Exhibit 4.3
Execution Version
EXHIBITS B-1 & B-2
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NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION OF
THESE SECURITIES HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL
TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE BORROWER. THESE SECURITIES AND THE SECURITIES ISSUABLE
UPON CONVERSION OF THESE SECURITIES MAY BE PLEDGED IN A MANNER CONSISTENT
WITH THE SECURITIES ACT IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT
SECURED BY SUCH SECURITIES.
No. [ ] $[ ]
Original Issue Date: [ ]
ZOLTEK COMPANIES, INC.
SENIOR CONVERTIBLE NOTE DUE [ ](1)
THIS NOTE is one of a series of duly authorized and issued
notes of Zoltek Companies, Inc., a Missouri corporation (the "BORROWER"),
designated as its Senior Convertible Notes due [______](2), in the original
aggregate principal amount of [Twenty Million Dollars ($20,000,000)] [Ten
Million Dollars ($10,000,000)] (collectively, the "NOTES" and each note
comprising the Notes, a "NOTE").
FOR VALUE RECEIVED, the Borrower promises to pay to the
order of [ ] or its registered assigns (the "LENDER"), the principal sum of
[ ] ($), on [ ](3) or such earlier date as this Note is required to be
repaid as provided hereunder (the "MATURITY DATE"), and to pay interest to
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(1) 42nd month anniversary of the Original Issue Date
(2) 42nd month anniversary of the Original Issue Date
(3) 42nd month anniversary of the Original Issue Date
the Lender on the principal amount of this Note outstanding from time to
time in accordance with the provisions hereof. All holders of Notes are
referred to collectively, as the "LENDERS." This Note is subject to the
following additional provisions:
1. Definitions. In addition to the terms defined elsewhere
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in this Note: (a) capitalized terms that are used but not otherwise defined
herein have the meanings given to such terms in the Loan and Warrant
Agreement, dated as of the September 29, 2005, as amended by Amendment No. 1
(the "AMENDMENT"), dated April 28, 2006, among the Borrower, the lenders
identified therein and Omicron Master Trust, as Administrative Agent
thereunder (the "LOAN AGREEMENT"), and (b) the following terms have the
meanings indicated below:
"BANKRUPTCY EVENT" means any of the following events: (a) the
Borrower or any Subsidiary commences a case or other proceeding under any
bankruptcy, reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction relating to the Borrower or any Subsidiary thereof; (b) there
is commenced against the Borrower or any Subsidiary any such case or
proceeding that is not dismissed within 60 days after commencement; (c) the
Borrower or any Subsidiary is adjudicated by a court of competent
jurisdiction insolvent or bankrupt or any order of relief or other order
approving any such case or proceeding is entered; (d) the Borrower or any
Subsidiary suffers any appointment of any custodian or the like for it or
any substantial part of its property that is not discharged or stayed within
60 days; (e) under applicable law the Borrower or any Subsidiary makes a
general assignment for the benefit of creditors; (f) the Borrower or any
Subsidiary fails to pay, or states that it is unable to pay or is unable to
pay, its debts generally as they become due; (g) the Borrower or any
Subsidiary calls a meeting of its creditors with a view to arranging a
composition, adjustment or restructuring of its debts; or (h) the Borrower
or any Subsidiary, by any act or failure to act, expressly indicates its
consent to, approval of or acquiescence in any of the foregoing or takes any
corporate or other action for the purpose of effecting any of the foregoing.
"CHANGE OF CONTROL" means the occurrence of any of the following in
one or a series of related transactions: (i) an acquisition after the date
hereof by an individual or legal entity or "group" (as described in Rule
13d-5(b)(1) under the Exchange Act) of more than 20% of the voting rights or
equity interests in the Borrower; (ii) a replacement of more than one-half
of the members of the Borrower's board of directors in a single election of
directors that is not approved by those individuals who are members of the
board of directors on the date hereof (or other directors previously
approved by such individuals); (iii) a Fundamental Transaction, a merger or
consolidation of the Borrower or any Subsidiary or a sale of more than 20%
of the assets of the Borrower in one or a series of related transactions,
unless following such transaction or series of transactions, the holders of
the Borrower's securities prior to the first such transaction continue to
hold at least two-thirds of the voting rights and equity interests in the
surviving entity or acquirer of such assets; (iv) a recapitalization,
reorganization or other transaction involving the Borrower or any Subsidiary
that constitutes or results in a transfer of more than 20% of the voting
rights or equity interests in the Borrower, unless following such
transaction or series of transactions, the holders of the Borrower's
securities prior to the first such transaction continue to hold at least
two-thirds of the voting rights and equity interests in the surviving entity
or acquirer of such assets; (v) consummation of a "Rule 13e-3 transaction"
as defined in Rule 13e-3 under the Exchange Act with respect to the
Borrower, or (vi) the execution by the Borrower or its
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controlling shareholders of an agreement providing for or reasonably likely
to result in any of the foregoing events.
"CLOSING DATE" shall mean the Third Closing Date.
"CLOSING PRICE" means, for any date, the price determined by the
first of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on an Eligible Market, the closing sale price per share of
the Common Stock for such date (or the nearest preceding date) on the
primary Eligible Market or exchange on which the Common Stock is then listed
or quoted; (b) if prices for the Common Stock are then quoted on the OTC
Bulletin Board, the closing sale price per share of the Common Stock for
such date (or the nearest preceding date) so quoted; (c) if prices for the
Common Stock are then reported in the "Pink Sheets" published by the
National Quotation Bureau Incorporated (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent sale price
per share of the Common Stock so reported; or (d) in all other cases, the
fair market value of a share of Common Stock as determined by an independent
qualified appraiser selected in good faith and paid for by a majority in
interest of the Lenders.
"COMMON STOCK" means the common stock of the Borrower, $0.01 par
value per share, and any securities into which such common stock may
hereafter be reclassified.
"COMMON STOCK EQUIVALENTS" means any securities of the Borrower or
a subsidiary thereof which entitle the holder thereof to acquire Common
Stock at any time, including without limitation, any debt, preferred stock,
rights, options, warrants or other instrument that is at any time
convertible into or exchangeable for, or otherwise entitles the holder
thereof to receive, Common Stock or other securities that entitle the holder
to receive, directly or indirectly, Common Stock.
"CONVERSION DATE" means the date a Conversion Notice together with
the Conversion Schedule is delivered to the Borrower in accordance with
Section 5(a).
"CONVERSION NOTICE" means a written notice in the form attached
hereto as Exhibit A.
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"CONVERSION PRICE" means $25.51 subject to adjustment from time to
time pursuant to Section 11.
"DEFAULT" means any event or condition which constitutes an Event
of Default or that upon notice, lapse of time or both would, unless cured or
waived, become an Event of Default.
"ELIGIBLE MARKET" means any of the New York Stock Exchange, the
American Stock Exchange, the Nasdaq National Market or the Nasdaq SmallCap
Market.
"EQUITY CONDITIONS ARE SATISFIED" means, as of any date of
determination, that each of the following conditions is (or would be)
satisfied on such date, if the Borrower were to issue on such date all of
the Underlying Shares then issuable upon (1) conversion in full of the
outstanding principal amount of all convertible debt issued by the Borrower
(including the Notes), (2) the exercise of all options and warrants for
Common Stock (including the Warrants) and (3) the payment of accrued and
unpaid interest on such Interest Payment Date under all convertible debt
(including the Notes) of the Borrower: (i) the number of authorized but
unissued and otherwise unreserved shares of Common Stock is sufficient for
such issuance, (ii) the Common Stock is listed or quoted (and is not
suspended from trading) on an Eligible Market and such shares of Common
Stock are approved for listing on such Eligible Market upon
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issuance, (iii) such Common Stock is registered for resale under the
Registration Statement, (iv) such issuance would be permitted in full
without violating Section 5(b)(i) or Section 5(b)(ii) hereof or the rules or
regulations of the Eligible Market on which such shares are listed or
quoted, (v) both immediately before and after giving effect thereto, no
Default shall or would exist, and (vi) no public announcement of a pending
or proposed Change of Control transaction has occurred that has not been
consummated.
"EVENT EQUITY VALUE" means the average of the Closing Prices for
the five consecutive Trading Days preceding either: (a) the date of an Event
Notice or the date the Borrower becomes obligated to pay the Event Price
under Section 7(b), as applicable, or (b) the date on which the Event Price
with respect thereto (together with any other payments, expenses and
liquidated damages then due and payable under the Transaction Documents) is
paid in full, whichever is greater.
"EVENT OF DEFAULT" means any one of the following events (whatever
the reason and whether it shall be voluntary or involuntary or effected by
operation of law or pursuant to any judgment, decree or order of any court,
or any order, rule or regulation of any administrative or governmental
body):
(i) any default in the payment (free of any claim of
subordination), when the same becomes due and payable (whether on a
Conversion Date or the Borrower Conversion Date, a Prepayment Date, the
Maturity Date or by acceleration or prepayment or otherwise), of principal,
interest or liquidated damages in respect of this Note which default
continues unremedied for a period of three Trading Days after the date on
which written notice of such default is first given to the Borrower by the
Holder;
(ii) the Borrower or any Subsidiary (1) fails to pay when
due any monetary obligation (regardless of amount) under any currently
existing or hereafter arising debenture or note (other than a Note) or any
mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which
there may be secured or evidenced, any Indebtedness or under any long term
leasing or factoring arrangement, if the aggregate amount of the obligations
and liabilities of the Borrower and the Subsidiaries thereunder exceed
$350,000 (each of the foregoing a "MATERIAL DEBT AGREEMENT"), or (2) fails
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to observe or perform any other obligation under any Material Debt
Agreement, and such failure results in the obligations thereunder becoming
or being declared due and payable prior to the date on which they would
otherwise become due and payable;
(iii) the occurrence or entering into by the Borrower or
any Subsidiary, or consummation of, any Change of Control transaction;
(iv) the Borrower shall fail to observe or perform any
covenant, condition or agreement contained in Section 4.4, 4.6, 4.8, 4.9,
4.10, 4.12, 4.16, 4.17 or in Article 5 of the Loan Agreement;
(v) the Borrower shall fail to observe or perform any
covenant, condition or agreement contained in any Transaction Document
(other than those specified in clause (i) or (iv) above and clause (xvii) or
(xxi) below), and such failure shall continue unremedied for a period of ten
Trading Days after the date on which written notice of such
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default is first given to the Borrower by the Holder (it being understood
that no prior notice need be given in the case of a default that cannot
reasonably be cured within ten Trading Days);
(vi) the occurrence and continuance of an Event of Default
under any other Note;
(vii) any prepayment by the Borrower of any other Note or
any other Indebtedness (other than (a) the Borrower's outstanding
Indebtedness to Marshall and Isley Bank of St. Louis, and (b) the 2003
Debentures (as defined below) 2004 Debentures (as defined below), 2004 Notes
(as defined below) or 2005 Notes (as defined below) each in accordance with
their respective terms), issued by it or outstanding under any issuance of
securities in exchange for any Notes issued by it (other than Underlying
Shares upon conversion of such notes in accordance with their terms as in
effect on the Original Issue Date thereof), except in each case (1) if the
Borrower offers to the Lender in writing the same prepayment of this Note
and all other Notes then held by such Lender on the same economic terms on
which the Borrower prepays or offers to prepay (whichever is more favorable
to the holder of such Note) such Notes and (2) in accordance with the
prepayment provisions of Section 8 and 13 of this Note;
(viii) any of the Borrower's representations and
warranties set forth in the Loan Agreement shall be incorrect in any
material respect as of the Original Issue Date;
(ix) the occurrence of a Bankruptcy Event;
(x) one or more judgments for the payment of money in an
aggregate amount in excess of (1) with respect to the existing litigation
pertaining to Scott Macon Securities, $850,000, or (2) in all other cases,
$350,000, shall be rendered against the Borrower or any Subsidiary or any
combination thereof (which shall not be fully covered by insurance without
taking into account any applicable deductibles) and the same shall remain
undischarged or unbonded for a period of 30 consecutive days during which
execution shall not be effectively stayed, or any action shall be legally
taken by a judgment creditor to attach or levy upon any assets of the
Borrower or any Subsidiary to enforce any such judgment;
(xi) any Transaction Document shall cease, for any reason,
to be in full force and effect, or the Borrower shall so assert in writing
or shall disavow any of its obligations thereunder;
(xii) the Common Stock shall not be listed or quoted, or
is suspended from trading, on an Eligible Market for a period of three
Trading Days (which need not be consecutive Trading Days);
(xiii) the Borrower fails to deliver a stock certificate
evidencing Underlying Shares to a Lender within three Trading Days after a
Conversion Date, or in the case of exercises under a Warrant, within three
Trading Days after a Date of Exercise under, and as such term is defined in,
such Warrant, or the conversion or exercise rights of the Lenders pursuant
to the terms hereof or the terms of the Warrants are otherwise suspended for
any reason (other than as set forth in Section 5 of this Note or Section 11
of the Warrant);
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(xiv) the Borrower fails to have available a sufficient
number of authorized but unissued and otherwise unreserved shares of Common
Stock available to issue Underlying Shares upon any conversion of Notes or
upon any exercise of Warrants;
(xv) the Borrower effects or publicly announces its
intention to effect any exchange, recapitalization or other transaction that
effectively requires or rewards physical delivery of certificates evidencing
the Common Stock, unless following such transaction, the holders of the
Borrower's securities prior to the first such transaction continue to
beneficially own at least two-thirds of the voting rights and equity
interests in the surviving entity or acquirer of such assets;
(xvi) a Registration Statement under the Registration
Rights Agreement is not declared effective by the Commission by the 365th
day following the First Closing Date, or is not effective as to all
Registrable Securities (as defined in the Registration Rights Agreement),
and available for use by the holders of Registrable Securities, for in
excess of an aggregate of 60 Trading Days (which need not be consecutive
Trading Days) during the Effectiveness Period (as defined in the
Registration Rights Agreement);
(xvii) the Borrower fails to make any cash payment
required under the Transaction Documents (other than as set forth in
paragraph (i) above) and such failure is not cured within five Trading Days
after notice of such default is first given to the Borrower by a Lender;
(xviii) there shall be an Event of Default under and as
defined in any debenture issued by the Borrower in respect of the Securities
Purchase Agreement dated as of December 19, 2003 (the "2003 SECURITIES
PURCHASE AGREEMENT") (such debentures, the "2003 DEBENTURES");
(xix) there shall be an Event of Default under and as
defined in any debenture issued by the Borrower in respect of the Securities
Purchase Agreement dated as of March 11, 2004 (the "2004 SECURITIES PURCHASE
Agreement") (such debentures, the "2004 DEBENTURES");
(xx) there shall be an Event of Default under and as
defined in any note issued by the Borrower in respect of the Loan and
Warrant Agreement dated as of October 14, 2004 (the "2004 LOAN AGREEMENT")
(such notes, the "2004 NOTES");
(xxi) there shall be an Event of Default under and as
defined in any note issued by the Borrower in respect of the Loan and
Warrant Agreement dated as of February 29, 2005 (the "2005 LOAN AGREEMENT")
or in any other note issued by the Borrower in respect of the Loan Agreement
(collectively, such notes, the "2005 NOTES"); or
(xxii) the Borrower shall agree to amend, waive or
otherwise modify the Shareholders Agreement other than in accordance with
Section 8.4 of the Loan Agreement.
"GUARANTEE" of or by any Person shall mean any obligation,
contingent or otherwise, of such Person guaranteeing or having the economic
effect of guaranteeing any Indebtedness of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, and including
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any obligation of such Person, direct or indirect, (a) to purchase or pay
(or advance or supply funds for the purchase or payment of) such
Indebtedness or to purchase (or to advance or supply funds for the purchase
of) any security for the payment of such Indebtedness, (b) to purchase
property, securities or services for the purpose of assuring the owner of
such Indebtedness of the payment of such Indebtedness or (c) to maintain
working capital, equity capital or other financial statement condition or
liquidity of the primary obligor so as to enable the primary obligor to pay
such Indebtedness, provided, that the term Guarantee shall not include
endorsements for collection or deposit, in either case in the ordinary
course of business.
"INDEBTEDNESS" of any Person shall mean, without duplication, (a)
all obligations of such Person for borrowed money, (b) all obligations of
such Person evidenced by bonds, debentures, notes or similar instruments,
(c) all obligations of such Person upon which interest charges are
customarily paid, (d) all obligations of such Person under conditional sale
or other title retention agreements relating to property or assets purchased
by such Person, (e) all obligations of such Person issued or assumed as the
deferred purchase price of property or services (other than unsecured
accounts payable incurred in the ordinary course of business), (f) all
Indebtedness of others secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured
by) any Lien on property owned or acquired by such Person, whether or not
the obligations secured thereby have been assumed, (g) all Guarantees by
such Person of Indebtedness of others, (h) all Capital Lease Obligations of
such Person, (i) all obligations of such Person in respect of interest rate
protection agreements, foreign currency exchange agreements or other
interest or exchange rate hedging arrangements that exceed amounts necessary
to hedge the Borrower's interest rate or cross-currency exposure and (j) all
obligations of such Person as an account party in respect of letters of
credit and bankers' acceptances. The Indebtedness of any Person shall
include the Indebtedness of any partnership in which such Person is a
general partner.
"INTEREST PERIOD" means each of the period commencing November 1,
2007, and ending April 30, 2008, the period commencing May 1, 2008, and
ending October 31, 2008, the period commencing November 1, 2008, and ending
April 30, 2009, and the period commencing May 1, 2009, and ending on the
Maturity Date.
"LIBOR" means, in respect of any Interest Period, (i) a rate per
annum (rounded to the nearest 1/16th of 1%) equal to the British Bankers'
Association interest settlement rates for deposits in U.S. dollars having an
index maturity of six (6) months as of 11:00 a.m. (London time) on the day
two (2) London Business Days (meaning a day on which dealings in deposits in
U.S. dollars are transacted in the London interbank market) before the first
day of such Interest Period as published by Telerate, Bloomberg Financial
Services, Dow Jones Market Services Reuters or any other similar service or
(ii) should such quotation not be published on the relevant day and time
such interest rate per annum according to such other widely published LIBOR
quotation as the Borrower may select for such Interest Period as of 11:00
a.m. London time two (2) London Business Days prior to the commencement of
such Interest Period.
"ORIGINAL ISSUE DATE" has the meaning set forth on the face of this
Note.
"PRINCIPAL PAYMENT DATE" means any date on which payment of a
principal amount of this Note shall be due and payable by the Borrower in
accordance with Section 2.
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"VWAP" means, with respect to any date of determination, the daily
volume weighted average price (as reported by Bloomberg using the VAP
function) of the Common Stock on such date of determination, or if there is
no such price on such date of determination, then the daily volume weighted
average price on the date nearest preceding such date.
2. Principal and Interest.
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(a) The Borrower shall pay interest to the Lender
on the aggregate then outstanding principal amount of this Note as follows:
(i) from the Original Issue Date through and including October 31, 2007, at
the rate of 7.5% per annum, and (ii) with respect to each Interest Period
until the Notes are paid in full, at the rate of LIBOR for such Interest
Period plus 4% per annum, in each case payable quarterly in cash in arrears
on each June 30, September 30, December 31 and March 31 (each an "INTEREST
PAYMENT DATE"), beginning June 30, 2006, except if such date is not a
Trading Day, in which case such interest shall be payable on the next
succeeding Trading Day. Interest shall be calculated on the basis of a
360-day year for the actual number of days elapsed and shall accrue daily
commencing on the Original Issue Date.
(b) The Borrower shall pay the principal balance
of this Note to the Holder in 10 equal quarterly installments (each, a
"QUARTERLY INSTALLMENT") commencing on the date fifteen (15) months
following the Closing Date and to continue for each of the 9 quarters
thereafter, except if such date is not a Trading Day, in which case such
principal shall be payable on the next succeeding Trading Day (each, a
"PRINCIPAL PAYMENT DATE"), until the outstanding principal balance of this
Note has been paid in full.
(c) Subject to the conditions and limitations set
forth below, the Borrower may at its option, on each Interest Payment Date,
pay accrued interest on this Note either: (A) in cash, or (B) by delivering
by the Third Trading Day following the applicable Interest Payment Date, a
number of freely tradable shares of Common Stock equal to the quotient
obtained by dividing the amount of such interest by 93% of the arithmetic
average of the VWAP for each of the 20 consecutive Trading Days immediately
preceding (but not including) such Interest Payment Date and (ii) on each
Principal Payment Date, pay the applicable Quarterly Installment on this
Note, either (A) in cash, or (B) by delivery by the Third Trading Day
following the applicable Quarterly Installment Date, a number of freely
tradable shares of Common Stock equal to the quotient obtained by dividing
the amount of such Quarterly Installment by the lesser of (i) 90% of the
arithmetic average of the VWAP for each of the 20 consecutive Trading Days
immediately preceding (but not including) such Principal Payment Date and
(ii) the Conversion Price. The Borrower must deliver written notice to the
Lender indicating the manner in which it intends to pay interest or
principal at least ten Trading Days prior to each Interest Payment Date or
Principal Payment Date, but the Borrower may indicate in any such notice
that the election contained therein shall continue for subsequent Interest
Payment Dates or Principal Payment Dates until rescinded. Failure to timely
provide such written notice shall be deemed an irrevocable election by the
Borrower to pay such interest or principal in cash. All interest or
principal payable in respect of the Notes on any Interest Payment Date or
Principal Payment Date must be paid in the same manner.
(d) Notwithstanding the foregoing, the Borrower
may not pay interest or principal in shares of Common Stock on any Interest
Payment Date, Principal Payment Date or in connection with any conversion of
all or any portion of this Note unless, (i) on the date
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thereof, the Equity Conditions Are Satisfied, (ii) the closing price of the
Common Stock for the twenty (20) consecutive Trading Days immediately
preceding the date thereof shall exceed $12.50 per share (as adjusted
pursuant to Section 11) and (iii) the trading volume of the Common Stock for
each Trading Day of such twenty (20) consecutive Trading Day period
immediately preceding the date thereof exceeds 50,000 shares.
3. Registration of Notes. The Borrower shall register the
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Notes upon records maintained by the Borrower for that purpose (the "NOTE
REGISTER") in the name of each record Lender thereof from time to time. The
Borrower may deem and treat the registered Lender of this Note as the
absolute owner hereof for the purpose of any conversion hereof or any
payment of interest hereon, and for all other purposes, absent actual notice
to the contrary from such record Lender. The Borrower shall at any time and
from time to time, upon one Business Days' prior notice by the
Administrative Agent or any Lender, make the Note Register available for
inspection by the Administrative Agent, such Lender or the representative(s)
of the Administrative Agent or such Lender, at the chief executive office of
the Borrower during normal business hours. The Administrative Agent shall be
permitted to rely on the information set forth in the Note Register.
4. Registration of Transfers and Exchanges. The Borrower
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shall register the transfer of any portion of this Note in the Note Register
upon surrender of this Note to the Borrower at its address for notice set
forth herein. Upon any such registration or transfer, a new Note, in
substantially the form of this Note (any such new note, a "NEW NOTE"),
evidencing the portion of this Note so transferred shall be issued to the
transferee and a New Note evidencing the remaining portion of this Note not
so transferred, if any, shall be issued to the transferring Lender. The
acceptance of the New Note by the transferee thereof shall be deemed the
acceptance by such transferee of all of the rights and obligations of a
holder of a Note. The Borrower agrees that its prior consent is not required
for the transfer of any portion of this Note; provided, however, that the
Borrower shall be entitled to reasonable assurance, including an opinion of
counsel reasonably acceptable to Borrower, that such transfer complies with
applicable federal and state securities laws. This Note is exchangeable for
an equal aggregate principal amount of Notes of different authorized
denominations, as requested by the Lender surrendering the same. No service
charge or other fee will be imposed in connection with any such registration
of transfer or exchange.
5. Conversion.
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(a) At the Option of the Lender. All or any
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portion of the principal amount of this Note then outstanding shall be
convertible into shares of Common Stock at the Conversion Price (subject to
limitations set forth in Section 5(b)), at the option of the Lender, at any
time and from time to time from and after the Original Issue Date. The
Lender may effect conversions under this Section 5(a), by delivering to the
Borrower a Conversion Notice together with a schedule in the form of
Schedule 1 attached hereto (the "CONVERSION SCHEDULE"). Upon receipt of the
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Conversion Notice, any accrued and unpaid interest hereunder payable with
respect to the principal amount of the Note to be converted shall, at the
option of the Borrower, be payable by the Borrower in cash or convertible
into that number of shares of Common Stock equal to the amount of such
payment divided by the Conversion Price. If the Lender is converting less
than all of the principal amount represented by this Note, or if a
conversion
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hereunder may not be effected in full due to the application of Section
5(b), the Borrower shall honor such conversion to the extent permissible
hereunder and shall promptly deliver to the Lender a Conversion Schedule
indicating the principal amount which has not been converted.
(b) Certain Conversion Restrictions.
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(i) Notwithstanding anything to the
contrary contained herein, the number of shares of Common Stock that may be
acquired by a Lender upon any conversion of Notes (or otherwise in respect
hereof) shall be limited to the extent necessary to insure that, following
such conversion (or other issuance), the total number of shares of Common
Stock then beneficially owned by such Lender and its Affiliates and any
other Persons whose beneficial ownership of Common Stock would be aggregated
with such Lender's for purposes of Section 13(d) of the Exchange Act, does
not exceed 4.999% (the "THRESHOLD PERCENTAGE") or 9.999% (the "MAXIMUM
PERCENTAGE") of the total number of issued and outstanding shares of Common
Stock (including for such purpose the shares of Common Stock issuable upon
such conversion). For such purposes, beneficial ownership shall be
determined in accordance with Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder. Each delivery of a Conversion
Notice hereunder will constitute a representation by the Lender that it has
evaluated the limitation set forth in this paragraph and determined that
issuance of the full number of shares of Common Stock requested in such
Conversion Notice is permitted under this paragraph. The Borrower's
obligation to issue shares of Common Stock in excess of the limitation
referred to in this Section shall be suspended (and shall not terminate or
expire notwithstanding any contrary provisions hereof) until such time, if
any, as such shares of Common Stock may be issued in compliance with such
limitation. The Lender shall have the right (x) at any time and from time to
time to reduce its Maximum Percentage immediately upon notice to the
Borrower in the event and only to the extent that Section 16 of the Exchange
Act or the rules promulgated thereunder (or any successor statute or rules)
is changed to reduce the beneficial ownership percentage threshold
thereunder to a percentage less than 9.99% and (y) at any time and from time
to time, to waive the provisions of this Section insofar as they relate to
the Threshold Percentage or to increase its Threshold Percentage (but not in
excess of the Maximum Percentage) unless the Lender shall have, by written
instrument delivered to the Borrower, irrevocably waived its rights to so
increase its Threshold Percentage, but (i) any such waiver or increase will
not be effective until the 61st day after such notice is delivered to the
Borrower, and (ii) any such waiver or increase or decrease will apply only
to the Lender and not to any other Lender of Notes; but (i) any such waiver
or increase will not be effective until the 61st day after such notice is
delivered to the Borrower, and (ii) any such waiver or increase or decrease
will apply only to the Lender and not to any other Lender of Notes.
(ii) Notwithstanding anything to the
contrary in this Note, if the Borrower has not previously obtained
Shareholder Approval (as defined below), then the Borrower may not issue
shares of Common Stock in excess of (a) the Issuable Maximum or (b) a number
of shares above which the issuance of one additional share would cause a
Change of Control (a "Change of Control Threshold") upon conversion of this
Note at a conversion price which is less than the Closing Price on the
Trading Day immediately preceding the Original Issue Date (the "THRESHOLD
PRICE"). The "Issuable Maximum" means, as of any date, a number of shares of
Common Stock equal to 19.99% of the outstanding shares of Common Stock
immediately preceding the Closing Date, less such number of shares of Common
Stock as have
10
been issued at a price below the Threshold Price (1) upon exercise of the
Warrants issued under the Loan Agreement and warrants issued under the 2003
Securities Purchase Agreement, the 2004 Securities Purchase Agreement, the
2004 Loan Agreement, and the 2005 Loan Agreement, (2) upon conversion of the
2003 Debentures, the 2004 Debentures, the 2004 Notes and the 2005 Notes and
(3) upon conversion of the Notes, or in payment of interest thereunder. Each
Lender shall be entitled to a portion of the Issuable Maximum or Change of
Control Threshold, as applicable, equal to the quotient obtained by
dividing: (x) the principal amount of Notes issued and sold to such Lender
on the Original Issue Date by (y) the aggregate principal amount of all
Notes issued and sold by the Borrower on the Original Issue Date. If any
Lender shall no longer hold Notes, then such Lender's remaining portion of
the Issuable Maximum or Change of Control Threshold, as applicable, (other
than those represented by the remaining portion of the Warrant and the other
warrants referenced in clause (1) above) shall be allocated pro-rata among
the remaining Lenders, giving effect to the Borrower's desire to allocate
this limitation among the class of securities known as the Notes. If on any
Conversion Date, or at such time as a Lender shall notify the Borrower that
the condition in (A) following this clause shall be in effect: (A) the
aggregate number of shares of Common Stock that would then be issuable upon
conversion in full of all then outstanding principal amount of Notes would
exceed the Issuable Maximum or would exceed the Change of Control Threshold
on such date and (B) the Borrower shall not have previously obtained the
vote of shareholders applicable to approve the issuance of shares of Common
Stock in excess of the Issuable Maximum or Change of Control Threshold, as
applicable, pursuant to the terms hereof (the "SHAREHOLDER APPROVAL"), then,
the Borrower shall, on such Conversion Date or on any Conversion Date prior
to the receipt by the Borrower of the Shareholder Approval, issue to the
Lender a number of shares of Common Stock equal to the Issuable Maximum or
Change of Control Threshold, as applicable, and, with respect to the
remainder of the principal amount of Notes then held by the Lenders for
which a conversion would result in an issuance of shares of Common Stock in
excess of the Issuable Maximum or Change of Control Threshold, the Borrower
must seek Shareholder Approval in accordance with subsection (iii) below.
The Borrower and the Lender understand and agree that shares of Common Stock
issued to and then held by the Lender as a result of conversions of the
Notes shall not be entitled to cast votes on any resolution to obtain
Shareholder Approval pursuant hereto.
(iii) Shareholder Approval.
--------------------
(1) If required under
applicable Nasdaq regulations, the Borrower shall use its best efforts to
obtain as soon as possible but in no event later than July 26, 2006 or
August 25, 2006 in the event the proxy materials shall be reviewed by the
Commission, shareholder approval of the issuance of the Underlying Shares
with respect to the April Notes, the April Warrants and the Additional
Warrants (the "SHAREHOLDER PROPOSAL"), which approval shall meet the
requirements of Nasdaq's Rule 4350(i) of Nasdaq set forth in the NASD Manual
(the "SHAREHOLDER APPROVAL DATE").
(2) As soon as practicable
following the date of the Original Issue Date, but in no event more than 30
days following the Original Issue Date, the Borrower shall prepare and file
with the Commission proxy materials calling a special meeting (the "SPECIAL
MEETING") of its shareholders seeking approval of the Shareholder Proposal.
The Borrower shall use its reasonable best efforts to cause such proxy
materials to reach the "no
11
further comment" stage as soon as possible (the "CLEARANCE DATE") and to
hold the Special Meeting as soon as possible following the Clearance Date,
but in no event later than 45 days following the Clearance Date.
(3) The Board of Directors
shall recommend approval thereof by the Borrower's shareholders. The
Borrower shall mail and distribute its proxy materials for the Special
Meeting to its shareholders at least 30 days prior to the date of the
Special Meeting and shall actively solicit proxies to vote for the
Shareholder Proposal. The Borrower shall provide the Lenders an opportunity
to review and comment on such proxy materials by providing (which may be by
e-mail) copies of such proxy materials and any revised preliminary proxy
materials to the Lenders at least three (3) days prior to their filing with
the Commission. The Borrower shall provide the Lenders (which may be by
e-mail) copies of all correspondence from or to the Commission or its staff
concerning the proxy materials for the Special Meeting promptly after the
same is sent or received by the Borrower and summaries of any comments of
the Commission's staff which the Borrower receives orally promptly after
receiving such oral comments. The Borrower shall (i) furnish to the Lenders
and their counsel (which may be by e-mail) a copy of its definitive proxy
materials for the Special Meeting and any amendments or supplements thereto
promptly after the same are first used, mailed to shareholders or filed with
the Commission, (ii) inform the Lenders of the progress of solicitation of
proxies for such meeting and (iii) inform the Lenders of any adjournment of
the Special Meeting and shall report the result of the vote of shareholders
on the Shareholder Proposal at the conclusion of the Special Meeting.
(4) If for any reason the
Shareholder Proposal is not approved at the Special Meeting, the Borrower
will take such additional acts or actions as are necessary to hold an
additional Special Meeting to consider the Shareholder Proposal and in
conjunction therewith shall hire a nationally recognized proxy solicitation
firm, selected by the Lenders which is reasonably satisfactory to the
Borrower, to assist it in obtaining the necessary shareholder votes to
approve the Shareholder Proposal. The Borrower shall bear all costs and
expenses of the preparation and filing of any and all proxy materials and
Special Meetings, including but not limited to the costs and expenses of the
proxy solicitation firm if needed.
6. Mechanics of Conversion.
-----------------------
(a) The number of Underlying Shares issuable upon
any conversion hereunder shall equal the outstanding principal amount of
this Note to be converted, divided by the Conversion Price on the Conversion
Date, plus (if indicated by Borrower as set forth in Section 5) the amount
of any accrued but unpaid interest on this Note through the Conversion Date,
divided by the Conversion Price on the Conversion Date.
(b) The Borrower shall promptly following each
Conversion Date (but in no event later than three Trading Days after such
Conversion Date) issue or cause to be issued and cause to be delivered to or
upon the written order of the Lender and in such name or names as the Lender
may designate a certificate for the Underlying Shares issuable upon such
conversion, free of restrictive legends. The Lender, or any Person so
designated by the Lender to receive Underlying Shares, shall be deemed to
have become holder of record of such Underlying
12
Shares as of such Conversion Date. The Borrower shall, upon request of the
Lender, use its best efforts to deliver Underlying Shares hereunder
electronically (via a DWAC) through the Depository Trust Corporation or
another established clearing corporation performing similar functions.
(c) The Lender shall not be required to deliver
the original Note in order to effect a conversion hereunder. Execution and
delivery of the Conversion Notice shall have the same effect as cancellation
of the Note and issuance of a New Note representing the remaining
outstanding principal amount.
(d) The Borrower's obligations to issue and
deliver Underlying Shares upon conversion of this Note in accordance with
the terms hereof are absolute and unconditional, irrespective of any action
or inaction by the Lender to enforce the same, any waiver or consent with
respect to any provision hereof, the recovery of any judgment against any
Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by
the Lender or any other Person of any obligation to the Borrower or any
violation or alleged violation of law by the Lender or any other Person, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Borrower to the Lender in connection with the issuance of
such Underlying Shares.
(e) If by the third Trading Day after a
Conversion Date or the Borrower Conversion Date the Borrower fails to
deliver to the Lender such Underlying Shares in such amounts and in the
manner required pursuant to Section 5, then the Lender will have the right
to rescind the Conversion Notice or the Borrower Conversion Notice
pertaining thereto by giving written notice to the Borrower prior to such
Lender's receipt of such Underlying Shares.
(f) If by the third Trading Day after a
Conversion Date or the Borrower Conversion Date the Borrower fails to
deliver to the Lender the required number of Underlying Shares in the manner
required pursuant to Section 5, and if after such third Trading Day and
prior to the receipt of such Underlying Shares, the Lender purchases (in an
open market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by the Lender of the Underlying Shares which the
Lender anticipated receiving upon such conversion (a "BUY IN"), then the
Borrower shall: (1) pay in cash to the Lender (in addition to any other
remedies available to or elected by the Lender) the amount by which (x) the
Lender's total purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (A) the number of Underlying Shares that the Borrower was
required to deliver to the Lender in connection with the exercise at issue
by (B) the Closing Price at the time of the obligation giving rise to such
purchase obligation and (2) at the option of the Lender, either void the
conversion at issue and reinstate the principal amount of Notes (plus
converted accrued interest therein) for which such conversion was not timely
honored or deliver to the Lender the number of shares of Common Stock that
would have been issued had the Borrower timely complied with its exercise
and delivery obligations hereunder. The Lender shall provide the Borrower
reasonably detailed evidence or written notice indicating the amounts
payable to the Lender in respect of the Buy-In.
13
7. Events of Default.
-----------------
(a) At any time or times following the occurrence
and during the continuance of an Event of Default (other than under clause
(ix) of such defined term with respect to the Borrower), the Lender may by
notice to the Borrower (an "EVENT NOTICE"), require the Borrower to purchase
all or any portion of the outstanding principal amount of this Note, as
indicated in such Event Notice, at a purchase price in Dollars in cash equal
to the greater of: (A) 100% of such outstanding principal amount, plus all
accrued but unpaid interest thereon and any unpaid liquidated damages and
other amounts then owing to the Lender under the Transaction Documents,
through the date of purchase, or (B) the Event Equity Value of the
Underlying Shares that would be issuable upon conversion of such principal
amount and payment in Common Stock of all such accrued but unpaid interest
thereon (without regard to any condition precedent or conversion limitation
contained herein). The aggregate amount payable pursuant to the preceding
sentence is referred to as the "EVENT PRICE." The Borrower shall pay the
aggregate Event Price to the Lender (free of any claim of subordination) no
later than the third Trading Day following the date of delivery of the Event
Notice, and upon receipt thereof the Lender shall deliver the original Note
so repurchased to the Borrower.
(b) Upon the occurrence of any Bankruptcy Event
with respect to the Borrower, all outstanding principal and accrued but
unpaid interest on this Note and any unpaid liquidated damages and other
amounts then owing under the Transaction Documents shall immediately become
due and payable in full in Dollars in cash (free of any claim of
subordination), without any action by the Lender, and the Borrower shall
immediately be obligated to repurchase this Note held by such Lender at the
Event Price pursuant to the preceding paragraph as if the Lender had
delivered an Event Notice immediately prior to the occurrence of such
Bankruptcy Event.
(c) In connection with any Event of Default, the
Lender need not provide and the Borrower hereby waives any presentment,
demand, protest or other notice of any kind (other than the Event Notice),
and the Lender may immediately enforce any and all of its rights and
remedies hereunder and all other remedies available to it under applicable
law. Any such declaration may be rescinded and annulled by the Lender at any
time prior to payment hereunder. No such rescission or annulment shall
affect any subsequent Event of Default or impair any right consequent
thereto.
8. Ranking. This Note ranks senior to or pari passu with
-------
all other Notes now or hereafter issued pursuant to the Transaction
Documents and is senior to or pari passu with all existing and hereafter
created Indebtedness of the Borrower. No Indebtedness of the Borrower is
senior to this Note in right of payment, whether with respect of interest,
damages or upon liquidation or dissolution or otherwise. The Borrower will
not, directly or indirectly, enter into, create, incur, assume or suffer to
exist any indebtedness of any kind, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein
or any income or profits therefrom, that is senior in any respect to the
Borrower's obligations under the Notes.
9. Charges, Taxes and Expenses. Issuance of certificates
---------------------------
for Underlying Shares upon conversion of (or otherwise in respect of) this
Note shall be made without charge to the Lender for any issue or transfer
tax, withholding tax, transfer agent fee or other incidental tax
14
or expense in respect of the issuance of such certificate, all of which
taxes and expenses shall be paid by the Borrower; provided, however, that
the Borrower shall not be required to pay any tax which may be payable in
respect of any transfer involved in the registration of any certificates for
Underlying Shares or Notes in a name other than that of the Lender. The
Lender shall be responsible for all other tax liability that may arise as a
result of holding or transferring this Note or receiving Underlying Shares
in respect hereof.
10. Reservation of Underlying Shares. The Borrower
--------------------------------
covenants that it will at all times reserve and keep available out of the
aggregate of its authorized but unissued and otherwise unreserved Common
Stock, solely for the purpose of enabling it to issue Underlying Shares as
required hereunder, the number of Underlying Shares which are then issuable
and deliverable upon the conversion of (and otherwise in respect of) this
entire Note (taking into account the adjustments of Section 11), free from
preemptive rights or any other contingent purchase rights of persons other
than the Lender. The Borrower covenants that all Underlying Shares so
issuable and deliverable shall, upon issuance in accordance with the terms
hereof, be duly and validly authorized, issued and fully paid and
nonassessable.
11. Certain Adjustments. The Conversion Price is subject
-------------------
to adjustment from time to time as set forth in this Section 11.
(a) Stock Dividends and Splits. If the Borrower,
--------------------------
at any time while this Note is outstanding: (i) pays a stock dividend on its
Common Stock or otherwise makes a distribution on any class of capital stock
that is payable in shares of Common Stock, (ii) subdivides outstanding
shares of Common Stock into a larger number of shares, or (iii) combines
outstanding shares of Common Stock into a smaller number of shares, then in
each such case the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock
outstanding immediately before such event and of which the denominator shall
be the number of shares of Common Stock outstanding immediately after such
event. Any adjustment made pursuant to clause (i) of this paragraph shall
become effective immediately after the record date for the determination of
shareholders entitled to receive such dividend or distribution, and any
adjustment pursuant to clause (ii) or (iii) of this paragraph shall become
effective immediately after the effective date of such subdivision or
combination.
(b) Pro Rata Distributions. If the Borrower, at
----------------------
any time while this Note is outstanding, distributes to all holders of
Common Stock (i) evidences of its indebtedness, (ii) any security (other
than a distribution of Common Stock covered by the preceding paragraph),
(iii) rights or warrants to subscribe for or purchase any security, or (iv)
any other asset (in each case, "DISTRIBUTED PROPERTY"), then, at the request
of the Lender delivered before the 90th day after the record date fixed for
determination of shareholders entitled to receive such distribution, the
Borrower will deliver to the Lender, within five Trading Days after such
request (or, if later, on the effective date of such distribution), the
Distributed Property that the Lender would have been entitled to receive in
respect of the Underlying Shares for which this Note could have been
converted immediately prior to such record date. If such Distributed
Property is not delivered to the Lender pursuant to the preceding sentence,
then upon any conversion of this Note that occurs after such record date,
the Lender shall be entitled to receive, in addition to the Underlying
Shares otherwise issuable upon such conversion, the Distributed Property
that the Lender would have been entitled to receive in respect of such
number of Underlying Shares had
15
the Lender been the record holder of such Underlying Shares immediately
prior to such record date. Notwithstanding the foregoing, this Section 11(b)
shall not apply to any distribution of rights or securities in respect of
adoption by the Borrower of a shareholder rights plan, which events shall be
covered by Section 11(a).
(c) Fundamental Transactions. If, at any time
------------------------
while this Note is outstanding, (i) the Borrower effects any merger or
consolidation of the Borrower with or into another Person, (ii) the Borrower
effects any sale of all or substantially all of its assets in one or a
series of related transactions, (iii) any tender offer or exchange offer
(whether by the Borrower or another Person) is completed pursuant to which
holders of Common Stock tender or exchange their shares for other
securities, cash or property, or (iv) the Borrower effects any
reclassification of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (other than as a result of
a subdivision or combination of shares of Common Stock covered by Section
11(a) above) (in any such case, a "FUNDAMENTAL TRANSACTION"), then upon any
subsequent conversion of this Note, the Lender shall have the right to: (x)
declare an Event of Default pursuant to clause (iii) thereunder, (y)
receive, for each Underlying Share that would have been issuable upon such
conversion absent such Fundamental Transaction, the same kind and amount of
securities, cash or property as it would have been entitled to receive upon
the occurrence of such Fundamental Transaction if it had been, immediately
prior to such Fundamental Transaction, the holder of one share of Common
Stock (the "ALTERNATE CONSIDERATION") or (z) require the surviving entity to
issue to the Lender and instrument identical to this Note (with an
appropriate adjustments to the conversion price). For purposes of any such
conversion, the Borrower shall apportion the Conversion Price among the
Alternate Consideration in a reasonable manner reflecting the relative value
of any different components of the Alternate Consideration. If holders of
Common Stock are given any choice as to the securities, cash or property to
be received in a Fundamental Transaction, then the Lender shall be given the
same choice as to the Alternate Consideration it receives upon any
conversion of this Note following such Fundamental Transaction. To the
extent necessary to effectuate the foregoing provisions, any successor to
the Borrower or surviving entity in such Fundamental Transaction (or, if
different, the ultimate parent of such successor or entity or the entity
issuing the Alternate Consideration) shall issue to the Lender a new
debenture consistent with the foregoing provisions and evidencing the
Lender's right to convert such debenture into Alternate Consideration. The
terms of any agreement pursuant to which a Fundamental Transaction is
effected shall include terms requiring any such successor or surviving
entity to comply with the provisions of this paragraph (c) and insuring that
this Note (or any such replacement security) will be similarly adjusted upon
any subsequent transaction analogous to a Fundamental Transaction.
(d) Subsequent Equity Sales.
-----------------------
(i) If the Borrower or any Subsidiary,
as applicable, at any time while this Note is outstanding, shall issue
shares of Common Stock or Common Stock Equivalents entitling any Person to
acquire shares of Common Stock, at a price per share less than the
Conversion Price (if the holder of the Common Stock or Common Stock
Equivalent so issued shall at any time, whether by operation of purchase
price adjustments, reset provisions, floating conversion, exercise or
exchange prices or otherwise, or due to warrants, options or rights issued
in connection with such issuance, be entitled to receive shares of Common
Stock at
16
a price less than the Conversion Price, such issuance shall be deemed to
have occurred for less than the Conversion Price), then, the Conversion
Price shall be adjusted to the lowest conversion, exchange or purchase price
for such Common Stock or Common Stock Equivalents (including any reset
provisions thereof) at issue. Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued. The Borrower shall
notify the Lender in writing, no later than the Trading Day following the
issuance of any Common Stock or Common Stock Equivalent subject to this
section, indicating therein the applicable issuance price, or of applicable
reset price, exchange price, conversion price and other pricing terms. No
further adjustments shall be made to the Conversion Price upon the actual
issuance of Common Stock upon conversion or exercise of the applicable
Common Stock Equivalent.
(ii) For purposes of this subsection
11(d), the following subsections (d)(ii)(l) to (d)(ii)(6) shall also be
applicable:
(1) Issuance of Rights or
---------------------
Options. In case at any time the Borrower shall in any manner grant
- -------
(directly and not by assumption in a merger or otherwise) any warrants or
other rights to subscribe for or to purchase, or any options for the
purchase of, Common Stock or any stock or security convertible into or
exchangeable for Common Stock (such warrants, rights or options being called
"OPTIONS" and such convertible or exchangeable stock or securities being
called "CONVERTIBLE SECURITIES") whether or not such Options or the right to
convert or exchange any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon
the exercise of such Options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (i) the sum (which sum shall
constitute the applicable consideration) of (x) the total amount, if any,
received or receivable by the Borrower as consideration for the granting of
such Options, plus (y) the aggregate amount of additional consideration
payable to the Borrower upon the exercise of all such Options, plus (z), in
the case of such Options which relate to Convertible Securities, the
aggregate amount of additional consideration, if any, payable upon the issue
or sale of such Convertible Securities and upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of Common Stock issuable
upon the exercise of such Options or upon the conversion or exchange of all
such Convertible Securities issuable upon the exercise of such Options)
shall be less than the Conversion Price in effect immediately prior to the
time of the granting of such Options, then the total number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion
or exchange of the total amount of such Convertible Securities issuable upon
the exercise of such Options shall be deemed to have been issued for such
price per share as of the date of granting of such Options or the issuance
of such Convertible Securities and thereafter shall be deemed to be
outstanding for purposes of adjusting the Conversion Price. Except as
otherwise provided in subsection 11(d)(ii)(3), no adjustment of the
Conversion Price shall be made upon the actual issue of such Common Stock or
of such Convertible Securities upon exercise of such Options or upon the
actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities.
(2) Issuance of Convertible
-----------------------
Securities. In case the Borrower shall in any manner issue (directly and not
- ----------
by assumption in a merger or otherwise) or sell any Convertible Securities,
whether or not the rights to exchange or convert any such Convertible
Securities are immediately exercisable, and the price per share for which
Common Stock is issuable upon such conversion or exchange (determined by
dividing (i) the sum (which
17
sum shall constitute the applicable consideration) of (x) the total amount
received or receivable by the Borrower as consideration for the issue or
sale of such Convertible Securities, plus (y) the aggregate amount of
additional consideration, if any, payable to the Borrower upon the
conversion or exchange thereof, by (ii) the total number of shares of Common
Stock issuable upon the conversion or exchange of all such Convertible
Securities) shall be less than the Conversion Price in effect immediately
prior to the time of such issue or sale, then the total maximum number of
shares of Common Stock issuable upon conversion or exchange of all such
Convertible Securities shall be deemed to have been issued for such price
per share as of the date of the issue or sale of such Convertible Securities
and thereafter shall be deemed to be outstanding for purposes of adjusting
the Conversion Price, provided that (a) except as otherwise provided in
subsection 11(d)(ii)(3), no adjustment of the Conversion Price shall be made
upon the actual issuance of such Common Stock upon conversion or exchange of
such Convertible Securities and (b) no further adjustment of the Conversion
Price shall be made by reason of the issue or sale of Convertible Securities
upon exercise of any Options to purchase any such Convertible Securities for
which adjustments of the Conversion Price have been made pursuant to the
other provisions of subsection 11(d).
(3) Change in Option Price or
-------------------------
Conversion Rate. Upon the happening of any of the following events, namely,
- ---------------
if the purchase price provided for in any Option referred to in subsection
11(d)(ii)(l) hereof, the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
subsections 11(d)(ii)(l) or 11(d)(ii)(2), or the rate at which Convertible
Securities referred to in subsections 11(d)(ii)(l) or 11(d)(ii)(2) are
convertible into or exchangeable for Common Stock shall change at any time
(including, but not limited to, changes under or by reason of provisions
designed to protect against dilution), the Conversion Price in effect at the
time of such event shall forthwith be readjusted to the Conversion Price
which would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold. On the termination of any Option for
which any adjustment was made pursuant to this subsection 11(d) or any right
to convert or exchange Convertible Securities for which any adjustment was
made pursuant to this subsection 11(d) (including without limitation upon
the redemption or purchase for consideration of such Convertible Securities
by the Borrower), the Conversion Price then in effect hereunder shall
forthwith be changed to the Conversion Price which would have been in effect
at the time of such termination had such Option or Convertible Securities,
to the extent outstanding immediately prior to such termination, never been
issued.
(4) Stock Dividends. Subject to
---------------
the provisions of this Section 11(d), in case the Borrower shall declare a
dividend or make any other distribution upon any stock of the Borrower
(other than the Common Stock) payable in Common Stock, Options or
Convertible Securities, then any Common Stock, Options or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration.
(5) Consideration for Stock. In
-----------------------
case any shares of Common Stock, Options or Convertible Securities shall be
issued or sold for cash, the consideration received therefor shall be deemed
to be the net amount received by the Borrower therefor, after deduction
therefrom of any expenses incurred or any underwriting commissions or
18
concessions paid or allowed by the Borrower in connection therewith. In case
any shares of Common Stock, Options or Convertible Securities shall be
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Borrower shall be deemed to be
the fair value of such consideration as determined in good faith by the
Board of Directors of the Borrower, after deduction of any expenses incurred
or any underwriting commissions or concessions paid or allowed by the
Borrower in connection therewith. In case any Options shall be issued in
connection with the issue and sale of other securities of the Borrower,
together comprising one integral transaction in which no specific
consideration is allocated to such Options by the parties thereto, such
Options shall be deemed to have been issued for such consideration as
determined in good faith by the Board of Directors of the Borrower. If
Common Stock, Options or Convertible Securities shall be issued or sold by
the Borrower and, in connection therewith, other Options or Convertible
Securities (the "ADDITIONAL RIGHTS") are issued, then the consideration
received or deemed to be received by the Borrower shall be reduced by the
fair market value of the Additional Rights (as determined using the
Black-Scholes option pricing model or another method mutually agreed to by
the Borrower and the Lender). The Board of Directors of the Borrower shall
respond promptly, in writing, to an inquiry by the Lenders as to the fair
market value of the Additional Rights. In the event that the Board of
Directors of the Borrower and the Lenders are unable to agree upon the fair
market value of the Additional Rights, the Borrower and the Lenders shall
jointly select an appraiser, who is experienced in such matters. The
decision of such appraiser shall be final and conclusive, and the cost of
such appraiser shall be borne evenly by the Borrower and the Lender.
(6) Record Date. In case the
-----------
Borrower shall take a record of the holders of its Common Stock for the
purpose of entitling them (i) to receive a dividend or other distribution
payable in Common Stock, Options or Convertible Securities or (ii) to
subscribe for or purchase Common Stock, Options or Convertible Securities,
then such record date shall be deemed to be the date of the issue or sale of
the shares of 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.
(iii) Notwithstanding the foregoing, no
adjustment will be made under this paragraph (d) in respect of: (A) the
issuance of securities upon the exercise or conversion of any Common Stock
Equivalents issued by the Borrower prior to the Original Issue Date of this
Note (but will apply to any amendments, modifications and reissuances
thereof), and (B) the grant of options or warrants, or the issuance of
additional securities, under any duly authorized Borrower stock option,
stock incentive plan, restricted stock plan or stock purchase plan in
existence on the Closing Date; (C) the issuance of Common Stock in payment
of interest on the 2005 Notes, 2004 Notes or on the 2003 Debentures or 2004
Debentures or this Note; (D) the issuance of Common Stock Equivalents
pursuant to a Strategic Transaction or (E) the issuance of Common Stock
pursuant to Section 2(c) of the Registration Rights Agreement.
(e) Reclassifications; Share Exchanges. In case
----------------------------------
of any reclassification of the Common Stock, or any compulsory share
exchange pursuant to which the Common Stock is converted into other
securities, cash or property (other than compulsory share exchanges which
constitute Change of Control transactions), the Lenders of the Notes then
outstanding shall have the right thereafter to convert such shares only into
the shares of stock and
19
other securities, cash and property receivable upon or deemed to be held by
holders of Common Stock following such reclassification or share exchange,
and the Lenders shall be entitled upon such event to receive such amount of
securities, cash or property as a holder of the number of shares of Common
Stock of the Borrower into which such shares of Notes could have been
converted immediately prior to such reclassification or share exchange would
have been entitled. This provision shall similarly apply to successive
reclassifications or share exchanges.
(f) Calculations. All calculations under this
------------
Section 11 shall be made to the nearest cent or the nearest 1/100th of a
share, as applicable. The number of shares of Common Stock outstanding at
any given time shall not include shares owned or held by or for the account
of the Borrower, and the disposition of any such shares shall be considered
an issue or sale of Common Stock.
(g) Notice of Adjustments. Upon the occurrence of
---------------------
each adjustment pursuant to this Section 11, the Borrower at its expense
will promptly compute such adjustment in accordance with the terms hereof
and prepare a certificate describing in reasonable detail such adjustment
and the transactions giving rise thereto, including all facts upon which
such adjustment is based. Upon written request, the Borrower will promptly
deliver a copy of each such certificate to the Lender.
(h) Notice of Corporate Events. If the Borrower
--------------------------
(i) declares a dividend or any other distribution of cash, securities or
other property in respect of its Common Stock, including without limitation
any granting of rights or warrants to subscribe for or purchase any capital
stock of the Borrower or any Subsidiary, (ii) authorizes and publicly
approves, or enters into any agreement contemplating or solicits shareholder
approval for any Fundamental Transaction or (iii) publicly authorizes the
voluntary dissolution, liquidation or winding up of the affairs of the
Borrower, then the Borrower shall deliver to the Lender a notice describing
the material terms and conditions of such transaction, at least 20 calendar
days prior to the applicable record or effective date on which a Person
would need to hold Common Stock in order to participate in or vote with
respect to such transaction, and the Borrower will take all steps reasonably
necessary in order to insure that the Lender is given the practical
opportunity to convert this Note prior to such time so as to participate in
or vote with respect to such transaction; provided, however, that the
failure to deliver such notice or any defect therein shall not affect the
validity of the corporate action required to be described in such notice.
12. Fractional Shares. The Borrower shall not be required
-----------------
to issue or cause to be issued fractional Underlying Shares on conversion of
this Note. If any fraction of an Underlying Share would, except for the
provisions of this Section, be issuable upon conversion of this Note or
payment of interest hereon, the number of Underlying Shares to be issued
will be rounded up to the nearest whole share.
13. Call Right.
----------
(a) Subject to the provisions of this Section 13,
----------
if after the six-month anniversary of the Effective Date, the Closing Price
of the Borrower's Common Stock on the Nasdaq National Market is equal to or
above $42.50 (as adjusted pursuant to Section 11) (the "THRESHOLD PRICE")
for each of 20 consecutive Trading Days, then the Borrower shall have the
20
right, but not the obligation (the "CALL RIGHT"), on at least thirty (30)
days prior written notice to the Lender to redeem all (but not part) of the
unpaid principal balance of this Note for which a Conversion Notice has not
yet been delivered (the "CALL AMOUNT").
(b) To exercise this Call Right, the Borrower
shall deliver to the Lender an irrevocable written notice (a "CALL NOTICE"),
indicating the Call Amount. The date that the Borrower delivers the Call
Notice to the Lender shall be referred to as the "CALL DATE." Within thirty
(30) days of receipt of the Call Notice, and provided that the Lender is
permitted to convert this Note pursuant to Section 5 above, the Lender may
convert this Note in whole or in part in accordance with Section 5 above.
Any portion of the Call Amount that is not exercised by 6:30 p.m. (New York
City time) on the 30th day following the date of receipt of the Call Notice
(the "REDEMPTION DATE") shall be cancelled upon the payment by the Borrower
to the Lender of the Call Amount, plus all accrued but unpaid interest
thereon through the date of payment. Any portion of this Note to which the
Call Notice does not pertain (the "REMAINING PORTION") will be unaffected by
such Call Notice. The Borrower covenants and agrees that it will honor any
Conversion Notice with respect to the Call Amount that is tendered to the
Borrower from the time of delivery of the Call Notice through and including
6:30 p.m. (New York City time) on the Redemption Date.
(c) Notwithstanding anything to the contrary set
forth in this Note, the Borrower may not deliver a Call Notice or require
the cancellation of any unexercised Call Amount (and any Call Notice will be
void), unless from the beginning of the 20 consecutive Trading Days used to
determine whether the Common Stock has achieved the Threshold Price through
the Redemption Date (the "CALL PERIOD") (i) the Borrower shall have honored
in accordance with the terms of this Note any Conversion Notice delivered by
6:30 p.m. (New York City time) on or prior to the Redemption Date, (ii) all
Equity Conditions Are Satisfied, and (iii) the Closing Price of the
Borrower's Common Stock is equal to or above the Threshold Price.
14. Notices. Any and all notices or other communications
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or deliveries hereunder (including without limitation any Conversion Notice
or the Borrower Conversion Notice) shall be in writing and shall be deemed
given and effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section prior to 6:30 p.m. (New York City time) on a
Trading Day, (ii) the next Trading Day after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
number specified in this Section on a day that is not a Trading Day or later
than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading
Day following the date of mailing, if sent by nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to whom
such notice is required to be given. The addresses for such communications
shall be: (i) if to the Borrower, to 3101 McKelvey Road, St. Louis, Missouri
63044, facsimile: (314) 291-9082, attention Chief Financial Officer, (ii) if
to the Lender, to the address or facsimile number appearing on the
Borrower's shareholder records or such other address or facsimile number as
the Lender may provide to the Borrower in accordance with this Section, or
(iii) if to the Administrative Agent, to the address or facsimile number
therefor set forth in the Loan Agreement.
21
15. Miscellaneous.
-------------
(a) This Note shall be binding on and inure to
the benefit of the parties hereto and their respective successors and
assigns.
(b) Subject to Section 15(a), above, nothing in
this Note shall be construed to give to any person or corporation other than
the Borrower and the Lender any legal or equitable right, remedy or cause
under this Note. This Note shall inure to the sole and exclusive benefit of
the Borrower and the Lender.
(c) All questions concerning the construction,
validity, enforcement and interpretation of this Note shall be governed by
and construed and enforced in accordance with the internal laws of the State
of New York, without regard to the principles of conflicts of law thereof.
Each party agrees that all Proceedings shall be commenced exclusively in the
state and federal courts sitting in the City of New York, Borough of
Manhattan (the "NEW YORK COURTS"). Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the New York Courts for any
Proceeding, and hereby irrevocably waives, and agrees not to assert in any
proceeding, any claim that it is not personally subject to the jurisdiction
of any New York Court or that a New York Court is an inconvenient forum for
such Proceeding. Each party hereto hereby irrevocably waives personal
service of process and consents to process being served in any such
Proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address
in effect for notices to it under this Note and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to
serve process in any manner permitted by law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any
and all right to trial by jury in any legal proceeding. The prevailing party
in a proceeding shall be reimbursed by the other party for its reasonable
attorneys' fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such proceeding.
(d) The headings herein are for convenience only,
do not constitute a part of this Note and shall not be deemed to limit or
affect any of the provisions hereof.
(e) In case any one or more of the provisions of
this Note shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Note shall not
in any way be affected or impaired thereby and the parties will attempt in
good faith to agree upon a valid and enforceable provision which shall be a
commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Note.
(f) No provision of this Note may be waived,
amended or otherwise modified except in accordance with the requirements set
forth in the Loan Agreement. No waiver of any default with respect to any
provision, condition or requirement of this Note shall be deemed to be a
continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof, nor shall
any delay or omission of either party to exercise any right hereunder in any
manner impair the exercise of any such right.
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(g) To the extent it may lawfully do so, the
Borrower hereby agrees not to insist upon or plead or in any manner
whatsoever claim, and will resist any and all efforts to be compelled to
take the benefit or advantage of, usury laws wherever enacted, now or at any
time hereafter in force, in connection with any claim, action or proceeding
that may be brought by any Lender in order to enforce any right or remedy
under the Notes. Notwithstanding any provision to the contrary contained in
the Notes, it is expressly agreed and provided that the total liability of
the Borrower under the Notes for payments in the nature of interest shall
not exceed the maximum lawful rate authorized under applicable law (the
"MAXIMUM RATE"), and, without limiting the foregoing, in no event shall any
rate of interest or default interest, or both of them, when aggregated with
any other sums in the nature of interest that the Borrower may be obligated
to pay under the Notes exceed such Maximum Rate. It is agreed that if the
maximum contract rate of interest allowed by law and applicable to the Notes
is increased or decreased by statute or any official governmental action
subsequent to the date hereof, the new maximum contract rate of interest
allowed by law will be the Maximum Rate of interest applicable to the Notes
from the effective date forward, unless such application is precluded by
applicable law. If under any circumstances whatsoever, interest in excess of
the Maximum Rate is paid by the Borrower to any Lender with respect to
indebtedness evidenced by the Notes, such excess shall be applied by such
Lender to the unpaid principal balance of any such indebtedness or be
refunded to the Borrower, the manner of handling such excess to be at such
Lender's election.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Borrower has caused this Note to be duly
executed by a duly authorized officer as of the date first above indicated.
ZOLTEK COMPANIES, INC.
By:
------------------------------
Name:
Title:
24
EXHIBIT A
CONVERSION NOTICE
(To be Executed by the Registered Lender
in order to convert Notes)
The undersigned hereby elects to convert the principal amount of
Note indicated below, into shares of Common Stock of Zoltek Companies, Inc.,
as of the date written below. If shares are to be issued in the name of a
Person other than undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates
and opinions as reasonably requested by the Borrower in accordance
therewith. No fee will be charged to the Lender for any conversion, except
for such transfer taxes, if any. All terms used in this notice shall have
the meanings set forth in the Note.
Conversion calculations:
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Date to Effect Conversion
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Principal amount of Note owned prior to conversion
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Principal amount of Note to be Converted
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Principal amount of Note remaining after Conversion
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Number of shares of Common Stock to be Issued
-------------------------------------------------------
Applicable Conversion Price
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Name of Lender
By:
----------------------------------------------------
Name:
Title:
By the delivery of this Conversion Notice the Lender represents and
warrants to the Borrower that its ownership of the Common Stock does not
exceed the restrictions set forth in Section 5(b) of the Note.
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SCHEDULE 1
Zoltek Companies, Inc.
Senior Convertible Notes due November __, 2009
CONVERSION SCHEDULE
This Conversion Schedule reflects conversions made under the above referenced Notes.
Dated:
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Date of Conversion Amount of Conversion Aggregate Applicable Conversion Price
Principal
Amount
Remaining Subsequent
to Conversion
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