EX-10.8
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM,
SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN
COMPARABLE TRANSACTIONS THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S
UNDER SAID ACT.
CALLABLE SECURED CONVERTIBLE NOTE
Clinton Township, Michigan
January 18, 2007 $[________]
FOR VALUE RECEIVED, MIDNIGHT HOLDINGS GROUP, INC., a Delaware
corporation (hereinafter called the "BORROWER"), hereby promises to pay to the
order of [________] or registered assigns (the "HOLDER") the sum of $[________],
on January 18, 2010 (the "MATURITY DATE"), and to pay interest on the unpaid
principal balance hereof at the rate of ten percent (10%) per annum from January
18, 2007 (the "ISSUE DATE") until the same becomes due and payable, whether at
maturity or upon acceleration or by prepayment or otherwise. Any amount of
principal or interest on this Note which is not paid when due shall bear
interest at the rate of fifteen percent (15%) per annum from the due date
thereof until the same is paid ("DEFAULT INTEREST"). Interest shall commence
accruing on the issue date, shall be computed on the basis of a 365-day year and
the actual number of days elapsed and shall be payable, quarterly on March 31,
June 30, September 30 and December 31 of each year beginning on the last day of
the first full quarter after Issue Date. All payments due hereunder (to the
extent not converted into common stock, $.00005 par value per share, of the
Borrower (the "COMMON STOCK") in accordance with the terms hereof) shall be made
in lawful money of the United States of America. All payments shall be made at
such address as the Holder shall hereafter give to the Borrower by written
notice made in accordance with the provisions of this Note. 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 payment 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. As used in this Note, the term "business day" shall
mean any day other than a Saturday, Sunday or a day on which commercial banks in
the city of New York, New York are authorized or required by law or executive
order to remain closed. Each capitalized term used herein, and not otherwise
defined, shall have the meaning ascribed thereto in that certain Securities
Purchase Agreement, dated January 18, 2007, pursuant to which this Note was
originally issued (the "PURCHASE AGREEMENT").
This Note is free from all taxes, liens, claims and encumbrances with
respect to the issue thereof and shall not be subject to preemptive rights or
other similar rights of shareholders of the Borrower and will not impose
personal liability upon the holder thereof. The obligations of the Borrower
under this Note shall be secured by that certain Security Agreement by and
between the Borrower and the Holder of even date herewith.
The following terms shall apply to this Note:
ARTICLE I. CONVERSION RIGHTS
1.1 CONVERSION RIGHT. The Holder shall have the right from
time to time, and at any time on or prior to the earlier of (i) the Maturity
Date and (ii) the date of payment of the Default Amount (as defined in Article
III) pursuant to Section 1.6(a) or Article III, the Optional Prepayment Amount
(as defined in Section 5.1) or (iii) any payments pursuant to Section 1.7, each
in respect of the remaining outstanding principal amount of this Note to convert
all or any part of the outstanding and unpaid principal amount of this Note into
fully paid and non-assessable shares of Common Stock, as such Common Stock
exists on the Issue Date, or any shares of capital stock or other securities of
the Borrower into which such Common Stock shall hereafter be changed or
reclassified at the conversion price (the "CONVERSION PRICE") determined as
provided herein (a "CONVERSION"); PROVIDED, HOWEVER, that in no event shall the
Holder be entitled to convert any portion of this Note in excess of that portion
of this Note upon conversion of which the sum of (1) the number of shares of
Common Stock beneficially owned by the Holder and its affiliates (other than
shares of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the Notes or the unexercised or
unconverted portion of any other security of the Borrower (including, without
limitation, the warrants issued by the Borrower pursuant to the Purchase
Agreement) subject to a limitation on conversion or exercise analogous to the
limitations contained herein) and (2) the number of shares of Common Stock
issuable upon the conversion of the portion of this Note with respect to which
the determination of this proviso is being made, would result in beneficial
ownership by the Holder and its affiliates of more than 4.9% of the outstanding
shares of Common Stock. For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulations 13D-G
thereunder, except as otherwise provided in clause (1) of such proviso. The
number of shares of Common Stock to be issued upon each conversion of this Note
shall be determined by dividing the Conversion Amount (as defined below) by the
applicable Conversion Price then in effect on the date specified in the notice
of conversion, in the form attached hereto as Exhibit A (the "NOTICE OF
CONVERSION"), delivered to the Borrower by the Holder in accordance with Section
1.4 below; provided that the Notice of Conversion is submitted by facsimile (or
by other means resulting in, or reasonably expected to result in, notice) to the
Borrower before 6:00 p.m., New York, New York time on such conversion date (the
"CONVERSION DATE"). The term "CONVERSION AMOUNT" means, with respect to any
conversion of this Note, the sum of (1) the principal amount of this Note to be
converted in such conversion PLUS (2) accrued and unpaid interest, if any, on
such principal amount at the interest rates provided in this Note to the
Conversion Date PLUS (3) Default Interest, if any, on the amounts referred to in
the immediately preceding clauses (1) and/or (2) PLUS (4) at the Holder's
option, any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g)
hereof or pursuant to
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Section 2(c) of that certain Registration Rights Agreement, dated as of January
18, 2007, executed in connection with the initial issuance of this Note and the
other Notes issued on the Issue Date (the "REGISTRATION RIGHTS AGREEMENT").
1.2 CONVERSION PRICE.
(a) CALCULATION OF CONVERSION PRICE. The Conversion
Price shall be the lesser of (i) the Variable Conversion Price (as defined
herein) and (ii) the Fixed Conversion Price (as defined herein) (subject, in
each case, to equitable adjustments for stock splits, stock dividends or rights
offerings by the Borrower relating to the Borrower's securities or the
securities of any subsidiary of the Borrower, combinations, recapitalization,
reclassifications, extraordinary distributions and similar events). The
"VARIABLE CONVERSION PRICE" shall mean the Applicable Percentage (as defined
herein) multiplied by the Market Price (as defined herein). "MARKET PRICE" means
the average of the lowest three (3) Trading Prices (as defined below) for the
Common Stock during the twenty (20) Trading Day period ending one Trading Day
prior to the date the Conversion Notice is sent by the Holder to the Borrower
via facsimile (the "CONVERSION DATE"). "TRADING PRICE" means, for any security
as of any date, the intraday trading price on the Over-the-Counter Bulletin
Board (the "OTCBB") as reported by a reliable reporting service mutually
acceptable to and hereafter designated by Holders of a majority in interest of
the Notes and the Borrower or, if the OTCBB is not the principal trading market
for such security, the intraday trading price of such security on the principal
securities exchange or trading market where such security is listed or traded
or, if no intraday trading price of such security is available in any of the
foregoing manners, the average of the intraday trading prices of any market
makers for such security that are listed in the "pink sheets" by the National
Quotation Bureau, Inc. If the Trading Price cannot be calculated for such
security on such date in the manner provided above, the Trading Price shall be
the fair market value as mutually determined by the Borrower and the holders of
a majority in interest of the Notes being converted for which the calculation of
the Trading Price is required in order to determine the Conversion Price of such
Notes. "TRADING DAY" shall mean any day on which the Common Stock is traded for
any period on the OTCBB, or on the principal securities exchange or other
securities market on which the Common Stock is then being traded. "APPLICABLE
PERCENTAGE" shall mean 25%; provided, however, that the Applicable Percentage
shall be increased to (i) 30% in the event that the Registration Statement (as
defined in the Registration Rights Agreement) is filed on or before the Filing
Date (as defined in the Registration Rights Agreement) and (ii) 40% in the event
that the Registration Statement (as defined in the Registration Rights
Agreement) becomes effective on or before the Effectiveness Deadline (as defined
in the Registration Rights Agreement).
(b) CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS.
Notwithstanding anything contained in Section 1.2(a) to the contrary, in the
event the Borrower (i) makes a public announcement that it intends to
consolidate or merge with any other corporation (other than a merger in which
the Borrower is the surviving or continuing corporation and its capital stock is
unchanged) or sell or transfer all or substantially all of the assets of the
Borrower or (ii) any person, group or entity (including the Borrower) publicly
announces a tender offer to purchase 50% or more of the Borrower's Common Stock
(or any other takeover scheme) (the date of the announcement referred to in
clause (i) or (ii) is hereinafter referred to as the "ANNOUNCEMENT DATE"), then
the Conversion Price shall, effective upon the Announcement Date and continuing
through the Adjusted Conversion Price
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Termination Date (as defined below), be equal to the lower of (x) the Conversion
Price which would have been applicable for a Conversion occurring on the
Announcement Date and (y) the Conversion Price that would otherwise be in
effect. From and after the Adjusted Conversion Price Termination Date, the
Conversion Price shall be determined as set forth in this Section 1.2(a). For
purposes hereof, "ADJUSTED CONVERSION PRICE TERMINATION DATE" shall mean, with
respect to any proposed transaction or tender offer (or takeover scheme) for
which a public announcement as contemplated by this Section 1.2(b) has been
made, the date upon which the Borrower (in the case of clause (i) above) or the
person, group or entity (in the case of clause (ii) above) consummates or
publicly announces the termination or abandonment of the proposed transaction or
tender offer (or takeover scheme) which caused this Section 1.2(b) to become
operative.
1.3 AUTHORIZED SHARES. Subject to the completion of the
Charter Amendment Actions (as defined in the Purchase Agreement), the Borrower
covenants that during the period the conversion right exists, the Borrower will
reserve from its authorized and unissued Common Stock a sufficient number of
shares, free from preemptive rights, to provide for the issuance of Common Stock
upon the full conversion of this Note and the other Notes issued pursuant to the
Purchase Agreement. The Borrower is required at all times to have authorized and
reserved two times the number of shares that is actually issuable upon full
conversion of the Notes (based on the Conversion Price of the Notes or the
Exercise Price of the Warrants in effect from time to time) (the "RESERVED
AMOUNT"). The Reserved Amount shall be increased from time to time in accordance
with the Borrower's obligations pursuant to Section 4(h) of the Purchase
Agreement. The Borrower represents that upon issuance, such shares will be duly
and validly issued, fully paid and non-assessable. In addition, if the Borrower
shall issue any securities or make any change to its capital structure which
would change the number of shares of Common Stock into which the Notes shall be
convertible at the then current Conversion Price, the Borrower shall at the same
time make proper provision so that thereafter there shall be a sufficient number
of shares of Common Stock authorized and reserved, free from preemptive rights,
for conversion of the outstanding Notes. The Borrower (i) acknowledges that it
has irrevocably instructed its transfer agent to issue certificates for the
Common Stock issuable upon conversion of this Note, and (ii) agrees that its
issuance of this Note shall constitute full authority to its officers and agents
who are charged with the duty of executing stock certificates to execute and
issue the necessary certificates for shares of Common Stock in accordance with
the terms and conditions of this Note.
If, at any time a Holder of this Note submits a Notice of
Conversion, and the Borrower does not have sufficient authorized but unissued
shares of Common Stock available to effect such conversion in accordance with
the provisions of this Article I (a "CONVERSION DEFAULT"), subject to Section
4.8, the Borrower shall issue to the Holder all of the shares of Common Stock
which are then available to effect such conversion. The portion of this Note
which the Holder included in its Conversion Notice and which exceeds the amount
which is then convertible into available shares of Common Stock (the "EXCESS
AMOUNT") shall, notwithstanding anything to the contrary contained herein, not
be convertible into Common Stock in accordance with the terms hereof until (and
at the Holder's option at any time after) the date additional shares of Common
Stock are authorized by the Borrower to permit such conversion, at which time
the Conversion Price in respect thereof shall be the lesser of (i) the
Conversion Price on the Conversion Default Date (as defined below) and (ii) the
Conversion
4
Price on the Conversion Date thereafter elected by the Holder in respect
thereof. In addition, the Borrower shall pay to the Holder payments ("CONVERSION
DEFAULT PAYMENTS") for a Conversion Default in the amount of (x) the SUM OF (1)
the then outstanding principal amount of this Note PLUS (2) accrued and unpaid
interest on the unpaid principal amount of this Note through the Authorization
Date (as defined below) PLUS (3) Default Interest, if any, on the amounts
referred to in clauses (1) and/or (2), MULTIPLIED BY (y) .24, MULTIPLIED BY (z)
(N/365), where N = the number of days from the day the holder submits a Notice
of Conversion giving rise to a Conversion Default (the "CONVERSION DEFAULT
DATE") to the date (the "AUTHORIZATION DATE") that the Borrower authorizes a
sufficient number of shares of Common Stock to effect conversion of the full
outstanding principal balance of this Note. The Borrower shall use its best
efforts to authorize a sufficient number of shares of Common Stock as soon as
practicable following the earlier of (i) such time that the Holder notifies the
Borrower or that the Borrower otherwise becomes aware that there are or likely
will be insufficient authorized and unissued shares to allow full conversion
thereof and (ii) a Conversion Default. The Borrower shall send notice to the
Holder of the authorization of additional shares of Common Stock, the
Authorization Date and the amount of Holder's accrued Conversion Default
Payments. The accrued Conversion Default Payments for each calendar month shall
be paid in cash or shall be convertible into Common Stock (at such time as there
are sufficient authorized shares of Common Stock) at the applicable Conversion
Price, at the Borrower's option, as follows:
(a) In the event the Borrower elects to make such
payment in cash, cash payment shall be made to Holder by the fifth (5th) day of
the month following the month in which it has accrued; and
(b) In the event the Borrower elects to make such
payment in Common Stock, the Holder may convert such payment amount into Common
Stock at the Conversion Price (as in effect at the time of conversion) at any
time after the fifth day of the month following the month in which it has
accrued in accordance with the terms of this Article I (so long as there is then
a sufficient number of authorized shares of Common Stock).
The Borrower's election shall be made in writing to the Holder
at any time prior to 6:00 p.m., New York, New York time, on the third day of the
month following the month in which Conversion Default payments have accrued. If
no election is made, the Borrower shall be deemed to have elected to remit
Common Stock. Nothing herein shall limit the Holder's right to pursue actual
damages (to the extent in excess of the Conversion Default Payments) for the
Borrower's failure to maintain a sufficient number of authorized shares of
Common Stock, and each holder shall have the right to pursue all remedies
available at law or in equity (including degree of specific performance and/or
injunctive relief).
1.4 METHOD OF CONVERSION.
(a) MECHANICS OF CONVERSION. Subject to Section 1.1,
this Note may be converted by the Holder in whole or in part at any time from
time to time after the Issue Date, by (A) submitting to the Borrower a Notice of
Conversion (by facsimile or other reasonable means of communication dispatched
on the Conversion Date prior to 6:00 p.m., New York, New
5
York time) and (B) subject to Section 1.4(b), surrendering this Note at the
principal office of the Borrower.
(b) SURRENDER OF NOTE UPON CONVERSION.
Notwithstanding anything to the contrary set forth herein, upon conversion of
this Note in accordance with the terms hereof, the Holder shall not be required
to physically surrender this Note to the Borrower unless the entire unpaid
principal amount of this Note is so converted. The Holder and the Borrower shall
maintain records showing the principal amount so converted and the dates of such
conversions or shall use such other method, reasonably satisfactory to the
Holder and the Borrower, so as not to require physical surrender of this Note
upon each such conversion. In the event of any dispute or discrepancy, such
records of the Borrower shall be controlling and determinative in the absence of
manifest error. Notwithstanding the foregoing, if any portion of this Note is
converted as aforesaid, the Holder may not transfer this Note unless the Holder
first physically surrenders this Note to the Borrower, whereupon the Borrower
will forthwith issue and deliver upon the order of the Holder a new Note of like
tenor, registered as the Holder (upon payment by the Holder of any applicable
transfer taxes) may request, representing in the aggregate the remaining unpaid
principal amount of this Note. The Holder and any assignee, by acceptance of
this Note, acknowledge and agree that, by reason of the provisions of this
paragraph, following conversion of a portion of this Note, the unpaid and
unconverted principal amount of this Note represented by this Note may be less
than the amount stated on the face hereof.
(c) PAYMENT OF TAXES. The Borrower shall not be
required to pay any tax which may be payable in respect of any transfer involved
in the issue and delivery of shares of Common Stock or other securities or
property on conversion of this Note in a name other than that of the Holder (or
in street name), and the Borrower shall not be required to issue or deliver any
such shares or other securities or property unless and until the person or
persons (other than the Holder or the custodian in whose street name such shares
are to be held for the Holder's account) requesting the issuance thereof shall
have paid to the Borrower the amount of any such tax or shall have established
to the satisfaction of the Borrower that such tax has been paid.
(d) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon
receipt by the Borrower from the Holder of a facsimile transmission (or other
reasonable means of communication) of a Notice of Conversion meeting the
requirements for conversion as provided in this Section 1.4, the Borrower shall
issue and deliver or cause to be issued and delivered to or upon the order of
the Holder certificates for the Common Stock issuable upon such conversion
within five (5) business days after such receipt (and, solely in the case of
conversion of the entire unpaid principal amount hereof, surrender of this Note)
(such second business day being hereinafter referred to as the "DEADLINE") in
accordance with the terms hereof and the Purchase Agreement (including, without
limitation, in accordance with the requirements of Section 2(g) of the Purchase
Agreement that certificates for shares of Common Stock issued on or after the
effective date of the Registration Statement upon conversion of this Note shall
not bear any restrictive legend).
(e) OBLIGATION OF BORROWER TO DELIVER COMMON STOCK.
Upon receipt by the Borrower of a Notice of Conversion, the Holder shall be
deemed to be the holder of record of the Common Stock issuable upon such
conversion, the outstanding principal amount
6
and the amount of accrued and unpaid interest on this Note shall be reduced to
reflect such conversion, and, unless the Borrower defaults on its obligations
under this Article I, all rights with respect to the portion of this Note being
so converted shall forthwith terminate except the right to receive the Common
Stock or other securities, cash or other assets, as herein provided, on such
conversion. If the Holder shall have given a Notice of Conversion as provided
herein, the Borrower's obligation to issue and deliver the certificates for
Common Stock shall be absolute and unconditional, irrespective of the absence of
any action by the Holder to enforce the same, any waiver or consent with respect
to any provision thereof, the recovery of any judgment against any person or any
action to enforce the same, any failure or delay in the enforcement of any other
obligation of the Borrower to the holder of record, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder of any obligation to the Borrower, and irrespective of any other
circumstance which might otherwise limit such obligation of the Borrower to the
Holder in connection with such conversion. The Conversion Date specified in the
Notice of Conversion shall be the Conversion Date so long as the Notice of
Conversion is received by the Borrower before 6:00 p.m., New York, New York
time, on such date.
(f) DELIVERY OF COMMON STOCK BY ELECTRONIC TRANSFER.
In lieu of delivering physical certificates representing the Common Stock
issuable upon conversion, provided the Borrower's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the Holder and its compliance with
the provisions contained in Section 1.1 and in this Section 1.4, the Borrower
shall use its best efforts to cause its transfer agent to electronically
transmit the Common Stock issuable upon conversion to the Holder by crediting
the account of Holder's Prime Broker with DTC through its Deposit Withdrawal
Agent Commission ("DWAC") system.
(g) FAILURE TO DELIVER COMMON STOCK PRIOR TO
DEADLINE. Without in any way limiting the Holder's right to pursue other
remedies, including actual damages and/or equitable relief, the parties agree
that if delivery of the Common Stock issuable upon conversion of this Note is
more than two (2) days after the Deadline (other than a failure due to the
circumstances described in Section 1.3 above, which failure shall be governed by
such Section) the Borrower shall pay to the Holder $2,000 per day in cash, for
each day beyond the Deadline that the Borrower fails to deliver such Common
Stock. Such cash amount shall be paid to Holder by the fifth day of the month
following the month in which it has accrued or, at the option of the Holder (by
written notice to the Borrower by the first day of the month following the month
in which it has accrued), shall be added to the principal amount of this Note,
in which event interest shall accrue thereon in accordance with the terms of
this Note and such additional principal amount shall be convertible into Common
Stock in accordance with the terms of this Note.
1.5 CONCERNING THE SHARES. The shares of Common Stock
issuable upon conversion of this Note may not be sold or transferred unless (i)
such shares are sold pursuant to an effective registration statement under the
Act or (ii) the Borrower or its transfer agent shall have been furnished with an
opinion of counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions) to the effect that
the shares to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration or (iii) such shares are sold or transferred
pursuant to Rule 144 under the Act (or a
7
successor rule) ("RULE 144") or (iv) such shares are transferred to an
"affiliate" (as defined in Rule 144) of the Borrower who agrees to sell or
otherwise transfer the shares only in accordance with this Section 1.5 and who
is an Accredited Investor (as defined in the Purchase Agreement). Except as
otherwise provided in the Purchase Agreement (and subject to the removal
provisions set forth below), until such time as the shares of Common Stock
issuable upon conversion of this Note have been registered under the Act as
contemplated by the Registration Rights Agreement or otherwise may be sold
pursuant to Rule 144 without any restriction as to the number of securities as
of a particular date that can then be immediately sold, each certificate for
shares of Common Stock issuable upon conversion of this Note that has not been
so included in an effective registration statement or that has not been sold
pursuant to an effective registration statement or an exemption that permits
removal of the legend, shall bear a legend substantially in the following form,
as appropriate:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM,
SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN
COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER
SAID ACT."
The legend set forth above shall be removed and the Borrower
shall issue to the Holder a new certificate therefor free of any transfer legend
if (i) the Borrower or its transfer agent shall have received an opinion of
counsel, in form, substance and scope customary for opinions of counsel in
comparable transactions, to the effect that a public sale or transfer of such
Common Stock may be made without registration under the Act and the shares are
so sold or transferred, (ii) such Holder provides the Borrower or its transfer
agent with reasonable assurances that the Common Stock issuable upon conversion
of this Note (to the extent such securities are deemed to have been acquired on
the same date) can be sold pursuant to Rule 144 or (iii) in the case of the
Common Stock issuable upon conversion of this Note, such security is registered
for sale by the Holder under an effective registration statement filed under the
Act or otherwise may be sold pursuant to Rule 144 without any restriction as to
the number of securities as of a particular date that can then be immediately
sold. Nothing in this Note shall (i) limit the Borrower's obligation under the
Registration Rights Agreement or (ii) affect in any way the Holder's obligations
to comply with applicable prospectus delivery requirements upon the resale of
the securities referred to herein.
1.6 EFFECT OF CERTAIN EVENTS.
(a) EFFECT OF MERGER, CONSOLIDATION, ETC. At the
option of the Holder, the sale, conveyance or disposition of all or
substantially all of the assets of the Borrower, the effectuation by the
Borrower of a transaction or series of related transactions in which more than
50% of the voting power of the Borrower is disposed of, or the consolidation,
merger or other business combination of the Borrower with or into any other
Person (as defined below) or Persons when the Borrower is not the survivor shall
either: (i) be deemed to be an
8
Event of Default (as defined in Article III) pursuant to which the Borrower
shall be required to pay to the Holder upon the consummation of and as a
condition to such transaction an amount equal to the Default Amount (as defined
in Article III) or (ii) be treated pursuant to Section 1.6(b) hereof. "PERSON"
shall mean any individual, corporation, limited liability company, partnership,
association, trust or other entity or organization.
(b) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC.
If, at any time when this Note is issued and outstanding and prior to conversion
of all of the Notes, there shall be any merger, consolidation, exchange of
shares, recapitalization, reorganization, or other similar event, as a result of
which shares of Common Stock of the Borrower shall be changed into the same or a
different number of shares of another class or classes of stock or securities of
the Borrower or another entity, or in case of any sale or conveyance of all or
substantially all of the assets of the Borrower other than in connection with a
plan of complete liquidation of the Borrower, then the Holder of this Note shall
thereafter have the right to receive upon conversion of this Note, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore issuable upon conversion, such
stock, securities or assets which the Holder would have been entitled to receive
in such transaction had this Note been converted in full immediately prior to
such transaction (without regard to any limitations on conversion set forth
herein), and in any such case appropriate provisions shall be made with respect
to the rights and interests of the Holder of this Note to the end that the
provisions hereof (including, without limitation, provisions for adjustment of
the Conversion Price and of the number of shares issuable upon conversion of the
Note) shall thereafter be applicable, as nearly as may be practicable in
relation to any securities or assets thereafter deliverable upon the conversion
hereof. The Borrower shall not effect any transaction described in this Section
1.6(b) unless (a) it first gives, to the extent practicable, thirty (30) days
prior written notice (but in any event at least fifteen (15) days prior written
notice) of the record date of the special meeting of shareholders to approve, or
if there is no such record date, the consummation of, such merger,
consolidation, exchange of shares, recapitalization, reorganization or other
similar event or sale of assets (during which time the Holder shall be entitled
to convert this Note) and (b) the resulting successor or acquiring entity (if
not the Borrower) assumes by written instrument the obligations of this Section
1.6(b). The above provisions shall similarly apply to successive consolidations,
mergers, sales, transfers or share exchanges.
(c) ADJUSTMENT DUE TO DISTRIBUTION. If the Borrower
shall declare or make any distribution of its assets (or rights to acquire its
assets) to holders of Common Stock as a dividend, stock repurchase, by way of
return of capital or otherwise (including any dividend or distribution to the
Borrower's shareholders in cash or shares (or rights to acquire shares) of
capital stock of a subsidiary (i.e., a spin-off)) (a "DISTRIBUTION"), then the
Holder of this Note shall be entitled, upon any conversion of this Note after
the date of record for determining shareholders entitled to such Distribution,
to receive the amount of such assets which would have been payable to the Holder
with respect to the shares of Common Stock issuable upon such conversion had
such Holder been the holder of such shares of Common Stock on the record date
for the determination of shareholders entitled to such Distribution.
(d) ADJUSTMENT DUE TO DILUTIVE ISSUANCE. If, at any
time when any Notes are issued and outstanding, the Borrower issues or sells, or
in accordance with this Section
9
1.6(d) hereof is deemed to have issued or sold, any shares of Common Stock for
no consideration or for a consideration per share (before deduction of
reasonable expenses or commissions or underwriting discounts or allowances in
connection therewith) less than the Fixed Conversion Price in effect on the date
of such issuance (or deemed issuance) of such shares of Common Stock (a
"DILUTIVE ISSUANCE"), then immediately upon the Dilutive Issuance, the Fixed
Conversion Price will be reduced to the amount of the consideration per share
received by the Borrower in such Dilutive Issuance; PROVIDED that only one
adjustment will be made for each Dilutive Issuance.
The Borrower shall be deemed to have issued or sold shares of
Common Stock if the Borrower in any manner issues or grants any warrants, rights
or options, whether or not immediately exercisable, to subscribe for or to
purchase Common Stock or other securities convertible into or exchangeable for
Common Stock ("CONVERTIBLE SECURITIES") (such warrants, rights and options to
purchase Common Stock or Convertible Securities are hereinafter referred to as
"OPTIONS") and the price per share for which Common Stock is issuable upon the
exercise of such Options is less than the Fixed Conversion Price then in effect,
then the Fixed Conversion Price shall be equal to such price per share. For
purposes of the preceding sentence, the "price per share for which Common Stock
is issuable upon the exercise of such Options" is determined by dividing (i) the
total amount, if any, received or receivable by the Borrower as consideration
for the issuance or granting of all such Options, plus the minimum aggregate
amount of additional consideration, if any, payable to the Borrower upon the
exercise of all such Options, plus, in the case of Convertible Securities
issuable upon the exercise of such Options, the minimum aggregate amount of
additional consideration payable upon the conversion or exchange thereof at the
time such Convertible Securities first become convertible or exchangeable, by
(ii) the maximum total number of shares of Common Stock issuable upon the
exercise of all such Options (assuming full conversion of Convertible
Securities, if applicable). No further adjustment to the Conversion Price will
be made upon the actual issuance of such Common Stock upon the exercise of such
Options or upon the conversion or exchange of Convertible Securities issuable
upon exercise of such Options.
Additionally, the Borrower shall be deemed to have issued or
sold shares of Common Stock if the Borrower in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than where
the same are issuable upon the exercise of Options), and the price per share for
which Common Stock is issuable upon such conversion or exchange is less than the
Fixed Conversion Price then in effect, then the Fixed Conversion Price shall be
equal to such price per share. For the purposes of the preceding sentence, the
"price per share for which Common Stock is issuable upon such conversion or
exchange" is determined by dividing (i) the total amount, if any, received or
receivable by the Borrower as consideration for the issuance or sale of all such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Borrower upon the conversion or exchange
thereof at the time such Convertible Securities first become convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No
further adjustment to the Fixed Conversion Price will be made upon the actual
issuance of such Common Stock upon conversion or exchange of such Convertible
Securities.
10
(e) PURCHASE RIGHTS. If, at any time when any Notes
are issued and outstanding, the Borrower issues any convertible securities or
rights to purchase stock, warrants, securities or other property (the "PURCHASE
RIGHTS") pro rata to the record holders of any class of Common Stock, then the
Holder of this Note will be entitled to acquire, upon the terms applicable to
such Purchase Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Note (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
(f) NOTICE OF ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of the Conversion Price as a result of the
events described in this Section 1.6, the Borrower, at its expense, shall
promptly compute such adjustment or readjustment and prepare and furnish to the
Holder of a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Borrower shall, upon the written request at any time of the Holder, furnish
to such Holder a like certificate setting forth (i) such adjustment or
readjustment, (ii) the Conversion Price at the time in effect and (iii) the
number of shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon conversion of the Note.
1.7 TRADING MARKET LIMITATIONS. Unless permitted by the
applicable rules and regulations of the principal securities market on which the
Common Stock is then listed or traded, in no event shall the Borrower issue upon
conversion of or otherwise pursuant to this Note and the other Notes issued
pursuant to the Purchase Agreement more than the maximum number of shares of
Common Stock that the Borrower can issue pursuant to any rule of the principal
United States securities market on which the Common Stock is then traded (the
"MAXIMUM SHARE AMOUNT"), which shall be 19.99% of the total shares outstanding
on the Closing Date (as defined in the Purchase Agreement), subject to equitable
adjustment from time to time for stock splits, stock dividends, combinations,
capital reorganizations and similar events relating to the Common Stock
occurring after the date hereof. Once the Maximum Share Amount has been issued
(the date of which is hereinafter referred to as the "MAXIMUM CONVERSION DATE"),
if the Borrower fails to eliminate any prohibitions under applicable law or the
rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Borrower or any of
its securities on the Borrower's ability to issue shares of Common Stock in
excess of the Maximum Share Amount (a "TRADING MARKET PREPAYMENT EVENT"), in
lieu of any further right to convert this Note, and in full satisfaction of the
Borrower's obligations under this Note, the Borrower shall pay to the Holder,
within fifteen (15) business days of the Maximum Conversion Date (the "TRADING
MARKET PREPAYMENT DATE"), an amount equal to 130% TIMES the SUM of (a) the then
outstanding principal amount of this Note immediately following the Maximum
Conversion Date, PLUS (b) accrued and unpaid interest on the unpaid principal
amount of this Note to the Trading Market Prepayment Date, PLUS (c) Default
Interest, if any, on the amounts referred to in clause (a) and/or (b) above,
PLUS (d) any optional amounts that may be added thereto at the Maximum
Conversion Date by the Holder in accordance with the terms hereof (the then
outstanding principal amount of this Note immediately following the Maximum
Conversion Date, PLUS the amounts referred to in clauses (b), (c) and (d) above
shall collectively be referred
11
to as the "REMAINING CONVERTIBLE AMOUNT"). With respect to each Holder of Notes,
the Maximum Share Amount shall refer to such Holder's PRO RATA share thereof
determined in accordance with Section 4.8 below. In the event that the sum of
(x) the aggregate number of shares of Common Stock issued upon conversion of
this Note and the other Notes issued pursuant to the Purchase Agreement PLUS (y)
the aggregate number of shares of Common Stock that remain issuable upon
conversion of this Note and the other Notes issued pursuant to the Purchase
Agreement, represents at least one hundred percent (100%) of the Maximum Share
Amount (the "TRIGGERING EVENT"), the Borrower will use its best efforts to seek
and obtain Shareholder Approval (or obtain such other relief as will allow
conversions hereunder in excess of the Maximum Share Amount) as soon as
practicable following the Triggering Event and before the Maximum Conversion
Date. As used herein, "SHAREHOLDER APPROVAL" means approval by the shareholders
of the Borrower to authorize the issuance of the full number of shares of Common
Stock which would be issuable upon full conversion of the then outstanding Notes
but for the Maximum Share Amount.
1.8 STATUS AS SHAREHOLDER. Upon submission of a Notice of
Conversion by a Holder, (i) the shares covered thereby (other than the shares,
if any, which cannot be issued because their issuance would exceed such Holder's
allocated portion of the Reserved Amount or Maximum Share Amount) shall be
deemed converted into shares of Common Stock and (ii) the Holder's rights as a
Holder of such converted portion of this Note shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
and to any remedies provided herein or otherwise available at law or in equity
to such Holder because of a failure by the Borrower to comply with the terms of
this Note. Notwithstanding the foregoing, if a Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Deadline with respect to a conversion of any
portion of this Note for any reason, then (unless the Holder otherwise elects to
retain its status as a holder of Common Stock by so notifying the Borrower) the
Holder shall regain the rights of a Holder of this Note with respect to such
unconverted portions of this Note and the Borrower shall, as soon as
practicable, return such unconverted Note to the Holder or, if the Note has not
been surrendered, adjust its records to reflect that such portion of this Note
has not been converted. In all cases, the Holder shall retain all of its rights
and remedies (including, without limitation, (i) the right to receive Conversion
Default Payments pursuant to Section 1.3 to the extent required thereby for such
Conversion Default and any subsequent Conversion Default and (ii) the right to
have the Conversion Price with respect to subsequent conversions determined in
accordance with Section 1.3) for the Borrower's failure to convert this Note.
ARTICLE II. CERTAIN COVENANTS
2.1 DISTRIBUTIONS ON CAPITAL STOCK. So long as the Borrower
shall have any obligation under this Note, the Borrower shall not without the
Holder's written consent (a) pay, declare or set apart for such payment, any
dividend or other distribution (whether in cash, property or other securities)
on shares of capital stock other than dividends on shares of Common Stock solely
in the form of additional shares of Common Stock or (b) directly or indirectly
or through any subsidiary make any other payment or distribution in respect of
its capital stock except for distributions pursuant to any shareholders' rights
plan which is approved by a majority of the Borrower's disinterested directors.
12
2.2 RESTRICTION ON STOCK REPURCHASES. So long as the
Borrower shall have any obligation under this Note, the Borrower shall not
without the Holder's written consent redeem, repurchase or otherwise acquire
(whether for cash or in exchange for property or other securities or otherwise)
in any one transaction or series of related transactions any shares of capital
stock of the Borrower or any warrants, rights or options to purchase or acquire
any such shares.
2.3 BORROWINGS. So long as the Borrower shall have any
obligation under this Note, the Borrower shall not, without the Holder's written
consent, create, incur, assume or suffer to exist any liability for borrowed
money in excess of $50,000, except (a) borrowings in existence or committed on
the date hereof and of which the Borrower has informed Holder in writing prior
to the date hereof, (b) indebtedness to trade creditors or financial
institutions incurred in the ordinary course of business or (c) borrowings, the
proceeds of which shall be used to repay this Note.
2.4 SALE OF ASSETS. So long as the Borrower shall have any
obligation under this Note, the Borrower shall not, without the Holder's written
consent, sell, lease or otherwise dispose of any significant portion of its
assets outside the ordinary course of business. Any consent to the disposition
of any assets may be conditioned on a specified use of the proceeds of
disposition.
2.5 ADVANCES AND LOANS. So long as the Borrower shall have
any obligation under this Note, the Borrower shall not, without the Holder's
written consent, lend money, give credit or make advances to any person, firm,
joint venture or corporation, including, without limitation, officers,
directors, employees, subsidiaries and affiliates of the Borrower, except loans,
credits or advances (a) in existence or committed on the date hereof and which
the Borrower has informed Holder in writing prior to the date hereof, (b) made
in the ordinary course of business or (c) not in excess of $50,000.
2.6 CONTINGENT LIABILITIES. So long as the Borrower shall
have any obligation under this Note, the Borrower shall not, without the
Holder's written consent, assume, guarantee, endorse, contingently agree to
purchase or otherwise become liable upon the obligation of any person, firm,
partnership, joint venture or corporation, except by the endorsement of
negotiable instruments for deposit or collection and except assumptions,
guarantees, endorsements and contingencies (a) in existence or committed on the
date hereof and which the Borrower has informed Holder in writing prior to the
date hereof, and (b) similar transactions in the ordinary course of business.
ARTICLE III. EVENTS OF DEFAULT
If any of the following events of default (each, an "EVENT OF
DEFAULT") shall occur:
3.1 FAILURE TO PAY PRINCIPAL OR INTEREST. The Borrower fails
to pay the principal hereof or interest thereon when due on this Note, whether
at maturity, upon a Trading Market Prepayment Event pursuant to Section 1.7,
upon acceleration or otherwise;
13
3.2 CONVERSION AND THE SHARES. The Borrower fails to issue
shares of Common Stock to the Holder (or announces or threatens that it will not
honor its obligation to do so) upon exercise by the Holder of the conversion
rights of the Holder in accordance with the terms of this Note (for a period of
at least sixty (60) days, if such failure is solely as a result of the
circumstances governed by Section 1.3 and the Borrower is using its best efforts
to authorize a sufficient number of shares of Common Stock as soon as
practicable), fails to transfer or cause its transfer agent to transfer
(electronically or in certificated form) any certificate for shares of Common
Stock issued to the Holder upon conversion of or otherwise pursuant to this Note
as and when required by this Note or the Registration Rights Agreement, or fails
to remove any restrictive legend (or to withdraw any stop transfer instructions
in respect thereof) on any certificate for any shares of Common Stock issued to
the Holder upon conversion of or otherwise pursuant to this Note as and when
required by this Note or the Registration Rights Agreement (or makes any
announcement, statement or threat that it does not intend to honor the
obligations described in this paragraph) and any such failure shall continue
uncured (or any announcement, statement or threat not to honor its obligations
shall not be rescinded in writing) for ten (10) days after the Borrower shall
have been notified thereof in writing by the Holder;
3.3 FAILURE TO TIMELY FILE REGISTRATION OR EFFECT
REGISTRATION. The Borrower fails to file the Registration Statement within sixty
(60) days following the Closing Date (as defined in the Purchase Agreement) or
obtain effectiveness with the Securities and Exchange Commission of the
Registration Statement within two hundred fifty (250) days following the Closing
Date (as defined in the Purchase Agreement) or such Registration Statement
lapses in effect (or sales cannot otherwise be made thereunder effective,
whether by reason of the Borrower's failure to amend or supplement the
prospectus included therein in accordance with the Registration Rights Agreement
or otherwise) for more than twenty (20) consecutive days or forty (40) days in
any twelve month period after the Registration Statement becomes effective;
3.4 BREACH OF COVENANTS. The Borrower breaches any material
covenant or other material term or condition contained in Sections 1.3, 1.6 or
1.7 of this Note, or Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the Purchase
Agreement and such breach continues for a period of ten (10) days after written
notice thereof to the Borrower from the Holder;
3.5 BREACH OF REPRESENTATIONS AND WARRANTIES. Any
representation or warranty of the Borrower made herein or in any agreement,
statement or certificate given in writing pursuant hereto or in connection
herewith (including, without limitation, the Purchase Agreement and the
Registration Rights Agreement), shall be false or misleading in any material
respect when made and the breach of which has (or with the passage of time will
have) a material adverse effect on the rights of the Holder with respect to this
Note, the Purchase Agreement or the Registration Rights Agreement;
3.6 RECEIVER OR TRUSTEE. The Borrower or any subsidiary of
the Borrower shall make an assignment for the benefit of creditors, or apply for
or consent to the appointment of a receiver or trustee for it or for a
substantial part of its property or business, or such a receiver or trustee
shall otherwise be appointed;
14
3.7 JUDGMENTS. Any money judgment, writ or similar process
shall be entered or filed against the Borrower or any subsidiary of the Borrower
or any of its property or other assets for more than $50,000, and shall remain
unvacated, unbonded or unstayed for a period of twenty (20) days unless
otherwise consented to by the Holder, which consent will not be unreasonably
withheld;
3.8 BANKRUPTCY. Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Borrower or any subsidiary of the Borrower;
3.9 DELISTING OF COMMON STOCK. The Borrower shall fail to
maintain the listing of the Common Stock on at least one of the OTCBB or an
equivalent replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap
Market, the New York Stock Exchange, or the American Stock Exchange; or
3.10 DEFAULT UNDER OTHER NOTES. An Event of Default has
occurred and is continuing under any of the other Notes issued pursuant to the
Purchase Agreement, then, upon the occurrence and during the continuation of any
Event of Default specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or
3.10, at the option of the Holders of a majority of the aggregate principal
amount of the outstanding Notes issued pursuant to the Purchase Agreement
exercisable through the delivery of written notice to the Borrower by such
Holders (the "DEFAULT NOTICE"), and upon the occurrence of an Event of Default
specified in Section 3.6 or 3.8, the Notes shall become immediately due and
payable and the Borrower shall pay to the Holder, in full satisfaction of its
obligations hereunder, an amount equal to the greater of (i) 130% TIMES the SUM
of (w) the then outstanding principal amount of this Note PLUS (x) accrued and
unpaid interest on the unpaid principal amount of this Note to the date of
payment (the "MANDATORY PREPAYMENT DATE") PLUS (y) Default Interest, if any, on
the amounts referred to in clauses (w) and/or (x) PLUS (z) any amounts owed to
the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section
2(c) of the Registration Rights Agreement (the then outstanding principal amount
of this Note to the date of payment PLUS the amounts referred to in clauses (x),
(y) and (z) shall collectively be known as the "DEFAULT SUM") or (ii) the
"parity value" of the Default Sum to be prepaid, where parity value means (a)
the highest number of shares of Common Stock issuable upon conversion of or
otherwise pursuant to such Default Sum in accordance with Article I, treating
the Trading Day immediately preceding the Mandatory Prepayment Date as the
"Conversion Date" for purposes of determining the lowest applicable Conversion
Price, unless the Default Event arises as a result of a breach in respect of a
specific Conversion Date in which case such Conversion Date shall be the
Conversion Date), MULTIPLIED BY (b) the highest Closing Price for the Common
Stock during the period beginning on the date of first occurrence of the Event
of Default and ending one day prior to the Mandatory Prepayment Date (the
"DEFAULT AMOUNT") and all other amounts payable hereunder shall immediately
become due and payable, all without demand, presentment or notice, all of which
hereby are expressly waived, together with all costs, including, without
limitation, legal fees and expenses, of collection, and the Holder shall be
entitled to exercise all other rights and remedies available at law or in
equity. If the Borrower fails to pay the Default Amount within five (5) business
days of written notice that such amount is due and payable, then the Holder
shall have the right at any time, so long as the Borrower remains in default
(and so long and to the extent that there are sufficient authorized shares), to
require the Borrower, upon written notice, to immediately issue, in lieu of the
Default Amount,
15
the number of shares of Common Stock of the Borrower equal to the Default Amount
divided by the Conversion Price then in effect.
ARTICLE IV. MISCELLANEOUS
4.1 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 privileges. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.
4.2 NOTICES. Any notice herein required or permitted to be
given shall be in writing and may be personally served or delivered by courier
or sent by United States mail and shall be deemed to have been given upon
receipt if personally served (which shall include telephone line facsimile
transmission) or sent by courier or three (3) days after being deposited in the
United States mail, certified, with postage pre-paid and properly addressed, if
sent by mail. For the purposes hereof, the address of the Holder shall be as
shown on the records of the Borrower; and the address of the Borrower shall be
22600 Hall Road, Suite 205 Clinton Township, MI 48036, facsimile number:
586-468-8768. Both the Holder and the Borrower may change the address for
service by service of written notice to the other as herein provided.
4.3 AMENDMENTS. This Note and any provision hereof may only
be amended by an instrument in writing signed by the Borrower and the Holder.
The term "Note" and all reference thereto, as used throughout this instrument,
shall mean this instrument (and the other Notes issued pursuant to the Purchase
Agreement) as originally executed, or if later amended or supplemented, then as
so amended or supplemented.
4.4 ASSIGNABILITY. This Note shall be binding upon the
Borrower and its successors and assigns, and shall inure to be the benefit of
the Holder and its successors and assigns. Each transferee of this Note must be
an "accredited investor" (as defined in Rule 501(a) of the 1933 Act).
Notwithstanding anything in this Note to the contrary, this Note may be pledged
as collateral in connection with a BONA FIDE margin account or other lending
arrangement.
4.5 COST OF COLLECTION. If default is made in the payment of
this Note, the Borrower shall pay the Holder hereof costs of collection,
including reasonable attorneys' fees.
4.6 GOVERNING LAW. THIS NOTE SHALL BE ENFORCED, GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICT OF LAWS. THE BORROWER HEREBY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK,
NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS NOTE, THE AGREEMENTS
ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY. BOTH PARTIES IRREVOCABLY WAIVE
16
THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR
PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY
MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF
PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL
AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY
LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR
PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY
SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT
PREVAIL IN ANY DISPUTE ARISING UNDER THIS NOTE SHALL BE RESPONSIBLE FOR ALL FEES
AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN
CONNECTION WITH SUCH DISPUTE.
4.7 CERTAIN AMOUNTS. Whenever pursuant to this Note the
Borrower is required to pay an amount in excess of the outstanding principal
amount (or the portion thereof required to be paid at that time) plus accrued
and unpaid interest plus Default Interest on such interest, the Borrower and the
Holder agree that the actual damages to the Holder from the receipt of cash
payment on this Note may be difficult to determine and the amount to be so paid
by the Borrower represents stipulated damages and not a penalty and is intended
to compensate the Holder in part for loss of the opportunity to convert this
Note and to earn a return from the sale of shares of Common Stock acquired upon
conversion of this Note at a price in excess of the price paid for such shares
pursuant to this Note. The Borrower and the Holder hereby agree that such amount
of stipulated damages is not plainly disproportionate to the possible loss to
the Holder from the receipt of a cash payment without the opportunity to convert
this Note into shares of Common Stock.
4.8 ALLOCATIONS OF MAXIMUM SHARE AMOUNT AND RESERVED AMOUNT.
The Maximum Share Amount and Reserved Amount shall be allocated pro rata among
the Holders of Notes based on the principal amount of such Notes issued to each
Holder. Each increase to the Maximum Share Amount and Reserved Amount shall be
allocated pro rata among the Holders of Notes based on the principal amount of
such Notes held by each Holder at the time of the increase in the Maximum Share
Amount or Reserved Amount. In the event a Holder shall sell or otherwise
transfer any of such Holder's Notes, each transferee shall be allocated a pro
rata portion of such transferor's Maximum Share Amount and Reserved Amount. Any
portion of the Maximum Share Amount or Reserved Amount which remains allocated
to any person or entity which does not hold any Notes shall be allocated to the
remaining Holders of Notes, pro rata based on the principal amount of such Notes
then held by such Holders.
4.9 DAMAGES SHARES. The shares of Common Stock that may be
issuable to the Holder pursuant to Sections 1.3 and 1.4(g) hereof and pursuant
to Section 2(c) of the Registration Rights Agreement ("DAMAGES SHARES") shall be
treated as Common Stock issuable upon conversion of this Note for all purposes
hereof and shall be subject to all of the limitations and afforded all of the
rights of the other shares of Common Stock issuable hereunder, including without
limitation, the right to be included in the Registration Statement filed
pursuant to the Registration Rights Agreement. For purposes of calculating
interest payable on the outstanding principal amount hereof, except as otherwise
provided herein, amounts convertible into Damages
17
Shares ("DAMAGES AMOUNTS") shall not bear interest but must be converted prior
to the conversion of any outstanding principal amount hereof, until the
outstanding Damages Amounts is zero.
4.10 DENOMINATIONS. At the request of the Holder, upon
surrender of this Note, the Borrower shall promptly issue new Notes in the
aggregate outstanding principal amount hereof, in the form hereof, in such
denominations of at least $50,000 as the Holder shall request.
4.11 PURCHASE AGREEMENT. By its acceptance of this Note, each
Holder agrees to be bound by the applicable terms of the Purchase Agreement.
4.12 NOTICE OF CORPORATE EVENTS. Except as otherwise provided
below, the Holder of this Note shall have no rights as a Holder of Common Stock
unless and only to the extent that it converts this Note into Common Stock. The
Borrower shall provide the Holder with prior notification of any meeting of the
Borrower's shareholders (and copies of proxy materials and other information
sent to shareholders). In the event of any taking by the Borrower of a record of
its shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation,
reclassification or recapitalization) any share of any class or any other
securities or property, or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Borrower or any proposed liquidation, dissolution or winding up of the
Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20)
days prior to the record date specified therein (or thirty (30) days prior to
the consummation of the transaction or event, whichever is earlier), of the date
on which any such record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such dividend, distribution, right or other event to the extent
known at such time. The Borrower shall make a public announcement of any event
requiring notification to the Holder hereunder substantially simultaneously with
the notification to the Holder in accordance with the terms of this Section
4.12.
4.13 REMEDIES. The Borrower acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the Holder, by
vitiating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Borrower acknowledges that the remedy at law for a breach of
its obligations under this Note will be inadequate and agrees, in the event of a
breach or threatened breach by the Borrower of the provisions of this Note, that
the Holder shall be entitled, in addition to all other available remedies at law
or in equity, and in addition to the penalties assessable herein, to an
injunction or injunctions restraining, preventing or curing any breach of this
Note and to enforce specifically the terms and provisions thereof, without the
necessity of showing economic loss and without any bond or other security being
required.
18
ARTICLE V. CALL OPTION
5.1 CALL OPTION. Notwithstanding anything to the contrary
contained in this Article V, so long as (i) no Event of Default or Trading
Market Prepayment Event shall have occurred and be continuing, (ii) the Borrower
has a sufficient number of authorized shares of Common Stock reserved for
issuance upon full conversion of the Notes, then at any time after the Issue
Date, and (iii) the Common Stock is trading at or below $.04 per share, the
Borrower shall have the right, exercisable on not less than ten (10) Trading
Days prior written notice to the Holders of the Notes (which notice may not be
sent to the Holders of the Notes until the Borrower is permitted to prepay the
Notes pursuant to this Section 5.1), to prepay all of the outstanding Notes in
accordance with this Section 5.1. Any notice of prepayment hereunder (an
"OPTIONAL PREPAYMENT") shall be delivered to the Holders of the Notes at their
registered addresses appearing on the books and records of the Borrower and
shall state (1) that the Borrower is exercising its right to prepay all of the
Notes issued on the Issue Date and (2) the date of prepayment (the "OPTIONAL
PREPAYMENT NOTICE"). On the date fixed for prepayment (the "OPTIONAL PREPAYMENT
DATE"), the Borrower shall make payment of the Optional Prepayment Amount (as
defined below) to or upon the order of the Holders as specified by the Holders
in writing to the Borrower at least one (1) business day prior to the Optional
Prepayment Date. If the Borrower exercises its right to prepay the Notes, the
Borrower shall make payment to the holders of an amount in cash (the "OPTIONAL
PREPAYMENT AMOUNT") equal to either (i) 135% (for prepayments occurring within
thirty (30) days of the Issue Date), (ii) 145% for prepayments occurring between
thirty-one (31) and ninety (90) days of the Issue Date, or (iii) 150% (for
prepayments occurring after the ninetieth (90th) day following the Issue Date),
multiplied by the sum of (w) the then outstanding principal amount of this Note
PLUS (x) accrued and unpaid interest on the unpaid principal amount of this Note
to the Optional Prepayment Date PLUS (y) Default Interest, if any, on the
amounts referred to in clauses (w) and (x) PLUS (z) any amounts owed to the
Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of
the Registration Rights Agreement (the then outstanding principal amount of this
Note to the date of payment PLUS the amounts referred to in clauses (x), (y) and
(z) shall collectively be known as the "OPTIONAL PREPAYMENT SUM").
Notwithstanding notice of an Optional Prepayment, the Holders shall at all times
prior to the Optional Prepayment Date maintain the right to convert all or any
portion of the Notes in accordance with Article I and any portion of Notes so
converted after receipt of an Optional Prepayment Notice and prior to the
Optional Prepayment Date set forth in such notice and payment of the aggregate
Optional Prepayment Amount shall be deducted from the principal amount of Notes
which are otherwise subject to prepayment pursuant to such notice. If the
Borrower delivers an Optional Prepayment Notice and fails to pay the Optional
Prepayment Amount due to the Holders of the Notes within two (2) business days
following the Optional Prepayment Date, the Borrower shall forever forfeit its
right to redeem the Notes pursuant to this Section 5.1.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, Borrower has caused this Note to be signed
in its name by its duly authorized officer this 18th day of January, 2007.
MIDNIGHT HOLDINGS GROUP, INC.
By: _______________________________
Nicholas Cocco
Chief Executive Officer
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EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Notes)
The undersigned hereby irrevocably elects to convert $__________
principal amount of the Note (defined below) into shares of common stock, par
value $.00005 per share ("COMMON STOCK"), of Midnight Holdings Group, Inc., a
Delaware corporation (the "BORROWER") according to the conditions of the
convertible Notes of the Borrower dated as of January 18, 2007 (the "Notes"), as
of the date written below. If securities 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. No
fee will be charged to the Holder for any conversion, except for transfer taxes,
if any. A copy of each Note is attached hereto (or evidence of loss, theft or
destruction thereof).
The Borrower shall electronically transmit the Common Stock
issuable pursuant to this Notice of Conversion to the account of the undersigned
or its nominee with DTC through its Deposit Withdrawal Agent Commission system
("DWAC TRANSFER").
Name of DTC Prime Broker:
--------------------------------------
Account Number:
------------------------------------------------
In lieu of receiving shares of Common Stock issuable pursuant to
this Notice of Conversion by way of a DWAC Transfer, the undersigned hereby
requests that the Borrower issue a certificate or certificates for the number of
shares of Common Stock set forth below (which numbers are based on the Holder's
calculation attached hereto) in the name(s) specified immediately below or, if
additional space is necessary, on an attachment hereto:
Name:
----------------------------------------------------------
Address:
-------------------------------------------------------
The undersigned represents and warrants that all offers and
sales by the undersigned of the securities issuable to the undersigned upon
conversion of the Notes shall be made pursuant to registration of the securities
under the Securities Act of 1933, as amended (the "ACT"), or pursuant to an
exemption from registration under the Act.
Date of Conversion:______________________________________
Applicable Conversion Price:_____________________________
Number of Shares of Common Stock to be Issued Pursuant to
Conversion of the Notes:_________________________________
Signature:_______________________________________________
Name:____________________________________________________
Address:_________________________________________________
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The Borrower shall issue and deliver shares of Common Stock to an overnight
courier not later than three business days following receipt of the original
Note(s) to be converted, and shall make payments pursuant to the Notes for the
number of business days such issuance and delivery is late.
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