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 20(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.
MFC DEVELOPMENT CORP.
SENIOR SECURED CONVERTIBLE
NOTE
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Issuance Date: September 18, 2006
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Original Principal Amount: U.S. $2,887,700
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FOR VALUE RECEIVED, MFC Development
Corp., a Delaware corporation (the " Company "), hereby
promises to pay to Gottbetter Capital Master, Ltd. or registered
assigns (" Holder ") the amount set out above as the
Original Principal Amount (as reduced pursuant to the terms hereof
pursuant to redemption, conversion or otherwise, the "
Principal ") when due, whether upon the Maturity Date (as
defined below), on any Installment Date with respect to the
Installment Amount due on such Installment Date, 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 an Interest Date (as defined below),
any Installment Date, or the Maturity Date, acceleration,
conversion, redemption or otherwise (in each case in accordance
with the terms hereof). This Senior Secured Convertible Note
(including all Senior Secured Convertible Notes issued in exchange,
transfer or replacement hereof, this " Note ") issued
pursuant to the Securities Purchase Agreement (as defined below).
Certain capitalized terms are defined in Section
28.
1.
PAYMENTS OF PRINCIPAL;
MATURITY . On each
Installment Date commencing May 1, 2007, the Company shall pay to
the Holder an amount equal to the Installment Amount due on such
Installment Date in cash by wire transfer of immediately available
funds. The " Maturity Date " shall be July 30, 2009,
as may be extended at the option of the Holder (i) 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 and (ii)
through the date that is ten (10) days after the
consummation
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of a Change of Control in the event that
a Change of Control is publicly announced or a Change of Control
Notice (as defined in Section 5(b)) is delivered prior to the
Maturity Date.
2.
INTEREST; INTEREST RATE
.
(a)
Interest on this Note shall commence
accruing on the Issuance Date and shall be computed on the basis of
a 360-day year and actual days elapsed and shall be payable in
arrears for each Calendar Month during the period beginning on the
Issuance Date and ending on, and including, the Maturity Date
(each, an " Interest Date ") with the first Interest Date
being October 1, 2006. Interest shall be payable on each
Interest Date, to the record holder of this Note on the applicable
Interest Date, in cash (" Cash Interest ").
(b)
From and after the occurrence of an Event
of Default, the Interest Rate shall be increased to fifteen percent
(15%). In the event that such Event of Default is
subsequently cured, the adjustment referred to in the preceding
sentence shall cease to be effective as of the date of such cure;
provided that the Interest as calculated at such increased rate
during the continuance of such Event of Default shall continue to
apply to the extent relating to the days after the occurrence of
such Event of Default through and including the date of cure of
such Event of Default.
3.
CONVERSION OF NOTES
. This Note shall be convertible
into shares of common stock of the Company, par value $0.001 per
share (the " 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).
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. The Company shall pay any and all taxes
that may be payable with respect to the issuance and delivery of
Common Stock upon conversion of any Conversion Amount (except for
income taxes, capital gains or the like).
(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 to be converted, redeemed or otherwise
with respect to which this determination is being made.
(ii)
" Conversion Price " means, as of
any Conversion Date (as defined below) or other date of
determination, eighty (80%) of the arithmetic average of the two
lowest Weighted Average Prices for the twenty five (25) Trading
Days immediately preceding the Conversion Date, but in no event
lower that a floor price of $.69 (the “ Floor Price
”)
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2
(appropriately adjusted for any stock
split, stock dividend, stock combination or other similar
transaction that proportionately decreases or increases the Common
Stock).
(c)
Mechanics of Conversion
.
(i)
Optional Conversion
. To convert any Conversion Amount
into shares of Common Stock on any 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 I (the " Conversion
Notice ") to the Company and (B) if required by Section
3(c)(iv), 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 next Trading Day
following the date of receipt of a Conversion Notice, the Company
shall transmit by facsimile a confirmation of receipt of such
Conversion Notice to the Holder and the Transfer Agent. 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) (X) 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 (Y) 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, and (2) pay to the Holder in cash an amount equal to
the accrued and unpaid Interest on the Conversion Amount up to and
including the Conversion Date. If this Note is physically
surrendered for conversion as required by Section 3(c)(iv) 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 or (y) the receipt of the investment
bank or accountants determination completed by Section 23 with
respect to the shares effected by a dispute, 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 (a " Conversion Failure
"), and if on or after such Trading Day the Holder purchases (in an
open market transaction or otherwise) Common
{00086741.1 /
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3
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 (a "
Buy-In "), 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.
(iii)
Book-Entry . 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,
(B) the Company has provided the Holder with prior written notice
not to exceed once per year (C) the Holder has transferred or
assigned this Note or (D) 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.
In the case of (B) above, the Company may only request
physical surrender for administrative purposes. The Holder
and the Company shall maintain records showing the Principal,
Interest and Late Charges 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. The Holder may
utilize its conversion rights to the extent permitted hereunder
while the Company is in possession of the Note.
(iv)
Disputes . In the event of a
dispute as to the number of shares of Common Stock issuable to the
Holder in connection with a conversion of this Note, the Company
shall issue to the Holder the number of shares of Common Stock not
in dispute and resolve such dispute in accordance with Section
23.
(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% (the " Maximum Percentage ") of the number
of shares of Common Stock outstanding immediately after giving
effect to such conversion. 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 number of shares of Common Stock which would be
issuable upon (A) conversion of the remaining,
{00086741.1 /
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4
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 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-KSB, Form 10-K,
Form 10-QSB, Form 10-Q or Form 8-K, 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, during regular business hours of the Company and upon the
written request of the Holder, the Company shall within two (2)
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. By written notice to the Company, the Holder may
increase or decrease the Maximum Percentage to any other percentage
specified in such notice; provided that (i) any such increase will
not be effective until the sixty-first (61 st ) day
after such notice is delivered to the Company, (ii) any such
increase or decrease will apply only to the Holder and not to any
other holder of Notes and (iii) and in no case shall Holder or its
Affiliates acquire in excess of 19.999% of the outstanding shares
of Common Stock or the voting power of the Company.
(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 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 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 the Purchasers 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
{00086741.1 /
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5
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.
4.
RIGHTS UPON EVENT OF
DEFAULT .
(a)
Event of Default
. Each of the following events
shall constitute an "Event of Default ":
(i)
the failure of the applicable
Registration Statement required to be filed pursuant to the
Registration Rights Agreement to be declared effective by the SEC
on or prior to the date that is thirty (30) days after the
applicable Effectiveness Deadline (as defined in the Registration
Rights Agreement), or, while the applicable Registration Statement
is required to be maintained effective pursuant to the terms of the
Registration Rights Agreement, the
effectiveness of the applicable Registration Statement lapses for
any reason (including, without limitation, the issuance of a stop
order) or is unavailable to any holder of the Notes for sale of all
of such holder's Registrable Securities (as defined in the
Registration Rights Agreement) in accordance with the terms of the
Registration Rights Agreement, and such lapse or unavailability
continues for a period of ten (10) consecutive days or for more
than an aggregate of thirty (30) days in any 365-day period (other
than days during an Allowable Grace Period (as defined in the
Registration Rights Agreement)) or the happening of any event of
the kind described in Section 3(s) of the Registration Rights
Agreement);
(ii)
the suspension from trading or failure of
the Common Stock to be listed on the Principal Market or on an
Eligible Market for a period of five (5) consecutive Trading Days
or for more than an aggregate of ten (10) Trading Days in any
365-day period;
(iii)
the Company's (A) failure to cure a
Conversion Failure by delivery of the required number of shares of
Common Stock within ten (10) Business Days after the applicable
Conversion Date or (B) written notice to any holder of the Notes,
including by way of public announcement or through any of its
authorized agents, at any time, of its intention not to comply with
a request for conversion of any Notes into shares of Common Stock
that is tendered in accordance with the provisions of the
Notes;
(iv)
after the Company files an amendment to
its Articles of Incorporation to increase its authorized capital to
100,000,000 shares of Common Stock, at any time following the tenth
(10 th ) consecutive Business Day that the authorized
number of shares is less than the number of shares of Common Stock
that the Holder would be entitled to receive upon a conversion of
four hundred percent (400%) of the full Conversion Amount of this
Note (without regard to any limitations on conversion set forth in
Section 3(d) or otherwise);
{00086741.1 /
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6
(v)
the Company's failure to pay to the
Holder any amount of Principal (including, without limitation or
any redemption payments), Interest, Late Charges 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 and such failure continues for a period
of at least ten (10) Business Days;
(vi)
any default under, redemption of or
acceleration prior to maturity of any Indebtedness in excess of
$100,000, individually, of the Company or any of its Subsidiaries
(as defined in Section 3(a) of the Securities Purchase Agreement)
which is not disputed in writing by the Company;
(vii)
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;
(viii)
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;
(ix)
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;
(x)
the Company materially 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;
(xi)
any breach or failure in any respect to
comply with (x) Section 15 of this Note not cured within ten (10)
Business Days or (y) any of the Potential Partner
{00086741.1 /
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7
Conditions;
(xii)
commencing December 31, 2006, the Company
fails to achieve EBIDTA of (A) $600,000 for the period beginning on
the date of Closing and ending December 31, 2006, (B) $1,400,000
for the fiscal quarter ending March 31, 2007, (C) $1,300,000 for
the fiscal quarter ending June 30, 2007, (D) or such amount as the
Company and Holder shall mutually agree upon for the fiscal
quarters ending September 30 and December 31, 2007, and the fiscal
quarters ending March 31 and June 30, 2008 (the “EBITDA
Targets,” the Company’s failure to achieve which
shall be referred to as an “EBITDA Failure” );
provided, however, for purposes of determining whether any
particular EBITDA Target has been achieved, (X) the effect of
expenses associated with (1) equity compensation issued pursuant to
the Company’s 2006 Equity Incentive Plan, (2) business or
asset acquisitions or capital expenditures approved by Holder, (3)
the Company’s compliance with the Sarbanes-Oxley Act of 2002,
as amended, (4) compensation issued to public or investor relations
firms (including equity), and (5) such other extraordinary or
non-recurring events or transactions as Company and Holder shall
mutually agree, shall be excluded from EBITDA ( “Adjusted
EBITDA” ), (Y) Adjusted EBITDA achieved by the Company in
any period in excess of the EBITDA Target for such period shall
apply to the next subsequent period provided the Company’s
Adjusted EBITDA for the period beginning on the Closing Date and
ending June 30, 2007, is at least $3.3 million in the aggregate,
and (Z) if (1) by shifting the relevant time period one month
forward or backward, or (2) if by including in the calculation of
Adjusted EBITDA the revenue expected to be realized within thirty
(30) days from the end of the applicable period from expenditures
on advertising media made during such period, the Company would
have achieved the applicable EBIDTA Target, then an EBITDA Failure
will not be deemed to have occurred; provided further that,
notwithstanding any of the foregoing, if the average dollar trading
volume (as reported by Bloomberg) of the Common Stock for the
period to which an EBITDA Target relates is greater than $300,000
and there are no Trading Days with less than $100,000 of dollar
trading volume (as reported by Bloomberg) and a Weighted Average
Price below Two Dollars ($2) (appropriately adjusted for any stock
split, stock dividend, stock combination or other similar
transaction that proportionately decreases or increases the common
stock) then no EBITDA Failure shall be deemed to have occurred with
respect to such period;
(xiii)
Nancy Duitch or Alan Gerson cease to
remain a full time executive of the Company except by reason of
Death or Disability, as defined in their respective employment
agreements; or
(xiv)
Nancy Duitch or Jeffrey Edell sell or
otherwise transfer their shares of Common Stock prior to the
Maturity Date; or
(xiv)
the inability of the Common Stock to be
transferred with DTC through the Deposit Withdrawal at Custodian
system for as long as Continental Stock Transfer has such system
available.
(b)
Redemption Right
. Upon the occurrence of an Event
of Default with respect to
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8
this Note, the Company shall within two
(2) Business Days after the day on which the Company is aware of
the Event of Default deliver written notice thereof via facsimile
and overnight courier (an " Event of Default Notice ") to
the Holder. At any time after the earlier of the Holder's
receipt of an Event of Default Notice and the Holder becoming aware
of an Event of Default, the Holder may require the Company to
redeem all or any portion of this Note by delivering written notice
thereof (the "Event of Default Redemption Notice") to the Company,
which Event of Default Redemption Notice shall indicate the portion
of this Note the Holder is electing to redeem. Each portion
of this Note subject to redemption by the Company pursuant to this
Section 4(b) shall be redeemed by the Company at a price equal to
the greater of (i) the product of (x) the Conversion Amount to be
redeemed and (y) the Redemption Premium and (ii) the product of (A)
the Conversion Rate with respect to such Conversion Amount in
effect either on the date immediately proceeding such Event of
Default or at such time as the Holder delivers an Event of
Default Redemption Notice, whichever is lesser and (B) the Closing
Sale Price of the Common Stock on the date immediately preceding
such Event of Default (the " Event of Default Redemption
Price "). Redemptions required by this Section 4(b) shall
be made in accordance with the provisions of Section 12. To the extent redemptions
required by this Section 4(b) are deemed or determined by a court
of competent jurisdiction to be prepayments of the Note by the
Company, such redemptions shall be deemed to be voluntary
prepayments. The parties hereto agree that in the event of
the Company's redemption of any portion of the Note under this
Section 4(b), the Holder's damages would be uncertain and difficult
to estimate because of the parties' inability to predict future
interest rates and the uncertainty of the availability of a
suitable substitute investment opportunity for the Holder.
Accordingly, any Redemption Premium due under this Section
4(b) is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holder's actual loss of its investment
opportunity and not as a penalty.
(c)
Reduction of Floor Price
. Notwithstanding anything to the
contrary contained herein, upon the occurrence of an Event of
Default (ninety (90) days after an Event of Default described in
Section 4(a)(xii)), the Floor Price shall be reduced to $.345
(appropriately adjusted for any stock split, stock dividend, stock
combination or other similar transaction that proportionately
decreases or increases the common stock) for so long as an Event of
Default is continuing. If an Event of Default continues for
ninety (90) days then the Floor Price shall be reduced by an
additional $.05 (appropriately adjusted for any stock split, stock
dividend, stock combination or other similar transaction that
proportionately decreases or increases the common stock) for so
long as an Event of Default is continuing and an additional $.05
(appropriately adjusted for any stock split, stock dividend, stock
combination or other similar transaction that proportionately
decreases or increases the common stock) for every thirty (30) days
thereafter. After an Event of Default is cured, the Floor
Price shall be reset to $0.69 (as adjusted for any stock splits,
stock dividends or recapitalization).
5.
RIGHTS UPON FUNDAMENTAL TRANSACTION
AND CHANGE OF CONTROL .
(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 reasonably 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
{00086741.1 /
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9
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 their equivalent) of the Successor Entity, 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.
(b)
Redemption Right
. No sooner than fifteen (15) days
nor later than ten (10) days prior to the consummation of a Change
of Control, and providing the Company has not exercised its
Redemption Right under Section 8(a) herein, but not prior to the
public announcement of such Change of Control, the Company shall
deliver written notice thereof via facsimile and overnight courier
to the Holder (a " Change of Control Notice "). At any
time during the period beginning after the Holder's receipt of a
Change of Control Notice and ending ten (10) Trading Days after the
consummation of such Change of Control, the Holder may require the
Company to redeem all or any portion of this Note by delivering
written notice thereof (" Change of
Control Redemption Notice ") to the Company, which Change of
Control Redemption Notice shall indicate the Conversion Amount the
Holder is electing to redeem. The portion of this Note
subject to redemption pursuant to this Section 5 shall be redeemed
by the Company in cash at a price equal to the greater of (i) One
Hundred and Twenty Five percent (125%) of the face amount redeemed
plus accrued interest and (ii) eighty percent (80%) of the (x)
product of the remaining Conversion Amount divided by the
Conversion Price (not less than $1 (as adjusted for any stock
dividend, stock combination, stock split or other similar
transactions that proportionately increases or decreases the Common
Stock)) in effect on the Trading Day before the Company Redemption
Notice is sent and (y) the Closing Sale Price on the Trading Day
before the Company Redemption Notice is sent, plus accrued interest
(the " Change of Control Redemption Price ").
Redemptions required by this Section 5 shall be made in
accordance with the provisions of Section 15 and shall have
priority to payments to shareholders in connection with a Change of
Control. To the extent redemptions required by this Section
5(b) are deemed or determined by a court of competent jurisdiction
to be prepayments of the Note by the Company, such redemptions
shall be deemed to be voluntary prepayments. Notwithstanding
anything to the contrary in this Section 5, until the Change of
Control Redemption Price (together with any interest thereon) is
paid in full, the Conversion Amount submitted for redemption under
this
{00086741.1 /
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10
Section 5(c) may be converted, in whole
or in part, by the Holder into shares of Common Stock, or in the
event the Conversion Date is after the consummation of the Change
of Control, shares of publicly traded common stock (or their
equivalent) of the Successor Entity pursuant to Section 3.
The parties hereto agree that in the event of the Company's
redemption of any portion of the Note under this Section 5(b), the
Holder's damages would be uncertain and difficult to estimate
because of the parties' inability to predict future interest rates
and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holder. Accordingly, any
redemption premium due under this Section 5(b) is intended by the
parties to be, and shall be deemed, a reasonable estimate of the
Holder's actual loss of its investment opportunity and not as a
penalty.
6.
RIGHTS UPON ISSUANCE OF PURCHASE
RIGHTS AND OTHER CORPORATE EVENTS .
(a)
Purchase Rights
. Other than Excluded Securities,
if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any
class of Common Stock (the " Purchase Rights "), then the
Holder will be entitled to acquire, upon the terms applicable to
such Purchase Rights, the aggregate Purchase Rights which the
Holder could have acquired if the Holder had held the number of
shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions
on the convertibility of this Note) 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.
(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
upon a conversion of this Note, at the Holder's option, (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.
7.
RIGHTS UPON ISSUANCE OF OTHER
SECURITIES .
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11
(a)
Adjustment of Conversion Price upon
Issuance of Common Stock .
If at any time after the Subscription Date, the Company
issues or sells, other than Excluded Securities, or in accordance
with this Section 7(a) is deemed to have issued or sold, any shares
of Common Stock (including the issuance or sale of shares of Common
Stock owned or held by or for the account of the Company, but
excluding shares of Common Stock deemed to have been issued or sold
by the Company in connection with any Excluded Security) for a
consideration per share (the " New Issuance Price ") less
than a price (the " Applicable Price ") equal to 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 7(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
