Exhibit 99.2
THIS NOTE AND THE COMMON SHARES ISSUABLE
UPON CONVERSION OF THIS NOTE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, 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 FARMSTEAD TELEPHONE GROUP,
INC. THAT SUCH REGISTRATION IS NOT
REQUIRED.
SECURED REVOLVING NOTE
----------------------
FOR VALUE
RECEIVED, each of FARMSTEAD TELEPHONE GROUP, INC., a
Delaware corporation (the "Parent"), and
the other companies listed on
Exhibit A attached hereto (such other
companies together with the Parent,
each a "Company" and collectively, the
"Companies"), jointly and severally,
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 Three
Million Dollars ($3,000,000), without
duplication of any amounts owing by
the Companies to the Holder under the
Minimum Borrowing Notes (as defined
in the Security Agreement referred to
below), or, if different, the
aggregate principal amount of all Loans (as
defined in the Security
Agreement referred to below), together with
any accrued and unpaid interest
hereon, on March 31, 2008 (the "Maturity
Date") if not sooner
indefeasibly
paid in full.
Capitalized terms used herein without definition shall have the
meanings ascribed to such terms in the
Security Agreement among the
Companies and the Holder dated as of the
date hereof (as amended, modified
and/or supplemented from time to time, the
"Security Agreement").
The
following terms shall apply to this Secured Revolving Note
(this
"Note"):
ARTICLE I
CONTRACT RATE AND MINIMUM BORROWING NOTE
1.1
Contract Rate.
Subject to Sections
3.2 and 4.10, interest
payable on the outstanding principal amount
of this Note (the "Principal
Amount") 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 two percent (2.0%) (the "Contract
Rate"). The Contract
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 the Prime
Rate. Subject to Section 1.2, the
Contract Rate shall not at any time be
less than six percent (6.0%). Interest shall be (i) calculated
on the
basis of a 360 day year, and (ii) payable
monthly, in arrears, commencing
on May 1, 2005 on the first business day of
each consecutive calendar month
thereafter through and including the
Maturity Date, and on the Maturity
Date, whether by acceleration or
otherwise.
<PAGE>
1.2
Contract Rate
Adjustments and Payments. The Contract Rate
shall be calculated on the last business
day of each calendar month
hereafter (other than for increases or
decreases in the Prime Rate which
shall be calculated and become effective in
accordance with the terms of
Section 1.1) until the Maturity Date (each
a "Determination Date") and
shall be subject to adjustment as set forth
herein. If (i) the
Parent
shall have registered the shares of the
Common Stock underlying the
conversion of each Minimum Borrowing Note
and each Warrant 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 for
the five (5) trading days immediately
preceding a 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 200 basis
points (200 b.p.) (2%) 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
herein), in no event shall the Contract
Rate at any time be less than zero
percent (0%).
1.3
Allocation of
Principal to Minimum Borrowing Note. In the
event that the amount due and payable
hereunder should equal or exceed
$300,000, to the extent that the
outstanding balance on any Minimum
Borrowing Note shall be less than the
Minimum Borrowing Amount (such amount
being referred to herein as the
"Transferable Amount"), the portion of the
balance of the Revolving Note that exceeds
$300,000 (up to the Transferable
Amount) shall be deemed to be
simultaneously extinguished on this Note and
transferred to, and evidenced by, the next
(serialized) Minimum Borrowing
Note (the "Next Serialized Note").
ARTICLE II
CONVERSION RIGHTS AND FIXED CONVERSION PRICE
2.1
Optional
Conversion. Subject to
the terms of this Article II,
the Holder shall have the right, but not
the obligation, at any time until
the Maturity Date, or during an Event of
Default (as defined in Article
III), and, subject to the limitations set
forth in Section 2.2 hereof, to
convert all or any portion of the
outstanding Principal Amount and/or
accrued interest and fees due and payable
into fully paid and nonassessable
restricted shares of the Common Stock at
the Fixed Conversion Price
(defined below). For purposes hereof, subject to
Section 2.6 hereof, the
initial "Fixed Conversion Price" means
$1.54 [which has been determined on
the date of this Note as an amount equal to
the lesser of (x) 110% of the
average closing price of the Common Stock
for the ten (10) trading days
immediately prior to the date of this Note
and (y) 115% of the closing
price of the Common Stock on the date of
this Note]; provided that, on the
date on which the first $1,500,000
principal amount of all Minimum
Borrowing Notes converted hereunder (and
all interest and fees related
thereto) (the "Initial Conversion Amount")
shall have been converted
hereunder (the "Initial Conversion
Completion Date"), the Fixed Conversion
Price shall be adjusted for all amounts in
excess of the Initial Conversion
Amount converted thereunder (and all
interest and fees related thereto), to
the greater of (x) $1.54 [the initial Fixed
Conversion Price] and (y) an
amount equal to the lesser of (A) 110% of
the average closing price of the
Common Stock for the ten (10) trading days
immediately prior to the Initial
Conversion Completion Date and (B) 115% of
the closing price of the Common
Stock on the Initial Conversion Completion
Date.
<PAGE> 2
2.2
The shares of
Common Stock to be issued upon such conversion
are herein referred to as the "Conversion
Shares."
2.3
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
(i) 4.99% of the issued and outstanding
shares of Common Stock and (ii) the
number of shares of Common Stock
beneficially owned by the Holder and
issuable to the Holder upon exercise of the
Warrants. For 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 2.2
shall automatically become null and void
without any notice to any Company
upon the occurrence and during the
continuance of an Event of Default, or
upon 75 days prior notice to the Parent,
except that at no time shall the
number of shares of Common Stock
beneficially owned by the Holder exceed
19.99% of the outstanding shares of Common
Stock. Notwithstanding
anything
contained herein to the contrary, the
number of shares of Common Stock
issuable by the Parent and acquirable by
the Holder at a price below
$2.30 [insert the greater of market price
or book value of the Common Stock
as of the date hereof] per share pursuant
to the terms of this Note, the
Security Agreement or any other Ancillary
Agreement, shall not exceed an
aggregate of 664,104 shares of Common Stock
(subject to appropriate
adjustment for stock splits, stock
dividends, or other similar
recapitalizations affecting the Common
Stock) (the "Maximum Common Stock
Issuance"), unless the issuance of Common
Stock hereunder in excess of the
Maximum Common Stock Issuance shall first
be approved by the Parent's
shareholders. If at any point in time and from
time to time the number of
shares of Common Stock issued pursuant to
the terms of this Note, the
Security Agreement or any other Ancillary
Agreement, together with the
number of shares of Common Stock that would
then be issuable by the Parent
to the Holder in the event of a conversion
or exercise pursuant to the
terms of this Note, the Security Agreement
or any other Ancillary
Agreement, would exceed the Maximum Common
Stock Issuance but for this
Section 2.2, the Parent shall promptly call
a shareholders meeting to
solicit shareholder approval for the
issuance of the shares of Common Stock
hereunder in excess of the Maximum Common
Stock Issuance.
Notwithstanding
anything contained herein to the contrary,
the provisions of this Section
2.2 are irrevocable and may not be waived
by the Holder or any Company.
2.4
Mechanics of
Holder's Conversion.
In the event that the Holder
elects to convert amounts outstanding under
this Note into Common Stock,
the Holder shall give notice of such
election by delivering (by facsimile
or email) an executed and completed notice
of conversion in substantially
the form of Exhibit B hereto (appropriately
completed) ("Notice of
Conversion") to the Parent and such Notice
of Conversion shall provide a
breakdown in reasonable detail of the
Principal Amount, accrued interest
and fees that are being converted.
The Parent shall have
two (2) hours
from the time that such Notice of
Conversion is delivered to the Parent to
provide the Holder with written notice
(delivered to Holder via facsimile
or email) of the Parent's decision to
purchase the number of shares of
Common Stock otherwise deliverable to the
Holder pursuant to the Notice of
Conversion (the "Designated Shares") for a
purchase price determined by
multiplying the Designated Shares by the
intraday high price of the Common
Stock on the day the Notice of Conversion
was submitted to the Parent (the
<PAGE> 3
"Disposition Price"). The Disposition Price shall be
paid by the Parent to
the Holder by wire transfer of immediately
available funds within two (2)
business days of the date of the Notice of
Conversion; it being understood
that payment of the Disposition Price to
the extent required hereunder
shall be deemed to be an Obligation as
defined in the Security Agreement.
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 Parent within two (2)
Business Days after the Conversion Date.
Each date on which a
Notice of
Conversion is delivered or telecopied to
the Parent in accordance with the
provisions hereof shall be deemed a
Conversion Date (the "Conversion
Date").. Pursuant to the terms of the
Notice of Conversion, th
