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.
-5-
“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.
-6-
(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.
-7-
(b)
Common Stock Issuance Upon
Conversion.
(i)
Conversion Procedures
. Upon any conversion of this Note pursuant to Section
3(a) above, the outstanding Principal Amount being converted and
accrued and unpaid interest thereon to the applicable Conversion
Date shall be converted into such number of fully paid, validly
issued and non-assessable shares of Commo
