EXHIBIT 4.5
THE SECURITIES REPRESENTED HEREBY HAVE NOT 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 APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD PURSUANT TO
RULE 144 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 SECTION 2(d)(VIII) HEREOF.
THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 2(d)(VIII) HEREOF.
SECURED CONVERTIBLE NOTE
September 18, 2002 $____________
FOR VALUE RECEIVED, ZIX CORPORATION, a Texas corporation (the
"COMPANY"), hereby promises to pay to the order of __________________ or
registered assigns (the "HOLDER") the principal amount of ___________________
United States Dollars ($________________) when due, whether upon maturity,
acceleration, redemption or otherwise.
(1) Payments of Principal. All payments of principal of this
Note (to the extent such principal is not converted into Shares (as defined
below) in accordance with the terms hereof) shall be made in lawful money of the
United States of America by wire transfer of immediately available funds to such
account as the Holder may from time to time designate by written notice in
accordance with the provisions of this Note. Whenever any amount expressed to be
due by the terms of this Note is due on any day that is not a Business Day (as
defined below), the same shall instead be due on the next succeeding day that is
a Business Day. Each capitalized term used herein, and not otherwise defined,
shall have the meaning ascribed thereto in the Securities Purchase Agreement,
dated September 17, 2002, pursuant to which this Note and the Other Notes (as
defined below) were originally issued (as such agreement may be amended from
time to time as provided in such agreement, the "SECURITIES PURCHASE
AGREEMENT"). This Note and the Other Notes issued by the Company pursuant to the
Securities
Purchase Agreement on the Closing Date (as defined in the Securities Purchase
Agreement) and all convertible notes issued in exchange therefor or replacement
thereof are collectively referred to in this Note as the "NOTES."
(2) Conversion of this Note. This Note shall be converted into
Shares on the terms and conditions set forth in this Section 2.
(a) Certain Defined Terms. For purposes of this Note,
the following terms shall have the following meanings:
(i) "ADDITIONAL AMOUNT" means the result of the following
formula: (.065)(N/365) (P).
(ii) "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.
(iii) "COMMON STOCK" means (A) the Company's common stock,
$0.01 par value per share, and (ii) any capital stock
resulting from a reclassification of such common stock.
(iv) "COMPANY REDEMPTION DATE" means each Interim Company
Redemption Date and the Final Company Redemption Date.
(v) "CONVERSION AMOUNT" means the sum of (1) the principal
amount of this Note to be converted, redeemed or otherwise
with respect to which this determination is being made and (2)
the Additional Amount with respect to the amount referred to
in the immediately preceding clause (1).
(vi) "CONVERSION PRICE" means as of any Conversion Date or
other date of determination, $3.78, subject to adjustment as
provided herein.
(vii) "DOLLARS" or "$" means United States Dollars.
(viii) "FINAL COMPANY REDEMPTION DATE" means October 1, 2003.
(ix) "INSTALLMENT AMOUNT" means, (I) with respect to any
Interim Company Redemption Date, the lesser of (A) $500,000
multiplied by the quotient of (x) the original principal
amount of this Note on the Issuance Date divided by (y) the
aggregate original principal amount of the Notes on the
Issuance Date, and (B) the principal amount then outstanding
under this Note; and (II) with respect to the Final Company
Redemption Date, the lesser of (C) $5,000,000 multiplied by
the quotient of (w) the original principal amount of this Note
on the Issuance Date divided by (z) the aggregate original
principal amount of the Notes on the
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Issuance Date, and (D) the principal amount then outstanding
under this Note; in each case subject to the reduction of any
Installment Amount in accordance with Section 2(d)(ix) and
Section 7(b). 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 applicable Installment
Amount.
(x) "INTERIM COMPANY REDEMPTION DATE" means the first Business
Day of each calendar month during the period beginning on and
including January 1, 2003 and ending on and including June 30,
2003.
(xi) "ISSUANCE DATE" means the original date of issuance of
this Note pursuant to the Securities Purchase Agreement,
regardless of any exchange or replacement hereof.
(xii) "MATURITY DATE" means the Business Day immediately
following the Final Company Redemption Date.
(xiii) "N" means the number of days from, but excluding, the
Issuance Date through and including the Conversion Date or
other date of determination.
(xiv) "OTHER NOTES" means the convertible notes, other than
this Note, issued by the Company pursuant to the Securities
Purchase Agreement and all convertible notes issued in
exchange therefor or replacement thereof.
(xv) "P" means the principal amount of this Note to be
converted, redeemed or with respect to which the determination
of the Additional Amount is otherwise being made.
(xvi) "PERSON" means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization and a government or any
department or agency thereof or any other legal entity.
(xvii) "PRINCIPAL" means the outstanding principal amount of
this Note as of any date of determination.
(xviii) "PRINCIPAL MARKET" means the Nasdaq National Market
or, if the Common Stock is not traded on the Nasdaq National
Market, then the principal securities exchange or trading
market for the Common Stock.
(xix) "REGISTRATION RIGHTS AGREEMENT" means that certain
registration rights agreement among the Company and the
initial holders of the Notes relating to the filing of a
registration statement covering the resale of the Shares
issuable upon conversion of the Notes, as such agreement may
be amended from time to time as provided in such agreement.
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(xx) "SEC" means the United States Securities and Exchange
Commission.
(xxi) "SECURITY AGREEMENT" means that certain security
agreement among the Company and the initial holders of the
Notes relating to the granting by the Company of a security
interest in certain assets of the Company, as such agreement
may be amended from time to time as provided in such
agreement.
(xxii) "SHARES" means shares of Common Stock.
(xxiii) "WARRANTS" means the warrants issued to the holders of
the Notes pursuant to the Securities Purchase Agreement, and
all warrants issued in exchange therefor or replacement
thereof pursuant to the terms of such warrants.
(xxiv) "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 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 p.m. New York Time (or such other
time as the Principal Market publicly announces is the
official close of trading) as reported by Bloomberg Financial
Markets ("BLOOMBERG") through its "Volume at Price" functions
(ignoring any trade of more than 30,000 shares of such
security pursuant to an individual transaction (subject to
adjustment for stock splits, stock dividends, stock
combinations and other similar transactions involving such
security after the Issuance Date)), 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 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 p.m. New York Time (or such other
time as the Principal Market publicly announces is the
official close of trading) as reported by Bloomberg, 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 the National Quotation Bureau, Inc. If the
Weighted Average Price cannot be calculated for such security
on such 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
holders of Notes representing at least two-thirds of the
aggregate principal amount of the Notes then outstanding. If
the Company and the holders of the Notes representing at least
two-thirds of the aggregate principal amount of the Notes then
outstanding are unable to agree upon the fair market value of
the Common Stock, then such dispute shall be resolved pursuant
to Section 2(d)(iii) below with the term "Weighted Average
Price" being substituted for the term "Conversion Price." All
such determinations to be appropriately adjusted for any
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stock dividend, stock split, stock combination or other
similar transaction during any period during which the
Weighted Average Price is being determined.
(b) Holder's Conversion Right; Mandatory Redemption
at Maturity. Subject to the provisions of Section 5 and Section 14, at any time
or times on or after the Issuance Date, the Holder shall be entitled to convert
all or any part of the Principal (and the Additional Amount relating thereto)
into fully paid and nonassessable Shares in accordance with Section 2(d), at the
Conversion Rate (as defined below). The Company shall not issue any fraction of
a Share upon any conversion. If the issuance would result in the issuance of a
fraction of a Share, then the Company shall round such fraction of a Share up or
down to the nearest whole share. If any Principal remains outstanding on the
Maturity Date, then all such Principal shall be redeemed as of such date in
accordance with Section 2(d)(vii).
(c) Conversion Rate. The number of Shares issuable
upon conversion of any portion of this Note pursuant to Section 2(b) shall be
determined according to the following formula (the "CONVERSION RATE"):
Conversion Amount
-----------------
Conversion Price
(d) Mechanics of Conversion. The conversion of this
Note shall be conducted in the following manner:
(i) Holder's Delivery Requirements. To convert a Conversion
Amount into Shares on any date (the "CONVERSION DATE"), the
Holder shall (A) transmit by facsimile (or otherwise deliver),
for receipt on or prior to 7:00 p.m. New York Time on such
date, a copy of an executed conversion notice in the form
attached hereto as Exhibit I (the "CONVERSION NOTICE") to the
Company and (B) if required by Section 2(d)(viii), surrender
to a common carrier for delivery to the Company as soon as
practicable following such date the original Note being
converted (or an indemnification undertaking reasonably
acceptable to the Company with respect to this Note in the
case of its loss, theft or destruction).
(ii) Company's Response. Upon receipt or deemed receipt (which
for purposes hereof shall mean pursuant to Section 8) by the
Company of a copy of a Conversion Notice, the Company (I)
shall immediately send, via facsimile, a confirmation of
receipt of such Conversion Notice to the Holder and the
Company's designated transfer agent (the "TRANSFER AGENT"),
which confirmation shall constitute an instruction to the
Transfer Agent to process such Conversion Notice in accordance
with the terms herein and (II) on or before the second (2nd)
Business Day following the date of receipt or deemed receipt
by the Company of such Conversion Notice (such second (2nd)
Business Day, the "SHARE DELIVERY DATE") (A) provided that the
Transfer Agent is participating in The Depository Trust
Company ("DTC") Fast Automated Securities Transfer Program
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and provided that the Holder is eligible to receive Shares
through DTC, credit such aggregate number of Shares 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 (B) 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 to which the Holder shall be entitled. If this Note is
submitted for conversion, as may be required by Section
2(d)(viii), and the principal amount represented by this Note
is greater than the principal amount being converted, then the
Company shall, as soon as practicable and in no event later
than three (3) Business Days after receipt of this Note (such
third (3rd) Business Day, the "NOTE DELIVERY DATE") and at its
own expense, issue and deliver to the Holder a new Note
representing the Principal not converted.
(iii) Dispute Resolution. In the case of a dispute as to the
determination of the Conversion Price or the arithmetic
calculation of the Conversion Rate, the Company shall instruct
the Transfer Agent to issue to the Holder the Shares
representing the number of Shares that is not disputed and
shall transmit an explanation of the disputed determinations
or arithmetic calculations to the Holder via facsimile within
one (1) Business Day of receipt or deemed receipt of the
Holder's Conversion Notice or other date of determination. If
the Holder and the Company are unable to agree upon the
determination of the Conversion Price or arithmetic
calculation of the Conversion Rate within one (1) Business Day
of such disputed determination or arithmetic calculation being
transmitted to the Holder, then the Company shall within two
(2) Business Days submit via facsimile (A) the disputed
determination of the Conversion Price to an independent,
reputable investment bank selected from a list of such
investment banks agreed to by the Company and the holders of
Notes representing at least two-thirds of the aggregate
original principal amount of the Notes at or prior to the
Issuance Date or (B) the disputed arithmetic calculation of
the Conversion Rate to the Company's independent, outside
accountant. The Company 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 three (3) 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 error.
(iv) Record Holder. The person or persons entitled to receive
the Shares issuable upon a conversion of this Note shall be
treated for all purposes as the legal and record holder or
holders of such Shares on the Conversion Date.
(v) Company's Failure to Timely Convert.
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(A) Cash Damages. If within three (3) Business Days
after the Company's receipt of the facsimile copy of a Conversion Notice or
deemed receipt of a Conversion Notice the Company shall fail to issue and
deliver a certificate to the Holder for, or credit the Holder's balance account
with DTC with, the number of Shares to which the Holder is entitled upon the
Holder's conversion of any Conversion Amount, or if the Company fails to issue
and deliver a new Note representing the Principal to which such Holder is
entitled on or before the Note Delivery Date pursuant to Section 2(d)(ii), then
in addition to all other available remedies that the Holder may pursue hereunder
and under the Securities Purchase Agreement (including indemnification pursuant
to Section 8 thereof), the Company shall pay additional damages to the Holder
for each day after the Share Delivery Date such conversion is not timely
effected and/or each day after the Note Delivery Date such Note is not delivered
in an amount equal to 0.5% of the sum of (a) the product of (I) the number of
Shares not issued to the Holder on or prior to the Share Delivery Date and to
which the Holder is entitled and (II) the Weighted Average Price of the Common
Stock on the Share Delivery Date (such product is referred to herein as the
"SHARE PRODUCT AMOUNT"), and (b) in the event the Company has failed to deliver
a Note to the Holder on or prior to the Note Delivery Date, the product of (y)
the number of Shares issuable upon conversion of the Principal represented by
the Note as of the Note Delivery Date and (z) the Weighted Average Price of the
Common Stock on the Note Delivery Date; provided that in no event shall cash
damages accrue pursuant to this Section 2(d)(v)(A) with respect the Share
Product Amount during the period, if any, in which the Conversion Price or the
arithmetic calculation of the Conversion Rate is subject to a bona fide dispute
that is subject to and being resolved pursuant to, and in compliance with the
time periods and other provisions of, the dispute resolution provisions of
Section 2(d)(iii). Alternatively, subject to Section 2(d)(iii), at the election
of the Holder made in the Holder's sole discretion, the Company shall pay to the
Holder, in lieu of the additional damages referred to in the preceding sentence
(but in addition to all other available remedies that the Holder may pursue
hereunder and under the Securities Purchase Agreement (including indemnification
pursuant to Section 8 thereof)), 110% of the amount by which (A) the Holder's
total purchase price (including brokerage commissions, if any) for the shares
purchased to make delivery in satisfaction of a sale by such holder of the
Shares to which such holder is entitled but has not received upon a conversion
exceeds (B) the net proceeds received by such holder from the sale of the Shares
to which the Holder is entitled but has not received upon such conversion. If
the Company fails to pay the additional damages set forth in this Section
2(d)(v) within five (5) Business Days of the date incurred, then the Holder
entitled to such payments shall have the right at any time, so long as the
Company continues to fail to make such payments, to require the Company, upon
written notice, to immediately issue, in lieu of such cash damages, the number
of Shares equal to the quotient of (X) the aggregate amount of the damages
payments described herein divided by (Y) the Conversion Price in effect on such
Conversion Date as specified by the holder in the Conversion Notice.
(B) Void Conversion Notice; Adjustment to Conversion
Price. If for any reason the Holder has not received all of the Shares prior to
the tenth (10th) Business Day after the Share Delivery Date with respect to a
conversion of this Note, then the Holder, upon written notice to the Company (a
"VOID CONVERSION NOTICE"), may void its Conversion Notice with respect to, and
retain or have returned, as the case may be, any portion
7
of this Note that has not been converted pursuant to the Holder's Conversion
Notice; provided that the voiding of the Holder's Conversion Notice shall not
affect the Company's obligations to make any payments that have accrued prior to
the date of such notice pursuant to Section 2(d)(v)(A) or otherwise. Thereafter,
the Conversion Price with respect to all of the Principal shall be adjusted to
the lesser of (I) the Conversion Price as in effect on the date on which the
Holder voided the Conversion Notice and (II) the lowest Weighted Average Price
during the period beginning on the Conversion Date and ending on the date such
holder voided the Conversion Notice, subject to further adjustment as provided
in this Note; provided that in no event shall an adjustment to the Conversion
Price with respect to any Principal be made pursuant to this Section 2(d)(v)(B)
with respect to any conversion of this Note that is the subject of a bona fide
dispute that is subject to and being resolved pursuant to, and in compliance
with the time periods and other provisions of, the dispute resolution provisions
of Section 2(d)(iii), provided the Shares are delivered to the Holder within one
(1) Business Day of the resolution of such bona fide dispute. Upon delivery of a
Void Conversion Notice, cash amounts shall stop accruing under Section
2(d)(v)(A) on the Shares subject to such Void Conversion Notice, provided that
the voiding of the Holder's Conversion Notice shall not affect the Company's
obligations to make any payments that have accrued prior to the date of such
Void Conversion Notice pursuant to Section 2(d)(v)(A) or otherwise.
(C) Redemption. If for any reason the Holder has not
received all of the Shares prior to the tenth (10th) Business Day after the
Share Delivery Date with respect to a conversion of this Note (a "CONVERSION
FAILURE"), then the Holder, upon written notice to the Company, may require that
the Company redeem, in accordance with Section 3, all of the Principal,
including the Principal previously submitted for conversion and with respect to
which the Company has not delivered shares of Common Stock; provided that in the
event the Holder has delivered to the Company a Void Conversion Notice with
respect to a Conversion Failure, the Company shall not be required to redeem the
amount of principal specified in and represented by such Void Conversion Notice;
and further provided that the Holder shall not be entitled to require redemption
of any Principal pursuant to this clause (C) solely as a result of a Conversion
Failure caused by any Principal being the subject of a bona fide dispute that is
subject to and being resolved pursuant to, and in compliance with the time
periods and other provisions of, the dispute resolution provisions of Section
2(d)(iii), provided the Shares are delivered to the Holder within one (1)
Business Day of the resolution of such bona fide dispute.
(vi) Pro Rata Conversion. In the event the Company receives a
Conversion Notice from more than one holder of the Notes for
the same Conversion Date and the Company can convert some, but
not all, of such Notes, then, subject to Section 14, the
Company shall convert from each holder of the Notes electing
to have Notes converted at such time a pro rata amount of such
holder's Note submitted for conversion based on the principal
amount of the Note submitted for conversion on such date by
such holder relative to the principal amount of the Notes
submitted for conversion on such date.
8
(vii) Mechanics of Mandatory Redemption. If any Principal
remains outstanding on the Maturity Date, then the Holder
shall surrender this Note, duly endorsed for cancellation, to
the Company and such Principal shall be redeemed as of the
Maturity Date by payment on the Maturity Date to the Holder of
an amount equal to the sum of (A) 105% of such Principal plus
(B) the Additional Amount with respect to such Principal.
(viii) Book-Entry. Notwithstanding anything to the contrary
set forth herein, upon conversion of this Note in accordance
with the terms hereof, the Holder shall not be required to
physically surrender this Note to the Company unless all of
the Principal is being converted. The Holder and the Company
shall maintain records showing the principal amount converted
or redeemed and the dates of such conversions or redemptions
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 each such conversion or
redemption. In the event of any dispute or discrepancy, such
records of the Company establishing the Principal to which the
Holder is entitled shall be controlling and determinative in
the absence of error. Notwithstanding the foregoing, if this
Note is converted or redeemed as aforesaid, the Holder may not
transfer this Note unless the Holder first physically
surrenders this Note to the Company, whereupon the Company
will forthwith issue and deliver upon the order of the Holder
a new Note of like tenor, registered as the Holder may
request, representing in the aggregate the remaining Principal
represented by this Note. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason
of the provisions of this paragraph, following conversion or
redemption of any portion of this Note, the Principal of this
Note may be less than the principal amount stated on the face
hereof. Each Note shall bear the following legend:
ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS
OF THIS NOTE, INCLUDING SECTION 2(d)(viii) HEREOF. THE
PRINCIPAL AMOUNT OF THIS NOTE MAY BE LESS THAN THE PRINCIPAL
AMOUNT STATED ON THE FACE HEREOF PURSUANT TO SECTION
2(d)(viii) HEREOF.
(ix) Application of Conversion Amounts. Any principal amount
that the Holder elects, or is deemed pursuant to Section 8 to
have elected, to convert in accordance with this Section 2
shall be deducted first from the Installment Amount relating
to the Company Redemption Date immediately following the
Conversion Date with respect to such conversion and then
sequentially from the immediately succeeding Company
Redemption Date.
(e) Taxes. The Company shall pay any and all taxes
that may be payable with respect to the issuance and delivery of Shares upon the
conversion of this Note;
9
provided, however, that the holder of this Note shall pay any taxes in
connection with any transfers of this Note or the transfer of the Shares
issuable upon conversion hereof.
(f) Adjustments to Conversion Price. The Conversion
Price will be subject to adjustment from time to time as provided in this
Section 2(f).
(i) Adjustment of Conversion Price upon Issuance of Common
Stock. If and whenever on or after the Issuance Date, the
Company issues or sells, or in accordance with this Section
2(f) is deemed to have issued or sold, any Shares (including
the issuance or sale of Shares owned or held by or for the
account of the Company, but excluding Exempted Issuances) for
a consideration per share less than a price (the "APPLICABLE
PRICE") equal to the Conversion Price in effect immediately
prior to such time, then immediately after such issue or sale,
the Conversion Price then in effect shall be reduced to an
amount equal to such consideration per share. For purposes of
determining the adjusted Conversion Price under this Section
2(f)(i), the following shall be applicable:
(A) Issuance of Options. If the
Company in any manner grants or sells any Options (as defined below) and the
lowest price per share for which one Share is issuable upon the exercise of any
such Option or upon conversion, exchange or exercise of any Convertible
Securities (as defined below) issuable upon exercise of such Option is less than
the Applicable Price, then such Share 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 2(f)(i)(A),
the "lowest price per share for which one Share is issuable upon the exercise of
any such Option or upon conversion, 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 upon granting or sale of the Option, upon
exercise of the Option and upon conversion, 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 or of such Convertible Securities upon the exercise of such Options
or upon the actual issuance of such Share upon conversion, exchange or exercise
of such Convertible Securities.
(B) 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 is issuable upon
such conversion, exchange or exercise thereof is less than the Applicable Price,
then such Share 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
2(f)(i)(B), the "lowest price per share for which one Share is issuable upon
such conversion, 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 upon the issuance or sale of the Convertible Security
and upon the conversion, exchange or exercise of such Convertible Security. No
further adjustment of the Conversion
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Price shall be made upon the actual issuance of such Share upon conversion,
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 2(f)(i), then no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.
(C) Change in Option Price or Rate
of Conversion. If the purchase, exchange or exercise 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 Options or Convertible Securities are convertible into or exchangeable
or exercisable for Shares changes at any time, then the Conversion Price in
effect at the time of such change shall be adjusted to the Conversion Price that
would have been in effect at such time had such Options or Convertible
Securities provided for such changed purchase, exchange or exercise price,
additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold. For purposes of this Section 2(f)(i)(C),
if the terms of any Option or Convertible Security that was outstanding as of
the Issuance Date are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Shares
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.
(D) 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 a consideration of
$0.01. If any Shares, 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
Shares, 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, except where such
consideration received by the Company consists of marketable securities, in
which case the amount of consideration received by the Company will be the
Weighted Average Price of such securities on the date of receipt of such
securities. If any Shares, 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 Shares, 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
holders of Notes representing at least two-thirds of the aggregate principal
amount of the Notes then outstanding. 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 (10th) day following
the Valuation Event by an independent, reputable appraiser jointly selected by
the Company and the holders representing at least two-thirds of the aggregate
principal amount of
11
the Notes then outstanding. The determination of such appraiser shall be final
and binding upon all parties absent error and the fees and expenses of such
appraiser shall be borne by the Company.
(E) Record Date. If the Company
takes a record of the holders of Shares for the purpose of entitling them (1) to
receive a dividend or other distribution payable in Shares, Options or in
Convertible Securities or (2) to subscribe for or purchase Shares, Options or
Convertible Securities, then such record date will be deemed to be the date of
the issue or sale of the Shares 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.
(F) Certain Definitions. For
purposes of this Section 2(f)(i), the following terms have the respective
meanings set forth below:
(I) "APPROVED STOCK PLAN"
means any employee benefit plan that has been approved by the Board of Directors
of the Company prior to the date of the Securities Purchase Agreement, pursuant
to which the Company's securities may be issued to any consultant, employee,
officer or director for services provided to the Company.
(II) "CONVERTIBLE
SECURITIES" means any stock or securities (other than Options) directly or
indirectly convertible into or exchangeable or exercisable for Shares.
(III) "EXEMPTED ISSUANCES"
shall mean: (A) Shares issued or deemed to have been issued by the Company in
connection with an Approved Stock Plan (as defined above) and up to 4,000,000
shares (subject to adjustment for stock splits, stock dividends, stock
combinations and other similar transactions after the Issuance Date) issued in
connection with a Future Approved Stock Plan (as defined below); (B) Shares
issued or deemed to have been issued upon the conversion, exchange or exercise
of any Option or Convertible Security outstanding on the date prior to the
Issuance Date and set forth in Schedule 3(c) of the Securities Purchase
Agreement, provided that the terms of such Option or Convertible Security are
not amended on or after the Issuance Date; (C) Shares deemed to have been issued
by the Company upon the issuance of its Series A Convertible Preferred Stock or
Series B Convertible Preferred Stock and the warrants issued in connection
therewith, so long as the number and terms of such Series A and Series B
Convertible Preferred Stock and such warrants are not amended or otherwise
altered on or after the Issuance Date; (D) Shares issued by the Company upon
conversion of the Series A Convertible Preferred Stock or Series B Convertible
Preferred Stock, and Shares issued by the Company upon exercise of the warrants
issued in connection with the issuance of the Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock, so long as the number and terms
of such Series A and Series B Convertible Preferred Stock and the number and
terms of such warrants have not been amended or otherwise altered on or after
the Issuance Date; (E) Shares issued or deemed to have been issued by the
Company upon conversion of the Notes or exercise of the Warrants; (F) Shares
12
issued or deemed to have been issued either (x) to parties that are suppliers,
customers or strategic partners investing in connection with a commercial
relationship with the Company, the primary purpose of which is not to raise
capital, or (y) as consideration for mergers or consolidations or acquisitions
of businesses or their tangible or intangible assets (each an "ACQUISITION
TRANSACTION"), excluding Acquisition Transactions in which cash or cash
equivalents represent a majority of the assets acquired; provided that such
issuances or deemed issuances pursuant to this clause (F) shall not exceed
400,000 Shares in the aggregate (subject to adjustment for stock splits, stock
dividends, stock combinations or other similar transactions after the Issuance
Date); (G) Shares issued or deemed to have been issued in connection with
leases; and (H) Shares issued or deemed to have been issued to former employees
in satisfaction of severance obligations of the Company.
(IV) "FUTURE APPROVED STOCK
PLAN" means any employee benefit plan that has been approved by the shareholders
of the Company after the date of the Securities Purchase Agreement, pursuant to
which the Company's securities may be issued to any consultant, employee,
officer or director for services provided to the Company.
(V) "OPTIONS" means any
rights, warrants or options to subscribe for or purchase Shares or Convertible
Securities.
(ii) Adjustment of Conversion Price upon Subdivision or
Combination of Common Stock. If the Company at any time after
the Issuance Date subdivides (by any stock split, stock
dividend, recapitalization or otherwise) outstanding Shares
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 after the
Issuance Date combines (by combination, reverse stock split or
otherwise) its outstanding Shares into a smaller number of
shares, the Conversion Price in effect immediately prior to
such combination will be proportionately increased.
(iii) Holder's Right of Alternative Conversion Price Following
Issuance of Convertible Securities. If the Company in any
manner issues or sells any Options or Convertible Securities
after the Issuance Date (other than the issuance of Series A
Preferred Stock and Series B Preferred Stock and the related
warrants on the Closing Date, each such issuance on the terms
and in accordance with the forms and agreements provided to
the Purchasers (as defined in Section 14) at the Closing (as
defined in the Securities Purchase Agreement)) that are
convertible into or exchangeable or exercisable for Shares at
a price that varies or may vary with the market price of the
Shares, including by way of one or more resets to a fixed
price, or at a price that upon the passage of time or the
occurrence of certain events is automatically reduced or is
adjusted to a price that is based on some formulation of the
then current market price of the Shares (each of the
formulations for such variable price being herein referred to
as a "VARIABLE PRICE"; provided, however, that a price that
upon the passage of time or the
13
occurrence of certain events is automatically reduced or is
adjusted to a price that is based on some formulation of the
then current market price of the Shares shall not constitute a
Variable Price until the passage of such time or the
occurrence of such event, as the case may be), then the
Company shall provide written notice thereof via facsimile and
overnight courier to the Holder ("VARIABLE NOTICE") on the
date of issuance of such Convertible Securities or Options.
From and after the date the Company issues any such
Convertible Securities or Options with a Variable Price, the
Holder shall have the right, but not the obligation, in its
sole discretion to substitute the Variable Price for the
Conversion Price upon conversion of any Principal by
designating in the Conversion Notice delivered upon conversion
of such Principal that solely for purposes of such conversion
the Holder is relying on the Variable Price rather than the
Conversion Price then in effect. The Holder's election to rely
on a Variable Price for a particular conversion of Principal
shall not obligate the holder to rely on a Variable Price for
any future conversions of Principal.
(iv) Other Events. If any event occurs of the type
contemplated by the provisions of this Section 2(f) 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; provided that no such adjustment will increase
the Conversion Price as otherwise determined pursuant to this
Section 2(f).
(v) Adjustment of Conversion Price upon Announcement of Cash
Private Transaction. If after the Issuance Date there is the
public announcement of the pending, proposed, intended or
consummated Cash Private Transaction (as defined in Section
4(k) of the Securities Purchase Agreement (the date of such
announcement is referred to as the "ANNOUNCEMENT DATE"), then
on and after the Announcement Date the Conversion Price shall
be equal to the lower of (A) the Conversion Price in effect
immediately prior to the Announcement Date and (B) the
Weighted Average Price of the Common Stock on the trading day
immediately preceding the Announcement Date, subject to
further adjustment after the Announcement Date as provided in
this Note.
(vi) Notices.
(A) Promptly upon any adjustment of
the Conversion Price, the Company will give written notice thereof to the
Holder, setting forth in reasonable detail, and certifying, the calculation of
such adjustment.
(B) The Company will give written
notice to the Holder at least ten (10) Business Days prior to the date on which
the Company closes its books or takes a record (I) with respect to any dividend
or distribution upon the Common Stock, (II) with
14
respect to any pro rata subscription offer to holders of Common Stock or (III)
for determining rights to vote with respect to any Organic Change (as defined in
Section 4(a)), dissolution or liquidation, provided that such information shall
be made known to the public prior to or in conjunction with such notice being
provided to the Holder.
(C) The Company will also give
written notice to the Holder at least ten (10) Business Days prior to the date
on which any Organic Change (as defined in Section 4(a)), dissolution or
liquidation will take place, provided that such information shall be made known
to the public prior to or in conjunction with such notice being provided to the
Holder.
(3) Redemption at Option of the Holder.
(a) Redemption Option Upon Triggering Event. In
addition to all other rights of the Holder contained herein, after a Triggering
Event (as defined below), the Holder shall have the right, at the Holder's
option, to require the Company to redeem all or a portion of the Principal at a
price ("REDEMPTION PRICE") equal to (x) in the case of a Triggering Event other
than a Triggering Event described in clauses (vi) or (ix) of Section 3(b), the
greater of (i) the sum of (x) 125% of such Principal plus (y) the Additional
Amount with respect to such Principal and (ii) the product of (A) the Conversion
Rate in effect at such time as the Holder delivers a Notice of Redemption at
Option of Holder (as defined below), multiplied by (B) the Weighted Average
Price of the Common Stock on the trading day immediately preceding such
Triggering Event on which the Principal Market is open for trading, (y) in the
case of a Triggering Event described in clause (vi) of Section 3(b), the sum of
(I) 100% of such Principal plus (II) the Additional Amount with respect to such
Principal or (z) in the case of a Triggering Event described in clause (ix) of
Section 3(b), the product of (A) the Conversion Rate in effect at such time as
the Holder delivers a Notice of Redemption at Option of Holder, multiplied by
(B) the Weighted Average Price of the Common Stock on the trading day
immediately preceding such Triggering Event on which the Principal Market is
open for trading; provided that the maximum principal amount that the Holder
shall have the right to require the Company to redeem after a Triggering Event
described in clause (ix) of Section 3(b) shall be the Installment Amount with
respect to the applicable Company Redemption Date.
(b) Triggering Event. A "TRIGGERING EVENT" shall be
deemed to have occurred at such time as any of the following events:
(i) the failure of the Registration Statement (as defined in
the Registration Rights Agreement) to be declared effective by
the SEC on or prior to the date that is 30 days after the
Effectiveness Deadline (as defined in the Registration Rights
Agreement);
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration
Rights Agreement, the effectiveness of the Registration
Statement lapses for any reason (including, without
limitation,
15
the issuance of a stop order) or is unavailable to the Holder
for sale of all of the 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
trading days or for more than an aggregate of ten (10) trading
days in any 365-day period (other than days during an
Allowable Grace Period (as defined in the Registration Rights
Agreement));
(iii) the suspension from trading or failure of the Common
Stock to be listed on the Nasdaq National Market or The New
York Stock Exchange, Inc. 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;
(iv) the Company's or the Transfer Agent's notice to any
holder of the Notes, including by way of public announcement,
at any time, of its intention not to comply with a request for
conversion of any Notes into Shares that is tendered in
accordance with the provisions of the Notes (excluding,
however, notices that relate solely to a bona fide dispute
that is subject to and being resolved pursuant to, and in
compliance with the time periods and other provisions of, the
dispute resolution provisions of Section 2(d)(iii) provided
neither such dispute nor such notice is publicly disclosed
(other than public disclosures made solely to comply with the
rules and regulations of the SEC));
(v) a Conversion Failure (as defined in Section 2(d)(v)(C));
(vi) upon the Company's receipt or deemed receipt of a
Conversion Notice, the Company shall not be obligated to issue
Shares upon such conversion due to the provisions of Section
14;
(vii) the Company breaches any representation, warranty,
covenant or other term or condition of the Securities Purchase
Agreement, the Registration Rights Agreement, the Warrants,
this Note or any other agreement, document, certificate or
other instrument delivered in connection with the transactions
contemplated thereby and hereby, except to the extent that
such breach would not have a Material Adverse Effect (as
defined in Section 3(a) of the Securities Purchase Agreement)
and except, in the case of a breach of a covenant or other
term that is curable, only if such breach continues for a
period of at least ten (10) days;
(viii) the Company does not comply with the provisions of
Section 6 (including, without limitation, the Company's
failure to pay the required Company Redemption Price on the
applicable Company Redemption Date); or
(ix) with respect to a Company Redemption Date, the failure of
the Registration Statement to be declared effective by the SEC
on or prior to fifth (5th) Business Day prior to such Company
Redemption Date.
16
(c) Mechanics of Redemption at Option of Holder.
Within one (1) day after the occurrence of a Triggering Event, the Company shall
deliver written notice thereof via facsimile and overnight courier ("NOTICE OF
TRIGGERING EVENT") to the Holder and each holder of the Other Notes. At any time
after the earlier of the Holder's receipt of a Notice of Triggering Event and
the Holder becoming aware of a Triggering Event, the Holder may require the
Company to redeem up to all of the Principal by delivering written notice
thereof via facsimile and overnight courier ("NOTICE OF REDEMPTION AT OPTION OF
HOLDER") to the Company, which Notice of Redemption at Option of Holder shall
indicate (i) the Principal that the Holder is electing to have the Company
redeem from it and (ii) the applicable Redemption Price, as calculated pursuant
to Section 3(a) above; provided that a Notice of Redemption at Option of Holder
may only be sent during the period beginning on and including the date of the
Triggering Event and ending on and including the later of the date which is (I)
20 Business Days after the date on which the Holder receives a Notice of
Triggering Event from the Company with respect to such Triggering Event and (II)
10 Business Days after the date on which such Triggering Event is cured and the
Holder receives written notice from the Company confirming such Triggering Event
has been cured.
(d) Payment of Redemption Price. Upon the Company's
receipt of a Notice(s) of Redemption at Option of Holder from any holder of the
Other Notes, the Company shall promptly notify the Holder by facsimile of the
Company's receipt of such notice(s). Each holder that has sent such a notice
shall, if required pursuant to Section 2(d)(viii), promptly submit to the
Company such holder's Note that such holder has elected to have redeemed. The
Company shall deliver the applicable Redemption Price to the Holder within five
(5) Business Days after the Company's receipt of a Notice of Redemption at
Option of Holder; provided that a holder's Note shall have been so delivered to
the Company. If the Company is unable to redeem all of the Notes submitted for
redemption, the Company shall (i) redeem a pro rata amount from each holder of
the Notes based on the principal amount of the Notes submitted for redemption by
such holder relative to the aggregate principal amount of the Notes submitted
for redemption by all holders of the Notes and (ii) in addition to any remedy
the Holder may have under this Note and the Securities Purchase Agreement, pay
to the Holder interest at the rate of the lesser of 2.0% per month (prorated for
partial months) or the highest lawful maximum interest rate in respect of the
unredeemed Principal until paid in full.
(e) Void Redemption. In the event that the Company
does not pay the Redemption Price within the time period set forth in Section
3(d), at any time thereafter and until the Company pays such unpaid Redemption
Price in full, the Holder shall have the option (the "VOID OPTIONAL REDEMPTION
OPTION") to, in lieu of redemption, require the Company to promptly return to
the Holder any or all of the Notes representing the Principal that was submitted
for redemption by the Holder under this Section 3 and for which the Redemption
Price (together with any interest thereon) has not been paid, by sending written
notice thereof to the Company via facsimile (the "VOID OPTIONAL REDEMPTION
NOTICE"). Upon the Company's receipt of such Void Optional Redemption Notice,
(i) the Notice of Redemption at Option of
17
Holder shall be null and void with respect to the Principal subject to the Void
Optional Redemption Notice, (ii) the Company shall immediately return any Note
subject to the Void Optional Redemption Notice, (iii) the Conversion Price with
respect to all the Principal shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the Void Optional Redemption
Notice is delivered to the Company and (B) the lowest Weighted Average Price
during the period beginning on and including the date on which the Notice of
Redemption at Option of Holder is delivered to the Company and ending on and
including the date on which the Void Optional Redemption Notice is delivered to
the Company.
(f) Disputes; Miscellaneous. In the event of a bona
fide dispute as to the determination of the arithmetic calculation of the
Redemption Price, such dispute shall be resolved pursuant to Section 2(d)(iii)
above with the term "Redemption Price" being substituted for the term
"Conversion Rate." A holder's delivery of a Void Optional Redemption Notice and
exercise of its rights following such notice shall not affect the Company's
obligations to make any payments that have accrued prior to the date of such
notice (other than the payment of the Redemption Price in respect of the
redemption so voided). In the event of a redemption pursuant to this Section 3
of less than all of the Principal, the Company shall promptly cause to be issued
and delivered to the Holder a Note representing the remaining Principal that has
not been redeemed, if necessary.
(4) Other Rights of Holders.
(a) Reorganization, Reclassification, Consolidation,
Merger or Sale. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person or other transaction that is effected in such a way that
holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as "ORGANIC CHANGE." Prior to
the consummation of any (i) sale of all or substantially all of the Company's
assets to an acquiring Person or (ii) other Organic Change following which the
Company is not a surviving entity, the Company will secure from the Person
purchasing such assets or the successor resulting from such Organic Change (in
each case, the "ACQUIRING ENTITY") a written agreement (in form and substance
satisfactory to the holders representing at least two-thirds of the Notes then
outstanding) to deliver to the Holder in exchange for this Note, a security of
the Acquiring Entity evidenced by a written instrument substantially similar in
form and substance to this Note and satisfactory to the holders representing at
least two-thirds of the principal amount then outstanding under the Notes. Prior
to the consummation of any other Organic Change, the Company shall make
appropriate provision (in form and substance satisfactory to the holders
representing at least two-thirds of the Notes then outstanding) to ensure that
the Holder will thereafter have the right to acquire and receive in lieu of or
in addition to (as the case may be) the Shares immediately theretofore
acquirable and receivable upon the conversion of this Note (without regard to
any limitations on conversion) such shares of stock, securities or assets that
would have been issued or payable in such Organic Change with respect to or in
exchange for the number of Shares that would have been acquirable and receivable
upon the conversion of this Note as of the date of such Organic Change (without
taking into account any limitations or restrictions on the convertibility of
this Note).
18
(b) Optional Redemption Upon Change of Control. In
addition to the rights of the Holder under Section 4(a), upon a Change of
Control (as defined below) of the Company the Holder shall have the right, at
the Holder's option, to require the Company to redeem all or a portion of the
Principal at a price equal to the greater of (A) the sum of (x) 115% of the
Principal plus (y) the Additional Amount with respect to such Principal, and (B)
the product of (I) the Conversion Rate on the date the Holder gives a Notice of
Redemption Upon Change of Control (as defined below), multiplied by (II) the
arithmetic average of the Weighted Average Prices of the Common Stock during the
five (5) trading days immediately preceding such date ("CHANGE OF CONTROL
REDEMPTION PRICE"). No sooner than 40 nor later than 30 Business Days 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 (a "NOTICE OF CHANGE OF CONTROL") to
the Holder. At any time during the period beginning after receipt of a Notice of
Change of Control (or, in the event a Notice of Change of Control is not
delivered at least thirty (30) Business Days prior to a Change of Control, at
any time on or after the date which is thirty (30) Business Days prior to a
Change of Control) and ending on and including the date that is ten (10)
Business Days prior to the date of such Change of Control, the Holder may
require the Company to redeem all or a portion of the Principal by delivering
written notice thereof via facsimile and overnight courier (a "NOTICE OF
REDEMPTION UPON CHANGE OF CONTROL") to the Company, which Notice of Redemption
Upon Change of Control shall indicate (i) the Principal that the Holder is
submitting for redemption, and (ii) the applicable Change of Control Redemption
Price, as calculated pursuant to this Section 4(b). Upon the Company's receipt
of a Notice(s) of Redemption Upon Change of Control from any holder of the Other
Notes, the Company shall promptly, but in no event later than one (1) Business
Day following such receipt, notify the Holder by facsimile of the Company's
receipt of such Notice(s) of Redemption Upon Change of Control. The Company
shall deliver the Change of Control Redemption Price simultaneously with the
consummation of the Change of Control; provided that, if required by Section
2(d)(viii), this Note shall have been so delivered to the Company. The Company
shall not enter into any binding agreement or other arrangement with respect to
a Change of Control unless the Company provides that the payments provided for
in this Section 4(b) shall have priority to payments to stockholders in
connection with such Change of Control and the Company complies with such
provision. For purposes of this Section 4(b), "CHANGE OF CONTROL" means (i) the
consolidation, merger or other business combination of the Company with or into
another Person (other than (A) a consolidation, merger or other business
combination in which holders of the Company's voting power immediately prior to
the transaction continue after the transaction to hold, directly or indirectly,
the voting power of the surviving entity or entities necessary to elect a
majority of the members of the board of directors (or their equivalent if other
than a corporation) of such entity or entities, or (B) pursuant to a migratory
merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company), (ii) the sale or transfer of all or substantially
all of the Company's assets, (iii) the consummation of a purchase, tender or
exchange offer made to and accepted by the holders of more than the 50% of the
outstanding Shares, or (iv) the occurrence of
19
a "change of control" as that term is referred to in any of the agreements
referred to in the first paragraph of Schedule 3(w) to the Securities Purchase
Agreement.
(c) 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 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 that such holder could have acquired if the Holder had
held the number of Shares 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.
(5) Limitations on Conversion. The Company shall not effect
any conversion of this Note and the Holder shall not have the right to convert
Principal in excess of that portion of the Principal that, upon giving effect to
such conversion, would cause the aggregate number of Shares beneficially owned
by the Holder and its affiliates to exceed 4.99% of the total outstanding Shares
following such conversion. For purposes of the foregoing proviso, the aggregate
number of Shares beneficially owned by the Holder and its affiliates shall
include the Shares issuable upon conversion of this Note with respect to which
the determination of such proviso is being made, but shall exclude the Shares
that would be issuable upon (i) conversion of the remaining, nonconverted
Principal beneficially owned by the Holder and its affiliates and (ii) exercise,
conversion or exchange of the unexercised, unconverted or unexchanged portion of
any other securities of the Company (including, without limitation, any warrants
or convertible preferred stock) subject to a limitation on conversion, exercise
or exchange analogous to the limitation contained herein beneficially owned by
the Holder and its affiliates. Except as set forth in the preceding sentence,
for purposes of this Section 5, beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended
(the "1934 ACT"). For purposes of this Section 5, in determining the number of
outstanding Shares the Holder may rely on the number of outstanding Shares as
reflected in (1) the Company's most recent Form 10-Q or Form 10-K, as the case
may be, (2) a more recent public announcement by the Company or (3) any other
notice by the Company or its transfer agent setting forth the number of Shares
outstanding. Upon the written request of the Holder, the Company shall promptly,
but in no event later than two (2) Business Days following the receipt of such
request, confirm in writing to the Holder the number of Shares then outstanding.
In any case, the number of outstanding Shares shall be determined after giving
effect to the conversion, exercise or exchange of securities of the Company,
including the Notes and the Warrants, since the date as of which such number of
outstanding Shares was reported.
(6) Company Installment Redemption. On each Company Redemption
Date the Company shall redeem the applicable Installment Amount (the "COMPANY
REDEMPTION AMOUNT") in accordance with this Section 6 (a "COMPANY REDEMPTION").
The Company Redemption Amount shall be redeemed by the Company on such Company
Redemption Date,
20
and the Company shall pay to the Holder on such Company Redemption Date, by wire
transfer of immediately available funds, an amount in cash (the "COMPANY
REDEMPTION PRICE") equal to the sum of (A) 100% of the Company Redemption
Amount, plus (B) the Additional Amount with respect to the Company Redemption
Amount calculated as of such Company Redemption Date. If the Company fails to
redeem any Company Redemption Amount that is outstanding on the respective
Company Redemption Date by payment to the Holder of the applicable Company
Redemption Price, then in addition to any remedy the Holder may have under this
Note (including, without limitation, Section 3) and the Securities Purchase
Agreement (including indemnification pursuant to Section 8 thereof), the Company
Redemption Price payable in respect of such unredeemed Company Redemption Amount
shall bear interest at the rate of the lesser of 2.0% per month (prorated for
partial months) or the highest lawful maximum interest rate until paid in full.
Notwithstanding anything to the contrary in this Section 6, but subject to
Section 14, until the Company Redemption Price (together with any interest
thereon) is paid in full, the Company Redemption Amount (together with any
interest thereon) may be converted, in whole or in part, by the Holder into
Shares pursuant to Section 2.
(7) Company Alternative Redemption.
(a) General. After the Issuance Date, the Company
shall have the right to redeem some or all of the Principal (a "COMPANY
ALTERNATIVE REDEMPTION") for an amount in cash equal to the sum of (a) 105% of
the principal amount of this Note being redeemed pursuant to this Section 7,
plus (b) the Additional Amount with respect to such principal amount as of the
Company Alternative Redemption Date (as defined below) (the "COMPANY ALTERNATIVE
REDEMPTION PRICE"); provided that the Conditions to Company Alternative
Redemption (as set forth in Section 7(c)) and the conditions of this Section
7(a) and Section 7(b) are satisfied (or waived in writing by the Holder). The
Company may exercise its right to Company Alternative Redemption by delivering
to the Holder written notice ("COMPANY ALTERNATIVE REDEMPTION NOTICE") at least
ten (10) Business Days but not more than 20 Business Days prior to the date of
consummation of such redemption ("COMPANY ALTERNATIVE REDEMPTION DATE"). The
date on which the Holder receives the Company Alternative Redemption Notice is
referred to as the "COMPANY ALTERNATIVE REDEMPTION NOTICE DATE." The Company
Alternative Redemption Notice shall be irrevocable. If the Company elects a
Company Alternative Redemption pursuant to this Section 7(a), then it must
simultaneously take the similar action with respect to the Other Notes. If the
Company elects a Company Alternative Redemption (or similar action under the
Other Notes) with respect to less than all of the aggregate principal amount of
the Notes then outstanding (ignoring for such purposes all principal amounts
that are part of Installment Amounts for any Company Redemption Date occurring
prior to the Company Alternative Redemption Date or the corresponding provisions
under the Other Notes), then the Company shall require redemption of a principal
amount (together with the related Additional Amount) from each of the holders of
the Notes equal to the product of (I) the aggregate principal amount of Notes
that the Company has elected to redeem pursuant to this Section 7 (or the
similar provisions of the Other Notes), multiplied by (II) the fraction, the
numerator of which is the aggregate
21
principal amount of the Notes initially purchased by such holder on the Issuance
Date and the denominator of which is the aggregate principal amount of the Notes
purchased by all holders on the Issuance Date (such fraction with respect to
each holder is referred to as its "ALLOCATION PERCENTAGE," and such amount with
respect to each holder is referred to as its "PRO RATA REDEMPTION AMOUNT"). In
the event that the initial holder of any Notes shall sell or otherwise transfer
any of such holder's Notes, the transferee shall be allocated a pro rata portion
of such holder's Allocation Percentage. The Company Alternative Redemption
Notice shall state (i) the date selected by the Company for the Company
Alternative Redemption Date in accordance with this Section 7(a), (ii) the
aggregate principal amount of the Notes that the Company has elected to redeem
from all of the holders of the Notes pursuant to this Section 7 and (iii) each
holder's Pro Rata Redemption Amount of the principal amount of the Notes the
Company has elected to redeem pursuant to this Section 7(a).
(b) Mechanics of Company Alternative Redemption. If
the Company has exercised its right to Company Alternative Redemption in
accordance with Section 7(a) and the conditions of this Section 7 are satisfied
(including the Conditions to Company Alternative Redemption as set forth in
Section 7(c)) (or waived in writing by the Holder), then the Holder's Pro Rata
Redemption Amount, if any, that remains outstanding on the Company Alternative
Redemption Date shall be redeemed by the Company on such Company Alternative
Redemption Date by the payment by the Company to the Holder on the Company
Alternative Redemption Date, by wire transfer of immediately available funds, of
an amount equal to the Company Alternative Redemption Price for the Holder's Pro
Rata Redemption Amount. Notwithstanding anything to the contrary in this Section
7, but subject to Section 14, until the Company Alternative Redemption Price is
paid in full to the Holder, the Holder may convert its Pro Rata Redemption
Amount (together with the related Additional Amount) into Shares in accordance
with Section 2. All principal amounts of this Note redeemed pursuant to this
Section 7 shall be deducted first from the Installment Amount relating to the
Company Redemption Date immediately following the Conversion Date with respect
to such conversion and then sequentially from the immediately succeeding Company
Redemption Date.
(c) Conditions to Company Alternative Redemption. For
purposes of this Section 7, "CONDITIONS TO COMPANY ALTERNATIVE REDEMPTION" means
the following conditions: (i) during the period beginning on and including the
Company Alternative Redemption Notice Date and ending on and including the
Company Alternative Redemption Date, the Company shall have delivered Shares
upon conversion of Conversion Amounts on a timely basis as set forth in Section
2(d)(ii) and delivered Shares upon exercise of the Warrants on a timely basis as
set forth in Section 2(a) of the Warrants; (ii) on each day during the period
beginning on and including the Company Alternative Redemption Notice Date and
ending on and including the applicable Company Alternative Redemption Date, the
Common Stock shall be listed, and trading in the Common Stock shall not have
been suspended, on the Nasdaq National Market or The New York Stock Exchange,
Inc.; (iii) during the period beginning on the Issuance Date and ending on and
including the applicable Company Alternative Redemption Date, there shall not
have occurred either (x) the public announcement of a pending, proposed or
intended Change of Control that has not been abandoned, terminated or
consummated or (y) a Triggering Event or an Event of Default (as defined in
Section 11); (iv) on each day during the period beginning on and including the
Company Alternative Redemption Notice Date and ending
22
on and including the applicable Company Alternative Redemption Date, the
Registration Statement (as defined in the Registration Rights Agreement) shall
be effective and available for the sale of at least all of the Registrable
Securities (as defined in the Registration Rights Agreement) and there shall not
have been any Grace Period (as defined in the Registration Rights Agreement)
during such period; (v) if a Change of Control is consummated after the Issuance
Date, the Company Alternative Redemption Date is at least 20 Business Days after
the consummation and public announcement of such Change of Control; and (vi) on
each day during the period beginning on and including the Company Alternative
Redemption Notice Date and ending on and including the applicable Company
Alternative Redemption Date, the Company otherwise shall have been in compliance
with in all respects and shall not have breached or been in breach of any
provision or covenant of the Securities Purchase Agreement, the Registration
Rights Agreement, any of the Warrants or any of the Notes.
(d) Remedies. In the event that the Company does not
pay the Company Alternative Redemption Price in full for the Holder's Pro Rata
Redemption Amount on the Company Alternative Redemption Date and the Conditions
to the Company Alternative Redemption were satisfied, or to the extent not
satisfied, were waived by the Holder, then in addition to any remedy the Holder
may have under this Note and the Securities Purchase Agreement (including
indemnification pursuant to Section 8 thereof) (i) the Company Alternative
Redemption Price payable in respect of such unredeemed Pro Rata Redemption
Amount shall bear interest at the rate of the lesser of 2.0% per month (prorated
for partial months) or the highest lawful maximum interest rate until paid in
full and (ii) the Company shall not be permitted to submit another Company
Alternative Redemption Notice without the prior written consent of the Holder.
(8) Conversion at the Company's Election. On any day after the
date that is ten (10) trading days after the Registration Statement has been
declared effective by the SEC, the Company shall have the right, in its sole
discretion, to require that all or any portion of the Principal of this Note
(together with the Additional Amount with respect thereto) be converted
("COMPANY'S CONVERSION ELECTION") at the applicable Conversion Price; provided
that the Conditions to Conversion at the Company's Election (as set forth below)
are satisfied. The Company may exercise its right to Company's Conversion
Election by delivering to the Holder written notice ("COMPANY'S CONVERSION
ELECTION NOTICE") at least 20 Business Days but not more than 40 Business Days
prior to the date of consummation of such Company's Conversion Election
("COMPANY'S ELECTION CONVERSION DATE"). The date on which the Holder receives
the Company's Conversion Election Notice is referred to as the "COMPANY'S
CONVERSION ELECTION NOTICE DATE"). The Company's Conversion Election Notice
shall be irrevocable by the Company. If the Company elects a Company's
Conversion Election pursuant to this Section 8, then it must simultaneously take
the similar action with respect to the Other Notes. The Company shall require
conversion of a principal amount (together with the related Additional Amount)
from each holder of the Notes equal to the product of (I) the aggregate
principal amount of Notes that the Company has elected to convert pursuant to
this Section 8 (or the similar provisions of the Other Notes), multiplied by
(II) such holder's Allocation Percentage (such amount with respect to each
holder is referred to as its "PRO RATA CONVERSION AMOUNT").
23
The Company's Conversion Election Notice shall indicate (x) the date selected by
the Company for the Company's Election Conversion Date in accordance with this
Section 8, (y) the aggregate principal amount of the Notes that the Company has
elected to convert from all the holders of the Notes pursuant to this Section 8
(or other similar provisions in the Other Notes) and (z) each holder's Pro Rata
Conversion Amount of the principal amount of the Notes the Company has elected
to convert pursuant to this Section 8 (or other similar provisions in the Other
Notes). Subject to the satisfaction of all the conditions of this Section 8, on
the Company's Election Conversion Date the Holder of this Note will be deemed to
have submitted a Conversion Notice in accordance with Section 2(d) for a
Conversion Amount equal to the result of (a) the Holder's Pro Rata Conversion
Amount (together with the related Additional Amount), minus (b) the Conversion
Amount of this Note converted by the Holder during the Company's Mandatory
Conversion Period (as defined below), minus (c) the Excluded Principal Amount
(as defined below) (including the related Additional Amount). "CONDITIONS TO
CONVERSION AT THE COMPANY'S ELECTION" means the following conditions: (i) on
each day during the period beginning on the date the SEC declares the
Registration Statement effective and ending on and including the date that is 20
days prior to the Company's Conversion Election Notice Date, the Registration
Statement shall be effective and available for the sale of all of the
Registrable Securities (other than any day during an Allowable Grace Period);
(ii) on each day during the period beginning on and including the date that is
20 days prior to the Company's Conversion Election Notice Date and ending on and
including the Company's Election Conversion Date, the Registration Statement
shall be effective and available for the sale of all of the Registrable
Securities and no Grace Period (as defined in the Registration Rights Agreement)
shall have occurred; (iii) on each day during the period beginning on and
including the date that is 20 days prior to the Company's Conversion Election
Notice Date and ending on and including the Company's Election Conversion Date,
the Common Stock is designated for quotation on the Nasdaq National Market or
listed on The New York Stock Exchange, Inc. and shall not have been suspended
from trading on such exchanges nor shall delisting or suspension by such
exchanges have been threatened either (A) in writing by such exchanges or (B) by
falling below the minimum listing maintenance requirements of such exchanges;
(iv) on each day during the ten (10) consecutive trading days immediately
preceding the Company's Conversion Election Notice Date, the Weighted Average
Price of the Common Stock is at least 120% of the Conversion Price in effect on
the Issuance Date (subject to adjustment for stock splits, stock dividends,
stock combinations and other similar transactions after the Issuance Date); (v)
during the period beginning on the Issuance Date and ending on and including the
Company's Election Conversion Date, there shall not have occurred either (x) the
public announcement of a pending, proposed or intended Change of Control that
has not been abandoned, terminated or consummated or (y) a Triggering Event or
an Event of Default (as defined in Section 11) (other than an Event of Default
described in Section 11(a)(iii) that has been cured, provided that such cure has
been publicly disclosed at least 20 days prior to the Company's Conversion
Election Notice Date); (vi) the aggregate principal amount of the Notes selected
for conversion by the Company as reflected in the Company's Conversion Election
Notice is at least $1,000,000 (or, if less, the aggregate principal amount of
the Notes then outstanding); (vii) during the period beginning on the Issuance
Date and ending on and including the Company's Election Conversion Date, the
Company shall have delivered Shares upon conversion of this Note and upon
exercise
24
of the Warrants to the Holder on a timely basis as set forth in Section 2(d)(ii)
of this Note and Sections 2(a) of the Warrants, respectively; (viii) the Company
shall not have delivered the Company's Conversion Election Notice during any
Company's Mandatory Conversion Period; (ix) on each day during the Company's
Mandatory Conversion Period, the Company otherwise shall have been in compliance
with in all respects and shall not have breached or been in breach of any
provision, covenant, of the Securities Purchase Agreement, the Registration
Rights Agreement, any of the Warrants or any of the Notes; and (x) the
representations and warranties of the Company shall have been true and correct
as of the date of the Securities Purchase Agreement and as of the Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date, which shall have been true and correct as of such
date, and except for representations and warranties the breach of which would
not have a Material Adverse Effect (as defined in the Securities Purchase
Agreement)). "COMPANY'S MANDATORY CONVERSION PERIOD" means, with respect to any
Company's Conversion Election, the period beginning on and including the
Company's Conversion Election Notice Date and ending on and including the
Company's Election Conversion Date. "EXCLUDED PRINCIPAL AMOUNT" means, with
respect to the Holder with respect to any Company's Conversion Election, the
result of (I) the Holder's Pro Rata Conversion Amount multiplied by (II) the
quotient of (A) the number of trading days during the applicable Company's
Mandatory Conversion Period on which the Weighted Average Price of the Common
Stock is less than or equal to the Conversion Price in effect on the Issuance
Date (subject to adjustment for stock splits, stock dividends, stock
combinations and other similar transactions after the Issuance Date), divided by
(B) the aggregate number of trading days during such Company's Mandatory
Conversion Period.
(9) Reservation of Shares.
(a) Reservation. The Company shall, so long as any of
the Notes are outstanding, 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, such number of Shares as shall
from time to time be sufficient to effect the conversion of all of the principal
amount then outstanding under the Notes (together with accrued Additional
Amounts thereon); provided that the number of Shares so reserved shall at no
time be less than 110% of the number of Shares for which the Notes are at any
time convertible (without regard to any limitations on conversions) (the
"REQUIRED RESERVE AMOUNT"). The initial number of Shares 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 time of issuance of the
Notes or increase in the number of reserved Shares, as the case may be. In the
event the Holder shall sell or otherwise transfer any portion of the Holder's
Notes, each transferee shall be allocated a pro rata portion of the number of
Shares reserved for such transferor. Any Shares reserved and allocated to any
Person that ceases to hold any Notes shall be allocated to the remaining holders
of the Notes, pro rata based on the principal amount of the Notes then held by
such holders.
25
(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 to satisfy its obligation to reserve
for issuance upon conversion of the Notes at least a number of Shares 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 to an amount sufficient to allow the Company to reserve the Required
Reserve Amount for the Notes then outstanding. Without 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 90 days
after the occurrence of such Authorized Share Failure, the Company shall hold a
meeting of its stockholders for the authorization of an increase in the number
of authorized Shares. In connection with such meeting, the Company shall provide
each stockholder with a proxy statement and shall use its best efforts to
solicit its stockholders' approval of such increase in authorized Shares and to
cause its Board of Directors to recommend to the stockholders that they approve
such proposal.
(10) Voting Rights. Holders of the Notes shall have no voting
rights, except as required by law and as expressly provided in this Note.
(11) Defaults and Remedies.
(a) Events of Default. An "EVENT OF DEFAULT" is (i)
default in payment of any principal amount of this Note, the Company Redemption
Price or the Company Alternative Redemption Price when and as due; (ii) failure
by the Company for ten (10) days after notice to it to comply with any other
provision of this Note in all material respects; (iii) any default in payment of
at least $100,000, individually or in the aggregate, under or acceleration prior
to maturity of, or any event or circumstances arising such that, any person is
entitled, or could, with the giving of notice and/or lapse of time and/or the
fulfillment of any condition and/or the making of any determination, become
entitled, to require repayment before its stated maturity of, or to take any
step to enforce any security for, any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
indebtedness for money borrowed of at least $100,000 by the Company or for money
borrowed the repayment of at least $100,000 of which is guaranteed by the
Company, whether such indebtedness or guarantee now exists or shall be created
hereafter; (iv) if the Company pursuant to or within the meaning of any
Bankruptcy Law (as defined below); (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 Custodian of it or any of its Subsidiaries (as
defined in the Securities Purchase Agreement) for all or substantially all of
its property; (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 the
same become due; (v) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that: (1) is for relief against the Company in an
involuntary case; (2) appoints a Custodian (as defined below) of the Company or
any subsidiary for all or substantially all of its property; or (3) orders the
liquidation of the Company or any subsidiary; (vi) the Company fails to file, or
is determined to have failed to file, in a timely manner (without giving effect
to any extension provided by Rule 12b-25 under the 1934 Act or any successor
thereto) any report required to be filed with the SEC pursuant to the 1934 Act;
(vii) failure by the
26
Company to comply with any provision set forth in Section 4(q) of the Securities
Purchase Agreement; or (viii) the making of any claim(s) against or demand(s) of
the Company by any holder(s) of the Company's Series A Convertible Preferred
Stock or Series B Convertible Preferred Stock or the related warrants relating
to such preferred stock or warrants or any document or transaction relating
thereto which exceed $100,000, individually or in the aggregate. The term
"BANKRUPTCY LAW" means Title 11, U.S. Code, or any similar federal or state law
for the relief of debtors. The term "CUSTODIAN" means any receiver, trustee,
assignee, liquidator or similar official under any Bankruptcy Law. Within five
(5) Business Days after the occurrence of any Event of Default set forth in
clause (iii) or clause (vi) above, the Company shall deliver written notice
thereof to the Holder.
(b) Remedies. If an Event of Default occurs and is
continuing, the Holder of this Note may declare all of this Note, including all
amounts due hereunder (the "ACCELERATION AMOUNT"), to be due and payable
immediately, except that in the case of an Event of Default arising from events
described in clauses (iv) and (v) of Section 11(a), this Note shall become due
and payable without further action or notice. In addition to any remedy the
Holder may have under this Note and the Securities Purchase Agreement, such
unpaid amount shall bear interest at the rate of the lesser of 2.0% per month
(prorated for partial months) or the highest lawful maximum interest rate until
paid in full. Nothing in this Section 11 shall limit any other rights the Holder
may have under this Note and the Securities Purchase Agreement, including
Section 3 of this Note.
(c) Void Acceleration. In the event that the Company
does not pay the Acceleration Amount within five (5) Business Days of this Note
becoming due under Section 11(b), at any time thereafter and until the Company
pays such unpaid Acceleration Amount in full, the Holder shall have the option
(the "VOID ACCELERATION OPTION") to, in lieu of redemption, require the Company
to promptly return this Note (to the extent this Note has been previously
delivered to the Company) to the Holder, by sending written notice thereof to
the Company via facsimile (the "VOID ACCELERATION NOTICE"). Upon the Company's
receipt of such Void Acceleration Notice, (i) the acceleration pursuant to
Section 11(b) shall be null and void, (ii) the Company shall promptly return
this Note (to the extent this Note has been previously delivered to the
Company), (iii) the Conversion Price with respect to the Principal shall be
adjusted to the lesser of (A) the Conversion Price as in effect on the date on
which the Void Acceleration Notice is delivered to the Company and (B) the
lowest Weighted Average Price of the Common Stock during the period beginning on
and including the date on which this Note became due under Section 11(b) and
ending on and including the date on which the Void Acceleration Notice is
delivered to the Company.
(12) Other Indebtedness. Payments of principal and other
payments due under this Note shall not be subordinated to any obligations of the
Company. The Holder of this Note is entitled to the benefits of the Security
Agreement, and in the event of a transfer of this Note in accordance with the
terms hereof and the Securities Purchase Agreement, the Holder shall be deemed
to have assigned its rights under the Security Agreement. For so long as this
Note is outstanding, the Company shall not, and shall not permit any of its
Subsidiaries (as defined in the
27
Securities Purchase Agreement) to, (a) issue or incur any Indebtedness (as
defined below), except for Indebtedness the holders of which agree in writing to
be subordinate to this Note either (i) pursuant to the terms of a subordination
agreement in the form attached as Exhibit G to the Securities Purchase Agreement
or (ii) on terms and conditions otherwise acceptable to the Holder, including
with regard to interest payments or repayment of principal, (b) issue or incur
any Indebtedness which would mature or require repayment prior to the Maturity
Date; (c) issue or incur any Indebtedness which is secured by any of the
Collateral (as defined in the Security Agreement); or (d) issue any capital
stock of the Company redeemable prior to the Maturity Date (other than the
shares of Series A Preferred Stock and shares of Series B Preferred Stock issued
on the Closing Date, each issuance on the terms and in accordance with the forms
and agreements provided to the Purchasers (as defined below) at the Closing).
For purposes of this Note: (x) "INDEBTEDNESS" of any Person means, without
duplication (A) all indebtedness for borrowed money, (B) all obligations issued,
undertaken or assumed as the deferred purchase price of property or services
(other than trade payables entered into in the ordinary course of business), (C)
all reimbursement or payment obligations with respect to letters of credit,
surety bonds and other similar instruments, (D) 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, (E) 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), (F) all indebtedness referred to in clauses (A) through (E)
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,
change, 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 that owns such assets or property has not assumed or become liable for
the payment of such indebtedness, and (G) all Contingent Obligations in respect
of indebtedness or obligations of others of the kinds referred to in clauses (A)
through (F) above; provided, however, that "INDEBTEDNESS" shall not include any
monetary obligation under any leasing or similar arrangement incurred in the
Company's ordinary course of business, and (y) "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.
(13) Participation; Restrictions. The Holder shall be entitled
to such dividends paid and distributions made to the holders of Common Stock to
the same extent as if the Holder had converted this Note in full into Shares
(without taking into account any limitations or restrictions on the
convertibility of this Note) immediately prior to the record date for such
dividend or distribution, or, if no such record date is taken, immediately prior
to the date as of which the record holders of Common Stock are to be determined
for such dividend or
28
distribution. Payments made pursuant to the previous sentence shall be made
concurrently with the dividend or distribution to the holders of Common Stock.
While this Note is outstanding, the Company shall not, directly or indirectly,
redeem, repay, or purchase any of the Company's capital stock without the prior
express written consent of the Holder (except for the repayment or redemption of
the Notes in accordance with the terms thereof or, with respect to the Warrants,
pursuant to Section 12 of the Warrants and other than pursuant to conversions or
redemptions of Series A Convertible Preferred Stock or Series B Convertible
Preferred Stock made solely in shares of Common Stock pursuant to the terms of
the Statement of Designations for such preferred stock as in effect on the
Issuance Date, and except for the redemption of Series A Convertible Preferred
Stock or Series B Convertible Preferred Stock pursuant to the terms of the
Statement of Designations for such preferred stock as in effect on the Issuance
Date upon the occurrence of an event described in Section 4(c)(i) of such
Statement of Designations provided that (A) such event constitutes a Change of
Control and (B) the Company has delivered written notice of such redemption
(which notice shall include the amount which will be redeemed) to the Holder at
least 20 Business Days prior to the consummation of such Change of Control).
While this Note is outstanding, the Company shall not enter into any agreement
which would limit or restrict the Company's ability to perform under, or take
any other voluntary action to avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed by it under, this
Note, the Securities Purchase Agreement, the Registration Rights Agreement and
the Warrants. While this Note is outstanding, the Company shall not declare or
pay any dividend on any of the Company's capital stock, other than with respect
to its Common Stock and other than pursuant to conversions or redemptions of
Series A Convertible Preferred Stock or Series B Convertible Preferred Stock
made solely in shares of Common Stock pursuant to the terms of the Statement of
Designations for such preferred stock as in effect on the Issuance Date.
(14) Limitation on Number of Conversion Shares. The Company
shall not be obligated to issue any Shares upon conversion of the Notes and
exercise of the Warrants in excess of 2,753,163 Shares (subject to adjustment
for stock splits, stock dividends, stock combinations and other similar
transactions involving the Common Stock after the Issuance Date, and further
subject to increase as described below, the "EXCHANGE CAP"), except that such
limitation shall not apply in the event that the Company obtains the approval of
its stockholders as required by the applicable rules of the Principal Market (or
any successor rule or regulation) for issuances of Shares in excess of the
number of Shares that the Company may issue upon conversion of the Notes and
exercise of the Warrants without breaching the Company's obligations under the
rules and regulations of the Principal Market. Until such approval is obtained,
no purchaser of the Notes pursuant to the Securities Purchase Agreement (the
"PURCHASERS") shall be issued, upon conversion of the Notes or exercise of the
Warrants, Shares in an amount greater than the product of (i) the Exchange Cap
amount then in effect multiplied by (ii) a fraction, the numerator of which is
the principal amount of the Notes issued to such Purchaser pursuant to the
Securities Purchase Agreement and the denominator of which is the aggregate
principal amount of all the Notes issued to the Purchasers pursuant to the
Securities Purchase Agreement (the "CAP ALLOCATION AMOUNT"). 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 Cap
Allocation Amount. In the event that any holder of the Notes
29
shall convert and exercise, as the case may be, all of such holder's Notes and
Warrants into a number of shares of Common Stock which, in the aggregate, is
less than such holder's Cap Allocation Amount, then the difference between such
holder's Cap Allocation Amount and the number of Shares actually issued to such
holder shall be allocated to the respective Cap Allocation Amounts of the
remaining holders of Notes and Warrants on a pro rata basis in proportion to the
number of Shares then issuable under the Notes and Warrants then held by each
such holder. The Company may increase the Exchange Cap from time to time by
delivering written notice (each an "INCREASE NOTICE") of such increase to the
holder of this Note at least five (5) Business Days prior to the effective date
of such increase, provided that prior to delivering such Increase Notice the
Company shall have obtained all necessary shareholder and governmental or
regulatory approvals in connection with the relevant increase of the Exchange
Cap. Each Increase Notice shall (A) state the number of Shares by which the
Exchange Cap has been increased and the resulting new Exchange Cap, (B) state
that the Company has obtained all necessary shareholder and governmental or
regulatory approvals in connection with the relevant increase of the Exchange
Cap and (C) attach to such Increase Notice evidence of the Company's
satisfaction of its statement in the immediately preceding clause (B). The
increase in the Exchange Cap shall be effective on the fifth (5th) Business Day
(or such later date as the Company may specify in the Increase Notice) following
the Holder's receipt of an Increase Notice complying with the immediately
preceding sentence.
(15) Vote to Change the Terms of the Notes. The written
consent of the Company and the holders representing at least two-thirds of the
principal amount then outstanding under the Notes shall be required for any
change to the Notes (including this Note) and upon receipt of such consent, each
Note shall be deemed amended thereby.
(16) Lost or Stolen Notes. 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
an indemnification undertaking by the Holder to the Company in customary form
and reasonably satisfactory to the Company and, in the case of mutilation, upon
surrender and cancellation of this Note, the Company shall execute and deliver a
new Note of like tenor and date; provided, however, the Company shall not be
obligated to re-issue a Note if the Holder contemporaneously requests the
Company to convert this Note into Shares as permitted hereunder.
(17) 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, at law or in
equity (including a decree of specific performance and/or other injunctive
relief), no remedy contained herein shall be deemed a waiver of compliance with
the provisions giving rise to such remedy and nothing herein shall limit the
Holder's right to pursue actual damages for any failure by the Company to comply
with the terms of this Note. The Company covenants to the Holder that there
shall be no characterization concerning this instrument other than as expressly
provided herein. 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 thereof and shall not,
30
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.
(18) Specific Shall Not Limit General; Construction. No
specific provision contained in this Note shall limit or modify any more general
provision contained herein. This Note shall be deemed to be jointly drafted by
the Company and all Purchasers and shall not be construed against any person as
the drafter hereof.
(19) Failure or Indulgence Not Waiver. No failure or delay on
the part of a 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.
(20) Notice. 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.
(21) Transfer of this Note. The Holder may assign or transfer
some or all of its rights hereunder, subject to compliance with the 1933 Act and
the provisions of Section 2(f) of the Securities Purchase Agreement without the
consent of the Company.
(22) 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 (b) an
attorney is retained to represent the Holder in 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,
including but not limited to reasonable attorneys' fees and disbursements.
(23) Cancellation. After all principal and other amounts at
any time owed under this Note have been paid in full or converted into Shares in
accordance with the terms hereof, this Note shall automatically be deemed
canceled, shall be surrendered to the Company for cancellation and shall not be
reissued.
(24) 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 containing the same terms and conditions
and representing in the aggregate the Principal, and each such new Note will
represent such portion of such Principal as is designated by the Holder at the
time of such surrender. The date the Company initially issues
31
this Note will be deemed to be the "Issuance Date" hereof regardless of the
number of times a new Note shall be issued.
(25) 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.
(26) Governing Law. This Note shall be construed and enforced
in accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of New York, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of New York or any other
country or jurisdiction) that would cause the application of the laws of any
jurisdiction or country other than the State of New York. Each party 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. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Note 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. EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT
OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.
(27) Reissuance of Notes. Subject to Section 2(d)(viii), in
the event of a conversion or redemption pursuant to this Note of less than all
of the Principal, the Company shall promptly cause to be issued and delivered to
the Holder, upon tender by the Holder of this Note, a new Note of like tenor
representing the remaining Principal that has not been so converted or redeemed.
The date the Company issued this Note shall be the "Issuance Date" hereof
regardless of the number of times a new Note shall be issued.
(28) Effect of Redemption or Conversion; No Prepayment. Upon
payment of the Redemption Price, the Change of Control Redemption Price, the
Company Redemption Price, the Company Alternative Redemption Price or the amount
provided for in Section 2(d)(vii), each in accordance with the terms hereof with
respect to any portion of the principal of this Note, or delivery of Shares upon
conversion of any portion of the principal of this Note in accordance with the
terms hereof, such portion of the principal of this Note shall be deemed paid in
full and shall no longer be deemed outstanding for any purpose. Except as
specifically set
32
forth in this Note, the Company does not have any right, option, or obligation,
to pay any portion of the Principal at any time prior to the Maturity Date.
(29) Payment Set Aside. To the extent that the Company makes a
payment or payments to the Holder hereunder or the Holder enforces or exercises
its rights hereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to the Company,
by a trustee, receiver or any other person under any law (including, without
limitation, any bankruptcy law, U.S. state or federal law, common law or
equitable cause of action), then to the extent of any such restoration the
obligation or part thereof originally intended to be satisfied shall be revived
and continued in full force and effect as if such payment had not been made or
such enforcement or setoff had not occurred.
* * * * * *
33
IN WITNESS WHEREOF, the Company has caused this Note to be signed by
Ronald A. Woessner, its Senior Vice President and General Counsel, as of the
18th day of September 2002.
ZIX CORPORATION
By:
---------------------------------
Name: Ronald A. Woessner
Title: Senior Vice President and
General Counsel
EXHIBIT I
ZIX CORPORATION
CONVERSION NOTICE
Reference is made to the Convertible Note (the "NOTE") of Zix
Corporation (formerly known as Zixit Corporation), a Texas corporation (the
"COMPANY"). In accordance with and pursuant to the Note, the undersigned hereby
elects to convert the Conversion Amount (as defined in the Note) of the Note
indicated below into Shares of Common Stock, par value $0.01 per share (the
"COMMON STOCK"), of the Company, as of the date specified below.
Date of Conversion:
----------------------------------------------------
Aggregate Conversion Amount to be converted:
---------------------------
Please confirm the following information:
Conversion Price:
------------------------------------------------------
Number of shares of Common Stock to be issued:
-------------------------
Is the Variable Price being relied on pursuant to Section 2(f)(iii) of
the Note? (check one) YES _____ NO _____
Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:
Issue to:
--------------------------------------------------------------
Facsimile Number:
------------------------------------------------------
Authorization:
---------------------------------------
By:
-----------------------------------------
Title:
--------------------------------------
Dated:
-----------------------------------------------
DTC Participant Number and Name (if electronic book entry transfer):
-------------------------
Account Number (if electronic book entry transfer):
--------------------
ACKNOWLEDGMENT
The Company hereby acknowledges this Conversion Notice and hereby
directs [TRANSFER AGENT] to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated ___________ ___,
200_ from the Company and acknowledged and agreed to by [TRANSFER AGENT].
ZIX CORPORATION
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------