EXHIBIT 10.7
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE
STATES SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
CATALYST LIGHTING GROUP, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
SECURED REVOLVING NOTE
FOR VALUE RECEIVED, each of CATALYST LIGHTING GROUP, INC., a Delaware
corporation ("COMPANY") and WHITCO COMPANY, LP, a Texas limited partnership
("Eligible Subsidiary" and together with Company, each a "BORROWER" and
collectively the "BORROWERS"), jointly and severally promise to pay to LAURUS
MASTER FUND, LTD., c/o M&C Corporate Services Limited, P.O. Box 309 G.T., Xxxxxx
House, South Church Street, Xxxxxx Town, Grand Cayman, Cayman Islands, Fax:
000-000-0000 (the "HOLDER"), without duplication of any amounts owing by a
Borrower to Holder under the Minimum Borrowing Notes (as defined in the Security
Agreement referred to below), or its registered assigns, on order, the sum of
Three Million Dollars ($3,000,000) or, if different, the aggregate principal
amount of all "REVOLVING LOANS" (as such term is defined in the Security
Agreement referred to below), together with any accrued and unpaid interest
hereon, on September 30, 2007 (the "MATURITY DATE")
Capitalized terms used herein without definition shall have the meanings
ascribed to such terms in the Security Agreement among the Borrowers and the
Holder dated as of September 30, 2004 (as amended, modified and supplemented
from time to time, the "SECURITY AGREEMENT").
The following terms shall apply to this Note:
ARTICLE I
CONTRACT RATE & PREPAYMENTS
1.1. Interest Rate. Subject to Sections 3.11, 4.1 and 5.7 hereof, interest
payable on this Note shall accrue at a rate per annum (the "CONTRACT RATE")
equal to the "prime rate" published in The Wall Street Journal from time to time
(the "PRIME RATE"), plus two percent (2%). The Contract Rate shall be increased
or decreased as the case may be for each increase or decrease in the Prime Rate
in an amount equal to such increase or decrease in the Prime Rate; each change
to be effective as of the day of the change in such rate in accordance with the
terms of the Security Agreement. Subject to Section 1.2, the Contract Rate shall
not be less than six percent (6%).
1.2. Contract Rate Adjustments and Payments. The Contract Rate shall be
calculated on the last business day of each month hereafter until the Maturity
Date (each a "DETERMINATION DATE") and shall be subject to adjustment as set
forth herein. If (i) Company shall have registered the shares of Company's
common stock, par value $.01 per share (the "COMMON STOCK") underlying each of
the conversion of the Minimum Borrowing Notes and that certain warrant issued to
Holder on a registration statement declared effective by the Securities and
Exchange Commission (the "SEC"), and (ii) the market price (the "MARKET PRICE")
of the Common Stock as reported by Bloomberg, L.P. on the Principal Market (as
defined below) for the five (5) trading days immediately preceding a
Determination Date exceeds the then applicable Fixed Conversion Price by at
least twenty five percent (25%), the Contract Rate for the succeeding calendar
month shall automatically be reduced by 200 basis points (200 b.p.) (2.0%) for
each incremental twenty five percent (25%) increase in the Market Price of the
Common Stock above the then applicable Fixed Conversion Price. If (i) Company
shall not have registered the shares of Company's common stock underlying the
conversion of the Minimum Borrowing Notes and that certain warrant issued to
Holder on a registration statement declared effective by the SEC and which
remains effective, and (ii) the Market Price of the Common Stock as reported by
Bloomberg, L.P. on the principal market for the five (5) trading days
immediately preceding a Determination Date exceeds the then applicable Fixed
Conversion Price by at least twenty five percent (25%), the Contract Rate for
the succeeding calendar month shall automatically be decreased by 100 basis
points (100 b.p.) (1.0%) for each incremental twenty five percent (25%) increase
in the Market Price of the Common Stock above the then applicable Fixed
Conversion Price. Notwithstanding the foregoing (and anything to the contrary
contained in herein), in no event shall the Contract Rate be less than zero
percent (0%). Interest shall be (i) calculated on the basis of a 360 day year,
and (ii) payable monthly, in arrears, commencing on November 1, 2004 and on the
first business day of each consecutive calendar month thereafter until the
Maturity Date (and on the Maturity Date), whether by acceleration or otherwise
(each, a "CONTRACT RATE PAYMENT DATE").
1.3. Allocation of Principal to Minimum Borrowing Note. In the event that
the amount due and payable hereunder should equal or exceed $1,000,000, to the
extent that the outstanding balance on the Minimum Borrowing Note shall be less
than $1,000,000 (the difference of $1,000,000 less the actual balance of the
Minimum Borrowing Note, the "AVAILABLE MINIMUM BORROWING"), such portion of the
balance hereof as shall equal the Available Minimum Borrowing shall be deemed to
be simultaneously extinguished on this Note and transferred to, and evidenced
by, a Minimum Borrowing Note.
ARTICLE II
HOLDER'S CONVERSION RIGHTS
2.1. Optional Conversion. Subject to the terms of this Article II, the
Holder shall have the right, but not the obligation, at any time until the
Maturity Date, or during an Event of Default (as defined in Article IV), and,
subject to the limitations set forth in Section 2.2 hereof, to convert all or
any portion of the outstanding Principal Amount and/or accrued interest and fees
due and payable into fully paid and nonassessable restricted shares of the
Common Stock at the Fixed Conversion Price (defined below). For purposes hereof,
subject to Section 2.5 hereof, the "FIXED CONVERSION PRICE" means $2.66. The
shares of Common Stock to be issued upon such conversion are herein referred to
as the "CONVERSION SHARES."
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2.2. Conversion Limitation. Notwithstanding anything contained herein to
the contrary, the Holder shall not be entitled to convert pursuant to the terms
of this Note an amount that would be convertible into that number of Conversion
Shares which would exceed the difference between the number of shares of Common
Stock beneficially owned by such Holder or issuable upon exercise of warrants
held by such Holder and 4.99% of the outstanding shares of Common Stock of
Company. For the purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Exchange
Act and Regulation 13d-3 thereunder. The Conversion Shares limitation described
in this Section 2.2 shall automatically become null and void without any notice
to any Borrower upon the occurrence and during the continuance beyond any
applicable grace period of an Event of Default, or upon 75 days prior notice to
Company. Notwithstanding anything contained herein to the contrary, Company
shall have no obligation to confirm the ownership percentage of the Holder
either prior or subsequent to conversion of any portion of this Note, Company
shall be entitled to rely solely on the Notice of Conversion with respect to the
Holder's ownership of Common Stock and Company shall not incur any liability of
any kind, type or nature to any party as a result of any violation of this
Section.
2.3. Mechanics of Xxxxxx's Conversion. In the event that the Holder elects
to convert this Note into Common Stock, the Holder shall give notice of such
election by delivering an executed and completed notice of conversion ("NOTICE
OF CONVERSION") to Company and such Notice of Conversion shall provide a
breakdown in reasonable detail of the Principal Amount, accrued interest and
fees that are being converted. On each Conversion Date (as hereinafter defined)
and in accordance with its Notice of Conversion, the Holder shall make the
appropriate reduction to the Principal Amount, accrued interest and fees as
entered in its records and shall provide written notice thereof to Company
within two (2) business days after the Conversion Date. Each date on which a
Notice of Conversion is delivered or telecopied to Company in accordance with
the provisions hereof shall be deemed a Conversion Date (the "CONVERSION DATE").
A form of Notice of Conversion to be employed by the Holder is annexed hereto as
Exhibit A. Pursuant to the terms of the Notice of Conversion, Company will issue
instructions to the transfer agent accompanied by an opinion of counsel within
one (1) business day of the date of the delivery to Company of the Notice of
Conversion and shall cause the transfer agent to transmit the certificates
representing the Conversion Shares to the Holder by crediting the account of the
Holder's designated broker with the Depository Trust Corporation ("DTC") through
its Deposit Withdrawal Agent Commission ("DWAC") system within three (3)
business days after receipt by Company of the Notice of Conversion (the
"DELIVERY DATE"). In the case of the exercise of the conversion rights set forth
herein the conversion privilege shall be deemed to have been exercised and the
Conversion Shares issuable upon such conversion shall be deemed to have been
issued upon the date of receipt by Company of the Notice of Conversion. The
Holder shall be treated for all purposes as the record holder of such Common
Stock, unless the Holder provides Company written instructions to the contrary.
2.4. Late Payments. Each Borrower understands that a delay in the delivery
of the shares of Common Stock in the form required pursuant to this Article
beyond the Delivery Date could result in economic loss to the Holder. As
compensation to the Holder for such loss, each Borrower agrees to jointly and
severally pay late payments to the Holder for late issuance of such shares in
the form required pursuant to this Article III upon conversion of the Note, in
the amount equal to $500 per business day after the Delivery Date. Each Borrower
shall pay any payments incurred under this Section in immediately available
funds upon demand.
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2.5. Adjustment Provisions. The Fixed Conversion Price and number and kind
of shares or other securities to be issued upon conversion determined pursuant
to Section 2.1 shall be subject to adjustment from time to time upon the
happening of certain events while this conversion right remains outstanding, as
follows:
A. Reclassification. If Company at any time shall, by
reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note, as to the
unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed
to evidence the right to purchase an adjusted number of such securities and kind
of securities as would have been issuable as the result of such change with
respect to the Common Stock (i) immediately prior to or (ii) immediately after,
such reclassification or other change at the sole election of the Holder.
B. Stock Splits, Combinations and Dividends. If the shares of Common
Stock are subdivided or combined into a greater or smaller number of shares of
Common Stock, or if a dividend is paid on the Common Stock or any preferred
stock issued by Company in shares of Common Stock, the Fixed Conversion Price
shall be proportionately reduced in case of subdivision of shares or stock
dividend or proportionately increased in the case of combination of shares, in
each such case by the ratio which the total number of shares of Common Stock
outstanding immediately after such event bears to the total number of shares of
Common Stock outstanding immediately prior to such event.
C. Share Issuances. Subject to the provisions of this Section 2.5,
if Company shall at any time prior to the conversion or repayment in full of the
Principal Amount issue any shares of Common Stock or securities convertible into
Common Stock to a person other than the Holder (except (i) pursuant to
Subsections A or B above; (ii) pursuant to options, warrants, or other
obligations to issue shares outstanding on the date hereof as disclosed to
Holder in writing, other than the disclosure made by the Company to the Holder
on Schedule 12(c)(ii) to the Security Agreement; or (iii) pursuant to options
that may be issued under any employee incentive stock option and/or any
qualified stock option plan adopted by Company) for a consideration per share
(the "OFFER Price") less than the Fixed Conversion Price in effect at the time
of such issuance, then the Fixed Conversion Price shall be immediately reset to
such lower Offer Price. For purposes hereof, the issuance of any security of
Company convertible into or exercisable or exchangeable for Common Stock shall
result in an adjustment to the Fixed Conversion Price upon the issuance of such
securities.
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If the Company issues any additional shares pursuant to Section 2.5 above
then, and thereafter successively upon each such issue, the Fixed Conversion
Price shall be adjusted by multiplying the then applicable Fixed Conversion
Price by the following fraction:
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A + B
--------------------------------------
(A + B) + [((C - D) x B) / C]
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A = Actual shares outstanding prior to such offering
B = Actual shares sold in the offering
C = Fixed Conversion Price
D = Offering price
D. Computation of Consideration. For purposes of any computation
respecting consideration received pursuant to Subsection C above, the following
shall apply:
(a) in the case of the issuance of shares of Common Stock for
cash, the consideration shall be the amount of such cash, provided that in no
case shall any deduction be made for any commissions, discounts or other
expenses incurred by Company for any underwriting of the issue or otherwise in
connection therewith;
(b) in the case of the issuance of shares of Common Stock for
a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value thereof as determined in
good faith by the Board of Directors of Company (irrespective of the accounting
treatment thereof); and
(c) the aggregate consideration received for such securities
shall be deemed to be the consideration received by Company for the issuance of
such securities plus the additional minimum consideration, if any, to be
received by Company upon the conversion or exchange thereof (the consideration
in each case to be determined in the same manner as provided in clauses (a) and
(b) of this Subsection (D)).
2.6. Reservation of Shares. During the period the conversion right
exists, Company will reserve from its authorized and unissued Common Stock a
sufficient number of shares to provide for the issuance of Common Stock upon the
full conversion of this Note. Company represents that upon issuance, such shares
will be duly and validly issued, fully paid and non-assessable. Company agrees
that its issuance of this Note shall constitute full authority to its officers,
agents, and transfer agents who are charged with the duty of executing and
issuing stock certificates to execute and issue the necessary certificates for
shares of Common Stock upon the conversion of this Note.
ARTICLE III
EVENTS OF DEFAULT
The occurrence of any of the events set forth in Sections 3.1
through 3.10, inclusive, shall be an Event of Default ("EVENT OF DEFAULT"):
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3.1. Failure to Pay Principal, Interest or other Fees. Any Borrower
fails to pay when due any installment of principal, interest or other fees
hereon or on any other Note issued pursuant to the Security Agreement, or any
Borrower fails to pay when due any amount due under any other promissory note
issued by such Borrower in favor of Holder, when due in accordance with the
terms thereof, and in any such case, such failure shall continue for a period of
five (5) days following the date upon which any such payment was due.
3.2. Breach of Covenant. Any Borrower breaches any covenant or other
term or condition of this Note, the Security Agreement or any Ancillary
Agreement in any material respect and such breach, if subject to cure, continues
for a period of twenty (20) days after the occurrence thereof.
3.3. Breach of Representations and Warranties. Any representation or
warranty of any Borrower or any of its Subsidiaries made herein, or the Security
Agreement, or in any Ancillary Agreement shall be false or misleading in any
material respect.
3.4. Stop Trade. An SEC stop trade order or Principal Market trading
suspension of the Common Stock shall be in effect for 10 consecutive days or 10
days during a period of 20 consecutive days, excluding in all cases a suspension
of all trading on a Principal Market, provided that Company shall not have been
able to cure such trading suspension within 30 days of the notice thereof or
list the Common Stock on another Principal Market within 60 days of such notice.
The "Principal Market" for the Common Stock shall include the NASD OTC Bulletin
Board, NASDAQ SmallCap Market, NASDAQ National Market System, American Stock
Exchange, or New York Stock Exchange (whichever of the foregoing is at the time
the principal trading exchange or market for the Common Stock), or any
securities exchange or other securities market on which the Common Stock is then
being listed or traded.
3.5. Receiver or Trustee. Any Borrower or any of its Subsidiaries
shall make an assignment for the benefit of creditors, or apply for or consent
to the appointment of a receiver or trustee for it or for a substantial part of
its property or business; or such a receiver or trustee shall otherwise be
appointed.
3.6. Judgments. Any money judgment, writ or similar final process
shall be entered or filed against any Borrower or any of its Subsidiaries or any
of their respective property or other assets for more than $100,000, and shall
remain unvacated, unbonded or unstayed for a period of thirty (30) days.
3.7. Bankruptcy. Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings or relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against any
Borrower or any of its Subsidiaries and, in the case of an involuntary case or
proceeding, such case or proceeding is not dismissed within forty-five (45) days
following commencement thereof.
3.8. Default Under Other Agreements. The occurrence of an Event of
Default under and as defined in the Security Agreement or any Ancillary
Agreement or the Secured Convertible Term Note dated as of the date hereof in
the original principal amount of $2,000,000 made by Company in favor of the
Holder or any event of default (or similar term) under any other indebtedness.
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3.9. Failure to Deliver Common Stock or Replacement Note. Company's
failure to timely deliver Common Stock to the Holder pursuant to and in the form
required by this Note and the Security Agreement, if such failure to timely
deliver Common Stock shall not be cured within three (3) days. If any Borrower
is required to issue a replacement Note to Holder and such Borrower shall fail
to deliver such replacement Note within fourteen (14) days.
3.10. Change in Control. The occurrence of a change in the
controlling ownership of any Borrower without the prior written consent of the
Holder.
DEFAULT RELATED PROVISIONS
3.11. Default Interest Rate. Following the occurrence and during the
continuance of an Event of Default, interest on this Note shall automatically be
increased by two percent (2%) per month to a maximum annual rate not to exceed
fifteen percent (15%), and all outstanding Obligations, including unpaid
interest, shall continue to accrue interest from the date of such Event of
Default at such interest rate applicable to such Obligations until such Event of
Default is cured or waived.
3.12. Conversion Privileges. The conversion privileges set forth in
Article III shall remain in full force and effect immediately from the date
hereof and until this Note is paid in full.
3.13. Cumulative Remedies. The remedies under this Note shall be
cumulative.
ARTICLE IV
DEFAULT PAYMENTS
4.1. Default Payment. If an Event of Default occurs and is
continuing beyond any applicable grace period, the Holder, at its option, may
elect, in addition to all rights and remedies of Holder under the Security
Agreement and the Ancillary Agreements and all obligations of each Borrower
under the Security Agreement and the Ancillary Agreements, to require the
Borrowers to make a Default Payment ("DEFAULT PAYMENT"). The Default Payment
shall be 120% of the outstanding principal amount of the Note, plus accrued but
unpaid interest, all other fees then remaining unpaid, and all other amounts
payable hereunder. The Default Payment shall be applied first to any fees due
and payable to Holder pursuant to the Notes or the Ancillary Agreements, then to
accrued and unpaid interest due on the Notes and then to outstanding principal
balance of the Notes.
4.2. Default Payment Date. The Default Payment shall be due and
payable immediately on the date that the Holder has exercised its rights
pursuant to Section 4.1 ("DEFAULT PAYMENT DATE").
4.3. Cumulative Remedies. The remedies under this Note shall be
cumulative.
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ARTICLE V
MISCELLANEOUS
5.1. Failure or Indulgence Not Waiver. No failure or delay on the
part of the Holder hereof 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 privilege. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.
5.2. Notices. Any notice herein required or permitted to be given
shall be in writing and provided in accordance with the terms of the Security
Agreement.
5.3. Amendment Provision. The term "Note" and all reference thereto,
as used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented, and any successor instrument as it may be amended or supplemented.
5.4. Assignability. This Note shall be binding upon each Borrower
and its successors and assigns, and shall inure to the benefit of the Holder and
its successors and assigns, and may be assigned by the Holder in accordance with
the requirements of the Security Agreement and all applicable securities laws.
5.5. Cost of Collection. If default is made in the payment of this
Note, each Borrower shall jointly and severally pay the Holder hereof reasonable
costs of collection, including reasonable attorneys' fees.
5.6. Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws. Any action brought by either party against the other
concerning the transactions contemplated by this Agreement shall be brought only
in the state courts of New York or in the federal courts located in the State of
New York. Each party hereto and the individual signing this Note on behalf of
each Borrower agree to submit to the jurisdiction of such courts. The prevailing
party shall be entitled to recover from the other party its reasonable
attorney's fees and costs. In the event that any provision of this Note is
invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or unenforceability of any other provision of this
Note. Nothing contained herein shall be deemed or operate to preclude the Holder
from bringing suit or taking other legal action against any Borrower in any
other jurisdiction to collect on the Borrowers obligations to Holder, to realize
on any collateral or any other security for such obligations, or to enforce a
judgment or other court order in favor of Holder.
5.7. Maximum Payments. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by Borrowers to the Holder and thus refunded to the
Borrowers.
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5.8. Security Interest. The Holder has been granted a security
interest (i) in certain assets of the Borrowers as more fully described in the
Security Agreement and (ii) pursuant to the Pledge Agreement dated as of the
date hereof.
5.9. Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.
[Balance of page intentionally left blank; signature page follows.]
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IN WITNESS WHEREOF, each Borrower has caused this Secured Revolving Note
to be signed in its name effective as of this 30th day of September, 2004.
CATALYST LIGHTING GROUP, INC.
By:
------------------------------------
Name:
Title:
WITNESS:
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WHITCO COMPANY, LP
By: WHITCO MANAGEMENT, LLC
its General Partner
By:
------------------------------------
Name:
Title:
WITNESS:
------------------------------------
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NOTICE OF CONVERSION
(To be executed by the Holder in order to convert the Note)
The undersigned hereby elects to convert $_________ of the principal and
$_________ of the interest due on the Secured Revolving Note (the "NOTE") issued
by Catalyst Lighting Group, Inc. ("CLG") and the other Borrowers named and as
defined therein on September ___, 2004 into shares of Common Stock of CLG
according to the conditions set forth in the Note, as of the date written below.
Date of Conversion:
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Conversion Price:
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Shares To Be Delivered:
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Signature:
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Print Name:
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Address:
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Holder DWAC
instructions
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