Exhibit 4.2
THIS
NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION
OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO HYBRID FUEL SYSTEMS, INC. THAT SUCH REGISTRATION IS
NOT REQUIRED.
SECURED CONVERTIBLE
NOTE
FOR VALUE RECEIVED, HYBRID FUEL SYSTEMS, INC., a
Georgia corporation (hereinafter called "Borrower"), hereby
promises to pay to ALPHA CAPITAL AKTIENGESELLSCHAFT, Pradafant 7,
9490 Furstentums, Vaduz, Lichtenstein, Fax: 011-42-32323196, (the
"Holder") or its registered assigns or successors in interest or
order, without demand, the sum of _____________________________
THOUSAND DOLLARS ($________) (“Principal Amount”), with
simple and unpaid interest thereon, on March 31, 2007 (the
"Maturity Date"), if not sooner paid.
This Note has been entered into pursuant to the
terms of a subscription agreement between the Borrower and the
Holder, dated of even date herewith (the “Subscription
Agreement”), and shall be governed by the terms of such
Subscription Agreement. Unless otherwise separately defined herein,
all capitalized terms used in this Note shall have the same meaning
as is set forth in the Subscription Agreement. The following terms
shall apply to this Note:
ARTICLE I
INTEREST; AMORTIZATION; SECURITY
AGREEMENT
1.1. Interest Rate . Subject to Section 6.7 hereof, interest
payable on this Note shall accrue at a rate per annum (the
"Interest Rate") equal to the "prime rate" published in The Wall
Street Journal from time to time, plus three percent (3%). The
interest rate shall be increased or decreased as the case may be
for each increase or decrease in the prime rate in an amount equal
to such increase or decrease in the prime rate; each change to be
effective as of the day of the change in such rate. The Interest
Rate shall not be less than eight percent (8%). Interest shall be
calculated on the basis of a 360-day year. Interest on the
Principal Amount shall accrue from the date of this Note and be
payable monthly, in arrears, commencing on August 1, 2005 and on
the first day of each consecutive calendar month thereafter (each,
a "Repayment Date") and on the Maturity Date, whether by
acceleration or otherwise.
1.2.
Minimum Monthly Principal
Payments . Amortizing
payments of the outstanding Principal Amount of this Note and
accrued interest shall commence on the first (1 st )
Repayment Date and shall recur on each succeeding Repayment Date
thereafter until the Principal Amount has been repaid in full,
whether by the payment of cash or by the conversion of such
principal into Common Stock pursuant to the terms hereof. Subject
to Section 2 and Article III below, on each Repayment Date, the
Borrower shall make payments to the Holder in the amount of
one-twentieth (1/20 th ) of the initial Principal Amount
(the "Monthly Principal Amount"), together with any accrued and
unpaid interest due on the Principal Amount plus any and all other
amounts which are then owing under this Note that have not been
paid (the Monthly Principal Amount, together with such accrued and
unpaid interest and such other amounts, collectively, the "Monthly
Amount"). Amounts of conversions of Principal Amount made by the
Holder or Borrower pursuant to Section 2 or Article III, and
Redemption Amounts (as defined in Section 2.3 of this Note)
actually paid to Borrower shall be applied first against
outstanding fees and damages, then accrued interest on the
Principal Amount and then to Monthly Amounts commencing with the
Monthly Amounts first payable and then Monthly Amounts thereafter
in chronological order. Any Principal Amount, interest and any
other sum arising under the Subscription Agreement that remains
outstanding on the Maturity Date shall be due and payable on the
Maturity Date. ˆm
1.3. Default Interest Rate . Following the occurrence and during the
continuance of an Event of Default, which, if susceptible to cure
is not cured within twenty (20) days, otherwise then from the first
date of such occurrence, the annual interest rate on this Note
shall (subject to Section 6.7) automatically be increased to
fifteen percent (15%), and all outstanding obligations under this
Note, including unpaid interest, shall continue to accrue interest
from the date of such Event of Default at such interest rate
applicable to such obligations until such Event of Default is cured
or waived.
1.4 Pledge and Security Agreement. The obligations
of the Borrower hereunder shall be secured by, and the Holder shall
be entitled to the rights and security granted by the Borrower
pursuant to, the Pledge and Security Agreement dated as of the date
hereof by the Borrower for the benefit of the
Holder.
ARTICLE
II
CONVERSION
REPAYMENT
2.1. (a) Payment of Monthly Amount in Cash or Common
Stock . If the Monthly
Principal Amount and interest accrued thereon (or a portion thereof
of such amount if such portion of the Monthly Amount could have
been converted into shares of Common Stock but for Section 3.2) is
required to be paid in cash pursuant to Section 2.1(b), then the
Borrower shall pay the Holder an amount equal to 103% of such
amount due and owing to the Holder on the Repayment Date in cash.
If the Monthly Principal Amount and interest accrued thereon (or a
portion of such amount if not all of such amount may be converted
into shares of Common Stock pursuant to Section 3.2) is
required to be paid in shares of Common Stock pursuant to
Section 2.1(b), the number of such shares to be issued by the
Borrower to the Holder on such Repayment Date (in respect of the
portion of such amount converted into shares of Common Stock
pursuant to Section 2.1(b)), shall be the number determined by
dividing (x) the portion of such amount converted into shares of
Common Stock, by (y) the then applicable Fixed Conversion Price.
For purposes hereof, the initial "Fixed Conversion Price" means
fifty-five cents ($0.55).
(b)
Conversion Guidelines
. Subject to Sections 2.1(a), 2.2
and 3.2 hereof, the Holder shall convert into shares of Common
Stock at the Fixed Conversion Price, the maximum portion of the
Monthly Principal Amount and interest accrued thereon due on each
Repayment Date provided that the average of the five lowest closing
bid prices of the Common Stock as reported by Bloomberg, L.P. on
the Principal Market (as defined below) for the twenty (20)
consecutive trading days immediately preceding such Repayment Date
shall be greater than or equal to 15% above the Fixed Conversion
Price (“Conversion Criterion”). The Monthly Amount due
on a Repayment Date that the Holder has not been able to convert
into shares of Common Stock due to failure to meet the Conversion
Criterion shall be paid by the Borrower at the Borrower’s
election (i) in cash at the rate of 103% of such Monthly Amount
otherwise due on such Repayment Date within three (3) business days
of the applicable Repayment Date, or (ii) in registered,
unlegended, free-trading Common Stock at an applied conversion rate
equal to eighty percent (80%) of the average of the five (5) lowest
closing bid prices of the Common Stock as reported by Bloomberg
L.P. for the twenty (20) trading days preceding such Repayment
Date. Such shares of Common Stock must be delivered to the Holder
not later than three (3) business days after the applicable
Repayment Date. Whichever of the OTC Pink Sheets, NASD OTC Bulletin
Board, NASDAQ SmallCap Market, NASDAQ National Market System,
American Stock Exchange, or New York Stock Exchange or such other
principal market or exchange where the Common Stock is listed or
traded is the principal trading exchange or market for the Common
Stock is the Principal Market.
(c)
The Borrower may not elect to pay
any amount due on a Repayment Date in Common Stock in an amount of
shares of Common Stock which would exceed in the aggregate for all
Holders of Notes similar to this Note, twenty percent (20%) of the
aggregate daily trading volume for the twenty trading days
preceding the Repayment Date multiplied by the lesser of (A) the
closing bid price of the Common Stock on the trading day preceding
the Repayment Date, or (B) the average volume weighted average
price of the Common stock as reported by Bloomberg L.P. for the
Principal Market using the AQR function (“VWAP”) for
the twenty trading days preceding the Repayment Date.
(d)
The Borrower must send notice to
the Holder by confirmed telecopier not later than 3:00 PM, New York
City time on each Repayment Date notifying Holder of
Borrower’s election to pay the Monthly Redemption Amount in
cash or stock. The Notice must state the amount of cash and or
stock to be paid and include supporting calculations. Elections by
the Borrower must be made to all Holders of Notes similar to this
Note in proportion to the relative Note principal held by such Note
Holders. If such notice is not timely sent or if the Monthly
Redemption Amount is not timely delivered, then Holder shall have
the right, instead of the Company, to elect within five trading
days after the later of the applicable Repayment Date or required
delivery date, as the case may be whether to be paid in cash or
Common Stock. Such Holder’s election shall not be construed
to be a waiver of any default by Borrower relating to non-timely
compliance by Borrower with any of its obligations under this
Note.
2.2.
No Effective
Registration .
Notwithstanding anything to the contrary herein, no amount payable
hereunder may made in shares of Common Stock by the Borrower
without the Holder’s consent unless (a) either (i) an
effective current Registration Statement covering the shares of
Common Stock to be issued in satisfaction of such obligations
exists, or (ii) an exemption from registration of the Common Stock
is available pursuant to Rule 144(k) of the Securities Act, and (b)
no Event of Default hereunder exists and is continuing, unless such
Event of Default is cured within any applicable cure period or is
otherwise waived in writing by the Holder in whole or in part at
the Holder's option.
2.3.
Optional Redemption of Principal
Amount . Provided an
Event of Default has not occurred, whether or not such Event of
Default has been cured, the Borrower will have the option of
prepaying the outstanding Principal Amount ("Optional Redemption"),
in whole or in part, by paying to the Holder a sum of money equal
to one hundred twenty percent (120%) of the Principal Amount to be
redeemed, together with accrued but unpaid interest thereon and any
and all other sums due, accrued or payable to the Holder arising
under this Note, the Subscription Agreement or any Transaction
Document through the Redemption Payment Date as defined below (the
"Redemption Amount"). Borrower’s election to exercise its
right to prepay must be by notice in writing (“Notice of
Redemption”). The Notice of Redemption shall specify the date
for such Optional Redemption (the "Redemption Payment Date"), which
date shall be not less than thirty (30) business days after the
date of the Notice of Redemption (the "Redemption Period"). A
Notice of Redemption shall not be effective with respect to any
portion of the Principal Amount for which the Holder has a pending
election to convert pursuant to Section 3.1, or for conversions
initiated or made by the Holder pursuant to Section 3.1 during the
Redemption Period. On the Redemption Payment Date, the Redemption
Amount less any portion of the Redemption Amount against which the
Holder has exercised its rights pursuant to Section 3.1, shall be
paid in good funds to the Holder. In the event the Borrower fails
to pay the Redemption Amount on the Redemption Payment Date as set
forth herein, then (i) such Notice of Redemption will be null and
void, (ii) Borrower will have no right to deliver another Notice of
Redemption, and (iii) Borrower’s failure may be deemed by
Holder to be a non-curable Event of Default.
ARTICLE
III
CONVERSION
RIGHTS
3.1.
Holder's Conversion
Rights . Subject to
Section 2.2 and the mandatory conversion provisions therein, the
Holder shall have the right, but not the obligation, to convert all
or any portion of the then aggregate outstanding Principal Amount
of this Note, together with interest and fees due hereon, into
shares of Common Stock, subject to the terms and conditions set
forth in this Article III. The Holder may exercise such right by
delivery to the Borrower of a written Notice of Conversion pursuant
to Section 3.3.
3.2.
Conversion Limitation
. Notwithstanding anything contained
herein to the contrary, the Holder shall not be entitled to convert
pursuant to the terms of this Note nor may this Note be converted
in whole or in part into an amount of Common Stock that would be
convertible into that number of Common Stock which would exceed the
difference between the number of shares of Common Stock
beneficially owned by such Holder and 4.99% of the outstanding
shares of Common Stock. For the purposes of the immediately
preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Exchange Act and Regulation
13d-3 thereunder. The foregoing limitation shall be calculated as
of each Conversion Date. Aggregate conversions over time shall not
be limited to 4.99%. The Holder may waive the Conversion Share
limitation described in this Section 3.2, in whole or in part, upon
61 days prior notice to the Borrower. The Holder may allocate which
of the equity of the Borrower deemed beneficially owned by the
Holder shall be included in the 4.99% amount described above and
which shall be allocated to the excess above 4.99%.
3.3.
Mechanics of Holder's
Conversion .
(a)
In the event that the Holder elects
to convert any amounts outstanding under this Note into Common
Stock, the Holder shall give notice of such election by delivering
an executed and completed notice of conversion (a "Notice of
Conversion") to the Borrower, which Notice of Conversion shall
provide a breakdown in reasonable detail of the Principal Amount,
accrued interest and fees being converted. The original Note is not
required to be surrendered to the Borrower until all sums due under
the Note have been paid. On each Conversion Date (as hereinafter
defined) and in accordance with its Notice of Conversion, the
Holder shall make the appropriate reduction to the Principal
Amount, accrued interest and fees as entered in its records and
shall provide written notice thereof t
