Exhibit 10.6
THE SECURITIES REPRESENTED BY THIS
NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR
DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT OF 1933.
SUBORDINATED
CONVERTIBLE
NOTE
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$2,000,000.00
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February 16, 2005
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Seattle, Washington
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FOR VALUE RECEIVED, PhotoWorks,
Inc., a Washington corporation (“ Payor ”),
promises to pay to the order of Sunra Capital Holdings, Ltd. or its
assigns (“ Holder ”) the principal sum of
$2,000,000.00 (Two Million Dollars), with interest on the
outstanding principal amount at the rate of 6% per annum (computed
on the basis of a 360-day year of twelve 30-day months). Interest
shall accrue from the date the advance is first made and continue
to accrue on the outstanding principal amount until paid in full or
this Note is converted in accordance with Section 3 hereof.
Commencing June 30, 2005, accrued interest shall be payable
quarterly on the last business day of the months of March, June,
September and December. Interest and principal shall be payable at
such address as Holder shall specify by written notice or in the
absence of such notice at the address set forth for Holder in
Section 11 hereof.
1. Note. This
Subordinated Convertible Note (this “ Note ”) is
issued pursuant to the terms of that certain Convertible Note,
Warrant and Common Stock Purchase Agreement, dated as of
February 16, 2005 (the “ Purchase Agreement
”), among Payor and the purchasers named therein. Unless
defined herein, all capitalized terms in this Note shall have the
meaning ascribed to them in the Purchase Agreement.
(a) Form of Payment. All
payments of interest and principal shall be in lawful money of the
United States of America in immediately available funds. All
payments shall be applied first to accrued interest, and thereafter
to principal.
(b) Scheduled Payment . The
unpaid principal balance and all accrued interest shall be due and
payable on April 30, 2008 (the “
Maturity Date ” ) unless converted
earlier pursuant to Section 3 hereof.
(c) Prepayment. Principal and
accrued interest on this Note may be repaid, in whole or in part,
at any time following thirty (30) days’ written notice
to Holder, but only with the written consent of Holder and only to
the extent this Note is not converted prior to such payment.
Neither all nor any portion of the outstanding principal amount of
this Note shall be repaid unless simultaneously therewith an equal
percentage of the outstanding principal amount of all other
outstanding Notes issued pursuant to the Purchase Agreement, if
any, is also prepaid (except Notes as to which the then holder
shall have refused to give such consent to repayment).
(a)
Automatic Conversion.
In the event that the
Recapitalization Proposal (as such term is defined in the Purchase
Agreement) is approved (the “ Shareholder Approval
”) by Holders of the requisite number of shares of Common
Stock of Payor (the “ Common Stock ”), then, on
the date of the Second Closing (as defined in the Purchase
Agreement), all of the outstanding principal balance and interest
on this Note shall automatically convert into such number of fully
paid and nonassessable shares of Common Stock as is obtained by
dividing (A) the aggregate outstanding principal balance and
interest of this Note as of the date of conversion by (B) the
applicable Conversion Price (as determined pursuant to
Section 6 hereof) (such shares and the shares issuable
pursuant to Section 3(c) hereof are hereinafter referred to
collectively as the “ Conversion Shares
”).
(b)
Issuance of Conversion Shares
Upon Automatic Conversion. In the event that Conversion Shares are to be
issued pursuant to Section 3(a) hereof, Payor shall deliver to
Holder as soon as practicable following the effective date of the
Shareholder Approval a written notice of the automatic conversion
of this Note (the “ Automatic Conversion Notice
”). At the Second Closing (as defined in the Purchase
Agreement), Holder shall deliver to Payor this Note in its original
form duly endorsed for cancellation (or an affidavit in a form
reasonably satisfactory to counsel to Payor that the original copy
of this Note has been lost or destroyed), and Payor shall issue and
deliver to Holder a certificate or certificates, registered in
Holder’s name, for the Conversion Shares (bearing such
legends as are required by applicable state and federal securities
laws in the reasonable opinion of counsel to Payor). The conversion
of the principal balance and accrued interest pursuant to
Section 3(a) shall be deemed to have been made on the
effective date of the Second Closing and Holder shall be treated
for all purposes as the record holder of the Conversion Shares as
of such date.
(c)
Holder Voluntary
Conversion. Holder may,
in its sole discretion, at any time elect to convert all of the
outstanding principal balance and interest on this Note into such
number of shares of Common Stock as is obtained by dividing
(A) the aggregate outstanding principal balance and interest
of this Note as of the date of conversion by (B) the
applicable Conversion Price (as determined pursuant to
Section 6 hereof).
(d)
Issuance of Conversion Shares
Upon Voluntary Conversion. To convert the principal balance and accrued
interest hereunder into shares of Common Stock pursuant to
Section 3(c), Holder shall deliver to Payor a written notice
of election to exercise Holder’s voluntary conversion rights
(the “ Voluntary Conversion Notice ”) and this
Note in its original form duly endorsed for cancellation (or an
affidavit in a form reasonably satisfactory to counsel to Payor
that the original copy of this Note has been lost or destroyed).
Payor shall, as soon as practicable thereafter, issue and deliver
to Holder a certificate or certificates, registered in
Holder’s name, for the Conversion Shares (bearing such
legends as are required by the Purchase Agreement). The conversion
of the principal balance and accrued interest pursuant to
Section 3(c) shall be deemed to have been made on the date
that Payor actually receives the Voluntary Conversion Notice and
Holder shall be treated for all purposes as the record holder of
the Conversion Shares as of such date.
(e)
Fractional Shares.
Payor shall not issue fractional
shares of Common Stock upon conversion of the principal balance and
accrued interest, and the number of shares of Common Stock to be
issued shall be rounded to the nearest whole share.
(f)
Effect of Conversion.
Upon full conversion of this Note
pursuant to the terms of this Section 3, Payor shall be
forever released from all its obligations and liabilities under
this Note other that the obligation to issue the certificates
representing the Conversion Shares pursuant to Sections 3(b)
and 3(d).
4. Events of Default. Payor shall give Holder prompt (within 24 hours)
written notice of any event that is or with notice or passage of
time would be an Event of Default hereunder. The occurrence of any
one or more of the following events (herein called “
Events of Default ”) shall constitute a default
hereunder and under the Purchase Agreement:
(a)
Payor defaults in the payment of any
principal, interest or other obligation involving the payment of
money under this Note and such default continues for more than
five (5) business days after the due date thereof;
or
(b)
Payor defaults in the performance of
any other covenant or obligation under this Note or the Purchase
Agreement, and such default continues for more than ten (10)
business days after Holder has given notice of such default to
Payor; or
(c)
Any representation or warranty made
in the Purchase Agreement by Payor shall prove to have been false
or misleading in any material respect as of the Initial Closing of
the Purchase Agreement; or
(d)
Payor or any of the Subsidiaries
defaults under any other agreement or instrument relating to
indebtedness of Payor or any Subsidiary for money borrowed or any
capital lease; or
(e)
Payor shall make an assignment for
the benefit of creditors, or shall admit in writing its inability
to pay its debts as they become due, or shall file a voluntary
petition in bankruptcy, or shall file any petition or answer
seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any
present or future bankruptcy or other statute, law or regulation,
or shall seek or consent to or acquiesce in the appointment of any
trustee, receiver, or liquidator of Payor or of all or any
substantial part (i.e., 33-1/3% or more) of the properties of
Payor; or Payor or its directors or majority shareholders shall
take any action initiating the dissolution or liquidation of Payor;
or
(f)
Sixty (60) days shall have
elapsed after the commencement of an action by or against Payor
seeking reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or
future bankruptcy or other statute, law or regulation, without such
action being dismissed or all orders or proceedings thereunder
affecting the operations or the business of Payor being stayed; or
a stay of any such order or proceedings shall thereafter be set
aside and the action setting it aside shall not be timely appealed;
or Payor shall file any answer admitti
