Document:

exv10w7

Exhibit 10.7

J.P.
MORGAN SECURITIES INC.

270 Park Avenue

New York, New York 10016

BANC OF AMERICA SECURITIES LLC

214 North Tryon Street

Charlotte, North Carolina 28255

WACHOVIA CAPITAL MARKETS, LLC

One Wachovia Center

301 South College Street

Charlotte, North Carolina 28288

June 18, 2008

Lender Processing Services, Inc.

$1,350,000,000 Senior Secured Credit Facilities

$375,000,000 Senior Notes

Fidelity National Information Services, Inc.

601 Riverside Avenue

Jacksonville, FL 32204

Attention: Brent Bickett

Ladies and Gentlemen:

     J.P. Morgan Securities Inc. (“JPMorgan”), Banc of America Securities LLC
(“BAS”) and Wachovia Capital Markets, LLC (“WCM” and, collectively with JPMorgan,
BAS and WCM, “we”, “us” or the “Arrangers”) have been engaged by you to
arrange the senior secured credit facilities (the “Bank Facilities”) referred to above,
which will be comprised of (i) a term loan “A” facility of $700 million bearing interest initially
at LIBOR plus 250 basis points (the “Term A Facility”), (ii) a term loan “B” facility of
$510 million bearing interest at LIBOR plus 250 basis points (the “Term B Facility”) and
(iii) a revolving credit facility of $140 million bearing interest initially at LIBOR plus 250
basis points (the “Revolving Credit Facility”).

     In addition, we note that Lender Processing Services, Inc. has executed a purchase agreement
with the initial purchasers named therein (which include each of the undersigned) under which the
initial purchasers have, subject to the terms and conditions stated therein, severally agreed to
purchase an aggregate of $375 million of 8.125% Senior Notes due 2016 of Lender Processing
Services, Inc.

     We are pleased to confirm that, as of 5:00 p.m. (New York City time) on the date hereof, we
have received commitments (in a form or manner consistent with that customarily provided in
syndicated bank facilities of this type, and subject to satisfactory documentation and the
conditions to borrowing therein) from others, including certain affiliates of the undersigned, for
the full $700 million amount of the Term A Facility, the full $510 million amount of the Term B
Facility and the full $140 million amount of the Revolving Credit Facility, in each case on the
terms set forth above and in the term sheet attached as Exhibit A.

     The indemnification and confidentiality provisions set forth in the engagement letter dated
December 31, 2007, as amended, with respect to the aforementioned Bank Facilities shall apply to
this letter, except that we hereby consent to the submission of this letter to the Securities and
Exchange Commission in connection with its review of the Form 10 relating to the proposed spin-off
of Lender Processing Services, Inc.

 

 

     This Letter is intended to be solely for the benefit of the parties hereto and is not intended
to confer any benefits upon, or create any rights in favor of, any person other than the parties
hereto.

     We are pleased to have been given the opportunity to assist you in connection with this
important financing.

	 	 	 	 	 
	 	Sincerely,

J.P. MORGAN SECURITIES INC.

 	 
	 	By:  	/s/ Stathis Karanikolaidis
 	 
	 	 	Title:  	Vice President 	 
	 
	 	BANC OF AMERICA SECURITIES LLC

 	 
	 	By:  	/s/ John Rote
 	 
	 	 	Title: Managing Director 	 
	 	 	 	 
	 
	 	WACHOVIA CAPITAL MARKETS, LLC

 	 
	 	By:  	/s/ Rit Amin
 	 
	 	 	Title: Director 	 
	 	 	 	 
	 

Acknowledged and agreed to as of

the date first written above:

FIDELITY NATIONAL INFORMATION SERVICES, INC.

			
	By:	 	/s/ Brent Bickett                    

Title: Executive Vice President

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EXHIBIT A

LENDER PROCESSING SERVICES, INC.

$1,350,000,000 Senior Secured Credit Facilities

Summary of Principal Terms and Conditions

	 	 	 	 	 	 	 
	I.

	 	Parties	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Borrower:	 	Lender Processing Services, Inc. (the “Borrower”), and prior to the
Spinoff (as defined below), a wholly-owned subsidiary of Fidelity National
Information Services, Inc. (the “Parent”).
	 
	 	 	 	 	 	 
	 	 	Transactions:	 	The Parent will contribute (the “Contribution”) to the Borrower
substantially all of the assets, liabilities and operations of the Acquired Business
(as defined below) in exchange for equity interests in the Borrower and certain
indebtedness of the Borrower (consisting of (a) $700,000,000 aggregate principal
amount of Term A Loans (as defined below); (b) $510,000,000 aggregate principal
amount of Term B Loans (as defined below); and (c) $375,000,000 aggregate principal
amount of senior unsecured notes due 2016 issued in a public offering or a Rule 144A
offering (the “Senior Notes”). The Term A Loans, the Term B Loans and the
Senior Notes are referred to collectively herein as the “Exchange Debt”).
Following the Contribution, the Parent will distribute all of the issued and
outstanding shares of the Borrower’s common stock on a pro rata basis to holders of
the Parent’s common stock (the “Spinoff”). In connection with the Spinoff,
the Parent will exchange 100% of the Exchange Debt for all of the outstanding
principal of the “Tranche B Term Loans” issued under the Parent’s existing credit
facility (the “Existing Tranche B Loans”) (all of which will be owned at that
time by JPMCB, Bank of America and Wachovia Bank (each, as defined below) or their
respective affiliates) through a debt-for-debt exchange that is intended to be
tax-free to the Parent (the “Exchange”), following which (A) the Existing
Tranche B Loans acquired by the Parent in the Exchange will be retired, (B) the
Exchange Debt acquired by JPMCB, Bank of America and Wachovia Bank (or their
respective affiliates) in the Exchange will be distributed (i) with respect to

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	 	 	 	 	the Term A Loans and the Term B Loans, to the Lenders
(as defined below) in the syndication thereof and (ii)
with respect to the Senior Notes, to qualified
purchasers in a private or public offering thereof and
(C) the applicable Lenders will provide the Revolving
Credit Facility (as defined below) to the Borrower.
	 
	 	 	 	 	 	 
	 	 	 	 	The Contribution, the Spinoff, the Exchange and the
financing transactions contemplated above are referred
to as the “Transactions”.
	 
	 	 	 	 	 	 
	 	 	 	 	“Acquired Business” means the Lender
Processing Services segment of the Parent, which
provides mortgage-related processing services, and is
transferred to the Borrower in connection with the
Contribution.
	 
	 	 	 	 	 	 
	 	 	Guarantors:	 	The Senior Credit Facilities (as defined below) will be guaranteed (each, a
“Guarantee”; and the providers of Guarantees collectively, the
“Guarantors” and, together with the Borrower, the “Loan Parties”) by
a sufficient number of the Borrower’s domestic subsidiaries to constitute at least
95% of the consolidated EBITDA and at least 95% of the consolidated total assets of
the Available Domestic Entities (as defined below). The “Available Domestic
Entities” shall mean all of the direct and indirect domestic Subsidiaries of the
Borrower other than the following: (i) any regulated insurance subsidiary, (ii) any
direct or indirect domestic subsidiary of any foreign subsidiary of the Borrower,
(iii) any Unrestricted Subsidiary (defined below) and (iv) such other entities as may
be set forth in the definitive loan documentation.
	 
	 	 	 	 	 	 
	 	 	 	 	“Unrestricted Subsidiary” means any subsidiary
of the Borrower designated by the Borrower as an
Unrestricted Subsidiary in accordance with limitations
to be agreed; provided that immediately after giving
effect to such designation, the Loan Parties shall be
in compliance, on a pro forma basis, with all
covenants, including the financial covenants.
	 
	 	 	 	 	 	 
	 	 	 	 	“Restricted Subsidiary” means any subsidiary
of the Borrower other than any Unrestricted
Subsidiary.

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	 	 	Joint Lead Arrangers and Joint Bookrunners:	 	J.P. Morgan Securities
Inc., Banc of America Securities LLC and Wachovia Capital Markets, LLC (collectively, in such
capacity, the “Lead Arrangers”).
	 
	 	 	 	 	 	 
	 	 	Administrative and Collateral Agent:	 	JPMorgan Chase Bank,
N.A. (“JPMCB”) (in such capacity, the “Administrative Agent”).
	 
	 	 	 	 	 	 
	 	 	Syndication Agents:	 	Bank of America, N.A. (“Bank of America”) and Wachovia Bank,
National Association (“Wachovia Bank” and, together with Bank of America in
such capacity, the “Syndication Agents”).
	 
	 	 	 	 	 	 
	 	 	Lenders:	 	A syndicate of banks, financial institutions and other entities, including JPMCB,
Bank of America and Wachovia, arranged by the Lead Arrangers and reasonably
acceptable to the Borrower (collectively, the “Lenders”).
	 
	 	 	 	 	 	 
	II.

	 	Senior Credit Facilities	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Type and Amount of Facilities:	 	An aggregate principal
amount of up to $1,350,000,000 will be available through the following facilities (collectively, the “Senior Credit

Facilities”):
	 
	 	 	 	 	 	 
	 	 	 	 	Term A Facility: a $700,000,000 5-year term
loan facility.
	 
	 	 	 	 	 	 
	 	 	 	 	Term B Facility: a $510,000,000 6-year term
loan facility (together with the Term A Facility, the
“Term Facilities”).
	 
	 	 	 	 	 	 
	 	 	 	 	Revolving Credit Facility: a $140,000,000
revolving credit facility which will include a
$25,000,000 sub-facility for the issuance of letters
of credit (each a “Letter of Credit”) and a
$20,000,000 sub-facility for swingline loans (each, a
“Swingline Loan”). Letters of Credit will be
initially issued by JPMCB (in such capacity, the
“Issuing Bank”), and each of the Lenders under
the Revolving Credit Facility will purchase an
irrevocable and unconditional participation in each
Letter of Credit and each Swingline Loan. An amount
to be determined of the Revolving Credit Facility may
be drawn on the Closing Date.

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	 	 	Maturity:	 	The Term A Facility will mature and be payable in full on the 5th
anniversary of the date on which the note under the Term A Facility is issued to the
initial holder of such note (the “Closing Date”).
	 
	 	 	 	 	 	 
	 	 	 	 	The Term B Facility will mature and be payable in full
on the 6th anniversary of the Closing Date.
	 
	 	 	 	 	 	 
	 	 	 	 	The Revolving Credit Facility shall terminate and all
amounts outstanding thereunder shall be due and
payable in full on the 5th anniversary of
the Closing Date.
	 
	 	 	 	 	 	 
	 	 	Purpose:	 	The loans under the Term A Facility (the “Term A Loans”) and the loans
under the Term B Facility (the “Term B Loans”) (collectively, the “Term
Loans”) shall be used, together with the Senior Notes, to effectuate the Exchange
for the Existing Tranche B Loans.
	 
	 	 	 	 	 	 
	 	 	 	 	The proceeds of the Revolving Credit Facility shall be
used (i) to pay fees and expenses incurred in
connection with the Transactions and (ii) to provide
ongoing working capital and for other general
corporate purposes of the Borrower and its
subsidiaries.
	 
	 	 	 	 	 	 
	III.	 	Security	 	Each Loan Party shall grant the Administrative Agent and the Lenders valid
and perfected first priority (subject to certain exceptions to be set forth in the loan
documentation) liens and security interests in all of the following (collectively, the
“Collateral”):
	 
	 	 	 	 	 	 
	 

	 	 	 	 	 	(a) all present and future shares of capital
stock of (or other ownership or profit
interests in) each of the present and future
subsidiaries of such Loan Party (limited in
the case of foreign subsidiaries, to 65% of
the voting stock of each first-tier foreign
subsidiary);
	 
	 	 	 	 	 	 
	 

	 	 	 	 	 	(b) substantially all of the present and
future property and assets, real and
personal, of such Loan Party, including, but
not limited to, machinery and equipment,
inventory and other goods, accounts
receivable (including intercompany debt),
material fee-owned

6

 

	 	 	 	 	 	 	 
	 

	 	 	 	 	 	real estate (other than the corporate campus
in Jacksonville, Florida), fixtures, general
intangibles, license rights, patents,
trademarks, trade names, copyrights, chattel
paper, insurance proceeds, contract rights,
documents and instruments; and
	 
	 	 	 	 	 	 
	 

	 	 	 	 	 	(c) all proceeds and products of the property
and assets described in clauses (a) and (b)
above.
	 
	 	 	 	 	 	 
	 	 	 	 	The Collateral shall ratably secure the relevant Loan
Party’s obligations in respect of (i) the Senior
Credit Facilities and (ii) any swap agreements or cash
management arrangements entered into with a Lender or
any affiliate of any Lender. Notwithstanding the
foregoing, the Collateral shall exclude those assets
as to which the Administrative Agent shall reasonably
determine that the costs of obtaining a security
interest are unreasonably excessive in relation to the
benefit to the Lenders of the security afforded
thereby.
	 
	 	 	 	 	 	 
	IV.

	 	Certain Payment Provisions	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Fees and Interest Rates:	 	As set forth on
Annex I.
	 
	 	 	 	 	 	 
	 	 	Amortization:	 	Term A Facility: The Term A Facility will be subject to quarterly
amortization of principal (in equal installments), with 5.00% of the initial
aggregate advances to be payable on each quarterly date prior to the maturity date of
such Term A Facility (commencing with December 2008), and the remaining initial
aggregate advances to be payable at the maturity of the Term A Facility.
	 
	 	 	 	 	 	 
	 	 	 	 	Term B Facility: The Term B Facility will be
subject to quarterly amortization of principal (in
equal installments), with 0.25% of the initial
aggregate advances to be payable on each quarterly
date prior to the maturity date of such Term B
Facility (commencing with September 2008), and the
remaining initial aggregate advances to be payable at
the maturity of the Term B Facility.

7

 

	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	The amortization of the advances of the Term
Facilities described above is collectively referred to
as the “Scheduled Amortization”.
	 
	 	 	 	 	 	 
	 	 	Mandatory Prepayments:	 	In addition to scheduled amortization payments described above, the
following amounts (each a “Mandatory Prepayment Amount”) will be applied to
repay the Term Loans:
	 
	 	 	 	 	 	 
	 	 	 	 	1. 100% of the net proceeds from the issuance of
certain indebtedness of the Borrower and the
Restricted Subsidiaries;
	 
	 	 	 	 	 	 
	 	 	 	 	2. 100% of the net proceeds from asset sales by, and
of the proceeds of casualty insurance, condemnation
awards and similar recoveries received by, the
Borrower and the Restricted Subsidiaries, in each case
subject to exceptions and reinvestment provisions to
be agreed; and
	 
	 	 	 	 	 	 
	 	 	 	 	3. 50% (with step-down(s) to be agreed) of excess cash
flow (to be defined) in excess of an amount to be
agreed for each fiscal year of the Borrower
(commencing with the first full fiscal year ended
after the Closing Date), subject to a
dollar-for-dollar reduction for any voluntary
prepayments of loans under the Senior Credit
Facilities made in cash during such fiscal year
(provided that, in the case of the Revolving Credit
Facility, any such prepayment is accompanied by a
corresponding permanent reduction of the commitments
thereunder).
	 
	 	 	 	 	 	 
	 	 	 	 	The above mandatory prepayments will be applied
ratably to the Scheduled Amortization of the Term
Loans on a pro rata basis in direct order of maturity.
	 
	 	 	 	 	 	 
	 	 	Optional Prepayments and Commitment Reductions:	 	Subject to the
immediately succeeding paragraph, the Senior Credit Facilities may be prepaid by the Borrower without
premium or penalty (other than with respect to
breakage cost of any LIBOR loan) in customary minimum
amounts to be agreed upon, and such optional
prepayments of Senior Credit Facilities will be
applied as directed by the Borrower. The unutilized
portion of any commitment under the Revolving Credit
Facility may be reduced or
terminated by the Borrower at any time without
penalty.

8

 

	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	Notwithstanding anything herein to the contrary, all
optional prepayments of the Term B Loans effected on
or prior to the first anniversary of the Closing Date
with the proceeds of certain new term loans having an
interest rate spread that is less than the Term B
Loans shall be accompanied by a prepayment fee equal
to 1% of the aggregate principal amount of such
prepayments.
	 
	 	 	 	 	 	 
	V.

	 	Conditions	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Initial Conditions:	 	The initial availability of the Senior Credit Facilities shall be
conditioned upon satisfaction or waiver of the conditions precedent set forth in
Annex II hereto.
	 
	 	 	 	 	 	 
	 	 	On-Going Conditions:	 	The making of each extension of credit shall be conditioned upon (a)
the accuracy in all material respects of all representations and warranties in the
Credit Documentation (as defined in Annex II) and (b) there being no default or event
of default in existence at the time of, or after giving effect to the making of, such
extension of credit.
	 
	 	 	 	 	 	 
	VI.	 	Certain Documentation Matters	 	The Credit
Documentation shall contain representations, warranties, covenants and events of default customary for financings of
this type and other terms deemed appropriate by the Lenders, including, without
limitation:
	 
	 	 	 	 	 	 
	 	 	Representations and Warranties:	 	(i) Corporate
status; (ii) corporate power and authority, enforceability; (iii) no violation of law, material contracts or
organizational documents; (iv) no material litigation; (v) accuracy and completeness
of specified financial statements and other information and no material adverse
change; (vi) no required governmental, regulatory or third party approvals or
consents; (vii) use of proceeds/compliance with margin regulations; (viii) valid
title to property and assets, free and clear of liens, charges and other
encumbrances; (ix) status under Investment Company Act; (x) ERISA matters; (xi)

9

 

	 	 	 	 	 	 	 
	 	 	 	 	environmental matters; (xii) perfected liens, security
interests and charges; (xiii) solvency at closing;
(xiv) tax status and payment of taxes; and (xv)
enforceability of Transaction Documents (as defined in
Annex II).
	 
	 	 	 	 	 	 
	 	 	Affirmative Covenants:	 	(i) Compliance with laws and regulations (including, without
limitation, ERISA and environmental laws); (ii) payment of taxes and other similar
obligations; (iii) maintenance of insurance; (iv) preservation of corporate
existence, rights (charter and statutory), franchises, permits, licenses and
approvals; (v) visitation and inspection rights; (vi) keeping of proper books to
allow financial statements to be prepared in accordance with generally accepted
accounting principles; (vii) maintenance of properties; (viii) use of proceeds; (ix)
designation of subsidiaries; (x) further assurances as to perfection and priority of
security interests, additional guarantees and additional collateral; and (xi)
customary financial and other reporting requirements (including, without limitation,
audited annual financial statements within 90 days of year-end and quarterly
unaudited financial statements within 45 days of quarter-end, notices of defaults,
compliance certificates, annual forecasts, notices of material litigation and
proceedings, material environmental actions and liabilities and material ERISA events
and liabilities, reports to shareholders, and other business and financial
information as any Lender shall reasonably request through the Administrative Agent).
	 
	 	 	 	 	 	 
	 	 	Financial Covenants:	 	(With definitions and levels to be agreed upon, and with compliance
tested beginning with the fiscal quarter of the Borrower ended September 30, 2008):
	 
	 	 	 	 	 	 
	 

	 	 	 	•
	 	Minimum Interest Coverage; and
	 
	 	 	 	 	 	 
	 

	 	 	 	•
	 	Maximum Total Leverage.
	 
	 	 	 	 	 	 
	 	 	 	 	All of the financial covenants will be calculated on a
consolidated basis and for each consecutive four
fiscal quarter period, except that during the first
year following the Closing Date the measurement of net
cash interest expense shall
be made for the period of time since the Closing Date
and annualized.

10

 

	 	 	 	 	 	 	 
	 	 	Negative Covenants:	 	Restrictions on (i) liens; (ii) debt (including guarantee
obligations); (iii) mergers and consolidations; (iv) sales, transfers and other
dispositions of property and assets; (v) loans, acquisitions, joint ventures and
other investments; (vi) in the case of the Borrower, dividends and other
distributions to, and redemptions and repurchases from, equity holders; (vii)
prepaying, redeeming or repurchasing certain debt; (viii) negative pledge clauses and
clauses restricting subsidiary distributions or intercompany asset transfers; (ix)
material changes in the nature of business; and (x) transactions with affiliates.
	 
	 	 	 	 	 	 
	 	 	Events of Default:	 	(i) Nonpayment of principal when due and nonpayment of interest, fees
or other amounts after a grace period to be agreed upon, (ii) any representation or
warranty proving to have been materially incorrect when made or confirmed; (iii)
failure to perform or observe covenants (subject, in the case of certain affirmative
covenants, to a grace period to be agreed upon); (iv) cross-defaults to other
indebtedness in an amount to be agreed; (v) bankruptcy and insolvency events (with
grace period for involuntary proceedings); (vi) judgment defaults in an amount to be
agreed; (vii) impairment of loan documentation or of security, or the assertion of
such impairment, in writing, by any Loan Party; (viii) change of control (to be
defined); and (ix) customary ERISA defaults.
	 
	 	 	 	 	 	 
	 	 	Voting:	 	Amendments and waivers with respect to the Credit Documentation shall require the
approval of Lenders holding more than 50% of the aggregate amount of outstanding
loans and letters of credit and unused commitments under the Senior Credit Facilities
(the “Required Lenders”), except that (a) the consent of each Lender affected
thereby shall be required with respect to (i) increases in commitment amounts, (ii)
reductions in the amount or extensions of the scheduled date of amortization or final
maturity and (iii) reductions in the rate of interest or any fee or extensions of any
due date thereof and (b) the consent of 100% of the Lenders shall be

11

 

	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	required with respect to (i) modifications to any of
the voting percentages and (ii) release of all or
substantially all of the Collateral or value of the
Guarantees.
	 
	 	 	 	 	 	 
	 	 	 	 	Notwithstanding the foregoing, if any amendment or
waiver that requires the unanimous consent of the
Lenders is agreed to by the Required Lenders, the
Borrower shall have the right to substitute any
non-consenting Lender by having its loans and
commitments assigned, at par, to one or more other
institutions, subject to the assignment provisions.
Notwithstanding the foregoing sentence, in connection
with any amendment effected on or prior to the first
anniversary of the Closing Date that reduces or could
have the effect of reducing the interest rate spread
on the Term B Loans, the Borrower shall pay a fee to
each Term B Lender (whether or not such Lender
consents to such amendment) equal to 1% of such
Lender’s Term B Loans outstanding on the effective
date of such amendment.
	 
	 	 	 	 	 	 
	 

	 	Assignments and	 	 	 	 
	 	 	Participations:	 	The Lenders shall be permitted to assign all or a portion of their loans
and commitments with the consent, not to be unreasonably withheld, of (a) the
Borrower, unless (i) the assignee is a Lender, an affiliate of a Lender or an
approved fund or (ii) a payment or bankruptcy Event of Default has occurred and is
continuing, (b) in the case of the Term Facilities, the Administrative Agent, unless
the assignee is a Lender, an affiliate of a Lender or an approved fund and (c) the
case of the Revolving Credit Facility, the Administrative Agent, the Issuing Bank and
the Swing Line Lender. In the case of partial assignments (other than to another
Lender, to an affiliate of a Lender or an approved fund), the minimum assignment
amount shall be $1 million (in the case of the Term Facilities) and $5 million (in
the case of the Revolving Credit Facility), unless otherwise agreed by the Borrower
and the Administrative Agent.
	 
	 	 	 	 	 	 
	 	 	 	 	The Lenders shall also be permitted to sell
participations in their Loans and commitments.
Participants shall have customary voting rights with
respect to matters requiring unanimous consent of the
Lenders, and the same benefits as
the Lenders with respect to yield protection and
increased cost provisions.

12

 

	 	 	 	 	 	 	 
	 	 	Yield Protection:	 	The Credit Documentation shall contain customary provisions
(a) protecting the Lenders against increased costs or loss of yield resulting from
changes in reserve, tax, capital adequacy and other requirements of law and from the
imposition of or changes in withholding or other taxes and (b) indemnifying the
Lenders for “breakage costs” incurred in connection with, among other things, any
prepayment of a Eurodollar Loan (as defined in Annex I) on a day other than the last
day of an interest period with respect thereto.
	 
	 	 	 	 	 	 
	 

	 	Expenses and	 	 	 	 
	 	 	Indemnifications:	 	If the Closing Date occurs, the Borrowers will pay all reasonable
out-of-pocket costs and expenses of the Administrative Agent and each Lead Arranger
associated with the syndication of the Senior Credit Facilities and the preparation,
administration and enforcement of all loan documentation, including, without
limitation, the reasonable legal fees and expenses of Davis Polk & Wardwell, counsel
to the Lead Arrangers and Administrative Agent. The Borrowers will also pay the
reasonable out-of-pocket expenses of each Lender in connection with the enforcement
of any of the loan documentation related to the Senior Credit Facilities (including,
without limitation, reasonable fees and expenses of one outside counsel to the
Administrative Agent and the Lenders).
	 
	 	 	 	 	 	 
	 

	 	Governing Law and	 	 	 	 
	 	 	Non-Exclusive Forum:	 	State of New York.
	 
	 	 	 	 	 	 
	 

	 	Counsel to the	 	 	 	 
	 

	 	Administrative Agent	 	 	 	 
	 	 	and the Lead Arrangers:	 	Davis Polk & Wardwell.

13

 

Annex I

Interest

	 	 	 	 	 
	Interest Rate Options:	 	The Borrower may elect that the Loans (other than

Swingline Loans) comprising each borrowing bear

interest at a rate per annum equal to:
	 
	 	 	 	 
	 

	 	 	 	the ABR plus the Applicable Margin; or
	 
	 	 	 	 
	 

	 	 	 	the Adjusted LIBO Rate plus the Applicable Margin.
	 
	 	 	 	 
	 	 	As used herein:
	 
	 	 	 	 
	 	 	“ABR” means the higher of (i) the rate of interest
publicly announced by JPMCB as its prime rate in
effect at its principal office in New York City
(the “Prime Rate”) and (ii) the federal funds
effective rate from time to time plus 0.5%.
	 
	 	 	 	 
	 	 	“Adjusted LIBO
Rate” means the LIBO Rate, as
adjusted for statutory reserve requirements for
eurocurrency liabilities.
	 
	 	 	 	 
	 	 	“Applicable
Margin” means:
	 
	 	 	 	 
	 	 	(a) with respect to the Term B Facility, (i) 2.50% per annum in
the case of Eurodollar Loans (as defined below) and (ii) 1.50%
per annum in the case of ABR Loans (as defined below); and
	 
	 	 	 	 
	 	 	(b) with respect to (i) the Term A Facility and (ii) the
Revolving Credit Facility, (A) until the 6-month anniversary of
the Closing Date, (1) 2.50% per annum in the case of Eurodollar
Loans and (2) 1.50% per annum in the case of ABR Loans and (B)
thereafter, a percentage per annum to be determined in
accordance with a leverage ratio-based pricing grid to be
agreed.
	 
	 	 	 	 
	 	 	“LIBO Rate” means the rate at which eurodollar deposits
in the London interbank market for the applicable interest
period are quoted on the applicable Reuters screen.

14

 

	 	 	 	 	 
	 
	 	 	 	 
	Interest Payment Dates:	 	In the case of Loans bearing interest based upon
the ABR (“ABR Loans”), quarterly in arrears.
	 
	 	 	 	 
	 	 	In the case of Loans bearing interest based upon
the Adjusted LIBO Rate (“Eurodollar Loans”), on
the last day of each relevant interest period and,
in the case of any interest period longer than
three months, on each successive date three months
after the first day of such interest period.
	 
	 	 	 	 
	Default Rate:	 	Any overdue amounts (regarding which all
applicable grace periods have expired) under the
Senior Credit Facilities shall, at the election of
the Required Lenders or the Administrative Agent,
bear interest at the rate that is 2% above the
rate otherwise applicable thereto (in the case of
overdue principal) and 2% above the rate
applicable to ABR Loans (in the case of all other
overdue amounts) (the “Default Rate”). In
addition, after the occurrence of any bankruptcy
Event of Default, all overdue amounts (regarding
which all applicable grace periods have expired)
under the Senior Credit Facilities shall
automatically bear interest at the Default Rate.
	 
	 	 	 	 
	Rate and Fee Basis:	 	All per annum rates shall be calculated on the
basis of a year of 360 days (or 365/366 days, in
the case of ABR Loans the interest rate payable on
which is then based on the Prime Rate) for actual
days elapsed.
	 
	 	 	 	 
	Commitment Fee:	 	Commencing on the Closing Date, a commitment fee
equal to 0.50% per annum (calculated on a 360-day
basis) shall be payable on the unused portions of
the Revolving Credit Facility, such fee to be
payable quarterly in arrears and on the date of
termination or expiration of the commitments. The
commitment fee rate will be subject to step-downs
to be determined in accordance with a leverage
ratio-based pricing grid to be agreed, commencing
with the 6-month anniversary of the Closing Date.
	 
	 	 	 	 
	Letter of Credit Fees:	 	Letter of Credit fees equal to the Applicable
Margin from time to time on Revolving Credit
Eurodollar Loans on a per annum basis will be
payable quarterly in arrears and shared
proportionately by the Lenders under the Revolving
Credit Facility. In addition, a fronting fee to
be agreed will be payable to the Issuing Bank for
its own account. Both the Letter of Credit fees
and the fronting fees will be calculated on the
amount available to be drawn under each
outstanding Letter of Credit.

15

 

Annex II

Summary of Initial Conditions Precedent

The availability of the Senior Credit Facilities will be subject to the satisfaction or waiver of
the following conditions precedent:

	(a)	 	The Loan Parties shall have executed and delivered definitive financing documentation with
respect to the Senior Credit Facilities consistent with the provisions with this Term Sheet
reasonably satisfactory to the Lenders and the Borrower (the “Credit Documentation”).
	 
	(b)	 	The final terms and conditions of each aspect of the Transactions, including without
limitation, all tax aspects thereof, shall be consistent in all material respects with the
terms set forth in the contribution and distribution agreement between the Borrower and the
Parent (the “Distribution Agreement”) and the information set forth in the Form 10. The Lead
Arrangers shall be reasonably satisfied with the terms and conditions of (A) the Distribution
Agreement and any other contribution and separation agreements and other documents relating to
the Contribution, the Exchange and the Spinoff (including as to the allocation of
liabilities), (B) the documentation relating to the establishment of the Borrower, (C) the
indenture for the Senior Notes and all other documents evidencing or governing the Senior
Notes or guarantees thereof, and (D) all other agreements, instruments and documents relating
to the Transactions (the agreements, instruments and documents referred to clauses (A) through
(D), collectively, the “Transaction Documents”). The Transaction Documents shall not have
been altered, amended or otherwise changed or supplemented or any condition therein waived, in
each case in a manner that is materially adverse to the interests of the Lenders, without the
prior written consent of the Lead Arrangers. The Contribution shall have been consummated,
and the Lead Arrangers shall be reasonably satisfied that the Spinoff and the Exchange will be
consummated substantially contemporaneously with each other, in each case substantially in
accordance with the terms of the applicable Transaction Documents and applicable law and
regulatory approvals. The Senior Notes shall have been (or substantially contemporaneously
with the closing of the Transactions shall be) issued by the Borrower in an aggregate
principal amount that together with the aggregate principal amount of the Term Facilities
shall equal $1,585,000,000.
	 
	(c)	 	There shall not have occurred between December 31, 2007 and the Closing Date any event,
occurrence, change, state of circumstances or condition which, individually or in the
aggregate has had or could reasonably be expected to (i) have a material adverse effect on the
business, assets, liabilities, results of operations or financial position of (A) the Borrower
and its subsidiaries taken as a whole or (B) the Acquired Business or (ii) materially and
adversely affect (x) the ability of the Borrower to perform its obligations under the
applicable loan documentation or (y) the rights and remedies of the applicable lenders under
such loan documentation.

16

 

	(d)	 	Completion of all necessary searches, filings and recordations in connection with the liens
and security interests in the Collateral; and receipt of evidence reasonably satisfactory to
the Administrative Agent regarding maintenance of acceptable insurance (including the naming
of the Administrative Agent as loss payee, if requested by it).
	 
	(e)	 	The Lenders shall have received customary legal opinions, a solvency certificate from the
chief financial officer of the Borrower (after giving effect to the Transactions and the
incurrence of indebtedness relating thereto) and customary certificates, resolutions and other
closing documents, all reasonably satisfactory to the Lead Arrangers.
	 
	(f)	 	The Lenders shall have received (i) audited consolidated financial statements of the Borrower
for the fiscal year ended December 31, 2007 and (ii) unaudited interim consolidated financial
statements of the Borrower for each subsequent fiscal quarter ending at least 45 days prior to
the Closing Date. The Lenders shall have received pro forma consolidated financial statements
as to the Borrower and its subsidiaries, and forecasts of balance sheets, income statements
and cash flow statements on a quarterly basis for the first year following the Closing Date
and on an annual basis for each year thereafter during the term of the Senior Credit
Facilities.
	 
	(g)	 	All accrued fees and expenses of the Administrative Agent and the Lead Arrangers (including
the fees and expenses of counsel for the Administrative Agent and the Lead Arranger) and all
accrued fees of the Lenders shall have been paid.
	 
	(h)	 	(i) The accuracy in all material respects of all representations and warranties in the Credit
Documentation and (ii) there being no default or event of default in existence at the time of,
or after giving effect to, the making of the Term Loans or any extension of credit under the
Revolving Credit Facility on the Closing Date.

17exv4w1

Exhibit
4.1

FORM OF DEBENTURE

     The indebtedness and other obligations of the Company and its subsidiaries evidenced by this
Debenture owed to the Holder are junior and subordinate to the indebtedness and other obligations
of the Company and its subsidiaries in accordance with the provisions of the Intercreditor and
Subordination Agreement dated as of June 18, 2008, among JPMorgan Chase Bank, N.A., as Senior
Agent, Whitebox Advisors, LLC, as Subordinated Noteholder Representative, the Company and certain
of its affiliates, as amended from time to time.

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES
INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD
PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY
BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT
SECURED BY THE SECURITIES.

Original Issue Date: June 18, 2008

Original Conversion Price (subject to adjustment herein): $6.50

$                    

10.75% SECURED CONVERTIBLE DEBENTURE

DUE JUNE 18, 2013

     THIS 10.75% SECURED CONVERTIBLE DEBENTURE is one of a series of duly authorized and validly
issued 10.75% Secured Convertible Debentures of Teton Energy Corporation, a Delaware corporation
(the “Company”), having its principal place of business at 410 17th Street,
Suite 1850, Denver, Colorado, 80202, designated as its 10.75% Secured Convertible Debenture due
June 2013 (this debenture, the “Debenture” and, collectively with the other debentures of
such series, the “Debentures”).

     FOR VALUE RECEIVED, the Company promises to pay to                                          or its
registered assigns (the “Holder”), or shall have paid pursuant to the terms hereunder, the
principal sum of $                     on June 18, 2013 (the “Maturity Date”) or such earlier date
as this Debenture is required or permitted to be repaid

1

 

as provided hereunder, 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 shall have
the meanings set forth in the Purchase Agreement and (b) the following terms shall have the
following meanings:

     “Additional Shares” shall have the meaning set forth in Section 5(f).

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

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

     “Beneficial Ownership Limitation” shall have the meaning set forth in Section
4(c).

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

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

     “Change of Control Date” shall have the meaning set forth in Section 5(f).

2

 

     “Change of Control Notice” shall have the meaning set forth in Section 5(f).

     “Change of Control Notice Date” shall have the meaning set forth in Section
5(f).

     “Change of Control Period” shall have the meaning set forth in Section 5(f).

     “Change of Control Redemption” shall have the meaning set forth in Section
5(f).

     “Change of Control Redemption Date” shall have the meaning set forth in Section
5(f).

     “Change of Control Redemption Notice” shall have the meaning set forth in
Section 5(f).

     “Change of Control Redemption Price” shall have the meaning set forth in
Section 5(f).

     “Change of Control Transaction” means the occurrence after the date hereof of
any of (a) an acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control
(whether through legal or beneficial ownership of capital stock of the Company, by contract
or otherwise) of in excess of 40% of the voting securities of the Company (other than by
means of conversion or exercise of the Debentures and the Securities issued together with
the Debentures), (b) the Company merges into or consolidates with any other Person, or any
Person merges into or consolidates with the Company and, after giving effect to such
transaction, the stockholders of the Company immediately prior to such transaction own less
than 60% of the aggregate voting power of the Company or the successor entity of such
transaction, (c) the Company sells or transfers all or substantially all of its assets to
another Person and the stockholders of the Company immediately prior to such transaction own
less than 60% of the aggregate voting power of the acquiring entity immediately after the
transaction, (d) a replacement at one time or within a three year period of more than
one-half of the members of the 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 (e) the execution by the Company of an
agreement to which the Company is a party or by which it is bound, providing for any of the
events set forth in clauses (a) through (d) above.

     “Company Optional Redemption” shall have the meaning set forth in Section 6(a).

3

 

     “Company Optional Redemption Amount” means the sum of (a) 100% of the then
outstanding principal amount of the Debenture, (b) accrued but unpaid interest in respect of
the Debenture, (c) all liquidated damages and other amounts due, if any, in respect of the
Debenture, and (d) any Interest Make-Whole.

     “Company Optional Redemption Date” shall have the meaning set forth in Section
6(a).

     “Company Optional Redemption Notice” shall have the meaning set forth in
Section 6(a).

     “Company Optional Redemption Notice Date” shall have the meaning set forth in
Section 6(a).

     “Company Optional Redemption Period” shall have the meaning set forth in
Section 6(a).

     “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 Schedule” means the Conversion Schedule in the form of Schedule
1 attached hereto.

     “Conversion Shares” means, collectively, the shares of Common Stock issued or
issuable upon conversion of this Debenture in accordance with the terms hereof, including
without limitation shares of Common Stock issued or issuable, if any, as Make Whole Interest
and any Additional Shares.

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

     “Equity Conditions” means, during the period in question, (a) the Company shall
have duly honored all conversions and redemptions scheduled to occur or occurring by virtue
of one or more Notices of Conversion of the Holder, if any, (b) the Company shall have paid
all liquidated damages and other amounts owing to the Holder in respect of this Debenture,
(c) there is an effective Registration Statement pursuant to which the Holder is permitted
to utilize the prospectus thereunder to resell all of the shares of Common Stock issuable
pursuant to the Transaction Documents (and the Company believes, in good faith, that such
effectiveness will continue uninterrupted for the foreseeable future), as determined by
outside counsel to the Company pursuant to a written opinion letter to such effect,
addressed and acceptable to the Transfer Agent and the Holder, (d) the Common Stock is
trading on a Trading Market and all of the shares issuable pursuant to the Transaction
Documents are listed or quoted for trading on such Trading Market (and the Company believes,
in good faith, that trading of the Common Stock on a Trading

4

 

Market will continue uninterrupted for the foreseeable future), (e) 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
(disregarding any limitation on issuance or conversion under such documents), (f) there is
no existing Event of Default and no existing event which, with the passage of time or the
giving of notice, would constitute an Event of Default, (g) the issuance of the shares in
question (or, in the case of a Company Optional Redemption or a Holder Optional Redemption,
the shares issuable upon conversion in full of the applicable Optional Redemption Amount) to
the Holder would comply with the limitations set forth in Section 4(c), (h) there has been
no public announcement of a pending or proposed Fundamental Transaction or Change of Control
Transaction that has not been consummated, (i) the Holder is not in possession of any
information provided by the Company that constitutes, or may constitute, material non-public
information and (j) for each Trading Day in a period of 20 consecutive Trading Days prior to
the applicable date in question, the daily trading volume for the Common Stock on the
principal Trading Market exceeds 50,000 shares (subject to adjustment for forward and
reverse stock splits and the like) per Trading Day .

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

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

     “Holder Optional Redemption” shall have the meaning set forth in Section 6(b).

     “Holder Optional Redemption Amount” means the sum of (a) 100% of the then
outstanding principal amount of the Debenture, (b) accrued but unpaid interest in respect of
the Debenture and (c) all liquidated damages and other amounts due, if any, in respect of
the Debenture.

     “Holder Optional Redemption Date” shall have the meaning set forth in Section
6(b).

     “Holder Optional Redemption Notice” shall have the meaning set forth in Section
6(b).

     “Holder Optional Redemption Notice Date” shall have the meaning set forth in
Section 6(b).

     “Holder Optional Redemption Period” shall have the meaning set forth in Section
6(b).

     “Interest Make-Whole” shall have the meaning set forth in Section 2(c).

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

5

 

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

     “Make-Whole Measurement Period” shall have the meaning set forth in Section
2(d).

     “Mandatory Default Amount” means the sum of (a) the greater of (i) the
outstanding principal amount of this Debenture, plus all accrued and unpaid interest hereon,
divided by the Conversion Price on the date the Mandatory Default Amount is either (A)
demanded (if demand or notice is required to create an Event of Default) or otherwise due or
(B) paid in full, whichever results in a lower Conversion Price, multiplied by the VWAP on
the date the Mandatory Default Amount is either (x) demanded or otherwise due or (y) paid in
full, whichever has a higher VWAP, or (ii) 100% of the outstanding principal amount of this
Debenture, plus 100% of accrued and unpaid interest hereon, (b) all other amounts, costs,
expenses and liquidated damages due in respect of this Debenture and (c) any Interest
Make-Whole.

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

     “Permitted Indebtedness” means (a) the debt evidenced by the $150,000,000
Credit Facility pursuant to that certain Second Amended and Restated Credit Agreement dated
as of April 2, 2008 among the Company, JPMorgan Chase Bank, N.A., as administrative agent
(“JPMorgan”), and the lenders party thereto (the “Credit Agreement”), as the
same may be amended, transferred to other institutional lenders or otherwise refinanced or
restated, from time to time, except that no such restatement, refinancing, or amendment
shall (i) result in the size of the Credit Facility being greater than $150,000,000
aggregate principal amount (which amount shall include all fees and other amounts paid or
payable in connection with such restatement, refinancing, or amendment) or (ii) without the
consent of holders of at least 67% in principal amount of the then outstanding Debentures,
change the other terms of such Indebtedness from such terms existing on the Original Issue
Date so as to adversely affect in any material respect the holders of the Debentures; (b)
the indebtedness evidenced by the Debentures; (c) the Indebtedness existing on the Original
Issue Date and set forth on Schedule 3.1(aa) attached to the Purchase Agreement, as
the same may be amended, transferred to other institutional lenders or otherwise refinanced
or restated, from time to time, except that no such restatement, refinancing, or amendment
shall (i) result in the principal amount of any such Indebtedness (which amount shall
include all fees and other amounts paid or payable in connection with such restatement,
refinancing, or amendment) being greater

6

 

than the principal amount thereof on the Original Issue Date or (ii) without the
consent of holders of at least 67% in principal amount of the then outstanding Debentures,
change the other terms of such Indebtedness (including without limitation with respect to
liens, collateral, subordination, average life, stated maturity and obligors) from the terms
existing on the Original Issue Date so as to adversely affect in any material respect the
holders of the Debentures; and (d) up to $30,000,000 of additional indebtedness that is
expressly subordinated to the Debentures pursuant to a written Intercreditor Agreement with
the Purchasers that is reasonably acceptable to the holders of at least 67% in principal
amount of the then outstanding Debentures.

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

     “Public Information Failure” shall have the meaning set forth in Section 2(e).

     “Purchase Agreement” means the Securities Purchase Agreement, dated as of June
9, 2008 among the Company and the original holders, 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, among the Company and the original Holders, as
amended, modified or supplemented from time to time in accordance with its terms.

     “Registration Statement” means a registration statement under the Securities
Act that registers the resale of all Conversion Shares of the Holder, names the Holder as a
“selling stockholder” therein, contains a prospectus not subject to any blackout, suspension
or stop order, and otherwise meets the requirements of the Registration Rights Agreement.

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

7

 

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

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

     “Stock Price” shall have the meaning set forth in Section 5(f).

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

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

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

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

     Section 2. Interest.

     a) Payment. The Company shall pay interest to the Holder on the aggregate
unconverted and then-outstanding principal amount of this Debenture at the rate of 10.75%
per annum, payable semiannually on January 1 and July 1, in arrears, beginning on the first
such date after the Original Issue Date, on each Conversion Date (as to that principal
amount then being converted), on each Company Optional Redemption Date or Holder Optional
Redemption Date (as to that principal amount then being redeemed) and on the Maturity Date
(each such date, an “Interest Payment Date”) (if any Interest

8

 

Payment Date is not a Business Day, then the applicable payment shall be due on the
next succeeding Business Day), in cash.

     b) Interest Calculations. Interest shall be calculated on the basis of a
360-day year, consisting of twelve 30 calendar-day periods and shall accrue daily commencing
on the Original Issue Date until payment in full of the outstanding principal, together with
all accrued and unpaid interest, liquidated damages and other amounts which may become due
hereunder, has been made. 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 this Debenture (the “Debenture Register”).

     c) Interest Make-Whole. Upon any conversion or redemption (other than pursuant
to a Holder Optional Redemption) of all or any portion of this Debenture prior to the third
anniversary of the Original Issue Date, the Holder shall be entitled to receive the present
value of all interest which would have accrued on the principal amount being converted or
redeemed after the date of such conversion or redemption if no payment of such principal
amount were made prior to such third anniversary of the Original Issue Date, in cash (the
“Interest Make-Whole”). The present value of such future-accrued interest shall be
calculated by discounting in accordance with accepted financial practice all such
future-accruing interest on the principal amount being converted or redeemed from their
respective scheduled due dates to the date on which payment on such principal is to be made
by the yield-to-maturity interest rate for United States Treasury bills of comparable
maturity to the third anniversary of the Original Issue Date as of the applicable conversion
date or redemption date, as applicable, as reported in The Wall Street Journal.

     d) Calculation of Interest Make-Whole Shares. Amounts due under Section 2(c)
(other than in connection with the payment of any Change in Control Redemption Price and any
Mandatory Default Amount) may, at the option of the Company, be made in registered shares of
Common Stock of the Company upon irrevocable notice to holders no less than two (2) trading
days prior to the start of the Make-Whole Measurement Period, subject to satisfaction of the
conditions in the immediately following sentence. Payment in shares of Common Stock
pursuant to this Section 2(d) may only occur if each of the Equity Conditions shall have
been met (unless waived in writing by the Holder) on each Trading Day during the Make-Whole
Measurement Period and through and including the date such shares are issued to the Holder.
When making any payment under Section 2(c) using common stock of the Company, the value of
each such share of stock shall be determined based on ninety percent (90%) of the lower of
the (i) VWAP for such stock for the ten (10) Trading Days immediately prior to
the date such payment is due pursuant to Section 2(c) (“Make-Whole Measurement
Period”), and (ii) the closing price of the stock on the day immediately preceding the
conversion date or redemption date, as applicable; provided, that until and unless the
Company has received any approval of its stockholders required under Amex Rule 713 or any
equivalent rule of any other applicable Trading Market, the value of such shares used in
such determination may

9

 

not be less than the closing price of the Common Stock on AMEX or such other applicable
Trading Market on the execution date of the Purchase Agreement. In the event that the
Company has not received the necessary approval under AMEX Rule 713 or any equivalent rule
of any other applicable Trading Market, then such payment will be made in cash pursuant to
Section 2(c).

     e) Late Fee. All overdue accrued and unpaid interest to be paid hereunder
shall entail a late fee on such unpaid interest (and not on the entire principal amount) at
an interest rate equal to the lesser of 18% per annum or the maximum rate permitted by
applicable law (the “Late Fees”) which shall accrue daily from the date such
interest is due hereunder through and including the date of actual payment in full. In
addition, subject to Section 8, if the Company does not meet the current public information
requirements as in effect under Rule 144 as they may exist from time to time in respect of
the Conversion Shares and the Holder cannot freely resell the Conversion Shares on a Trading
Market pursuant to Rule 144 for a period of 3 months (a “Public Information
Failure”), then, as of the first day following such Public Information Failure, interest
on this Debenture shall accrue at an interest rate equal to 12% per annum until such date as
the Company satisfies the current public information requirements under Rule 144 such that
the Holder is able to freely resell all the Conversion Shares on a Trading Market.

     f) Increase in Interest Rate for Failure of Debenture or Exchanged Debenture to be
DTC Eligible. In the event the Company fails to exchange this Debenture for an
Exchanged Debenture that is DTC Eligible within 120 days from the Original Issue Date, then
on the 121st day the rate of interest payable to the Holder shall increase to
11.75% per annum until such time as the Holder has received an Exchanged Debenture that is
DTC Eligible, at which time the rate of interest payable to the Holder shall return to
10.75% per annum.

     g) 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; Other 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 payable for such
registration of transfer or exchange.

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

10

 

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

     d) Exchange for DTC Eligible Debenture. The Company shall exchange and retire
this Debenture for an Exchanged Debenture upon the completion of all necessary documentation
to create the Exchanged Debenture and presentation of this Debenture to the Company by the
Holder.

     Section 4. Conversion.

     a) Voluntary Conversion. At any time after the Original Issue Date until this
Debenture is no longer outstanding, the principal amount of this Debenture shall be
convertible, in whole or in part, into shares of Common Stock at the option of the Holder,
at any time and from time to time (subject to the conversion limitations set forth in
Section 4(c) hereof). The Holder shall effect conversions by delivering to the Company a
Notice of Conversion, the form of which is attached hereto as Annex A (each, a
“Notice of Conversion”), specifying therein the principal amount of this Debenture
to be converted and the date on which such conversion shall be effected (such date, the
“Conversion Date”). If no Conversion Date is specified in a Notice of Conversion,
the Conversion Date shall be the date that such Notice of Conversion is deemed delivered
hereunder. To effect conversions hereunder, the Holder shall not be required to physically
surrender this Debenture to the Company unless the entire principal amount of this Debenture
has been so converted, and all accrued and unpaid interest thereon has been paid.
Conversions hereunder shall have the effect of lowering the outstanding principal amount of
this Debenture in an amount equal to the applicable conversion. The Holder and the Company
shall maintain records showing the principal amount(s) converted and the date of such
conversion(s). The Company may deliver a valid objection to any Notice of Conversion
promptly but in any event within 3 Business Days of delivery of such Notice of Conversion.
Absent manifest error, the Holder’s records showing the principal amount(s) converted and
the date of such conversion(s) shall be determinative. 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 $6.50, subject to adjustment herein (the “Conversion Price”).

11

 

     c) Conversion Limitations. The Company shall not effect any conversion of
this Debenture, and a Holder shall not have the right to convert any portion of this
Debenture, to the extent that after giving effect to the conversion set forth on the
applicable Notice of Conversion, the Holder (together with the Holder’s Affiliates, and any
other person or entity acting as a group together with the Holder or any of the Holder’s
Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as
defined below).  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 such
determination is being made, but shall exclude the number of shares of Common Stock which
are issuable upon (A) conversion of the remaining, unconverted principal amount of this
Debenture beneficially owned by the Holder or any of its Affiliates and (B) exercise or
conversion of the unexercised or unconverted portion of any other securities of the Company
subject to a limitation on conversion or exercise analogous to the limitation contained
herein (including, without limitation, any other Debentures) 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 and the rules and regulations promulgated thereunder. To
the extent that the limitation contained in this Section 4(c) applies, the determination of
whether this Debenture is convertible (in relation to other securities owned by the Holder
together with any Affiliates) and of which principal amount of this Debenture is convertible
shall be in the sole discretion of the Holder, and the submission of a Notice of Conversion
shall be deemed to be the Holder’s determination of whether this Debenture may be converted
(in relation to other securities owned by the Holder together with any Affiliates) and which
principal amount of this Debenture is convertible, in each case subject to the Beneficial
Ownership Limitation. To ensure compliance with this restriction, the Holder will be deemed
to represent to the Company each time it delivers a Notice of Conversion that such Notice of
Conversion has not violated the restrictions set forth in this paragraph and the Company
shall have no obligation to verify or confirm the accuracy of such determination. In
addition, a determination as to any group status as contemplated above shall be determined
in accordance with Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder. 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 stated in the most recent of the following: (A) the Company’s most recent
periodic or annual report, as the case may be; (B) a more recent public announcement by the
Company; or (C) a more recent 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
a 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.

12

 

The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of
the Common Stock outstanding immediately after giving effect to the issuance of shares of
Common Stock issuable upon conversion of this Debenture held by the Holder. The Holder,
upon not less than 61 days’ prior notice to the Company, may increase or decrease the
Beneficial Ownership Limitation provisions of this Section 4(c), provided that the
Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to the issuance of shares of Common
Stock upon conversion of this Debenture held by the Holder and the Beneficial Ownership
Limitation provisions of this Section 4(c) shall continue to apply. Any such increase or
decrease will not be effective until the 61st day after such notice is delivered
to the Company. The Beneficial Ownership Limitation provisions of this paragraph shall be
construed and implemented in a manner otherwise than in strict conformity with the terms of
this Section 4(c) to correct this paragraph (or any portion hereof) which may be defective
or inconsistent with the intended Beneficial Ownership Limitation contained herein or to
make changes or supplements necessary or desirable to properly give effect to such
limitation. The limitations contained in this paragraph shall apply to a successor holder of
this Debenture.

     d) Mechanics of Conversion.

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

     ii. Delivery of Certificate Upon Conversion. Not later than three
Trading Days after each Conversion Date (the “Share Delivery Date”), the
Company shall deliver, or cause to be delivered, to the Holder (A) a certificate or
certificates representing the Conversion Shares which, on or after the earlier of
(i) the six month anniversary of the Original Issue Date (unless the Holder is then
an Affiliate of the Company) and (ii) the Effective Date, shall be free of
restrictive legends and trading restrictions (other than those which may then be
required by the Purchase Agreement) representing the number of Conversion Shares
being acquired upon the conversion of this Debenture, (B) a bank check or wire of
immediately available funds, at the Company’s option, in the amount of accrued and
unpaid interest, and (C) as to Conversion Dates that occur prior to the three year
anniversary of the Original Issue Date, a bank check or wire transfer in the amount
equal to the Interest Make-Whole. On or after the earlier of (i) the six month
anniversary of the Original Issue Date and (ii) the Effective Date, the Company
shall use its commercially reasonable efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section 4(d)
electronically through the Depository Trust Company or another established clearing
corporation performing similar functions.

      

13

 

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

     iv. Obligation Absolute; Partial Liquidated Damages. The Company’s
obligations to issue and deliver the Conversion Shares upon conversion of this
Debenture in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any waiver
or consent with respect to any provision hereof, the recovery of any judgment
against any Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the Holder
or any other Person of any obligation to the Company or any violation or alleged
violation of law by the Holder or any other Person, and irrespective of any other
circumstance which might otherwise limit such obligation of the Company to the
Holder in connection with the issuance of such Conversion Shares; provided,
however, that such delivery shall not operate as a waiver by the Company of
any such action the Company may have against the Holder. In the event the Holder of
this Debenture shall elect to convert any or all of the outstanding principal amount
hereof, the Company may not refuse conversion based on any claim that the Holder or
anyone associated or affiliated with the Holder has been engaged in any violation of
law, agreement or for any other reason, unless an injunction from a court, on notice
to Holder, restraining and or enjoining conversion of all or part of this Debenture
shall have been sought and obtained and the Company posts a surety bond for the
benefit of the Holder in the amount of 150% of the outstanding principal amount of
this Debenture, which is subject to the injunction, which bond shall remain in
effect until the completion of arbitration/litigation of the underlying dispute and
the proceeds of which shall be payable to such Holder to the extent it obtains
judgment. In the absence of such injunction, the Company shall issue Conversion
Shares or, if applicable, cash, upon a properly noticed conversion. If the Company
fails for any reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(d)(ii) by the third Trading Day after the Conversion Date, the
Company shall pay to such Holder, in cash, as liquidated damages and not as a
penalty, for each $1,000 of principal amount being converted, $10 per Trading Day
(increasing to $20 per Trading Day on the fifth Trading Day after such liquidated
damages begin to accrue) for each Trading Day after such third Trading Day until
such certificates are delivered. Nothing herein shall limit a Holder’s right to
pursue actual damages or declare an Event of Default pursuant to Section 8 hereof
for the

14

 

Company’s failure to deliver Conversion Shares within the period specified
herein and the Holder shall have the right to pursue all remedies available to it
hereunder, at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such rights shall not
prohibit the Holder from seeking to enforce damages pursuant to any other Section
hereof or under applicable law.

     v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. In addition to any other rights available to the Holder, if the
Company fails for any reason to deliver to the Holder such certificate or
certificates by the Share Delivery Date pursuant to Section 4(d)(ii), and if after
such Share Delivery Date the Holder is required by its brokerage firm to purchase
(in an open market transaction or otherwise), or the Holder or its brokerage firm
otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by
the Holder of the Conversion Shares which the Holder was entitled to receive upon
the conversion relating to such Share Delivery Date (a “Buy-In”), then the
Company shall (A) pay in cash to the Holder (in addition to any other remedies
available to or elected by the Holder) the amount by which (x) the Holder’s total
purchase price (including any brokerage commissions) for the Common Stock so
purchased exceeds (y) the product of (1) the aggregate number of shares of Common
Stock that the Holder was entitled to receive from the conversion at issue
multiplied by (2) the actual sale price at which the sell order giving rise to such
purchase obligation was executed (including any brokerage commissions) and (B) at
the option of the Holder, either reissue (if surrendered) this Debenture in a
principal amount equal to the principal amount of the attempted conversion or
deliver to the Holder the number of shares of Common Stock that would have been
issued if the Company had timely complied with its delivery requirements under
Section 4(d)(ii). For example, if the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion
of this Debenture with respect to which the actual sale price of the Conversion
Shares (including any brokerage commissions) giving rise to such purchase obligation
was a total of $10,000 under clause (A) of the immediately preceding sentence, the
Company shall be required to pay the Holder $1,000. The Holder shall provide the
Company written notice indicating the amounts payable to the Holder in respect of
the Buy-In and, upon request of the Company, evidence of the amount of such loss.
Nothing herein shall limit a Holder’s right to pursue any other remedies available
to it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company’s failure
to timely deliver certificates representing shares of Common Stock upon conversion
of this Debenture as required pursuant to the terms hereof.

     vi. Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will at all times reserve and keep available out of its authorized

15

 

and unissued shares of Common Stock for the sole purpose of issuance upon
conversion of this Debenture, as herein provided, free from preemptive rights or any
other actual contingent purchase rights of Persons other than the Holder (and the
other holders of the Debentures), not less than such aggregate number of shares of
the Common Stock as shall (subject to the terms and conditions set forth in the
Purchase Agreement) be issuable (taking into account the adjustments and
restrictions of Section 5) upon the conversion of the outstanding principal amount
of this Debenture. The Company covenants that all shares of Common Stock that shall
be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and
nonassessable and, if the Registration Statement is then effective under the
Securities Act, shall be registered for public sale in accordance with such
Registration Statement.

     vii. Fractional Shares. No fractional shares or scrip representing
fractional shares shall be issued upon the conversion of this Debenture. As to any
fraction of a share which Holder would otherwise be entitled to purchase upon such
conversion, the Company shall at its election, either pay a cash adjustment in
respect of such final fraction in an amount equal to such fraction multiplied by the
Conversion Price or round up to the next whole share.

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

     Section 5. Certain Adjustments.

     a) Stock Dividends and Stock Splits. If the Company, at any time while this
Debenture is outstanding: (i) pays a stock dividend or otherwise makes a distribution or
distributions payable in shares of Common Stock on shares of Common Stock or any Common
Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common
Stock issued by the Company upon conversion of the Debentures),
(ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of a
reverse stock split) outstanding shares of Common Stock into a smaller number of shares or
(iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of
capital stock of the Company, then the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the

16

 

number of shares of Common Stock (excluding any treasury shares of the Company)
outstanding immediately before such event and of which the denominator shall be the number
of shares of Common Stock outstanding immediately after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a subdivision,
combination or re-classification.

     b) [RESERVED]

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

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

17

 

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

     f) Change in Control Transaction. If the Fundamental Transaction is also a
Change in Control Transaction, then the Holder shall have the right to cause the Company to
redeem this Debenture or to have an adjustment of the Conversion Price and/or Conversion
Shares, as set forth below. No later than 20 Trading Days prior to the consummation of a
Change of Control (such date of consummation of a Change of Control, the “Change of
Control Date”), but not prior to the public announcement of such Change of Control, the
Company shall deliver written notice thereof to the Holders (a “Change of Control
Notice” and the date of such Change of Control Notice, the “Change of Control Notice
Date”). Such Change of Control Notice shall state:

18

 

               (A)  the events causing the Change of Control;

               (B)  the Change of Control Date or anticipated Change of Control Date of such
Change of Control;

               (C)  the purchase price and whether that price will be paid in cash, shares of
common stock, or a combination of cash and shares of common stock; and

               (D)  if applicable, the expected determination of the adjustment to the
Conversion Price as set forth pursuant to Section 5(f)(iii) below.

               Simultaneously with the Change of Control Notice, the Company shall issue a
press release and timely file a Form 8-K containing the information contained in the
Change of Control Notice.

               (i) Change in Control Redemption. At any time during the period (the
“Change of Control Period”) beginning after a Holder’s receipt of a Change
of Control Notice and ending on the date that is five (5) Trading Days subsequent to
the Change of Control Date as set forth in the Change of Control Notice, such Holder
may require the Company to redeem (a “Change of Control Redemption”) all or
any portion of such Holder’s Debenture by delivering written notice thereof
(“Change of Control Redemption Notice”) to the Company, which Change of
Control Redemption Notice shall indicate the principal amount the Holder is electing
to redeem. Any principal amount of the Debenture subject to redemption pursuant to
this Section 5(f) shall be redeemed by the Company in cash at a price equal to the
sum of 103% of the principal amount being redeemed together with 100% of any accrued
but unpaid interest thereon and the Interest Make-Whole, if any (the “Change of
Control Redemption Price”). The Company shall make payment of the Change of
Control Redemption Price concurrently with the consummation of such Change of
Control if such a Change of Control Redemption Notice is received prior to the
consummation of such Change of Control and within 5 Trading Days after the Company’s
receipt of such notice otherwise (the “Change of Control Redemption Date”).
Notwithstanding anything to the contrary in this Section 5(f), until the Change of
Control Redemption Price (together with any interest thereon) is paid in full, the
principal amount submitted for redemption under this Section 5(f) may be converted,
in whole or in part, by the Holder into Conversion Shares, or in the event the
Conversion Date is after the consummation of the Change of Control, shares or equity
interests of the successor entity substantially equivalent to the Company’s Common
Stock. The parties hereto agree that in the event of the Company’s redemption of
any portion of the Debenture under this Section 5(f), the Holder’s damages would be
uncertain and difficult to estimate because of the parties’ inability to predict
future interest rates and the uncertainty of the availability of a suitable
substitute investment

19

 

opportunity for the Holder. Accordingly, any redemption premium due under this
Section 5(f) is intended by the parties to be, and shall be deemed, a reasonable
estimate of the Holder’s actual loss of its investment opportunity and not as a
penalty.

     (ii) Adjustment to Conversion Shares Upon a Change of Control.

          In connection with a Change of Control, the Company will increase the number of
Conversion Shares issuable upon conversion of the Debenture by a number of
additional shares (the “Additional Shares”) for each $1,000 principal amount
of Debenture when converted as described in this Section 5(f)(ii); provided that (A)
such increase in Conversion Shares shall not take place if such Change of Control is
not consummated and (B) the Company shall issue Conversion Shares (without such
increase) on or prior to the fifth (5th) Trading Day following the
Conversion Date and the Additional Shares described in Section 5(f)(iii) hereof will
be issued after the later to occur of (x) the fifth (5th) Trading Day
following the Change of Control Date and (y) the fifth (5th) Trading Day
following the relevant Conversion Date. On and after the Change of Control Date,
Holders entitled to receive Additional Shares pursuant to this Section 5(f)(ii)
shall receive the kind and amount of securities (of the Company or another issuer),
cash and other property receivable upon such Change of Control by a holder of the
number of shares of Common Stock into which this Debenture was convertible
immediately prior to such Change of Control, after giving effect to any adjustment
event, based on the number of Additional Shares set forth above.

          The number of Additional Shares will be determined by reference to the table
below, based on the Change of Control Date and the price of the Common Stock (the
“Stock Price”). If the consideration for the Common Stock consists solely of
cash, then the Stock Price will be the cash amount paid per share of the Common
Stock. Otherwise, the Stock Price will be the average of the VWAPs for the 5
consecutive Trading Days immediately preceding the Change of Control Date.

          The following table sets forth the number of Additional Shares per $1,000
principal amount of Debenture to be added to the Conversion Shares issuable in
connection with the Change of Control referred to in Section 5(f)(ii):

20

 

Number of Additional Shares

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Stock Price	 
	 	 	$5.47	 	 	$6.00	 	 	$6.50	 	 	$7.00	 	 	$7.50	 	 	$8.00	 	 	$8.50	 	 	$9.00	 	 	$9.50	 	 	$10.00	 
	 	 	 	 
	Additional Shares	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 
	Pricing Date
	 	 	28.9710	 	 	 	24.3770	 	 	 	21.0950	 	 	 	18.3340	 	 	 	15.9470	 	 	 	13.8590	 	 	 	12.0170	 	 	 	10.3810	 	 	 	8.9190	 	 	 	7.6070	 
	Pricing Date + 1 Year
	 	 	28.9710	 	 	 	18.2100	 	 	 	15.6260	 	 	 	13.6360	 	 	 	11.9350	 	 	 	10.4480	 	 	 	9.1360	 	 	 	7.9690	 	 	 	6.9260	 	 	 	5.9870	 
	Pricing Date + 2
Years
	 	 	28.9710	 	 	 	15.5710	 	 	 	8.7830	 	 	 	7.6080	 	 	 	6.6950	 	 	 	5.8990	 	 	 	5.1960	 	 	 	4.5720	 	 	 	4.0140	 	 	 	3.5110	 
	Pricing Date + 3
Years
	 	 	28.9710	 	 	 	12.8210	 	 	 	4.3915	 	 	 	3.8040	 	 	 	3.3475	 	 	 	2.9495	 	 	 	2.5980	 	 	 	2.2860	 	 	 	2.0070	 	 	 	1.7555	 

          The Stock Prices set forth in the table will be adjusted as of any date on
which the Conversion Price is adjusted. The adjusted Stock Prices will equal the
Stock Prices applicable immediately prior to the adjustment divided by a fraction,
the numerator of which is the Conversion Price immediately prior to the adjustment
to the Conversion Price and the denominator of which is the Conversion Price as so
adjusted.

          The exact Stock Price and Change of Control Date may not be set forth in the
table, in which case:

          (A) if the Stock Price is between two Stock Prices in the table
or the Change of Control Date is between two Change of Control Dates
in the table, the number of Additional Shares will be determined by
straight-line interpolation between the Additional Share amounts set
forth for the higher and lower Stock Prices and the two Change of
Control Dates, as applicable, based on a 365-day year;

          (B) if the Stock Price is in excess of $10.00 per share (subject
to adjustment in the same manner as the Stock Price), no Additional
Shares will be added to the Conversion Shares; and

          (C) if the Stock Price is less than or equal to $5.47 per share
(subject to adjustment in the same manner as the Stock Price), no
Additional Shares will be added to the Conversion Shares.

     g) 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

21

 

as of a given date shall be the sum of the number of shares of Common Stock (excluding
any treasury shares of the Company) issued and outstanding.

     h) Notice to the Holder.

     i. Adjustment to Conversion Price. Whenever the Conversion Price is
adjusted pursuant to any provision of this Section 5, the Company shall promptly
deliver 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.

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

22

 

     Section 6. Redemption.

     a) Optional Redemption at Election of Company. Subject to the provisions of
this Section 6(a), at any time after the 2-year anniversary of the Original Issue Date,
provided that the VWAP of the Common Stock has been at least 150% of the Conversion Price
for any 20 out of 30 consecutive Trading Days, such 30 consecutive Trading Day period
beginning only after the 2-year anniversary of the Original Issue Date, then, within 1
Trading Day of the end of such period, the Company may deliver a notice to the Holder (a
“Company Optional Redemption Notice” and the date such notice is deemed delivered
hereunder, the “Company Optional Redemption Notice Date”) of its irrevocable
election to redeem some or all of the then outstanding principal amount of this Debenture
for cash in an amount equal to the Company Optional Redemption Amount on the 20th
Trading Day following the Company Optional Redemption Notice Date (such date, the
“Company Optional Redemption Date”, such 20 Trading Day period, the “Company
Optional Redemption Period” and such redemption, the “Company Optional
Redemption”). The Company Optional Redemption Amount is payable in full on the Company
Optional Redemption Date. The Company may only effect an Company Optional Redemption if
each of the Equity Conditions shall have been met (unless waived in writing by the Holder)
on each Trading Day during the period commencing on the Company Optional Redemption Notice
Date through to the Company Optional Redemption Date and through and including the date
payment of the Company Optional Redemption Amount is actually made in full. If any of the
Equity Conditions shall cease to be satisfied at any time during the Company Optional
Redemption Period through to the Company Optional Redemption Date and through and including
the date payment of the Company Optional Redemption Amount is actually made in full, then
the Holder may elect to nullify the Company Optional Redemption Notice by notice to the
Company within 3 Trading Days after it receives written notice from the Company that any
such Equity Condition has not been met, in which case the Company Optional Redemption Notice
shall be null and void, ab initio. The Company covenants and agrees that it
will honor all Notices of Conversion tendered from the time of delivery of the Company
Optional Redemption Notice through the date all amounts owing thereon are due and paid in
full. The Company’s determination to effect a Company Optional Redemption shall be applied
ratably to all of the holders of the then outstanding Debentures.

     b) Optional Redemption at Election of Holder. Subject to the provisions of
this Section 6(b), at any time prior to the three month anniversary of the Original Issue
Date, the Holder may deliver a notice to the Company (an “Holder Optional Redemption
Notice” and the date such notice is deemed delivered hereunder, the “Holder Optional
Redemption Notice Date”) of its election to require the Company redeem up to 25% of the
original face principal amount of this Debenture for cash in an amount equal to the Holder
Optional Redemption Amount on the 20th Trading Day following the Holder Optional
Redemption Notice Date (such date, the “Holder Optional Redemption Date”, such 20
Trading Day period, the “Holder Optional Redemption Period” and such redemption, the
“Holder Optional Redemption”). The Holder Optional Redemption

23

 

Amount is payable in full on the Holder Optional Redemption Date. The Company
covenants and agrees that it will honor all Notices of Conversion tendered from the time of
delivery of the Holder Optional Redemption Notice through the date all amounts owing thereon
are due and paid in full.

     c) Redemption Procedure. The payment of cash or issuance of Common Stock, as
applicable, pursuant to a Company Optional Redemption or a Holder Optional Redemption shall
be payable on the Company Optional Redemption Date or the Holder Optional Redemption Date,
as applicable. If any portion of the payment pursuant to an Optional Redemption shall not
be paid by the Company by the applicable due date, interest shall accrue thereon at an
interest rate equal to the lesser of 18% per annum or the maximum rate permitted by
applicable law until such amount is paid in full. Notwithstanding anything herein contained
to the contrary, if any portion of the Company Optional Redemption Amount or the Holder
Optional Redemption Amount remains unpaid after such date, the Holder may elect, by written
notice to the Company given at any time thereafter, to invalidate such Optional Redemption,
ab initio, and, with respect to the Company’s failure to honor the Optional
Redemption, the Company shall have no further right to exercise such Optional Redemption.
The Holder may elect to convert the outstanding principal amount of the Debenture pursuant
to Section 4 prior to actual payment in cash for any redemption under this Section 6 by the
delivery of a Notice of Conversion to the Company. Upon completion of any redemption
provided for under this Section 6, the Company will promptly and in no event later than four
(4) Business Days file a Current Report on Form 8-K disclosing the material details of such
redemption.

     Section 7. Negative Covenants. As long as any portion of this Debenture
remains outstanding, unless the holders of at least 67% in principal amount of the then outstanding
Debentures shall have otherwise given prior written consent, the Company shall not, and shall not
permit any of its subsidiaries (whether or not a Subsidiary on the Original Issue Date) to,
directly or indirectly:

     a) other than Permitted Indebtedness and except as provided in the Credit Agreement,
enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for
borrowed money of any kind, including, but not limited to, a guarantee, on or with respect
to any of its property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom; provided, that, any such additional Indebtedness effected
through the Credit Agreement, when combined with other existing Indebtedness of the Credit
Agreement, shall not exceed $150,000,000 in aggregate principal amount;

     b) other than Permitted Liens and except as provided in the Credit Agreement,
enter into, create, incur, assume or suffer to exist any Liens of any kind, on or with
respect to any of its property or assets now owned or hereafter acquired or any interest
therein or any income or profits therefrom; provided, that, any such additional

24

 

Liens effected through the Credit Agreement, when combined with other existing Liens
under the Credit Agreement, shall not secure Indebtedness with an aggregate principal amount
in excess of $150,000,000;

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

     d) repay, repurchase or offer to repay, repurchase or otherwise acquire more than an
amount of shares of its Common Stock or Common Stock Equivalents equal to $200,000, other
than as to (i) the Conversion Shares as permitted or required under the Transaction
Documents and (ii) repurchases of Common Stock or Common Stock Equivalents of departing
officers and directors of the Company, provided that such repurchases shall not exceed an
aggregate of $100,000 for all officers and directors during the term of this Debenture;

     e) repay, repurchase or offer to repay, repurchase or otherwise acquire any
Indebtedness, other than (i) the Debentures if on a pro-rata basis or (ii) regularly
scheduled principal and interest payments as such terms are in effect as of the Original
Issue Date, provided that such payments shall not be permitted if, at such time, or after
giving effect to such payment, any Event of Default exists or occurs (unless such payments
are required to be made under the Credit Agreement and are permitted to be made under the
Intercreditor and Subordination Agreement);

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

     g) enter into any transaction with any Affiliate of the Company which would be required
to be disclosed in any public filing with the Commission, unless such transaction is
otherwise permitted under the Transaction Documents and are upon fair and reasonable terms
no less favorable to it than it would obtain in a comparable arm’s-length transaction with a
Person not an Affiliate; or

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

     Section 8. Events of Default.

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

25

 

     i. any default in the payment of (A) the principal amount of any Debenture or
(B) interest, liquidated damages other amounts owing to a Holder on any Debenture,
as and when the same shall become due and payable (whether on a Conversion Date, any
redemption date or the Maturity Date or by acceleration or otherwise;

     ii. the Company shall fail to observe or perform any other covenant or
agreement contained in the Debentures (other than a breach by the Company of its
obligations to deliver shares of Common Stock to the Holder upon conversion, which
breach is addressed in clause (x) below) which failure is not cured, if possible to
cure, within 10 Trading Days after the earlier of (A) the Company’s becoming aware
of such failure and (B) notice of such failure sent by the Holder or by any other
Holder to the Company;

     iii.  the Company shall fail to observe or perform any covenants or agreements
contained in Section 4.6, 4.7, 4.9, 4.10, 4.12, 4.13 and 4.17 of the Purchase
Agreement, which failure is not cured, if possible to cure, within 10 Trading Days
after the earlier of (A) the Company’s becoming aware of such failure and (B) notice
of such failure sent by the Holder or by any other Holder to the Company;

     iv. any representation or warranty made by the Company in the Debenture or in
Section 3.1(c), (d), (f), or (g) in the Purchase Agreement shall be untrue or
incorrect in any material respect as of the date when made or deemed made;

     v. a default or event of default (subject to any grace or cure period provided
in the applicable agreement, document or instrument) shall occur under (A) any of
the Transaction Documents other than another Debenture or (B) under the documents
governing any Permitted Indebtedness or any other material agreement, lease,
document or instrument to which the Company or any Subsidiary is obligated;

     vi. the Company or any Significant Subsidiary (as such term is defined in Rule
1-02(w) of Regulation S-X) shall be subject to a Bankruptcy Event;

     vii. the Company or any Subsidiary shall default on any of its obligations
under any mortgage, credit agreement or other facility, indenture agreement,
factoring agreement or other instrument under which there may be issued, or by which
there may be secured or evidenced, any indebtedness for borrowed money or money due
under any long term leasing or factoring arrangement that (a) involves an obligation
the greater of $1,000,000 or five percent (5%) of the then effective Conforming
Borrowing Base, as defined in the

26

 

Credit Agreement, whether such indebtedness now exists or shall hereafter be
created, and (b) results in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and payable;

     viii. the Common Stock shall not be eligible for listing or quotation for
trading on a Trading Market and shall not be eligible to resume listing or quotation
for trading thereon within 10 Trading Days;

     ix. if the Company does not meet the current public information requirements as
in effect under Rule 144 as they may exist from time to time in respect of the
Conversion Shares and the Holder cannot freely resell the Conversion Shares on a
Trading Market pursuant to Rule 144 for a period of 3 months;

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

     xi. any monetary judgment, writ or similar final process shall be entered or
filed against the Company, any subsidiary or any of their respective property or
other assets for more than the greater of $1,000,000 or five percent (5%) of the
then effective Conforming Borrowing Base as defined in the Credit Agreement, and
such judgment, writ or similar final process shall remain unvacated, unbonded or
unstayed for a period of 60 calendar days; and

     xii. if any of the Security Documents ceases to be in full force and effect
(including failure to create a valid and perfected second priority lien on and
security interest in all the Collateral (as defined in the Security Documents) at
any time for any reason.

     b) Remedies Upon Event of Default. If any Event of Default occurs, the
outstanding principal amount of this Debenture, plus accrued but unpaid interest, liquidated
damages and other amounts owing in respect thereof through the date of acceleration, shall
become, at the Holder’s election, immediately due and payable in cash at the Mandatory
Default Amount. Commencing upon the occurrence of any Event of Default the interest rate on
this Debenture shall accrue at an interest rate equal to the lesser of 18% per annum or the
maximum rate permitted under applicable law. Upon the payment in full of the Mandatory
Default Amount, the Holder shall promptly surrender this Debenture to or as directed by the
Company. In connection with such acceleration described herein, the Holder need not
provide, and the Company hereby waives, any presentment, demand, protest or other notice of
any kind, and the Holder may

27

 

immediately and without expiration of any grace period enforce any and all of its
rights and remedies hereunder and all other remedies available to it under applicable law.
Such acceleration may be rescinded and annulled by Holder at any time prior to payment
hereunder and the Holder shall have all rights as a holder of the Debenture until such time,
if any, as the Holder receives full payment pursuant to this Section 8(b). No such
rescission or annulment shall affect any subsequent Event of Default or impair any right
consequent thereon.

28

 

     Section 9. Miscellaneous.

     a) Notices. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Notice of Conversion,
shall be in writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service, addressed to the Company, at the address set forth
above, or such other facsimile number or address as the Company may specify for such purpose
by notice to the Holder delivered in accordance with this Section 9(a). Any and all notices
or other communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, or sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile number or address of the Holder
appearing on the books of the Company, or if no such facsimile number or address appears, at
the principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the facsimile
number specified on the signature page prior to 5:30 p.m. (New York City time), (ii) the
date immediately following the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile number specified on the signature page between 5:30
p.m. (New York City time) and 11:59 p.m. (New York City time) on any date, (iii) the second
Business Day following the date of mailing, if sent by nationally recognized overnight
courier service or (iv) upon actual receipt by the party to whom such notice is required to
be given.

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

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

     d) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York, without regard to

29

 

the principles of conflict of laws thereof. Each party agrees that all legal
proceedings concerning the interpretation, enforcement and defense of the transactions
contemplated by any of the Transaction Documents (whether brought against a party hereto or
its respective Affiliates, directors, officers, shareholders, employees or agents) shall be
commenced in the state and federal courts sitting in the City of New York, Borough of
Manhattan (the “New York Courts”). Each party hereto hereby irrevocably submits to
the exclusive jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction Documents), and
hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any
claim that it is not personally subject to the jurisdiction of such New York Courts, or such
New York Courts are improper or inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or certified mail
or overnight delivery (with evidence of delivery) to such party at the address in effect for
notices to it under this Debenture and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any other manner permitted by applicable
law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding arising out of or
relating to this Debenture or the transactions contemplated hereby. If either party shall
commence an action or proceeding to enforce any provisions of this Debenture, then the
prevailing party in such action or proceeding shall be reimbursed by the other party for its
attorneys fees and other costs and expenses incurred in the investigation, preparation and
prosecution of such action or proceeding.

     e) Waiver and Amendment. No provision of this Debenture may be waived,
modified, supplemented or amended except in a written instrument signed, in the case of an
amendment, by the Company and the Holder, except that Section 7 hereof may be waived or
amended with the prior written consent of the holders of at least 67% of the principal
amount of Debentures then outstanding (provided that any Debentures held by the Company and
its Affiliates shall be deemed not to be outstanding for this purpose and no consideration
shall be offered or paid to any holder of Debentures to consent to any such amendment or
waiver unless the same consideration is offered to all holders of the Debentures). Any
waiver by the Company or the Holder of a breach of any provision of this Debenture shall not
operate as or be construed to be a waiver of any other breach of such provision or of any
breach of any other provision of this Debenture. The failure of the Company or the Holder
to insist upon strict adherence to any term of this Debenture on one or more occasions shall
not be considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Debenture. Any waiver by the
Company or the Holder must be in writing.

     f) Severability. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any provision

30

 

is inapplicable to any Person or circumstance, it shall nevertheless remain applicable
to all other Persons and circumstances. If it shall be found that any interest or other
amount deemed interest due hereunder violates the applicable law governing usury, the
applicable rate of interest due hereunder shall automatically be lowered to equal the
maximum rate of interest permitted under applicable law. The Company covenants (to the
extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay, extension or
usury law or other law which would prohibit or forgive the Company from paying all or any
portion of the principal of or interest on this Debenture as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may lawfully do so) hereby
expressly waives all benefits or advantage of any such law, and covenants that it will not,
by resort to any such law, hinder, delay or impede 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.

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

     j) Secured Obligation. The obligations of the Company under this Debenture are
secured pursuant to the Security Agreement and the Mortgages between the Company, the
Subsidiaries and the Secured Parties (as defined therein) granting a second lien on all
those assets of the Company and each Subsidiary, with respect to which JP Morgan has a first
lien pursuant to the Credit Agreement.

31

 

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

(Signature Pages Follow)

32

 

     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.

TETON ENERGY CORPORATION

By:                                                             

     Name: Dominic J. Bazile II

     Title: Executive Vice President and Chief Operating Officer

Facsimile No. for delivery of Notices: (303) 565-4606

33

 

ANNEX A

NOTICE OF CONVERSION

     The undersigned hereby elects to convert principal under the 10.75% Secured Convertible
Debenture due June 18, 2013 of Teton Energy Corporation, a Delaware corporation (the
“Company”), into shares of common stock (the “Common Stock”), of the Company
according to the conditions hereof, as of the date written below. If shares of Common Stock 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 specified under Section
4 of this Debenture, as determined in accordance with Section 13(d) of the Exchange Act.

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

Conversion calculations:

Date to Effect Conversion:

Principal Amount of Debenture to be Converted:

Number of shares of Common Stock to be issued:

Signature:

Name:

Address for Delivery of Common Stock Certificates:

Or

DWAC Instructions:

Broker No:                                        

Account No:                                        

34

 

Schedule 1

CONVERSION SCHEDULE

The 10.75% Secured Convertible Debentures due on June 18, 2013 in the aggregate principal amount of
$40,000,000 are issued by Teton Energy Corporation, a Delaware corporation. This Conversion
Schedule reflects conversions made under Section 4 of the above referenced Debenture.

Dated:

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

	 	 
	 	 
	 	 
	 

	 	 
	 	 
	 	 

35

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