THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "1933 ACT"). THE ISSUANCE TO THE HOLDER OF THE SHARES OF COMMON STOCK
ISSUABLE UPON CONVERSION OF THIS NOTE AND IN PAYMENT OF INTEREST ON THIS NOTE
ARE NOT COVERED BY A REGISTRATION STATEMENT UNDER THE 1933 ACT. PURSUANT TO THE
NOTE PURCHASE AGREEMENT, THIS NOTE HAS BEEN ACQUIRED, AND SUCH SHARES MUST BE
ACQUIRED, FOR INVESTMENT ONLY AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN
THE ABSENCE OF REGISTRATION OF THE RESALE THEREOF UNDER THE 1933 ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY IN FORM, SCOPE AND SUBSTANCE TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
DWANGO NORTH AMERICA CORP.
9% SENIOR CONVERTIBLE NOTE DUE 2007
No. 1 $1,700,000.00
New York, New York
January 8, 2004
FOR VALUE RECEIVED, DWANGO NORTH AMERICA CORP., a Nevada
corporation (hereinafter called the "Company"), hereby promises to pay to
ALEXANDRA GLOBAL MASTER FUND, LTD., c/o Alexandra Investment Management, LLC,
767 Third Avenue, 39th Floor, New York, New York 10017 or registered assigns
(the "Holder"), or order, the sum of One Million Seven Hundred Thousand Dollars
($1,700,000.00), on the Maturity Date, and to pay interest on the unpaid
principal balance hereof at the Applicable Rate from the date hereof, until the
same becomes due and payable, whether at maturity or upon acceleration or by
repurchase in accordance with the terms hereof or otherwise. Any amount,
including, without limitation, principal of or interest on this Note or the
Optional Redemption Price or the Repurchase Price, that is payable under this
Note and that is not paid when due shall bear interest at the Default Rate from
the due date thereof until the same is paid ("Default Interest"). Regular
interest shall be payable in arrears on each Interest Payment Date, commencing
on March 1, 2004, on the principal amount outstanding on such date. Regular
interest on this Note shall be computed on the basis of a 360-day year of 12
30-day months and actual days elapsed. No regular interest shall be payable on
an Interest Payment Date on any portion of the principal amount of this Note
which shall have been redeemed prior to such Interest Payment Date so long as
the Company shall have complied in full with its obligations with respect to
such redemption.
All payments of principal of and premium, if any, interest,
and other amounts on this Note shall be made in lawful money of the United
States of America, or, at the option of the Company and subject to the
provisions of this Note, interest payable on the Interest Payment Dates may be
paid in whole or in part in fully paid and nonassessable shares of Common Stock.
All cash payments shall be made by wire transfer of immediately available funds
to such account as the Holder may from time to time designate by written notice
in accordance with the provisions of this Note. Whenever any amount expressed to
be due by the terms of this Note is due on any day which is not a Business Day,
the same shall instead be due on the next succeeding day which is a Business Day
and, in the case of any Interest Payment Date which is not the date on which
this Note is paid in full, the extension of the due date thereof shall not be
taken into account for purposes of determining the amount of interest due on
such date. Certain capitalized terms used in this Note are defined in Article
VI.
The obligations of the Company under this Note shall rank in
right of payment on a parity with all other unsubordinated obligations of the
Company for indebtedness for borrowed money or the purchase price of property.
This Note is issued pursuant to the Note Purchase Agreement and the Holder of
this Note and this Note are subject to the terms and entitled to the benefits of
the Note Purchase Agreement.
The following terms shall apply to this Note:
ARTICLE I
PAYMENT OF CERTAIN INTEREST IN COMMON
STOCK; OPTIONAL REDEMPTION
1.1 ISSUANCE OF COMMON STOCK IN LIEU OF CASH INTEREST. (a) If
-------------------------------------------------
the Company exercises its option to make a payment of interest on this Note
wholly or partly in Common Stock (herein sometimes called the "Share Interest
Payment Option"), the issuance of Interest Payment Shares upon such exercise of
the Share Interest Payment Option shall have been authorized by the Board of
Directors of the Company.
(b) The Company shall not be permitted to exercise the Share
Interest Payment Option with respect to any payment of interest on this Note if:
(i) the number of shares of Common Stock authorized, unissued
and unreserved for all purposes, or held in the Company's treasury, is
insufficient to pay the portion of such interest to be paid in Common
Stock;
-2-
(ii) the issuance or delivery of Interest Payment Shares or
the public resale of such Interest Payment Shares by the Holder would
require registration or filing with or approval of any governmental
authority under any law or regulation, and such registration, filing or
approval has not been effected or obtained or is not in effect or on
such Interest Payment Date or the date the Company delivers such
Interest Payment Shares to the Holder the Registration Statement is
unavailable for use by the Holder for the resale of the Interest
Payment Shares or is not expected to be available for such use for at
least 15 Trading Days after the date the Company delivers such Interest
Payment Shares to the Holder;
(iii) the outstanding shares of Common Stock are neither (A)
listed or admitted for trading on a national securities exchange,
Nasdaq or Nasdaq SmallCap nor (B) quoted on the Over-The-Counter
Bulletin Board; or the Interest Payment Shares shall not at the time of
issuance (X) have been authorized for listing, upon official notice of
issuance, on the principal securities exchange on which the Common
Stock is then listed and traded or (Y) have been approved for quotation
if then traded in the over-the-counter market;
(iv) the Interest Share Price for the Interest Payment Shares
is less than the par value of the Common Stock; or
(v) an Event of Default has occurred and is continuing on the
date the Company makes such election or on the applicable Interest
Payment Date.
(c) (1) The Company may exercise its right to elect the Share
Interest Payment Option with respect to any Interest Payment Date only by giving
notice of such election to the Holder not less than 12 or more than 20 Trading
Days prior to such Interest Payment Date, which notice shall state the
percentage of the interest payable on such Interest Payment Date which is to be
paid in Interest Payment Shares. If the Company elects the Share Interest
Payment Option with respect to a particular Interest Payment Date, the Company
shall issue to the Holder in respect of such Interest Payment Date the aggregate
number of whole shares of Common Stock determined by dividing the per share
Interest Share Price of the Common Stock on the applicable Interest Payment Date
into an amount equal to the total amount of lawful money of the United States of
America which the Holder would receive if the aggregate amount of interest on
this Note which is being paid in Common Stock were being paid in such lawful
money; PROVIDED, HOWEVER, that if the Holder has been advised by its legal
counsel in good faith that the payment of interest on a particular Interest
Payment Date in shares of Common Stock may give rise to liability under Section
16(b) of the 1934 Act, the Holder shall have the right to elect, by notice to
the Company, to defer the payment of interest
-3-
on such Interest Payment Date until the Maturity Date and such interest shall
continue to accrue until the Maturity Date or until the earlier acceleration,
repurchase or conversion of this Note in accordance with the terms hereof.
Notwithstanding anything to the contrary herein, (A) if the Interest Share Price
on a particular Interest Payment Date is greater than 120% of the Market Price
of the Common Stock on the date the Company gives the Holder notice that it has
elected to exercise the Share Interest Payment Option with respect to such
Interest Payment Date (the "Share Interest Notice Date"), the Holder may, at its
option, require the Company to make such payment of interest on such Interest
Payment Date in cash, and (B) if the Interest Share Price on a particular
Interest Payment Date is less than 80% of the Market Price of the Common Stock
on the Share Interest Notice Date, the Company may, at its option, revoke its
election of the Share Interest Payment Option and pay such interest on such
Interest Payment Date in cash.
(2) If the Company elects the Share Interest Payment Option
with respect to an Interest Payment Date, the Interest Payment Shares for such
Interest Payment Date shall become issuable on such Interest Payment Date and
the Company shall deliver, or cause to be delivered, the appropriate number of
shares of Common Stock to the Holder within five Trading Days after the
applicable Interest Payment Date. If in any case the Company shall fail to
deliver or cause to be delivered such number of shares of Common Stock to the
Holder within such period of five Trading Days, then in addition to any other
liabilities the Company may have hereunder and under applicable law (1) the
Company shall pay or reimburse the Holder on demand for all out-of-pocket
expenses, including, without limitation, reasonable fees and expenses of legal
counsel, incurred by the Holder as a result of such failure, (2) if as a result
of such failure the Holder shall suffer any direct damages or liabilities from
such failure (including, without limitation, margin interest and the cost of
purchasing securities to cover a sale (whether by the Holder or the Holder's
securities broker) or borrowing of shares of Common Stock by the Holder for
purposes of settling any trade involving a sale of shares of Common Stock made
by the Holder during the period beginning on the date the Company notified the
Holder of the Company's election of the Share Interest Payment Option and ending
on the date the Company delivers or causes to be delivered to the Holder the
shares of Common Stock issuable in respect thereof), then the Company shall upon
demand of the Holder pay to the Holder an amount equal to the actual direct,
out-of-pocket damages and liabilities suffered by the Holder by reason thereof
which the Holder documents to the reasonable satisfaction of the Company, and
(3) the Holder may by written notice (which may be given by mail, courier,
personal service or telephone line facsimile transmission) or oral notice
(promptly confirmed in writing), given at any time prior to delivery to the
Holder of the shares of Common Stock issuable in connection with such exercise
of the Share Interest Payment Option, require payment in cash of the interest in
respect of which the Company exercised the Share Interest Payment Option, in
which case the amount of such
-4-
interest shall be immediately due and payable, with Default Interest thereon
from the applicable Interest Payment Date until paid in full and the Company
shall not be obligated or entitled to issue such Interest Payment Shares in
respect of such Interest Payment Date. Notwithstanding the foregoing the Company
shall not be liable to the Holder under clause (2) of the immediately preceding
sentence to the extent the failure of the Company to deliver or to cause to be
delivered such shares of Common Stock results from fire, flood, storm,
earthquake, shipwreck, strike, war, acts of terrorism, crash involving
facilities of a common carrier, acts of God, or any similar event outside the
control of the Company (it being understood that the action or failure to act of
the Transfer Agent shall not be deemed an event outside the control of the
Company except to the extent resulting from fire, flood, storm, earthquake,
shipwreck, strike, war, acts of terrorism, crash involving facilities of a
common carrier, acts of God, or any similar event outside the control of the
Transfer Agent or the bankruptcy, liquidation or reorganization of the Transfer
Agent under any bankruptcy, insolvency or other similar law). The Holder shall
notify the Company in writing (or by telephone conversation, confirmed in
writing) as promptly as practicable following the third Trading Day after such
Interest Payment Date if the Holder becomes aware that shares of Common Stock so
issuable have not been received as provided herein but any failure to give such
notice shall not affect the Holder's rights under this Note or otherwise. If the
Company shall have exercised the Share Interest Payment Option with respect to a
particular Interest Payment Date and either (1) the Company shall notify the
Holder on or after such Interest Payment Date that the Interest Payment Shares
might not be delivered within five Trading Days after such Interest Payment Date
or (2) the Holder learns after the date which is five Trading Days after such
Interest Payment Date that the Holder has not received such Interest Payment
Shares, then, without releasing the Company of its obligations with respect
thereto, from and after the Trading Day next succeeding the earlier of the
events described in the preceding clauses (1) and (2) of this sentence the
Holder shall make reasonable efforts not to sell shares of Common Stock in
anticipation of receipt of such Interest Payment Shares in a manner which is
likely to increase materially the liability of the Company under clause (2) of
the second preceding sentence. No fractional shares of Common Stock shall be
issued in payment of interest on this Note. In lieu thereof, the Company may, at
its option, issue a number of shares of Common Stock which reflects a rounding
up to the next whole number or may pay lawful money of the United States of
America in lieu of issuance of such fractional share.
(d) If the Company elects the Share Interest Payment Option
with respect to a payment of interest on this Note with respect to a particular
Interest Payment Date, the Company shall deliver to the Holder, on or prior to
the date on which Interest Payment Shares for such payment of interest on this
Note are to be received by the Holder, a Company Certificate setting forth (i)
the total amount of the cash interest payment to which the Holder is entitled,
(ii) the portion of such interest payment being made in Interest Payment Shares
and the amount which is
-5-
100% thereof, (iii) the number of Interest Payment Shares allocable to such
payment, as calculated pursuant to this Section 1.1, (iv) any rounding
adjustment to such number or any payment necessary to be made pursuant to
Section 1.1(c), (v) a brief statement of the facts requiring such adjustment,
and (vi) a brief statement that none of the conditions set forth in Section
1.1(b) has occurred and is existing and that all of the requirements of this
Section 1.1 have been met. The Interest Payment Shares shall be duly issued in
the name of the Holder or its nominee. Such Company Certificate shall be
conclusive evidence of the correctness of the calculation of the number of
Interest Payment Shares allocable to the payments to which such Company
Certificate relates and of any adjustments to such number made pursuant to this
Section 1.1 in the absence of manifest error. On or before the pertinent payment
date, the Company shall issue, or cause the transfer agent for the Common Stock
to prepare and issue, the Interest Payment Shares in the name of the Holder or
its nominee before being so delivered by the Company on the payment date.
(e) The Interest Payment Shares, when issued pursuant to and
in compliance with this Section 1.1, shall be, and for all purposes shall be
deemed to be, validly issued, fully paid and nonassessable shares of Common
Stock; the issuance and delivery thereof is in all respects hereby authorized;
and the issuance thereof, together with lawful money of the United States of
America, if any, paid in lieu of fractional shares of Common Stock, will be, and
for all purposes shall be deemed to be, in full discharge and satisfaction of
the Company's obligation to pay the interest on this Note to which such Interest
Payment Shares relate.
1.2 OPTIONAL REDEMPTION. (a) At any time during the Optional
---------------------
Redemption Period, the Company shall have the right to redeem at any one time
all or from time to time any part of the outstanding principal amount of this
Note at the Optional Redemption Price pursuant to this Section 1.2 on any
Optional Redemption Date, so long as the following conditions are met:
(1) during a period of 20 consecutive Trading Days ending not
more than three Trading Days prior to the date the Company gives a
particular Optional Redemption Notice,
(A) on each such Trading Day the Market Price of the
Common Stock shall be at least 200 percent of the Conversion
Price in effect on such Trading Day; and
(B) the Average Daily Trading Volume Threshold is
met;
(2) on the date an Optional Redemption Notice is given and at
all times to and including the applicable Optional Redemption Date, no
Event of Default and no event which, with notice or passage of time, or
both, would
-6-
become an Event of Default has occurred and is continuing (unless the
requirements of this clause (2) will be satisfied immediately after the
redemption of this Note on the applicable Optional Redemption Date and
the Company shall furnish Company Certificates to the Holder to such
effect on the date the applicable Optional Redemption Notice is given
to the Holder and on the applicable Optional Redemption Date),
(3) on the date an Optional Redemption Notice is given and at
all times to and including the applicable Optional Redemption Date, no
Repurchase Event has occurred with respect to which the Holder has the
right to exercise repurchase rights pursuant to Sections 4.1 and 4.2
with respect to which the Holder has exercised such repurchase rights
and the Repurchase Price has not been paid to the Holder and no event
which, with notice or passage of time, or both, would become a
Repurchase Event has occurred and is continuing, and
(4) on the date the Optional Redemption Notice is given and at
all times thereafter to and including the applicable Optional
Redemption Date, the Registration Statement shall be effective and
available for use by the Holder and the holders of the Warrants for the
resale of the shares of Common Stock issued and issuable upon
conversion of this Note and issued or issuable upon exercise of the
Warrants, as the case may be, and is reasonably expected to remain
effective and available for such use for at least 30 days after the
applicable Optional Redemption Date; and
(5) on the date an Optional Redemption Notice is given, the
Company has funds available to pay the Optional Redemption Price.
In order to exercise its right of redemption under this Section 1.2, the Company
shall give an Optional Redemption Notice to the Holder not less than 30 Trading
Days or more than 40 Trading Days prior to the Optional Redemption Date stating
that: (1) the Company is exercising its right to redeem a specified portion
(which may be all, if so specified by the Company) of this Note in accordance
with this Section 1.2, (2) the principal amount of this Note to be redeemed, (3)
the Optional Redemption Price, (4) the Optional Redemption Date and that all of
the conditions of this Section 1.2 entitling the Company to call this Note for
redemption have been met. On the applicable Optional Redemption Date (or such
later date as the Holder surrenders this Note to the Company) the Company shall
pay to or upon the order of the Holder, by wire transfer of immediately
available funds to such account as shall be specified for such purpose by the
Holder at least one Business Day prior to the Optional Redemption Date, an
amount equal to the Optional Redemption Price of the portion (which may be all)
of this Note to be redeemed. In each such case the aggregate principal amount of
this Note to be so redeemed shall be at least
-7-
$1,000,000.00 or such lesser
aggregate principal amount of this Note as shall remain outstanding at the time
an Optional Redemption Notice is given.
1.3 NO PREPAYMENT. Except as specifically provided in Section
--------------
1.2, this Note may not be prepaid, redeemed or repurchased at the option of the
Company prior to the Maturity Date.
ARTICLE II
CERTAIN COVENANTS
So long as the Company shall have any obligation under this Note:
2.1 LIMITATIONS ON CERTAIN INDEBTEDNESS. The Company will not
-----------------------------------
itself, and will not permit any Subsidiary to, create, assume, incur or in any
manner become liable in respect of, including, without limitation, by reason of
any business combination transaction (all of which are referred to herein as
"incurring"), any Indebtedness other than Permitted Indebtedness; PROVIDED,
HOWEVER, that if (a) at any time during any period of 45 consecutive Trading
Days commencing after the Issuance Date on each such Trading Day (1) the Market
Price of the Common Stock shall be at least 200% of the Conversion Price in
effect on each such Trading Day, (2) the Average Daily Trading Volume Threshold
is met, (3) no Event of Default shall have occurred or be continuing and no
Repurchase Event shall have occurred with respect to which the Holder has the
right to require repurchase of this Note pursuant to Article IV or with respect
to which the Holder has exercised such right and the Company shall not have paid
or deposited in accordance with Section 7.10 the applicable Repurchase Price and
(4) the Registration Statement shall be effective and available for use by the
Holder and the holders of the Warrants for the resale of shares of Common Stock
issued or issuable upon conversion of this Note and upon exercise of the
Warrants and is reasonably expected to remain effective and available for a
reasonable period after such period of 45 Trading Days, and (b) the Company
shall have furnished to the Holder a Company Certificate certifying the matters
set forth in the immediately preceding clause (a), then thereafter the Company
shall no longer be obligated to comply with this Section 2.1.
2.2 PAYMENT OF OBLIGATIONS. The Company will pay and
-------------------------
discharge, and will cause each Significant Subsidiary to pay and discharge, all
their respective material obligations and liabilities, including, without
limitation, tax liabilities, except where the same may be contested in good
faith by appropriate proceedings and the Company shall have established adequate
reserves therefor on its books.
-8-
2.3 MAINTENANCE OF PROPERTY; INSURANCE. (a) The Company will
-----------------------------------
keep, and will cause each Significant Subsidiary to keep, all property which, in
the reasonable business judgment of the Company, is useful and necessary in its
business in good working order and condition, ordinary wear and tear excepted.
(b) The Company will maintain, and will cause each Significant
Subsidiary to maintain, with financially sound and responsible insurance
companies, insurance, in at least such amounts and against such risks as is
reasonably adequate for the conduct of their respective businesses and the value
of their respective properties.
2.4 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The
----------------------------------------------------
Company will continue, and will cause each Significant Subsidiary to continue,
to engage in business of the same general type as now conducted by the Company,
and will preserve, renew and keep in full force and effect, and will cause each
Significant Subsidiary to preserve, renew and keep in full force and effect
their respective corporate existence and their respective rights, privileges and
franchises necessary or desirable in the normal conduct of business and such
matter other than maintenance of the Company's corporate existence, except where
the failure to do so would not have a material adverse effect on (i) the
business, properties, operations, condition (financial or other), results of
operation or prospects of the Company and the Subsidiaries, taken as a whole or,
(ii) the ability of the Company to pay and perform its obligations under the
Transaction Documents.
2.5 COMPLIANCE WITH LAWS. The Company will comply, and will
---------------------
cause each Significant Subsidiary to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, decisions, orders and
requirements of governmental authorities and courts (including, without
limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate proceedings or (ii) where non-compliance
therewith could not reasonably be expected to have a material adverse effect on
the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company and the Subsidiaries, taken as a whole.
2.6 INVESTMENT COMPANY ACT. The Company will not be or become
-----------------------
an open-end investment trust, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act of 1940, as amended.
2.7 LIMITATIONS ON ASSET SALES, LIQUIDATIONS, ETC.;
-----------------------------------------------
CERTAIN MATTERS. The Company shall not
- ---------------
-9-
(a) sell, convey or otherwise dispose of all or substantially
all of the assets of the Company as an entirety or substantially as an entirety
in a single transaction or in a series of related transactions; or
(b) liquidate, dissolve or otherwise wind up the affairs of
the Company.
2.8 LIMITATION ON CERTAIN ISSUANCES. The Company shall not (A)
-------------------------------
offer, sell or issue, or enter into any agreement, arrangement or understanding
to offer, sell or issue, any Common Stock Equivalent for which the price at
which the holder of such Common Stock Equivalent is entitled to acquire shares
of Common Stock varies based on the market or trading price of the Common Stock,
or (B) offer, sell or issue, or enter into any agreement, arrangement or
understanding to offer, sell or issue, any Common Stock or Common Stock
Equivalent on terms which provide for adjustment or repricing of the purchase
price or number of shares or other units of such Common Stock or Common Stock
Equivalents other than pursuant to customary anti-dilution provisions; PROVIDED,
HOWEVER, that nothing in this Section 2.8 shall prohibit the Company from
issuing shares of Common Stock for cash for the account of the Company (x) in an
offering that is underwritten on a firm commitment basis and registered with the
SEC under the 1933 Act, or (y) an offering of Common Stock that is a private
investment in publicly-traded equity (commonly known as a PIPE); PROVIDED
FURTHER, HOWEVER that so long as any principal amount of this Note is
outstanding the original holders of this Note shall have the rights of first
refusal provided in Section 5(j) of the Note Purchase Agreement.
2.9 LIMITATIONS ON LIENS. The Company will not itself, and
---------------------
will not permit any Subsidiary to, create, assume or suffer to exist any
mortgage, lien, pledge, security interest or other charge or encumbrance
(including, without limitation, the lien or retained security title of a
conditional vendor), all of which are referred to below as "liens", upon all or
any part of its property of any character, whether owned at the date hereof or
thereafter acquired, except:
(a) liens upon any property of any Subsidiary or Subsidiaries
as security for indebtedness owing by such Subsidiary to the Company;
(b) purchase money liens upon any property acquired by the
Company or any Subsidiary, or liens existing on such property at the time of
acquisition and in any such case securing Permitted Indebtedness described in
clause (3) of the definition of the term Permitted Indebtedness; provided that
(i) no such lien shall extend to or cover any other property of the Company or
any Subsidiary, (ii) the principal amount of indebtedness secured by each such
lien on any such property shall not exceed the cost (including such principal
amount of the indebtedness secured thereby) to the Company or the Subsidiary of
the property
-10-
subject thereto, and (iii) the aggregate principal amount of all indebtedness of
the Company and all Subsidiaries secured by all liens described in this
subsection (b) and any extensions, renewals or replacements thereof, at any one
time outstanding, shall not exceed $2,000,000.00 for the Company and the
Subsidiaries; and the extending, renewing or replacing of any lien permitted by
this subsection (b) or of the indebtedness secured thereby; PROVIDED, HOWEVER,
that in any such case the lien by which any lien is extended, renewed or
replaced shall not extend to or cover any other property of the Company or any
Subsidiary and the principal amount of such indebtedness extended, renewed or
replaced shall not be increased;
(c) liens securing this Note and the Other Notes ratably;
(d) liens for taxes or assessments or governmental charges or
levies on its property if such taxes or assessments or charges or levies shall
not at the time be due and payable or if the amount, applicability, or validity
of any such tax, assessment, charge or levy shall currently be contested in good
faith by appropriate proceedings or necessary preliminary steps are being taken
to contest, compromise or settle the amount thereof or to determine the
applicability or validity thereof and if the Company or such Subsidiary, as the
case may be, shall have set aside on its books reserves (segregated to the
extent required by sound accounting practice) deemed by it adequate with respect
thereto; deposits or pledges to secure payment of worker's compensation,
unemployment insurance, old age pensions or other social security; deposits or
pledges to secure performance of bids, tenders, contracts (other than contracts
for the payment of money borrowed or credit extended), leases, public or
statutory obligations, surety or appeal bonds, or other deposits or pledges for
purposes of like general nature in the ordinary course of business; mechanics',
carriers', workers', repairmen's or other like liens arising in the ordinary
course of business securing obligations which are not overdue for a period of 60
days, or which are in good faith being contested or litigated, or deposits to
obtain the release of such liens; liens created by or resulting from any
litigation or legal proceedings or proceedings being contested in good faith by
appropriate proceedings, provided any execution levied thereon shall be stayed;
leases made, or existing on property acquired, in the ordinary course of
business; landlords' liens under leases to which the Company or any Subsidiary
is a party; and zoning restrictions, easements, licenses or restrictions on the
use of real property or minor irregularities in title thereto; provided that all
such liens described in this subsection (d) do not, in the aggregate, materially
impair the use of such property in the operations of the business of the Company
or any Subsidiary or the value of such property for the purpose of such
business;
(e) liens existing on the Issuance Date and listed in Schedule
4(r) to the Note Purchase Agreement; and
-11-
(f) liens upon raw materials, works in progress and finished
goods inventory and accounts receivable granted to a bank, finance company or
other institutional lender providing receivables and inventory financings.
2.10 TRANSACTIONS WITH AFFILIATES. The Company will not pay,
-----------------------------
and will not permit any Subsidiary, directly or indirectly, to pay, any funds to
or for the account of, make any investment (whether by acquisition of stock or
Indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Indebtedness,
or otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with, any joint enterprise or other joint arrangement with, any
Affiliate of the Company, except, on terms to the Company or such Subsidiary no
less favorable than terms that could be obtained by the Company or such
Subsidiary from a Person that is not an Affiliate of the Company, as determined
in good faith by the Board of Directors.
2.11 RULE 144A INFORMATION REQUIREMENT. Within the period
-----------------------------------
prior to the expiration of the holding period applicable to sales hereof under
Rule 144(k) under the 1933 Act (or any successor provision), the Company shall,
during any period in which it is not subject to Section 13 or 15(d) under the
1934 Act, make available to the Holder and any prospective purchaser of this
Note from the Holder, the information required pursuant to Rule 144A(d)(4) under
the 1933 Act upon the request of the Holder and it will take such further action
as the Holder may reasonably request, all to the extent required from time to
time to enable the Holder to sell this Note without registration under the 1933
Act within the limitations of the exemption provided by Rule 144A, as Rule 144A
may be amended from time to time. Upon the request of the Holder, the Company
will deliver to the Holder a written statement as to whether it has complied
with such requirements.
2.12 NOTICE OF DEFAULTS. The Company shall notify the Holder
------------------
promptly, but in any event not later than five days after the Company becomes
aware of the fact, of any failure by the Company to comply with this Article II.
ARTICLE III
EVENTS OF DEFAULT
3.1 If any of the following events of default (each, an "Event
of Default") shall occur:
(A) FAILURE TO PAY PRINCIPAL, INTEREST, ETC. The Company fails
---------------------------------------
(1) to pay the principal, the Optional Redemption Price or the
Repurchase Price hereof when due, whether at maturity, upon
acceleration or otherwise,
-12-
as applicable, or (2) to pay any installment of interest hereon when
due and, in the case of this clause (2) of this Section 3.1(a) only,
such failure continues for a period of ten Business Days after the due
date thereof; or
(B) CONVERSION AND THE SHARES. The Company fails to issue or
--------------------------
cause to be issued shares of Common Stock to the Holder or the holder
of any Other Note upon exercise of the conversion or purchase rights of
the Holder or such holder within three Trading Days after the due date
therefor in accordance with the terms of this Note, any Other Note or
any Warrant or fails to transfer any certificate for any such shares of
Common Stock or any shares of Common Stock issued in payment of
interest on this Note or any Other Note as and when required by this
Note and the Note Purchase Agreement or the Other Note, as the case may
be; or
(C) BREACH OF CERTAIN COVENANTS. The Company fails to comply
----------------------------
with Section 2.1, 2.7 or 2.8; or
(D) BREACH OF OTHER COVENANTS. The Company fails to comply in
-------------------------
any material respect with any other provision of Article III of this
Note (other than Section 2.1, 2.7 or 2.8) or breaches any other
material covenant or other material term or condition of this Note or
any of the other Transaction Documents (other than as specifically
provided in clauses (a), (b), (c), (j), and (k) of this Section 3.1),
and such breach continues for a period of 15 days after written notice
thereof to the Company from the Holder; or
(E) BREACH OF REPRESENTATIONS AND WARRANTIES. Any
------------------------------------------------
representation or warranty of the Company made herein or in any
agreement, statement or certificate given in writing pursuant hereto
(or pursuant to any Transaction Documents) shall be false or misleading
in any material respect when made; or
(F) CERTAIN VOLUNTARY PROCEEDINGS. The Company or any
--------------------------------
Subsidiary shall commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief
or to the appointment of or taking possession by any such official in
an involuntary case or other proceeding commenced against it, or shall
make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due or shall admit in writing
its inability generally to pay its debts as they become due; or
-13-
(G) CERTAIN INVOLUNTARY PROCEEDINGS. An involuntary case or
---------------------------------
other proceeding shall be commenced against the Company or any
Subsidiary seeking liquidation, reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of
it or any substantial part of its property, and such involuntary case
or other proceeding shall remain undismissed and unstayed for a period
of 60 consecutive days; or
(H) JUDGMENTS. Any court of competent jurisdiction shall enter
---------
one or more final judgments against the Company or any Subsidiary or
any of their respective properties or other assets in an aggregate
amount in excess of $250,000, which is not vacated, appealed, bonded,
stayed, discharged, satisfied or waived for a period of 30 consecutive
days; or
(I) DEFAULT UNDER OTHER AGREEMENTS. (a) The Company or any
--------------------------------
Subsidiary shall (i) default in any payment with respect to any
Indebtedness for borrowed money (other than this Note) which
Indebtedness has an outstanding principal amount in excess of $250,000
individually or $750,000 in the aggregate for all such Indebtedness,
beyond the period of grace, if any, provided in the instrument or
agreement under which such Indebtedness was created or (ii) default in
the observance or performance of any agreement, covenant or condition
relating to any such Indebtedness or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event
shall occur or condition exist, the effect of which default or other
event or condition is to cause, or to permit the holder or holders of
such Indebtedness (or a trustee or agent on behalf of such holder or
holders) to cause, any such Indebtedness to become due prior to its
stated maturity and such default or event shall continue beyond the
period of grace, if any, provided in the instrument or agreement under
which such Indebtedness was created (after giving effect to any consent
or waiver obtained and then in effect thereunder) and such default
shall continue for five days (or to such earlier date as the holder of
any other Indebtedness shall declare the same due and payable by reason
of such default; or (b) any Indebtedness of the Company or any
Subsidiary which has an outstanding principal amount in excess of the
$250,000 individually or $750,000 in the aggregate for all such
Indebtedness shall, in accordance with its terms, be declared to be due
and payable, or required to be prepaid other than by a regularly
scheduled or required payment prior to the stated maturity thereof; or
(J) CESSATION OF DISTRIBUTION, SALES OR MARKETING. None of the
---------------------------------------------
Company or any of its Affiliates shall (directly or through reliable
third parties) be distributing, selling or marketing the Products in
the Territory for a continuous period of three months;
-14-
then,
(1) upon the occurrence and during the continuation of any
Event of Default specified in clause (a), (b), (c), (e) or (j) of this
Section 3.1, at the option of the Holder, and upon the occurrence of
any Event of Default specified in clause (f) or (g) of this Section
3.1: (X) the Company shall pay to the Holder an amount equal to the
outstanding principal amount of this Note PLUS accrued and unpaid
interest on such principal amount to the date of payment PLUS accrued
and unpaid Default Interest, if any, thereon at the rate provided in
this Note to the date of payment, (Y) all other amounts payable
hereunder or under any of the other Transaction Documents shall
immediately become due and payable, all without demand, presentment or
notice, all of which hereby are expressly waived, together with all
costs, including, without limitation, reasonable legal fees and
expenses of collection, and (Z) the Holder shall be entitled to
exercise all other rights and remedies available at law or in equity;
and
(2) upon the occurrence and during the continuation of any
Event of Default specified in clause (d), (h) or (i) of this Section
3.1: (A) if any Event of Default continues during the period of 120
consecutive days following the occurrence of such Event of Default,
then thereafter so long as any Event of Default is continuing (i) at
the option of the Holder the Company shall pay to the Holder an amount
equal to the outstanding principal amount of this Note PLUS accrued and
unpaid interest on such principal amount to the date of payment PLUS
accrued and unpaid Default Interest, if any, thereon at the rate
provided in this Note to the date of payment, (ii) all other amounts
payable hereunder shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly
waived, together with all costs, including, without limitation,
reasonable legal fees and expenses, of collection, and (B) the Holder
shall be entitled to exercise all rights and remedies available at law
or in equity other than those set forth in the immediately preceding
clause (A).
ARTICLE IV
REPURCHASE UPON A REPURCHASE EVENT
4.1 REPURCHASE RIGHT UPON REPURCHASE EVENT. If a Repurchase
-----------------------------------------
Event occurs, in addition to any other right of the Holder, the Holder shall
have the right, at the Holder's option, to require the Company to repurchase all
of this Note, or any portion hereof on the repurchase date that is five Business
Days after the date of the Holder Notice delivered with respect to such
Repurchase
-15-
Event. The Holder shall have the right to require the Company to repurchase all
or any such portion of this Note if a Repurchase Event occurs at any time while
any portion of the principal amount of this Note is outstanding at a price equal
to the Repurchase Price.
4.2 NOTICES; METHOD OF EXERCISING REPURCHASE RIGHTS, ETC. (a)
-----------------------------------------------------
On or before the fifth Business Day after the occurrence of a Repurchase Event,
the Company shall give to the Holder a Company Notice of the occurrence of the
Repurchase Event and of the repurchase right set forth herein arising as a
result thereof. Such Company Notice shall set forth:
(i) the date by which the repurchase right must be exercised,
and
(ii) a description of the procedure (set forth in this Section
4.2) which the Holder must follow to exercise the repurchase right.
No failure of the Company to give a Company Notice or defect therein shall limit
the Holder's right to exercise the repurchase right or affect the validity of
the proceedings for the repurchase of this Note or portion hereof.
(b) To exercise the repurchase right, the Holder shall deliver
to the Company on or before the 30th day after a Company Notice (or if no such
Company Notice has been given, within 40 days after the Holder first learns of
the Repurchase Event) (i) a Holder Notice setting forth the name of the Holder
and the principal amount of this Note to be repurchased, and (ii) this Note,
duly endorsed for transfer to the Company of the portion of the outstanding
principal amount of this Note to be repurchased. A Holder Notice may be revoked
by the Holder at any time prior to the time the Company pays the applicable
Repurchase Price to the Holder.
(c) If the Holder shall have given a Holder Notice, then on
the date which is five Business Days after the date such Holder Notice is given
(or such later date as the Holder surrenders this Note) the Company shall make
payment in immediately available funds of the applicable Repurchase Price to
such account as specified by the Holder in writing to the Company at least one
Business Day prior to the applicable repurchase date.
4.3 OTHER. A Holder Notice given by the Holder shall be deemed
-----
for all purposes to be in proper form unless the Company notifies the Holder
within three Business Days after such Holder Notice has been given (which notice
shall specify all defects in such Holder Notice), and any Holder Notice
containing any such defect shall nonetheless be effective on the date given if
the Holder promptly undertakes to correct all such defects. No such claim of
defect shall limit or delay
-16-
performance of the Company's obligation to repurchase any portion of this Note,
the repurchase of which is not in dispute.
ARTICLE V
CONVERSION
5.1 RIGHT TO CONVERT. Subject to and upon compliance with the
----------------
provisions of this Note, the Holder shall have the right, at the Holder's
option, at any time prior to the close of business on the Maturity Date (except
that, if the Holder shall have exercised repurchase rights under Sections 4.1
and 4.2 or the Company shall have exercised its redemption rights under Section
1.2, such conversion right shall terminate with respect to the portion of this
Note to be repurchased or redeemed, as the case may be, at the close of business
on the last Trading Day prior to the later of (x) the Optional Redemption Date
or the date the Company is required to make such repurchase, as the case may be,
and (y) the date the Company pays or deposits in accordance with Section 7.10
the applicable Repurchase Price or Optional Redemption Price unless in any such
case the Company shall default in payment due upon repurchase or redemption
hereof) to convert the principal amount of this Note, or any portion of such
principal amount which is at least $1,000 (or such lesser principal amount of
this Note as shall be outstanding at such time), plus accrued and unpaid
interest, into that number of fully paid and non-assessable shares of Common
Stock (as such shares shall then be constituted) obtained by dividing (1) the
sum of (x) the principal amount of this Note or portion thereof being converted
PLUS (y) accrued and unpaid interest on the portion of the principal amount of
this Note being converted to the applicable Conversion Date PLUS (z) accrued and
unpaid Default Interest, if any, on the amount referred to in the immediately
preceding clause (y) to the applicable Conversion Date BY (2) the Conversion
Price in effect on the applicable Conversion Date, by giving a Conversion Notice
in the manner provided in Section 5.2; PROVIDED, HOWEVER, that, if at any time
this Note is converted in whole or in part pursuant to this Section 5.1, the
Company does not have available for issuance upon such conversion as authorized
and unissued shares or in its treasury at least the number of shares of Common
Stock required to be issued pursuant hereto, then, at the election of the Holder
made by notice from the Holder to the Company, this Note (or portion hereof as
to which conversion has been requested), to the extent that sufficient shares of
Common Stock are not then available for issuance upon conversion, shall be
converted into the right to receive from the Company, in lieu of the shares of
Common Stock into which this Note or such portion hereof would otherwise be
converted and which the Company is unable to issue, payment in an amount equal
to the product obtained by multiplying (x) the number of shares of Common Stock
which the Company is unable to issue TIMES (y) the arithmetic average of the
Market Price for the Common Stock during the five consecutive
-17-
Trading Days immediately prior to the applicable Conversion Date. Any such
payment shall, for all purposes of this Note, be deemed to be a payment of
principal plus a premium equal to the total amount payable less the principal
portion of this Note converted as to which such payment is required to be made
because shares of Common Stock are not then available for issuance upon such
conversion. The Holder is not entitled to any rights of a holder of Common Stock
until the Holder has converted this Note to Common Stock, and only to the extent
this Note is deemed to have been converted to Common Stock under this Article V.
For purposes of Sections 5.5 and 5.6, whenever a provision references the shares
of Common Stock into which this Note (or a portion hereof) is convertible or the
shares of Common Stock issuable upon conversion of this Note (or a portion
hereof) or words of similar import, any determination required by such provision
shall be made as if a sufficient number of shares of Common Stock were then
available for issuance upon conversion in full of this Note.
5.2 EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF COMMON STOCK
----------------------------------------------------------
ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS. (a) In order to exercise
- ------------------------------------------------------
the conversion privilege with respect to this Note, the Holder shall give a
Conversion Notice (or such other notice which is acceptable to the Company) to
the Company and the Transfer Agent or to the office or agency designated by the
Company for such purpose by notice to the Holder. A Conversion Notice may be
given by telephone line facsimile transmission to the numbers set forth on the
form of Conversion Notice.
(b) As promptly as practicable, but in no event later than
five Trading Days, after a Conversion Notice is given, the Company shall issue
and shall deliver to the Holder or the Holder's designee the number of full
shares of Common Stock issuable upon such conversion of this Note or portion
hereof in accordance with the provisions of this Article and deliver a check or
cash in respect of any fractional interest in respect of a share of Common Stock
arising upon such conversion, as provided in Section 5.2(f) and, if applicable,
any cash payment required pursuant to the proviso to the first sentence of
Section 5.1 (which payment, if any, shall be paid no later than five Trading
Days after the applicable Conversion Date).
(c) Each conversion of this Note (or portion hereof) shall be
deemed to have been effected on the applicable Conversion Date, and the person
in whose name any certificate or certificates for shares of Common Stock shall
be issuable upon such conversion shall be deemed to have become on such
Conversion Date the holder of record of the shares represented thereby;
PROVIDED, HOWEVER, that if a Conversion Date is a date on which the stock
transfer books of the Company shall be closed such conversion shall constitute
the person in whose name the certificates are to be issued as the record holder
thereof for all purposes on the next succeeding day on which such stock transfer
books are open, but such conversion shall be at the
-18-
Conversion Price in effect on the applicable Conversion Date. Upon conversion of
this Note or any portion hereof, the accrued and unpaid interest on this Note
(or portion hereof) to (but excluding) the applicable Conversion Date shall be
deemed to be paid to the Holder of this Note through receipt of such number of
shares of Common Stock issued upon conversion of this Note or portion hereof as
shall have an aggregate Current Fair Market Value on the Trading Day immediately
preceding such Conversion Date equal to the amount of such accrued and unpaid
interest.
(d) The Company shall notify the Holder of any claim by the
Company of manifest error in a Conversion Notice within two Trading Days after
the Holder gives such Conversion Notice and no such claim of error shall limit
or delay performance of the Company's obligation to issue upon such conversion
the number of shares of Common Stock which are not in dispute. A Conversion
Notice shall be deemed for all purposes to be in proper form unless the Company
notifies the Holder by telephone line facsimile transmission within two Trading
Days after a Conversion Notice has been given (which notice from the Company
shall specify all defects in the Conversion Notice) and any Conversion Notice
containing any such defect shall nonetheless be effective on the date given if
the Holder promptly undertakes to correct all such defects. The Company shall
not be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of shares of Common Stock or other
securities or property on conversion of this Note in a name other than that of
the Holder, and the Company shall not be required to issue or deliver any such
shares or other securities or property unless and until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of any
such tax or shall have established to the satisfaction of the Company that such
tax has been paid. The Holder shall be responsible for the amount of any
withholding tax payable in connection with any conversion of this Note.
(e) (1) If the Holder shall have given a Conversion Notice in
accordance with the terms of this Note, the Company's obligation to issue and
deliver the certificates for Common Stock shall be absolute and unconditional,
irrespective of any action or inaction by the Holder 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, any failure or
delay in the enforcement of any other obligation of the Company to the Holder,
or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other person of any obligation to
the Company or any violation or alleged violation of law by the Holder or any
other person, and irrespective of any other circumstance which might otherwise
limit such obligation of the Company to the Holder in connection with such
conversion; PROVIDED, HOWEVER, that nothing herein shall limit or prejudice the
right of the Company to pursue any such claim in any other manner permitted by
applicable law. The
-19-
occurrence of an event which requires an adjustment of the Conversion Price as
contemplated by Section 5.3 shall in no way restrict or delay the right of the
Holder to receive certificates for Common Stock upon conversion of this Note and
the Company shall use its best efforts to implement such adjustment on terms
reasonably acceptable to the Holder within two Trading Days of such occurrence.
(2) If in any case the Company shall fail to issue and deliver
the shares of Common Stock to the Holder in connection with a particular
conversion of this Note within five Trading Days after the Holder gives the
Conversion Notice for such conversion, in addition to any other liabilities the
Company may have hereunder and under applicable law (A) the Company shall pay or
reimburse the Holder on demand for all out-of-pocket expenses, including,
without limitation, reasonable fees and expenses of legal counsel, incurred by
the Holder as a result of such failure, (B) if as a result of such failure the
Holder shall suffer any direct damages or liabilities from such failure
(including, without limitation, margin interest and the cost of purchasing
securities to cover a sale (whether by the Holder or the Holder's securities
broker) or borrowing of shares of Common Stock by the Holder for purposes of
settling any trade involving a sale of shares of Common Stock made by the Holder
during the period beginning on the Issuance Date and ending on the date the
Company delivers or causes to be delivered to the Holder such shares of Common
Stock), then the Company shall upon demand of the Holder pay to the Holder an
amount equal to the actual direct, out-of-pocket damages and liabilities
suffered by the Holder by reason thereof which the Holder documents to the
reasonable satisfaction of the Company, and (C) the Holder may by written notice
(which may be given by mail, courier, personal service or telephone line
facsimile transmission) or oral notice (promptly confirmed in writing), given at
any time prior to delivery to the Holder of the shares of Common Stock issuable
in connection with such exercise of the Holder's conversion right, rescind such
exercise and the Conversion Notice relating thereto, in which case the Holder
shall thereafter be entitled to convert that portion of this Note as to which
such exercise is so rescinded and to exercise its other rights and remedies with
respect to such failure by the Company. Notwithstanding the foregoing the
Company shall not be liable to the Holder under clause (B) of the immediately
preceding sentence to the extent the failure of the Company to deliver or to
cause to be delivered such shares of Common Stock results from fire, flood,
storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving
facilities of a common carrier, acts of God, or any similar event outside the
control of the Company (it being understood that the action or failure to act of
the Transfer Agent shall not be deemed an event outside the control of the
Company except to the extent resulting from fire, flood, storm, earthquake,
shipwreck, strike, war, acts of terrorism, crash involving facilities of a
common carrier, acts of God, or any similar event outside the control of the
Transfer Agent or the bankruptcy, liquidation or reorganization of the Transfer
Agent under any bankruptcy, insolvency or other similar law). The Holder shall
notify the Company in writing (or by telephone conversation, confirmed in
writing) as
-20-
promptly as practicable following the fifth Trading Day after the Holder gives a
Conversion Notice if the Holder becomes aware that such shares of Common Stock
so issuable have not been received as provided herein, but any failure so to
give such notice shall not affect the Holder's rights under this Note or
otherwise. If the Holder shall have exercised the conversion right in any
particular instance and either (1) the Company shall notify the Holder on or
after such that the shares of Common Stock issuable upon such conversion might
not be delivered within five Trading Days after the date the Holder gives such
Conversion Notice or (2) the Holder learns after the date which is five Trading
Days after the date the Holder gives such Conversion Notice that the Holder has
not received such shares of Common Stock, then, without releasing the Company of
its obligations with respect thereto, from and after the Trading Day next
succeeding the earlier of the events described in the preceding clauses (1) and
(2) of this sentence the Holder shall make reasonable efforts not to sell shares
of Common Stock in anticipation of receipt of such shares of Common Stock in a
manner which is likely to increase materially the liability of the Company under
clause (2) of the second preceding sentence.
(f) No fractional shares of Common Stock shall be issued upon
conversion of this Note but, in lieu of any fraction of a share of Common Stock
which would otherwise be issuable in respect of such conversion, the Company may
round the number of shares of Common Stock issued on such conversion up to the
next highest whole share or may pay lawful money of the United States of America
for such fractional share, based on a value of one share of Common Stock being
equal to the Market Price of the Common Stock on the applicable Conversion Date.
5.3 ADJUSTMENT OF CONVERSION PRICE. The Conversion Price shall
------------------------------
be adjusted from time to time by the Company as follows:
(a) In case the Company shall on or after the Issuance Date
pay a dividend or make a distribution to all holders of the outstanding Common
Stock in shares of Common Stock, the Conversion Price in effect at the opening
of business on the date following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such Conversion Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the close
of business on the Record Date fixed for such determination and the denominator
shall be the sum of such number of shares and the total number of shares
constituting such dividend or other distribution, such reduction to become
effective immediately after the opening of business on the day following the
Record Date. If any dividend or distribution of the type described in this
Section 5.3(a) is declared but not so paid or made, the Conversion Price shall
again be adjusted to the Conversion Price which would then be in effect if such
dividend or distribution had not been declared.
-21-
(b) In case the Company shall on or after the Issuance Date
issue rights or warrants (other than any rights or warrants referred to in
Section 5.3(d)) to all holders of its outstanding shares of Common Stock
entitling them (for a period expiring within 45 days after the date fixed for
the determination of stockholders entitled to receive such rights or warrants)
to subscribe for or purchase shares of Common Stock at a price per share less
than the Current Market Price on the Record Date fixed for the determination of
stockholders entitled to receive such rights or warrants, the Conversion Price
shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect at the opening of business on the
date after such Record Date by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding at the close of business on the
Record Date plus the number of shares which the aggregate offering price of the
total number of shares so offered would purchase at such Current Market Price,
and the denominator shall be the number of shares of Common Stock outstanding on
the close of business on the Record Date plus the total number of additional
shares of Common Stock so offered for subscription or purchase. Such adjustment
shall become effective immediately after the opening of business on the day
following the Record Date fixed for determination of stockholders entitled to
receive such rights or warrants. To the extent that shares of Common Stock are
not delivered pursuant to such rights or warrants, upon the expiration or
termination of such rights or warrants, the Conversion Price shall be readjusted
to the Conversion Price which would then be in effect had the adjustments made
upon the issuance of such rights or warrants been made on the basis of delivery
of only the number of shares of Common Stock actually delivered. In the event
that such rights or warrants are not so issued, the Conversion Price shall again
be adjusted to be the Conversion Price which would then be in effect if such
date fixed for the determination of stockholders entitled to receive such rights
or warrants had not been fixed. In determining whether any rights or warrants
entitle the holder to subscribe for or purchase shares of Common Stock at less
than such Current Market Price, and in determining the aggregate offering price
of such shares of Common Stock, there shall be taken into account any
consideration received for such rights or warrants, the value of such
consideration, if other than cash, to be determined by the Board of Directors.
(c) In case the outstanding shares of Common Stock shall on or
after the Issuance Date be subdivided into a greater number of shares of Common
Stock, the Conversion Price in effect at the opening of business on the earlier
of the day following the day upon which such subdivision becomes effective and
the day on which "ex-" trading of the Common Stock begins with respect to such
subdivision shall be proportionately reduced, and conversely, in case
outstanding shares of Common Stock shall be combined into a smaller number of
shares of Common Stock, the Conversion Price in effect at the opening of
business on the earlier of the day following the day upon which such combination
becomes effective and the day on which "ex-" trading of the Common Stock with
respect to such combination
-22-
begins shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of business on
the earlier of the day following the day upon which such subdivision or
combination becomes effective and the day on which "ex-" trading of the Common
Stock begins with respect to such subdivision or combination.
(d) In case the Company shall on or after the Issuance Date,
by dividend or otherwise, distribute to all holders of its Common Stock shares
of any class of capital stock of the Company (other than any dividends or
distributions to which Section 5.3(a) applies) or evidences of its indebtedness,
cash or other assets (including securities, but excluding any rights or warrants
referred to in Section 5.3(b) and dividends and distributions paid exclusively
in cash and excluding any capital stock, evidences of indebtedness, cash or
assets distributed upon a merger or consolidation to which Section 5.4 applies)
(the foregoing hereinafter in this Section 5.3(d) called the "Securities")),
then, in each such case, subject to the second paragraph of this Section 5.3(d),
the Conversion Price shall be reduced so that the same shall be equal to the
price determined by multiplying the Conversion Price in effect immediately prior
to the close of business on the Record Date with respect to such distribution by
a fraction of which the numerator shall be the Current Market Price on such date
less the fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution) on such
date of the portion of the Securities so distributed applicable to one share of
Common Stock and the denominator shall be such Current Market Price, such
reduction to become effective immediately prior to the opening of business on
the day following the Record Date; PROVIDED, HOWEVER, that in the event the then
fair market value (as so determined) of the portion of the Securities so
distributed applicable to one share of Common Stock is equal to or greater than
the Current Market Price on the Record Date, in lieu of the foregoing
adjustment, adequate provision shall be made so that the Holder shall have the
right to receive upon conversion of this Note (or any portion hereof) the amount
of Securities such holder would have received had such holder converted this
Note (or portion hereof) immediately prior to such Record Date. In the event
that such dividend or distribution is not so paid or made, the Conversion Price
shall again be adjusted to be the Conversion Price which would then be in effect
if such dividend or distribution had not been declared. If the Board of
Directors determines the fair market value of any distribution for purposes of
this Section 5.3(d) by reference to the actual or when issued trading market for
any Securities comprising all or part of such distribution, it must in doing so
consider the prices in such market over the same period used in computing the
Current Market Price, to the extent possible.
Rights or warrants distributed by the Company to all holders
of Common Stock entitling the holders thereof to subscribe for or purchase
shares of the Company's capital stock (either initially or under certain
circumstances), which rights or warrants, until the occurrence of a specified
event or events (a "Trigger
-23-
Event"): (i) are deemed to be transferred with such shares of Common Stock; (ii)
are not exercisable; and (iii) are also issued in respect of future issuances of
Common Stock, shall not be deemed to have been distributed for purposes of this
Section 5.3 (and no adjustment to the Conversion Price under this Section 5.3
will be required) until the occurrence of the earliest Trigger Event. If any
such rights or warrants, including any such existing rights or warrants
distributed prior to the Issuance Date, are subject to Trigger Events, upon the
satisfaction of each of which such rights or warrants shall become exercisable
to purchase different securities, evidences of indebtedness or other assets,
then the occurrence of each such Trigger Event shall be deemed to be such date
of issuance and record date with respect to new rights or warrants (and a
termination or expiration of the existing rights or warrants without exercise by
the holder thereof) (so that, by way of illustration and not limitation, the
dates of issuance of any such rights shall be deemed to be the dates on which
such rights become exercisable to purchase capital stock of the Company, and not
the date on which such rights may be issued, or may become evidenced by separate
certificates, if such rights are not then so exercisable). In addition, in the
event of any distribution of rights or warrants, or any Trigger Event with
respect thereto, that was counted for purposes of calculating a distribution
amount for which an adjustment to the Conversion Price under this Section 5.3
was made (1) in the case of any such rights or warrants which shall all have
been redeemed or repurchased without exercise by any holders thereof, the
Conversion Price shall be readjusted upon such final redemption or repurchase to
give effect to such distribution or Trigger Event, as the case may be, as though
it were a cash distribution, equal to the per share redemption or repurchase
price received by a holder or holders of Common Stock with respect to such
rights or warrants (assuming such holder had retained such rights or warrants),
made to all holders of Common Stock as of the date of such redemption or
repurchase, and (2) in the case of such rights or warrants which shall have
expired or been terminated without exercise by any holders thereof, the
Conversion Price shall be readjusted as if such rights and warrants had not been
issued.
For purposes of this Section 5.3(d) and Sections 5.3(a) and
(b), any dividend or distribution to which this Section 5.3(d) is applicable
that also includes shares of Common Stock, or rights or warrants to subscribe
for or purchase shares of Common Stock to which Section 5.3(b) applies (or
both), shall be deemed instead to be (1) a dividend or distribution of the
evidences of indebtedness, assets, shares of capital stock, rights or warrants
other than such shares of Common Stock or rights or warrants to which Section
5.3(b) applies (and any Conversion Price reduction required by this Section
5.3(d) with respect to such dividend or distribution shall then be made)
immediately followed by (2) a dividend or distribution of such shares of Common
Stock or such rights or warrants (and any further Conversion Price reduction
required by Sections 5.3(a) and (b) with respect to such dividend or
distribution shall then be made), except (A) the Record Date of such dividend or
distribution shall be substituted as "the date fixed for the determination of
-24-
stockholders entitled to receive such dividend or other distribution", "Record
Date fixed for such determination" and "Record Date" within the meaning of
Section 5.3(a) and as "the date fixed for the determination of stockholders
entitled to receive such rights or warrants", "the Record Date fixed for the
determination of the stockholders entitled to receive such rights or warrants"
and "such Record Date" within the meaning of Section 5.3(b) and (B) any shares
of Common Stock included in such dividend or distribution shall not be deemed
"outstanding at the close of business on the Record Date fixed for such
determination" within the meaning of Section 5.3(a).
(e) In case the Company shall on or after the Issuance Date,
by dividend or otherwise, distribute to all holders of its Common Stock cash
(excluding any cash that is distributed upon a merger or consolidation to which
Section 5.4 applies or as part of a distribution referred to in Section 5.3(d))
in an aggregate amount that, combined with (1) the aggregate amount of any other
such distributions to all holders of its Common Stock made exclusively in cash
within the 12 months preceding the date of payment of such distribution, and in
respect of which no adjustment pursuant to this Section 5.3(e) has been made,
and (2) the aggregate of any cash plus the fair market value (as determined by
the Board of Directors, whose determination shall be conclusive and set forth in
a Board Resolution) of consideration payable in respect of any Tender Offer by
the Company or any Subsidiary for all or any portion of the Common Stock
concluded within the 12 months preceding the date of payment of such
distribution, and in respect of which no adjustment pursuant to Section 5.3(f)
has been made, exceeds 10% of the product of (x) the Current Market Price on the
Record Date with respect to such distribution TIMES (y) the number of shares of
Common Stock outstanding on such date, then, and in each such case, immediately
after the close of business on such date, unless the Company elects to reserve
such cash for distribution to the Holder upon the conversion of this Note (and
shall have made adequate provision) so that the Holder will receive upon such
conversion, in addition to the shares of Common Stock to which the Holder is
entitled, the amount of cash which the Holder would have received if the Holder
had, immediately prior to the Record Date for such distribution of cash,
converted this Note into Common Stock, the Conversion Price shall be reduced so
that the same shall equal the price determined by multiplying the Conversion
Price in effect immediately prior to the close of business on such Record Date
by a fraction (i) the numerator of which shall be equal to the Current Market
Price on the Record Date less an amount equal to the quotient of (x) the excess
of such combined amount over such 10% and (y) the number of shares of Common
Stock outstanding on the Record Date and (ii) the denominator of which shall be
equal to the Current Market Price on the Record Date; PROVIDED, HOWEVER, that in
the event the portion of the cash so distributed applicable to one share of
Common Stock is equal to or greater than the Current Market Price of the Common
Stock on the Record Date, in lieu of the foregoing adjustment, adequate
provision shall be made so that the Holder shall have the right to receive upon
conversion of
-25-
this Note (or any portion hereof) the amount of cash the Holder would have
received had the Holder converted this Note (or portion hereof) immediately
prior to such Record Date. In the event that such dividend or distribution is
not so paid or made, the Conversion Price shall again be adjusted to be the
Conversion Price which would then be in effect if such dividend or distribution
had not been declared.
(f) In case a Tender Offer on or after the Issuance Date made
by the Company or any Subsidiary for all or any portion of the Common Stock
shall expire and such Tender Offer (as amended upon the expiration thereof)
shall require the payment to stockholders (based on the acceptance (up to any
maximum specified in the terms of the Tender Offer) of Purchased Shares (as
defined below)) of an aggregate consideration having a fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a Board Resolution) that combined together with (1) the
aggregate of the cash plus the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a Board
Resolution), as of the expiration of such Tender Offer, of consideration payable
in respect of any other Tender Offers, by the Company or any Subsidiary for all
or any portion of the Common Stock expiring within the 12 months preceding the
expiration of such Tender Offer and in respect of which no adjustment pursuant
to this Section 5.3(f) has been made and (2) the aggregate amount of any
distributions to all holders of the Company's Common Stock made exclusively in
cash within 12 months preceding the expiration of such Tender Offer and in
respect of which no adjustment pursuant to Section 5.3(e) has been made, exceeds
10% of the product of (i) the Current Market Price as of the last time (the
"Expiration Time") tenders could have been made pursuant to such Tender Offer
(as it may be amended) TIMES (ii) the number of shares of Common Stock
outstanding (including any tendered shares) at the Expiration Time, then, and in
each such case, immediately prior to the opening of business on the day after
the date of the Expiration Time, the Conversion Price shall be adjusted so that
the same shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to close of business on the date of the Expiration Time
by a fraction of which the numerator shall be the number of shares of Common
Stock outstanding (including any tendered shares) at the Expiration Time
multiplied by the Current Market Price of the Common Stock on the Trading Day
next succeeding the Expiration Time and the denominator shall be the sum of (x)
the fair market value (determined as aforesaid) of the aggregate consideration
payable to stockholders based on the acceptance (up to any maximum specified in
the terms of the Tender Offer) of all shares validly tendered and not withdrawn
as of the Expiration Time (the shares deemed so accepted, up to any such
maximum, being referred to as the "Purchased Shares") and (y) the product of the
number of shares of Common Stock outstanding (less any Purchased Shares) at the
Expiration Time and the Current Market Price of the Common Stock on the Trading
Day next succeeding the Expiration Time, such reduction (if any) to become
effective immediately prior to the opening of business on the day following the
Expiration
-26-
Time. In the event that the Company is obligated to purchase shares pursuant to
any such Tender Offer, but the Company is permanently prevented by applicable
law from effecting any such purchases or all such purchases are rescinded, the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such Tender Offer had not been made. If the application of
this Section 5.3(f) to any Tender Offer would result in an increase in the
Conversion Price, no adjustment shall be made for such Tender Offer under this
Section 5.3(f).
(g) (1) In case at any time on or after the Issuance Date the
Company shall issue shares of its Common Stock or Common Stock Equivalents
(collectively, the "Newly Issued Shares"), other than an issuance pro rata to
all holders of its outstanding Common Stock and other than an issuance in
respect of which Section 5.3(h) is applicable, at a price below the Current Fair
Market Value of the Common Stock at the time of such issuance, then following
such issuance of Newly Issued Shares the Conversion Price shall be adjusted as
provided in this Section 5.3(g). The Conversion Price following any such
adjustment shall be determined by multiplying the Conversion Price immediately
prior to such adjustment by a fraction, of which the numerator shall be the sum
of (a) the number of shares of Common Stock outstanding immediately prior to the
issuance of the Newly Issued Shares (calculated on a fully-diluted basis
assuming the conversion of all options, warrants, purchase rights or convertible
securities which are exercisable at the time of the issuance of the Newly Issued
Shares) PLUS (b) the number of shares of Common Stock which the aggregate
consideration, if any, received by the Company for the number of Newly Issued
Shares would purchase at a price equal to the Current Fair Market Value of the
Common Stock at the time of such issuance, and the denominator shall be the sum
of (X) the number of shares of Common Stock outstanding immediately prior to the
issuance of the Newly Issued Shares (calculated on a fully-diluted basis
assuming the exercise or conversion of all options, warrants, purchase rights or
convertible securities which are exercisable or convertible at the time of the
issuance of the Newly Issued Shares) PLUS (Y) the number of Newly Issued Shares.
The adjustment provided for in this Section 5.3(g) may be expressed as the
following mathematical formula:
( O +(C / FMV)) x CP
---------------
NCP = ( O + N )
where:
C = aggregate consideration received by the Company for the
Newly Issued Shares
N = number of Newly Issued Shares
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O = number of shares of Common Stock outstanding (on a fully
diluted basis, as described above)immediately prior to the
issuance of the Newly Issued Shares
FMV = Current Fair Market Value of the Common Stock at the time
of issuance of the Newly Issued Shares
CP = Conversion Price immediately prior to the issuance of the
Newly Issued Shares
NCP = Conversion Price immediately after the issuance of the
Newly Issued Shares
(2) Notwithstanding the foregoing, no adjustment shall be
made under this Section 5.3(g) by reason of:
(A) the issuance by the Company of shares of Common Stock pro
rata to all holders of the Common Stock so long as (i) any adjustment to the
Conversion Price that is required by Section 5.3(a) is made and (ii) the Company
shall have given notice of such issuance thereof to the Holder pursuant to
Section 5.6;
(B) the issuance by the Company of the Notes, the Other Notes,
the Warrants or the Other Warrants or shares of Common Stock upon conversion of
this Note, or the Other Notes or upon exercise of the Warrants or the Other
Warrants or in accordance with the terms hereof and thereof or any other
issuance of securities solely to the Holder occurring on or before August 31,
2004;
(C) the issuance by the Company of shares of Common Stock in
payment of interest on this Note in accordance with the terms hereof;
(D) the issuance of Common Stock upon conversion, exercise or
exchange of Common Stock Equivalents outstanding on the Issuance Date;
(E) the issuance by the Company of Newly Issued Shares upon
grant or exercise of options for employees, directors and consultants under a
stock option, equity compensation or similar plan duly adopted by the Board of
Directors; or
(F) the issuance by the Company of the Advance Shares, the
Advance Warrants or the Placement Agent Warrants or shares of Common Stock upon
exercise of the Advance Warrants or the Placement Agent Warrants in accordance
with the terms hereof and thereof.
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(h) (1) In case at any time on or before January 8, 2005 the
Company issues shares of Common Stock or Common Stock Equivalents that are not
registered for sale by the Company in such offering under the 1933 Act or issues
shares of Common Stock or Common Stock Equivalents in an offering of a type
commonly known as a PIPE or an equity line, in any such case in an amount which,
together with all other offerings by the Company that would be integrated with
such offering for purposes of Regulation D under the 1933 Act, results in gross
proceeds to the Company of at least $250,000, at a price per share at which the
Company sells such shares of Common Stock or the price per share at which the
holders of such Common Stock Equivalents are entitled to acquire shares of
Common Stock upon conversion or exercise thereof which is less than the
Conversion Price in effect at the time of such issuance, then following such
issuance the Conversion Price shall be reduced to the price per share (or
weighted average price per share, if such shares are issued, or such Common
Stock Equivalents may be converted or exercised, at different prices) at which
such shares of Common Stock are issued or at which such Common Stock Equivalents
may be exercised, if the same is lower than the Conversion Price in effect
immediately prior to such issuance.
(2) If any adjustment in the Conversion Price is made pursuant
to this Section 5.3(h) in respect of any issuance of shares of Common Stock or
Common Stock Equivalents, no adjustment in the Conversion Price shall be made by
reason of such issuance pursuant to Section 5.3(g).
(3) Notwithstanding the foregoing, no adjustment shall be made
under this Section 5.3(h) by reason of:
(A) the issuance by the Company of shares of Common Stock pro
rata to all holders of the Common Stock so long as (i) any adjustment required
by Section 5.3(a) is made and (ii) the Company shall have given notice thereof
to the Holder pursuant to Section 5.6;
(B) the issuance by the Company of the Notes, the Other Notes,
the Warrants or the Other Warrants or the issuance by the Company of shares of
Common Stock upon conversion of this Note or the Other Notes or upon exercise of
the Warrants or the Other Warrants in accordance with the terms hereof and
thereof or any other issuance of securities solely to the Holder occurring on or
before August 31, 2004;
(C) the issuance by the Company of shares of Common Stock in
payment of interest on this Note or the Other Notes in accordance with the terms
hereof and thereof;
-29-
(D) the issuance of Common Stock upon conversion, exercise or
exchange of Common Stock Equivalents outstanding on the Issuance Date; or
(E) the issuance by the Company of Newly Issued Shares upon
grant or exercise of options for employees, directors and consultants under a
stock option, equity compensation or similar plan duly adopted by the Board of
Directors; or
(F) the issuance by the Company of the Advance Shares, the
Advance Warrants or the Placement Agent Warrants or shares of Common Stock upon
exercise of the Advance Warrants or the Placement Agent Warrants in accordance
with the terms hereof and thereof.
(i) The Company may make such reductions in the Conversion
Price, in addition to those required by Sections 5.3(a), (b), (c), (d), (e),
(f), (g) and (h), as the Board of Directors considers to be advisable to avoid
or diminish any income tax to holders of Common Stock or rights to purchase
Common Stock resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for income tax purposes.
(j) No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
such price; PROVIDED, HOWEVER, that any adjustments which by reason of this
Section 5.3(j) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Article V
shall be made by the Company and shall be made to the nearest cent or to the
nearest one hundredth of a share, as the case may be.
No adjustment need be made for a change in the par value of the Common Stock or
from par value to no par value or from no par value to par value.
(k) Whenever the Conversion Price is adjusted as herein
provided, the Company shall promptly, but in no event later than five days
thereafter, give a notice to the Holder setting forth the Conversion Price after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment, but which statement shall not include any information which would be
material non-public information for purposes of the 1934 Act. Failure to deliver
such notice shall not affect the legality or validity of any such adjustment.
(l) In any case in which this Section 5.3 provides that an
adjustment shall become effective immediately after a Record Date for an event,
the Company may defer until the occurrence of such event (i) issuing to the
Holder in connection with any conversion of this Note after such Record Date and
before the occurrence of such event the additional shares of Common Stock
issuable upon such
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conversion by reason of the adjustment required by such event over and above the
Common Stock issuable upon such conversion before giving effect to such
adjustment and (ii) paying to such holder any amount in cash in lieu of any
fraction pursuant to Section 5.2(f).
(m) For purposes of this Section 5.3, the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock. The Company
will not pay any dividend or make any distribution on shares of Common Stock
held in the treasury of the Company other than dividends or distributions
payable only in shares of Common Stock.
5.4 EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE.
-------------------------------------------------- (a) If any of the
following events occur, namely (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation, merger or combination of
the Company with another corporation as a result of which holders of Common
Stock shall be entitled to receive stock, securities or other property or assets
(including cash) with respect to or in exchange for such Common Stock, or (iii)
any sale or conveyance of the properties and assets of the Company as, or
substantially as, an entirety to any other corporation as a result of which
holders of Common Stock shall be entitled to receive stock, securities or other
property or assets (including cash) with respect to or in exchange for such
Common Stock, then the Company or the successor or purchasing Person, as the
case may be, shall execute with the Holder a written agreement providing that
(x) this Note shall be convertible into the kind and amount of shares of stock
and other securities or property or assets (including cash) receivable upon such
reclassification, change, consolidation, merger, combination, sale or conveyance
by the holder of the number of shares of Common Stock issuable upon conversion
of this Note in full (assuming, for such purposes, a sufficient number of
authorized shares of Common Stock available to convert this Note) immediately
prior to such reclassification, change, consolidation, merger, combination, sale
or conveyance assuming such holder of Common Stock did not exercise such
holder's rights of election, if any, as to the kind or amount of securities,
cash or other property receivable upon such consolidation, merger, statutory
exchange, sale or conveyance (PROVIDED that, if the kind or amount of
securities, cash or other property receivable upon such consolidation, merger,
statutory exchange, sale or conveyance is not the same for each share of Common
Stock in respect of which such rights of election shall not have been exercised
("non-electing share"), then for the purposes of this Section 5.4 the kind and
amount of securities, cash or other property receivable upon such consolidation,
merger, statutory exchange, sale or conveyance for each non-electing share shall
be deemed to be the kind and amount so receivable per share by a plurality of
the non-electing
-31-
shares), (y) in the case of any such successor or purchasing Person, upon such
consolidation, merger, combination, sale or conveyance such successor or
purchasing Person shall be jointly and severally liable with the Company for the
performance of all of the Company's obligations under this Note and the Note
Purchase Agreement and (z) if registration or qualification is required under
the 1933 Act or applicable state law for the public resale by the Holder of such
shares of stock and other securities so issuable upon conversion of this Note,
such registration or qualification shall be completed prior to such
reclassification, change, consolidation, merger, combination or sale. Such
written agreement shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Article. If, in the case of any such reclassification, change, consolidation,
merger, combination, sale or conveyance, the stock or other securities and
assets receivable thereupon by a holder of shares of Common Stock includes
shares of stock or other securities and assets of a corporation other than the
successor or purchasing corporation, as the case may be, in such
reclassification, change, consolidation, merger, combination, sale or
conveyance, then such written agreement shall also be executed by such other
corporation and shall contain such additional provisions to protect the
interests of the Holder as the Board of Directors shall reasonably consider
necessary by reason of the foregoing, including, to the extent practicable, the
provisions providing for the repurchase rights set forth in Article IV herein.
(b) The above provisions of this Section shall similarly apply
to successive reclassifications, changes, consolidations, mergers, combinations,
sales and conveyances.
(c) If this Section 5.4 applies to any event or occurrence,
Section 5.3 shall not apply.
5.5 RESERVATION OF SHARES; SHARES TO BE FULLY PAID; LISTING OF
----------------------------------------------------------
COMMON STOCK.
- ------------
(a) The Company shall reserve and keep available, free from
preemptive rights, out of its authorized but unissued shares of Common Stock or
shares of Common Stock held in treasury, solely for issuance upon conversion of
this Note, and in addition to the shares of Common Stock required to be reserved
by the terms of the Warrants, sufficient shares to provide for the conversion of
this Note from time to time as this Note is converted.
(b) Before taking any action which would cause an adjustment
reducing the Conversion Price below the then par value, if any, of the shares of
Common Stock issuable upon conversion of this Note, the Company will take all
corporate action which may, in the opinion of its counsel, be necessary in order
that
-32-
the Company may validly and legally issue shares of such Common Stock at
such adjusted Conversion Price.
(c) The Company covenants that all shares of Common Stock
issued upon conversion of this Note will be fully paid and non-assessable by the
Company and free from all taxes, liens and charges with respect to the issue
thereof.
(d) The Company covenants that if any shares of Common Stock
to be provided for the purpose of conversion of this Note hereunder require
registration with or approval of any governmental authority under any federal or
state law before such shares may be validly issued upon conversion, the Company
will in good faith and as expeditiously as possible endeavor to secure such
registration or approval, as the case may be.
(e) The Company covenants that, in the event the Common Stock
shall be listed on the Nasdaq, the NYSE, the AMEX or any other national
securities exchange, the Company shall obtain and, so long as the Common Stock
shall be so listed on such market or exchange, maintain approval for listing
thereon of all Common Stock issuable upon conversion of or in payment of
interest on this Note.
5.6 NOTICE TO HOLDER PRIOR TO CERTAIN ACTIONS. In case on or
-----------------------------------------
after the Issuance Date:
(a) the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than in cash out of retained earnings);
or
(b) the Company shall authorize the granting to the holders of
its Common Stock of rights or warrants to subscribe for or purchase any share of
any class or any other rights or warrants; or
(c) the Board of Directors shall authorize any
reclassification of the Common Stock of the Company (other than a subdivision or
combination of its outstanding Common Stock, or a change in par value, or from
par value to no par value, or from no par value to par value), or any
consolidation or merger or other business combination transaction to which the
Company is a party and for which approval of any stockholders of the Company is
required, or the sale or transfer of all or substantially all of the assets of
the Company; or
(d) there shall be pending the voluntary or involuntary
dissolution, liquidation or winding-up of the Company;
the Company shall give the Holder, as promptly as possible but in any event at
least ten Trading Days prior to the applicable date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the purpose of
such dividend,
-33-
distribution or rights or warrants, or, if a record is not to be taken, the date
as of which the holders of Common Stock of record to be entitled to such
dividend, distribution or rights are to be determined, or (y) the date on which
such reclassification, consolidation, merger, other business combination
transaction, sale, transfer, dissolution, liquidation or winding-up is expected
to become effective or occur, and the date as of which it is expected that
holders of Common Stock of record who shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such reclassification,
consolidation, merger, other business combination transaction, sale, transfer,
dissolution, liquidation or winding-up shall be determined. Such notice shall
not include any information which would be material non-public information for
purposes of the 1934 Act. Failure to give such notice, or any defect therein,
shall not affect the legality or validity of such dividend, distribution,
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up. In the case of any such action of which the Company
gives such notice to the Holder or is required to give such notice to the
Holder, the Holder shall be entitled to give a Conversion Notice which is
contingent on the completion of such action.
5.7 9.9% LIMITATION. (a) Notwithstanding anything to the
----------------
contrary contained herein, the number of shares of Common Stock that may be
acquired at any time by the Holder upon conversion of the Note shall not exceed
a number that, when added to the total number of shares of Common Stock deemed
beneficially owned by such Holder (other than by virtue of the ownership of
securities or rights to acquire securities (including the Warrants) that have
limitations on the holder's right to convert, exercise or purchase similar to
the limitation set forth herein (the "Excluded Shares")), together with all
shares of Common Stock beneficially owned at such time (other than by virtue of
the ownership of Excluded Shares) by Persons whose beneficial ownership of
Common Stock would be aggregated with the beneficial ownership by such Holder
for purposes of determining whether a group exists or for purposes of
determining the Holder's beneficial ownership (the "Aggregation Parties"), in
either such case for purposes of Section 13(d) of the 1934 Act and Regulation
13D-G thereunder (including, without limitation, as the same is made applicable
to Section 16 of the 1934 Act and the rules promulgated thereunder), would
result in beneficial ownership by such Holder or such group of more than 9.9% of
the shares of Common Stock for purposes of Section 13(d) or Section 16 of the
1934 Act and the rules promulgated thereunder (as the same may be modified by a
particular Holder as provided herein, the "Restricted Ownership Percentage"). A
Holder shall have the right at any time and from time to time to reduce its
Restricted Ownership Percentage immediately upon notice to the Company in the
event and only to the extent that Section 16 of the 1934 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 9.9%. If at any time the limits in this Section 5.7 make the Note
inconvertible in whole or in part, the Company shall not by reason thereof be
-34-
relieved of its obligation to issue shares of Common Stock at any time or from
time to time thereafter upon conversion of the Note as and when shares of Common
Stock may be issued in compliance with such restrictions.
(b) For purposes of this Section 5.7, in determining the
number of outstanding shares of Common Stock at any time the Holder may rely on
the number of outstanding shares of Common Stock as reflected in (1) the
Company's then most recent Form 10-Q, Form 10-K or other public filing with the
SEC, as the case may be, (2) a public announcement by the Company that is later
than any such filing referred to in the preceding clause (1) or (3) any other
notice by the Company or its transfer agent setting forth the number shares of
Common Stock outstanding and knowledge the Holder may have about the number of
shares of Common Stock issued upon conversions or exercises of the Notes or
other Common Stock Equivalents by any Person, including the Holder, which are
not reflected in the information referred to in the preceding clauses (1)
through (3). Upon the written request of any Holder, the Company shall within
three Business Days confirm in writing to such Holder the number of shares of
Common Stock then outstanding. In any case, the number of outstanding shares of
Common Stock shall be determined after giving effect to the conversion or
exercise of Common Stock Equivalents, including the Notes and the Warrants, by
the Holder or its affiliates, in each such case subsequent to, the date as of
which such number of outstanding shares of Common Stock was reported.
ARTICLE VI
DEFINITIONS
6.1 CERTAIN DEFINED TERMS. (a) All the agreements or
------------------------
instruments herein defined shall mean such agreements or instruments as the same
may from time to time be supplemented or amended or the terms thereof waived or
modified to the extent permitted by, and in accordance with, the terms thereof
and of this Note.
(b) The following terms shall have the following meanings
(such meanings to be equally applicable to both the singular and plural forms of
the terms defined):
"Advance Shares" means shares of Common Stock issued to Robert
E. Huntley and Paul Eibeler on or before January 31, 2004 in exchange for up to
$450,000.00 of advances to the Company by such persons outstanding as of the
Issuance Date at an exchange rate of not less than $1.20 per share.
-35-
"Advance Warrants" means Common Stock Purchase Warrants to
purchase a number of shares of Common Stock equal to the Advance Shares issued
to Robert E, Huntley and Paul Eibeler in connection with the issuance of the
Advance Shares in substantially the same form as the Warrants
"Affiliate" means, with respect to any Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by or is under common control with the subject Person.
For purposes of this definition, "control" (including, with correlative meaning,
the terms "controlled by" and "under common control with"), as used with respect
to any Person, shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.
"AMEX" means the American Stock Exchange, Inc.
"Applicable Rate" means 9 percent per annum or, if an Event of
Default shall occur, then so long as any Event of Default shall continue, 16
percent per annum (or in either case such lesser rate as shall be the highest
rate permitted by applicable law).
"Average Daily Trading Volume Threshold" means, with respect
to any period, that the average daily trading volume of the Common Stock during
such period as reported by Bloomberg, L.P. (or if such source ceases to be
available, a comparable source selected by the Holder and acceptable to the
Company in its reasonable judgment) shall be at least 100,000 shares (such
amount to be subject to equitable adjustment for stock splits, stock dividends
and similar events relating to the Common Stock that are reflected in the
trading market for the Common Stock on or before the last Trading Day in such
period).
"Board of Directors" means the Board of Directors of the
Company.
"Board Resolution" means a copy of a resolution certified by
the Secretary or an Assistant Secretary of the Company to have been duly adopted
by the Board of Directors, or duly authorized committee thereof (to the extent
permitted by applicable law), and to be in full force and effect on the date of
such certification, and delivered to the Holder.
"Business Day" means any day other than a Saturday, Sunday or
a day on which commercial banks in The City of New York are authorized or
required by law or executive order to remain closed.
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"Common Stock" means the Common Stock, par value $.001 per
share, or any shares of capital stock of the Company into which such shares
shall be changed or reclassified after the Issuance Date.
"Common Stock Equivalent" means any warrant, option,
subscription or purchase right with respect to shares of Common Stock, any
security convertible into, exchangeable for, or otherwise entitling the holder
thereof to acquire, shares of Common Stock or any warrant, option, subscription
or purchase right with respect to any such convertible, exchangeable or other
security.
"Company" shall have the meaning provided in the first
paragraph of this Note.
"Company Certificate" means a certificate of the Company
signed by an Officer.
"Company Notice" means a Company Notice in the form attached
hereto as EXHIBIT B.
"Conversion Date" means the date on which a Conversion Notice
is given in accordance with Section 5.2(a).
"Conversion Notice" means a duly executed Notice of Conversion
of 9% Senior Convertible Note due 2007 substantially in the form of EXHIBIT D to
this Note.
"Conversion Price" means $1.20, subject to adjustment as
provided in Section 5.3.
"Current Fair Market Value" when used with respect to the
Common Stock as of a specified date means with respect to each share of Common
Stock the average of the closing prices of the Common Stock sold on all
securities exchanges (including the Nasdaq and the Nasdaq SmallCap) on which the
Common Stock may at the time be listed, or, if there have been no sales on any
such exchange on such day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on such day the
Common Stock is not so listed, the average of the representative bid and asked
prices quoted in the NASDAQ System as of 4:00 p.m., New York City time, or, if
on such day the Common Stock is not quoted in the NASDAQ System, the average of
the highest bid and lowest asked price on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, in each such case averaged
over a period of five Trading Days consisting of the day as of which the Current
Fair Market Value of Common Stock is being determined (or if such day is not a
Trading Day, the Trading Day next preceding such day) and the
-37-
four consecutive Trading Days prior to such day. If on the date for which
Current Fair Market Value is to be determined the Common Stock is not listed on
any securities exchange or quoted in the NASDAQ System or the over-the-counter
market, the Current Fair Market Value of Common Stock shall be the greater of
(i) the highest price per share of Common Stock at which the Company has sold
shares of Common Stock or Common Stock Equivalents during the 365 days prior to
the date of such determination and (ii) the highest price per share which the
Company could then obtain from a willing buyer (not an employee or director of
the Company at the time of determination) for shares of Common Stock sold by the
Company, from authorized but unissued shares, as determined in good faith by the
Board of Directors.
"Current Market Price" shall mean the arithmetic average of
the daily Market Prices per share of Common Stock for the ten consecutive
Trading Days immediately prior to the date in question; PROVIDED, HOWEVER, that
(1) if the "ex" date (as hereinafter defined) for any event (other than the
issuance or distribution requiring such computation) that requires an adjustment
to the Conversion Price pursuant to Section 5.3(a), (b), (c), (d), (e), (f), (g)
or (h), occurs during such ten consecutive Trading Days, the Market Price for
each Trading Day prior to the "ex" date for such other event shall be adjusted
by multiplying such Market Price by the same fraction by which the Conversion
Price is so required to be adjusted as a result of such other event, (2) if the
"ex" date for any event (other than the issuance or distribution requiring such
computation) that requires an adjustment to the Conversion Price pursuant to
Section 5.3(a), (b), (c), (d), (e), (f), (g) or (h), occurs on or after the "ex"
date for the issuance or distribution requiring such computation and prior to
the day in question, the Market Price for each Trading Day on and after the "ex"
date for such other event shall be adjusted by multiplying such Market Price by
the reciprocal of the fraction by which the Conversion Price is so required to
be adjusted as a result of such other event, and (3) if the "ex" date for the
issuance or distribution requiring such computation is prior to the day in
question, after taking into account any adjustment required pursuant to clause
(1) or (2) of this proviso, the Market Price for each Trading Day on or after
such "ex" date shall be adjusted by adding thereto the amount of any cash and
the fair market value (as determined by the Board of Directors in a manner
consistent with any determination of such value for purposes of Section 5.3(d)
or (f), whose determination shall be conclusive and described in a Board
Resolution) of the evidences of indebtedness, shares of capital stock or assets
being distributed applicable to one share of Common Stock as of the close of
business on the day before such "ex" date. For purposes of any computation under
Section 5.3(f), the Current Market Price of the Common Stock on any date shall
be deemed to be the arithmetic average of the daily Market Prices per share of
Common Stock for such day and the next two succeeding Trading Days; PROVIDED,
HOWEVER, that if the "ex" date for any event (other than the Tender Offer
requiring such computation) that requires an adjustment to the Conversion Price
pursuant to Section 5.3(a), (b), (c),
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(d), (e), (f), (g) or (h), occurs on or after the Expiration Time for the Tender
Offer requiring such computation and prior to the day in question, the Market
Price for each Trading Day on and after the "ex" date for such other event shall
be adjusted by multiplying such Market Price by the reciprocal of the fraction
by which the Conversion Price is so required to be adjusted as a result of such
other event. For purposes of this paragraph, the term "ex" date, (1) when used
with respect to any issuance or distribution, means the first date on which the
Common Stock trades, regular way, on the relevant exchange or in the relevant
market from which the Market Price was obtained without the right to receive
such issuance or distribution, (2) when used with respect to any subdivision or
combination of shares of Common Stock, means the first date on which the Common
Stock trades, regular way, on such exchange or in such market after the time at
which such subdivision or combination becomes effective, and (3) when used with
respect to any Tender Offer means the first date on which the Common Stock
trades, regular way, on such exchange or in such market after the Expiration
Time of such Tender Offer. Notwithstanding the foregoing, whenever successive
adjustments to the Conversion Price are called for pursuant to Section 5.3, such
adjustments shall be made to the Current Market Price as may be necessary or
appropriate to effectuate the intent of Section 5.3 and to avoid unjust or
inequitable results as determined in good faith by the Board of Directors.
"Default Interest" shall have the meaning provided in the
first paragraph of this Note.
"Default Rate" means 14 percent per annum.
"Eligible Bank" means a corporation organized or existing
under the laws of the United States or any other state, having combined capital
and surplus of at least $100 million and subject to supervision by federal or
state authority and which has a branch located in New York, New York.
"Expiration Time" shall have the meaning provided in Section
5.3(f).
"Event of Default" shall have the meaning provided in Section
3.1.
"Fundamental Change" means
(a) Any consolidation or merger of the Company or any
Subsidiary with or into another entity (other than a merger or
consolidation of a Subsidiary into the Company or a wholly-owned
Subsidiary) where the stockholders of the Company immediately prior to
such transaction do not collectively own at least 51% of the
outstanding voting securities of the surviving corporation of such
consolidation or merger immediately following such transaction; or the
sale of all or substantially all of the assets of the
-39-
Company and the Subsidiaries in a single transaction or a series of
related transactions; or
(b) The occurrence of any transaction or event in connection
with which all or substantially all the Common Stock shall be exchanged
for, converted into, acquired for or constitute the right to receive
consideration (whether by means of an exchange offer, liquidation,
tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) which is not all or substantially all
common stock which is (or will, upon consummation of or immediately
following such transaction or event, will be) listed on a national
securities exchange or approved for quotation on Nasdaq or any similar
United States system of automated dissemination of transaction
reporting of securities prices; or
(c) The acquisition by a Person or entity or group of Persons
or entities acting in concert as a partnership, limited partnership,
syndicate or group, as a result of a tender or exchange offer, open
market purchases, privately negotiated purchases or otherwise, of
beneficial ownership of securities of the Company representing 50% or
more of the combined voting power of the outstanding voting securities
of the Company ordinarily (and apart from rights accruing in special
circumstances) having the right to vote in the election of directors.
"Generally Accepted Accounting Principles" for any Person
means the generally accepted accounting principles and practices applied by such
Person from time to time in the preparation of its audited financial statements.
"Holder" shall have the meaning provided in the first
paragraph of this Note.
"Holder Notice" means a Holder Notice in the form attached
hereto as EXHIBIT C.
"Indebtedness" as used in reference to any Person means all
indebtedness of such Person for borrowed money, the deferred purchase price of
property, goods and services and obligations under leases which are required to
be capitalized in accordance with Generally Accepted Accounting Principles and
shall include all such indebtedness guaranteed in any manner by such Person or
in effect guaranteed by such Person through a contingent agreement to purchase
and all indebtedness for the payment or purchase of which such Person has
contingently agreed to advance or supply funds and all indebtedness secured by
mortgage or other lien upon property owned by such Person, although such Person
has not assumed or become liable for the payment of such indebtedness, and, for
all
-40-
purposes hereof, such indebtedness shall be treated as though it has been
assumed by such Person.
"Interest Payment Date" means each March 1, June 1, September
1 and December 1 and the Maturity
Date.
"Interest Payment Shares" means the shares of Common Stock
issuable in payment of interest on this Note in accordance with Section 1.1.
"Interest Share Price" for any Interest Payment Date means the
volume weighted average of the Market Price of the Common Stock for all of the
Trading Days during the period of 10 consecutive Trading Days ending on and
including the Trading Day immediately preceding such Interest Payment Date.
"Issuance Date" means January 8, 2004.
"Letter Agreement" shall have the meaning provided in the Note
Purchase Agreement.
"Market Price" with respect to any security on any day shall
mean the closing bid price of such security on such day on the Nasdaq, the NYSE
or the AMEX, as applicable, or, if such security is not listed or admitted to
trading on the Nasdaq, the NYSE or the AMEX, on the principal national
securities exchange or quotation system on which such security is quoted or
listed or admitted to trading, in any such case as reported by Bloomberg, L.P.
(or if such source ceases to be available, comparable source selected by the
Holder and acceptable to the Company in its reasonable judgment) or, if not
quoted or listed or admitted to trading on any national securities exchange or
quotation system, the average of the closing bid and asked prices of such
security on the over-the-counter market on the day in question, as reported by
the National Quotation Bureau Incorporated, or a similar generally accepted
reporting service, or if not so available, in such manner as furnished by any
NYSE member firm selected from time to time by the Board of Directors for that
purpose, or a price determined in good faith by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution.
"Maturity Date" means January 8, 2007.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"1934 Act" means the Securities Exchange Act of 1934, as
amended.
"1933 Act" means the Securities Act of 1933, as amended.
-41-
"Note" means this instrument as originally executed, or if
later amended or supplemented in accordance with its terms, then as so amended
or supplemented.
"Note Purchase Agreement" means the Note Purchase Agreement,
dated as of January 8, 2004, by and between the Company and the original Holder
of this Note.
"NYSE" means the New York Stock Exchange, Inc.
"Officer" means the Chairman of the Board, the Chief Executive
Officer, the President or the Chief Financial Officer of the Company.
"Optional Redemption Date" means each Business Day on which
this Note is to be redeemed in whole or in part pursuant to Section 1.2.
"Optional Redemption Notice" means an Optional Redemption
Notice in the form attached hereto as EXHIBIT A.
"Optional Redemption Period" means the period which commences
on the date that is two years after the SEC Effective Date and ends on the
Maturity Date.
"Optional Redemption Price" means an amount in cash equal to
the sum of (1) 100% of the outstanding principal amount of this Note specified
in an Optional Redemption Notice as being redeemed by the Company PLUS (2)
accrued and unpaid interest on such principal amount to the applicable Optional
Redemption Date PLUS (3) accrued and unpaid Default Interest, if any, on the
amount referred to in the immediately preceding clause (2) at the rate provided
in this Note to the Optional Redemption Date.
"Other Notes" means up to $2,000,000 aggregate principal
amount of 9% Senior Convertible Notes due 2007 issued by the Company on or
before June 30, 2004 on terms acceptable to the Holder.
"Other Warrants" means the Common Stock Purchase Warrants
issued or issuable by the Company in connection with the Other Notes, if any.
"Permitted Indebtedness" means
(1) Indebtedness outstanding on the Issuance Date prior to
issuance of this Note and listed on Schedule 4(l) to the Note Purchase
Agreement; and
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(2) Indebtedness evidenced by the Note and the Other Notes;
(3) Indebtedness incurred after the Issuance Date in an
aggregate amount not to exceed $2,000,000.00 million at any one time
outstanding so long as (x) such Indebtedness is incurred for the
purpose of acquiring equipment owned or used or to be owned or used by
the Company or any Subsidiaries (or for the purpose of acquiring the
capital stock or similar equity interests of a Subsidiary that is
formed for the limited purpose of owning same and does not own or hold
any other material assets) and does not exceed the purchase price of
the equipment, capital stock or other equity interest so acquired plus
reasonable transaction expenses and (y) such Indebtedness, if secured,
is secured solely by the interest of the Company or one of its
Subsidiaries in the equipment so acquired and rights related thereto;
(4) Indebtedness incurred after the Issuance Date not to
exceed $4,000,000.00 million at any one time outstanding that is
secured solely in raw materials, works in progress and finished goods
inventory and accounts receivable in a financing by a bank, finance
company or other institutional lender providing receivables or
inventory financing;
(5) Indebtedness incurred after the Issuance Date which is
unsecured, subordinated to the Notes as to payment on terms approved in
advance of such incurrence by the Holder as evidenced by the written
approval of the Holder given priority to the incurrence of such
Indebtedness, and for which no payment of principal of such
Indebtedness is scheduled to be due prior to the date that is six
months after the latest scheduled Maturity Date;
(6) endorsements for collection or deposit in the ordinary
course of business; and
(7) in the case of any Subsidiary, Indebtedness owed by such
Subsidiary to the Company;
so long as at the time of incurrence of such Indebtedness no Event of Default
has occurred and is continuing or would result from such incurrence and no event
which, with notice or passage of time, or both, would become an Event of Default
has occurred and is continuing or would result from such incurrence and so long
as in the case of such Indebtedness referred to in the preceding clauses (2)
thru (6), inclusive, such Indebtedness shall have been approved by the Board of
Directors prior to the incurrence thereof.
-43-
"Person" means any natural person, corporation, partnership,
limited liability company, trust, incorporated organization, unincorporated
association or similar entity or any government, governmental agency or
political subdivision.
"Placement Agent" shall have the meaning provided in the Note
Purchase Agreement.
"Placement Agent Warrants" means the Common Stock Purchase
Warrants to purchase shares of Common Stock issued to the Placement Agent in
connection with the transactions contemplated by the Note Purchase Agreement and
in connection with the bridge financing with the Holder in December 2003.
"Products" means wireless applications, including games,
polyphonic musical ringtones and entertainment content for wireless devices.
"QIB" means a "qualified institutional buyer" as defined in
Rule 144A.
"Record Date" shall mean, with respect to any dividend,
distribution or other transaction or event in which the holders of Common Stock
have the right to receive any cash, securities or other property or in which the
Common Stock (or other applicable security) is exchanged for or converted into
any combination of cash, securities or other property, the date fixed for
determination of stockholders entitled to receive such cash, securities or other
property (whether such date is fixed by the Board of Directors or by statute,
contract or otherwise).
"Registration Statement" means the Registration Statement
required to be filed by the Company with the SEC pursuant to Section 8(a)(1) of
the Note Purchase Agreement.
"Repurchase Event" means the occurrence of any one or more of
the following events:
(a) The Common Stock ceases to be traded on the
Over-The-Counter Bulletin Board and is not listed for trading on
Nasdaq, the NYSE or the AMEX;
(b) Any Fundamental Change;
(c) The adoption of any amendment to the Company's Certificate
of Incorporation (other than any certificate designating a series of
preferred stock of the Company) which materially and adversely affects
the rights of the Holder or the taking of any other action by the
Company which materially and adversely affects the rights of the Holder
in respect of the
-44-
Holder's interest in the Common Stock in a different and more adverse
manner than it affects the rights of holders of Common Stock generally;
(d) The inability of the Holder for 20 Trading Days (whether
or not consecutive) during any period of 365 consecutive days occurring
on or after the SEC Effective Date to sell shares of Common Stock
issued or issuable upon conversion of this Note or exercise of the
Warrants or issued as Interest Payment Shares pursuant to the
Registration Statement (1) by reason of the requirements of the 1933
Act, the 1934 Act or any of the rules or regulations under either
thereof or (2) due to the Registration Statement containing any untrue
statement of material fact or omitting to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or other failure of the Registration Statement
to comply with the rules and regulations of the SEC other than by
reason of a review by the SEC staff of the Registration Statement or a
post effective amendment to the Registration Statement; or
(f) The occurrence of any Event of Default specified in
Article III of this Note.
"Repurchase Price" means with respect to any repurchase
pursuant to Sections 4.1 and 4.2 an amount in cash equal to the sum of (1) 100%
of the outstanding principal amount of this Note PLUS (2) accrued and unpaid
interest on such principal amount to the date of such repurchase PLUS (3)
accrued and unpaid Default Interest, if any, thereon at the rate provided in
this Note to the date of such repurchase.
"Rule 144A" means Rule 144A as promulgated under the 1933 Act
or any successor rule thereto.
"SEC" means the Securities and Exchange Commission.
"SEC Effective Date" means the date the Registration Statement
is first declared effective by the SEC.
"Share Interest Notice Date" shall have the meaning provided
in Section 1.1(c).
"Share Interest Payment Option" shall have the meaning
provided in Section 1.1(a).
"Significant Subsidiary" shall have the meaning provided in
Regulation S-X of the SEC, except that a Subsidiary shall not be a Significant
Subsidiary only if such Subsidiary, when consolidated for financial reporting
-45-
purposes with all other Subsidiaries which are not Significant Subsidiaries,
would not constitute a Significant Subsidiary.
"Subsidiary" means any corporation or other entity of which a
majority of the capital stock or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other Persons
performing similar functions are at the time directly or indirectly owned by the
Company.
"Tender Offer" means a tender offer or exchange offer.
"Territory" means North America.
"Trading Day" means at any time a day on which any of a
national securities exchange, Nasdaq, the OTC Bulletin Board or such other
securities market as at such time constitutes the principal securities market
for the Common Stock is open for general trading of securities.
"Transaction Documents" means this Note, the Note Purchase
Agreement, the Letter Agreement and the Warrants.
"Transfer Agent" means Interwest Transfer Company, Inc., or
its successor as transfer agent and registrar for the Common Stock.
"Warrants" means Common Stock Purchase Warrants of the Company
issued to the original Holder of this Note pursuant to the Note Purchase
Agreement.
ARTICLE VII
MISCELLANEOUS
7.1 FAILURE OR INDULGENCY NOT WAIVER. No failure or delay on
---------------------------------
the part of the Holder in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privileges. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.
7.2 NOTICES. Except as otherwise specifically provided herein,
-------
any notice herein required or permitted to be given shall be in writing and may
be personally served, sent by telephone line facsimile transmission or delivered
by courier or sent by United States mail and shall be deemed to have been given
upon receipt if personally served, sent by telephone line facsimile transmission
or sent by
-46-
courier or three days after being deposited in the facilities of the United
States Postal Service, certified, with postage pre-paid and properly addressed,
if sent by mail. For the purposes hereof, the address and facsimile line
transmission number of the Holder shall be as furnished by the Holder for such
purpose and shown on the records of the Company; and the address of the Company
shall be 5847 San Felipe Street, Houston, Texas, 77057, Attention: Chief
Executive Officer (telephone line facsimile transmission number (713) 914-9688).
The Holder or the Company may change its address for notice by service of
written notice to the other as herein provided.
7.3 AMENDMENT, WAIVER, ETC. Neither this Note nor any terms
------------------------
hereof may be changed, waived, discharged or terminated unless such change,
waiver, discharge or termination is in writing signed by the Company and the
Holder.
7.4 ASSIGNABILITY. This Note shall be binding upon the Company
-------------
and its successors, and shall inure to the benefit of and be binding upon the
Holder and its successors and permitted assigns. The Company may not assign its
rights or obligations under this Note.
7.5 CERTAIN EXPENSES. The Company shall pay on demand all
-----------------
expenses incurred by the Holder, including reasonable attorneys' fees and
expenses, as a consequence of, or in connection with (x) any amendment or waiver
of this Note or any other Transaction Document, (y) any default or breach of any
of the Company's obligations set forth in the Transaction Documents and (z) the
enforcement or restructuring of any right of, including the collection of any
payments due, the Holder under the Transaction Documents, including any action
or proceeding relating to such enforcement or any order, injunction or other
process seeking to restrain the Company from paying any amount due the Holder.
7.6 GOVERNING LAW. This Note shall be governed by the internal
-------------
laws of the State of New York, without regard to the principles of conflict of
laws.
7.7 TRANSFER OF NOTE AND NOTEHOLDER PAYMENT AMOUNT. This Note
----------------------------------------------
has not been and is not being registered under the provisions of the 1933 Act or
any state securities laws and this Note may not be transferred unless the Holder
shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that
this Note may be sold or transferred without registration under the 1933 Act.
Prior to any such transfer, such transferee shall have represented in writing to
the Company that such transferee has requested and received from the Company all
information relating to the business, properties, operations, condition
(financial or other), results of operations or prospects of the Company and the
Subsidiaries deemed relevant by such transferee; that such transferee has been
afforded the opportunity
-47-
to ask questions of the Company concerning the foregoing and has had the
opportunity to obtain and review the reports and other information concerning
the Company which at the time of such transfer have been filed by the Company
with the SEC pursuant to the 1934 Act. If such transfer is intended to assign
the rights and obligations under 5(a), 5(b), 8, 9 and 10 of the Note Purchase
Agreement, such transfer shall otherwise be made in compliance with Article V of
the Note Purchase Agreement. The Holder may not transfer a portion of this Note
to any Person if such transfer would result in an increase in the aggregate
number of registered holders of this Note of more than two such holders without
the prior written consent of the Company, which consent will not be unreasonably
withheld. Any instrument issued upon any such transfer of a portion of this Note
which results in such increase of one holder shall bear a legend that the holder
thereof shall not be entitled to transfer such instrument in a manner which
would further increase the aggregate number of registered holders of this Note
without the prior written consent of the Company, which consent shall not be
unreasonably withheld; PROVIDED, HOWEVER, that any remaining right of the Holder
to transfer all or a portion of this Note may be transferred to the transferee
by agreement between the Holder and the transferee.
7.8 ENFORCEABLE OBLIGATION. The Company represents and
------------------------
warrants that at the time of the original issuance of this Note it received the
full purchase price payable pursuant to the Note Purchase Agreement in an amount
at least equal to the original principal amount of this Note, and that this Note
is an enforceable obligation of the Company which is not subject to any offset,
reduction, counterclaim or disallowance of any sort.
7.9 NOTE REGISTER; REPLACEMENT OF NOTES. The Company shall
--------------------------------------
maintain a register showing the names, addresses and telephone line facsimile
numbers of the Holder and the registered holders of the Other Notes. The Company
shall also maintain a facility for the registration of transfers of this Note
and the Other Notes and at which this Note and the Other Notes may be
surrendered for split up into instruments of smaller denominations or for
combination into instruments of larger denominations. Upon receipt by the
Company of evidence reasonably satisfactory to it of the ownership of and the
loss, theft, destruction or mutilation of this Note and (a) in the case of loss,
theft or destruction, of indemnity from the Holder reasonably satisfactory in
form to the Company (and without the requirement to post any bond or other
security) or (b) in the case of mutilation, upon surrender and cancellation of
this Note, the Company will execute and deliver to the Holder a new Note of like
tenor without charge to the Holder.
7.10 PAYMENT OF NOTE ON REDEMPTION OR REPURCHASE; DEPOSIT OF
---------------------------------------------------------
REDEMPTION PRICE OR REPURCHASE PRICE, ETC. (a) If this Note or any portion of
- --------------------------------------------
this Note is to be redeemed as provided in Section 1.2 or repurchased as
provided in Sections 4.1 and 4.2 and any notice required in connection therewith
shall have
-48-
been given as provided therein and the Company shall have otherwise complied
with the requirements of this Note with respect thereto, then this Note or the
portion of this Note to be so redeemed or repurchased and with respect to which
any such notice has been given shall become due and payable on the date stated
in such notice at the applicable Optional Redemption Price or Repurchase Price.
On and after the Optional Redemption Date or repurchase date so stated in such
notice, provided that the Company shall have deposited with an Eligible Bank on
or prior to such Optional Redemption Date or repurchase date, an amount
sufficient to pay the applicable Optional Redemption Price or Repurchase Price,
interest on this Note or the portion of this Note to be so redeemed or
repurchased shall cease to accrue, and this Note or such portion hereof shall be
deemed not to be outstanding and shall not be entitled to any benefit with
respect to principal of or interest on the portion to be so redeemed or
repurchased except to receive payment of the applicable Optional Redemption
Price or Repurchase Price. On presentation and surrender of this Note or such
portion hereof, this Note or the specified portion hereof shall be paid and
redeemed or repurchased at the applicable Optional Redemption Price or
Repurchase Price. If a portion of this Note is to be redeemed or repurchased,
upon surrender of this Note to the Company in accordance with the terms hereof,
the Company shall execute and deliver to the Holder without service charge, a
new Note or Notes, having the same date hereof and containing identical terms
and conditions, in such denomination or denominations as requested by the Holder
in aggregate principal amount equal to, and in exchange for, the unredeemed or
unrepurchased portion of the principal amount of this Note so surrendered.
(b) Upon the payment in full of all amounts payable by the
Company under this Note or the deposit thereof as provided in Section 7.10(a),
thereafter the obligations of the Company under this Note shall be as set forth
in this Article VII, and, in the case of such deposit, to pay the Optional
Redemption Price or Repurchase Price, as the case may be, from the funds so
deposited. Upon such payment or deposit, any Event of Default which occurred
prior to such payment or deposit by reason of one or more provisions of this
Note with which the Company thereafter is no longer obligated to comply, then
shall no longer exist.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-49-
IN WITNESS WHEREOF, the Company has caused this Note to be
signed in its name by its duly authorized officer as of the day and in the year
first above written.
DWANGO NORTH AMERICA CORP.
By:/s/ R. E. Huntley
-----------------------
Name:Robert E. Huntley
Title: CEO
-50-
ASSIGNMENT
For value received _________________________ hereby sell(s),
assign(s) and transfer(s) unto _________________________ (Please insert social
security or other Taxpayer Identification Number of assignee:
______________________________) the within Note, and hereby irrevocably
constitutes and appoints _________________________ attorney to transfer the said
Note on the books of Dwango North America Corp., a Nevada corporation (the
"Company"), with full power of substitution in the premises.
In connection with any transfer of the Note within the period
prior to the expiration of the holding period applicable to sales thereof under
Rule 144(k) under the 1933 Act (or any successor provision) (other than any
transfer pursuant to a registration statement that has been declared effective
under the 1933 Act), the undersigned confirms that such Note is being
transferred:
[ ] To the Company or a subsidiary thereof; or
[ ] To a QIB pursuant to and in compliance with Rule 144A; or
[ ] To an "accredited investor" pursuant to and in compliance
with the 1933 Act; or
[ ] Pursuant to and in compliance with Rule 144 under the 1933
Act;
and unless the box below is checked, the undersigned confirms that, to the
knowledge of the undersigned, such Note is not being transferred to an
"affiliate" of the Company as defined in Rule 144 under the 1933 Act (an
"Affiliate").
[ ] The transferee is an Affiliate of the Company.
Capitalized terms used in this Assignment and not defined in
this Assignment shall have the respective meanings provided in the Note.
Dated: NAME:
----------- -----------------
--------------------------
Signature(s)
EXHIBIT A
---------
DWANGO NORTH AMERICA CORP.
OPTIONAL REDEMPTION NOTICE
(SECTION 1.2 OF 9% SENIOR
CONVERTIBLE NOTE DUE 2007)
TO:
-------------------------------------------------
(Name of Holder)
(1) Pursuant to the terms of the 9% Senior Convertible Note
due 2007 (the "Note"), Dwango North America Corp., a Nevada corporation (the
"Company"), hereby notifies the above-named Holder that the Company is
exercising its right to redeem the Note in accordance with Section 1.2 of the
Note as set forth below:
(i) The principal amount of the Note to be
redeemed is $ .
-------------
(ii) The Optional Redemption Price is $ .
---------------
(iii) The Optional Redemption Date is .
(2) All of the conditions specified in Section 1.2 of the Note
entitling the Company to call the Note for redemption have been satisfied.
(3) Capitalized terms used herein and not otherwise defined
herein have the respective meanings provided in the Note.
Date _________________________ DWANGO NORTH AMERICA CORP.
By:
-----------------------
Title:
A-1
EXHIBIT B
---------
DWANGO NORTH AMERICA CORP.
COMPANY NOTICE
(SECTION 4.2(A) OF 9% SENIOR
CONVERTIBLE NOTE DUE 2007)
TO:
-------------------------------------------------
(Name of Holder)
(1) A Repurchase Event described in the 9% Senior Convertible
Note due 2007 (the "Note") of Dwango North America Corp., a Nevada
corporation (the "Company"), occurred on , 200 . As a result of such
Repurchase Event, the Holder is entitled to exercise its repurchase
rights pursuant to Section 4.2 of the Note.
(2) The Holder's repurchase right must be exercised on or
before , 200 .
-------------- --
(3) At or before the date set forth in the preceding paragraph
(2), the Holder must deliver to the Company:
(a) a Holder Notice, in the form attached as EXHIBIT C to the
Note; and
(b) the Note, duly endorsed for transfer to the Company of the
portion of the principal amount to be repurchased.
(4) Capitalized terms used herein and not otherwise defined
herein have the respective meanings provided in the Note.
Date _________________________ DWANGO NORTH AMERICA CORP.
By:
-----------------------
Title:
B-1
EXHIBIT C
---------
DWANGO NORTH AMERICA CORP.
HOLDER NOTICE
(SECTION 4.2(B) OF 9% SENIOR
CONVERTIBLE NOTE DUE 2007)
TO: DWANGO NORTH AMERICA CORP.
(1) Pursuant to the terms of the 9% Senior Convertible Note
due 2007 (the "Note"), the undersigned Holder hereby elects to exercise its
right to require repurchase by the Company pursuant to Sections 4.2(a) and
4.2(b) of $ of the Note, equal to the sum of $ principal
-------- -------------
amount of the Note, $ of accrued a nd unpaid interest on such
----------
principal amount and $ of Default Interest on such interest at the
-------------
Repurchase Price provided in the Note.
(2) Capitalized terms used herein and not otherwise defined
herein have the respective meanings provided in the Note.
Date: NAME OF HOLDER:
----------------------
By
-----------------------
Signature of Registered
Holder (Must be signed
exactly as name appears
in the Note.)
C-1
EXHIBIT D
---------
NOTICE OF CONVERSION
OF 9% SENIOR CONVERTIBLE
NOTE DUE 2007
OF DWANGO NORTH AMERICA CORP.
To: Dwango North America Corp.
5847 San Felipe Street
Houston, Texas 77057
Attention: Chief Executive Officer
Primary Facsimile No.: (713) 914-9688
Alternate Facsimile No. (if primary not
functioning): (713)
-----------------------
Interwest Transfer Company, Inc.
as Issuing Agent
1981 East Murray Holladay Road
P.O. Box 17136
Salt Lake City, Utah 84117
Attention:
Facsimile No.: (801) 277-3147
1. Pursuant to the terms of the 9% Senior Convertible Note due
2007 (the "Note"), the undersigned hereby elects to convert $_______________ of
the Note, equal to the sum of $_______________ principal amount of the Note,
$_______________ of accrued and unpaid interest on such principal amount and
$_______________ of Default Interest on such interest into shares of Common
Stock of Dwango North America Corp., a Nevada corporation (the "Company"), at a
Conversion Price per share equal to $_______________. Capitalized terms used
herein and not otherwise defined herein have the respective meanings provided in
the Note.
2. The number of shares of Common Stock issuable upon the
conversion of the Note to which this Notice relates is _______________ (the
"Conversion Shares").
D-1
3. Please issue a certificate or certificates for
_______________ shares of Common Stock in the name(s) specified immediately
below or, if additional space is necessary, on an attachment hereto:
- -------------------------- --------------------------
Name Name
- -------------------------- --------------------------
Address Address
- -------------------------- --------------------------
SS or Tax ID Number SS or Tax ID Number
Delivery Instructions
for Common Stock:
---------------------------------------------------------------
4. The Holder hereby represents and warrants that it has
complied and will comply with the applicable requirements of Sections 8(c)(3)
and 8(c)(5) of the Note Purchase Agreement with respect to the shares of Common
Stock issuable upon the conversion of the Note to which this Notice relates.
5. If the shares of Common Stock issuable upon conversion of
the Note have not been registered for resale under the Securities Act of 1933,
as amended (the "Act"), and the provisions of Rule 144(k) under the 1933 Act are
inapplicable to the undersigned with respect to the Conversion Shares relating
to this Notice, the undersigned represents and warrants that (i) the shares of
Common Stock issuable upon the conversion of the Note to which this Notice
relates are being acquired for the account of the undersigned for investment,
and not with a view to, or for resale in connection with, the distribution
thereof, and that the undersigned has no present intention of distributing or
reselling such shares and (ii) the undersigned is an "accredited investor" as
defined in Regulation D under the 1933 Act. If the provisions of Rule 144(k)
under the 1933 Act are inapplicable to the undersigned with respect to the
Conversion Shares relating to this Notice, the undersigned further agrees that
(A) such shares shall not be sold or transferred unless (i) they first shall
have been registered under the 1933 Act and applicable state securities laws or
(ii) the Company shall have been furnished with an opinion of legal counsel
reasonably satisfactory in form, scope and substance to the Company to the
effect that such sale or transfer is exempt from the registration requirements
of the 1933 Act and (B) until such shares are registered for resale by the
undersigned under the 1933 Act, the Company may place a legend on the
certificate(s) for the shares to that effect and place a stop-transfer
restriction in its records relating to the shares.
D-2
NAME:
---------------------
Date:
---------------- --------------------------
Signature of Registered
Holder (Must be signed
exactly as name appears
in the Note.)
D-3