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EXHIBIT 10.5
NEITHER THIS NOTE NOR THE SECURITIES INTO WHICH THIS NOTE IS
CONVERTIBLE 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.
No. 1 $500,000
FRANKLIN TELECOMMUNICATIONS CORP.
10% CONVERTIBLE NOTE
DUE DECEMBER 3, 2002
THIS NOTE is one of a series of duly authorized and issued notes of
Franklin Telecommunications Corp., a California corporation, having a principal
place of business at 733 Lakefield Road, Westlake Village, California 91361 (the
"Company"), designated as its 10% Convertible Notes, due December 3, 2002, in
the aggregate principal amount of Two Million and Five Hundred Thousand Dollars
($2,500,000) (the "Notes").
FOR VALUE RECEIVED, the Company promises to pay to Strong
River Investments, Inc, or its registered assigns (the "Holder""), the
principal sum of Five Hundred Thousand Dollars ($500,000), on December
3, 2002 or such earlier date as the Notes are required or permitted to
be repaid as provided hereunder (such date, the "Maturity Date") and to
pay interest, in cash or shares of Common Stock (as defined in Section
5), to the Holder on the aggregate unconverted and then outstanding
principal amount of this Note, at the rate of 10% per annum, on and
after the Put Date (as defined herein), on each December 31, March 31,
June 30 and September 30 of each year during which any principal amount
of this Note remains outstanding (each a "Quarterly Date") and each
Conversion Date (as defined herein) (each of a Conversion Date and such
Quarterly Dates are referred to herein as an "Interest Payment Date").
Subject to the terms and conditions herein, the decision whether to pay
interest hereunder in Common Stock or cash shall be at the discretion
of the Company. Not less than ten (10) days prior to each Interest
Payment Date occurring subsequent to the Put Date, the Company shall
provide the Holder with written notice of its election to pay interest
hereunder either in (i) cash no later than three (3) Trading Days (as
defined in Section 5) following the applicable Interest Payment Date or
(ii) shares of Common Stock pursuant to the terms of Section 4(a)(i). A
failure of the Company to timely provide the aforementioned written
notice, shall result in the Company's obligation to pay interest
hereunder in shares of Common Stock pursuant to the terms of Section
4(a)(i) on the applicable Interest Payment Date. Any interest to be
paid in cash hereunder that is not paid within three (3) Trading Days
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following an Interest Payment Date shall continue to accrue and shall
entail a late fee, which must be paid in cash, at the rate of 18% per
annum or the lesser rate permitted by applicable law (such fees to
accrue daily, from the date such interest payment is due hereunder
through and including the date of payment). Interest shall accrue daily
commencing on the Original Issue Date (as defined in Section 5) until
payment in full of the principal sum, together with all accrued and
unpaid interest and other amounts which may become due hereunder, has
been made. Interest hereunder will be paid to the Person (as defined in
Section 5) in whose name this Note is registered on the records of the
Company regarding registration and transfers of Notes (the "Note
Register").
This Note is subject to the following additional provisions:
Section 1. This Note is exchangeable for an equal aggregate principal
amount of Notes of different authorized denominations, as requested by the
Holder surrendering the same. No service charge will be made for such
registration of transfer or exchange.
Section 2. This Note has been issued subject to certain investment
representations of the original Holder set forth in the Purchase Agreement (as
defined in Section 5) and may be transferred or exchanged only in compliance
with the Purchase Agreement. Prior to due presentment to the Company for
transfer of this Note, the Company and any agent of the Company may treat the
Person (as defined in Section 5), in whose name this Note is duly registered on
the Note Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Note is overdue,
and neither the Company nor any such agent shall be affected by notice to the
contrary.
Section 3. Events of Default.
(a) "Event of Default", wherever used herein, 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 of the principal of, interest
on or liquidated damages in respect of, any Notes, free of all claims
of subordination, as and when the same shall become due and payable
(whether on a Conversion Date, a Quarterly Date, the Maturity Date, by
acceleration or otherwise);
(ii) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of the Purchase Agreement, the Registration Rights Agreement (as
defined in Section 5) the Common Stock Purchase Warrant delivered to
the original Holder pursuant to the Purchase Agreement or any Notes,
and such failure or breach shall not, if subject to the probability of
cure by the Company, have been remedied within five (5) days after the
date on which notice of such failure or breach shall have been given;
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(iii) the Company or any of its subsidiaries shall commence or
there shall be commenced against the Company or any such subsidiary a
case under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Company commences
any other proceeding under any reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect
relating to the Company or any subsidiary thereof or there is commenced
against the Company or any subsidiary thereof any such bankruptcy,
insolvency or other proceeding which remains undismissed for a period
of 60 days; or the Company or any subsidiary thereof is adjudicated
insolvent or bankrupt; or any order of relief or other order approving
any such case or proceeding is entered; or the Company or any
subsidiary thereof suffers any appointment of any custodian or the like
for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the Company or any
subsidiary thereof makes a general assignment for the benefit of
creditors; or the Company shall fail to pay, or shall state that it is
unable to pay, or shall be unable to pay, its debts generally as they
become due; or the Company or any subsidiary thereof shall call a
meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or the Company or any
subsidiary thereof shall by any act or failure to act indicate its
consent to, approval of or acquiescence in any of the foregoing; or any
corporate or other action is taken by the Company or any subsidiary
thereof for the purpose of effecting any of the foregoing;
(iv) the Company shall default in any of its obligations under
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
for borrowed money or money due under any long term leasing or
factoring arrangement of the Company in an amount exceeding two hundred
thousand dollars ($200,000), whether such indebtedness now exists or
shall hereafter be created and such default shall result in such
indebtedness becoming or being declared due and payable prior to the
date on which it would otherwise become due and payable;
(v) the Common Stock shall either be delisted from the
American Stock Exchange ("AMEX") or suspended from trading on the AMEX,
without being relisted thereon or on the New York Stock Exchange, the
Nasdaq National Market or the Nasdaq SmallCap Market (each, a
"Subsequent Market") or having such suspension lifted and/or resuming
trading for three (3) consecutive Trading Days (as defined in Section
5);
(vi) the Company shall be a party to any Change of Control
Transaction (as defined in Section 5), shall agree to sell or dispose
all or in excess of 33% of its assets in one or more transactions
(whether or not such sale would constitute a Change of Control
Transaction), or shall redeem or repurchase more than a de minimis
number of shares of Common Stock or other equity securities of the
Company (other than redemptions of Underlying Shares (as defined in
Section 5));
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(vii) an Underlying Shares Registration Statement (as defined
in Section 5) shall not have been declared effective by the Commission
(as defined in Section 5) on or prior to the Effectiveness Date under
the Registration Rights Agreement;
(viii) if, during the Effectiveness Period (as defined in the
Registration Rights Agreement), the effectiveness of the Underlying
Shares Registration Statement lapses for any reason for more than an
aggregate of five (5) Trading Days (which need not be consecutive
days), or the Holder shall not be permitted to resell Registrable
Securities (as defined in the Registration Rights Agreement) under the
Underlying Shares Registration Statement for more than an aggregate of
five (5) Trading Days (which need not be consecutive Trading Days);
(ix) an Event (as hereinafter defined) shall not have been
cured to the satisfaction of the Holder prior to the expiration of
thirty (30) days from the Event Date (as defined below) relating
thereto (other than an Event resulting from a failure of an Underlying
Shares Registration Statement to be declared effective by the
Commission on or prior to the Effectiveness Date under the Registration
Rights Agreement);
(x) the Company shall fail for any reason to deliver
certificates to a Holder prior to the twelfth (12th) day after a
Conversion Date pursuant to and in accordance with Section 4(b) or the
Company shall provide notice to the Holder, including by way of public
announcement, at any time, of its intention not to comply with requests
for conversions of any Notes in accordance with the terms hereof;
(xi) the Company shall fail for any reason to deliver the
payment in cash pursuant to a Buy-In (as defined herein) within seven
(7) days after notice is deemed delivered hereunder;
(xii) the Company shall issue in excess of an aggregate of
25,000 shares of Common Stock or shall issue Common Stock Equivalents
(as defined herein) entitling the holders thereof to acquire in excess
of an aggregate of 25,000 shares of Common Stock in connection with or
to any present or future lender or creditor of the Company or any
affiliate subsidiary thereof;
(xiii) except for (a) the issuance of up to 250,000 shares of
Common Stock in settlement any litigation and (b) the payment of up to
an aggregate of $250,000 in cash, the Company shall agree to pay or
settle any litigation or action for an amount in stock or cash that
exceeds the insurance coverage for such litigation or claim; or
(xvi) other than indebtedness and payables between the Company
and its subsidiaries, the Company shall, without the consent of the
Holders, restructure any material portion of its present or future debt
obligations or payables (for purposes of this subsection, it is agreed
that solely extending the time for repayment (as opposed to the amount
owed) of debt in any such extensions whereby the aggregate annual rate
of interest applicable to
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such debt (inclusive of the consideration, if any, for such extension),
does not exceed the prime rate of interest then in effect as announced
by The Chase Manhattan Bank, N.A. plus 3% shall not constitute a
restructuring of debt.
(b) During the time that any portion of this Note remains outstanding,
if any Event of Default occurs and is continuing, the full principal amount of
this Note (and, at the Holder's option, all other Notes then held by such
Holder), together with interest and other amounts owing in respect thereof, to
the date of acceleration shall become, immediately due and payable in cash. The
aggregate amount payable upon an Event of Default shall be equal to the sum of
(i) the Mandatory Prepayment Amount (as defined in Section 5) plus (ii) the
product of (A) the number of Underlying Shares issued in respect of conversions
hereunder or as payment of interest hereunder, in either case, within thirty
(30) days of the date of a declaration of an Event of Default and then held by
the Holder and (B) the Per Share Market Value (as defined in Section 5) on the
date prepayment is due or the date the full prepayment price is paid, whichever
is greater. Interest shall accrue on the prepayment amount hereunder from the
seventh (7th) day after such amount is due (being the date of an Event of
Default) through the date of prepayment in full thereof at the rate of 18% per
annum or such lesser maximum amount that is permitted to be paid by applicable
law, to accrue daily from the date such payment is due hereunder through and
including the date of payment. All Notes and Underlying Shares for which the
full prepayment price hereunder shall have been paid in accordance herewith
shall be promptly surrendered to or as directed by the Company. The Holder need
not provide and the Company hereby waives any presentment, demand, protest or
other notice of any kind, and the Holder may immediately and without expiration
of any grace period enforce any and all of its rights and remedies hereunder and
all other remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder. No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.
Section 4. Conversion.
(a) (i) Prepayment or Conversions. (A) On the 90th day following the
Original Issue Date (the "Put Date"), the Company will notify the Holder in
writing (the "Company Notification") of its intention to either (i) prepay the
aggregate principal amount outstanding and all interest and payments then due
hereunder no later than the 150th day following the Original Issue Date (such
day, the "Payment Date") for a cash payment equal to the Optional Prepayment
Price (as defined in Section 5) or (ii) at any time and from time to time, from
and after the Put Date until the Maturity Date, allow the Holder to convert all
or a portion of this Note into shares of Common Stock (subject to the
limitations on conversion set forth in Section 4(a)(iii) hereof) without any
further action by the Company. A failure on the part of the Company to either
timely deliver a Company Notification to the Holder or, if the Company shall
have elected the option pursuant to clause (i) of the immediately preceding
sentence and shall fail to pay the Optional Prepayment Price on or prior to the
Payment Date, then, as of the Payment Date, the Company will automatically be
deemed to have elected the option pursuant to clause (ii) of the immediately
preceding sentence. If the Company shall have elected the option pursuant to
clause (i) of the immediately preceding sentence, the Notes for which the full
prepayment price hereunder shall have been paid in accordance
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herewith shall be promptly surrendered to or as directed by the Company. If the
Company shall have elected the option pursuant to clause (ii) of the immediately
preceding sentence, the Note shall remain in effect in all respects thereof. The
number of shares of Common Stock issuable upon a conversion hereunder shall be
determined by adding the sum of (i) the quotient obtained by dividing (x) the
outstanding principal amount of this Note to be converted and (y) the Conversion
Price (as defined herein), and (ii) the amount equal to the product of (x) the
outstanding principal amount of this Note to be converted and (y)(I) the product
of (1) the quotient obtained by dividing 0.10 by 365 and (2) the number of days
for which such principal amount was outstanding, divided by (II) the Conversion
Price on the Conversion Date.
(B) Notwithstanding anything to the contrary contained herein,
if on any Conversion Date:
(1) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, or held as
treasury stock, is insufficient to pay interest hereunder in
shares of Common Stock;
(2) after the Interest Effectiveness Date (as defined in
Section 5) such shares of Common Stock (x) are not registered for
resale pursuant to an effective Underlying Shares Registration
Statement and (y) may not be sold without volume restrictions
pursuant to Rule 144(k) promulgated under the Securities Act (as
defined in Section 5), as determined by counsel to the Company
pursuant to a written opinion letter, addressed to the Company's
transfer agent in the form and substance acceptable to the
applicable Holder and such transfer agent (if the shares of Common
Stock are permitted by the Holder to be delivered under this
clause (2) prior to the Effectiveness Date (as defined in the
Registration Rights Agreement) and thereafter an Underlying Shares
Registration Statement shall be declared effective by the
Commission, the Company shall, within three (3) Trading Days after
the date of such declaration of effectiveness, exchange such
shares for shares of Common Stock that are free of restrictive
legends of any kind);
(3) the Common Stock is not listed or quoted on the AMEX
or on a Subsequent Market;
(4) the Company has failed to timely satisfy its
conversion obligations hereunder; or
(5) the issuance of such shares of Common Stock would
result in a violation of Sections 4(a)(iii)(A) and (B),
then, at the option of the Holder, the Company, in lieu of delivering shares of
Common Stock pursuant to Section 4(a)(i)(A)(ii), shall deliver, within three (3)
Trading Days of each applicable Conversion Date, an amount of cash equal to the
product of (a) the outstanding principal amount of the Notes to be converted on
such Conversion Date and (b) the product of (x) the quotient obtained by
dividing 0.10 by 365 and (y) the number of days for which such principal amount
was outstanding.
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(C) Subject to the provisions hereof, the Holder shall effect
conversions by surrendering the Notes (or such portions thereof) to be
converted, together with the form of conversion notice attached hereto as
Exhibit A (a "Conversion Notice") to the Company. Each Conversion Notice shall
specify the principal amount of Notes to be converted and the date on which such
conversion is to be effected, which date may not be prior to the date such
Conversion Notice is deemed to have been delivered hereunder (a "Conversion
Date"). If no Conversion Date is specified in a Conversion Notice, the
Conversion Date shall be the date that such Conversion Notice is deemed
delivered hereunder. Subject to Section 4(b), each Conversion Notice, once
given, shall be irrevocable. If the Holder is converting less than all of the
principal amount represented by the Note(s) tendered by the Holder with the
Conversion Notice, or if a conversion hereunder cannot be effected in full for
any reason, the Company shall honor such conversion to the extent permissible
hereunder and shall promptly deliver to such Holder (in the manner and within
the time set forth in Section 4(b)) a new Note for such principal amount as has
not been converted.
(ii) Automatic Conversion. Subject to the provisions in
this paragraph, the principal amount of Notes for which conversion notices have
not previously been received or for which prepayment has not been required
hereunder shall be automatically converted on December 3, 2002 (the "Automatic
Conversion Date") pursuant to Section 4(a)(i), at the Conversion Price on such
date. The conversion contemplated by this paragraph shall not occur if (a) (1)
an Underlying Securities Registration Statement is not then effective that names
the Holder as a selling stockholder thereunder or (2) the Holder is not
permitted to resell Underlying Shares pursuant to Rule 144(k) promulgated under
the Securities Act, without volume restrictions, as evidenced by an opinion
letter of counsel acceptable to the Holder and the transfer agent for the Common
Stock; (b) there are not sufficient shares of Common Stock authorized and
reserved for issuance upon such conversion; and (c) the Company shall not have
defaulted on its covenants and obligations hereunder or under the Purchase
Agreement or Registration Rights Agreement. Notwithstanding anything herein to
the contrary, the Automatic Conversion Date shall be extended (on a day-for-day
basis) for any Trading Days that the Holder is unable to resell Underlying
Shares under an Underlying Securities Registration Statement due to (a) the
Common Stock not being listed for trading on the AMEX or any Subsequent Market,
(b) the failure of an Underlying Securities Registration Statement to be
declared effective by the Commission by the Effectiveness Date, or (c) if an
Underlying Securities Registration Statement shall have been declared effective
by the Commission, (x) the failure of such Underlying Securities Registration
Statement to remain effective at all times thereafter as to all Underlying
Shares, or (y) the suspension of the Holder's ability to resell Underlying
Shares thereunder. Notwithstanding anything to the contrary contained herein, a
conversion pursuant to this Section shall not be subject to the provisions of
Section 4(a)(iii)(A).
(iii) Certain Conversion Restrictions.
(A)(1) A Holder may not convert Notes or receive
shares of Common Stock as payment of interest hereunder to the extent such
conversion or receipt of such interest payment
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would result in the Holder, together with any affiliate thereof, beneficially
owning (as determined in accordance with Section 13(d) of the Exchange Act (as
defined in Section 5) and the rules promulgated thereunder) in excess of 4.999%
of the then issued and outstanding shares of Common Stock, including shares
issuable upon conversion of, and payment of interest on, the Notes held by such
Holder after application of this Section. Since the Holder will not be obligated
to report to the Company the number of shares of Common Stock it may hold at the
time of a conversion hereunder, unless the conversion at issue would result in
the issuance of shares of Common Stock in excess of 4.999% of the then
outstanding shares of Common Stock without regard to any other shares which may
be beneficially owned by the Holder or an affiliate thereof, the Holder shall
have the authority and obligation to determine whether the restriction contained
in this Section will limit any particular conversion hereunder and to the extent
that the Holder determines that the limitation contained in this Section
applies, the determination of which portion of the principal amount of Notes are
convertible shall be the responsibility and obligation of the Holder. If the
Holder has delivered a Conversion Notice for a principal amount of Notes that
would result in the issuance in excess of the permitted amount hereunder, the
Company shall notify the Holder of this fact and shall honor the conversion for
the maximum principal amount permitted to be converted on such Conversion Date
in accordance with the periods described in Section 4(b) and, at the option of
the Holder, either retain any principal amount tendered for conversion in excess
of the permitted amount hereunder for future conversions or return such excess
principal amount to the Holder. The provisions of this Section may be waived by
a Holder (but only as to itself and not to any other Holder) upon not less than
61 days prior notice to the Company. Other Holders shall be unaffected by any
such waiver.
(2) A Holder may not convert Notes or receive
shares of Common Stock as payment of interest hereunder to the extent such
conversion or receipt of such interest payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules promulgated
thereunder) in excess of 9.999% of the then issued and outstanding shares of
Common Stock, including shares issuable upon conversion of, and payment of
interest on, the Notes held by such Holder after application of this Section.
Since the Holder will not be obligated to report to the Company the number of
shares of Common Stock it may hold at the time of a conversion hereunder, unless
the conversion at issue would result in the issuance of shares of Common Stock
in excess of 9.999% of the then outstanding shares of Common Stock without
regard to any other shares which may be beneficially owned by the Holder or an
affiliate thereof, the Holder shall have the authority and obligation to
determine whether the restriction contained in this Section will limit any
particular conversion hereunder and to the extent that the Holder determines
that the limitation contained in this Section applies, the determination of
which portion of the principal amount of Notes are convertible shall be the
responsibility and obligation of the Holder. If the Holder has delivered a
Conversion Notice for a principal amount of Notes that would result in the
issuance of in excess of the permitted amount hereunder, the Company shall
notify the Holder of this fact and shall honor the conversion for the maximum
principal amount permitted to be converted on such Conversion Date in accordance
with the periods described in Section 4(b) and, at the option of the Holder,
either retain any principal amount tendered for conversion in excess of the
permitted amount hereunder for future conversions or return such excess
principal amount to the Holder. The provisions of this
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Section may be waived by a Holder (but only as to itself and not to any other
Holder) upon not less than 61 days prior notice to the Company. Other Holders
shall be unaffected by any such waiver.
(B) If the Common Stock is then listed for trading
on the AMEX and the Company has not obtained the Shareholder Approval (as
defined below), then the Company may not issue in excess of 5,156,765 shares of
Common Stock upon conversions of Notes or as payment of interest thereon in
shares of Common Stock, which number shall be subject to adjustment (such number
of shares, the "Issuable Maximum"). The Issuable Maximum equals 19.999% of the
number of shares of Common Stock outstanding immediately prior to the Original
Issue Date. If on any Conversion Date (A) the Common Stock is listed for trading
on the AMEX, (B) the Conversion Price then in effect is such that the aggregate
number of shares of Common Stock that would then be issuable upon conversion in
full of all then outstanding Notes and as payment of interest thereon in shares
of Common Stock, together with any shares of Common Stock previously issued upon
conversion of Notes and as payment of interest thereon, would exceed Issuable
Maximum, and (C) the Company shall not have previously obtained the vote of
shareholders (the "Shareholder Approval"), if any, as may be required by the
applicable rules and regulations of the American Stock Exchange (or any
successor entity) applicable to approve the issuance of shares of Common Stock
in excess of the Issuable Maximum pursuant to the terms hereof, then the Company
shall issue to the Holder so requesting a conversion a number of shares of
Common Stock equal to the Issuable Maximum and, with respect to the remainder of
the principal amount of Notes then held by such Holder for which a conversion in
accordance with the Conversion Price would result in an issuance of shares of
Common Stock in excess of the Issuable Maximum (the "Excess Principal"), the
Holder shall have the option to require the Company to either (1) use its best
efforts to obtain the Shareholder Approval applicable to such issuance as soon
as is possible, but in any event not later than the 60th day after such request,
or (2) pay cash to the converting Holder in an amount equal to the Mandatory
Prepayment Amount for the Excess Principal. If the converting Holder shall have
elected the first option pursuant to the immediately preceding sentence and the
Company shall have failed to obtain the Shareholder Approval on or prior to the
60th day after such request, then within three (3) days of such 60th day, the
Company shall pay cash to the converting Holder an amount equal to the Mandatory
Prepayment Amount for the Excess Principal. If the Company fails to pay the
Mandatory Prepayment Amount in full pursuant to this Section within seven (7)
days of the date payable, the Company will pay interest thereon at a rate of 18%
per annum (or such lesser maximum amount that is permitted to be paid by
applicable law) to the converting Holder, accruing daily from the Conversion
Date until such amount, plus all such interest thereon, is paid in full. The
Company and the Holder understand and agree that shares of Common Stock issued
to and then held by the Holder as a result of conversions of the Notes shall not
be entitled to cast votes on any resolution to obtain Shareholder Approval
pursuant hereto.
(b) (i) Not later than three (3) Trading Days after any Conversion
Date, the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other than
those required by Section 3.1(b) of the Purchase Agreement) representing the
number of shares of Common Stock being acquired upon the conversion of Notes
(subject to the limitations set forth in Section 4(a)(iii) hereof), (ii) Notes
in a principal amount equal to the principal amount of Notes not converted, and
(iii) a bank check in the
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amount of accrued and unpaid interest (if the Company is required to pay accrued
interest in cash), provided, that the Company shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon conversion of
the principal amount of Notes until Notes are delivered for conversion to the
Company, or the Holder notifies the Company that such Notes have been lost,
stolen or destroyed and provides a bond (or other adequate security) reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. The Company shall, upon request of the Holder, if
available, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions. If in the case of any Conversion
Notice such certificate or certificates are not delivered to or as directed by
the applicable Holder by the third (3rd) Trading Day after a Conversion Date,
the Holder shall be entitled by written notice to the Company at any time on or
before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Company shall immediately return the
certificates representing the principal amount of Notes tendered for conversion.
(ii) If the Company fails to deliver to the Holder such certificate
or certificates pursuant to Section 4(b)(i) by the fifth (5th) Trading Day after
the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, $5,000 for each Trading Day after such
fifth (5th) Trading Day until such certificates are delivered. Nothing herein
shall limit a Holder's right to pursue actual damages or declare an Event of
Default pursuant to Section 3 herein for the Company's failure to deliver
certificates representing shares of Common Stock upon conversion within the
period specified herein and such Holder shall have the right to pursue all
remedies available to it at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief. The exercise of any
such rights shall not prohibit the Holders from seeking to enforce damages
pursuant to any other Section hereof or under applicable law. Further, if the
Company shall not have delivered any cash due in respect of conversions of Notes
or as payment of interest thereon by the fifth (5th) Trading Day after the
Conversion Date, the Holder may, by notice to the Company, require the Company
to issue shares of Common Stock pursuant to Section 4(c), except that for such
purpose the Conversion Price applicable thereto shall be the lesser of the
Conversion Price on the Conversion Date and the Conversion Price on the date of
such Holder demand. Any such shares will be subject to the provision of this
Section.
(iii) In addition to any other rights available to the Holder, if
the Company fails to deliver to the Holder such certificate or certificates
pursuant to Section 4(b)(i) by the fifth (5th) Trading Day after the Conversion
Date, and if after such fifth (5th) Trading Day the Holder purchases (in an open
market transaction or otherwise) Common Stock to deliver in satisfaction of a
sale by such Holder of the Underlying Shares which the Holder anticipated
receiving upon such conversion (a "Buy-In"), then the Company shall (A) pay in
cash to the Holder (in addition to any remedies available to or elected by the
Holder) the amount by which (x) the Holder's total purchase price (including
brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the
product of (1) the aggregate number of shares of Common Stock that such Holder
anticipated receiving from the conversion at issue multiplied by (2) the market
price of the Common Stock at the time of the sale giving rise to such purchase
obligation and (B) at the option of the Holder, either
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reissue Notes in principal amount equal to the principal amount of the attempted
conversion or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its delivery
requirements under Section 4(b)(i). For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted conversion of Notes with respect to which the market price of the
Underlying Shares on the date of conversion was a total of $10,000 under clause
(A) of the immediately preceding sentence, the Company shall be required to pay
the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
Notwithstanding anything contained herein to the contrary, if a Holder requires
the Company to make payment in respect of a Buy-In for the failure to timely
deliver certificates hereunder and the Company timely pays in full such payment,
the Company shall not be required to pay such Holder liquidated damages under
Section 4(b)(ii) in respect of the certificates resulting in such Buy-In.
(c) The conversion price in effect on any Conversion Date (the
"Conversion Price") shall be the lesser of (i) 2.50 and (ii) 92% of the average
of the three (3) lowest Per Share Market Values for the twenty two (22) Trading
Days immediately preceding the Conversion Date, provided, that such twenty two
(22) Trading Day period shall be extended for the number of Trading Days during
such period in which (A) trading in the Common Stock is suspended by the AMEX or
a Subsequent Market on which the Common Stock is then listed, or (B) after the
date declared effective by the Commission, the Underlying Shares Registration
Statement is not effective, or (C) after the date declared effective by the
Commission, the Prospectus included in the Underlying Shares Registration
Statement may not be used by the Holder for the resale of Underlying Shares.
If (a) an Underlying Shares Registration Statement is not filed on or
prior to the Filing Date (as defined under the Registration Rights Agreement)
(if the Company files such Underlying Shares Registration Statement without
affording the Holder the opportunity to review and comment on the same as
required by Section 3(a) of the Registration Rights Agreement, the Company shall
not be deemed to have satisfied this clause (a)), or (b) the Company fails to
file with the Commission a request for acceleration in accordance with Rule
12d1-2 promulgated under the Exchange Act, within five (5) days of the date that
the Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Shares Registration Statement will not be
"reviewed," or not subject to further review, or (c) the Underlying Shares
Registration Statement is not declared effective by the Commission on or prior
to the Effectiveness Date, or (d) such Underlying Shares Registration Statement
is filed with and declared effective by the Commission but thereafter ceases to
be effective as to all Registrable Securities at any time prior to the
expiration of the Effectiveness Period (as defined in the Registration Rights
Agreement), without being succeeded within ten (10) days by an amendment to such
Underlying Shares Registration Statement or by a subsequent Underlying Shares
Registration Statement filed with and declared effective by the Commission, or
(e) the Common Stock shall be delisted or suspended from trading on the AMEX or
on any Subsequent Market for more than three (3) days (which need not be
consecutive days), or (f) the conversion rights of the Holders are suspended for
any reason, or (g) an amendment to the Underlying Shares Registration Statement
is not filed by the Company with the Commission within ten (10) days of the
Commission's notifying the Company that such amendment is required in order
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for the Underlying Shares Registration Statement to be declared effective (any
such failure or breach being referred to as an "Event," and for purposes of
clauses (a), (c), (f) the date on which such Event occurs, or for purposes of
clause (b) the date on which such five (5) day period is exceeded, or for
purposes of clauses (d) and (g) the date which such 10 day-period is exceeded,
or for purposes of clause (e) the date on which such three day-period is
exceeded, being referred to as "Event Date"), then, on the Event Date and each
monthly anniversary thereof until such time as the applicable Event is cured,
the Company to pay to the Holder 3.0% of the aggregate principal amount of Notes
and interest accrued thereon then held by the Holder, in cash, as liquidated
damages and not as a penalty. The liquidated damages pursuant to the terms
hereof shall apply on a pro-rata basis for any portion of a month prior to the
cure of an Event. The provisions of this Section are not exclusive and shall in
no way limit the Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any Notes are outstanding, (a)
shall pay a stock dividend or otherwise make a distribution or distributions on
shares of its Common Stock or any other equity or equity equivalent securities
payable in shares of Common Stock, (b) subdivide outstanding shares of Common
Stock into a larger number of shares, (c) combine (including by way of reverse
stock split) outstanding shares of Common Stock into a smaller number of shares,
or (d) issue by reclassification of shares of the Common Stock any shares of
capital stock of the Company, then the Conversion Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding before such event and of which
the denominator shall be the number of shares of Common Stock outstanding after
such event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
(iii) If the Company, at any time while any Notes are outstanding,
shall issue rights, options or warrants to all holders of Common Stock (and not
to Holders) entitling them to subscribe for or purchase shares of Common Stock
at a price per share less than the Per Share Market Value at the record date
mentioned below, then the Conversion Price shall be multiplied by a fraction, of
which the denominator shall be the number of shares of the Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of such
rights or warrants plus the number of additional shares of Common Stock offered
for subscription or purchase, and of which the numerator shall be the number of
shares of the Common Stock (excluding treasury shares, if any) outstanding on
the date of issuance of such rights or warrants plus the number of shares which
the aggregate offering price of the total number of shares so offered would
purchase at such Per Share Market Value. Such adjustment shall be made whenever
such rights or warrants are issued, and shall become effective immediately after
the record date for the determination of stockholders entitled to receive such
rights, options or warrants. However, upon the expiration of any such right,
option or warrant to purchase shares of the Common Stock the issuance of which
resulted in an adjustment in the Conversion Price pursuant to this Section, if
any such right, option or warrant shall expire and shall not have been
exercised, the Conversion Price shall immediately upon such expiration be
recomputed and effective immediately upon such expiration be increased to the
price which it would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the
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provisions of this Section after the issuance of such rights or warrants) had
the adjustment of the Conversion Price made upon the issuance of such rights,
options or warrants been made on the basis of offering for subscription or
purchase only that number of shares of the Common Stock actually purchased upon
the exercise of such rights, options or warrants actually exercised.
If the Company or any subsidiary thereof, as applicable with respect to
Common Stock Equivalents (as defined below), at any time while Notes are
outstanding, shall issue shares of Common Stock or rights, warrants, options or
other securities or debt that is convertible into or exchangeable for shares of
Common Stock ("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 at a price
less than the prevailing Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price) then in effect, then the Conversion
Price shall be multiplied by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to the issuance
of such shares of Common Stock or such Common Stock Equivalents plus the number
of shares of Common Stock which the offering price for such shares of Common
Stock or Common Stock Equivalents would purchase at the Conversion Price, and
the denominator of which shall be the sum of the number of shares of Common
Stock outstanding immediately prior to such issuance plus the number of shares
of Common Stock so issued or issuable, provided, that for purposes hereof, all
shares of Common Stock that are issuable upon conversion, exercise or exchange
of Common Stock Equivalents shall be deemed outstanding immediately after the
issuance of such Common Stock Equivalents. Such adjustment shall be made
whenever such shares of Common Stock or Common Stock Equivalents are issued.
However, upon the expiration of any Common Stock Equivalents the issuance of
which resulted in an adjustment in the Conversion Price pursuant to this
Section, if any such Common Stocks Equivalents shall expire and shall not have
been exercised, the Conversion Price shall immediately upon such expiration be
recomputed and effective immediately upon such expiration be increased to the
price which it would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the provisions of this Section after the
issuance of such Common Stock Equivalents) had the adjustment of the Conversion
Price made upon the issuance of such Common Stock Equivalents been made on the
basis of offering for subscription or purchase only that number of shares of
Common Stock actually purchased upon the exercise of such Common Stock
Equivalents actually exercised.
If the Company, at any time while Notes are outstanding, shall
distribute to all holders of Common Stock (and not to Holders) evidences of its
indebtedness or assets or rights or warrants to subscribe for or purchase any
security, then in each such case the Conversion Price at which Notes shall
thereafter be convertible shall be determined by multiplying the Conversion
Price in effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the Per Share Market Value determined as of the record date
mentioned above, and of which the numerator shall be such Per Share Market Value
on such record date less the then fair market value at such record date of the
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portion of such assets or evidence of indebtedness so distributed applicable to
one outstanding share of the Common Stock as determined by the Board of
Directors in good faith; provided, however, that in the event of a distribution
exceeding ten percent (10%) of the net assets of the Company, if the Holders of
a majority in interest of the Notes dispute such valuation, such fair market
value shall be determined by a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the financial
statements of the Company) (an "Appraiser") selected in good faith by the
holders of a majority in interest of Notes then outstanding; and provided,
further, that the Company, after receipt of the determination by such Appraiser
shall have the right to select an additional Appraiser, in good faith, in which
case the fair market value shall be equal to the average of the determinations
by each such Appraiser. In either case the adjustments shall be described in a
statement provided to the Holders of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above.
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, the Holders shall have the right thereafter to, at
their option, (A) convert the then outstanding principal amount, together with
all accrued but unpaid interest and any other amounts then owing hereunder in
respect of this Note only into the shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of the Common Stock
following such reclassification or share exchange, and the Holders of the Notes
shall be entitled upon such event to receive such amount of securities, cash or
property as the shares of the Common Stock of the Company into which the then
outstanding principal amount, together with all accrued but unpaid interest and
any other amounts then owing hereunder in respect of this Note could have been
converted immediately prior to such reclassification or share exchange would
have been entitled or (B) require the Company to prepay the aggregate of its
outstanding principal amount of Notes, plus all interest and other amounts due
and payable thereon, at a price determined in accordance with Section 3(b). The
entire prepayment price shall be paid in cash. This provision shall similarly
apply to successive reclassifications or share exchanges.
No adjustments in the Conversion Price shall be required if such
adjustment is less than $0.01; provided, however, that any adjustments which by
reason of this Section are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 4 shall be made to the nearest cent or to the nearest 1/100th of a
share, as the case may be.
Whenever the Conversion Price is adjusted pursuant to any of Section
4(c)(ii) - (v), the Company shall promptly mail to each Holder a notice setting
forth the Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
If (A) the Company shall declare a dividend (or any other distribution)
on the Common Stock; (B) the Company shall declare a special nonrecurring cash
dividend on or a
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redemption of the Common Stock; (C) the Company shall authorize the granting to
all holders of the Common Stock rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any rights; (D) the approval of
any stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, of any compulsory share exchange whereby the Common Stock
is converted into other securities, cash or property; (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or winding up of
the affairs of the Company; then, in each case, the Company shall cause to be
filed at each office or agency maintained for the purpose of conversion of the
Notes, and shall cause to be mailed to the Holders at their last addresses as
they shall appear upon the stock books of the Company, at least 20 calendar days
prior to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of the Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert Notes during the 20-day period
commencing the date of such notice to the effective date of the event triggering
such notice.
(xi) In case of any (1) merger or consolidation of the Company with or
into another Person that would constitute a Change of Control Transaction, or
(2) sale, directly or indirectly, by the Company of more than one-half of the
assets of the Company (on an as valued basis) in one or a series of related
transactions, or (3) tender or other offer or exchange (whether by the Company
or another Person) pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, stock, cash or property of
the Company or another Person; then a Holder shall have the right to (A) if
permitted under Section 3(b) hereof, exercise its rights of prepayment under
Section 3(b) with respect to such event, (B) convert its aggregate principal
amount of Notes then outstanding into the shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of Common
Stock following such merger, consolidation or sale, and such Holder shall be
entitled upon such event or series of related events to receive such amount of
securities, cash and property as the shares of Common Stock into which such
aggregate principal amount of Notes could have been converted immediately prior
to such merger, consolidation or sales would have been entitled, (C) in the case
of a merger or consolidation, (x) require the surviving entity to issue shares
of convertible preferred stock or convertible debentures with such aggregate
stated value or in such face amount, as the case may be, equal to the aggregate
principal amount of Notes then held by such Holder, plus all accrued and unpaid
interest and other amounts owing thereon, which newly issued shares of preferred
stock or debentures shall have terms identical (including with respect to
conversion) to the terms of this Note (except, in the case of preferred stock,
as may be required to reflect the differences between equity and debt) and
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shall be entitled to all of the rights and privileges of a Holder of Notes set
forth herein and the agreements pursuant to which the Notes were issued
(including, without limitation, as such rights relate to the acquisition,
transferability, registration and listing of such shares of stock other
securities issuable upon conversion thereof), and (y) simultaneously with the
issuance of such convertible preferred stock or convertible debentures, shall
have the right to convert such instrument only into shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger or consolidation, or (D) in the event of an
exchange or tender offer or other transaction contemplated by clause (3) of this
Section, tender or exchange its aggregate principal amount of Notes for such
securities, stock, cash and other property receivable upon or deemed to be held
by holders of Common Stock that have tendered or exchanged their shares of
Common Stock following such tender or exchange, and such Holder shall be
entitled upon such exchange or tender to receive such amount of securities, cash
and property as the shares of Common Stock into which such aggregate principal
amount of Notes could have been converted (taking into account all then accrued
and unpaid dividends) immediately prior to such tender or exchange would have
been entitled as would have been issued. In the case of clause (C), the
conversion price applicable for the newly issued shares of convertible preferred
stock or convertible debentures shall be based upon the amount of securities,
cash and property that each share of Common Stock would receive in such
transaction and the Conversion Price in effect immediately prior to the
effectiveness or closing date for such transaction. The terms of any such
merger, sale, consolidation, tender or exchange shall include such terms so as
to continue to give the Holders the right to receive the securities, cash and
property set forth in this Section upon any conversion or redemption following
such event. This provision shall similarly apply to successive such events.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued shares of Common Stock solely for
the purpose of issuance upon conversion of the Notes and payment of interest on
the Notes, each as herein provided, free from preemptive rights or any other
actual contingent purchase rights of persons other than the Holders, not less
than such number of shares of the Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set
forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 4(b)) upon the conversion of the
outstanding principal amount of the Notes and payment of interest hereunder. The
Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid,
nonassessable and, if the Underlying Shares Registration Statement has been
declared effective under the Securities Act, registered for public sale in
accordance with such Underlying Shares Registration Statement.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of the Common Stock,
but may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time. If the
Company elects not, or is unable, to make such a cash payment, the Holder shall
be entitled to receive, in lieu of the final fraction of a share, one whole
share of Common Stock.
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(f) The issuance of certificates for shares of the Common Stock on
conversion of the Notes shall be made without charge to the Holders thereof for
any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such certificate, provided that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate upon conversion in a name
other than that of the Holder of such Notes so converted and the Company shall
not be required to issue or deliver such certificates unless or until the person
or persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
(g) Any and all notices or other communications or deliveries to be
provided by the Holders of the Notes hereunder, including, without limitation,
any Conversion Notice, shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service or sent by
certified or registered mail, postage prepaid, addressed to the Company, at the
address indicated on the first page of this Note, attention Chief Financial
Officer, or such other address or facsimile number as the Company may specify
for such purposes by notice to the Holder delivered in accordance with this
Section. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to each Holder of
the Notes at the facsimile telephone number or address of such Holder appearing
on the books of the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the holder. Any notice or other
communication or deliveries hereunder 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 telephone number specified in this
Section prior to 8:00 p.m. (New York City time), (ii) the date after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section later than 8:00 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) four days after deposit in the United States mail, (iv) the
Business Day following the date of mailing, if send by nationally recognized
overnight courier service, or (v) upon actual receipt by the party to whom such
notice is required to be given.
Section 5. Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State of
New York or the State of California are authorized or required by law or other
government action to close.
"Change of Control Transaction" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of in
excess of 33.33% of the voting securities of the Company, (ii) a replacement of
more than one-half of the members of the Company's board of directors which is
not approved by those individuals who are members of the board of directors on
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the date hereof in one or a series of related transactions, (iii) the merger of
the Company with or into another entity, the direct or indirect consolidation or
sale of all or substantially all of the assets of the Company in one or a series
of related transactions, unless following such transaction, the holders of the
Company's securities continue to hold at least 66.66% of such securities
following such transaction or (iv) the execution by the Company of an agreement
to which the Company is a party or by which it is bound, providing for any of
the events set forth above in (i), (ii) or (iii).
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, no par value per share, of the
Company and stock of any other class into which such shares may hereafter have
been reclassified or changed.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Interest Effectiveness Date" means the earlier to occur of (x) the
Effectiveness Date and (y) the date that an Underlying Shares Registration
Statement is declared effective by the Commission.
"Mandatory Prepayment Amount" for any Notes shall equal the sum of (i)
the greater of (A) 115% of the principal amount of Notes to be prepaid, plus all
accrued and unpaid interest thereon, and (B) the principal amount of Notes to be
prepaid, plus all accrued and unpaid interest thereon, divided by the Conversion
Price on (x) the date the Mandatory Prepayment Amount is demanded or otherwise
due or (y) the date the Mandatory Prepayment Amount is paid in full, whichever
is less, multiplied by the Per Share Market Value on (x) the date the Mandatory
Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory
Prepayment Amount is paid in full, whichever is greater, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of such Notes.
"Optional Prepayment Price" shall equal the sum of (i) the principal
amount of Notes to be prepaid, plus all accrued and unpaid interest thereon, and
(ii) all other amounts, expenses, costs and liquidated damages due in respect of
such Notes.
"Original Issue Date" shall mean the date of the first issuance of the
Notes regardless of the number of transfers of any Note and regardless of the
number of instruments which may be issued to evidence such Note.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of Common Stock on such date on the AMEX or on such
Subsequent Market on which the shares of Common Stock are then listed or quoted,
or if there is no such price on such date, then the closing bid price on the
AMEX or on such Subsequent Market on the date nearest preceding such date
(provided, that if at any time the Common Stock is listed on the AMEX, if the
Per Share Market Values in a Trading Day shall be less than the closing sales
price as reported by the AMEX for such Trading Day by more than $0.1666, then
the Per Share Market Value for such Trading Day shall be deemed $0.1666 less
than the closing sales price as reported by the AMEX for such Trading Day),
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or (b) if the shares of Common Stock are not then listed or quoted on the AMEX
or a Subsequent Market, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the shares of
Common Stock are not then reported by the National Quotation Bureau Incorporated
(or similar organization or agency succeeding to its functions of reporting
prices), then the average of the "Pink Sheet" quotes for the relevant conversion
period, as determined in good faith by the Holder, or (d) if the shares of
Common Stock are not then publicly traded the fair market value of a share of
Common Stock as determined by an Appraiser selected in good faith by the Holders
of a majority in interest of the principal amount of Notes then outstanding.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Note Purchase Agreement,
dated as of the Original Issue Date, between the Company and the original Holder
of Notes, as amended, modified or supplemented from time to time in accordance
with its terms.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Notes, as amended, modified or supplemented from time to time
in accordance with its terms.
"Securities Act" means the Securities Act of 1933, as amended.
"Trading Day" means (a) a day on which the shares of Common Stock are
traded on the AMEX or on such Subsequent Market on which the shares of Common
Stock are then listed or quoted, or (b) if the shares of Common Stock are not
listed on the AMEX or a Subsequent Market, a day on which the shares of Common
Stock are traded in the over-the-counter market, as reported by the OTC Bulletin
Board, or (c) if the shares of Common Stock are not quoted on the OTC Bulletin
Board, a day on which the shares of Common Stock are quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices); provided, however, that in the event that the shares of
Common Stock are not listed or quoted as set forth in (a), (b) and (c) hereof,
then Trading Day shall mean any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State of
New York are authorized or required by law or other government action to close.
"Underlying Shares" means the shares of Common Stock issuable upon
conversion of Notes or as payment of interest in accordance with the terms
hereof.
"Underlying Shares Registration Statement" means a registration
statement meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Underlying Shares and
naming the Holder as a "selling stockholder" thereunder.
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Section 6. Except as expressly provided herein, no provision of this
Note shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, interest and liquidated damages (if any)
on, this Note at the time, place, and rate, and in the coin or currency, herein
prescribed. This Note is a direct obligation of the Company. This Note ranks
pari passu with all other Notes now or hereafter issued under the terms set
forth herein. As long as there are Notes outstanding, the Company shall not and
shall cause it subsidiaries not to, without the consent of the Holders, (i)
amend its certificate of incorporation, bylaws or other charter documents so as
to adversely affect any rights of the Holders; (ii) repay, repurchase or offer
to repay, repurchase or otherwise acquire shares of its Common Stock or other
equity securities other than as to the Underlying Shares to the extent permitted
or required under the Transaction Documents; or (iii) enter into any agreement
with respect to any of the foregoing. Except pursuant to the provisions of
Section 4(a)(i)(A), the Company may not prepay the outstanding principal amount
on the Notes.
Section 7. This Note shall not entitle the Holder to any of the rights
of a stockholder of the Company, including without limitation, the right to
vote, to receive dividends and other distributions, or to receive any notice of,
or to attend, meetings of stockholders or any other proceedings of the Company,
unless and to the extent converted into shares of Common Stock in accordance
with the terms hereof.
Section 8. If this Note shall be mutilated, lost, stolen or destroyed,
the Company shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated Note, or in lieu of or in substitution for a lost,
stolen or destroyed note, a new Note for the principal amount of this Note so
mutilated, lost, stolen or destroyed but only upon receipt of evidence of such
loss, theft or destruction of such Note, and of the ownership hereof, and
indemnity, if requested, all reasonably satisfactory to the Company.
Section 9. Except as set forth in Schedule 2.1(q) to the Purchase
Agreement, no indebtedness of the Company is senior to this Note in right of
payment, whether with respect to interest, damages or upon liquidation or
dissolution or otherwise. The Company will not and will not permit any of its
subsidiaries to, 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 obligations
under this Note.
Section 10. This Note shall be governed by and construed in accordance
with the laws of the State of New York, without giving effect to conflicts of
laws thereof. The Company and the Holders hereby irrevocably submit to the
exclusive jurisdiction of the state and federal courts sitting in the City of
New York, Borough of Manhattan, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, or that such suit, action or proceeding is
improper. Each of the Company and the Holder hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by receiving a copy thereof sent to the Company at the address in
effect for notices to it under this
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instrument 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.
Section 11. Any waiver by the Company or the Holder of a breach of any
provision of this Note shall not operate as or be construed to be a waiver of
any other breach of such provision or of any breach of any other provision of
this Note. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Note on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Note. Any waiver must be
in writing.
Section 12. If any provision of this Note is invalid, illegal or
unenforceable, the balance of this Note shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
Section 13. If it shall be found that any interest or other amount
deemed interest due hereunder shall violate applicable laws governing usury, the
applicable rate of interest or due hereunder shall be reduced to the maximum
permitted rate of interest under such law.
Section 14. Whenever any payment or other obligation hereunder shall be
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day.
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SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Company has caused this Convertible Note to be
duly executed by a duly authorized officer as of the date first above indicated.
FRANKLIN TELECOMMUNICATIONS CORP.
By: /s/ Tom Russell
---------------------------------
Name: Tom Russell
--------------------------------
Title: Vice President - CFO
-------------------------------
Attest:
By: /s/ Helen West
---------------------------------
Name: Helen West
--------------------------------
Title: Corporate Secretary
-------------------------------
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EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Note)
The undersigned hereby elects to convert the attached Note into shares of common
stock, no par value (the "Common Stock"), of Franklin Telecommunications Corp
(the "Company") according to the conditions hereof, 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 Company in accordance therewith. No fee will be charged to the
holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
Date to Effect Conversion
Principal Amount of Notes to be Converted
Number of shares of Common Stock to be
Issued
Applicable Conversion Price
Signature
Name
Address
1