Exhibit 10.2
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD
CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 20(a)
HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE
SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.
CATUITY, INC.
SENIOR SECURED CONVERTIBLE NOTE
Issuance Date: November 22, 2006 Original Principal Amount: U.S. $1,111,112
FOR VALUE RECEIVED, Catuity, Inc., a Delaware corporation (the "COMPANY"),
hereby promises to pay to the order of Gottbetter Capital Master, Ltd. or
registered assigns ("HOLDER") the amount set out above as the Original Principal
Amount (as reduced pursuant to the terms hereof pursuant to redemption,
conversion or otherwise, the "PRINCIPAL") when due, whether upon the Maturity
Date (as defined below), on any Installment Date with respect to the Installment
Amount due on such Installment Date, acceleration, redemption or otherwise (in
each case in accordance with the terms hereof) and to pay interest ("INTEREST")
on any outstanding Principal at a rate per annum equal to the Interest Rate (as
defined below), from the date set out above as the Issuance Date (the "ISSUANCE
DATE") until the same becomes due and payable, whether upon an Interest Date (as
defined below), any Installment Date, or the Maturity Date, acceleration,
conversion, redemption or otherwise (in each case in accordance with the terms
hereof). This Senior Secured Convertible Note (including all Senior Secured
Convertible Notes issued in exchange, transfer or replacement hereof, this
"NOTE") is one of an issue of Senior Secured Convertible Notes issued pursuant
to the Securities Purchase Agreement on the Closing Date (collectively, the
"NOTES" and such other Senior Secured Convertible Notes, the "OTHER NOTES").
Certain capitalized terms are defined in Section 28.
1. PAYMENTS OF PRINCIPAL; MATURITY. On each Installment Date commencing December
1, 2007, the Company shall pay to the Holder an amount equal to the Installment
Amount due on such Installment Date in cash by wire transfer of immediately
available funds.
The "MATURITY DATE" shall be November 21, 2009, as may be extended at the option
of the Holder (i) in the event that, and for so long as, an Event of Default (as
defined in Section 4(a)) shall have occurred and be continuing or any event
shall have occurred and be continuing which with the passage of time and the
failure to cure would result in an Event of Default, (ii) through the date that
is ten (10) days after the consummation of a Change of Control in the event that
a Change of Control is publicly announced or a Change of Control Notice (as
defined in Section 5(b)) is delivered prior to the Maturity Date and (iii) in
accordance with Section 8(d).
2. INTEREST; INTEREST RATE.
(a) Interest on this Note shall commence accruing on the Issuance Date and
shall be computed on the basis of a 360-day year and actual days elapsed and
shall be payable in arrears for each Calendar Month during the period beginning
on the Issuance Date and ending on, and including, the Maturity Date (each, an
"INTEREST DATE") with the first Interest Date being December 1, 2006. Interest
shall be payable on each Interest Date, to the record holder of this Note on the
applicable Interest Date, in cash ("CASH INTEREST").
(b) From and after the occurrence of an Event of Default, the Interest Rate
shall be increased to fifteen percent (15%). In the event that such Event of
Default is subsequently cured, the adjustment referred to in the preceding
sentence shall cease to be effective as of the date of such cure; provided that
the Interest as calculated at such increased rate during the continuance of such
Event of Default shall continue to apply to the extent relating to the days
after the occurrence of such Event of Default through and including the date of
cure of such Event of Default.
3. CONVERSION OF NOTES. This Note shall be convertible into shares of common
stock of the Company, par value $0.001 per share (the "COMMON STOCK"), on the
terms and conditions set forth in this Section 3.
(a) Conversion Right. Subject to the provisions of Section 3(d), at any
time or times on or after the Issuance Date, the Holder shall be entitled to
convert any portion of the outstanding and unpaid Conversion Amount (as defined
below) into fully paid and nonassessable shares of Common Stock in accordance
with Section 3(c), at the Conversion Rate (as defined below). The Company shall
not issue any fraction of a share of Common Stock upon any conversion. If the
issuance would result in the issuance of a fraction of a share of Common Stock,
the Company shall round such fraction of a share of Common Stock up to the
nearest whole share. The Company shall pay any and all taxes that may be payable
with respect to the issuance and delivery of Common Stock upon conversion of any
Conversion Amount.
(b) Conversion Rate. The number of shares of Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be determined
by dividing (x) such Conversion Amount by (y) the Conversion Price (the
"CONVERSION RATE").
(i) "CONVERSION AMOUNT" means the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination
is being made.
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(ii) "CONVERSION PRICE" means, as of any Conversion Date (as defined
below) or other date of determination, $3.25 (appropriately adjusted for
any stock split, stock dividend, stock combination or other similar
transaction that proportionately decreases or increases the Common Stock).
(c) Mechanics of Conversion.
(i) Optional Conversion. To convert any Conversion Amount into shares
of Common Stock on any date (a "CONVERSION DATE"), the Holder shall (A)
transmit by facsimile (or otherwise deliver), for receipt on or prior to
11:59 p.m., New York Time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the "CONVERSION
NOTICE") to the Company and (B) if required by Section 3(c)(iv), surrender
this Note to a nationally recognized overnight delivery service for
delivery to the Company (or an indemnification undertaking with respect to
this Note in the case of its loss, theft or destruction). On or before the
next Trading Day following the date of receipt of a Conversion Notice, the
Company shall transmit by facsimile a confirmation of receipt of such
Conversion Notice to the Holder and the Transfer Agent. On or before the
second (2nd) Trading Day following the date of receipt of a Conversion
Notice (the "SHARE DELIVERY DATE"), the Company shall (1) (X) provided that
the Transfer Agent is participating in the Fast Automated Securities
Transfer Program of DTC credit such aggregate number of shares of Common
Stock to which the Holder shall be entitled to the Holder's or its
designee's balance account with DTC through its Deposit Withdrawal Agent
Commission system or (Y) if the Transfer Agent is not participating in the
DTC Fast Automated Securities Transfer Program, issue and deliver to the
address as specified in the Conversion Notice, a certificate, registered in
the name of the Holder or its designee, for the number of shares of Common
Stock to which the Holder shall be entitled, (2) pay to the Holder in cash
an amount equal to the accrued and unpaid Interest on the Conversion Amount
up to and including the Conversion Date. If this Note is physically
surrendered for conversion as required by Section 3(c)(iv) and the
outstanding Principal of this Note is greater than the Principal portion of
the Conversion Amount being converted, then the Company shall as soon as
practicable and in no event later than three Business Days after receipt of
this Note and at its own expense, issue and deliver to the holder a new
Note (in accordance with Section 18(d)) representing the outstanding
Principal not converted. The Person or Persons entitled to receive the
shares of Common Stock issuable upon a conversion of this Note shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on the Conversion Date. In the event of a partial conversion
of this Note pursuant hereto, the principal amount converted shall be
deducted from the Installment Amounts relating to the Installment Dates as
set forth in the Conversion Notice.
(ii) Company's Failure to Timely Convert. If within three (3) Trading
Days after the Company's receipt of the facsimile copy of a Conversion
Notice the Company shall fail to issue and deliver a certificate to the
Holder or credit the Holder's balance account with DTC for the number of
shares of Common Stock to which the Holder is entitled upon such holder's
conversion of any Conversion Amount (a "CONVERSION FAILURE"), and if on or
after such Trading Day the Holder purchases (in an open market
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transaction or otherwise) Common Stock to deliver in satisfaction of a sale
by the Holder of Common Stock issuable upon such conversion that the Holder
anticipated receiving from the Company (a "BUY-IN"), then the Company
shall, within three (3) Business Days after the Holder's request and
provision of trade confirmations and in the Holder's discretion, either (i)
pay cash to the Holder in an amount equal to the Holder's total purchase
price (including brokerage commissions and other out-of-pocket expenses, if
any) for the shares of Common Stock so purchased (the "BUY-IN PRICE"), at
which point the Company's obligation to deliver such certificate (and to
issue such Common Stock) shall terminate, or (ii) promptly honor its
obligation to deliver to the Holder a certificate or certificates
representing such Common Stock and pay cash to the Holder in an amount
equal to the excess (if any) of the Buy-In Price over the product of (A)
such number of shares of Common Stock, times (B) the Closing Bid Price on
the Conversion Date.
(iii) Registration; Book-Entry. The Company shall maintain a register
(the "REGISTER") for the recordation of the names and addresses of the
holders of each Note and the principal amount of the Notes held by such
holders (the "REGISTERED NOTES"). The entries in the Register shall be
conclusive and binding for all purposes absent manifest error. The Company
and the holders of the Notes shall treat each Person whose name is recorded
in the Register as the owner of a Note for all purposes, including, without
limitation, the right to receive payments of principal and interest
hereunder, notwithstanding notice to the contrary. A Registered Note may be
assigned or sold in whole or in part only by registration of such
assignment or sale on the Register. Upon its receipt of a request to assign
or sell all or part of any Registered Note by a Holder, to the extent
permitted by applicable securities laws the Company shall record the
information contained therein in the Register and issue one or more new
Registered Notes in the same aggregate principal amount as the principal
amount of the surrendered Registered Note to the designated assignee or
transferee pursuant to Section 17. Notwithstanding anything to the contrary
set forth herein, upon conversion of any portion of this Note in accordance
with the terms hereof, the Holder shall not be required to physically
surrender this Note to the Company unless (A) the full Conversion Amount
represented by this Note is being converted or (B) the Holder has provided
the Company with prior written notice (which notice may be included in a
Conversion Notice) requesting physical surrender and reissue of this Note.
The Holder and the Company shall maintain records showing the Principal,
Interest and Late Charges converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the Holder and the
Company, so as not to require physical surrender of this Note upon
conversion.
(iv) Disputes. In the event of a dispute as to the number of shares of
Common Stock issuable to the Holder in connection with a conversion of this
Note, the Company shall issue to the Holder the number of shares of Common
Stock not in dispute and resolve such dispute in accordance with Section
23.
(d) Limitations on Conversions.
(i) Beneficial Ownership. The Company shall not effect any conversion
of this Note, and the Holder of this Note (including any successor,
transferee or assignee)
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shall not have the right to convert any portion of this Note pursuant to
Section 3(a), to the extent that after giving effect to such conversion,
the Holder (together with the Holder's affiliates) would beneficially own
in excess of 4.99% (the "MAXIMUM PERCENTAGE") of the number of shares of
Common Stock outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by the Holder and its affiliates shall
include the number of shares of Common Stock issuable upon conversion of
this Note with respect to which the determination of such sentence is being
made, but shall exclude the number of shares of Common Stock which would be
issuable upon (A) conversion of the remaining, nonconverted portion of this
Note beneficially owned by the Holder or any of its affiliates and (B)
exercise or conversion of the unexercised or nonconverted portion of any
other securities of the Company (including, without limitation, any Other
Notes or warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the
Holder or any of its affiliates. Except as set forth in the preceding
sentence, for purposes of this Section 3(d)(i), beneficial ownership shall
be calculated in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended. For purposes of this Section 3(d)(i), in
determining the number of outstanding shares of Common Stock, the Holder
may rely on the number of outstanding shares of Common Stock as reflected
in (x) the Company's most recent Form 10-KSB, Form 10-K, Form 10-QSB, Form
10-Q or Form 8-K, as the case may be (y) a more recent public announcement
by the Company or (z) any other notice by the Company or the Transfer Agent
setting forth the number of shares of Common Stock outstanding. For any
reason at any time, during regular business hours of the Company and upon
the written request of the Holder, the Company shall within two (2)
Business Days confirm in writing to the Holder the number of shares of
Common Stock then outstanding. In any case, the number of outstanding
shares of Common Stock shall be determined after giving effect to the
conversion or exercise of securities of the Company, including this Note,
by the Holder or its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported. By written notice to the
Company, the Holder may increase or decrease the Maximum Percentage to any
other percentage specified in such notice; provided that (i) any such
increase will not be effective until the sixty-first (61st ) day after such
notice is delivered to the Company, and (ii) any such increase or decrease
will apply only to the Holder and not to any other holder of Notes.
(ii) Principal Market Regulation. The Company shall not be obligated
to issue any shares of Common Stock upon conversion of this Note, and the
Holder of this Note shall not have the right to receive upon conversion of
this Note any shares of Common Stock, if the issuance of such shares of
Common Stock would exceed the aggregate number of shares of Common Stock
which the Company may issue upon conversion or exercise, as applicable, of
the Notes, the Preferred Stock and Warrants without breaching the Company's
obligations under the rules or regulations of the Principal Market or the
Australian Stock Exchange (the "EXCHANGE CAP"), except that such limitation
shall not apply in the event that the Company (A) obtains the approval of
its stockholders as required by the applicable rules of the Principal
Market or the Australian Stock Exchange for issuances of Common Stock in
excess of such amount or (B) obtains a written opinion from outside counsel
to the Company that such approval is not required, which opinion
5
shall be reasonably satisfactory to the Required Holders. Until such
approval or written opinion is obtained, no purchaser of the Notes pursuant
to the Securities Purchase Agreement (the "PURCHASERS") shall be issued in
the aggregate, upon conversion or exercise, as applicable, of Notes, the
Preferred Stock or Warrants, shares of Common Stock in an amount greater
than the product of the Exchange Cap multiplied by a fraction, the
numerator of which is the principal amount of Notes issued to the
Purchasers pursuant to the Securities Purchase Agreement on the Closing
Date and the denominator of which is the aggregate principal amount of all
Notes issued to the Purchasers pursuant to the Securities Purchase
Agreement on the Closing Date (with respect to each Purchaser, the
"EXCHANGE CAP ALLOCATION"). In the event that any Purchaser shall sell or
otherwise transfer any of such Purchaser's Notes, the transferee shall be
allocated a pro rata portion of such Purchaser's Exchange Cap Allocation,
and the restrictions of the prior sentence shall apply to such transferee
with respect to the portion of the Exchange Cap Allocation allocated to
such transferee. In the event that any holder of Notes shall convert all of
such holder's Notes into a number of shares of Common Stock which, in the
aggregate, is less than such holder's Exchange Cap Allocation, then the
difference between such holder's Exchange Cap Allocation and the number of
shares of Common Stock actually issued to such holder shall be allocated to
the respective Exchange Cap Allocations of the remaining holders of Notes
on a pro rata basis in proportion to the aggregate principal amount of the
Notes then held by each such holder.
4. RIGHTS UPON EVENT OF DEFAULT.
(a) Event of Default. Each of the following events shall constitute an
"Event of Default ":
(i) the failure of the applicable Registration Statement required to
be filed pursuant to the Registration Rights Agreement to be declared
effective by the SEC on or prior to the date that is ninety (90) days after
the applicable Effectiveness Deadline (as defined in the Registration
Rights Agreement), or, while the applicable Registration Statement is
required to be maintained effective pursuant to the terms of the
Registration Rights Agreement, the effectiveness of the applicable
Registration Statement lapses for any reason (including, without
limitation, the issuance of a stop order) or is unavailable to any holder
of the Notes for sale of all of such holder's Registrable Securities (as
defined in the Registration Rights Agreement) in accordance with the terms
of the Registration Rights Agreement, and such lapse or unavailability
continues for a period of five (5) consecutive days or for more than an
aggregate of ten (10) days in any 365-day period (other than days during an
Allowable Grace Period (as defined in the Registration Rights Agreement));
(ii) the suspension from trading or failure of the Common Stock to be
listed on the Principal Market or on an Eligible Market for a period of
five (5) consecutive Trading Days or for more than an aggregate of ten (10)
Trading Days in any 365-day period;
(iii) the Company's (A) failure to cure a Conversion Failure by
delivery of the
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required number of shares of Common Stock within ten (10) Business Days
after the applicable Conversion Date or (B) written notice to any holder of
the Notes, including by way of public announcement or through any of its
authorized agents, at any time, of its intention not to comply with a
request for conversion of any Notes into shares of Common Stock that is
tendered in accordance with the provisions of the Notes;
(iv) at any time following the tenth (10th) consecutive Business Day
that the authorized number of shares is less than the number of shares of
Common Stock that the Holder would be entitled to receive upon a conversion
of three hundred percent (300%) of the full Conversion Amount of this Note
(without regard to any limitations on conversion set forth in Section 3(d)
or otherwise);
(v) the Company's failure to pay to the Holder any amount of Principal
(including, without limitation, any redemption or make-whole payments),
Interest, Late Charges or other amounts when and as due under this Note or
any other Transaction Document (as defined in the Securities Purchase
Agreement) or any other agreement, document, certificate or other
instrument delivered in connection with the transactions contemplated
hereby and thereby to which the Holder is a party, except, in the case of a
failure to pay Interest and Late Charges when and as due, in which case
only if such failure continues for a period of at least five (5) Business
Days;
(vi) any default under, redemption of or acceleration prior to
maturity of any Indebtedness in excess of $100,000, in the aggregate, of
the Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement);
(vii) the Company or any of its Subsidiaries, pursuant to or within
the meaning of Title 11, U.S. Code, or any similar Federal, foreign or
state law for the relief of debtors (collectively, "BANKRUPTCY LAW"), (A)
commences a voluntary case, (B) consents to the entry of an order for
relief against it in an involuntary case, (C) consents to the appointment
of a receiver, trustee, assignee, liquidator or similar official (a
"CUSTODIAN"), (D) makes a general assignment for the benefit of its
creditors or (E) admits in writing that it is generally unable to pay its
debts as they become due;
(viii) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that (A) is for relief against the Company or any
of its Subsidiaries in an involuntary case, (B) appoints a Custodian of the
Company or any of its Subsidiaries or (C) orders the liquidation of the
Company or any of its Subsidiaries;
(ix) a final judgment or judgments for the payment of money
aggregating in excess of $250,000 are rendered against the Company or any
of its Subsidiaries and which judgments are not, within sixty (60) days
after the entry thereof, bonded, discharged or stayed pending appeal, or
are not discharged within sixty (60) days after the expiration of such
stay; provided, however, that any judgment which is covered by insurance or
an indemnity from a credit worthy party shall not be included in
calculating the $250,000 amount set forth above so long as the Company
provides the Holder a written statement from such insurer or indemnity
provider (which written statement shall
7
be reasonably satisfactory to the Holder) to the effect that such judgment
is covered by insurance or an indemnity and the Company will receive the
proceeds of such insurance or indemnity within thirty (30) days of the
issuance of such judgment;
(x) the Company breaches any material representation, warranty,
covenant or other term or condition of any Transaction Document, except, in
the case of a breach of a covenant which is curable, only if such breach
continues for a period of at least ten (10) consecutive Business Days;
(xi) any breach or failure in any respect to comply with (x) Section
15 of this Note or (y) any of the Potential Partner Conditions;
(xii) any breach or failure to comply with the Company's obligations
under the Series A Certificate of Designation;
(xiii) any Event of Default (as defined in the Other Notes) occurs
with respect to any Other Notes;
(ix) the inability of the Common Stock to be transferred with DTC
through the Deposit Withdrawal at Custodian system;
(x) failure by the Company to issue the Holder once every six months,
or as otherwise required by the Transfer Agent, a power-of-attorney, as set
forth in Section 5 (b) of the Securities Purchase Agreement, to instruct
the Transfer Agent to convert the Notes or the Preferred Stock into shares
of the Company's Common Stock or to convert the Warrants into shares of the
Company's Common Stock, such that a valid Power-of-Attorney (as defined in
the Securities Purchase Agreement) no longer exists for such conversions;
and
(xi) in the event that the Transfer Agent does not recognize a
Power-of-Attorney as sufficient instruction from the Holder to convert the
Notes or the Preferred Stock or to allow for the exercise of the Warrants,
failure by the Company to switch within three weeks to a different Transfer
Agent that recognizes the Power-of-Attorney allowing the Holder to convert
the Notes or the Preferred Stock into shares of the Company's Common Stock
or to convert the Warrants into shares of the Company's Common Stock.
(b) Redemption Right. Upon the occurrence of an Event of Default with
respect to this Note, the Company shall within two (2) Business Days after the
day on which the Company is aware of the Event of Default deliver written notice
thereof via facsimile and overnight courier (an "EVENT OF DEFAULT NOTICE") to
the Holder. At any time after the earlier of the Holder's receipt of an Event of
Default Notice and the Holder becoming aware of an Event of Default, the Holder
may require the Company to redeem all or any portion of this Note by delivering
written notice thereof (the "Event of Default Redemption Notice") to the
Company, which Event of Default Redemption Notice shall indicate the portion of
this Note the Holder is electing to redeem. Each portion of this Note subject to
redemption by the Company pursuant to this
8
Section 4(b) shall be redeemed by the Company at a price equal to the greater of
(i) the product of (x) the Conversion Amount to be redeemed and (y) the
Redemption Premium and (ii) the product of (A) the Conversion Rate with respect
to such Conversion Amount in effect at such time as the Holder delivers an Event
of Default Redemption Notice and (B) the Closing Sale Price of the Common Stock
on the date immediately preceding such Event of Default (the "EVENT OF DEFAULT
REDEMPTION PRICE"). Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 12. To the extent redemptions required
by this Section 4(b) are deemed or determined by a court of competent
jurisdiction to be prepayments of the Note by the Company, such redemptions
shall be deemed to be voluntary prepayments. The parties hereto agree that in
the event of the Company's redemption of any portion of the Note under this
Section 4(b), the Holder's damages would be uncertain and difficult to estimate
because of the parties' inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder. Accordingly, any Redemption Premium due under this Section 4(b)
is intended by the parties to be, and shall be deemed, a reasonable estimate of
the Holder's actual loss of its investment opportunity and not as a penalty.
5. RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.
(a) Assumption. The Company shall not enter into or be party to a
Fundamental Transaction unless (i) the Successor Entity assumes in writing all
of the obligations of the Company under this Note and the other Transaction
Documents in accordance with the provisions of this Section 5(a) pursuant to
written agreements in form and substance satisfactory to the Required Holders
and approved by the Required Holders prior to such Fundamental Transaction,
including agreements to deliver to each holder of Notes in exchange for such
Notes a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to the Notes, including, without
limitation, having a principal amount and interest rate equal to the principal
amounts and the interest rates of the Notes held by such holder, having similar
conversion rights as the Notes and having similar ranking to the Notes, and
satisfactory to the Required Holders and (ii) the Successor Entity (including
its Parent Entity) is a publicly traded corporation whose common stock is quoted
on or listed for trading on an Eligible Market. Upon the occurrence of any
Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Note referring to the "Company" shall refer
instead to the Successor Entity), and may exercise every right and power of the
Company and shall assume all of the obligations of the Company under this Note
with the same effect as if such Successor Entity had been named as the Company
herein. Upon consummation of the Fundamental Transaction, the Successor Entity
shall deliver to the Holder confirmation that there shall be issued upon
conversion or redemption of this Note at any time after the consummation of the
Fundamental Transaction, in lieu of the shares of Common Stock (or other
securities, cash, assets or other property) issuable upon the conversion of the
Notes prior to such Fundamental Transaction, such shares of publicly traded
common stock (or their equivalent) of the Successor Entity, as adjusted in
accordance with the provisions of this Note. The provisions of this Section
shall apply similarly and equally to successive Fundamental Transactions and
shall be applied without regard to any limitations on the conversion of this
Note.
(b) Redemption Right. No sooner than fifteen (15) days nor later than ten
(10) days
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prior to the consummation of a Change of Control, but not prior to the public
announcement of such Change of Control, the Company shall deliver written notice
thereof via facsimile and overnight courier to the Holder (a "CHANGE OF CONTROL
NOTICE"). At any time during the period beginning after the Holder's receipt of
a Change of Control Notice and ending ten (10) Trading Days after the
consummation of such Change of Control, the Holder may require the Company to
redeem all or any portion of this Note by delivering written notice thereof
("CHANGE OF CONTROL REDEMPTION NOTICE") to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing to
have redeemed. The portion of this Note subject to redemption pursuant to this
Section 5 shall be redeemed by the Company in cash at a price equal to the
greater of (i) the Change of Control Premium multiplied by the product of (x)
the sum of the Conversion Amount being redeemed and any accrued and unpaid
Interest with respect to such Conversion Amount and accrued and unpaid Late
Charges with respect to such Conversion Amount and Interest and (y) the Closing
Sale Price of the Common Stock immediately following the public announcement of
such proposed Change of Control and (ii) 150% of the sum of the Conversion
Amount being redeemed and any accrued and unpaid Interest with respect to such
Conversion Amount subject to such Change of Control Redemption and accrued and
unpaid Late Charges with respect to such Conversion Amount and Interest (the
"CHANGE OF CONTROL REDEMPTION PRICE"). For example and the avoidance of any
doubt, if the Change of Control Premium is 130%, the Conversion Amount being
redeemed including all accrued and unpaid Interest and Late Charges is $100,000
and the Closing Sale Price of the Common Stock immediately following the public
announcement of the Change of Control is $2.00, then the Redemption Price shall
be the greater of:
130% * [$100,000 * $2] or $260,000
and
150% * $100,000 or $150,000.
Redemptions required by this Section 5 shall be made in accordance with the
provisions of Section 15 and shall have priority to payments to shareholders in
connection with a Change of Control. To the extent redemptions required by this
Section 5(b) are deemed or determined by a court of competent jurisdiction to be
prepayments of the Note by the Company, such redemptions shall be deemed to be
voluntary prepayments. Notwithstanding anything to the contrary in this Section
5, until the Change of Control Redemption Price (together with any interest
thereon) is paid in full, the Conversion Amount submitted for redemption under
this Section 5(c) may be converted, in whole or in part, by the Holder into
shares of Common Stock, or in the event the Conversion Date is after the
consummation of the Change of Control, shares of publicly traded common stock
(or their equivalent) of the Successor Entity pursuant to Section 3. The parties
hereto agree that in the event of the Company's redemption of any portion of the
Note under this Section 5(b), the Holder's damages would be uncertain and
difficult to estimate because of the parties' inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holder. Accordingly, any redemption premium due
under this Section 5(b) is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holder's actual loss of its investment opportunity
and not as a penalty.
10
6. RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.
(a) Purchase Rights. If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "PURCHASE RIGHTS"), then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions on the
convertibility of this Note) 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.
(b) Other Corporate Events. In addition to and not in substitution for any
other rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a "CORPORATE EVENT"), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, at the Holder's option, (i) in addition to the shares
of Common Stock receivable upon such conversion, such securities or other assets
to which the Holder would have been entitled with respect to such shares of
Common Stock had such shares of Common Stock been held by the Holder upon the
consummation of such Corporate Event (without taking into account any
limitations or restrictions on the convertibility of this Note) or (ii) in lieu
of the shares of Common Stock otherwise receivable upon such conversion, such
securities or other assets received by the holders of shares of Common Stock in
connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Note initially been issued
with conversion rights for the form of such consideration (as opposed to shares
of Common Stock) at a conversion rate for such consideration commensurate with
the Conversion Rate. Provision made pursuant to the preceding sentence shall be
in a form and substance satisfactory to the Required Holders. The provisions of
this Section shall apply similarly and equally to successive Corporate Events
and shall be applied without regard to any limitations on the conversion or
redemption of this Note.
7. RIGHTS UPON ISSUANCE OF OTHER SECURITIES.
(a) Adjustment of Conversion Price upon Issuance of Common Stock. If at any
time after the Subscription Date, the Company issues or sells, or in accordance
with this Section 7(a) is deemed to have issued or sold, any shares of Common
Stock (including the issuance or sale of shares of Common Stock owned or held by
or for the account of the Company, but excluding shares of Common Stock deemed
to have been issued or sold by the Company in connection with any Excluded
Securities) for a consideration per share (the "NEW ISSUANCE PRICE") less than a
price (the "APPLICABLE PRICE") equal to Conversion Price in effect immediately
prior to such issue or sale (the foregoing a "DILUTIVE ISSUANCE"), then
immediately after such Dilutive Issuance, the Conversion Price then in effect
shall be reduced to the New Issuance Price. For
11
purposes of determining the adjusted Conversion Price under this Section 7(a),
the following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants or sells
any Options and the lowest price per share for which one share of Common
Stock is issuable upon the exercise of any such Option or upon conversion
or exchange or exercise of any Convertible Securities issuable upon
exercise of such Option is less than the Applicable Price, then such share
of Common Stock shall be deemed to be outstanding and to have been issued
and sold by the Company at the time of the granting or sale of such Option
for such price per share. For purposes of this Section 7(a)(i), the "lowest
price per share for which one share of Common Stock is issuable upon the
exercise of any such Option or upon conversion or exchange or exercise of
any Convertible Securities issuable upon exercise of such Option" shall be
equal to the sum of the lowest amounts of consideration (if any) received
or receivable by the Company with respect to any one share of Common Stock
upon granting or sale of the Option, upon exercise of the Option and upon
conversion or exchange or exercise of any Convertible Security issuable
upon exercise of such Option. No further adjustment of the Conversion Price
shall be made upon the actual issuance of such share of Common Stock or of
such Convertible Securities upon the exercise of such Options or upon the
actual issuance of such Common Stock upon conversion or exchange or
exercise of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities and the lowest price per share
for which one share of Common Stock is issuable upon such conversion or
exchange or exercise thereof is less than the Applicable Price, then such
share of Common Stock shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the issuance or sale of such
Convertible Securities for such price per share. For the purposes of this
Section 7(a)(ii), the "lowest price per share for which one share of Common
Stock is issuable upon such conversion or exchange or exercise" shall be
equal to the sum of the lowest amounts of consideration (if any) received
or receivable by the Company with respect to any one share of Common Stock
upon the issuance or sale of the Convertible Security and upon the
conversion or exchange or exercise of such Convertible Security. No further
adjustment of the Conversion Price shall be made upon the actual issuance
of such share of Common Stock upon conversion or exchange or exercise of
such Convertible Securities, and if any such issue or sale of such
Convertible Securities is made upon exercise of any Options for which
adjustment of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 7(a), no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Rate of Conversion. If the purchase
price provided for in any Options, the additional consideration, if any,
payable upon the issue, conversion, exchange or exercise of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable or exercisable for Common Stock changes at any time,
the Conversion Price in effect at the time of such change shall be adjusted
to the Conversion Price which would have been in effect at such time had
such Options or Convertible Securities provided for such changed purchase
price,
12
additional consideration or changed conversion rate, as the case may be, at
the time initially granted, issued or sold. For purposes of this Section
7(a)(iii), if the terms of any Option or Convertible Security that was
outstanding as of the Subscription Date are changed in the manner described
in the immediately preceding sentence, then such Option or Convertible
Security and the Common Stock deemed issuable upon exercise, conversion or
exchange thereof shall be deemed to have been issued as of the date of such
change. No adjustment shall be made if such adjustment would result in an
increase of the Conversion Price then in effect.
(iv) Calculation of Consideration Received. In case any Option is
issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties thereto,
the Options will be deemed to have been issued for such consideration as
determined in good faith by the Board of Directors of the Company. If any
Common Stock, Options or Convertible Securities are issued or sold or
deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the Company
therefor. If any Common Stock, Options or Convertible Securities are issued
or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company will be the fair
value of such consideration as determined in good faith by the Board of
Directors of the Company, except where such consideration consists of
securities, in which case the amount of consideration received by the
Company will be the Closing Sale Price of such securities on the date of
receipt. If any Common Stock, Options or Convertible Securities are issued
to the owners of the non-surviving entity in connection with any merger in
which the Company is the surviving entity, the amount of consideration
therefor will be deemed to be the fair value of such portion of the net
assets and business of the non-surviving entity as is attributable to such
Common Stock, Options or Convertible Securities, as the case may be. The
fair value of any consideration other than cash or securities will be
determined jointly by the Company and the Required Holders. If such parties
are unable to reach agreement within ten (10) days after the occurrence of
an event requiring valuation (the "VALUATION EVENT"), the fair value of
such consideration will be determined within five (5) Business Days after
the tenth day following the Valuation Event by an independent, reputable
appraiser jointly selected by the Company and the Required Holders. The
determination of such appraiser shall be deemed binding upon all parties
absent manifest error and the fees and expenses of such appraiser shall be
borne by the Company.
(v) Record Date. If the Company takes a record of the holders of
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible
Securities or (B) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the Common Stock deemed to have been issued or sold
upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
13
(b) Adjustment of Conversion Price upon Subdivision or Combination of
Common Stock. If the Company at any time on or after the Subscription Date
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any time on or
after the Subscription Date combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination will be proportionately increased.
(c) Other Events. If any event occurs of the type contemplated by the
provisions of this Section 7 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
Board of Directors will make an appropriate adjustment in the Conversion Price
so as to protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 7.
8. COMPANY RIGHT OF REDEMPTION.
(a) General. The Company at its option shall have the right to redeem, with
three (3) Business Days advance written notice (the "COMPANY REDEMPTION
NOTICE"), a portion or all of the outstanding principal of the Note. The Holder
may convert after the Company Redemption Notice is received and until the
Company Redemption Price is received by the Holder. The redemption price shall
be the greater of (i) One Hundred and Twenty percent (120%) of the face amount
redeemed plus accrued interest and (ii) sixty-eight percent (68%) of the (x)
product of the remaining Conversion Amount divided by the Conversion Price (not
less than $1 (as adjusted for any stock dividend, stock combination, stock split
or other similar transactions that proportionately increases or decreases the
Common Stock)) in effect on the Trading Day before the Company Redemption Notice
is sent and (y) the Closing Sale Price on the Trading Day before the Company
Redemption Notice is sent, plus accrued interest (the "COMPANY REDEMPTION
PRICE"). The Company shall pay the Company Redemption Price on all payments made
pursuant to the Note, including payments made before, on, or after the Maturity
Date. For all payments under this Note, the payment of the Company Redemption
Price by the Company shall be in addition to any accrued interest due.
(b) Mechanics of Company Redemption. If the Company elects to redeem the
Note in accordance with Section 8(a), then the Company Redemption Price, if any,
which is to be paid to the Holder, shall be paid, by wire transfer of
immediately available funds, an amount in cash equal to 100% of the Company
Redemption Price. If the Company fails to redeem the Company Redemption Price on
such date, then at the option of the Holder designated in writing to the Company
(any such designation, "Conversion Notice" for purposes of this Note), the
Holder may require the Company to convert all or any part of the Company
Redemption Amount at the Conversion Price. Conversions required by this Section
8(b) shall be made in accordance with the provisions of Section 3(c).
Notwithstanding anything to the contrary in this Section 8(b), but subject to
Section 3(d), until the Company Redemption Price (together with any interest
thereon) is paid in full, the Company Redemption Price (together with any
interest thereon) may be
14
converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3.
(c) Pro Rata Redemption Requirement. If the Company elects to convert any
Conversion Amount of this Note pursuant to Section 8(a), then it must
simultaneously take the same action in the same proportion with respect to the
Other Notes.
9. SECURITY. This Note and the Other Notes are secured to the extent and in the
manner set forth in the Security Documents (as defined in the Securities
Purchase Agreement).
10. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company
will not, by amendment of its Articles of Incorporation, Bylaws or through any
reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Note, and will at all times in good faith carry out all of the
provisions of this Note and take all reasonable action as may be required to
protect the rights of the Holder of this Note.
11. RESERVATION OF AUTHORIZED SHARES.
(a) Reservation. The Company initially shall reserve out of its authorized
and unissued Common Stock a number of shares of Common Stock for each of the
Notes equal to 300% of the Conversion Rate with respect to the Conversion Amount
of each such Note as of the Issuance Date. So long as any of the Notes are
outstanding, the Company shall take all action necessary to reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Notes, 300% of the number of shares
of Common Stock as shall from time to time be necessary to effect the conversion
of all of the Notes then outstanding; provided that at no time shall the number
of shares of Common Stock so reserved be less than the number of shares required
to be reserved of the previous sentence (without regard to any limitations on
conversions) (the "REQUIRED RESERVE AMOUNT"). The initial number of shares of
Common Stock reserved for conversions of the Notes and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Notes based on the principal amount of the Notes held by each holder at the
Closing (as defined in the Securities Purchase Agreement) or increase in the
number of reserved shares, as the case may be (the "AUTHORIZED SHARE
ALLOCATION"). In the event that a holder shall sell or otherwise transfer any of
such holder's Notes, each transferee shall be allocated a pro rata portion of
such holder's Authorized Share Allocation. Any shares of Common Stock reserved
and allocated to any Person which ceases to hold any Notes shall be allocated to
the remaining holders of Notes, pro rata based on the principal amount of the
Notes then held by such holders.
(b) Insufficient Authorized Shares. If at any time while any of the Notes
remain outstanding the Company does not have a sufficient number of authorized
and unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an "AUTHORIZED SHARE FAILURE"), then
the Company shall immediately take all action necessary to increase the
Company's authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Notes then outstanding.
Without
15
limiting the generality of the foregoing sentence, as soon as practicable after
the date of the occurrence of an Authorized Share Failure, but in no event later
than ninety (90) days after the occurrence of such Authorized Share Failure, the
Company shall hold a meeting of its shareholders for the approval of an increase
in the number of authorized shares of Common Stock. In connection with such
meeting, the Company shall provide each shareholder with a proxy or information
statement and shall use its reasonable best efforts to solicit its shareholders'
approval of such increase in authorized shares of Common Stock and to cause its
board of directors to recommend to the shareholders that they approve such
proposal.
12. HOLDER'S REDEMPTIONS. (a) The Company shall deliver the applicable Event of
Default Redemption Price to the Holder within five (5) Business Days after the
Company's receipt of the Holder's Event of Default Redemption Notice. If the
Holder has submitted a Change of Control Redemption Notice in accordance with
Section 5(b), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder concurrently with the consummation of such Change
of Control if such notice is received prior to the consummation of such Change
of Control and within five (5) Business Days after the Company's receipt of such
notice otherwise. In the event of a redemption of less than all of the
Conversion Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the applicable Redemption Price to the Holder
within the time period required, at any time thereafter and until the Company
pays such unpaid Redemption Price in full, the Holder shall have the option, in
lieu of redemption, to require the Company to promptly return to the Holder all
or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (together
with any Late Charges thereon) has not been paid. Upon the Company's receipt of
such notice, (x) the applicable Redemption Notice shall be null and void with
respect to such Conversion Amount, (y) the Company shall immediately return this
Note, or issue a new Note (in accordance with Section 18(d)) to the Holder
representing the sum of such Conversion Amount to be redeemed together with
accrued and unpaid Interest with respect to such Conversion Amount and accrued
and unpaid Late Charges with respect to such Conversion Amount and Interest and
(z) the Conversion Price of this Note or such new Notes shall be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the
applicable Redemption Notice is voided and (B) the lowest Closing Bid Price
during the period beginning on and including the date on which the applicable
Redemption Notice is delivered to the Company and ending on and including the
date on which the applicable Redemption Notice is voided. The Holder's delivery
of a notice voiding a Redemption Notice and exercise of its rights following
such notice shall not affect the Company's obligations to make any payments of
Late Charges which have accrued prior to the date of such notice with respect to
the Conversion Amount subject to such notice.
(b) Redemption by Other Holders. Upon the Company's receipt of notice from
any of the holders of the Other Notes for redemption or repayment as a result of
an event or occurrence substantially similar to the events or occurrences
described in Section 4(b) or Section 5(b) (each, an "OTHER REDEMPTION NOTICE"),
the Company shall immediately, but no later than one (1) Business Day of its
receipt thereof, forward to the Holder by facsimile a copy of such notice. If
the Company receives a Redemption Notice and one or more Other Redemption
Notices, during
16
the seven (7) Business Day period beginning on and including the date which is
three (3) Business Days prior to the Company's receipt of the Holder's
Redemption Notice and ending on and including the date which is three (3)
Business Days after the Company's receipt of the Holder's Redemption Notice and
the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received
during such seven (7) Business Day period, then the Company shall redeem a pro
rata amount from each holder of the Notes (including the Holder) based on the
principal amount of the Notes submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven (7) Business Day period.
13. RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the Notes have
been converted, redeemed or otherwise satisfied in accordance with their terms,
the Company shall not, directly or indirectly, redeem, repurchase or declare or
pay any cash dividend or distribution on its capital stock without the prior
express written consent of the Required Holders.
14. VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as required by law, including but not limited to Chapter 78 of the
Delaware Revised Statutes, and as expressly provided in this Note.
15. COVENANTS.
(a) Rank. All payments due under this Note shall rank pari passu with all
Other Notes and no other Indebtedness of the Company and its Subsidiaries shall
be senior to the Indebtedness of the Company and its Subsidiary evidenced by the
Note and the Other Notes.
(b) Incurrence of Indebtedness. So long as this Note is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness, other than (i) the Indebtedness evidenced by this Note and (ii)
Permitted Indebtedness.
(c) Existence of Liens. So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to, directly
or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge,
security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, "LIENS") other than Permitted Liens.
(d) Restricted Payments. The Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, redeem, defease,
repurchase, repay or make any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Permitted Indebtedness, whether by way of payment in respect of principal of (or
premium, if any) or interest on, such Indebtedness if at the time such payment
is due or is otherwise made or, after giving effect to such payment, an event
constituting, or that with the passage of time and without being cured would
constitute, an Event of Default has occurred and is continuing.
17
(e) Sales of Equity Securities. Until the Company has obtained the
Stockholder Approval (as defined in the Securities Purchase Agreement), except
for any issuance of Securities in accordance with the Transaction Documents or
as set forth on Schedule 18(e) attached hereto, the Company will not, directly
or indirectly, offer, sell, grant any option to purchase, or otherwise dispose
of (or announce any offer, sale, grant or any option to purchase or other
disposition of) any of its equity or Common Stock Equivalents (as defined in the
Securities Purchase Agreement), including without limitation any debt, preferred
stock or other instrument or security that is, at any time during its life and
under any circumstances, convertible into or exchangeable or exercisable for
shares of common equity of the Company, without the prior written consent of the
Required Holders.
(f) Subsidiary Internal Accounting Controls. So long as this Note is
outstanding, the Company and each of its Subsidiaries shall maintain, in all
material respects, a system of internal accounting controls consistent with the
Internal Accounting Controls (as defined in the Securities Purchase Agreement).
16. VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a
meeting duly called for such purpose or the written consent without a meeting of
the Required Holders shall be required for any change or amendment to this Note
or the Other Notes.
17. TRANSFER. The Holder acknowledges and agrees that this Note may only be
offered, sold, assigned or transferred by the Holder without the consent of the
Company, provided that the provisions of Section 2(f) of the Securities Purchase
Agreement are complied with in all respects.
18. REISSUANCE OF THIS NOTE.
(a) Transfer. If this Note is to be transferred, the Holder shall surrender
this Note to the Company, whereupon the Company will issue, promptly following
the satisfaction of the provisions of Section 2(f) of the Securities Purchase
Agreement, and deliver upon the order of the Holder a new Note (in accordance
with Section 18(d)), in the name of the validly registered assigns or
transferee, representing the outstanding Principal being transferred by the
Holder and, if less then the entire outstanding Principal is being transferred,
a new Note (in accordance with Section 18(d)) to the Holder representing the
outstanding Principal not being transferred. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of the provisions
of Section 3(c)(iii) and this Section 18(a), following conversion or redemption
of any portion of this Note, the outstanding Principal represented by this Note
may be less than the Principal stated on the face of this Note.
(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 18(d)) representing the outstanding Principal.
18
(c) Note Exchangeable for Different Denominations. This Note is
exchangeable, upon the surrender hereof by the Holder at the principal office of
the Company, for a new Note or Notes (in accordance with Section (d) and in
principal amounts of at least $100,000) representing in the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.
(d) Issuance of New Notes. Whenever the Company is required to issue a new
Note pursuant to the terms of this Note, such new Note (i) shall be of like
tenor with this Note, (ii) shall represent, as indicated on the face of such new
Note, the Principal remaining outstanding (or in the case of a new Note being
issued pursuant to Section 18(a) or Section 18(c), the Principal designated by
the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued Interest and
Late Charges on the Principal and Interest of this Note, from the Issuance Date.
19. REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
RELIEF. The remedies provided in this Note shall be cumulative and in addition
to all other remedies available under this Note and any of the other Transaction
Documents at law or in equity (including a decree of specific performance and/or
other injunctive relief), and nothing herein shall limit the Holder's right to
pursue actual and consequential damages for any failure by the Company to comply
with the terms of this Note. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
20. PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is
placed in the hands of an attorney for collection or enforcement or is collected
or enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Note or to enforce the provisions of this Note or
(b) there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors' rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, but not limited to,
attorneys' fees and disbursements.
19
21. CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by
the Company and all the Purchasers and shall not be construed against any person
as the drafter hereof. The headings of this Note are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Note.
22. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.
23. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the
arithmetic calculation of the Conversion Rate or any Redemption Price, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within one (1) Business Day of receipt of the Conversion Notice or
Redemption Notice or other event giving rise to such dispute, as the case may
be, to the Holder. If the Holder and the Company are unable to agree upon such
determination or calculation within one (1) Business Day of such disputed
determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within one (1) Business Day submit via facsimile (a) the disputed
determination of the Closing Bid Price, the Closing Sale Price or the Weighted
Average Price to an independent, reputable investment bank selected by the
Company and approved by the Holder (such approval not to be unreasonably
withheld or delayed) or (b) the disputed arithmetic calculation of the
Conversion Rate or any Redemption Price to the Company's independent, outside
accountant. The Company, at the Company's expense, shall cause the investment
bank or the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the Holder of the results no later than
five (5) Business Days from the time it receives the disputed determinations or
calculations. Such investment bank's or accountant's determination or
calculation, as the case may be, shall be binding upon all parties absent
demonstrable error.
24. NOTICES; PAYMENTS.
(a) Notices. Whenever notice is required to be given under this Note,
unless otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Securities Purchase Agreement. The Company shall provide the
Holder with prompt written notice of all actions taken pursuant to this Note,
including in reasonable detail a description of such action and the reason
therefore. Without limiting the generality of the foregoing, the Company will
give written notice to the Holder (i) immediately upon any adjustment of the
Conversion Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least twenty days prior to the date
on which the Company closes its books or takes a record (A) with respect to any
dividend or distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.
(b) Payments. Whenever any payment of cash is to be made by the Company to
any
20
Person pursuant to this Note, such payment shall be made in lawful money of the
United States of America by a check drawn on the account of the Company and sent
via overnight courier service to such Person at such address as previously
provided to the Company in writing (which address, in the case of each of the
Purchasers, shall initially be as set forth on the Schedule of Buyers attached
to the Securities Purchase Agreement); provided that the Holder may elect to
receive a payment of cash via wire transfer of immediately available funds by
providing the Company with prior written notice setting out such request and the
Holder's wire transfer instructions. Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day, the same
shall instead be due on the next succeeding day which is a Business Day and, in
the case of any Interest Date which is not the date on which this Note is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of Interest due on such date. Any amount
of Principal or other amounts due under the Transaction Documents, other than
Interest, which is not paid when due shall result in a late charge being
incurred and payable by the Company in an amount equal to interest on such
amount at the rate of fifteen (15%) per annum from the date such amount was due
until the same is paid in full ("Late Charge").
25. CANCELLATION. After all Principal, accrued Interest and other amounts at any
time owed on this Note has been paid in full, this Note shall automatically be
deemed canceled, shall be surrendered to the Company for cancellation and shall
not be reissued.
26 WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note and the
Securities Purchase Agreement.
27. GOVERNING LAW; JURISDICTION; JURY TRIAL. This Note shall be construed and
enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Note shall be governed by, the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. The Company hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
The City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. The Company 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 it set forth
on the signature page hereto and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law. In the event that any provision of this Note is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute
21
or rule of law. Any such provision which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any other
provision of this Note. Nothing contained herein shall be deemed or operate to
preclude the Holder from bringing suit or taking other legal action against the
Company in any other jurisdiction to collect on the Company's obligations to the
Holder, to realize on any collateral or any other security for such obligations,
or to enforce a judgment or other court ruling in favor of the Holder. THE
COMPANY 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 WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
HEREBY.
28. CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall
have the following meanings:
(a) "APPROVED STOCK PLAN" means any employee benefit plan which has been
approved by the Board of Directors of the Company, pursuant to which the
Company's securities may be issued to any employee, consultant, officer or
director for services provided to the Company.
(b) "BLOOMBERG" means Bloomberg Financial Markets.
(c) "BUSINESS DAY" means any day other than Saturday, Sunday or other day
on which commercial banks in The City of New York are authorized or required by
law to remain closed.
(d) "CALENDAR MONTH" means the period beginning on and including the first
of each calendar month and ending on and including the last day of such calendar
month.
(e) "CHANGE OF CONTROL" means any Fundamental Transaction other than (i)
any reorganization, recapitalization or reclassification of the Common Stock in
which holders of the Company's voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving entity
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (ii) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.
(f) "CHANGE OF CONTROL PREMIUM" means (i) 130% or (ii) 120% in the event of
a Change of Control involving consideration paid to holders of the Company's
Common Stock where the consideration per share of the Company's Common Stock to
be received by the holders thereof is greater (as to amounts other than cash, as
determined reasonably and in good faith by the Board of Directors of the
Company) than 200% of the Conversion Price as of the Initial Issuance Date (as
adjusted for stock splits, stock dividends, reverse stock splits,
recapitalizations, reclassifications and similar events).
(g) "CLOSING BID PRICE" and "CLOSING SALE PRICE" means, for any security as
of any
22
date, the last closing bid price and last closing trade price, respectively, for
such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the "pink sheets" by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the
case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 23. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.
(h) "CLOSING DATE" shall have the meaning set forth in the Securities
Purchase Agreement, which date is the date the Company initially issued Notes
pursuant to the terms of the Securities Purchase Agreement.
(i) "CONTINGENT OBLIGATION" means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.
(j) "CONVERTIBLE SECURITIES" means any stock or securities (other than
Options) directly or indirectly convertible into or exercisable or exchangeable
for Common Stock.
(k) "ELIGIBLE MARKET" means, the Principal Market, The New York Stock
Exchange, Inc., Over-the-Counter Bulletin Board, the Nasdaq National Market or
the American Stock Exchange.
(l) "EXCLUDED SECURITIES" means any Common Stock issued or issuable: (i) in
connection with any Approved Stock Plan up to a maximum of five percent (5%) of
the outstanding Common Stock; (ii) upon conversion of, or in exchange for, the
Notes or the exercise of the Warrants; (iii) in connection with any acquisition
by the Company, whether through an acquisition of stock or a merger of any
business, assets or technologies the primary purpose of which is not to raise
equity capital; and (iv) upon conversion of any Options or
23
Convertible Securities which are outstanding on the day immediately preceding
the Subscription Date, provided that the terms of such Options or Convertible
Securities are not amended, modified or changed on or after the Subscription
Date.
(m) "FUNDAMENTAL TRANSACTION" means that the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another
Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (iii) allow another Person or Persons to make a purchase, tender or exchange
offer that is accepted by the holders of more than the 50% of the outstanding
shares of Voting Stock (not including any shares of Voting Stock held by the
Person or Persons making or party to, or associated or affiliated with the
Person or Persons making or party to, such purchase, tender or exchange offer),
or (iv) consummate a stock purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with another Person whereby such other Person acquires
more than the 50% of either the outstanding shares of Voting Stock (not
including any shares of Voting Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or
party to, such stock purchase agreement or other business combination), (v)
reorganize, recapitalize or reclassify its Common Stock or (vi) any "person" or
"group" (as these terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act) is or shall become the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate
Voting Stock of the Company.
(n) "GAAP" means United States generally accepted accounting principles,
consistently applied.
(o) "INDEBTEDNESS" of any Person means, without duplication (i) all
indebtedness for borrowed money, (ii) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services, including
(without limitation) "capital leases" in accordance with generally accepted
accounting principles (other than trade payables entered into in the ordinary
course of business), (iii) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (iv) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (vii) all indebtedness referred to in clauses (i)
through (vi) above secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, (viii) all obligations
issued, undertaken or assumed as part of any financing facility
24
with respect to accounts receivables of the Company and its Subsidiaries,
including, without limitation, any factoring arrangement of such accounts
receivables and (ix) all Contingent Obligations in respect of indebtedness or
obligations of others of the kinds referred to in clauses (i) through (viii)
above.
(p) "INITIAL ISSUANCE DATE" means November 22, 2006.
(q) "INSTALLMENT AMOUNT" means with respect to any Installment Date, the
lesser of (A) $30,864.22 and (B) the remaining principal due hereunder. In the
event the Holder shall sell or otherwise transfer any portion of this Note, the
transferee shall be allocated a pro rata portion of the each unpaid Installment
Amount hereunder.
(r) "INSTALLMENT DATE" means the first day of each calendar month.
(s) "INTEREST RATE" means ten percent (10%) per annum, subject to periodic
adjustment pursuant to Section 2.
(t) "OPTIONS" means any rights, warrants or options to subscribe for or
purchase Common Stock or Convertible Securities.
(u) "PARENT ENTITY" of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common stock or equivalent
equity security is quoted or listed on an Eligible Market, or, if there is more
than one such Person or Parent Entity, the Person or Parent Entity with the
largest public market capitalization as of the date of consummation of the
Fundamental Transaction.
(v) "PERMITTED INDEBTEDNESS" means (A) Indebtedness incurred by the Company
that is made expressly subordinate in right of payment to the Indebtedness
evidenced by this Note, as reflected in a written agreement acceptable to the
Holder and approved by the Holder in writing (which approval shall not be
unreasonably delayed), and which Indebtedness does not provide at any time for
(1) the payment, prepayment, repayment, repurchase or defeasance, directly or
indirectly, of any principal or premium, if any, thereon until ninety-one (91)
days after the Maturity Date or later and (2) total interest and fees at a rate
in excess of the Interest Rate hereunder, (B) Indebtedness secured by Permitted
Liens, (C) Indebtedness to trade creditors incurred in the ordinary course of
business, and (D) extensions, refinancings and renewals of any items of
Permitted Indebtedness, provided that the principal amount is not increased or
the terms modified to impose more burdensome terms upon the Company or its
Subsidiary, as the case may be.
(w) "PERMITTED LIENS" means (i) any Lien for taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with GAAP, (ii) any
statutory Lien arising in the ordinary course of business by operation of law
with respect to a liability that is not yet due or delinquent, (iii) any Lien
created by operation of law, such as materialmen's liens, mechanics' liens and
other similar liens, arising in the ordinary course of business with respect to
a liability that is not yet due or delinquent or that are being contested in
good faith by appropriate proceedings, (iv) Liens
25
securing the Company's obligations under the Notes, (v) Liens (A) upon or in any
equipment (as defined in the Security Agreement) acquired or held by the Company
or any of its Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition or
lease of such equipment, or (B) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment, (vi)
Liens incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clauses (i) and (v)
above, provided that any extension, renewal or replacement Lien shall be limited
to the property encumbered by the existing Lien and the principal amount of the
Indebtedness being extended, renewed or refinanced does not increase, (vii)
leases or subleases and licenses and sublicenses granted to others in the
ordinary course of the Company's business, not interfering in any material
respect with the business of the Company and its Subsidiaries taken as a whole,
(viii) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payments of custom duties in connection with the importation of
goods; (ix) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 4(a)(ix) and
(x) Liens with respect to Indebtedness not individually in excess of $25,000 or
in the aggregate in excess of $100,000, which individually and in aggregate are
not material to the Company.
(x) "PERSON" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, any other entity and a government or any department or agency
thereof.
(y) "POTENTIAL PARTNER CONDITIONS" means at any time during the period
commencing on the date of the consummation of any material transaction between
the Company and a Person and ending on the first anniversary of the Effective
Date, there shall be no disclosure that any executive officer of such Person has
(i) exhibited dishonesty in the performance of his or her duties, which is
materially and demonstrably injurious to the Company; or (ii) been convicted of
(x) a felony under the laws of the United States or any state thereof or (y) a
misdemeanor involving moral turpitude, in each case, which is materially and
demonstrably injurious to the Company.
(z) "PRINCIPAL MARKET" means the Nasdaq Capital Market.
(aa) "REDEMPTION NOTICES" means, collectively, the Event of Default
Redemption Notices, Change of Control Redemption Notices, the Company Redemption
Notice, and, each of the foregoing, individually, a Redemption Notice.
(bb) "REDEMPTION PREMIUM" means (i) in the case of the Events of Default
described in Section 4(a)(i) - (vi) and (ix) - (xii), 125% or (ii) in the case
of the Events of Default described in Section 4(a)(vii) - (viii), 120%.
(cc) "REDEMPTION PRICES" means, collectively, the Event of Default
Redemption Price, Change of Control Redemption Price, and the Company Redemption
Amount, the Holder Optional Redemption Price and the Holder Partial Redemption
Price and, each of the foregoing, individually, a Redemption Price.
26
(dd) "REGISTRATION RIGHTS AGREEMENT" means that certain registration rights
agreement between the Company and the initial holders of the Notes relating to,
among other things, the registration of the resale of the Common Stock issuable
upon conversion of the Notes and exercise of the Warrants.
(ee) "REQUIRED HOLDERS" means the holders of Notes representing at least a
majority of the aggregate principal amount of the Notes then outstanding.
(ff) "SEC" means the United States Securities and Exchange Commission.
(gg) "SECURITIES PURCHASE AGREEMENT" means that certain securities purchase
agreement dated the Subscription Date by and among the Company and the initial
holders of the Notes pursuant to which the Company issued the Notes.
(hh) "SUBSCRIPTION DATE" means November 21, 2006
(ii) "SUCCESSOR ENTITY" means the Person, which may be the Company, formed
by, resulting from or surviving any Fundamental Transaction or the Person with
which such Fundamental Transaction shall have been made, provided that if such
Person is not a publicly traded entity whose common stock or equivalent equity
security is quoted or listed for trading on an Eligible Market, Successor Entity
shall mean such Person's Parent Entity.
(jj) "TRADING DAY" means any day on which the Common Stock are traded on
the Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock are then traded; provided that
"Trading Day" shall not include any day on which the Common Stock are scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock are suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York Time).
(kk) "VOTING STOCK" of a Person means capital stock of such Person of the
class or classes pursuant to which the holders thereof have the general voting
power to elect, or the general power to appoint, at least a majority of the
board of directors, managers or trustees of such Person (irrespective of whether
or not at the time capital stock of any other class or classes shall have or
might have voting power by reason of the happening of any contingency).
(ll) "WARRANTS" has the meaning ascribed to such term in the Securities
Purchase Agreement, and shall include all warrants issued in exchange therefor
or replacement thereof.
(mm) "WEIGHTED AVERAGE PRICE" means, for any security as of any date, the
dollar volume-weighted average price for such security on the Principal Market
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as the Principal Market publicly announces is the official open of trading), and
ending at 4:00:00 p.m., New York Time (or such
27
other time as the Principal Market publicly announces is the official close of
trading) as reported by Bloomberg through its "Volume at Price" functions, or,
if the foregoing does not apply, the dollar volume-weighted average price of
such security in the over-the-counter market on the electronic bulletin board
for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of
trading), and ending at 4:00:00 p.m., New York Time (or such other time as such
market publicly announces is the official close of trading) as reported by
Bloomberg, or, if no dollar volume-weighted average price is reported for such
security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such
security as reported in the "pink sheets" by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Weighted Average Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Weighted Average Price of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the
Company and the Holder are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section 23. All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during the applicable calculation
period.
29. DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries, the Company
shall within one (1) Business Day after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains
material, nonpublic information, relating to the Company or its Subsidiaries,
the Company shall indicate to the Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.
[Signature Page Follows]
28
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of
the Issuance Date set out above.
CATUITY, INC.
By:
-----------------------------------
Name: John Racine
Title: Chief Executive Officer
29
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD
CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 20(a)
HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE
SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.
CATUITY, INC.
SENIOR SECURED CONVERTIBLE NOTE
Issuance Date: November 22, 2006 Original Principal Amount: U.S. $688,888
FOR VALUE RECEIVED, Catuity, Inc., a Delaware corporation (the "COMPANY"),
hereby promises to pay to the order of BridgePointe Master Fund Ltd. or
registered assigns ("HOLDER") the amount set out above as the Original Principal
Amount (as reduced pursuant to the terms hereof pursuant to redemption,
conversion or otherwise, the "PRINCIPAL") when due, whether upon the Maturity
Date (as defined below), on any Installment Date with respect to the Installment
Amount due on such Installment Date, acceleration, redemption or otherwise (in
each case in accordance with the terms hereof) and to pay interest ("INTEREST")
on any outstanding Principal at a rate per annum equal to the Interest Rate (as
defined below), from the date set out above as the Issuance Date (the "ISSUANCE
DATE") until the same becomes due and payable, whether upon an Interest Date (as
defined below), any Installment Date, or the Maturity Date, acceleration,
conversion, redemption or otherwise (in each case in accordance with the terms
hereof). This Senior Secured Convertible Note (including all Senior Secured
Convertible Notes issued in exchange, transfer or replacement hereof, this
"NOTE") is one of an issue of Senior Secured Convertible Notes issued pursuant
to the Securities Purchase Agreement on the Closing Date (collectively, the
"NOTES" and such other Senior Secured Convertible Notes, the "OTHER NOTES").
Certain capitalized terms are defined in Section 28.
1. PAYMENTS OF PRINCIPAL; MATURITY. On each Installment Date commencing December
1, 2007, the Company shall pay to the Holder an amount equal to the Installment
Amount due on such Installment Date in cash by wire transfer of immediately
available funds.
The "MATURITY DATE" shall be November 21, 2009, as may be extended at the option
of the Holder (i) in the event that, and for so long as, an Event of Default (as
defined in Section 4(a)) shall have occurred and be continuing or any event
shall have occurred and be continuing which with the passage of time and the
failure to cure would result in an Event of Default, (ii) through the date that
is ten (10) days after the consummation of a Change of Control in the event that
a Change of Control is publicly announced or a Change of Control Notice (as
defined in Section 5(b)) is delivered prior to the Maturity Date and (iii) in
accordance with Section 8(d).
2. INTEREST; INTEREST RATE.
(a) Interest on this Note shall commence accruing on the Issuance Date and
shall be computed on the basis of a 360-day year and actual days elapsed and
shall be payable in arrears for each Calendar Month during the period beginning
on the Issuance Date and ending on, and including, the Maturity Date (each, an
"INTEREST DATE") with the first Interest Date being December 1, 2006. Interest
shall be payable on each Interest Date, to the record holder of this Note on the
applicable Interest Date, in cash ("CASH INTEREST").
(b) From and after the occurrence of an Event of Default, the Interest Rate
shall be increased to fifteen percent (15%). In the event that such Event of
Default is subsequently cured, the adjustment referred to in the preceding
sentence shall cease to be effective as of the date of such cure; provided that
the Interest as calculated at such increased rate during the continuance of such
Event of Default shall continue to apply to the extent relating to the days
after the occurrence of such Event of Default through and including the date of
cure of such Event of Default.
3. CONVERSION OF NOTES. This Note shall be convertible into shares of common
stock of the Company, par value $0.001 per share (the "COMMON STOCK"), on the
terms and conditions set forth in this Section 3.
(a) Conversion Right. Subject to the provisions of Section 3(d), at any
time or times on or after the Issuance Date, the Holder shall be entitled to
convert any portion of the outstanding and unpaid Conversion Amount (as defined
below) into fully paid and nonassessable shares of Common Stock in accordance
with Section 3(c), at the Conversion Rate (as defined below). The Company shall
not issue any fraction of a share of Common Stock upon any conversion. If the
issuance would result in the issuance of a fraction of a share of Common Stock,
the Company shall round such fraction of a share of Common Stock up to the
nearest whole share. The Company shall pay any and all taxes that may be payable
with respect to the issuance and delivery of Common Stock upon conversion of any
Conversion Amount.
(b) Conversion Rate. The number of shares of Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be determined
by dividing (x) such Conversion Amount by (y) the Conversion Price (the
"CONVERSION RATE").
(i) "CONVERSION AMOUNT" means the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination
is being made.
2
(ii) "CONVERSION PRICE" means, as of any Conversion Date (as defined
below) or other date of determination, $3.25 (appropriately adjusted for
any stock split, stock dividend, stock combination or other similar
transaction that proportionately decreases or increases the Common Stock).
(c) Mechanics of Conversion.
(i) Optional Conversion. To convert any Conversion Amount into shares
of Common Stock on any date (a "CONVERSION DATE"), the Holder shall (A)
transmit by facsimile (or otherwise deliver), for receipt on or prior to
11:59 p.m., New York Time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the "CONVERSION
NOTICE") to the Company and (B) if required by Section 3(c)(iv), surrender
this Note to a nationally recognized overnight delivery service for
delivery to the Company (or an indemnification undertaking with respect to
this Note in the case of its loss, theft or destruction). On or before the
next Trading Day following the date of receipt of a Conversion Notice, the
Company shall transmit by facsimile a confirmation of receipt of such
Conversion Notice to the Holder and the Transfer Agent. On or before the
second (2nd) Trading Day following the date of receipt of a Conversion
Notice (the "SHARE DELIVERY DATE"), the Company shall (1) (X) provided that
the Transfer Agent is participating in the Fast Automated Securities
Transfer Program of DTC credit such aggregate number of shares of Common
Stock to which the Holder shall be entitled to the Holder's or its
designee's balance account with DTC through its Deposit Withdrawal Agent
Commission system or (Y) if the Transfer Agent is not participating in the
DTC Fast Automated Securities Transfer Program, issue and deliver to the
address as specified in the Conversion Notice, a certificate, registered in
the name of the Holder or its designee, for the number of shares of Common
Stock to which the Holder shall be entitled, (2) pay to the Holder in cash
an amount equal to the accrued and unpaid Interest on the Conversion Amount
up to and including the Conversion Date. If this Note is physically
surrendered for conversion as required by Section 3(c)(iv) and the
outstanding Principal of this Note is greater than the Principal portion of
the Conversion Amount being converted, then the Company shall as soon as
practicable and in no event later than three Business Days after receipt of
this Note and at its own expense, issue and deliver to the holder a new
Note (in accordance with Section 18(d)) representing the outstanding
Principal not converted. The Person or Persons entitled to receive the
shares of Common Stock issuable upon a conversion of this Note shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on the Conversion Date. In the event of a partial conversion
of this Note pursuant hereto, the principal amount converted shall be
deducted from the Installment Amounts relating to the Installment Dates as
set forth in the Conversion Notice.
(ii) Company's Failure to Timely Convert. If within three (3) Trading
Days after the Company's receipt of the facsimile copy of a Conversion
Notice the Company shall fail to issue and deliver a certificate to the
Holder or credit the Holder's balance account with DTC for the number of
shares of Common Stock to which the Holder is entitled upon such holder's
conversion of any Conversion Amount (a "CONVERSION FAILURE"), and if on or
after such Trading Day the Holder purchases (in an open market
3
transaction or otherwise) Common Stock to deliver in satisfaction of a sale
by the Holder of Common Stock issuable upon such conversion that the Holder
anticipated receiving from the Company (a "BUY-IN"), then the Company
shall, within three (3) Business Days after the Holder's request and
provision of trade confirmations and in the Holder's discretion, either (i)
pay cash to the Holder in an amount equal to the Holder's total purchase
price (including brokerage commissions and other out-of-pocket expenses, if
any) for the shares of Common Stock so purchased (the "BUY-IN PRICE"), at
which point the Company's obligation to deliver such certificate (and to
issue such Common Stock) shall terminate, or (ii) promptly honor its
obligation to deliver to the Holder a certificate or certificates
representing such Common Stock and pay cash to the Holder in an amount
equal to the excess (if any) of the Buy-In Price over the product of (A)
such number of shares of Common Stock, times (B) the Closing Bid Price on
the Conversion Date.
(iii) Registration; Book-Entry. The Company shall maintain a register
(the "REGISTER") for the recordation of the names and addresses of the
holders of each Note and the principal amount of the Notes held by such
holders (the "REGISTERED NOTES"). The entries in the Register shall be
conclusive and binding for all purposes absent manifest error. The Company
and the holders of the Notes shall treat each Person whose name is recorded
in the Register as the owner of a Note for all purposes, including, without
limitation, the right to receive payments of principal and interest
hereunder, notwithstanding notice to the contrary. A Registered Note may be
assigned or sold in whole or in part only by registration of such
assignment or sale on the Register. Upon its receipt of a request to assign
or sell all or part of any Registered Note by a Holder, to the extent
permitted by applicable securities laws the Company shall record the
information contained therein in the Register and issue one or more new
Registered Notes in the same aggregate principal amount as the principal
amount of the surrendered Registered Note to the designated assignee or
transferee pursuant to Section 17. Notwithstanding anything to the contrary
set forth herein, upon conversion of any portion of this Note in accordance
with the terms hereof, the Holder shall not be required to physically
surrender this Note to the Company unless (A) the full Conversion Amount
represented by this Note is being converted or (B) the Holder has provided
the Company with prior written notice (which notice may be included in a
Conversion Notice) requesting physical surrender and reissue of this Note.
The Holder and the Company shall maintain records showing the Principal,
Interest and Late Charges converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the Holder and the
Company, so as not to require physical surrender of this Note upon
conversion.
(iv) Disputes. In the event of a dispute as to the number of shares of
Common Stock issuable to the Holder in connection with a conversion of this
Note, the Company shall issue to the Holder the number of shares of Common
Stock not in dispute and resolve such dispute in accordance with Section
23.
(d) Limitations on Conversions.
(i) Beneficial Ownership. The Company shall not effect any conversion
of this Note, and the Holder of this Note (including any successor,
transferee or assignee)
4
shall not have the right to convert any portion of this Note pursuant to
Section 3(a), to the extent that after giving effect to such conversion,
the Holder (together with the Holder's affiliates) would beneficially own
in excess of 4.99% (the "MAXIMUM PERCENTAGE") of the number of shares of
Common Stock outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by the Holder and its affiliates shall
include the number of shares of Common Stock issuable upon conversion of
this Note with respect to which the determination of such sentence is being
made, but shall exclude the number of shares of Common Stock which would be
issuable upon (A) conversion of the remaining, nonconverted portion of this
Note beneficially owned by the Holder or any of its affiliates and (B)
exercise or conversion of the unexercised or nonconverted portion of any
other securities of the Company (including, without limitation, any Other
Notes or warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the
Holder or any of its affiliates. Except as set forth in the preceding
sentence, for purposes of this Section 3(d)(i), beneficial ownership shall
be calculated in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended. For purposes of this Section 3(d)(i), in
determining the number of outstanding shares of Common Stock, the Holder
may rely on the number of outstanding shares of Common Stock as reflected
in (x) the Company's most recent Form 10-KSB, Form 10-K, Form 10-QSB, Form
10-Q or Form 8-K, as the case may be (y) a more recent public announcement
by the Company or (z) any other notice by the Company or the Transfer Agent
setting forth the number of shares of Common Stock outstanding. For any
reason at any time, during regular business hours of the Company and upon
the written request of the Holder, the Company shall within two (2)
Business Days confirm in writing to the Holder the number of shares of
Common Stock then outstanding. In any case, the number of outstanding
shares of Common Stock shall be determined after giving effect to the
conversion or exercise of securities of the Company, including this Note,
by the Holder or its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported. By written notice to the
Company, the Holder may increase or decrease the Maximum Percentage to any
other percentage specified in such notice; provided that (i) any such
increase will not be effective until the sixty-first (61st ) day after such
notice is delivered to the Company, and (ii) any such increase or decrease
will apply only to the Holder and not to any other holder of Notes.
(ii) Principal Market Regulation. The Company shall not be obligated
to issue any shares of Common Stock upon conversion of this Note, and the
Holder of this Note shall not have the right to receive upon conversion of
this Note any shares of Common Stock, if the issuance of such shares of
Common Stock would exceed the aggregate number of shares of Common Stock
which the Company may issue upon conversion or exercise, as applicable, of
the Notes, the Preferred Stock and Warrants without breaching the Company's
obligations under the rules or regulations of the Principal Market or the
Australian Stock Exchange (the "EXCHANGE CAP"), except that such limitation
shall not apply in the event that the Company (A) obtains the approval of
its stockholders as required by the applicable rules of the Principal
Market or the Australian Stock Exchange for issuances of Common Stock in
excess of such amount or (B) obtains a written opinion from outside counsel
to the Company that such approval is not required, which opinion
5
shall be reasonably satisfactory to the Required Holders. Until such
approval or written opinion is obtained, no purchaser of the Notes pursuant
to the Securities Purchase Agreement (the "PURCHASERS") shall be issued in
the aggregate, upon conversion or exercise, as applicable, of Notes, the
Preferred Stock or Warrants, shares of Common Stock in an amount greater
than the product of the Exchange Cap multiplied by a fraction, the
numerator of which is the principal amount of Notes issued to the
Purchasers pursuant to the Securities Purchase Agreement on the Closing
Date and the denominator of which is the aggregate principal amount of all
Notes issued to the Purchasers pursuant to the Securities Purchase
Agreement on the Closing Date (with respect to each Purchaser, the
"EXCHANGE CAP ALLOCATION"). In the event that any Purchaser shall sell or
otherwise transfer any of such Purchaser's Notes, the transferee shall be
allocated a pro rata portion of such Purchaser's Exchange Cap Allocation,
and the restrictions of the prior sentence shall apply to such transferee
with respect to the portion of the Exchange Cap Allocation allocated to
such transferee. In the event that any holder of Notes shall convert all of
such holder's Notes into a number of shares of Common Stock which, in the
aggregate, is less than such holder's Exchange Cap Allocation, then the
difference between such holder's Exchange Cap Allocation and the number of
shares of Common Stock actually issued to such holder shall be allocated to
the respective Exchange Cap Allocations of the remaining holders of Notes
on a pro rata basis in proportion to the aggregate principal amount of the
Notes then held by each such holder.
4. RIGHTS UPON EVENT OF DEFAULT.
(a) Event of Default. Each of the following events shall constitute an
"Event of Default ":
(i) the failure of the applicable Registration Statement required to
be filed pursuant to the Registration Rights Agreement to be declared
effective by the SEC on or prior to the date that is ninety (90) days after
the applicable Effectiveness Deadline (as defined in the Registration
Rights Agreement), or, while the applicable Registration Statement is
required to be maintained effective pursuant to the terms of the
Registration Rights Agreement, the effectiveness of the applicable
Registration Statement lapses for any reason (including, without
limitation, the issuance of a stop order) or is unavailable to any holder
of the Notes for sale of all of such holder's Registrable Securities (as
defined in the Registration Rights Agreement) in accordance with the terms
of the Registration Rights Agreement, and such lapse or unavailability
continues for a period of five (5) consecutive days or for more than an
aggregate of ten (10) days in any 365-day period (other than days during an
Allowable Grace Period (as defined in the Registration Rights Agreement));
(ii) the suspension from trading or failure of the Common Stock to be
listed on the Principal Market or on an Eligible Market for a period of
five (5) consecutive Trading Days or for more than an aggregate of ten (10)
Trading Days in any 365-day period;
(iii) the Company's (A) failure to cure a Conversion Failure by
delivery of the
6
required number of shares of Common Stock within ten (10) Business Days
after the applicable Conversion Date or (B) written notice to any holder of
the Notes, including by way of public announcement or through any of its
authorized agents, at any time, of its intention not to comply with a
request for conversion of any Notes into shares of Common Stock that is
tendered in accordance with the provisions of the Notes;
(iv) at any time following the tenth (10th) consecutive Business Day
that the authorized number of shares is less than the number of shares of
Common Stock that the Holder would be entitled to receive upon a conversion
of three hundred percent (300%) of the full Conversion Amount of this Note
(without regard to any limitations on conversion set forth in Section 3(d)
or otherwise);
(v) the Company's failure to pay to the Holder any amount of Principal
(including, without limitation, any redemption or make-whole payments),
Interest, Late Charges or other amounts when and as due under this Note or
any other Transaction Document (as defined in the Securities Purchase
Agreement) or any other agreement, document, certificate or other
instrument delivered in connection with the transactions contemplated
hereby and thereby to which the Holder is a party, except, in the case of a
failure to pay Interest and Late Charges when and as due, in which case
only if such failure continues for a period of at least five (5) Business
Days;
(vi) any default under, redemption of or acceleration prior to
maturity of any Indebtedness in excess of $100,000, in the aggregate, of
the Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement);
(vii) the Company or any of its Subsidiaries, pursuant to or within
the meaning of Title 11, U.S. Code, or any similar Federal, foreign or
state law for the relief of debtors (collectively, "BANKRUPTCY LAW"), (A)
commences a voluntary case, (B) consents to the entry of an order for
relief against it in an involuntary case, (C) consents to the appointment
of a receiver, trustee, assignee, liquidator or similar official (a
"CUSTODIAN"), (D) makes a general assignment for the benefit of its
creditors or (E) admits in writing that it is generally unable to pay its
debts as they become due;
(viii) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that (A) is for relief against the Company or any
of its Subsidiaries in an involuntary case, (B) appoints a Custodian of the
Company or any of its Subsidiaries or (C) orders the liquidation of the
Company or any of its Subsidiaries;
(ix) a final judgment or judgments for the payment of money
aggregating in excess of $250,000 are rendered against the Company or any
of its Subsidiaries and which judgments are not, within sixty (60) days
after the entry thereof, bonded, discharged or stayed pending appeal, or
are not discharged within sixty (60) days after the expiration of such
stay; provided, however, that any judgment which is covered by insurance or
an indemnity from a credit worthy party shall not be included in
calculating the $250,000 amount set forth above so long as the Company
provides the Holder a written statement from such insurer or indemnity
provider (which written statement shall
7
be reasonably satisfactory to the Holder) to the effect that such judgment
is covered by insurance or an indemnity and the Company will receive the
proceeds of such insurance or indemnity within thirty (30) days of the
issuance of such judgment;
(x) the Company breaches any material representation, warranty,
covenant or other term or condition of any Transaction Document, except, in
the case of a breach of a covenant which is curable, only if such breach
continues for a period of at least ten (10) consecutive Business Days;
(xi) any breach or failure in any respect to comply with (x) Section
15 of this Note or (y) any of the Potential Partner Conditions;
(xii) any breach or failure to comply with the Company's obligations
under the Series A Certificate of Designation;
(xiii) any Event of Default (as defined in the Other Notes) occurs
with respect to any Other Notes;
(ix) the inability of the Common Stock to be transferred with DTC
through the Deposit Withdrawal at Custodian system;
(x) failure by the Company to issue the Holder once every six months,
or as otherwise required by the Transfer Agent, a power-of-attorney, as set
forth in Section 5 (b) of the Securities Purchase Agreement, to instruct
the Transfer Agent to convert the Notes or the Preferred Stock into shares
of the Company's Common Stock or to convert the Warrants into shares of the
Company's Common Stock, such that a valid Power-of-Attorney (as defined in
the Securities Purchase Agreement) no longer exists for such conversions;
and
(xi) in the event that the Transfer Agent does not recognize a
Power-of-Attorney as sufficient instruction from the Holder to convert the
Notes or the Preferred Stock or to allow for the exercise of the Warrants,
failure by the Company to switch within three weeks to a different Transfer
Agent that recognizes the Power-of-Attorney allowing the Holder to convert
the Notes or the Preferred Stock into shares of the Company's Common Stock
or to convert the Warrants into shares of the Company's Common Stock.
(b) Redemption Right. Upon the occurrence of an Event of Default with
respect to this Note, the Company shall within two (2) Business Days after the
day on which the Company is aware of the Event of Default deliver written notice
thereof via facsimile and overnight courier (an "EVENT OF DEFAULT NOTICE") to
the Holder. At any time after the earlier of the Holder's receipt of an Event of
Default Notice and the Holder becoming aware of an Event of Default, the Holder
may require the Company to redeem all or any portion of this Note by delivering
written notice thereof (the "Event of Default Redemption Notice") to the
Company, which Event of Default Redemption Notice shall indicate the portion of
this Note the Holder is electing to redeem. Each portion of this Note subject to
redemption by the Company pursuant to this
8
Section 4(b) shall be redeemed by the Company at a price equal to the greater of
(i) the product of (x) the Conversion Amount to be redeemed and (y) the
Redemption Premium and (ii) the product of (A) the Conversion Rate with respect
to such Conversion Amount in effect at such time as the Holder delivers an Event
of Default Redemption Notice and (B) the Closing Sale Price of the Common Stock
on the date immediately preceding such Event of Default (the "EVENT OF DEFAULT
REDEMPTION PRICE"). Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 12. To the extent redemptions required
by this Section 4(b) are deemed or determined by a court of competent
jurisdiction to be prepayments of the Note by the Company, such redemptions
shall be deemed to be voluntary prepayments. The parties hereto agree that in
the event of the Company's redemption of any portion of the Note under this
Section 4(b), the Holder's damages would be uncertain and difficult to estimate
because of the parties' inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder. Accordingly, any Redemption Premium due under this Section 4(b)
is intended by the parties to be, and shall be deemed, a reasonable estimate of
the Holder's actual loss of its investment opportunity and not as a penalty.
5. RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.
(a) Assumption. The Company shall not enter into or be party to a
Fundamental Transaction unless (i) the Successor Entity assumes in writing all
of the obligations of the Company under this Note and the other Transaction
Documents in accordance with the provisions of this Section 5(a) pursuant to
written agreements in form and substance satisfactory to the Required Holders
and approved by the Required Holders prior to such Fundamental Transaction,
including agreements to deliver to each holder of Notes in exchange for such
Notes a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to the Notes, including, without
limitation, having a principal amount and interest rate equal to the principal
amounts and the interest rates of the Notes held by such holder, having similar
conversion rights as the Notes and having similar ranking to the Notes, and
satisfactory to the Required Holders and (ii) the Successor Entity (including
its Parent Entity) is a publicly traded corporation whose common stock is quoted
on or listed for trading on an Eligible Market. Upon the occurrence of any
Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Note referring to the "Company" shall refer
instead to the Successor Entity), and may exercise every right and power of the
Company and shall assume all of the obligations of the Company under this Note
with the same effect as if such Successor Entity had been named as the Company
herein. Upon consummation of the Fundamental Transaction, the Successor Entity
shall deliver to the Holder confirmation that there shall be issued upon
conversion or redemption of this Note at any time after the consummation of the
Fundamental Transaction, in lieu of the shares of Common Stock (or other
securities, cash, assets or other property) issuable upon the conversion of the
Notes prior to such Fundamental Transaction, such shares of publicly traded
common stock (or their equivalent) of the Successor Entity, as adjusted in
accordance with the provisions of this Note. The provisions of this Section
shall apply similarly and equally to successive Fundamental Transactions and
shall be applied without regard to any limitations on the conversion of this
Note.
(b) Redemption Right. No sooner than fifteen (15) days nor later than ten
(10) days
9
prior to the consummation of a Change of Control, but not prior to the public
announcement of such Change of Control, the Company shall deliver written notice
thereof via facsimile and overnight courier to the Holder (a "CHANGE OF CONTROL
NOTICE"). At any time during the period beginning after the Holder's receipt of
a Change of Control Notice and ending ten (10) Trading Days after the
consummation of such Change of Control, the Holder may require the Company to
redeem all or any portion of this Note by delivering written notice thereof
("CHANGE OF CONTROL REDEMPTION NOTICE") to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing to
have redeemed. The portion of this Note subject to redemption pursuant to this
Section 5 shall be redeemed by the Company in cash at a price equal to the
greater of (i) the Change of Control Premium multiplied by the product of (x)
the sum of the Conversion Amount being redeemed and any accrued and unpaid
Interest with respect to such Conversion Amount and accrued and unpaid Late
Charges with respect to such Conversion Amount and Interest and (y) the Closing
Sale Price of the Common Stock immediately following the public announcement of
such proposed Change of Control and (ii) 150% of the sum of the Conversion
Amount being redeemed and any accrued and unpaid Interest with respect to such
Conversion Amount subject to such Change of Control Redemption and accrued and
unpaid Late Charges with respect to such Conversion Amount and Interest (the
"CHANGE OF CONTROL REDEMPTION PRICE"). For example and the avoidance of any
doubt, if the Change of Control Premium is 130%, the Conversion Amount being
redeemed including all accrued and unpaid Interest and Late Charges is $100,000
and the Closing Sale Price of the Common Stock immediately following the public
announcement of the Change of Control is $2.00, then the Redemption Price shall
be the greater of:
130% * [$100,000 * $2] or $260,000
and
150% * $100,000 or $150,000.
Redemptions required by this Section 5 shall be made in accordance with the
provisions of Section 15 and shall have priority to payments to shareholders in
connection with a Change of Control. To the extent redemptions required by this
Section 5(b) are deemed or determined by a court of competent jurisdiction to be
prepayments of the Note by the Company, such redemptions shall be deemed to be
voluntary prepayments. Notwithstanding anything to the contrary in this Section
5, until the Change of Control Redemption Price (together with any interest
thereon) is paid in full, the Conversion Amount submitted for redemption under
this Section 5(c) may be converted, in whole or in part, by the Holder into
shares of Common Stock, or in the event the Conversion Date is after the
consummation of the Change of Control, shares of publicly traded common stock
(or their equivalent) of the Successor Entity pursuant to Section 3. The parties
hereto agree that in the event of the Company's redemption of any portion of the
Note under this Section 5(b), the Holder's damages would be uncertain and
difficult to estimate because of the parties' inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holder. Accordingly, any redemption premium due
under this Section 5(b) is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holder's actual loss of its investment opportunity
and not as a penalty.
10
6. RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS .
(a) Purchase Rights. If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "PURCHASE RIGHTS"), then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions on the
convertibility of this Note) 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.
(b) Other Corporate Events. In addition to and not in substitution for any
other rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a "CORPORATE EVENT"), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, at the Holder's option, (i) in addition to the shares
of Common Stock receivable upon such conversion, such securities or other assets
to which the Holder would have been entitled with respect to such shares of
Common Stock had such shares of Common Stock been held by the Holder upon the
consummation of such Corporate Event (without taking into account any
limitations or restrictions on the convertibility of this Note) or (ii) in lieu
of the shares of Common Stock otherwise receivable upon such conversion, such
securities or other assets received by the holders of shares of Common Stock in
connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Note initially been issued
with conversion rights for the form of such consideration (as opposed to shares
of Common Stock) at a conversion rate for such consideration commensurate with
the Conversion Rate. Provision made pursuant to the preceding sentence shall be
in a form and substance satisfactory to the Required Holders. The provisions of
this Section shall apply similarly and equally to successive Corporate Events
and shall be applied without regard to any limitations on the conversion or
redemption of this Note.
7. RIGHTS UPON ISSUANCE OF OTHER SECURITIES.
(a) Adjustment of Conversion Price upon Issuance of Common Stock. If at any
time after the Subscription Date, the Company issues or sells, or in accordance
with this Section 7(a) is deemed to have issued or sold, any shares of Common
Stock (including the issuance or sale of shares of Common Stock owned or held by
or for the account of the Company, but excluding shares of Common Stock deemed
to have been issued or sold by the Company in connection with any Excluded
Securities) for a consideration per share (the "NEW ISSUANCE PRICE") less than a
price (the "APPLICABLE PRICE") equal to Conversion Price in effect immediately
prior to such issue or sale (the foregoing a "DILUTIVE ISSUANCE"), then
immediately after such Dilutive Issuance, the Conversion Price then in effect
shall be reduced to the New Issuance Price. For
11
purposes of determining the adjusted Conversion Price under this Section 7(a),
the following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants or sells
any Options and the lowest price per share for which one share of Common
Stock is issuable upon the exercise of any such Option or upon conversion
or exchange or exercise of any Convertible Securities issuable upon
exercise of such Option is less than the Applicable Price, then such share
of Common Stock shall be deemed to be outstanding and to have been issued
and sold by the Company at the time of the granting or sale of such Option
for such price per share. For purposes of this Section 7(a)(i), the "lowest
price per share for which one share of Common Stock is issuable upon the
exercise of any such Option or upon conversion or exchange or exercise of
any Convertible Securities issuable upon exercise of such Option" shall be
equal to the sum of the lowest amounts of consideration (if any) received
or receivable by the Company with respect to any one share of Common Stock
upon granting or sale of the Option, upon exercise of the Option and upon
conversion or exchange or exercise of any Convertible Security issuable
upon exercise of such Option. No further adjustment of the Conversion Price
shall be made upon the actual issuance of such share of Common Stock or of
such Convertible Securities upon the exercise of such Options or upon the
actual issuance of such Common Stock upon conversion or exchange or
exercise of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities and the lowest price per share
for which one share of Common Stock is issuable upon such conversion or
exchange or exercise thereof is less than the Applicable Price, then such
share of Common Stock shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the issuance or sale of such
Convertible Securities for such price per share. For the purposes of this
Section 7(a)(ii), the "lowest price per share for which one share of Common
Stock is issuable upon such conversion or exchange or exercise" shall be
equal to the sum of the lowest amounts of consideration (if any) received
or receivable by the Company with respect to any one share of Common Stock
upon the issuance or sale of the Convertible Security and upon the
conversion or exchange or exercise of such Convertible Security. No further
adjustment of the Conversion Price shall be made upon the actual issuance
of such share of Common Stock upon conversion or exchange or exercise of
such Convertible Securities, and if any such issue or sale of such
Convertible Securities is made upon exercise of any Options for which
adjustment of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 7(a), no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Rate of Conversion. If the purchase
price provided for in any Options, the additional consideration, if any,
payable upon the issue, conversion, exchange or exercise of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable or exercisable for Common Stock changes at any time,
the Conversion Price in effect at the time of such change shall be adjusted
to the Conversion Price which would have been in effect at such time had
such Options or Convertible Securities provided for such changed purchase
price,
12
additional consideration or changed conversion rate, as the case may be, at
the time initially granted, issued or sold. For purposes of this Section
7(a)(iii), if the terms of any Option or Convertible Security that was
outstanding as of the Subscription Date are changed in the manner described
in the immediately preceding sentence, then such Option or Convertible
Security and the Common Stock deemed issuable upon exercise, conversion or
exchange thereof shall be deemed to have been issued as of the date of such
change. No adjustment shall be made if such adjustment would result in an
increase of the Conversion Price then in effect.
(iv) Calculation of Consideration Received. In case any Option is
issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties thereto,
the Options will be deemed to have been issued for such consideration as
determined in good faith by the Board of Directors of the Company. If any
Common Stock, Options or Convertible Securities are issued or sold or
deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the Company
therefor. If any Common Stock, Options or Convertible Securities are issued
or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company will be the fair
value of such consideration as determined in good faith by the Board of
Directors of the Company, except where such consideration consists of
securities, in which case the amount of consideration received by the
Company will be the Closing Sale Price of such securities on the date of
receipt. If any Common Stock, Options or Convertible Securities are issued
to the owners of the non-surviving entity in connection with any merger in
which the Company is the surviving entity, the amount of consideration
therefor will be deemed to be the fair value of such portion of the net
assets and business of the non-surviving entity as is attributable to such
Common Stock, Options or Convertible Securities, as the case may be. The
fair value of any consideration other than cash or securities will be
determined jointly by the Company and the Required Holders. If such parties
are unable to reach agreement within ten (10) days after the occurrence of
an event requiring valuation (the "VALUATION EVENT"), the fair value of
such consideration will be determined within five (5) Business Days after
the tenth day following the Valuation Event by an independent, reputable
appraiser jointly selected by the Company and the Required Holders. The
determination of such appraiser shall be deemed binding upon all parties
absent manifest error and the fees and expenses of such appraiser shall be
borne by the Company.
(v) Record Date. If the Company takes a record of the holders of
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible
Securities or (B) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the Common Stock deemed to have been issued or sold
upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
13
(b) Adjustment of Conversion Price upon Subdivision or Combination of
Common Stock. If the Company at any time on or after the Subscription Date
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any time on or
after the Subscription Date combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination will be proportionately increased.
(c) Other Events. If any event occurs of the type contemplated by the
provisions of this Section 7 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
Board of Directors will make an appropriate adjustment in the Conversion Price
so as to protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 7.
8. COMPANY RIGHT OF REDEMPTION.
(a) General. The Company at its option shall have the right to redeem, with
three (3) Business Days advance written notice (the "COMPANY REDEMPTION
NOTICE"), a portion or all of the outstanding principal of the Note. The Holder
may convert after the Company Redemption Notice is received and until the
Company Redemption Price is received by the Holder. The redemption price shall
be the greater of (i) One Hundred and Twenty percent (120%) of the face amount
redeemed plus accrued interest and (ii) sixty-eight percent (68%) of the (x)
product of the remaining Conversion Amount divided by the Conversion Price (not
less than $1 (as adjusted for any stock dividend, stock combination, stock split
or other similar transactions that proportionately increases or decreases the
Common Stock)) in effect on the Trading Day before the Company Redemption Notice
is sent and (y) the Closing Sale Price on the Trading Day before the Company
Redemption Notice is sent, plus accrued interest (the "COMPANY REDEMPTION
PRICE"). The Company shall pay the Company Redemption Price on all payments made
pursuant to the Note, including payments made before, on, or after the Maturity
Date. For all payments under this Note, the payment of the Company Redemption
Price by the Company shall be in addition to any accrued interest due.
(b) Mechanics of Company Redemption. If the Company elects to redeem the
Note in accordance with Section 8(a), then the Company Redemption Price, if any,
which is to be paid to the Holder, shall be paid, by wire transfer of
immediately available funds, an amount in cash equal to 100% of the Company
Redemption Price. If the Company fails to redeem the Company Redemption Price on
such date, then at the option of the Holder designated in writing to the Company
(any such designation, "Conversion Notice" for purposes of this Note), the
Holder may require the Company to convert all or any part of the Company
Redemption Amount at the Conversion Price. Conversions required by this Section
8(b) shall be made in accordance with the provisions of Section 3(c).
Notwithstanding anything to the contrary in this Section 8(b), but subject to
Section 3(d), until the Company Redemption Price (together with any interest
thereon) is paid in full, the Company Redemption Price (together with any
interest thereon) may be
14
converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3.
(c) Pro Rata Redemption Requirement. If the Company elects to convert any
Conversion Amount of this Note pursuant to Section 8(a), then it must
simultaneously take the same action in the same proportion with respect to the
Other Notes.
9. SECURITY. This Note and the Other Notes are secured to the extent and in the
manner set forth in the Security Documents (as defined in the Securities
Purchase Agreement).
10. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company
will not, by amendment of its Articles of Incorporation, Bylaws or through any
reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Note, and will at all times in good faith carry out all of the
provisions of this Note and take all reasonable action as may be required to
protect the rights of the Holder of this Note.
11. RESERVATION OF AUTHORIZED SHARES.
(a) Reservation. The Company initially shall reserve out of its authorized
and unissued Common Stock a number of shares of Common Stock for each of the
Notes equal to 300% of the Conversion Rate with respect to the Conversion Amount
of each such Note as of the Issuance Date. So long as any of the Notes are
outstanding, the Company shall take all action necessary to reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Notes, 300% of the number of shares
of Common Stock as shall from time to time be necessary to effect the conversion
of all of the Notes then outstanding; provided that at no time shall the number
of shares of Common Stock so reserved be less than the number of shares required
to be reserved of the previous sentence (without regard to any limitations on
conversions) (the "REQUIRED RESERVE AMOUNT"). The initial number of shares of
Common Stock reserved for conversions of the Notes and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Notes based on the principal amount of the Notes held by each holder at the
Closing (as defined in the Securities Purchase Agreement) or increase in the
number of reserved shares, as the case may be (the "AUTHORIZED SHARE
ALLOCATION"). In the event that a holder shall sell or otherwise transfer any of
such holder's Notes, each transferee shall be allocated a pro rata portion of
such holder's Authorized Share Allocation. Any shares of Common Stock reserved
and allocated to any Person which ceases to hold any Notes shall be allocated to
the remaining holders of Notes, pro rata based on the principal amount of the
Notes then held by such holders.
(b) Insufficient Authorized Shares. If at any time while any of the Notes
remain outstanding the Company does not have a sufficient number of authorized
and unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an "AUTHORIZED SHARE FAILURE"), then
the Company shall immediately take all action necessary to increase the
Company's authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Notes then outstanding.
Without
15
limiting the generality of the foregoing sentence, as soon as practicable after
the date of the occurrence of an Authorized Share Failure, but in no event later
than ninety (90) days after the occurrence of such Authorized Share Failure, the
Company shall hold a meeting of its shareholders for the approval of an increase
in the number of authorized shares of Common Stock. In connection with such
meeting, the Company shall provide each shareholder with a proxy or information
statement and shall use its reasonable best efforts to solicit its shareholders'
approval of such increase in authorized shares of Common Stock and to cause its
board of directors to recommend to the shareholders that they approve such
proposal.
12. HOLDER'S REDEMPTIONS. (a) The Company shall deliver the applicable Event of
Default Redemption Price to the Holder within five (5) Business Days after the
Company's receipt of the Holder's Event of Default Redemption Notice. If the
Holder has submitted a Change of Control Redemption Notice in accordance with
Section 5(b), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder concurrently with the consummation of such Change
of Control if such notice is received prior to the consummation of such Change
of Control and within five (5) Business Days after the Company's receipt of such
notice otherwise. In the event of a redemption of less than all of the
Conversion Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the applicable Redemption Price to the Holder
within the time period required, at any time thereafter and until the Company
pays such unpaid Redemption Price in full, the Holder shall have the option, in
lieu of redemption, to require the Company to promptly return to the Holder all
or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (together
with any Late Charges thereon) has not been paid. Upon the Company's receipt of
such notice, (x) the applicable Redemption Notice shall be null and void with
respect to such Conversion Amount, (y) the Company shall immediately return this
Note, or issue a new Note (in accordance with Section 18(d)) to the Holder
representing the sum of such Conversion Amount to be redeemed together with
accrued and unpaid Interest with respect to such Conversion Amount and accrued
and unpaid Late Charges with respect to such Conversion Amount and Interest and
(z) the Conversion Price of this Note or such new Notes shall be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the
applicable Redemption Notice is voided and (B) the lowest Closing Bid Price
during the period beginning on and including the date on which the applicable
Redemption Notice is delivered to the Company and ending on and including the
date on which the applicable Redemption Notice is voided. The Holder's delivery
of a notice voiding a Redemption Notice and exercise of its rights following
such notice shall not affect the Company's obligations to make any payments of
Late Charges which have accrued prior to the date of such notice with respect to
the Conversion Amount subject to such notice.
(b) Redemption by Other Holders. Upon the Company's receipt of notice from
any of the holders of the Other Notes for redemption or repayment as a result of
an event or occurrence substantially similar to the events or occurrences
described in Section 4(b) or Section 5(b) (each, an "OTHER REDEMPTION NOTICE"),
the Company shall immediately, but no later than one (1) Business Day of its
receipt thereof, forward to the Holder by facsimile a copy of such notice. If
the Company receives a Redemption Notice and one or more Other Redemption
Notices, during
16
the seven (7) Business Day period beginning on and including the date which is
three (3) Business Days prior to the Company's receipt of the Holder's
Redemption Notice and ending on and including the date which is three (3)
Business Days after the Company's receipt of the Holder's Redemption Notice and
the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received
during such seven (7) Business Day period, then the Company shall redeem a pro
rata amount from each holder of the Notes (including the Holder) based on the
principal amount of the Notes submitted for redemption pursuant to such
Redemption Notice and such Other Redemption Notices received by the Company
during such seven (7) Business Day period.
13. RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the Notes have
been converted, redeemed or otherwise satisfied in accordance with their terms,
the Company shall not, directly or indirectly, redeem, repurchase or declare or
pay any cash dividend or distribution on its capital stock without the prior
express written consent of the Required Holders.
14. VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as required by law, including but not limited to Chapter 78 of the
Delaware Revised Statutes, and as expressly provided in this Note.
15. COVENANTS.
(a) Rank. All payments due under this Note shall rank pari passu with all
Other Notes and no other Indebtedness of the Company and its Subsidiaries shall
be senior to the Indebtedness of the Company and its Subsidiary evidenced by the
Note and the Other Notes.
(b) Incurrence of Indebtedness. So long as this Note is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness, other than (i) the Indebtedness evidenced by this Note and (ii)
Permitted Indebtedness.
(c) Existence of Liens. So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to, directly
or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge,
security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, "LIENS") other than Permitted Liens.
(d) Restricted Payments. The Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, redeem, defease,
repurchase, repay or make any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Permitted Indebtedness, whether by way of payment in respect of principal of (or
premium, if any) or interest on, such Indebtedness if at the time such payment
is due or is otherwise made or, after giving effect to such payment, an event
constituting, or that with the passage of time and without being cured would
constitute, an Event of Default has occurred and is continuing.
17
(e) Sales of Equity Securities. Until the Company has obtained the
Stockholder Approval (as defined in the Securities Purchase Agreement), except
for any issuance of Securities in accordance with the Transaction Documents or
as set forth on Schedule 18(e) attached hereto, the Company will not, directly
or indirectly, offer, sell, grant any option to purchase, or otherwise dispose
of (or announce any offer, sale, grant or any option to purchase or other
disposition of) any of its equity or Common Stock Equivalents (as defined in the
Securities Purchase Agreement), including without limitation any debt, preferred
stock or other instrument or security that is, at any time during its life and
under any circumstances, convertible into or exchangeable or exercisable for
shares of common equity of the Company, without the prior written consent of the
Required Holders.
(f) Subsidiary Internal Accounting Controls. So long as this Note is
outstanding, the Company and each of its Subsidiaries shall maintain, in all
material respects, a system of internal accounting controls consistent with the
Internal Accounting Controls (as defined in the Securities Purchase Agreement).
16. VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a
meeting duly called for such purpose or the written consent without a meeting of
the Required Holders shall be required for any change or amendment to this Note
or the Other Notes.
17. TRANSFER. The Holder acknowledges and agrees that this Note may only be
offered, sold, assigned or transferred by the Holder without the consent of the
Company, provided that the provisions of Section 2(f) of the Securities Purchase
Agreement are complied with in all respects.
18. REISSUANCE OF THIS NOTE.
(a) Transfer. If this Note is to be transferred, the Holder shall surrender
this Note to the Company, whereupon the Company will issue, promptly following
the satisfaction of the provisions of Section 2(f) of the Securities Purchase
Agreement, and deliver upon the order of the Holder a new Note (in accordance
with Section 18(d)), in the name of the validly registered assigns or
transferee, representing the outstanding Principal being transferred by the
Holder and, if less then the entire outstanding Principal is being transferred,
a new Note (in accordance with Section 18(d)) to the Holder representing the
outstanding Principal not being transferred. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of the provisions
of Section 3(c)(iii) and this Section 18(a), following conversion or redemption
of any portion of this Note, the outstanding Principal represented by this Note
may be less than the Principal stated on the face of this Note.
(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 18(d)) representing the outstanding Principal.
18
(c) Note Exchangeable for Different Denominations. This Note is
exchangeable, upon the surrender hereof by the Holder at the principal office of
the Company, for a new Note or Notes (in accordance with Section (d) and in
principal amounts of at least $100,000) representing in the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.
(d) Issuance of New Notes. Whenever the Company is required to issue a new
Note pursuant to the terms of this Note, such new Note (i) shall be of like
tenor with this Note, (ii) shall represent, as indicated on the face of such new
Note, the Principal remaining outstanding (or in the case of a new Note being
issued pursuant to Section 18(a) or Section 18(c), the Principal designated by
the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued Interest and
Late Charges on the Principal and Interest of this Note, from the Issuance Date.
19. REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
RELIEF. The remedies provided in this Note shall be cumulative and in addition
to all other remedies available under this Note and any of the other Transaction
Documents at law or in equity (including a decree of specific performance and/or
other injunctive relief), and nothing herein shall limit the Holder's right to
pursue actual and consequential damages for any failure by the Company to comply
with the terms of this Note. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
20. PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is
placed in the hands of an attorney for collection or enforcement or is collected
or enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Note or to enforce the provisions of this Note or
(b) there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors' rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, but not limited to,
attorneys' fees and disbursements.
19
21. CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by
the Company and all the Purchasers and shall not be construed against any person
as the drafter hereof. The headings of this Note are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Note.
22. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.
23. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the
arithmetic calculation of the Conversion Rate or any Redemption Price, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within one (1) Business Day of receipt of the Conversion Notice or
Redemption Notice or other event giving rise to such dispute, as the case may
be, to the Holder. If the Holder and the Company are unable to agree upon such
determination or calculation within one (1) Business Day of such disputed
determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within one (1) Business Day submit via facsimile (a) the disputed
determination of the Closing Bid Price, the Closing Sale Price or the Weighted
Average Price to an independent, reputable investment bank selected by the
Company and approved by the Holder (such approval not to be unreasonably
withheld or delayed) or (b) the disputed arithmetic calculation of the
Conversion Rate or any Redemption Price to the Company's independent, outside
accountant. The Company, at the Company's expense, shall cause the investment
bank or the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the Holder of the results no later than
five (5) Business Days from the time it receives the disputed determinations or
calculations. Such investment bank's or accountant's determination or
calculation, as the case may be, shall be binding upon all parties absent
demonstrable error.
24. NOTICES; PAYMENTS.
(a) Notices. Whenever notice is required to be given under this Note,
unless otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Securities Purchase Agreement. The Company shall provide the
Holder with prompt written notice of all actions taken pursuant to this Note,
including in reasonable detail a description of such action and the reason
therefore. Without limiting the generality of the foregoing, the Company will
give written notice to the Holder (i) immediately upon any adjustment of the
Conversion Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least twenty days prior to the date
on which the Company closes its books or takes a record (A) with respect to any
dividend or distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.
(b) Payments. Whenever any payment of cash is to be made by the Company to
any
20
Person pursuant to this Note, such payment shall be made in lawful money of the
United States of America by a check drawn on the account of the Company and sent
via overnight courier service to such Person at such address as previously
provided to the Company in writing (which address, in the case of each of the
Purchasers, shall initially be as set forth on the Schedule of Buyers attached
to the Securities Purchase Agreement); provided that the Holder may elect to
receive a payment of cash via wire transfer of immediately available funds by
providing the Company with prior written notice setting out such request and the
Holder's wire transfer instructions. Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day, the same
shall instead be due on the next succeeding day which is a Business Day and, in
the case of any Interest Date which is not the date on which this Note is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of Interest due on such date. Any amount
of Principal or other amounts due under the Transaction Documents, other than
Interest, which is not paid when due shall result in a late charge being
incurred and payable by the Company in an amount equal to interest on such
amount at the rate of fifteen (15%) per annum from the date such amount was due
until the same is paid in full ("Late Charge").
25. CANCELLATION. After all Principal, accrued Interest and other amounts at any
time owed on this Note has been paid in full, this Note shall automatically be
deemed canceled, shall be surrendered to the Company for cancellation and shall
not be reissued.
26 WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note and the
Securities Purchase Agreement.
27. GOVERNING LAW; JURISDICTION; JURY TRIAL. This Note shall be construed and
enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Note shall be governed by, the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. The Company hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
The City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. The Company 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 it set forth
on the signature page hereto and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law. In the event that any provision of this Note is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute
21
or rule of law. Any such provision which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any other
provision of this Note. Nothing contained herein shall be deemed or operate to
preclude the Holder from bringing suit or taking other legal action against the
Company in any other jurisdiction to collect on the Company's obligations to the
Holder, to realize on any collateral or any other security for such obligations,
or to enforce a judgment or other court ruling in favor of the Holder. THE
COMPANY 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 WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
HEREBY.
28. CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall
have the following meanings:
(a) "APPROVED STOCK PLAN" means any employee benefit plan which has been
approved by the Board of Directors of the Company, pursuant to which the
Company's securities may be issued to any employee, consultant, officer or
director for services provided to the Company.
(b) "BLOOMBERG" means Bloomberg Financial Markets.
(c) "BUSINESS DAY" means any day other than Saturday, Sunday or other day
on which commercial banks in The City of New York are authorized or required by
law to remain closed.
(d) "CALENDAR MONTH" means the period beginning on and including the first
of each calendar month and ending on and including the last day of such calendar
month.
(e) "CHANGE OF CONTROL" means any Fundamental Transaction other than (i)
any reorganization, recapitalization or reclassification of the Common Stock in
which holders of the Company's voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving entity
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (ii) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.
(f) "CHANGE OF CONTROL PREMIUM" means (i) 130% or (ii) 120% in the event of
a Change of Control involving consideration paid to holders of the Company's
Common Stock where the consideration per share of the Company's Common Stock to
be received by the holders thereof is greater (as to amounts other than cash, as
determined reasonably and in good faith by the Board of Directors of the
Company) than 200% of the Conversion Price as of the Initial Issuance Date (as
adjusted for stock splits, stock dividends, reverse stock splits,
recapitalizations, reclassifications and similar events).
(g) "CLOSING BID PRICE" and "CLOSING SALE PRICE" means, for any security as
of any
22
date, the last closing bid price and last closing trade price, respectively, for
such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the "pink sheets" by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the
case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 23. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.
(h) "CLOSING DATE" shall have the meaning set forth in the Securities
Purchase Agreement, which date is the date the Company initially issued Notes
pursuant to the terms of the Securities Purchase Agreement.
(i) "CONTINGENT OBLIGATION" means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.
(j) "CONVERTIBLE SECURITIES" means any stock or securities (other than
Options) directly or indirectly convertible into or exercisable or exchangeable
for Common Stock.
(k) "ELIGIBLE MARKET" means, the Principal Market, The New York Stock
Exchange, Inc., Over-the-Counter Bulletin Board, the Nasdaq National Market or
the American Stock Exchange.
(l) "EXCLUDED SECURITIES" means any Common Stock issued or issuable: (i) in
connection with any Approved Stock Plan up to a maximum of five percent (5%) of
the outstanding Common Stock; (ii) upon conversion of, or in exchange for, the
Notes or the exercise of the Warrants; (iii) in connection with any acquisition
by the Company, whether through an acquisition of stock or a merger of any
business, assets or technologies the primary purpose of which is not to raise
equity capital; and (iv) upon conversion of any Options or
23
Convertible Securities which are outstanding on the day immediately preceding
the Subscription Date, provided that the terms of such Options or Convertible
Securities are not amended, modified or changed on or after the Subscription
Date.
(m) "FUNDAMENTAL TRANSACTION" means that the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another
Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (iii) allow another Person or Persons to make a purchase, tender or exchange
offer that is accepted by the holders of more than the 50% of the outstanding
shares of Voting Stock (not including any shares of Voting Stock held by the
Person or Persons making or party to, or associated or affiliated with the
Person or Persons making or party to, such purchase, tender or exchange offer),
or (iv) consummate a stock purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with another Person whereby such other Person acquires
more than the 50% of either the outstanding shares of Voting Stock (not
including any shares of Voting Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or
party to, such stock purchase agreement or other business combination), (v)
reorganize, recapitalize or reclassify its Common Stock or (vi) any "person" or
"group" (as these terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act) is or shall become the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate
Voting Stock of the Company.
(n) "GAAP" means United States generally accepted accounting principles,
consistently applied.
(o) "INDEBTEDNESS" of any Person means, without duplication (i) all
indebtedness for borrowed money, (ii) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services, including
(without limitation) "capital leases" in accordance with generally accepted
accounting principles (other than trade payables entered into in the ordinary
course of business), (iii) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (iv) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (vii) all indebtedness referred to in clauses (i)
through (vi) above secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, (viii) all obligations
issued, undertaken or assumed as part of any financing facility
24
with respect to accounts receivables of the Company and its Subsidiaries,
including, without limitation, any factoring arrangement of such accounts
receivables and (ix) all Contingent Obligations in respect of indebtedness or
obligations of others of the kinds referred to in clauses (i) through (viii)
above.
(p) "INITIAL ISSUANCE DATE" means November 22, 2006.
(q) "INSTALLMENT AMOUNT" means with respect to any Installment Date, the
lesser of (A) $19,135.77 and (B) the remaining principal due hereunder. In the
event the Holder shall sell or otherwise transfer any portion of this Note, the
transferee shall be allocated a pro rata portion of the each unpaid Installment
Amount hereunder.
(r) "INSTALLMENT DATE" means the first day of each calendar month.
(s) "INTEREST RATE" means ten percent (10%) per annum, subject to periodic
adjustment pursuant to Section 2.
(t) "OPTIONS" means any rights, warrants or options to subscribe for or
purchase Common Stock or Convertible Securities.
(u) "PARENT ENTITY" of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common stock or equivalent
equity security is quoted or listed on an Eligible Market, or, if there is more
than one such Person or Parent Entity, the Person or Parent Entity with the
largest public market capitalization as of the date of consummation of the
Fundamental Transaction.
(v) "PERMITTED INDEBTEDNESS" means (A) Indebtedness incurred by the Company
that is made expressly subordinate in right of payment to the Indebtedness
evidenced by this Note, as reflected in a written agreement acceptable to the
Holder and approved by the Holder in writing (which approval shall not be
unreasonably delayed), and which Indebtedness does not provide at any time for
(1) the payment, prepayment, repayment, repurchase or defeasance, directly or
indirectly, of any principal or premium, if any, thereon until ninety-one (91)
days after the Maturity Date or later and (2) total interest and fees at a rate
in excess of the Interest Rate hereunder, (B) Indebtedness secured by Permitted
Liens, (C) Indebtedness to trade creditors incurred in the ordinary course of
business, and (D) extensions, refinancings and renewals of any items of
Permitted Indebtedness, provided that the principal amount is not increased or
the terms modified to impose more burdensome terms upon the Company or its
Subsidiary, as the case may be.
(w) "PERMITTED LIENS" means (i) any Lien for taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with GAAP, (ii) any
statutory Lien arising in the ordinary course of business by operation of law
with respect to a liability that is not yet due or delinquent, (iii) any Lien
created by operation of law, such as materialmen's liens, mechanics' liens and
other similar liens, arising in the ordinary course of business with respect to
a liability that is not yet due or delinquent or that are being contested in
good faith by appropriate proceedings, (iv) Liens
25
securing the Company's obligations under the Notes, (v) Liens (A) upon or in any
equipment (as defined in the Security Agreement) acquired or held by the Company
or any of its Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition or
lease of such equipment, or (B) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment, (vi)
Liens incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clauses (i) and (v)
above, provided that any extension, renewal or replacement Lien shall be limited
to the property encumbered by the existing Lien and the principal amount of the
Indebtedness being extended, renewed or refinanced does not increase, (vii)
leases or subleases and licenses and sublicenses granted to others in the
ordinary course of the Company's business, not interfering in any material
respect with the business of the Company and its Subsidiaries taken as a whole,
(viii) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payments of custom duties in connection with the importation of
goods; (ix) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 4(a)(ix) and
(x) Liens with respect to Indebtedness not individually in excess of $25,000 or
in the aggregate in excess of $100,000, which individually and in aggregate are
not material to the Company.
(x) "PERSON" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, any other entity and a government or any department or agency
thereof.
(y) "POTENTIAL PARTNER CONDITIONS" means at any time during the period
commencing on the date of the consummation of any material transaction between
the Company and a Person and ending on the first anniversary of the Effective
Date, there shall be no disclosure that any executive officer of such Person has
(i) exhibited dishonesty in the performance of his or her duties, which is
materially and demonstrably injurious to the Company; or (ii) been convicted of
(x) a felony under the laws of the United States or any state thereof or (y) a
misdemeanor involving moral turpitude, in each case, which is materially and
demonstrably injurious to the Company.
(z) "PRINCIPAL MARKET" means the Nasdaq Capital Market.
(aa) "REDEMPTION NOTICES" means, collectively, the Event of Default
Redemption Notices, Change of Control Redemption Notices, the Company Redemption
Notice, and, each of the foregoing, individually, a Redemption Notice.
(bb) "REDEMPTION PREMIUM" means (i) in the case of the Events of Default
described in Section 4(a)(i) - (vi) and (ix) - (xii), 125% or (ii) in the case
of the Events of Default described in Section 4(a)(vii) - (viii), 120%.
(cc) "REDEMPTION PRICES" means, collectively, the Event of Default
Redemption Price, Change of Control Redemption Price, and the Company Redemption
Amount, the Holder Optional Redemption Price and the Holder Partial Redemption
Price and, each of the foregoing, individually, a Redemption Price.
26
(dd) "REGISTRATION RIGHTS AGREEMENT" means that certain registration rights
agreement between the Company and the initial holders of the Notes relating to,
among other things, the registration of the resale of the Common Stock issuable
upon conversion of the Notes and exercise of the Warrants.
(ee) "REQUIRED HOLDERS" means the holders of Notes representing at least a
majority of the aggregate principal amount of the Notes then outstanding.
(ff) "SEC" means the United States Securities and Exchange Commission.
(gg) "SECURITIES PURCHASE AGREEMENT" means that certain securities purchase
agreement dated the Subscription Date by and among the Company and the initial
holders of the Notes pursuant to which the Company issued the Notes.
(hh) "SUBSCRIPTION DATE" means November 21, 2006
(ii) "SUCCESSOR ENTITY" means the Person, which may be the Company, formed
by, resulting from or surviving any Fundamental Transaction or the Person with
which such Fundamental Transaction shall have been made, provided that if such
Person is not a publicly traded entity whose common stock or equivalent equity
security is quoted or listed for trading on an Eligible Market, Successor Entity
shall mean such Person's Parent Entity.
(jj) "TRADING DAY" means any day on which the Common Stock are traded on
the Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock are then traded; provided that
"Trading Day" shall not include any day on which the Common Stock are scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock are suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York Time).
(kk) "VOTING STOCK" of a Person means capital stock of such Person of the
class or classes pursuant to which the holders thereof have the general voting
power to elect, or the general power to appoint, at least a majority of the
board of directors, managers or trustees of such Person (irrespective of whether
or not at the time capital stock of any other class or classes shall have or
might have voting power by reason of the happening of any contingency).
(ll) "WARRANTS" has the meaning ascribed to such term in the Securities
Purchase Agreement, and shall include all warrants issued in exchange therefor
or replacement thereof.
(mm) "WEIGHTED AVERAGE PRICE" means, for any security as of any date, the
dollar volume-weighted average price for such security on the Principal Market
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as the Principal Market publicly announces is the official open of trading), and
ending at 4:00:00 p.m., New York Time (or such
27
other time as the Principal Market publicly announces is the official close of
trading) as reported by Bloomberg through its "Volume at Price" functions, or,
if the foregoing does not apply, the dollar volume-weighted average price of
such security in the over-the-counter market on the electronic bulletin board
for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of
trading), and ending at 4:00:00 p.m., New York Time (or such other time as such
market publicly announces is the official close of trading) as reported by
Bloomberg, or, if no dollar volume-weighted average price is reported for such
security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such
security as reported in the "pink sheets" by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Weighted Average Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Weighted Average Price of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the
Company and the Holder are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section 23. All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during the applicable calculation
period.
29. DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries, the Company
shall within one (1) Business Day after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains
material, nonpublic information, relating to the Company or its Subsidiaries,
the Company shall indicate to the Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of
the Issuance Date set out above.
CATUITY, INC.
By:
------------------------------------
Name: John Racine
Title: Chief Executive Officer
29