KENTUCKY USA ENERGY, INC. 8% SENIOR CONVERTIBLE NOTEConvertible Promissory Note |
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EXHIBIT
10.2
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY
ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A
UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES. ANY
TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS
NOTE, INCLUDING SECTIONS 3(c)(iii) AND 18(a) HEREOF. THE
PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE
SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE
AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii)
OF THIS NOTE.
KENTUCKY USA ENERGY, INC.
8% SENIOR CONVERTIBLE NOTE
FOR
VALUE RECEIVED, Kentucky USA Energy, Inc., a Delaware
corporation (the “
Company ”),
hereby promises to pay to the order of _______________ or
registered assigns (the “
Holder ”)
the amount set out above as the Original Principal Amount (as
reduced pursuant to the terms hereof pursuant to payment,
redemption, conversion or otherwise, the “
Principal ”)
when due, whether upon the Maturity Date (as defined below) or any
Installment Date (as defined below) with respect to the Installment
Amount (as defined below) due on such Installment Date or upon
acceleration, redemption or otherwise (in each case in accordance
with the terms hereof) and to pay interest (“
Interest ”)
on any outstanding Principal at a rate per annum equal to the
Interest Rate (as defined below), from the date set out above as
the Issuance Date (the “
Issuance Date ”)
until the same becomes due and payable, whether upon the Maturity
Date, an Interest Date (as defined below) or any Installment Date
or upon acceleration, redemption or otherwise (in each case in
accordance with the terms hereof). This 8% Senior Convertible
Note (including all 8% Senior Convertible Notes issued in exchange,
transfer or replacement hereof, this “
Note ”)
is one of a series of 8% Senior Convertible Notes issued pursuant
to the Securities Purchase Agreement on the Closing Date
(collectively, the “
Notes ”
and such other 8% Senior Convertible Notes, the “
Other
Notes ”).
Unless otherwise defined herein, certain capitalized terms in this
Note are defined in Section 28.
The
“
Maturity Date ”
shall be May 28, 2011, as may be extended at the option of the
Holder in the event that, and for so long as, an Event of Default
(as defined in Section 4(a)) shall have occurred and be continuing
or any event shall have occurred and be continuing which with the
passage of time and the failure to cure would result in an Event of
Default.
2.
INTEREST; INTEREST RATE .
Interest on this Note shall commence accruing on the Issuance Date
at the Interest Rate and shall be computed on the basis of a
360-day year and actual days elapsed and shall be payable in
arrears on the first Business Day of each calendar quarter
following the Issuance Date and ending on, and including, the
Maturity Date (each, an “
Interest Date ”)
with the first Interest Date being August 29, 2008. Interest shall
be payable to the record holder of this Note on the applicable
Interest Date, in cash. Any Interest not paid on the Interest Date
shall be added to the Principal of the Note
3.
CONVERSION OF NOTES .
This Note shall be convertible into shares of common stock of
the Company, par value $0.0001 per share (“
Common Stock ”),
on the terms and conditions set forth in this Section
3.
(a)
Conversion Right .
Subject to the provisions of Section 3(d), at any time or
times on or after the Issuance Date, the Holder shall be entitled
to convert any portion of the outstanding and unpaid Conversion
Amount (as defined below) into fully paid and nonassessable shares
of Common Stock in accordance with Section 3(c), at the Conversion
Rate (as defined below). Any conversion pursuant to this
Section 3(a) shall be deemed to be a pre-payment of principal plus
accrued and unpaid interest thereon, without any penalty, and shall
be credited against any future payment of the Installment Amount in
reverse chronological order starting with the last Installment
Date. The Company shall not issue any fraction of a share of Common
Stock upon any conversion. If the issuance would result in
the issuance of a fraction of a share of Common Stock, the Company
shall round such fraction of a share of Common Stock up to the
nearest whole share.
(b)
Conversion Rate .
The number of shares of Common Stock issuable upon conversion
of any Conversion Amount pursuant to Section 3(a) shall be
determined by dividing (x) such Conversion Amount by (y) the
Conversion Price (the “
Conversion Rate ”).
(i)
“
Conversion Amount ”
means the portion of the Principal plus any accrued and unpaid
interest thereon at the Interest Rate to be converted, redeemed or
otherwise with respect to which this determination is being
made.
2
(c)
Mechanics of Conversion .
(i)
Optional Conversion .
To convert any Conversion Amount into shares of Common Stock
on any date on or after the Issuance Date (a “
Conversion Date ”),
the Holder shall (A) transmit by facsimile (or otherwise deliver),
for receipt on or prior to 11:59 p.m., New York Time, on such date,
a copy of an executed notice of conversion in the form attached
hereto as
Exhibit A (the
“
Conversion Notice ”)
to the Company and (B) if required by Section 3(c)(iii), surrender
this Note to a nationally recognized overnight delivery service for
delivery to the Company (or an indemnification undertaking with
respect to this Note in the case of its loss, theft or
destruction). On or before the second (2
nd )
Trading Day following the date of receipt of a Conversion Notice
(the “
Share Delivery Date ”),
the Company shall (1) provided that the Transfer Agent is
participating in the Fast Automated Securities Transfer Program of
DTC credit such aggregate number of shares of Common Stock to which
the Holder shall be entitled to the Holder’s or its
designee’s balance account with DTC through its Deposit
Withdrawal Agent Commission system or (2) if the Transfer Agent is
not participating in the DTC Fast Automated Securities Transfer
Program, issue and deliver to the address as specified in the
Conversion Notice, a certificate, registered in the name of the
Holder or its designee, for the number of shares of Common Stock to
which the Holder shall be entitled. If this Note is
physically surrendered for conversion as required by Section
3(c)(iii) and the outstanding Principal of this Note is greater
than the Principal portion of the Conversion Amount being
converted, then the Company shall as soon as practicable and in no
event later than three Business Days after receipt of this Note and
at its own expense, issue and deliver to the holder a new Note (in
accordance with Section 18(d)) representing the outstanding
Principal not converted. The Person or Persons entitled to
receive the shares of Common Stock
issuable upon a conversion of this Note shall be treated for all
purposes as the record holder or holders of such shares of Common
Stock on the Conversion Date. In the event of a partial
conversion of this Note pursuant hereto, the principal amount
converted shall be deducted from the Installment Amounts relating
to the Installment Dates as set forth in the Conversion
Notice.
(ii)
Company’s Failure to Timely Convert .
If within three (3) Trading Days after the Company’s
receipt of the facsimile copy of a Conversion Notice, the Company
shall fail to issue and deliver a certificate to the Holder or
credit the Holder’s balance account with DTC for the number
of shares of Common Stock to which the Holder is entitled upon such
holder’s conversion of any Conversion Amount, and if on or
after such Trading Day the Holder purchases (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction
of a sale by the Holder of Common Stock issuable upon such
conversion that the Holder anticipated receiving from the Company,
then the Company shall, within three (3) Business Days after the
Holder’s request and provision of trade confirmations and in
the Holder’s discretion, either (i) pay cash to the Holder in
an amount equal to the Holder’s total purchase price
(including brokerage commissions and other out-of-pocket expenses,
if any) for the shares of Common Stock so purchased (the
“
Buy-In Price ”),
at which point the Company’s obligation to deliver such
certificate (and to issue such Common Stock) shall terminate, or
(ii) promptly honor its obligation to deliver to the Holder a
certificate or certificates representing such Common Stock and pay
cash to the Holder in an amount equal to the excess (if any) of the
Buy-In Price over the product of (A) such number of shares of
Common Stock times (B) the Closing Bid Price on the Conversion
Date.
3
(iii)
Registration; Book-Entry .
The Company shall maintain a register (the “
Register ”)
for the recordation of the names and addresses of the holders of
each Note and the principal amount of the Notes held by such
holders (the “
Registered Notes ”).
The entries in the Register shall be conclusive and binding for all
purposes absent manifest error. The Company and the holders of the
Notes shall treat each Person whose name is recorded in the
Register as the owner of a Note for all purposes, including,
without limitation, the right to receive payments of principal and
interest hereunder, notwithstanding notice to the contrary. A
Registered Note may be assigned or sold in whole or in part only by
registration of such assignment or sale on the Register. Upon its
receipt of a request to assign or sell all or part of any
Registered Note by a Holder, to the extent permitted by applicable
securities laws, the Company shall record the information contained
therein in the Register and issue one or more new Registered Notes
in the same aggregate principal amount as the principal amount of
the surrendered Registered Note to the designated assignee or
transferee pursuant to Section 17. Notwithstanding anything to the
contrary set forth herein, upon conversion of any portion of this
Note in accordance with the terms hereof, the Holder shall not be
required to physically surrender this Note to the Company unless
(A) the full Conversion Amount represented by this Note is being
converted or (B) the Holder has provided the Company with prior
written notice (which notice may be included in a Conversion
Notice) requesting physical surrender and reissue of this Note.
The Holder and the Company shall maintain records showing the
Principal and Interest converted and the dates of such conversions
or shall use such other method, reasonably satisfactory to the
Holder and the Company, so as not to require physical surrender of
this Note upon conversion.
(d)
Limitations on Conversions .
(i)
Beneficial Ownership .
The Company shall not effect any conversion of this Note, and
the Holder of this Note (including any successor, transferee or
assignee) shall not have the right to convert any portion of this
Note pursuant to Section 3(a), to the extent that after giving
effect to such conversion, the Holder (together with the
Holder’s affiliates) would beneficially own in excess of
4.99% of the number of shares of Common Stock outstanding
immediately after giving effect to such conversion;
provided ,
however ,
the percentage limitation may be increase to 9.99% at the
Holder’s written request to the Company. For purposes
of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of
this Note with respect to which the determination of such sentence
is being made, but shall exclude the shares of Common Stock which
would be issuable upon (A) conversion of the remaining,
nonconverted portion of this Note beneficially owned by the Holder
or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the
Company (including, without limitation, any Other Notes or
warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by
the Holder or any of its affiliates. Except as set forth in
the preceding sentence, for purposes of this Section 3(d)(i),
beneficial ownership shall be calculated in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended. For
purposes of this Section 3(d)(i), in determining the number of
outstanding shares of Common Stock, the Holder may rely on the
number of outstanding shares of Common Stock as reflected in (x)
the Company’s most recent Form 10-K, Form 10-Q, Form 8-K or
any other public filing with the Securities and Exchange
Commission, as the case may be, (y) a more recent public
announcement by the Company or (z) any other notice by the Company
or the Transfer Agent setting forth the number of shares of Common
Stock outstanding. For any reason at any time, upon the
written request of the Holder, the Company shall within two
Business Days confirm in writing to the Holder the number of shares
of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company,
including this Note, by the Holder or its affiliates since the date
as of which such number of outstanding shares of Common Stock was
reported.
4
(ii)
Principal Market Regulation .
The Company shall not be obligated to issue any shares of
Common Stock upon conversion of this Note, and the Holder of this
Note shall not have the right to receive upon conversion of this
Note any shares of Common Stock, if the issuance of such shares of
Common Stock would exceed the aggregate number of shares of Common
Stock which the Company may issue upon conversion or exercise, as
applicable, of the Notes and Warrants or otherwise without
breaching the Company’s obligations under the rules or
regulations of the Principal Market (the “
Exchange Cap ”),
except that such limitation shall not apply in the event that the
Company (A) obtains the approval of its stockholders as required by
the applicable rules of the Principal Market for issuances of
shares of Common Stock in excess of such amount or (B) obtains a
written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably
satisfactory to the Required Holders. Until such approval or
written opinion is obtained, no purchaser of the Notes pursuant to
the Securities Purchase Agreement (the “
Purchasers ”)
shall be issued in the aggregate, upon conversion or exercise, as
applicable, of Notes or Warrants, shares of Common Stock in an
amount greater than the product of the Exchange Cap multiplied by a
fraction, the numerator of which is the principal amount of Notes
issued to such Purchaser pursuant to the Securities Purchase
Agreement on the Closing Date and the denominator of which is the
aggregate principal amount of all Notes issued to the Purchasers
pursuant to the Securities Purchase Agreement on the Closing Date
(with respect to each Purchaser, the “
Exchange Cap Allocation ”).
In the event that any Purchaser shall sell or otherwise
transfer any of such Purchaser’s Notes, the transferee shall
be allocated a pro rata portion of such Purchaser’s Exchange
Cap Allocation, and the restrictions of the prior sentence shall
apply to such transferee with respect to the portion of the
Exchange Cap Allocation allocated to such transferee. In the
event that any holder of Notes shall convert all of such
holder’s Notes into a number of shares of Common Stock which,
in the aggregate, is less than such holder’s Exchange Cap
Allocation, then the difference between such holder’s
Exchange Cap Allocation and the number of shares of Common Stock
actually issued to such holder shall be allocated to the respective
Exchange Cap Allocations of the remaining holders of Notes on a pro
rata basis in proportion to the aggregate principal amount of the
Notes then held by each such holder. To the extent required by the
Principal Market, the provisions of the Exchange Cap shall be
modified to comply with the applicable rules and regulations of the
Principal Market, provided that any such changes shall not, in the
Holder’s reasonable discretion, materially change the terms
of the transaction contemplated hereby.
5
4.
RIGHTS UPON EVENT OF DEFAULT .
(a)
Event of Default .
Each of the following events shall constitute an “Event
of Default “:
(i)
the
Company’s failure to pay to the Holder any amount of
Principal (including, without limitation, any redemption or
make-whole payments), Interest or other amounts when and as
due under this Note or any other Transaction Document (as
defined in the Securities Purchase Agreement) or any other
agreement, document, certificate or other instrument delivered
in connection with the transactions contemplated hereby and
thereby to which the Holder is a party, except, in the case of
a failure to pay Interest when and as due, in which case only
if such failure continues for a period of at least five (5)
Business Days;
(ii)
any
default under, redemption of or acceleration prior to maturity
of any Indebtedness in excess of $100,000, in the aggregate,
of the Company or any of its Subsidiaries (as defined in the
Securities Purchase Agreement);
(iii)
the
Company or any of its Subsidiaries, pursuant to or within the
meaning of Title 11, U.S. Code, or any similar federal,
foreign or state law for the relief of debtors (collectively,
“
Bankruptcy Law ”),
(A) commences a voluntary case, (B) consents to the entry of an
order for relief against it in an involuntary case, (C) consents to
the appointment of a receiver, trustee, assignee, liquidator or
similar official (a
“
Custodian ”),
(D) makes a general assignment for the benefit of its creditors or
(E) admits in writing that it is generally unable to pay its debts
as they become due;
(iv)
a
court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that (A) is for relief against the
Company or any of its Subsidiaries in an involuntary case, (B)
appoints a Custodian of the Company or any of its Subsidiaries
or (C) orders the liquidation of the Company or any of its
Subsidiaries;
(v)
a
final judgment or judgments for the payment of money
aggregating in excess of $250,000 are rendered against the
Company or any of its Subsidiaries and which judgments are
not, within sixty (60) days after the entry thereof, bonded,
discharged or stayed pending appeal, or are not discharged
within sixty (60) days after the expiration of such
stay;
provided ,
however ,
that any judgment which is covered by insurance or an indemnity
from a credit worthy party shall not be included in calculating the
$250,000 amount set forth above so long as the Company provides the
Holder a written statement from such insurer or indemnity provider
(which written statement shall be reasonably satisfactory to the
Holder) to the effect that such judgment is covered by insurance or
an indemnity and the Company will receive the proceeds of such
insurance or indemnity within thirty (30) days of the issuance of
such judgment;
6
(vi)
the
Company breaches any material representation, warranty,
covenant or other term or condition of any Transaction
Document, except, in the case of a breach of a covenant which
is curable, only if such breach continues for a period of at
least ten (10) consecutive Business Days;
(vii)
any
breach or failure in any respect to comply with Section 15 of
this Note; and
(viii)
any
Event of Default (as defined in the Other Notes) occurs with
respect to any Other Notes.
5.
RIGHTS UPON FUNDAMENTAL TRANSACTION AND OTHER CORPORATE
EVENTS .
(a)
Assumption .
The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing all
of the obligations of the Company under this Note and the other
Transaction Documents in accordance with the provisions of this
Section 5(a) pursuant to written agreements in form and substance
satisfactory to the Required Holders and approved by the Required
Holders prior to such Fundamental Transaction, including agreements
to deliver to each holder of Notes in exchange for such Notes a
security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to the Notes,
including, without limitation, having a principal amount and
interest rate equal to the principal amounts and the interest rates
of the Notes held by such holder, having similar conversion rights
as the Notes and having similar ranking to the Notes, and
satisfactory to the Required Holders and (ii) the Successor
Entity (including its Parent Entity) is a publicly traded
corporation whose common stock is quoted on or listed for trading
on an Eligible Market. Upon the occurrence of any Fundamental
Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Note referring to
the “Company” shall refer instead to the Successor
Entity), and may exercise every right and power of the Company and
shall assume all of the obligations of the Company under this Note
with the same effect as if such Successor Entity had been named as
the Company herein. Upon consummation of the Fundamental
Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon conversion or
redemption of this Note at any time after the consummation of the
Fundamental Transaction, in lieu of the shares of Common Stock (or
other securities, cash, assets or other property) issuable upon the
conversion of the Notes prior to such Fundamental Transaction, such
shares of publicly traded common stock (or its equivalent) of the
Successor Entity (including its Parent Entity) which the Holder
would have been entitled to receive upon the happening of such
Fundamental Transaction had this Note been converted immediately
prior to such Fundamental Transaction, as adjusted in accordance
with the provisions of this Note. The provisions of this
Section shall apply similarly and equally to successive Fundamental
Transactions and shall be applied without regard to any limitations
on the conversion of this Note.
7
(b)
Other Corporate Events .
In addition to and not in substitution for any other rights
hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to
receive securities or other assets with respect
to or in exchange for shares of Common Stock (a “
Corporate Event ”),
the Company shall make appropriate provision to insure that the
Holder will thereafter have the right to receive, at the
Holder’s option, upon a conversion of this Note (i) in
addition to the shares of Common Stock receivable upon such
conversion, such securities or other assets to which the Holder
would have been entitled with respect to such shares of Common
Stock had such shares of Common Stock been held by the Holder upon
the consummation of such Corporate Event (without taking into
account any limitations or restrictions on the convertibility of
this Note) or (ii) in lieu of the shares of Common Stock otherwise
receivable upon such conversion, such securities or other assets
received by the holders of shares of Common Stock in connection
with the consummation of such Corporate Event in such amounts as
the Holder would have been entitled to receive had this Note
initially been issued with conversion rights for the form of such
consideration (as opposed to shares of Common Stock) at a
conversion rate for such consideration commensurate with the
Conversion Rate. Provision made pursuant to the preceding
sentence shall be in a form and substance satisfactory to the
Required Holders. The provisions of this Section shall apply
similarly and equally to successive Corporate Events and shall be
applied without regard to any limitations on the conversion or
redemption of this Note.
6.
ADJUSTMENT OF CONVERSION PRICE .
(a)
Adjustment of Conversion Price upon Issuance of Common
Stock .
If at any time after the Subscription Date and prior to
repayment in full or conversion in full of this Note, the Company
issues or sells, or in accordance with this Section 6(a) is deemed
to have issued or sold, any shares of Common Stock (excluding
shares of Common Stock deemed to have been issued or sold by the
Company in connection with any Excluded Securities) for a
consideration per share (the “
New Issuance Price ”)
less than a price (the “
Applicable Price ”)
equal to the Conversion Price in effect immediately prior to such
issue or sale (the foregoing a “
Dilutive Issuance ”),
then immediately after such Dilutive Issuance, the Conversion Price
then in effect shall be reduced to the New Issuance Price.
For purposes of determining the adjusted Conversion Price
under this Section 6(a), the following shall be
applicable:
(i)
Issuance of Options .
If the Company in any manner grants or sells any options and
the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such option or upon conversion or
exchange or exercise of any convertible securities issuable upon
exercise of such option is less than the Applicable Price, then
such share of Common Stock shall be deemed to be outstanding and to
have been issued and sold by the Company at the time of the
granting or sale of such option for such price per share. For
purposes of this Section 6(a)(i), the “lowest price per share
for which one share of Common Stock is issuable upon the exercise
of any such option or upon conversion or exchange or exercise of
any convertible securities issuable upon exercise of such
option” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon granting or sale of
the option, upon exercise of the option and upon conversion or
exchange or exercise of any convertible security issuable upon
exercise of such option. No further adjustment of the
Conversion Price shall be made upon the actual issuance of such
share of Common Stock or of such convertible securities upon the
exercise of such options or upon the actual issuance
of such Common Stock upon conversion or exchange or exercise of
such convertible securities.
8
(ii)
Issuance of Convertible Securities .
If the Company in any manner issues or sells any convertible
securities and the lowest price per share for which one share of
Common Stock is issuable upon such conversion or exchange or
exercise thereof is less than the Applicable Price, then such share
of Common Stock shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the issuance or sale
of such convertible securities for such price per share. For
the purposes of this Section 6(a)(ii), the “lowest price per
share for which one share of Common Stock is issuable upon such
conversion or exchange or exercise” shall be equal to the sum
of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to any one share of Common
Stock upon the issuance or sale of the convertible security and
upon the conversion or exchange or exercise of such convertible
security. No further adjustment of the Conversion Price shall be
made upon the actual issuance of such share of Common Stock upon
conversion or exchange or exercise of such convertible
securit
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