Exhibit 10.4
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"). THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION
OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR
OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD
PURSUANT TO RULE 144 OR REGULATION S UNDER SAID ACT.
CALLABLE SECURED CONVERTIBLE NOTE
Houston, Texas
May 30, 2006 $167,400
FOR VALUE RECEIVED, PEDIATRIC PROSTHETICS, INC., an Idaho Corporation
(hereinafter called the "BORROWER"), hereby promises to pay to the order of AJW
QUALIFIED PARTNERS, LLC or registered assigns (the "HOLDER") the sum of
$167,400, on May 30, 2009 (the "MATURITY DATE"), and to pay interest on the
unpaid principal balance hereof at the rate of six percent (6%) (the "INTEREST
RATE") per annum from May 30, 2006 (the "ISSUE DATE") until the same becomes due
and payable, whether at maturity or upon acceleration or by prepayment or
otherwise. Any amount of principal or interest on this Note which is not paid
when due shall bear interest at the rate of fifteen percent (15%) per annum from
the due date thereof until the same is paid ("DEFAULT INTEREST"). Interest shall
commence accruing on the Issue Date, shall be computed on the basis of a 365-day
year and the actual number of days elapsed and shall be payable quarterly
provided that no interest shall be due and payable for any month in which the
Trading Price (as such term is defined below) is greater than $.10375 for each
Trading Day (as such term is defined below) of the month. All payments due
hereunder (to the extent not converted into common stock, $.001 par value per
share (the "COMMON STOCK") in accordance with the terms hereof) shall be made in
lawful money of the United States of America. All payments shall be made at such
address as the Holder shall hereafter give to the Borrower by written notice
made 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. As used in this Note, the term "business day" shall
mean any day other than a Saturday, Sunday or a day on which commercial banks in
the city of New York, New York are authorized or required by law or executive
order to remain closed. Each
capitalized term used herein, and not otherwise defined, shall have the meaning
ascribed thereto in that certain Securities Purchase Agreement, dated May 30,
2006, pursuant to which this Note was originally issued (the "PURCHASE
AGREEMENT").
This Note is free from all taxes, liens, claims and encumbrances with
respect to the issue thereof and shall not be subject to preemptive rights or
other similar rights of shareholders of the Borrower and will not impose
personal liability upon the holder thereof. The obligations of the Borrower
under this Note shall be secured by that certain Security Agreement and
Intellectual Property Security Agreement, each dated May 30, 2006 by and between
the Borrower and the Holder.
The following terms shall apply to this Note:
ARTICLE I. CONVERSION RIGHTS
1.1 CONVERSION RIGHT. The Holder shall have the right from time to
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time, and at any time on or prior to the earlier of (i) the Maturity Date
and (ii) the date of payment of the Default Amount (as defined in Article
III) pursuant to Section 1.6(a) or Article III, the Optional Prepayment
Amount (as defined in Section 5.1 or any payments pursuant to Section 1.7,
each in respect of the remaining outstanding principal amount of this Note
to convert all or any part of the outstanding and unpaid principal amount
of this Note into fully paid and non-assessable shares of Common Stock, as
such Common Stock exists on the Issue Date, or any shares of capital stock
or other securities of the Borrower into which such Common Stock shall
hereafter be changed or reclassified at the conversion price (the
"CONVERSION PRICE") determined as provided herein (a "CONVERSION");
provided, however, that in no event shall the Holder be entitled to convert
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any portion of this Note in excess of that portion of this Note upon
conversion of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership
of the unconverted portion of the Notes or the unexercised or unconverted
portion of any other security of the Borrower (including, without
limitation, the warrants issued by the Borrower pursuant to the Purchase
Agreement) subject to a limitation on conversion or exercise analogous to
the limitations contained herein) and (2) the number of shares of Common
Stock issuable upon the conversion of the portion of this Note with respect
to which the determination of this proviso is being made, would result in
beneficial ownership by the Holder and its affiliates of more than 4.99% of
the outstanding shares of Common Stock and provided further that the Holder
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shall not be entitled to convert any portion of this Note during any month
immediately succeeding a Determination Date on which the Borrower exercises
its prepayment option pursuant to Section 5.2 of this Note. For purposes of
the proviso to the immediately preceding sentence, beneficial ownership
shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulations 13D-G thereunder, except
as otherwise provided in clause (1) of such proviso. The number of shares
of Common Stock to be issued upon each conversion of this Note shall be
determined by dividing the Conversion Amount (as defined below) by the
applicable Conversion Price then in effect on the date specified in the
notice of conversion, in the form attached hereto as Exhibit A (the "NOTICE
OF CONVERSION"), delivered to the Borrower by the Holder in accordance with
Section 1.4 below; provided that the Notice of Conversion is submitted by
facsimile (or by other means resulting in, or reasonably expected to result
in, notice) to the Borrower before 6:00 p.m., New York, New York time on
such conversion date (the "CONVERSION DATE"). The term "CONVERSION AMOUNT"
means, with respect to any conversion of this Note, the sum of (1) the
principal amount of this Note to be converted in such conversion plus (2)
accrued and unpaid interest, if any, on such principal amount at the
interest rates provided in this Note to the Conversion Date, provided,
however, that the Company shall have the right to pay any or all interest
in cash plus (3) Default Interest, if any, on the amounts referred to in
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the immediately preceding clauses (1) and/or (2) plus (4) at the Holder's
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option, any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g)
hereof or pursuant to Section 2(c) of that certain Registration Rights
Agreement, dated as of May 30, 2006, executed in connection with the
initial issuance of this Note and the other Notes issued on the Issue Date
(the "REGISTRATION RIGHTS AGREEMENT"). The term "DETERMINATION DATE" means
the last business day of each month after the Issue Date.
1.2 CONVERSION PRICE.
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(A) CALCULATION OF CONVERSION PRICE. The Conversion Price shall
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be the Variable Conversion Price (as defined herein) (subject, in each
case, to equitable adjustments for stock splits, stock dividends or
rights offerings by the Borrower relating to the Borrower's securities
or the securities of any subsidiary of the Borrower, combinations,
recapitalization, reclassifications, extraordinary distributions and
similar events). The "VARIABLE CONVERSION PRICE" shall mean the
Applicable Percentage (as defined herein) multiplied by the Market
Price (as defined herein). "MARKET PRICE" means the average of the
lowest three (3) Trading Prices (as defined below) for the Common
Stock during the twenty (20) Trading Day period ending one Trading Day
prior to the date the Conversion Notice is sent by the Holder to the
Borrower via facsimile (the "CONVERSION DATE"). "TRADING PRICE" means,
for any security as of any date, the intraday trading price on the
Over-the-Counter Bulletin Board (the "OTCBB") as reported by a
reliable reporting service ("REPORTING SERVICE") mutually acceptable
to Borrower and Holder and hereafter designated by Holders of a
majority in interest of the Notes and the Borrower or, if the OTCBB is
not the principal trading market for such security, the intraday
trading price of such security on the principal securities exchange or
trading market where such security is listed or traded or, if no
intraday trading price of such security is available in any of the
foregoing manners, the average of the intraday trading prices of any
market makers for such security that are listed in the "pink sheets"
by the National Quotation Bureau, Inc. If the Trading Price cannot be
calculated for such security on such date in the manner provided
above, the Trading Price shall be the fair market value as mutually
determined by the Borrower and the holders of a majority in interest
of the Notes being converted for which the calculation of the Trading
Price is required in order to determine the Conversion Price of such
Notes. "TRADING DAY" shall mean any day on which the Common Stock is
traded for any period on the OTCBB, or on the principal securities
exchange or other securities market on which the Common Stock is then
being traded. "APPLICABLE PERCENTAGE" shall mean 50%; provided,
however, that the Applicable Percentage shall be increased to (i) 55%
in the event that the Registration Statement (as defined in the
Registration Rights Agreement) is filed on or before the Filing Date
(as defined in the in the Registration Rights Agreement) and (ii) 60%
in the event that the Registration Statement (as defined in the
Registration Rights Agreement) becomes effective on or before the
Effectiveness Deadline (as defined in the Registration Rights
Agreement). In addition, the Holder agrees that it will limit all of
its conversions to no more than the greater of (1) $80,000 per
calendar month; or (2) the average daily dollar volume calculated
during the ten (10) business days prior to a conversion, per
conversion.
(B) CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS. Notwithstanding
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anything contained in Section 1.2(a) to the contrary, in the event the
Borrower (i) makes a public announcement that it intends to
consolidate or merge with any other corporation (other than a merger
in which the Borrower is the surviving or continuing corporation and
its capital stock is unchanged) or sell or transfer all or
substantially all of the assets of the Borrower or (ii) any person,
group or entity (including the Borrower) publicly announces a tender
offer to purchase 50% or more of the Borrower's Common Stock (or any
other takeover scheme) (the date of the announcement referred to in
clause (i) or (ii) is hereinafter referred to as the "ANNOUNCEMENT
DATE"), then the Conversion Price shall, effective upon the
Announcement Date and continuing through the Adjusted Conversion Price
Termination Date (as defined below), be equal to the lower of (x) the
Conversion Price which would have been applicable for a Conversion
occurring on the Announcement Date and (y) the Conversion Price that
would otherwise be in effect. From and after the Adjusted Conversion
Price Termination Date, the Conversion Price shall be determined as
set forth in this Section 1.2(a). For purposes hereof, "ADJUSTED
CONVERSION PRICE TERMINATION DATE" shall mean, with respect to any
proposed transaction or tender offer (or takeover scheme) for which a
public announcement as contemplated by this Section 1.2(b) has been
made, the date upon which the Borrower (in the case of clause (i)
above) or the person, group or entity (in the case of clause (ii)
above) consummates or publicly announces the termination or
abandonment of the proposed transaction or tender offer (or takeover
scheme) which caused this Section 1.2(b) to become operative.
1.3 AUTHORIZED SHARES. Subject to Stockholder Approval (as such term
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is defined in Section 4(n) of the Securities Purchase Agreement), the
Borrower covenants that during the period the conversion right exists, the
Borrower will reserve from its authorized and unissued Common Stock a
sufficient number of shares, free from preemptive rights, to provide for
the issuance of Common Stock upon the full conversion of this Note and the
other Notes issued pursuant to the Purchase Agreement. The Borrower is
required at all times to have authorized and reserved two times the number
of shares that is actually issuable upon full conversion of the Notes
(based on the Conversion Price of the Notes or the Exercise Price of the
Warrants in effect from time to time) (the "RESERVED AMOUNT"). The Reserved
Amount shall be increased from time to time in accordance with the
Borrower's obligations pursuant to Section 4(h) of the Purchase Agreement.
The Borrower represents that upon issuance, such shares will be duly and
validly issued, fully paid and non-assessable. In addition, if the Borrower
shall issue any securities or make any change to its capital structure
which would change the number of shares of Common Stock into which the
Notes shall be convertible at the then current Conversion Price, the
Borrower shall at the same time make proper provision so that thereafter
there shall be a sufficient number of shares of Common Stock authorized and
reserved, free from preemptive rights, for conversion of the outstanding
Notes. The Borrower (i) acknowledges that it has irrevocably instructed its
transfer agent to issue certificates for the Common Stock issuable upon
conversion of this Note, and (ii) agrees that its issuance of this Note
shall constitute full authority to its officers and agents who are charged
with the duty of executing stock certificates to execute and issue the
necessary certificates for shares of Common Stock in accordance with the
terms and conditions of this Note.
If, at any time a Holder of this Note submits a Notice of Conversion,
and the Borrower does not have sufficient authorized but unissued shares of
Common Stock available to effect such conversion in accordance with the
provisions of this Article I (a "CONVERSION DEFAULT"), subject to Section
4.8, the Borrower shall issue to the Holder all of the shares of Common
Stock which are then available to effect such conversion. The portion of
this Note which the Holder included in its Conversion Notice and which
exceeds the amount which is then convertible into available shares of
Common Stock (the "EXCESS AMOUNT") shall, notwithstanding anything to the
contrary contained herein, not be convertible into Common Stock in
accordance with the terms hereof until (and at the Holder's option at any
time after) the date additional shares of Common Stock are authorized by
the Borrower to permit such conversion, at which time the Conversion Price
in respect thereof shall be the lesser of (i) the Conversion Price on the
Conversion Default Date (as defined below) and (ii) the Conversion Price on
the Conversion Date thereafter elected by the Holder in respect thereof. In
addition, the Borrower shall pay to the Holder payments ("CONVERSION
DEFAULT PAYMENTS") for a Conversion Default in the amount of (x) the sum of
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(1) the then outstanding principal amount of this Note plus (2) accrued and
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unpaid interest on the unpaid principal amount of this Note through the
Authorization Date (as defined below) plus (3) Default Interest, if any, on
----
the amounts referred to in clauses (1) and/or (2), multiplied by (y) .24,
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multiplied by (z) (N/365), where N = the number of days from the day the
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holder submits a Notice of Conversion giving rise to a Conversion Default
(the "CONVERSION DEFAULT DATE") to the date (the "AUTHORIZATION DATE") that
the Borrower authorizes a sufficient number of shares of Common Stock to
effect conversion of the full outstanding principal balance of this Note.
The Borrower shall use its best efforts to authorize a sufficient number of
shares of Common Stock as soon as practicable following the earlier of (i)
such time that the Holder notifies the Borrower or that the Borrower
otherwise becomes aware that there are or likely will be insufficient
authorized and unissued shares to allow full conversion thereof and (ii) a
Conversion Default. The Borrower shall send notice to the Holder of the
authorization of additional shares of Common Stock, the Authorization Date
and the amount of Holder's accrued Conversion Default Payments. The accrued
Conversion Default Payments for each calendar month shall be paid in cash
or shall be convertible into Common Stock (at such time as there are
sufficient authorized shares of Common Stock) at the applicable Conversion
Price, at the Borrower's option, as follows:
(A) In the event Holder elects to take such payment in cash, cash
payment shall be made to Holder by the fifth (5th) day of the month
following the month in which it has accrued; and
(B) In the event Holder elects to take such payment in Common
Stock, the Holder may convert such payment amount into Common Stock at
the Conversion Price (as in effect at the time of conversion) at any
time after the fifth day of the month following the month in which it
has accrued in accordance with the terms of this Article I (so long as
there is then a sufficient number of authorized shares of Common
Stock).
The Holder's election shall be made in writing to the Borrower at any
time prior to 6:00 p.m., New York, New York time, on the third day of the
month following the month in which Conversion Default payments have
accrued. If no election is made, the Holder shall be deemed to have elected
to receive cash. Nothing herein shall limit the Holder's right to pursue
actual damages (to the extent in excess of the Conversion Default Payments)
for the Borrower's failure to maintain a sufficient number of authorized
shares of Common Stock, and each holder shall have the right to pursue all
remedies available at law or in equity (including degree of specific
performance and/or injunctive relief).
1.4 METHOD OF CONVERSION.
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(A) MECHANICS OF CONVERSION. Subject to Section 1.1, this Note
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may be converted by the Holder in whole or in part at any time from
time to time after the Issue Date, by (A) submitting to the Borrower a
Notice of Conversion (by facsimile or other reasonable means of
communication dispatched on the Conversion Date prior to 6:00 p.m.,
New York, New York time) and (B) subject to Section 1.4(b),
surrendering this Note at the principal office of the Borrower.
(B) SURRENDER OF NOTE UPON CONVERSION. Notwithstanding anything
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to the contrary set forth herein, upon conversion of this Note in
accordance with the terms hereof, the Holder shall not be required to
physically surrender this Note to the Borrower unless the entire
unpaid principal amount of this Note is so converted. The Holder and
the Borrower shall maintain records showing the principal amount so
converted and the dates of such conversions or shall use such other
method, reasonably satisfactory to the Holder and the Borrower, so as
not to require physical surrender of this Note upon each such
conversion. In the event of any dispute or discrepancy, such records
of the Borrower shall be controlling and determinative in the absence
of manifest error. Notwithstanding the foregoing, if any portion of
this Note is converted as aforesaid, the Holder may not transfer this
Note unless the Holder first physically surrenders this Note to the
Borrower, whereupon the Borrower will forthwith issue and deliver upon
the order of the Holder a new Note of like tenor, registered as the
Holder (upon payment by the Holder of any applicable transfer taxes)
may request, representing in the aggregate the remaining unpaid
principal amount of this Note. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of a portion of
this Note, the unpaid and unconverted principal amount of this Note
represented by this Note may be less than the amount stated on the
face hereof.
(C) PAYMENT OF TAXES. The Borrower shall not be required to pay
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any tax which may be payable in respect of any transfer involved in
the issue 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 (or in street name), and the Borrower shall not be required
to issue or deliver any such shares or other securities or property
unless and until the person or persons (other than the Holder or the
custodian in whose street name such shares are to be held for the
Holder's account) requesting the issuance thereof shall have paid to
the Borrower the amount of any such tax or shall have established to
the satisfaction of the Borrower that such tax has been paid.
(D) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon receipt by the
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Borrower from the Holder of a facsimile transmission (or other
reasonable means of communication) of a Notice of Conversion meeting
the requirements for conversion as provided in this Section 1.4, the
Borrower shall issue and deliver or cause to be issued and delivered
to or upon the order of the Holder certificates for the Common Stock
issuable upon such conversion within three (3) business days after
such receipt (and, solely in the case of conversion of the entire
unpaid principal amount hereof, surrender of this Note) (such third
business day being hereinafter referred to as the "DEADLINE") in
accordance with the terms hereof and the Purchase Agreement
(including, without limitation, in accordance with the requirements of
Section 2(g) of the Purchase Agreement that certificates for shares of
Common Stock issued on or after the effective date of the Registration
Statement upon conversion of this Note shall not bear any restrictive
legend).
(E) OBLIGATION OF BORROWER TO DELIVER COMMON STOCK. Upon receipt
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by the Borrower of a Notice of Conversion, the Holder shall be deemed
to be the holder of record of the Common Stock issuable upon such
conversion, the outstanding principal amount and the amount of accrued
and unpaid interest on this Note shall be reduced to reflect such
conversion, and, unless the Borrower defaults on its obligations under
this Article I, all rights with respect to the portion of this Note
being so converted shall forthwith terminate except the right to
receive the Common Stock or other securities, cash or other assets, as
herein provided, on such conversion. If the Holder shall have given a
Notice of Conversion as provided herein, the Borrower's obligation to
issue and deliver the certificates for Common Stock shall be absolute
and unconditional, irrespective of the absence of any action by the
Holder to enforce the same, any waiver or consent with respect to any
provision thereof, 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 Borrower to the holder of
record, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder of any
obligation to the Borrower, and irrespective of any other circumstance
which might otherwise limit such obligation of the Borrower to the
Holder in connection with such conversion. The Conversion Date
specified in the Notice of Conversion shall be the Conversion Date so
long as the Notice of Conversion is received by the Borrower before
6:00 p.m., New York, New York time, on such date.
(F) DELIVERY OF COMMON STOCK BY ELECTRONIC TRANSFER. In lieu of
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delivering physical certificates representing the Common Stock
issuable upon conversion, provided the Borrower's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer ("FAST") program, upon request of the Holder and
its compliance with the provisions contained in Section 1.1 and in
this Section 1.4, the Borrower shall use its best efforts to cause its
transfer agent to electronically transmit the Common Stock issuable
upon conversion to the Holder by crediting the account of Holder's
Prime Broker with DTC through its Deposit Withdrawal Agent Commission
("DWAC") system.
(G) FAILURE TO DELIVER COMMON STOCK PRIOR TO DEADLINE. Without in
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any way limiting the Holder's right to pursue other remedies,
including actual damages and/or equitable relief, the parties agree
that if delivery of the Common Stock issuable upon conversion of this
Note is more than three (3) business days after the Deadline (other
than a failure due to the circumstances described in Section 1.3
above, which failure shall be governed by such Section) the Borrower
shall pay to the Holder $1,000 per day in cash, for each day beyond
the Deadline that the Borrower fails to deliver such Common Stock.
Such cash amount shall be paid to Holder by the fifth day of the month
following the month in which it has accrued or, at the option of the
Holder (by written notice to the Borrower by the first day of the
month following the month in which it has accrued), shall be added to
the principal amount of this Note, in which event interest shall
accrue thereon in accordance with the terms of this Note and such
additional principal amount shall be convertible into Common Stock in
accordance with the terms of this Note.
1.5 CONCERNING THE SHARES. The shares of Common Stock issuable upon
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conversion of this Note may not be sold or transferred unless (i) such
shares are sold pursuant to an effective registration statement under the
Act or (ii) the Borrower or its transfer agent shall have been furnished
with an opinion of counsel (which opinion shall be in form, substance and
scope customary for opinions of counsel in comparable transactions) to the
effect that the shares to be sold or transferred may be sold or transferred
pursuant to an exemption from such registration or (iii) such shares are
sold or transferred pursuant to Rule 144 under the Act (or a successor
rule) ("RULE 144") or (iv) such shares are transferred to an "affiliate"
(as defined in Rule 144) of the Borrower who agrees to sell or otherwise
transfer the shares only in accordance with this Section 1.5 and who is an
Accredited Investor (as defined in the Purchase Agreement). Except as
otherwise provided in the Purchase Agreement (and subject to the removal
provisions set forth below), until such time as the shares of Common Stock
issuable upon conversion of this Note have been registered under the Act as
contemplated by the Registration Rights Agreement or otherwise may be sold
pursuant to Rule 144 without any restriction as to the number of securities
as of a particular date that can then be immediately sold, each certificate
for shares of Common Stock issuable upon conversion of this Note that has
not been so included in an effective registration statement or that has not
been sold pursuant to an effective registration statement or an exemption
that permits removal of the legend, shall bear a legend substantially in
the following form, as appropriate:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION
OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR
OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT UNLESS SOLD
PURSUANT TO RULE 144 OR REGULATION S UNDER SAID ACT."
The legend set forth above shall be removed and the Borrower shall
issue to the Holder a new certificate therefor free of any transfer legend
if (i) the Borrower or its transfer agent shall have received an opinion of
counsel, in form, substance and scope customary for opinions of counsel in
comparable transactions, to the effect that a public sale or transfer of
such Common Stock may be made without registration under the Act and the
shares are so sold or transferred, (ii) such Holder provides the Borrower
or its transfer agent with reasonable assurances that the Common Stock
issuable upon conversion of this Note (to the extent such securities are
deemed to have been acquired on the same date) can be sold pursuant to Rule
144 or (iii) in the case of the Common Stock issuable upon conversion of
this Note, such security is registered for sale by the Holder under an
effective registration statement filed under the Act or otherwise may be
sold pursuant to Rule 144 without any restriction as to the number of
securities as of a particular date that can then be immediately sold.
Nothing in this Note shall (i) limit the Borrower's obligation under the
Registration Rights Agreement or (ii) affect in any way the Holder's
obligations to comply with applicable prospectus delivery requirements upon
the resale of the securities referred to herein.
1.6 EFFECT OF CERTAIN EVENTS.
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(A) EFFECT OF MERGER, CONSOLIDATION, ETC. At the option of the
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Holder, the sale, conveyance or disposition of all or substantially
all of the assets of the Borrower, the effectuation by the Borrower of
a transaction or series of related transactions in which more than 50%
of the voting power of the Borrower is disposed of, or the
consolidation, merger or other business combination of the Borrower
with or into any other Person (as defined below) or Persons when the
Borrower is not the survivor shall either: (i) be deemed to be an
Event of Default (as defined in Article III) pursuant to which the
Borrower shall be required to pay to the Holder upon the consummation
of and as a condition to such transaction an amount equal to the
Default Amount (as defined in Article III) or (ii) be treated pursuant
to Section 1.6(b) hereof. "PERSON" shall mean any individual,
corporation, limited liability company, partnership, association,
trust or other entity or organization.
(B) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time
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when this Note is issued and outstanding and prior to conversion of
all of the Notes, there shall be any merger, consolidation, exchange
of shares, recapitalization, reorganization, or other similar event,
as a result of which shares of Common Stock of the Borrower shall be
changed into the same or a different number of shares of another class
or classes of stock or securities of the Borrower or another entity,
or in case of any sale or conveyance of all or substantially all of
the assets of the Borrower other than in connection with a plan of
complete liquidation of the Borrower, then the Holder of this Note
shall thereafter have the right to receive upon conversion of this
Note, upon the basis and upon the terms and conditions specified
herein and in lieu of the shares of Common Stock immediately
theretofore issuable upon conversion, such stock, securities or assets
which the Holder would have been entitled to receive in such
transaction had this Note been converted in full immediately prior to
such transaction (without regard to any limitations on conversion set
forth herein), and in any such case appropriate provisions shall be
made with respect to the rights and interests of the Holder of this
Note to the end that the provisions hereof (including, without
limitation, provisions for adjustment of the Conversion Price and of
the number of shares issuable upon conversion of the Note) shall
thereafter be applicable, as nearly as may be practicable in relation
to any securities or assets thereafter deliverable upon the conversion
hereof. The Borrower shall not effect any transaction described in
this Section 1.6(b) unless (a) it first gives, to the extent
practicable, thirty (30) days prior written notice (but in any event
at least fifteen (15) days prior written notice) of the record date of
the special meeting of shareholders to approve, or if there is no such
record date, the consummation of, such merger, consolidation, exchange
of shares, recapitalization, reorganization or other similar event or
sale of assets (during which time the Holder shall be entitled to
convert this Note) and (b) the resulting successor or acquiring entity
(if not the Borrower) assumes by written instrument the obligations of
this Section 1.6(b). The above provisions shall similarly apply to
successive consolidations, mergers, sales, transfers or share
exchanges.
(C) ADJUSTMENT DUE TO DISTRIBUTION. If the Borrower shall declare
------------------------------
or make any distribution of its assets (or rights to acquire its
assets) to holders of Common Stock as a dividend, stock repurchase, by
way of return of capital or otherwise (including any dividend or
distribution to the Borrower's shareholders in cash or shares (or
rights to acquire shares) of capital stock of a subsidiary (i.e., a
spin-off)) (a "DISTRIBUTION"), then the Holder of this Note shall be
entitled, upon any conversion of this Note after the date of record
for determining shareholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the Holder
with respect to the shares of Common Stock issuable upon such
conversion had such Holder been the holder of such shares of Common
Stock on the record date for the determination of shareholders
entitled to such Distribution.
(D) ADJUSTMENT DUE TO DILUTIVE ISSUANCE. If, at any time when any
-----------------------------------
Notes are issued and outstanding, the Borrower issues or sells, or in
accordance with this Section 1.6(d) hereof is deemed to have issued or
sold, any shares of Common Stock for no consideration or for a
consideration per share (before deduction of reasonable expenses or
commissions or underwriting discounts or allowances in connection
therewith) less than the Fixed Conversion Price in effect on the date
of such issuance (or deemed issuance) of such shares of Common Stock
(a "DILUTIVE ISSUANCE"), then immediately upon the Dilutive Issuance,
the Variable Conversion Price will be reduced to the amount of the
consideration per share received by the Borrower in such Dilutive
Issuance; provided that only one adjustment will be made for each
Dilutive Issuance.
The Borrower shall be deemed to have issued or sold shares of
Common Stock if the Borrower in any manner issues or grants any
warrants, rights or options (not including employee stock option
plans), whether or not immediately exercisable, to subscribe for or to
purchase Common Stock or other securities convertible into or
exchangeable for Common Stock ("CONVERTIBLE SECURITIES") (such
warrants, rights and options to purchase Common Stock or Convertible
Securities are hereinafter referred to as "OPTIONS") and the price per
share for which Common Stock is issuable upon the exercise of such
Options is less than the Variable Conversion Price then in effect,
then the Variable Conversion Price shall be equal to such price per
share. For purposes of the preceding sentence, the "price per share
for which Common Stock is issuable upon the exercise of such Options"
is determined by dividing (i) the total amount, if any, received or
receivable by the Borrower as consideration for the issuance or
granting of all such Options, plus the minimum aggregate amount of
additional consideration, if any, payable to the Borrower upon the
exercise of all such Options, plus, in the case of Convertible
Securities issuable upon the exercise of such Options, the minimum
aggregate amount of additional consideration payable upon the
conversion or exchange thereof at the time such Convertible Securities
first become convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise of all
such Options (assuming full conversion of Convertible Securities, if
applicable). No further adjustment to the Conversion Price will be
made upon the actual issuance of such Common Stock upon the exercise
of such Options or upon the conversion or exchange of Convertible
Securities issuable upon exercise of such Options.
Additionally, the Borrower shall be deemed to have issued or sold
shares of Common Stock if the Borrower in any manner issues or sells
any Convertible Securities, whether or not immediately convertible
(other than where the same are issuable upon the exercise of Options),
and the price per share for which Common Stock is issuable upon such
conversion or exchange is less than the Variable Conversion Price then
in effect, then the Variable Conversion Price shall be equal to such
price per share. For the purposes of the preceding sentence, the
"price per share for which Common Stock is issuable upon such
conversion or exchange" is determined by dividing (i) the total
amount, if any, received or receivable by the Borrower as
consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Borrower upon the conversion or
exchange thereof at the time such Convertible Securities first become
convertible or exchangeable, by (ii) the maximum total number of
shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities. No further adjustment to the Variable
Conversion Price will be made upon the actual issuance of such Common
Stock upon conversion or exchange of such Convertible Securities.
(E) PURCHASE RIGHTS. If, at any time when any Notes are issued
----------------
and outstanding, the Borrower issues any convertible securities or
rights to purchase stock, warrants, securities or other property (the
"PURCHASE RIGHTS") pro rata to the record holders of any class of
Common Stock, then the Holder of this Note will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such Holder could have acquired if
such Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Note (without regard to any
limitations on conversion contained herein) immediately before the
date on which a record is taken for the grant, issuance or sale of
such Purchase Rights or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights.
(F) NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment
---------------------
or readjustment of the Conversion Price as a result of the events
described in this Section 1.6, the Borrower, at its expense, shall
promptly compute such adjustment or readjustment and prepare and
furnish to the Holder of a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Borrower shall, upon the
written request at any time of the Holder, furnish to such Holder a
like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price at the time in effect and (iii) the number
of shares of Common Stock and the amount, if any, of other securities
or property which at the time would be received upon conversion of the
Note.
1.7 RESERVED
--------
1.8 STATUS AS SHAREHOLDER. Upon submission of a Notice of Conversion
----------------------
by a Holder, (i) the shares covered thereby (other than the shares, if any,
which cannot be issued because their issuance would exceed such Holder's
allocated portion of the Reserved Amount or Maximum Share Amount) shall be
deemed converted into shares of Common Stock and (ii) the Holder's rights
as a Holder of such converted portion of this Note shall cease and
terminate, excepting only the right to receive certificates for such shares
of Common Stock and to any remedies provided herein or otherwise available
at law or in equity to such Holder because of a failure by the Borrower to
comply with the terms of this Note. Notwithstanding the foregoing, if a
Holder has not received certificates for all shares of Common Stock prior
to the tenth (10th) business day after the expiration of the Deadline with
respect to a conversion of any portion of this Note for any reason, then
(unless the Holder otherwise elects to retain its status as a holder of
Common Stock by so notifying the Borrower) the Holder shall regain the
rights of a Holder of this Note with respect to such unconverted portions
of this Note and the Borrower shall, as soon as practicable, return such
unconverted Note to the Holder or, if the Note has not been surrendered,
adjust its records to reflect that such portion of this Note has not been
converted. In all cases, the Holder shall retain all of its rights and
remedies (including, without limitation, (i) the right to receive
Conversion Default Payments pursuant to Section 1.3 to the extent required
thereby for such Conversion Default and any subsequent Conversion Default
and (ii) the right to have the Conversion Price with respect to subsequent
conversions determined in accordance with Section 1.3) for the Borrower's
failure to convert this Note.
ARTICLE II. CERTAIN COVENANTS
2.1 DISTRIBUTIONS ON CAPITAL STOCK. So long as the Borrower shall have
------------------------------
any obligation under this Note, the Borrower shall not without the Holder's
written consent (a) pay, declare or set apart for such payment, any
dividend or other distribution (whether in cash, property or other
securities) on shares of capital stock other than dividends on shares of
Common Stock solely in the form of additional shares of Common Stock or (b)
directly or indirectly or through any subsidiary make any other payment or
distribution in respect of its capital stock except for distributions
pursuant to any shareholders' rights plan which is approved by a majority
of the Borrower's disinterested directors.
2.2 RESTRICTION ON STOCK REPURCHASES. So long as the Borrower shall
----------------------------------
have any obligation under this Note, the Borrower shall not without the
Holder's written consent redeem, repurchase or otherwise acquire (whether
for cash or in exchange for property or other securities or otherwise) in
any one transaction or series of related transactions any shares of capital
stock of the Borrower or any warrants, rights or options to purchase or
acquire any such shares.
2.3 BORROWINGS. So long as the Borrower shall have any obligation
----------
under this Note, the Borrower shall not, without the Holder's written
consent, create, incur, assume or suffer to exist any liability for
borrowed money, except (a) borrowings in existence or committed on the date
hereof and of which the Borrower has informed Holder in writing prior to
the date hereof, (b) indebtedness to trade creditors or financial
institutions incurred in the ordinary course of business or (c) borrowings,
the proceeds of which shall be used to repay this Note.
2.4 SALE OF ASSETS. So long as the Borrower shall have any obligation
--------------
under this Note, the Borrower shall not, without the Holder's written
consent, sell, lease or otherwise dispose of any significant portion of its
assets outside the ordinary course of business. Any consent to the
disposition of any assets may be conditioned on a specified use of the
proceeds of disposition.
2.5 ADVANCES AND LOANS. So long as the Borrower shall have any
--------------------
obligation under this Note, the Borrower shall not, without the Holder's
written consent, lend money, give credit or make advances to any person,
firm, joint venture or corporation, including, without limitation,
officers, directors, employees, subsidiaries and affiliates of the
Borrower, except loans, credits or advances (a) in existence or committed
on the date hereof and which the Borrower has informed Holder in writing
prior to the date hereof, (b) made in the ordinary course of business or
(c) not in excess of $100,000.
2.6 CONTINGENT LIABILITIES. So long as the Borrower shall have any
-----------------------
obligation under this Note, the Borrower shall not, without the Holder's
written consent, which shall not be unreasonably withheld, assume,
guarantee, endorse, contingently agree to purchase or otherwise become
liable upon the obligation of any person, firm, partnership, joint venture
or corporation, except by the endorsement of negotiable instruments for
deposit or collection and except assumptions, guarantees, endorsements and
contingencies (a) in existence or committed on the date hereof and which
the Borrower has informed Holder in writing prior to the date hereof, and
(b) similar transactions in the ordinary course of business.
ARTICLE III. EVENTS OF DEFAULT
If any of the following events of default (each, an "EVENT OF
DEFAULT") shall occur:
3.1 FAILURE TO PAY PRINCIPAL OR INTEREST. The Borrower fails to pay
--------------------------------------
the principal hereof or interest thereon when due on this Note, whether at
maturity, upon a Trading Market Prepayment Event pursuant to Section 1.7,
upon acceleration or otherwise;
3.2 CONVERSION AND THE SHARES. The Borrower fails to issue shares of
--------------------------
Common Stock to the Holder (or announces or threatens that it will not
honor its obligation to do so) upon exercise by the Holder of the
conversion rights of the Holder in accordance with the terms of this Note,
fails to transfer or cause its transfer agent to transfer (electronically
or in certificated form) any certificate for shares of Common Stock issued
to the Holder upon conversion of or otherwise pursuant to this Note as and
when required by this Note or the Registration Rights Agreement, or fails
to remove any restrictive legend (or to withdraw any stop transfer
instructions in respect thereof) on any certificate for any shares of
Common Stock issued to the Holder upon conversion of or otherwise pursuant
to this Note as and when required by this Note or the Registration Rights
Agreement (or makes any announcement, statement or threat that it does not
intend to honor the obligations described in this paragraph) and any such
failure shall continue uncured (or any announcement, statement or threat
not to honor its obligations shall not be rescinded in writing) for three
(3) business days after the Borrower shall have received a conversion
request by the Holder;
3.3 FAILURE TO TIMELY FILE REGISTRATION OR EFFECT REGISTRATION. The
------------------------------------------------------------
Borrower fails to file the Registration Statement within sixty (60) days
following the Closing Date (as defined in the Purchase Agreement) or obtain
effectiveness with the Securities and Exchange Commission of the
Registration Statement within one hundred forty-five (145) days following
the Closing Date (as defined in the Purchase Agreement) or such
Registration Statement lapses in effect (or sales cannot otherwise be made
thereunder effective, whether by reason of the Borrower's failure to amend
or supplement the prospectus included therein in accordance with the
Registration Rights Agreement or otherwise) for more than ten (10)
consecutive days or twenty (20) days in any twelve month period after the
Registration Statement becomes effective;
3.4 BREACH OF COVENANTS. The Borrower breaches any material covenant
--------------------
or other material term or condition contained in Sections 1.3, 1.6 or 1.7
of this Note, or Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the Purchase
Agreement and such breach continues for a period of ten (10) days after
written notice thereof to the Borrower from the Holder;
3.5 BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation or
------------------------------------------
warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Purchase Agreement and the Registration
Rights Agreement), shall be false or misleading in any material respect
when made and the breach of which has (or with the passage of time will
have) a material adverse effect on the rights of the Holder with respect to
this Note, the Purchase Agreement or the Registration Rights Agreement;
3.6 RECEIVER OR TRUSTEE. The Borrower or any subsidiary of the
---------------------
Borrower shall make an assignment for the benefit of creditors, or apply
for or consent to the appointment of a receiver or trustee for it or for a
substantial part of its property or business, or such a receiver or trustee
shall otherwise be appointed;
3.7 JUDGMENTS. Any money judgment, writ or similar process shall be
---------
entered or filed against the Borrower or any subsidiary of the Borrower or
any of its property or other assets for more than $100,000, and shall
remain unvacated, unbonded or unstayed for a period of twenty (20) days
unless otherwise consented to by the Holder, which consent will not be
unreasonably withheld;
3.8 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
----------
proceedings or other proceedings for relief under any bankruptcy law or any
law for the relief of debtors shall be instituted by or against the
Borrower or any subsidiary of the Borrower, unless such proceeding shall be
stayed within thirty (30) days;
3.9 LISTING OF COMMON STOCK. The Borrower shall fail to maintain the
------------------------
listing of the Common Stock on at least one of the OTCBB or an equivalent
replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap
Market, the New York Stock Exchange, or the American Stock Exchange within
180 days from the date of Closing; or
3.10 DEFAULT UNDER OTHER NOTES. An Event of Default has occurred and
--------------------------
is continuing under any of the other Notes issued pursuant to the Purchase
Agreement,
then, upon the occurrence and during the continuation of any Event of
Default specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at
the option of the Holders of a majority of the aggregate principal amount
of the outstanding Notes issued pursuant to the Purchase Agreement
exercisable through the delivery of written notice to the Borrower by such
Holders (the "DEFAULT NOTICE"), and upon the occurrence of an Event of
Default specified in Section 3.6 or 3.8 (unless, under Section 3.8, such
proceeding shall be stayed within 30 days), the Notes shall become
immediately due and payable and the Borrower shall pay to the Holder, in
full satisfaction of its obligations hereunder, an amount equal to the
greater of (i) 130% times the sum of (w) the then outstanding principal
----- ---
amount of this Note plus (x) accrued and unpaid interest on the unpaid
----
principal amount of this Note to the date of payment (the "MANDATORY
PREPAYMENT DATE") plus (y) Default Interest, if any, on the amounts
----
referred to in clauses (w) and/or (x) plus (z) any amounts owed to the
----
Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section
2(c) of the Registration Rights Agreement (the then outstanding principal
amount of this Note to the date of payment plus the amounts referred to in
----
clauses (x), (y) and (z) shall collectively be known as the "DEFAULT SUM")
or (ii) the "parity value" of the Default Sum to be prepaid, where parity
value means (a) the highest number of shares of Common Stock issuable upon
conversion of or otherwise pursuant to such Default Sum in accordance with
Article I, treating the Trading Day immediately preceding the Mandatory
Prepayment Date as the "Conversion Date" for purposes of determining the
lowest applicable Conversion Price, unless the Default Event arises as a
result of a breach in respect of a specific Conversion Date in which case
such Conversion Date shall be the Conversion Date), multiplied by (b) the
-------------
highest Closing Price for the Common Stock during the period beginning on
the date of first occurrence of the Event of Default and ending one day
prior to the Mandatory Prepayment Date (the "DEFAULT AMOUNT") and 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, legal fees
and expenses, of collection, and the Holder shall be entitled to exercise
all other rights and remedies available at law or in equity. If the
Borrower fails to pay the Default Amount within five (5) business days of
written notice that such amount is due and payable, then the Holder shall
have the right at any time, so long as the Borrower remains in default (and
so long and to the extent that there are sufficient authorized shares), to
require the Borrower, upon written notice, to immediately issue, in lieu of
the Default Amount, the number of shares of Common Stock of the Borrower
equal to the Default Amount divided by the Conversion Price then in effect.
ARTICLE IV. MISCELLANEOUS
4.1 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part
--------------------------------
of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise
of any such power, right or privilege preclude other or further exercise
thereof or of any other right, power or privileges. All rights and remedies
existing hereunder are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
4.2 NOTICES. Any notice herein required or permitted to be given shall
-------
be in writing and may be personally served or delivered by courier or sent
by United States mail and shall be deemed to have been given upon receipt
if personally served (which shall include telephone line facsimile
transmission) or sent by courier or three (3) days after being deposited in
the United States mail, certified, with postage pre-paid and properly
addressed, if sent by mail. For the purposes hereof, the address of the
Holder shall be as shown on the records of the Borrower; and the address of
the Borrower shall be 12926 Willowchase Drive, Houston, TX 77070, facsimile
number: (281). Both the Holder and the Borrower may change the address for
service by service of written notice to the other as herein provided.
4.3 AMENDMENTS. This Note and any provision hereof may only be amended
----------
by an instrument in writing signed by the Borrower and the Holder. The term
"Note" and all reference thereto, as used throughout this instrument, shall
mean this instrument (and the other Notes issued pursuant to the Purchase
Agreement) as originally executed, or if later amended or supplemented,
then as so amended or supplemented.
4.4 ASSIGNABILITY. This Note shall be binding upon the Borrower and
-------------
its successors and assigns, and shall inure to be the benefit of the Holder
and its successors and assigns. Each transferee of this Note must be an
"accredited investor" (as defined in Rule 501(a) of the 1933 Act).
Notwithstanding anything in this Note to the contrary, this Note may be
pledged as collateral in connection with a bona fide margin account or
other lending arrangement. ---- ----
4.5 COST OF COLLECTION. If default is made in the payment of this
--------------------
Note, the Borrower shall pay the Holder hereof costs of collection,
including reasonable attorneys' fees.
4.6 GOVERNING LAW. THIS NOTE SHALL BE ENFORCED, GOVERNED BY AND
--------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE
TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT
REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE BORROWER HEREBY SUBMITS
TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED
IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS NOTE,
THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE
OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING.
BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY
FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF
PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL
AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED
BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH
SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER
JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE
PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS NOTE SHALL
BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES,
INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.
4.7 CERTAIN AMOUNTS. Whenever pursuant to this Note the Borrower is
----------------
required to pay an amount in excess of the outstanding principal amount (or
the portion thereof required to be paid at that time) plus accrued and
unpaid interest plus Default Interest on such interest, the Borrower and
the Holder agree that the actual damages to the Holder from the receipt of
cash payment on this Note may be difficult to determine and the amount to
be so paid by the Borrower represents stipulated damages and not a penalty
and is intended to compensate the Holder in part for loss of the
opportunity to convert this Note and to earn a return from the sale of
shares of Common Stock acquired upon conversion of this Note at a price in
excess of the price paid for such shares pursuant to this Note. The
Borrower and the Holder hereby agree that such amount of stipulated damages
is not plainly disproportionate to the possible loss to the Holder from the
receipt of a cash payment without the opportunity to convert this Note into
shares of Common Stock.
4.8 ALLOCATIONS OF MAXIMUM SHARE AMOUNT AND RESERVED AMOUNT. The
------------------------------------------------------------
Maximum Share Amount and Reserved Amount shall be allocated pro rata among
the Holders of Notes based on the principal amount of such Notes issued to
each Holder. Each increase to the Maximum Share Amount and Reserved Amount
shall be allocated pro rata among the Holders of Notes based on the
principal amount of such Notes held by each Holder at the time of the
increase in the Maximum Share Amount or Reserved Amount. In the event a
Holder shall sell or otherwise transfer any of such Holder's Notes, each
transferee shall be allocated a pro rata portion of such transferor's
Maximum Share Amount and Reserved Amount. Any portion of the Maximum Share
Amount or Reserved Amount which remains allocated to any person or entity
which does not hold any Notes shall be allocated to the remaining Holders
of Notes, pro rata based on the principal amount of such Notes then held by
such Holders.
4.9 DAMAGES SHARES. The shares of Common Stock that may be issuable to
--------------
the Holder pursuant to Sections 1.3 and 1.4(g) hereof and pursuant to
Section 2(c) of the Registration Rights Agreement ("DAMAGES SHARES") shall
be treated as Common Stock issuable upon conversion of this Note for all
purposes hereof and shall be subject to all of the limitations and afforded
all of the rights of the other shares of Common Stock issuable hereunder,
including without limitation, the right to be included in the Registration
Statement filed pursuant to the Registration Rights Agreement. For purposes
of calculating interest payable on the outstanding principal amount hereof,
except as otherwise provided herein, amounts convertible into Damages
Shares ("DAMAGES AMOUNTS") shall not bear interest but must be converted
prior to the conversion of any outstanding principal amount hereof, until
the outstanding Damages Amounts is zero.
4.10 DENOMINATIONS. At the request of the Holder, upon surrender of
-------------
this Note, the Borrower shall promptly issue new Notes in the aggregate
outstanding principal amount hereof, in the form hereof, in such
denominations of at least $50,000 as the Holder shall request.
4.11 PURCHASE AGREEMENT. By its acceptance of this Note, each Holder
-------------------
agrees to be bound by the applicable terms of the Purchase Agreement.
4.12 NOTICE OF CORPORATE EVENTS. Except as otherwise provided below,
---------------------------
the Holder of this Note shall have no rights as a Holder of Common Stock
unless and only to the extent that it converts this Note into Common Stock.
The Borrower shall provide the Holder with prior notification of any
meeting of the Borrower's shareholders (and copies of proxy materials and
other information sent to shareholders). In the event of any taking by the
Borrower of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation, reclassification or
recapitalization) any share of any class or any other securities or
property, or to receive any other right, or for the purpose of determining
shareholders who are entitled to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the
Borrower or any proposed liquidation, dissolution or winding up of the
Borrower, the Borrower shall mail a notice to the Holder, at least twenty
(20) days prior to the record date specified therein (or thirty (30) days
prior to the consummation of the transaction or event, whichever is
earlier), of the date on which any such record is to be taken for the
purpose of such dividend, distribution, right or other event, and a brief
statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time. The
Borrower shall make a public announcement of any event requiring
notification to the Holder hereunder substantially simultaneously with the
notification to the Holder in accordance with the terms of this Section
4.12.
4.13 REMEDIES. The Borrower acknowledges that a breach by it of its
--------
obligations hereunder will cause irreparable harm to the Holder, by
vitiating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Borrower acknowledges that the remedy at law for a breach
of its obligations under this Note will be inadequate and agrees, in the
event of a breach or threatened breach by the Borrower of the provisions of
this Note, that the Holder shall be entitled, in addition to all other
available remedies at law or in equity, and in addition to the penalties
assessable herein, to an injunction or injunctions restraining, preventing
or curing any breach of this Note and to enforce specifically the terms and
provisions thereof, without the necessity of showing economic loss and
without any bond or other security being required.
ARTICLE V. CALL OPTION
5.1 CALL OPTION. Notwithstanding anything to the contrary contained in
-----------
this Article V, so long as no Event of Default or Trading Market Prepayment
Event shall have occurred and be continuing, the Borrower has a sufficient
number of authorized shares of Common Stock reserved for issuance upon full
conversion of the Notes, then at any time after the Issue Date, and the
Common Stock is trading at or below $.20 per share, the Borrower shall have
the right, exercisable on not less than ten (10) Trading Days prior written
notice to the Holders of the Notes (which notice may not be sent to the
Holders of the Notes until the Borrower is permitted to prepay the Notes
pursuant to this Section 5.1), to prepay all of the outstanding Notes in
accordance with this Section 5.1. Any notice of prepayment hereunder (an
"OPTIONAL PREPAYMENT") shall be delivered to the Holders of the Notes at
their registered addresses appearing on the books and records of the
Borrower and shall state (1) that the Borrower is exercising its right to
prepay all of the Notes issued on the Issue Date and (2) the date of
prepayment (the "OPTIONAL PREPAYMENT NOTICE"). On the date fixed for
prepayment (the "OPTIONAL PREPAYMENT DATE"), the Borrower shall make
payment of the Optional Prepayment Amount (as defined below) to or upon the
order of the Holders as specified by the Holders in writing to the Borrower
at least one (1) business day prior to the Optional Prepayment Date. If the
Borrower exercises its right to prepay the Notes, the Borrower shall make
payment to the holders of an amount in cash (the "OPTIONAL PREPAYMENT
AMOUNT") equal to either (i) 120% (for prepayments occurring within 180
(180) days of the Issue Date), (ii) 130% for prepayments occurring between
one hundred and eighty-one (181) and three hundred and sixty (360) days of
the Issue Date, or (iii) 140% (for prepayments occurring after the three
hundred and sixtieth (360th) day following the Issue Date), multiplied by
the sum of (w) the then outstanding principal amount of this Note plus (x)
----
accrued and unpaid interest on the unpaid principal amount of this Note to
the Optional Prepayment Date plus (y) Default Interest, if any, on the
----
amounts referred to in clauses (w) and (x) plus (z) any amounts owed to the
----
Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section
2(c) of the Registration Rights Agreement (the then outstanding principal
amount of this Note to the date of payment plus the amounts referred to in
----
clauses (x), (y) and (z) shall collectively be known as the "OPTIONAL
PREPAYMENT SUM"). Notwithstanding notice of an Optional Prepayment, the
Holders shall at all times prior to the Optional Prepayment Date maintain
the right to convert all or any portion of the Notes in accordance with
Article I and any portion of Notes so converted after receipt of an
Optional Prepayment Notice and prior to the Optional Prepayment Date set
forth in such notice and payment of the aggregate Optional Prepayment
Amount shall be deducted from the principal amount of Notes which are
otherwise subject to prepayment pursuant to such notice. If the Borrower
delivers an Optional Prepayment Notice and fails to pay the Optional
Prepayment Amount due to the Holders of the Notes within two (2) business
days following the Optional Prepayment Date, the Borrower shall forever
forfeit its right to redeem the Notes pursuant to this Section 5.1.
5.2 PARTIAL CALL OPTION. Notwithstanding anything to the contrary
---------------------
contained in this Article V, in the event that the Average Daily Price of
the Common Stock, as reported by the Reporting Service, for each day of the
month ending on any Determination Date is below the Initial Market Price,
the Borrower may, at its option, prepay a portion of the outstanding
principal amount of the Notes equal to 101% of the principal amount hereof
divided by thirty-six (36) plus one month's interest and will stay all
conversions for that month. The term "INITIAL MARKET PRICE" shall mean the
volume weighted average price of the Common Stock for the five (5) Trading
Days immediately preceding the Closing which is $.20.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name
by its duly authorized officer this 30th day of May, 2006.
PEDIATRIC PROSTHETICS, INC.
By: /s/ Linda Putback-Bean
--------------------------
Linda Putback-Bean
Chief Executive Officer
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Notes)
The undersigned hereby irrevocably elects to convert $__________ principal
amount of the Note (defined below) into shares of common stock, par value $.001
per share ("COMMON STOCK"), of Pediatric Prosthetics, Inc., an Idaho corporation
(the "BORROWER") according to the conditions of the convertible Notes of the
Borrower dated as of May 30, 2006 (the "NOTES"), as of the date written below.
If securities are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates. No fee will be charged to
the Holder for any conversion, except for transfer taxes, if any. A copy of each
Note is attached hereto (or evidence of loss, theft or destruction thereof).
The Borrower shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee with DTC through its Deposit Withdrawal Agent Commission system ("DWAC
TRANSFER").
Name of DTC Prime Broker:
------------------------------
Account Number:
-------------------------------------------
In lieu of receiving shares of Common Stock issuable pursuant to this
Notice of Conversion by way of a DWAC Transfer, the undersigned hereby requests
that the Borrower issue a certificate or certificates for the number of shares
of Common Stock set forth below (which numbers are based on the Holder's
calculation attached hereto) in the name(s) specified immediately below or, if
additional space is necessary, on an attachment hereto:
Name:
-------------------------------------------
Address:
----------------------------------------
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Notes shall be made pursuant to registration of the securities under the
Securities Act of 1933, as amended (the "ACT"), or pursuant to an exemption from
registration under the Act.
Date of Conversion:
------------------------------------
Applicable Conversion Price:
---------------------------
Number of Shares of Common Stock to be Issued Pursuant to
Conversion of the Notes:
------------------------------
Signature:
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Name:
----------------------------------------------------
Address:
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The Borrower shall issue and deliver shares of Common Stock to an overnight
courier not later than three business days following receipt of the original
Note(s) to be converted, and shall make payments pursuant to the Notes for the
number of business days such issuance and delivery is late.