Contract
THIS
AMENDED AND RESTATED 8% SENIOR SECURED CONVERTIBLE NOTE AMENDS AND RESTATES
THE
8% SENIOR SECURED CONVERTIBLE NOTE ORIGINALLY ISSUED PURSUANT TO THE SECURITIES
PURCHASE AGREEMENT, DATED AS OF MARCH 5, 2008, BY AND BETWEEN BLUE HOLDINGS,
INC., A NEVADA CORPORATION, AND THE PURCHASER NAMED THEREIN.
NEITHER
THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS
SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED
BY
SUCH SECURITIES.
Original
Issue Date: March 5, 2008
Original
Conversion Price (subject to adjustment herein): $0.40
$2,500,000
AMENDED
AND RESTATED 8% SENIOR SECURED CONVERTIBLE NOTE
THIS
NOTE
is one of a series of duly authorized and validly issued 8% Senior Secured
Convertible Notes of Blue Holdings, Inc., a Nevada corporation (the
“Company”),
having its principal place of business at 0000 Xxxxxxxx Xxxxxx, Xxxxxxxx,
Xxxxxxxxxx 00000, designated as its 8% Senior Secured Convertible Notes (this
Note, the “Note”
and,
collectively with the other Notes of such series, the “Notes”).
FOR
VALUE
RECEIVED, the Company promises to pay to GEMINI MASTER FUND, LTD. or its
registered assigns (the “Holder”),
or
shall have paid pursuant to the terms hereunder, the principal sum of $2,500,000
on September 1, 2010 (the “Maturity
Date”)
or
such earlier date as this Note is required or permitted to be repaid as provided
hereunder, or such later date as may be permitted by the Holder as set forth
in
Section 2 hereof, and to pay interest to the Holder on the aggregate unconverted
and then outstanding principal amount of this Note in accordance with the
provisions hereof.
The
Company’s and its Subsidiaries’ obligations under this Note and the other
Transaction Documents are secured by the Collateral (as defined in the Security
Agreement, including without limitation all Intellectual Property Rights)
pursuant to the terms of the Security Documents and the obligations under this
Note are guaranteed by the Company’s Subsidiaries pursuant to the Subsidiary
Guarantee.
1
This
Note
is subject to the following additional provisions:
Section
1. Definitions.
For the
purposes hereof, in addition to the terms defined elsewhere in this Note (a)
capitalized terms not otherwise defined herein shall have the meanings set
forth
in the Purchase Agreement and (b) the following terms shall have the following
meanings:
“Alternate
Consideration”
shall
have the meaning set forth in Section 5(e).
“Amendment”
means
that certain Amendment Agreement, dated as of July 30, 2008, amending this
Note
(among other things).
“Bankruptcy
Event”
means
any of the following events: (a) the Company or any Significant Subsidiary
(as
such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a
case
or other proceeding under any bankruptcy, reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation
or
similar law of any jurisdiction relating to the Company or any Significant
Subsidiary thereof; (b) there is commenced against the Company or any
Significant Subsidiary thereof any such case or proceeding that is not dismissed
within 60 days after commencement; (c) the Company or any Significant Subsidiary
thereof is adjudicated insolvent or bankrupt or any order of relief or other
order approving any such case or proceeding is entered; (d) the Company or
any
Significant Subsidiary thereof suffers any appointment of any custodian or
the
like for it or any substantial part of its property that is not discharged
or
stayed within 60 calendar days after such appointment; (e) the Company or any
Significant Subsidiary thereof makes a general assignment for the benefit of
creditors; (f) the Company or any Significant Subsidiary thereof calls a meeting
of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (g) the Company or any Significant Subsidiary
thereof, by any act or failure to act, expressly indicates its consent to,
approval of or acquiescence in any of the foregoing or takes any corporate
or
other action for the purpose of effecting any of the foregoing.
“Base
Conversion Price”
shall
have the meaning set forth in Section 5(b).
“Business
Day”
means
any day except any Saturday, any Sunday, any day which shall be a federal legal
holiday in the United States or any day on which banking institutions in the
State of New York are authorized or required by law or other governmental action
to close.
“Buy-In”
shall
have the meaning set forth in Section 4(d)(v).
“Change
of Control Transaction”
means
the occurrence after the date hereof of any of (i) an acquisition after the
date
hereof by an individual or legal entity or “group” (as described in Rule
13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company, by
contract or otherwise) of in excess of 33% of the voting securities of the
Company (other than by means of conversion or exercise of the Notes and the
Securities issued together with the Notes) (for clarification, retention of
the
current ownership by Xxxx Xxxx shall not be deemed a Change of Control
Transaction), or (ii) the Company merges into or consolidates with any other
Person, or any Person merges into or consolidates with the Company and, after
giving effect to such transaction, the stockholders of the Company immediately
prior to such transaction own less than 66% of the aggregate voting power of
the
Company or the successor entity of such transaction, or (iii) the Company sells
or transfers all or substantially all of its assets to another Person and the
stockholders of the Company immediately prior to such transaction own less
than
66% of the aggregate voting power of the acquiring entity immediately after
the
transaction, or (iv) a replacement at one time or within a three year period
of
more than one-half of the members of the Company’s board of directors which is
not approved by a majority of those individuals who are members of the board
of
directors on the date hereof (or by those individuals who are serving as members
of the board of directors on any date whose nomination to the board of directors
was approved by a majority of the members of the board of directors who are
members on the date hereof), or (v) the execution by the Company of an agreement
to which the Company is a party or by which it is bound, providing for any
of
the events set forth in clauses (i) through (iv) above.
2
“Conversion
Date”
shall
have the meaning set forth in Section 4(a).
“Conversion
Price”
shall
have the meaning set forth in Section 4(b).
“Conversion
Shares”
means,
collectively, the shares of Common Stock issued or issuable upon conversion
or
redemption of this Note in accordance with the terms hereof, including without
limitation shares of Common Stock issued or issuable as interest hereunder
or as
damages under the Transaction Documents.
“Note
Register”
shall
have the meaning set forth in Section 2(c).
“Dilutive
Issuance”
shall
have the meaning set forth in Section 5(b).
“Dilutive
Issuance Notice”
shall
have the meaning set forth in Section 5(b).
“Equity
Conditions”
means,
during the period in question, (i)
the
Company shall have duly honored all conversions and redemptions scheduled to
occur or occurring by virtue of one or more Notices of Conversion of the Holder,
if any, (ii) the Company shall have paid all liquidated damages and other
amounts owing to the Holder in respect of this Note, (iii)
all
of the shares of Common Stock issued or issuable pursuant to the Transaction
Documents may be sold by the Holder pursuant to either (a) Section (b)(1)(i)
of
Rule 144 and the Company has been subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act for the then preceding 90 days and
has
filed all reports required to be filed thereunder during the then preceding
12
months (or such shorter period that the Company was required to file such
reports) or (b) an effective Registration Statement (and the Company believes,
in good faith, that such effectiveness will continue uninterrupted for the
foreseeable future), (iv) the Common Stock is trading on a Trading Market and
all of the shares issuable pursuant to the Transaction Documents are listed
or
quoted for trading on such Trading Market (and the Company believes, in good
faith, that trading of the Common Stock on a Trading Market will continue
uninterrupted for the foreseeable future), (v) there is a sufficient number
of
authorized but unissued and otherwise unreserved shares of Common Stock for
the
issuance of all of the shares issuable pursuant to the Transaction Documents,
(vi) there is no existing Event of Default or no existing event which, with
the
passage of time or the giving of notice, would constitute an Event of Default,
(vii) the issuance of the shares in question (or, in the case of an Optional
or
Monthly Redemption, the shares issuable upon conversion in full of the Optional
or Monthly Redemption Amount) to
the
Holder would not violate the limitations set forth in Section 4(c) below,
(viii)
there has been no public announcement of a pending or proposed Fundamental
Transaction or Change of Control Transaction that has not been consummated,
(ix)
the Holder is not in possession of any information provided by the Company
that
constitutes, or may constitute, material non-public information, and (x) the
closing bid price per share of Common Stock on the Trading Market for each
of
the ten (10) Trading Days immediately preceding the applicable date in question
shall be greater than $0.30.
3
“Event
of Default”
shall
have the meaning set forth in Section 8.
“Factor
Indebtedness”
means
indebtedness to the Company’s factor which has provided or is providing
factoring financing secured by, or pursuant to the sale of, accounts receivable
and inventory of the Company or its subsidiaries.
“Forced
Conversion”
shall
have the meaning set forth in Section 6(d).
“Forced
Conversion Date”
shall
have the meaning set forth in Section 6(d).
“Forced
Conversion Notice”
shall
have the meaning set forth in Section 6(d).
“Forced
Conversion Notice Date”
shall
have the meaning set forth in Section 6(d).
“Fundamental
Transaction”
shall
have the meaning set forth in Section 5(e).
“Guez
Note”
means
that certain 8% Senior Convertible Note issued or to be issued by the Company
to
Xxxx Xxxx in the principal amount of $1,618,093.15.
“Late
Fees”
shall
have the meaning set forth in Section 2(d).
“Mandatory
Default Amount”
means
the sum of (i) the greater of (A) 125% of the outstanding principal amount
of
this Note, plus 100% of accrued and unpaid interest hereon, or (B) the
outstanding principal amount of this Note, plus all accrued and unpaid interest
hereon, divided by the lesser of the Conversion Price and the Market Redemption
Price on the date the Mandatory Default Amount is either (a) demanded (if demand
or notice is required to create an Event of Default) or otherwise due or (b)
paid in full, whichever has a lower price, multiplied by the VWAP on the date
the Mandatory Default Amount is either (x) demanded or otherwise due or (y)
paid
in full, whichever has a higher VWAP, and (ii) all other amounts, costs,
expenses and liquidated damages due in respect of this Note.
“Market
Pricing Period”
means
the 10 consecutive Trading Day period used in determining the Market Redemption
Price.
4
“Market
Redemption Price”
means
85% of the average of the closing bid prices for the 10 consecutive Trading
Days
immediately preceding the date as of which the Market Redemption Price is being
determined (subject to appropriate and equitable adjustment for any stock
dividend, stock split, stock combination or other similar event affecting the
Common Stock during such 10 Trading Day period).
“Monthly
Redemption”
means
the redemption of this Note pursuant to Section 6(b) hereof.
“Monthly
Redemption Amount”
means,
as to a Monthly Redemption, 1/24th
of the
original principal amount of this Note (as modified by the Amendment), plus
all
accrued but unpaid interest, liquidated damages and any other amounts then
owing
to the Holder in respect of this Note.
“Monthly
Redemption Date”
means
the first day of each calendar month, commencing on the first day of the first
full calendar month occurring after the date which is six (6) months following
the Original Issue Date on which this Note was issued, and terminating upon
the
full redemption of 100% of the principal amount of this Note.
“Monthly
Redemption Notice”
shall
have the meaning set forth in Section 6(b) hereof.
“New
York Courts”
shall
have the meaning set forth in Section 9(d).
“Notice
of Conversion”
shall
have the meaning set forth in Section 4(a).
“Optional
Redemption”
shall
have the meaning set forth in Section 6(a).
“Optional
Redemption Amount”
means
the sum of (i) 120% of the then outstanding principal amount of this Note,
(ii)
all accrued but unpaid interest thereon, and (iii) all liquidated damages and
other amounts due in respect of this Note.
“Optional
Redemption Date”
shall
have the meaning set forth in Section 6(a).
“Optional
Redemption Notice”
shall
have the meaning set forth in Section 6(a).
“Optional
Redemption Notice Date”
shall
have the meaning set forth in Section 6(a).
“Original
Issue Date”
means
the date of the first issuance of this Note, regardless of any transfers of
this
Note and regardless of the number of instruments which may be issued to evidence
this Note.
“Permitted
Indebtedness”
means
(a) the indebtedness evidenced by the Notes, (b) the Indebtedness existing
on
the initial Closing Date and set forth on Schedule
3.1(aa)
attached
to the Purchase Agreement, (c) lease obligations and purchase money indebtedness
of up to $100,000, in the aggregate, incurred in connection with the acquisition
of capital assets and lease obligations with respect to newly acquired or leased
assets, (d) Factor Indebtedness, and (e) indebtedness that (i) is expressly
subordinate to the Notes pursuant to a written subordination agreement with
the
Purchasers that is acceptable to each Purchaser in its sole and absolute
discretion and (ii) matures at a date later than the Maturity Date.
5
“Permitted
Lien”
means
the individual and collective reference to the following: (a) Liens for taxes,
assessments and other governmental charges or levies not yet due or Liens for
taxes, assessments and other governmental charges or levies being contested
in
good faith and by appropriate proceedings for which adequate reserves (in the
good faith judgment of the management of the Company) have been established
in
accordance with GAAP; (b) Liens imposed by law which were incurred in the
ordinary course of the Company’s business, such as carriers’, warehousemen’s and
mechanics’ Liens, statutory landlords’ Liens, and other similar Liens arising in
the ordinary course of the Company’s business, and which (x) do not individually
or in the aggregate materially detract from the value of such property or assets
or materially impair the use thereof in the operation of the business of the
Company and its consolidated Subsidiaries or (y) are being contested in good
faith by appropriate proceedings, which proceedings have the effect of
preventing for the foreseeable future the forfeiture or sale of the property
or
asset subject to such Lien; (c) Liens incurred in connection with Permitted
Indebtedness under clauses (a), (b), (c) and (d) thereunder, provided that
such
Liens are not secured by assets of the Company or its Subsidiaries other than
the assets so acquired, leased or factored against.
“Purchase
Agreement”
means
the Securities Purchase Agreement, dated as of March 5, 2008, among the Company
and the original Holders, as amended, modified or supplemented from time to
time
in accordance with its terms.
“Registration
Statement”
means
an effective registration statement under the Securities Act that registers
the
resale of all Conversion Shares of the Holder, names the Holder as a “selling
stockholder” therein, and contains a current prospectus not subject to any
blackout, suspension or stop order.
“Securities
Act”
means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
“Share
Delivery Date”
shall
have the meaning set forth in Section 4(d).
“Shareholder
Approval”
shall
have the meaning set forth in the Amendment.
“Subsidiary”
shall
have the meaning set forth in the Purchase Agreement.
“Threshold
Period”
shall
have the meaning set forth in Section 6(d).
“Trading
Day”
means
a
day on which the principal Trading Market is open for business.
“Trading
Market”
means
the following markets or exchanges on which the Common Stock is listed or quoted
for trading on the date in question: the American Stock Exchange, the Nasdaq
Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market,
the
New York Stock Exchange or the OTC Bulletin Board.
6
“Transaction
Documents”
shall
have the meaning set forth in the Purchase Agreement.
“VWAP”
means,
for any date, the price determined by the first of the following clauses that
applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
the daily volume weighted average price of the Common Stock for such date (or
the nearest preceding date) on the Trading Market on which the Common Stock
is
then listed or quoted for trading as reported by Bloomberg L.P. (based on a
Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
time)); (b) if the OTC Bulletin Board is not a Trading Market, the volume
weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then
quoted for trading on the OTC Bulletin Board and if prices for the Common Stock
are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a
similar organization or agency succeeding to its functions of reporting prices),
the most recent bid price per share of the Common Stock so reported; or
(d) in all other cases, the fair market value of a share of Common Stock as
determined by an independent appraiser selected in good faith by the Holder
and
reasonably acceptable to the Company.
Section
2. Interest;
No Prepayment.
a) Interest
Rate.
Interest shall accrue daily on the outstanding principal amount of this Note
at
a rate per annum equal to 8%.
b) Payment
of Interest.
On each
Monthly Redemption Date and on the Maturity Date, the Company shall pay to
the
Holder any accrued but unpaid interest hereunder on the aggregate unconverted
and then outstanding principal amount of this Note, and on each Conversion
Date
and Optional Redemption Date the Company shall pay to the Holder any accrued
but
unpaid interest hereunder on that portion of the principal amount then being
converted or redeemed, as the case may be. The amount of interest payable on
each Monthly Redemption Date, Conversion Date, Maturity Date and Optional
Redemption Date (“Interest
Amount”)
shall
be added to and included in the principal amount being so converted or redeemed
on such date.
c) Interest
Calculations.
Interest shall be calculated on the basis of a 360-day year, consisting of
twelve 30 calendar day periods, and shall accrue daily commencing on the
Original Issue Date until payment in full of the outstanding principal, together
with all accrued and unpaid interest, liquidated damages and other amounts
which
may become due hereunder, has been made. Interest hereunder will be paid to
the
Person in whose name this Note is registered on the records of the Company
regarding registration and transfers of this Note (the “Note
Register”).
Except as otherwise provided herein, if at any time the Company pays interest
partially in cash and partially in shares of Common Stock to the holders of
the
Notes, then such payment of cash shall be distributed ratably among the holders
of the then-outstanding Notes based on their (or their predecessor’s) initial
purchases of Notes pursuant to the Purchase Agreement.
7
d) Late
Fees.
All
overdue accrued and unpaid interest to be paid hereunder shall entail a late
fee
at an interest rate equal to the lesser of 20% per annum or the maximum rate
permitted by applicable law (“Late
Fees”)
which
shall accrue daily from the date such interest is due hereunder through and
including the date of actual payment in full.
e) No
Prepayment.
Except
as otherwise set forth in this Note, the Company may not prepay any portion
of
the principal amount of this Note without the prior written consent of the
Holder.
Section
3. Registration
of Transfers and Exchanges.
a) Different
Denominations.
This
Note is exchangeable for an equal aggregate principal amount of Notes of
different authorized denominations, as requested by the Holder surrendering
the
same. No service charge will be payable for such exchange.
b) Investment
Representations.
This
Note has been issued subject to certain investment representations of the
original Holder set forth in the Purchase Agreement and may be transferred
or
exchanged only in compliance with the Purchase Agreement and applicable federal
and state securities laws and regulations.
c) Reliance
on Note Register.
Prior
to due presentment for transfer to the Company of this Note, the Company and
any
agent of the Company may treat the Person in whose name this Note is duly
registered on the Note Register as the owner hereof for the purpose of receiving
payment as herein provided and for all other purposes, whether or not this
Note
is overdue, and neither the Company nor any such agent shall be affected by
notice to the contrary.
Section
4. Conversion.
a) Voluntary
Conversion.
At any
time after the Original Issue Date until this Note is no longer outstanding,
this Note shall be convertible, in whole or in part, into shares of Common
Stock
at the option of the Holder, at any time and from time to time (subject to
the
conversion limitations set forth in Section 4(c) hereof). The Holder shall
effect conversions by delivering to the Company a Notice of Conversion, the
form
of which is attached hereto as Annex
A
(a
“Notice
of Conversion”),
specifying therein the principal amount of this Note to be converted and the
future date (which may be the same date as the date such notice is deemed
effective pursuant to Section 9(a)) on which such conversion shall be effected
(such date, the “Conversion
Date”).
If no
Conversion Date is specified in a Notice of Conversion, the Conversion Date
shall be the date that such Notice of Conversion is deemed delivered hereunder.
To effect conversions hereunder, the Holder shall not be required to physically
surrender this Note to the Company unless the entire principal amount of this
Note, plus all accrued and unpaid interest thereon, has been so converted.
Conversions hereunder shall have the effect of lowering the outstanding
principal amount of this Note in an amount equal to the applicable conversion.
The Holder and the Company shall maintain records showing the principal
amount(s) converted and the date of such conversion(s). In the event of any
dispute or discrepancy, the records of the Holder shall be controlling and
determinative in the absence of manifest error. The Holder, and any assignee
by
acceptance of this Note, acknowledge and agree that, by reason of the provisions
of this paragraph, following conversion of a portion of this Note, the unpaid
and unconverted principal amount of this Note may be less than the amount stated
on the face hereof.
8
b) Conversion
Price.
The
conversion price shall be equal to $0.40, subject
to adjustment herein (the “Conversion
Price”).
c) Conversion
Limitations.
i. Issuance
Limitations.
Notwithstanding anything herein to the contrary, if the Company has not obtained
Shareholder Approval, then the Company may not issue, upon conversion of this
Note or the issuance of shares of Common Stock for the payment of principal,
interest or liquidated damages, a number of shares of Common Stock which, when
aggregated with any shares of Common Stock issued on or after the Original
Issue
Date and prior to such Conversion Date (A) in connection with the conversion
of
any Notes issued pursuant to the Purchase Agreement or as payment of principal,
interest or liquidated damages, (B) in connection with the exercise of any
Warrants issued pursuant to the Purchase Agreement and (C) in connection with
any warrants issued to any registered broker-dealer as a fee in connection
with
the issuance of the Securities pursuant to the Purchase Agreement, would exceed
19.99% of the number of shares of Common Stock outstanding on the Trading Day
immediately preceding the date of the Purchase Agreement (subject to adjustment
for forward and reverse stock splits, recapitalizations and the like) (such
number of shares, the “Issuable
Maximum”).
Each
Holder shall be entitled to a portion of the Issuable Maximum equal to the
quotient obtained by dividing (x) the original principal amount of the Holder’s
Note by (y) the aggregate original principal amount of all Notes issued to
all
Holders under the Purchase Agreement. In addition, each Holder may allocate
its
pro-rata portion of the Issuable Maximum among Notes and Warrants held by it
in
its sole discretion. Such portion shall be adjusted upward ratably in the event
a Holder no longer holds any Notes or Warrants and the amount of shares issued
to the Holder pursuant to the Holder’s Notes and Warrants was less than the
Holder’s pro-rata share of the Issuable Maximum. In determining the issuance
limitation contained in this paragraph in connection with any conversions or
redemptions pursuant to Section 6 below, the number of Warrant Shares issuable
upon exercise of all the Warrants (and shares of Common Stock underlying any
warrants issued to any registered broker-dealer as a fee in connection with
the
issuance of the Securities pursuant to the Purchase Agreement) shall be applied
first against the Issuable Maximum (and shall be deemed to have been issued
for
such purposes).
ii. Holder’s
Restriction on Conversion.
The
Company shall not effect any conversion of this Note, and a Holder shall not
have the right to convert any portion of this Note, to the extent that after
giving effect to the conversion set forth on the applicable Notice of
Conversion, the Holder (together with the Holder’s Affiliates, and any other
person or entity acting as a group together with the Holder or any of the
Holder’s Affiliates) would beneficially own in excess of the Beneficial
Ownership Limitation (as defined below). For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by the Holder
and its Affiliates shall include the number of shares of Common Stock issuable
upon conversion of this Note with respect to which such determination is being
made, but shall exclude the number of shares of Common Stock which are issuable
upon (A) conversion of the remaining, unconverted principal amount of this
Note
beneficially owned by the Holder or any of its Affiliates and (B) exercise
or
conversion of the unexercised or unconverted portion of any other securities
of
the Company subject to a limitation on conversion or exercise analogous to
the
limitation contained herein (including, without limitation, any other Notes
or
the Warrants) beneficially owned by the Holder or any of its Affiliates.
Except as set forth in the preceding sentence, for purposes of this Section
4(c), beneficial ownership shall be calculated in accordance with Section 13(d)
of the Exchange Act and the rules and regulations promulgated thereunder. To
the
extent that the limitation contained in this paragraph applies, the
determination of whether this Note is convertible (in relation to other
securities owned by the Holder together with any Affiliates) and of which
principal amount of this Note is convertible shall be in the sole discretion
of
the Holder, and the submission of a Notice of Conversion shall be deemed to
be
the Holder’s determination of whether this Note may be converted (in relation to
other securities owned by the Holder together with any Affiliates) and which
principal amount of this Note is convertible, in each case subject to the
Beneficial Ownership Limitation. To ensure compliance with this restriction,
the
Holder will be deemed to represent to the Company each time it delivers a Notice
of Conversion that such Notice of Conversion has not violated the restrictions
set forth in this paragraph and the Company shall have no obligation to verify
or confirm the accuracy of such determination. In
addition, a determination as to any group status as contemplated above shall
be
determined in accordance with Section 13(d) of the Exchange Act and
the
rules and regulations promulgated thereunder. For
purposes of this paragraph, in determining the number of outstanding shares
of
Common Stock, the Holder may rely on the number of outstanding shares of Common
Stock as stated in the most recent of the following: (A) the Company’s most
recent periodic or annual report, as the case may be; (B) a more recent public
announcement by the Company; or (C) a more recent notice by the Company or
the
Company’s transfer agent setting forth the number of shares of Common Stock
outstanding. Upon the written or oral request of a Holder, the Company
shall within three Trading Days confirm orally and in writing to the Holder
the
number of shares of Common Stock then outstanding. In any case, the number
of
outstanding shares of Common Stock shall be determined after giving effect
to
the conversion or exercise of securities of the Company, including this Note,
by
the Holder or its Affiliates since the date as of which such number of
outstanding shares of Common Stock was reported. The “Beneficial
Ownership Limitation”
shall
be 4.9% of the number of shares of the Common Stock outstanding immediately
after giving effect to the issuance of shares of Common Stock issuable upon
conversion of this Note held by the Holder. By written notice to the Company,
the Holder may at any time and from time to time increase or decrease the
Beneficial Ownership Limitation to any other percentage specified in such notice
(or specify that the Beneficial Ownership Limitation shall no longer be
applicable), provided, however, that (A) any such increase (or inapplicability)
shall not be effective until the sixty-first (61st) day after such notice is
delivered to the Company, and (B) any such increase or decrease shall apply
only
to the Holder and not to any other holder of Notes. The provisions of this
paragraph shall be construed and implemented in a manner otherwise than in
strict conformity with the terms of this paragraph to correct this paragraph
(or
any portion hereof) which may be defective or inconsistent with the intended
Beneficial Ownership Limitation herein contained or to make changes or
supplements necessary or desirable to properly give effect to such
limitation.
The
limitations contained in this paragraph shall apply to a successor holder of
this
Note.
9
d) Mechanics
of Conversion.
i. Conversion
Shares Issuable Upon Conversion of Principal Amount.
The
number of Conversion Shares issuable upon a conversion hereunder shall be
determined by the quotient obtained by dividing (x) the outstanding principal
amount of this Note to be converted plus any accrued but unpaid interest
thereon, by (y) the Conversion Price.
ii. Delivery
of Certificate Upon Conversion.
Not
later than three Trading Days after each Conversion Date (the “Share
Delivery Date”),
the
Company shall deliver, or cause to be delivered, to the Holder a certificate
or
certificates representing the Conversion Shares which, on or after the Legend
Removal Date, shall be free of restrictive legends and trading restrictions
(other than those which may then be required by the Purchase Agreement)
representing the number of Conversion Shares being acquired upon the conversion
of this Note. After September 30, 2008 (provided the Holder is not an affiliate
of the Company and the Holder may sell such Conversion Shares pursuant to
Section (b)(1) of Rule 144), the Company shall use commercially reasonable
efforts to deliver any certificate(s) or shares required to be delivered by
the
Company under this Section 4 electronically through the Depository Trust Company
or another established clearing corporation performing similar functions.
iii. Failure
to Deliver Certificates.
If in
the case of any Notice of Conversion such certificate(s) or shares are not
delivered to or as directed by the applicable Holder by the third Trading Day
after the Conversion Date, the Holder shall be entitled to elect by written
notice to the Company at any time on or before its receipt of such certificate
or certificates, to rescind such Conversion, in which event the Company shall
promptly return to the Holder any original Note delivered to the Company and
the
Holder shall promptly return to the Company the Common Stock certificates
representing the principal amount of this Note unsuccessfully tendered for
conversion to the Company.
10
iv. Obligation
Absolute; Partial Liquidated Damages.
The
Company’s obligations to issue and deliver the Conversion Shares upon conversion
of this Note in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any
waiver or consent with respect to any provision hereof, the recovery of any
judgment against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other Person of any obligation to the Company or
any
violation or alleged violation of law by the Holder or any other Person, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of
such
Conversion Shares; provided,
however,
that
such delivery shall not operate as a waiver by the Company of any such action
the Company may have against the Holder. In the event the Holder of this Note
shall elect to convert any or all of the outstanding principal amount hereof,
the Company may not refuse conversion based on any claim that the Holder or
anyone associated or affiliated with the Holder has been engaged in any
violation of law, agreement or for any other reason, unless an injunction from
a
court, on notice to the Holder, restraining and or enjoining conversion of
all
or part of this Note shall have been sought and obtained, and the Company posts
a surety bond for the benefit of the Holder in the amount of 100% of the
outstanding principal amount of this Note, which is subject to the injunction,
which bond shall remain in effect until the completion of arbitration/litigation
of the underlying dispute and the proceeds of which shall be payable to the
Holder to the extent it obtains judgment. In the absence of such injunction,
the
Company shall issue Conversion Shares or, if applicable, cash, upon a properly
noticed conversion. If the Company fails for any reason to deliver to the Holder
such certificate(s) or shares pursuant to Section 4(d)(ii) by the second Trading
Day after the Share Delivery Date, the Company shall pay to the Holder, in
cash,
as liquidated damages and not as a penalty, for each $1,000 of principal amount
being converted, $10 per Trading Day (increasing to $17.50 per Trading Day
on
the fifth Trading Day after such liquidated damages begin to accrue) for each
Trading Day after such second Trading Day after the Share Delivery Date until
such certificates are delivered. Nothing herein shall limit a Holder’s right to
pursue actual damages or declare an Event of Default pursuant to Section 8
hereof for the Company’s failure to deliver Conversion Shares within the period
specified herein and the Holder shall have the right to pursue all remedies
available to it hereunder, at law or in equity including, without limitation,
a
decree of specific performance and/or injunctive relief. The exercise of any
such rights shall not prohibit the Holder from seeking to enforce damages
pursuant to any other Section hereof or under applicable law.
v. Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion.
In
addition to any other rights available to the Holder, if the Company fails
for
any reason to deliver to the Holder such certificate(s) or shares by the Share
Delivery Date pursuant to Section 4(d)(ii), and if after such Share Delivery
Date the Holder is required by its brokerage firm to purchase (in an open market
transaction or otherwise), or the Holder’s brokerage firm otherwise purchases,
shares of Common Stock to deliver in satisfaction of a sale by the Holder of
the
Conversion Shares which the Holder was entitled to receive upon the conversion
relating to such Share Delivery Date (a “Buy-In”),
then
the Company shall (A) pay in cash to the Holder (in addition to any other
remedies available to or elected by the Holder) the amount by which (x) the
Holder’s total purchase price (including any brokerage commissions) for the
Common Stock so purchased exceeds (y) the product of (1) the aggregate number
of
shares of Common Stock that the Holder was entitled to receive from the
conversion at issue multiplied by (2) the actual sale price at which the sell
order giving rise to such purchase obligation was executed (including any
brokerage commissions) and (B) at the option of the Holder, either reissue
(if
surrendered) this Note in a principal amount equal to the principal amount
of
the attempted conversion or deliver to the Holder the number of shares of Common
Stock that would have been issued if the Company had timely complied with its
delivery requirements under Section 4(d)(ii). For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted conversion of this Note with respect to
which the actual sale price of the Conversion Shares (including any brokerage
commissions) giving rise to such purchase obligation was a total of $10,000
under clause (A) of the immediately preceding sentence, the Company shall be
required to pay the Holder $1,000. The Holder shall provide the Company written
notice indicating the amounts payable to the Holder in respect of the Buy-In
and, upon request of the Company, evidence of the amount of such loss. Nothing
herein shall limit a Holder’s right to pursue any other remedies available to it
hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company’s
failure to timely deliver certificates representing shares of Common Stock
upon
conversion of this Note as required pursuant to the terms hereof.
11
vi. Reservation
of Shares Issuable Upon Conversion.
The
Company covenants that it will at all times reserve and keep available out
of
its authorized and unissued shares of Common Stock for the sole purpose of
issuance upon conversion of this Note and payment of interest on this Note,
each
as herein provided, free from preemptive rights or any other actual contingent
purchase rights of Persons other than the Holder (and the other holders of
the
Notes), not less than such aggregate number of shares of the Common Stock as
shall (subject to the terms and conditions set forth in the Purchase Agreement)
be issuable (taking into account the adjustments of Section 5) upon the
conversion of the outstanding principal amount of this Note and payment of
interest hereunder. The Company covenants that all shares of Common Stock that
shall be so issuable shall, upon issue, be duly authorized, validly issued,
fully paid and nonassessable and, if the Registration Statement is then
effective under the Securities Act, shall be registered for public sale in
accordance with such Registration Statement.
vii. Fractional
Shares.
No
fractional shares or scrip representing fractional shares shall be issued upon
the conversion of this Note. As to any fraction of a share which the Holder
would otherwise be entitled to purchase upon such conversion, the Company shall
at its election, either pay a cash adjustment in respect of such final fraction
in an amount equal to such fraction multiplied by the Conversion Price or round
up to the next whole share.
12
viii. Transfer
Taxes.
The
issuance of certificates for shares of the Common Stock on conversion of this
Note shall be made without charge to the Holder hereof for any documentary
stamp
or similar taxes that may be payable in respect of the issue or delivery of
such
certificates, provided that the Company shall not be required to pay any tax
that may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than that
of
the Holder of this Note and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting
the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been
paid.
Section
5. Certain
Adjustments.
a) Stock
Dividends and Stock Splits.
If the
Company, at any time while this Note is outstanding: (A) pays a stock dividend
or otherwise makes a distribution or distributions payable in shares of Common
Stock on shares of Common Stock or any Common Stock Equivalents (which, for
avoidance of doubt, shall not include any shares of Common Stock issued by
the
Company upon conversion of, or payment of interest on, the Notes); (B)
subdivides outstanding shares of Common Stock into a larger number of shares;
(C) combines (including by way of a reverse stock split) outstanding shares
of
Common Stock into a smaller number of shares; or (D) issues, in the event of
a
reclassification of shares of the Common Stock, any shares of capital stock
of
the Company, then the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock (excluding
any
treasury shares of the Company) outstanding immediately before such event and
of
which the denominator shall be the number of shares of Common Stock outstanding
immediately after such event. Any adjustment made pursuant to this Section
shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.
b) Subsequent
Equity Sales.
If, at
any time while this Note is outstanding, the Company or any Subsidiary, as
applicable, sells or grants any option to purchase or sells or grants any right
to reprice, or otherwise disposes of or issues (or announces any sale, grant
or
any option to purchase or other disposition), any Common Stock or Common Stock
Equivalents entitling any Person to acquire shares of Common Stock at an
effective price per share that is lower than the then Conversion Price (such
lower price, the “Base
Conversion Price”
and
such issuances, collectively, a “Dilutive
Issuance”)
(if
the holder of the Common Stock or Common Stock Equivalents so issued shall
at
any time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights per share which are issued in connection with such
issuance, be entitled to receive shares of Common Stock at an effective price
per share that is lower than the Conversion Price, such issuance shall be deemed
to have occurred for less than the Conversion Price on such date of the Dilutive
Issuance), then the Conversion Price shall be reduced to equal the Base
Conversion Price. Such adjustment shall be made whenever such Common Stock
or
Common Stock Equivalents are issued. Notwithstanding
the foregoing, no adjustment will be made under this Section 5(b) in respect
of
an Exempt Issuance or in the event that such adjustment will result in the
issuance of more than 42,000,000 shares of Common Stock (as appropriately and
equitably adjusted for stock splits, stock dividends and similar events) when
aggregated with any shares of Common Stock issued on or after the initial
Closing Date and prior to the Maturity Date (A) in connection with the
conversion of any Notes or as payment of principal, interest or liquidated
damages, (B) in connection with the exercise of any Warrants issued pursuant
to
the Purchase Agreement, and (C) in connection with any warrants issued to any
registered broker-dealer as a fee in connection with the issuance of the
Securities pursuant to the Purchase Agreement.
If the
Company enters into a Variable Rate Transaction or MFN Transaction, despite
the
prohibition set forth in the Purchase Agreement, the Company shall be deemed
to
have issued Common Stock or Common Stock Equivalents at the lowest possible
conversion price at which such securities may be converted or exercised. The
Company shall notify the Holder in writing, no later than 1 Business Day
following the issuance of any Common Stock or Common Stock Equivalents subject
to this Section 5(b), indicating therein the applicable issuance price, or
applicable reset price, exchange price, conversion price and other pricing
terms
(such notice, the “Dilutive
Issuance Notice”).
For
purposes of clarification, whether or not the Company provides a Dilutive
Issuance Notice pursuant to this Section 5(b), upon the occurrence of any
Dilutive Issuance, the Holder is entitled to receive a number of Conversion
Shares based upon the Base Conversion Price on or after the date of such
Dilutive Issuance, regardless of whether the Holder accurately refers to the
Base Conversion Price in the Notice of Conversion.
13
c) Subsequent
Rights Offerings.
If the
Company, at any time while the Note is outstanding, shall issue rights, options
or warrants to all holders of Common Stock (and not to the Holders in their
capacity as holders of Notes) entitling them to subscribe for or purchase shares
of Common Stock at a price per share that is lower than the VWAP on the record
date referenced below, then the Conversion Price shall be multiplied by a
fraction of which the denominator shall be the number of shares of the Common
Stock outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of the Common
Stock outstanding on the date of issuance of such rights or warrants plus the
number of shares which the aggregate offering price of the total number of
shares issued (assuming delivery to the Company in full of all consideration
payable upon exercise of such rights, options or warrants) would purchase at
such VWAP. Such adjustment shall be made whenever such rights or warrants are
issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights, options or
warrants.
14
d) Pro
Rata Distributions.
If the
Company, at any time while this Note is outstanding, distributes to all holders
of Common Stock (and not to the Holders in their capacity as holders of Notes)
evidences of its indebtedness or assets (including cash and cash dividends)
or
rights or warrants to subscribe for or purchase any security (other than the
Common Stock, which shall be subject to Section 5(b)), then in each such case
the Conversion Price shall be adjusted by multiplying such Conversion Price
in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the VWAP determined as of the record date mentioned above,
and of which the numerator shall be such VWAP on such record date less the
then
fair market value at such record date of the portion of such assets or evidence
of indebtedness so distributed applicable to 1 outstanding share of the Common
Stock as determined by the Board of Directors of the Company in good faith.
In
either case the adjustments shall be described in a statement delivered to
the
Holder describing the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to 1 share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
e) Fundamental
Transaction.
If, at
any time while this Note is outstanding, (A) the Company effects any merger
or
consolidation of the Company with or into another Person, (B) the Company
effects any sale of all or substantially all of its assets in one transaction
or
a series of related transactions, (C) any tender offer or exchange offer
(whether by the Company or another Person) is completed pursuant to which
holders of Common Stock are permitted to tender or exchange their shares for
other securities, cash or property, or (D) the Company effects any
reclassification of the Common Stock or any compulsory share exchange pursuant
to which the Common Stock is effectively converted into or exchanged for other
securities, cash or property (in any such case, a “Fundamental
Transaction”),
then,
upon any subsequent conversion of this Note, the Holder shall have the right
to
receive, for each Conversion Share that would have been issuable upon such
conversion immediately prior to the occurrence of such Fundamental Transaction,
the same kind and amount of securities, cash or property as it would have been
entitled to receive upon the occurrence of such Fundamental Transaction if
it
had been, immediately prior to such Fundamental Transaction, the holder of
1
share of Common Stock (the “Alternate
Consideration”).
For
purposes of any such conversion, the determination of the Conversion Price
shall
be appropriately adjusted to apply to such Alternate Consideration based on
the
amount of Alternate Consideration issuable in respect of 1 share of Common
Stock
in such Fundamental Transaction, and the Company shall apportion the Conversion
Price among the Alternate Consideration in a reasonable manner reflecting the
relative value of any different components of the Alternate Consideration.
If
holders of Common Stock are given any choice as to the securities, cash or
property to be received in a Fundamental Transaction, then the Holder shall
be
given the same choice as to the Alternate Consideration it receives upon any
conversion of this Note following such Fundamental Transaction. To the extent
necessary to effectuate the foregoing provisions, any successor to the Company
or surviving entity in such Fundamental Transaction shall issue to the Holder
a
new Note consistent with the foregoing provisions and evidencing the Holder’s
right to convert such Note into Alternate Consideration. The terms of any
agreement pursuant to which a Fundamental Transaction is effected shall include
terms requiring any such successor or surviving entity to comply with the
provisions of this Section 5(e) and insuring that this Note (or any such
replacement security)
will be similarly adjusted upon any subsequent transaction analogous to a
Fundamental Transaction.
15
f) Calculations.
All
calculations under this Section 5 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be. For purposes of this Section
5,
the number of shares of Common Stock deemed to be issued and outstanding as
of a
given date shall be the sum of the number of shares of Common Stock (excluding
any treasury shares of the Company) issued and outstanding.
g) Notice
to the Holder.
i. Adjustment
to Conversion Price.
Whenever the Conversion Price is adjusted pursuant to any provision of this
Section 5, the Company shall promptly deliver to each Holder a notice setting
forth the Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
ii. Notice
to Allow Conversion by Holder.
If (A)
the Company shall declare a dividend (or any other distribution in whatever
form) on the Common Stock, (B) the Company shall declare a special nonrecurring
cash dividend on or a redemption of the Common Stock, (C) the Company shall
authorize the granting to all holders of the Common Stock of rights or warrants
to subscribe for or purchase any shares of capital stock of any class or of
any
rights, (D) the approval of any stockholders of the Company shall be required
in
connection with any reclassification of the Common Stock, any consolidation
or
merger to which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, of any compulsory share exchange
whereby the Common Stock is converted into other securities, cash or property
or
(E) the
Company shall authorize the voluntary or involuntary dissolution, liquidation
or
winding up of the affairs of the Company, then, in each case, the Company shall
cause to be filed at each office or agency maintained for the purpose of
conversion of this Note, and shall cause to be delivered
to the Holder at its last address as it shall appear upon the Note Register,
at
least 20 calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x)
the
date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled
to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange, provided that the
failure to deliver such notice or any defect therein or in the delivery thereof
shall not affect the validity of the corporate action required to be specified
in such notice. The Holder is entitled to convert this Note during the 20-day
period commencing on the date of such notice through the effective date of
the
event triggering such notice.
16
Section
6. Redemption
and Forced Conversion.
a) Optional
Redemption at Election of Company.
Subject
to the provisions of this Section 6, at any time after six months following
the
Original Issue Date, the Company may deliver a notice to the Holder (an
“Optional
Redemption Notice”
and
the
date such notice is deemed delivered hereunder, the “Optional
Redemption Notice Date”)
of its
irrevocable election to redeem the entire outstanding principal amount of this
Note for cash in an amount equal to the Optional Redemption Amount on the
20th
Trading
Day following the Optional Redemption Notice Date (such date, the “Optional
Redemption Date”
and
such redemption, the “Optional
Redemption”).
The
Optional Redemption Amount is payable in full on the Optional Redemption Date.
The Company may only effect an Optional Redemption if each of the Equity
Conditions shall have been met (unless waived in writing by the Holder) on
each
Trading Day during the period commencing on the Optional Redemption Notice
Date
through the Optional Redemption Date and
through and including the date payment of the Optional Redemption Amount is
actually made in full.
If any
of the Equity Conditions shall cease to be satisfied at any time during the
20
Trading Day period, then the Holder may elect to nullify the Optional Redemption
Notice by notice to the Company, in which case the Optional Redemption Notice
shall be null and void, ab initio.
The
Company covenants and agrees that it will honor all Notices of Conversion
tendered from the time of delivery of the Optional Redemption Notice through
the
date all amounts owing thereon are due and paid in full, and to the extent
elected by the Holder, any such conversions effected during such period shall
be
applied against principal amount otherwise payable on the Optional Redemption
Date.
If the
Company elects to redeem this Note it must redeem all outstanding
Notes.
b) Monthly
Redemption.
On each
Monthly Redemption Date, the Company shall redeem the Monthly Redemption Amount
(the “Monthly
Redemption”).
The
Monthly Redemption Amount payable on each Monthly Redemption Date shall be
paid
in cash; provided,
however,
as to
any Monthly Redemption and upon 15 Trading Days’ prior written irrevocable
notice (the “Monthly
Redemption Notice”),
in
lieu of a cash redemption payment the Company may elect to pay all or part
of a
Monthly Redemption Amount in Conversion Shares based on a conversion price
equal
to the lesser of (i) the then Conversion Price and (ii) the Market Redemption
Price; provided,
further,
that
the Company may not pay the Monthly Redemption Amount in Conversion Shares
unless from the date the Holder receives the duly delivered Monthly Redemption
Notice through and until the date such Monthly Redemption is paid in full,
the
Equity Conditions have been satisfied, unless waived in writing by the Holder.
The Holder may convert, pursuant to Section 4(a), any principal amount of this
Note at any time prior to the date that the Monthly Redemption Amount, plus
accrued but unpaid interest, liquidated damages and any other amounts then
owing
to the Holder are due and paid in full. At the Holder’s election, any
conversions of the principal amount of this Note pursuant to Section 4(a) may
be
applied against either the next upcoming Monthly Redemption Amount(s) due or
the
last principal amounts of this Note scheduled to be redeemed hereunder, in
reverse time order from the Maturity Date. In the event that the Holder elects
to have conversions of the principal amount of this Note pursuant to Section
4(a) applied against the next upcoming Monthly Redemption Amount(s) due, then
on
such Monthly Redemption Date the Monthly Redemption Amount shall consist of
any
remaining portion of the principal amount due on such Monthly Redemption date
plus all accrued and unpaid interest on the entire outstanding principal amount
of this Note as of such date. The Company covenants and agrees that it will
honor all Notices of Conversion tendered up until such amounts are paid in
full.
The Company’s determination to pay a Monthly Redemption in cash, shares of
Common Stock or a combination thereof shall be applied ratably to all of the
holders of the then outstanding Notes based on their (or their predecessor’s)
initial purchases of Notes pursuant to the Purchase Agreement. If a Registration
Statement is effective covering the resale of the Conversion Shares by the
Holder, at any time the Company delivers a notice to the Holder of its election
to pay the Monthly Redemption Amount in shares of Common Stock, the Company
shall file a prospectus supplement pursuant to Rule 424 disclosing such
election. Notwithstanding anything herein to the contrary, until such time
as
the Company has obtained Shareholder Approval and it is deemed effective, in
no
event shall the Company issue any Conversion Shares upon a Monthly Redemption
hereunder.
17
c) Redemption
Procedure.
The
payment of cash pursuant to an Optional Redemption shall be payable on the
Optional Redemption Date. If any portion of the payment pursuant to an Optional
Redemption shall not be paid by the Company by the applicable due date, interest
shall accrue thereon at an interest rate equal to the lesser of 20% per annum
or
the maximum rate permitted by applicable law until such amount is paid in full.
Notwithstanding anything herein contained to the contrary, if any portion of
the
Optional Redemption Amount remains unpaid after such date, the Holder may elect,
by written notice to the Company given at any time thereafter,
to invalidate such Optional Redemption, ab initio,
and,
with respect to the Company’s failure to honor the Optional Redemption, the
Company shall have no further right to exercise such Optional Redemption. The
payment of cash or Common Stock pursuant to a Monthly Redemption shall be
payable on the Monthly Redemption Date. If any portion of the payment pursuant
to a Monthly Redemption shall not be paid by the Company by the applicable
due
date, interest shall accrue thereon at an interest rate equal to the lesser
of
20% per annum or the maximum rate permitted by applicable law until such amount
is paid in full.
d) Forced
Conversion.
Notwithstanding anything herein to the contrary, if after one year following
the
initial Closing Date, the VWAP for any 20 out of 30 consecutive Trading Days
(such 30 Trading Day period being the “Threshold
Period”)
exceeds $0.80 (subject to appropriate and equitable adjustment for reverse
and
forward stock splits, stock dividends, stock combinations and other similar
transactions of the Common Stock that occur after such Closing Date), then
the
Company may, within 1 Trading Day after the end of any such Threshold Period,
deliver a written notice to the Holder (a “Forced
Conversion Notice”
and
the
date such notice is delivered to the Holder, the “Forced
Conversion Notice Date”)
to
cause the Holder to convert all or part of the then outstanding principal amount
of this Note plus, if so specified in the Forced Conversion Notice, accrued
but
unpaid interest, liquidated damages and other amounts owing to the Holder under
this Note, at the Conversion Price on or prior to the tenth Trading Day
following the Holder’s receipt of such Forced Conversion Notice (such date, the
“Forced
Conversion Date”).
The
Company may not deliver a Forced Conversion Notice, and any Forced Conversion
Notice delivered by the Company shall not be effective, unless all of the Equity
Conditions are met (unless waived in writing by the Holder) on each Trading
Day
occurring during the applicable Threshold Period through and including the
later
of the Forced Conversion Date and the Trading Day after the date such Conversion
Shares pursuant to such conversion are delivered to the Holder. Any Forced
Conversion shall be applied ratably to all Holders based on their initial
purchases of Notes pursuant to the Purchase Agreement, provided that any
voluntary conversions by a Holder shall be applied against the Holder’s pro rata
allocation, thereby decreasing the aggregate amount forcibly converted hereunder
if only a portion of this Note is forcibly converted. For purposes of
clarification, a Forced Conversion shall be subject to all of the provisions
of
Section 4, including, without limitation, the provision requiring payment of
liquidated damages and limitations on conversions.
18
Section
7. Negative
Covenants.
As long
as any portion of this Note remains outstanding, unless the holders of at least
a majority in principal amount of the then outstanding Notes shall have
otherwise given prior written consent, the Company shall not, and shall not
permit any of its subsidiaries (whether or not a Subsidiary on any Closing
Date)
to, directly or indirectly:
a) other
than Permitted Indebtedness or as set forth on Schedule 7(a) enter into, create,
incur, assume, guarantee or suffer to exist any indebtedness for borrowed money
of any kind, including but not limited to, a guarantee, on or with respect
to
any of its property or assets now owned or hereafter acquired or any interest
therein or any income or profits therefrom;
b) other
than Permitted Liens, enter into, create, incur, assume or suffer to exist
any
Liens of any kind, on or with respect to any of its property or assets now
owned
or hereafter acquired or any interest therein or any income or profits
therefrom;
c) amend
its
charter documents, including, without limitation, its articles of incorporation
and bylaws, in any manner that materially and adversely affects any rights
of
the Holder;
d) repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a
de minimis
number
of shares of its Common Stock or Common Stock Equivalents other than (a) as
to
the Conversion Shares or Warrant Shares as permitted or required under the
Transaction Documents, (b) as to repurchases of Common Stock or Common Stock
Equivalents of departing employees of the Company, provided that such
repurchases shall not exceed an aggregate of $150,000 for all employees during
the term of this Note, and (c) as set forth on Schedule
7(d);
19
e) repay,
repurchase or offer to repay, repurchase or otherwise acquire any Indebtedness
(except for the Notes in accordance with the terms of the Notes), other than
regularly scheduled principal and interest payments as such terms are in effect
as of the initial Closing Date or as set forth on Schedule 7(e);
f) pay
cash
dividends or distributions on any equity securities of the Company;
g) enter
into any transaction with any Affiliate of the Company which would be required
to be disclosed in any public filing with the Commission, unless such
transaction is made on an arm’s-length basis and expressly approved by a
majority of the disinterested directors of the Company (even if less than a
quorum otherwise required for board approval);
h) amend
the
Guez Note, or enter into any agreement which has the effect of effectively
modifying the Guez Note, without the Holder’s prior written consent;
or
i) enter
into any agreement with respect to any of the foregoing.
Section
8. Events
of Default.
a) “Event
of Default”
means,
wherever used herein, any of the following events (whatever the reason for
such
event and whether such event shall be voluntary or involuntary or effected
by
operation of law or pursuant to any judgment, decree or order of any court,
or
any order, rule or regulation of any administrative or governmental
body):
i. any
default in the payment of (A) the principal amount of any Note or (B) interest,
liquidated damages and other amounts owing to a Holder on any Note, as and
when
the same shall become due and payable (whether on a Conversion Date or the
Maturity Date or by acceleration or otherwise) which default is not cured within
3 Trading Days;
ii. the
Company shall fail to observe or perform any other covenant or agreement
contained in the Notes (other than a breach by the Company of its obligations
to
deliver shares of Common Stock to the Holder upon conversion, which breach
is
addressed in clause (xiii) below) which failure is not cured, if possible to
cure, within the earlier to occur
of
(A)
5
Trading
Days after notice of such failure sent by the Holder or by any other
Holder
and (B)
10 Trading Days after the Company has become or should have become aware of
such
failure (except as waived in the Amendment);
iii. a
default
or event of default (subject to any grace or cure period provided in the
applicable agreement, document or instrument) shall occur under (A) any of
the
Transaction Documents or (B) any other material agreement, lease, document
or
instrument to which the Company or any Subsidiary is obligated (and not covered
by clause (vi) below) (except as waived in the Amendment);
20
iv. any
representation
or warranty made in this Note, any other Transaction Document, any written
statement pursuant hereto or thereto or any other report, financial statement
or
certificate made or delivered to the Holder or any other Holder shall
be
untrue or incorrect in any material respect as of the date when made or deemed
made (except as waived in the Amendment);
v. the
Company or any Significant Subsidiary shall be subject to a Bankruptcy
Event;
vi. the
Company or any Subsidiary shall default on any of its obligations under any
mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which
there
may be secured or evidenced, any indebtedness for borrowed money or money due
under any long term leasing or factoring arrangement that (a) involves an
obligation greater than $100,000, whether such indebtedness now exists or shall
hereafter be created, and (b) results in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable;
vii. if
the
Common Stock shall not be eligible for listing or quotation for trading on
a
Trading Market and shall not be eligible to resume listing or quotation for
trading thereon within five Trading Days;
viii. the
Company shall be a party to any Change of Control Transaction or Fundamental
Transaction or shall agree to sell or dispose of all or in excess of 33% of
its
assets in one transaction or a series of related transactions (whether or not
such sale would constitute a Change of Control Transaction);
ix. if
at any
time after September 30, 2008 the
Company is not subject to the reporting requirements of Section 13 or 15(d)
of
the Exchange Act or has failed to file all reports required to be filed
thereunder during the then preceding 12 months (or such shorter period that
the
Company was required to file such reports);
x. if
any of
the Security Documents or Subsidiary Guaranties ceases to be in full force
and
effect (including failure to create a valid and perfected second priority lien
on and security interest in all the Collateral (as defined in the Security
Agreement) and Intellectual Property Rights of the Company and its Subsidiaries)
at any time for any reason;
xi. any
material adverse change in the condition, value or operation of a material
portion of the Collateral or Intellectual Property Rights;
21
xii. if
Xxxxx
Xxxxxx ceases to serve full time as the President and Chief Executive Officer
of
the Company and perform the duties consistent with such positions for similarly
situated companies, provided that if such cessation is due to Xxxxx Xxxxxx’x
death, permanent disability, voluntary termination or termination by the Company
for cause, then (A) an Event of Default shall not be deemed to have occurred
unless and until the Company shall have failed to retain a full-time replacement
reasonably acceptable to the Holder within 90 days following such death,
permanent disability, voluntary termination or termination by the Company for
cause, and (B) following any such acceptable replacement this clause shall
apply
to such replacement in lieu of Xxxxx Xxxxxx;
xiii. the
Company shall fail for any reason to deliver certificates to a Holder prior
to
the seventh Trading Day after a Conversion Date or any Forced Conversion Date
pursuant to Section 4(d) or the Company shall provide at any time notice to
the
Holder, including by way of public announcement, of the Company’s intention to
not honor requests for conversions of any Notes in accordance with the terms
hereof; or
xiv. any
monetary judgment, writ or similar final process shall be entered or filed
against the Company, any subsidiary or any of their respective property or
other
assets for more than $100,000, and such judgment, writ or similar final process
shall remain unvacated, unbonded or unstayed for a period of 45 calendar days;
provided, however, that any judgment which is covered by insurance or an
indemnity from a creditworthy party (such creditworthiness as reasonably
determined by the Holder) shall not be included in calculating the amount of
such judgment, writ or final process so long as the Company provides the Holder
a written statement from such insurer or indemnity provider (which written
statement shall be reasonably satisfactory to the Holder) to the effect that
such judgment is covered by insurance or an indemnity and the Company will
receive the proceeds of such insurance or indemnity within 45 calendar days
of
the issuance of such judgment.
b) Remedies
Upon Event of Default.
If any
Event of Default occurs, the outstanding principal amount of this Note, plus
accrued but unpaid interest, liquidated damages and other amounts owing in
respect thereof through the date of acceleration, shall become, at the Holder’s
election (which the Holder shall not make more than the later of 30 calendar
days after the date (a) such Event of Default is cured or otherwise resolved
and
(b) the Holder is aware of such cure or resolution), immediately due and payable
in cash at the Mandatory Default Amount. After the occurrence and during the
continuance of any Event of Default, the interest rate on this Note shall accrue
at an interest rate equal to the lesser of 20% per annum or the maximum rate
permitted under applicable law. Upon the payment in full of the Mandatory
Default Amount, the Holder shall promptly surrender this Note to or as directed
by the Company. In connection with such acceleration described herein, the
Holder need not provide, and the Company hereby waives, any presentment, demand,
protest or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable law. Such
acceleration may be rescinded and annulled by Holder at any time prior to
payment hereunder and the Holder shall have all rights as a holder of the Note
until such time, if any, as the Holder receives full payment pursuant to this
Section 8(b). No such rescission or annulment shall affect any subsequent Event
of Default or impair any right consequent thereon.
22
Section
9. Miscellaneous.
a) Notices.
Any and
all notices or other communications or deliveries to be provided by the Holder
hereunder, including, without limitation, any Notice of Conversion, shall be
in
writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service, addressed to the Company, at the address
set forth above, or such other facsimile number or address as the Company may
specify for such purpose by notice to the Holder delivered in accordance with
this Section 9. Any and all notices or other communications or deliveries to
be
provided by the Company hereunder shall be in writing and delivered personally,
by facsimile, or sent by a nationally recognized overnight courier service
addressed to each Holder at the facsimile number or address of the Holder
appearing on the books of the Company, or if no such facsimile number or address
appears, at the principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective on
the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile number specified in this Section 9
prior to 5:30 p.m. (New York City time), (ii) the date immediately following
the
date of transmission, if such notice or communication is delivered via facsimile
at the facsimile number specified in this Section 9 between 5:30 p.m. (New
York
City time) and 11:59 p.m. (New York City time) on any date, (iii) the second
Business Day following the date of mailing, if sent by U.S. nationally
recognized overnight courier service, or (iv) upon actual receipt by the party
to whom such notice is required to be given. The address for such notices and
communications shall be as set forth on the signature pages attached to the
Purchase Agreement.
b) Absolute
Obligation.
Except
as expressly provided herein, no provision of this Note shall alter or impair
the obligation of the Company, which is absolute and unconditional, to pay
the
principal of, liquidated damages and accrued interest, as applicable, on this
Note at the time, place, and rate, and in the coin or currency, herein
prescribed. This Note is a direct debt obligation of the Company. This Note
ranks pari passu
with all
other Notes now or hereafter issued under the terms set forth
herein.
c) Lost
or Mutilated Note.
If this
Note shall be mutilated, lost, stolen or destroyed, the Company shall execute
and deliver, in exchange and substitution for and upon cancellation of a
mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed
Note, a new Note for the principal amount of this Note so mutilated, lost,
stolen or destroyed, but only upon receipt of evidence of such loss, theft
or
destruction of such Note, and of the ownership hereof, reasonably satisfactory
to the Company.
23
d) Governing
Law.
All
questions concerning the construction, validity, enforcement and interpretation
of this Note shall be governed by and construed and enforced in accordance
with
the internal laws of the State of New York, without regard to the principles
of
conflict of laws thereof. Each party agrees that all legal proceedings
concerning the interpretation, enforcement and defense of the transactions
contemplated by any of the Transaction Documents (whether brought against a
party hereto or its respective Affiliates, directors, officers, shareholders,
employees or agents) shall be commenced in the state and federal courts sitting
in the City of New York, Borough of Manhattan (the “New
York Courts”).
Each
party hereto hereby irrevocably submits to the exclusive jurisdiction of the
New
York Courts for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction Documents),
and hereby irrevocably waives, and agrees not to assert in any suit, action
or
proceeding, any claim that it is not personally subject to the jurisdiction
of
such New York Courts, or such New York Courts are improper or inconvenient
venue
for such proceeding. Each party hereby irrevocably waives personal service
of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address
in
effect for notices to it under this Note and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any other manner permitted by applicable law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any
and
all right to trial by jury in any legal proceeding arising out of or relating
to
this Note or the transactions contemplated hereby. If either party shall
commence an action or proceeding to enforce any provisions of this Note, then
the prevailing party in such action or proceeding shall be reimbursed by the
other party for its attorney’s fees and other costs and expenses reasonably
incurred in the investigation, preparation and prosecution of such action or
proceeding.
e) Waiver.
Any
waiver by the Company or the Holder of a breach of any provision of this Note
shall not operate as or be construed to be a waiver of any other breach of
such
provision or of any breach of any other provision of this Note. The failure
of
the Company or the Holder to insist upon strict adherence to any term of this
Note on one or more occasions shall not be considered a waiver or deprive that
party of the right thereafter to insist upon strict adherence to that term
or
any other term of this Note. Any waiver by the Company or the Holder must be
in
writing.
f) Severability.
If any
provision of this Note is invalid, illegal or unenforceable, the balance of
this
Note shall remain in effect, and if any provision is inapplicable to any Person
or circumstance, it shall nevertheless remain applicable to all other Persons
and circumstances. If it shall be found that any interest or other amount deemed
interest due hereunder violates the applicable law governing usury, the
applicable rate of interest due hereunder shall automatically be lowered to
equal the maximum rate of interest permitted under applicable law. The Company
covenants (to the extent that it may lawfully do so) that it shall not at any
time insist upon, plead, or in any manner whatsoever claim or take the benefit
or advantage of, any stay, extension or usury law or other law which would
prohibit or forgive the Company from paying all or any portion of the principal
of or interest on this Note as contemplated herein, wherever enacted, now or
at
any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may lawfully
do
so) hereby expressly waives all benefits or advantage of any such law, and
covenants that it will not, by resort to any such law, hinder, delay or impeded
the execution of any power herein granted to the Holder, but will suffer and
permit the execution of every such as though no such law has been
enacted.
24
g) Next
Business Day.
Whenever any payment or other obligation hereunder shall be due on a day other
than a Business Day, such payment shall be made on the next succeeding Business
Day.
h) Headings.
The
headings contained herein are for convenience only, do not constitute a part
of
this Note and shall not be deemed to limit or affect any of the provisions
hereof.
i) Assumption.
Any successor to the Company or any surviving entity in a Fundamental
Transaction shall (i) assume, prior to such Fundamental Transaction, all of
the
obligations of the Company under this Note and the other Transaction Documents
pursuant to written agreements in form and substance satisfactory to the Holder
(such approval not to be unreasonably withheld or delayed) and (ii) issue to
the
Holder a new Note of such successor entity evidenced by a written instrument
substantially similar in form and substance to this Note, including, without
limitation, having a principal amount and interest rate equal to the principal
amount and the interest rate of this Note and having similar ranking to this
Note, which shall be satisfactory to the Holder (any such approval not to be
unreasonably withheld or delayed). The provisions of this Section 9(i)
shall apply similarly and equally to successive Fundamental Transactions and
shall be applied without regard to any limitations of this Note.
j) Usury.
This
Note shall be subject to the anti-usury limitations contained in the Purchase
Agreement.
*********************
25
IN
WITNESS WHEREOF, the Company has caused this Note to be duly executed by a
duly
authorized officer as of the date first above indicated.
|
|
|
By: | ||
Name: Xxxxx X. Xxxxxx |
||
Title: CEO | ||
Facsimile No. for delivery of Notices: 323-726 |
26
ANNEX
A
NOTICE
OF CONVERSION
The
undersigned hereby elects to convert principal under the 8% Senior Secured
Convertible Note due September 1, 2010 of Blue Holdings, Inc., a Nevada
corporation (the Company”),
into
shares of common stock (the “Common
Stock”),
of
the Company according to the conditions hereof, as of the date written below.
If
shares of Common Stock are to be issued in the name of a person other than
the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to
the
holder for any conversion, except for such transfer taxes, if any.
By
the
delivery of this Notice of Conversion the undersigned represents and warrants
to
the Company that its ownership of the Common Stock does not exceed the amounts
specified under Section 4 of this Note, as determined in accordance with Section
13(d) of the Exchange Act.
The
undersigned agrees to comply with the prospectus delivery requirements under
the
applicable securities laws in connection with any transfer of the aforesaid
shares of Common Stock pursuant to any prospectus.
Conversion
calculations:
Date
to
Effect Conversion: _______________________________________
Principal
Amount of Note to be Converted:
___________________________
Interest
Accrued on Account
of
Conversion at Issue: __________________________________________
Number
of
shares of Common Stock to be issued:
______________________
____________________________________________________________
Signature:
____________________________________________________
Name:
_______________________________________________________
Address
for Delivery of Common Stock Certificates: ____________________
____________________________________________________
____________________________________________________
Or
DWAC
Instructions:
Broker
No: ______________
Account
No: _____________
27
Schedule
7(a)
The
Company is party to that certain Revolving Promissory Note dated August 7,
2006
with Xxxx Xxxx pursuant to which Xx. Xxxx advances and may continue to advance
funds to the Company from time to time under the terms currently in effect.
The
Company repays these funds from time to time in the ordinary course. The Company
and Xx. Xxxx are operating under a one-year extension of the term of the
Revolving Promissory Note under the same terms as reflected in the Revolving
Promissory Note. There are no amounts outstanding under the Revolving Promissory
Note as of July 30, 2007.
The
Company intends to enter into an 8% Senior Convertible Note with Xxxx Xxxx
in
the principal amount of $1,618,093.15 on terms substantially similar to those
set forth in this Note except that the note to be issued to Xxxx Xxxx shall
be
unsecured and shall be subordinate in payment to the Notes.
Schedule
7(d)
The
Company intends to rescind the conversion on March 5, 2008 of $1,400,000 of
indebtedness under the Revolving Promissory Note dated August 7, 2006 with
Xxxx
Xxxx into 1,750,000 shares of the Company’s common stock. Xx. Xxxx will cancel
$700,000 of outstanding indebtedness under the Revolving Promissory Note and
the
Company will issue to Xx. Xxxx an 8% Senior Convertible Note in the principal
amount of $1,618,093.15 (which will include $700,000 of remaining indebtedness
under the Revolving Promissory Note), such that upon the issuance of the 8%
Senior Convertible Note, no amounts shall be outstanding under the Revolving
Promissory Note other that new amounts advanced under the Note after July 30,
2008.
Schedule
7(e)
The
Company is party to that certain Revolving Promissory Note dated August 7,
2006
with Xxxx Xxxx pursuant to which Xx. Xxxx advances and may continue to advance
funds to the Company from time to time under the terms currently in effect.
The
Company repays these funds from time to time in the ordinary course. The Company
and Xx. Xxxx are operating under a one-year extension of the term of the
Revolving Promissory Note under the same terms as reflected in the Revolving
Promissory Note. There are no amounts outstanding under the Revolving Promissory
Note as of July 30, 2007.
The
Company intends to enter into an 8% Senior Convertible Note with Xxxx Xxxx
in
the principal amount of $1,618,093.15 on terms substantially similar to those
set forth in this Note except that the note to be issued to Xxxx Xxxx shall
be
unsecured and shall be subordinate in payment to the Notes.
28