
exchange offer (whether by the Company or another Person) is completed pursuant
to which holders of Common Stock are permitted to tender or exchange their
shares for other securities, cash or property, or (D) the Company effects any
reclassification of the Common Stock or any compulsory share exchange pursuant
to which the Common Stock is effectively converted into or exchanged for other
securities, cash or property (in any such case, a “Fundamental Transaction”),
then, upon any subsequent exercise of
this Warrant, the Holder shall have the
right to receive, for each Warrant Share that would have been issuable upon
such exercise absent such Fundamental Transaction, at the option of the Holder, (a) upon exercise of this Warrant, the number
of shares of Common Stock of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and Alternate Consideration
receivable upon or as a result of such reorganization, reclassification,
merger, consolidation or disposition of assets by a Holder of the number of
shares of Common Stock for which this Warrant is exercisable immediately prior
to such event or (b) upon exercise of this Warrant, if the Company is acquired
in an all cash transaction, cash equal to the the cash amount issuable in
respect to one share of Common Stock in such Fundamental Transaction (the
“Alternate Consideration”).  For
purposes of any such exercise, the determination of the Exercise Price shall be
appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the
Exercise Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate
Consideration.  If holders of Common
Stock are given any choice as to the securities, cash or property to be
received in a Fundamental Transaction, then the Holder shall be given the same
choice as to the Alternate Consideration it receives upon any exercise of this
Warrant following such Fundamental Transaction. 
To the extent necessary to effectuate the foregoing provisions, any

 

7

 

successor to the
Company or surviving entity in such Fundamental Transaction shall issue to the
Holder a new warrant consistent with the foregoing provisions and evidencing
the Holder’s right to exercise such warrant into Alternate Consideration. The
terms of any agreement pursuant to which a Fundamental Transaction is effected
shall include terms requiring any such successor or surviving entity to comply
with the provisions of this Section 3(d) and insuring that this Warrant (or any
such replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.

 

e)                                      Exempt
Issuance. Notwithstanding the foregoing, no adjustments, Alternate
Consideration nor notices shall be made, paid or issued under this Section 3 in
respect of an Exempt Issuance.

 

f)                                        Calculations.
All calculations under this Section 3 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be. The number of shares of Common
Stock outstanding at any given time shall not include shares of Common Stock
owned or held by or for the account of the Company, and the description of any
such shares of Common Stock shall be considered on issue or sale of Common  Stock.  For
purposes of this Section 3, the number of shares of Common Stock deemed to be
issued and outstanding as of a given date shall be the sum of the number of
shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

 

g)                                     Voluntary
Adjustment By Company. The Company may at any time during the term of this
Warrant reduce the then current Exercise Price to any amount and for any period
of time deemed appropriate by the Board of Directors of the Company.

 

h)                                     Notice
to Holders.

 

i.                                          Adjustment
to Exercise Price. Whenever the Exercise Price is adjusted pursuant to this
Section 3, the Company shall promptly mail to each Holder a notice setting
forth the Exercise Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment. If the Company issues a
variable rate security, despite the prohibition thereon in the Purchase Agreement,
the Company shall be deemed to have issued Common Stock or Common Stock
Equivalents at the lowest possible conversion or exercise price at which such
securities may be converted or exercised in the case of a Variable Rate
Transaction (as defined in the Purchase Agreement), or the lowest possible
adjustment price in the case of an MFN Transaction (as defined in the Purchase
Agreement.

 

ii.                                       Notice
to Allow Exercise by Holder. If (A) the Company shall declare a dividend
(or any other distribution) on the Common Stock; (B) the Company shall declare
a special nonrecurring cash dividend on or a redemption of the Common Stock;
(C) the Company shall authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of capital stock of
any class or of any

 

8

 

rights;
(D) the approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock, any consolidation or
merger to which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, of any compulsory share
exchange whereby the Common Stock is converted into other securities, cash or
property; (E) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company; then, in
each case, the Company shall cause to be mailed to the Holder at its last
addresses as it shall appear upon the Warrant Register of the Company, at least
20 calendar days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution, redemption, rights or warrants, or
if a record is not to be taken, the date as of which the holders of the Common
Stock of record to be entitled to such dividend, distributions, redemption,
rights or warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share exchange is
expected to become effective or close, and the date as of which it is expected
that holders of the Common Stock of record shall be entitled to exchange their
shares of the Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share
exchange; provided, that the failure to mail such notice or any defect
therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.  The Holder is entitled to exercise this
Warrant during the 20-day period commencing on the date of such notice to the
effective date of the event triggering such notice.

 

Section 4.                                            Transfer of Warrant.

 

a)                                      Transferability.  Subject to compliance with any applicable
securities laws and the conditions set forth in Sections 5(a) and 4(d) hereof
and to the provisions of Section 4.1 of the Purchase Agreement, this Warrant
and all rights hereunder are transferable, in whole or in part, upon surrender
of this Warrant at the principal office of the Company, together with a written
assignment of this Warrant substantially in the form attached hereto duly
executed by the Holder or its agent or attorney and funds sufficient to pay any
transfer taxes payable upon the making of such transfer.  Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Warrant or Warrants in the
name of the assignee or assignees and in the denomination or denominations
specified in such instrument of assignment, and shall issue to the assignor a
new Warrant evidencing the portion of this Warrant not so assigned, and this
Warrant shall promptly be cancelled.  A
Warrant, if properly assigned, may be exercised by a new holder for the
purchase of Warrant Shares without having a new Warrant issued.  The minimum number of Warrant Shares subject
to this Section 4(a) shall be 10,000 per transfer.

 

9

 

b)                                     New
Warrants. This Warrant may be divided or combined with other Warrants upon
presentation hereof at the aforesaid office of the Company, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued, signed by the Holder or its agent or attorney.  Subject to compliance with Section 4(a), as
to any transfer which may be involved in such division or combination, the
Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice.

 

c)                                      Warrant
Register. The Company shall register this Warrant, upon records to be
maintained by the Company for that purpose (the “Warrant Register”), in
the name of the record Holder hereof from time to time.  The Company may deem and treat the registered
Holder of this Warrant as the absolute owner hereof for the purpose of any
exercise hereof or any distribution to the Holder, and for all other purposes,
absent actual notice to the contrary.

 

d)                                     Transfer
Restrictions. If, at the time of the surrender of this Warrant in
connection with any transfer of this Warrant, the transfer of this Warrant
shall not be registered pursuant to an effective registration statement under
the Securities Act and under applicable state securities or blue sky laws, the
Company may require, as a condition of allowing such transfer (i) that the
Holder or transferee of this Warrant, as the case may be, furnish to the
Company a written opinion of counsel reasonably acceptable to the Company (which
opinion shall be in form, substance and scope customary for opinions of counsel
in comparable transactions) to the effect that such transfer may be made
without registration under the Securities Act and under applicable state
securities or blue sky laws, (ii) that the holder or transferee execute and
deliver to the Company an investment letter in form and substance acceptable to
the Company and (iii) that the transferee be an “accredited investor” as
defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8) promulgated under
the Securities Act or a qualified institutional buyer as defined in Rule
144A(a) under the Securities Act.

 

Section 5.                                            Miscellaneous.

 

a)                                      Title
to Warrant.  Prior to the Termination
Date and subject to compliance with applicable laws and Section 4 of this
Warrant, this Warrant and all rights hereunder are transferable, in whole or in
part, at the office or agency of the Company by the Holder in person or by duly
authorized attorney, upon surrender of this Warrant together with the Assignment
Form annexed hereto properly endorsed. 
The transferee shall sign an investment letter in form and substance
reasonably satisfactory to the Company.

 

b)                                     No
Rights as Shareholder Until Exercise. 
This Warrant does not entitle the Holder to any voting rights or other
rights as a shareholder of the Company prior to the exercise hereof.  Upon the surrender of this Warrant and the
payment of the aggregate Exercise Price (or by means of a cashless exercise),
the Warrant Shares so purchased shall be and be deemed to be issued to such
Holder as the record owner of such shares as of the close of business on the
later of the date of such surrender or payment.

 

10

 

c)                                      Loss,
Theft, Destruction or Mutilation of Warrant. The Company covenants that
upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant or any stock certificate
relating to the Warrant Shares, and in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to it (which, in the case of the
Warrant, shall not include the posting of any bond), and upon surrender and
cancellation of such Warrant or stock certificate, if mutilated, the Company
will make and deliver a new Warrant or stock certificate of like tenor and
dated as of such cancellation, in lieu of such Warrant or stock certificate.

 

d)                                     Saturdays,
Sundays, Holidays, etc.  If the last
or appointed day for the taking of any action or the expiration of any right
required or granted herein shall be a Saturday, Sunday or a legal holiday, then
such action may be taken or such right may be exercised on the next succeeding
day not a Saturday, Sunday or legal holiday.

 

e)                                      Authorized
Shares.

 

The
Company covenants that during the period the Warrant is outstanding, it will
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of the Warrant Shares upon the exercise of
any purchase rights under this Warrant. 
The Company further covenants that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates
for the Warrant Shares upon the exercise of the purchase rights under this
Warrant.  The Company will take all such
reasonable action as may be necessary to assure that such Warrant Shares may be
issued as provided herein without violation of any applicable law or
regulation, or of any requirements of the Trading Market upon which the Common
Stock may be listed.

 

Except
and to the extent as waived or consented to by the Holder, the Company shall
not by any action, including, without limitation, amending its certificate of
incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of
this Warrant, but will at all times in good faith assist in the carrying out of
all such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of Holder as set forth in this Warrant
against impairment.  Without limiting the
generality of the foregoing, the Company will (a) not increase the par value of
any Warrant Shares above the amount payable therefor upon such exercise
immediately prior to such increase in par value, (b) take all such action as
may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable Warrant Shares upon the exercise of
this Warrant, and (c) use commercially reasonable efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof as may be necessary to enable the Company to perform its
obligations under this Warrant.

 

11

 

Before
taking any action which would result in an adjustment in the number of Warrant Shares
for which this Warrant is exercisable or in the Exercise Price, the Company
shall obtain all such authorizations or exemptions thereof, or consents
thereto, as may be necessary from any public regulatory body or bodies having
jurisdiction thereof.

 

f)                                        Jurisdiction.
All questions concerning the construction, validity, enforcement and
interpretation of this Warrant shall be determined in accordance with the
provisions of the Purchase Agreement.

 

g)                                     Restrictions.  The Holder acknowledges that the Warrant
Shares acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws.

 

h)                                     Nonwaiver
and Expenses.  No course of dealing
or any delay or failure to exercise any right hereunder on the part of Holder
shall operate as a waiver of such right or otherwise prejudice Holder’s rights,
powers or remedies, notwithstanding the fact that all rights hereunder
terminate on the Termination Date.  If
the Company willfully and knowingly fails to comply with any provision of this
Warrant, which results in any material damages to the Holder, the Company shall
pay to Holder such amounts as shall be sufficient to cover any costs and
expenses including, but not limited to, reasonable attorneys’ fees, including
those of appellate proceedings, incurred by Holder in collecting any amounts
due pursuant hereto or in otherwise enforcing any of its rights, powers or
remedies hereunder.

 

i)                                         Notices.  Any notice, request or other document
required or permitted to be given or delivered to the Holder by the Company
shall be delivered in accordance with the notice provisions of the Purchase
Agreement.

 

j)                                         Limitation
of Liability.  No provision hereof,
in the absence of any affirmative action by Holder to exercise this Warrant or
purchase Warrant Shares, and no enumeration herein of the rights or privileges
of Holder, shall give rise to any liability of Holder for the purchase price of
any Common Stock or as a stockholder of the Company, whether such liability is asserted
by the Company or by creditors of the Company.

 

k)                                      Remedies.  Holder, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Warrant.  The Company agrees that monetary damages
would not be adequate compensation for any loss incurred by reason of a breach
by it of the provisions of this Warrant and hereby agrees to waive the defense
in any action for specific performance that a remedy at law would be adequate.

 

l)                                         Successors
and Assigns.  Subject to applicable
securities laws, this Warrant and the rights and obligations evidenced hereby
shall inure to the benefit of and be binding upon the successors of the Company
and the successors and permitted assigns of Holder.  The provisions of this Warrant are intended
to be for the benefit of all Holders

 

12

 

from time to time
of this Warrant and shall be enforceable by any such Holder or holder of Warrant
Shares.

 

m)                                   Amendment.  This Warrant may be modified or amended or
the provisions hereof waived with the written consent of the Company and the
Holder.

 

n)                                     Severability.  Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.

 

o)                                     Headings.  The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.

 

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

 

13

 

IN WITNESS WHEREOF, the Company has caused this
Warrant to be executed by its officer thereunto duly authorized.

 

 

	
  Dated:  February     ,
  2005

  
	
   

  
	
   

  
	
   

  	
  VISTULA COMMUNICATIONS SERVICES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  

 

14

 

NOTICE OF EXERCISE

 

TO:                            VISTULA COMMUNICATIONS SERVICES, INC.

 

(1)          The
undersigned hereby elects to purchase                   
Warrant Shares of the Company pursuant to the terms of the attached Warrant
(only if exercised in full), and tenders herewith payment of the exercise price
in full, together with all applicable transfer taxes, if any.

 

(2)          Payment
shall take the form of (check applicable box):

 

[  ] in lawful money of the United States; or

 

[ ]
the cancellation of such number of Warrant Shares as is necessary, in
accordance with the formula set forth in subsection 2(c), to exercise this
Warrant with respect to the maximum number of Warrant Shares purchasable
pursuant to the cashless exercise procedure set forth in subsection 2(c).

 

(3)          Please
issue a certificate or certificates representing said Warrant Shares in the
name of the undersigned or in such other name as is specified below:

 

 

 

The Warrant Shares shall
be delivered to the following:

 

 

 

 

 

(4)          Accredited
Investor.  The undersigned is an “accredited
investor” as defined in Regulation D promulgated under the Securities Act of
1933, as amended.

 

[SIGNATURE OF HOLDER]

 

	
  Name of Investing
  Entity:

  	
   

  	
   

  
	
  Signature of Authorized Signatory
  of Investing Entity:

  	
   

  	
   

  
	
  Name of Authorized
  Signatory:

  	
   

  	
   

  
	
  Title of Authorized
  Signatory:

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  
							

 

 

ASSIGNMENT FORM

 

(To assign the foregoing warrant, execute

this form and supply required information. 

Do not use this form to exercise the warrant.)

 

FOR VALUE RECEIVED, the foregoing Warrant and all
rights evidenced thereby are hereby assigned to

 

                                                                                                      
whose address is

 

                                                                                                                                          .

 

 

	
   

  	
  Dated:

  	
   

  	
  , 

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Holder’s
  Signature:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Holder’s
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Signature
  Guaranteed:

  	
   

  	
   

  	
   

  
										

 

NOTE:  The signature to this Assignment Form must
correspond with the name as it appears on the face of the Warrant, without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank or trust company.  Officers of corporations
and those acting in a fiduciary or other representative capacity should file
proper evidence of authority to assign the foregoing Warrant.

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