Exhibit 10.18
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 STOCK 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
OR SUCH STOCK UNDER SAID ACT AND ANY APPLICABLE STATES SECURITIES
LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO DIGITAL
LIFESTYLES GROUP, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED.
SECURED REVOLVING
NOTE
FOR VALUE RECEIVED, DIGITAL
LIFESTYLES GROUP, INC. a Delaware corporation (the “
Borrower ”) promises to pay to LAURUS MASTER FUND,
LTD., 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, the sum of Four Million Seven Hundred Fifty
Thousand Dollars ($4,750,000) without duplication of any amounts
owing by Borrower to 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 such term is defined in the Security
Agreement referred to below), together with any accrued and unpaid
interest hereon, on November 29, 2007 (the “ Maturity
Date ”).
Capitalized terms used herein
without definition shall have the meanings ascribed to such terms
in the Security Agreement between the Borrower, certain
Subsidiaries party thereto and the Holder dated as of November 29,
2004 (as amended, modified and supplemented from time to time, the
“ Security Agreement ”).
The following terms shall apply to this
Note:
ARTICLE I
CONTRACT RATE &
PREPAYMENTS
1.1. Interest Rate . Subject
to Sections 1.2, 3.2, 4.1 and 5.7 hereof, interest payable on this
Note shall accrue at a rate per annum equal to the “prime
rate” published in The Wall Street Journal from time
to time, plus two percent (2.0%) (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 Rate; each
change to be effective as of the day of the change in such rate in
accordance with the terms of the Security Agreement. Subject to
Section 1.2, the Contract Rate shall not be less than six percent
(6.0%).
1.2. Contract Rate Adjustments
and Payments . The Contract Rate shall be calculated on the
last business day of each month hereafter until the Maturity Date
(each a “Determination Date”) and shall be subject to
adjustment as set forth herein. If (i) the Borrower shall have
registered the shares of the Borrower’s common stock
underlying each of the
conversion of each Minimum Borrowing Note then
outstanding and that certain warrant issued to Holder 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.)
(2.0.%) for each incremental twenty five percent (25%) increase in
the Market Price of the Common Stock above the then applicable
Fixed Conversion Price. If (i) the Borrower shall not have
registered the shares of the Borrower’s common stock
underlying the conversion of each Minimum Borrowing Note then
outstanding and that certain warrant issued to Holder on a
registration statement declared effective by the SEC and which
remains effective, and (ii) 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 decreased 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%). Interest shall be (i)
calculated on the basis of a 360 day year, and (ii) payable
monthly, in arrears, commencing on December 1, 2004 and on the
first business day of each consecutive calendar month thereafter
until the Maturity Date (and on the Maturity Date), whether by
acceleration or otherwise (each, a “ Contract Rate Payment
Date ”).
1.3 Allocation of Principal to
serialized Minimum Borrowing Note . In the event that the
amount due and payable hereunder should equal or exceed $1,500,000,
to the extent that the aggregate outstanding balance on Minimum
Borrowing Note shall be less than $2,750,000 the difference of
$2,750,000 less the actual aggregate balance of the Minimum
Borrowing Note, the “Available Minimum Borrowing”), the
portion of the balance hereof (in excess of $1,500,000) as shall
equal the Available Minimum Borrowing shall be deemed to be
simultaneously extinguished on the Revolving Note and transferred
to, and evidenced by, a new serialized Minimum Borrowing Note,
substantially in the form as the Minimum Borrowing Note issued on
the date hereof.
ARTICLE II
HOLDER’S CONVERSION
RIGHTS
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 2.5
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hereof, the initial “ Fixed Conversion
Price ” means $0.39. The shares of Common Stock to be
issued upon such conversion are herein referred to as the “
Conversion Shares .”
2.2. 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 outstanding shares of Common Stock of the Borrower and the
number of shares of Common Stock beneficially owned by such Holder
or issuable upon exercise of warrants 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 2.2 shall automatically
become null and void without any notice to Borrower upon the
occurrence and during the continuance beyond any applicable grace
period of an Event of Default, or upon 75 days prior notice to the
Borrower. In addition, the Holder shall not be entitled to convert
pursuant to the terms of this Note during any twenty two (22)
trading day period an amount that would result in the issuance of
Conversion Shares in excess of thirty percent (30%) of the trading
volume of the Common Stock for the twenty two (22) trading days
immediately prior to the Conversion Date (defined below). The
Holder shall deliver no more than two (2) Notices of Conversion (as
defined below) to Borrower during any twenty two (22) day
period.
2.3. Mechanics of Holder’s
Conversion . In the event that the Holder elects to convert
this Note into Common Stock, the Holder shall give notice of such
election by delivering an executed and completed notice of
conversion (“ Notice of Conversion ”) to the
Borrower and such Notice of Conversion shall provide a breakdown in
reasonable detail of the Principal Amount, accrued interest and
fees that are 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 Borrower
within two (2) business days after the Conversion Date. Each date
on which a Notice of Conversion is delivered or telecopied to the
Borrower in accordance with the provisions hereof shall be deemed a
Conversion Date (the “ Conversion Date ”). A
form of Notice of Conversion to be employed by the Holder is
annexed hereto as Exhibit A. Pursuant to the terms of the Notice of
Conversion, the Borrower will issue instructions to the transfer
agent accompanied by an opinion of counsel, if such an opinion is
required by the transfer agent, within one (1) Business Day of the
date of the delivery to Borrower 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 Borrower 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 Borrower of the
Notice of Conversion. The Holder shall be treated for all purposes
as the record holder of such Common Stock, unless the Holder
provides the Borrower written instructions to the contrary. No
fractional share shall be issued
3
upon any conversion of this Note. If a
conversion would result in the issuance of a fraction of a share of
Common Stock, the Borrower shall, in lieu of issuing any fractional
share, pay the Holder otherwise entitled to such fraction a sum in
cash equal to the fair market value of such fraction on the
Conversion Date (based on the Current Market Price Per Share). The
“Current Market Price Per Share” on any date shall mean
the average of the Quoted Prices of the Common Stock for the
fifteen (15) consecutive Business Days ending before the day in
question. If no such Quoted Prices are available, however,
“Current Market Price Per Share” shall be the Fixed
Conversion Price. “Quoted Price” means, with respect to
any security on any date, the average of the closing prices on such
day of such security on all domestic securities exchanges and
inter-dealer quotation systems providing last sale information on
which such security is then listed or tracked, or, if there have
been no sales on any such exchange or inter-dealer quotation system
on such day, the average of the highest bid and lowest asked prices
on all such exchanges or inter-dealer quotation system at the end
of such day or, if on any such day such security is not so listed,
the average of the representative bid and asked prices quoted on
NASDAQ as of 4:00 p.m., New York time, on such day, or if on any
day such security is not quoted on NASDAQ, the average of the
highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar successor
organization.
2.4. Late Payments . The
Borrower understands that a delay in the delivery of the shares of
Common Stock in the form required pursuant to this Article beyond
the Delivery Date could result in economic loss to the
