THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "1933 ACT"). THE ISSUANCE TO THE HOLDER OF THE SHARES OF COMMON STOCK
ISSUABLE UPON CONVERSION OF THIS NOTE AND IN PAYMENT OF INTEREST ON THIS NOTE
ARE NOT COVERED BY A REGISTRATION STATEMENT UNDER THE 1933 ACT. PURSUANT TO THE
NOTE PURCHASE AGREEMENT, THIS NOTE HAS BEEN ACQUIRED, AND SUCH SHARES MUST BE
ACQUIRED, FOR INVESTMENT ONLY AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN
THE ABSENCE OF REGISTRATION OF THE RESALE THEREOF UNDER THE 1933 ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY IN FORM, SCOPE AND SUBSTANCE TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
DWANGO NORTH AMERICA CORP.
9% SENIOR CONVERTIBLE NOTE DUE 2007
No. 2 $2,300,000.00
New York, New York
March 19, 2004
FOR VALUE RECEIVED, DWANGO NORTH AMERICA CORP., a Nevada
corporation (hereinafter called the "Company"), hereby promises to pay to
ALEXANDRA GLOBAL MASTER FUND, LTD., c/o Alexandra Investment Management, LLC,
000 Xxxxx Xxxxxx, 00xx Xxxxx, Xxx Xxxx, Xxx Xxxx 00000 or registered assigns
(the "Holder"), or order, the sum of Two Million Three Hundred Thousand Dollars
($2,300,000.00), on the Maturity Date, and to pay interest on the unpaid
principal balance hereof at the Applicable Rate from the date hereof, until the
same becomes due and payable, whether at maturity or upon acceleration or by
repurchase in accordance with the terms hereof or otherwise. Any amount,
including, without limitation, principal of or interest on this Note or the
Optional Redemption Price or the Repurchase Price, that is payable under this
Note and that is not paid when due shall bear interest at the Default Rate from
the due date thereof until the same is paid ("Default Interest"). Regular
interest shall be payable in arrears on each Interest Payment Date, commencing
on June 1, 2004, on the principal amount outstanding on such date. Regular
interest on this Note shall be computed on the basis of a 360-day year of 12
30-day months and actual days elapsed. No regular interest shall be payable on
an Interest Payment Date on any portion of the principal amount of this Note
which shall have been redeemed prior to such Interest Payment Date so long as
the Company shall have complied in full with its obligations with respect to
such redemption.
All payments of principal of and premium, if any, interest,
and other amounts on this Note shall be made in lawful money of the United
States of America, or, at the option of the Company and subject to the
provisions of this Note, interest payable on the Interest Payment Dates may be
paid in whole or in part in fully paid and nonassessable shares of Common Stock.
All cash payments shall be
made by wire transfer of immediately available funds to such account as the
Holder may from time to time designate by written notice in accordance with the
provisions of this Note. Whenever any amount expressed to be due by the terms
of this Note is due on any day which is not a Business Day, the same shall
instead be due on the next succeeding day which is a Business Day and, in the
case of any Interest Payment Date which is not the date on which this Note is
paid in full, the extension of the due date thereof shall not be taken into
account for purposes of determining the amount of interest due on such date.
Certain capitalized terms used in this Note are defined in Article VI.
The obligations of the Company under this Note shall rank in
right of payment on a parity with all other unsubordinated obligations of the
Company for indebtedness for borrowed money or the purchase price of property.
This Note is issued pursuant to the Note Purchase Agreement and the Holder of
this Note and this Note are subject to the terms and entitled to the benefits of
the Note Purchase Agreement.
The following terms shall apply to this Note:
ARTICLE I
PAYMENT OF CERTAIN INTEREST IN COMMON
STOCK; OPTIONAL REDEMPTION
1.1 ISSUANCE OF COMMON STOCK IN LIEU OF CASH INTEREST. (a)
-------------------------------------------------
If the Company exercises its option to make a payment of interest on this Note
wholly or partly in Common Stock (herein sometimes called the "Share Interest
Payment Option"), the issuance of Interest Payment Shares upon such exercise of
the Share Interest Payment Option shall have been authorized by the Board of
Directors of the Company.
(b) The Company shall not be permitted to exercise the Share
Interest Payment Option with respect to any payment of interest on this Note
if:
(i) the number of shares of Common Stock authorized,
unissued and unreserved for all purposes, or held in the Company's
treasury, is insufficient to pay the portion of such interest to be
paid in Common Stock;
(ii) the issuance or delivery of Interest Payment Shares or
the public resale of such Interest Payment Shares by the Holder would
require registration or filing with or approval of any governmental
authority under any law or regulation, and such registration, filing or
approval has not been effected or obtained or is not in effect or on
such Interest Payment Date or the date the Company delivers such
Interest Payment Shares to the Holder the Registration Statement is
unavailable for use by the Holder for the resale of the Interest
Payment Shares or is not expected to be available for such use for at
least 15 Trading Days after the date the Company delivers such Interest
Payment Shares to the Holder;
-2-
(iii) the outstanding shares of Common Stock are neither (A)
listed or admitted for trading on a national securities exchange,
Nasdaq or Nasdaq SmallCap nor (B) quoted on the Over-The-Counter
Bulletin Board; or the Interest Payment Shares shall not at the time of
issuance (X) have been authorized for listing, upon official notice of
issuance, on the principal securities exchange on which the Common
Stock is then listed and traded or (Y) have been approved for quotation
if then traded in the over-the-counter market;
(iv) the Interest Share Price for the Interest Payment Shares
is less than the par value of the Common Stock; or
(v) an Event of Default has occurred and is continuing on
the date the Company makes such election or on the applicable Interest
Payment Date.
(c) (1) The Company may exercise its right to elect the
Share Interest Payment Option with respect to any Interest Payment Date only by
giving notice of such election to the Holder not less than 12 or more than 20
Trading Days prior to such Interest Payment Date, which notice shall state the
percentage of the interest payable on such Interest Payment Date which is to be
paid in Interest Payment Shares. If the Company elects the Share Interest
Payment Option with respect to a particular Interest Payment Date, the Company
shall issue to the Holder in respect of such Interest Payment Date the
aggregate number of whole shares of Common Stock determined by dividing the per
share Interest Share Price of the Common Stock on the applicable Interest
Payment Date into an amount equal to the total amount of lawful money of the
United States of America which the Holder would receive if the aggregate amount
of interest on this Note which is being paid in Common Stock were being paid in
such lawful money; PROVIDED, HOWEVER, that if the Holder has been advised by
its legal counsel in good faith that the payment of interest on a particular
Interest Payment Date in shares of Common Stock may give rise to liability
under Section 16(b) of the 1934 Act, the Holder shall have the right to elect,
by notice to the Company, to defer the payment of interest on such Interest
Payment Date until the Maturity Date and such interest shall continue to accrue
until the Maturity Date or until the earlier acceleration, repurchase or
conversion of this Note in accordance with the terms hereof. Notwithstanding
anything to the contrary herein, (A) if the Interest Share Price on a
particular Interest Payment Date is greater than 120% of the Market Price of
the Common Stock on the date the Company gives the Holder notice that it has
elected to exercise the Share Interest Payment Option with respect to such
Interest Payment Date (the "Share Interest Notice Date"), the Holder may, at
its option, require the Company to make such payment of interest on such
Interest Payment Date in cash, and (B) if the Interest Share Price on a
particular Interest Payment Date is less than 80% of the Market Price of the
Common Stock on the Share Interest Notice Date, the Company may, at its option,
revoke its election of the Share Interest Payment Option and pay such interest
on such Interest Payment Date in cash.
-3-
(2) If the Company elects the Share Interest Payment Option
with respect to an Interest Payment Date, the Interest Payment Shares for such
Interest Payment Date shall become issuable on such Interest Payment Date and
the Company shall deliver, or cause to be delivered, the appropriate number of
shares of Common Stock to the Holder within five Trading Days after the
applicable Interest Payment Date. If in any case the Company shall fail to
deliver or cause to be delivered such number of shares of Common Stock to the
Holder within such period of five Trading Days, then in addition to any other
liabilities the Company may have hereunder and under applicable law (1) the
Company shall pay or reimburse the Holder on demand for all out-of-pocket
expenses, including, without limitation, reasonable fees and expenses of legal
counsel, incurred by the Holder as a result of such failure, (2) if as a result
of such failure the Holder shall suffer any direct damages or liabilities from
such failure (including, without limitation, margin interest and the cost of
purchasing securities to cover a sale (whether by the Holder or the Holder's
securities broker) or borrowing of shares of Common Stock by the Holder for
purposes of settling any trade involving a sale of shares of Common Stock made
by the Holder during the period beginning on the date the Company notified the
Holder of the Company's election of the Share Interest Payment Option and
ending on the date the Company delivers or causes to be delivered to the Holder
the shares of Common Stock issuable in respect thereof), then the Company shall
upon demand of the Holder pay to the Holder an amount equal to the actual
direct, out-of-pocket damages and liabilities suffered by the Holder by reason
thereof which the Holder documents to the reasonable satisfaction of the
Company, and (3) the Holder may by written notice (which may be given by mail,
courier, personal service or telephone line facsimile transmission) or oral
notice (promptly confirmed in writing), given at any time prior to delivery to
the Holder of the shares of Common Stock issuable in connection with such
exercise of the Share Interest Payment Option, require payment in cash of the
interest in respect of which the Company exercised the Share Interest Payment
Option, in which case the amount of such interest shall be immediately due and
payable, with Default Interest thereon from the applicable Interest Payment
Date until paid in full and the Company shall not be obligated or entitled to
issue such Interest Payment Shares in respect of such Interest Payment Date.
Notwithstanding the foregoing the Company shall not be liable to the Holder
under clause (2) of the immediately preceding sentence to the extent the
failure of the Company to deliver or to cause to be delivered such shares of
Common Stock results from fire, flood, storm, earthquake, shipwreck, strike,
war, acts of terrorism, crash involving facilities of a common carrier, acts of
God, or any similar event outside the control of the Company (it being
understood that the action or failure to act of the Transfer Agent shall not be
deemed an event outside the control of the Company except to the extent
resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts of
terrorism, crash involving facilities of a common carrier, acts of God, or any
similar event outside the control of the Transfer Agent or the bankruptcy,
liquidation or reorganization of the Transfer Agent under any bankruptcy,
insolvency or other similar law). The Holder shall notify the Company in
writing (or by telephone conversation, confirmed in writing) as promptly as
practicable following the third Trading Day after such Interest Payment Date if
the Holder becomes aware that shares of Common Stock so issuable have not been
received as provided herein but any failure to give such notice shall not
affect the Holder's rights under this Note or otherwise. If the
-4-
Company shall have exercised the Share Interest Payment Option
with respect to a particular Interest Payment Date and either (1) the Company
shall notify the Holder on or after such Interest Payment Date that the
Interest Payment Shares might not be delivered within five Trading Days after
such Interest Payment Date or (2) the Holder learns after the date which is
five Trading Days after such Interest Payment Date that the Holder has not
received such Interest Payment Shares, then, without releasing the Company of
its obligations with respect thereto, from and after the Trading Day next
succeeding the earlier of the events described in the preceding clauses (1) and
(2) of this sentence the Holder shall make reasonable efforts not to sell
shares of Common Stock in anticipation of receipt of such Interest Payment
Shares in a manner which is likely to increase materially the liability of the
Company under clause (2) of the second preceding sentence. No fractional shares
of Common Stock shall be issued in payment of interest on this Note. In lieu
thereof, the Company may, at its option, issue a number of shares of Common
Stock which reflects a rounding up to the next whole number or may pay lawful
money of the United States of America in lieu of issuance of such fractional
share.
(d) If the Company elects the Share Interest Payment
Option with respect to a payment of interest on this Note with
respect to a particular Interest Payment Date, the Company shall deliver to the
Holder, on or prior to the date on which Interest Payment Shares for such
payment of interest on this Note are to be received by the Holder, a Company
Certificate setting forth (i) the total amount of the cash interest payment to
which the Holder is entitled, (ii) the portion of such interest payment being
made in Interest Payment Shares and the amount which is 100% thereof, (iii) the
number of Interest Payment Shares allocable to such payment, as calculated
pursuant to this Section 1.1, (iv) any rounding adjustment to such number or
any payment necessary to be made pursuant to Section 1.1(c), (v) a brief
statement of the facts requiring such adjustment, and (vi) a brief statement
that none of the conditions set forth in Section 1.1(b) has occurred and is
existing and that all of the requirements of this Section 1.1 have been met.
The Interest Payment Shares shall be duly issued in the name of the Holder or
its nominee. Such Company Certificate shall be conclusive evidence of the
correctness of the calculation of the number of Interest Payment Shares
allocable to the payments to which such Company Certificate relates and of any
adjustments to such number made pursuant to this Section 1.1 in the absence of
manifest error. On or before the pertinent payment date, the Company shall
issue, or cause the transfer agent for the Common Stock to prepare and issue,
the Interest Payment Shares in the name of the Holder or its nominee before
being so delivered by the Company on the payment date.
(e) The Interest Payment Shares, when issued pursuant to
and in compliance with this Section 1.1, shall be, and for all
purposes shall be deemed to be, validly issued, fully paid and nonassessable
shares of Common Stock; the issuance and delivery thereof is in all respects
hereby authorized; and the issuance thereof, together with lawful money of the
United States of America, if any, paid in lieu of fractional shares of Common
Stock, will be, and for all purposes shall be deemed to be, in full discharge
and satisfaction of the Company's obligation to pay the interest on this Note
to which such Interest Payment Shares relate.
-5-
1.2 OPTIONAL REDEMPTION. (a) At any time during the Optional
-------------------
Redemption Period, the Company shall have the right to redeem at any one time
all or from time to time any part of the outstanding principal amount of this
Note at the Optional Redemption Price pursuant to this Section 1.2 on any
Optional Redemption Date, so long as the following conditions are met:
(1) during a period of 20 consecutive Trading Days ending
not more than three Trading Days prior to the date the Company gives a
particular Optional Redemption Notice,
(A) on each such Trading Day the Market Price of the
Common Stock shall be at least 200 percent of the Conversion
Price in effect on such Trading Day; and
(B) the Average Daily Trading Volume Threshold is met;
(2) on the date an Optional Redemption Notice is given and
at all times to and including the applicable Optional Redemption Date,
no Event of Default and no event which, with notice or passage of time,
or both, would become an Event of Default has occurred and is
continuing (unless the requirements of this clause (2) will be
satisfied immediately after the redemption of this Note on the
applicable Optional Redemption Date and the Company shall furnish
Company Certificates to the Holder to such effect on the date the
applicable Optional Redemption Notice is given to the Holder and on the
applicable Optional Redemption Date),
(3) on the date an Optional Redemption Notice is given and
at all times to and including the applicable Optional Redemption Date,
no Repurchase Event has occurred with respect to which the Holder has
the right to exercise repurchase rights pursuant to Sections 4.1 and
4.2 with respect to which the Holder has exercised such repurchase
rights and the Repurchase Price has not been paid to the Holder and no
event which, with notice or passage of time, or both, would become a
Repurchase Event has occurred and is continuing, and
(4) on the date the Optional Redemption Notice is given and
at all times thereafter to and including the applicable Optional
Redemption Date, the Registration Statement shall be effective and
available for use by the Holder and the holders of the Warrants for the
resale of the shares of Common Stock issued and issuable upon
conversion of this Note and issued or issuable upon exercise of the
Warrants, as the case may be, and is reasonably expected to remain
effective and available for such use for at least 30 days after the
applicable Optional Redemption Date; and
(5) on the date an Optional Redemption Notice is given,
the Company has funds available to pay the Optional Redemption Price.
In order to exercise its right of redemption under this Section 1.2, the Company
shall give an Optional Redemption Notice to the Holder not less than 30 Trading
-6-
Days or more than 40 Trading Days prior to the Optional Redemption Date stating
that: (1) the Company is exercising its right to redeem a specified portion
(which may be all, if so specified by the Company) of this Note in accordance
with this Section 1.2, (2) the principal amount of this Note to be redeemed, (3)
the Optional Redemption Price, (4) the Optional Redemption Date and that all of
the conditions of this Section 1.2 entitling the Company to call this Note for
redemption have been met. On the applicable Optional Redemption Date (or such
later date as the Holder surrenders this Note to the Company) the Company shall
pay to or upon the order of the Holder, by wire transfer of immediately
available funds to such account as shall be specified for such purpose by the
Holder at least one Business Day prior to the Optional Redemption Date, an
amount equal to the Optional Redemption Price of the portion (which may be all)
of this Note to be redeemed. In each such case the aggregate principal amount of
this Note to be so redeemed shall be at least $1,000,000.00 or such lesser
aggregate principal amount of this Note as shall remain outstanding at the time
an Optional Redemption Notice is given.
1.3 NO PREPAYMENT. Except as specifically provided in
--------------
Section 1.2, this Note may not be prepaid, redeemed or repurchased at the
option of the Company prior to the Maturity Date.
ARTICLE II
CERTAIN COVENANTS
So long as the Company shall have any obligation under this
Note:
2.1 LIMITATIONS ON CERTAIN INDEBTEDNESS. The Company will
-----------------------------------
not itself, and will not permit any Subsidiary to, create, assume, incur or in
any manner become liable in respect of, including, without limitation, by
reason of any business combination transaction (all of which are referred to
herein as "incurring"), any Indebtedness other than Permitted Indebtedness;
PROVIDED, HOWEVER, that if (a) at any time during any period of 45 consecutive
Trading Days commencing after the Issuance Date on each such Trading Day (1)
the Market Price of the Common Stock shall be at least 200% of the Conversion
Price in effect on each such Trading Day, (2) the Average Daily Trading Volume
Threshold is met, (3) no Event of Default shall have occurred or be continuing
and no Repurchase Event shall have occurred with respect to which the Holder
has the right to require repurchase of this Note pursuant to Article IV or with
respect to which the Holder has exercised such right and the Company shall not
have paid or deposited in accordance with Section 7.10 the applicable
Repurchase Price and (4) the Registration Statement shall be effective and
available for use by the Holder and the holders of the Warrants for the resale
of shares of Common Stock issued or issuable upon conversion of this Note and
upon exercise of the Warrants and is reasonably expected to remain effective
and available for a reasonable period after such period of 45 Trading Days, and
(b) the Company shall have furnished to the Holder a Company Certificate
certifying the matters set forth in the immediately preceding clause (a), then
thereafter the Company shall no longer be obligated to comply with this Section
2.1.
-7-
2.2 PAYMENT OF OBLIGATIONS. The Company will pay and
-------------------------
discharge, and will cause each Significant Subsidiary to pay and discharge, all
their respective material obligations and liabilities, including, without
limitation, tax liabilities, except where the same may be contested in good
faith by appropriate proceedings and the Company shall have established adequate
reserves therefor on its books.
2.3 MAINTENANCE OF PROPERTY; INSURANCE. (a) The Company
-------------------------------------
will keep, and will cause each Significant Subsidiary to keep, all property
which, in the reasonable business judgment of the Company, is useful and
necessary in its business in good working order and condition, ordinary wear
and tear excepted.
(b) The Company will maintain, and will cause each
Significant Subsidiary to maintain, with financially sound and responsible
insurance companies, insurance, in at least such amounts and against such risks
as is reasonably adequate for the conduct of their respective businesses and
the value of their respective properties.
2.4 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE.
-------------------------------------------------------
The Company will continue, and will cause each Significant Subsidiary to
continue, to engage in business of the same general type as now conducted by
the Company, and will preserve, renew and keep in full force and effect, and
will cause each Significant Subsidiary to preserve, renew and keep in full
force and effect their respective corporate existence and their respective
rights, privileges and franchises necessary or desirable in the normal conduct
of business and such matter other than maintenance of the Company's corporate
existence, except where the failure to do so would not have a material adverse
effect on (i) the business, properties, operations, condition (financial or
other), results of operation or prospects of the Company and the Subsidiaries,
taken as a whole or, (ii) the ability of the Company to pay and perform its
obligations under the Transaction Documents.
2.5 COMPLIANCE WITH LAWS. The Company will comply, and
----------------------
will cause each Significant Subsidiary to comply, in all material respects with
all applicable laws, ordinances, rules, regulations, decisions, orders and
requirements of governmental authorities and courts (including, without
limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate proceedings or (ii) where non-compliance
therewith could not reasonably be expected to have a material adverse effect on
the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company and the Subsidiaries, taken as a whole.
2.6 INVESTMENT COMPANY ACT. The Company will not be or
------------------------
become an open-end investment trust, unit investment trust or face-amount
certificate company that is or is required to be registered under Section 8 of
the Investment Company Act of 1940, as amended.
2.7 LIMITATIONS ON ASSET SALES, LIQUIDATIONS, ETC.; CERTAIN
--------------------------------------------------------
MATTERS. The Company shall not
-------
-8-
(a) sell, convey or otherwise dispose of all or
substantially all of the assets of the Company as an entirety or substantially
as an entirety in a single transaction or in a series of related transactions;
or
(b) liquidate, dissolve or otherwise wind up the affairs of
the Company.
2.8 LIMITATION ON CERTAIN ISSUANCES. The Company shall not
-------------------------------
(A) offer, sell or issue, or enter into any agreement, arrangement or
understanding to offer, sell or issue, any Common Stock Equivalent for which
the price at which the holder of such Common Stock Equivalent is entitled to
acquire shares of Common Stock varies based on the market or trading price of
the Common Stock, or (B) offer, sell or issue, or enter into any agreement,
arrangement or understanding to offer, sell or issue, any Common Stock or
Common Stock Equivalent on terms which provide for adjustment or repricing of
the purchase price or number of shares or other units of such Common Stock or
Common Stock Equivalents other than pursuant to customary anti-dilution
provisions; PROVIDED, HOWEVER, that nothing in this Section 2.8 shall prohibit
the Company from issuing shares of Common Stock for cash for the account of the
Company (x) in an offering that is underwritten on a firm commitment basis and
registered with the SEC under the 1933 Act, or (y) an offering of Common Stock
that is a private investment in publicly-traded equity (commonly known as a
PIPE); PROVIDED FURTHER, HOWEVER that so long as any principal amount of this
Note is outstanding the original holders of this Note shall have the rights of
first refusal provided in Section 5(j) of the Note Purchase Agreement.
2.9 LIMITATIONS ON LIENS. The Company will not itself,
--------------------
and will not permit any Subsidiary to, create, assume or suffer to exist any
mortgage, lien, pledge, security interest or other charge or encumbrance
(including, without limitation, the lien or retained security title of a
conditional vendor), all of which are referred to below as "liens", upon all or
any part of its property of any character, whether owned at the date hereof or
thereafter acquired, except:
(a) liens upon any property of any Subsidiary or
Subsidiaries as security for indebtedness owing by such Subsidiary to the
Company;
(b) purchase money liens upon any property acquired by the
Company or any Subsidiary, or liens existing on such property at the time of
acquisition and in any such case securing Permitted Indebtedness described in
clause (3) of the definition of the term Permitted Indebtedness; provided that
(i) no such lien shall extend to or cover any other property of the Company or
any Subsidiary, (ii) the principal amount of indebtedness secured by each such
lien on any such property shall not exceed the cost (including such principal
amount of the indebtedness secured thereby) to the Company or the Subsidiary of
the property subject thereto, and (iii) the aggregate principal amount of all
indebtedness of the Company and all Subsidiaries secured by all liens described
in this subsection (b) and any extensions, renewals or replacements thereof, at
any one time outstanding, shall not exceed $2,000,000.00 for the Company and the
Subsidiaries; and the extending, renewing or replacing of any lien permitted by
this subsection (b) or of
-9-
the indebtedness secured thereby; PROVIDED, HOWEVER, that in any such case the
lien by which any lien is extended, renewed or replaced shall not extend to or
cover any other property of the Company or any Subsidiary and the principal
amount of such indebtedness extended, renewed or replaced shall not be
increased;
(c) liens securing this Note and the Other Notes ratably;
(d) liens for taxes or assessments or governmental charges
or levies on its property if such taxes or assessments or charges or levies
shall not at the time be due and payable or if the amount, applicability, or
validity of any such tax, assessment, charge or levy shall currently be
contested in good faith by appropriate proceedings or necessary preliminary
steps are being taken to contest, compromise or settle the amount thereof or to
determine the applicability or validity thereof and if the Company or such
Subsidiary, as the case may be, shall have set aside on its books reserves
(segregated to the extent required by sound accounting practice) deemed by it
adequate with respect thereto; deposits or pledges to secure payment of
worker's compensation, unemployment insurance, old age pensions or other social
security; deposits or pledges to secure performance of bids, tenders, contracts
(other than contracts for the payment of money borrowed or credit extended),
leases, public or statutory obligations, surety or appeal bonds, or other
deposits or pledges for purposes of like general nature in the ordinary course
of business; mechanics', carriers', workers', repairmen's or other like liens
arising in the ordinary course of business securing obligations which are not
overdue for a period of 60 days, or which are in good faith being contested or
litigated, or deposits to obtain the release of such liens; liens created by or
resulting from any litigation or legal proceedings or proceedings being
contested in good faith by appropriate proceedings, provided any execution
levied thereon shall be stayed; leases made, or existing on property acquired,
in the ordinary course of business; landlords' liens under leases to which the
Company or any Subsidiary is a party; and zoning restrictions, easements,
licenses or restrictions on the use of real property or minor irregularities in
title thereto; provided that all such liens described in this subsection (d) do
not, in the aggregate, materially impair the use of such property in the
operations of the business of the Company or any Subsidiary or the value of
such property for the purpose of such business;
(e) liens existing on the Issuance Date and listed in
Schedule 4(r) to the Note Purchase Agreement; and
(f) liens upon raw materials, works in progress and finished
goods inventory and accounts receivable granted to a bank, finance company or
other institutional lender providing receivables and inventory financings.
2.10 TRANSACTIONS WITH AFFILIATES. The Company will not pay,
----------------------------
and will not permit any Subsidiary, directly or indirectly, to pay, any funds to
or for the account of, make any investment (whether by acquisition of stock or
Indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Indebtedness,
or otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with, any joint enterprise or
-10-
other joint arrangement with, any Affiliate of the Company, except, on terms to
the Company or such Subsidiary no less favorable than terms that could be
obtained by the Company or such Subsidiary from a Person that is not an
Affiliate of the Company, as determined in good faith by the Board of
Directors.
2.11 RULE 144A INFORMATION REQUIREMENT. Within the period
----------------------------------
prior to the expiration of the holding period applicable to sales hereof under
Rule 144(k) under the 1933 Act (or any successor provision), the Company shall,
during any period in which it is not subject to Section 13 or 15(d) under the
1934 Act, make available to the Holder and any prospective purchaser of this
Note from the Holder, the information required pursuant to Rule 144A(d)(4) under
the 1933 Act upon the request of the Holder and it will take such further action
as the Holder may reasonably request, all to the extent required from time to
time to enable the Holder to sell this Note without registration under the 1933
Act within the limitations of the exemption provided by Rule 144A, as Rule 144A
may be amended from time to time. Upon the request of the Holder, the Company
will deliver to the Holder a written statement as to whether it has complied
with such requirements.
2.12 NOTICE OF DEFAULTS. The Company shall notify the Holder
------------------
promptly, but in any event not later than five days after the Company becomes
aware of the fact, of any failure by the Company to comply with this Article II.
ARTICLE III
EVENTS OF DEFAULT
3.1 If any of the following events of default (each, an
"Event of Default") shall occur:
(A) FAILURE TO PAY PRINCIPAL, INTEREST, ETC. The Company
-----------------------------------------
fails(1) to pay the principal, the Optional Redemption Price or the
Repurchase Price hereof when due, whether at maturity, upon
acceleration or otherwise, as applicable, or (2) to pay any
installment of interest hereon when due and, in the case of this
clause (2) of this Section 3.1(a) only, such failure continues for a
period of ten Business Days after the due date thereof; or
(B) CONVERSION AND THE SHARES. The Company fails to issue or
-------------------------
cause to be issued shares of Common Stock to the Holder or the holder
of any Other Note upon exercise of the conversion or purchase rights of
the Holder or such holder within three Trading Days after the due date
therefor in accordance with the terms of this Note, any Other Note or
any Warrant or fails to transfer any certificate for any such shares of
Common Stock or any shares of Common Stock issued in payment of
interest on this Note or any Other Note as and when required by this
Note and the Note Purchase Agreement or the Other Note, as the case may
be; or
(C) BREACH OF CERTAIN COVENANTS. The Company fails to comply
---------------------------
with Section 2.1, 2.7 or 2.8; or
-11-
(D) BREACH OF OTHER COVENANTS. The Company fails to comply
-------------------------
in any material respect with any other provision of Article III of
this Note (other than Section 2.1, 2.7 or 2.8) or breaches any other
material covenant or other material term or condition of this Note or
any of the other Transaction Documents (other than as specifically
provided in clauses (a), (b), (c), and (j) of this Section 3.1), and
such breach continues for a period of 15 days after written notice
thereof to the Company from the Holder; or
(E) BREACH OF REPRESENTATIONS AND WARRANTIES. Any
------------------------------------------------
representation or warranty of the Company made herein or in any
agreement, statement or certificate given in writing pursuant hereto
(or pursuant to any Transaction Documents) shall be false or misleading
in any material respect when made; or
(F) CERTAIN VOLUNTARY PROCEEDINGS. The Company or any
--------------------------------
Subsidiary shall commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief
or to the appointment of or taking possession by any such official in
an involuntary case or other proceeding commenced against it, or shall
make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due or shall admit in writing
its inability generally to pay its debts as they become due; or
(G) CERTAIN INVOLUNTARY PROCEEDINGS. An involuntary case
---------------------------------
or other proceeding shall be commenced against the Company or any
Subsidiary seeking liquidation, reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of
it or any substantial part of its property, and such involuntary case
or other proceeding shall remain undismissed and unstayed for a period
of 60 consecutive days; or
(H) JUDGMENTS. Any court of competent jurisdiction shall
---------
enter one or more final judgments against the Company or any
Subsidiary or any of their respective properties or other assets in an
aggregate amount in excess of $250,000, which is not vacated,
appealed, bonded, stayed, discharged, satisfied or waived for a period
of 30 consecutive days; or
(I) DEFAULT UNDER OTHER AGREEMENTS. (a) The Company or any
--------------------------------
Subsidiary shall (i) default in any payment with respect to any
Indebtedness for borrowed money (other than this Note) which
Indebtedness has an outstanding principal amount in excess of $250,000
individually or $750,000 in the aggregate for all such Indebtedness,
beyond the period of grace, if any, provided in the instrument or
agreement under which such Indebtedness was created or (ii) default in
the observance or performance of any agreement,
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covenant or condition relating to any such Indebtedness or contained
in any instrument or agreement evidencing, securing or relating
thereto, or any other event shall occur or condition exist, the effect
of which default or other event or condition is to cause, or to permit
the holder or holders of such Indebtedness (or a trustee or agent on
behalf of such holder or holders) to cause, any such Indebtedness to
become due prior to its stated maturity and such default or event
shall continue beyond the period of grace, if any, provided in the
instrument or agreement under which such Indebtedness was created
(after giving effect to any consent or waiver obtained and then in
effect thereunder) and such default shall continue for five days (or
to such earlier date as the holder of any other Indebtedness shall
declare the same due and payable by reason of such default; or (b) any
Indebtedness of the Company or any Subsidiary which has an outstanding
principal amount in excess of the $250,000 individually or $750,000 in
the aggregate for all such Indebtedness shall, in accordance with its
terms, be declared to be due and payable, or required to be prepaid
other than by a regularly scheduled or required payment prior to the
stated maturity thereof; or
(J) CESSATION OF DISTRIBUTION, SALES OR MARKETING. None of
---------------------------------------------
the Company or any of its Affiliates shall (directly or through
reliable third parties) be distributing, selling or marketing the
Products in the Territory for a continuous period of three months;
then,
(1) upon the occurrence and during the continuation of
any Event of Default specified in clause (a), (b), (c), (e) or (j) of
this Section 3.1, at the option of the Holder, and upon the occurrence
of any Event of Default specified in clause (f) or (g) of this Section
3.1: (X) the Company shall pay to the Holder an amount equal to the
outstanding principal amount of this Note PLUS accrued and unpaid
interest on such principal amount to the date of payment PLUS accrued
and unpaid Default Interest, if any, thereon at the rate provided in
this Note to the date of payment, (Y) all other amounts payable
hereunder or under any of the other Transaction Documents shall
immediately become due and payable, all without demand, presentment or
notice, all of which hereby are expressly waived, together with all
costs, including, without limitation, reasonable legal fees and
expenses of collection, and (Z) the Holder shall be entitled to
exercise all other rights and remedies available at law or in equity;
and
(2) upon the occurrence and during the continuation of any
Event of Default specified in clause (d), (h) or (i) of this Section
3.1: (A) if any Event of Default continues during the period of 120
consecutive days following the occurrence of such Event of Default,
then thereafter so long as any Event of Default is continuing (i) at
the option of the Holder the Company shall pay to the Holder an amount
equal to the outstanding principal amount of this Note PLUS accrued and
unpaid interest on such principal amount to the date of payment PLUS
accrued and unpaid Default Interest, if any, thereon at the rate
provided in this Note to the date of payment, (ii) all other amounts
payable
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hereunder shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly
waived, together with all costs, including, without limitation,
reasonable legal fees and expenses, of collection, and (B) the Holder
shall be entitled to exercise all rights and remedies available at law
or in equity other than those set forth in the immediately preceding
clause (A).
ARTICLE IV
REPURCHASE UPON A REPURCHASE EVENT
4.1 REPURCHASE RIGHT UPON REPURCHASE EVENT. If a Repurchase
---------------------------------------
Event occurs, in addition to any other right of the Holder, the Holder shall
have the right, at the Holder's option, to require the Company to repurchase all
of this Note, or any portion hereof on the repurchase date that is five Business
Days after the date of the Holder Notice delivered with respect to such
Repurchase Event. The Holder shall have the right to require the Company to
repurchase all or any such portion of this Note if a Repurchase Event occurs at
any time while any portion of the principal amount of this Note is outstanding
at a price equal to the Repurchase Price.
4.2 NOTICES; METHOD OF EXERCISING REPURCHASE RIGHTS, ETC.
-------------------------------------------------------
(a) On or before the fifth Business Day after the occurrence of a Repurchase
Event, the Company shall give to the Holder a Company Notice of the occurrence
of the Repurchase Event and of the repurchase right set forth herein arising as
a result thereof. Such Company Notice shall set forth:
(i) the date by which the repurchase right must be
exercised, and
(ii) a description of the procedure (set forth in this
Section 4.2) which the Holder must follow to exercise the repurchase
right.
No failure of the Company to give a Company Notice or defect therein shall limit
the Holder's right to exercise the repurchase right or affect the validity of
the proceedings for the repurchase of this Note or portion hereof.
(b) To exercise the repurchase right, the Holder shall
deliver to the Company on or before the 30th day after a Company Notice (or if
no such Company Notice has been given, within 40 days after the Holder first
learns of the Repurchase Event) (i) a Holder Notice setting forth the name of
the Holder and the principal amount of this Note to be repurchased, and (ii)
this Note, duly endorsed for transfer to the Company of the portion of the
outstanding principal amount of this Note to be repurchased. A Holder Notice
may be revoked by the Holder at any time prior to the time the Company pays the
applicable Repurchase Price to the Holder.
(c) If the Holder shall have given a Holder Notice, then on
the date which is five Business Days after the date such Holder Notice is given
(or such later
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date as the Holder surrenders this Note) the Company shall make payment in
immediately available funds of the applicable Repurchase Price to such account
as specified by the Holder in writing to the Company at least one Business Day
prior to the applicable repurchase date.
4.3 OTHER. A Holder Notice given by the Holder shall be
-----
deemed for all purposes to be in proper form unless the Company notifies the
Holder within three Business Days after such Holder Notice has been given
(which notice shall specify all defects in such Holder Notice), and any Holder
Notice containing any such defect shall nonetheless be effective on the date
given if the Holder promptly undertakes to correct all such defects. No such
claim of defect shall limit or delay performance of the Company's obligation to
repurchase any portion of this Note, the repurchase of which is not in dispute.
ARTICLE V
CONVERSION
5.1 RIGHT TO CONVERT. Subject to and upon compliance with
----------------
the provisions of this Note, the Holder shall have the right, at the Holder's
option, at any time prior to the close of business on the Maturity Date (except
that, if the Holder shall have exercised repurchase rights under Sections 4.1
and 4.2 or the Company shall have exercised its redemption rights under Section
1.2, such conversion right shall terminate with respect to the portion of this
Note to be repurchased or redeemed, as the case may be, at the close of
business on the last Trading Day prior to the later of (x) the Optional
Redemption Date or the date the Company is required to make such repurchase, as
the case may be, and (y) the date the Company pays or deposits in accordance
with Section 7.10 the applicable Repurchase Price or Optional Redemption Price
unless in any such case the Company shall default in payment due upon
repurchase or redemption hereof) to convert the principal amount of this Note,
or any portion of such principal amount which is at least $1,000 (or such
lesser principal amount of this Note as shall be outstanding at such time),
plus accrued and unpaid interest, into that number of fully paid and
non-assessable shares of Common Stock (as such shares shall then be
constituted) obtained by dividing (1) the sum of (x) the principal amount of
this Note or portion thereof being converted PLUS (y) accrued and unpaid
interest on the portion of the principal amount of this Note being converted to
the applicable Conversion Date PLUS (z) accrued and unpaid Default Interest, if
any, on the amount referred to in the immediately preceding clause (y) to the
applicable Conversion Date BY (2) the Conversion Price in effect on the
applicable Conversion Date, by giving a Conversion Notice in the manner
provided in Section 5.2; PROVIDED, HOWEVER, that, if at any time this Note is
converted in whole or in part pursuant to this Section 5.1, the Company does
not have available for issuance upon such conversion as authorized and unissued
shares or in its treasury at least the number of shares of Common Stock
required to be issued pursuant hereto, then, at the election of the Holder made
by notice from the Holder to the Company, this Note (or portion hereof as to
which conversion has been requested), to the extent that sufficient shares of
Common Stock are not then available for issuance upon
-15-
conversion, shall be converted into the right to receive from the Company, in
lieu of the shares of Common Stock into which this Note or such portion hereof
would otherwise be converted and which the Company is unable to issue, payment
in an amount equal to the product obtained by multiplying (x) the number of
shares of Common Stock which the Company is unable to issue TIMES (y) the
arithmetic average of the Market Price for the Common Stock during the five
consecutive Trading Days immediately prior to the applicable Conversion Date.
Any such payment shall, for all purposes of this Note, be deemed to be a
payment of principal plus a premium equal to the total amount payable less the
principal portion of this Note converted as to which such payment is required
to be made because shares of Common Stock are not then available for issuance
upon such conversion. The Holder is not entitled to any rights of a holder of
Common Stock until the Holder has converted this Note to Common Stock, and only
to the extent this Note is deemed to have been converted to Common Stock under
this Article V. For purposes of Sections 5.5 and 5.6, whenever a provision
references the shares of Common Stock into which this Note (or a portion
hereof) is convertible or the shares of Common Stock issuable upon conversion
of this Note (or a portion hereof) or words of similar import, any
determination required by such provision shall be made as if a sufficient
number of shares of Common Stock were then available for issuance upon
conversion in full of this Note.
5.2 EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF COMMON
--------------------------------------------------------
STOCK ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS. (a) In order to
------------------------------------------------------------
exercise the conversion privilege with respect to this Note, the Holder shall
give a Conversion Notice (or such other notice which is acceptable to the
Company) to the Company and the Transfer Agent or to the office or agency
designated by the Company for such purpose by notice to the Holder. A
Conversion Notice may be given by telephone line facsimile transmission to the
numbers set forth on the form of Conversion Notice.
(b) As promptly as practicable, but in no event later
than five Trading Days, after a Conversion Notice is given, the Company shall
issue and shall deliver to the Holder or the Holder's designee the number of
full shares of Common Stock issuable upon such conversion of this Note or
portion hereof in accordance with the provisions of this Article and deliver a
check or cash in respect of any fractional interest in respect of a share of
Common Stock arising upon such conversion, as provided in Section 5.2(f) and,
if applicable, any cash payment required pursuant to the proviso to the first
sentence of Section 5.1 (which payment, if any, shall be paid no later than
five Trading Days after the applicable Conversion Date).
(c) Each conversion of this Note (or portion hereof) shall
be deemed to have been effected on the applicable Conversion Date, and the
person in whose name any certificate or certificates for shares of Common Stock
shall be issuable upon such conversion shall be deemed to have become on such
Conversion Date the holder of record of the shares represented thereby;
PROVIDED, HOWEVER, that if a Conversion Date is a date on which the stock
transfer books of the Company shall be closed such conversion shall constitute
the person in whose name the certificates are to be issued as the record holder
thereof for all purposes on the next succeeding
-16-
day on which such stock transfer books are open, but such conversion shall be
at the Conversion Price in effect on the applicable Conversion Date. Upon
conversion of this Note or any portion hereof, the accrued and unpaid interest
on this Note (or portion hereof) to (but excluding) the applicable Conversion
Date shall be deemed to be paid to the Holder of this Note through receipt of
such number of shares of Common Stock issued upon conversion of this Note or
portion hereof as shall have an aggregate Current Fair Market Value on the
Trading Day immediately preceding such Conversion Date equal to the amount of
such accrued and unpaid interest.
(d) The Company shall notify the Holder of any claim by
the Company of manifest error in a Conversion Notice within two Trading Days
after the Holder gives such Conversion Notice and no such claim of error shall
limit or delay performance of the Company's obligation to issue upon such
conversion the number of shares of Common Stock which are not in dispute. A
Conversion Notice shall be deemed for all purposes to be in proper form unless
the Company notifies the Holder by telephone line facsimile transmission within
two Trading Days after a Conversion Notice has been given (which notice from
the Company shall specify all defects in the Conversion Notice) and any
Conversion Notice containing any such defect shall nonetheless be effective on
the date given if the Holder promptly undertakes to correct all such defects.
The Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of shares of
Common Stock or other securities or property on conversion of this Note in a
name other than that of the Holder, and the Company shall not be required to
issue or deliver any such shares or other securities or property unless and
until the person or persons requesting the issuance thereof shall have paid to
the Company the amount of any such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The Holder shall be
responsible for the amount of any withholding tax payable in connection with
any conversion of this Note.
(e) (1) If the Holder shall have given a Conversion Notice
in accordance with the terms of this Note, the Company's obligation to issue
and deliver the certificates for Common Stock shall be 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,
any failure or delay in the enforcement of any other obligation of the Company
to the Holder, 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 such conversion; PROVIDED, HOWEVER, that nothing herein shall
limit or prejudice the right of the Company to pursue any such claim in any
other manner permitted by applicable law. The occurrence of an event which
requires an adjustment of the Conversion Price as contemplated by Section 5.3
shall in no way restrict or delay the right of the Holder to receive
certificates for Common Stock upon conversion of this Note and the
-17-
Company shall use its best efforts to implement such adjustment on terms
reasonably acceptable to the Holder within two Trading Days of such occurrence.
(2) If in any case the Company shall fail to issue and
deliver the shares of Common Stock to the Holder in connection with a
particular conversion of this Note within five Trading Days after the Holder
gives the Conversion Notice for such conversion, in addition to any other
liabilities the Company may have hereunder and under applicable law (A) the
Company shall pay or reimburse the Holder on demand for all out-of-pocket
expenses, including, without limitation, reasonable fees and expenses of legal
counsel, incurred by the Holder as a result of such failure, (B) if as a result
of such failure the Holder shall suffer any direct damages or liabilities from
such failure (including, without limitation, margin interest and the cost of
purchasing securities to cover a sale (whether by the Holder or the Holder's
securities broker) or borrowing of shares of Common Stock by the Holder for
purposes of settling any trade involving a sale of shares of Common Stock made
by the Holder during the period beginning on the Issuance Date and ending on
the date the Company delivers or causes to be delivered to the Holder such
shares of Common Stock), then the Company shall upon demand of the Holder pay
to the Holder an amount equal to the actual direct, out-of-pocket damages and
liabilities suffered by the Holder by reason thereof which the Holder documents
to the reasonable satisfaction of the Company, and (C) the Holder may by
written notice (which may be given by mail, courier, personal service or
telephone line facsimile transmission) or oral notice (promptly confirmed in
writing), given at any time prior to delivery to the Holder of the shares of
Common Stock issuable in connection with such exercise of the Holder's
conversion right, rescind such exercise and the Conversion Notice relating
thereto, in which case the Holder shall thereafter be entitled to convert that
portion of this Note as to which such exercise is so rescinded and to exercise
its other rights and remedies with respect to such failure by the Company.
Notwithstanding the foregoing the Company shall not be liable to the Holder
under clause (B) of the immediately preceding sentence to the extent the
failure of the Company to deliver or to cause to be delivered such shares of
Common Stock results from fire, flood, storm, earthquake, shipwreck, strike,
war, acts of terrorism, crash involving facilities of a common carrier, acts of
God, or any similar event outside the control of the Company (it being
understood that the action or failure to act of the Transfer Agent shall not be
deemed an event outside the control of the Company except to the extent
resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts of
terrorism, crash involving facilities of a common carrier, acts of God, or any
similar event outside the control of the Transfer Agent or the bankruptcy,
liquidation or reorganization of the Transfer Agent under any bankruptcy,
insolvency or other similar law). The Holder shall notify the Company in
writing (or by telephone conversation, confirmed in writing) as promptly as
practicable following the fifth Trading Day after the Holder gives a Conversion
Notice if the Holder becomes aware that such shares of Common Stock so issuable
have not been received as provided herein, but any failure so to give such
notice shall not affect the Holder's rights under this Note or otherwise. If
the Holder shall have exercised the conversion right in any particular instance
and either (1) the Company shall notify the Holder on or after such that the
shares of Common Stock issuable upon such conversion might not be delivered
within five Trading Days after the date the Holder gives such Conversion Notice
or (2) the
-18-
Holder learns after the date which is five Trading Days after the date the
Holder gives such Conversion Notice that the Holder has not received such
shares of Common Stock, then, without releasing the Company of its obligations
with respect thereto, from and after the Trading Day next succeeding the
earlier of the events described in the preceding clauses (1) and (2) of this
sentence the Holder shall make reasonable efforts not to sell shares of Common
Stock in anticipation of receipt of such shares of Common Stock in a manner
which is likely to increase materially the liability of the Company under
clause (2) of the second preceding sentence.
(f) No fractional shares of Common Stock shall be issued
upon conversion of this Note but, in lieu of any fraction of a share of Common
Stock which would otherwise be issuable in respect of such conversion, the
Company may round the number of shares of Common Stock issued on such
conversion up to the next highest whole share or may pay lawful money of the
United States of America for such fractional share, based on a value of one
share of Common Stock being equal to the Market Price of the Common Stock on
the applicable Conversion Date.
5.3 ADJUSTMENT OF CONVERSION PRICE. The Conversion Price
--------------------------------
shall be adjusted from time to time by the Company as follows:
(a) In case the Company shall on or after the Issuance Date
pay a dividend or make a distribution to all holders of the outstanding Common
Stock in shares of Common Stock, the Conversion Price in effect at the opening
of business on the date following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such Conversion Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the close
of business on the Record Date fixed for such determination and the denominator
shall be the sum of such number of shares and the total number of shares
constituting such dividend or other distribution, such reduction to become
effective immediately after the opening of business on the day following the
Record Date. If any dividend or distribution of the type described in this
Section 5.3(a) is declared but not so paid or made, the Conversion Price shall
again be adjusted to the Conversion Price which would then be in effect if such
dividend or distribution had not been declared.
(b) In case the Company shall on or after the Issuance Date
issue rights or warrants (other than any rights or warrants referred to in
Section 5.3(d)) to all holders of its outstanding shares of Common Stock
entitling them (for a period expiring within 45 days after the date fixed for
the determination of stockholders entitled to receive such rights or warrants)
to subscribe for or purchase shares of Common Stock at a price per share less
than the Current Market Price on the Record Date fixed for the determination of
stockholders entitled to receive such rights or warrants, the Conversion Price
shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect at the opening of business on the
date after such Record Date by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding at the close of business on the
Record Date plus the number of shares which the aggregate offering price of the
total number of shares so offered would purchase at such Current Market Price,
and the denominator shall be the number of shares of
-19-
Common Stock outstanding on the close of business on the Record Date plus the
total number of additional shares of Common Stock so offered for subscription
or purchase. Such adjustment shall become effective immediately after the
opening of business on the day following the Record Date fixed for
determination of stockholders entitled to receive such rights or warrants. To
the extent that shares of Common Stock are not delivered pursuant to such
rights or warrants, upon the expiration or termination of such rights or
warrants, the Conversion Price shall be readjusted to the Conversion Price
which would then be in effect had the adjustments made upon the issuance of
such rights or warrants been made on the basis of delivery of only the number
of shares of Common Stock actually delivered. In the event that such rights or
warrants are not so issued, the Conversion Price shall again be adjusted to be
the Conversion Price which would then be in effect if such date fixed for the
determination of stockholders entitled to receive such rights or warrants had
not been fixed. In determining whether any rights or warrants entitle the
holder to subscribe for or purchase shares of Common Stock at less than such
Current Market Price, and in determining the aggregate offering price of such
shares of Common Stock, there shall be taken into account any consideration
received for such rights or warrants, the value of such consideration, if other
than cash, to be determined by the Board of Directors.
(c) In case the outstanding shares of Common Stock shall on
or after the Issuance Date be subdivided into a greater number of shares of
Common Stock, the Conversion Price in effect at the opening of business on the
earlier of the day following the day upon which such subdivision becomes
effective and the day on which "ex-" trading of the Common Stock begins with
respect to such subdivision shall be proportionately reduced, and conversely,
in case outstanding shares of Common Stock shall be combined into a smaller
number of shares of Common Stock, the Conversion Price in effect at the opening
of business on the earlier of the day following the day upon which such
combination becomes effective and the day on which "ex-" trading of the Common
Stock with respect to such combination begins shall be proportionately
increased, such reduction or increase, as the case may be, to become effective
immediately after the opening of business on the earlier of the day following
the day upon which such subdivision or combination becomes effective and the
day on which "ex-" trading of the Common Stock begins with respect to such
subdivision or combination.
(d) In case the Company shall on or after the Issuance Date,
by dividend or otherwise, distribute to all holders of its Common Stock shares
of any class of capital stock of the Company (other than any dividends or
distributions to which Section 5.3(a) applies) or evidences of its indebtedness,
cash or other assets (including securities, but excluding any rights or warrants
referred to in Section 5.3(b) and dividends and distributions paid exclusively
in cash and excluding any capital stock, evidences of indebtedness, cash or
assets distributed upon a merger or consolidation to which Section 5.4 applies)
(the foregoing hereinafter in this Section 5.3(d) called the "Securities")),
then, in each such case, subject to the second paragraph of this Section 5.3(d),
the Conversion Price shall be reduced so that the same shall be equal to the
price determined by multiplying the Conversion Price in effect immediately prior
to the close of business on the Record Date with respect to such distribution by
a fraction of which the numerator shall be the Current Market
-20-
Price on such date less the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a Board
Resolution) on such date of the portion of the Securities so distributed
applicable to one share of Common Stock and the denominator shall be such
Current Market Price, such reduction to become effective immediately prior to
the opening of business on the day following the Record Date; PROVIDED,
HOWEVER, that in the event the then fair market value (as so determined) of the
portion of the Securities so distributed applicable to one share of Common
Stock is equal to or greater than the Current Market Price on the Record Date,
in lieu of the foregoing adjustment, adequate provision shall be made so that
the Holder shall have the right to receive upon conversion of this Note (or any
portion hereof) the amount of Securities such holder would have received had
such holder converted this Note (or portion hereof) immediately prior to such
Record Date. In the event that such dividend or distribution is not so paid or
made, the Conversion Price shall again be adjusted to be the Conversion Price
which would then be in effect if such dividend or distribution had not been
declared. If the Board of Directors determines the fair market value of any
distribution for purposes of this Section 5.3(d) by reference to the actual or
when issued trading market for any Securities comprising all or part of such
distribution, it must in doing so consider the prices in such market over the
same period used in computing the Current Market Price, to the extent possible.
Rights or warrants distributed by the Company to all holders
of Common Stock entitling the holders thereof to subscribe for or purchase
shares of the Company's capital stock (either initially or under certain
circumstances), which rights or warrants, until the occurrence of a specified
event or events (a "Trigger Event"): (i) are deemed to be transferred with such
shares of Common Stock; (ii) are not exercisable; and (iii) are also issued in
respect of future issuances of Common Stock, shall not be deemed to have been
distributed for purposes of this Section 5.3 (and no adjustment to the
Conversion Price under this Section 5.3 will be required) until the occurrence
of the earliest Trigger Event. If any such rights or warrants, including any
such existing rights or warrants distributed prior to the Issuance Date, are
subject to Trigger Events, upon the satisfaction of each of which such rights or
warrants shall become exercisable to purchase different securities, evidences of
indebtedness or other assets, then the occurrence of each such Trigger Event
shall be deemed to be such date of issuance and record date with respect to new
rights or warrants (and a termination or expiration of the existing rights or
warrants without exercise by the holder thereof) (so that, by way of
illustration and not limitation, the dates of issuance of any such rights shall
be deemed to be the dates on which such rights become exercisable to purchase
capital stock of the Company, and not the date on which such rights may be
issued, or may become evidenced by separate certificates, if such rights are not
then so exercisable). In addition, in the event of any distribution of rights or
warrants, or any Trigger Event with respect thereto, that was counted for
purposes of calculating a distribution amount for which an adjustment to the
Conversion Price under this Section 5.3 was made (1) in the case of any such
rights or warrants which shall all have been redeemed or repurchased without
exercise by any holders thereof, the Conversion Price shall be readjusted upon
such final redemption or repurchase to give effect to such distribution or
Trigger Event, as the case may be, as though it were a cash distribution, equal
to the per share redemption or repurchase price received by a
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holder or holders of Common Stock with respect to such rights or warrants
(assuming such holder had retained such rights or warrants), made to all
holders of Common Stock as of the date of such redemption or repurchase, and
(2) in the case of such rights or warrants which shall have expired or been
terminated without exercise by any holders thereof, the Conversion Price shall
be readjusted as if such rights and warrants had not been issued.
For purposes of this Section 5.3(d) and Sections 5.3(a) and
(b), any dividend or distribution to which this Section 5.3(d) is applicable
that also includes shares of Common Stock, or rights or warrants to subscribe
for or purchase shares of Common Stock to which Section 5.3(b) applies (or
both), shall be deemed instead to be (1) a dividend or distribution of the
evidences of indebtedness, assets, shares of capital stock, rights or warrants
other than such shares of Common Stock or rights or warrants to which Section
5.3(b) applies (and any Conversion Price reduction required by this Section
5.3(d) with respect to such dividend or distribution shall then be made)
immediately followed by (2) a dividend or distribution of such shares of Common
Stock or such rights or warrants (and any further Conversion Price reduction
required by Sections 5.3(a) and (b) with respect to such dividend or
distribution shall then be made), except (A) the Record Date of such dividend or
distribution shall be substituted as "the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution", "Record
Date fixed for such determination" and "Record Date" within the meaning of
Section 5.3(a) and as "the date fixed for the determination of stockholders
entitled to receive such rights or warrants", "the Record Date fixed for the
determination of the stockholders entitled to receive such rights or warrants"
and "such Record Date" within the meaning of Section 5.3(b) and (B) any shares
of Common Stock included in such dividend or distribution shall not be deemed
"outstanding at the close of business on the Record Date fixed for such
determination" within the meaning of Section 5.3(a).
(e) In case the Company shall on or after the Issuance Date,
by dividend or otherwise, distribute to all holders of its Common Stock cash
(excluding any cash that is distributed upon a merger or consolidation to which
Section 5.4 applies or as part of a distribution referred to in Section 5.3(d))
in an aggregate amount that, combined with (1) the aggregate amount of any other
such distributions to all holders of its Common Stock made exclusively in cash
within the 12 months preceding the date of payment of such distribution, and in
respect of which no adjustment pursuant to this Section 5.3(e) has been made,
and (2) the aggregate of any cash plus the fair market value (as determined by
the Board of Directors, whose determination shall be conclusive and set forth in
a Board Resolution) of consideration payable in respect of any Tender Offer by
the Company or any Subsidiary for all or any portion of the Common Stock
concluded within the 12 months preceding the date of payment of such
distribution, and in respect of which no adjustment pursuant to Section 5.3(f)
has been made, exceeds 10% of the product of (x) the Current Market Price on the
Record Date with respect to such distribution TIMES (y) the number of shares of
Common Stock outstanding on such date, then, and in each such case, immediately
after the close of business on such date, unless the Company elects to reserve
such cash for distribution to the Holder upon the conversion of this Note (and
shall have made adequate provision) so that
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the Holder will receive upon such conversion, in addition to the shares of
Common Stock to which the Holder is entitled, the amount of cash which the
Holder would have received if the Holder had, immediately prior to the Record
Date for such distribution of cash, converted this Note into Common Stock, the
Conversion Price shall be reduced so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the close of business on such Record Date by a fraction (i) the numerator of
which shall be equal to the Current Market Price on the Record Date less an
amount equal to the quotient of (x) the excess of such combined amount over
such 10% and (y) the number of shares of Common Stock outstanding on the Record
Date and (ii) the denominator of which shall be equal to the Current Market
Price on the Record Date; PROVIDED, HOWEVER, that in the event the portion of
the cash so distributed applicable to one share of Common Stock is equal to or
greater than the Current Market Price of the Common Stock on the Record Date,
in lieu of the foregoing adjustment, adequate provision shall be made so that
the Holder shall have the right to receive upon conversion of this Note (or any
portion hereof) the amount of cash the Holder would have received had the
Holder converted this Note (or portion hereof) immediately prior to such Record
Date. In the event that such dividend or distribution is not so paid or made,
the Conversion Price shall again be adjusted to be the Conversion Price which
would then be in effect if such dividend or distribution had not been declared.
(f) In case a Tender Offer on or after the Issuance Date
made by the Company or any Subsidiary for all or any portion of the Common
Stock shall expire and such Tender Offer (as amended upon the expiration
thereof) shall require the payment to stockholders (based on the acceptance (up
to any maximum specified in the terms of the Tender Offer) of Purchased Shares
(as defined below)) of an aggregate consideration having a fair market value
(as determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution) that combined together with (1)
the aggregate of the cash plus the fair market value (as determined by the
Board of Directors, whose determination shall be conclusive and described in a
Board Resolution), as of the expiration of such Tender Offer, of consideration
payable in respect of any other Tender Offers, by the Company or any Subsidiary
for all or any portion of the Common Stock expiring within the 12 months
preceding the expiration of such Tender Offer and in respect of which no
adjustment pursuant to this Section 5.3(f) has been made and (2) the aggregate
amount of any distributions to all holders of the Company's Common Stock made
exclusively in cash within 12 months preceding the expiration of such Tender
Offer and in respect of which no adjustment pursuant to Section 5.3(e) has been
made, exceeds 10% of the product of (i) the Current Market Price as of the last
time (the "Expiration Time") tenders could have been made pursuant to such
Tender Offer (as it may be amended) TIMES (ii) the number of shares of Common
Stock outstanding (including any tendered shares) at the Expiration Time, then,
and in each such case, immediately prior to the opening of business on the day
after the date of the Expiration Time, the Conversion Price shall be adjusted
so that the same shall equal the price determined by multiplying the Conversion
Price in effect immediately prior to close of business on the date of the
Expiration Time by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding (including any tendered shares) at the
Expiration Time multiplied by the Current Market Price of the Common Stock on
the Trading Day next succeeding the Expiration Time and the denominator shall
be the sum of (x) the fair market value (determined as aforesaid) of the
aggregate consideration payable to stockholders based on the acceptance (up to
any maximum specified in the terms of the Tender Offer) of all shares validly
tendered and not withdrawn as of the Expiration Time (the shares deemed so
accepted, up to any such maximum, being referred to as the "Purchased Shares")
and (y) the product of the number of shares of Common Stock outstanding (less
any Purchased Shares) at the Expiration Time and the Current Market Price of
the Common Stock on the Trading Day next succeeding
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the Expiration Time, such reduction (if any) to become effective immediately
prior to the opening of business on the day following the Expiration Time. In
the event that the Company is obligated to purchase shares pursuant to any such
Tender Offer, but the Company is permanently prevented by applicable law from
effecting any such purchases or all such purchases are rescinded, the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such Tender Offer had not been made. If the application of
this Section 5.3(f) to any Tender Offer would result in an increase in the
Conversion Price, no adjustment shall be made for such Tender Offer under this
Section 5.3(f).
(g) (1) In case at any time on or after the Issuance Date
the Company shall issue shares of its Common Stock or Common Stock Equivalents
(collectively, the "Newly Issued Shares"), other than an issuance pro rata to
all holders of its outstanding Common Stock and other than an issuance in
respect of which Section 5.3(h) is applicable, at a price below the Current
Fair Market Value of the Common Stock at the time of such issuance, then
following such issuance of Newly Issued Shares the Conversion Price shall be
adjusted as provided in this Section 5.3(g). The Conversion Price following any
such adjustment shall be determined by multiplying the Conversion Price
immediately prior to such adjustment by a fraction, of which the numerator
shall be the sum of (a) the number of shares of Common Stock outstanding
immediately prior to the issuance of the Newly Issued Shares (calculated on a
fully-diluted basis assuming the conversion of all options, warrants, purchase
rights or convertible securities which are exercisable at the time of the
issuance of the Newly Issued Shares) PLUS (b) the number of shares of Common
Stock which the aggregate consideration, if any, received by the Company for
the number of Newly Issued Shares would purchase at a price equal to the
Current Fair Market Value of the Common Stock at the time of such issuance, and
the denominator shall be the sum of (X) the number of shares of Common Stock
outstanding immediately prior to the issuance of the Newly Issued Shares
(calculated on a fully-diluted basis assuming the exercise or conversion of all
options, warrants, purchase rights or convertible securities which are
exercisable or convertible at the time of the issuance of the Newly Issued
Shares) PLUS (Y) the number of Newly Issued Shares. The adjustment provided for
in this Section 5.3(g) may be expressed as the following mathematical formula:
( O +(C / FMV)) x CP
---------------
NCP = ( O + N )
where:
C = aggregate consideration received by the Company for
the Newly Issued Shares
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N = number of Newly Issued Shares
O = number of shares of Common Stock outstanding (on a
fully diluted basis, as described
above) immediately prior to the issuance of the Newly
Issued Shares
FMV = Current Fair Market Value of the Common Stock at
the time of issuance of the Newly Issued Shares
CP = Conversion Price immediately prior to the issuance of
the Newly Issued Shares
NCP = Conversion Price immediately after the issuance of
the Newly Issued Shares
(2) Notwithstanding the foregoing, no adjustment shall be
made under this Section 5.3(g) by reason of:
(A) the issuance by the Company of shares of Common Stock
pro rata to all holders of the Common Stock so long as (i) any adjustment to
the Conversion Price that is required by Section 5.3(a) is made and (ii) the
Company shall have given notice of such issuance thereof to the Holder pursuant
to Section 5.6;
(B) the issuance by the Company of the Notes, the Other
Notes, the Warrants or the Other Warrants or shares of Common Stock upon
conversion of this Note, or the Other Notes or upon exercise of the Warrants or
the Other Warrants or in accordance with the terms hereof and thereof or any
other issuance of securities solely to the Holder occurring on or before August
31, 2004;
(C) the issuance by the Company of shares of Common Stock in
payment of interest on this Note in accordance with the terms hereof;
(D) the issuance of Common Stock upon conversion, exercise
or exchange of Common Stock Equivalents outstanding on the Issuance Date;
(E) the issuance by the Company of Newly Issued Shares
upon grant or exercise of options for employees, directors and consultants
under a stock option, equity compensation or similar plan duly adopted by the
Board of Directors; or
(F) the issuance by the Company of the Placement Agent
Warrants or shares of Common Stock upon exercise of the Placement Agent Warrants
in accordance with the terms hereof and thereof.
(h) (1) In case at any time on or before March 19, 2005 the
Company issues shares of Common Stock or Common Stock Equivalents that are not
registered for sale by the Company in such offering under the 1933 Act or issues
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shares of Common Stock or Common Stock Equivalents in an offering of a type
commonly known as a PIPE or an equity line, in any such case in an amount which,
together with all other offerings by the Company that would be integrated with
such offering for purposes of Regulation D under the 1933 Act, results in gross
proceeds to the Company of at least $250,000, at a price per share at which the
Company sells such shares of Common Stock or the price per share at which the
holders of such Common Stock Equivalents are entitled to acquire shares of
Common Stock upon conversion or exercise thereof which is less than the
Conversion Price in effect at the time of such issuance, then following such
issuance the Conversion Price shall be reduced to the price per share (or
weighted average price per share, if such shares are issued, or such Common
Stock Equivalents may be converted or exercised, at different prices) at which
such shares of Common Stock are issued or at which such Common Stock Equivalents
may be exercised, if the same is lower than the Conversion Price in effect
immediately prior to such issuance.
(2) If any adjustment in the Conversion Price is made
pursuant to this Section 5.3(h) in respect of any issuance of shares of Common
Stock or Common Stock Equivalents, no adjustment in the Conversion Price shall
be made by reason of such issuance pursuant to Section 5.3(g).
(3) Notwithstanding the foregoing, no adjustment shall be
made under this Section 5.3(h)by reason of:
(A) the issuance by the Company of shares of Common Stock
pro rata to all holders of the Common Stock so long as (i) any adjustment
required by Section 5.3(a) is made and (ii) the Company shall have given notice
thereof to the Holder pursuant to Section 5.6;
(B) the issuance by the Company of the N otes, the Other
Notes, the Warrants or the Other Warrants or the issuance by the Company of
shares of Common Stock upon conversion of this Note or the Other Notes or upon
exercise of the Warrants or the Other Warrants in accordance with the terms
hereof and thereof or any other issuance of securities solely to the Holder
occurring on or before August 31, 2004;
(C) the issuance by the Company of shares of Common Stock in
payment of interest on this Note or the Other Notes in accordance with the terms
hereof and thereof;
(D) the issuance of Common Stock upon conversion, exercise
or exchange of Common Stock Equivalents outstanding on the Issuance Date; or
(E) the issuance by the Company of Newly Issued Shares
upon grant or exercise of options for employees, directors and consultants
under a stock option, equity compensation or similar plan duly adopted by the
Board of Directors; or
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(F) the issuance by the Company of the Placement Agent
Warrants or shares of Common Stock upon exercise of the Placement Agent Warrants
in accordance with the terms hereof and thereof.
(i) The Company may make such reductions in the Conversion
Price, in addition to those required by Sections 5.3(a), (b), (c), (d), (e),
(f), (g) and (h), as the Board of Directors considers to be advisable to avoid
or diminish any income tax to holders of Common Stock or rights to purchase
Common Stock resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for income tax purposes.
(j) No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
such price; PROVIDED, HOWEVER, that any adjustments which by reason of this
Section 5.3(j) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Article V
shall be made by the Company and shall be made to the nearest cent or to the
nearest one hundredth of a share, as the case may be.
No adjustment need be made for a change in the par value of the Common Stock or
from par value to no par value or from no par value to par value.
(k) Whenever the Conversion Price is adjusted as herein
provided, the Company shall promptly, but in no event later than five days
thereafter, give a notice to the Holder setting forth the Conversion Price after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment, but which statement shall not include any information which would be
material non-public information for purposes of the 1934 Act. Failure to deliver
such notice shall not affect the legality or validity of any such adjustment.
(l) In any case in which this Section 5.3 provides that an
adjustment shall become effective immediately after a Record Date for an event,
the Company may defer until the occurrence of such event (i) issuing to the
Holder in connection with any conversion of this Note after such Record Date and
before the occurrence of such event the additional shares of Common Stock
issuable upon such conversion by reason of the adjustment required by such event
over and above the Common Stock issuable upon such conversion before giving
effect to such adjustment and (ii) paying to such holder any amount in cash in
lieu of any fraction pursuant to Section 5.2(f).
(m) For purposes of this Section 5.3, the number of shares
of Common Stock at any time outstanding shall not include shares held in the
treasury of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock. The Company
will not pay any dividend or make any distribution on shares of Common Stock
held in the treasury of the Company other than dividends or distributions
payable only in shares of Common Stock.
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5.4 EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR
--------------------------------------------------------
SALE. (a) If any of the following events occur, namely (i) any reclassification
-----
or change of the outstanding shares of Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination), (ii) any consolidation, merger or
combination of the Company with another corporation as a result of which
holders of Common Stock shall be entitled to receive stock, securities or other
property or assets (including cash) with respect to or in exchange for such
Common Stock, or (iii) any sale or conveyance of the properties and assets of
the Company as, or substantially as, an entirety to any other corporation as a
result of which holders of Common Stock shall be entitled to receive stock,
securities or other property or assets (including cash) with respect to or in
exchange for such Common Stock, then the Company or the successor or purchasing
Person, as the case may be, shall execute with the Holder a written agreement
providing that (x) this Note shall be convertible into the kind and amount of
shares of stock and other securities or property or assets (including cash)
receivable upon such reclassification, change, consolidation, merger,
combination, sale or conveyance by the holder of the number of shares of Common
Stock issuable upon conversion of this Note in full (assuming, for such
purposes, a sufficient number of authorized shares of Common Stock available to
convert this Note) immediately prior to such reclassification, change,
consolidation, merger, combination, sale or conveyance assuming such holder of
Common Stock did not exercise such holder's rights of election, if any, as to
the kind or amount of securities, cash or other property receivable upon such
consolidation, merger, statutory exchange, sale or conveyance (PROVIDED that,
if the kind or amount of securities, cash or other property receivable upon
such consolidation, merger, statutory exchange, sale or conveyance is not the
same for each share of Common Stock in respect of which such rights of election
shall not have been exercised ("non-electing share"), then for the purposes of
this Section 5.4 the kind and amount of securities, cash or other property
receivable upon such consolidation, merger, statutory exchange, sale or
conveyance for each non-electing share shall be deemed to be the kind and
amount so receivable per share by a plurality of the non-electing shares), (y)
in the case of any such successor or purchasing Person, upon such
consolidation, merger, combination, sale or conveyance such successor or
purchasing Person shall be jointly and severally liable with the Company for
the performance of all of the Company's obligations under this Note and the
Note Purchase Agreement and (z) if registration or qualification is required
under the 1933 Act or applicable state law for the public resale by the Holder
of such shares of stock and other securities so issuable upon conversion of
this Note, such registration or qualification shall be completed prior to such
reclassification, change, consolidation, merger, combination or sale. Such
written agreement shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Article. If, in the case of any such reclassification, change, consolidation,
merger, combination, sale or conveyance, the stock or other securities and
assets receivable thereupon by a holder of shares of Common Stock includes
shares of stock or other securities and assets of a corporation other than the
successor or purchasing corporation, as the case may be, in such
reclassification, change, consolidation, merger, combination, sale or
conveyance, then such written agreement shall also be executed by such other
corporation and shall contain such additional provisions to protect the
interests of the Holder as the Board of Directors
-28-
shall reasonably consider necessary by reason of the foregoing, including, to
the extent practicable, the provisions providing for the repurchase rights set
forth in Article IV herein.
(b) The above provisions of this Section shall similarly
apply to successive reclassifications, changes, consolidations, mergers,
combinations, sales and conveyances.
(c) If this Section 5.4 applies to any event or occurrence,
Section 5.3 shall not apply.
5.5 RESERVATION OF SHARES; SHARES TO BE FULLY PAID; LISTING
--------------------------------------------------------
OF COMMON STOCK.
----------------
(a) The Company shall reserve and keep available, free from
preemptive rights, out of its authorized but unissued shares of Common Stock or
shares of Common Stock held in treasury, solely for issuance upon conversion of
this Note, and in addition to the shares of Common Stock required to be reserved
by the terms of the Warrants, sufficient shares to provide for the conversion of
this Note from time to time as this Note is converted.
(b) Before taking any action which would cause an adjustment
reducing the Conversion Price below the then par value, if any, of the shares of
Common Stock issuable upon conversion of this Note, the Company will take all
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue shares of such Common Stock at
such adjusted Conversion Price.
(c) The Company covenants that all shares of Common Stock
issued upon conversion of this Note will be fully paid and non-assessable by the
Company and free from all taxes, liens and charges with respect to the issue
thereof.
(d) The Company covenants that if any shares of Common Stock
to be provided for the purpose of conversion of this Note hereunder require
registration with or approval of any governmental authority under any federal or
state law before such shares may be validly issued upon conversion, the Company
will in good faith and as expeditiously as possible endeavor to secure such
registration or approval, as the case may be.
(e) The Company covenants that, in the event the Common
Stock shall be listed on the Nasdaq, the NYSE, the AMEX or any other national
securities exchange, the Company shall obtain and, so long as the Common Stock
shall be so listed on such market or exchange, maintain approval for listing
thereon of all Common Stock issuable upon conversion of or in payment of
interest on this Note.
5.6 NOTICE TO HOLDER PRIOR TO CERTAIN ACTIONS. In case on or
-----------------------------------------
after the Issuance Date:
-29-
(a) the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than in cash out of retained earnings);
or
(b) the Company shall authorize the granting to the holders
of its Common Stock of rights or warrants to subscribe for or purchase any
share of any class or any other rights or warrants; or
(c) the Board of Directors shall authorize any
reclassification of the Common Stock of the Company (other than a subdivision or
combination of its outstanding Common Stock, or a change in par value, or from
par value to no par value, or from no par value to par value), or any
consolidation or merger or other business combination transaction to which the
Company is a party and for which approval of any stockholders of the Company is
required, or the sale or transfer of all or substantially all of the assets of
the Company; or
(d) there shall be pending the voluntary or involuntary
dissolution, liquidation or winding-up of the Company;
the Company shall give the Holder, as promptly as possible but in any event at
least ten Trading Days prior to the applicable date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the purpose of
such dividend, distribution or rights or warrants, or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be entitled
to such dividend, distribution or rights are to be determined, or (y) the date
on which such reclassification, consolidation, merger, other business
combination transaction, sale, transfer, dissolution, liquidation or winding-up
is expected to become effective or occur, and the date as of which it is
expected that holders of Common Stock of record who shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reclassification, consolidation, merger, other business combination
transaction, sale, transfer, dissolution, liquidation or winding-up shall be
determined. Such notice shall not include any information which would be
material non-public information for purposes of the 1934 Act. Failure to give
such notice, or any defect therein, shall not affect the legality or validity of
such dividend, distribution, reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding-up. In the case of any such action
of which the Company gives such notice to the Holder or is required to give such
notice to the Holder, the Holder shall be entitled to give a Conversion Notice
which is contingent on the completion of such action.
5.7 9.9% LIMITATION. (a) Notwithstanding anything to the
----------------
contrary contained herein, the number of shares of Common Stock that may be
acquired at any time by the Holder upon conversion of the Note shall not exceed
a number that, when added to the total number of shares of Common Stock deemed
beneficially owned by such Holder (other than by virtue of the ownership of
securities or rights to acquire securities (including the Warrants) that have
limitations on the holder's right to convert, exercise or purchase similar to
the limitation set forth herein (the "Excluded Shares")), together with all
shares of Common Stock beneficially owned at such time (other than by virtue of
the ownership of Excluded Shares) by Persons whose beneficial ownership of
Common Stock would be aggregated with the
-30-
beneficial ownership by such Holder for purposes of determining whether a group
exists or for purposes of determining the Holder's beneficial ownership (the
"Aggregation Parties"), in either such case for purposes of Section 13(d) of
the 1934 Act and Regulation 13D-G thereunder (including, without limitation, as
the same is made applicable to Section 16 of the 1934 Act and the rules
promulgated thereunder), would result in beneficial ownership by such Holder or
such group of more than 9.9% of the shares of Common Stock for purposes of
Section 13(d) or Section 16 of the 1934 Act and the rules promulgated
thereunder (as the same may be modified by a particular Holder as provided
herein, the "Restricted Ownership Percentage"). A Holder shall have the right
at any time and from time to time to reduce its Restricted Ownership Percentage
immediately upon notice to the Company in the event and only to the extent that
Section 16 of the 1934 Act or the rules promulgated thereunder (or any
successor statute or rules) is changed to reduce the beneficial ownership
percentage threshold thereunder to a percentage less than 9.9%. If at any time
the limits in this Section 5.7 make the Note inconvertible in whole or in part,
the Company shall not by reason thereof be relieved of its obligation to issue
shares of Common Stock at any time or from time to time thereafter upon
conversion of the Note as and when shares of Common Stock may be issued in
compliance with such restrictions.
(b) For purposes of this Section 5.7, in determining the
number of outstanding shares of Common Stock at any time the Holder may rely on
the number of outstanding shares of Common Stock as reflected in (1) the
Company's then most recent Form 10-Q, Form 10-K or other public filing with the
SEC, as the case may be, (2) a public announcement by the Company that is later
than any such filing referred to in the preceding clause (1) or (3) any other
notice by the Company or its transfer agent setting forth the number shares of
Common Stock outstanding and knowledge the Holder may have about the number of
shares of Common Stock issued upon conversions or exercises of the Notes or
other Common Stock Equivalents by any Person, including the Holder, which are
not reflected in the information referred to in the preceding clauses (1)
through (3). Upon the written request of any Holder, the Company shall within
three Business Days confirm in writing to such 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 Common Stock Equivalents, including the Notes and the Warrants, by
the Holder or its affiliates, in each such case subsequent to, the date as of
which such number of outstanding shares of Common Stock was reported.
ARTICLE VI
DEFINITIONS
6.1 CERTAIN DEFINED TERMS. (a) All the agreements or
------------------------
instruments herein defined shall mean such agreements or instruments as the same
may from time to time be supplemented or amended or the terms thereof waived or
modified to the extent permitted by, and in accordance with, the terms thereof
and of this Note.
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(b) The following terms shall have the following meanings
(such meanings to be equally applicable to both the singular and plural forms of
the terms defined):
"Affiliate" means, with respect to any Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by or is under common control with the subject Person.
For purposes of this definition, "control" (including, with correlative meaning,
the terms "controlled by" and "under common control with"), as used with respect
to any Person, shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.
"AMEX" means the American Stock Exchange, Inc.
"Applicable Rate" means 9 percent per annum or, if an Event of
Default shall occur, then so long as any Event of Default shall continue, 16
percent per annum (or in either case such lesser rate as shall be the highest
rate permitted by applicable law).
"Average Daily Trading Volume Threshold" means, with respect
to any period, that the average daily trading volume of the Common Stock during
such period as reported by Bloomberg, L.P. (or if such source ceases to be
available, a comparable source selected by the Holder and acceptable to the
Company in its reasonable judgment) shall be at least 100,000 shares (such
amount to be subject to equitable adjustment for stock splits, stock dividends
and similar events relating to the Common Stock that are reflected in the
trading market for the Common Stock on or before the last Trading Day in such
period).
"Board of Directors" means the Board of Directors of the
Company.
"Board Resolution" means a copy of a resolution certified by
the Secretary or an Assistant Secretary of the Company to have been duly adopted
by the Board of Directors, or duly authorized committee thereof (to the extent
permitted by applicable law), and to be in full force and effect on the date of
such certification, and delivered to the Holder.
"Business Day" means any day other than a Saturday, Sunday or
a day on which commercial banks in The City of New York are authorized or
required by law or executive order to remain closed.
"Common Stock" means the Common Stock, par value $.001 per
share, or any shares of capital stock of the Company into which such shares
shall be changed or reclassified after the Issuance Date.
"Common Stock Equivalent" means any warrant, option,
subscription or purchase right with respect to shares of Common Stock, any
security convertible into, exchangeable for, or otherwise entitling the holder
thereof to acquire, shares of
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Common Stock or any warrant, option, subscription or purchase right with
respect to any such convertible, exchangeable or other security.
"Company" shall have the meaning provided in the first
paragraph of this Note.
"Company Certificate" means a certificate of the Company
signed by an Officer.
"Company Notice" means a Company Notice in the form attached
hereto as EXHIBIT B.
"Conversion Date" means the date on which a Conversion Notice
is given in accordance with Section 5.2(a).
"Conversion Notice" means a duly executed Notice of Conversion
of 9% Senior Convertible Note due 2007 substantially in the form of EXHIBIT D to
this Note.
"Conversion Price" means $1.20, subject to adjustment as
provided in Section 5.3.
"Current Fair Market Value" when used with respect to the
Common Stock as of a specified date means with respect to each share of Common
Stock the average of the closing prices of the Common Stock sold on all
securities exchanges (including the Nasdaq and the Nasdaq SmallCap) on which the
Common Stock may at the time be listed, or, if there have been no sales on any
such exchange on such day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on such day the
Common Stock is not so listed, the average of the representative bid and asked
prices quoted in the NASDAQ System as of 4:00 p.m., New York City time, or, if
on such day the Common Stock is not quoted in the NASDAQ System, the average of
the highest bid and lowest asked price on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, in each such case averaged
over a period of five Trading Days consisting of the day as of which the Current
Fair Market Value of Common Stock is being determined (or if such day is not a
Trading Day, the Trading Day next preceding such day) and the four consecutive
Trading Days prior to such day. If on the date for which Current Fair Market
Value is to be determined the Common Stock is not listed on any securities
exchange or quoted in the NASDAQ System or the over-the-counter market, the
Current Fair Market Value of Common Stock shall be the greater of (i) the
highest price per share of Common Stock at which the Company has sold shares of
Common Stock or Common Stock Equivalents during the 365 days prior to the date
of such determination and (ii) the highest price per share which the Company
could then obtain from a willing buyer (not an employee or director of the
Company at the time of determination) for shares of Common Stock sold by the
Company, from authorized but unissued shares, as determined in good faith by the
Board of Directors.
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"Current Market Price" shall mean the arithmetic average of
the daily Market Prices per share of Common Stock for the ten consecutive
Trading Days immediately prior to the date in question; PROVIDED, HOWEVER, that
(1) if the "ex" date (as hereinafter defined) for any event (other than the
issuance or distribution requiring such computation) that requires an adjustment
to the Conversion Price pursuant to Section 5.3(a), (b), (c), (d), (e), (f), (g)
or (h), occurs during such ten consecutive Trading Days, the Market Price for
each Trading Day prior to the "ex" date for such other event shall be adjusted
by multiplying such Market Price by the same fraction by which the Conversion
Price is so required to be adjusted as a result of such other event, (2) if the
"ex" date for any event (other than the issuance or distribution requiring such
computation) that requires an adjustment to the Conversion Price pursuant to
Section 5.3(a), (b), (c), (d), (e), (f), (g) or (h), occurs on or after the "ex"
date for the issuance or distribution requiring such computation and prior to
the day in question, the Market Price for each Trading Day on and after the "ex"
date for such other event shall be adjusted by multiplying such Market Price by
the reciprocal of the fraction by which the Conversion Price is so required to
be adjusted as a result of such other event, and (3) if the "ex" date for the
issuance or distribution requiring such computation is prior to the day in
question, after taking into account any adjustment required pursuant to clause
(1) or (2) of this proviso, the Market Price for each Trading Day on or after
such "ex" date shall be adjusted by adding thereto the amount of any cash and
the fair market value (as determined by the Board of Directors in a manner
consistent with any determination of such value for purposes of Section 5.3(d)
or (f), whose determination shall be conclusive and described in a Board
Resolution) of the evidences of indebtedness, shares of capital stock or assets
being distributed applicable to one share of Common Stock as of the close of
business on the day before such "ex" date. For purposes of any computation under
Section 5.3(f), the Current Market Price of the Common Stock on any date shall
be deemed to be the arithmetic average of the daily Market Prices per share of
Common Stock for such day and the next two succeeding Trading Days; PROVIDED,
HOWEVER, that if the "ex" date for any event (other than the Tender Offer
requiring such computation) that requires an adjustment to the Conversion Price
pursuant to Section 5.3(a), (b), (c), (d), (e), (f), (g) or (h), occurs on or
after the Expiration Time for the Tender Offer requiring such computation and
prior to the day in question, the Market Price for each Trading Day on and after
the "ex" date for such other event shall be adjusted by multiplying such Market
Price by the reciprocal of the fraction by which the Conversion Price is so
required to be adjusted as a result of such other event. For purposes of this
paragraph, the term "ex" date, (1) when used with respect to any issuance or
distribution, means the first date on which the Common Stock trades, regular
way, on the relevant exchange or in the relevant market from which the Market
Price was obtained without the right to receive such issuance or distribution,
(2) when used with respect to any subdivision or combination of shares of Common
Stock, means the first date on which the Common Stock trades, regular way, on
such exchange or in such market after the time at which such subdivision or
combination becomes effective, and (3) when used with respect to any Tender
Offer means the first date on which the Common Stock trades, regular way, on
such exchange or in such market after the Expiration Time of such Tender Offer.
Notwithstanding the foregoing, whenever successive adjustments to the Conversion
Price are called for pursuant to Section 5.3, such adjustments shall be made to
the
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Current Market Price as may be necessary or appropriate to effectuate the
intent of Section 5.3 and to avoid unjust or inequitable results as determined
in good faith by the Board of Directors.
"Default Interest" shall have the meaning provided in the
first paragraph of this Note.
"Default Rate" means 14 percent per annum.
"Eligible Bank" means a corporation organized or existing
under the laws of the United States or any other state, having combined capital
and surplus of at least $100 million and subject to supervision by federal or
state authority and which has a branch located in New York, New York.
"Expiration Time" shall have the meaning provided in Section
5.3(f).
"Event of Default" shall have the meaning provided in Section
3.1.
"Fundamental Change" means
(a) Any consolidation or merger of the Company or any
Subsidiary with or into another entity (other than a merger or
consolidation of a Subsidiary into the Company or a wholly-owned
Subsidiary) where the stockholders of the Company immediately prior to
such transaction do not collectively own at least 51% of the
outstanding voting securities of the surviving corporation of such
consolidation or merger immediately following such transaction; or the
sale of all or substantially all of the assets of the Company and the
Subsidiaries in a single transaction or a series of related
transactions; or
(b) The occurrence of any transaction or event in connection
with which all or substantially all the Common Stock shall be exchanged
for, converted into, acquired for or constitute the right to receive
consideration (whether by means of an exchange offer, liquidation,
tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) which is not all or substantially all
common stock which is (or will, upon consummation of or immediately
following such transaction or event, will be) listed on a national
securities exchange or approved for quotation on Nasdaq or any similar
United States system of automated dissemination of transaction
reporting of securities prices; or
(c) The acquisition by a Person or entity or group of
Persons or entities acting in concert as a partnership, limited
syndicate or group, as a result of a tender or exchange offer, open
partnership, market purchases, privately negotiated purchases or
otherwise, of beneficial ownership of securities of the Company
representing 50% or more of the combined voting power of the
outstanding voting securities of the Company ordinarily (and apart from
rights accruing in special circumstances) having the right to vote in
the election of directors.
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"Generally Accepted Accounting Principles" for any Person
means the generally accepted accounting principles and practices applied by such
Person from time to time in the preparation of its audited financial statements.
"Holder" shall have the meaning provided in the first
paragraph of this Note.
"Holder Notice" means a Holder Notice in the form attached
hereto as EXHIBIT C.
"Indebtedness" as used in reference to any Person means all
indebtedness of such Person for borrowed money, the deferred purchase price of
property, goods and services and obligations under leases which are required to
be capitalized in accordance with Generally Accepted Accounting Principles and
shall include all such indebtedness guaranteed in any manner by such Person or
in effect guaranteed by such Person through a contingent agreement to purchase
and all indebtedness for the payment or purchase of which such Person has
contingently agreed to advance or supply funds and all indebtedness secured by
mortgage or other lien upon property owned by such Person, although such Person
has not assumed or become liable for the payment of such indebtedness, and, for
all purposes hereof, such indebtedness shall be treated as though it has been
assumed by such Person.
"Interest Payment Date" means each March 1, June 1, September
1 and December 1 and the Maturity
Date.
"Interest Payment Shares" means the shares of Common Stock
issuable in payment of interest on this Note in accordance with Section 1.1.
"Interest Share Price" for any Interest Payment Date means the
volume weighted average of the Market Price of the Common Stock for all of the
Trading Days during the period of 10 consecutive Trading Days ending on and
including the Trading Day immediately preceding such Interest Payment Date.
"Issuance Date" means March 19, 2004.
"Letter Agreement" shall have the meaning provided in the Note
Purchase Agreement.
"Market Price" with respect to any security on any day shall
mean the closing bid price of such security on such day on the Nasdaq, the NYSE
or the AMEX, as applicable, or, if such security is not listed or admitted to
trading on the Nasdaq, the NYSE or the AMEX, on the principal national
securities exchange or quotation system on which such security is quoted or
listed or admitted to trading, in any such case as reported by Bloomberg, L.P.
(or if such source ceases to be available, comparable source selected by the
Holder and acceptable to the Company in its reasonable judgment) or, if not
quoted or listed or admitted to trading on any national securities exchange or
quotation system, the average of the closing bid and
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asked prices of such security on the over-the-counter market on the day in
question, as reported by the National Quotation Bureau Incorporated, or a
similar generally accepted reporting service, or if not so available, in such
manner as furnished by any NYSE member firm selected from time to time by the
Board of Directors for that purpose, or a price determined in good faith by the
Board of Directors, whose determination shall be conclusive and described in a
Board Resolution.
"Maturity Date" means March 19, 2007.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"1934 Act" means the Securities Exchange Act of 1934, as
amended.
"1933 Act" means the Securities Act of 1933, as amended.
"Note" means this instrument as originally executed, or if
later amended or supplemented in accordance with its terms, then as so amended
or supplemented.
"Note Purchase Agreement" means the Note Purchase Agreement,
dated as of March 19, 2004, by and between the Company and the original Holder
of this Note.
"NYSE" means the New York Stock Exchange, Inc.
"Officer" means the Chairman of the Board, the Chief Executive
Officer, the President or the Chief Financial Officer of the Company.
"Optional Redemption Date" means each Business Day on which
this Note is to be redeemed in whole or in part pursuant to Section 1.2.
"Optional Redemption Notice" means an Optional Redemption
Notice in the form attached hereto as EXHIBIT A.
"Optional Redemption Period" means the period which commences
on the date that is two years after the SEC Effective Date and ends on the
Maturity Date.
"Optional Redemption Price" means an amount in cash equal to
the sum of (1) 100% of the outstanding principal amount of this Note specified
in an Optional Redemption Notice as being redeemed by the Company PLUS (2)
accrued and unpaid interest on such principal amount to the applicable Optional
Redemption Date PLUS (3) accrued and unpaid Default Interest, if any, on the
amount referred to in the immediately preceding clause (2) at the rate provided
in this Note to the Optional Redemption Date.
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"Other Notes" means the $1,700,000 aggregate principal amount
of 9% Senior Convertible Notes due 2007, dated January 8, 2004, issued by the
Company to the Holder.
"Other Warrants" means the Common Stock Purchase Warrants
issued by the Company to the original holder of this Note in connection with the
Other Notes.
"Permitted Indebtedness" means
(1) Indebtedness outstanding on the Issuance Date prior to
issuance of this Note and listed on Schedule 4(l) to the Note Purchase
Agreement; and
(2) Indebtedness evidenced by the Note and the Other Notes;
(3) Indebtedness incurred after the Issuance Date in an
aggregate amount not to exceed $2,000,000.00 million at any one time
outstanding so long as (x) such Indebtedness is incurred for the
purpose of acquiring equipment owned or used or to be owned or used by
the Company or any Subsidiaries (or for the purpose of acquiring the
capital stock or similar equity interests of a Subsidiary that is
formed for the limited purpose of owning same and does not own or hold
any other material assets) and does not exceed the purchase price of
the equipment, capital stock or other equity interest so acquired plus
reasonable transaction expenses and (y) such Indebtedness, if secured,
is secured solely by the interest of the Company or one of its
Subsidiaries in the equipment so acquired and rights related thereto;
(4) Indebtedness incurred after the Issuance Date not to
exceed $4,000,000.00 million at any one time outstanding that is
secured solely in raw materials, works in progress and finished goods
inventory and accounts receivable in a financing by a bank, finance
company or other institutional lender providing receivables or
inventory financing;
(5) Indebtedness incurred after the Issuance Date which is
unsecured, subordinated to the Notes as to payment on terms approved in
advance of such incurrence by the Holder as evidenced by the written
approval of the Holder given priority to the incurrence of such
Indebtedness, and for which no payment of principal of such
Indebtedness is scheduled to be due prior to the date that is six
months after the latest scheduled Maturity Date;
(6) endorsements for collection or deposit in the ordinary
course of business; and
(7) in the case of any Subsidiary, Indebtedness owed by such
Subsidiary to the Company;
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so long as at the time of incurrence of such Indebtedness no Event of Default
has occurred and is continuing or would result from such incurrence and no event
which, with notice or passage of time, or both, would become an Event of Default
has occurred and is continuing or would result from such incurrence and so long
as in the case of such Indebtedness referred to in the preceding clauses (2)
thru (6), inclusive, such Indebtedness shall have been approved by the Board of
Directors prior to the incurrence thereof.
"Person" means any natural person, corporation, partnership,
limited liability company, trust, incorporated organization, unincorporated
association or similar entity or any government, governmental agency or
political subdivision.
"Placement Agent" shall have the meaning provided in the Note
Purchase Agreement.
"Placement Agent Warrants" means the Common Stock Purchase
Warrants to purchase shares of Common Stock issued to the Placement Agent in
connection with the transactions contemplated by the Note Purchase Agreement.
"Products" means wireless applications, including games,
polyphonic musical ringtones and entertainment content for wireless devices.
"QIB" means a "qualified institutional buyer" as defined in
Rule 144A.
"Record Date" shall mean, with respect to any dividend,
distribution or other transaction or event in which the holders of Common Stock
have the right to receive any cash, securities or other property or in which the
Common Stock (or other applicable security) is exchanged for or converted into
any combination of cash, securities or other property, the date fixed for
determination of stockholders entitled to receive such cash, securities or other
property (whether such date is fixed by the Board of Directors or by statute,
contract or otherwise).
"Registration Statement" means the Registration Statement
required to be filed by the Company with the SEC pursuant to Section 8(a)(1) of
the Note Purchase Agreement.
"Repurchase Event" means the occurrence of any one or more of
the following events:
(a) The Common Stock ceases to be traded on the
Over-The-Counter Bulletin Board and is not listed for trading on
Nasdaq, the NYSE or the AMEX;
(b) Any Fundamental Change;
(c) The adoption of any amendment to the Company's
Certificate of Incorporation (other than any certificate designating a
series of preferred stock of the Company) which materially and
adversely affects the rights of the Holder or the taking of any other
action by the Company which
-39-
materially and adversely affects the rights of the Holder in respect of
the Holder's interest in the Common Stock in a different and more
adverse manner than it affects the rights of holders of Common Stock
generally;
(d) The inability of the Holder for 20 Trading Days (whether
or not consecutive) during any period of 365 consecutive days occurring
on or after the SEC Effective Date to sell shares of Common Stock
issued or issuable upon conversion of this Note or exercise of the
Warrants or issued as Interest Payment Shares pursuant to the
Registration Statement (1) by reason of the requirements of the 1933
Act, the 1934 Act or any of the rules or regulations under either
thereof or (2) due to the Registration Statement containing any untrue
statement of material fact or omitting to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or other failure of the Registration Statement
to comply with the rules and regulations of the SEC other than by
reason of a review by the SEC staff of the Registration Statement or a
post effective amendment to the Registration Statement; or
(f) The occurrence of any Event of Default specified in
Article III of this Note.
"Repurchase Price" means with respect to any repurchase
pursuant to Sections 4.1 and 4.2 an amount in cash equal to the sum of (1) 100%
of the outstanding principal amount of this Note PLUS (2) accrued and unpaid
interest on such principal amount to the date of such repurchase PLUS (3)
accrued and unpaid Default Interest, if any, thereon at the rate provided in
this Note to the date of such repurchase.
"Rule 144A" means Rule 144A as promulgated under the 1933 Act
or any successor rule thereto.
"SEC" means the Securities and Exchange Commission.
"SEC Effective Date" means the date the Registration
Statement is first declared effective by the SEC.
"Share Interest Notice Date" shall have the meaning provided
in Section 1.1(c).
"Share Interest Payment Option" shall have the meaning
provided in Section 1.1(a).
"Significant Subsidiary" shall have the meaning provided in
Regulation S-X of the SEC, except that a Subsidiary shall not be a Significant
Subsidiary only if such Subsidiary, when consolidated for financial reporting
purposes with all other Subsidiaries which are not Significant Subsidiaries,
would not constitute a Significant Subsidiary.
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"Subsidiary" means any corporation or other entity of which a
majority of the capital stock or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other Persons
performing similar functions are at the time directly or indirectly owned by the
Company.
"Tender Offer" means a tender offer or exchange offer.
"Territory" means North America.
"Trading Day" means at any time a day on which any of a
national securities exchange, Nasdaq, the OTC Bulletin Board or such other
securities market as at such time constitutes the principal securities market
for the Common Stock is open for general trading of securities.
"Transaction Documents" means this Note, the Note Purchase
Agreement, the Letter Agreement and the Warrants.
"Transfer Agent" means Interwest Transfer Company, Inc., or
its successor as transfer agent and registrar for the Common Stock.
"Warrants" means Common Stock Purchase Warrants of the Company
issued to the original Holder of this Note pursuant to the Note Purchase
Agreement.
ARTICLE VII
MISCELLANEOUS
7.1 FAILURE OR INDULGENCY NOT WAIVER. No failure or delay on
--------------------------------
the part of the Holder in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privileges. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.
7.2 NOTICES. Except as otherwise specifically provided
-------
herein, any notice herein required or permitted to be given shall be in writing
and may be personally served, sent by telephone line facsimile transmission or
delivered by courier or sent by United States mail and shall be deemed to have
been given upon receipt if personally served, sent by telephone line facsimile
transmission or sent by courier or three days after being deposited in the
facilities of the United States Postal Service, certified, with postage
pre-paid and properly addressed, if sent by mail. For the purposes hereof, the
address and facsimile line transmission number of the Holder shall be as
furnished by the Holder for such purpose and shown on the records of the
Company; and the address of the Company shall be 000 Xxxx Xxxxxx Xxxxxx, Xxxxx
000, Xxxxxxx, Xxxxxxxxxx 00000, Attention: Chief Executive Officer (telephone
line facsimile transmission number (000) 000-0000). The Holder or the
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Company may change its address for notice by service of written notice to the
other as herein provided.
7.3 AMENDMENT, WAIVER, ETC. Neither this Note nor any terms
----------------------
hereof may be changed, waived, discharged or terminated unless such change,
waiver, discharge or termination is in writing signed by the Company and the
Holder. Notwithstanding anything to the contrary contained herein, no amendment
or waiver shall increase or eliminate the Restricted Ownership Percentage,
whether permanently or temporarily, unless, in addition to complying with the
other requirements of this Note, such amendment or waiver shall have been
approved in accordance with the General Corporation Law of the State of Nevada
and the Company's By-laws by holders of the outstanding shares of Common Stock
entitled to vote at a meeting or by written consent in lieu of such meeting.
7.4 ASSIGNABILITY. This Note shall be binding upon the
-------------
Company and its successors, and shall inure to the benefit of and be binding
upon the Holder and its successors and permitted assigns. The Company may not
assign its rights or obligations under this Note.
7.5 CERTAIN EXPENSES. The Company shall pay on demand all
-----------------
expenses incurred by the Holder, including reasonable attorneys' fees and
expenses, as a consequence of, or in connection with (x) any amendment or waiver
of this Note or any other Transaction Document, (y) any default or breach of any
of the Company's obligations set forth in the Transaction Documents and (z) the
enforcement or restructuring of any right of, including the collection of any
payments due, the Holder under the Transaction Documents, including any action
or proceeding relating to such enforcement or any order, injunction or other
process seeking to restrain the Company from paying any amount due the Holder.
7.6 GOVERNING LAW. This Note shall be governed by the
-------------
internal laws of the State of New York, without regard to the principles of
conflict of laws.
7.7 TRANSFER OF NOTE AND NOTEHOLDER PAYMENT AMOUNT. This
-------------------------------------------------
Note has not been and is not being registered under the provisions of the 1933
Act or any state securities laws and this Note may not be transferred unless
the Holder shall have delivered to the Company an opinion of counsel,
reasonably satisfactory in form, scope and substance to the Company, to the
effect that this Note may be sold or transferred without registration under the
1933 Act. Prior to any such transfer, such transferee shall have represented in
writing to the Company that such transferee has requested and received from the
Company all information relating to the business, properties, operations,
condition (financial or other), results of operations or prospects of the
Company and the Subsidiaries deemed relevant by such transferee; that such
transferee has been afforded the opportunity to ask questions of the Company
concerning the foregoing and has had the opportunity to obtain and review the
reports and other information concerning the Company which at the time of such
transfer have been filed by the Company with the SEC pursuant to the 1934 Act.
If such transfer is intended to assign the rights and obligations under 5(a),
5(b), 8, 9 and 10 of the Note Purchase Agreement, such transfer shall otherwise
be made in compliance with Article V of the Note Purchase
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Agreement. The Holder may not transfer a portion of this Note to any Person if
such transfer would result in an increase in the aggregate number of registered
holders of this Note of more than two such holders without the prior written
consent of the Company, which consent will not be unreasonably withheld. Any
instrument issued upon any such transfer of a portion of this Note which
results in such increase of one holder shall bear a legend that the holder
thereof shall not be entitled to transfer such instrument in a manner which
would further increase the aggregate number of registered holders of this Note
without the prior written consent of the Company, which consent shall not be
unreasonably withheld; PROVIDED, HOWEVER, that any remaining right of the
Holder to transfer all or a portion of this Note may be transferred to the
transferee by agreement between the Holder and the transferee.
7.8 ENFORCEABLE OBLIGATION. The Company represents and
------------------------
warrants that at the time of the original issuance of this Note it received the
full purchase price payable pursuant to the Note Purchase Agreement in an amount
at least equal to the original principal amount of this Note, and that this Note
is an enforceable obligation of the Company which is not subject to any offset,
reduction, counterclaim or disallowance of any sort.
7.9 NOTE REGISTER; REPLACEMENT OF NOTES. The Company shall
------------------------------------
maintain a register showing the names, addresses and telephone line facsimile
numbers of the Holder and the registered holders of the Other Notes. The Company
shall also maintain a facility for the registration of transfers of this Note
and the Other Notes and at which this Note and the Other Notes may be
surrendered for split up into instruments of smaller denominations or for
combination into instruments of larger denominations. Upon receipt by the
Company of evidence reasonably satisfactory to it of the ownership of and the
loss, theft, destruction or mutilation of this Note and (a) in the case of loss,
theft or destruction, of indemnity from the Holder reasonably satisfactory in
form to the Company (and without the requirement to post any bond or other
security) or (b) in the case of mutilation, upon surrender and cancellation of
this Note, the Company will execute and deliver to the Holder a new Note of like
tenor without charge to the Holder.
7.10 PAYMENT OF NOTE ON REDEMPTION OR REPURCHASE; DEPOSIT OF
--------------------------------------------------------
REDEMPTION PRICE OR REPURCHASE PRICE, ETC. (a) If this Note or any portion of
--------------------------------------------
this Note is to be redeemed as provided in Section 1.2 or repurchased as
provided in Sections 4.1 and 4.2 and any notice required in connection therewith
shall have been given as provided therein and the Company shall have otherwise
complied with the requirements of this Note with respect thereto, then this Note
or the portion of this Note to be so redeemed or repurchased and with respect to
which any such notice has been given shall become due and payable on the date
stated in such notice at the applicable Optional Redemption Price or Repurchase
Price. On and after the Optional Redemption Date or repurchase date so stated in
such notice, provided that the Company shall have deposited with an Eligible
Bank on or prior to such Optional Redemption Date or repurchase date, an amount
sufficient to pay the applicable Optional Redemption Price or Repurchase Price,
interest on this Note or the portion of this Note to be so redeemed or
repurchased shall cease to accrue, and this Note or such portion hereof shall be
deemed not to be outstanding and
-43-
shall not be entitled to any benefit with respect to principal of or interest
on the portion to be so redeemed or repurchased except to receive payment of
the applicable Optional Redemption Price or Repurchase Price. On presentation
and surrender of this Note or such portion hereof, this Note or the specified
portion hereof shall be paid and redeemed or repurchased at the applicable
Optional Redemption Price or Repurchase Price. If a portion of this Note is to
be redeemed or repurchased, upon surrender of this Note to the Company in
accordance with the terms hereof, the Company shall execute and deliver to the
Holder without service charge, a new Note or Notes, having the same date hereof
and containing identical terms and conditions, in such denomination or
denominations as requested by the Holder in aggregate principal amount equal
to, and in exchange for, the unredeemed or unrepurchased portion of the
principal amount of this Note so surrendered.
(b) Upon the payment in full of all amounts payable by the
Company under this Note or the deposit thereof as provided in Section 7.10(a),
thereafter the obligations of the Company under this Note shall be as set forth
in this Article VII, and, in the case of such deposit, to pay the Optional
Redemption Price or Repurchase Price, as the case may be, from the funds so
deposited. Upon such payment or deposit, any Event of Default which occurred
prior to such payment or deposit by reason of one or more provisions of this
Note with which the Company thereafter is no longer obligated to comply, then
shall no longer exist.
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IN WITNESS WHEREOF, the Company has caused this Note to be
signed in its name by its duly authorized officer as of the day and in the year
first above written.
DWANGO NORTH AMERICA CORP.
By: /s/ Xxxx X. Xxxxxxxxx
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Name: Xxxx X. Xxxxxxxxx
Title: CEO
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ASSIGNMENT
For value received hereby sell(s),
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assign(s) and transfer(s) unto (Please insert social
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security or other Taxpayer Identification Number of assignee:
) the within Note, and hereby irrevocably
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constitutes and appoints attorney to transfer the said
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Note on the books of Dwango North America Corp., a Nevada corporation (the
"Company"), with full power of substitution in the premises.
In connection with any transfer of the Note within the period
prior to the expiration of the holding period applicable to sales thereof under
Rule 144(k) under the 1933 Act (or any successor provision) (other than any
transfer pursuant to a registration statement that has been declared effective
under the 1933 Act), the undersigned confirms that such Note is being
transferred:
[ ] To the Company or a subsidiary thereof; or
[ ] To a QIB pursuant to and in compliance with Rule 144A;
or
[ ] To an "accredited investor" pursuant to and in
compliance with the 1933 Act; or
[ ] Pursuant to and in compliance with Rule 144 under the
1933 Act;
and unless the box below is checked, the undersigned confirms that, to the
knowledge of the undersigned, such Note is not being transferred to an
"affiliate" of the Company as defined in Rule 144 under the 1933 Act (an
"Affiliate").
[ ] The transferee is an Affiliate of the Company.
Capitalized terms used in this Assignment and not defined in
this Assignment shall have the respective meanings provided in the Note.
Dated: NAME:
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Signature(s)
EXHIBIT A
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DWANGO NORTH AMERICA CORP.
OPTIONAL REDEMPTION NOTICE
(SECTION 1.2 OF 9% SENIOR
CONVERTIBLE NOTE DUE 2007)
TO:
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(Name of Holder)
(1) Pursuant to the terms of the 9% Senior Convertible Note
due 0000 (xxx "Xxxx"), Xxxxxx Xxxxx Xxxxxxx Corp., a Nevada corporation (the
"Company"), hereby notifies the above-named Holder that the Company is
exercising its right to redeem the Note in accordance with Section 1.2 of the
Note as set forth below:
(i) The principal amount of the Note to be redeemed is
$ .
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(ii) The Optional Redemption Price is $ .
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(iii) The Optional Redemption Date is .
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(2) All of the conditions specified in Section 1.2 of the
Note entitling the Company to call the Note for redemption have been satisfied.
(3) Capitalized terms used herein and not otherwise defined
herein have the respective meanings provided in the Note.
Date DWANGO NORTH AMERICA CORP.
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By:
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Title:
A-1
EXHIBIT B
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DWANGO NORTH AMERICA CORP.
COMPANY NOTICE
(SECTION 4.2(A) OF 9% SENIOR
CONVERTIBLE NOTE DUE 2007)
TO:
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(Name of Holder)
(1) A Repurchase Event described in the 9% Senior
Convertible Note due 0000 (xxx "Xxxx") xx Xxxxxx Xxxxx Xxxxxxx Corp., a Nevada
corporation (the "Company"), occurred on , 200 . As a result of such Repurchase
Event, the Holder is entitled to exercise its repurchase rights pursuant to
Section 4.2 of the Note.
(2) The Holder's repurchase right must be exercised on or
before , 200 .
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(3) At or before the date set forth in the preceding
paragraph (2), the Holder must deliver to the Company:
(a) a Holder Notice, in the form attached as EXHIBIT C to
the Note; and
(b) the Note, duly endorsed for transfer to the Company of
the portion of the principal amount to be repurchased.
(4) Capitalized terms used herein and not otherwise defined
herein have the respective meanings provided in the Note.
Date DWANGO NORTH AMERICA CORP.
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By:
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Title:
X-0
XXXXXXX X
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XXXXXX XXXXX XXXXXXX CORP.
HOLDER NOTICE
(SECTION 4.2(B) OF 9% SENIOR
CONVERTIBLE NOTE DUE 2007)
TO: DWANGO NORTH AMERICA CORP.
(1) Pursuant to the terms of the 9% Senior Convertible Note
due 2007 (the "Note"), the undersigned Holder hereby elects to exercise its
right to require repurchase by the Company pursuant to Sections 4.2(a) and
4.2(b) of $ of the Note, equal to the sum of $ principal amount
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of the Note, $ of accrued and unpaid interest on such principal
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amount and $ of Default Interest on such interest at the Repurchase
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Price provided in the Note.
(2) Capitalized terms used herein and not otherwise defined
herein have the respective meanings provided in the Note.
Date: NAME OF HOLDER:
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By
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Signature of Registered Holder
(Must be signed exactly as name
appears in the Note.)
C-1
EXHIBIT D
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NOTICE OF CONVERSION
OF 9% SENIOR CONVERTIBLE
NOTE DUE 2007
OF DWANGO NORTH AMERICA CORP.
To: Dwango North America Corp.
000 Xxxx Xxxxxx Xxxxxx
Xxxxx 000
Xxxxxxx Xxxxxxxxxx 00000
Attention: Chief Executive Officer
Facsimile No.: (000) 000-0000
Interwest Transfer Company, Inc.
as Issuing Agent
0000 Xxxx Xxxxxx Xxxxxxxx Xxxx
X.X. Xxx 00000
Xxxx Xxxx Xxxx, Xxxx 00000
Attention:
Facsimile No.: (000) 000-0000
1. Pursuant to the terms of the 9% Senior Convertible Note
due 2007 (the "Note"), the undersigned hereby elects to convert $
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of the Note, equal to the sum of $ principal amount of the Note,
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$ of accrued and unpaid interest on such principal amount and
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$ of Default Interest on such interest into shares of Common
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Stock of Dwango North America Corp., a Nevada corporation (the "Company"), at a
Conversion Price per share equal to $ . Capitalized terms used
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herein and not otherwise defined herein have the respective meanings provided in
the Note.
2. The number of shares of Common Stock issuable upon the
conversion of the Note to which this Notice relates is (the
"Conversion Shares"). ---------------
D-1
3. Please issue a certificate or certificates for
shares of Common Stock in the name(s) specified immediately
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below or, if additional space is necessary, on an attachment hereto:
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Name Name
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Address Address
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SS or Tax ID Number SS or Tax ID Number
Delivery Instructions
for Common Stock:
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4. The Holder hereby represents and warrants that it has
complied and will comply with the applicable requirements of Sections 8(c)(3)
and 8(c)(5) of the Note Purchase Agreement with respect to the shares of Common
Stock issuable upon the conversion of the Note to which this Notice relates.
5. If the shares of Common Stock issuable upon conversion
of the Note have not been registered for resale under the Securities Act of
1933, as amended (the "Act"), and the provisions of Rule 144(k) under the 1933
Act are inapplicable to the undersigned with respect to the Conversion Shares
relating to this Notice, the undersigned represents and warrants that (i) the
shares of Common Stock issuable upon the conversion of the Note to which this
Notice relates are being acquired for the account of the undersigned for
investment, and not with a view to, or for resale in connection with, the
distribution thereof, and that the undersigned has no present intention of
distributing or reselling such shares and (ii) the undersigned is an
"accredited investor" as defined in Regulation D under the 0000 Xxx. If the
provisions of Rule 144(k) under the 1933 Act are inapplicable to the
undersigned with respect to the Conversion Shares relating to this Notice, the
undersigned further agrees that (A) such shares shall not be sold or
transferred unless (i) they first shall have been registered under the 1933 Act
and applicable state securities laws or (ii) the Company shall have been
furnished with an opinion of legal counsel reasonably satisfactory in form,
scope and substance to the Company to the effect that such sale or transfer is
exempt from the registration requirements of the 1933 Act and (B) until such
shares are registered for resale by the undersigned under the 1933 Act, the
Company may place a legend on the certificate(s) for the shares to that effect
and place a stop-transfer restriction in its records relating to the shares.
D-2
NAME:
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Date:
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Signature of Registered Holder
(Must be signed exactly as name
appears in the Note.)
D-3
