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. NEITHER SECURITIES MAY BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF
(A) AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN
OPINION OF COUNSEL IN A GENERALLY ACCEPTABLE FORM, 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.
|
|
|
|
Issuance Date:
October 27, 2005
|
|
Principal: U.S.
$10,000,000.00
|
FOR VALUE RECEIVED, Telkonet, Inc., a Utah corporation, (the
“ Company ”), hereby promises to pay to KINGS
ROAD INVESTMENTS LTD. or registered assigns (“ Holder
”) the amount set out above as the Principal (as reduced
pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the “ Principal ”) when due, whether
upon the Maturity Date, on any Installment Date with respect to the
Installment Amount due on such Installment Date (each, as defined
herein), acceleration, redemption or otherwise (in each case in
accordance with the terms hereof) and to pay interest (“
Interest ”) on any outstanding Principal at the rate
of 7.25% per annum (the “ Interest Rate ”), 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, the Maturity Date, acceleration, conversion,
redemption or otherwise (in each case, in accordance with the terms
hereof). This Senior Convertible Note (including all Senior
Convertible Notes issued in exchange, transfer or replacement
hereof, this “ Note ”) is one of an issue of
Senior Convertible Notes issued pursuant to the Securities Purchase
Agreement (as defined below) on the Closing Date (collectively, the
“ Notes ” and such other Senior Convertible
Notes, the “ Other Notes ”). Certain capitalized
terms used herein are defined in Section 28.
(1)
PAYMENTS OF PRINCIPAL .
(a) On
each Installment Date the Company shall pay to the Holder an amount
equal to the Installment Amount due on such Installment Date in
accordance with Section 8. On the Maturity Date, the Holder
shall surrender the Note to the Company and the Company shall pay
to the Holder, (i) an amount in Common Shares, or, at the
option of the Company, in cash, representing all outstanding
Principal and (ii) an amount in cash equal to the accrued and
unpaid Interest thereon; provided that Principal shall be payable
in Common Shares on the Maturity Date if, and only if, there has
been no Equity Conditions Failure during the applicable period. On
or prior to the fifth (5 th )
Trading Day prior to the Maturity Date (the “ Maturity
Election Notice Due Date ”), the Company shall deliver a
written notice to the Holder (x) specifying whether the
Principal shall be paid on the Maturity Date in Common Shares or
cash and (y) if the Principal is to be paid in Common Shares,
certifying that there has been no Equity Conditions Failure.
Principal to be paid on the Maturity Date and on the Maturity
Settlement Date (as defined below) in Common Shares shall be paid
in a number of fully paid and non-assessable (rounded to the
nearest whole share in accordance with Section 3(a)) Common
Shares.
(b) If
the Company shall pay the Principal on the Maturity Date in Common
Shares, then on the Maturity Date (i) (A) provided that the
Company’s transfer agent (the “ Transfer Agent
”) is participating in the Depository Trust Company (“
DTC ”) Fast Automated Securities Transfer Program, the
Company shall, or shall cause the Transfer Agent to, credit a
number of Common Shares equal to the quotient of the outstanding
Principal due on such date and the Initial Maturity Conversion
Price (the “ Pre-Maturity Conversion Shares ”)
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 (B) if the foregoing
shall not apply, the Company shall issue and deliver, to the
address set forth in the register maintained by the Company for
such purpose pursuant to the Securities Purchase Agreement or to
such address as specified by the Holder in writing to the Company
at least three (3) Trading Days prior to the Maturity Date, a
certificate, registered in the name of the Holder or its designee,
for the number of Pre-Maturity Conversion Shares to which the
Holder shall be entitled and (ii) the Company shall pay to the
Holder, in cash by wire transfer of immediately available funds,
the amount of any accrued and unpaid interest on such Principal. On
the Trading Day immediately after the end of the Maturity
Conversion Measuring Period (the “ Maturity Settlement
Date ”), the Company shall, or shall cause the Transfer
Agent to, deliver to the Holder’s account with DTC a number
of additional Common Shares, if any, equal to the Maturity Balance
Conversion Shares. If an Event of Default or Equity Conditions
Failure occurs during the Maturity Conversion Measuring Period,
then, at the Holder’s option, either (x) the Holder may
require the Company to pay the Principal amount of the Note
outstanding on the Maturity Date (including any Principal amount
represented by Pre-Maturity Conversion Shares that shall be
returned to the Company) in cash on the Maturity Settlement Date
and, in conjunction with receipt of such cash payment, shall return
any Pre-Maturity Conversion Shares delivered to the Holder which
the Holder has not otherwise sold, transferred or disposed of or
(y) the Company shall pay to the Holder in cash on the
Maturity Settlement Date an amount equal to the difference between
(1) the Principal outstanding on the Maturity Date minus
(2) the product of (A) the Principal outstanding on the
Maturity Date multiplied by (B) the Conversion Share
Ratio.
2
(2)
INTEREST; INTEREST RATE . Interest on this Note shall
commence accruing on the Issuance Date and shall be computed on the
basis of a 360-day year comprised of twelve 30-day months and shall
be payable on each Installment Date, on each Conversion Date and on
the Maturity Date (each, an “ Interest Date ”).
Interest shall be payable on each Interest Date in cash. Prior to
the payment of Interest on an Interest Date, Interest on this Note
shall accrue at the Interest Rate. Upon the occurrence and during
the continuance of an Event of Default, the Interest Rate shall be
increased to twelve percent (12.0%) per annum (the “
Default Rate ”). 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. Interest on overdue interest
shall accrue at the same rate compounded quarterly.
(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 Shares ”), 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 Common Shares in accordance with
Section 3(c), at the Conversion Rate (as defined below). The
Company shall not issue any fraction of a Common Share upon any
conversion. If the issuance would result in the issuance of a
fraction of a Common Share, the Company shall round such fraction
of a Common Share 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.
(b)
Conversion Rate . The number of Common Shares 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 (such number of shares, 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 a price equal to
$5.00, subject to adjustment as provided herein.
(c)
Mechanics of Conversion .
(i)
Optional Conversion . To convert any Conversion Amount into
Common Shares 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)(iii), surrender this
3
Note to a
common carrier for delivery to the Company as soon as practicable
on or following such date (or an indemnification undertaking with
respect to this Note in the case of its loss, theft or
destruction). On or before the first (1 st )
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 third (3 rd )
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 DTC Fast Automated Securities Transfer Program, credit such
aggregate number of Common Shares 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 Common Shares 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)(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
five (5) Trading 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 Common Shares issuable upon a conversion of this Note shall be
treated for all purposes as the record holder or holders of such
Common Shares 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)
Failure to Timely Convert . If the Company shall fail to
issue a certificate to the Holder or credit the Holder’s
balance account with DTC for the number of Common Shares to which
the Holder is entitled upon conversion of any Conversion Amount on
or prior to the date which is three (3) Trading Days after the
Conversion Date (a “ Conversion Failure ”), then
(A) the Company shall pay damages to the Holder for each day
of such Conversion Failure in an amount equal to 1.5% of the
product of (I) the sum of the number of Common Shares not
issued to the Holder on or prior to the Share Delivery Date and to
which the Holder is entitled, and (II) the Closing Sale Price
of the Common Shares on the Share Delivery Date and (B) the
Holder, upon written notice to the Company, may void its Conversion
Notice with respect to, and retain or have returned, as the case
may be, any portion of this Note that has not been converted
pursuant to such Conversion Notice; provided that the
voiding of a Conversion Notice shall not affect the Company’s
obligations to make any payments which have accrued prior to the
date of such notice pursuant to this Section 3(c)(ii) or otherwise.
In addition to the foregoing, 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 Common Shares 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
Shares to deliver in satisfaction of a sale by the Holder of Common
Shares issuable upon such conversion that the Holder anticipated
receiving from the Company (a “ Buy-In ”), then
the Company shall, within three (3) Trading Days after the
Holder’s request and in the
4
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 Common Shares so purchased (the “Buy-In
Price” ), at which point the Company’s obligation
to deliver such certificate (and to issue such Common Shares) shall
terminate, or (ii) promptly honor its obligation to deliver to
the Holder a certificate or certificates representing such Common
Shares 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 Common Shares 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 or (B) the Holder has provided the Company
with prior written notice (which notice may be included in a
Conversion Notice) requesting reissuance of this Note upon physical
surrender. The Holder and the Company shall maintain records
showing the Principal 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.
(iv)
Pro Rata Conversion; Disputes . In the event that the
Company receives a Conversion Notice from more than one holder of
Notes for the same Conversion Date and the Company can convert
some, but not all, of such portions of the Notes submitted for
conversion, the Company, subject to Section 3(d), shall cause
the Company to convert from each holder of Notes electing to have
Notes converted on such date a pro rata amount of such
holder’s portion of its Notes submitted for conversion based
on the principal amount of Notes submitted for conversion on such
date by such holder relative to the aggregate principal amount of
all Notes submitted for conversion on such date. In the event of a
dispute as to the number of Common Shares issuable to the Holder in
connection with a conversion of this Note, the Company shall issue
to the Holder the number of Common Shares 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 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 9.99% (the “
Maximum Percentage ”) of the number of Common Shares
outstanding immediately after giving effect to such conversion. For
purposes of the foregoing sentence, the number of Common Shares
beneficially owned by the Holder and its affiliates shall include
the number of Common Shares issuable upon conversion of this Note
with respect to which the determination of such sentence is being
made, but shall exclude the number of Common Shares 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
5
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 Common Shares, the Holder may
rely on the number of outstanding Common Shares as reflected in
(x) the Company’s most recent Form 10-K, 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 Common
Shares outstanding. For any reason at any time, upon the written or
oral request of the Holder, the Company shall within one
(1) Trading Day confirm orally and in writing to the Holder
the number of Common Shares then outstanding. In any case, the
number of outstanding Common Shares 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 Common Shares was
reported. By written notice to the Company, the Holder may increase
or decrease the Maximum Percentage to any other percentage not in
excess of 9.99% 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, and
(ii) any such increase or decrease will apply only to the
Holder and not to any other holder of Notes.
(ii)
Principal Market Regulation . The Company shall not be
obligated to issue any Common Shares upon conversion of this Note
and the Holder of this Note shall not have the right to receive
upon conversion of this Note any Common Shares if the issuance of
such Common Shares would exceed the aggregate number of Common
Shares which the Company may issue upon conversion or exercise, as
applicable, of the Notes and Warrants or otherwise under the Notes
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 Shares 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, Common
Shares 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 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 Common Shares 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 Common Shares 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.
6
(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 sixty
(60) 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));
(ii) the
suspension from trading or failure of the Common Shares to be
listed 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 Common Shares within ten
(10) Trading Days after the applicable Conversion Date or (B)
notice, written or oral, to any holder of the Notes, including by
way of public announcement or through any of its agents, at any
time, of its intention not to comply with a request for conversion
of any Notes into Common Shares that is tendered in accordance with
the provisions of the Notes;
(iv) at
any time following the tenth (10 th )
consecutive Trading Day that the number of Common Shares that are
available for issuance to the Holder is less than the number of
Common Shares that the Holder would be entitled to receive upon a
conversion of the full Conversion Amount of this Note (without
regard to any limitations on conversion set forth in Section 3(d)
or otherwise);
(v) the
Company’s failure to pay to the Holder any amount of
Principal (including, without limitation, the Company’s
failure to pay any redemption payments), Interest or other amounts
when and as due under this Note or any other Transaction Document
(as defined in the Securities Purchase Agreement), 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 three
(3) Trading Days;
(vi) the
occurrence of any default under, redemption of or acceleration
prior to maturity of Indebtedness of the Company or any of its
Subsidiaries (as defined in Section 3(a) of the Securities Purchase
Agreement) other than with respect to any Other Notes and other
than the prepayment of any Indebtedness set forth in Section 1
of
7
Schedule 3(dd) of the Securities Purchase
Agreement provided such prepayment is not due to any acceleration
following any default thereunder;
(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 $100,000 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 $100,000 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
clearly 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) other
than as set forth in item (xi) below, the Company breaches any
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 fifteen (15) consecutive Trading
Days;
(xi) any
breach or failure in any respect to comply with either of
Sections 8 or 14 of this Note or Section 4(q) of the
Securities Purchase Agreement; or
(xii) any
Event of Default (as defined in the Other Notes) occurs with
respect to any Other Notes.
(b)
Redemption Right . Promptly after the occurrence of an Event
of Default with respect to this Note or any Other Note, the Company
shall 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
8
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 at such time as
the Holder delivers an Event of Default Redemption Notice and
(B) the Closing Sale Price of the Common Shares 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. In the
event of a partial redemption of this Note pursuant hereto, the
Principal amount redeemed shall be deducted from the Installment
Amounts relating to the applicable Installment Dates as set forth
in the Event of Default Redemption Notice. 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.
(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 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, having similar ranking to
the Notes, and satisfactory to the Required Holders and
(ii) the Successor Entity is a publicly traded corporation
whose common shares are 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 (if other than the Company) 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
Company’s Common Shares (or other securities, cash, assets or
other property) purchasable upon the conversion or redemption of
the Notes prior to such Fundamental Transaction, such publicly
traded common shares (or their equivalent) of the Successor Entity,
as adjusted in accordance with the provisions of this Note. The
provisions of
9
this Section
shall apply similarly and equally to successive Fundamental
Transactions and shall be applied without regard to any limitations
on the conversion or redemption 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, 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 (the
“ Change of Control Period ”) beginning after
the Holder’s receipt of a Change of Control Notice and ending
on the date that is twenty (20) 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 (x) 120% of
the sum of (1) the Conversion Amount being redeemed and
(2) the amount of any accrued but unpaid Interest thereon
through the date of such redemption payment and (y) 120% of
the sum of (1) the product of (A) the Conversion Amount
being redeemed multiplied by (B) the quotient determined by
dividing (I) the aggregate cash consideration and the
aggregate cash value of any non-cash consideration per Common Share
to be paid to the holders of the Common Shares upon consummation of
the Change of Control (any such non-cash consideration consisting
of marketable securities to be valued at the higher of the Closing
Sale Price of such securities as of the Trading Day immediately
prior to or the Trading Day following the public announcement of
such proposed Change of Control) by (II) the Conversion Price
plus (2) the amount of any accrued but unpaid Interest on such
Conversion Amount being redeemed through the date of such
redemption payment (the “ Change of Control Redemption
Price ”). Redemptions required by this Section 5
shall be made in accordance with the provisions of Section 12 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 Section 5(c) may be converted, in whole
or in part, by the Holder into Common Shares, or in the event the
Conversion Date is after the consummation of the Change of Control,
shares or equity interests of the Successor Entity substantially
equivalent to the Company’s Common Shares 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. No Accelerated Payment
Option Warrants shall be issued or issuable by the Company in
connection with any redemption pursuant to this
Section 5(b).
10
(6)
RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE
EVENTS .
(a)
Purchase Rights . If at any time the Company grants, issues
or sells any Options, Convertible Securities or rights to purchase
shares, warrants, securities or other property pro rata to all
record holders of any class of Common Shares (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 Common Shares 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
Shares 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 Common Shares are entitled to receive securities or
other assets with respect to or in exchange for Common Shares (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 Common Shares
receivable upon such conversion, such securities or other assets to
which the Holder would have been entitled with respect to such
Common Shares had such Common Shares 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 Common Shares otherwise
receivable upon such conversion, such securities or other assets
received by the holders of Common Shares 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 Common Shares) 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 .
(a)
Adjustment of Conversion Price upon Issuance of Common
Shares . If and whenever on or after the Subscription Date, the
Company issues or sells, or in accordance with this Section 7(a) is
deemed to have issued or sold, any Common Shares (including the
issuance or sale of Common Shares owned or held by or for the
account of the Company, but excluding Common Shares 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 the Conversion Price in
effect immediately prior to such issue or sale or deemed issuance
or sale (the foregoing a “ Dilutive Issuance ”),
then immediately after such Dilutive Issuance, the Conversion Price
then in effect shall be reduced to an amount equal to the product
of (A) the Conversion Price in effect immediately prior to
such Dilutive Issuance and (B) the quotient determined by
dividing (1) the sum of (I) the product derived
by
11
multiplying the
Conversion Price in effect immediately prior to such Dilutive
Issuance and the number of Common Shares Deemed Outstanding
immediately prior to such Dilutive Issuance plus (II) the
consideration, if any, received by the Company upon such Dilutive
Issuance, by (2) the product derived by multiplying
(I) the Conversion Price in effect immediately prior to such
Dilutive Issuance by (II) the number of Common Shares Deemed
Outstanding immediately after such Dilutive Issuance. 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 (other than an Excluded Security) and the lowest
price per share for which one Common Share 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 Common
Share 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 7(a)(i), the “lowest price per share for which
one Common Share 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
Common Share 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 Common Shares or of such Convertible
Securities upon the exercise of such Options or upon the actual
issuance of such Common Shares upon conversion or exchange or
exercise of such Convertible Securities.
(ii)
Issuance of Convertible Securities . If the Company or the
Company in any manner issues or sells any Convertible Securities
(other than an Excluded Security) and the lowest price per share
for which one Common Share is issuable upon such conversion or
exchange or exercise thereof is less than the Applicable Price,
then such Common Share 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 7(a)(ii), the
“lowest price per share for which one Common Share 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
Common Share 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 Common Shares upon conversion
or exchange or exercise of such Convertible Securities, and if any
such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustment of the Conversion
Price had been or are to be made pursuant to other provisions of
this Section 7(a), no further adjustment of the Conversion
Price shall be made by reason of such issue or sale.
(iii)
Change in Option Price or Rate of Conversion . If the
purchase price provided for in any Options (other than an Excluded
Security), the additional consideration, if any, payable upon the
issue, conversion, exchange or exercise of any Convertible
Securities, or the rate at which any Convertible Securities are
convertible into or exchangeable or exercisable for Common Shares
changes at any time, the Conversion Price in
12
effect at the
time of such change shall be adjusted to the Conversion Price which
would have been in effect at such time had such Options or
Convertible Securities provided for such changed purchase price,
additional consideration or changed conversion rate, as the case
may be, at the time initially granted, issued or sold. For purposes
of this Section 7(a)(iii), if the terms of any Option or
Convertible Security that was outstanding as of the Subscription
Date are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and
the Common Shares deemed issuable upon exercise, conversion or
exchange thereof shall be deemed to have been issued as of the date
of such change. No adjustment shall be made if such adjustment
would result in an increase of the Conversion Price then in
effect.
(iv)
Calculation of Consideration Received . In case any Option
(other than an Excluded Security) is issued in connection with the
issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto,
the Options will be deemed to have been issued for a consideration
of $.01. If any Common Shares, Options or Convertible Securities
are issued or sold or deemed to have been issued or sold for cash,
the consideration received therefor will be deemed to be the net
amount received by the Company therefor. If any Common Shares,
Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration
other than cash received by the Company will be the fair value of
such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by
the Company will be the closing sale price of such securities on
the date of receipt if such securities are listed on a national
securities exchange. If any Common Shares, Options or Convertible
Securities are issued to the owners of the non-surviving entity in
connection with any merger in which the Company is the surviving
entity, the amount of consideration therefor will be deemed to be
the fair value of such portion of the net assets and business of
the non-surviving entity as is attributable to such Common Shares,
Options or Convertible Securities, as the case may be. The fair
value of any consideration other than cash or securities will be
determined jointly by the Company and the Required Holders. If such
parties are unable to reach agreement within ten (10) days
after the occurrence of an event requiring valuation (the
“Valuation Event”), the fair value of such
consideration will be determined within five (5) Trading Days
after the tenth (10th) day following the Valuation Event by an
independent, reputable appraiser jointly selected by the Company
and the Required Holders. The determination of such appraiser shall
be deemed binding upon all parties absent manifest error and the
fees and expenses of such appraiser shall be borne by the
Company.
(v)
Record Date . If the Company takes a record of the holders
of Common Shares for the purpose of entitling them (A) to
receive a dividend or other distribution payable in Common Shares,
Options or in Convertible Securities or (B) to subscribe for
or purchase Common Shares, Options or Convertible Securities, then
such record date will be deemed to be the date of the issue or sale
of the Common Shares deemed to have been issued or sold upon the
declaration of such dividend or the making of such other
distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
(b)
Adjustment of Conversion Price upon Subdivision or Combination
of Common Shares . If the Company at any time on or after the
Subscription Date subdivides (by any share split, share dividend,
recapitalization or otherwise) one or more classes of its
outstanding Common Shares into a greater number of shares, the
Conversion Price in effect
13
immediately
prior to such subdivision will be proportionately reduced. If the
Company at any time on or after the Subscription Date combines (by
combination, reverse share split or otherwise) one or more classes
of its outstanding Common Shares into a smaller number of shares,
the Conversion Price in effect immediately prior to such
combination will be proportionately increased.
(c)
Other Events . If any event occurs of the type contemplated
by the provisions of this Section 7 but not expressly provided
for by such provisions (including, without limitation, the granting
of share appreciation rights, phantom share rights or other rights
with equity features), then the Company’s Board of Directors
will make an appropriate adjustment in the Conversion Price so as
to protect the rights of the Holder under this Note; provided that
no such adjustment will increase the Conversion Price as otherwise
determined pursuant to this Section 7.
(8)
COMPANY INSTALLMENT CONVERSION OR REDEMPTION .
(a)
General . Subject to and in accordance with the terms of
this Section 8, on each applicable Installment Date, the
Company shall pay to the Holder of this Note the Installment Amount
as of such Installment Date by the combination of any of the
following, (i) provided that there has been no Equity
Conditions Failure, requiring the conversion of a portion of the
applicable Installment Amount, in whole or in part, in accordance
with this Section 8 (a “ Company Conversion
”), and/or (ii) redeeming for cash the applicable
Installment Amount, in whole or in part, in accordance with this
Section 8 (a “ Company Redemption ”);
provided that all of the outstanding applicable Installment Amount
as of each such Installment Date must be converted and/or redeemed
by the Company on the applicable Installment Date, subject to the
provisions of this Section 8. Unless the Company Installment
Notice (as defined below) indicates otherwise or if there is an
Equity Conditions Failure, the entire Installment Amount to be paid
on such Installment Date shall be paid through a Company
Conversion. On or prior to the date which is the fifth (5
th ) Trading Day prior to each Installment Date or,
if the Company is exercising its Accelerated Payment Option the
tenth (10 th
) Trading Day prior to the
applicable Installment Date (each, an “ Installment Notice
Due Date ”), the Company shall deliver written notice
(each, a “ Company Installment Notice ” and the
date all of the holders received such notice is referred to as the
“ Company Installment Notice Date ”), to the
Holder which Company Installment Notice shall state (i) the
portion, if any, of the applicable Installment Amount to be
converted pursuant to a Company Conversion, which amount when added
to the Company Redemption Amount must equal the applicable
Installment Amount (the “ Company Conversion Amount
”), (ii) the portion, if any, of the applicable
Installment Amount which the Company elects to redeem pursuant to a
Company
|
