EXHIBIT 4.2
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND THE
COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO NETGURU, INC., THAT SUCH REGISTRATION IS NOT REQUIRED.
CONVERTIBLE NOTE
----------------
FOR VALUE RECEIVED, NETGURU, INC., a Delaware corporation (hereinafter
called the "BORROWER"), hereby promises to pay to LAURUS MASTER FUND, LTD., c/o
Ironshore Corporate Services Ltd., P.O. Box 1234 G.T., Queensgate House, South
Church Street, Grand Cayman, Cayman Islands, Fax: 000-000-0000 (the "HOLDER") or
its registered assigns or successors in interest, on order, without demand, the
sum of One Million Four Hundred Thousand Dollars ($1,400,000), with any accrued
and unpaid interest on December 4, 2006 (the "MATURITY DATE"). Capitalized terms
used herein without definition shall have the meanings ascribed to such terms in
the Purchase Agreement (as defined in Section 3.1(a) below). The Borrower
previously borrowed $900,000 (the "PRIOR OUTSTANDING LOAN") from the Holder
pursuant to that certain $4,000,000 Secured Convertible Note dated July 31, 2003
(the "JULY 2003 NOTE"). Such Prior Outstanding Loan is to become an obligation
of Borrower to Holder under this Convertible Note with such obligation canceled
under the July 2003 Note.
The following terms shall apply to this Note:
ARTICLE I
INTEREST
1.1 INTEREST RATE. Interest payable on this Note shall accrue at an
interest rate per annum equal to the greater of the "prime rate" published in
the Wall Street Journal from time to time plus one percent (1.0%) and five
percent (5%) and be payable in arrears commencing January 1, 2004 and on the
first business day of each consecutive calendar month thereafter, and on the
Maturity Date, accelerated or otherwise, due and payable as described below.
1.2 PAYMENT GRACE PERIOD. The Borrower shall have a four (4) day grace
period to pay any monetary amounts due under this Note. During this grace
period, and thereafter until paid, a default interest rate of five percent (5%)
per annum above the then applicable interest rate hereunder shall apply to the
amounts owed hereunder.
1
ARTICLE II
AMORTIZATION
2.1 MONTHLY PAYMENTS. Subject to the terms of this Article II,
beginning April 1, 2004, and thereafter on the first day of each succeeding
calendar month until the Maturity Date (each, a "REPAYMENT DATE"), the Borrower
shall repay the sum of thirty thousand dollars (to the extent such amount has
not been converted pursuant to Article III below), together with interest
accrued to date on such portion of the original principal amount plus any and
all default payments owing under the Purchase Agreement but not previously paid
(collectively the "MONTHLY AMOUNT"), in accordance with Section 2.2 below;
provided, however, that if the Borrower's Registration Statement with respect to
the shares of Common Stock issuable upon conversion of this Note is declared
effective by the Securities and Exchange Commission prior to ninety (90) days
from the date hereof, then the payment the principal portion of the Monthly
Amount shall commence on the first business day of each consecutive calendar
month, beginning on the first such day which occurs following ninety (90) days
from the date hereof.
2.2 CASH OR COMMON STOCK. Subject to the terms hereof, the Borrower has
the sole option to determine whether to satisfy payment of the Monthly Amount in
full on each Repayment Date either in cash or in shares of Common Stock, or a
combination of both. The Borrower shall deliver to the Holder a written
irrevocable notice in the form of Exhibit B attached hereto electing to pay such
Monthly Amount in full on such Repayment Date in either cash or Common Stock, or
a combination of both ("REPAYMENT ELECTION NOTICE"). Such Repayment Election
Notice shall be delivered to the Holder at least twenty (20) days prior to the
applicable Repayment Date (the date of such notice being hereinafter referred to
as the "NOTICE DATE"). If such Repayment Election Notice is not delivered within
the prescribed period set forth in the preceding sentence, then the repayment
shall be made in cash. If the Borrower repays all or a portion of the Monthly
Amount in shares of Common Stock, the number of such shares to be issued for
such Repayment Date shall be the number determined by dividing (x) the portion
of the Monthly Amount to be paid in shares of Common Stock, by (y) the
Conversion Price (as defined herein) as of such date.
2.3 NO EFFECTIVE REGISTRATION. Notwithstanding anything to the contrary
herein, the Borrower shall be prohibited from exercising its right to repay the
Monthly Amount in shares of Common Stock (and must deliver cash in respect
thereof) on the applicable Repayment Date if at any time from the Notice Date
until the time at which the Holder receives such shares, there fails to exist an
effective registration statement or an Event of Default hereunder exists or
occurs, unless otherwise waived in writing by the Holder in whole or in part at
the Holder's option.
2.4 SHARE PRICE/ISSUANCE LIMITATIONS. Notwithstanding anything to the
contrary herein, if the average closing price of the Common Stock as reported by
Bloomberg, L.P. on the Principal Market for the 10 trading days preceding a
Repayment Date was less than 110% of the Fixed Conversion Price, and the
Borrower has previously elected to pay all or a portion of the Monthly Amount in
shares of Common Stock, then the Borrower, in its sole discretion, shall
determine whether (i) to pay the Monthly Amount in cash; or (ii) require the
Holder to convert all or part of the Monthly Amount that is payable in shares of
Common Stock at a Conversion Price of 85% of the average of the three lowest
closing prices during the twenty (20) trading days immediately preceding the
Conversion Date. Any part of the Monthly Amount not converted into shares of
Common Stock by the following Repayment Date shall be paid by the Borrower in
cash on such following Repayment Date. At any time during the relevant month,
the Borrower has the option to pay the Monthly Amount, or the unconverted part
thereof, in cash and the Conversion Price set forth in this Section 2.4 shall no
longer be applicable.
2
2.5 DEEMED CONVERSIONS. Any repayment of the Monthly Amount in shares
of Common Stock pursuant to the terms hereof shall constitute and be deemed a
conversion of such portion of the applicable principal amount of this Note for
all purposes under this Note and the Purchase Agreement (except as otherwise
provided herein).
2.6 DEEMED OWNERSHIP. In the case of the exercise of the conversion
rights or payment of the Monthly Amount set forth herein the conversion
privilege shall be deemed to have been exercised and the shares of Common Stock
issuable upon such conversion or Repayment shall be deemed to have been issued
upon the date of receipt by the Borrower of the Notice of Conversion or
Repayment Election Notice, as the case may be. The person or entity entitled to
receive Common Stock issuable upon such conversion shall, on the date such
conversion privilege is deemed to have been exercised and thereafter, be treated
for all purposes as the record holder of such Common Stock.
ARTICLE III
CONVERSION RIGHTS
3.1. CONVERSION INTO THE BORROWER'S COMMON STOCK.
(a) Subject to the provisions set forth above, the Holder shall have
the right, but not the obligation, from and after the date hereof, and then at
any time until this Note is fully paid, to convert the principal portion of this
Note and/or interest and fees due and payable into fully paid and nonassessable
shares of common stock of the Borrower as such stock exists on the date of
issuance of this Note, or any shares of capital stock of the Borrower into which
such stock shall hereafter be changed or reclassified (the "COMMON STOCK") at
the conversion price set forth below (the "CONVERSION PRICE"). Notwithstanding
the foregoing, the Holder will not be permitted to convert on any Conversion
Date (as defined below) an amount of shares having a dollar value exceeding 25%
of the aggregate dollar trading volume during the 30 trading days preceding such
Conversion Date.
Upon delivery to the Borrower of a Notice of Conversion as described in
Section 8 of the Securities Purchase Agreement entered into between the Borrower
and the Holder relating to this Note (the "PURCHASE AGREEMENT") of the Holder's
written request for conversion (the date of giving such notice of conversion
being a "CONVERSION DATE"), the Borrower shall issue and deliver to the Holder
within three business days from the Conversion Date that number of shares of
Common Stock for the portion of the Note converted in accordance with the
foregoing. The number of shares of Common Stock to be issued upon each
conversion of this Note shall be determined by dividing that portion of the
principal of the Note to be converted and interest, if any, by the Fixed
3
Conversion Price as of the Conversion Date. In the event of any conversions of
outstanding principal amount under this Note in part pursuant to this Article
III, such conversions shall be deemed to constitute conversions of outstanding
principal amount applying to Monthly Amounts for the Repayment Dates in
chronological order. By way of example, if the original principal amount of this
Note is $1,400,000 and the Holder converted $75,000 of such original principal
amount prior to the first Repayment Date, then (1) the principal amount of the
Monthly Amount due on the first Repayment Date would equal $0, (2) the principal
amount of the Monthly Amount due on the second Repayment Date would equal $0 and
(3) the principal amount of the Monthly Amount due on each of the remaining
Repayment Dates would be $15,000.
(b) Subject to adjustment as provided in Section 3.1(c) hereof, the
Conversion Price per share shall be $1.30 (the "FIXED CONVERSION PRICE"). If an
Event of Default has occurred and be continuing hereunder then the Conversion
Price shall be equal to the lower of (i) the Fixed Conversion Price; or (ii)
seventy percent (70%) of the average of the three lowest closing prices for the
Common Stock on NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ National
Market System, American Stock Exchange, or New York Stock Exchange (whichever of
the foregoing is at the time the principal trading exchange or market for the
Common Stock, the "PRINCIPAL MARKET"), or on any securities exchange or other
securities market on which the Common Stock is then being listed or traded, for
the thirty (30) trading days prior to but not including the Conversion Date.
(c) The Conversion Price and number and kind of shares or other
securities to be issued upon conversion determined pursuant to Section 3.1(a)
and 3.1(b), shall be subject to adjustment from time to time upon the happening
of certain events while this conversion right remains outstanding, as follows:
X. Xxxxxx, Sale of Assets, etc. If the Borrower at any time
shall consolidate with or merge into or sell or convey all or substantially all
its assets to any other corporation, this Note, as to the unpaid principal
portion thereof and accrued interest thereon, shall thereafter be deemed to
evidence the right to purchase such number and kind of shares or other
securities and property as would have been issuable or distributable on account
of such consolidation, merger, sale or conveyance, upon or with respect to the
number of shares of Common Stock the Holder could have acquired immediately
prior to such consolidation, merger, sale or conveyance based on the Fixed
Conversion Price or the Conversion Price, as the case may be, as of the closing
date thereof. The foregoing provision shall similarly apply to successive
transactions of a similar nature by any such successor or purchaser. Without
limiting the generality of the foregoing, the provisions of this Section shall
apply to such securities of such successor or purchaser after any such
consolidation, merger, sale or conveyance.
B. Reclassification, etc. If the Borrower at any time shall,
by reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note, as to the
unpaid principal portion thereof and accrued interest thereon, shall thereafter
be deemed to evidence the right to purchase an adjusted number of such
securities and kind of securities as would have been issuable as the result of
such change with respect to the number of shares of Common Stock into which the
Note would have been convertible immediately prior to such reclassification or
other change at the Fixed Conversion Price or the Conversion Price, as the case
may be, as of the effective date for such reclassification or change.
4
C. Stock Splits, Combinations and Dividends. If the shares of
Common Stock are subdivided or combined into a greater or smaller number of
shares of Common Stock, or if a dividend is paid on the Common Stock in shares
of Common Stock, the Fixed Conversion Price or the Conversion Price, as the case
may be, shall be proportionately reduced in case of subdivision of shares or
stock dividend or proportionately increased in the case of combination of
shares, in each such case by the ratio which the total number of shares of
Common Stock outstanding immediately after such event bears to the total number
of shares of Common Stock outstanding immediately prior to such event.
D. Share Issuance. Subject to the provisions of this Section,
if the Borrower at any time shall issue any shares of Common Stock prior to the
conversion of the entire principal amount of the Note (otherwise than as: (i)
provided in Sections 3.1(c)A, 3.1(c)B or 3.1(c)C or this subparagraph D; (ii)
pursuant to warrants or options that may be granted in the future under any
option plan of the Borrower, or any employment agreement, joint venture, credit,
leasing or other financing agreement or any joint venture or other strategic
arrangement, in each case now or hereinafter entered into by the Borrower; (iii)
pursuant to any agreement entered into by the Company or any of its subsidiaries
for the acquisition of another business (whether by stock purchase or asset
purchase, merger or otherwise; or (iv) for services rendered by consultants;
((i), (ii), (iii) and (iv) above, are hereinafter referred to as the "EXCLUDED
ISSUANCES")) for a consideration less than the Fixed Conversion Price that would
be in effect at the time of such issue, then, and thereafter successively upon
each such issue, the Fixed Conversion Price shall be reduced as follows: (i) the
number of shares of Common Stock outstanding immediately prior to such issue
shall be multiplied by the Fixed Conversion Price in effect at the time of such
issue and the product shall be added to the aggregate consideration, if any,
received by the Borrower upon such issue of additional shares of Common Stock;
and (ii) the sum so obtained shall be divided by the number of shares of Common
Stock outstanding immediately after such issue. The resulting quotient shall be
the adjusted Fixed Conversion Price. Except for the Excluded Issuances for
purposes of this adjustment, the issuance of any security of the Borrower
carrying the right to convert such security into shares of Common Stock or of
any warrant, right or option to purchase Common Stock shall result in an
adjustment to the Fixed Conversion Price upon the issuance of shares of Common
Stock upon exercise of such conversion or purchase rights.
(d) During the period the conversion right exists, the Borrower will
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of Common Stock upon the full conversion of
this Note. The Borrower represents that upon issuance, such shares will be duly
and validly issued, fully paid and non-assessable. The Borrower agrees that its
issuance of this Note shall constitute full authority to its officers, agents,
and transfer agents who are charged with the duty of executing and issuing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the conversion of this Note.
3.2 METHOD OF CONVERSION. This Note may be converted by the Holder in
whole or in part as described in Section 3.1(a) hereof and the Purchase
Agreement. Upon partial conversion of this Note, a new Note containing the same
date and provisions of this Note shall, at the request of the Holder, be issued
by the Borrower to the Holder for the principal balance of this Note and
interest which shall not have been converted or paid.
5
3.3 REQUIRED CONVERSION. The Borrower may, at its sole option, provide
the Holder irrevocable written notice ("CALL NOTICE") requiring the conversion
of all or a portion of the Note held by such Holder as of the date set forth in
such Call Notice (the "CALL DATE"), which such date shall be at least 30 days
following the date of the Call Notice, provided a registration statement
covering resales of that number of shares of Common Stock then issuable upon
conversion of this Note pursuant to such Call Notice has been declared effective
and is available for use. The amount of Common Stock to be issued in connection
with any such conversion pursuant to a particular Call Notice pursuant to this
Section 3.3 shall not exceed 20% of the aggregate dollar trading volume of the
Common Stock for the 22 trading days immediately preceding the date of such Call
Notice. If all of the conditions described herein have been satisfied, no amount
(either principal, interest or fees) shall be payable after the Call Date with
respect to the portion of the Note so converted and the Borrower will cause a
certificate representing the shares of Common Stock so converted to be issued to
the Holder upon receipt of a completed Notice of Conversion as provided herein.
The conversion price with respect to conversions pursuant to this Section 3.3
shall equal the lesser of (i) the Fixed Conversion Price and (ii) 90% of the
average of the fifteen closing prices for the Common Stock on the Principal
Market during the period immediately preceding the Call Date.
ARTICLE IV
EVENT OF DEFAULT
The occurrence of any of the following events is an Event of Default
("EVENT OF DEFAULT"):
4.1 FAILURE TO PAY PRINCIPAL, INTEREST OR OTHER FEES. The Borrower
fails to pay any installment of principal, interest or other fees hereon or on
any other promissory note issued pursuant to the Purchase Agreement and this
Note, when due and such failure continues for a period of four (4) days after
the due date (this is the same four day period in Section 1.2 above).
4.2 BREACH OF COVENANT. The Borrower breaches any material covenant or
other term or condition of this Note or the Purchase Agreement in any material
respect and such breach, if subject to cure, continues for a period of thirty
(30) days after written notice to the Borrower from the Holder.
4.3 BREACH OF REPRESENTATIONS AND WARRANTIES. Any material
representation or warranty of the Borrower made herein, in the Purchase
Agreement, or in any agreement, statement or certificate given in writing
pursuant hereto or in connection therewith shall be false or misleading and
shall not be cured for a period of thirty (30) days after written notice thereof
is received by the Borrower from the Holder.
4.4 RECEIVER OR TRUSTEE. The Borrower shall make an assignment for the
benefit of creditors, or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business; or such
a receiver or trustee shall otherwise be appointed.
6
4.5 JUDGMENTS. Any money judgment, writ or similar final process shall
be entered or filed against the Borrower or any of its property or other assets
for more than $250,000, and shall remain unvacated, unbonded or unstayed for a
period of ninety (90) days.
4.6 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Borrower.
4.7 STOP TRADE. An SEC stop trade order or Principal Market trading
suspension of the Common Stock for 5 consecutive days or 5 days during a period
of 10 consecutive days, excluding in all cases a suspension of all trading on a
Principal Market.
4.8 DEFAULT UNDER RELATED AGREEMENT. An Event of Default occurs under
and as defined in the Security Agreement dated as of the date hereof between
Borrower and Holder, as such agreement may be amended, modified and supplemented
from time to time.
4.9 FAILURE TO DELIVER COMMON STOCK OR REPLACEMENT NOTE. The Borrower's
failure to timely deliver Common Stock to the Holder pursuant to and in the form
required by this Note.
If an Event of Default occurs and is continuing, the Holder may make
all sums of principal, interest and other fees then remaining unpaid hereon and
all other amounts payable hereunder immediately due and payable, all without
demand, presentment or notice, or grace period, all of which hereby are
expressly waived. In the event of an acceleration, the amount due and owing to
the Holder shall be 125% of the outstanding principal amount of the Note (plus
accrued and unpaid interest and fees, if any).
ARTICLE V
MISCELLANEOUS
5.1 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part
of the Holder hereof in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
5.2 NOTICES. Any notice herein required or permitted to be given shall
be in writing and shall be deemed effectively given: (a) upon personal delivery
to the party notified, (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next business
day, (c) five days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, or (d) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the
Borrower at the address as set forth on the signature page to the Purchase
Agreement executed in connection herewith, with a copy to Xxxxxxxxxx & Xxxxx,
LLP, attn: Xxxxxx Xxxxx, Esq., 00000 Xxxxxxxx Xxxxxxxxx, Xxxxx 000, Xxx Xxxxxxx,
Xxxxxxxxxx 00000, facsimile number (000) 000-0000, and to the Holder at the
address set forth on the signature page to the Purchase Agreement for such
Holder, with a copy to Xxxx Xxxxxx, Esq., 000 Xxxxx Xxxxxx, 00xx Xxxxx, Xxx
Xxxx, Xxx Xxxx 00000, facsimile number (000) 000-0000, or at such other address
as the Borrower or the Holder may designate by ten days advance written notice
to the other parties hereto. A Notice of Conversion shall be deemed given when
made to the Borrower pursuant to the Purchase Agreement.
7
5.3 AMENDMENT PROVISION. The term "Note" and all reference thereto, as
used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented.
5.4 ASSIGNABILITY. This Note shall be binding upon the Borrower and its
successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder.
5.5 GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws. Any action brought by either party against the other
concerning the transactions contemplated by this Agreement shall be brought only
in the state courts of New York or in the federal courts located in the state of
New York; provided, however that the Holder may choose to waive this provision
and bring an action outside the state of New York. Both parties and the
individual signing this Note on behalf of the Borrower agree to submit to the
jurisdiction of such courts. The prevailing party shall be entitled to recover
from the other party its reasonable attorney's fees and costs. In the event that
any provision of this Note is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or unenforceability of
any other provision of this Note.
5.6 MAXIMUM PAYMENTS. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Borrower to the Holder and thus refunded to the
Borrower.
5.7 SECURITY INTEREST. The holder of this Note has been granted a
security interest in the assets of the Borrower more fully described in a
Security Agreement.
5.8 CONSTRUCTION. Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.
8
IN WITNESS WHEREOF, the Borrower has caused this Note to be signed in
its name effective as of this 4th day of December 2003.
NETGURU, INC.
By:/s/ Xxxxxxxx Xxx
WITNESS:
_______________________________
9
NOTICE OF CONVERSION
--------------------
(To be executed by the Holder in order to convert the Note)
The undersigned hereby elects to convert $_________ of the principal
and $_________ of the interest due on the Note issued by NETGURU, INC. on
December ___, 2003 into Shares of Common Stock of NETGURU, INC. (the "Company")
according to the conditions set forth in such Note, as of the date written
below.
Date of Conversion:_____________________________________________________________
Conversion Price:_______________________________________________________________
Shares To Be Delivered:_________________________________________________________
Signature:______________________________________________________________________
Print Name:_____________________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________
10
EXHIBIT B
FORM OF REPAYMENT ELECTION NOTICE
To: [HOLDER AT HOLDER'S ADDRESS]
Pursuant to Section 2.2 of the Note of netGuru, Inc. issued on December
__, 2003, we hereby notify you that we are irrevocably electing to repay the
outstanding Monthly Amount (as defined in the Note) due on the Repayment Date
(as defined in the Note) which occurs on ______, 20__ (CHECK ONE):
_____ In full in cash on such Repayment Date.
_____ In full in shares of the Company's Common Stock within three
(3) trading days following such Repayment Date.
_____ In part in cash in the amount of $______ on such Repayment
Date, and in part in shares of the Company's Common Stock (in
the amount of ______ shares) within three (3) trading days
following such Repayment Date.
________ In shares, but the Hodler will be permitted to convert up to
the Monthly Amount that is payable in shares of Common Stock
during the period until the next Repayment Date.
Netguru, Inc.
By:
------------------------------------
Name:
Title:
11
