SECURED CONVERTIBLE TERM NOTE

 

 

THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT

BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE

SECURITIES LAWS. 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

AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY

SATISFACTORY TO ADAL GROUP, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

 

                          SECURED CONVERTIBLE TERM NOTE

 

         FOR VALUE RECEIVED, ADAL GROUP, INC., a Delaware corporation (the

"Company"), hereby promises to pay to LAURUS MASTER FUND, LTD., c/o M&C

Corporate Services Limited, P.O. Box 309 GT, Ugland House, South Church Street,

George Town, Grand Cayman, Cayman Islands, Fax: 345-949-8080 (the "Holder") or

its registered assigns or successors in interest, on order, the sum of One

Million Five Hundred Dollars ($1,500,000), together with any accrued and unpaid

interest hereon, on June 29, 2008 (the "Maturity Date") if not sooner paid. The

original principal amount of this Note, subject to amortizing payments pursuant

to Section 1.2 hereof is hereinafter referred to as the "Principal Amount".

 

         Capitalized terms used herein without definition shall have the

meanings ascribed to such terms in that certain Securities Purchase Agreement

dated as of the date hereof between the Company and the Holder (the "Purchase

Agreement").

 

         The following terms shall apply to this Secured Convertible Term Note

(this "Note"):

 

                                    ARTICLE I

 

                             INTEREST & AMORTIZATION

 

         1.1 (a) Contract Rate. Subject to Sections 1.1(b), 4.2 and 5.10 hereof,

interest payable on the Principal Amount of this Note shall accrue at a rate per

annum equal to the "prime rate" published in The Wall Street Journal from time

to time (the "Prime Rate"), plus three percent (3%) (the "Contract Rate"). The

Prime 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 Pate; each change to be effective as of the day of the change in the

Prime Rate. Subject to Section 1.1(b) hereof, the Contract Rate shall not be

less than eight percent (8%). Interest shall be calculated on the basis of a 360

day year. Interest shall accrue but not be payable during the period commencing

on the date hereof and ending on June 30, 2005. Interest on the Principal Amount

shall be payable monthly, in arrears, commencing on July 1, 2005 and on the

first business day of each consecutive calendar month thereafter (each, a

"Repayment Date") and on the Maturity Date, whether by acceleration or

otherwise.

 

         1.1 (b) Contract Rate Adjustment. The Contract Rate shall be subject to

adjustment on the last business day of each month hereafter until the Maturity

Date (each a "Determination Date"). If on any Determination Date (i) the Company

 

 

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shall have registered under the Securities Act of 1933, as amended (the

"Securities Act"), the shares of Common Stock underlying each of the conversion

of this Note and the exercise of each Warrant and Option issued on a

registration statement declared effective by the Securities and Exchange

Commission (the "SEC"), and (ii) the market price (the "Market Price") of the

Common Stock as reported by Bloomberg, L.P. on the Principal Market (as defined

below) for the five (5) consecutive trading days immediately preceding such

Determination Date exceeds the then applicable Fixed Conversion Price by at

least twenty five percent (25%), the Contract Rate for the succeeding calendar

month shall automatically be reduced by 100 basis points (100 b.p.) (1.0%) for

each incremental twenty five percent (25%) increase in the Market Price of the

Common Stock above the then applicable Fixed Conversion Price. Notwithstanding

the foregoing (and anything to the contrary contained in herein), in no event

shall the Contract Rate be less than zero percent (0%).

 

         1.2 Minimum Monthly Principal Payments. Amortizing payments of the

outstanding principal amount of this Note shall begin on January 1, 2005 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 2.1 and Article 3 below, on each Repayment Date, the Company

shall make payments to the Holder in the amount of $50,000.00 (the "Monthly

Principal Amount"), together with any accrued and unpaid interest then due on

such portion of 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"). Any outstanding Principal Amount together

with any accrued and unpaid interest and any other unpaid amounts which are then

owing by the Company to the Holder under this Note, the Purchase Agreement

and/or any other Related Agreement shall be due and payable on the Maturity

Date.

 

 

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                                   ARTICLE II

 

                              CONVERSION REPAYMENT

 

         2.1 (a) Payment of Monthly Amount in Cash or Common Stock. If the

Monthly Amount (or a portion thereof of such Monthly Amount if such portion of

the Monthly Amount would 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

Company shall pay the Holder an amount equal to 102% of the Monthly Amount due

and owing to the Holder on the Repayment Date in cash. If the Monthly Amount (or

a portion of such Monthly Amount if not all of the Monthly 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 Company to the Holder on such Repayment Date (in

respect of such portion of the Monthly Amount converted into in shares of Common

Stock pursuant to Section 2.1(b)), shall be the number determined by dividing

(x) the portion of the Monthly Amount converted into shares of Common Stock, by

(y) the then applicable Fixed Conversion Price. For purposes hereof, the "Fixed

Conversion Price" shall, subject to adjustments as set forth herein, mean (i)

with respect to the first $1,000,000 of the Principal Amount of this Note

converted pursuant to the terms hereof (and all interest and fees related

thereto), $3.00. and (ii) with respect to the remaining Principal Amount of this

Note converted pursuant to the terms hereof (and all interest and fees related

thereto), $3.50.

 

                  (b) Monthly Amount Conversion Guidelines. Subject to Sections

2.1(a), 2.2 and 3.2 hereof, the Holder shall convert into shares of Common Stock

all or a portion of the Monthly Amount due on each Repayment Date according to

the following guidelines (collectively, the "Conversion Criteria"): (i) the

average closing price of the Common Stock as reported by Bloomberg, L.P. on the

Principal Market for the five (5) consecutive trading days immediately preceding

such Repayment Date shall be greater than or equal to 110% of the Fixed

Conversion Price and (ii) the amount of such conversion does not exceed twenty

five percent (25%) of the average dollar trading volume of the Common Stock for

the twenty two (22) day trading period immediately preceding the applicable

Repayment Date. If the Conversion Criteria are not met, the Holder shall convert

only such part of the Monthly Amount that meets the Conversion Criteria. Any

part of 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 Criteria, shall be paid by the Company in cash at the rate of 102% of

the Monthly Amount otherwise due on such Repayment Date, within three (3)

business days of the applicable Repayment Date.

 

                   (c) Application of Conversion Amounts. Any amounts converted

by the Holder pursuant to Section 2.1(b) shall be deemed to constitute payments

of, or applied against, (i) first, outstanding fees, (ii) second, accrued

interest on the Principal Amount, and (iii) third, the Principal Amount.

 

         2.2 No Effective Registration. Notwithstanding anything to the contrary

herein, no amount payable hereunder may be converted into Common Stock unless

(a) either (i) an effective current Registration Statement (as defined in the

Registration Rights Agreement) 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 of the

Securities Act, and (b) no Event of Default hereunder exists and is continuing,

 

 

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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. The Company will have the

option of prepaying the outstanding Principal Amount by paying to the Holder a

sum of money equal to one hundred fifteen percent (115%) 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 Purchase Agreement or any Related Agreement (the "Redemption Amount") on the

Redemption Payment Date (as defined below). The Company shall deliver to the

Holder a notice of redemption (the "Notice of Redemption") specifying the date

for such Optional Redemption (the "Redemption Payment Date"), which date shall

be not less than seven (7) 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. The Redemption Amount shall be determined as if such Holder's

conversion elections had been completed immediately prior to the date of the

Notice of Redemption. On the Redemption Payment Date, the Redemption Amount

shall be paid in good funds to the Holder. In the event the Company fails to pay

the Redemption Amount on the Redemption Payment Date as set forth herein, then

such Notice of Redemption will be null and void.

 

                                   ARTICLE III

                                CONVERSION RIGHTS

 

         3.1. Holder's Conversion Rights. Subject to Section 2.2, 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 Company of a written Notice of Conversion pursuant to Section

3.3. The shares of Common Stock to be issued upon such conversion are herein

referred to as the "Conversion Shares."

 

         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 an amount that would be convertible into that number of Conversion

Shares which would exceed the difference between 4.99% of the issued and

outstanding shares of Common Stock and the number of shares of Common Stock

beneficially owned by such Holder or issuable upon exercise of Warrants or the

Option held by such Holder. 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 Conversion Shares

limitation described in this Section 3.2 shall automatically become null and

void following notice to the Company upon the occurrence and during the

continuance of an Event of Default, or upon 75 days prior notice to the Company.

Notwithstanding anything contained herein to the contrary, the provisions of

this Section 3.2 are irrevocable and may not be waived by the Holder or the

Company.

 

 

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         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 Company, which

Notice of Conversion shall provide a breakdown in reasonable detail of the

Principal Amount, accrued interest and fees being converted. 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 to the Company within two (2) business days after the Conversion Date.

Each date on which a Notice of Conversion is delivered or telecopied to the

Company in accordance with the provisions hereof shall be deemed a "Conversion

Date". A form of Notice of Conversion to be employed by the Holder is annexed

hereto as Exhibit A.

 

                  (b) Pursuant to the terms of a Notice of Conversion, the

Company will issue instructions to the transfer agent accompanied by an opinion

of counsel, if so required by the Company's transfer agent, within one (1)

business day of the date of the delivery to Company of the Notice of Conversion

and shall cause the transfer agent to transmit the certificates representing the

Conversion Shares to the Holder by crediting the account of the Holder's

designated broker with the Depository Trust Corporation ("DTC") through its

Deposit Withdrawal Agent Commission ("DWAC") system within three (3) business

days after receipt by the Company of the Notice of Conversion (the "Delivery

Date"). In the case of the exercise of the conversion rights set forth herein

the conversion privilege shall be deemed to have been exercised and the

Conversion Shares issuable upon such conversion shall be deemed to have been

issued upon the date of receipt by the Company of the Notice of Conversion. The

Holder shall be treated for all purposes as the record holder of such shares of

Common Stock, unless the Holder provides the Company written instructions to the

contrary.

 

         3.4       Conversion Mechanics.

 

                  (a) The number of shares of Common Stock to be issued upon

each conversion of this Note pursuant to this Article III shall be determined by

dividing that portion of the Principal Amount and interest and fees to be

converted, if any, by the then applicable Fixed Conversion Price.