SUBRORDINATED NOTE
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No. 1 of 4 Notes As of April 23 , 2003
THIS NOTE IS ISSUED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
PROVISIONS OF THE SECURITIES ACT OF 1933 (THE "ACT") AND QUALIFICATION
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. NEITHER it NOR THE SHARES
OF COMMON STOCK FOR WHICH IT CAN BE REFEEMED MAY BE SOLD, HYPOTHECATED OR
OTHERWISE TRANSFERRED UNLESS REGISTERED PURSUANT TO THE SECURITIES ACT AND
QUALIFIED UNDER APPLICABLE STATE LAW OR, IN THE OPINION OF COUNSEL TO
PAYOR, AN EXEMPTION THEREFROM IS AVAILABLE.
Issued Pursuant to an assignment dated April 23 , 2003 by Gary Eichsteadt,
located at 5710 CoCo Palm Drive, Tamarac, Florida 33319 to CNE Group, Inc., for
all of the right, title and interest in and to inventions covered by U.S. Patent
No. 6,060,979 issued on May 9, 2000 for "Call box apparatus"
1. FOR VALUE RECEIVED, CNE Group, Inc., a Delaware Corporation, (hereinafter
referred to as the "Payor" ), promises to pay Gary Eichsteadt, resident in the
State of Florida, (hereinafter referred to as "Payee," which term, except for
the provisions of Paragraph 2 below, shall include any subsequent holder of this
Note or any portion thereof) the principal sum of five hundred thousand dollars
($500,000) on October 31, 2008 (with the right to make payment earlier, as
hereinafter provided), with interest payable at the dates and in the amounts
hereinafter set forth for such time as said principal sum or any part thereof
may remain unpaid. Both principal and interest are payable at 5710 CoCo Palm
Drive, Tamarac, Florida 33319 or at such other place as may be designated in
writing by Payee.. This note is one of four notes aggregating in total principal
amount of two million ($2,000,000) dollars, all dated 2003, and having the same
maturity and the same provisions relative to interest (the notes of such series
being hereinafter sometimes called "those notes").
This note was issued pursuant to the terms of an Asset Purchase Agreement of
even date by and between the Payor and Payee and is subject to the setoff
provisions set forth therein.
2. The Notes shall be secured by all of the assets of Payor and certain of its
subsidiaries in accordance with the terms of that certain Pledge Agreement dated
as of the date hereof between Payor and Payee, and
is entitled to the benefits of and security provided under the Pledge Agreement.
The security provided for in this Paragraph shall terminate in accordance with
the terms of the Pledge Agreement. This Note and the Pledge Agreement are
sometimes collectively referred to herein as the "Credit Documents."
3. The annual interest rate herein shall be eight percent (8%) payable in
arrears quarter annually on the first day of July, October, January, and April.
The first interest payment shall be due July 1, 2003.
4. Payments are to be made payable to the order of Payee.
5. Payor may at any time or from time to time make a voluntary prepayment,
whether in full or in part, of this Note, without premium or penalty.
6. If this Note is not paid when due, the undersigned further promises to pay
all costs of collection and reasonable attorney's fees incurred by the Payee,
whether or not suit is filed hereon.
7. Any waiver of any rights under this Note is neither valid nor effective
unless made in writing and signed by the Payee of this Note.
8. No delay or omission on the part of the Payee of this Note in exercising any
right shall operate as a waiver thereof or of any other right.
9. A waiver by the Payee of this Note upon any one occasion shall not be
construed as a bar or waiver of any right or remedy on any future occasion.
10. Should any one or more of the provisions of this Note be determined illegal
or unenforceable, all other provisions shall nevertheless remain effective.
11. This Note cannot be changed, modified, amended, or terminated orally.
12. If default shall be made in the payment of interest or principal hereunder,
and shall be continuing, then the entire unpaid balance hereof may, at the
option of Payee, by written notice to the Payor and to any financial
institution, entity or person then providing funds to the Payor under a loan
agreement or credit facility, or debt instrument ("Financier"), be declared due
and payable, unless within ten (10)
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business days after such notice the default is cured. Such notice shall be
deemed given three (3) days after having been deposited in the United States
Mail, pre-paid, properly addressed and sent by certified or registered mail to
the particular addressee, return receipt requested.
13. Anything contained herein to the contrary notwithstanding, the indebtedness
evidenced by this Note and all interest thereon shall be subordinate and junior
in right of payment, to the extent and in the manner hereinafter set forth, to
all indebtedness of the Payor to Financier, which term shall include any other
lender, whenever arising, due or to become due, and any and all renewals
thereof, whether arising under any Loan and Security Agreement between Payor and
Financier (the "Financier Agreement"), by operation of law, or otherwise, or to
any financial institution then providing funds to the Payor (such indebtedness
being sometimes hereinafter referred to as "Senior Debt"). Notwithstanding the
foregoing, Senior Debt with respect to Payor or any subsidiary thereof shall not
include (i) any Indebtedness of Payor to any such subsidiary for money borrowed
or advanced from such subsidiary, and (ii) any Indebtedness representing the
redemption price of any preferred stock. "Indebtedness," as applied to any
entity means any indebtedness, contingent or otherwise, in respect of borrowed
money (whether or not the recourse of the lender is to the whole of the assets
of such entity or only to a portion thereof), or evidenced by bonds, notes,
debentures or similar instruments or letters of credit, or representing the
balance deferred and unpaid of the purchase price of any property or interest
therein, except any such balance that constitutes a trade payable, if and to the
extent that such indebtedness would appear as a liability upon a balance sheet
of such entity prepared on a consolidated basis in accordance with generally
accepted accounting principles. Senior Debt must be paid in accordance with the
terms thereof before this Note may be paid. Upon request of Payor Payee shall
execute such subordination agreements with holders of Senior Debt as shall be
reasonably requested. Anything to the contrary notwithstanding the holders of
the 10% Notes in the principal amount of $1,250, 0000 and holders of any debt
securities issued by Payor to obtain up to an additional $3,000,000 in financing
shall be included in the definition of Financier and the debt held by them shall
constitute Senior Indebtedness.
(a) In the event of any insolvency or bankruptcy proceedings, and any
receivership, liquidation, reorganization or other similar proceedings in
connection therewith, relative to Payor, and in the event of any
proceedings for voluntary liquidation, dissolution or other winding up of
Payor, whether or not involving insolvency or, and in the event of any
execution sale, then the holders of Senior Debt shall be entitled to
receive payment in full of all principal of and interest on all Senior Debt
(including any such interest which may accrue after the commencement of any
such proceedings), before Payee
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is entitled to receive any payment on account of principal of or interest
on, this Note or enforce the terms of the Pledge Agreement.
(b) In the event that this Note is declared due and payable before its
expressed maturity because of the occurrence of a default hereunder (under
circumstances when the provisions of clause (a) above shall not be
applicable), the holders of Senior Debt shall be entitled to receive
payment in full of all principal and interest on all Senior Debt (including
any such interest which may accrue after the commencement of any such
proceedings referred to in clause (i) above) before Payee is entitled to
receive any payment on account of the principal of or premium, if any, or
interest on this Note or enforce the terms of the Pledge Agreement.
(c) In the event that any default shall occur and be continuing in the
payment of the principal of, or premium, if any, or interest on, any Senior
Debt, under a Financier Agreement or otherwise, the holders of Senior Debt
shall be entitled to receive payment in full of all principal of and
interest on senior debt (including any such interest which may accrue after
the commencement of any proceedings referred to in clause (i) above) before
the Payee is entitled to receive any payment on account of the principal
of, or premium, if any, or interest on this Note or enforce the terms of
the Pledge Agreement.
(d) Should any payment or distribution be made to Payee which the holders
of the Senior Debt shall be entitled to receive prior payment thereof under
the foregoing provisions, the same shall be forthwith delivered to the
holders of the Senior Debt and, until so delivered, shall be held by Payee,
in trust, as property of the holders of the Senior Debt. No current or
future holder of Senior Debt shall be prejudiced in his right to enforce
subordination of this Note by any act or failure to act on the part of
Payor.
14. In furtherance of the subordination provided for herein, Payee hereby grants
to the holders of the Senior Debt irrevocable authority, after any default in
the payment of any amounts due on the Senior Debt or in any event specified in
clauses 13 (a), (b) or (c) above, to demand, collect, or file proofs of claim in
any proceeding described in clause (i) above with respect to, any and all moneys
due or to become due on account of this Note.
15. The subordination provisions of this Note are solely for the purpose of
defining the relative rights
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of the holders of Senior Debt on the one hand and Payee on the other hand, and
nothing herein shall impair as between Payor and Payee the obligation of Payor,
which is unconditional and absolute, to pay to Payee the principal thereof and
interest thereon in accordance with the terms of this Note, or, except as
provided herein, shall anything herein prevent Payee from declaring the Note to
be due and payable before its expressed maturity because of the occurrence of a
default hereunder or, in connection therewith, from exercising all remedies
otherwise permitted by applicable law or hereunder upon default hereunder, all
subject to the rights of holders of Senior Debt to cash, securities or other
property otherwise payable or deliverable to Payee.
16. Payor agrees, for the benefit of the holders of Senior Debt, that in the
event that this Note is declared due and payable before its expressed maturity
because of the occurrence of a default hereunder (a) Payor will give prompt
notice in writing of such events to the holders of Senior Debt, and (b) all
Senior Debt shall forthwith become immediately due and payable upon written
demand regardless of the expressed maturity thereof.
17. Conversion:
(a) Subject to and in compliance with the provisions hereof, the Payor
shall have the right, upon Payor's written notification to Payee after
April 30, 2008 and before October 31, 2008, to convert all or any portion
of the outstanding principal amount of this Note, and all accrued and
unpaid interest thereon, into such number of shares of Common Stock (the
shares of Common Stock issuable upon conversion of, and issuable in lieu of
interest payments on, this Note are hereinafter referred to as the
"Conversion Shares") as shall equal the quotient obtained by dividing (x)
the principal amount of this Note and any accrued but unpaid interest to be
converted by (y) the Applicable Conversion Price (as hereinafter defined),
upon surrender of this Note by Payee.
(b) For purposes hereof the term "Applicable Conversion Price" shall mean
the Average Closing Price (as hereinafter defined). For purposes hereof the
"Average Closing Price" with respect to any conversion elected to be made
by Payor shall be the average of the daily closing bid prices (each such
price is referred to individually as a "Floating Reference Price" and,
collectively, as the "Floating Reference Prices") during the thirty (30)
trading days immediately preceding the date on which Payor gives Payee a
written notice of Payor's election to convert any outstanding principal of,
and accrued interest on, this Note. The closing bid price on any trading
day shall be, if the Common Stock is then
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listed or quoted on either the American Stock Exchange, the NASDAQ SmallCap
Market or the NASDAQ National Market, the reported closing bid price for
the Common Stock as reported by Bloomberg, L.P. ("Bloomberg") or The Wall
Street Journal (the "Journal") on such day (or, if not so reported but the
Common Stock is quoted in the over-the-counter market, another recognized
exchange, or on the pink sheets, the last reported bid price thereof on
such date). If the prices of the Common Stock cannot be calculated on such
date on any of the foregoing bases, such prices on such date shall be
determined by Payor's Board of Directors which amount shall be conclusive
absent fraud or manifest error. "Trading day" shall mean any day on which
Payor's Common Stock is traded for any period on the principal securities
exchange or other securities market on which the Common Stock is then being
traded. Not withstanding anything to the contrary set forth above the
Applicable Conversion Price shall not be less than one dollar ($1.00) per
share unless the reduction in value is due to adjustments set forth below
in Paragraph 18.
18. Adjustments to the Securities. In case of any consolidation of Payor
with, or merger of Payor with, or merger of Payor into, another corporation
(other than a consolidation or merger which does not result in any
reclassification or change of the outstanding Common Stock), the corporation
formed by such consolidation or merger shall execute and deliver to Payee a
supplemental conversion agreement providing that Payee shall have the right
thereafter to receive, upon Conversion of this Note, the kind and amount of
shares of stock and other securities and property receivable upon such
consolidation or merger, by a holder of the number of shares of Payee's Common
Stock for which this Note might have been converted immediately prior to such
consolidation or merger. Such supplemental conversion agreement shall provide
for adjustments which shall be identical to the adjustments provided in
Paragraph 18, subparagraphs a and b above.
19. Payor shall deliver the certificates representing the shares underlying
the conversion to Payee within fifteen (15) business days after Payor has
notified Payee of Payor's intent to exercise the conversion right, against
delivery of the Note by Payee to Payor. In the event that less than the
outstanding principal of the Note shall be converted as provided herein, in
addition to the certificates representing the converted shares, the Payor shall
deliver to Payee a new note with the same terms and conditions of the this Note
in a principal amount equal to the unconverted portion of this Note. The shares
to be delivered upon the conversion the conversion of this Note as provided
herein are the shares of Payor's common stock for which the 2,000,000 Series C
Preferred shares of the Payor may be redeemed that are held in escrow for this
purpose in accordance with a certain escrow agreement of even date
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among Michael Gutowski, Carol Gutowski, Payee and Thomas Sullivan with Lawrence
D. Greenberg, Esq. as escrow agent.
20. This Note shall be governed as to validity, interpretation, construction,
effect, and in all other respects, by the laws and judicial decisions of the
State of Florida, where it is initially payable.
CNE Group, Inc.
By:___________________________
George W. Benoit
Title: Chief Executive Officer
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