EXHIBIT 99.1
THIS CONVERTIBLE NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS
CONVERTIBLE NOTE (COLLECTIVELY THE "SECURITIES") HAVE NOT BEEN REGISTERED WITH
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES
COMMISSION OF ANY STATE UNDER ANY STATE SECURITIES LAW. THEY ARE BEING OFFERED
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION D ("REGULATION "D")
PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE, SOLD OR TRANSFERRED UNLESS
THE SECURITIES ARE REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES
LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE MADE PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
No. ____ $____________ U.S.
EA INDUSTRIES, INC.
6% CONVERTIBLE NOTE DUE JULY ___, 2001
THIS CONVERTIBLE NOTE is one of a duly authorized issue of Convertible
Notes of EA Industries, Inc., a corporation duly organized and existing under
the laws of the State of New Jersey (the "Company"), designated as its 6%
Convertible Notes due July __, 2001, in an aggregate principal amount not
exceeding Four Million Five Hundred Thousand Dollars ($4,500,000 U.S.) (the
"Convertible Notes").
FOR VALUE RECEIVED, the Company promises to pay to ______________________,
or any subsequent registered holder hereof (the "Holder"), the principal sum
of ____________________ Dollars ($_____________ U.S.), on or prior to _____,
2001, or, if not a business day, the first business day thereafter
(the "Maturity Date"), and to pay interest
(continued on next page)
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
EA INDUSTRIES, INC.
Dated: July 16, 1998
By:
-------------------------------
Howard P. Kamins, Vice President
on the principal sum outstanding in arrears on the earlier of the Date of
Conversion (as defined in Section 5(b)(iv)below) or the Maturity Date, at the
rate of six percent (6%) per annum. There shall be no prepayment of this
Convertible Note except as provided herein. Accrual of interest on this
Convertible Note shall commence on the Closing Date (as defined in Section 5(a)
below) with respect to this Convertible Note, and shall continue to accrue until
payment in full of the principal sum has been made or duly provided for, or,
with respect to any principal amount subject to conversion, until the Date of
Conversion, whichever is earlier. The interest so payable will be paid on the
Maturity Date, or the Date of Conversion, as defined in Section 5(b)(iv) below,
as the case may be. Such interest shall be paid to the person and at the address
in whose name this Convertible Note is registered on the records of the Company
regarding registration and transfers of the Convertible Notes (the "Convertible
Note Register") on the business day immediately preceding the payment date. The
principal of, and interest on, this Convertible Note are payable, if converted
by the Holder pursuant to Section 5 hereof, in shares of Common Stock, or if
redeemed, in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts, to the
person and at the address in whose name this Convertible Note is registered on
the Convertible Note Register on the business day immediately preceding the
payment date.
This Convertible Note is subject to the following additional provisions:
Section 1. Convertible Note Denominations. Upon conversion of a portion,
but less than all, of this Convertible Note in accordance with the terms hereof,
a new convertible note or convertible notes may be issued to the Holder in a
denomination equal to the exact amount of the unconverted portion of this
Convertible Note. No service charge will be made for registration of transfer or
exchange.
Section 2. Withholding. The Company shall be entitled to withhold from all
payments of principal of, and interest on, this Convertible Note any amounts
required to be withheld under the applicable provisions of the United States
income tax laws, or other applicable laws, at the time of such payments. Holder
shall, prior to any transfer hereof, deliver to the Company a completed form W-8
for such transferee. The Holder shall pay any other taxes, charges, or levies in
connection with the issuance or transfer thereof.
Section 3. Sale, Transfer or Exchange. This Convertible Note has been
issued based upon investment representations of the original purchaser hereof
and may be transferred or exchanged only in compliance with the Act, including
Regulation D and any applicable state securities laws ("State Acts"). Any Holder
of this Convertible Note, by acceptance hereof, agrees to the representations,
warranties and covenants herein. Prior to due presentment to the Company for
transfer of this Convertible Note, the Company and any agent of the Company may
treat the person in whose name this Convertible Note is duly registered on the
Company's Convertible Note Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Convertible Note be overdue, and neither the Company nor any such agent
shall be affected by notice to the contrary.
Section 4. [Intentionally Left Blank].
Section 5. Conversion. The record Holders of this Convertible Note shall
have conversion rights as follows (the "Conversion Rights"):
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(a) Right to Convert. The record Holder of this Convertible Note shall
be entitled to convert any or all its Convertible Notes at any time or from
time to time on or after the Last Closing Date, as defined below, at the office
of the Company's designated transfer agent for the Common Stock (the "Transfer
Agent"), into that number of fully-paid and non-assessable shares of Common
Stock calculated in accordance with the following formula (the "Conversion
Rate"):
Number of shares of Common Stock issued upon conversion of a Convertible
Note or Convertible Notes =
Principal + Interest
--------------------
Conversion Price
where,
o "Principal" = the then outstanding principal amount of Convertible
Note(s) to be converted,
o "Interest" = (.06) X (N/365) X Principal, where "N" = the number of
days between (i) the Closing Date (as defined below), and (ii) the
applicable Date of Conversion (as defined in Section 5(b)(iv) below)
for the Convertible Notes for which conversion is being elected.
o "Conversion Price": Subject to the Floor Price (as defined below), if
applicable, the Conversion Price equals the Variable Conversion Price
(as defined below) on the Date of Conversion, but shall in no event
exceed the Maximum Conversion Price (as defined below).
o "Floor Price": If, at any time on or after the date that is four
hundred fifty-five (455) days after the Last Closing Date, the Closing
Bid Price (as defined below) of the Common Stock exceeds the greater
of $6 or 150% of the Maximum Conversion Price then in effect for
twenty (20) consecutive trading days, the Conversion Price shall
thereafter be no less than a "Floor Price" equal to $2. There shall be
no Floor Price prior to the date that is four hundred fifty-five (455)
days after the Closing Date.
o "Maximum Conversion Price": During the period beginning on the Last
Closing Date and ending on the date which is one hundred eighty (180)
days after the Last Closing Date, the "Maximum Conversion Price" per
share shall equal 150% of the average Closing Bid Price for the five
(5) trading days immediately preceding the date of the first Closing
of a Convertible Note (the "Initial Maximum Conversion Price").
Anytime after the date that is one hundred eighty (180) days after the
Last Closing Date, "Maximum Conversion Price" shall equal the lesser
of (i) the Initial Maximum Conversion Price or (ii) the Market Price
(as defined below) in effect on the date that is one hundred eighty
(180) days after the Closing Date.
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o "Market Price" shall equal the lowest Closing Bid Price for any
trading day occurring during the applicable Pricing Period (as defined
below).
o "Discounted Conversions" shall mean (a) conversions which (i) occur on
or after the date that is ninety (90) days after the Last Closing
Date, and (ii) do not exceed the Limited Conversion Quota (as defined
below), or (b) other conversions specifically designated herein as
Discounted Conversions. In the event that any "Key Employee" (as
defined in the Subscription Agreement) leaves his employment with the
Company, any conversions which occur thereafter shall be deemed to be
Discounted Conversions. From and after the occurrence of an Event of
Default, all subsequent conversions shall be deemed to be Discounted
Conversions.
o "Unlimited Conversions" shall mean conversions which do not meet the
definition of a Discounted Conversion.
o "Variable Conversion Price": (i) for Discounted Conversions, the
"Variable Conversion Price" shall equal 85% of the Market Price in
effect on the Date of Conversion (the "Limited Conversion Price"), and
(ii) for Unlimited Conversions, the Variable Conversion Price shall
equal 100% of the Closing Bid Price of the Common Stock on the trading
day immediately preceding the Date of Conversion.
o "Pricing Period" shall mean twenty (20) consecutive trading days, plus
two (2) additional consecutive trading days for each thirty (30)
calendar days which have passed since the date that is one hundred
eighty (180) days after the Last Closing Date, ending on the trading
day immediately preceding the Date of Conversion. If the Holder
conducts short-sales, or other sales, of Common Stock during a Pricing
Period, trading days otherwise includable in a Pricing Period shall
not include the days on which such sales or short sales occurred.
o "Limited Conversion Quota": Beginning on the date that is ninety (90)
days following the Last Closing Date, as defined below, the "Limited
Conversion Quota" initially shall be one third (1/3) of the aggregate
principal amount of Convertible Notes issued to such Holder, and on
the date that is one hundred twenty (120) after the Last Closing Date,
the Limited Conversion Quota shall increase by an additional one third
(1/3) of the aggregate principal amount of the Convertible Notes
issued to such Holder, and on the date that is one hundred eighty
(180) days after the Last Closing Date, the Limited Conversion Quota
shall increase to one hundred percent (100%) of the aggregate
principal amount of the Convertible Notes issued to such Holder; and
provided, further, in the event that the Holder converts less than its
full Limited Conversion Quota during any one of the above periods, the
unconverted amount shall be carried forward and added to the Limited
Conversion Quota, and provided, further, that subsequent to the date
that is one hundred eighty (180) days following the Last Closing Date,
all conversions shall be deemed to be Discounted Conversions.
For purposes hereof, a new month will be deemed to occur on the same
numeric day of the next calendar month. For example, if the Last
Closing Date were to occur on July 8, 1998, the date that is six
months thereafter would be December 8, 1998.
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For purposes hereof, any Holder which acquires Convertible Notes from
another Holder (the "Transferor") and not upon original issuance from the
Company shall be entitled to exercise its conversion right as to the percentages
of the Principal Amount specified under Section 5(a) in such amounts and at such
times such that the aggregate principal amount of Convertible Notes eligible for
conversion by such Holder at any time shall be in the same proportion that the
principal amount of Convertible Notes acquired by such Holder from its
Transferor bears to the total principal amount of Convertible Notes immediately
theretofore owned by such Transferor, or (subject to the aggregate limitation
applicable to a Transferor) as may otherwise be agreed between a Transferor and
its transferee with notice to the Company.
o "Closing," "Last Closing," "Closing Date," and "Last Closing Date"
shall have the meanings as set forth in the Regulation D Subscription
Agreements between the Company and the initial purchasers of the
Convertible Notes, dated as of July ___, 1998 (each, a "Subscription
Agreement").
As used herein, "Closing Bid Price" means, for any security as of any date,
the last closing bid price per share for such security on the New York Stock
Exchange (the "NYSE") as reported by Bloomberg Financial Markets ("Bloomberg"),
or, if the NYSE is not the principal securities exchange or trading market for
such security, the last closing bid price per share 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 per share 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 is reported for such security by Bloomberg, the last
closing trade price per share of such security as reported by Bloomberg, or, if
no last closing trade price is reported for such security by Bloomberg, the
average of the bid prices per share of any market makers for such security as
reported in the "pink sheets" by the National Quotation Bureau, Inc. If the
Closing Bid Price cannot be calculated for such security on such date on any of
the foregoing bases, the Closing Bid Price of such security on such date shall
be the fair market value per share as mutually determined by the Company and the
holders of a majority of the principal amount of Convertible Notes. If the
Company and the holders of a majority of the principal amount of Convertible
Notes are unable to agree upon the fair market value of the Common Stock, then
such dispute shall be resolved by an investment banking firm mutually acceptable
to the Company and the holders of a majority of the principal amount of
Convertible Notes.
As used herein, "Closing Sale Price" means, for any security as of any
date, the last closing trade price per share for such security on the NYSE as
reported by Bloomberg, or, if the NYSE is not the principal securities exchange
or trading market for such security, the last closing trade price per share 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 trade price per share of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no last closing trade price is reported for such
security by Bloomberg, the last closing bid price per share of such security as
reported by Bloomberg, or, if no last closing bid price is reported for such
security by Bloomberg, the average of the bid prices per share of any market
makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Sale Price
5
cannot be calculated for such security on such date on any of the foregoing
bases, the Closing Sale Price of such security on such date shall be the fair
market value per share as mutually determined by the Company and the holders of
a majority of the principal amount of Convertible Notes. If the Company and the
holders of Convertible Notes are unable to agree upon the fair market value of
the Common Stock, then such dispute shall be resolved by an investment banking
firm mutually acceptable to the Company and the holders of a majority of the
principal amount of Convertible Notes.
(b) Mechanics of Conversion. In order to convert Convertible Notes into
full shares of Common Stock, the Holder shall (i) send via facsimile, on or
prior to 11:59 p.m., New York City time (the "Conversion Notice Deadline") on
the Date of Conversion, a copy of the fully executed notice of conversion
attached hereto ("Notice of Conversion") to the Transfer Agent, with a copy to
the Company at the office of the Company stating that the Holder elects to
convert (provided that if a Holder timely sends a copy of the Notice of
Conversion to either one of the Company or the Transfer Agent, failure to send a
copy of the Notice of Conversion to the other shall not void the conversion),
which notice shall specify the Date of Conversion, the principal amount of
Convertible Notes to be converted, the applicable Conversion Price and a
calculation of the number of shares of Common Stock issuable upon such
conversion (together with a copy of the front page of each certificate to be
converted) and (ii) within two (2) business days surrender to a common courier
for delivery to the office of the Company or the Transfer Agent, the Convertible
Notes (the "Convertible Note Certificates") being converted, duly endorsed for
transfer; provided, however, that the Company shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such conversion
unless either the Convertible Notes are delivered to the Company or its Transfer
Agent as provided above, or the Holder notifies the Company or its Transfer
Agent that such certificates have been lost, stolen or destroyed (subject to the
requirements of subparagraph (i) below). Upon receipt by the Company of a
facsimile copy of a Notice of Conversion, the Company shall immediately send,
via facsimile, a confirmation of receipt of the Notice of Conversion to the
Holder which shall specify that the Notice of Conversion has been received and
the name and telephone number of a contact person at the Company whom the Holder
should contact regarding information related to the Conversion. In the case of a
dispute as to the calculation of the Conversion Rate, the Company shall promptly
issue to the Holder the number of Shares that are not disputed and shall submit
the disputed calculations to its outside accountant via facsimile within three
(3) days of receipt of Holder's Notice of Conversion. The Company shall cause
the accountant to perform the calculations and notify the Company and Holder of
the results no later than two business days from the time it receives the
disputed calculations. Accountant's calculation shall be deemed conclusive
absent manifest error.
(i) Lost or Stolen Convertible Notes. Upon receipt by the Company of
evidence of the loss, theft, destruction or mutilation of any Convertible Note
and (in the case of loss, theft or destruction) of indemnity reasonably
satisfactory to the Company and the Transfer Agent, and upon surrender and
cancellation of the Convertible Notes, if mutilated, the Company shall or shall
cause the Transfer Agent to execute and deliver new Convertible Notes of like
principal amount and date. However, the Company shall not be obligated to
re-issue such lost or stolen Convertible Notes if the Holder contemporaneously
requests the Company to convert such Convertible Notes into Common Stock.
6
(ii) Delivery of Common Stock Upon Conversion. The Company shall
cause to be delivered to the Holder or at its direction to transferees of
the Holder, as soon as practicable but in any event no later than the later of
(the "Deadline") (x) the close of business on the third (3rd) business day
following the delivery of the facsimile Notice of Conversion and (y) the day
that is the first business day after receipt by the Transfer Agent of the
original Convertible Notes to be converted (or provision for indemnification in
accordance with the requirements of subparagraph (i) in the case of lost or
destroyed certificates, if required) and a copy of the Notice of Conversion, the
number of shares of Common Stock to which the Holder shall be entitled as
aforesaid and a certificate for that principal amount of Convertible Notes not
being converted, if any, which were previously represented by the Convertible
Notes submitted for conversion. If electronic delivery is requested, shares of
Common Stock shall be transmitted electronically pursuant to such electronic
delivery system as the Holder shall request (to the extent such shares may be
delivered without a legend pursuant to the Subscription Agreement); otherwise
delivery shall be by physical certificates. All Convertible Notes shall be
physically delivered. All physical deliveries shall be by reputable overnight
courier and the Deadline shall be extended by one additional business day for
physical delivery of certificates to a location outside of the United States.
(iii) No Fractional Shares. If any conversion of the Convertible
Notes would create a fractional share of Common Stock or a right to acquire
a fractional share of Common Stock, such fractional share shall be disregarded
and the number of shares of Common Stock issuable upon conversion, in the
aggregate, shall be the next higher number of shares.
(iv) Date of Conversion. The date on which conversion occurs (the
"Date of Conversion") shall be deemed to be the date set forth in such
Notice of Conversion, provided (i) that the advance copy of the Notice of
Conversion is sent via facsimile to the Transfer Agent before 11:59 p.m., New
York City time, on the Date of Conversion, and (ii) that the original
Convertible Notes to be converted are surrendered by depositing such Convertible
Notes with a common courier, for delivery to the Transfer Agent as provided
above, within two (2) business days after the Date of Conversion. The person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record Holder or Holders of
such shares of Common Stock on the Date of Conversion. In the event that the
original Notice of Conversion and Convertible Notes are inadvertently forwarded
to the Company instead of the Transfer Agent within the required time frame, the
conversion shall not be voided thereby and the Date of Conversion shall still be
deemed to be the date set forth in such Notice of Conversion, provided that the
Deadline for delivery of the Common Stock is based solely on the date of receipt
by the Transfer Agent of the required documentation. In the event that the
Company receives an original Notice of Conversion or original Convertible Notes
from a Holder, it shall promptly forward such Convertible Notes to the Transfer
Agent.
(c) Payment upon Maturity. Each Convertible Note outstanding on the date
which is three (3) years after the Last Closing Date or, if not a business day,
the first business day thereafter ("Termination Date" or the "Maturity Date")
automatically shall, at the option of the Company, either (i) be converted
("Automatic Conversion") into Common Stock on such date at the Conversion Rate
then in effect (calculated in accordance with the formula in Section 5(a)
above), and the Termination Date shall be deemed the Date of Conversion with
respect to such conversion for purposes of this Convertible Note, or (ii) be
repaid (a "Maturity Payment")
7
by the Company for cash in an amount equal to the principal amount of
Convertible Notes being repaid, plus liquidated damages, Conversion Failure
Payments, Late Registration Payments (as defined in the Registration Rights
Agreement) and any other cash payments then due from the Company and then
unpaid, together with the accrued but unpaid Interest (as defined in Section
5(a)) (the "Total Maturity Value"). If the Company elects to repay the
Convertible Notes in cash, within five (5) business days prior to the
Termination Date, the Company shall send to the Holders of outstanding
Convertible Notes notice (the "Maturity Payment Notice") via facsimile of its
intent to make a Maturity Payment with respect to the outstanding Convertible
Notes. If the Company does not send such notice to Holder on such date, an
Automatic Conversion shall be deemed to have occurred. If an Automatic
Conversion occurs, the Company and the Holders shall follow the applicable
conversion procedures set forth in this Convertible Note; provided, however,
that the Holders are not required to send the Notice of Conversion contemplated
by Section 5(b). If the Company elects to repay the Convertible Notes for cash,
each Holder of outstanding Convertible Notes shall send their Convertible Notes
to the Company within five (5) days of the date of receipt of the Maturity
Payment Notice from the Company, and the Company shall pay the applicable
repayment price to each respective Holder within five (5) days of the receipt of
such Convertible Notes. The Company shall not be obligated to deliver the
repayment price unless the Convertible Notes are delivered to the Company, or,
in the event any Convertible Notes have been lost, stolen, mutilated or
destroyed, unless the Holder has complied with Section 5(b)(i). If the Company
elects to repay the Convertible Notes for cash under this Section 5(c) and the
Company fails to pay the Holders the repayment price within five (5) business
days of its receipt of the Convertible Notes to be repaid as required by this
Section 5(c), then an Automatic Conversion shall be deemed to have occurred and,
upon receipt of the Convertible Notes, the Company shall immediately deliver to
the Holders the certificates representing the number of shares of Common Stock
to which the Holders would have been entitled upon Automatic Conversion using
the lowest Conversion Price (as defined in Section 5 hereof) in effect during
the period beginning on the Termination Date and ending on the date the Transfer
Agent issues Common Stock pursuant to this Section 5(c). Nothing in this Section
5(c) shall be construed to limit Holder's ability to pursue Holder's rights
under Section 14 hereof.
(d) Adjustment to Conversion Rate.
(i) Adjustment to Maximum Conversion Price Due to Stock Split, Stock
Dividend, Etc. If, prior to the conversion of all of the Convertible Notes, the
number of outstanding shares of Common Stock is increased by a stock split,
stock dividend, or other similar event, the Maximum Conversion Price shall be
proportionately reduced, or if the number of outstanding shares of Common Stock
is decreased by a combination or reclassification of shares, or other similar
event, the Maximum Conversion Price and the Floor Price shall be proportionately
increased.
(ii) Further Adjustment to Conversion Price. If, at any time when any
Convertible Notes are issued and outstanding, the number of outstanding shares
of Common Stock is increased or decreased by a stock split, stock dividend, or
other similar event, which event shall have taken place during the reference
period for determination of the Conversion Price for any conversion of the
Convertible Notes (including, without limitation, a reference period for
determining the Maximum Conversion Price), then the Market Price, the Conversion
Price, the Variable Conversion Price, and the Maximum Conversion Price, as
applicable, shall be
8
calculated giving appropriate effect to the stock split, stock dividend,
combination, reclassification or other similar event.
(iii) Adjustments.
(A) Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person (as defined below) or other transaction which is effected in
such a way that holders of Common Stock are entitled to receive (either directly
or upon subsequent liquidation) stock, securities or assets with respect to or
in exchange for Common Stock is referred to herein as "Organic Change." Prior to
the consummation of any Organic Change, the Company will make appropriate
provision (in form and substance reasonably satisfactory to the Holders of a
majority of the principal amount of Convertible Notes then outstanding) to
insure that the Holders of the Convertible Notes will thereafter have the right
to acquire and receive in lieu of or addition to (as the case may be) the shares
of Common Stock otherwise acquirable and receivable upon the conversion of this
Convertible Note at the lesser of (i) the Limited Conversion Price or (ii) the
Maximum Conversion Price, such shares of stock, securities or assets that would
have been issued or payable in such Organic Change with respect to or in
exchange for the number of share of Common Stock which would have been
acquirable and receivable upon the conversion such Holder's Convertible Notes
had such Organic Change not taken place (without taking into account any
limitations or restrictions on the timing or amount of conversions). In any such
case, the Company will make appropriate provision (in form and substance
reasonably satisfactory to the Holders of a majority of the Principal amount of
Convertible Notes then outstanding) with respect to such Holders' rights and
interests to insure that the provisions of this Section 5(d)(iii) and the
remaining Sections of this Convertible Note will thereafter be applicable to the
Convertible Notes (including, in the case of any such consolidation, merger or
sale in which the successor entity or purchasing entity is other than the
Company, an immediate adjustment of the Maximum Conversion Price to the value
for the Common Stock reflected by the terms of such consolidation, merger or
sale, if the value so reflected is less than the Maximum Conversion Price in
effect immediately prior to such consolidation, merger or sale and an immediate
revision to the Variable Conversion Price so that it is thereafter based on the
price of the common stock of the surviving entity and the market in which such
common stock is traded). The Company will not effect any such consolidation,
merger or sale, unless prior to the consummation thereof, the successor entity
(if other than the Company) resulting from consolidation or merger or the entity
purchasing such assets assumes, by written instrument (in form and substance
reasonably satisfactory to the Holders of a majority of the principal amount of
the Convertible Notes then outstanding), the obligation to deliver to each
Holder of Convertible Notes such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire. "Person" shall mean an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(B) Adjustment Due to Distribution. Subject to the restrictions
herein contained, if at any time after the Closing Date, the Company shall
declare or make any distribution of its assets (or rights to acquire its assets)
or shares of its capital stock (other than Common Stock) to holders of Common
Stock as a partial liquidating dividend, by way of return
9
of capital or otherwise (including any dividend or distribution to the
Company's shareholders in cash or shares (or rights to acquire shares) of
capital stock of any other public or private company, including but not limited
to a subsidiary or spin-off of the Company (a "Distribution"), then the Holder
of this Convertible Note shall be entitled to receive the amount of such
distribution (in kind) which would be payable to the Holder with respect to the
shares of Common Stock which would be issuable upon such conversion of the
Convertible Note as of the record date for determining that the shareholders are
entitled to such Distribution (without regard to any limitation on conversion
contained herein) had such Holder been the holder of such shares of Common Stock
on the record date for determination of shareholders entitled to such
Distribution.
(iv) Issuance of Other Securities With Market Conversion Price. If,
at any time while the Convertible Notes are issued and outstanding, the
Company shall issue any securities which are convertible into or exchangeable
for Common Stock ("Convertible Securities") either (i) at a conversion or
exchange rate based on a discount from the market price of the Common Stock at
the time of conversion or exercise or (ii) with a fixed conversion or exercise
price less than the Maximum Conversion Price, then, at the Holder's option: (X)
in the case of clause (i), the Variable Conversion Price in respect of any
conversion of Convertible Notes after such issuance shall be calculated
utilizing the lesser of the lowest variable conversion price and the lowest
fixed conversion price applicable to any such Convertible Securities, and (Y) in
the case of clause (ii), the Maximum Conversion Price shall be reduced to such
lesser conversion or exercise price.
(v) No Fractional Shares. If any adjustment under this Section 5(d)
would create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon conversion, in the aggregate,
shall be the next higher number of shares.
Section 6. Company's Right to Prepay.
(a) Company's Right to Prepay Upon Receipt of Notice of Conversion.
If the Company has, in its sole discretion, delivered an Advance Notice of
Election to Holder in accordance with Section 7 below and such Advance Notice of
Election is in effect in accordance with Section 7 below at the time of receipt
of a Notice of Conversion pursuant to Section 5, and if the Conversion Price of
such conversion is less than $2.00, the Company shall prepay in whole or in part
(as specified in the applicable Advance Notice of Election) any Convertible Note
so submitted for conversion, immediately prior to and in lieu of conversion
("Prepayment Upon Receipt of Notice of Conversion").
(i) Prepayment Price Upon Receipt of a Notice of Conversion. The
prepayment for Convertible Notes under this Section 6(a) shall be
calculated in accordance with the following formula ("Prepayment Price"):
[Principal + Interest] x Highest Sale Price on Date of Conversion
----------------------------------------
Conversion Price
where,
10
"Date of Conversion", and "Conversion Price" shall have the same meanings as
defined in Section 5, and Highest Sale Price shall have the meaning as defined
below; provided, however, that such Prepayment Price shall be no less than (110%
X Principal) + accrued Interest and no greater than (130% X Principal) + accrued
Interest.
As used herein, "Highest Sale Price" means, for any security as of any
date, the highest trade price per share for such security on the NYSE as
reported by Bloomberg, or, if the NYSE is not the principal securities exchange
or trading market for such security, the highest trade price per share 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 highest trade price per share of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no trade price is reported for such security by
Bloomberg, the closing bid price per share of such security as reported by
Bloomberg, or, if no closing bid price is reported for such security by
Bloomberg, the average of the bid prices per share of any market makers for such
security as reported in the "pink sheets" by the National Quotation Bureau, Inc.
If the Closing Sale Price cannot be calculated for such security on such date on
any of the foregoing bases, the Highest Sale Price of such security on such date
shall be the fair market value per share as mutually determined by the Company
and the holders of a majority of the principal amount of Convertible Notes. If
the Company and the holders of Convertible Notes are unable to agree upon the
fair market value of the Common Stock, then such dispute shall be resolved by an
investment banking firm mutually acceptable to the Company and the holders of a
majority of the principal amount of Convertible Notes.
(ii) Mechanics of Prepayment Upon Receipt of Notice of Conversion.
If a conversion occurs that the Company is required to prepay under Section
6(a) above, the Company shall effect such prepayment by giving notice
("Prepayment Confirmation") confirming its election to prepay as set forth in
any effective Advance Notice of Election, by facsimile, by 5:00 p.m. New York
City time the next business day following receipt of a Notice of Conversion from
a Holder, and the Company shall provide a copy of such Prepayment Confirmation
by overnight or two (2) day courier, to (A) the Holder of the Convertible Notes
submitted for conversion at the address and facsimile number of such Holder
appearing in the Company's register for the Convertible Notes and (B) the
Company's Transfer Agent. Such Prepayment Confirmation shall conform to the
election set forth in any effective Advance Notice of Election and shall verify
the portion of the Convertible Notes submitted for conversion which the Company
will prepay and the applicable Prepayment Price.
(iii) Void Prepayment. In the event that the Company does not pay the
Prepayment Price within the time period set forth in this Section 6 (a "Void
Prepayment"), at any time thereafter and until the Company pays such unpaid
applicable Prepayment Price in full, a Holder of Convertible Notes shall have
the option (the "Void Prepayment Option") to, in lieu of prepayment, require the
Company to promptly return to such Holder any or all of the Convertible Notes
that were submitted for prepayment by such Holder under this Section 6 and for
which the applicable Prepayment Price (together with any interest thereon) has
not been paid, by sending written notice thereof to the Company via facsimile
(the "Void Prepayment Notice"). Upon the Company's receipt of such Void
Prepayment Notice, (i) the Prepayment Confirmation, shall be null and void with
respect to those Convertible Notes subject to the Void Prepayment Notice, (ii)
the Company shall immediately return any Convertible Notes subject to the Void
Prepayment Notice, and (iii) at any time thereafter, the Convertible Notes
subject to the Void Prepayment
11
Notice shall be eligible for conversion according to Section 5. If there is
a Void Prepayment, the Company shall promptly notify the Holders and thereafter
the Company forfeits its rights to prepay any Convertible Notes under this
Section 6.
(b) Company Must Have Immediately Available Funds or Credit Facilities.
The Company shall not be entitled to send any Advance Notice of Election
(as defined below)and begin the prepayment procedure under this Section 6 unless
it has:
(i) the full amount of the Prepayment Price in cash, available in a
demand or other immediately available account in a bank or similar
financial institution; or
(ii) immediately available credit facilities, in the full amount of
the Prepayment Price with a bank or similar financial institution; or
(iii) an agreement with a standby underwriter willing to purchase
from the Company a sufficient number of shares of stock to provide proceeds
necessary to prepay any outstanding amounts on the Convertible Note that is not
converted prior to prepayment; or
(iv) in the case of an Asset Sale, an agreement with the purchaser
of such assets that proceeds from the Asset Sale in the amount of the
Prepayment Price shall be set aside, upon the closing of the Asset Sale, in a
separate escrow account for payment directly to the Holder of the Convertible
Notes being prepaid; or
(v) a combination of the items set forth in (i), (ii), (iii) and (iv)
above, aggregating the full amount of the Prepayment Price.
The Company shall include with the Notice of Prepayment a written
certification by an officer of the Company (or from such third party, if the
funds relied upon are from a third party), that the funds or credit facilities
are available for the prepayment.
Following delivery of a Notice of Prepayment, the Company shall maintain
the funding availability as contemplated by (i) through (v) above. If the
foregoing conditions of this Section 6(b) are satisfied and the Company complies
with Section 6(c) hereof, then any Convertible Notes called for by a Notice of
Prepayment shall cease to be outstanding for all purposes hereunder (including
the right to convert or to accrue additional Interest or to exercise any other
right or privilege hereunder) on the Date of Prepayment and shall instead
represent the right to receive the Prepayment Price without interest from and
after the Date of Prepayment.
(c) Payment of Prepayment Price. Each Holder submitting Convertible
Notes being prepaid under this Section 6 shall send their Convertible Notes
so prepaid to the Transfer Agent by overnight or, if outside the U.S., two-day
courier within three (3) business days of the Date of Prepayment, and the
Company shall pay the applicable Prepayment Price to that Holder within five (5)
business days of the date the Transfer Agent receives the Convertible Notes
being prepaid. The Company shall not be obligated to deliver the Prepayment
Price unless and until the Convertible Notes so prepaid are delivered to the
Transfer Agent, or, in the event one (1) or more Convertible Notes have been
lost, stolen, mutilated or destroyed, at such time as the Holder has complied
with Section 5(b)(i). In the event that the Convertible Notes
12
being prepaid are inadvertently forwarded to the Company instead of the
Transfer Agent, the Company shall promptly forward such Convertible Notes to the
Transfer Agent.
Section 7. Advance Notice of Prepayment.
(a) Advance Notice of Company's Election to Prepay. In order to effect a
Prepayment Upon Receipt of Notice of Conversion under Section 5(a) above, the
Company must provide advance written notice ("Advance Notice of Election")
stating that the Company elects to prepay all or some stated portion of Holder's
Convertible Notes in cash if submitted for conversion over the subsequent thirty
(30) day period, pursuant to the Company's prepayment rights discussed in
Section 6(a).
(b) Mechanics of Advance Notice of Election. The Company may deliver an
Advance Notice of Election to the Holder at any time (1) via facsimile and (2)
by depositing such Election Response with an overnight or five (5) day courier
delivery, provided that the Advance Notice of Election shall not take effect
until at least five (5) business days after the date it is delivered to the
Holder. The Company's Advance Notice of Election shall state (i) that the
Company shall prepay, where prepayment is allowed under Section 6 above, all or
a specified percentage portion (the "Percentage Portion") of any of Holder's
Convertible Notes submitted for conversion over a thirty (30) day period
beginning no sooner than two (2) business days after the delivery of notice to
the Holder, and (ii) that the Company has funds or credit facilities, as
required in Section 6(b) to effect such prepayments. The Company may not deliver
any further Advance Notices of Election and shall immediately retract any and
all outstanding Advance Notices of Election if the Company fails to deliver any
Prepayment Price to any Holder in accordance with Section 6(c). Any Advance
Notice of Election shall be delivered to each Holder and shall cover the same
Percentage Portion of Convertible Notes submitted for conversion with respect to
each Holder.
(c) Retraction of an Advance Notice of Election. The Company may retract
any Advance Notice of Election by giving ten (10) business days advance written
notice to the Holders. The Company must retract any Advance Notice of Election
then in effect if, at any time, the Company does not have, or reasonably
anticipates that it will not have, funds or credit facilities, as required in
Section 6(b) to effect all prepayments covered by the notice.
(d) Advance Notice of Election is Binding. Unless an Advance Notice of
Election is retracted in the manner allowed in subsection (c) above or unless
Holder agrees in writing otherwise, the election made by the Company in an
Advance Notice of Election is binding and the Company must prepay conversions as
and to the extent specified in any Advance Notice of Election in effect at the
time of a conversion.
Section 8. Negative Covenants. Company shall not amend, alter or change
this Convertible Note or the rights of the parties thereunder without the
consent of Holders of at least 75% of the then outstanding principal amount of
the Convertible Notes.
In the event Holders of at least seventy-five percent (75%) of the then
outstanding principal amount of Convertible Notes agree to allow the Company to
alter or change the rights, preferences or privileges of the Convertible Notes
so as to affect the Convertible Notes, then the
13
Company will deliver notice of such approved change to the Holders of the
Convertible Notes that did not agree to such alteration or change (the
"Dissenting Holders") and Dissenting Holders shall have the right for a period
of thirty (30) business days to convert pursuant to the terms of this
Convertible Note as they exist prior to such alteration or change (provided
that, for purposes of calculating the Variable Conversion Price, such
conversions shall be deemed to be Discounted Conversions), or continue to hold
their Convertible Notes, as amended.
Section 9. [Intentionally Left Blank].
Section 10. [Intentionally Left Blank].
Section 11. Authorization and Reservation of Shares of Common Stock/Cap
Amount.
(a) Authorized and Reserved Amount. At the time of each Closing, the
Company shall have authorized and reserved and keep available for issuance five
million two hundred fifty thousand (5,250,000) shares of Common Stock (the
"Reserved Amount") solely for the purpose of effecting the conversion of the
Convertible Notes and exercise of the Warrants (as defined in the Registration
Rights Agreement between the Company and the Holders, referred to herein as the
"Registration Rights Agreement"), which number shall not be reduced. The Company
shall at all times have authorized and reserved and keep available out of its
authorized but unissued shares of Common Stock a sufficient number of shares of
Common Stock to provide for the full conversion of all outstanding Convertible
Notes, and issuance of the shares of Common Stock in connection therewith. The
Company shall use all authorized but unreserved shares as necessary to honor
conversions of Convertible Notes.
(b) Increases to Reserved Amount. Without limiting any other provision
of this Section 11, if at any time the Holder's portion of the Reserved
Amount, based upon the average of the five (5) lowest Conversion Prices in
effect during any 30 consecutive trading days prior to the providing of such
notice shall be less than One Hundred Fifty percent (150%) of the number of
shares of Common Stock issuable to such Holder upon conversion all of its
Convertible Notes (assuming, for such calculations, that the Variable Conversion
Price is calculated based upon a Limited Conversion) (a "Share Reservation
Failure"), or that the Holder's portion of the Reserved Amount, based upon the
Conversion Prices in effect during any two consecutive trading days prior to
such notice, shall be less than One Hundred Twenty Five percent (125%) of the
number of shares of Common Stock issuable to such Holder upon conversion of all
its Convertible Notes (assuming, for such calculations, that the Variable
Conversion Price is calculated based upon a Limited Conversion) (each, a "Share
Reservation Failure"), the Company shall within five (5) business days notify
all Holders of Convertible Notes of such occurrence and shall take action as
soon as possible, but in any event within five (5) days after such Holder's
notice if such action can be accomplished by the Board of Directors and within
120 days of such Holder's notice if such action requires the approval of the
Company's shareholders, to increase the Reserved Amount for each Holder to Two
Hundred percent (200%) of the number of shares of Common Stock then issuable to
such Holder upon conversion of its Convertible Notes (assuming, for such
calculations, that the Variable Conversion Price is calculated based upon a
Limited Conversion).
14
(c) Reduction of Reserved Amount Under Certain Circumstances. Prior to
complete conversion of all Convertible Notes the Company shall not reduce the
number of shares required to be reserved for issuance under this Section 11
without the written consent of all Holders except for a reduction proportionate
to a combination, reverse stock split, or similar action effected for a valid
business purpose other than affecting the obligations of Company under this
Section 11, which action affects all shares of Common Stock equally; provided,
however that in no event shall any Holder's portion of the Reserved Amount be
reduced below One Hundred Fifty percent (150%) of the number of shares of Common
Stock issuable upon conversion of that Holder's outstanding Convertible Notes
(assuming, for such calculations, that the Variable Conversion Price is
calculated based upon a Limited Conversion), without that Holder's written
consent.
(d) [Intentionally Omitted].
(e) Cap Amount. Unless otherwise permitted by the New York Stock
Exchange ("NYSE") in no event shall the total number of shares of Common
Stock issued upon conversion of all of the Convertible Notes and upon exercise
of the Warrants exceed the maximum number of shares of Common Stock that the
Company can without shareholder approval so issue pursuant to NYSE Listed
Company Manual Section 312.03(c) (or any successor rule) ("Rule 312.03(c)") (the
"Cap Amount") which, as of the date of issuance of the Convertible Notes, shall
be 2,632,465 shares (subject to appropriate adjustments for stock splits, stock
dividends, combinations and other similar events). The Cap Amount shall be
allocated pro-rata to the holders of Convertible Notes as provided in subsection
(f) below. In the event the Company is prohibited from issuing shares of Common
Stock as a result of the operation of this subparagraph (e), the Company shall
comply with subsection (g) below.
(f) Allocations of Cap Amount and Reserved Amount. The initial Cap
Amount and Reserved Amount shall be allocated pro rata among the Holders of
Convertible Notes based on the principal amount of Convertible Notes initially
issued to each Holder. Each increase to the Cap Amount and Reserved Amount shall
be allocated pro rata among the Holders of Convertible Notes based on the then
outstanding principal amount of Convertible Notes held by each Holder at the
time of the increase in the Cap Amount or Reserved Amount, as the case may be.
In the event a Holder shall sell or otherwise transfer any of such Holder's
Convertible Notes, each transferee shall be allocated a pro rata portion of such
transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or
Reserved Amount which remains allocated to any person or entity which does not
hold any Convertible Notes shall be allocated to the remaining Holders of
Convertible Notes, pro rata based on the principal amount of Convertible Notes
then held by such Holders.
(g) Shareholder Vote for 20% Approval. The Company shall, at its next
annual shareholder meeting, to be held no later than September 30, 1998, use its
best efforts to obtain approval of its shareholders (the "Shareholder Vote") to
authorize the issuance of the full number of shares of Common Stock which would
be issuable upon the conversion of all of the Convertible Notes and exercise of
the Warrants but for the Cap Amount and without regard to any other conversion
limitations contained herein and 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 Company or any
of its securities with
15
respect to the Company's ability to issue shares of Common Stock in excess
of the Cap Amount (such approvals being the "20% Approval"). In connection with
such Shareholder Vote, the Company shall use its best efforts to cause all
officers and directors of the Company to promptly enter into irrevocable
agreements to vote all of their shares in favor of eliminating such
prohibitions.
(h) Inability to Convert due to Cap Amount.
(i) [Intentionally Omitted].
(ii) Remedies. In the event the Shareholder Vote results in a denial
of the 20% Approval or the 20% Approval has not occurred by October 31,
1998, then (A) Holders of at least fifty percent (50%) of the aggregate of the
then outstanding principal amount of the Convertible Notes, by delivery of
written notice to the Company, shall have the option to require the Company to
terminate the listing of its Common Stock on the NYSE (or any other stock
exchange, interdealer quotation system or trading market) and cause its Common
Stock to be eligible for trading on the over-the-counter electronic bulletin
board; and (B) each Holder of Convertible Notes shall thereafter have the
option, exercisable in whole or in part at any time and from time to time by
delivery of written notice ("Cap Prepayment Notice") to the Company, to require
the Company to repay in cash, at an amount per share equal to the Prepayment
Price in effect on the date of the Cap Prepayment Notice, a portion of the
Holder's Convertible Notes such that, after giving effect to such purchase, the
Holder's allocated portion of the Cap Amount exceeds 125% of the total number of
shares of Common Stock issuable to such Holder upon conversion of its
Convertible Notes on the date of such Cap Prepayment Notice.
Section 12. Failure to Satisfy Conversions.
(a) Conversion Failure Payments. If, at any time, (x) a Holder submits a
Notice of Conversion (or is deemed to submit such notice pursuant to Section
5(c) hereof), and the Company fails for any reason to deliver, on or prior to
the expiration of the Deadline ("Delivery Period") for such conversion, such
number of shares of Common Stock to which such converting Holder is entitled
upon such conversion (which shares shall be listed, authorized, reserved,
registered, and freely tradable to the extent required in this Convertible Note,
the Registration Rights Agreement between the Company and the Holder(s) and the
Subscription Agreement between the Company and the Holder(s), collectively
referred to as the "Governing Agreements"), or (y) the Company provides notice
to the Holders or otherwise announces at any time its intention not to issue
shares of Common Stock upon exercise by the Holders of its conversion rights in
accordance with the terms of this Convertible Note (each of (x) and (y) being a
"Conversion Failure"), then in addition to all other available remedies which
such Holder may pursue hereunder and under the Subscription Agreement (including
indemnification pursuant to Section 8 thereof, the Company shall pay to such
Holder liquidated cash damages in an amount equal to the lower of:
(i) "Damages Amount" X "D" X .005, and
(ii) the highest amount permitted by applicable law, where:
16
"D" means the number of days beginning the date of the Conversion Failure
through and including the Cure Date with respect to such Conversion Failure;
"Damages Amount" means the principal amount of this Convertible Note
subject to conversion plus all accrued and unpaid Interest thereon as of the
first day of the Conversion Failure, plus all damage payments previously owed
and unpaid.
"Cure Date" means (i) with respect to a Conversion Failure described in
clause (x) of its definition, the date the Company effects the conversion of the
portion of this Convertible Note submitted for conversion and (ii) with respect
to a Conversion Failure described in clause (y) of its definition, the date the
Company undertakes in writing to timely issue Common Stock in satisfaction of
all conversions of Convertible Notes in accordance with the terms of the
Convertible Notes.
The payments to which a Holder shall be entitled pursuant to this Section
are referred to herein as "Conversion Failure Payments." The parties agree that
the damages caused by a breach hereof would be difficult or impossible to
estimate accurately. A Holder may elect to receive accrued Conversion Failure
Payments in cash or to convert all or any portion of such accrued Conversion
Failure Payments, at any time, into Common Stock at the lowest Conversion Price
in effect during the period beginning on the date of the Conversion Failure
through the Cure Date for such Conversion Failure. In the event a Holder elects
to receive any Conversion Failure Payments in cash, it shall so notify the
Company in writing. In the event a Holder elects to convert all or any portion
of the Conversion Failure Payments, such Holder shall indicate on a Notice of
Conversion such portion of the Conversion Failure Payments which such Holder
elects to so convert and such conversion shall otherwise be effected in
accordance with the provisions of Section 5.
(b) Buy-In Cure. Unless a Conversion Failure described in clause (y) of
Section 12(a) hereof has occurred with respect to a Holder, if (i) the Company
fails for any reason to deliver during the Delivery Period shares of Common
Stock to a Holder upon a conversion of the Convertible Notes and (ii) after the
applicable Delivery Period with respect to such conversion, a Holder purchases
(in an open market transaction or otherwise) shares of Common Stock to make
delivery upon a sale by a Holder of the shares of Common Stock (the "Sold
Shares") which such Holder anticipated receiving upon such conversion (a
"Buy-In"), the Company shall pay such Holder within two (2) business days
following receipt of written notice of a claim pursuant to Section 12(b) (in
addition to any other remedies available to Holder) the amount by which (x) such
Holder's total purchase price (including brokerage commission, if any) for the
shares of Common Stock so purchased exceeds (y) the net proceeds received by
such Holder from the sale of the Sold Shares. For example, if a Holder purchases
shares of Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to shares of Common Stock sold for $10,000, the Company will
be required to pay such Holder $1,000. A Holder shall provide the Company
written notification indicating any amounts payable to Holder pursuant to this
Section 12.
(c) Adjustment to Conversion Price. If a Holder has not received
certificates for all shares of Common Stock within five (5) business days
following the expiration of the Delivery Period with respect to a conversion of
any portion of any of such Holder's Convertible
17
Notes for any reason, then the Conversion Price applicable upon conversion
of such portion of the Convertible Notes shall thereafter be the lowest
Conversion Price in effect during the period beginning on, and including, such
Conversion Date through and including the Cure Date. If there shall occur a
Conversion Failure of the type described in clause (y) of Section 12(a), then
the Maximum Conversion Price with respect to any conversion of Convertible Notes
thereafter shall be the lowest Conversion Price in effect at any time during the
period beginning on, and including, the date of the occurrence of such
Conversion Failure through and including the Cure Date. The Conversion Price
shall thereafter be subject to further adjustment for any events described in
Section 5(d).
(d) Void Conversion Notice. If for any reason a holder has not received
all of the shares of Common Stock prior to the tenth (10th) business day
after the Deadline with respect to a conversion of Convertible Notes, then the
holder, upon written notice to the Transfer Agent, with a copy to the Company,
may void its Conversion Notice with respect to, and retain or have returned, as
the case may be, any Convertible Notes that have not been converted pursuant to
such holder's Conversion Notice; provided that the voiding of a holder's
Conversion Notice shall not affect the Company's obligations to make any
payments which have accrued prior to the date of such notice pursuant to Section
12(a) above or otherwise or effect the Adjustment to the Conversion Price
provided in Section 12(c).
Section 13. Repayment at Option of Holders.
(a) Repayment Option Upon Major Transaction. In addition to all other
rights of the holders of Convertible Notes contained herein, upon the
announcement of a Major Transaction (as defined below), each holder of
Convertible Notes shall have the right, at such Holder's option, upon written
notice to the Company to require the Company to declare any or all of the
amounts due under this Convertible Note due and payable, at any time and from
time to time, at a price equal to the greater of (i) 125% of the Total Maturity
Value of such Convertible Notes and (ii) the product of (A) the Conversion Rate
on the date of such notice and (B) the Closing Sale Price of the Common Stock on
the trading date immediately preceding the date of consummation of the Major
Transaction ("Major Transaction Repayment Price").
(b) "Major Transaction". A "Major Transaction" shall be deemed to have
occurred at such time as any of the following events:
(i) a consolidation, merger or other business combination or event
(other than a public offering of the Company's equity for cash) following
which the holders of Common Stock of the Company immediately preceding such
consolidation, merger, combination or event either (i) no longer hold a
majority of the shares of Common Stock of the Company or (ii) no longer
have the ability to elect a majority of the board of directors of the
Company (a "Change of Control"); provided, however, that if the other
entity involved in such consolidation, merger, combination or event is a
publicly traded company with "Substantially Similar Trading
Characteristics" (as defined below) as the Company and the holders of
Common Stock are to receive solely Common Stock or no consideration (if the
Company is the surviving entity) or solely common stock of such other
entity (if such other entity is the surviving entity), such transaction (a
"Substantially Similar Change in Control") shall not be deemed to be a
Major
18
Transaction (provided the surviving entity, if other than the Company,
shall have agreed to assume all obligations of the Company under this
Convertible Note, the Subscription Agreement and the Registration Rights
Agreement). For purposes hereof, an entity shall have Substantially Similar
Trading Characteristics as the Company if the average daily dollar trading
volume of the common stock of such entity is equal to or in excess of
$350,000, if the surviving entity is listed on the NYSE or AMEX, or
$700,000 otherwise for the 90th through the 31st day prior to the public
announcement of such transaction.
(ii) the sale or transfer of all or substantially all of the Company's
assets (an "Asset Sale"); or
(iii) a purchase, tender or exchange offer made to the holders of
outstanding shares of Common Stock, such that following such purchase,
tender or exchange offer a Change of Control shall have occurred.
(c) Mechanics of Repayment at Option of Holder Upon Major Transaction.
Within 2 business days following the public announcement and at least five (5)
business days prior to the consummation of a Major Transaction, the Company
shall deliver written notice thereof via facsimile ("Notice of Major
Transaction") to each Holder of Convertible Notes, which notice shall state the
expected consummation date. At any time after the public announcement of a Major
Transaction, but prior to the consummation thereof, any Holder of Convertible
Notes then outstanding may by delivering written notice thereof via facsimile
and overnight courier ("Notice of Repayment at Option of Holder Upon Major
Transaction") to the Company, require the Company to repay up to all of the
Holder's Convertible Notes outstanding at the time such Major Transaction is
consummated. The Notice of Repayment at Option of Holder Upon Major Transaction
shall indicate the maximum principal amount of Convertible Notes that such
holder is electing to require to be repaid provided that such repayment shall be
contingent upon the closing of such Major Transaction. No such notice shall
preclude a Holder from converting Convertible Notes pursuant to Section 5
hereof.
(d) Payment of Repayment Price. Upon the Company's receipt of a
Notice(s) of Repayment at Option of Holder Upon Major Transaction from any
Holder of Convertible Notes, the Company shall immediately notify each Holder of
Convertible Notes by facsimile of the Company's receipt of such notices. The
Company shall deliver the applicable Major Transaction Repayment Price to such
holder within five (5) business days after the Company's receipt of a Notice of
Repayment Option of Holder Upon Major Transaction, but in no event later than
the consummation date for such Major Transaction; provided that a Holder's
Convertible Notes shall have been so delivered to the Transfer Agent. If the
Company is unable to repay all of the Convertible Notes submitted for repayment,
the Company shall (i) repay a pro rata amount from each holder of Convertible
Notes based on the principal amount of Convertible Notes submitted for repayment
by such Holder relative to the total principal amount of Convertible Notes
submitted for repayment by all Holders of Convertible Notes as of the date
payment is required to be made and (ii) in addition to any remedy such holder of
Convertible Notes may have under this Convertible Note and the Subscription
Agreement, pay to each Holder interest at the rate of 18% per annum in respect
of each unpaid Convertible Note until paid in full.
19
(e) Void Repayment. In the event that the Company does not pay the Major
Transaction Repayment Price within the time period set forth in Section 13(d),
at any time thereafter and until the Company pays such unpaid applicable
Repayment Price in full, a Holder of Convertible Notes shall have the option
(the "Void Optional Repayment Option") to, in lieu of repayment, require the
Company to promptly return to such Holder any or all of the Convertible Notes
that were submitted for repayment by such Holder under this Section 13 and for
which the applicable Major Transaction Repayment Price (together with any
interest thereon) has not been paid, by sending written notice thereof to the
Company via facsimile (the "Void Optional Repayment Notice"). Upon the Company's
receipt of such Void Optional Repayment Notice, (i) the Notice of Repayment at
Option of Holder Upon Major Transaction shall be null and void with respect to
those Convertible Notes subject to the Void Optional Repayment Notice, (ii) the
Company shall immediately return any Convertible Notes subject to the Void
Optional Repayment Notice, (iii) the Maximum Conversion Price of such returned
Convertible Notes shall be adjusted to the lesser of (A) the Maximum Conversion
Price as in effect on the date on which the Void Optional Repayment Notice is
delivered to the Company and (B) the lowest Closing Bid Price during the period
beginning on the date on which the Notice of Repayment at Option of Holder Upon
Major Transaction is delivered to the Company and ending on the date on which
the Void Optional Repayment Notice is delivered to the Company, and (iv) the
Conversion Price in effect at such time shall be reduced by a number of
percentage points equal to the product of (A) .25 and (B) the number of days in
the period beginning on the date which is five business days after the date on
which the Notice of Repayment at Option of Holder Upon Major Transaction is
delivered to the Company and ending on the date on which the Void Optional
Repayment Notice is delivered to the Company.
(f) Miscellaneous. A Holder's delivery of a Void Optional Repayment
Notice and exercise of its rights following such notice shall not effect
the Company's obligations to make any payments which have accrued prior to the
date of such notice. In the event of a repayment pursuant to this Section 13 of
less than all of the principal amount represented by a particular Convertible
Note, the Company shall promptly cause to be issued and delivered to the Holder
of such Convertible Notes a Convertible Note representing the remaining unpaid
principal amount thereof which has not been repaid.
Section 14. Events of Default.
(a) Holder's Option to Demand Prepayment. Upon the occurrence of an
Event of Default (as herein defined), each Holder shall have the right to
elect at any time and from time to time prior to the cure by Company of such
Event of Default to have all or any portion of such Holder's then outstanding
Convertible Notes prepaid by the Company for an amount equal to the Holder
Demand Prepayment Amount (as herein defined).
(i) The right of a Holder to elect prepayment shall be exercisable
upon the occurrence of an Event of Default by such Holder in its sole
discretion by delivery of a Demand Prepayment Notice (as herein defined) in
accordance with the procedures set forth in this Section 14. Notwithstanding the
exercise of such right, the Holder shall be entitled to exercise all other
rights and remedies available under the provisions of this Convertible Note and
at law or in equity.
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(ii) A Holder shall effect each demand for prepayment under this
Section 14 by giving at least two (2) business days prior written notice
(the "Demand Prepayment Notice") of the date which such prepayment is to become
effective (the "Effective Date of Demand of Prepayment"), the Convertible Notes
selected for prepayment and the Holder Demand Prepayment Amount to the Company
at the address and facsimile number provided in the Subscription Agreement,
which Demand Prepayment Notice shall be deemed to have been delivered on the
business day after the date of transmission of Holder's facsimile (with a copy
sent by overnight courier to the Company) of such notice.
(iii) The Holder Demand Prepayment Amount shall be paid to a Holder
whose Convertible Notes are being prepaid within one (1) business day
following the Effective Date of Demand of Prepayment; provided, however, that
the Company shall not be obligated to deliver any portion of the Holder Demand
Prepayment Amount until one (1) business day following either the date on which
the Convertible Notes being prepaid are delivered to the office of the Company
or the Transfer Agent, or the date on which the Holder notifies the Company or
the Transfer Agent that such Convertible Notes have been lost, stolen or
destroyed and delivers the documentation required in accordance with Section
5(b)(i) hereof.
(b) Holder Demand Prepayment Amount. The "Holder Demand Prepayment
Amount" means the greater of: (a) 1.3 times the Total Maturity Value of the
Convertible Notes for which demand is being made, through the date of prepayment
or (b) the product of (1) the highest price at which the Common Stock is traded
on the date of the Event of Default (or on the most recent trading date for the
Common Stock if the Common Stock is not traded on such date) divided by the
Conversion Price in effect as of the date of the Event of Default, and (2) the
Total Maturity Value through the date of prepayment.
(c) Events of Default. An "Event of Default" means any one of the
following:
(i) either (a) a Conversion Failure described in Section 12(a) hereof
which is uncured ten (10) business days after the applicable Deadline or
(b) a material failure by the Company to comply with the remedies described in
Sections 11(g)(ii) and 12 hereof;
(ii) a Share Reservation Failure described in Section 11(b) hereof,
if such Share Reservation Failure continues uncured for ninety (90) days;
(iii) the Company fails, and such failure continues uncured for
three (3) business days after the Company has been notified thereof in
writing by a Holder, to satisfy the share reservation requirements of Section 11
hereof, where such action can be accomplished by the Board of Directors;
(iv) the Company fails to pay any cash payments due to a Holder under
the terms of this Convertible Note or the Registration Rights Agreement (as
defined below) within five (5) days after such Holder has notified the Company,
in writing, that such payment is past due and that the Holder intends to declare
an "Event of Default" under this Section 14;
(v) the Company fails to cause the registration statement required
by the Registration Rights Agreement to become effective within one hundred
twenty (120) days of
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the Closing Date, or fails to maintain an effective registration statement
as required by the Registration Rights Agreement between the Company and the
Holder(s) (the "Registration Rights Agreement") except where such failure lasts
no longer than three (3) consecutive trading days and is caused solely by
failure of the Securities and Exchange Commission to timely review the customary
submission of or respond to the customary requests of the Company;
(vi) for three (3) consecutive trading days or for an aggregate of
ten (10) trading days in any nine (9) month period, the Common Stock
(including any of the shares of Common Stock issuable upon conversion of the
Convertible Notes is (i) suspended from trading on any of the NYSE, Nasdaq
SmallCap, Nasdaq Stock Market Inc.'s National Market ("NMS"), or the American
Stock Exchange ("AMEX"), or (ii) is not qualified for trading on at least one of
the NYSE, Nasdaq SmallCap, NMS, or the AMEX;
(vii) the Company fails, and such failure continues uncured for
three (3) business days after the Company has been notified thereof in
writing by a Holder, to remove any restrictive legend on any certificate for any
shares of Common Stock issued to a Holder upon conversion of any Convertible
Notes, as and when required by this Convertible Note, the Subscription
Agreement, or the Registration Rights Agreement;
(viii) the Company breaches, and such breach continues uncured for
three (3) business days after the Company has been notified thereof in
writing by a Holder, any significant covenant or other material term or
condition of any Convertible Note, the Subscription Agreement or the
Registration Rights Agreement;
(ix) any representation or warranty of the Company made herein or in
any agreement, statement or certificate given in writing pursuant hereto or
in connection herewith (including, without limitation, the Subscription
Agreement and Registration Rights Agreement), shall be false or misleading in
any material respect when made and is not cured prior to Closing;
(x) the Company or any subsidiary of the Company shall make an
assignment for the benefit of its 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 receiver or trustee shall otherwise be appointed;
(xi) 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 Company or
any subsidiary of the Company (and such proceedings shall continue unstayed for
thirty (30) days);
(xii) the Shareholder Vote has not occurred by October 31, 1998; or
(xiii) the Warrant Shares (as defined in the Subscription Agreement)
have not become listed and available for trading on the NYSE by the date
that is five (5) trading days after the Shareholder Vote or the Company has
received a letter from the NYSE stating the listing of the Warrant Shares is
denied regardless of the results of the Shareholder Vote.
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(d) Failure to Pay Damages Amount. If the Company fails to pay the
Holder Demand Prepayment Amount within five (5) business days of its
receipt of a Demand Prepayment Notice, then such Holder shall have the right, at
any time and from time to time prior to the payment of the Holder Demand
Prepayment Amount, to require the Company, upon written notice, to immediately
convert (in accordance with the terms of Section 5) all or any portion of the
Holder Demand Prepayment Amount, into shares of Common Stock at the then current
Conversion Price, provided that if the Company has not delivered the full number
of shares of Common Stock issuable upon such conversion within three (3)
business days after the Company receives written notice of such conversion, the
Conversion Price with respect to such Holder Demand Prepayment Amount shall
thereafter be deemed to be the lowest Conversion Price in effect during the
period beginning on the date of the Event of Default through the date on which
the Company delivers to the Holder the full number of freely tradable shares of
Common Stock issuable upon such conversion. In the event the Company is not able
to pay all amounts due and payable with respect to all Convertible Notes subject
to Holder Demand Prepayment Notices, the Company shall pay the Holders such
amounts pro rata, based on the total amounts payable to such Holder relative to
the total amounts payable to all Holders.
Section 15. Remedies, Other Obligations, Breaches and Injunctive Relief.
The remedies provided in this Convertible Note shall be cumulative and in
addition to all other remedies available under the Convertible Note at law or in
equity (including a decree of specific performance and/or other injunctive
relief), no remedy contained herein shall be deemed a waiver of compliance with
the provision giving rise to such remedy and nothing herein shall limit a
holder's right to actual damages for any failure by the Company to comply with
the terms of this Convertible Note (after taking into effect the damages and
remedies available hereunder). 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 hereof 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 Holders of Convertible
Notes and that the remedy at law for any such breach may be inadequate. The
Company therefore agrees, in the event of any such breach or threatened breach,
the Holders of Convertible Notes 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.
Section 16. Restriction on Repayment and Cash Dividends. Until all of the
Convertible Notes have been converted or repaid as provided herein, the Company
shall not, directly or indirectly, redeem, or declare or pay any cash dividend
or distribution on its capital stock without the prior express written consent
of the holders of not less than two-thirds (2/3) of the then outstanding
Convertible Notes.
Section 17. No Five Percent Holders. Notwithstanding anything to the
contrary contained herein, the Convertible Notes shall not be convertible by a
Holder to the extent (but only to the extent) that, if converted by such Holder,
the Holder would beneficially own in excess of 4.99% of the then outstanding
shares of Common Stock of the Company. To the extent this limitation applies,
the determination of whether Convertible Notes shall be convertible (vis-a vis
other securities owned by such Holder) and of which Convertible Notes shall be
converted shall be in the sole discretion of the Holder and submission of the a
given principal amount of
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Convertible Notes for conversion shall be deemed to be the Holder's
determination of whether such principal amount of Convertible Notes is
convertible, subject to such aggregate percentage limitations. No prior
inability to convert Convertible Notes pursuant to this subparagraph shall have
any effect on the applicability of its provisions with respect to any subsequent
determination of convertibility. For the purposes of this subparagraph,
beneficial ownership and all calculations, including without limitation, with
respect to calculations of percentage ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13-D and G thereunder. Notwithstanding the foregoing,
each Holder shall have the right to waive such restriction or increase such
percentage to one Applicable Percentage (as defined below) or any lesser
percentage upon sixty one (61) days' prior notice to the Company and to decrease
any such percentage immediately upon written notice to the Company. Moreover
each Holder shall have the right at any time irrevocably to waive the
applicability of the immediately preceding sentence to itself. The provisions of
this subparagraph may be waived and/or implemented in a manner otherwise than in
strict conformity with the terms hereof with the approval of the Board of
Directors of the Company and the Holders of a majority of the outstanding
principal amount of the Convertible Notes: (i) with respect to any matter to
cure any ambiguity herein, to correct this subparagraph (or any portion thereof)
which may be defective or inconsistent with the intended beneficial ownership
limitation herein contained or to make changes or supplements necessary or
desirable to properly give effect to such limitation; and (ii) with respect to
any other matter, with the further consent of the Holders of majority of the
then outstanding shares of Common Stock. The limitations contained in this
subparagraph shall apply to a successor Holder of Convertible Notes if, and to
the extent, elected by such successor Holder concurrently with its acquisition
of such Convertible Notes, such election to be promptly confirmed in writing to
the Company (provided no transfer or series of transfers to a successor Holder
or Holders shall be used by a Holder to evade the limitations contained herein).
As used herein, the Applicable Percentage shall mean 9.9% at any time that an
Event of Default has not occurred and is continuing and shall otherwise mean
100%.
Section 18. Miscellaneous.
(a) Construction of Instrument. This Convertible Note shall be deemed
to be jointly drafted by the Company and all Purchasers and shall not be
construed against any person as the drafter hereof. No failure or delay on the
part of a 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. The Company covenants to each Holder
that there shall be no characterization concerning this instrument other than as
expressly provided herein. Notwithstanding anything to the contrary contained
herein, or any limitations contained herein, any cash amounts due hereunder
which are not paid when due shall bear interest at 18% per annum.
(b) Obligations Secured by Collateral. All of the Company's existing and
future obligations under this Convertible Note are secured by the Collateral
described in that certain Stock Pledge Agreement of even date herewith by and
between the Company and the holders of the Convertible Notes, including but not
limited to a pledge of common stock of Service Assembly, Inc., a corporation
duly organized under the laws of Massachusetts and a wholly-owned subsidiary of
the Company and related dividends, cash, securities and property.
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(c) Successors and Assigns. The terms and conditions of this Convertible
Note shall inure to the benefit of and be binding upon the respective successors
and assigns of the parties. Nothing in this Convertible Note, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Convertible Note, except as expressly
provided in this Convertible Note. Holder may assign Holder's rights hereunder,
in connection with any private sale of the Convertible Notes of such Holder, so
long as, as a condition precedent to such transfer, the transferee executes an
acknowledgment agreeing to be bound by the applicable provisions of this
Convertible Note.
(d) Arbitration of Disputes. Any controversy or claim arising out of or
related to this Convertible Note or the breach thereof, shall be settled by
binding arbitration in New York, NY in accordance with the Expedited Procedures
(Rules 53-57) of the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"). A proceeding shall be commenced upon written demand by
Company or any Holder to the other. The arbitrator(s) shall enter a judgment by
default against any party which fails or refuses to appear in any properly
noticed arbitration proceeding. The proceeding shall be conducted by one (1)
arbitrator, unless the amount alleged to be in dispute exceeds two hundred fifty
thousand dollars ($250,000), in which case three (3) arbitrators shall preside.
The arbitrator(s) will be chosen by the parties from a list provided by the AAA,
and if they are unable to agree within ten (10) days, the AAA shall select the
arbitrator(s). The arbitrators must be experts in securities law and financial
transactions. The arbitrators shall assess costs and expenses of the
arbitration, including all attorneys' and experts' fees, as the arbitrators
believe is appropriate in light of the merits of the parties' respective
positions in the issues in dispute. Each party submits irrevocably to the
jurisdiction of any state court sitting in New York, NY or to the United States
District Court sitting in New York, NY for purposes of enforcement of any
discovery order, judgment or award in connection with such arbitration. The
award of the arbitrator(s) shall be final and binding upon the parties and may
be enforced in any court having jurisdiction. The arbitration shall be held in
such place as set by the arbitrator(s) in accordance with Rule 55.
(e) Waiver of Defenses. The Company hereby waives presentment for
payment, demand, notice of demand, notice of nonpayment or dishonor,
protest and notice of protest of this Convertible Note, and all other notices in
connection with the delivery, acceptance, performance, default, or enforcement
of the payment of this Convertible Note. The Company agrees that the Company's
liability shall be unconditional, without regard to the liability of any other
party, and shall not be affected in any manner by any indulgence, extension of
time, renewal, waiver or modification granted or consented to by the Holders.
The Company hereby waives and releases all errors, defects and imperfections in
any proceeding instituted by Holders under the terms of this Convertible Note.
(f) Governing Law/Waiver of Jury Trial. This Convertible Note shall be
governed by and construed under the laws of the State of New York without
respect to conflict of laws principles. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Convertible Note and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained
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herein shall be deemed to limit in any way any right to serve process in
any manner permitted by law. Each party hereby irrevocably waives any right it
may have, and agrees not to request, a jury trial for the adjudication of any
dispute hereunder or in connection herewith or arising out of this agreement or
any transaction contemplated hereby.
(g) Company Pays Convertible Note Collection Costs. The Company agrees
to pay to Holder all of Holder's costs incurred in conjunction with the
collection of amounts due under this Convertible Note which are not paid as
required herein.
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