EXHIBIT 10.2
THIS NOTE AND THE SECURITIES INTO WHICH THIS NOTE IS CONVERTIBLE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES OR IN ANY OTHER JURISDICTION. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES
LAWS UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
7% CONVERTIBLE PROMISSORY NOTE
Date: September 5, 2003 $_________
FOR VALUE RECEIVED, DAUGHERTY RESOURCES, INC., a corporation
organized under the laws of British Columbia, Canada (the "BORROWER"), hereby
promises to pay to the order of ____________________, a ____________________, or
its registered assigns (individually, the "HOLDER," and, collectively with the
holders of all other notes of same like and tenor, the "HOLDERS"), the sum of
_______________________ ($_________) on September 5, 2008 (the "SCHEDULED
MATURITY DATE"), and to pay interest on the unpaid principal balance hereof at
the rate of seven percent (7%) per annum (except as otherwise provided herein),
all as provided in Article I below.
The term "NOTE" and all references thereto, as used throughout this
instrument, shall mean this instrument as originally executed, or if later
amended or supplemented, then as so amended or supplemented, and including all
PIK Notes (as defined below) issued in respect hereof. This Note is being issued
by the Borrower along with similar convertible promissory notes designated as 7%
Convertible Promissory Notes (the "OTHER NOTES" and, together with this Note,
the "NOTES") pursuant to that certain Securities Purchase Agreement, dated as of
the date hereof, between the Borrower and the signatories thereto (the
"SECURITIES PURCHASE AGREEMENT"). The Notes, the Securities Purchase Agreement,
the Warrants issued pursuant to the Securities Purchase Agreement (the
"WARRANTS") and the Registration Rights Agreement, dated as of the date hereof,
between the Borrower and the initial Holders of the Notes (the "REGISTRATION
RIGHTS AGREEMENT") are collectively referred to herein as the "TRANSACTION
DOCUMENTS." All capitalized terms used but not otherwise defined herein shall
have the respective meanings assigned to such terms in the Securities Purchase
Agreement.
ARTICLE I
PAYMENT OF PRINCIPAL AND INTEREST
A. Payment of Interest. Interest shall accrue on the unpaid
principal balance hereof from the Issuance Date until the same is paid, whether
at maturity, or upon prepayment, repayment, conversion or otherwise. Interest
shall be calculated based on a 365 day year and shall be payable quarterly in
arrears on March 31, June 30, September 30, and December 31 of
each year (each, an "INTEREST PAYMENT DATE"), commencing on September 30, 2003.
Payment of each installment of interest due hereunder shall be made, at the
Borrower's election but subject to the Payment Limitations (as defined in
Paragraph E below), (i) in cash, (ii) by adding such interest to the principal
amount of this Note (any interest payment made pursuant to this clause (ii)
being referred to herein as "PIK INTEREST") (provided that, in the event the
Borrower elects to pay any installment of interest due hereunder as PIK
Interest, the Holder shall have the right to require that the Borrower issue to
such Holder a new Note (each, a "PIK NOTE") in principal amount equal to the
amount of such PIK Interest, and any PIK Notes so issued shall have the same
terms as the Notes (including, without limitation, the Scheduled Maturity Date)
and shall for all purposes be considered Notes under the Securities Purchase
Agreement), or (iii) in any combination of cash and PIK Interest with an
aggregate value equal to the interest then due. In the event that the Borrower
is prohibited from paying any installment of interest due hereunder in PIK
Interest as a result of the operation of the Payment Limitations, the Borrower
shall be required to pay in cash any amounts due hereunder as to which it is so
prohibited.
B. Payment of Principal. The principal amount hereof, together
with all accrued and unpaid interest thereon, shall be due and payable on the
Scheduled Maturity Date. Payment of principal and accrued interest on the
Scheduled Maturity Date shall be made, at the Borrower's election but subject to
the Payment Limitations and the limitations set forth in Article VIII, (i) in
cash, (ii) in such number of duly authorized, validly issued, fully paid and
non-assessable shares of Common Stock determined by dividing the aggregate
amount due on the Scheduled Maturity Date by the lesser of (a) the Closing Sales
Price of the Common Stock on the Scheduled Maturity Date or (b) 90% of the
average Closing Sales Price of the Common Stock over the 20 trading day period
ending on the day immediately prior to the Scheduled Maturity Date, or (iii) in
any combination of cash and shares of Common Stock with an aggregate value equal
to the principal and interest then due. In the event that the Borrower is
prohibited from issuing shares of Common Stock in connection with the payment
pursuant to this Paragraph B as a result of the operation of the Payment
Limitations or the limitations set forth in Article VIII, the Borrower shall be
required to pay in cash any amounts due hereunder as to which it is so
prohibited.
C. Prepayment. Except as and to the extent otherwise provided
herein, no amounts of principal or interest due hereunder may be prepaid by the
Borrower without the prior written consent of the Holder.
D. Manner of Payments. Subject to the Payment Limitations, in the
event that the Borrower elects to pay any installment of interest due hereunder
as PIK Interest or elects to repay this Note on the Scheduled Maturity Date in
shares of Common Stock, the Borrower shall give written notice to the Holder at
least five business days in advance of the applicable Interest Payment Date or
Scheduled Maturity Date. All cash payments of principal and interest shall be
made in, and all references herein to monetary denominations shall refer to,
lawful money of the United States of America. All payments shall be made at such
address as the Holder shall have given or shall hereafter give to the Borrower
by written notice made in accordance with the provisions of this Note. If any
cash payment to be made hereunder shall be due on a day other than a business
day, such payment shall be made on the next succeeding business day and such
extension of time shall be included in computing interest in connection with
such payment. If any payment due hereunder is not made when due, the Holder
shall thereafter be entitled to
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interest on the unpaid amount at a per annum rate equal to the lower of eighteen
percent (18%) and the highest interest rate permitted by applicable law until
such amount is paid in full.
E. Payment Limitations. Notwithstanding any other provision of
this Article I, (i) with respect to each particular Interest Payment Date and on
the Scheduled Maturity Date, the Borrower shall be required to make the same
election as to payment method for this Note as it makes for all other Notes then
outstanding; (ii) in no event shall the Borrower repay this Note on the
Scheduled Maturity Date in shares of Common Stock to the extent that such number
of shares of Common Stock, when added to the aggregate number of shares of
Common Stock previously issued upon conversions of the Notes or previously
issued or issuable upon exercise of the Warrants, would exceed an aggregate of
1,947,990 shares of Common Stock; (iii) in no event shall the Borrower pay any
installment of interest due hereunder as PIK Interest to the extent that such
PIK Interest for all Notes, when added to the aggregate principal amount of all
Notes (including PIK Notes) previously issued (including Notes that have already
been converted into Common Stock), would result in such Notes, together with all
Warrants (including Warrants that have already been exercised for Common Stock),
being convertible into and exercisable for more than an aggregate of 1,947,990
shares of Common Stock; (iv) subject to the foregoing clause (iii), with respect
to each of the Interest Payment Dates through and including September 30, 2004,
each installment of interest due hereunder shall be paid as PIK Interest; and
(v) in order to pay any installment of interest due hereunder in PIK Interest or
to repay this Note on the Scheduled Maturity Date in shares of Common Stock, the
shares of Common Stock into which such PIK Interest is convertible hereunder or
the shares of Common Stock to be issued on the Scheduled Maturity Date, as
applicable, must be registered under the Securities Act for resale by the
holders and listed or traded on any of the New York Stock Exchange, the American
Stock Exchange, the Nasdaq National Market or the Nasdaq SmallCap Market (or the
successor to any of them) (the limitations set forth in clauses (i), (ii),
(iii), (iv) and (v) being referred to herein as the "PAYMENT LIMITATIONS").
ARTICLE II
CONVERSION
A. Conversion at the Option of the Holder. Subject to the
limitations on conversions contained in Article VIII, the Holder may, at any
time and from time to time, convert (an "OPTIONAL CONVERSION") all or any
portion of the unpaid principal amount hereof and any accrued interest thereon
into a number of fully paid and non-assessable shares of Common Stock as is
equal to the quotient obtained by dividing (x) the amount of principal and
interest being so converted by (y) the Conversion Price then in effect.
B. Mechanics of Conversion. In order to effect an Optional
Conversion, the Holder shall: (x) fax (or otherwise deliver) a copy of the fully
executed Notice of Conversion to the Borrower (Attention: Secretary) and (y)
surrender or cause to be surrendered this Note, duly endorsed, along with a copy
of the Notice of Conversion as soon as practicable thereafter to the Borrower.
Upon receipt by the Borrower of a facsimile copy of a Notice of Conversion from
the Holder, the Borrower shall promptly send, via facsimile, a confirmation to
the Holder stating that the Notice of Conversion has been received, the date
upon which the Borrower expects to deliver the Common Stock issuable upon such
conversion and the name and telephone number of a
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contact person at the Borrower regarding the conversion. The Borrower shall not
be obligated to issue shares of Common Stock upon a conversion unless this Note
is delivered to the Borrower as provided above, or the Holder notifies the
Borrower that this Note has been lost, stolen or destroyed and delivers the
documentation to the Borrower required by Article X.B hereof.
(i) Delivery of Common Stock Upon Conversion. Upon the
surrender of this Note accompanied by a Notice of Conversion, the Borrower
(itself, or through its transfer agent) shall, no later than the later of (a)
the second business day following the Conversion Date and (b) the business day
following the date of such surrender (or, in the case of lost, stolen or
destroyed certificates, after provision of indemnity pursuant to Article X.B)
(the "DELIVERY PERIOD"), issue and deliver (i.e., deposit with a nationally
recognized overnight courier service postage prepaid) to the Holder or its
nominee (x) that number of shares of Common Stock issuable upon conversion of
that portion of this Note being converted and (y) a new Note representing the
principal balance of this Note not being converted, if any. Notwithstanding the
foregoing, if the Borrower's transfer agent is participating in the Depository
Trust Company ("DTC") Fast Automated Securities Transfer program, and so long as
the certificates therefor do not bear a legend (pursuant to the terms of the
Securities Purchase Agreement) and the holder thereof is not then required to
return such certificate for the placement of a legend thereon (pursuant to the
terms of the Securities Purchase Agreement), the Borrower shall cause its
transfer agent to promptly electronically transmit the Common Stock issuable
upon conversion to the Holder by crediting the account of the Holder or its
nominee with DTC through its Deposit Withdrawal Agent Commission system ("DTC
TRANSFER"). If the aforementioned conditions to a DTC Transfer are not
satisfied, the Borrower shall deliver as provided above to the Holder physical
certificates representing the Common Stock issuable upon conversion. Further,
the Holder may instruct the Borrower to deliver to the Holder physical
certificates representing the Common Stock issuable upon conversion in lieu of
delivering such shares by way of DTC Transfer.
(ii) Taxes. The Borrower shall pay any and all taxes that
may be imposed upon it with respect to the issuance and delivery of the shares
of Common Stock upon the conversion of this Note.
(iii) No Fractional Shares. If any conversion of this Note
would result in the issuance of a fractional share of Common Stock (aggregating
the entire amount of principal and interest being converted pursuant to a given
Notice of Conversion), such fractional share shall be payable in cash based upon
the Closing Sales Price of the Common Stock at such time, and the number of
shares of Common Stock issuable upon conversion of this Note shall be the next
lower whole number of shares. If the Borrower elects not to, or is unable to,
make such a cash payment, the holder shall be entitled to receive, in lieu of
the final fraction of a share, one whole share of Common Stock.
(iv) Conversion Disputes. In the case of any dispute with
respect to a conversion, the Borrower shall promptly issue such number of shares
of Common Stock as are not disputed in accordance with subparagraph (i) above.
If such dispute involves the calculation of the Conversion Price, and such
dispute is not promptly resolved by discussion between the Holders and the
Borrower, the Borrower shall submit the disputed calculations to an independent
outside accountant (which accountant shall be subject to the reasonable approval
of the Majority Holders) via facsimile within three business days of receipt of
the Notice of Conversion. The
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accountant shall promptly audit the calculations and notify the Borrower and the
Holders of the results no later than three business days from the date it
receives the disputed calculations. The accountant's calculation shall be deemed
conclusive, absent manifest error, and the party whose proposed calculation is
further from the calculation determined by the accountant shall bear all of the
accountant's expenses (which, if the disputing Holders are the non-prevailing
party, shall be allocated pro rata among such disputing Holders). The Borrower
shall then issue the appropriate number of shares of Common Stock in accordance
with subparagraph (i) above.
(v) Payment of Accrued Amounts. Upon conversion of any
unpaid principal amount of this Note, all accrued interest on such amount
through and including the Conversion Date shall be paid on the Conversion Date
in accordance with one of the permitted payment methods set forth in Article I.A
above.
C. Mandatory Conversion into Common Stock. Subject to the
limitations on conversion contained in Article VIII, if at any time following
the second anniversary of the Issuance Date all of the Required Conditions are
satisfied, then, at the option of the Borrower exercisable by the delivery of
written notice to the Holders, delivered no more than ten days and no less than
three days prior to the Conversion Date stated in such notice, convert all, but
not less than all, of the Notes into a number of fully paid and non-assessable
shares of Common Stock determined in accordance with the formula set forth in
Paragraph A of this Article II (a "MANDATORY CONVERSION"). Thereafter, the
Borrower and the Holder shall follow the applicable conversion procedures set
forth in Article II.B (including the requirement that the Holder deliver the
Notes being converted to the Borrower); provided, however, the Holder shall not
be required to deliver a Notice of Conversion to the Borrower in order for the
Borrower to effect a Mandatory Conversion. In the event that the Borrower is
prohibited from issuing shares of Common Stock upon a Mandatory Conversion
pursuant to this Article II.C as a result of the operation of the limitations
set forth in Article VIII, the Borrower shall pay to each Holder an amount of
cash equal to the Closing Sales Price of the Common Stock on the Conversion Date
multiplied by the number of shares of Common Stock that the Borrower is
prohibited from issuing to such Holder as a result of the operation of the
limitations set forth in Article VIII.
ARTICLE III
RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. On or prior to the Issuance Date, the
Borrower shall reserve 1,500,000 shares of its authorized but unissued shares of
Common Stock for issuance upon conversion of the Notes pursuant to Article II,
and, thereafter, the number of authorized but unissued shares of Common Stock so
reserved (the "RESERVED AMOUNT") shall at all times be sufficient to provide for
the full conversion of all of the Notes outstanding at the then current
Conversion Price thereof (without giving effect to the limitations contained in
Article VIII). The Reserved Amount shall be allocated among the Holders as
provided in Article X.C.
B. Increases to Reserved Amount. If the Reserved Amount for any
three consecutive trading days (the last of such three trading days being the
"AUTHORIZATION TRIGGER DATE") shall be less than one hundred percent (100%) of
the number of shares of Common Stock issuable upon full conversion of all then
outstanding Notes (without giving effect to the limitations
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contained in Article VIII), the Borrower shall immediately notify the Holders of
such occurrence and shall take immediate action (including, if necessary,
seeking stockholder approval to authorize the issuance of additional shares of
Common Stock) to increase the Reserved Amount to one hundred percent (100%) of
the number of shares of Common Stock then issuable upon full conversion of all
then outstanding Notes at the then current Conversion Price (without giving
effect to the limitations contained in Article VIII). In the event the Borrower
fails to so increase the Reserved Amount within 90 days after an Authorization
Trigger Date, the Holder shall thereafter have the option, exercisable in whole
or in part at any time and from time to time, by delivery of a Default Notice to
the Borrower, to require the Borrower to prepay in cash, for an amount equal to
the Default Amount (as defined in Article V.B), that portion of the unpaid
principal amount hereof and accrued interest thereon such that, after giving
effect to such prepayment, the then unissued portion of the Holder's Reserved
Amount is at least equal to one hundred percent (100%) of the total number of
shares of Common Stock issuable upon conversion of this Note by the Holder. If
the Borrower fails to prepay any portion of this Note as required hereby within
five business days after its receipt of such Default Notice, then the Holder
shall be entitled to the remedies provided in Article V.C.
ARTICLE IV
FAILURE TO SATISFY CONVERSIONS
A. Conversion Defaults. If, at any time, (i) the Holder submits a
Notice of Conversion and the Borrower fails for any reason (other than because
such issuance would exceed the Holder's allocated portion of the Reserved
Amount, for which failures the holders shall have the remedies set forth in
Article III) to deliver, on or prior to the fifth business day following the
expiration of the Delivery Period for such conversion, such number of freely
tradable shares of Common Stock to which the Holder is entitled upon such
conversion, or (ii) the Borrower provides written notice to the Holders (or
makes a public announcement via press release) at any time of its intention not
to issue freely tradable shares of Common Stock upon exercise by the Holders of
their conversion rights in accordance with the terms of the Notes (other than
because such issuance would exceed a Holder's allocated portion of the Reserved
Amount) (each of (i) and (ii) being a "CONVERSION DEFAULT"), then the Holder may
elect, at any time and from time to time prior to the Default Cure Date for such
Conversion Default, by delivery of a Default Notice to the Borrower, to have all
or any portion of the unpaid principal amount hereof and accrued interest
thereto prepaid by the Borrower in cash, for an amount per share equal to the
Default Amount (as defined in Article V.B). If the Borrower fails to prepay any
portion of this Note as required hereby within five business days after its
receipt of such Default Notice, then the Holder shall be entitled to the
remedies provided in Article V.C.
B. Buy-In Cure. Unless the Borrower has notified the Holder in
writing prior to the delivery by the Holder of a Notice of Conversion that the
Borrower is unable to honor conversions, if (i) (a) the Borrower fails to
promptly deliver during the Delivery Period shares of Common Stock to the Holder
upon a conversion of all or any portion of this Note or (b) there shall occur a
Legend Removal Failure (as defined in Article V.A(iv) below) and (ii)
thereafter, the Holder purchases (in an open market transaction or otherwise)
shares of Common Stock to make delivery in satisfaction of a sale by the Holder
of the unlegended shares of Common Stock (the "SOLD SHARES") which the Holder
anticipated receiving upon such conversion (a "BUY-IN"),
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the Borrower shall pay the Holder, in addition to any other remedies available
to the Holder, the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the unlegended shares of Common
Stock so purchased exceeds (y) the net proceeds received by the Holder from the
sale of the Sold Shares. For example, if the Holder purchases unlegended shares
of Common Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to shares of Common Stock it sold for $10,000, the Borrower will be
required to pay the Holder $1,000. The Holder shall provide the Borrower written
notification and supporting documentation indicating any amounts payable to the
Holder pursuant to this Article IV.B.
ARTICLE V
EVENTS OF DEFAULT
A. Events of Default. In the event (each of the events described
in clauses (i)-(ix) below after expiration of the applicable cure period (if
any) being an "EVENT OF DEFAULT"):
(i) the Borrower fails to pay in full an interest payment
within ten days after a scheduled Interest Payment Date, or fails to pay in full
the principal hereof, and/or the accrued and unpaid interest thereon, when due,
whether at maturity, upon acceleration or otherwise;
(ii) the Common Stock (including any of the shares of
Common Stock issuable upon conversion of this Note) is suspended from trading on
any of, or is not listed (and authorized) for trading on at least one of, the
New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market
or the Nasdaq SmallCap Market for an aggregate of ten or more trading days in
any twelve month period;
(iii) the registration statement required to be filed by
the Borrower pursuant to Section 2(a) of the Registration Rights Agreement has
not been declared effective by the two hundred seventieth (270th) day following
the Issuance Date or such registration statement, after being declared
effective, cannot be utilized by the Holders for the resale of all of their
Registrable Securities (as defined in the Registration Rights Agreement) for an
aggregate of more than 60 days;
(iv) the Borrower fails to remove any restrictive legend
on any certificate or any shares of Common Stock issued to the Holder upon
conversion of this Note as and when required by the terms hereof and of the
Securities Purchase Agreement or the Registration Rights Agreement (a "LEGEND
REMOVAL FAILURE"), and any such failure continues uncured for ten business days
after the Borrower has been notified thereof in writing by the Holder;
(v) the Borrower provides written notice (or otherwise
indicates) to the Holder, or states by way of public announcement distributed
via a press release, at any time, of its intention not to issue, or otherwise
refuses to issue, shares of Common Stock to the Holder upon conversion in
accordance with the terms of this Note (other than because such issuance would
exceed the Holder's allocated portion of the Reserved Amount, for which failures
the Holder shall have the remedies set forth in Article III);
(vi) the Borrower or any subsidiary of the Borrower shall
make an assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for
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it or for a substantial part of its property or business, or such a receiver or
trustee shall otherwise be appointed;
(vii) bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for the relief of debtors shall be instituted
by or against the Borrower or any subsidiary of the Borrower and if instituted
against the Borrower or any subsidiary of the Borrower by a third party, shall
not be dismissed within 60 days of their initiation;
(viii) the Borrower shall:
(a) sell, convey or dispose of all or
substantially all of its assets (the presentation of any such transaction for
stockholder approval being conclusive evidence that such transaction involves
the sale of all or substantially all of the assets of the Borrower), unless the
Holder has approved such transaction pursuant to Article VII.B below;
(b) merge or consolidate with or into any person
or entity, which results in either (i) the holders of the voting securities of
the Borrower immediately prior to such transaction holding or having the right
to direct the voting of fifty percent (50%) or less of the total outstanding
voting securities of the Borrower or such other surviving or acquiring person or
entity immediately following such transaction or (ii) the members of the board
of directors or other governing body of the Borrower comprising fifty percent
(50%) or less of the members of the board of directors or other governing body
of the Borrower or such other surviving or acquiring person or entity
immediately following such transaction, unless the Holder has approved such
transaction pursuant to Article VII.B below;
(c) either (i) fail to pay, when due, or within
any applicable grace period, any payment with respect to any indebtedness of the
Borrower in excess of $250,000 due to any third party, other than payments
contested by the Borrower in good faith, or otherwise be in breach or violation
of any agreement for monies owed or owing in an amount in excess of $250,000
which breach or violation permits the other party thereto to declare a default
or otherwise accelerate amounts due thereunder, or (ii) suffer to exist any
other default or event of default under any agreement binding the Borrower which
default or event of default would or is likely to have a material adverse effect
on the business, operations, properties, prospects or financial condition of the
Borrower;
(d) have thirty-five percent (35%) or more of
the voting power of its capital stock owned beneficially by one person, entity
or "group" (as such term is used under Section 13(d) of the Securities Exchange
Act of 1934, as amended); or
(ix) except with respect to matters covered by
subparagraph (i) - (viii) above, as to which such applicable subparagraphs shall
apply, the Borrower otherwise shall breach any material term hereunder or under
the other Transaction Documents, including, without limitation, the
representations and warranties contained therein (i.e., in the event of a
material breach as of the date such representation and warranty was made) and if
such breach is curable, shall fail to cure such breach within ten business days
after the Borrower has been notified thereof in writing by the Holder;
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then, upon the occurrence of any such Event of Default, at the option of the
Holder, exercisable in whole or in part at any time and from time to time by
delivery of a written notice to such effect (a "DEFAULT NOTICE") to the Borrower
while such Event of Default continues, the Borrower shall prepay, in
satisfaction of its obligation to pay the outstanding principal amount of this
Note and accrued and unpaid interest thereon, an amount equal to the Default
Amount (as defined in Section V.B below); provided, however, that (a) in the
case of an Event of Default described in clauses (vi) and (vii) of this Article
V.A, the Borrower's prepayment obligation hereunder shall be automatic and shall
not require the delivery of a Default Notice by the Holder, and (b) in the case
of an Event of Default resulting from a Legend Removal Failure, the Borrower's
prepayment obligation hereunder shall only apply to that portion of the Note
affected by such Legend Removal Failure. Such Default Amount, together with all
other ancillary amounts payable hereunder, shall immediately become due and
payable, all without demand, presentment or notice, all of which are hereby
expressly waived, together with all costs, including, without limitation, legal
fees and expenses of collection, and the Holder shall be entitled to exercise
all other rights and remedies available at law or in equity. For the avoidance
of doubt, the occurrence of any event described in clauses (i), (ii), (iii),
(vi), (vii) and (viii) above shall immediately constitute an Event of Default
and there shall be no cure period. Upon the Borrower's receipt of any Default
Notice hereunder, the Borrower shall immediately (and in any event within one
business day following such receipt) deliver a written notice (a "DEFAULT
ANNOUNCEMENT") to all Holders of the Notes stating the date upon which the
Borrower received such Default Notice and the amount of the Notes covered
thereby. Following the delivery of a Default Announcement hereunder, at any time
and from time to time, the Holder may request (either orally or in writing)
information from the Borrower with respect to the instant default (including,
but not limited to, the aggregate principal amount outstanding of Notes covered
by Default Notices received by the Borrower) and the Borrower shall furnish
(either orally or in writing) as soon as practicable such requested information
to the Holder.
B. Definition of Default Amount. The "DEFAULT AMOUNT" with
respect to this Note means an amount equal to the greater of:
(i) V
----------------- x m
C P
and (ii) V x R
where:
"V" means the aggregate principal amount outstanding of the
Notes required to be prepaid plus all accrued and unpaid interest thereon
through the date of payment of the Default Amount hereunder;
"CP" means the Conversion Price in effect on the date on which
the Borrower receives the Default Notice;
"M" means (i) with respect to all Events of Default other than
Events of Default described in subparagraph (a) or (b) of Article V.A(viii)
hereof, the highest Closing Sales Price
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of the Borrower's Common Stock during the period beginning on the date on which
the Borrower receives the Default Notice and ending on the date immediately
preceding the date of payment of the Default Amount hereunder, and (ii) with
respect to an Event of Default described in subparagraph (a) or (b) of Article
V.A(viii) hereof, the greater of (a) the amount determined pursuant to clause
(i) of this definition or (b) the fair market value, as of the date on which the
Borrower receives the Default Notice, of the consideration payable to the holder
of a share of Common Stock pursuant to the transaction which triggers the Event
of Default. For purposes of this definition, "fair market value" shall be
determined by the mutual agreement of the Borrower and the Majority Holders, or
if such agreement cannot be reached within five business days prior to the date
of the Event of Default, by an investment banking firm selected by the Borrower
and reasonably acceptable to the Majority Holders, with the costs of such
appraisal to be borne by the Borrower; and
"R" means 115%.
C. Failure to Pay Default Amounts. If the Borrower fails to pay
the Holder the Default Amount with respect to any Note within five business days
after its receipt of a Default Notice (the "PREPAYMENT DATE"), then the Holder
shall be entitled to interest on the Default Amount at a per annum rate equal to
the lower of twenty percent (20%) and the highest interest rate permitted by
applicable law from the date on which the Borrower receives the Default Notice
until the date of payment of the Default Amount hereunder. In the event the
Borrower is not able to prepay all of the outstanding Notes required to be
prepaid on the Prepayment Date (including for such purpose all Notes subject to
Default Notices delivered prior to the Prepayment Date), the Borrower shall
prepay the outstanding Notes from each Holder pro rata, based on the total
amounts due on the Notes at the time of prepayment and required to be prepaid on
the Prepayment Date relative to the total amounts due under the Notes on the
Prepayment Date.
ARTICLE VI
ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time
as follows:
A. Stock Splits, Stock Dividends, Etc. If, at any time on or
after the Issuance Date, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, combination, reclassification or
other similar event, the Conversion Price shall be proportionately reduced, or
if the number of outstanding shares of Common Stock is decreased by a reverse
stock split, combination, reclassification or other similar event, the
Conversion Price shall be proportionately increased. In such event, the Borrower
shall notify the Borrower's transfer agent of such change on or before the
effective date thereof.
B. Merger, Consolidation, Etc. If, at any time after the Issuance
Date, there shall be (i) any reclassification or change of the outstanding
shares of Common Stock (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), (ii) any consolidation or merger of the Borrower with any other
entity (other than a merger in which the Borrower is the surviving or continuing
entity
- 10 -
and its capital stock is unchanged), (iii) any sale or transfer of all or
substantially all of the assets of the Borrower or (iv) any share exchange or
other transaction pursuant to which all of the outstanding shares of Common
Stock are converted into other securities or property (each of (i) - (iv) above
being a "CORPORATE CHANGE"), then the Holder shall thereafter have the right to
receive upon conversion, in lieu of the shares of Common Stock otherwise
issuable, such shares of stock, securities and/or other property as would have
been issued or payable in such Corporate Change with respect to or in exchange
for the number of shares of Common Stock which would have been issuable upon
conversion had such Corporate Change not taken place (without giving effect to
the limitations contained in Article VIII), and in any such case, appropriate
provisions (in form and substance reasonably satisfactory to the Majority
Holders) shall be made with respect to the rights and interests of the Holder
hereunder to the end that the economic value of this Note are in no way
diminished by such Corporate Change and that the provisions hereof (including,
without limitation, in the case of any such consolidation, merger or sale in
which the successor entity or purchasing entity is not the Borrower, an
immediate adjustment of the Conversion Price so that the Conversion Price
immediately after the Corporate Change reflects the same relative value as
compared to the value of the surviving entity's common stock that existed
between the Conversion Price and the value of the Borrower's Common Stock
immediately prior to such Corporate Change) shall thereafter be applicable, as
nearly as may be practicable in relation to any shares of stock or securities
thereafter deliverable upon the conversion thereof. The Borrower shall not
effect any Corporate Change unless (i) each Holder has received written notice
of such transaction at least 45 days prior thereto, but in no event later than
15 days prior to the record date for the determination of stockholders entitled
to vote with respect thereto, and (ii) the resulting successor or acquiring
entity (if not the Borrower) assumes by written instrument (in form and
substance reasonable satisfactory to the Holder) the obligations under this Note
(including, without limitation, the obligation to make interest payments accrued
but unpaid through the date of such consolidation, merger or sale and accruing
thereafter). The above provisions shall apply regardless of whether or not there
would have been a sufficient number of shares of Common Stock authorized and
available for issuance upon conversion of this Note as of the date of such
transaction, and shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
C. Distributions. If, at any time after the Issuance Date, the
Borrower shall declare or make any distribution of its assets (or rights to
acquire its assets) to holders of Common Stock as a partial liquidating
dividend, by way of return of capital or otherwise (including any dividend or
distribution to the Borrower's stockholders in cash or shares (or rights to
acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a
"DISTRIBUTION"), then the Holder shall be entitled, upon any conversion of this
Note after the date of record for determining stockholders entitled to such
Distribution (or if no such record is taken, the date on which such Distribution
is declared or made), to receive the amount of such assets which would have been
payable to the Holder with respect to the shares of Common Stock issuable upon
such conversion (without giving effect to the limitations contained in Article
VIII) had the Holder been the holder of such shares of Common Stock on the
record date for the determination of stockholders entitled to such Distribution
(or if no such record is taken, the date on which such Distribution is declared
or made).
D. Convertible Securities and Purchase Rights. If, at any time
after the Issuance Date, the Borrower issues any securities or other instruments
which are convertible into or
- 11 -
exercisable or exchangeable for Common Stock ("CONVERTIBLE SECURITIES") or
options, warrants or other rights to purchase or subscribe for Common Stock or
Convertible Securities ("PURCHASE RIGHTS") pro rata to the record holders of the
Common Stock, whether or not such Convertible Securities or Purchase Rights are
immediately convertible, exercisable or exchangeable, then the Holder shall be
entitled, upon any conversion of this Note after the date of record for
determining stockholders entitled to receive such Convertible Securities or
Purchase Rights (or if no such record is taken, the date on which such
Convertible Securities or Purchase Rights are issued), to receive the aggregate
number of Convertible Securities or Purchase Rights which the Holder would have
received with respect to the shares of Common Stock issuable upon such
conversion (without giving effect to the limitations contained in Article VIII)
had the Holder been the holder of such shares of Common Stock on the record date
for the determination of stockholders entitled to receive such Convertible
Securities or Purchase Rights (or if no such record is taken, the date on which
such Convertible Securities or Purchase Rights were issued). If the right to
exercise or convert any such Convertible Securities or Purchase Rights would
expire in accordance with their terms prior to the conversion of this Note, then
the terms of such Convertible Securities or Purchase Rights shall provide that
such exercise or convertibility right shall remain in effect until 30 days after
the date the Holder receives such Convertible Securities or Purchase Rights
pursuant to the conversion hereof.
E. Dilutive Issuances.
(i) Adjustment Upon Dilutive Issuance. If, at any time
after the Issuance Date, the Borrower issues or sells, or in accordance with
subparagraph (ii) of this Article VI.E is deemed to have issued or sold, any
shares of Common Stock for no consideration or for a consideration per share
less than the Conversion Price on the date of issuance or sale (or deemed
issuance or sale) (a "DILUTIVE ISSUANCE"), then effective immediately upon the
Dilutive Issuance, the Conversion Price shall be adjusted so as to equal an
amount determined by multiplying such Conversion Price by the following
fraction:
N(0) + N(1)
--------------
N(0) + N(2)
where:
N(0) = the number of shares of Common Stock outstanding
immediately prior to the issuance, sale or deemed issuance or sale of such
additional shares of Common Stock in such Dilutive Issuance (without taking into
account any shares of Common Stock issuable upon conversion, exchange or
exercise of any Convertible Securities or Purchase Rights, including the Notes
and Warrants);
N(1) = the number of shares of Common Stock which the
aggregate consideration, if any, received or receivable by the Borrower for the
total number of such additional shares of Common Stock so issued, sold or deemed
issued or sold in such Dilutive Issuance (which, in the case of a deemed
issuance or sale, shall be calculated in accordance with subparagraph (ii)
- 12 -
below) would purchase at the Conversion Price in effect immediately prior to
such Dilutive Issuance; and
N(2) = the number of such additional shares of Common Stock so
issued, sold or deemed issued or sold in such Dilutive Issuance.
Notwithstanding the foregoing, no adjustment shall be made pursuant to this
Paragraph E if such adjustment would result in an increase in the Conversion
Price.
(ii) Effect on Conversion Price of Certain Events. For
purposes of determining the adjusted Conversion Price under subparagraph (i) of
this Article VI.E, the following will be applicable:
(a) Issuance of Purchase Rights. If the Borrower
issues or sells any Purchase Rights, whether or not immediately exercisable, and
the price per share for which Common Stock is issuable upon the exercise of such
Purchase Rights (and the price of any conversion of Convertible Securities, if
applicable) is less than the Conversion Price in effect on the date of issuance
or sale of such Purchase Rights, then the maximum total number of shares of
Common Stock issuable upon the exercise of all such Purchase Rights (assuming
full conversion, exercise or exchange of Convertible Securities, if applicable)
shall, as of the date of the issuance or sale of such Purchase Rights, be deemed
to be outstanding and to have been issued and sold by the Borrower for such
price per share. For purposes of the preceding sentence, the "price per share
for which Common Stock is issuable upon the exercise of such Purchase Rights"
shall be determined by dividing (A) the total amount, if any, received or
receivable by the Borrower as consideration for the issuance or sale of all such
Purchase Rights, plus the minimum aggregate amount of additional consideration,
if any, payable to the Borrower upon the exercise of all such Purchase Rights,
plus, in the case of Convertible Securities issuable upon the exercise of such
Purchase Rights, the minimum aggregate amount of additional consideration
payable upon the conversion, exercise or exchange thereof (determined in
accordance with the calculation method set forth in subparagraph (ii)(b) of this
Article VI.E) at the time such Convertible Securities first become convertible,
exercisable or exchangeable, by (B) the maximum total number of shares of Common
Stock issuable upon the exercise of all such Purchase Rights (assuming full
conversion, exercise or exchange of Convertible Securities, if applicable). No
further adjustment to the Conversion Price shall be made upon the actual
issuance of such Common Stock upon the exercise of such Purchase Rights or upon
the conversion, exercise or exchange of Convertible Securities issuable upon
exercise of such Purchase Rights.
(b) Issuance of Convertible Securities. If the
Borrower issues or sells any Convertible Securities, whether or not immediately
convertible, exercisable or exchangeable, and the price per share for which
Common Stock is issuable upon such conversion, exercise or exchange is less than
the Conversion Price in effect on the date of issuance or sale of such
Convertible Securities, then the maximum total number of shares of Common Stock
issuable upon the conversion, exercise or exchange of all such Convertible
Securities shall, as of the date of the issuance or sale of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by the
Borrower for such price per share. If the Convertible Securities so issued or
sold do not have a fluctuating conversion or exercise price or exchange ratio,
then for the purposes of the preceding sentence, the "price per share for which
Common Stock is issuable
- 13 -
upon such conversion, exercise or exchange" shall be determined by dividing (A)
the total amount, if any, received or receivable by the Borrower as
consideration for the issuance or sale of all such Convertible Securities, plus
the minimum aggregate amount of additional consideration, if any, payable to the
Borrower upon the conversion, exercise or exchange thereof (determined in
accordance with the calculation method set forth in this subparagraph (ii)(b) of
this Article VI.E) at the time such Convertible Securities first become
convertible, exercisable or exchangeable, by (B) the maximum total number of
shares of Common Stock issuable upon the exercise, conversion or exchange of all
such Convertible Securities. If the Convertible Securities so issued or sold
have a fluctuating conversion or exercise price or exchange ratio (a "VARIABLE
RATE CONVERTIBLE SECURITY"), then for purposes of the next preceding sentence,
the "price per share for which Common Stock is issuable upon such conversion,
exercise or exchange" shall be deemed to be the lowest price per share which
would be applicable (assuming all holding period and other conditions to any
discounts contained in such Variable Rate Convertible Security have been
satisfied) if the conversion price of such Variable Rate Convertible Security on
the date of issuance or sale thereof was seventy-five percent (75%) of the
actual conversion price on such date (the "ASSUMED VARIABLE MARKET PRICE"), and,
further, if the conversion price of such Variable Rate Convertible Security at
any time or times thereafter is less than or equal to the Assumed Variable
Market Price last used for making any adjustment under this Article VI.E with
respect to any Variable Rate Convertible Security, the Conversion Price in
effect at such time shall be readjusted to equal the Conversion Price which
would have resulted if the Assumed Variable Market Price at the time of issuance
of the Variable Rate Convertible Security had been seventy-five percent (75%) of
the actual conversion price of such Variable Rate Convertible Security existing
at the time of the adjustment required by this sentence. No further adjustment
to the Conversion Price shall be made upon the actual issuance of such Common
Stock upon conversion, exercise or exchange of such Convertible Securities.
(c) Change in Option Price or Conversion Rate.
If there is a change at any time in (A) the amount of additional consideration
payable to the Borrower upon the exercise of any Purchase Rights; (B) the amount
of additional consideration, if any, payable to the Borrower upon the
conversion, exercise or exchange of any Convertible Securities; or (C) the rate
at which any Convertible Securities are convertible into or exercisable or
exchangeable for Common Stock (in each such case, other than under or by reason
of provisions designed to protect against dilution), the Conversion Price in
effect at the time of such change shall be readjusted to the Conversion Price
which would have been in effect at such time had such Purchase Rights or
Convertible Securities still outstanding provided for such changed additional
consideration or changed conversion, exercise or exchange rate, as the case may
be, at the time initially issued or sold.
(d) Calculation of Consideration Received. If
any Common Stock, Purchase Rights or Convertible Securities are issued or sold
for cash, the consideration received therefor will be the amount received by the
Borrower therefor. In case any Common Stock, Purchase Rights or Convertible
Securities are issued or sold for a consideration part or all of which shall be
other than cash, including in the case of a strategic or similar arrangement in
which the other entity will provide services to the Borrower, purchase services
from the Borrower or otherwise provide intangible consideration to the Borrower,
the amount of the consideration other than cash received by the Borrower
(including the net present value of the consideration expected by the Borrower
for the provided or purchased services) shall be the fair
- 14 -
market value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Borrower
will be the Closing Sales Price thereof as of the date of receipt. In case any
Common Stock, Purchase Rights or Convertible Securities are issued in connection
with any merger or consolidation in which the Borrower is the surviving
corporation, the amount of consideration therefor will be deemed to be the fair
market value of such portion of the net assets and business of the non-surviving
Borrower as is attributable to such Common Stock, Purchase Rights or Convertible
Securities, as the case may be. Notwithstanding anything else herein to the
contrary, if Common Stock, Purchase Rights or Convertible Securities are issued
or sold in conjunction with each other as part of a single transaction or in a
series of related transactions, the Holder may elect to determine the amount of
consideration deemed to be received by the Borrower therefor by deducting the
fair value of any type of securities (the "DISREGARDED SECURITIES") issued or
sold in such transaction or series of transactions. If the Holder makes an
election pursuant to the immediately preceding sentence, no adjustment to the
Conversion Price shall be made pursuant to this Article VI.E for the issuance of
the Disregarded Securities or upon any conversion, exercise or exchange thereof.
For example, if the Borrower were to issue convertible notes having a face value
of $1,000,000 and warrants to purchase shares of Common Stock at an exercise
price equal to the market price of the Common Stock on the date of issuance of
such warrants in exchange for $1,000,000 of consideration, the fair value of the
warrants would be subtracted from the $1,000,000 of consideration received by
the Borrower for the purposes of determining whether the shares of Common Stock
issuable upon conversion of the convertible notes shall be deemed to be issued
at a price per share below the Conversion Price then in effect and, if so, for
purposes of determining any adjustment to the Conversion Price hereunder as a
result of the issuance of the convertible notes. The Borrower shall calculate,
using standard commercial valuation methods appropriate for valuing such assets,
the fair market value of any consideration other than cash or securities;
provided, however, that if the Holder does not agree to such fair market value
calculation within three business days after receipt thereof from the Borrower,
then such fair market value shall be determined in good faith by an investment
banker or other appropriate expert of national reputation selected by the
Borrower and reasonably acceptable to the Holder, with the costs of such
appraisal to be borne by the Borrower.
(e) Issuances Pursuant to Existing Securities.
If the Borrower issues (or becomes obligated to issue) shares of Common Stock
pursuant to any antidilution or similar adjustments (other than as a result of
stock splits, stock dividends and the like) contained in any Convertible
Securities or Purchase Rights outstanding as of the date hereof but not included
in Section 3(c) of the Disclosure Schedule to the Securities Purchase Agreement,
then all shares of Common Stock so issued shall be deemed to have been issued
for no consideration. If the Borrower issues (or becomes obligated to issue)
shares of Common Stock pursuant to any antidilution or similar adjustments
contained in any Convertible Securities or Purchase Rights included in Section
3(c) of the Disclosure Schedule to the Securities Purchase Agreement as a result
of the issuance of the Notes or Warrants and the number of shares that the
Borrower issues (or is obligated to issue) as a result of such initial issuance
exceeds the amount specified in Section 3(c) of the Disclosure Schedule to the
Securities Purchase Agreement, such excess shares shall be deemed to have been
issued for no consideration.
(iii) Limitation on Adjustments for Dilutive Issuances.
Notwithstanding the foregoing or any other provision of this Note to the
contrary, in no event shall the Conversion
- 15 -
Price be adjusted as a result of a Dilutive Issuance to the extent (but only to
the extent) that such adjustment would result in this Note, together with all
other Notes (including PIK Notes and any portions of any Notes that have already
been converted into Common Stock) and all Warrants (including any Warrants that
have already been exercised for Common Stock), being convertible into and
exercisable for more than an aggregate of 1,947,990 shares of Common Stock. In
the event that any Dilutive Issuance would result in an adjustment to the
Conversion Price of the Notes and such adjustment is limited by operation of
this Paragraph E(iii), such adjustment shall be allocated pro rata among the
Notes then outstanding. In the event that any Dilutive Issuance would result in
an adjustment to both the Conversion Price of the Notes and the Exercise Price
of the Warrants and such adjustment is limited by operation of this Paragraph
E(iii), such adjustment shall first be made to the Conversion Price of the Notes
to the maximum extent possible within the limitations of this Paragraph E(iii)
(allocated pro rata in accordance with the foregoing sentence), and only if such
adjustment has been made in full shall any adjustments be made to the Exercise
Price of the Warrants (subject to any similar limitations set forth therein).
F. Exceptions to Adjustment of Conversion Price. Notwithstanding
the foregoing, no adjustment to the Conversion Price shall be made upon (i) the
issuance of Common Stock upon the exercise or conversion of any Convertible
Securities or Purchase Rights outstanding on the Issuance Date and disclosed in
Section 3(c) of the Disclosure Schedule to the Securities Purchase Agreement in
accordance with the terms of such Convertible Securities and Purchase Rights as
of such date; (ii) the grant of options to purchase Common Stock, with exercise
prices not less than the market price of the Common Stock on the date of grant,
or the grant of restricted shares of Common Stock, in each case which are issued
to employees, officers, directors or consultants of the Borrower for the primary
purpose of soliciting or retaining their employment or service pursuant to an
equity compensation plan approved by the Borrower's Board of Directors, and the
issuance of shares of Common Stock upon the exercise thereof; (iii) the issuance
of securities pursuant to a bona fide underwritten public offering; or (iv) the
issuance of shares of Common Stock upon conversion of the Notes or the exercise
of the Warrants; (v) the issuance of securities in a bona fide business
acquisition; or (vi) the issuance of securities in connection with a strategic
business partnership with an oil and gas company, the primary purpose of which,
in the reasonable judgment of the Borrower's Board of Directors, is not to raise
additional capital.
G. Other Action Affecting Conversion Price. If, at any time after
the Issuance Date, the Borrower takes any action affecting the Common Stock that
would be covered by Article VI.A through E, but for the manner in which such
action is taken or structured, which would in any way diminish the value of the
Notes, then the Conversion Price shall be adjusted in such manner as the Board
of Directors of the Borrower shall in good faith determine to be equitable under
the circumstances.
H. Notice of Adjustments. Upon the occurrence of each adjustment
or readjustment of the Conversion Price pursuant to this Article VI amounting to
a more than one percent (1%) change in such Conversion Price, or any change in
the number or type of stock, securities and/or other property issuable upon
conversion of the Notes, the Borrower, at its expense, shall promptly compute
such adjustment or readjustment or change and prepare and furnish to the Holder
a certificate setting forth such adjustment or readjustment or change and
showing in detail the facts upon which such adjustment or readjustment or change
is based. The Borrower
- 16 -
shall, upon the written request at any time of the Holder, furnish to the Holder
a like certificate setting forth (i) such adjustment or readjustment or change,
(ii) the Conversion Price at the time in effect and (iii) the number of shares
of Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of the Notes.
ARTICLE VII
CONSENT RIGHTS; NOTICE OF CERTAIN ACTIONS
A. Consent Rights. So long as any Notes are outstanding, the
Borrower shall not take any of the following corporate actions (whether by
merger, consolidation or otherwise) without first obtaining the approval (by
vote or written consent) of the Majority Holders:
(i) alter or change the rights, preferences or privileges
of the Notes;
(ii) issue any additional Notes other than PIK Notes;
(iii) redeem, repurchase or otherwise acquire, or declare
or pay any cash dividend or distribution on, any securities of the Borrower,
except pursuant to any equity compensation plan approved by the Borrower's Board
of Directors;
(iv) issue any debt securities or incur any indebtedness
that would have priority over the Notes upon liquidation of the Borrower (except
for borrowings under the Borrower's existing credit facility with KeyBank N.A.
and any renewal, refinancing or replacement of such facility not involving an
increase in the principal amount thereof, an increase in the interest rate due
thereon or a change in any other material term thereof), or redeem, repurchase,
prepay or otherwise acquire any outstanding debt securities or indebtedness of
the Borrower, except as expressly required by the terms of such securities or
indebtedness;
(v) enter into any agreement, commitment, understanding
or other arrangement to take any of the foregoing actions; or
(vi) cause or authorize any subsidiary of the Borrower to
engage in any of the foregoing actions.
Notwithstanding the foregoing, no change pursuant to this Article VII shall be
effective to the extent that, by its terms, it applies to less than all of the
Holders of the Notes then outstanding.
B. Approval of Certain Transactions. In the event that the
Borrower desires to enter into any transaction that would result in (i) the
sale, conveyance or disposition of all or substantially all of its assets (the
presentation of any such transaction for stockholder approval being conclusive
evidence that such transaction involves the sale of all or substantially all of
the assets of the Borrower), or (ii) the merger or consolidation of the Borrower
with or into any person or entity, which results in either (a) the holders of
the voting securities of the Borrower immediately prior to such transaction
holding or having the right to direct the voting of fifty percent (50%) or less
of the total outstanding voting securities of the Borrower or such other
surviving or acquiring person or entity immediately following such transaction
or (b) the members of the board of directors or other governing body of the
Borrower comprising fifty
- 17 -
percent (50%) or less of the members of the board of directors or other
governing body of the Borrower or such other surviving or acquiring person or
entity immediately following such transaction, then the Borrower shall be
permitted to seek the approval of the Holder for such transaction in advance of
its entering into such transaction, and if the Holder so approves the
transaction and the Borrower enters into and consummates such transaction within
90 days following such approval on terms no less favorable to the Borrower than
those presented to the Holder for purposes of obtaining such approval, then such
transaction shall not constitute an Event of Default under Section V.A(viii).
C. Notice Rights. In addition to the foregoing consent rights,
the Borrower shall provide the Holder with prior notification of any meeting of
the stockholders (and copies of proxy materials and other information sent to
stockholders). If the Borrower takes a record of its stockholders for the
purpose of determining stockholders entitled to (i) receive payment of any
dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or (ii) to vote in connection with any proposed
sale, lease or conveyance of all or substantially all of the assets of the
Borrower, or any proposed merger, consolidation, liquidation, dissolution or
winding up of the Borrower, the Borrower shall mail a notice to the Holder, at
least 15 days prior to the record date specified therein (or 45 days prior to
the consummation of the transaction or event, whichever is earlier, but in no
event earlier than public announcement of such proposed transaction), of the
date on which any such record is to be taken for the purpose of such vote,
dividend, distribution, right or other event, and a brief statement regarding
the amount and character of such vote, dividend, distribution, right or other
event to the extent known at such time.
ARTICLE VIII
LIMITATIONS ON CERTAIN CONVERSIONS, REDEMPTIONS AND TRANSFERS
In no event shall the Borrower issue Common Stock to the Holder in
connection with the repayment of this Note pursuant to Article I.B or Mandatory
Conversion of this Note pursuant to Article II.C, and in no event shall the
Holder have the right to effect an Optional Conversion of this Note into shares
of Common Stock or to dispose of this Note to the extent that such repayment,
conversion or right to effect such conversion or disposition would result in the
Holder and its affiliates together beneficially owning more than 4.99% of the
outstanding shares of Common Stock. For purposes of this Article VIII,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder.
The restriction contained in this Article VIII may not be altered, amended,
deleted or changed in any manner whatsoever unless the holders of a majority of
the outstanding shares of Common Stock and the Holder shall approve, in writing,
such alteration, amendment, deletion or change. In the event that the Borrower
is prohibited from issuing shares of Common Stock in connection with the
repayment of this Note pursuant to Article I.B as a result of the operation of
this Article VIII, the Borrower shall make such repayment in cash. In the event
that the Borrower is prohibited from issuing shares of Common Stock upon a
Mandatory Conversion pursuant to Article II.C as a result of the operation of
this Article VIII, the Borrower shall pay to the Holder an amount of cash equal
to the Closing Sales Price of the
- 18 -
Common Stock on the Conversion Date multiplied by the number of shares of Common
Stock that the Borrower is prohibited from issuing as a result of the operation
of this Article VIII.
ARTICLE IX
CERTAIN DEFINITIONS
For purposes of this Note, in addition to the other terms defined
herein, the following terms shall have the following meanings:
A. "BUSINESS DAY" means any day, other than a Saturday or Sunday
or a day on which banking institutions in the State of New York are authorized
or obligated by law, regulation or executive order to close.
B. "CLOSING SALES PRICE" means, for any security as of any date,
the last sales price of such security on the principal trading market where such
security is listed or traded as reported by Bloomberg Financial Markets (or a
comparable reporting service of national reputation selected by the Borrower and
reasonably acceptable to the Majority Holders if Bloomberg Financial Markets is
not then reporting closing bid prices of such security) (in any case,
"BLOOMBERG"), or if the foregoing does not apply, the last reported sales price
of such security on a national exchange or in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
such price is reported for such security by Bloomberg, the average of the bid
prices of all market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc., in each case for such date or, if such
date was not a trading day for such security, on the next preceding date which
was a trading day. If the Closing Sales Price cannot be calculated for such
security as of either of such dates on any of the foregoing bases, the Closing
Sales Price of such security on such date shall be the fair market value as
reasonably determined by an investment banking firm selected by the Borrower and
reasonably acceptable to the Majority Holders, with the costs of such appraisal
to be borne by the Borrower.
C. "COMMON STOCK" means the common stock of the Borrower, no par
value per share.
D. "CONVERSION DATE" means, as applicable, (i) for any Optional
Conversion (as defined in Article II.A), the date specified in the notice of
conversion in the form attached hereto (the "NOTICE OF CONVERSION"), so long as
a copy of the Notice of Conversion is faxed (or delivered by other means
resulting in notice) to the Borrower before 11:59 p.m., New York City time, on
the Conversion Date indicated in the Notice of Conversion; provided, however,
that if the Notice of Conversion is not so faxed or otherwise delivered before
such time, then the Conversion Date shall be the date the holder faxes or
otherwise delivers the Notice of Conversion to the Borrower; and (ii) for any
Mandatory Conversion (as defined in Article II.C), that date specified in the
notice delivered to the Holders in the event that such Mandatory Conversion
occurs.
E. "CONVERSION PRICE" means $4.50, and shall be subject to
adjustment as provided herein.
- 19 -
F. "DEFAULT CURE DATE" means, as applicable, (i) with respect to
a Conversion Default described in clause (i) of Article IV.A, the date the
Borrower effects the conversion of the full amount of this Note being converted,
(ii) with respect to a Conversion Default described in clause (ii) of Article
IV.A, the date the Borrower issues freely tradable shares of Common Stock in
satisfaction of the conversion of the full amount of this Note being converted
in accordance with Article II, or (iii) with respect to either type of a
Conversion Default, the date on which the Borrower prepay this Note pursuant to
Article IV.A.
G. "ISSUANCE DATE" means the date of the closing under the
Securities Purchase Agreement, pursuant to which the Borrower issued, and such
purchasers purchased, the Notes.
H. "MAJORITY HOLDERS" means the holders of a majority of the
aggregate principal amount and accrued interest represented by the then
outstanding Notes.
I. "REQUIRED CONDITIONS" means all of the following: (i) the
registration statement required to be filed by the Borrower pursuant to Section
2(a) of the Registration Rights Agreement shall have been declared effective by
the Securities and Exchange Commission (and is not the subject of any stop order
or other suspension of effectiveness); (ii) the Closing Sales Price of the
Common Stock is greater than 200% of the Conversion Price then in effect for at
least twenty (20) consecutive trading days; (iii) all shares of Common Stock
issuable upon conversion of the Notes and exercise of the Warrants are then (a)
authorized and reserved for issuance, (b) registered under the Securities Act
for resale by the Holders and (c) listed or traded on any of the New York Stock
Exchange, the American Stock Exchange, the Nasdaq National Market or the Nasdaq
SmallCap Market (or the successor to any of them); (iv) no Event of Default (as
defined in Article V.A) shall have occurred without having been cured; and (v)
all amounts, if any, then accrued or payable under the Notes (including, without
limitation, all interest) or the Registration Rights Agreement shall have been
paid.
J. "TRADING DAY" means any day on which the principal United
States securities exchange or trading market where the Common Stock is then
listed or traded, is open for trading.
ARTICLE X
MISCELLANEOUS
A. Failure or Indulgency Not Waiver. No failure or delay on the
part of any 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.
B. Lost or Stolen Notes. Upon receipt by the Borrower of (i)
evidence of the loss, theft, destruction or mutilation of any Note and (ii) (y)
in the case of loss, theft or destruction, of indemnity (without any bond or
other security) reasonably satisfactory to the Borrower, or (z) in the case of
mutilation, the Note (surrendered for cancellation), the Borrower shall execute
and deliver a new Note of like tenor and date. However, the Borrower shall not
be obligated to reissue such lost, stolen, destroyed or mutilated Note if the
Holder contemporaneously requests the Borrower to convert such Note.
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C. Allocation of Reserved Amount. The initial Reserved Amount
shall be allocated pro rata among the Holders of the Notes based on the
principal amount of Notes issued to each Holder. Each increase to the Reserved
Amount shall be allocated pro rata among the Holders of the Notes based on the
principal amount of Notes held by each Holder at the time of the increase in the
Reserved Amount. In the event a Holder shall sell or otherwise transfer any of
such Holder's Notes, each transferee shall be allocated a pro rata portion of
such transferor's Reserved Amount. Any portion of the Reserved Amount which
remains allocated to any person or entity which does not hold any Notes shall be
allocated to the remaining Holders of the Notes, pro rata based on the principal
balance of Notes then held by such Holders.
D. Quarterly Statements of Available Shares. For each calendar
quarter beginning in the quarter in which the initial registration statement
required to be filed pursuant to Section 2(a) of the Registration Rights
Agreement is declared effective and thereafter for so long as any Notes are
outstanding, the Borrower shall deliver (or cause its transfer agent to deliver)
to the Holder a written report notifying the Holder of any occurrence that
prohibits the Borrower from issuing Common Stock upon any conversion. The report
shall also specify (i) the total principal amount of Notes outstanding as of the
end of such quarter, (ii) the total number of shares of Common Stock issued upon
all conversions of Notes prior to the end of such quarter, (iii) the total
number of shares of Common Stock which are reserved for issuance upon conversion
of the Notes as of the end of such quarter and (iv) the total number of shares
of Common Stock which may thereafter be issued by the Borrower upon conversion
of the Notes before the Borrower would exceed the Reserved Amount. The Borrower
(or its transfer agent) shall use its best efforts to deliver the report for
each quarter to the Holder prior to the tenth day of the calendar month
following the quarter to which such report relates. In addition, the Borrower
(or its transfer agent) shall provide, as promptly as practicable following
delivery to the Borrower of a written request by the Holder, any of the
information enumerated in clauses (i) - (iv) of this Paragraph D as of the date
of such request.
E. Status as Stockholder. Upon submission of a Notice of
Conversion by the Holder, (i) the shares covered thereby (other than the shares,
if any, which cannot be issued because their issuance would exceed the Holder's
allocated portion of the Reserved Amount) shall be deemed converted into shares
of Common Stock and (ii) the Holder's rights as a holder of such converted Note
shall cease and terminate, excepting only the right to receive certificates for
such shares of Common Stock and to any remedies provided herein or otherwise
available at law or in equity to the Holder because of a failure by the Borrower
to comply with the terms of this Note. Notwithstanding the foregoing, if the
Holder has not received certificates for all shares of Common Stock prior to the
sixth business day after the expiration of the Delivery Period with respect to a
conversion of this Note for any reason, then (unless the Holder otherwise elects
to retain its status as a holder of Common Stock by so notifying the Borrower
within five business days after the expiration of such six business day period
after expiration of the Delivery Period) the Holder shall regain the rights of a
holder of this Note and the Borrower shall, as soon as practicable, return such
unconverted Note to the Holder. In all cases, the Holder shall retain all of its
rights and remedies for the Borrower's failure to convert this Note.
F. Remedies Cumulative. 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), and nothing herein shall limit the
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Holder's right to pursue actual damages for any failure by the Borrower to
comply with the terms of this Note. The Borrower 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 Borrower
therefore agrees, in the event of any such breach or threatened breach, that 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.
G. Waiver. Notwithstanding any provision in this Note to the
contrary, any provision contained herein and any right of the Holder granted
hereunder may be waived as to all Notes (and the Holders thereof) upon the
written consent of the Majority Holders, unless a higher percentage is required
by applicable law, in which case the written consent of the Holders of not less
than such higher percentage of Notes shall be required.
H. Notices. Any notices required or permitted to be given under
the terms hereof shall be sent by certified or registered mail (return receipt
requested) or delivered personally, by responsible overnight carrier or by
confirmed facsimile, and shall be effective five days after being placed in the
mail, if mailed, or upon receipt or refusal of receipt, if delivered personally
or by responsible overnight carrier or confirmed facsimile, in each case
addressed to a party. The addresses for such communications are:
(i) if to the Borrower, to:
Daugherty Resources, Inc.
120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
Telephone: (859) 263-3948
Facsimile: (859) 263-4228
Attention: William Daugherty, President
(ii) if to the Holder, to the address set forth under the
Holder's name on the execution page to the Securities Purchase Agreement, or
such other address as may be designated in writing hereafter, in the same
manner, by such person.
I. Amendment Provision. This Note and any provision hereof may be
amended only by an instrument in writing signed by the Borrower and the Holder.
J. Assignability. This Note shall be binding upon the Borrower
and its successors and assigns and shall inure to the benefit of the Holder and
its successors and assigns. Notwithstanding anything to the contrary contained
in this Note or the Transaction Documents, this Note may be pledged and all
rights of the Holder under this Note may be assigned to any affiliate or to any
other person or entity without the consent of the Borrower.
K. Cost of Collection. If an Event of Default occurs hereunder,
the Borrower shall pay the Holder hereof costs of collection, including
reasonable attorneys' fees.
L. Governing Law; Jurisdiction. This Note shall be governed by
and construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be
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performed in the State of Delaware. The Borrower irrevocably consents to the
jurisdiction of the United States federal courts and the state courts located in
the County of New Castle, State of Delaware, in any suit or proceeding based on
or arising under this Note and irrevocably agrees that all claims in respect of
such suit or proceeding may be determined in such courts. The Borrower
irrevocably waives the defense of an inconvenient forum to the maintenance of
such suit or proceeding in such forum. The Borrower further agrees that service
of process upon the Borrower mailed by first class mail shall be deemed in every
respect effective service of process upon the Borrower in any such suit or
proceeding. Nothing herein shall affect the right of the Holder to serve process
in any other manner permitted by law. The Borrower agrees that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
M. Denominations. At the request of the Holder, upon surrender of
this Note, the Borrower shall promptly issue new Notes in the aggregate
outstanding principal amount hereof, in the form hereof, in such denominations
of at least $25,000 as the Holder shall request.
N. Certain Waivers. The Borrower and each endorser hereby waive
presentment, notice of nonpayment or dishonor, protest, notice of protest and
all other notices in connection with the delivery, acceptance, performance,
default or enforcement of payment of this Note, and hereby waive all notice or
right of approval of any extensions, renewals, modifications or forbearances
which may be allowed.
O. Severability. If any provision of this Note shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Note or the
validity or enforceability of this Note in any other jurisdiction.
P. Maximum Interest Rate. If the effective interest rate on this
Note would otherwise violate any applicable usury law, then the interest rate
shall be reduced to the maximum permissible rate and any payment received by the
Holder in excess of the maximum permissible rate shall be treated as a
prepayment of the principal of this Note.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
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IN WITNESS WHEREOF, the Borrower has caused this Note to be executed by
its duly authorized officer as of the date first written above.
DAUGHERTY RESOURCES, INC.
By:________________________________
Name:
Title:
[SIGNATURE PAGE TO SECURED CONVERTIBLE PROMISSORY NOTE]
EXHIBIT A
NOTICE OF OPTIONAL CONVERSION
To: Daugherty Resources, Inc.
120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
Facsimile: (859) 263-4228
Attention: William Daugherty, President
The undersigned hereby irrevocably elects to convert $____________ of the
outstanding principal balance of, and accrued interest on, the Note (the
"CONVERSION"), into shares of common stock ("COMMON STOCK") of Daugherty
Resources, Inc. (the "CORPORATION") according to the conditions of the 7%
Convertible Promissory Note dated September 5, 2003 (the "NOTE"), as of the date
written below. If securities are to be issued in the name of a person other than
the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto. No fee will be charged to the holder for any conversion, except
for transfer taxes, if any. A copy of the Note is attached hereto (or evidence
of loss, theft or destruction thereof).
Except as may be provided below, the Corporation shall electronically transmit
the Common Stock issuable pursuant to this Notice of Conversion to the account
of the undersigned or its nominee (which is ________________) with DTC through
its Deposit Withdrawal Agent Commission System ("DTC TRANSFER").
In the event of partial exercise, please reissue an appropriate Note(s) for the
principal balance which shall not have been converted.
The undersigned acknowledges and agrees that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Note have been or will be made only pursuant to an effective registration of the
transfer of the Common Stock under the Securities Act of 1933, as amended (the
"ACT"), or pursuant to an exemption from registration under the Act.
Check Box if Applicable:
[ ] In lieu of receiving the shares of Common Stock issuable pursuant to
this Notice of Conversion by way of DTC Transfer, the undersigned
hereby requests that the Corporation issue and deliver to the
undersigned or its nominee (if applicable) physical certificates
representing such shares of Common Stock.
Date of Conversion:_________________________
Applicable Conversion Price:________________
Number of Shares of
Common Stock to be Issued:__________________
Signature:__________________________________
Name:_______________________________________
Address:____________________________________