EXHIBIT 10.5
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS HEREOF, INCLUDING
SECTION 4(a). THE PRINCIPAL AMOUNT UNDER THIS NOTE MAY BE LESS THAN THE AMOUNT
STATED ON THE FACE HEREOF PURSUANT TO SECTION 4(a).
Original Issue Date: May 2, 2005
$2,635,547.00
AMENDED AND RESTATED 11% SENIOR SECURED NOTE DUE MAY 2, 2008
THIS NOTE amends and restates that certain 11% Senior Secured Notes of
Knockout Holdings, Inc., a Delaware corporation, having a principal place of
business at 000 X. Xxxxxxxxx Xxx., Xxxxxxxxx, XX 00000-0000 (the "Company"),
designated as its 11% Senior Secured Note (as amended and restated, the
"Note(s)"), which was originally issued to DCOFI MASTER LDC on May 2, 2005 in
the original principal amount of $3,000,000.00.
FOR VALUE RECEIVED, the Company promises to pay to CAMOFI MASTER LDC,
formerly known as DCOFI MASTER LDC, or its registered assigns (the "Holder"),
the principal sum of $2,635,547 on May 2, 2008 or such earlier date as the Notes
are required or permitted to be repaid as provided hereunder (the "Maturity
Date"), and to pay interest to the Holder on the aggregate then outstanding
principal amount of this Note in accordance with the provisions hereof. This
Note is subject to the following additional provisions:
Section 1. Definitions. For the purposes hereof, in addition to the terms
defined elsewhere in this Note: (a) capitalized terms not otherwise defined
herein have the meanings given to such terms in the Purchase Agreement, and (b)
the following terms shall have the following meanings:
"Alternate Consideration" shall have the meaning set forth in Section
5(c).
"Business Day" means any day except Saturday, Sunday and any day which
shall be a federal legal holiday in the United States or a day on which banking
institutions in the State of New York are authorized or required by law or other
government action to close.
1
"Change of Control Transaction" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company, or (ii) a replacement at one time or within a
one-year period of more than one-half of the members of the Company's board of
directors which is not approved by a majority of those individuals who are
members of the board of directors on the date hereof (or by those individuals
who are serving as members of the board of directors on any date whose
nomination to the board of directors was approved by a majority of the members
of the board of directors who are members on the date hereof), or (iii) the
execution by the Company of an agreement to which the Company is a party or by
which it is bound, providing for any of the events set forth above in (i) or
(ii).
"Common Stock" means the common stock, par value $0.001, of the Company
and stock of any other class into which such shares may hereafter have been
reclassified or changed.
"Conversion Date" shall have the meaning set forth in Section 4(a) hereof.
"Conversion Price" shall have the meaning set forth in Section 4(b).
"Conversion Shares" means the shares of Common Stock issuable upon
conversion of Notes or as payment of interest in accordance with the terms
hereof.
"Equity Conditions" shall mean, during the period in question, (i) the
Company shall have duly honored all redemptions scheduled to occur, if any, (ii)
all liquidated damages and other amounts owing in respect of the Notes shall
have been paid; (iii) there is an effective Registration Statement pursuant to
which the Holder is permitted to utilize the prospectus thereunder to resell all
of the shares issuable pursuant to the Transaction Documents (and the Company
believes, in good faith, that such effectiveness will continue uninterrupted for
the foreseeable future), (iv) the Common Stock is trading on the Trading Market
and all of the shares issuable pursuant to the Transaction Documents are listed
for trading on a Trading Market (and the Company believes, in good faith, that
trading of the Common Stock on a Trading Market will continue uninterrupted for
the foreseeable future), (v) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the issuance of all
of the shares issuable pursuant to the Transaction Documents, (vi) there is then
existing no Event of Default or event which, with the passage of time or the
giving of notice, would constitute an Event of Default, (vii) all of the shares
issued or issuable pursuant to the transaction proposed would not violate the
limitations set forth in Section 4, and (viii) no public announcement of a
pending or proposed Fundamental Transaction, Change of Control Transaction or
acquisition transaction has occurred that has not been consummated.
"Event of Default" shall have the meaning set forth in Section 8.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2
"Fundamental Transaction" shall have the meaning set forth in Section 5(c)
hereof.
"Interest Conversion Rate" means 85% the average VWAP for the 20 days
immediately prior to the applicable Interest Payment Date.
"Late Fees" shall have the meaning set forth in the second paragraph to
this Note.
"Mandatory Prepayment Amount" shall equal the sum of 115% of the principal
amount of the Notes outstanding, plus all accrued and unpaid interest thereon.
"Monthly Redemption" shall mean the redemption of the Note pursuant to
Section 6(a) hereof.
"Monthly Redemption Amount" shall mean, as to a Monthly Redemption, 1/21st
the original principal amount in the aggregate among all Holders.
"Monthly Redemption Date" means the first Business Day of each month,
commencing 15 months after the Original Issue Date (i.e. commencing August 1,
2006) and ending upon the full redemption of this Note.
"Original Issue Date" shall mean May 2, 2005.
"Person" means a corporation, an association, a partnership, organization,
a business, an individual, a government or political subdivision thereof or a
governmental agency.
"Prepayment Amount" for any Notes shall equal the sum of (i) (A) 108% of
the principal amount of Notes to be prepaid, plus all accrued and unpaid
interest thereon if such prepayment shall occur on or before one year from the
date hereof, or (B) 105% of the principal amount of Notes to be prepaid, plus
all accrued and unpaid interest thereon if such prepayment shall occur after one
year but before two years from the date hereof, or (C) 102% of the principal
amount of the Notes to be prepaid, plus all accrued and unpaid interest thereon
if such prepayment shall occur after two years but before three years from the
date hereof, and (ii) all other amounts, costs, expenses and liquidated damages
due in respect of such Notes.
"Purchase Agreement" means the Securities Purchase Agreement, dated as of
May 2, 2005, to which the Company and the original Holder are parties, as
amended, modified or supplemented from time to time in accordance with its
terms.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Subsidiary" shall have the meaning given to such term in the Purchase
Agreement.
"Trading Day" means a day on which the Common Stock is traded on a Trading
Market.
3
"Trading Market" means the following markets or exchanges on which the
Common Stock is listed or quoted for trading on the date in question: the Nasdaq
SmallCap Market, the American Stock Exchange, the New York Stock Exchange, the
Nasdaq National Market or the OTC Bulletin Board.
"Transaction Documents" shall have the meaning set forth in the Purchase
Agreement.
"VWAP" means, for any date, the price determined by the first of the
following clauses that applies: (a) if the Common Stock is then listed or quoted
on a Trading Market, the daily volume weighted average price of the Common Stock
for such date (or the nearest preceding date) on the primary Trading Market on
which the Common Stock is then listed or quoted as reported by Bloomberg
Financial L.P. (based on a Trading Day from 9:30 a.m. EST to 4:02 p.m. Eastern
Time) using the VAP function; (b) if the Common Stock is not then listed or
quoted on the Trading Market and if prices for the Common Stock are then
reported in the "Pink Sheets" published by the Pink Sheets, LLC (or a similar
organization or agency succeeding to its functions of reporting prices), the
most recent bid price per share of the Common Stock so reported; or (c) in all
other cases, the fair market value of a share of Common Stock as determined by a
nationally recognized-independent appraiser selected in good faith by Purchasers
holding a majority of the principal amount of Notes then outstanding.
Section 2. Interest and Prepayments.
a) Payment of Interest in Cash or Kind. The Company shall pay interest to
the Holder on the aggregate then outstanding principal amount of this Note at
the rate of 11% per annum, payable quarterly in arrears, beginning on the first
such date after the Original Issue Date and on the Maturity Date (except that,
if any such date is not a Business Day, then such payment shall be due on the
next succeeding Business Day) and on each Monthly Redemption Date (as to that
principal amount then being redeemed) (each such date, an "Interest Payment
Date"), in cash. After the expiration of 15 months from the Original Issue Date,
the Company shall have the option to pay the interest in shares of Common Stock
at the Interest Conversion Rate, or cash, or a combination thereof; provided,
however, payment in shares of Common Stock may only occur if during the 20
Trading Days immediately prior to the applicable Interest Payment Date all of
the Equity Conditions have been met, the payment in shares of Common Stock would
not exceed 25% of the trading volume for any of the previous 10 Trading Days and
the Company shall have given the Holder notice in accordance with the notice
requirements set forth below.
b) Company's Election to Pay Interest in Kind. Subject to the terms and
conditions herein, after the expiration of 15 months from the Original Issue
Date hereof, the decision whether to pay interest hereunder in shares of Common
Stock or cash shall be at the discretion of the Company. Not less than 10
Trading Days prior to each Interest Payment Date, the Company shall provide the
Holder with written notice of its election to pay interest hereunder either in
cash or shares of Common Stock (the Company may indicate in such notice that the
election contained in such notice shall continue for later periods until
revised). Within 10 Trading Days prior to an Interest Payment Date, the
Company's election (whether specific to an Interest Payment Date or continuous)
shall be irrevocable as to such Interest Payment Date. Subject to the
aforementioned conditions, failure to timely provide such written notice shall
be deemed an election by the Company to pay the interest on such Interest
Payment Date in cash.
4
c) Interest Calculations. Interest shall be calculated on the basis of a
360-day year and shall accrue daily commencing on the Original Issue Date until
payment in full of the principal sum, together with all accrued and unpaid
interest and other amounts which may become due hereunder, has been made.
Interest hereunder will be paid to the Person in whose name this Note is
registered on the records of the Company regarding registration and transfers of
Notes (the "Note Register"). Except as otherwise provided herein, if at any time
the Company pays interest partially in cash and partially in shares of Common
Stock, then such payment shall be distributed ratably among the Holders based
upon the principal amount of Notes held by each Holder.
d) Late Fee. All overdue accrued and unpaid interest to be paid hereunder
shall entail a late fee at the rate of 20% per annum (or such lower maximum
amount of interest permitted to be charged under applicable law) ("Late Fee")
which will accrue daily, from the date such interest is due hereunder through
and including the date of payment. Notwithstanding anything to the contrary
contained herein, if on any Interest Payment Date the Company has elected to pay
interest in Common Stock and is not able to pay accrued interest in the form of
Common Stock because it does not then satisfy the conditions for payment in the
form of Common Stock set forth above, then, at the option of the Holder, the
Company, in lieu of delivering either shares of Common Stock pursuant to this
Section 2 or paying the regularly scheduled cash interest payment, shall
deliver, within three Trading Days of each applicable Interest Payment Date, an
amount in cash equal to the product of the number of shares of Common Stock
otherwise deliverable to the Holder in connection with the payment of interest
due on such Interest Payment Date and the highest VWAP during the period
commencing on the Interest Payment Date and ending on the Trading Day prior to
the date such payment is made.
e) Optional Prepayment. The Company shall have the right to prepay, in
cash, all or a portion of the Notes for an amount equal to such percentage of
the principal amount to be repaid as set forth in (i), (ii), and (iii) below,
plus all accrued and unpaid interest thereon:
(i) In the event that the Notes are prepaid on or prior to one year
from the date hereof, the prepayment shall be 108%.
(ii) In the event that the Notes are prepaid after one year but on
or before two years from the date hereof, the prepayment shall be 105%.
(iii) In the event that the Notes are prepaid after two years but on
or before three years from the date hereof, the prepayment shall be 102%.
Section 3. Registration of Transfers and Exchanges.
a) Different Denominations. This Note is exchangeable for an equal
aggregate principal amount of Notes of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange.
5
b) Investment Representations. This Note has been issued subject to
certain investment representations of the original Holder set forth in the
Purchase Agreement and may be transferred or exchanged only in compliance with
the Purchase Agreement and applicable federal and state securities laws and
regulations.
c) Reliance on Note Register. Prior to due presentment to the Company for
transfer of this Note, the Company and any agent of the Company may treat the
Person in whose name this Note is duly registered on the Note Register as the
owner hereof for the purpose of receiving payment as herein provided and for all
other purposes, whether or not this Note is overdue, and neither the Company nor
any such agent shall be affected by notice to the contrary.
Section 4. Conversion.
a) Voluntary Conversion. At any time after the Original Issue Date until
this Note is no longer outstanding, this Note shall be convertible into shares
of Common Stock at the option of the Holder, in whole or in part at any time and
from time to time (subject to the limitations on conversion set forth in Section
4(c) hereof). The Holder shall effect conversions by delivering to the Company
the form of Notice of Conversion attached hereto as Annex A (a "Notice of
Conversion"), specifying therein the principal amount of Notes to be converted
and the date on which such conversion is to be effected (a "Conversion Date").
If no Conversion Date is specified in a Notice of Conversion, the Conversion
Date shall be the date that such Notice of Conversion is provided hereunder. To
effect conversions hereunder, the Holder shall not be required to physically
surrender Notes to the Company unless the entire principal amount of this Note
plus all accrued and unpaid interest thereon has been so converted. Conversions
hereunder shall have the effect of lowering the outstanding principal amount of
this Note in an amount equal to the applicable conversion. The Holder and the
Company shall maintain records showing the principal amount converted and the
date of such conversions. The Company shall deliver any objection to any Notice
of Conversion within 3 Business Days of receipt of such notice. In the event of
any dispute or discrepancy, the records of the Holder shall be controlling and
determinative in the absence of manifest error. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of the provisions
of this paragraph, following conversion of a portion of this Note, the unpaid
and unconverted principal amount of this Note may be less than the amount stated
on the face hereof. However, at the Company's request, the Holder shall
surrender the Note to the Company within five (5) Trading Days following such
request so that a new Note reflecting the correct principal amount may be issued
to Holder.
b) Conversion Price. The conversion price in effect on any Conversion Date
shall be $0.50, subject to adjustment as hereinafter provided.
c) Conversion Limitations; Xxxxxx's Restriction on Conversion. The Company
shall not effect any conversion of this Note, and the Holder shall not have the
right to convert any portion of this Note, pursuant to Section 4(a) or
otherwise, to the extent that after giving effect to such conversion, the Holder
(together with the Holder's affiliates), as set forth on the applicable Notice
of Conversion, would beneficially own in excess of 9.9% of the number of shares
of the Common Stock outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of this Note with
6
respect to which the determination of such sentence is being made, but shall
exclude the number of shares of Common Stock 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 the Warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates. Except as set
forth in the preceding sentence, for purposes of this Section 4(c), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange
Act. To the extent that the limitation contained in this section applies, the
determination of whether this Note is convertible (in relation to other
securities owned by the Holder) and of which a portion of this Note is
convertible shall be in the sole discretion of such Holder. To ensure compliance
with this restriction, the Holder will be deemed to represent to the Company
each time it delivers a Notice of Conversion that such Notice of Conversion has
not violated the restrictions set forth in this paragraph and the Company shall
have no obligation to verify or confirm the accuracy of such determination. For
purposes of this Section 4(c), in determining the number of outstanding shares
of Common Stock, the Holder may rely on the number of outstanding shares of
Common Stock as reflected in (x) the Company's most recent Form 10-QSB or Form
10-KSB (or such related form), as the case may be, (y) a more recent public
announcement by the Company or (z) any other notice by the Company or the
Company's Transfer Agent setting forth the number of shares of Common Stock
outstanding. Upon the written or oral request of the Holder, the Company shall
within two Trading Days confirm orally and in writing to the Holder the number
of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock 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 shares of Common Stock was reported. The provisions of this Section
4(c) may be waived by the Holder upon, at the election of the Holder, not less
than 61 days' prior notice to the Company, and the provisions of this Section
4(d) shall continue to apply until such 61st day (or such later date, as
determined by the Holder, as may be specified in such notice of waiver).
d) Mechanics of Conversion
i. Conversion Shares Issuable Upon Conversion of Principal Amount.
The number of shares of Common Stock issuable upon a conversion hereunder
shall be determined by the quotient obtained by dividing (x) the
outstanding principal amount of this Note to be converted by (y) the
Conversion Price.
ii. Delivery of Certificate Upon Conversion. Not later than three
Trading Days after any Conversion Date, the Company will deliver to the
Holder (A) a certificate or certificates representing the Conversion
Shares which shall be free of restrictive legends and trading restrictions
(other than those required by the Purchase Agreement, provided, for
purposes of this Section 4(d)(ii), the term "Securities" in Section 4.2 of
the Purchase Agreement shall deemed to include the Conversion Shares)
representing the number of shares of Common Stock being acquired upon the
7
conversion of Notes (including, if so timely elected by the Company,
shares of Common Stock representing the payment of accrued interest) and
(B) a bank check in the amount of accrued and unpaid interest (if the
Company is required to pay accrued interest in cash). The Company shall,
if available and if allowed under applicable securities laws, use its best
efforts to deliver any certificate or certificates required to be
delivered by the Company under this Section electronically through the
Depository Trust Corporation or another established clearing corporation
performing similar functions.
iii. Failure to Deliver Certificates. If in the case of any Notice
of Conversion such certificate or certificates are not delivered to or as
directed by the applicable Holder by the third Trading Day after a
Conversion Date (due to no fault of the Holder), the Holder shall be
entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such
conversion, in which event the Company shall immediately return the
certificates representing the principal amount of Notes tendered for
conversion.
iv. Obligation Absolute; Partial Liquidated Damages. If the Company
fails for any reason to deliver to the Holder such certificate or
certificates pursuant to Section 4(d)(ii) by the third Trading Day after
the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, for each $1000 of principal
amount being converted, $10 per Trading Day (increasing to $20 per Trading
Day after 5 Trading Days after such damages begin to accrue) for each
Trading Day after such third Trading Day until such certificates are
delivered. The Company's obligations to issue and deliver the Conversion
Shares upon conversion of this Note in accordance with the terms hereof
are absolute and unconditional, irrespective of any action or inaction by
the Holder to enforce the same, any waiver or consent with respect to any
provision hereof, the recovery of any judgment against any Person or any
action to enforce the same, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the Holder
or any other Person of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other person, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of
such Conversion Shares; provided, however, such delivery shall not operate
as a waiver by the Company of any such action the Company may have against
the Holder. In the event a Holder of this Note shall elect to convert any
or all of the outstanding principal amount hereof, the Company may not
refuse conversion based on any claim that the Holder or any one associated
or affiliated with the Holder of has been engaged in any violation of law,
agreement or for any other reason, unless, an injunction from a court, on
notice, restraining and or enjoining conversion of all or part of this
Note shall have been sought and obtained and the Company posts a surety
bond for the benefit of the Holder in the amount of 150% of the principal
amount of this Note outstanding, which is subject to the injunction, which
bond shall remain in effect until the completion of arbitration/litigation
of the dispute and the proceeds of which shall be payable to such Holder
to the extent it obtains judgment. In the absence of an injunction
precluding the same, the Company shall issue Conversion Shares or, if
applicable, cash, upon a properly noticed conversion. Nothing herein shall
limit a Xxxxxx's right to pursue actual damages or declare an Event of
Default pursuant to Section 8 herein for the Company's failure to deliver
Conversion Shares within the period specified herein and such Holder shall
have the right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief. The exercise of any such rights shall not prohibit the
Holders from seeking to enforce damages pursuant to any other Section
hereof or under applicable law.
8
v. Compensation for Buy-In on Failure to Timely Deliver Certificates
Upon Conversion. In addition to any other rights available to the Holder,
if the Company fails for any reason to deliver to the Holder such
certificate or certificates pursuant to Section 4(d)(ii) by the third
Trading Day after the Conversion Date, and if after such third Trading Day
the Holder is required by its brokerage firm to purchase (in an open
market transaction or otherwise) Common Stock to deliver in satisfaction
of a sale by such Holder of the Conversion Shares which the Holder
anticipated receiving upon such conversion (a "Buy-In"), then the Company
shall (A) pay in cash to the Holder (in addition to any remedies available
to or elected by the Holder) the amount by which (x) the Holder's total
purchase price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the aggregate number of
shares of Common Stock that such Holder anticipated receiving from the
conversion at issue multiplied by (2) the actual sale price of the Common
Stock at the time of the sale (including brokerage commissions, if any)
giving rise to such purchase obligation and (B) at the option of the
Holder, either reissue Notes in principal amount equal to the principal
amount of the attempted conversion or deliver to the Holder the number of
shares of Common Stock that would have been issued had the Company timely
complied with its delivery requirements under Section 4(e)(ii). For
example, if the Holder purchases Common Stock having a total purchase
price of $11,000 to cover a Buy-In with respect to an attempted conversion
of Notes with respect to which the actual sale price of the Conversion
Shares at the time of the sale (including brokerage commissions, if any)
giving rise to such purchase obligation was a total of $10,000 under
clause (A) of the immediately preceding sentence, the Company shall be
required to pay the Holder $1,000. The Holder shall provide the Company
written notice indicating the amounts payable to the Holder in respect of
the Buy-In. Notwithstanding anything contained herein to the contrary, if
a Holder requires the Company to make payment in respect of a Buy-In for
the failure to timely deliver certificates hereunder and the Company
timely pays in full such payment, the Company shall not be required to pay
such Holder liquidated damages under Section 4(d)(iv) in respect of the
certificates resulting in such Buy-In.
vi. Reservation of Shares Issuable Upon Conversion. Upon the
amendment to the Company's Certificate of Incorporation increasing the
Company's authorized shares of Common Stock to 300,000,000 in accordance
with the Preliminary Schedule 14C filed by the Company with the Securities
and Exchange Commission on May 4, 2005, the Company covenants that it will
at all times reserve and keep available out of its authorized and unissued
shares of Common Stock solely for the purpose of issuance upon conversion
of the Notes and payment of interest on the Note, each as herein provided,
free from preemptive rights or any other actual contingent purchase rights
of persons other than the Holders, not less than such number of shares of
9
the Common Stock as shall (subject to any additional requirements of the
Company as to reservation of such shares set forth in the Purchase
Agreement) be issuable (taking into account the adjustments and
restrictions of Section 5) upon the conversion of the outstanding
principal amount of the Notes and payment of interest hereunder. The
Company covenants that all shares of Common Stock that shall be so
issuable shall, upon issue, be duly and validly authorized, issued and
fully paid, nonassessable and, if the Registration Statement is then
effective under the Securities Act, registered for public sale in
accordance with such Registration Statement.
vii. Fractional Shares. Upon a conversion hereunder the Company
shall not be required to issue stock certificates representing fractions
of shares of the Common Stock, but may if otherwise permitted, make a cash
payment in respect of any final fraction of a share based on the VWAP at
such time. If the Company elects not, or is unable, to make such a cash
payment, the Holder shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
viii. Transfer Taxes. The issuance of certificates for shares of the
Common Stock on conversion of the Notes shall be made without charge to
the Holders thereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificate, provided
that the Company shall not be required to pay any tax that may be payable
in respect of any transfer involved in the issuance and delivery of any
such certificate upon conversion in a name other than that of the Holder
of such Notes so converted and the Company shall not be required to issue
or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount
of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
Section 5. Certain Adjustments.
a) Stock Dividends and Stock Splits. If the Company, at any time while the
Notes are outstanding: (A) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock or any other equity
or equity equivalent securities payable in shares of Common Stock, (B) subdivide
outstanding shares of Common Stock into a larger number of shares, (C) combine
(including by way of reverse stock split) outstanding shares of Common Stock
into a smaller number of shares, or (D) issue by reclassification of shares of
the Common Stock any shares of capital stock of the Company, then the Conversion
Shares shall be adjusted accordingly. Any adjustment made pursuant to this
Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.
b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as
applicable, at any time while this Note is outstanding, shall offer, sell, grant
any option to purchase or offer, sell or grant any right to reprice its
securities, or otherwise dispose of or issue (or announce any offer, sale, grant
or any option to purchase or other disposition) any Common Stock or Common Stock
Equivalents (but with the exception of Excluded Issuances) entitling any Person
to acquire shares of Common Stock, at an effective price per share less than the
then Conversion Price (such lower price, the "Base Share Price" and such
issuances collectively, a "Dilutive Issuance"), as adjusted hereunder (if the
holder of the Common Stock or Common Stock Equivalents so issued shall at any
time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
10
warrants, options or rights per share which is issued in connection with such
issuance, be entitled to receive shares of Common Stock at an effective price
per share which is less than the Conversion Price, such issuance shall be deemed
to have occurred for less than the Conversion Price), then, the Conversion Price
shall be reduced to equal the Base Share Price and the number of Conversion
Shares issuable hereunder shall be increased. Such adjustment shall be made
whenever such Common Stock or Common Stock Equivalents are issued. The Company
shall notify the Holder in writing, no later than the Trading Day following the
issuance of any Common Stock or Common Stock Equivalents subject to this
section, indicating therein the applicable issuance price, or of applicable
reset price, exchange price, conversion price and other pricing terms (such
notice the "Dilutive Issuance Notice"). For purposes of clarification, whether
or not the Company provides a Dilutive Issuance Notice pursuant to this Section
3(b), upon the occurrence of any Dilutive Issuance, after the date of such
Dilutive Issuance the Holder is entitled to receive a number of Conversion
Shares based upon the Base Share Price regardless of whether the Holder
accurately refers to the Base Share Price in the Notice of Conversion. "Common
Stock Equivalents" shall means (a) any rights, warrants or options to purchase
or otherwise acquire Common Stock or (b) any stock or securities directly or
indirectly convertible into or exchangeable for Common Stock. "Excluded
Issuances" shall mean (A) any issuance by the Company of securities in
connection with a strategic partnership or a joint venture (the primary purpose
of which is not to raise equity capital), (B) any issuance by the Company of
securities as consideration for a merger or consolidation or the acquisition of
a business, product, license or other assets of another person or entity, (C)
any Common Stock Equivalents outstanding as of September 12, 2005; (D) options
to purchase shares of Common Stock issued to employees of the Company; and (E)
any issuance by the Company of securities in consideration for services
rendered, provided, an aggregate of no more than 1,000,000 shares of Common
Stock are issued or issuable in reliance on this clause (E).
c) Calculations. All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be. The
number of shares of Common Stock outstanding at any given time shall not include
shares of Common Stock owned or held by or for the account of the Company, and
the description of any such shares of Common Stock shall be considered one issue
or sale of Common Stock. For purposes of this Section 5, the number of shares of
Common Stock deemed to be issued and outstanding as of a given date shall be the
sum of the number of shares of Common Stock (excluding treasury shares, if any)
issued and outstanding.
d) Fundamental Transaction. If, at any time while this Note is
outstanding, (A) the Company effects any sale of all or substantially all of its
assets in one or a series of related transactions, (B) any tender offer or
exchange offer (whether by the Company or another Person) is completed pursuant
to which holders of Common Stock are permitted to tender or exchange their
shares for other securities, cash or property, or (C) the Company effects any
reclassification of the Common Stock or any compulsory share exchange pursuant
to which the Common Stock is effectively converted into or exchanged for other
securities, cash or property (in any such case, a "Fundamental Transaction"),
then upon issuance of the Conversion Shares, the Holder shall have the right to
receive, for each Underlying Share that would have been issuable absent such
Fundamental Transaction, the same kind and amount of securities, cash or
11
property as it would have been entitled to receive upon the occurrence of such
Fundamental Transaction if it had been, immediately prior to such Fundamental
Transaction, the holder of one share of Common Stock (the "Alternate
Consideration"). If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental Transaction, then
the Holder shall be given the same choice as to the Alternate Consideration it
receives upon issuance of the Conversion Shares following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions, any
successor to the Company or surviving entity in such Fundamental Transaction
shall issue to the Holder a new note consistent with the foregoing provisions.
The terms of any agreement pursuant to which a Fundamental Transaction is
effected shall include terms requiring any such successor or surviving entity to
comply with the provisions of this paragraph (c) and insuring that this Note (or
any such replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.
e) Notice to Holders.
i. Adjustment to Conversion Price. Whenever the Conversion Price is
adjusted pursuant to any of this Section 5, the Company shall promptly
mail to each Holder a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment. If the Company issues a variable rate security, despite the
prohibition thereon in the Purchase Agreement, the Company shall be deemed
to have issued Common Stock or Common Stock Equivalents at the lowest
possible conversion or exercise price at which such securities may be
converted or exercised in the case of a Variable Rate Transaction (as
defined in the Purchase Agreement).
ii. Notice to Allow Conversion by Xxxxxx. If (A) the Company shall
declare a dividend (or any other distribution) on the Common Stock; (B)
the Company shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock; (C) the Company shall authorize the
granting to all holders of the Common Stock rights or warrants to
subscribe for or purchase any shares of capital stock of any class or of
any rights; (D) the approval of any stockholders of the Company shall be
required in connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; (E) the Company shall authorize the
voluntary or involuntary dissolution, liquidation or winding up of the
affairs of the Company; then, in each case, the Company shall cause to be
filed at each office or agency maintained for the purpose of conversion of
the Notes, and shall cause to be mailed to the Holders at their last
addresses as they shall appear upon the stock books of the Company, at
least 20 calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record is
to be taken for the purpose of such dividend, distribution, redemption,
rights or warrants, or if a record is not to be taken, the date as of
which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective
12
or close, and the date as of which it is expected that holders of the
Common Stock of record shall be entitled to exchange their shares of the
Common Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share exchange;
provided, that the failure to mail such notice or any defect therein or in
the mailing thereof shall not affect the validity of the corporate action
required to be specified in such notice. Holders are entitled to convert
Notes during the 20-day period commencing the date of such notice to the
effective date of the event triggering such notice.
Section 6. Monthly Redemption
a) Monthly Redemption. On each Monthly Redemption Date, the Company shall
redeem each Holder's Pro Rata Portion of the Monthly Redemption Amount plus
accrued but unpaid interest, the sum of all liquidated damages and any other
amounts then owing to such Holder in respect of the Note. For purposes of this
subsection 6(a) only, "Pro Rata Portion" is the ratio of (x) the principal
amount of this Note on the Original Issue Date to (y) the sum of the aggregate
original principal amounts of the Notes issued to all Holders. If any Holder
shall no longer hold Notes, then the Pro Rata Portion shall be recalculated to
exclude such Holder's principal amount from clause (y) above and the Monthly
Redemption Amount shall be allocated pro-rata among the remaining Holders. The
Monthly Redemption Amount due on each Monthly Redemption Date shall be paid in
cash; provided, however, as to any Monthly Redemption and upon 10 Trading Days'
prior written irrevocable notice, in lieu of a cash redemption payment, the
Company may elect to pay 100% of a Monthly Redemption in shares of Common Stock
based on a conversion price equal to 85% of the average of the 20 consecutive
VWAPs immediately prior to the applicable Monthly Redemption Date (subject to
adjustment for any stock dividend, stock split, stock combination or other
similar event affecting the Common Stock during such 20 Trading Day period);
provided, however, that the Company may not pay the Monthly Redemption Amount in
shares of Common Stock unless, on the Monthly Redemption Date and during the 20
Trading Day period immediately prior to the Monthly Redemption Date, the Equity
Conditions have been satisfied and the payment in shares of Common Stock would
not exceed 25% of the trading volume for any of the previous 10 Trading Days.
b) Redemption Procedure. The payment of cash and/or issuance of Common
Stock, as the case may be, pursuant to a Monthly Redemption shall be made on the
Monthly Redemption Date. If any portion of the cash payment for a Monthly
Redemption shall not be paid by the Company by the respective due date, interest
shall accrue thereon at the rate of 20% per annum (or the maximum rate permitted
by applicable law, whichever is less) until the payment of the Monthly
Redemption Amount, plus all amounts owing thereon is paid in full.
Alternatively, if any portion of the Monthly Redemption Amount remains unpaid
after such date, the Holders subject to such redemption may elect, by written
notice to the Company given at any time thereafter, to invalidate ab initio such
redemption, notwithstanding anything herein contained to the contrary. =
Section 7. Negative Covenants. So long as any portion of this Note is
outstanding, the Company will not and will not permit any of its Subsidiaries to
directly or indirectly, without the prior written approval of the Holder:
a) [intentionally deleted];
13
b) [intentionally deleted];
c) amend its certificate of incorporation, bylaws or other charter
documents so as to adversely affect any rights of the Holder;
d) repay, repurchase or offer to repay, repurchase or otherwise acquire
any of its Common Stock, Preferred Stock, or other equity securities; or
e) enter into any agreement with respect to any of the foregoing.
The Holders acknowledge that the Company intends to enter into a customary
inventory and receivables bank financing and upon receipt of such financing, the
Holders and the Company will negotiate in good faith and in a timely manner in
respect of making such modifications to the Transaction Documents as are
necessary to permit such financing.
Section 8. Events of Default.
a) "Event of Default", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
i. any default in the payment of (A) the principal of amount of any
Note, or (B) interest (including Late Fees) on, or damages in respect of,
any Note, in each case free of any claim of subordination, as and when the
same shall become due and payable (whether on the Maturity Date or by
acceleration or otherwise) which default, solely in the case of an
interest payment or other default under clause (B) above, is not cured,
within 2 Trading Days;
ii. the Company shall fail to observe or perform any other covenant
or agreement contained in this Note or any of the other Transaction
Documents which failure is not cured, if possible to cure, within the
earlier to occur of (A) 5 Trading Days after notice of such default sent
by the Holder or by any other Holder and (B) 10 Trading Days after the
Company shall become or should have become aware of such failure;
iii. a default or event of default (subject to any grace or cure
period provided for in the applicable agreement, document or instrument)
shall occur under (A) any of the Transaction Documents other than the
Notes, or (B) any other material agreement, lease, document or instrument
to which the Company or any Subsidiary is bound;
iv. any representation or warranty made herein, in any other
Transaction Document, in any written statement pursuant hereto or thereto,
or in any other report, financial statement or certificate made or
delivered to the Holder or any other holder of Notes shall be untrue or
incorrect in any material respect as of the date when made or deemed made;
14
v. (i) the Company or any of its Subsidiaries shall commence, or
there shall be commenced against the Company or any such Subsidiary, a
case under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Company or any
Subsidiary commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction whether now
or hereafter in effect relating to the Company or any Subsidiary thereof
or (ii) there is commenced against the Company or any Subsidiary thereof
any such bankruptcy, insolvency or other proceeding which remains
undismissed for a period of 60 days; or (iii) the Company or any
Subsidiary thereof is adjudicated by a court of competent jurisdiction
insolvent or bankrupt; or any order of relief or other order approving any
such case or proceeding is entered; or (iv) the Company or any Subsidiary
thereof suffers any appointment of any custodian or the like for it or any
substantial part of its property which continues undischarged or unstayed
for a period of 60 days; or (v) the Company or any Subsidiary thereof
makes a general assignment for the benefit of creditors; or (vi) the
Company shall fail to pay, or shall state that it is unable to pay, or
shall be unable to pay, its debts generally as they become due; or (vii)
the Company or any Subsidiary thereof shall call a meeting of its
creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (viii) the Company or any Subsidiary
thereof shall by any act or failure to act expressly indicate its consent
to, approval of or acquiescence in any of the foregoing; or (ix) any
corporate or other action is taken by the Company or any Subsidiary
thereof for the purpose of effecting any of the foregoing;
vi. the Company or any Subsidiary shall default in any of its
obligations under any mortgage, credit agreement or other facility,
indenture agreement, factoring agreement or other instrument under which
there may be issued, or by which there may be secured or evidenced any
indebtedness for borrowed money or money due under any long term leasing
or factoring arrangement of the Company in an amount exceeding $50,000,
whether such indebtedness now exists or shall hereafter be created and
such default shall result in such indebtedness becoming or being declared
due and payable prior to the date on which it would otherwise become due
and payable;
vii. the Common Stock shall not be eligible for quotation on or
quoted for trading on a Trading Market and shall not again be eligible for
and quoted or listed for trading thereon within five Trading Days;
viii. the Company shall be a party to any Change of Control
Transaction or Fundamental Transaction, shall agree to sell or dispose of
all or in excess of 33% of its assets in one or more transactions (whether
or not such sale would constitute a Change of Control Transaction) or
shall redeem or repurchase more than a de minimis number of its
outstanding shares of Common Stock or other equity securities of the
Company (other than repurchases of shares of Common Stock or other equity
securities of departing officers and directors of the Company; provided
such repurchases shall not exceed $50,000, in the aggregate, for all
officers and directors during the term of this Note);
b) Remedies Upon Event of Default. If any Event of Default occurs, the
full principal amount of this Note, together with interest and other amounts
owing in respect thereof, to the date of acceleration shall become, at the
Holder's election, immediately due and payable in cash. The aggregate amount
payable upon an Event of Default shall be equal to the Mandatory Prepayment
Amount. Commencing 5 days after the occurrence of any Event of Default that
results in the eventual acceleration of this Note, the interest rate on this
Note shall accrue at the rate of 20% per annum, or such lower maximum amount of
15
interest permitted to be charged under applicable law. All Notes for which the
full Mandatory Prepayment Amount hereunder shall have been paid in accordance
herewith shall promptly be surrendered to or as directed by the Company. The
Holder need not provide and the Company hereby waives any presentment, demand,
protest or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable law. Such
declaration may be rescinded and annulled by Xxxxxx at any time prior to payment
hereunder and the Holder shall have all rights as a Note holder until such time,
if any, as the full payment under this Section shall have been received by it.
No such rescission or annulment shall affect any subsequent Event of Default or
impair any right consequent thereon.
Section 9. Miscellaneous.
a) Notices. Any and all notices or other communications or deliveries to
be provided by the Holders hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service, addressed to the Company, at the address set forth above, facsimile
number (000) 000-0000, Attn: Xxxxxxx Xxx, Chief Financial Officer, or such other
address or facsimile number as the Company may specify for such purposes by
notice to the Holders delivered in accordance with this Section. Any and all
notices or other communications or deliveries to be provided by the Company
hereunder shall be in writing and delivered personally, by facsimile, sent by a
nationally recognized overnight courier service addressed to each Holder at the
facsimile telephone number or address of such Xxxxxx appearing on the books of
the Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
5:30 p.m. (New York City time), (ii) the date after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 5:30 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on such date,
(iii) the second Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by
the party to whom such notice is required to be given.
b) Absolute Obligation. Except as expressly provided herein, no provision
of this Note shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, interest and liquidated
damages (if any) on, this Note at the time, place, and rate, and in the coin or
currency, herein prescribed. This Note is a direct debt obligation of the
Company. This Note ranks pari passu with all other Notes now or hereafter issued
under the terms set forth herein
c) Lost or Mutilated Note. If this Note shall be mutilated, lost, stolen
or destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Note, or in lieu of or in
substitution for a lost, stolen or destroyed Note, a new Note for the principal
amount of this Note so mutilated, lost, stolen or destroyed but only upon
receipt of evidence of such loss, theft or destruction of such Note, and of the
ownership hereof, and indemnity, if requested, all reasonably satisfactory to
the Company.
d) [intentionally deleleted].
16
e) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Note shall be governed by and construed
and enforced in accordance with the internal laws of the State of New York,
without regard to the principles of conflicts of law thereof. Each party agrees
that all legal proceedings concerning the interpretations, enforcement and
defense of the transactions contemplated by any of the Transaction Documents
(whether brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the state and
federal courts sitting in the City of New York, Borough of Manhattan (the "New
York Courts"). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of any such court, or such New York Courts are improper or
inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Note and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. Each party hereto hereby irrevocably
waives, to the fullest extent permitted by applicable law, any and all right to
trial by jury in any legal proceeding arising out of or relating to this Note or
the transactions contemplated hereby. If either party shall commence an action
or proceeding to enforce any provisions of this Note, then the prevailing party
in such action or proceeding shall be reimbursed by the other party for its
attorneys fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such action or proceeding.
f) Waiver. Any waiver by the Company or the Holder of a breach of any
provision of this Note shall not operate as or be construed to be a waiver of
any other breach of such provision or of any breach of any other provision of
this Note. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Note on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Note. Any waiver must be
in writing.
g) Severability. If any provision of this Note is invalid, illegal or
unenforceable, the balance of this Note shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder violates
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on this Note as contemplated herein, wherever enacted,
now or at any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may lawfully do
so) hereby expressly waives all benefits or advantage of any such law, and
covenants that it will not, by resort to any such law, hinder, delay or impeded
the execution of any power herein granted to the Holder, but will suffer and
permit the execution of every such as though no such law has been enacted.
17
h) Next Business Day. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day.
i) Headings. The headings contained herein are for convenience only, do
not constitute a part of this Note and shall not be deemed to limit or affect
any of the provisions hereof.
*********************
18
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed
by a duly authorized officer as of the date first above indicated.
KNOCKOUT HOLDINGS, INC.
/s/ Xxxxxxx Xxx
----------------------------------------
Xxxxxxx Xxx, Chief Financial Officer
19
