EXHIBIT 4.7
[FORM OF SENIOR SECURED CONVERTIBLE NOTE]
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT, (B) AN OPINION OF
COUNSEL, REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (C) REASONABLE ASSURANCE HAVING BEEN PROVIDED TO THE COMPANY
THAT SUCH OFFER, SALE, ASSIGNMENT OR TRANSFER IS BEING MADE PURSUANT TO RULE 144
OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY
BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE
SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(C)(III) AND
19(A) HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY,
THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(C)(III) OF THIS NOTE.
VERILINK CORPORATION
SENIOR SECURED CONVERTIBLE NOTE
Issuance Date: ______, 200_ Principal: U.S. $_____________
FOR VALUE RECEIVED, Verilink Corporation, a Delaware corporation
(the "COMPANY"), hereby promises to pay to the order of [BUYER] or registered
assigns ("HOLDER") the amount set out above as the Principal (as reduced
pursuant to the terms hereof pursuant to redemption, conversion or otherwise,
the "PRINCIPAL") when due, whether upon the Maturity Date (as defined below), on
any Installment Date with respect to the Installment Amount due on such
Installment Date (each, as defined herein), acceleration, redemption or
otherwise (in each case in accordance with the terms hereof) and to pay interest
("INTEREST") on any outstanding Principal at the rate of 6.00% per annum (the
"INTEREST RATE"), from the date set out above as the Issuance Date (the
"ISSUANCE DATE") until the same becomes due and payable, whether upon an
Interest Date (as defined below), any Installment Date or the Maturity Date,
acceleration, conversion, redemption or otherwise (in each case in accordance
with the terms hereof). This Senior Secured Convertible Note (including all
Senior Secured Convertible Notes issued in exchange, transfer or replacement
hereof, this "NOTE") is one of an issue of Senior Secured Convertible Notes
issued pursuant to the Securities Purchase Agreement (as defined below)
(collectively, the "NOTES" and such other Senior Secured Convertible Notes, the
"OTHER NOTES"). Certain capitalized terms used herein are defined in Section 29.
(1) PAYMENTS OF PRINCIPAL. On each Installment Date, the Company
shall pay to the Holder an amount equal to the Installment Amount due on such
Installment Date in accordance with Section 8. The "MATURITY DATE" shall be
March 21, 2008, as the same may be extended at the option of the Holder (i)
through the date that is fifteen (15) Business Days (or, in the case of the
Event of Default specified in Section 4(a)(ix), sixty-five (65) days) after the
cure or termination of any Event of Default (as defined in Section 4(a)) that
has occurred and is continuing on the Maturity Date (as may be extended pursuant
to this Section 1) or the termination of any event that has occurred and is
continuing on the Maturity Date (as may be extended pursuant to this Section 1)
and that with the passage of time and the failure to cure would result in an
Event of Default and (ii) through the date that is ten (10) days after the
consummation of a Change of Control in the event that a Change of Control is
publicly announced or a Change of Control Notice (as defined in Section 5(b)) is
delivered prior to the Maturity Date.
(2) INTEREST; INTEREST RATE. Interest on this Note shall commence
accruing on the Issuance Date and shall be computed on the basis of a 365-day
year and actual days elapsed and shall be payable in arrears for each Calendar
Quarter on the tenth day of the succeeding Calendar Quarter during the period
beginning on the Issuance Date and ending on, and including, the Maturity Date
(each, an "INTEREST DATE") with the first Interest Date being July 10, 2005.
Interest shall be payable on each Interest Date, to the record holder of this
Note on the applicable Interest Date, in cash ("CASH INTEREST") or, at the
option of the Company, in shares of Common Stock ("INTEREST SHARES") or a
combination thereof, provided that the Interest which accrued during any period
may be payable in Interest Shares if, and only if, the Company delivers written
notice (each, an "INTEREST ELECTION NOTICE") of such election to each holder of
the Notes on or prior to the twentieth (20th) Trading Day prior to the Interest
Date (each, an "INTEREST NOTICE DUE DATE"); provided, further, that from and
after November 21, 2005, the Company must pay at least 50% of all Interest due
hereunder as Cash Interest, unless at such time the Stockholder Approval (as
defined in the Securities Purchase Agreement) has been obtained. Each Interest
Election Notice must specify the amount of Interest that shall be paid as Cash
Interest, if any, and the amount of Interest that shall be paid in Interest
Shares. Interest to be paid on an Interest Date in Interest Shares shall be paid
in a number of fully paid and nonassessable shares (rounded to the nearest whole
share in accordance with Section 3(a)) of Common Stock equal to the quotient of
(a) the amount of Interest payable on such Interest Date less any Cash Interest
paid and (b) the Interest Conversion Price in effect on the applicable Interest
Date. If any Interest Shares are to be paid on an Interest Date, then the
Company shall (X) provided that the Company's transfer agent (the "TRANSFER
AGENT") is participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer Program and such action is not prohibited by applicable law
or regulation or any applicable policy of DTC, credit such aggregate number of
Interest 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 (Y) if the foregoing shall not apply, issue and deliver on
the applicable Interest Date, to the address set forth in the register
maintained by the Company for such purpose pursuant to the Securities Purchase
Agreement or to such address as specified by the Holder in writing to the
Company at least two Business Days prior to the applicable Interest Date, a
certificate, registered
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in the name of the Holder or its designee, for the number of Interest Shares to
which the Holder shall be entitled. Notwithstanding the foregoing, the Company
shall not be entitled to pay Interest in Interest Shares and shall be required
to pay such Interest in cash as Cash Interest on the applicable Interest Date
if, unless consented to in writing by the Holder, during the period commencing
on the applicable Interest Notice Due Date through the applicable Interest Date
the Equity Conditions have not been satisfied. Prior to the payment of Interest
on an Interest Date, Interest on this Note shall accrue at the Interest Rate and
be payable by way of inclusion of the Interest in the Conversion Amount in
accordance with Section 3(b)(i). Upon the occurrence and during the continuance
of an Event of Default, the Interest Rate shall be increased to twelve percent
(12%). In the event that such Event of Default is subsequently cured, the
adjustment referred to in the preceding sentence shall cease to be effective as
of the date of such cure; provided that the Interest as calculated and unpaid at
such increased rate during the continuance of such Event of Default shall
continue to apply to the extent relating to the days after the occurrence of
such Event of Default through and including the date of cure of such Event of
Default. The Company shall pay any and all taxes that may be payable with
respect to the issuance and delivery of Interest Shares; provided that the
Company shall not be required to pay any tax that may be payable in respect of
any issuance of Interest Shares to any Person other than the Holder or with
respect to any income tax due by the Holder with respect to such Interest
Shares.
(3) CONVERSION OF NOTES. This Note shall be convertible into shares
of the Company's common stock, par value $.01 per share (the "COMMON STOCK"), on
the terms and conditions set forth in this Section 3.
(a) Conversion Right. Subject to the provisions of Section
3(d), at any time or times on or after the Issuance Date, the Holder shall be
entitled to convert any portion of the outstanding and unpaid Conversion Amount
(as defined below) into fully paid and nonassessable shares of Common Stock in
accordance with Section 3(c), at the Conversion Rate (as defined below). The
Company shall not issue any fraction of a share of Common Stock upon any
conversion. If the conversion would result in the issuance of a fraction of a
share of Common Stock, unless the entire balance of the Note is being converted,
the portion of the Conversion Amount that corresponds to such fraction of a
share of Common Stock shall resume the status of unpaid Principal on the Note.
If the entire balance of the Note is being converted, the Company shall round
such fraction of a share of Common Stock up to the nearest whole share. The
Company shall pay any and all taxes that may be payable with respect to the
issuance and delivery of Common Stock upon conversion of any Conversion Amount;
provided that the Company shall not be required to pay any tax that may be
payable in respect of any issuance of Common Stock to any Person other than the
converting Holder or with respect to any income tax due by the Holder with
respect to such Common Stock.
(b) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of any Conversion Amount pursuant to Section 3(a) shall
be determined by dividing (x) such Conversion Amount by (y) the Conversion Price
(the "CONVERSION RATE").
(i) "CONVERSION AMOUNT" means the sum of (A) the portion
of the Principal to be converted, redeemed or otherwise with respect to which
this determination
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is being made, (B) accrued and unpaid Interest with respect to such Principal
and (C) accrued and unpaid Late Charges with respect to such Principal and
Interest.
(ii) "CONVERSION PRICE" means, as of any Conversion Date
(as defined below) or other date of determination, $3.01, subject to adjustment
as provided herein.
(c) Mechanics of Conversion.
(i) Optional Conversion. To convert any Conversion
Amount into shares of Common Stock on any date (a "CONVERSION DATE"), the Holder
shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior
to 11:59 p.m., New York Time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the "CONVERSION NOTICE") to
the Company and (B) if required by Section 3(c)(iii), surrender this Note to a
common carrier for delivery to the Company as soon as practicable on or
following such date (or an indemnification undertaking with respect to this Note
in the case of its loss, theft or destruction). On or before the first (1st)
Business Day following the date of receipt of a Conversion Notice, the Company
shall transmit by facsimile a confirmation of receipt of such Conversion Notice
to the Holder and the Transfer Agent. On or before the second Business Day
following the date of receipt of a Conversion Notice (the "SHARE DELIVERY
DATE"), the Company shall (X) provided that the Transfer Agent is participating
in the DTC Fast Automated Securities Transfer Program and such action is not
prohibited by applicable law or regulation or any applicable policy of DTC,
credit such aggregate number of shares of Common Stock to which the Holder shall
be entitled to the Holder's or its designee's balance account with DTC through
its Deposit Withdrawal Agent Commission system or (Y) if the foregoing shall not
apply, issue and deliver to the address as specified in the Conversion Notice, a
certificate, registered in the name of the Holder or its designee, for the
number of shares of Common Stock to which the Holder shall be entitled. If this
Note is physically surrendered for conversion as required by Section 3(c)(iii)
and the outstanding Principal of this Note is greater than the Principal portion
of the Conversion Amount being converted, then the Company shall as soon as
practicable and in no event later than three (3) Business Days after receipt of
this Note and at its own expense, issue and deliver to the holder a new Note (in
accordance with Section 19(d)) representing the outstanding Principal not
converted. The Person or Persons entitled to receive the shares of Common Stock
issuable upon a conversion of this Note shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on the Conversion Date.
In the event of a partial conversion of this Note pursuant hereto, the principal
amount converted shall be deducted from the Installment Amounts relating to the
Installment Dates as set forth in the Conversion Notice.
(ii) Company's Failure to Timely Convert. If the Company
shall fail, other than pursuant to Section 3(d), to issue a certificate to the
Holder or credit the Holder's balance account with DTC for the number of shares
of Common Stock to which the Holder is entitled upon conversion of any
Conversion Amount on or prior to the date which is five Business Days after the
Conversion Date (a "CONVERSION FAILURE"), then (A) the Company shall pay damages
in cash to the Holder for each date of such Conversion Failure in an amount
equal to 2.0% of the product of (I) the sum of the number of shares of Common
Stock not issued to the Holder on or prior to the Share Delivery Date and to
which the Holder is entitled, and (II) the Closing Sale Price of the Common
Stock on the Share Delivery Date and (B) the Holder,
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upon written notice to the Company, may void its Conversion Notice with respect
to, and retain or have returned, as the case may be, any portion of this Note
that has not been converted pursuant to such Conversion Notice; provided that
the voiding of a Conversion Notice shall not affect the Company's obligations to
make any payments which have accrued prior to the date of such notice pursuant
to this Section 3(c)(ii) or otherwise. In addition to the foregoing, if within
three (3) Trading Days after the Company's receipt of the facsimile copy of a
Conversion Notice the Company shall fail to issue and deliver a certificate to
the Holder or credit the Holder's balance account with DTC for the number of
shares of Common Stock to which the Holder is entitled upon such holder's
conversion of any Conversion Amount, and if on or after such Trading Day the
Holder purchases (in an open market transaction or otherwise) Common Stock to
deliver in satisfaction of a sale by the Holder of Common Stock issuable upon
such conversion that the Holder anticipated receiving from the Company (a
"BUY-IN"), then the Company shall, within three (3) Business Days after the
Holder's request and in the Holder's discretion, either (i) pay cash to the
Holder in an amount equal to the Holder's total purchase price (including
brokerage commissions, if any) for the shares of Common Stock so purchased (the
"BUY-IN PRICE"), at which point the Company's obligation to deliver such
certificate (and to issue such Common Stock) shall terminate, or (ii) promptly
honor its obligation to deliver to the Holder a certificate or certificates
representing such Common Stock and pay cash to the Holder in an amount equal to
the excess (if any) of the Buy-In Price over the product of (A) such number of
shares of Common Stock, times (B) the Closing Bid Price on the Conversion Date.
(iii) Book-Entry. Notwithstanding anything to the
contrary set forth herein, upon conversion of any portion of this Note in
accordance with the terms hereof, the Holder shall not be required to physically
surrender this Note to the Company unless (A) the full Conversion Amount
represented by this Note is being converted or (B) the Holder has provided the
Company with prior written notice (which notice may be included in a Conversion
Notice) requesting reissuance of this Note upon physical surrender of this Note.
The Holder and the Company shall maintain records showing the Principal,
Interest and Late Charges converted and the dates of such conversions or shall
use such other method, reasonably satisfactory to the Holder and the Company, so
as not to require physical surrender of this Note upon conversion.
(iv) Pro Rata Conversion; Disputes. In the event that
the Company receives a Conversion Notice from more than one holder of Notes for
the same Conversion Date and the Company can convert some, but not all, of such
portions of the Notes submitted for conversion, the Company, subject to Section
3(d), shall convert from each holder of Notes electing to have Notes converted
on such date a pro rata amount of such holder's portion of its Notes submitted
for conversion based on the principal amount of Notes submitted for conversion
on such date by such holder relative to the aggregate principal amount of all
Notes submitted for conversion on such date. In the event of a dispute as to the
number of shares of Common Stock issuable to the Holder in connection with a
conversion of this Note, the Company shall issue to the Holder the number of
shares of Common Stock not in dispute and resolve such dispute in accordance
with Section 24. The failure to issue to the Holder the number of shares of
Common Stock in dispute shall not be a Conversion Failure.
(d) Limitations on Conversions.
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(i) Beneficial Ownership. The Company shall not effect
any conversion of this Note, and the Holder of this Note shall not have the
right to convert any portion of this Note pursuant to Section 3(a), to the
extent that after giving effect to such conversion, the Holder (together with
the Holder's affiliates) would beneficially own in excess of 4.99% (the "MAXIMUM
PERCENTAGE") of the number of shares of Common Stock outstanding immediately
after giving effect to such conversion. For purposes of the foregoing sentence,
the number of shares of Common Stock beneficially owned by the Holder and its
affiliates shall include the number of shares of Common Stock issuable upon
conversion of this Note with respect to which the determination of such sentence
is being made, but shall exclude the number of shares of Common Stock which
would be issuable upon (A) conversion of the remaining, nonconverted portion of
this Note beneficially owned by the Holder or any of its affiliates and (B)
exercise or conversion of the unexercised or nonconverted portion of any other
securities of the Company (including, without limitation, any Other Notes or
warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder or any of its
affiliates. Except as set forth in the preceding sentence, for purposes of this
Section 3(d)(i), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes
of this Section 3(d)(i), in determining the number of outstanding shares of
Common Stock, the Holder may rely on the number of outstanding shares of Common
Stock as reflected in (x) the Company's most recent Form 10-Q or Form 8-K, as
the case may be, (y) a more recent public announcement by the Company or (z) any
other notice by the Company or the Transfer Agent setting forth the number of
shares of Common Stock outstanding. For any reason at any time, upon the written
or oral request of the Holder, the Company shall within one Business Day confirm
orally and in writing to the Holder the number of shares of Common Stock then
outstanding. In any case, the number of outstanding shares of Common Stock shall
be determined after giving effect to the conversion or exercise of securities of
the Company, including this Note, by the Holder or its affiliates since the date
as of which such number of outstanding shares of Common Stock was reported. By
written notice to the Company, the Holder may increase or decrease the Maximum
Percentage to any other percentage not in excess of 9.99% specified in such
notice; provided that (i) any such increase will not be effective until the
sixty-first (61st) day after such notice is delivered to the Company, and (ii)
any such increase or decrease will apply only to the Holder and not to any other
holder of Notes.
(ii) Principal Market Regulation. The Company shall not
be obligated to issue any shares of Common Stock upon conversion of this Note if
the issuance of such shares of Common Stock would exceed the aggregate number of
shares of Common Stock which the Company may issue upon conversion or exercise,
as applicable, of the Notes and Warrants and the payment of Interest in Interest
Shares without breaching the Company's obligations under the rules or
regulations of the Principal Market (the "EXCHANGE CAP"), except that such
limitation shall not apply in the event that the Company (A) obtains the
approval of its stockholders as required by the applicable rules of the
Principal Market for issuances of Common Stock in excess of such amount or (B)
obtains a written opinion from outside counsel to the Company that such approval
is not required, which opinion shall be reasonably satisfactory to the Required
Holders. Until such approval or written opinion is obtained, no purchaser of the
Notes pursuant to the Securities Purchase Agreement (the "PURCHASERS") shall be
issued in the aggregate, upon conversion or exercise, as applicable, of Notes or
Warrants or the payment of Interest in Interest Shares, shares of Common Stock
(as adjusted for stock splits,
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stock dividends, stock combinations and other similar transactions) in an amount
greater than the product of the Exchange Cap multiplied by a fraction, the
numerator of which is the principal amount of Notes issued to the Purchasers
pursuant to the Securities Purchase Agreement on the Closing Date and the
denominator of which is the aggregate principal amount of all Notes issued to
the Purchasers pursuant to the Securities Purchase Agreement on the Closing Date
(with respect to each Purchaser, the "EXCHANGE CAP ALLOCATION"). In the event
that any Purchaser shall sell or otherwise transfer any of such Purchaser's
Notes, the transferee shall be allocated a pro rata portion of such Purchaser's
Exchange Cap Allocation, and the restrictions of the prior sentence shall apply
to such transferee with respect to the portion of the Exchange Cap Allocation
allocated to such transferee. In the event that any holder of Notes shall
convert all of such holder's Notes into a number of shares of Common Stock
which, in the aggregate, is less than such holder's Exchange Cap Allocation,
then the difference between such holder's Exchange Cap Allocation and the number
of shares of Common Stock actually issued to such holder shall be allocated to
the respective Exchange Cap Allocations of the remaining holders of Notes on a
pro rata basis in proportion to the aggregate principal amount of the Notes then
held by each such holder.
(4) RIGHTS UPON EVENT OF DEFAULT.
(a) Event of Default. Each of the following events shall
constitute an "EVENT OF DEFAULT":
(i) the failure of the applicable Registration Statement
required to be filed pursuant to the Registration Rights Agreement to be
declared effective by the SEC on or prior to the date that is sixty (60) days
after the applicable Effectiveness Deadline (as defined in the Registration
Rights Agreement), or, while the applicable Registration Statement is required
to be maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the applicable Registration Statement lapses for
any reason (including, without limitation, the issuance of a stop order) or is
unavailable to any holder of the Notes for sale of all of such holder's
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such lapse
or unavailability continues for a period of ten (10) consecutive days or for
more than an aggregate of thirty (30) days in any 365-day period (other than
days during an Allowable Grace Period (as defined in the Registration Rights
Agreement));
(ii) the suspension from trading or failure of the
Common Stock to be listed on an Eligible Market for a period of five (5)
consecutive days or for more than an aggregate of ten (10) days in any 365-day
period;
(iii) the Company's (A) failure to cure a Conversion
Failure by delivery of the required number of shares of Common Stock within ten
(10) Business Days after the applicable Conversion Date or (B) notice, written
or oral, to any holder of the Notes, including by way of public announcement or
through any of its agents, at any time, of its intention not to comply with a
request for conversion of any Notes into shares of Common Stock that is tendered
in accordance with the provisions of the Notes, other than pursuant to Section
3(d);
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(iv) at any time following the tenth (10th) consecutive
Business Day that the Holder's Authorized Share Allocation is less than the
number of shares of Common Stock that the Holder would be entitled to receive
upon a conversion of the full Conversion Amount of this Note (without regard to
any limitations on conversion set forth in Section 3(d) or otherwise);
(v) (A) the Company's failure to pay to the Holder any
amount of Principal, when and as due under this Note (including, without
limitation, the Company's failure to pay any redemption payments) or (B) the
Company's failure to pay to the Holder any other amounts when due and as due
under any Transaction Document (as defined in the Securities Purchase Agreement)
or any other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated hereby and thereby to which the
Holder is a party, if such failure continues for a period of at least five (5)
Business Days;
(vi) (A) any payment default or other default occurs
under any Indebtedness (as defined in Section 3(s) of the Securities Purchase
Agreement) of the Company or any of its Subsidiaries (as defined in Section 3(a)
of the Securities Purchase Agreement) (other than the Alabama Mortgage) that
results in a redemption of or acceleration prior to maturity of $250,000 or more
of such Indebtedness in the aggregate, (B) any material default occurs under any
Indebtedness of the Company (other than the Alabama Mortgage) or any of its
Subsidiaries having an aggregate outstanding balance in excess of $250,000 and
such default continues uncured for more than ten (10) Business Days, other than,
in each case (A) and (B) above, a default with respect to any Other Notes, or
(C) any "event of default" occurs under the Alabama Mortgage;
(vii) the Company or any of its Subsidiaries, pursuant
to or within the meaning of Title 11, U.S. Code, or any similar Federal, foreign
or state law for the relief of debtors (collectively, "BANKRUPTCY LAW"), (A)
commences a voluntary case, (B) consents to the entry of an order for relief
against it in an involuntary case, (C) consents to the appointment of a
receiver, trustee, assignee, liquidator or similar official (a "CUSTODIAN"), (D)
makes a general assignment for the benefit of its creditors or (E) admits in
writing that it is generally unable to pay its debts as they become due;
(viii) a court of competent jurisdiction enters an order
or decree under any Bankruptcy Law that (A) is for relief against the Company or
any of its Subsidiaries in an involuntary case, (B) appoints a Custodian of the
Company or any of its Subsidiaries or (C) orders the liquidation of the Company
or any of its Subsidiaries;
(ix) a final judgment or judgments for the payment of
money aggregating in excess of $2,000,000 are rendered against the Company or
any of its Subsidiaries and which judgments are not, within sixty (60) days
after the entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within sixty (60) days after the expiration of such stay; provided,
however, that any judgment which is covered by insurance or an indemnity from a
credit worthy party shall not be included in calculating the $2,000,000 amount
set forth above so long as the Company provides the Holder a written statement
from such insurer or indemnity provider (which written statement shall be
reasonably satisfactory to the Holder) to the effect that
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such judgment is covered by insurance or an indemnity and the Company will
receive the proceeds of such insurance or indemnity within thirty (30) days of
the issuance of such judgment;
(x) the Company breaches in any material respect any
representation, warranty, covenant or other term or condition of any Transaction
Document, except, in the case of a breach of a covenant or other term or
condition of any Transaction Document which is curable, only if such breach
continues for a period of at least ten (10) consecutive Business Days;
(xi) any breach or failure in any respect to comply with
Section 15 of this Note or Section 8(b) of the Securities Purchase Agreement; or
(xii) any Event of Default (as defined in the Other
Notes) occurs with respect to any Other Notes.
(b) Redemption Right. Promptly after the occurrence of an
Event of Default with respect to this Note or any Other Note, the Company shall
deliver written notice thereof via facsimile and overnight courier (an "EVENT OF
DEFAULT NOTICE") to the Holder. At any time after the earlier of the Holder's
receipt of an Event of Default Notice and the Holder becoming aware of an Event
of Default and prior to sixty (60) days after written notice from the Company to
the Holder that such Event of Default is cured (which written notice shall
provide satisfactory evidence that such Event of Default has actually been
cured), the Holder may require the Company to redeem all or any portion of this
Note by delivering written notice thereof (the "EVENT OF DEFAULT REDEMPTION
NOTICE") to the Company, which Event of Default Redemption Notice shall indicate
the portion of this Note the Holder is electing to redeem. Each portion of this
Note subject to redemption by the Company pursuant to this Section 4(b) shall be
redeemed by the Company at a price equal to the greater of (i) the product of
(x) the Conversion Amount to be redeemed and (y) the Redemption Premium and (ii)
the product of (A) the Conversion Rate with respect to such Conversion Amount in
effect at such time as the Holder delivers an Event of Default Redemption Notice
and (B) the Closing Sale Price of the Common Stock on the date immediately
preceding such Event of Default (the "EVENT OF DEFAULT REDEMPTION PRICE").
Redemptions required by this Section 4(b) shall be made in accordance with the
provisions of Section 13. In the event of a partial redemption of this Note
pursuant hereto, the principal amount redeemed shall be deducted from the
Installment Amounts relating to the applicable Installment Dates as set forth in
the Event of Default Redemption Notice.
(5) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.
(a) Assumption. The Company shall not enter into or be party
to a Fundamental Transaction unless (i) the Successor Entity (if other than the
Company) assumes in writing all of the obligations of the Company under this
Note and the other Transaction Documents in accordance with the provisions of
this Section 5(a) pursuant to written agreements in form and substance
reasonably satisfactory to the Required Holders and approved by the Required
Holders prior to such Fundamental Transaction, including agreements to deliver
to each holder of Notes in exchange for such Notes a security of the Successor
Entity evidenced by
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a written instrument substantially similar in form and substance to the Notes,
including, without limitation, having a principal amount and interest rate equal
to the principal amounts and the interest rates of the Notes held by such holder
and having similar ranking to the Notes, and satisfactory to the Required
Holders and (ii) the Successor Entity (including its Parent Entity) is a
publicly traded corporation whose common stock is quoted on or listed for
trading on an Eligible Market. Upon the occurrence of any Fundamental
Transaction, the Successor Entity (if other than the Company) shall succeed to,
and be substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Note referring to the "Company" shall refer
instead to the Successor Entity), and may exercise every right and power of the
Company and shall assume all of the obligations of the Company under this Note
with the same effect as if such Successor Entity had been named as the Company
herein. Upon consummation of the Fundamental Transaction, the Successor Entity
(if other than the Company) shall deliver to the Holder confirmation that there
shall be issued upon conversion or redemption of this Note at any time after the
consummation of the Fundamental Transaction, in lieu of the shares of the
Company's Common Stock (or other securities, cash, assets or other property)
purchasable upon the conversion or redemption of the Notes prior to such
Fundamental Transaction, such shares of stock, securities, cash, assets or any
other property whatsoever (including warrants or other purchase or subscription
rights) which the Holder would have been entitled to receive upon the happening
of such Fundamental Transaction had this Note been converted immediately prior
to such Fundamental Transaction, as adjusted in accordance with the provisions
of this Note. The provisions of this Section shall apply similarly and equally
to successive Fundamental Transactions and shall be applied without regard to
any limitations on the conversion or redemption of this Note.
(b) Redemption Right. No sooner than fifteen (15) days nor
later than ten (10) 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 to the
Holder (a "CHANGE OF CONTROL NOTICE"). At any time during the period beginning
after the Holder's receipt of a Change of Control Notice and ending on the date
of the consummation of such Change of Control (or, in the event a Change of
Control Notice is not delivered at least ten (10) days prior to a Change of
Control, at any time on or after the date which is ten (10) days prior to a
Change of Control and ending ten (10) days after the consummation of such Change
of Control), the Holder may require the Company to redeem all or any portion of
this Note by delivering written notice thereof ("CHANGE OF CONTROL REDEMPTION
NOTICE") to the Company, which Change of Control Redemption Notice shall
indicate the Conversion Amount the Holder is electing to redeem. The portion of
this Note subject to redemption pursuant to this Section 5 shall be redeemed by
the Company at a price equal to the greater of (i) the product of (x) the
Conversion Amount being redeemed and (y) the quotient determined by dividing (A)
the Closing Sale Price of the Common Stock immediately following the public
announcement of such proposed Change of Control by (B) the Conversion Price and
(ii) 105% of the Conversion Amount being redeemed from the Issuance Date until
six months from the Issuance Date, 110% of the Conversion Amount being redeemed
from the end of such six month period until the first anniversary of the
Issuance Date, and 120% of the Conversion Amount being redeemed thereafter (the
"CHANGE OF CONTROL REDEMPTION PRICE"). Redemptions required by this Section 5
shall be made in accordance with the provisions of Section 13 only if such
Change of Control is consummated and shall have priority to payments to
stockholders in connection with a Change of Control. Notwithstanding anything to
the contrary
-10-
in this Section 5, but subject to Section 3(d), until the Change of Control
Redemption Price (together with any interest thereon) is paid in full, the
Conversion Amount submitted for redemption under this Section 5(c) (together
with any interest thereon) may be converted, in whole or in part, by the Holder
into Common Stock pursuant to Section 3. In the event of a partial redemption of
this Note pursuant hereto, the principal amount redeemed shall be deducted from
the Installment Amounts relating to the applicable Installment Dates as set
forth in the Change of Control Redemption Notice.
(6) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE
EVENTS.
(a) Purchase Rights. If at any time the Company grants, issues
or sells any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property pro rata to the record holders of any
class of Common Stock (the "PURCHASE RIGHTS"), the Company shall make
appropriate provision to insure that the Holder will thereafter have the right
to receive upon a conversion of this Note, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which the Holder could have
acquired if the Holder had held the number of shares of Common Stock acquirable
upon conversion of this Note (without taking into account any limitations or
restrictions on the convertibility of this Note) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.
(b) Other Corporate Events. In addition to and not in
substitution for any other rights hereunder, prior to the consummation of any
Fundamental Transaction pursuant to which holders of shares of Common Stock are
entitled to receive securities or other assets with respect to or in exchange
for shares of Common Stock (a "CORPORATE EVENT"), the Company shall make
appropriate provision to insure that the Holder will thereafter have the right
to receive upon a conversion of this Note, as applicable, (i) in addition to the
shares of Common Stock receivable upon such conversion, such securities or other
assets to which the Holder would have been entitled with respect to such shares
of Common Stock had such shares of Common Stock been held by the Holder upon the
consummation of such Corporate Event (without taking into account any
limitations or restrictions on the convertibility of this Note) or (ii) in lieu
of the shares of Common Stock otherwise receivable upon such conversion, such
securities or other assets received by the holders of shares of Common Stock in
connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Note initially been issued
with conversion rights for the form of such consideration (as opposed to shares
of Common Stock) at a conversion rate for such consideration commensurate with
the Conversion Rate. Provision made pursuant to the preceding sentence shall be
in a form and substance reasonably satisfactory to the Required Holders. The
provisions of this Section shall apply similarly and equally to successive
Corporate Events and shall be applied without regard to any limitations on the
conversion or redemption of this Note.
(7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.
(a) Adjustment of Conversion Price upon Issuance of Common
Stock. If and whenever on or after the Subscription Date, the Company issues or
sells, or in accordance
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with this Section 7(a) is deemed to have issued or sold, any shares of Common
Stock (including the issuance or sale of shares of Common Stock owned or held by
or for the account of the Company, but excluding shares of Common Stock deemed
to have been issued or sold by the Company in connection with any Excluded
Security) for a consideration per share less than a price (the "APPLICABLE
PRICE") equal to the Conversion Price in effect immediately prior to such issue
or sale (the foregoing a "DILUTIVE ISSUANCE"), then immediately after such
Dilutive Issuance, the Conversion Price then in effect shall be reduced to an
amount equal to the product of (A) the Conversion Price in effect immediately
prior to such Dilutive Issuance and (B) the quotient determined by dividing (1)
the sum of (I) the product derived by multiplying the Conversion Price in effect
immediately prior to such Dilutive Issuance and the number of shares of Common
Stock Deemed Outstanding immediately prior to such Dilutive Issuance plus (II)
the consideration, if any, received by the Company upon such Dilutive Issuance,
by (2) the product derived by multiplying (I) the Conversion Price in effect
immediately prior to such Dilutive Issuance by (II) the number of shares of
Common Stock Deemed Outstanding immediately after such Dilutive Issuance. For
purposes of determining the adjusted Conversion Price under this Section 7(a),
the following shall be applicable:
(i) Issuance of Options. If the Company in any manner
grants or sells any Options and the lowest price per share for which one share
of Common Stock is issuable upon the exercise of any such Option or upon
exercise of such Option and conversion or exchange or exercise of any
Convertible Securities issuable upon exercise of such Option is less than the
Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share. For purposes of this
Section 7(a)(i), the "lowest price per share for which one share of Common Stock
is issuable upon the exercise of any such Option or upon conversion or exchange
or exercise of any Convertible Securities issuable upon exercise of such Option"
shall be equal to the sum of the lowest amounts of consideration (if any)
received or receivable by the Company with respect to any one share of Common
Stock upon granting or sale of the Option, upon exercise of the Option and upon
conversion or exchange or exercise of any Convertible Security issuable upon
exercise of such Option. No further adjustment of the Conversion Price shall be
made upon the actual issuance of such Common Stock or of such Convertible
Securities upon the exercise of such Options or upon the actual issuance of such
Common Stock upon conversion or exchange or exercise of such Convertible
Securities.
(ii) Issuance of Convertible Securities. If the Company
in any manner issues or sells any Convertible Securities and the lowest price
per share for which one share of Common Stock is issuable upon such conversion
or exchange or exercise thereof is less than the Applicable Price, then such
share of Common Stock shall be deemed to be outstanding and to have been issued
and sold by the Company at the time of the issuance or sale of such Convertible
Securities for such price per share. For the purposes of this Section 7(a)(ii),
the "price per share for which one share of Common Stock is issuable upon such
conversion or exchange or exercise" shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon the issuance or sale of the
Convertible Security and upon the conversion or exchange or exercise of such
Convertible Security. No further adjustment of the Conversion Price shall be
made upon the actual issuance of such Common Stock upon conversion or exchange
or exercise of such Convertible Securities, and if any such issue or sale of
such Convertible Securities is made upon
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exercise of any Options for which adjustment of the Conversion Price had been or
are to be made pursuant to other provisions of this Section 7(a), no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.
(iii) Change in Option Price or Rate of Conversion. If
the purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion, exchange or exercise of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exchangeable or exercisable for Common Stock changes at any time, the
Conversion Price in effect at the time of such change shall be adjusted to the
Conversion Price which would have been in effect at such time had such Options
or Convertible Securities provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold. For purposes of this Section 7(a)(iii), if
the terms of any Option or Convertible Security that was outstanding as of the
Subscription Date are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such change. No adjustment shall be
made pursuant to this Section 7(a)(iii) if such adjustment would result in an
increase of the Conversion Price then in effect.
(iv) Calculation of Consideration Received. In case any
Option is issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
will be deemed to have been issued for a consideration of $.01. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor will be deemed
to be the net amount received by the Company therefor. If any Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of the consideration other than cash received by the
Company will be the fair value of such consideration, except where such
consideration consists of marketable securities, in which case the amount of
consideration received by the Company will be the Closing Sale Price of such
securities on the date of receipt. If any Common Stock, Options or Convertible
Securities are issued to the shareholders 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 net
assets and business of the non-surviving entity, calculated on a going concern
basis, as is attributable to such Common Stock, Options or Convertible
Securities, as the case may be. The fair value of any consideration other than
cash or securities will be determined jointly by the Company and the Required
Holders. If such parties are unable to reach agreement within ten (10) days
after the occurrence of an event requiring valuation (the "VALUATION EVENT"),
the fair value of such consideration will be determined within five (5) Business
Days after the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the Required Holders.
The determination of such appraiser shall be deemed binding upon all parties
absent manifest error and the fees and expenses of such appraiser shall be borne
one-half by the Company and one-half by the Holders. The consideration received
by the Company need not be calculated for shares of Common Stock that are issued
or sold or deemed issued or sold to the extent they constitute Excluded
Securities.
-13-
(v) Record Date. If the Company takes a record of the
holders of Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (B) to subscribe for or purchase Common Stock, Options
or Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the Common Stock deemed to have been issued or sold upon
the declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
(vi) This Note Deemed Outstanding. If during the period
beginning on and including the Subscription Date and ending on the date
immediately preceding the Issuance Date, the Company entered into, or in
accordance with Section 7(a) would have been deemed to have entered into (had
this Note been outstanding at such time), any Dilutive Issuance, then solely for
purposes of determining any adjustment under this Section 7(a) as a result of
such Dilutive Issuance or deemed Dilutive Issuance, this Note shall be deemed to
have been outstanding at the time of each such Dilutive Issuance or deemed
Dilutive Issuance.
(b) Adjustment of Conversion Price upon Subdivision or
Combination of Common Stock. If the Company at any time on or after the
Subscription Date subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced. If the
Company at any time on or after the Subscription Date combines (by combination,
reverse stock split or otherwise) one or more classes of its outstanding shares
of Common Stock into a smaller number of shares, the Conversion Price in effect
immediately prior to such combination will be proportionately increased.
(c) Other Events. If any event occurs of the type contemplated
by the provisions of this Section 7 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the Holder under this Note;
provided that no such adjustment will increase the Conversion Price as otherwise
determined pursuant to this Section 7.
(8) COMPANY INSTALLMENT CONVERSION OR REDEMPTION.
(a) General. On each applicable Installment Date, the Company
shall pay to the Holder of this Note the Installment Amount as of such
Installment Date by the combination of any of the following, but subject to and
in accordance with the terms of this Section 8, (i) provided that during the
period commencing with the Company Installment Notice (as defined below) through
the applicable Installment Date, the Equity Conditions have been satisfied (or
waived in writing by the Holder, provided that the Holder may not waive the
provisions of Section 3(d)(ii)), requiring the conversion of a portion of the
applicable Installment Amount, in whole or in part, in accordance with this
Section 8 (a "COMPANY CONVERSION"), and/or (ii) redeeming the applicable
Installment Amount, in whole or in part, in accordance with this Section 8 (a
"COMPANY REDEMPTION"); provided that all of the outstanding applicable
Installment Amount as of each such Installment Date must be converted and/or
redeemed by the
-14-
Company on the applicable Installment Date, subject to the provisions of this
Section 8. From and after November 21, 2005, the Company may not elect to pay
more than 50% of the applicable Installment Amount by way of a Company
Conversion unless at such time the Stockholder Approval has been obtained. As
required by the last sentence of Section 8(d), the Company shall deliver written
notice (each, a "COMPANY INSTALLMENT NOTICE"), to the Holder which Company
Installment Notice shall state (i) the portion, if any, of the applicable
Installment Amount which the Company elects to convert pursuant to a Company
Conversion, which amount when added to the Company Redemption Amount must equal
the applicable Installment Amount (the "COMPANY CONVERSION AMOUNT"), (ii) the
portion, if any, of the applicable Installment Amount which the Company elects
to redeem pursuant to a Company Redemption (the "COMPANY REDEMPTION AMOUNT"),
which amount when added to the Company Conversion Amount must equal the
applicable Installment Amount and (iii) if the Company has elected, in whole or
in part, a Company Conversion, then the Company Installment Notice shall certify
that the Equity Conditions have been satisfied as of the date of the Company
Installment Notice. Each Company Installment Notice shall be irrevocable. If the
Company does not timely deliver a Company Installment Notice in accordance with
this Section 8, then the Company shall be deemed to have delivered an
irrevocable Company Installment Notice electing a Company Conversion and shall
be deemed to have certified that the Equity Conditions in connection with any
such conversion have been satisfied. Except as expressly provided in this
Section 8(a), the Company shall redeem and convert the applicable Installment
Amount of this Note pursuant to this Section 8 and the corresponding Installment
Amounts of the Other Notes pursuant to the corresponding provisions of the Other
Notes in the same ratio of the Installment Amount being redeemed and converted
hereunder. The Company Redemption Amount shall be redeemed in accordance with
Section 8(b) and the Company Conversion Amount (whether set forth in the Company
Installment Notice or by operation of this Section 8) shall be converted in
accordance with Section 8(c). Notwithstanding the foregoing, unless the Company
is given notice to the contrary by the Holder, if the arithmetic average of the
Weighted Average Price of the Common Stock during the applicable Company
Conversion Measuring Period (as defined in Section 29 below) is greater than the
Conversion Price, then the Company shall be deemed to have elected a Company
Conversion in the Company Installment Notice as to the entire applicable
Installment Amount.
(b) Mechanics of Company Redemption. If the Company elects a
Company Redemption in accordance with Section 8(a), then the Company Redemption
Amount, if any, which is to be paid to the Holder on the applicable Installment
Date shall be redeemed by the Company on such Installment Date, and the Company
shall pay to the Holder on such Installment Date, by wire transfer of
immediately available funds in accordance with Section 25(b), an amount in cash
(the "COMPANY INSTALLMENT REDEMPTION PRICE") equal to 100% of the Company
Redemption Amount. If the Company fails to redeem the Company Redemption Amount
on the applicable Installment Date by payment of the Company Installment
Redemption Price on such date, then at the option of the Holder designated in
writing to the Company (any such designation, a "CONVERSION NOTICE" for purposes
of this Note), the Holder may require the Company to convert all or any part of
the Company Redemption Amount at the Company Conversion Price. Conversions
required by this Section 8(b) shall be made in accordance with the provisions of
Section 3(c). Notwithstanding anything to the contrary in this Section 8(b), but
subject to Section 3(d), until the Company Installment Redemption Price
(together with any interest thereon) is paid in full, the Company Redemption
Amount (together with any interest
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thereon) may be converted, in whole or in part, by the Holder into Common Stock
pursuant to Section 3. In the event the Holder elects to convert all or any
portion of the Company Redemption Amount prior to the applicable Installment
Date as set forth in the immediately preceding sentence, the Company Redemption
Amount so converted shall be deducted from the Installment Amount to be paid on
such Installment Date.
(c) Mechanics of Company Conversion. Subject to Section 3(d),
if the Company delivers a Company Installment Notice and elects, or is deemed to
have elected, in whole or in part, a Company Conversion in accordance with
Section 8(a), then the applicable Company Conversion Amount, if any, which
remains outstanding shall be converted as of the applicable Installment Date by
converting on such Installment Date such Company Conversion Amount at the
Company Conversion Price; provided that the Equity Conditions have been
satisfied (or waived in writing by the Holder) on such Installment Date. If the
Equity Conditions are not satisfied (or waived in writing by the Holder) on such
Installment Date, then at the option of the Holder designated in writing to the
Company, the Holder may require the Company to do any one or more of the
following: (i) the Company shall redeem all or any part designated by the Holder
of the unconverted Company Conversion Amount (such designated amount is referred
to as the "FIRST REDEMPTION AMOUNT") on such Installment Date and the Company
shall pay to the Holder on such Installment Date, by wire transfer of
immediately available funds, an amount in cash equal to 120% of such First
Redemption Amount, or (ii) the Company Conversion shall be null and void with
respect to all or any part designated by the Holder of the unconverted Company
Conversion Amount and the Holder shall be entitled to all the rights of a holder
of this Note with respect to such amount of the Company Conversion Amount;
provided, however, that the Conversion Price for such unconverted Company
Conversion Amount shall thereafter be adjusted to equal the lesser of (A) the
Company Conversion Price as in effect on the date on which the Holder voided the
Company Conversion and (B) the Company Conversion Price as in effect on the date
on which the Holder delivers a Conversion Notice relating thereto. If the
Company fails to redeem any First Redemption Amount on or before the applicable
Installment Date by payment of such amount on the applicable Installment Date,
then the Holder shall have the rights set forth in Section 13(a) as if the
Company failed to pay the applicable Company Redemption Price and all other
rights under this Note (including, without limitation, such failure constituting
an Event of Default described in Section 4(a)(v)). Notwithstanding anything to
the contrary in this Section 8(c), but subject to 3(d), until the Company
delivers Common Stock representing the Company Conversion Amount to the Holder,
the Company Conversion Amount may be converted by the Holder into Common Stock
pursuant to Section 3. In the event the Holder elects to convert the Company
Conversion Amount prior to the applicable Installment Date as set forth in the
immediately preceding sentence, the Company Conversion Amount so converted shall
be deducted from the Installment Amount to be paid on such Installment Date.
(d) Special Installment Amounts. The Company shall announce
its operating results (the "OPERATING RESULTS") for each Fiscal Quarter no later
than the thirtieth (30th) day after the end of each Fiscal Quarter and such
announcement shall include the amount of the Company's Tested Working Capital.
In addition, if at the end of the Fiscal Quarter the Company's Tested Working
Capital is less than the Target Working Capital (a "WORKING CAPITAL
DEFICIENCY"), the Company shall make publicly available (as part of the
Operating Results announcement or, contemporaneously, on a Current Report on
Form 8-K or otherwise) the fact that the Company's obligation to pay Special
Installment Amounts has been triggered.
-16-
On the date of such announcement (the "ANNOUNCEMENT DATE"), the Company shall
also provide to the Holders a certification (a "WORKING CAPITAL CERTIFICATION")
as to the amount of the Tested Working Capital as of the end of the Fiscal
Quarter to which such Operating Results relate. If at the end of any Fiscal
Quarter a Working Capital Deficiency exists, the Company shall, on the
Announcement Date, also provide to the Holder a notice (each such notice, a
"WORKING CAPITAL DEFICIENCY NOTICE") stating the amount of such Working Capital
Deficiency. At any time during the period beginning after the Holder's receipt
of a Working Capital Deficiency Notice (or, in the event that the Company does
not deliver such Working Capital Deficiency Notice, at any time designated by
the Holder) and ending seven (7) Business Days thereafter (the "SPECIAL
INSTALLMENT NOTICE DUE DATE"), the Holder may require the Company to pay, on
each Special Installment Date, a Special Installment Amount in the form of a
Company Redemption or, at the Company's option if applicable, a Company
Conversion (or a combination thereof) in accordance with the provisions of this
Section 8 by delivering written notice thereof (a "SPECIAL INSTALLMENT NOTICE")
to the Company which Special Installment Notice shall state the amount of the
Special Installment Amount due on the applicable Special Installment Date.
Within two (2) Trading Days of receipt of a Special Installment Notice, the
Company shall provide to the Holder a Company Installment Notice in accordance
with Section 8(a).
(9) COMPANY'S RIGHT OF MANDATORY CONVERSION.
(a) Mandatory Conversion. If at any time from and after the one-year
anniversary of the Effective Date (as defined in the Registration Rights
Agreement) (the "MANDATORY CONVERSION ELIGIBILITY DATE"), (i) the Weighted
Average Price of the Common Stock equals or exceeds 200% of the Conversion Price
(subject to appropriate adjustments for stock splits, stock dividends, stock
combinations and other similar transactions after the Subscription Date) for
each of any twenty (20) consecutive Trading Days following the Mandatory
Conversion Eligibility Date (the "MANDATORY CONVERSION MEASURING PERIOD") and
(ii) the Equity Conditions shall have been satisfied (or waived in writing by
the Holder, provided that the Holder may not waive the provisions of Section
3(d)(ii)), during the period commencing on the Mandatory Conversion Notice Date
through the applicable Mandatory Conversion Date (each, as defined below), the
Company shall have the right to require the Holder to convert all, but not less
than all, of the Conversion Amount then remaining under this Note plus the
Present Value of Interest as designated in the Mandatory Conversion Notice (as
defined below) into fully paid, validly issued and nonassessable shares of
Common Stock in accordance with Section 3(c) hereof at the Conversion Rate as of
the Mandatory Conversion Date (as defined below) (a "MANDATORY CONVERSION") or,
at the Company's option and solely with respect to the Present Value of
Interest, cash or a combination of Common Stock and cash. The Company may
exercise its right to require conversion under this Section 9(a), by delivering
within not more than two (2) Trading Days following the end of such Mandatory
Conversion Measuring Period a written notice thereof by facsimile and overnight
courier to all, but not less than all, of the holders of Notes and the Transfer
Agent (the "MANDATORY CONVERSION NOTICE" and the date all of the holders
received such notice by facsimile is referred to as the "MANDATORY CONVERSION
NOTICE DATE"). The Mandatory Conversion Notice shall be irrevocable. The
Mandatory Conversion Notice shall state (i) the Trading Day selected for the
Mandatory Conversion in accordance with Section 9(a), which Trading Day shall be
at least twenty (20) Business Days but not more than sixty (60) Business Days
following the Mandatory Conversion Notice Date (the "MANDATORY CONVERSION
DATE"), (ii) the aggregate Conversion Amount of the Notes subject to
-17-
mandatory conversion from all of the holders of the Notes pursuant to this
Section 9 (and analogous provisions under the Other Notes), (iii) the number of
shares of Common Stock to be issued to, and the Present Value of Interest to be
paid to, such Holder on the Mandatory Conversion Date and (iv) the portion, if
any, of the Present Value of Interest that shall be paid in cash and the
portion, if any, that shall be paid in Common Stock.
(b) Pro Rata Conversion Requirement. If the Company elects to cause
a conversion of any Conversion Amount of this Note pursuant to Section 9(a),
then it must simultaneously take the same action in the same proportion with
respect to the Other Notes. All Conversion Amounts converted by the Holder after
the Mandatory Conversion Notice Date shall reduce the Conversion Amount of this
Note required to be converted on the Mandatory Conversion Date. If the Company
has elected a Mandatory Conversion, the mechanics of conversion set forth in
Section 3(c) shall apply, to the extent applicable, as if the Company and the
Transfer Agent had received from the Holder on the Mandatory Conversion Date a
Conversion Notice with respect to the Conversion Amount being converted pursuant
to the Mandatory Conversion.
(10) SECURITY. This Note and the Other Notes are secured to the
extent and in the manner set forth in the Security Documents (as defined in the
Securities Purchase Agreement).
(11) NONCIRCUMVENTION. The Company hereby covenants and agrees that
the Company will not, by amendment of its Certificate of Incorporation, Bylaws
or through any reorganization, transfer of assets, consolidation, merger, scheme
of arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Note, and will at all times in good faith carry out all of the
provisions of this Note and take all action as may be required to protect the
rights of the Holder of this Note.
(12) RESERVATION OF AUTHORIZED SHARES.
(a) Reservation. The Company shall initially reserve out of
its authorized and unissued Common Stock at least 8,144,109 shares of Common
Stock for all of the Notes. So long as any of the Notes are outstanding, the
Company shall take all action necessary to reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Notes, 150% of the number of shares of Common Stock as shall
from time to time be necessary to effect the conversion of all of the Notes then
outstanding pursuant to Sections 2 and 3 (without regard to any limitations on
conversions) (the "REQUIRED RESERVE AMOUNT"). The amount required to be reserved
shall be reduced by the number of shares of Common Stock issued upon conversion
of the Notes. The initial number of shares of Common Stock reserved for
conversions of the Notes and each increase in the number of shares so reserved
shall be allocated pro rata among the holders of the Notes based on the
principal amount of the Notes held by each holder at the Closing (as defined in
the Securities Purchase Agreement) or increase in the number of reserved shares,
as the case may be (the "AUTHORIZED SHARE ALLOCATION"). In the event that a
holder shall sell or otherwise transfer any of such holder's Notes, each
transferee shall be allocated a pro rata portion of such holder's Authorized
Share Allocation. Any shares of Common Stock reserved and allocated to any
Person which
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ceases to hold any Notes shall be allocated to the remaining holders of Notes,
pro rata based on the principal amount of the Notes then held by such holders.
(b) Insufficient Authorized Shares. If at any time while any
of the Notes remain outstanding the Company does not have a sufficient number of
authorized and unreserved shares of Common Stock to satisfy its obligation to
reserve for issuance upon conversion of the Notes at least a number of shares of
Common Stock equal to the Required Reserve Amount (an "AUTHORIZED SHARE
FAILURE"), then the Company shall immediately take all action necessary to
increase the Company's authorized shares of Common Stock to an amount sufficient
to allow the Company to reserve the Required Reserve Amount for the Notes then
outstanding. Without 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 sixty (60) days after the occurrence of such
Authorized Share Failure, the Company shall hold a meeting of its stockholders
for the approval of an increase in the number of authorized shares of Common
Stock. In connection with such meeting, the Company shall provide each
stockholder with a proxy statement and shall use its reasonable best efforts to
solicit its stockholders' approval of such increase in authorized shares of
Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal.
(13) HOLDER'S REDEMPTIONS.
(a) Mechanics. The Company shall deliver the applicable Event
of Default Redemption Price to the Holder within five (5) Business Days after
the Company's receipt of the Holder's Event of Default Redemption Notice. If the
Holder has submitted a Change of Control Redemption Notice in accordance with
Section 5(b), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder by the later of (i) consummation of the Change of
Control or (ii) five (5) Business Days after the Company's receipt of such
notice. The Company shall deliver the applicable Company Installment Redemption
Price to the Holder on the applicable Installment Date. In the event of a
redemption of less than all of the Conversion Amount of this Note, the Company
shall promptly cause to be issued and delivered to the Holder a new Note (in
accordance with Section 19(d)) representing the outstanding Principal which has
not been redeemed. In the event that the Company does not pay the applicable
Redemption Price to the Holder within the time period required, at any time
thereafter and until the Company pays such unpaid Redemption Price in full, the
Holder shall have the option, in lieu of redemption, to require the Company to
promptly return to the Holder all or any portion of this Note representing the
Conversion Amount that was submitted for redemption and for which the applicable
Redemption Price (together with any Late Charges thereon) has not been paid.
Upon the Company's receipt of such notice, (x) the Redemption Notice shall be
null and void with respect to such Conversion Amount, (y) the Company shall
immediately return this Note, or issue a new Note (in accordance with Section
19(d)) to the Holder representing such Conversion Amount and (z) the Conversion
Price of this Note or such new Notes shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the Redemption Notice is
voided and (B) the lowest Closing Bid Price of the Common Stock during the
period beginning on and including the date on which the Redemption Notice is
delivered to the Company and ending on and including the date on which the
Redemption Notice is voided. The Holder's delivery of a notice voiding a
Redemption Notice and exercise of its rights following such notice shall not
affect the Company's obligations to make any payments of
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Late Charges which have accrued prior to the date of such notice with respect to
the Conversion Amount subject to such notice.
(b) Redemption by Other Holders. Upon the Company's receipt of
notice from any of the holders of the Other Notes for redemption or repayment as
a result of an event or occurrence substantially similar to the events or
occurrences described in Section 4(b) or Section 5(b) (each, an "OTHER
REDEMPTION NOTICE"), the Company shall immediately forward to the Holder by
facsimile a copy of such notice. If the Company receives a Redemption Notice and
one or more Other Redemption Notices, during the seven (7) Business Day period
beginning on and including the date which is three (3) Business Days prior to
the Company's receipt of the Holder's Redemption Notice and ending on and
including the date which is three (3) Business Days after the Company's receipt
of the Holder's Redemption Notice and the Company is unable to redeem all
principal, interest and other amounts designated in such Redemption Notice and
such Other Redemption Notices received during such seven (7) Business Day
period, then the Company shall redeem a pro rata amount from each holder of the
Notes (including the Holder) based on the principal amount of the Notes
submitted for redemption pursuant to such Redemption Notice and such Other
Redemption Notices received by the Company during such seven Business Day
period.
(14) VOTING RIGHTS. The Holder shall have no voting rights as the
holder of this Note, except as required by law, including, but not limited to,
the General Corporation Law of the State of Delaware, and as expressly provided
in this Note.
(15) COVENANTS. The following covenants shall apply so long as this
Note is outstanding, but not thereafter:
(a) Rank. This Note shall be a senior secured obligation of
the Company and, together with the Other Notes and the Alabama Mortgage, shall
constitute the only senior Indebtedness of the Company secured by a consensual
lien granted by the Company (other than certain capital lease obligations
entered into prior to December 31, 2004 whose outstanding balance did not exceed
$150,000 as of March 8, 2005).
(b) Incurrence of Indebtedness. The Company shall not, and the
Company shall not permit any of its Subsidiaries to, directly or indirectly,
incur or guarantee, assume or suffer to exist any Indebtedness, other than (i)
the Indebtedness evidenced by this Note and the Other Notes and (ii) Permitted
Indebtedness.
(c) Existence of Liens. The Company shall not, and the Company
shall not permit any of its Subsidiaries to, directly or indirectly, allow or
suffer to exist any mortgage, lien, pledge, charge, security interest or other
encumbrance upon or in any property or assets (including accounts and contract
rights) owned by the Company or any of its Subsidiaries (collectively, "LIENS")
other than Permitted Liens.
(d) Restricted Payments. The Company shall not, and the
Company shall not permit any of its Subsidiaries to, directly or indirectly,
redeem, defease, repurchase, repay or make any payments in respect of, by the
payment of cash or cash equivalents (in whole or in part, whether by way of open
market purchases, tender offers, private transactions or otherwise), all or any
portion of any Permitted Indebtedness (other than the Alabama Mortgage) whether
by
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way of payment in respect of principal of (or premium, if any) or interest on
such Indebtedness if at the time such payment is due or is otherwise made or,
after giving effect to such payment, an event constituting, or that with the
passage of time and without being cured would constitute, an Event of Default
has occurred and is continuing; provided, that, notwithstanding the foregoing,
no principal (or any portion thereof) of any Subordinated Indebtedness may be
paid (whether upon maturity, redemption, acceleration or otherwise) so long as
this Note is outstanding.
(16) PARTICIPATION. The Holder, as the holder of this Note, shall be
entitled to receive such dividends paid and distributions made to the holders of
Common Stock to the same extent as if the Holder had converted this Note into
Common Stock (without regard to any limitations on conversion herein or
elsewhere) and had held such shares of Common Stock on the record date for such
dividends and distributions. Payments under the preceding sentence shall be made
concurrently with the dividend or distribution to the holders of Common Stock.
(17) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The written
agreement of the Company and either (i) the affirmative vote at a meeting duly
called for such purpose or (ii) the written consent without a meeting of the
Required Holders shall be required for any change or amendment to this Note or
the Other Notes.
(18) TRANSFER; REGISTERED HOLDER AS OWNER.
(a) Transfer by Holder. This Note and any shares of Common
Stock issued upon conversion of this Note may be offered, sold, assigned or
transferred by the Holder without the consent of the Company, subject only to
the provisions of Section 2(f) of the Securities Purchase Agreement. Each Person
to whom this Note is sold, assigned or transferred by the Holder shall provide
to the Company true and accurate information as to such Person comparable to
that contained in columns (1), (2) and (7) of the Schedule of Buyers attached to
the Securities Purchase Agreement and as to the jurisdiction of residence of
such Person.
(b) Registered Holder as Owner. The Company shall be entitled
to treat the registered Holder of this Note as the absolute owner hereof and
shall incur no liability for the issuance of Common Stock or for other action
taken hereunder in good faith based upon such ownership until such time as a
written assignment of this Note is effected by such registered owner, which
assignment has been delivered to the Company and satisfies the requirements of
Sections 18(a) and 19(a) hereof.
(19) REISSUANCE OF THIS NOTE.
(a) Transfer. If this Note is to be transferred, the Holder
shall surrender this Note to the Company, whereupon the Company will forthwith
issue and deliver upon the order of the Holder a new Note (in accordance with
Section 19(d)), registered as the Holder may request, representing the
outstanding Principal being transferred by the Holder and, if less then the
entire outstanding Principal is being transferred, a new Note (in accordance
with Section 19(d)) to the Holder representing the outstanding Principal not
being transferred. The Holder and any assignee, by acceptance of this Note,
acknowledge and agree that, by reason of the provisions of Section 3(c)(iii)
following conversion or redemption of any portion of this Note,
-21-
the outstanding Principal represented by this Note may be less than the
Principal stated on the face of this Note.
(b) Lost, Stolen or Mutilated Note. Upon receipt by the
Company of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Note, and, in the case of loss, theft or
destruction, of any indemnification undertaking by the Holder to the Company in
customary form and, in the case of mutilation, upon surrender and cancellation
of this Note, the Company shall execute and deliver to the Holder a new Note (in
accordance with Section 19(d)) representing the outstanding Principal.
(c) Note Exchangeable for Different Denominations. This Note
is exchangeable, upon the surrender hereof by the Holder at the principal office
of the Company, for a new Note or Notes (in accordance with Section 19(d) and in
principal amounts of at least $100,000) representing in the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.
(d) Issuance of New Notes. Whenever the Company is required to
issue a new Note pursuant to the terms of this Note, such new Note (i) shall be
of like tenor with this Note, (ii) shall represent, as indicated on the face of
such new Note, the Principal remaining outstanding (or in the case of a new Note
being issued pursuant to Section 19(a) or Section 19(c), the Principal
designated by the Holder which, when added to the principal represented by the
other new Notes issued in connection with such issuance, does not exceed the
Principal remaining outstanding under this Note immediately prior to such
issuance of new Notes), (iii) shall have an issuance date, as indicated on the
face of such new Note, which is the same as the Issuance Date of this Note, (iv)
shall have the same rights and conditions as this Note, and (v) shall represent
accrued and unpaid Interest and Late Charges on the Principal and Interest of
this Note, from the Issuance Date.
(20) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in
addition to all other remedies available under this Note and any of the other
Transaction Documents at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the
Holder's right to pursue actual and consequential damages for any failure by the
Company to comply with the terms of this Note. Amounts set forth or provided for
herein with respect to payments, conversion and the like (and the computation
thereof) shall be the amounts to be received by the Holder and shall not, except
as expressly provided herein, be subject to any other obligation of the Company
(or the performance thereof). The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
(21) 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
-22-
collected or enforced through any legal proceeding or the Holder otherwise takes
action to collect amounts due under this Note or to enforce the provisions of
this Note or (b) there occurs any bankruptcy, reorganization, receivership of
the Company or other proceedings affecting Company creditors' rights and
involving a claim under this Note, then the Company shall pay the costs incurred
by the Holder for such collection, enforcement or action or in connection with
such bankruptcy, reorganization, receivership or other proceeding, including,
but not limited to, attorneys' fees and disbursements.
(22) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly
drafted by the Company and all the Purchasers and shall not be construed against
any person as the drafter hereof. The headings of this Note are for convenience
of reference and shall not form part of, or affect the interpretation of, this
Note.
(23) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the
part of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege.
(24) DISPUTE RESOLUTION. In the case of a dispute as to the
determination of the Closing Bid Price, the Closing Sale Price or the Weighted
Average Price or the arithmetic calculation of the Conversion Rate or the
Redemption Price, the Company shall submit the disputed determinations or
arithmetic calculations via facsimile within one (1) Business Day of receipt, or
deemed receipt, of the Conversion Notice or Redemption Notice or other event
giving rise to such dispute, as the case may be, to the Holder. If the Holder
and the Company are unable to agree upon such determination or calculation
within one (1) Business Day of such disputed determination or arithmetic
calculation being submitted to the Holder, then the Company shall, within one
Business Day submit via facsimile (a) the disputed determination of the Closing
Bid Price, the Closing Sale Price or the Weighted Average Price to an
independent, reputable investment bank selected by the Company and approved by
the Holder or (b) the disputed arithmetic calculation of the Conversion Rate or
the Redemption Price to the Company's independent, outside accountant. The
Company, at the Company's expense, shall cause the investment bank or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the Holder of the results no later than five (5)
Business Days from the time it receives the disputed determinations or
calculations. Such investment bank's or accountant's determination or
calculation, as the case may be, shall be binding upon all parties absent
demonstrable error.
(25) NOTICES; PAYMENTS.
(a) Notices. Whenever notice is required to be given under
this Note, unless otherwise provided herein, such notice shall be given in
accordance with Section 9(f) of the Securities Purchase Agreement. The Company
shall provide the Holder with prompt written notice of all actions taken
pursuant to this Note, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the
foregoing, the Company will give written notice to the Holder (i) immediately
upon any adjustment of the Conversion Price, setting forth in reasonable detail,
and certifying, the calculation of such adjustment and (ii) at least twenty (20)
days prior to the date on which the Company closes its
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books or takes a record (A) with respect to any dividend or distribution upon
the Common Stock, (B) with respect to any pro rata subscription offer to holders
of Common Stock or (C) for determining rights to vote with respect to any
Fundamental Transaction, dissolution or liquidation, provided in each case that
such information shall be made known to the public prior to or in conjunction
with such notice being provided to the Holder.
(b) Payments. Whenever any payment of cash is to be made by
the Company to any Person pursuant to this Note, such payment shall be made in
lawful money of the United States of America by a check drawn on the account of
the Company and sent via overnight courier service to such Person at such
address as previously provided to the Company in writing (which address, in the
case of each of the Purchasers, shall initially be as set forth on the Schedule
of Buyers attached to the Securities Purchase Agreement); provided that the
Holder may elect to receive a payment of cash via wire transfer of immediately
available funds by providing the Company with prior written notice setting out
such request and the Holder's wire transfer instructions. Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a
Business Day, the same shall instead be due on the next succeeding day which is
a Business Day and, in the case of any Interest Date which is not the date on
which this Note is paid in full, the extension of the due date thereof shall not
be taken into account for purposes of determining the amount of Interest due on
such date. Any amount of Principal or other amounts due under the Transaction
Documents, other than Interest, which is not paid when due shall result in a
late charge being incurred and payable by the Company in an amount equal to
interest on such amount at the rate of twelve percent (12%) per annum from the
date such amount was due until the same is paid in full ("LATE CHARGE").
(26) CANCELLATION. After all Principal, accrued Interest and other
amounts at any time owed on this Note have been paid in full, this Note shall
automatically be deemed canceled, shall be surrendered to the Company for
cancellation and shall not be reissued.
(27) 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.
(28) 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
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York.
(29) CERTAIN DEFINITIONS. For purposes of this Note, the following
terms shall have the following meanings:
(a) "ADDITIONAL INVESTMENT RIGHTS" has the meaning ascribed to
such term in the Securities Purchase Agreement and shall include additional
investment rights issued in exchange therefor.
-24-
(b) "ALABAMA MORTGAGE" means the mortgages made by the Company
in favor of Regions Bank in connection with the real property located in the
Cummings Research Park West in Huntsville, Madison County, Alabama, and with the
outstanding loan amounts secured by these mortgages not being in the aggregate
in excess of $3,500,000 as of the Subscription Date; provided, however, that
such mortgages and loans shall not be amended, restated, renewed, refunded,
refinanced or otherwise extended and the outstanding principal amount shall not
be increased after the Subscription Date without the consent of the Required
Holders.
(c) "APPROVED STOCK PLAN" means any employee benefit plan
which has been approved by the Board of Directors of the Company, pursuant to
which the Company's securities may be issued to any consultant, employee,
officer or director for services provided to the Company.
(d) "BLOOMBERG" means Bloomberg Financial Markets.
(e) "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.
(f) "CALENDAR QUARTER" means each of: the period beginning on
and including January 1 and ending on and including March 31; the period
beginning on and including April 1 and ending on and including June 30; the
period beginning on and including July 1 and ending on and including September
30; and the period beginning on and including October 1 and ending on and
including December 31.
(g) "CHANGE OF CONTROL" means any Fundamental Transaction
other than (A) a Fundamental Transaction in which holders of the Company's
capital stock having voting power immediately prior to the Fundamental
Transaction continue after the Fundamental Transaction to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving entity
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.
(h) "CLOSING BID PRICE" and "CLOSING SALE PRICE" means, for
any security as of any date, the last closing bid price and last closing trade
price, respectively, for such security on the Principal Market, as reported by
Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing bid price or the closing trade price,
as the case may be, then the last bid price or last trade price, respectively,
of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg,
or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last closing bid price or last trade price,
respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price or last trade price, respectively, is reported for
-25-
such security by Bloomberg, the average of the bid prices, or the ask prices,
respectively, of any market makers for such security as reported in the "pink
sheets" by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If
the Closing Bid Price or the Closing Sale Price cannot be calculated for a
security on a particular date on any of the foregoing bases, the Closing Bid
Price or the Closing Sale Price, as the case may be, of such security on such
date shall be the fair market value as mutually determined by the Company and
the Holder. If the Company and the Holder are unable to agree upon the fair
market value of such security, then such dispute shall be resolved pursuant to
Section 24. All such determinations to be appropriately adjusted for any stock
dividend, stock split, stock combination or other similar transaction during the
applicable calculation period.
(i) "CLOSING DATE" shall have the meaning set forth in the
Securities Purchase Agreement, which date is the date the Company initially
issued Notes pursuant to the terms of the Securities Purchase Agreement.
(j) "COMMON STOCK DEEMED OUTSTANDING" means, at any given
time, the number of shares of Common Stock actually outstanding at such time,
plus the number of shares of Common Stock deemed to be outstanding pursuant to
Sections 7(a)(i) and 7(a)(ii) hereof regardless of whether the Options or
Convertible Securities are actually exercisable at such time, but excluding any
Common Stock owned or held by or for the account of the Company or issuable upon
conversion or exercise, as applicable, of the Notes and the Warrants.
(k) "COMPANY CONVERSION PRICE" means, as of any date of
determination, that price which shall be the lower of (i) the price computed as
90% of the arithmetic average of the Weighted Average Price of the Common Stock
during each of the fifteen (15) Trading Days of the fifteen (15) consecutive
Trading Day period commencing three (3) Trading Days after delivery of the
Special Installment Notice (each, a "COMPANY CONVERSION MEASURING PERIOD") and
(ii) the applicable Conversion Price. All such determinations to be
appropriately adjusted for any stock split, stock dividend, stock combination or
other similar transaction that proportionately decreases or increases the Common
Stock during such Company Conversion Measuring Period.
(l) "CONVERTIBLE SECURITIES" means any stock or securities
(other than Options) directly or indirectly convertible into or exercisable or
exchangeable for Common Stock.
(m) "ELIGIBLE MARKET" means the Principal Market, The New York
Stock Exchange, Inc., the American Stock Exchange or The Nasdaq SmallCap Market.
(n) "EQUITY CONDITIONS" means each of the following
conditions: (i) on each day during the period beginning one (1) month prior to
the applicable date of determination and ending on and including the applicable
date of determination, either (x) the Registration Statement filed pursuant to
the Registration Rights Agreement shall be effective and available for the
resale of all remaining Registrable Securities in accordance with the terms of
the Registration Rights Agreement and there shall not have been any Grace
Periods (as defined in the Registration Rights Agreement) or (y) all shares of
Common Stock issuable upon conversion of the Notes and exercise of the Warrants
shall be eligible for sale without restriction and without
-26-
the need for registration under any applicable federal or state securities laws;
(ii) on each day during the period beginning three (3) months prior to the
applicable date of determination and ending on and including the applicable date
of determination (the "EQUITY CONDITIONS MEASURING PERIOD"), the Common Stock is
designated for quotation on the Principal Market and shall not have been
suspended from trading on such exchange or market (other than suspensions of not
more than two (2) days and occurring prior to the applicable date of
determination due to business announcements by the Company) nor shall delisting
or suspension by such exchange or market been threatened or pending either (A)
in writing by such exchange or market or (B) by falling below the then effective
minimum listing maintenance requirements of such exchange or market; (iii)
during the one (1) year period ending on and including the date immediately
preceding the applicable date of determination, the Company shall have delivered
any Conversion Shares to be delivered upon conversion of the Notes and Warrant
Shares upon exercise of the Warrants to the holders on a timely basis as set
forth in Section 2(c)(ii) hereof (and analogous provisions under the Other
Notes) and Sections 2(a) of the Warrants and Notes upon exercise of the
Additional Investment Rights; (iv) during the Equity Conditions Measuring Period
any applicable shares of Common Stock to be issued in connection with the event
requiring determination may be issued in full without violating Section 3(d)
hereof and the rules or regulations of the Principal Market; (v) during the
Equity Conditions Measuring Period, the Company shall not have failed to timely
make any payments within five (5) Business Days of when such payment is due
pursuant to any Transaction Document; (vi) during the Equity Conditions
Measuring Period, there shall not have occurred either (A) the public
announcement of a pending, proposed or intended Fundamental Transaction which
has not been abandoned, terminated or consummated, or (B) an Event of Default or
(vii) during the period commencing on the Interest Notice Due Date, the Special
Installment Notice Due Date or the Mandatory Conversion Notice Date, as
applicable, and ending on the Interest Date, the Special Installment Date or the
Mandatory Conversion Date, as applicable, an event that with the passage of time
or giving of notice would constitute an Event of Default; (viii) on the
applicable date of determination, the Company shall have no knowledge of any
fact that would cause (x) the Registration Statements required pursuant to the
Registration Rights Agreement not to be effective and available for the resale
of all remaining Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) any shares of Common Stock issuable upon
conversion of the Notes and shares of Common Stock issuable upon exercise of the
Warrants not to be eligible for sale without restriction pursuant to Rule 144(k)
and any applicable state securities laws; and (ix) during the Equity Conditions
Measuring Period, the Company otherwise shall have been in material compliance
with and shall not have materially breached any provision, covenant,
representation or warranty of any Transaction Document.
(o) "EXCLUDED SECURITIES" means any Common Stock issued or
issuable: (i) in connection with any Approved Stock Plan; (ii) upon conversion
of the Notes or the exercise of the Warrants, including Common Stock issued upon
a Company Conversion; (iii) pursuant to a bona fide firm commitment underwritten
public offering with a nationally recognized underwriter which generates gross
proceeds to the Company in excess of $20,000,000 (other than an "at-the-market
offering" as defined in Rule 415(a)(4) under the 1933 Act and "equity lines");
(iv) in connection with the payment of any Interest Shares on the Notes; (v) in
connection with any acquisition by the Company, whether through an acquisition
of stock or a merger of any business, assets or technologies the primary purpose
of which is not to raise equity capital; and (vi) upon conversion of any Options
or Convertible Securities which are outstanding
-27-
on the day immediately preceding the Subscription Date, provided that the terms
of such Options or Convertible Securities are not amended, modified or changed
on or after the Subscription Date.
(p) "FISCAL QUARTER" means each of the fiscal quarters adopted
by the Company for financial reporting purposes that correspond to the Company's
fiscal year that ends on the Friday nearest to June 30, or such other fiscal
quarter adopted by the Company for financial reporting purposes in accordance
with GAAP.
(q) "FUNDAMENTAL TRANSACTION" means that the Company shall,
directly or indirectly, in one or more related transactions, (i) consolidate or
merge with or into (whether or not the Company is the surviving corporation)
another Person, or (ii) sell, assign, transfer, convey or otherwise dispose of
all or substantially all of the properties or assets of the Company to another
Person, or (iii) allow another Person to make a purchase, tender or exchange
offer that is accepted by the holders of more than the 50% of the outstanding
shares of Common Stock (not including any shares of Common Stock held by the
Person or Persons making or party to, or associated or affiliated with the
Persons making or party to, such purchase, tender or exchange offer), or (iv)
consummate a stock purchase agreement or other business combination (including,
without limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more than
the 50% of the outstanding shares of Common Stock (not including any shares of
Common Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock
purchase agreement or other business combination), or (v) reorganize,
recapitalize or reclassify its Common Stock.
(r) "GAAP" means United States generally accepted accounting
principles, consistently applied.
(s) "HOLDER PRO RATA AMOUNT" means a fraction (i) the
numerator of which is the Principal amount of this Note on the Closing Date and
(ii) the denominator of which is the aggregate principal amount of all Notes
issued to the initial purchasers pursuant to the Securities Purchase Agreement
on the Closing Date.
(t) "INSTALLMENT AMOUNT" means the Special Installment Amount
with respect to any Special Installment Date. In the event the Holder shall sell
or otherwise transfer any portion of this Note, the transferee shall be
allocated a pro rata portion of the each unpaid Installment Amount hereunder.
(u) "INSTALLMENT DATE" means each Special Installment Date.
(v) "INTEREST CONVERSION PRICE" means, with respect to any
Interest Date, that price which shall be computed as 90% of the arithmetic
average of the Weighted Average Price of the Common Stock on each of the fifteen
(15) consecutive Trading Days commencing two (2) Trading Days after the Interest
Notice Due Date and ending on the fourth (4th) Trading Day immediately preceding
the applicable Interest Date (each, an "INTEREST MEASURING PERIOD"). All such
determinations to be appropriately adjusted for any stock split, stock dividend,
stock combination or other similar transaction during such period.
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(w) "MATERIAL SUBSIDIARY" means any Subsidiary (as defined in
the Securities Purchase Agreement) that is a "significant subsidiary" within the
meaning of Regulation S-X adopted by the Securities and Exchange Commission.
(x) "OPTIONS" means any rights, warrants or options to
subscribe for or purchase shares of Common Stock or Convertible Securities.
(y) "OUTSTANDING AMOUNT" means, at any date, the sum of (i)
the then outstanding Principal, (ii) accrued and unpaid Interest with respect to
such Principal and (iii) accrued and unpaid Late Charges with respect to such
Principal and Interest.
(z) "PARENT ENTITY" of a Person means an entity that, directly
or indirectly, controls the applicable Person and whose common stock or
equivalent equity security is quoted or listed on an Eligible Market, or, if
there is more than one such Person or Parent Entity, the Person or Parent Entity
with the largest public market capitalization as of the date of consummation of
the Fundamental Transaction.
(aa) "PERMITTED INDEBTEDNESS" means (A) the Alabama Mortgage,
(B) the XEL Notes, (C) Indebtedness incurred by the Company that is made
expressly subordinate in right of payment to the Indebtedness evidenced by this
Note, as reflected in a written agreement reasonably acceptable to the Holder
and approved by the Holder in writing, and which Indebtedness does not provide
at any time for (1) the payment, prepayment, repayment, repurchase or
defeasance, directly or indirectly, of any principal or premium, if any, thereon
until ninety-one (91) days after the Maturity Date or later and (2) total
interest and fees at a rate in excess of six percent (6%) per annum (any such
Indebtedness, the "SUBORDINATED INDEBTEDNESS"), (D) Indebtedness secured by
Permitted Liens, (E) Indebtedness to trade creditors incurred in the ordinary
course of business, and (F) extensions, refinancings and renewals of any items
of Permitted Indebtedness (other than the Alabama Mortgage and the XEL Notes),
provided that the principal amount is not increased or the terms modified to
impose more burdensome terms upon the Company or its Subsidiary, as the case may
be.
(bb) "PERMITTED LIENS" means (i) any Lien for taxes not yet
due or delinquent or being contested in good faith by appropriate proceedings
for which adequate reserves have been established in accordance with GAAP, (ii)
any statutory Lien arising in the ordinary course of business by operation of
law with respect to a liability that is not yet due or delinquent, (iii) any
Lien created by operation of law, such as materialmen's liens, mechanics' liens
and other similar liens, arising in the ordinary course of business with respect
to a liability that is not yet due or delinquent or that are being contested in
good faith by appropriate proceedings, (iv) the Alabama Mortgage, (v) Liens
securing the Company's obligations under the Notes, (vi) Liens (A) upon or in
any equipment (as defined in the Security Agreement) acquired or held by the
Company or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition or lease of such equipment, or (B) existing on such equipment at the
time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment, (vii) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (i) and (vi) above, provided that any extension, renewal or replacement
Lien shall be limited to the property encumbered by
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the existing Lien and the principal amount of the Indebtedness being extended,
renewed or refinanced does not increase, (viii) leases or subleases and licenses
and sublicenses granted to others in the ordinary course of business, not
interfering in any material respect with the business of the Company and its
Subsidiaries taken as a whole, (ix) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payments of custom duties in
connection with the importation of goods and (x) Liens arising from judgments,
decrees or attachments in circumstances not constituting an Event of Default
under Section 4(a)(ix).
(cc) "PERSON" means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization, any other entity and a government or any department
or agency thereof.
(dd) "PRESENT VALUE OF INTEREST" means the amount of any
interest that, but for a Mandatory Conversion, would have accrued under this
Note at the Interest Rate for the period from the Mandatory Conversion Date
through the Maturity Date discounted to the present value of such interest using
a discount rate equal to six percent (6%).
(ee) "PRINCIPAL MARKET" means the Nasdaq National Market.
(ff) "REDEMPTION PREMIUM" means (i) in the case of the Events
of Default described in Section 4(a)(i) - (vi) and (ix) - (xii), 120% or (ii) in
the case of the Events of Default described in Section 4(a)(vii) - (viii), 100%.
(gg) "REGISTRATION RIGHTS AGREEMENT" means that certain
registration rights agreement dated as of the Subscription Date by and among the
Company and the initial holders of the Notes relating to, among other things,
the registration of the resale of the Common Stock issuable upon conversion of
the Notes and exercise of the Warrants.
(hh) "REQUIRED HOLDERS" means the holders of Notes
representing at least a majority of the aggregate principal amount of the Notes
then outstanding.
(ii) "SEC" means the United States Securities and Exchange
Commission.
(jj) "SECURITIES PURCHASE AGREEMENT" means that certain
securities purchase agreement dated as of the Subscription Date by and among the
Company and the initial holders of the Notes pursuant to which the Company
issued the Notes.
(kk) "SPECIAL INSTALLMENT AMOUNT" means, with respect to any
Special Installment Date, at the option of the Holder, an amount equal to one of
the following: (i) the difference between (A) the Outstanding Amount and (B) the
product of (1) 60% of the Tested Working Capital multiplied by (2) the Holder
Pro Rata Amount, (ii) the product of (A) $2,000,000 multiplied by (B) the Holder
Pro Rata Amount, or (iii) any amount that is less than the amounts set forth in
clauses (i) and (ii) hereof, in each case as any such Special Installment Amount
may be reduced pursuant to the terms of this Note, whether upon conversion,
redemption or otherwise.
(ll) "SPECIAL INSTALLMENT DATE" means the date that is twenty
(20) Trading Days after the receipt by the Company of a Special Installment
Notice. In the event that the day
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specified herein shall be prior to the end of the applicable Company Conversion
Period, the Special Installment Date shall be the third (3rd) day following the
end of such period.
(mm) "SUBSCRIPTION DATE" means March 20, 2005.
(nn) "SUCCESSOR ENTITY" means the Person, which may be the
Company, formed by, resulting from or surviving any Fundamental Transaction or
the Person with which such Fundamental Transaction shall have been made,
provided that if such Person is not a publicly traded entity whose common stock
or equivalent equity security is quoted or listed for trading on an Eligible
Market, Successor Entity shall mean such Person's Parent Entity.
(oo) "TARGET WORKING CAPITAL" means, at any date, an amount
equal to the sum of (i) $8,000,000 plus (ii) 80% of the aggregate principal
amount of any Notes purchased pursuant to the exercise of any Additional
Investment Rights.
(pp) "TESTED WORKING CAPITAL" means, at any date, an amount
equal to the following amounts shown or reflected on the Company's consolidated
balance sheet as of such date (i) the aggregate amount of all rights to payment
for goods sold or leased or services provided, less discounts, returns and
allowances plus (ii) the aggregate amount of cash and cash equivalents (not
including restricted cash) and short term investments, in each case only to the
extent such cash, cash equivalents and short term investments are on deposit in
each "Deposit Account" at United States banks pledged to the "Collateral Agent"
and constituting "Collateral" under (and as such terms and defined in the
"Pledge and Security Agreement" (as defined in the Securities Purchase
Agreement) minus (iii) the aggregate amount owed to all trade creditors in the
ordinary course of business.
(qq) "TRADING DAY" means any day on which the Common Stock is
traded on the Principal Market, or, if the Principal Market is not the principal
trading market for the Common Stock, then on the principal securities exchange
or securities market on which the Common Stock is then traded; provided that
"Trading Day" shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York Time).
(rr) "WARRANTS" has the meaning ascribed to such term in the
Securities Purchase Agreement, and shall include all warrants issued in exchange
therefor or replacement thereof.
(ss) "WEIGHTED AVERAGE PRICE" means, for any security as of
any date, the dollar volume-weighted average price for such security on the
Principal Market during the period beginning at 9:30:01 a.m., New York Time (or
such other time as the Principal Market publicly announces is the official open
of trading), and ending at 4:00:00 p.m., New York Time (or such other time as
the Principal Market publicly announces is the official close of trading) as
reported by Bloomberg through its "Volume at Price" functions, or, if the
foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the
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electronic bulletin board for such security during the period beginning at
9:30:01 a.m., New York Time (or such other time as such market publicly
announces is the official open of trading), and ending at 4:00:00 p.m., New York
Time (or such other time as such market publicly announces is the official close
of trading) as reported by Bloomberg, or, if no dollar volume-weighted average
price is reported for such security by Bloomberg for such hours, the average of
the highest closing bid price and the lowest closing ask price of any of the
market makers for such security as reported in the "pink sheets" by Pink Sheets
LLC (formerly the National Quotation Bureau, Inc.). If the Weighted Average
Price cannot be calculated for a security on a particular date on any of the
foregoing bases, the Weighted Average Price of such security on such date shall
be the fair market value as mutually determined by the Company and the Holder.
If the Company and the Holder are unable to agree upon the fair market value of
such security, then such dispute shall be resolved pursuant to Section 24. All
such determinations to be appropriately adjusted for any stock dividend, stock
split, stock combination or other similar transaction during the applicable
calculation period.
(tt) "XEL NOTES" means the convertible promissory notes in the
original aggregate principal amount of $10,480,000 due February 5, 2006 issued
in connection with the acquisition by the Company of XEL Communications, Inc.
and having an outstanding principal balance in the aggregate not in excess of
$2,900,000 as of the Subscription Date; provided, however, that such notes shall
not be amended, restated, renewed, refunded, refinanced or otherwise extended
and the outstanding principal balance shall not be increased after the
Subscription Date without the consent of the Required Holders.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed as of the Issuance Date set out above.
VERILINK CORPORATION
By:________________________________
Name:
Title:
EXHIBIT I
VERILINK CORPORATION
CONVERSION NOTICE
Reference is made to the Senior Secured Convertible Note (the "NOTE") issued to
the undersigned by Verilink 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 $.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 ("CONVERSION SHARES"): _________________________________________
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: ___________________________________________________________________
Account Number: _____________________________________________________
(if electronic book entry transfer)
Transaction Code Number: ____________________________________________
(if electronic book entry transfer)
The undersigned confirms that the Conversion Shares have been sold in compliance
with the applicable Registration Statement (as defined in the Registration
Rights Agreement) relative to the registration for resale of such Conversion
Shares.
Yes ______ No_______
Date: _______________ __, ______
___________________________________
Name of Registered Holder
By: ________________________
Name:
Title:
ACKNOWLEDGMENT
The Company hereby acknowledges this Conversion Notice and hereby
directs American Stock Transfer and Trust Company to issue the above indicated
number of shares of Common Stock in accordance with the Transfer Agent
Instructions dated March 21, 2005 from the Company and acknowledged and agreed
to by American Stock Transfer and Trust Company.
VERILINK CORPORATION
By:_____________________________
Name:
Title: