NEITHER THIS SECURITY NOR ANY SECURITY INTO WHICH IT MAY BE CONVERTED HAS
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT") OR APPLICABLE STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY
SECURITY INTO WHICH IT MAY BE CONVERTED NOR ANY INTEREST OR PARTICIPATION HEREIN
OR THEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF AT ANY TIME IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS
SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.
THE HOLDER OF THIS NOTE HAS DESIGNATED XXXXXXXX & XXXXXXXXX, INCORPORATED,
AS HIS, HER OR ITS ATTORNEY-IN-FACT TO ENGAGE DIRECTLY WITH THE COMPANY IN ALL
DEALINGS THAT ARE NECESSARY OR APPROPRIATE IN CONNECTION WITH ANY MATTER
PERTAINING TO THE NOTE, INCLUDING, BUT NOT LIMITED TO, ANY CONSENTS THAT THE
COMPANY MAY SEEK FROM THE HOLDER OF THIS NOTE.
TRANSNATIONAL FINANCIAL NETWORK, INC.
a California corporation
8.5% CONVERTIBLE SUBORDINATED NOTE DUE 0000
Xxx Xxxxxxxxx, Xxxxxxxxxx
$_________ January 12, 2005
FOR VALUE RECEIVED, TRANSNATIONAL FINANCIAL NETWORK, INC., a California
corporation (the "Company"), hereby promises to pay to __________________ (the
"Holder"), or registered assigns, subject to conversion as described below, the
principal sum of $____________ on January 12, 2015 ("Maturity"), together with
interest at eight and one-half percent (8.5%) per annum.
1. The Note.
--------
a. Related Transaction. This Note is issued pursuant to and is
entitled to the benefits and subject to the conditions of that certain Note
Purchase Agreement, dated January 12, 2005, among the Company and the Holder and
which Xxxxxxxx & Strudwick, Incorporated (the "Placement Agent") served as the
placement agent, as the same may be amended from time to time. If the Placement
Agent has been designated as Holder's attorney-in-fact to engage directly with
the Company in dealings that are necessary or appropriate in connection with
this Note, the Company shall ensure that all notices or deliveries required to
be given or made to the Holder are made to the Placement Agent as required by
the Purchase Agreement.
b. Payment of Interest. The Company promises to pay interest
on the principal amount of this Note at 8.5% per annum from the date hereof
until maturity. The Company will pay interest quarterly in arrears on or before
January 15, April 15, July 15, and October 15 of each year beginning April 15,
2005 (each an "Interest Payment Date"). Interest on the Notes will accrue from
the most recent date to which interest has been paid. Interest will be computed
on the basis of a 360-day year of twelve 30-day months.
c. Method of Payment. The Company will pay interest on the
Note (except defaulted interest) to the registered Holders at the close of
business on the December 31, March 31, June 30, and September 30 (each a "Record
Date") next preceding the Interest Payment Date, even if such Notes are canceled
after such record date and on or before such Interest Payment Date. The Notes
will be payable as to principal and interest at the office or agency of the
Company maintained for such purpose or, at the option of the Company, payment of
interest may be made by check mailed to the Holders at their addresses set forth
in the register of Holders. Such payment shall be in such coin or currency of
the United States of America as at the time of payment is legal tender for
payment of public and private debts.
d. Delinquency in Interest Payment. If any payment of interest
due to the Holder hereunder shall not be paid when due and shall remain unpaid
for more than five (5) business days after the due date, then, without any
further notice or demand, in addition to and not in limitation of any rights or
remedies which the Holder may otherwise have, the Company shall pay the Holder a
late charge computed at the rate of eighteen percent (18%) per annum of the
amount not paid to cover the extra expense and inconvenience to the Holder of
ensuring payment of such delinquent amount. Additionally, should the Company be
more than 100 days delinquent in its payment of any interest then due or fail to
pay the entire principal amount of this Note within 10 days following Maturity,
then the Holder of this Note may convert this Note into Common Stock of the
Company as described in Section 4(f)(x), below.
e. Default. The occurrence of any of the following events
shall constitute a default hereunder: (i) the failure to make any payments,
whether principal, interest or other payment, of any of the undersigned's
liabilities hereunder when the same shall be due and such failure continues for
5 business days after notice thereof by the Holder; (ii) the Company's failure
to observe and perform in all material respects any of the covenants or
agreements on its part to be observed or performed under this Note and such
failure continues for five (5) business days after notice thereof to the Holder;
(iii) the dissolution, suspension of business for any reason or insolvency (no
matter how such insolvency may be evidenced) of the Company; (iv) the
bankruptcy, insolvency, reorganization, receivership, arrangement or
commencement or filing of other similar proceedings by the Company or against
the Company which, if such proceeding shall be filed against the Company, the
Company shall not discharge within ninety (90) days after the filing thereof
under any state or federal law or if the Company shall (a) become insolvent
(which term is defined for purposes hereof as the failure to meet its
obligations as the same shall fall due and without payment for a period of 45
days), (b) make an assignment for the benefit of creditors or (c) apply for,
consent to or suffer the appointment of a custodian, receiver or trustee for any
part of its property or assets; (vi) the sale, lease, transfer or other
disposition, whether voluntary or involuntary, of all or substantially all of
the Company's property or assets without adequate provision for the payment of
all sums due hereunder; or (vii) the issuance of a writ, warrant or order of
attachment or garnishment against a material portion (material portion shall
mean 10% or more) of the Company's property or assets. Upon the happening of a
default, the Holder may declare the entire unpaid principal balance under this
Note immediately due and payable without any further notice, demand or
presentment and may exercise, without any further notice, demand or presentment,
any of its rights hereunder. In the event that the Holder or any subsequent
holder of this Note shall exercise or endeavor to exercise any of its remedies
hereunder, the Company shall pay on demand all reasonable costs and expenses
incurred in connection therewith, including, without limitation, reasonable
attorney's fees and the Holder may take judgment for all such amounts in
addition to all other sums due hereunder. In addition to the foregoing and any
other rights and remedies provided at law or in equity, in the event of an
occurrence of such a default, the Holder may forthwith exercise singly,
concurrently, successively or otherwise any and all rights and remedies
available to the Holder by law, equity, hereunder or otherwise.
f. Notice of Default. The Company shall promptly give notice
to the Holder of the occurrence of any default or any event which would be or
become a default if any requirement for the giving of notice, the lapse of time,
or both, or any other condition has been satisfied, accompanied by a statement
of a senior financial officer of the Company setting forth the details of the
occurrence referred to therein and stating what action the Company proposes to
take with respect thereto.
2. Subordination. The Notes are subordinated and junior in right of
payment to Senior Indebtedness, as defined below. Senior Indebtedness must be
paid in full before any payment of principal may be made in respect of the
Notes. Each Holder by accepting a Note agrees to and shall be bound by such
subordination and authorizes and directs the Company to give it effect and
appoints the Secretary of the Company as attorney-in-fact for such purpose. The
term "Senior Indebtedness" shall mean all existing subordinated debt outstanding
and all existing and future warehouse, quicksale or gestation lines of credit.
As of July 31, 2004, there was $1,512,000 subordinated debt outstanding and
warehouse lines (including quicksale facilities) of credit with a maximum
capacity of $60 million, all of which will rank superior to the convertible
subordinated debt offered herein.
3. Optional Redemption. The Notes shall be subject to redemption, at
the option of the Company, in whole or in part, for a period of 18 months from
the date they are issued, upon not less than 30 nor more than 60 days' notice
mailed to each Holder to be redeemed at his address appearing in the note
register, in amounts of $1,000 or an integral multiple of $1,000, at 120% of the
principal amount, plus accrued interest to but excluding the date fixed for
redemption (subject to the right of Holders of record on the relevant Record
Date to receive interest due on an interest payment date that is on or prior to
the date fixed for redemption). The Note shall be subject to redemption, at the
option of the Company, in whole or in part, at any time on or between months 19
and 24, upon not less than 30 nor more than 60 days' notice mailed to each
Holder to be redeemed at his address appearing in the note register, in amounts
of $1,000 or an integral multiple of $1,000, at 115% of the principal amount,
plus accrued interest to but excluding the date fixed for redemption (subject to
the right of Holders of record on the relevant Record Date to receive interest
due on an interest payment date that is on or prior to the date fixed for
redemption). Furthermore, the Note shall be subject to redemption, at the option
of the Company, in whole or in part, at any time on or after the Notes have been
issued for 2 years and prior to maturity, upon not less than 30 nor more than 60
days' notice mailed to each Holder to be redeemed at his address appearing in
the note register, in amounts of $1,000 or an integral multiple of $1,000, at
110% of the principal amount, plus accrued interest to but excluding the date
fixed for redemption (subject to the right of Holders of record on the relevant
Record Date to receive interest due on an interest payment date that is on or
prior to the date fixed for redemption). Any partial redemption shall be made on
a pro rata basis. On and after the redemption date interest ceases to accrue on
Notes or portions thereof called for redemption.
For example, if during the period from the date of issuance through July 12,
2006, the Company determines to redeem a $10,000 Note, then the Holder of the
Note shall receive accumulated interest through the date one day prior to the
redemption date and shall receive $12,000, representing a return of principal in
the amount of $10,000, plus a redemption premium of $2,000. If during the period
after July 12, 2006, but before January 12, 2007, the Company determines to
redeem a $10,000 Note, then the Holder of the Note shall receive accumulated
interest through the date one day prior to the redemption date and shall receive
$11,500, representing a return of principal in the amount of $10,000, plus a
redemption premium of $1,500. If during the period after January 12, 2007 the
Company determines to redeem a $10,000 note, then the Holder of the Note shall
receive accumulated interest through the date one day prior to the redemption
date and shall receive $11,000, representing a return of principal in the amount
of $10,000, plus a redemption premium of $1,000.
4. Conversion.
----------
a. Conversion into Common Stock. The Holder of this Note is
entitled, at his option, at any time on or before the maturity (except that, in
case this Note or any portion hereof shall be called for redemption within the
first 18 months from the date of the Notes issuance (i.e., the Company can
preempt this conversion privilege by calling the Note or any portion thereof
within the first 18 months from the date of the Note[s] issuance), such right
shall terminate with respect to this Note or portion hereof, as the case may be,
so called for redemption at the close of business on the fifth day (or if not a
business day, the next succeeding day) preceding the date fixed for redemption,
unless the Company fails to pay the redemption price, plus interest accrued to
the redemption date) to convert the principal amount of this Note (or any
portion hereof which is $1,000 or an integral multiple thereof) into shares of
Common Stock of the Company.
b. Conversion Price. The number of shares of Common Stock
issuable upon conversion shall be equal to the principal amount of this Note, or
such portion thereof, divided by the conversion price in effect at the time of
conversion (the "Current Conversion Price") and rounded to the nearest
one-hundredth of a share. The initial conversion price shall be $1.00 per share
of Common Stock.
c. Mechanics of Conversion. In order to exercise the
conversion privilege, the Holder shall surrender this Note, together with the
conversion notice hereon duly executed, to the Company at its office or agency
maintained for that purpose, accompanied (if so required by the Company) by
instruments of transfer, in form satisfactory to the Company, duly executed by
the Holder or by his duly authorized attorney in writing. No payment or
adjustment is to be made on conversion of this Note for interest accrued hereon
[or for dividends on shares of Common Stock issued on conversion]. The Holder of
this Note at the close of business on a Record Date will be entitled to receive
the interest payable on this Note (unless this Note has been called for
redemption on a redemption date between such Record Date and such Interest
Payment Date) on the corresponding Interest Payment Date, notwithstanding the
conversion hereof. The Company is not required to issue fractional shares upon
any such conversion, but shall pay a cash adjustment equal to such fractional
interest. The conversion price is subject to adjustment, from time to time, as
provided below.
d. Adjustment of Conversion Price. If and whenever on or after
the date hereof, the Company issues or sells, or in accordance with the terms
hereof is deemed to have issued or sold any shares of Common Stock for a
consideration per share less than the Conversion Price in effect immediately
prior to the time of such issue or sale; provided that such issuance or sale is
not in connection with an "Exempted Transaction", as defined below, then
immediately upon such issue or sale or deemed issue or sale, the Conversion
Price shall be reduced to the lowest net price per share at which any such share
of Common Stock has been issued or sold or is deemed to have been issued or
sold.
e. Exempted Transactions. Notwithstanding the foregoing, there
shall be no adjustment in the Conversion Price as a result of the following
events, each an "Exempted Transaction": (i) the acquisition of another
corporation or entity by the Company by merger, purchase of substantially all
the assets or other reorganization as a result of which the Company or its
shareholders prior to the transaction own more than 50% of the voting power of
the resulting corporation or other entity; (ii) equipment leases or borrowings,
direct or indirect, from financial or other institutions regularly engaged in
such business; (iii) the issuance of shares of Common Stock, options, warrants
or rights convertible into such Common Stock, to employees, consultants or
directors of the Company pursuant to the Company's 2000 Stock Incentive Plan or
any other incentive agreement or arrangement that was approved by a majority of
the members of the Compensation Committee of the Board of Directors, or if no
such committee exists, then the majority of the non-employee directors of the
Company; (iv) a transaction in which the Company licenses any intellectual
property to be used in the business of the Company; or (v) a strategic joint
venture or alliance between the Company and another party to which the
securities are issued, or an affiliate thereof (vi) the acquisition by another
corporation or entity of the Company directly or indirectly by merger, including
a reverse merger, purchase of substantially all the assets or other
reorganization as a result of which the Company or its shareholders prior to the
transaction own less than 50% of the voting power of the resulting corporation
or other entity; (vii) any warrants or options issued to the underwriters in
connection with a public offering of debt, equity or hybrid financial instrument
on behalf of the Company or its successor(s); (viii) the issuance of stock,
warrants or options, which by their terms would trigger an Adjustment to the
Conversion Price, if such issuance or issuances individually or cumulatively
within any twelve consecutive month period is less than or equal to two percent
of the Company's then issued and outstanding shares.
f. Adjustments to Conversion Price. For purposes of
determining the Conversion Price following a transaction that is not an Exempted
Transaction, the following shall be applicable.
(i) Issuance of Options. If the Company in any manner
grants or sells any options and the price per share for which Common Stock is
issuable upon the exercise of such options is less than the Conversion Price in
effect immediately prior to the time of the granting or sale of such options,
then the total maximum number of shares of Common Stock issuable upon the
exercise of such options shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the granting or sale of such
options for such price per share. For the purposes of this subsection, the
"price per share for which Common Stock is issuable" shall be determined by
dividing (A) the total amount, if any, received or receivable by the Company as
consideration for the granting or sale of such options, plus the minimum
aggregate amount of additional consideration payable to the Company upon
exercise of all such option, by (B) the total maximum number of shares of Common
Stock issuable upon the exercise of such options.
(ii) Issuance of Convertible Securities. If the Company
in any manner issues or sells any securities convertible into shares of Common
Stock and the price per share for which Common Stock is issuable upon conversion
or exchange thereof is less than the Conversion Price in effect immediately
prior to the time of such issue or sale, then the maximum number of shares of
Common Stock issuable upon conversion or exchange of such convertible securities
shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the issuance or sale of such convertible securities for
such price per share. For the purposes of this subsection, the "price per share
for which Common Stock is issuable" shall be determined by dividing (A) the
total gross amount (before related offering expenses) received or receivable by
the Company as consideration for the issue or sale of such convertible
securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the conversion or exchange thereof; by (B) the
total maximum number of shares of Common Stock issuable upon the conversion or
exchange of all such convertible securities. No further adjustment of the
Conversion Price shall be made when Common Stock is actually issued upon the
conversion or exchange of such convertible securities, and if any such issue or
sale of such convertible securities is made upon exercise of any options for
which adjustments of the conversion price had been or are to be made pursuant to
other provisions of this section, no further adjustment of the Conversion Price
shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the
exercise price provided for in any outstanding options changes at any time, the
Conversion Price in effect at the time of such change shall be immediately
adjusted to the Conversion Price which would have been in effect at such time
had such options provided for such changed purchase price at the time initially
granted. If the additional consideration, if any, payable upon the conversion or
exchange of any outstanding convertible securities or the rate at which any
outstanding convertible securities are convertible into or exchangeable for
Common Stock changes at any time, the Conversion Price in effect at the time of
such change shall be immediately adjusted to the Conversion Price which would
have been in effect at such time had such convertible securities provided for
such changed additional consideration or conversion rate at the time initially
issued or sold. Notwithstanding the foregoing, if such adjustment as described
herein would result in an increase of the Conversion Price then in effect, such
adjustment shall not be effective until 30 days after written notice thereof has
been given by the Company to the Holder.
(iv) Treatment of Expired Options and Unexercised
Convertible Securities. Upon the expiration of any option or the termination of
any right to convert or exchange any convertible security without the exercise
of any such option or right, the Conversion Price then in effect hereunder shall
be adjusted immediately to the Conversion Price which would have been in effect
at the time of such expiration or termination had such option or convertible
security, to the extent outstanding immediately prior to such expiration or
termination, never been issued; provided that if such expiration or termination
would result in an increase in the Conversion Price then in effect, such
increase shall not be effective until 30 days after written notice thereof has
been given to the Holder.
(v) Record Date. If the Company takes a record of the
holders of Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock, options or in
convertible securities or (B) to subscribe for or purchase Common Stock, options
or convertible securities, then such record date shall be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or upon the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(vi) Subdivision or Combination of Common Stock. If the
Company at any time subdivides (by any stock split stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and if
the Company at any time combines (by reverse stock split or otherwise) one or
more classes of its outstanding shares of Common Stock into a smaller number of
shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
(vii) Reorganization, Reclassification, Consolidation,
Merger or Sale. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's assets
or other transaction, in each case which is effected in such a manner that the
holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock, is referred to herein as an "Organic Change". Prior
to the consummation of any Organic Change, the Company shall make appropriate
provisions to insure that the Holder shall thereafter have the right to acquire
and receive, in lieu of or in addition to (as the case may be) the Conversion
Shares immediately theretofore acquirable and receivable upon the conversion of
this Note, such shares of stock, securities or assets as such holder would have
received in connection with such Organic Change if the Holder had converted this
Note immediately prior to such Organic Change.
(viii) Certain Events. If any event occurs of the type
contemplated by the provisions of this Note but not expressly provided for by
such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
except any included under the Exempted Transactions section, then the Company's
Board of Directors shall make an appropriate adjustment in the Conversion Price
so as to protect the rights of the Holder; provided that no such adjustment
shall increase the Conversion Price as otherwise determined pursuant to this
section or decrease the number of Conversion Shares issuable upon conversion of
this Note.
(ix) Payment Default. Should the Company be more than
100 days delinquent in its payment of any interest then due or fail to pay the
entire principal amount of this Note within 10 days following Maturity (the
"Material Default Date"), then the Current Conversion Rate shall equal the
lesser of (x) the Current Conversion Price immediately prior to such time, or
(y) the per share net tangible book value on the Material Default Date, as
verified by a nationally or regionally recognized independent auditing firm as
reasonably agreed upon by the Company and the Placement Agent. For the purposes
of this Section 4(f)(ix), net tangible book value shall mean the stated equity
of the Company minus goodwill.
g. No Impairment. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company but will at all times in good faith assist in the carrying out of all
the provisions of this Section 4 and in the taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of the Notes against impairment.
h. Taxes on Conversion. The issue of share certificates on
conversion of this Note shall be made without charge to the converting Holder
for any tax in respect of the issue thereof. The Company shall not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the issue and delivery of shares in any name other than that of the Holder,
and the Company shall not be required to issue or deliver any certificate in
respect of Conversion Shares unless and 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.
i. Reservation of Conversion Securities. The Company agrees
that the Company will at all times have authorized and reserved, and will keep
available, solely for issuance or delivery upon the conversion of this Note, the
shares of Common Stock and other securities and properties as from time to time
shall be receivable upon the conversion of this Note.
j. No Rights as Stockholders. Prior to the conversion of this
Note, the Holder of this Note shall not be entitled to any rights of a
stockholder of the Company, including, without limitation, the right to vote, to
receive dividends or other distributions or to exercise any preemptive rights,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided herein or as otherwise agreed.
6. Registration Rights. The Holder shall not be entitled to
registration rights with respect to the Conversion of Shares.
7. Transfer. Subject to the provisions of the legend above, this Note
is freely transferable, in whole or in part, by the Holder, and such transferee
shall have the same rights hereunder as the Holder. The Company may not assign
or delegate any of its obligations under this Note without the prior written
consent of the Holder (or its successor, transferee or assignee). Upon surrender
of this Note for transfer or exchange, a new Note or new Notes of the same
tenor, dated the date to which interest has been paid on the surrendered Note
and in an aggregate principal amount equal to the unpaid principal amount of the
Note so surrendered, will be issued to and registered in the name of the
transferee or transferees. The Company may treat the person in whose name this
Note is registered as the owner hereof for the purpose of receiving payments and
for all other purposes.
8. Note Register. This Note is transferable only upon the books of the
Company which it shall cause to be maintained for such purpose. Subject to
Section 1(a) above, the Company may treat the registered holder of this Note as
the Holder appears on the Company's books at any time as the Holder for all
purposes.
9. Parity of Notes. In the event any other holder of Notes issued
contemporaneously with this Note elects to accelerate the Notes held by such
holder as a result of an Event of Default, the Company shall notify the Holder
of this Note of such event and all holders of Notes issued contemporaneously
with this Note shall be deemed to have equal parity.
10. Loss, Etc., of Note. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Note, and of
indemnity reasonably satisfactory to the Company if lost, stolen or destroyed,
and upon surrender and cancellation of this Note if mutilated, and upon
reimbursement of the Company's reasonable incidental expenses, the Company shall
execute and deliver to the Holder a new Note of like date, tenor and
denomination.
11. Amendment, Waiver Etc., By Holders. The terms of this Note may be
amended or waived upon the written consent of the Company and the Holder.
12. Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California.
13. Waiver. The Company hereby waives presentment, demand, notice of
nonpayment, protest and all other demands and notices in connection with the
delivery, acceptance, performance or enforcement of this Note. If an action is
brought for collection under this Note, the Holder shall be entitled to receive
all costs of collection, including, but not limited to, its reasonable
attorneys' fees.
WITNESS the following signature and seal:
TRANSNATIONAL FINANCIAL CORPORATION
By:
--------------------------------------------------
Xxxxxx Xxxxxxx
Chief Executive Officer
[Corporate Seal]
