(14) VOTING RIGHTS. The Holder shall have no voting rights as the holder of this Note, except as required by law, including, but not limited to, the General Corporation Law of the State of Delaware, and as expressly provided in this Note.
(15) COVENANTS. The following covenants shall apply so long as this Note is outstanding, but not thereafter:
(a) Rank. This Note shall be a senior secured obligation of the Company and, together with the Other Notes shall constitute the only senior Indebtedness of the Company secured by a consensual lien granted by the Company (other than certain capital lease obligations entered into prior to December 31, 2004 whose outstanding balance did not exceed $150,000 as of March 8, 2005).
(b) Incurrence of Indebtedness. The Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness, other than (i) the Indebtedness evidenced by this Note and the Other Notes and (ii) Permitted Indebtedness.
(c) Existence of Liens. The Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by the Company or any of its Subsidiaries (collectively, “Liens”) other than Permitted Liens.
(d) Restricted Payments. The Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or make any payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Permitted Indebtedness whether by way of payment in respect of principal of (or premium, if any) or interest on such Indebtedness if at the time such payment is due or is otherwise made or, after giving effect to such payment, an event constituting, or that with the passage of time and without being cured would constitute, an Event of Default has occurred and is continuing; provided, that, notwithstanding the foregoing, no principal (or any portion thereof) (i) of any Subordinated Indebtedness may be paid (whether upon maturity, redemption, acceleration or otherwise) so long as this Note is outstanding and (ii) of the XEL Notes may be paid (whether upon maturity, redemption acceleration or otherwise) unless one (1) of the following conditions has been met: (A) the Required Holders have given consent prior to the making of any such payment, (B) the Required Holders have given prior consent to an amendment of the XEL Notes that allows such payment, (C) the Net Cash Balance (as hereinafter defined) following any such payment exceeds 100% of the aggregate principal amount outstanding under the Notes or (D) the Closing Sale Price of the Common Stock exceeds $1.50 for any twenty (20) consecutive Trading Days out of the thirty (30) Trading Days immediately preceding the date of such payment and the Registration Statement filed pursuant to the Registration Rights Agreement shall be effective and available for the resale of all Registrable Securities. For purposes of this Section 15(d), “Net Cash Balance” means, at any date, the difference between aggregate amount of all cash and cash equivalents (not including restricted cash) and short term investments as would be shown or reflected on the Company’s balance sheet as at such date if a balance sheet were prepared at such date, minus (ii) any Indebtedness other than under this Note, the Other Notes, or Permitted Indebtedness on such date.
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(e) XEL Notes. The Company shall not increase the aggregate principal amount of the XEL Notes without the prior written consent of the Required Holders; provided that such principal amount may be increased to include any unpaid interest that has accrued at the interest rate or default interest rate set forth thereunder as of the Issuance Date.
(16) PARTICIPATION. The Holder, as the holder of this Note, shall be entitled to receive such dividends paid and distributions made to the holders of Common Stock to the same extent as if the Holder had converted this Note into Common Stock (without regard to any limitations on conversion herein or elsewhere) and had held such shares of Common Stock on the record date for such dividends and distributions. Payments under the preceding sentence shall be made concurrently with the dividend or distribution to the holders of Common Stock.
(17) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The written agreement of the Company and either (i) the affirmative vote at a meeting duly called for such purpose or (ii) the written consent without a meeting of the Required Holders shall be required for any change or amendment to this Note or the Other Notes.
(18) TRANSFER; REGISTERED HOLDER AS OWNER.
(a) Transfer by Holder. This Note and any shares of Common Stock issued upon conversion of this Note may be offered, sold, assigned or transferred by the Holder without the consent of the Company, subject only to the provisions of Section 2(f) of the Securities Purchase Agreement. Each Person to whom this Note is sold, assigned or transferred by the Holder shall provide to the Company true and accurate information as to such Person comparable to that contained in columns (1), (2) and (7) of the Schedule of Buyers attached to the Securities Purchase Agreement and as to the jurisdiction of residence of such Person.
(b) Registered Holder as Owner. The Company shall be entitled to treat the registered Holder of this Note as the absolute owner hereof and shall incur no liability for the issuance of Common Stock or for other action taken hereunder in good faith based upon such ownership until such time as a written assignment of this Note is effected by such registered owner, which assignment has been delivered to the Company and satisfies the requirements of Sections 18(a) and 19(a) hereof.
(19) REISSUANCE OF THIS NOTE.
(a) Transfer. If this Note is to be transferred, the Holder shall surrender this Note to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Note (in accordance with Section 19(d)), registered as the Holder may request, representing the outstanding Principal being transferred by the Holder and, if less then the entire outstanding Principal is being transferred, a new Note (in accordance with Section 19(d)) to the Holder representing the outstanding Principal not being transferred. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of Section 3(c)(iv) following conversion or redemption of any portion of this Note, the outstanding Principal represented by this Note may be less than the Principal stated on the face of this Note.
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(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with Section 19(d)) representing the outstanding Principal.
(c) Note Exchangeable for Different Denominations. This Note is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes (in accordance with Section 19(d) and in principal amounts of at least $100,000) representing in the aggregate the outstanding Principal of this Note, and each such new Note will represent such portion of such outstanding Principal as is designated by the Holder at the time of such surrender.
(d) Issuance of New Notes. Whenever the Company is required to issue a new Note pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii) shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or in the case of a new Note being issued pursuant to Section 19(a) or Section 19(c), the Principal designated by the Holder which, when added to the principal represented by the other new Notes issued in connection with such issuance, does not exceed the Principal remaining outstanding under this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as indicated on the face of such new Note, which is the same as the Issuance Date of this Note, (iv) shall have the same rights and conditions as this Note, and (v) shall represent accrued and unpaid Interest and Late Charges on the Principal and Interest of this Note, from the Issuance Date.
(20) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and any of the other Transaction Documents at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder’s right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Note. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.
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(21) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting Company creditors’ rights and involving a claim under this Note, then the Company shall pay the costs incurred by the Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, but not limited to, attorneys’ fees and disbursements.
(22) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by the Company and all the Purchasers and shall not be construed against any person as the drafter hereof. The headings of this Note are for convenience of reference and shall not form part of, or affect the interpretation of, this Note.
(23) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.
(24) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the arithmetic calculation of the Conversion Rate or the Redemption Price, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within one (1) Business Day of receipt, or deemed receipt, of the Conversion Notice or Redemption Notice or other event giving rise to such dispute, as the case may be, to the Holder. If the Holder and the Company are unable to agree upon such determination or calculation within one (1) Business Day of such disputed determination or arithmetic calculation being submitted to the Holder, then the Company shall, within one Business Day submit via facsimile (a) the disputed determination of the Closing Bid Price, the Closing Sale Price or the Weighted Average Price to an independent, reputable investment bank selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of the Conversion Rate or the Redemption Price to the Company’s independent, outside accountant. The Company, at the Company’s expense, shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than five (5) Business Days from the time it receives the disputed determinations or calculations. Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.
(25) NOTICES; PAYMENTS.
(a) Notices. Whenever notice is required to be given under this Note, unless otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Note, including in reasonable detail a description of such action and the reason therefore. Without limiting the generality of the foregoing, the Company will give written notice to the Holder (i) immediately upon any adjustment of the Conversion Price, setting forth in reasonable detail, and certifying, the calculation of such
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adjustment and (ii) at least twenty (20) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation, provided in each case that such information shall be made known to the public prior to or in conjunction with such notice being provided to the Holder.
(b) Payments. Whenever any payment of cash is to be made by the Company to any Person pursuant to this Note, such payment shall be made in lawful money of the United States of America by a check drawn on the account of the Company and sent via overnight courier service to such Person at such address as previously provided to the Company in writing (which address, in the case of each of the Purchasers, shall initially be as set forth on the Schedule of Buyers attached to the Securities Purchase Agreement); provided that the Holder may elect to receive a payment of cash via wire transfer of immediately available funds by providing the Company with prior written notice setting out such request and the Holder’s wire transfer instructions. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a Business Day, the same shall instead be due on the next succeeding day which is a Business Day and, in the case of any Interest Date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of Interest due on such date. Any amount of Principal or other amounts due under the Transaction Documents, other than Interest, which is not paid when due shall result in a late charge being incurred and payable by the Company in an amount equal to interest on such amount at the rate of twelve percent (12%) per annum from the date such amount was due until the same is paid in full (“Late Charge”).
(26) CANCELLATION. After all Principal, accrued Interest and other amounts at any time owed on this Note have been paid in full, this Note shall automatically be deemed canceled, shall be surrendered to the Company for cancellation and shall not be reissued.
(27) WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the Securities Purchase Agreement.
(28) GOVERNING LAW. This Note shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Note shall be governed by, the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.
(29) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall have the following meanings:
(a) “Approved Stock Plan” means any employee benefit plan which has been approved by the Board of Directors of the Company, pursuant to which the Company’s securities may be issued to any consultant, employee, officer or director for services provided to the Company.
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(b) “Bloomberg” means Bloomberg Financial Markets.
(c) “Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.
(d) “Calendar Quarter” means each of: the period beginning on and including January 1 and ending on and including March 31; the period beginning on and including April 1 and ending on and including June 30; the period beginning on and including July 1 and ending on and including September 30; and the period beginning on and including October 1 and ending on and including December 31.
(e) “Change of Control” means any Fundamental Transaction other than (A) a Fundamental Transaction in which holders of the Company’s capital stock having voting power immediately prior to the Fundamental Transaction continue after the Fundamental Transaction to hold publicly traded securities and, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities, or (B) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company.
(f) “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the last closing bid price and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing trade price, as the case may be, then the last bid price or last trade price, respectively, of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the last closing bid price or last trade price, respectively, of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the case may be, of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 24. All such determinations to be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.
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(g) “Closing Date” shall have the meaning set forth in the Securities Purchase Agreement, which date is the date the Company initially issued Notes pursuant to the terms of the Securities Purchase Agreement.
(h) “Common Stock Deemed Outstanding” means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Sections 7(a)(i) and 7(a)(ii) hereof regardless of whether the Options or Convertible Securities are actually exercisable at such time, but excluding any Common Stock owned or held by or for the account of the Company or issuable upon conversion or exercise, as applicable, of the Notes and the Warrants.
(i) “Convertible Securities” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for Common Stock.
(j) “Eligible Market” means the Principal Market, The New York Stock Exchange, Inc., the American Stock Exchange or The Nasdaq Capital Market.
(k) “Equity Conditions” means each of the following conditions: (i) on each day during the period beginning one (1) month prior to the applicable date of determination and ending on and including the applicable date of determination, either (x) the Registration Statement filed pursuant to the Registration Rights Agreement shall be effective and available for the resale of all remaining Registrable Securities in accordance with the terms of the Registration Rights Agreement and there shall not have been any Grace Periods (as defined in the Registration Rights Agreement) or (y) all shares of Common Stock issuable upon conversion of the Notes and exercise of the Warrants shall be eligible for sale without restriction and without the need for registration under any applicable federal or state securities laws; (ii) on each day during the period beginning three (3) months prior to the applicable date of determination and ending on and including the applicable date of determination (the “Equity Conditions Measuring Period”), the Common Stock is designated for quotation on the Principal Market or on another Eligible Market and shall not have been suspended from trading on such exchange or market (other than suspensions of not more than two (2) days and occurring prior to the applicable date of determination due to business announcements by the Company) nor, solely in the event that the Common Stock is not designated for quotation on the Principal Market or on another Eligible Market, shall delisting or suspension by such exchange or market been threatened or pending either (A) in writing by such exchange or market or (B) by falling below the then effective minimum listing maintenance requirements of such exchange or market; (iii) during the one (1) year period ending on and including the date immediately preceding the applicable date of determination, the Company shall have delivered any Conversion Shares to be delivered upon conversion of the Notes and Warrant Shares upon exercise of the Warrants to the holders on a timely basis as set forth in Section 3(c)(ii) hereof (and analogous provisions under the Other Notes) and Sections 2(a) of the Warrants and Notes upon exercise of the Additional Investment Rights; (iv) during the Equity Conditions Measuring Period any applicable shares of Common Stock to be issued in connection with the event requiring determination may be issued in full without violating Section 3(d) hereof and the rules or regulations of the Nasdaq National Market or The Nasdaq Capital Market, as applicable; (v) during the Equity Conditions Measuring Period, the Company shall not have failed to timely make any payments within five
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(5) Business Days of when such payment is due pursuant to any Transaction Document; (vi) during the Equity Conditions Measuring Period, there shall not have occurred either (A) the public announcement of a pending, proposed or intended Fundamental Transaction which has not been abandoned, terminated or consummated, or (B) an Event of Default or (vii) during the period commencing on the Interest Notice Due Date, the Installment Notice Due Date, the Special Installment Notice Due Date or the Mandatory Conversion Notice Date, as applicable, and ending on the Interest Date, the Installment Date, the Special Installment Date or the Mandatory Conversion Date, as applicable, an event that with the passage of time or giving of notice would constitute an Event of Default; (viii) on the applicable date of determination, the Company shall have no knowledge of any fact that would cause (x) the Registration Statements required pursuant to the Registration Rights Agreement not to be effective and available for the resale of all remaining Registrable Securities in accordance with the terms of the Registration Rights Agreement or (y) any shares of Common Stock issuable upon conversion of the Notes and shares of Common Stock issuable upon exercise of the Warrants not to be eligible for sale without restriction pursuant to Rule 144(k) and any applicable state securities laws; (ix) during the Equity Conditions Measuring Period, the Company otherwise shall have been in material compliance with and shall not have materially breached any provision, covenant, representation or warranty of any Transaction Document and (x) the Interim Conversion Price (without regard to the application of the Interim Conversion Floor Price set forth in the proviso to the definition thereof) shall not be less than $0.5217 (as appropriately adjusted for any stock split, stock dividend, stock combination or other similar transaction).
(l) “Exchange Closing Date” shall have the meaning set forth in the Exchange Agreements, which date is the date the Company exchanged the Notes pursuant to the terms of the Exchange Agreement.
(m) “Excluded Securities” means any Common Stock issued or issuable: (i) in connection with any Approved Stock Plan; (ii) upon conversion of the Notes or the exercise of the Warrants, including Common Stock issued upon a Company Conversion; (iii) pursuant to a bona fide firm commitment underwritten public offering with a nationally recognized underwriter which generates gross proceeds to the Company in excess of $20,000,000 (other than an “at-the-market offering” as defined in Rule 415(a)(4) under the 1933 Act and “equity lines”); (iv) in connection with the payment of any Interest Shares on the Notes; (v) in connection with any acquisition by the Company, whether through an acquisition of stock or a merger of any business, assets or technologies the primary purpose of which is not to raise equity capital; and (vi) upon conversion of any Options or Convertible Securities which are outstanding on the day immediately preceding the Subscription Date, provided that the terms of such Options or Convertible Securities are not amended, modified or changed on or after the Subscription Date.
(n) “Fiscal Quarter” means each of the fiscal quarters adopted by the Company for financial reporting purposes that correspond to the Company’s fiscal year that ends on the Friday nearest to June 30, or such other fiscal quarter adopted by the Company for financial reporting purposes in accordance with GAAP.
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(o) “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or more related transactions, (i) consolidate or merge with or into (whether or not the Company is the surviving corporation) another Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of the Company to another Person, or (iii) allow another Person to make a purchase, tender or exchange offer that is accepted by the holders of more than the 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the Person or Persons making or party to, or associated or affiliated with the Persons making or party to, such purchase, tender or exchange offer), or (iv) consummate a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than the 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock purchase agreement or other business combination), or (v) reorganize, recapitalize or reclassify its Common Stock.
(p) “GAAP” means United States generally accepted accounting principles, consistently applied.
(q) “Holder Pro Rata Amount” means a fraction (i) the numerator of which is the Principal amount of this Note on the Exchange Closing Date and (ii) the denominator of which is the aggregate principal amount of all Notes exchanged pursuant to the Exchange Agreements on the Exchange Closing Date.
(r) “Installment Amount” means (a) with respect to any Scheduled Installment Date, the Scheduled Installment Amount with respect to such date and (b) with respect to any Special Installment Date, the Special Installment Amount with respect to such date. In the event the Holder shall sell or otherwise transfer any portion of this Note, the transferee shall be allocated a pro rata portion of the each unpaid Scheduled Installment Amount and Special Installment Amount hereunder.
(s) “Installment Date” means (a) each Scheduled Installment Date, and (b) each Special Installment Date.
(t) “Interest Conversion Price” means, with respect to any Interest Date, that price which shall be computed as 90% of the arithmetic average of the Weighted Average Price of the Common Stock on each of the fifteen (15) consecutive Trading Days commencing two (2) Trading Days after the Interest Notice Due Date and ending on the fourth (4th) Trading Day immediately preceding the applicable Interest Date (each, an “Interest Measuring Period”). All such determinations to be appropriately adjusted for any stock split, stock dividend, stock combination or other similar transaction during such period.
(u) “Interim Conversion Period” means each consecutive twenty-two (22) Trading Day period beginning with the period commencing on March 9, 2006 and ending April 7, 2006. For purposes of clarification, the next period commences on April 10, 2006 and ends on May 9, 2006 and the last Interim Conversion Period ends on the Maturity Date.
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(v) “Material Subsidiary” means any Subsidiary (as defined in the Securities Purchase Agreement) that is a “significant subsidiary” within the meaning of Regulation S-X adopted by the Securities and Exchange Commission.
(w) “Maximum Interim Amount” means, with respect to any Interim Conversion Period, an amount that is equal to the product of (A) the Holder Pro Rata Amount and (B) the greater of (i) 300,000 shares and (ii) 20% of the aggregate number of shares of Common Stock reported by Bloomberg as having traded during the twenty-two (22) consecutive Trading Day period ending on, and including, the applicable Conversion Date.
(x) “Minimum Interim Amount” means, with respect to any Interim Conversion Period, an amount that is equal to the product of 100,000 shares and the Holder Pro Rata Amount.
(y) “Options” means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible Securities.
(z) “Outstanding Amount” means, at any date, the sum of (i) the then outstanding Principal, (ii) accrued and unpaid Interest with respect to such Principal and (iii) accrued and unpaid Late Charges with respect to such Principal and Interest.
(aa) “Parent Entity” of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction.
(bb) “Permitted Indebtedness” means (A) the XEL Notes, (B) Indebtedness incurred by the Company that is made expressly subordinate in right of payment to the Indebtedness evidenced by this Note, as reflected in a written agreement reasonably acceptable to the Holder and approved by the Holder in writing, and which Indebtedness does not provide at any time for (1) the payment, prepayment, repayment, repurchase or defeasance, directly or indirectly, of any principal or premium, if any, thereon until ninety-one (91) days after the Maturity Date or later and (2) total interest and fees at a rate in excess of six percent (6%) per annum (any such Indebtedness, the “Subordinated Indebtedness”), (C) Indebtedness secured by Permitted Liens, (D) Indebtedness to trade creditors incurred in the ordinary course of business, and (E) extensions, refinancings and renewals of any items of Permitted Indebtedness (other than the XEL Notes), provided that the principal amount is not increased or the terms modified to impose more burdensome terms upon the Company or its Subsidiary, as the case may be.
(cc) “Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of business by operation of law with respect to a liability that is not yet due or delinquent, (iii) any Lien created by operation of law, such as materialmen’s liens, mechanics’ liens and other similar liens, arising in the ordinary course of business with respect to a liability that is not yet due or delinquent or that are being contested in good faith by appropriate
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proceedings, (iv) Liens securing the Company’s obligations under the Notes, (v) Liens (A) upon or in any equipment (as defined in the Security Agreement) acquired or held by the Company or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of such equipment, or (B) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment, (vi) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (i) and (v) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the Indebtedness being extended, renewed or refinanced does not increase, (vii) leases or subleases and licenses and sublicenses granted to others in the ordinary course of business, not interfering in any material respect with the business of the Company and its Subsidiaries taken as a whole, (viii) Liens in favor of customs and revenue authorities arising as a matter of law to secure payments of custom duties in connection with the importation of goods and (ix) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 4(a)(ix).
(dd) “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.
(ee) “Present Value of Interest” means the amount of any interest that, but for a Mandatory Conversion, would have accrued under this Note at the Interest Rate for the period from the Mandatory Conversion Date through the Maturity Date discounted to the present value of such interest using a discount rate equal to six percent (6%).
(ff) “Principal Market” means the Nasdaq National Market.
(gg) “Redemption Premium” means (i) in the case of the Events of Default described in Section 4(a)(i) - (vi) and (ix) - (xii), 120% or (ii) in the case of the Events of Default described in Section 4(a)(vii) - (viii), 100%.
(hh) “Registration Rights Agreement” means that certain registration rights agreement dated as of the Subscription Date by and among the Company and the initial holders of the Notes relating to, among other things, the registration of the resale of the Common Stock issuable upon conversion of the Notes and exercise of the Warrants.
(ii) “Required Holders” means the holders of Notes representing at least a majority of the aggregate principal amount of the Notes then outstanding.
(jj) “Scheduled Installment Amount” means, with respect to any Scheduled Installment Date, the lesser of (i) the difference between (A) the product of (1) $500,000, multiplied by (2) the Holder Pro Rata Amount and (B) 50% of the product of (1) any shares acquired by the Holder pursuant to Optional Interim Conversions pursuant to Section 3(c)(ii)(B) hereof since the last Scheduled Installment Date (the “Scheduled Conversion Period”) and (2) the applicable Interim Conversion Prices indicated on the Conversion Notices delivered during the applicable Scheduled Conversion Period and (ii) the Principal amount (plus
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any accrued and unpaid interest thereon) under this Note as of such Installment Date, as any such Scheduled Installment Amount may be reduced pursuant to the terms of this Note, whether upon conversion, redemption or otherwise. For the avoidance of doubt, any accrued and unpaid interest which may be paid pursuant to this definition shall be deducted from the total interest to be paid on any subsequent Interest Payment Date.
(kk) “Scheduled Installment Date” means the tenth day of each of the consecutive Calendar Quarters commencing on July 10, 2005 and ending the earlier of the Maturity Date or the date on which this Note is no longer outstanding.
(ll) “SEC” means the United States Securities and Exchange Commission.
(mm) “Securities Purchase Agreement” means that certain securities purchase agreement dated as of the Subscription Date by and among the Company and the initial holders of the Notes pursuant to which the Company issued the Notes.
(nn) “Special Installment Amount” means, with respect to any Special Installment Date, at the option of the Holder, an amount equal to one of the following: (i) the difference between (A) the Outstanding Amount and (B) the product of (1) 60% of the Tested Working Capital multiplied by (2) the Holder Pro Rata Amount, (ii) the product of (A) $2,000,000 multiplied by (B) the Holder Pro Rata Amount, or (iii) any amount that is less than the amounts set forth in clauses (i) and (ii) hereof, in each case as any such Special Installment Amount may be reduced pursuant to the terms of this Note, whether upon conversion, redemption or otherwise.
(oo) “Special Installment Date” means the date that is twenty (20) Trading Days after the receipt by the Company of a Special Installment Notice. In the event that the day specified herein shall be prior to the end of the applicable Company Conversion Period, the Special Installment Date shall be the third (3rd) day following the end of such period.
(pp) “Subscription Date” means March 20, 2005.
(qq) “Successor Entity” means the Person, which may be the Company, formed by, resulting from or surviving any Fundamental Transaction or the Person with which such Fundamental Transaction shall have been made, provided that if such Person is not a publicly traded entity whose common stock or equivalent equity security is quoted or listed for trading on an Eligible Market, Successor Entity shall mean such Person’s Parent Entity.
(rr) “Target Working Capital” means, at any date, an amount equal to the lesser of (i) $2,000,000 or (ii) the outstanding Principal of the Notes.
(ss) “Tested Working Capital” means, at any date, an amount equal to the following amounts shown or reflected on the Company’s consolidated balance sheet as of such date (i) the aggregate amount of all rights to payment for goods sold or leased or services provided, less discounts, returns and allowances plus (ii) the aggregate amount of cash and cash equivalents (not including restricted cash) and short term investments, in each case only to the extent such cash, cash equivalents and short term investments are on deposit in each “Deposit Account” at United States banks pledged to the “Collateral Agent” and constituting “Collateral” under (and as such terms and defined in the “Pledge and Security Agreement” (as defined in the Securities Purchase Agreement) minus (iii) the aggregate amount owed to all trade creditors in the ordinary course of business.
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(tt) “Trading Day” means any day on which the Common Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then traded; provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York Time).
(uu) “Warrants” has the meaning ascribed to such term in the Securities Purchase Agreement, and shall include all warrants issued in exchange therefor or replacement thereof.
(vv) “Weighted Average Price” means, for any security as of any date, the dollar volume-weighted average price for such security on the Principal Market during the period beginning at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the Principal Market publicly announces is the official close of trading) as reported by Bloomberg through its “Volume at Price” functions, or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or such other time as such market publicly announces is the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as such market publicly announces is the official close of trading) as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Weighted Average Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 24. All such determinations to be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.
(ww) “XEL Notes” means the convertible promissory notes in the original aggregate principal amount of $10,480,000 due February 5, 2006 issued in connection with the acquisition by the Company of XEL Communications, Inc., as amended by the XEL Amendment (as defined the Exchange Agreements) and having an outstanding principal balance in the aggregate not in excess of $2,900,000 as of the Subscription Date; provided, however, that such notes shall not be further amended, restated, renewed, refunded, refinanced or otherwise extended after the Exchange Closing Date and the outstanding principal balance shall not be increased after the Subscription Date without the consent of the Required Holders.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the Issuance Date set out above.
| VERILINK CORPORATION |
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| By: | |
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| Name: | |
| Title: | |
EXHIBIT I
VERILINK CORPORATION
CONVERSION NOTICE
Reference is made to the Amended and Restated Senior Secured Convertible Note (the “Note”) issued to the undersigned by Verilink Corporation (the “Company”). In accordance with and pursuant to the Note, the undersigned hereby elects to convert the Conversion Amount (as defined in the Note) of the Note indicated below into shares of Common Stock par value $.01 per share (the “Common Stock”) of the Company, as of the date specified below.
| Date of Conversion: __________________________________________________________________________________ |
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| Aggregate Conversion Amount to be converted: ____________________________________________________________ |
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Please confirm the following information: |
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| Is the Interim Conversion Price being used? YES _________ NO _________ |
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| Conversion Price or Interim Conversion Price, as applicable: __________________________________________________ |
| |
| Number of shares of Common Stock to
be issued (“Conversion Shares”): _______________________________________________________________________ |
Notwithstanding anything to the contrary contained herein, this Conversion Notice shall constitute a representation by the undersigned that, after giving effect to the conversion provided for in this Conversion Notice, the undersigned (together with its affiliates) will not have beneficial ownership (together with the beneficial ownership of such Person’s affiliates) of a number of shares of Common Stock which exceeds the Maximum Percentage.
Please issue the Common Stock into which the Note is being converted in the following name and to the following address:
| Issue to: ____________________________________________________________________________________________ |
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| ____________________________________________________________________________________________ |
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| ____________________________________________________________________________________________ |
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| Facsimile Number: ___________________________________________________________________________________ |
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| Authorization: _______________________________________________________________________________________ |
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| By: ___________________________________________________________________________________________ |
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| Title: _____________________________________________________________________________________ |
Dated: ___________________________________________________________________________________________________ |
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| Account Number: ____________________________________________________________________________________ |
| (if electronic book entry transfer) |
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| Transaction Code Number: _____________________________________________________________________________ |
| (if electronic book entry transfer) |
The undersigned confirms that the Conversion Shares have been sold in compliance with the applicable Registration Statement (as defined in the Registration Rights Agreement) relative to the registration for resale of such Conversion Shares.
Yes _________ No_________
Date: _________________ ___, _______ | |
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Name of Registered Holder | |
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By: | | |
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Name: | | |
Title: | | |
ACKNOWLEDGMENT
The Company hereby acknowledges this Conversion Notice and hereby directs American Stock Transfer and Trust Company to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions dated March 21, 2005 and March 9, 2006 from the Company and acknowledged and agreed to by American Stock Transfer and Trust Company.
| VERILINK CORPORATION |
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| By: | |
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| Name: | |
| Title: | |
