Quarterly report pursuant to sections 13 or 15(d)

Debentures and Notes Payable

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Debentures and Notes Payable
6 Months Ended
Jun. 30, 2012
Debentures and Notes Payable

Note 4 – Debentures and Notes Payable

 

Debentures payable consist of the following:

 

    June 30, 
2012
    December 31,
2011
 
Senior Convertible Debentures:                
6.25% Debenture due 2014   $ 31,788     $ 31,788  
4.75% Debenture due 2014     78,092       81,656  
5.0% Note due 2013     46,333       -  
Total Debentures     156,213       113,444  
Less - Current Maturities     (46,333 )     -  
Long-term Debentures   $ 109,880     $ 113,444  

 

Securities Purchase Agreement

 

6.25% Convertible Debenture due December 31, 2014 (stated in pre-split equivalent prices and shares)

 

On November 21, 2007, the Company issued and sold a convertible note in the principal amount of $1,250,000 to Golden State (the "Debenture"). Pursuant to the terms of the Debenture, Golden State may, at its election, convert all or a part of the Debenture into shares of the Company's common stock at a conversion rate equal to the lesser of (i) $2.00 or (ii) 90% of the average of the five lowest volume weighted average prices during the twenty trading days prior to Golden State's election to convert, subject to adjustment as provided in the Debenture. In addition, pursuant to the terms of the Debenture, the Company agreed to file a registration statement covering the shares of common stock issuable upon conversion or redemption of the Debenture. The Company filed a registration statement covering the shares to be issued upon conversion of the Debenture. Included in the registration statement were 4.25 million pre-split shares issuable on the Debenture based on 2007 market prices and assuming full conversion of the convertible debenture. The registration statement became effective on January 4, 2008.

 

Golden State advanced $125,000 on the $1.25 million Debenture on November 9, 2007 and $746,213 in January 2008 at which time the Company placed 7,961,783 shares of common stock in escrow to be released as debentures are converted. As of June 30, 2012, Golden State has funded an aggregate of $871,213 on the Debenture. Golden State will be obligated to fund the Company for the remaining $378,787 in principal on the Debenture upon the effectiveness of a registration statement underlying the remaining unfunded principal balance on the Debenture. At this time, the Company has not filed a registration statement. At various dates during 2011, $157,331 of the Debenture was converted into 16,156,404 shares of common stock at prices ranging from $0.0059 to $0.0174 based on the formula in the convertible debenture. Additionally $12,669 was added to the principle balance of the debenture in payment of accrued interest during 2011. There are no conversions for the period ended June 30, 2012.

 

The conversion price for the $1.25 million Debenture is the lesser of (i) $2.00 or (ii) 90% of the average of the five lowest volume weighted average prices during the twenty (20) trading days prior to the conversion.  If Golden State elects to convert a portion of the debenture and, on the day that the election is made, the volume weighted average price is below $0.75, the Company shall have the right to prepay that portion of the debenture that Golden State elected to convert, plus any accrued and unpaid interest, at 135% of such amount.

 

In addition to standard default provisions concerning timeliness of payments, delivery and notifications, the $1.25 million convertible debenture issued to Golden State on January 15, 2008 (the “Second Debenture”) will be in default if the common stock of the Company trades at a price per share of $7.35 or lower, regardless of whether the trading price subsequently is higher than $7.35 per share. The trading price was at $7.35 or lower on several occasions during and subsequent to the period ended June 30, 2012. On each of the occasions Golden State, by separate letter agreements, agreed that the occasions did not constitute a default and thereby waived the default provision for those occasions only.  (See Note 9 Subsequent Events) 

 

4.75% Convertible Debenture due November 3, 2014

 

 On November 3, 2006, the Company also issued to Golden State a 4.75% convertible debenture in a principal amount of $100,000, due 2011, and warrants to buy 1,000,000 shares of the common stock at an exercise price of $10.90 per share.  In connection with each conversion, Golden State is expected to simultaneously exercise a percentage of warrants equal to the percentage of the principal being converted.  During 2011, Golden State converted $6,760 of the $100,000 debenture into 60,601,868, shares of common stock, exercised warrants to purchase 67,600 shares of common stock at $10.90 per share based on the formula in the convertible debenture. Additionally Golden Gate advanced $753,381 against future exercises of warrants of which $736,840 was applied to the exercise of warrants leaving $16,542 of unapplied advances at December 31, 2011. During 2012, Golden State converted $3,563 of the $100,000 debenture into 2,901,390 post-split shares of common stock, exercised warrants to purchase 1,018 post-split shares of common stock at $381.50 per share based on the formula in the convertible debenture. Additionally Golden Gate advanced $638,831 against future exercises of warrants of which $388,422 was applied to the exercise of warrants leaving $266,951 of unapplied advances at June 30, 2012.

 

The conversion price for the 4.75% $100,000 convertible debenture is the lesser of (i) $4.00 or (ii) 80% of the average of the five lowest volume weighted average prices during the twenty (20) trading days prior to the conversion. If Golden State elects to convert a portion of the debenture and, on the day that the election is made, the volume weighted average price is below $0.75, the Company shall have the right to prepay that portion of the debenture that Golden State elected to convert, plus any accrued and unpaid interest, at 135% of such amount.

  

 5% Convertible Promissory Note

 

On June 6, 2012 (the “Effective Date”), the Company issued and sold a convertible promissory note (the "Note") in the principal amount of $275,000 to JMJ Financial (“JMJ”). The Note includes a $25,000 original issue discount (the “OID”) that will be prorated based on the advances actually paid to the Company. JMJ advanced $50,000 upon execution of the Note and collected $4,000 OID. Pursuant to the terms of the Note, JMJ may, at its election, convert all or a part of the Note into shares of the Company's common stock at a conversion rate equal to the lesser of (i) $0.35 or (ii) 70% of the lowest trade price during the twenty-five trading days prior to JMJ’s election to convert. In addition, pursuant to the terms of the Note, the Company agreed to include on the next registration statement filed by the Company with the SEC all shares issuable upon conversion of the Note. Failure to do so will result in liquidated damages of 25% of the outstanding principal balance of the Note. If the Company repays the Note on or before ninety days from the Effective Date, the interest rate will be zero percent. If the company does not repay the Note on or before ninety days from the Effective Date, a one-time interest charge of 5% shall be applied to the principal sum of $275,000. The principal of the Note is due one year from the date of each of the principal amounts advanced.