5% CONVERTIBLE NOTE DUE 2009 OF BROADCAST INTERNATIONAL, INC

THIS NOTE AND THE SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT. SUCH SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT.

 

THIS NOTE DOES NOT REQUIRE PHYSICAL SURRENDER OF THIS NOTE IN THE EVENT OF A PARTIAL REDEMPTION, REPAYMENT OR CONVERSION. AS A RESULT, FOLLOWING ANY REDEMPTION, REPAYMENT OR CONVERSION OF ANY PORTION OF THIS NOTE, THE OUTSTANDING PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE MAY BE LESS THAN THE PRINCIPAL AMOUNT SET FORTH BELOW.

 

 

5% CONVERTIBLE NOTE DUE 2009

 

OF

 

BROADCAST INTERNATIONAL, INC.

 

 

Original Principal Amount:  $1,000,000

Issuance Date:  October 28, 2006                                                          Salt Lake City, Utah

 

 

FOR VALUE RECEIVED, the Company hereby promises to pay to or upon the order of Leon Frenkel, or his registered assigns or successors-in-interest (the “Holder”) the principal sum of One Million Dollars ($1,000,000.00), together with all accrued but unpaid interest thereon, if any, on the Final Maturity Date, to the extent such principal amount and interest have not been repaid or converted into shares of the Company’s Common Stock, $0.05 par value (the “Common Stock”), in accordance with the terms hereof.  Interest on the unpaid principal balance hereof shall accrue at the rate of 5% per annum from the date of original issuance hereof (the “Issuance Date”) until the Final Maturity Date, or such earlier date upon acceleration or by conversion, repayment or redemption in accordance with the terms hereof.  Interest on this Note shall accrue daily commencing on the Issuance Date, shall be compounded semi-annually and shall be computed on the basis of a 360-day year, 30-day months and actual

 

days elapsed and shall be payable in accordance with Section 2 hereof. Notwithstanding anything contained herein, this Note shall bear interest on the outstanding Principal Amount from and after the occurrence and during the continuance of an Event of Default, at the rate (the “Default Rate”) equal to the lower of eighteen percent (18%) per annum or the highest rate permitted by applicable law. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs, then to unpaid interest and fees and any remaining amount to unpaid principal.  

 

All payments of principal of and interest on this Note shall be made in lawful money of the United States of America 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. This Note may not be prepaid in whole or in part except as specifically provided herein. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a Business Day (as defined below), the same shall instead be due on the next succeeding day which is a Business Day and such extension shall be taken into account in determining the amount of interest accrued on this Note.

 

The following terms and conditions shall apply to this Note:

 

1.

Definitions.

 

(a)

Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Purchase Agreement.

 

(b)

For purposes hereof the following terms shall have the meanings ascribed to them below:

 

“Approved Market” means one of the OTC Bulletin Board, the Nasdaq Small Cap, the Nasdaq, the New York Stock Exchange or the American Stock Exchange.

 

“Bankruptcy Event” means any of the following events: (a) the Company or any material subsidiary commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any material subsidiary thereof; (b) there is commenced against the Company or any material subsidiary any such case or proceeding that is not dismissed within 60 days after commencement; (c) the Company or any material subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) the Company or any material subsidiary suffers any appointment of any trustee, custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 days; (e) the Company or any material subsidiary makes a general assignment for the benefit of creditors; (f) the Company or any material subsidiary fails to pay, states that it is unable to pay, or is unable to pay, its debts (excluding those reasonably disputed in good faith by the Company in the case of failure to pay and for which it has reserves on its books and financial statements) generally as they become due; (g) the Company or any material subsidiary calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (h) the Company or any

 

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material subsidiary, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.

 

“Board of Directors” means the Company’s board of directors.

 

“Cash” or “cash” means at any time such coin or currency of the United States of America as shall at such time be legal tender for the payment of public and private debts.

 

“Change in Control Transaction” will be deemed to exist if (i) there occurs any consolidation, merger, amalgamation or other business combination of the Company with or into any other corporation or other entity or person (whether or not the Company is the surviving corporation), or any other corporate reorganization or transaction or series of related transactions in which in any of such events the persons who are holders of the voting stock of the Company immediately prior to such event cease to own more than 50% of the voting stock, or corresponding voting equity interests, of the surviving corporation or other entity immediately after such event (including without limitation any “going private” transaction under Rule 13e-3 promulgated pursuant to the Exchange Act or tender offer by the Company under Rule 13e-4 promulgated pursuant to the Exchange Act for 20% or more of the Company’s Common Stock), (ii) any person (as defined in Section 13(d) of the Exchange Act), together with its affiliates and associates (as such terms are defined in Rule 405 under the Securities Act), beneficially owns or is deemed to beneficially own (as described in Rule 13d-3 under the Exchange Act without regard to the 60-day exercise period) 50% or more of the voting power of the Company’s voting stock or corresponding voting securities, (iii) there is a replacement of more than one-half of the members of the Board of Directors which is not approved by a majority of those individuals who are either members of the Board of Directors on the date thereof or individuals approved by a majority of such members or (iv) in one or a series of related transactions, there is a sale or transfer of all or substantially all of the assets of the Company, determined on a consolidated basis.

 

“Company Notice Date” shall have the meaning provided in Section 2(c).

 

 

“Company Prepayment Notice” shall have the meaning provided in Section 2(c).

 

“Conversion Date” shall have the meaning provided in Section 3(b).

 

“Conversion Delay Payments” shall have the meaning provided in Section 3(b)(ii).

 

“Conversion Notice” means either an Optional Conversion Notice or a Mandatory Conversion Notice.

 

“Conversion Price” means $1.50, subject to adjustment as set forth herein.

 

“Current Market Price” means when used with respect to the Common Stock as of a specified date with respect to each share of Common Stock: (i) if the principal trading market

 

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for such securities is a national or regional securities exchange, the closing price on such exchange on such day; or (ii) if sales prices for shares of Common Stock are reported by the NASDAQ National Market System (or a similar system then in use), the last reported sales price (regular way) so reported on such day; or (iii) if neither (i) nor (ii) above are applicable, and if bid and ask prices for shares of Common Stock are reported in the over-the-counter market by NASDAQ (or, if not so reported, by the Pink Sheets, LLC), the average of the high bid and low ask prices so reported on such day. Notwithstanding the foregoing, if there is no reported closing price, last reported sales price, or bid and ask prices, as the case may be, for the day in question, then the Current Market Price shall be determined as of the latest date prior to such day for which such closing price, last reported sales price, or bid and ask prices, as the case may be, are available, unless such securities have not been traded on an exchange or in the over-the-counter market for 5 or more days immediately prior to the day in question, in which case the Current Market Price shall be determined by an Independent Financial Expert (and the costs of such determination shall be bourne entirely by the Company). An “ Independent Financial Expert ” shall mean a reputable accounting, appraisal or investment banking firm that is, in the reasonable judgment of the Board of Directors, qualified to perform the task for which such firm has been engaged hereunder, is nationally recognized and disinterested and Independent with respect to the Company and its affiliates and is reasonably acceptable to the Holder. “ Independent ” shall mean any person or entity that (A) is in fact independent, (B) does not have any direct financial interest or any material indirect financial interest in the Company or any of its subsidiaries, or in any affiliate of the Company or any of its subsidiaries (other than as a result of holding securities of the Company in trading accounts), and (C) is not an officer, employee, promoter, trustee, partner, director or person performing similar functions for the Company or any of its subsidiaries or any affiliate of the Company or any of its subsidiaries .

 

“DTC” shall have the meaning provided in Section 3(b)(ii).

 

“Effective Registration” means (i) the Company has complied in all material respects with its obligations under all the Transaction Documents where the failure to comply by the Company would have a material adverse effect on the ability of the Holder to publicly resell the Underlying Shares or the Warrant Shares, and no Event of Default shall have occurred and be continuing; (ii) the resale of all Registrable Securities (as defined in the Registration Rights Agreement) is covered by an effective Registration Statement in accordance with the terms of the Registration Rights Agreement and such Registration Statement is not subject to any suspension or stop order and is expected to remain effective and available for use by the selling stockholders named therein or in any related prospectus supplement for at least 20 Trading Days thereafter; (iii) the resale of such Registrable Securities may be effected pursuant to a current and deliverable prospectus that is not subject to any blackout or similar circumstance; (iv) such Registrable Securities are listed, or approved for listing prior to issuance, on an Approved Market and are not subject to any trading suspension (nor shall trading generally have been suspended on such exchanges or markets), and the Company shall not have been notified of any pending or threatened proceeding or other action to delist or suspend the Common Stock on the Approved Market on which the Common Stock is then traded or listed; (v) the requisite number of shares of Common Stock shall have been duly authorized and shall be available for issuance as required by the terms of the Transaction Documents; (vi) the Holder is not identified as an underwriter in the Registration Statement; and (vii) the Company is not subject to any

 

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Bankruptcy Event.

 

“Event of Default” shall have the meaning provided in Section 4(a).

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

“Final Maturity Date” means October 16, 2009.

 

“Force Majeure Event” means an event or circumstance that prevents the Company from performing its obligations under this Note or that prevents an act or event required hereunder from happening or occurring (including, without limitation, an act of God, war, insurrection, riot, nuclear disaster, labor strike or threat of violence, labor and material shortage, fire, explosion, flood, river freeze-up, breakdown or damage to mines, plant, equipment, or facilities (including a forced outage or an extension of a scheduled outage of equipment or facilities to make repairs to avoid breakdowns thereof or damage thereto), interruption to or slowdown in transportation, railcar shortage, barge shortage, embargo, order, or act of civil or military authority, law, regulation, or administrative ruling, or total or partial interruption of the Company’s operations which are due to any enforcement action or other administrative or judicial action arising from an environmental law or regulation), but in any case which is not within the reasonable control of, or the result of the negligence of, the Company, and which by the exercise of due diligence, the Company is unable to overcome or avoid or cause to be avoided or is unable in good faith to obtain a substitute acceptable to the Holder therefor.

 

“Holder Share Notice” shall have the meaning provided in Section 3(b)(ii).

 

“Mandatory Conversion Notice” shall have the meaning provided in Section 3(a).

 

“Optional Conversion Notice” shall have the meaning provided in Section 3(a).

 

 

“PIK Interest” shall have the meaning provided in Section 2(a).

 

“PIK Interest Notice” shall have the meaning provided in Section 2(a).

 

 

“PIK Interest Price” means 0.85 multiplied by the daily volume weighted average price of the Common Stock for the ten (10) Trading Days immediately preceding (but not including) the applicable Interest Payment Date, as reported by Bloomberg Financial Markets using the VAP function.

 

“PIK Interest Shares” shall have the meaning provided in Section 2(a).

 

 

“Principal Amount” means at any time the sum of (i) the outstanding principal amount of this Note at such time, (ii) all accrued but unpaid interest hereunder to such time, and (iii) any default payments owing at such time to the Holder under the Transaction Documents but not theretofore paid or added to the Principal Amount.

 

 

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“Principal Market” means the OTC Bulletin Board or such other U.S. market or exchange which is the principal market on which the Common Stock is then listed for trading.

 

“Purchase Agreement” means the Securities Purchase Agreement, dated as of October 28, 2006, by and among the Company and the Purchaser named therein, pursuant to which this Note was originally issued.

 

“QIB” means a qualified institutional buyer as defined in Rule 144A.

 

“Rule 144A” means Rule 144A as promulgated by the SEC under the Securities Act or any successor thereto.

 

“SEC” means the United States Securities and Exchange Commission.

 

 

“Securities Act” means the Securities Act of 1933, as amended.

 

“Trading Day” means a day on which the Principal Market is open for the general trading of securities.

 

“Underlying Shares” means the shares of Common Stock issued or issuable upon conversion of, in lieu of cash payment of principal of, or interest on, as repayment of principal under, or otherwise pursuant to, this Note in accordance with the terms hereof and the Purchase Agreement.

 

Section 2.

Payments of Principal and Interest.

(a)

Interest. The Company shall pay interest accruing on this Note (from October 17, 2006) on all principal outstanding at the Interest Rate, semi-annually on the Interest Payment Dates, commencing on April 17, 2007, in cash or the Company may pay such interest, at the Company’s option, (i) in fully paid and nonassessable shares of Common Stock (such interest paid in such form being herein called “PIK Interest”) or (ii) in cash. PIK Interest shall be paid by delivering to the Holder a number of shares of Common Stock (“PIK Interest Shares”) determined by dividing (x) the total aggregate dollar amount of interest due on the applicable Interest Payment Date (rounded to the nearest whole cent) by (y) the applicable PIK Interest Price. In order to deliver PIK Interest Shares in lieu of cash on an Interest Payment Date, the Company must deliver, on or before the due date, written notice to the Holder stating that the Company wishes to do so (a “PIK Interest Notice”); in the event that the Company does not deliver a PIK Interest Notice on or before such date, the Company will be deemed to have elected to pay the related interest in cash. If the Company wishes to deliver PIK Interest Shares in lieu of cash with respect to accrued interest, it must do so with respect to all (but not less than all) of such interest. A PIK Interest Notice, once delivered by the Company, shall be irrevocable unless there is not Effective Registration on the applicable Interest Payment Date, in which case such notice may be revoked at the option the Holder and the interest to which such notice relates shall be payable in cash on the Interest Payment Date. The Company shall not issue fractional shares of Common Stock to which the Holder may become entitled pursuant to this subparagraph, but in lieu thereof, the Company shall round the number of shares to be issued up to the next whole number.

 

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(b)

Principal. The entire Principal Amount of this Note, plus any and all default payments owing under the Transaction Documents but not previously paid, shall become due and payable on the Final Maturity Date. Any principal of this Note that is converted pursuant to Section 3 shall be applied to reduce the principal payable under this Section 2(b).

 

(c)

Prepayment.  At any time following the first anniversary of the Issuance Date, upon delivery of a written notice to the Holder (a “Company Prepayment Notice” and the date such notice is delivered by the Company, the “Company Notice Date”), the Company shall be entitled to prepay all or any portion of the outstanding Principal Amount of this Note, plus any accrued and unpaid interest thereon. Notwithstanding the foregoing, the Company shall be entitled to deliver a Company Prepayment Notice and prepay this Note pursuant to the terms of this subsection (c) only if (i) there is Effective Registration on the Company Notice Date and it is expected that Effective Registration will continue for at least 20 Trading Days after the Company Notice Date, and (ii) conversion by the Holder pursuant to Section 3 of the portion of this Note that is being prepaid would not cause the Holder’s beneficial ownership of shares of Common Stock to exceed the limits set forth in Section 3.12 of the Purchase Agreement.  The Holder may, within ten Trading Days of its receipt of the Company Prepayment Notice, convert pursuant to Section 3, at the then effective Conversion Price, any portion of the outstanding principal amount of this Note being prepaid and any accrued and unpaid interest thereon subject to the Company Prepayment Notice.

 

Section 3.

Conversion.

(a)

Conversion Rights.  Upon the terms and subject to the conditions hereof, the Holder shall have the right, at the Holder’s option, to convert the outstanding Principal Amount and accrued and unpaid interest thereon into Common Stock, in whole at any time or in part from time to time, by delivering to the Company a duly executed notice of conversion in the form attached hereto as Exhibit A (the “Optional Conversion Notice”), which may be transmitted by telephone line facsimile transmission. In addition, upon written notice by the Company to the Holder (the “Mandatory Conversion Notice”), the Company may cause the Holder to convert all (but not less than all) of the outstanding Principal Amount and accrued and unpaid interest thereon into Common Stock, if (and only if) (i) there is Effective Registration on the date that the Holder receives the Mandatory Conversion Notice, (ii) the closing price of the Common Stock exceeded 200% of the Conversion Price then in effect for any 20 out of 30 consecutive Trading Days immediately preceding (but not including) the date that the Holder receives the Mandatory Conversion Notice, and (iii) the average daily trading volume for the Common Stock during the 20 consecutive Trading Days immediately preceding (but not including) the date that the Holder receives the Mandatory Conversion Notice exceeded 100,000 shares.  Notwithstanding anything to the contrary herein, this Note and the outstanding Principal Amount hereunder shall not be convertible into Common Stock at any time to the extent, and only to the extent, that such conversion at such time would result in the Holder exceeding the limitation contained in, or otherwise violating the provisions of, Section 3.12 of the Securities Purchase Agreement.

 

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(b)

Common Stock Issuance Upon Conversion.

(i)

Conversion Procedures. Upon any conversion of this Note pursuant to Section 3(a) above, the outstanding Principal Amou