EXHIBIT 4.2
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR
RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE REASONABLY
ACCEPTABLE TO THE MAKER) IN THE FORM, SUBSTANCE AND SCOPE REASONABLY
SATISFACTORY TO THE MAKER THAT THIS NOTE MAY BE SOLD, TRANSFERRED, HYPOTHECATED
OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND
SUCH STATE SECURITIES LAWS.
VERTEL CORPORATION
Convertible Promissory Note
due _________ __, 2004
No. CN-1 $3,500,000.00
Dated: _________ __, 2001
For value received, VERTEL CORPORATION, a California corporation (the
"Maker"), hereby promises to pay to the order of SDS MERCHANT FUND, L.P.
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(together with its successors, representatives, and permitted assigns, the
"Holder"), in accordance with the terms hereinafter provided, the principal
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amount of Three Million Five Hundred Thousand Dollars ($3,500,000.00), together
with interest thereon.
All payments under or pursuant to this Note shall be made in United States
Dollars in immediately available funds to the Holder at the address of the
Holder first set forth above or at such other place as the Holder may designate
from time to time in writing to the Maker or by wire transfer of funds to the
Holder's account, instructions for which are attached hereto as Exhibit A. The
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outstanding principal balance of this Note shall be due and payable on _______
__ , 2004 (the "Maturity Date") or at such earlier time as provided herein.
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ARTICLE I
Section 1.1 Purchase Agreement. This Note has been executed and delivered
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pursuant to the Note and Warrant Purchase Agreement, dated as of August 31, 2001
(the "Purchase Agreement"), by and between the Maker and the purchaser listed
therein. Capitalized terms used and not otherwise defined herein shall have the
meanings set forth for such terms in the Purchase Agreement.
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Section 1.2 Interest. Beginning on the date hereof, the outstanding
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principal balance of this Note shall bear interest, in arrears, at a rate per
annum equal to six percent (6%), payable semi-annually or upon conversion unless
earlier converted or prepaid as provided herein. Interest shall be computed on
the basis of a 360-day year of twelve (12) 30-day months and shall accrue
commencing on the issuance date of this Note (the "Issuance Date"). The interest
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shall be payable in shares of the Maker's common stock, par value $.01 per share
(the "Common Stock"); provided, that the Maker shall issue to the Holder
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registered and freely tradable shares of Common Stock. The number of shares of
Common Stock to be issued as payment of accrued and unpaid interest shall be
determined by dividing (a) the total amount of accrued and unpaid interest to be
converted into Common Stock by (b) the Conversion Price (as defined in Section
3.2(a) hereof. Furthermore, upon the occurrence of an Event of Default (as
defined in Section 2.1 hereof), then to the extent permitted by law, the Maker
will pay interest to the Holder, payable on demand, on the outstanding principal
balance of the Note from the date of the Event of Default until such Event of
Default is cured at the rate of the lesser of fifteen percent (15%) and the
maximum applicable legal rate per annum.
Section 1.3 Payment on Non-Business Days. Whenever any payment to be made
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shall be due on a Saturday, Sunday or a public holiday under the laws of the
State of New York, such payment may be due on the next succeeding business day
and such next succeeding day shall be included in the calculation of the amount
of accrued interest payable on such date.
Section 1.4 Transfer. This Note may be transferred or sold, subject to
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the provisions of Section 4.8 of this Note, or pledged, hypothecated or
otherwise granted as security by the Holder.
Section 1.5 Replacement. Upon receipt of a duly executed, notarized and
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unsecured written statement from the Holder with respect to the loss, theft or
destruction of this Note (or any replacement hereof), and without requiring an
indemnity bond or other security, or, in the case of a mutilation of this Note,
upon surrender and cancellation of such Note, the Maker shall issue a new Note,
of like tenor and amount, in lieu of such lost, stolen, destroyed or mutilated
Note.
ARTICLE II
EVENTS OF DEFAULT; REMEDIES
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Section 2.1 Events of Default. The occurrence of any of the following
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events shall be an "Event of Default" under this Note:
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(a) the Maker shall fail to make the payment of any amount of principal
outstanding on the date such payment is due hereunder; or
(b) the Maker shall fail to make any payment of interest in Common Stock
for a period of five (5) days after the date such interest is due; or
(c) Intentionally Omitted.
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(d) the suspension from listing or the failure of the Common Stock to be
listed on the The Nasdaq National Market for a period of five (5) consecutive
Trading Days; or
(e) the Maker's notice to the Holder, including by way of public
announcement, at any time, of its inability to comply (including for any of the
reasons described in Section 3.8(a) hereof) or its intention not to comply with
proper requests for conversion of this Note into shares of Common Stock; or
(f) the Maker shall fail to (i) timely deliver the shares of Common Stock
upon conversion of the Note or any interest accrued and unpaid and (ii) make the
payment of any fees and/or liquidated damages under this Note, the Purchase
Agreement or the Registration Rights Agreement, which failure in the case of
items (i) and (ii) of this Section 2.1(f) is not remedied within seven (7)
business days after the incurrence thereof; or
(g) while the Registration Statement is required to be maintained effective
pursuant to the terms of the Registration Rights Agreement, the effectiveness of
the Registration Statement lapses for any reason (including, without limitation,
the issuance of a stop order) or is unavailable to the Holder for sale of the
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such lapse
or unavailability continues for a period of ten (10) consecutive Trading Days,
provided that the cause of such lapse or unavailability is not due to factors
primarily within the control of Holder; or
(h) default shall be made in the performance or observance of (i) any
material covenant, condition or agreement contained in this Note (other than as
set forth in clause (f) of this Section 2.1) and such default is not fully cured
within five (5) business days after the occurrence thereof or (ii) any material
covenant, condition or agreement contained in the Purchase Agreement or the
Registration Rights Agreement which is not covered by any other provisions of
this Section 2.1 and such default is not fully cured within seven (7) business
days after the occurrence thereof; or
(i) any material representation or warranty made by the Maker herein or in
the Purchase Agreement or the Registration Rights Agreement shall prove to have
been false or incorrect or breached in a material respect on the date as of
which made; or
(j) the Maker shall issue any debt securities which are not subordinate to
this Note on such terms as are acceptable to the Holders of a majority of the
outstanding principal amount of this Note and the other Notes purchased under
the Purchase Agreement; or
(k) if required by applicable law, rule or regulation, the stockholders of
the Maker shall fail to approve the proposal presented and recommended by the
Board of Directors of the Maker to approve the Holder acquiring in excess of
19.99% of the issued and outstanding shares of Common Stock upon conversion of
this Note and/or exercise of the Warrant.
(l) the Maker shall (i) default in any payment of any amount or amounts of
principal of or interest on any Indebtedness (other than the Indebtedness
hereunder) the aggregate principal amount of which Indebtedness is in excess of
$100,000 or (ii) default in the observance
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or performance of any other agreement or condition relating to any Indebtedness
or contained in any instrument or agreement evidencing, securing or relating
thereto, or any other event shall occur or condition exist, the effect of which
default or other event or condition is to cause, or to permit the holder or
holders or beneficiary or beneficiaries of such Indebtedness to cause with the
giving of notice if required, such Indebtedness to become due prior to its
stated maturity; or
(m) the Maker shall (i) apply for or consent to the appointment of, or the
taking of possession by, a receiver, custodian, trustee or liquidator of itself
or of all or a substantial part of its property or assets, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the United States Bankruptcy Code (as now or hereafter in effect) or under
the comparable laws of any jurisdiction (foreign or domestic), (iv) file a
petition seeking to take advantage of any bankruptcy, insolvency, moratorium,
reorganization or other similar law affecting the enforcement of creditors'
rights generally, (v) acquiesce in writing to any petition filed against it in
an involuntary case under United States Bankruptcy Code (as now or hereafter in
effect) or under the comparable laws of any jurisdiction (foreign or domestic),
or (vi) take any action under the laws of any jurisdiction (foreign or domestic)
analogous to any of the foregoing; or
(n) a proceeding or case shall be commenced in respect of the Maker,
without its application or consent, in any court of competent jurisdiction,
seeking (i) the liquidation, reorganization, moratorium, dissolution, winding
up, or composition or readjustment of its debts, (ii) the appointment of a
trustee, receiver, custodian, liquidator or the like of it or of all or any
substantial part of its assets in connection with the liquidation or dissolution
of the Maker or (iii) similar relief in respect of it under any law providing
for the relief of debtors, and such proceeding or case described in clause (i),
(ii) or (iii) shall continue undismissed, or unstayed and in effect, for a
period of sixty (60) days or any order for relief shall be entered in an
involuntary case under United States Bankruptcy Code (as now or hereafter in
effect) or under the comparable laws of any jurisdiction (foreign or domestic)
against the Maker or action under the laws of any jurisdiction (foreign or
domestic) analogous to any of the foregoing shall be taken with respect to the
Maker and shall continue undismissed, or unstayed and in effect for a period of
sixty (60) days.
Section 2.2 Remedies Upon An Event of Default. If an Event of Default
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shall have occurred and shall be continuing, the Holder of this Note may at any
time at its option (a) declare the entire unpaid principal balance of this Note,
together with all interest accrued hereon, due and payable, and thereupon, the
same shall be accelerated and so due and payable, without presentment, demand,
protest, or notice, all of which are hereby expressly unconditionally and
irrevocably waived by the Maker; provided, however, that upon the occurrence of
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an Event of Default described in (i) Sections 2.1 (l), (m) or (n), the
outstanding principal balance and accrued interest hereunder shall be
automatically due and payable and (ii) Sections 2.1 (d)-(k), demand the
prepayment of this Note pursuant to Section 3.7 hereof, (b) demand that the
principal amount of this Note then outstanding and all accrued and unpaid
interest thereon shall be converted into shares of Common Stock at a Conversion
Price per share calculated pursuant to Section 3.1 hereof assuming that the date
that the Event of Default occurs is the Conversion Date (as defined in Section
3.2(a) hereof), or (c) exercise or otherwise enforce any one or more of the
Holder's rights, powers, privileges, remedies and interests under this Note, the
Purchase Agreement, the Registration Rights Agreement or applicable law. No
course of delay on the part of the Holder
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shall operate as a waiver thereof or otherwise prejudice the right of the
Holder. No remedy conferred hereby shall be exclusive of any other remedy
referred to herein or now or hereafter available at law, in equity, by statute
or otherwise.
ARTICLE III
CONVERSION; ANTIDILUTION; PREPAYMENT
Section 3.1 Conversion Option. At any time on or after the Issuance Date,
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this Note shall be convertible (in whole or in part), at the option of the
Holder (the "Conversion Option"), into such number of fully paid and non-
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assessable shares of Common Stock (the "Conversion Rate") as is determined by
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dividing (x) that portion of the outstanding principal balance under the Note as
of such date that the Holder elects to convert by (y) the Conversion Price (as
hereinafter defined) then in effect on the date on which the Holder faxes a
notice of conversion (the "Conversion Notice"), duly executed, to the Maker
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(facsimile number (000) 000-0000, Attn.: Chief Financial Officer) (the
"Conversion Date"), provided, however, that the Conversion Price shall be
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subject to adjustment as described in Section 3.6 below.
Section 3.2 Conversion Price.
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(a) Subject to the provisions of subsection (b) below, the term
"Conversion Price" shall mean an amount equal to the Discount Percentage of the
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average of the Per Share Market Value for the five (5) Trading Days having the
lowest Per Share Market Value during the fifteen (15) Trading Days immediately
prior to the Conversion Date, except that if during any period (a "Black-out
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Period"), a Holder is unable to trade any Common Stock issued or issuable upon
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conversion of the Notes immediately due to the postponement of filing or delay
or suspension of effectiveness of a registration statement or because the Maker
has otherwise informed such Holder that an existing prospectus cannot be used at
that time in the sale or transfer of such Common Stock, such Holder shall have
the option but not the obligation on any Conversion Date within ten (10) Trading
Days following the expiration of the Black-out Period of using the Conversion
Price applicable on such Conversion Date or any Conversion Price selected by
such Holder that would have been applicable had such Conversion Date been at any
earlier time during the Black-out Period or within the ten (10) Trading Days
thereafter.
(b) The Conversion Price shall be subject to a minimum floor (the
"Floor Price") of an amount equal to seventy-five percent (75%) of the average
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of the Per Share Market Value for the five (5) Trading Days having the lowest
Per Share Market Value during the fifteen (15) Trading Days immediately prior to
the Closing Date (the "Closing Price"). If the Per Share Market Value is less
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than the Closing Price for a period of twenty-two (22) consecutive Trading Days,
the Floor Price shall no longer be applicable. In no event shall the Conversion
Price exceed $1.75.
(c) The term "Discount Percentage" shall initially mean ninety-three
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percent (93%). The Discount Percentage shall be adjusted for every one million
dollars ($1,000,000) above or below $3,008,000, which amount shall include cash,
cash equivalents and short-term investments (the "Target Cash Amount"). The
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Discount Percentage shall be decreased by two
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percent (2%) for each one million dollars ($1,000,000) below the Target Cash
Amount and shall be increased by two percent (2%) for each one million dollars
($1,000,000) above the Target Cash Amount. For example, if the Target Cash
Amount decreases to $2,008,000, the Discount Percentage shall be decreased to
ninety-one percent (91%). If the Target Cash Amount increases to $4,008,000, the
Discount Percentage shall be increased to ninety-five percent (95%). In no event
shall the Discount Percentage exceed one hundred percent (100%). The Target Cash
Amount shall not include the net proceeds resulting from the sale of the Notes
and the Warrants pursuant to the Purchase Agreement.
(d) The term "Per Share Market Value" means on any particular date (a)
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the closing bid price of the Common Stock on such date on The Nasdaq National
Market, The Nasdaq Small-Cap Market or other registered national stock exchange
on which the Common Stock is then listed or if there is no such price on such
date, then the closing bid price on such exchange or quotation system on the
date nearest preceding such date, or (b) if the Common Stock is not listed then
on The Nasdaq National Market, The Nasdaq Small-Cap Market or any registered
national stock exchange, then the lowest intra-day price for a share of Common
Stock, as reported by Bloomberg L.P. or similar organization or agency
succeeding to its functions of reporting prices) at the close of business on
such date, or (c) if the intra-day price for a share of Common Stock is not then
reported, then the average of the "Pink Sheet" quotes for the relevant
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conversion period, as determined in good faith by the Holder, or (d) if the
Common Stock is not then publicly traded the fair market value of a share of
Common Stock as determined by an Independent Appraiser (as defined in Section
4.13 hereof) selected in good faith by the Holders of a majority in interest of
the Notes; provided, however, that the Maker, after receipt of the determination
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by such Independent Appraiser, shall have the right to select an additional
Independent Appraiser, in which case, the fair market value shall be equal to
the average of the determinations by each such Independent Appraiser; and
provided, further that all determinations of the Per Share Market Value shall be
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appropriately adjusted for any stock dividends, stock splits or other similar
transactions during such period. The determination of fair market value by an
Independent Appraiser shall be based upon the fair market value of the Issuer
determined on a going concern basis as between a willing buyer and a willing
seller and taking into account all relevant factors determinative of value, and
shall be final and binding on all parties. In determining the fair market value
of any shares of Common Stock, no consideration shall be given to any
restrictions on transfer of the Common Stock imposed by agreement or by federal
or state securities laws, or to the existence or absence of, or any limitations
on, voting rights.
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Section 3.3 Mechanics of Conversion.
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(a) Not later than five (5) Trading Days after any Conversion Date, the
Maker will deliver to the applicable Holder by express courier (A) a certificate
or certificates which shall be free of restrictive legends and trading
restrictions (other than those required by Section 5.1 of the Purchase
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Agreement) representing the number of shares of Common Stock being acquired upon
the conversion of the Notes and (B) one or more certificates representing the
amount of this Note not converted. If in the case of any Conversion Notice such
certificate or certificates are not delivered to or as directed by the
applicable Holder by the fifth Trading Day after the Conversion Date (the
"Delivery Date"), the Holder shall be entitled by written notice to the Maker at
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any time on or before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Maker shall
immediately return the certificates representing the Notes tendered for
conversion, whereupon the Maker and the Holder shall each be restored to their
respective positions immediately prior to the delivery of such notice of
revocation, except that any amounts described in Sections 3.3(b) and (c) shall
be payable through the date notice of rescission is given to the Maker.
(b) The Maker understands that a delay in the delivery of the shares of
Common Stock upon conversion of the Notes and failure to deliver certificates
representing the unconverted shares of the Notes beyond the Delivery Date could
result in economic loss to the Holder. If the Maker fails to deliver to the
Holder such certificate or certificates pursuant to this Section hereunder by
the Delivery Date, the Maker shall pay to such Holder, in cash, an amount per
Trading Day for each Trading Day until such certificates are delivered, together
with interest on such amount at a rate of 10% per annum, accruing until such
amount and any accrued interest thereon is paid in full, equal to (i) 1% of the
aggregate principal amount of the Notes requested to be converted for the first
five (5) Trading Days after the Delivery Date and (ii) 2% of the aggregate
principal amount of the Notes requested to be converted for each Trading Day
thereafter (which amounts shall be paid as liquidated damages and not as a
penalty). Nothing herein shall limit a Holder's right to pursue actual damages
for the Maker's failure to deliver certificates representing shares of Common
Stock upon conversion within the period specified herein (including, without
limitation, damages relating to any purchase of shares of Common Stock by such
Holder to make delivery on a sale effected in anticipation of receiving
certificates representing shares of Common Stock upon conversion, such damages
to be in an amount equal to (A) the aggregate amount paid by such Holder for the
shares of Common Stock so purchased minus (B) the aggregate amount of net
proceeds, if any, received by such Holder from the sale of the shares of Common
Stock issued by the Maker pursuant to such conversion), and such Holder shall
have the right to pursue all remedies available to it at law or in equity
(including, without limitation, a decree of specific performance and/or
injunctive relief). Notwithstanding anything to the contrary contained herein,
the Holder shall be entitled to withdraw a Conversion Notice, and upon such
withdrawal the Maker shall only be obligated to pay the liquidated damages
accrued in accordance with this Section 3.3(b) through the date the Conversion
Notice is withdrawn.
(c) In addition to any other rights available to the Holder, if the Maker
fails to deliver to the Holder such certificate or certificates pursuant to
Section 3.3(a) by the Delivery Date and if after the Delivery Date the Holder
purchases (in an open market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by such Holder of the Conversion
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Shares which the Holder anticipated receiving upon such conversion (a "Buy-
---
In"), then the Maker shall pay in cash to the Holder (in addition to any
--
remedies available to or elected by the Holder) the amount by which (A) the
Holder's total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (B) the aggregate principal amount
of the Notes for which such conversion was not timely honored, together with
interest thereon at a rate of the lesser of 15% and the maximum applicable legal
rate per annum, accruing until such amount and any accrued interest thereon is
paid in full (which amount shall be paid as liquidated damages and not as a
penalty). For example, if the Holder purchases shares of Common Stock having a
total purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of $10,000 aggregate principal amount of the Notes, the Maker shall
be required to pay the Holder $1,000, plus interest. The Holder shall provide
the Maker written notice indicating the amounts payable to the Holder in respect
of the Buy-In.
Section 3.4 Ownership Cap and Certain Conversion Restrictions.
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(a) Notwithstanding anything to the contrary set forth in Section 3 of
this Note, at no time may a holder of this Note convert this Note if the number
of shares of Common Stock to be issued pursuant to such conversion would exceed,
when aggregated with all other shares of Common Stock owned by such holder at
such time, the number of shares of Common Stock which would result in such
holder owning more than 4.999% of all of the Common Stock outstanding at such
time; provided, however, that upon a holder of this Note providing the Maker
with seventy-five (75) days notice (pursuant to Section 4.1 hereof) (the "Waiver
Notice") that such holder would like to waive this Section 3.4 with regard to
any or all shares of Common Stock issuable upon conversion of this Note, this
Section 3.4 will be of no force or effect with regard to all or a portion of the
Note referenced in the Waiver Notice.
(b) The Holder may not convert any Note hereunder to the extent such
conversion would result in the Holder beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder) in
excess of 9.999% of the then issued and outstanding shares of Common Stock,
including shares issuable upon conversion of the Note held by the Holder after
application of this Section; provided, however, that upon a holder of this Note
providing the Maker with the 75-day Waiver Notice that such holder would like to
waive this Section 3.4 with regard to any or all shares of Common Stock issuable
upon conversion of this Note, this Section 3.4 will be of no force or effect
with regard to all or a portion of the Note referenced in the Waiver Notice.
(c) Notwithstanding anything to the contrary set forth herein, the Maker
shall not be obligated to issue in excess of an aggregate of 6,578,000 shares of
Common Stock upon conversion of the Notes and any shares of Common Stock
issuable in connection with the Purchase Agreement, which number of shares shall
be subject to adjustment pursuant to Section 3.6, and such number of shares, the
"Issuable Maximum". The Issuable Maximum equals 19.999% of the number of shares
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of Common Stock outstanding immediately prior to the Closing. Shares of Common
Stock issued in respect of penalties and liquidated damages hereunder shall not
count towards the 6,578,000 share limit set forth in this paragraph and shall be
paid in cash as provided herein unless otherwise agreed to by the Holders. If on
any Conversion Date (A) the Common Stock is listed for trading on Nasdaq, (B)
the Conversion Price then in effect is such that the aggregate number of shares
of Common Stock previously
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issued at a discount upon conversion of Notes or otherwise issued in connection
with the Purchase Agreement, would equal or exceed the Issuable Maximum, and (C)
the Maker shall not have previously obtained the vote of shareholders (the
"Shareholder Approval"), if any, as may be required by the applicable rules and
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regulations of the Nasdaq Stock Market, Inc. (or any successor entity)
applicable to approve the issuance of share of Common Stock in excess of the
Issuable Maximum pursuant to the terms hereof, then the Maker shall issue to the
Holder so requesting such number of shares of Common Stock equal to the Issuable
Maximum and, with respect to the remainder of shares of Common Stock which would
result in an issuance of shares of Common Stock in excess of the Issuable
Maximum (the "Excess Shares"), the Maker shall have the option to either (1) use
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its reasonable efforts to obtain the Shareholder Approval applicable to such
issuance as soon as is possible, but in any event not later than the 90th day
after such request, or (2) deliver to such holder cash in an amount equal to the
product of (x) the Per Share Market Value on the applicable Conversion Date, and
(y) the number of shares of Common Stock in excess of such Holder's pro rata
portion of the Issuable Maximum that would have otherwise been issuable to the
Holder but for the provisions of this Section (such amount of cash being
hereinafter referred to as the "Discount Equivalent"). If the Maker fails to pay
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the Discount Equivalent in full pursuant to this Section within fifteen (15)
days after the Maker fails to obtain Shareholder Approval pursuant to (1) above
or the date payable pursuant to (2) above, the Maker will pay interest thereon
at a rate of 10% per annum to the Holder, accruing daily from the applicable
Conversion until such amount, plus all such interest thereon, is paid in full.
The Maker and the Holder understand and agree that shares of Common Stock issued
to and then held by the Holder as a result of conversion of the Notes or as a
result of exercise of the Warrants shall not be entitled to cast votes on any
resolution to obtain Shareholder Approval.
Section 3.5 Intentionally Omitted.
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Section 3.6 Adjustment of Conversion Price.
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(a) The Conversion Price shall be subject to adjustment from time to time
as follows:
(i) Adjustments for Stock Splits and Combinations. If the Maker shall
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at any time or from time to time after the Issuance Date, effect a stock split
of the outstanding Common Stock, the applicable Conversion Price in effect
immediately prior to the stock split shall be proportionately decreased. If the
Maker shall at any time or from time to time after the Issuance Date, combine
the outstanding shares of Common Stock, the applicable Conversion Price in
effect immediately prior to the combination shall be proportionately increased.
Any adjustments under this Section 3.6(a)(i) shall be effective at the close of
business on the date the stock split or combination occurs.
(ii) Adjustments for Certain Dividends and Distributions. If the
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Maker shall at any time or from time to time after the Issuance Date, make or
issue or set a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in shares of Common
Stock, then, and in each event, the applicable Conversion Price in effect
immediately prior to such event shall be decreased as of the time of such
issuance or, in the event such record date shall have been fixed, as of the
close of business on such record date, by multiplying, as applicable, the
applicable Conversion Price then in effect by a fraction:
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(1) the numerator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date; and
(2) the denominator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution.
(iii) Adjustment for Other Dividends and Distributions. If the Maker
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shall at any time or from time to time after the Issuance Date, make or issue or
set a record date for the determination of holders of Common Stock entitled to
receive a dividend or other distribution payable in other than shares of Common
Stock, then, and in each event, an appropriate revision to the applicable
Conversion Price shall be made and provision shall be made (by adjustments of
the Conversion Price or otherwise) so that the holders of the Notes shall
receive upon conversions thereof, in addition to the number of shares of Common
Stock receivable thereon, the number of securities of the Maker which they would
have received had their Notes been converted into Common Stock on the date of
such event and had thereafter, during the period from the date of such event to
and including the Conversion Date, retained such securities (together with any
distributions payable thereon during such period), giving application to all
adjustments called for during such period under this Section 3.6(a)(iii) with
respect to the rights of the holders of the Notes.
(iv) Adjustments for Reclassification, Exchange or Substitution. If
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the Common Stock issuable upon conversion of the Notes at any time or from time
to time after the Issuance Date shall be changed to the same or different number
of shares of any class or classes of stock, whether by reclassification,
exchange, substitution or otherwise (other than by way of a stock split or
combination of shares or stock dividends provided for in Sections 3.6(a)(i),
(ii) and (iii), or a reorganization, merger, consolidation, or sale of assets
provided for in Section 3.6(a)(v)), then, and in each event, an appropriate
revision to the Conversion Price shall be made and provisions shall be made (by
adjustments of the Conversion Price or otherwise) so that the holder of each of
the Notes shall have the right thereafter to convert such Note into the kind and
amount of shares of stock and other securities receivable upon reclassification,
exchange, substitution or other change, by holders of the number of shares of
Common Stock into which such Note might have been converted immediately prior to
such reclassification, exchange, substitution or other change, all subject to
further adjustment as provided herein.
(v) Adjustments for Reorganization, Merger, Consolidation or Sales of
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Assets. If at any time or from time to time after the Issuance Date there shall
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be a capital reorganization of the Maker (other than by way of a stock split or
combination of shares or stock dividends or distributions provided for in
Section 3.6(a)(i), (ii) and (iii), or a reclassification, exchange or
substitution of shares provided for in Section 3.6(a)(iv)), or a merger or
consolidation of the Maker with or into another corporation, or the sale of all
or substantially all of the Maker's properties or assets to any other person (an
"Organic Change"), then as a part of such Organic Change an appropriate revision
--------------
to the Conversion Price shall be made and provision shall be made (by
adjustments of the Conversion Price or otherwise) so that the holder of each
Note shall have the right thereafter to convert such Note into the kind and
amount of
-10-
shares of stock and other securities or property of the Maker or any successor
corporation resulting from Organic Change. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section
3.6(a)(v) with respect to the rights of the holders of the Notes after the
Organic Change to the end that the provisions of this Section 3.6(a)(v)
(including any adjustment in the applicable Conversion Price then in effect and
the number of shares of stock or other securities deliverable upon conversion of
the Notes) shall be applied after that event in as nearly an equivalent manner
as may be practicable.
(vi) Adjustments for Issuance of Additional Shares of Common Stock.
--------------------------------------------------------------
(1) In the event the Maker, shall, at any time, from time to
time, issue or sell any shares of Additional Shares of Common Stock (including
Treasury Shares) to a third party other than the Holder for a consideration per
share less than the Conversion Price then in effect for the Note immediately
prior to the time of such issue or sale, then, forthwith upon such issue or
sale, the Conversion Price then in effect for the Notes shall be reduced to a
price equal to the consideration per share paid for such Common Stock and the
number of shares of Common Stock for which this Note is convertible shall be
increased by the product of the number of shares of Common Stock for which this
Note is convertible immediately prior to such issuance or sale multiplied by the
Dilution Percentage. "Dilution Percentage" shall mean the percentage by which
the Conversion Price then in effect is reduced pursuant to this Section
3.6(a)(vi). Additional Shares of Common Stock shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to subsection 3.6(a)) by
the Maker after the date hereof other than:
(A) Common Stock issued pursuant to a transaction described
in this Section 3.6;
(B) Common Stock issued or issuable to employees,
consultants or directors of the Maker directly or pursuant to stock option
plan(s) or restricted stock plan(s) approved by the Board of Directors of the
Maker prior to the date hereof;
(C) the issuance of securities pursuant to the conversion or
exercise of convertible or exercisable securities; or
(D) Common Stock, issued, or issuable upon exercise of
warrants, issued to vendors, financial institutions or lessors in connection
with commercial credit arrangements, equipment financings or similar
arrangements provided that such issuances are for primarily other than equity
financing purposes and are approved by the Board of Directors of the Maker.
(2) If at any time the Maker shall at any time issue or sell any
Additional Shares of Common Stock to a third party other than the Holder in
exchange for consideration in an amount per Additional Share of Common Stock
less than the Per Share Market Value at the time the Additional Shares of Common
Stock are issued or sold, then, forthwith upon such issue or sale, the
Conversion Price then in effect for the Notes shall be reduced by the product of
the Conversion Price then in effect multiplied by the Market Dilution Percentage
and the number of shares of Common Stock for which this Note is convertible
shall be increased by the product of the number of shares of Common Stock for
which this Note is
-11-
convertible immediately prior to such issuance or sale multiplied by the Market
Dilution Percentage. "Market Dilution Percentage" shall mean the percentage by
which such issuance or sale is below the lesser of the Per Share Market Value or
the per share market value of the Common Stock as calculated pursuant to the
terms of any other financings of the Maker.
(3) If at any time the Maker shall issue or sell any
Additional Shares of Common Stock to a third party other than the Holder in
exchange for consideration in an amount per Additional Share of Common Stock
which is less than the Conversion Price or the Per Share Market Value at the
time the Additional Shares of Common Stock are issued or sold, the adjustment
required under this Section 3.6(a)(vi) shall be made in accordance with the
formula in paragraph (1) or (2) above which results in the lower Conversion
Price following such adjustment. The provisions of paragraphs (1) and (2) of
this Section 3.6(a)(vi) shall not apply to any issuance of Additional Shares of
Common Stock for which an adjustment is provided under Sections 3.6(a)(ii) or
3.6(a)(iii) hereof. No adjustment of the number of shares of Common Stock for
which this Note shall be convertible shall be made under paragraph (1) or (2) of
this Section 3.6(a)(vi) upon the issuance of any Additional Shares of Common
Stock which are issued pursuant to the exercise of any warrants or other
subscription or purchase rights or pursuant to the exercise of any conversion or
exchange rights in any Convertible Securities, if any such adjustment shall
previously have been made upon the issuance of such warrants or other rights or
upon the issuance of such Convertible Securities (or upon the issuance of any
warrant or other rights therefor) pursuant to Section 3.6(a)(vii) hereof.
(4) If the Maker, at any time after the Issuance Date, shall
issue any Additional Shares of Common Stock to the Holder, at a price per share
less than the applicable Conversion Price then in effect or without
consideration, then the applicable Conversion Price upon each such issuance
shall be adjusted to that price (rounded to the nearest cent) determined by
multiplying the applicable Conversion Price then in effect by a fraction:
(A) the numerator of which shall be equal to the sum of
(x) the number of shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock plus (y) the number of shares
----
of Common Stock (rounded to the nearest whole share) which the aggregate
consideration for the total number of such Additional Shares of Common Stock so
issued would purchase at a price per share equal to the applicable Conversion
Price then in effect, and
(B) the denominator of which shall be equal to the
number of shares of Common Stock outstanding immediately after the issuance of
such Additional Shares of Common Stock.
The provisions under paragraph (4) of this subsection
3.6(a)(vi) shall not apply under any of the circumstances for which an
adjustment is provided in subsections (i), (ii), (iii), (iv) or (v) of this
Section 3.6(a). No adjustment of the applicable Conversion Price shall be made
under this subsection (a)(vi) upon the issuance of any Additional Shares of
Common Stock which are issued pursuant to any Common Stock Equivalent (as
defined below) if upon the issuance of such Common Stock Equivalent (x) any
adjustment shall have been made pursuant to subsection (vii) of this Section
3.6(a) or (y) no adjustment was required pursuant to subsection (vii) of this
Section 3.6(a). No adjustment of the applicable Conversion Price shall be made
-12-
under this subsection (vi) in an amount less than $.01 per share, but any such
lesser adjustment shall be carried forward and shall be made at the time and
together with the next subsequent adjustment, if any, which together with any
adjustments so carried forward shall amount to $.01 per share or more; provided
--------
that upon any adjustment of the applicable Conversion Price as a result of any
dividend or distribution payable in Common Stock or Convertible Securities (as
defined below) or the reclassification, subdivision or combination of Common
Stock into a greater or smaller number of shares, the foregoing figure of $.01
per share (or such figure as last adjusted) shall be adjusted (to the nearest
one-half cent) in proportion to the adjustment in the applicable Conversion
Price.
(vii) Issuance of Common Stock Equivalents. If the Maker, at any
------------------------------------
time after the Issuance Date, shall issue any securities convertible into or
exchangeable for, directly or indirectly, Common Stock ("Convertible
-----------
Securities"), other than this Note, or any rights or warrants or options to
----------
purchase any such Common Stock or Convertible Securities, shall be issued or
sold (collectively, the "Common Stock Equivalents") and the price per share for
------------------------
which Additional Shares of Common Stock may be issuable thereafter pursuant to
such Common Stock Equivalent shall be less than the applicable Conversion Price
then in effect, or if, after any such issuance of Common Stock Equivalents, the
price per share for which Additional Shares of Common Stock may be issuable
thereafter is amended or adjusted, and such price as so amended shall be less
than the applicable Conversion Price in effect at the time of such amendment,
then the applicable Conversion Price upon each such issuance or amendment shall
be adjusted as provided in the first sentence of subsection (vi) of this Section
3.6(a) on the basis that (1) the maximum number of Additional Shares of Common
Stock issuable pursuant to all such Common Stock Equivalents shall be deemed to
have been issued (whether or not such Common Stock Equivalents are actually then
exercisable, convertible or exchangeable in whole or in part) as of the earlier
of (A) the date on which the Maker shall enter into a firm contract for the
issuance of such Common Stock Equivalent, or (B) the date of actual issuance of
such Common Stock Equivalent, and (2) the aggregate consideration for such
maximum number of Additional Shares of Common Stock shall be deemed to be the
minimum consideration received or receivable by the Maker for the issuance of
such Additional Shares of Common Stock pursuant to such Common Stock Equivalent.
No adjustment of the applicable Conversion Price shall be made under this
subsection (vii) upon the issuance of any Convertible Security which is issued
pursuant to the exercise of any warrants or other subscription or purchase
rights therefor, if any adjustment shall previously have been made to the
exercise price of such warrants then in effect upon the issuance of such
warrants or other rights pursuant to this subsection (vii). If no adjustment is
required under this subsection (vii) upon issuance of any Common Stock
Equivalent or once an adjustment is made under this subsection (vii) based upon
the Per Share Market Value in effect on the date of such adjustment, no further
adjustment shall be made under this subsection (vii) based solely upon a change
in the Per Share Market Value after such date.
(viii) Consideration for Stock. In case any shares of Common Stock
-----------------------
or any Common Stock Equivalents shall be issued or sold:
(1) in connection with any merger or consolidation in which
the Maker is the surviving corporation (other than any consolidation or merger
in which the previously outstanding shares of Common Stock of the Maker shall be
changed to or exchanged for the stock or other securities of another
corporation), the amount of consideration therefore shall be,
-13-
deemed to be the fair value, as determined reasonably and in good faith by the
Board of Directors of the Maker, of such portion of the assets and business of
the nonsurviving corporation as such Board may determine to be attributable to
such shares of Common Stock, Convertible Securities, rights or warrants or
options, as the case may be; or
(2) in the event of any consolidation or merger of the Maker in
which the Maker is not the surviving corporation or in which the previously
outstanding shares of Common Stock of the Maker shall be changed into or
exchanged for the stock or other securities of another corporation, or in the
event of any sale of all or substantially all of the assets of the Maker for
stock or other securities of any corporation, the Maker shall be deemed to have
issued a number of shares of its Common Stock for stock or securities or other
property of the other corporation computed on the basis of the actual exchange
ratio on which the transaction was predicated, and for a consideration equal to
the fair market value on the date of such transaction of all such stock or
securities or other property of the other corporation. If any such calculation
results in adjustment of the applicable Conversion Price, or the number of
shares of Common Stock issuable upon conversion of the Notes, the determination
of the applicable Conversion Price or the number of shares of Common Stock
issuable upon conversion of the Notes immediately prior to such merger,
consolidation or sale, shall be made after giving effect to such adjustment of
the number of shares of Common Stock issuable upon conversion of the Notes.
(b) Record Date. In case the Maker shall take record of the holders
-----------
of its Common Stock for the purpose of entitling them to subscribe for or
purchase Common Stock or Convertible Securities, then the date of the issue or
sale of the shares of Common Stock shall be deemed to be such record date.
(c) Certain Issues Excepted. Anything herein to the contrary
-----------------------
notwithstanding, the Maker shall not be required to make any adjustment of the
number of shares of Common Stock issuable upon conversion of the Notes upon the
grant after the Issuance Date of, or the exercise after the Issuance Date of,
options or warrants or rights to purchase stock under the Maker's existing stock
option plan.
(d) No Impairment. The Maker shall not, by amendment of its Articles
-------------
of Incorporation or through any reorganization, 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 Maker, but will at all
times in good faith, assist in the carrying out of all the provisions of this
Section 3.6 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the Holder against
impairment. In the event a Holder shall elect to convert any Notes as provided
herein, the Maker cannot refuse conversion based on any claim that such Holder
or any one associated or affiliated with such Holder has been engaged in any
violation of law, violation of an agreement to which such Holder is a party or
for any reason whatsoever, unless, an injunction from a court, or notice,
restraining and or adjoining conversion of all or of said Notes shall have
issued and the Maker posts a surety bond for the benefit of such Holder in an
amount equal to 130% of the amount of the Notes the Holder has elected to
convert, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Holder in the event it obtains judgment.
-14-
(e) Certificates as to Adjustments. Upon occurrence of each
------------------------------
adjustment or readjustment of the Conversion Price or number of shares of Common
Stock issuable upon conversion of this Note pursuant to this Section 3.6, the
Maker at its expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and furnish to the Holder a certificate setting
forth such adjustment and readjustment, showing in detail the facts upon which
such adjustment or readjustment is based. The Maker shall, upon written request
of the Holder, at any time, furnish or cause to be furnished to such holder a
like certificate setting forth such adjustments and readjustments, the
applicable Conversion Price in effect at the time, and the number of shares of
Common Stock and the amount, if any, of other securities or property which at
the time would be received upon the conversion of this Note. Notwithstanding
the foregoing, the Maker shall not be obligated to deliver a certificate unless
such certificate would reflect an increase or decrease of at least one percent
(1%) of such adjusted amount.
(f) Issue Taxes. The Maker shall pay any and all issue and other
-----------
taxes, excluding federal, state or local income taxes, that may be payable in
respect of any issue or delivery of shares of Common Stock on conversion of this
Note pursuant thereto; provided, however, that the Maker shall not be obligated
-------- -------
to pay any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
(g) Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued upon conversion of this Note. In lieu of any fractional shares to which
the Holder would otherwise be entitled, the Maker shall pay cash equal to the
product of such fraction multiplied by the average of the Per Share Market
Values of the Common Stock for the five (5) consecutive Trading Days immediately
preceding the Conversion Date.
(h) Reservation of Common Stock. The Maker shall at all times when
---------------------------
this Note shall be outstanding, reserve and keep available out of its authorized
but unissued Common Stock, such number of shares of Common Stock as shall from
time to time be sufficient to effect the conversion of this Note and all
interest accrued thereon; provided that the number of shares of Common Stock so
--------
reserved shall at no time be less than 200% of the number of shares of Common
Stock for which this Note and all interest accrued thereon are at any time
convertible. The Maker shall, from time to time in accordance with the
California General Corporation Law, as amended, increase the authorized number
of shares of Common Stock if at any time the unissued number of authorized
shares shall not be sufficient to satisfy the Maker's obligations under this
Section 3.6(h).
(i) Regulatory Compliance. If any shares of Common Stock to be
---------------------
reserved for the purpose of conversion of this Note or any interest accrued
thereon require registration or listing with or approval of any governmental
authority, stock exchange or other regulatory body under any federal or state
law or regulation or otherwise before such shares may be validly issued or
delivered upon conversion, the Maker shall, at its sole cost and expense, in
good faith and as expeditiously as possible, endeavor to secure such
registration, listing or approval, as the case may be.
Section 3.7 Prepayment.
----------
-15-
(a) Prepayment Upon an Event of Default. Notwithstanding anything to
-----------------------------------
the contrary contained herein, upon the occurrence of an Event of Default
described in Sections 2.1(d)-(k) hereof, the Holder shall have the right, at
such Holder's option, to require the Maker to prepay all or a portion of this
Note at a price equal to Prepayment Price (as defined in Section 3.7(c) below)
applicable at the time of such request. Nothing in this Section 3.7(a) shall
limit the Holder's rights under Section 2.2 hereof.
(b) Prepayment Option Upon Major Transaction. In addition to all
----------------------------------------
other rights of the holders of the Notes contained herein, simultaneous with the
occurrence of a Major Transaction (as defined below), each holder of the Notes
shall have the right, at such holder's option, to require the Maker to prepay
all or a portion of such holder's Notes at a price equal to the greater of (i)
115% of the aggregate principal amount of the Notes and (ii) the product of (A)
the Conversion Rate and (B) the Per Share Market Value of the Common Stock on
the Trading Day immediately preceding such Major Transaction ("Major Transaction
-----------------
Prepayment Price").
----------------
(c) Prepayment Option Upon Triggering Event. In addition to all other
---------------------------------------
rights of the holders of the Notes contained herein, after a Triggering Event
(as defined below), each holder of the Notes shall have the right, at such
holder's option, to require the Maker to prepay all or a portion of such
holder's Notes at a price equal to the greater of (i) 115% of the aggregate
principal amount of the Notes and (ii) the product of (A) the Conversion Rate at
such time and (B) the Per Share Market Value of the Common Stock calculated as
of the date immediately preceding such Triggering Event on which the exchange or
market on which the Common Stock is traded is open ("Triggering Event Prepayment
---------------------------
Price").
-----
(d) Prepayment Option Upon Escrow Period Triggering Event. In
-----------------------------------------------------
addition to all other rights of the holders of the Notes contained herein, after
an Escrow Period Triggering Event (as defined below), each holder of the Notes
shall have the right, at such holder's option, to require the Maker to prepay
all or a portion of such holder's Notes at a price equal to the aggregate
principal amount of the Notes ("Escrow Period Prepayment Price" and,
------------------------------
collectively with Major Transaction Prepayment Price and Triggering Event
Prepayment Price, the "Prepayment Price").
----------------
(e) "Major Transaction." A "Major Transaction" shall mean (i) a
----------------- -----------------
merger, acquisition or consolidation of the Maker with or into another entity or
any other corporate reorganization, other than a transaction where fifty percent
(50%) or more of the combined voting power of the continuing or surviving
entity's securities outstanding immediately after such merger, consolidation or
other reorganization is owned by persons who were shareholders of the Maker
immediately prior to such merger, consolidation or reorganization, or (ii) a
transaction where the sole purpose is to change the state of the Maker's
incorporation; provided, that in either case, the surviving entity shall be a
--------
reporting company pursuant to the Securities Exchange Act of 1934, as amended,
and the securities to be issued to the shareholders of the Maker are registered
pursuant to an effective registration statement filed with the Securities and
Exchange Commission (the "SEC").
---
(f) "Triggering Event." A "Triggering Event" shall be deemed to have
---------------- ----------------
occurred at such time as any of the following events:
-16-
(i) Intentionally Omitted.
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights Agreement,
the effectiveness of the Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is unavailable
to the holder of the Notes for sale of the Registrable Securities (as defined in
the Registration Rights Agreement) in accordance with the terms of the
Registration Rights Agreement, and such lapse or unavailability continues for a
period of ten (10) consecutive Trading Days, provided that the cause of such
--------
lapse or unavailability is due to factors within the control of the Maker and
not due to factors solely within the control of such holder of the Notes;
(iii) the suspension from trading or the failure of the Common
Stock to be traded on the OTC Bulletin Board for a period of five (5)
consecutive days, provided, that such suspension from listing or failure to be
--------
listed is due to factors within the control of the Maker, including, but not
limited to, failure to timely file all reports required to be filed with the SEC
or to meet the net tangible assets requirements for listing, if any;
(iv) the Maker's notice to any holder of the Notes, including
by way of public announcement, at any time, of its inability to comply
(including for any of the reasons described in Section 3.8) or its intention not
to comply with proper requests for conversion of any of the Notes into shares of
Common Stock;
(v) the Maker's failure to comply with a Conversion Notice
tendered within ten (10) business days after the receipt by the Maker of the
Conversion Notice and the certificates representing the Notes; or
(g) "Escrow Period Triggering Event." An "Escrow Period Triggering
------------------------------- ------------------------
Event" shall mean any of the following events which have occurred commencing on
-----
the Effectiveness Date and ending on the Funding Date:
(i) a Material Adverse Effect has occurred;
(ii) the Target Cash Amount falls below $2,400,000;
(iii) the suspension from trading or the failure of the Common
Stock to be traded on The Nasdaq National Market for a period of five (5)
consecutive days, provided, that such suspension from listing or failure to be
--------
listed is due to factors within the control of the Maker, including, but not
limited to, failure to timely file all reports required to be filed with the SEC
or to meet the net tangible assets requirements for listing, if any; and
(iv) the Maker breaches any material representation, warranty,
covenant or other term or condition of the Purchase Agreement, the Registration
Rights Agreement or any other agreement, document, certificate or other
instrument delivered in connection with the transactions contemplated thereby or
hereby.
(h) Mechanics of Prepayment at Option of Holder Upon Major
------------------------------------------------------
Transaction. No sooner than fifteen (15) days nor later than ten (10) days
-----------
prior to the consummation of a
-17-
Major Transaction, but not prior to the public announcement of such Major
Transaction, the Maker shall deliver written notice thereof via facsimile and
overnight courier ("Notice of Major Transaction") to each holder of the Notes.
---------------------------
At any time after receipt of a Notice of Major Transaction (or, in the event a
Notice of Major Transaction is not delivered at least ten (10) days prior to a
Major Transaction, at any time within ten (10) days prior to a Major
Transaction), any holder of the Notes then outstanding may require the Maker to
prepay, effective immediately prior to the consummation of such Major
Transaction, all of the holder's Notes then outstanding by delivering written
notice thereof via facsimile and overnight courier ("Notice of Prepayment at
-----------------------
Option of Holder Upon Major Transaction") to the Maker, which Notice of
---------------------------------------
Prepayment at Option of Holder Upon Major Transaction shall indicate (i) the
number of Notes that such holder is electing to prepay and (ii) the applicable
Major Transaction Prepayment Price, as calculated pursuant to Section 3.7(b)
above.
(i) Mechanics of Prepayment at Option of Holder Upon Triggering
-----------------------------------------------------------
Event. Within one (1) day after the occurrence of a Triggering Event, the Maker
-----
shall deliver written notice thereof via facsimile and overnight courier
("Notice of Triggering Event") to each holder of the Notes. At any time after
--------------------------
the earlier of a holder's receipt of a Notice of Triggering Event and such
holder becoming aware of a Triggering Event, any holder of the Notes then
outstanding may require the Maker to prepay all of the Notes by delivering
written notice thereof via facsimile and overnight courier ("Notice of
---------
Prepayment at Option of Holder Upon Triggering Event") to the Maker, which
----------------------------------------------------
Notice of Prepayment at Option of Holder Upon Triggering Event shall indicate
(i) the number of Notes that such holder is electing to prepay and (ii) the
applicable Triggering Event Prepayment Price, as calculated pursuant to Section
3.7(c) above.
(j) Mechanics of Prepayment at Option of Holder Upon Escrow Period
--------------------------------------------------------------
Triggering Event. Within one (1) day after the occurrence of a Escrow Period
----------------
Triggering Event, the Maker shall deliver written notice thereof via facsimile
and overnight courier ("Notice of Escrow Period Triggering Event") to each
----------------------------------------
holder of the Notes. At any time after the earlier of a holder's receipt of a
Notice of Escrow Period Triggering Event and such holder becoming aware of an
Escrow Period Triggering Event, any holder of the Notes then outstanding may
require the Maker to prepay all of the Notes by delivering written notice
thereof via facsimile and overnight courier ("Notice of Prepayment at Option of
---------------------------------
Holder Upon Escrow Period Triggering Event") to the Maker, which Notice of
------------------------------------------
Prepayment at Option of Holder Upon Escrow Period Triggering Event shall
indicate (i) the number of Notes that such holder is electing to prepay and (ii)
the applicable Escrow Period Triggering Event Prepayment Price, as calculated
pursuant to Section 3.7(d) above.
(k) Payment of Prepayment Price. Upon the Maker's receipt of a
---------------------------
Notice(s) of Prepayment at Option of Holder Upon Triggering Event or a Notice(s)
of Prepayment at Option of Holder Upon Major Transaction or a Notice(s) of
Prepayment at Option of Holder Upon Escrow Period Triggering Event from any
holder of the Notes, the Maker shall immediately notify each holder of the Notes
by facsimile of the Maker's receipt of such Notice(s) of Prepayment at Option of
Holder Upon Triggering Event or Notice(s) of Prepayment at Option of Holder Upon
Major Transaction or Notice(s) of Prepayment at Option of Holder upon Escrow
Period Triggering Event and each holder which has sent such a notice shall
promptly submit to the Maker such holder's certificates representing the Notes
which such holder has elected to have prepaid. The Maker shall deliver the
applicable Triggering Event Prepayment Price, in the case
-18-
of a prepayment pursuant to Section 3.7(i), to such holder within five (5)
business days after the Maker's receipt of a Notice of Prepayment at Option of
Holder Upon Triggering Event and, in the case of a prepayment pursuant to
Section 3.7(k), the Maker shall deliver the applicable Major Transaction
Prepayment Price immediately prior to the consummation of the Major Transaction
and, in the case of a prepayment pursuant to Section 3.7(j), to such holder
within one (1) business day after the Maker's receipt of a Notice of Prepayment
at Option of Holder Upon Escrow Period Triggering Event; provided that a
--------
holder's certificates representing the Notes shall have been so delivered to the
Maker; provided further that if the Maker is unable to prepay all of the Notes
--------
to be prepaid, the Maker shall prepay an amount from each holder of the Notes
being prepaid equal to such holder's pro-rata amount (based on the number of
Notes held by such holder relative to the number of Notes outstanding) of all
Notes being prepaid. If the Maker shall fail to prepay all of the Notes
submitted for prepayment (other than pursuant to a dispute as to the arithmetic
calculation of the Prepayment Price), in addition to any remedy such holder of
the Notes may have under this Note and the Purchase Agreement, the applicable
Prepayment Price payable in respect of such Notes not prepaid shall bear
interest at the rate of 2.0% per month (prorated for partial months) until paid
in full. Until the Maker pays such unpaid applicable Prepayment Price in full to
a holder of the Notes submitted for prepayment, such holder shall have the
option (the "Void Optional Prepayment Option") to, in lieu of prepayment,
-------------------------------
require the Maker to promptly return to such holder(s) all of the Notes that
were submitted for prepayment by such holder(s) under this Section 3.7 and for
which the applicable Prepayment Price has not been paid, by sending written
notice thereof to the Maker via facsimile (the "Void Optional Prepayment
------------------------
Notice"). Upon the Maker's receipt of such Void Optional Prepayment Notice(s)
------
and prior to payment of the full applicable Prepayment Price to such holder, (i)
the Notice(s) of Prepayment at Option of Holder Upon Triggering Event, the
Notice(s) of Prepayment at Option of Holder Upon Major Transaction or the
Notice(s) of Prepayment at Option of Holder Upon Escrow Period Triggering Event,
as the case may be, shall be null and void with respect to those Notes submitted
for prepayment and for which the applicable Prepayment Price has not been paid,
(ii) the Maker shall immediately return any Notes submitted to the Maker by each
holder for prepayment under this Section 3.7(h) and for which the applicable
Prepayment Price has not been paid and (iii) the Conversion Price of such
returned Notes shall be adjusted to the lesser of (A) the Conversion Price as in
effect on the date on which the Void Optional Prepayment Notice(s) is delivered
to the Maker and (B) the lowest Per Share Market Value during the period
beginning on the date on which the Notice(s) of Prepayment of Option of Holder
Upon Major Transaction, the Notice(s) of Prepayment at Option of Holder Upon
Triggering Event or the Notice(s) of Prepayment at Option of Holder Upon Escrow
Period Triggering Event, as the case may be, is delivered to the Maker and
ending on the date on which the Void Optional Prepayment Notice(s) is delivered
to the Maker; provided that no adjustment shall be made if such adjustment would
result in an increase of the Conversion Price then in effect. A holder's
delivery of a Void Optional Prepayment Notice and exercise of its rights
following such notice shall not effect the Maker's obligations to make any
payments which have accrued prior to the date of such notice. Payments provided
for in this Section 3.7 shall have priority to payments to other stockholders in
connection with a Major Transaction.
(l) Holder Prepayment Option. At the sole option of the Holder, the
------------------------
Holder may grant the Maker the option to prepay all or any portion of the
outstanding principal amount of this Note together with all accrued and unpaid
interest thereon within ten (10) days of the
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Holder granting the option to the Maker. If the Maker elects to exercise the
prepayment option, the Maker shall upon five (5) days prior written notice to
the Holder (the "Maker's Prepayment Notice") prepay all or a portion of the
-------------------------
outstanding Notes equal to 115% of the aggregate principal amount of the Notes
plus any accrued but unpaid interest (the "Maker's Prepayment Price"); provided,
------------------------ --------
however, that if a holder has delivered a Conversion Notice to the Maker or
-------
delivers a Conversion Notice after receipt of the Maker's Prepayment Notice, the
Notes designated to be converted may not be prepaid by the Maker; provided
--------
further that if during the period between delivery of the Maker's Prepayment
-------
Notice and the Maker's Prepayment Date (as defined below), a holder shall become
entitled to deliver a Notice of Prepayment at Option of Holder Upon Major
Transaction or Notice of Prepayment at Option of Holder upon Triggering Event,
then the such rights of the holders shall take precedence over the previously
delivered Maker Prepayment Notice. The Maker's Prepayment Notice shall state the
date of prepayment which date shall be the sixth (6th) day after the Maker has
delivered the Maker's Prepayment Notice (the "Maker's Prepayment Date"), the
-----------------------
Maker's Prepayment Price and the amount of Notes to be prepaid by the Maker. The
Maker shall deliver the Maker's Prepayment Price to the Holder within five (5)
business days after the Maker has delivered the Maker's Prepayment Notice,
provided, that if the holder(s) delivers a Conversion Notice before the Maker's
--------
Prepayment Date, then the portion of the Maker's Prepayment Price which would be
paid to prepay the Notes covered by such Conversion Notice shall be returned to
the Maker upon delivery of the Common Stock issuable in connection with such
Conversion Notice to the holder(s). On the Maker's Prepayment Date, the Maker
shall pay the Maker's Prepayment Price, subject to any adjustment pursuant to
the immediately preceding sentence, to the holder(s) on a pro rata basis,
provided, however, that upon receipt by Maker of the certificates representing
--------
the Notes to be prepaid pursuant to this Section 3.7(l), the Maker shall, on the
next business day following the date of receipt by the Maker of such
certificates representing the Notes, pay the Maker's Prepayment Price to the
holder(s) on a pro rata basis. If the Maker fails to pay the Maker's Prepayment
Price by the sixth (6th) business day after the Maker has delivered the Maker's
Prepayment Notice, the prepayment will be declared null and void and the Maker
shall lose its right to serve a Maker 's Prepayment Notice pursuant to this
Section 3.7(l) in the future.
(m) Maker Prepayment Option. The Maker may prepay all or a
-----------------------
portion of this Note after the Effectiveness Date at a price equal to 115% of
the aggregate principal amount of the Notes plus all accrued and unpaid interest
by providing ninety (90) days written notice (the "Maker Prepayment Option
-----------------------
Notice") to the Holder. Nothing contained in this Section 3.7(m) shall preclude
------
the Holder from converting its Note within such ninety (90) day period;
provided, however, that subject to the terms and provisions of Section 3.2
-------- -------
hereof, the Conversion Price for purposes of this Section 3.7(m) shall be an
amount equal to the Discount Percentage of the average of the Per Share Market
Value for the five (5) Trading Days having the lowest Per Share Market Value
during the fifteen (15) Trading Days immediately prior to the date of delivery
of the Maker Prepayment Option Notice.
Section 3.8 Inability to Fully Convert.
--------------------------
(a) Holder's Option if Maker Cannot Fully Convert. If, upon the
---------------------------------------------
Maker's receipt of a Conversion Notice, the Maker cannot issue shares of Common
Stock registered for resale under the Registration Statement for any reason,
including, without limitation, because the Maker (w) does not have a sufficient
number of shares of Common Stock authorized and
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available, (x) is otherwise prohibited by applicable law or by the rules or
regulations of any stock exchange, interdealer quotation system or other self-
regulatory organization with jurisdiction over the Maker or any of its
securities from issuing all of the Common Stock which is to be issued to the
Holder pursuant to a Conversion Notice or (y) fails to have a sufficient number
of shares of Common Stock registered for resale under the Registration
Statement, then the Maker shall issue as many shares of Common Stock as it is
able to issue in accordance with the Holder's Conversion Notice and, with
respect to the unconverted portion of the Note, the Holder, solely at Holder's
option, can elect to:
(i) require the Maker to prepay that portion of the Note for
which the Maker is unable to issue Common Stock in accordance with the Holder's
Conversion Notice (the "Mandatory Prepayment") at a price per share equal to the
--------------------
Prepayment Price as of such Conversion Date (the "Mandatory Prepayment Price");
--------------------------
(ii) if the Maker's inability to fully convert is pursuant to
Section 3.8(a)(y) above, require the Maker to issue restricted shares of Common
Stock equal to one hundred twenty percent (120%) of the number of shares of
Common Stock the Maker is unable to deliver in accordance with such holder's
Conversion Notice;
(iii) void its Conversion Notice and retain or have returned, as
the case may be, the Note that was to be converted pursuant to the Conversion
Notice (provided that the Holder's voiding its Conversion Notice shall not
effect the Maker's obligations to make any payments which have accrued prior to
the date of such notice).
(b) Mechanics of Fulfilling Holder's Election. The Maker shall
-----------------------------------------
immediately send via facsimile to the Holder, upon receipt of a facsimile copy
of a Conversion Notice from the Holder which cannot be fully satisfied as
described in Section 3.8(a) above, a notice of the Maker's inability to fully
satisfy the Conversion Notice (the "Inability to Fully Convert Notice"). Such
---------------------------------
Inability to Fully Convert Notice shall indicate (i) the reason why the Maker is
unable to fully satisfy such holder's Conversion Notice, (ii) the amount of the
Note which cannot be converted and (iii) the applicable Mandatory Prepayment
Price. The Holder shall notify the Maker of its election pursuant to Section
3.8(a) above by delivering written notice via facsimile to the Maker ("Notice in
---------
Response to Inability to Convert").
--------------------------------
(c) Payment of Prepayment Price. If the Holder shall elect to have
---------------------------
its shares prepaid pursuant to Section 3.8(a)(i) above, the Maker shall pay the
Mandatory Prepayment Price in cash to the Holder within five (5) days of the
Maker's receipt of the Holder's Notice in Response to Inability to Convert,
provided that prior to the Maker's receipt of the Holder's Notice in Response to
--------
Inability to Convert the Maker has not delivered a notice to the Holder stating,
to the satisfaction of the Holder, that the event or condition resulting in the
Mandatory Prepayment has been cured and all Conversion Shares issuable to the
Holder can and will be delivered to the Holder in accordance with the terms of
this Note. If the Maker shall fail to pay the applicable Mandatory Prepayment
Price to the Holder on a timely basis as described in this Section 3.8(c) (other
than pursuant to a dispute as to the determination of the arithmetic calculation
of the Prepayment Price), in addition to any remedy the Holder may have under
this Note and the Purchase Agreement, such unpaid amount shall bear interest at
the rate of 2.0% per month (prorated for partial months) until paid in full.
Until the full Mandatory Prepayment Price is paid
-21-
in full to the Holder, the Holder may (i) void the Mandatory Prepayment with
respect to that portion of the Note for which the full Mandatory Prepayment
Price has not been paid, (ii) receive back such Note, and (iii) require that the
Conversion Price of such returned Note be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the Holder voided the
Mandatory Prepayment and (B) the lowest Per Share Market Value during the period
beginning on the Conversion Date and ending on the date the Holder voided the
Mandatory Prepayment.
Section 3.9 No Rights as Shareholder. Nothing contained in this Note
------------------------
shall be construed as conferring upon the Holder, prior to the conversion of
this Note, the right to vote or to receive dividends or to consent or to receive
notice as a shareholder in respect of any meeting of shareholders for the
election of directors of the Maker or of any other matter, or any other rights
as a shareholder of the Maker.
ARTICLE IV
MISCELLANEOUS
-------------
Section 4.1 Notices. Any notice, demand, request, waiver or other
-------
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telex (with correct answer back
received), telecopy or facsimile at the address or number designated in the
Purchase Agreement (if delivered on a business day during normal business hours
where such notice is to be received), or the first business day following such
delivery (if delivered other than on a business day during normal business hours
where such notice is to be received) or (b) on the second business day following
the date of mailing by express courier service, fully prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first occur.
The Maker will give written notice to the Holder at least ten (10) days prior to
the date on which the Maker closes its books or takes a record (x) with respect
to any dividend or distribution upon the Common Stock, (y) with respect to any
pro rata subscription offer to holders of Common Stock or (z) for determining
rights to vote with respect to any Organic Change, dissolution, liquidation or
winding-up and in no event shall such notice be provided to such holder prior to
such information being made known to the public. The Maker will also give
written notice to the Holder at least ten (10) days prior to the date on which
any Organic Change, dissolution, liquidation or winding-up will take place and
in no event shall such notice be provided to the Holder prior to such
information being made known to the public.
Section 4.2 Governing Law. This Note shall be governed by and construed
-------------
in accordance with the internal laws of the State of New York, without giving
effect to the choice of law provisions. This Note shall not be interpreted or
construed with any presumption against the party causing this Note to be
drafted.
Section 4.3 Headings. Article and section headings in this Note are
--------
included herein for purposes of convenience of reference only and shall not
constitute a part of this Note for any other purpose.
Section 4.4 Remedies, Characterizations, Other Obligations, Breaches and
------------------------------------------------------------
Injunctive Relief. The remedies provided in this Note shall be cumulative and
-----------------
in addition to all other remedies available under this Note, at law or in equity
(including, without limitation, a decree of
-22-
specific performance and/or other injunctive relief), no remedy contained herein
shall be deemed a waiver of compliance with the provisions giving rise to such
remedy and nothing herein shall limit a holder's right to pursue actual damages
for any failure by the Maker to comply with the terms of this Note. Amounts set
forth or provided for herein with respect to payments, conversion and the like
(and the computation thereof) shall be the amounts to be received by the holder
thereof and shall not, except as expressly provided herein, be subject to any
other obligation of the Maker (or the performance thereof). The Maker
acknowledges that a breach by it of its obligations hereunder will cause
irreparable and material harm to the Holder and that the remedy at law for any
such breach may be inadequate. Therefore the Maker agrees that, in the event of
any such breach or threatened breach, the Holder shall be entitled, in addition
to all other available rights and remedies, at law or in equity, to seek and
obtain such equitable relief, including but not limited to an injunction
restraining any such breach or threatened breach, without the necessity of
showing economic loss and without any bond or other security being required.
Section 4.5 Enforcement Expenses. The Maker agrees to pay all costs and
--------------------
expenses of enforcement of this Note, including, without limitation, reasonable
attorneys' fees and expenses.
Section 4.6 Binding Effect. The obligations of the Maker and the Holder
--------------
set forth herein shall be binding upon the successors and assigns of each such
party, whether or not such successors or assigns are permitted by the terms
hereof.
Section 4.7 Amendments. This Note may not be modified or amended in any
----------
manner except in writing executed by the Maker and the Holder.
Section 4.8 Compliance with Securities Laws. The Holder of this Note
-------------------------------
acknowledges that this Note is being acquired solely for the Holder's own
account and not as a nominee for any other party, and for investment, and that
the Holder shall not offer, sell or otherwise dispose of this Note. This Note
and any Note issued in substitution or replacement therefore shall be stamped or
imprinted with a legend in substantially the following form:
" THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE
SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH
REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL (WHICH
COUNSEL SHALL BE REASONABLY ACCEPTABLE TO THE MAKER) IN THE FORM, SUBSTANCE
AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE MAY BE SOLD,
TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM
REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS."
Section 4.9 Consent to Jurisdiction. Each of the Maker and the Holder (i)
-----------------------
hereby irrevocably submits to the exclusive jurisdiction of the United States
District Court sitting in the Southern District of New York and the courts of
the State of New York located in New York
-23-
county for the purposes of any suit, action or proceeding arising out of or
relating to this Note and (ii) hereby waives, and agrees not to assert in any
such suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of such court, that the suit, action or proceeding is brought
in an inconvenient forum or that the venue of the suit, action or proceeding is
improper. Each of the Maker and the Holder consents to process being served in
any such suit, action or proceeding by mailing a copy thereof to such party at
the address in effect for notices to it under the Purchase Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof. Nothing in this Section 4.9 shall affect or limit any right to
serve process in any other manner permitted by law.
Section 4.10 Parties in Interest. This Note shall be binding upon,
-------------------
inure to the benefit of and be enforceable by the Maker, the Holder and their
respective successors and permitted assigns.
Section 4.11 Failure or Indulgence Not Waiver. No failure or delay on the
--------------------------------
part of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege.
Section 4.12 Maker Waivers. Except as otherwise specifically provided
-------------
herein, the Maker and all others that may become liable for all or any part of
the obligations evidenced by this Note, hereby waive presentment, demand, notice
of nonpayment, protest and all other demands' and notices in connection with the
delivery, acceptance, performance and enforcement of this Note, and do hereby
consent to any number of renewals of extensions of the time or payment hereof
and agree that any such renewals or extensions may be made without notice to any
such persons and without affecting their liability herein and do further consent
to the release of any person liable hereon, all without affecting the liability
of the other persons, firms or Maker liable for the payment of this Note, AND DO
HEREBY WAIVE TRIAL BY JURY.
(a) No delay or omission on the part of the Holder in exercising its
rights under this Note, or course of conduct relating hereto, shall operate as a
waiver of such rights or any other right of the Holder, nor shall any waiver by
the Holder of any such right or rights on any one occasion be deemed a waiver of
the same right or rights on any future occasion.
(b) THE MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A
PART IS A COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW,
HEREBY WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT
REMEDY WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.
Section 4.13 Definitions. For the purposes hereof, the following terms
-----------
shall have the following meanings:
"Independent Appraiser" means a nationally recognized or major regional
---------------------
investment banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the financial
statements of the Issuer) that is regularly
-24-
engaged in the business of appraising the Capital Stock or assets of
corporations or other entities as going concerns, and which is not affiliated
with either the Issuer or the Holder of any Warrant.
"Person" means an individual or a corporation, partnership, trust,
------
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Trading Day" " means (a) a day on which the Common Stock is traded on The
-----------
Nasdaq National Market, The Nasdaq Small-Cap Market, or other registered
national stock exchange on which the Common Stock has been listed, or (b) if the
Common Stock is not listed on The Nasdaq Small-Cap Market, the Nasdaq National
Market or any registered national stock exchange, a day or which the Common
Stock is traded in the over-the-counter market, as reported by the OTC Bulletin
Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day
on which the Common Stock is quoted in the over-the-counter market as reported
by the National Quotation Bureau Incorporated (or any similar organization or
agency succeeding its functions of reporting prices); provided, however, that in
-------- -------
the event that the Common Stock is not listed or quoted as set forth in (a), (b)
and (c) hereof, then Trading Day shall mean any day except Saturday, Sunday and
any day which shall be a legal holiday or a day on which banking institutions in
the State of New York are authorized or required by law or other government
action to close.
VERTEL CORPORATION
By: ______________________________
Name:
Title:
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EXHIBIT A
WIRE INSTRUCTIONS.
Payee: _______________________________________________________
Bank: _______________________________________________________
Address: _____________________________________________________
_____________________________________________________
Bank No.: ____________________________________________________
Account No.: ________________________________________________
Account Name: ________________________________________________
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FORM OF
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Note)
The undersigned hereby irrevocably elects to convert $ ________________ of the
principal amount of the above Note No. ___ into shares of Common Stock of VERTEL
CORPORATION (the "Maker") according to the conditions hereof, as of the date
written below.
Date of Conversion _________________________________________________________
Applicable Conversion Price ________________________________________________
Signature___________________________________________________________________
[Name]
Address:____________________________________________________________________
____________________________________________________________________
-27-
