Exhibit 99.2
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. NEITHER SECURITIES MAY BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF
COUNSEL IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II)
UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE
TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 18(a) HEREOF. THE PRINCIPAL AMOUNT
REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE
LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.
Telkonet, Inc.
Senior Convertible Note
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Issuance Date: October 27, 2005
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Principal: U.S. $10,000,000.00 |
FOR VALUE RECEIVED, Telkonet, Inc., a Utah corporation, (the Company), hereby promises to
pay to PORTSIDE GROWTH & OPPORTUNITY FUND or registered assigns (Holder) the amount set out above
as the Principal (as reduced pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the Principal) when due, whether upon the Maturity Date, on any Installment Date with
respect to the Installment Amount due on such Installment Date (each, as defined herein),
acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay
interest (Interest) on any outstanding Principal at the rate of 7.25% per annum (the Interest
Rate), from the date set out above as the Issuance Date (the Issuance Date) until the same
becomes due and payable, whether upon an Interest Date (as defined below), any Installment Date,
the Maturity Date, acceleration, conversion, redemption or otherwise (in each case, in accordance
with the terms hereof). This Senior Convertible Note (including all Senior Convertible Notes
issued in exchange, transfer or replacement hereof, this Note) is one of an issue of Senior
Convertible Notes issued pursuant to the Securities Purchase Agreement (as defined below) on the
Closing Date (collectively, the Notes and such other Senior Convertible Notes, the Other
Notes). Certain capitalized terms used herein are defined in Section 28.
(1) PAYMENTS OF PRINCIPAL.
(a) On each Installment Date the Company shall pay to the Holder an amount equal to the
Installment Amount due on such Installment Date in accordance with Section 8. On the Maturity
Date, the Holder shall surrender the Note to the Company and the Company shall pay to the Holder,
(i) an amount in Common Shares, or, at the option of the Company, in cash, representing all
outstanding Principal and (ii) an amount in cash equal to the accrued and unpaid Interest thereon;
provided that Principal shall be payable in Common Shares on the Maturity Date if, and only if,
there has been no Equity Conditions Failure during the applicable period. On or prior to the fifth
(5th) Trading Day prior to the Maturity Date (the Maturity Election Notice Due Date),
the Company shall deliver a written notice to the Holder (x) specifying whether the Principal shall
be paid on the Maturity Date in Common Shares or cash and (y) if the Principal is to be paid in
Common Shares, certifying that there has been no Equity Conditions Failure. Principal to be paid
on the Maturity Date and on the Maturity Settlement Date (as defined below) in Common Shares shall
be paid in a number of fully paid and non-assessable (rounded to the nearest whole share in
accordance with Section 3(a)) Common Shares.
(b) If the Company shall pay the Principal on the Maturity Date in Common Shares, then on the
Maturity Date (i) (A) provided that the Companys transfer agent (the Transfer Agent) is
participating in the Depository Trust Company (DTC) Fast Automated Securities Transfer Program,
the Company shall, or shall cause the Transfer Agent to, credit a number of Common Shares equal to
the quotient of the outstanding Principal due on such date and the Initial Maturity Conversion
Price (the Pre-Maturity Conversion Shares) to which the Holder shall be entitled to the Holders
or its designees balance account with DTC through its Deposit Withdrawal Agent Commission system,
or (B) if the foregoing shall not apply, the Company shall issue and deliver, to the address set
forth in the register maintained by the Company for such purpose pursuant to the Securities
Purchase Agreement or to such address as specified by the Holder in writing to the Company at least
three (3) Trading Days prior to the Maturity Date, a certificate, registered in the name of the
Holder or its designee, for the number of Pre-Maturity Conversion Shares to which the Holder shall
be entitled and (ii) the Company shall pay to the Holder, in cash by wire transfer of immediately
available funds, the amount of any accrued and unpaid interest on such Principal. On the Trading
Day immediately after the end of the Maturity Conversion Measuring Period (the Maturity Settlement
Date), the Company shall, or shall cause the Transfer Agent to, deliver to the Holders account
with DTC a number of additional Common Shares, if any, equal to the Maturity Balance Conversion
Shares. If an Event of Default or Equity Conditions Failure occurs during the Maturity Conversion
Measuring Period, then, at the Holders option, either (x) the Holder may require the Company to
pay the Principal amount of the Note outstanding on the Maturity Date (including any Principal
amount represented by Pre-Maturity Conversion Shares that shall be returned to the Company) in cash
on the Maturity Settlement Date and, in conjunction with receipt of such cash payment, shall return
any Pre-Maturity Conversion Shares delivered to the Holder which the Holder has not otherwise sold,
transferred or disposed of or (y) the Company shall pay to the Holder in cash on the Maturity
Settlement Date an amount equal to the difference between (1) the Principal outstanding on the
Maturity Date minus (2) the product of (A) the Principal outstanding on the Maturity Date
multiplied by (B) the Conversion Share Ratio.
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(2) INTEREST; INTEREST RATE. Interest on this Note shall commence accruing on the
Issuance Date and shall be computed on the basis of a 360-day year comprised of twelve 30-day
months and shall be payable on each Installment Date, on each Conversion Date and on the Maturity
Date (each, an Interest Date). Interest shall be payable on each Interest Date in cash. Prior
to the payment of Interest on an Interest Date, Interest on this Note shall accrue at the Interest
Rate. Upon the occurrence and during the continuance of an Event of Default, the Interest Rate
shall be increased to twelve percent (12.0%) per annum (the Default Rate). In the event that
such Event of Default is subsequently cured, the adjustment referred to in the preceding sentence
shall cease to be effective as of the date of such cure; provided that the Interest as calculated
at such increased rate during the continuance of such Event of Default shall continue to apply to
the extent relating to the days after the occurrence of such Event of Default through and including
the date of cure of such Event of Default. Interest on overdue interest shall accrue at the same
rate compounded quarterly.
(3) CONVERSION OF NOTES. This Note shall be convertible into shares of common stock
of the Company, par value $0.001 per share (the Common Shares), on the terms and conditions set
forth in this Section 3.
(a) Conversion Right. Subject to the provisions of Section 3(d), at any time or times
on or after the Issuance Date, the Holder shall be entitled to convert any portion of the
outstanding and unpaid Conversion Amount (as defined below) into fully paid and nonassessable
Common Shares in accordance with Section 3(c), at the Conversion Rate (as defined below). The
Company shall not issue any fraction of a Common Share upon any conversion. If the issuance would
result in the issuance of a fraction of a Common Share, the Company shall round such fraction of a
Common Share up to the nearest whole share. The Company shall pay any and all taxes that may be
payable with respect to the issuance and delivery of Common Stock upon conversion of any Conversion
Amount.
(b) Conversion Rate. The number of Common Shares issuable upon conversion of any
Conversion Amount pursuant to Section 3(a) shall be determined by dividing (x) such Conversion
Amount by (y) the Conversion Price (such number of shares, the Conversion Rate).
(i) Conversion Amount means the portion of the Principal to be converted, redeemed or
otherwise with respect to which this determination is being made.
(ii) Conversion Price means, as of any Conversion Date (as defined below) or other date of
determination a price equal to $5.00, subject to adjustment as provided herein.
(c) Mechanics of Conversion.
(i) Optional Conversion. To convert any Conversion Amount into Common Shares on any
date (a Conversion Date), the Holder shall (A) transmit by facsimile (or otherwise deliver), for
receipt on or prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the Conversion Notice) to the
Company and (B) if required by Section 3(c)(iii), surrender this
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Note to a common carrier for delivery to the Company as soon as practicable on or following
such date (or an indemnification undertaking with respect to this Note in the case of its loss,
theft or destruction). On or before the first (1st) Trading Day following the date of
receipt of a Conversion Notice, the Company shall transmit by facsimile a confirmation of receipt
of such Conversion Notice to the Holder and the Transfer Agent. On or before the third
(3rd) Trading Day following the date of receipt of a Conversion Notice (the Share
Delivery Date), the Company shall (1) (x) provided that the Transfer Agent is participating in the
DTC Fast Automated Securities Transfer Program, credit such aggregate number of Common Shares to
which the Holder shall be entitled to the Holders or its designees balance account with DTC
through its Deposit Withdrawal Agent Commission system or (y) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, issue and deliver to the
address as specified in the Conversion Notice, a certificate, registered in the name of the Holder
or its designee, for the number of Common Shares to which the Holder shall be entitled and (2) pay
to the Holder in cash an amount equal to the accrued and unpaid Interest on the Conversion Amount
up to and including the Conversion Date. If this Note is physically surrendered for conversion as
required by Section 3(c)(iii) and the outstanding Principal of this Note is greater than the
Principal portion of the Conversion Amount being converted, then the Company shall as soon as
practicable and in no event later than five (5) Trading Days after receipt of this Note and at its
own expense, issue and deliver to the holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal not converted. The Person or Persons entitled to receive
the Common Shares issuable upon a conversion of this Note shall be treated for all purposes as the
record holder or holders of such Common Shares on the Conversion Date. In the event of a partial
conversion of this Note pursuant hereto, the principal amount converted shall be deducted from the
Installment Amounts relating to the Installment Dates as set forth in the Conversion Notice.
(ii) Failure to Timely Convert. If the Company shall fail to issue a certificate to
the Holder or credit the Holders balance account with DTC for the number of Common Shares to which
the Holder is entitled upon conversion of any Conversion Amount on or prior to the date which is
three (3) Trading Days after the Conversion Date (a Conversion Failure), then (A) the Company
shall pay damages to the Holder for each day of such Conversion Failure in an amount equal to 1.5%
of the product of (I) the sum of the number of Common Shares not issued to the Holder on or prior
to the Share Delivery Date and to which the Holder is entitled, and (II) the Closing Sale Price of
the Common Shares on the Share Delivery Date and (B) the Holder, upon written notice to the
Company, may void its Conversion Notice with respect to, and retain or have returned, as the case
may be, any portion of this Note that has not been converted pursuant to such Conversion Notice;
provided that the voiding of a Conversion Notice shall not affect the Companys obligations
to make any payments which have accrued prior to the date of such notice pursuant to this Section
3(c)(ii) or otherwise. In addition to the foregoing, if within three (3) Trading Days after the
Companys receipt of the facsimile copy of a Conversion Notice, the Company shall fail to issue and
deliver a certificate to the Holder or credit the Holders balance account with DTC for the number
of Common Shares to which the Holder is entitled upon such holders conversion of any Conversion
Amount, and if on or after such Trading Day the Holder purchases (in an open market transaction or
otherwise) Common Shares to deliver in satisfaction of a sale by the Holder of Common Shares
issuable upon such conversion that the Holder anticipated receiving from the Company (a Buy-In),
then the Company shall, within three (3) Trading Days after the Holders request and in the
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Holders discretion, either (i) pay cash to the Holder in an amount equal to the Holders
total purchase price (including brokerage commissions and other out-of-pocket expenses, if any) for
the Common Shares so purchased (the Buy-In Price), at which point the Companys obligation to
deliver such certificate (and to issue such Common Shares) shall terminate, or (ii) promptly honor
its obligation to deliver to the Holder a certificate or certificates representing such Common
Shares and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price
over the product of (A) such number of Common Shares times (B) the Closing Bid Price on the
Conversion Date.
(iii) Book-Entry. Notwithstanding anything to the contrary set forth herein, upon
conversion of any portion of this Note in accordance with the terms hereof, the Holder shall not be
required to physically surrender this Note to the Company unless (A) the full Conversion Amount
represented by this Note is being converted or (B) the Holder has provided the Company with prior
written notice (which notice may be included in a Conversion Notice) requesting reissuance of this
Note upon physical surrender. The Holder and the Company shall maintain records showing the
Principal converted and the dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical surrender of this Note
upon conversion.
(iv) Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion Date and the Company
can convert some, but not all, of such portions of the Notes submitted for conversion, the Company,
subject to Section 3(d), shall cause the Company to convert from each holder of Notes electing to
have Notes converted on such date a pro rata amount of such holders portion of its Notes submitted
for conversion based on the principal amount of Notes submitted for conversion on such date by such
holder relative to the aggregate principal amount of all Notes submitted for conversion on such
date. In the event of a dispute as to the number of Common Shares issuable to the Holder in
connection with a conversion of this Note, the Company shall issue to the Holder the number of
Common Shares not in dispute and resolve such dispute in accordance with Section 23.
(d) Limitations on Conversions.
(i) Beneficial Ownership. The Company shall not effect any conversion of this Note,
and the Holder of this Note shall not have the right to convert any portion of this Note pursuant
to Section 3(a), to the extent that after giving effect to such conversion, the Holder (together
with the Holders affiliates) would beneficially own in excess of 9.99% (the Maximum Percentage)
of the number of Common Shares outstanding immediately after giving effect to such conversion. For
purposes of the foregoing sentence, the number of Common Shares beneficially owned by the Holder
and its affiliates shall include the number of Common Shares issuable upon conversion of this Note
with respect to which the determination of such sentence is being made, but shall exclude the
number of Common Shares which would be issuable upon (A) conversion of the remaining, nonconverted
portion of this Note beneficially owned by the Holder or any of its affiliates and (B) exercise or
conversion of the unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any Other Notes or warrants) subject to a limitation on conversion
or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of
its
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affiliates. Except as set forth in the preceding sentence, for purposes of this Section
3(d)(i), beneficial ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. For purposes of this Section 3(d)(i), in determining
the number of outstanding Common Shares, the Holder may rely on the number of outstanding Common
Shares as reflected in (x) the Companys most recent Form 10-K, Form 10-Q or Form 8-K, as the case
may be (y) a more recent public announcement by the Company or (z) any other notice by the Company
or the Transfer Agent setting forth the number of Common Shares outstanding. For any reason at any
time, upon the written or oral request of the Holder, the Company shall within one (1) Trading Day
confirm orally and in writing to the Holder the number of Common Shares then outstanding. In any
case, the number of outstanding Common Shares shall be determined after giving effect to the
conversion or exercise of securities of the Company, including this Note, by the Holder or its
affiliates since the date as of which such number of outstanding Common Shares was reported. By
written notice to the Company, the Holder may increase or decrease the Maximum Percentage to any
other percentage not in excess of 9.99% specified in such notice; provided that (i) any such
increase will not be effective until the sixty-first (61st) day after such notice is
delivered to the Company, and (ii) any such increase or decrease will apply only to the Holder and
not to any other holder of Notes.
(ii) Principal Market Regulation. The Company shall not be obligated to issue any
Common Shares upon conversion of this Note and the Holder of this Note shall not have the right to
receive upon conversion of this Note any Common Shares if the issuance of such Common Shares would
exceed the aggregate number of Common Shares which the Company may issue upon conversion or
exercise, as applicable, of the Notes and Warrants or otherwise under the Notes without breaching
the Companys obligations under the rules or regulations of the Principal Market (the Exchange
Cap), except that such limitation shall not apply in the event that the Company (A) obtains the
approval of its stockholders as required by the applicable rules of the Principal Market for
issuances of Common Shares in excess of such amount or (B) obtains a written opinion from outside
counsel to the Company that such approval is not required, which opinion shall be reasonably
satisfactory to the Required Holders. Until such approval or written opinion is obtained, no
purchaser of the Notes pursuant to the Securities Purchase Agreement (the Purchasers) shall be
issued in the aggregate, upon conversion or exercise, as applicable, of Notes or Warrants, Common
Shares in an amount greater than the product of the Exchange Cap multiplied by a fraction, the
numerator of which is the principal amount of Notes issued to the Purchasers pursuant to the
Securities Purchase Agreement on the Closing Date and the denominator of which is the aggregate
principal amount of all Notes issued to the Purchasers pursuant to the Securities Purchase
Agreement on the Closing Date (with respect to each Purchaser, the Exchange Cap Allocation). In
the event that any Purchaser shall sell or otherwise transfer any of such Purchasers Notes, the
transferee shall be allocated a pro rata portion of such Purchasers Exchange Cap Allocation, and
the restrictions of the prior sentence shall apply to such transferee with respect to the portion
of the Exchange Cap Allocation allocated to such transferee. In the event that any holder of Notes
shall convert all of such holders Notes into a number of Common Shares which, in the aggregate, is
less than such holders Exchange Cap Allocation, then the difference between such holders Exchange
Cap Allocation and the number of Common Shares actually issued to such holder shall be allocated to
the respective Exchange Cap Allocations of the remaining holders of Notes on a pro rata basis in
proportion to the aggregate principal amount of the Notes then held by each such holder.
6
(4) RIGHTS UPON EVENT OF DEFAULT.
(a) Event of Default. Each of the following events shall constitute an Event of
Default:
(i) the failure of the applicable Registration Statement required to be filed pursuant to the
Registration Rights Agreement to be declared effective by the SEC on or prior to the date that is
sixty (60) days after the applicable Effectiveness Deadline (as defined in the Registration Rights
Agreement), or, while the applicable Registration Statement is required to be maintained effective
pursuant to the terms of the Registration Rights Agreement, the effectiveness of the applicable
Registration Statement lapses for any reason (including, without limitation, the issuance of a stop
order) or is unavailable to any holder of the Notes for sale of all of such holders 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 days or for more than an aggregate of thirty (30) days in any 365-day period (other
than days during an Allowable Grace Period (as defined in the Registration Rights Agreement));
(ii) the suspension from trading or failure of the Common Shares to be listed on an Eligible
Market for a period of five (5) consecutive Trading Days or for more than an aggregate of ten (10)
Trading Days in any 365-day period;
(iii) the Companys (A) failure to cure a Conversion Failure by delivery of the required
number of Common Shares within ten (10) Trading Days after the applicable Conversion Date or (B)
notice, written or oral, to any holder of the Notes, including by way of public announcement or
through any of its agents, at any time, of its intention not to comply with a request for
conversion of any Notes into Common Shares that is tendered in accordance with the provisions of
the Notes;
(iv) at any time following the tenth (10th) consecutive Trading Day that the number
of Common Shares that are available for issuance to the Holder is less than the number of Common
Shares that the Holder would be entitled to receive upon a conversion of the full Conversion Amount
of this Note (without regard to any limitations on conversion set forth in Section 3(d) or
otherwise);
(v) the Companys failure to pay to the Holder any amount of Principal (including, without
limitation, the Companys failure to pay any redemption payments), Interest or other amounts when
and as due under this Note or any other Transaction Document (as defined in the Securities Purchase
Agreement), except, in the case of a failure to pay Interest when and as due, in which case only if
such failure continues for a period of at least three (3) Trading Days;
(vi) the occurrence of any default under, redemption of or acceleration prior to maturity of
Indebtedness of the Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement) other than with respect to any Other Notes and other than the
prepayment of any Indebtedness set forth in Section 1 of
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Schedule 3(dd) of the Securities Purchase Agreement provided such prepayment is not due to any
acceleration following any default thereunder;
(vii) the Company or any of its Subsidiaries, pursuant to or within the meaning of Title 11,
U.S. Code, or any similar Federal, foreign or state law for the relief of debtors (collectively,
Bankruptcy Law), (A) commences a voluntary case, (B) consents to the entry of an order for relief
against it in an involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a Custodian), (D) makes a general assignment for the
benefit of its creditors or (E) admits in writing that it is generally unable to pay its debts as
they become due;
(viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law
that (A) is for relief against the Company or any of its Subsidiaries in an involuntary case, (B)
appoints a Custodian of the Company or any of its Subsidiaries or (C) orders the liquidation of the
Company or any of its Subsidiaries;
(ix) a final judgment or judgments for the payment of money aggregating in excess of $100,000
are rendered against the Company or any of its Subsidiaries and which judgments are not, within
sixty (60) days after the entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within sixty (60) days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a credit worthy party shall not be
included in calculating the $100,000 amount set forth above so long as the Company provides the
Holder a written statement from such insurer or indemnity provider (which written statement shall
be reasonably satisfactory to the Holder) to the effect that such judgment is clearly covered by
insurance or an indemnity and the Company will receive the proceeds of such insurance or indemnity
within thirty (30) days of the issuance of such judgment;
(x) other than as set forth in item (xi) below, the Company breaches any representation,
warranty, covenant or other term or condition of any Transaction Document, except, in the case of a
breach of a covenant which is curable, only if such breach continues for a period of at least
fifteen (15) consecutive Trading Days;
(xi) any breach or failure in any respect to comply with either of Sections 8 or 14 of this
Note or Section 4(q) of the Securities Purchase Agreement; or
(xii) any Event of Default (as defined in the Other Notes) occurs with respect to any Other
Notes.
(b) Redemption Right. Promptly after the occurrence of an Event of Default with
respect to this Note or any Other Note, the Company shall deliver written notice thereof via
facsimile and overnight courier (an Event of Default Notice) to the Holder. At any time after
the earlier of the Holders receipt of an Event of Default Notice and the Holder becoming aware of
an Event of Default, the Holder may require the Company to redeem all or any portion of this Note
by delivering written notice thereof (the Event of Default Redemption Notice) to the Company,
which Event of Default Redemption Notice shall indicate the portion of this Note the Holder is
electing to redeem. Each portion of this Note subject to redemption by
8
the Company pursuant to this Section 4(b) shall be redeemed by the Company at a price equal to
the greater of (i) the product of (x) the Conversion Amount to be redeemed and (y) the Redemption
Premium and (ii) the product of (A) the Conversion Rate with respect to such Conversion Amount in
effect at such time as the Holder delivers an Event of Default Redemption Notice and (B) the
Closing Sale Price of the Common Shares on the date immediately preceding such Event of Default
(the Event of Default Redemption Price). Redemptions required by this Section 4(b) shall be made
in accordance with the provisions of Section 12. To the extent redemptions required by this
Section 4(b) are deemed or determined by a court of competent jurisdiction to be prepayments of the
Note by the Company, such redemptions shall be deemed to be voluntary prepayments. In the event of
a partial redemption of this Note pursuant hereto, the Principal amount redeemed shall be deducted
from the Installment Amounts relating to the applicable Installment Dates as set forth in the Event
of Default Redemption Notice. The parties hereto agree that in the event of the Companys
redemption of any portion of the Note under this Section 4(b), the Holders damages would be
uncertain and difficult to estimate because of the parties inability to predict future interest
rates and the uncertainty of the availability of a suitable substitute investment opportunity for
the Holder. Accordingly, any Redemption Premium due under this Section 4(b) is intended by the
parties to be, and shall be deemed, a reasonable estimate of the Holders actual loss of its
investment opportunity and not as a penalty.
(5) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.
(a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing all of the obligations of the
Company under this Note and the other Transaction Documents in accordance with the provisions of
this Section 5(a) pursuant to written agreements in form and substance satisfactory to the Required
Holders and approved by the Required Holders prior to such Fundamental Transaction, including
agreements to deliver to each holder of Notes in exchange for such Notes a security of the
Successor Entity evidenced by a written instrument substantially similar in form and substance to
the Notes, including, without limitation, having a principal amount and interest rate equal to the
Principal amounts and the Interest Rates of the Notes held by such holder, having similar
conversion rights as the Notes, having similar ranking to the Notes, and satisfactory to the
Required Holders and (ii) the Successor Entity is a publicly traded corporation whose common shares
are quoted on or listed for trading on an Eligible Market. Upon the occurrence of any Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after
the date of such Fundamental Transaction, the provisions of this Note referring to the Company
shall refer instead to the Successor Entity), and may exercise every right and power of the Company
and shall assume all of the obligations of the Company under this Note with the same effect as if
such Successor Entity had been named as the Company herein. Upon consummation of the Fundamental
Transaction, the Successor Entity (if other than the Company) shall deliver to the Holder
confirmation that there shall be issued upon conversion or redemption of this Note at any time
after the consummation of the Fundamental Transaction, in lieu of the Companys Common Shares (or
other securities, cash, assets or other property) purchasable upon the conversion or redemption of
the Notes prior to such Fundamental Transaction, such publicly traded common shares (or their
equivalent) of the Successor Entity, as adjusted in accordance with the provisions of this Note.
The provisions of
9
this Section shall apply similarly and equally to successive Fundamental Transactions and
shall be applied without regard to any limitations on the conversion or redemption of this Note.
(b) Redemption Right. No sooner than fifteen (15) days nor later than ten (10) days
prior to the consummation of a Change of Control, but not prior to the public announcement of such
Change of Control, the Company shall deliver written notice thereof via facsimile and overnight
courier to the Holder (a Change of Control Notice). At any time during the period (the Change
of Control Period) beginning after the Holders receipt of a Change of Control Notice and ending
on the date that is twenty (20) Trading Days after the consummation of such Change of Control, the
Holder may require the Company to redeem all or any portion of this Note by delivering written
notice thereof (Change of Control Redemption Notice) to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing to redeem. The
portion of this Note subject to redemption pursuant to this Section 5 shall be redeemed by the
Company in cash at a price equal to the greater of (x) 120% of the sum of (1) the Conversion Amount
being redeemed and (2) the amount of any accrued but unpaid Interest thereon through the date of
such redemption payment and (y) 120% of the sum of (1) the product of (A) the Conversion Amount
being redeemed multiplied by (B) the quotient determined by dividing (I) the aggregate cash
consideration and the aggregate cash value of any non-cash consideration per Common Share to be
paid to the holders of the Common Shares upon consummation of the Change of Control (any such
non-cash consideration consisting of marketable securities to be valued at the higher of the
Closing Sale Price of such securities as of the Trading Day immediately prior to or the Trading Day
following the public announcement of such proposed Change of Control) by (II) the Conversion Price
plus (2) the amount of any accrued but unpaid Interest on such Conversion Amount being redeemed
through the date of such redemption payment (the Change of Control Redemption Price).
Redemptions required by this Section 5 shall be made in accordance with the provisions of Section
12 and shall have priority to payments to shareholders in connection with a Change of Control. To
the extent redemptions required by this Section 5(b) are deemed or determined by a court of
competent jurisdiction to be prepayments of the Note by the Company, such redemptions shall be
deemed to be voluntary prepayments. Notwithstanding anything to the contrary in this Section 5,
until the Change of Control Redemption Price (together with any interest thereon) is paid in full,
the Conversion Amount submitted for redemption under this Section 5(c) may be converted, in whole
or in part, by the Holder into Common Shares, or in the event the Conversion Date is after the
consummation of the Change of Control, shares or equity interests of the Successor Entity
substantially equivalent to the Companys Common Shares pursuant to Section 3. The parties hereto
agree that in the event of the Companys redemption of any portion of the Note under this Section
5(b), the Holders damages would be uncertain and difficult to estimate because of the parties
inability to predict future interest rates and the uncertainty of the availability of a suitable
substitute investment opportunity for the Holder. Accordingly, any Redemption Premium due under
this Section 5(b) is intended by the parties to be, and shall be deemed, a reasonable estimate of
the Holders actual loss of its investment opportunity and not as a penalty. No Accelerated
Payment Option Warrants shall be issued or issuable by the Company in connection with any
redemption pursuant to this Section 5(b).
10
(6) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.
(a) Purchase Rights. If at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase shares, warrants, securities or other property pro
rata to all record holders of any class of Common Shares (the Purchase Rights), then the Holder
will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the number of Common
Shares acquirable upon complete conversion of this Note (without taking into account any
limitations or restrictions on the convertibility of this Note) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Shares are to be determined for
the grant, issue or sale of such Purchase Rights.
(b) Other Corporate Events. In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which
holders of Common Shares are entitled to receive securities or other assets with respect to or in
exchange for Common Shares (a Corporate Event), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon a conversion of this Note, at
the Holders option, (i) in addition to the Common Shares receivable upon such conversion, such
securities or other assets to which the Holder would have been entitled with respect to such Common
Shares had such Common Shares been held by the Holder upon the consummation of such Corporate Event
(without taking into account any limitations or restrictions on the convertibility of this Note) or
(ii) in lieu of the Common Shares otherwise receivable upon such conversion, such securities or
other assets received by the holders of Common Shares in connection with the consummation of such
Corporate Event in such amounts as the Holder would have been entitled to receive had this Note
initially been issued with conversion rights for the form of such consideration (as opposed to
Common Shares) at a conversion rate for such consideration commensurate with the Conversion Rate.
Provision made pursuant to the preceding sentence shall be in a form and substance satisfactory to
the Required Holders. The provisions of this Section shall apply similarly and equally to
successive Corporate Events and shall be applied without regard to any limitations on the
conversion or redemption of this Note.
(7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.
(a) Adjustment of Conversion Price upon Issuance of Common Shares. If and whenever on
or after the Subscription Date, the Company issues or sells, or in accordance with this Section
7(a) is deemed to have issued or sold, any Common Shares (including the issuance or sale of Common
Shares owned or held by or for the account of the Company, but excluding Common Shares deemed to
have been issued or sold by the Company in connection with any Excluded Security) for a
consideration per share (the New Issuance Price) less than a price (the Applicable Price) equal
to the Conversion Price in effect immediately prior to such issue or sale or deemed issuance or
sale (the foregoing a Dilutive Issuance), then immediately after such Dilutive Issuance, the
Conversion Price then in effect shall be reduced to an amount equal to the product of (A) the
Conversion Price in effect immediately prior to such Dilutive Issuance and (B) the quotient
determined by dividing (1) the sum of (I) the product derived by
11
multiplying the Conversion Price in effect immediately prior to such Dilutive Issuance and the
number of Common Shares Deemed Outstanding immediately prior to such Dilutive Issuance plus (II)
the consideration, if any, received by the Company upon such Dilutive Issuance, by (2) the product
derived by multiplying (I) the Conversion Price in effect immediately prior to such Dilutive
Issuance by (II) the number of Common Shares Deemed Outstanding immediately after such Dilutive
Issuance. For purposes of determining the adjusted Conversion Price under this Section 7(a), the
following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants or sells any Options
(other than an Excluded Security) and the lowest price per share for which one Common Share is
issuable upon the exercise of any such Option or upon conversion or exchange or exercise of any
Convertible Securities issuable upon exercise of such Option is less than the Applicable Price,
then such Common Share shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the granting or sale of such Option for such price per share. For purposes
of this Section 7(a)(i), the lowest price per share for which one Common Share is issuable upon
the exercise of any such Option or upon conversion or exchange or exercise of any Convertible
Securities issuable upon exercise of such Option shall be equal to the sum of the lowest amounts
of consideration (if any) received or receivable by the Company with respect to any one Common
Share upon granting or sale of the Option, upon exercise of the Option and upon conversion or
exchange or exercise of any Convertible Security issuable upon exercise of such Option. No further
adjustment of the Conversion Price shall be made upon the actual issuance of such Common Shares or
of such Convertible Securities upon the exercise of such Options or upon the actual issuance of
such Common Shares upon conversion or exchange or exercise of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company or the Company in any manner
issues or sells any Convertible Securities (other than an Excluded Security) and the lowest price
per share for which one Common Share is issuable upon such conversion or exchange or exercise
thereof is less than the Applicable Price, then such Common Share shall be deemed to be outstanding
and to have been issued and sold by the Company at the time of the issuance or sale of such
Convertible Securities for such price per share. For the purposes of this Section 7(a)(ii), the
lowest price per share for which one Common Share is issuable upon such conversion or exchange or
exercise shall be equal to the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to any one Common Share upon the issuance or sale of the
Convertible Security and upon the conversion or exchange or exercise of such Convertible Security.
No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common
Shares upon conversion or exchange or exercise of such Convertible Securities, and if any such
issue or sale of such Convertible Securities is made upon exercise of any Options for which
adjustment of the Conversion Price had been or are to be made pursuant to other provisions of this
Section 7(a), no further adjustment of the Conversion Price shall be made by reason of such issue
or sale.
(iii) Change in Option Price or Rate of Conversion. If the purchase price provided
for in any Options (other than an Excluded Security), the additional consideration, if any, payable
upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exchangeable or exercisable for Common
Shares changes at any time, the Conversion Price in
12
effect at the time of such change shall be adjusted to the Conversion Price which would have
been in effect at such time had such Options or Convertible Securities provided for such changed
purchase price, additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold. For purposes of this Section 7(a)(iii), if the terms of
any Option or Convertible Security that was outstanding as of the Subscription Date are changed in
the manner described in the immediately preceding sentence, then such Option or Convertible
Security and the Common Shares deemed issuable upon exercise, conversion or exchange thereof shall
be deemed to have been issued as of the date of such change. No adjustment shall be made if such
adjustment would result in an increase of the Conversion Price then in effect.
(iv) Calculation of Consideration Received. In case any Option (other than an
Excluded Security) is issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to have been issued
for a consideration of $.01. If any Common Shares, Options or Convertible Securities are issued or
sold or deemed to have been issued or sold for cash, the consideration received therefor will be
deemed to be the net amount received by the Company therefor. If any Common Shares, Options or
Convertible Securities are issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company will be the fair value of such consideration,
except where such consideration consists of securities, in which case the amount of consideration
received by the Company will be the closing sale price of such securities on the date of receipt if
such securities are listed on a national securities exchange. If any Common Shares, Options or
Convertible Securities are issued to the owners of the non-surviving entity in connection with any
merger in which the Company is the surviving entity, the amount of consideration therefor will be
deemed to be the fair value of such portion of the net assets and business of the non-surviving
entity as is attributable to such Common Shares, Options or Convertible Securities, as the case may
be. The fair value of any consideration other than cash or securities will be determined jointly
by the Company and the Required Holders. If such parties are unable to reach agreement within ten
(10) days after the occurrence of an event requiring valuation (the Valuation Event), the fair
value of such consideration will be determined within five (5) Trading Days after the tenth (10th)
day following the Valuation Event by an independent, reputable appraiser jointly selected by the
Company and the Required Holders. The determination of such appraiser shall be deemed binding upon
all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the
Company.
(v) Record Date. If the Company takes a record of the holders of Common Shares for
the purpose of entitling them (A) to receive a dividend or other distribution payable in Common
Shares, Options or in Convertible Securities or (B) to subscribe for or purchase Common Shares,
Options or Convertible Securities, then such record date will be deemed to be the date of the issue
or sale of the Common Shares deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
(b) Adjustment of Conversion Price upon Subdivision or Combination of Common Shares.
If the Company at any time on or after the Subscription Date subdivides (by any share split, share
dividend, recapitalization or otherwise) one or more classes of its outstanding Common Shares into
a greater number of shares, the Conversion Price in effect
13
immediately prior to such subdivision will be proportionately reduced. If the Company at any
time on or after the Subscription Date combines (by combination, reverse share split or otherwise)
one or more classes of its outstanding Common Shares into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination will be proportionately increased.
(c) Other Events. If any event occurs of the type contemplated by the provisions of
this Section 7 but not expressly provided for by such provisions (including, without limitation,
the granting of share appreciation rights, phantom share rights or other rights with equity
features), then the Companys Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 7.
(8) COMPANY INSTALLMENT CONVERSION OR REDEMPTION.
(a) General. Subject to and in accordance with the terms of this Section 8, on each
applicable Installment Date, the Company shall pay to the Holder of this Note the Installment
Amount as of such Installment Date by the combination of any of the following, (i) provided that
there has been no Equity Conditions Failure, requiring the conversion of a portion of the
applicable Installment Amount, in whole or in part, in accordance with this Section 8 (a Company
Conversion), and/or (ii) redeeming for cash the applicable Installment Amount, in whole or in
part, in accordance with this Section 8 (a Company Redemption); provided that all of the
outstanding applicable Installment Amount as of each such Installment Date must be converted and/or
redeemed by the Company on the applicable Installment Date, subject to the provisions of this
Section 8. Unless the Company Installment Notice (as defined below) indicates otherwise or if
there is an Equity Conditions Failure, the entire Installment Amount to be paid on such Installment
Date shall be paid through a Company Conversion. On or prior to the date which is the fifth
(5th) Trading Day prior to each Installment Date or, if the Company is exercising its
Accelerated Payment Option the tenth (10th) Trading Day prior to the applicable
Installment Date (each, an Installment Notice Due Date), the Company shall deliver written notice
(each, a Company Installment Notice and the date all of the holders received such notice is
referred to as the Company Installment Notice Date), to the Holder which Company Installment
Notice shall state (i) the portion, if any, of the applicable Installment Amount to be converted
pursuant to a Company Conversion, which amount when added to the Company Redemption Amount must
equal the applicable Installment Amount (the Company Conversion Amount), (ii) the portion, if
any, of the applicable Installment Amount which the Company elects to redeem pursuant to a Company
Redemption (the Company Redemption Amount), which amount when added to the Company Conversion
Amount must equal the applicable Installment Amount and (iii) unless the Company has elected to pay
the applicable Installment Amount entirely through a Company Redemption, the Company Installment
Notice shall certify that the Equity Conditions have been satisfied as of the date of the Company
Installment Notice. Each Company Installment Notice whether actually given or deemed given shall
be irrevocable. Except as expressly provided in this Section 8(a), the Company shall redeem and
convert the applicable Installment Amount of this Note pursuant to this Section 8 and the
corresponding Installment Amounts of the Other Notes pursuant to the corresponding provisions of
the Other Notes in the same ratio of the Installment Amount being redeemed and converted hereunder.
14
The Company Redemption Amount (whether set forth in the Company Installment Notice or by
operation of this Section 8) shall be redeemed in accordance with Section 8(b) and the Company
Conversion Amount shall be converted in accordance with Section 8(c).
(b) Mechanics of Company Redemption. If the Company elects, or is deemed to have
elected, a Company Redemption in accordance with Section 8(a), then the Company Redemption Amount,
if any, which is to be paid to the Holder on the applicable Installment Date shall be redeemed by
the Company on such Installment Date, and the Company shall pay to the Holder on such Installment
Date, by wire transfer of immediately available funds, an amount in cash (the Company Installment
Redemption Price) equal to 100% of the Company Redemption Amount. If the Company fails to redeem
the Company Redemption Amount on the applicable Installment Date by payment of the Company
Installment Redemption Price on such date, then at the option of the Holder designated in writing
to the Company (any such designation, a Conversion Notice for purposes of this Note), the Holder
may require the Company to convert all or any part of the Company Redemption Amount at the Company
Conversion Price. Conversions required by this Section 8(b) shall be made in accordance with the
provisions of Section 3(c). Notwithstanding anything to the contrary in this Section 8(b), but
subject to Section 3(d), until the Company Installment Redemption Price (together with any interest
thereon) is paid in full, the Company Redemption Amount (together with any interest thereon) may be
converted, in whole or in part, by the Holder into Common Shares pursuant to Section 3. In the
event the Holder elects to convert all or any portion of the Company Redemption Amount prior to the
applicable Installment Date as set forth in the immediately preceding sentence, the Company
Redemption Amount so converted shall be deducted from the Installment Amounts relating to the
Installment Dates as set forth in the applicable Conversion Notice.
(c) Mechanics of Company Conversion.
(i) If the Company pays any part of an Installment Amount pursuant to a Company Conversion in
accordance with Section 8(a), then on the Trading Day prior to the Installment Date the Company
shall (i) cause the Transfer Agent to deliver to the Holders account with DTC a number of Common
Shares equal to the quotient of (x) such Company Conversion Amount divided by (y) the Initial
Company Conversion Price (the Pre-Installment Conversion Shares) and (ii) pay to the Holder, in
cash by wire transfer of immediately available funds, the amount of any accrued and unpaid interest
on such Company Conversion Amount. On the Trading Day immediately after the end of the Company
Conversion Measuring Period (the Installment Settlement Date), the Company shall, or shall direct
the Transfer Agent to, deliver to the Holders account with DTC a number of additional Conversion
Shares, if any, equal to the Installment Balance Conversion Shares. If an Event of Default occurs
during any applicable Company Conversion Measuring Period and the Holder elects an Event of Default
Redemption in accordance with Section 4(b), then, at the Holders option, either (A) the Holder,
upon receipt of the Event of Default Redemption Price (which Redemption Price includes redemption
of any portion of a Company Conversion Amount represented by Pre-Installment Conversion Shares that
the Holder shall return to the Company), shall return any Pre-Installment Conversion Shares
delivered in connection with the applicable Installment Date, which the Holder has not otherwise
sold, transferred or disposed of, to the Company or (B) the Conversion Amount used to calculate the
Event of Default Redemption Price shall be reduced by
15
the product of (I) the Company Conversion Amount applicable to such Installment Date
multiplied by (II) the Conversion Share Ratio.
(ii) If there is an Equity Conditions Failure, then at the option of the Holder designated in
writing to the Company, the Holder may require the Company to do any one or both of the following:
(x) the Company shall redeem all or any part designated by the Holder of the unconverted Company
Conversion Amount (such designated amount is referred to as the First Redemption Amount) on such
Installment Date or Installment Settlement Date, as applicable, and the Company shall pay to the
Holder on such Installment Date or Installment Settlement Date, as applicable, by wire transfer of
immediately available funds, an amount in cash equal to 125% of such First Redemption Amount, or
(y) the Company Conversion shall be null and void with respect to all or any part designated by the
Holder of the unconverted Company Conversion Amount and the Holder shall be entitled to all the
rights of a holder of this Note with respect to such amount of the Company Conversion Amount;
provided, however, that the Conversion Price for such unconverted Company Conversion Amount shall
thereafter be adjusted to equal the lesser of (1) the Company Conversion Price as in effect on the
date on which the Holder voided the Company Conversion and (2) the Company Conversion Price as in
effect on the date on which the Holder delivers a Conversion Notice relating thereto. In the event
of an Equity Conditions Failure, at the Holders option, either (A) the Holder shall, upon receipt
of a First Redemption Amount (which amount includes redemption of any portion of a Company
Conversion Amount represented by Pre-Installment Conversion Shares that the Holder shall return to
the Company), return any Pre-Installment Conversion Shares delivered in connection with the
applicable Installment Date, which the Holder has not otherwise sold, transferred or disposed of,
to the Company or (B) any related First Redemption Amount shall be reduced by the product of (I)
the Company Conversion Amount applicable to such Installment Date multiplied by (II) the Conversion
Share Ratio. If the Company fails to redeem any First Redemption Amount on or before the
applicable Installment Date or Installment Settlement Date, as applicable, by payment of such
amount on the applicable Installment Date or Installment Settlement Date, as applicable, then the
Holder shall have the rights set forth in Section 12(a) as if the Company failed to pay the
applicable Company Redemption Price and all other rights under this Note (including, without
limitation, such failure constituting an Event of Default described in Section 4(a)(xi)).
Notwithstanding anything to the contrary in this Section 8(c), but subject to 3(d), until the
Company delivers Common Shares representing the Company Conversion Amount to the Holder, the
Company Conversion Amount may be converted by the Holder into Common Shares pursuant to Section 3.
In the event the Holder elects to convert the Company Conversion Amount prior to the applicable
Installment Date as set forth in the immediately preceding sentence, the Company Conversion Amount
so converted shall be deducted from the Installment Amounts relating to the Installment Dates as
set forth in the applicable Conversion Notice.
(d) Accelerated Amounts. (i) The Company may, at its option (the Accelerated Payment
Option), at any time (A) prepay all or any part of the outstanding Principal amount (plus any
accrued and unpaid Interest thereon) on this Note prior to the first Installment Date or (B)
increase the applicable Installment Amount to be paid on any Installment Date to up to an amount
equal to the aggregate Principal amount of this Note then outstanding (any such amount accelerated
and, in the case of clause (B) only the amount exceeding any Installment Amount scheduled to be
paid on an Installment Date, an Accelerated Amount).
16
In connection with any exercise of the Companys Accelerated Payment Option, (1) if such
option is being exercised prior to the first Installment Date, the Company shall make payment of
the Accelerated Amount in accordance with the terms and procedures set forth in this Section 8
(including, without limitation, the condition that there have been no Equity Conditions Failure)
and shall provide the Holder with the required Company Installment Notice at least ten (10) Trading
Days before the proposed date of payment of such Accelerated Amount and such date shall thereafter
be considered an Installment Date for purposes of this Note, (2) if such option is being
exercised in connection with a scheduled Installment Date, the applicable Accelerated Amount shall
be added to the Installment Amount to be paid to the Holder pursuant to any Company Redemption
and/or Company Conversion on the applicable Installment Date in accordance with this Section 8 and
(3) the Company shall issue the appropriate number of Accelerated Payment Option Warrants on the
applicable Installment Date. For the avoidance of doubt, regardless of whether the Holder converts
any Accelerated Amount prior to the applicable Installment Date, the Company shall still issue to
the Holder that number of Accelerated Payment Option Warrants due in respect of the full
Accelerated Amount indicated in the applicable Company Installment Notice.
(ii) At any time when the Company exercises its Accelerated Payment Option, the applicable
Company Installment Notice delivered to the holders of the Notes pursuant to Section 8(a) shall
also state that (1) the Company is exercising the Accelerated Payment Option, (2) state the
aggregate Accelerated Amount that shall be paid to the holders of all Notes on the Installment
Date, (3) state the number of Accelerated Payment Option Warrants the Company shall issue to the
Holder on the applicable Installment Date. Each Accelerated Amount paid by the Company hereunder
shall reduce the Installment Amounts to be paid to the Holder on the final Installment Dates of the
Notes. Notwithstanding anything to the contrary herein, the Company shall not be entitled to
convert any portion of an Accelerated Amount pursuant to a Company Conversion under this Section 8
in excess of the Holders Pro Rata Amount of seventy-five percent (75%) of the aggregate dollar
trading volume (as reported on Bloomberg) of the Common Shares on AMEX or NASDAQ over the ten (10)
consecutive Trading Day period ending on the Trading Day immediately preceding Company Installment
Notice Date (the Volume Limitation); provided, however, that the Holder may waive the Volume
Limitation with respect to an Accelerated Amount to be paid on any Installment Date by providing
notice thereof to the Company.
(e) Pro Rata Acceleration Requirement. If the Company elects to exercise the
Accelerated Payment Option pursuant to Section 8(d), then it must simultaneously take the same
action (and in the same proportion of the Accelerated Amount) with respect to the Other Notes.
(f) Special Installment Amounts. Unless otherwise waived by the Holder in accordance
herewith, the Company shall pay to the Holder, on the next regularly scheduled Installment Date
following any Announcement Date on which the Company has publicly disclosed its failure to meet the
Minimum Revenue Test, a Special Installment Amount; provided, however, that the Holder may, within
ten (10) Business Days of any such Announcement Date, deliver notice to the Company waiving the
Companys obligation to make payment of such Special Installment Amount. Any Special Installment
Amount to be paid on an
17
Installment Date shall be added to, and considered a part of, the Installment Amount to be
paid on such date in accordance with Section 8.
(9) COMPANYS RIGHT OF MANDATORY REDEMPTION.
(a) Mandatory Redemption. If at any time from and after the six (6) month anniversary
of the Issuance Date (the Mandatory Redemption Eligibility Date), (i) the Closing Sale Price of
the Common Shares listed on AMEX or NASDAQ exceeds 175% of the Conversion Price then in effect for
each of twenty (20) Trading Days out of any thirty (30) consecutive Trading Days following the
Mandatory Redemption Eligibility Date (the Mandatory Redemption Condition) and (ii) the Equity
Conditions shall have been satisfied or waived in writing by the Holder from and including the
Mandatory Redemption Notice Date (as defined below) through and including the Mandatory Redemption
Date (as defined below), the Company shall have the right, provided the Mandatory Redemption
Condition is met on and as of the Mandatory Redemption Date, to redeem all or any portion of the
Conversion Amount (the Mandatory Redemption Amount) then remaining under this Note as designated
in the Mandatory Redemption Notice, as of the Mandatory Redemption Date (a Mandatory Redemption).
The portion of this Note subject to redemption pursuant to this Section 9 shall be redeemed by the
Company in cash at a price equal to the Conversion Amount being redeemed plus any accrued
and unpaid interest thereon through the Mandatory Redemption Date (the Mandatory Redemption
Price) on the Mandatory Redemption Date. The Company may exercise its right to require redemption
under this Section 9(a) by delivering a written notice thereof by facsimile and overnight courier
to all, but not less than all, of the holders of Notes (the Mandatory Redemption Notice and the
date all of the holders received such notice is referred to as the Mandatory Redemption Notice
Date) and each Mandatory Redemption Notice shall be irrevocable. The Mandatory Redemption Notice
shall state (A) the date on which the Mandatory Redemption shall occur (the Mandatory Redemption
Date) which date shall be not less than ten (10) Trading Days nor more than thirty (30) Trading
Days after the Mandatory Redemption Notice Date, and (B) the aggregate Conversion Amount of the
Notes which the Company has elected to be subject to Mandatory Redemption from all of the holders
of the Notes pursuant to this Section 9 (and analogous provisions under the Other Notes) on the
Mandatory Redemption Date; provided, however, that the Company shall not redeem a Conversion Amount
under this Section in excess of the Holders Pro Rata Amount of the aggregate dollar trading volume
(as reported on Bloomberg) of the Common Shares on AMEX or NASDAQ over the ten (10) consecutive
Trading Day period ending on the Trading Day immediately preceding the Mandatory Redemption Notice
Date. The Company may not effect more than one Mandatory Redemption during any consecutive thirty
(30) Trading Day period. Notwithstanding anything to the contrary in this Section 9(a), but
subject to Section 3(d), until the Mandatory Redemption Price is paid, in full, the Mandatory
Redemption Amount (together with any interest thereon) may be converted, in whole or in part, by
the Holder into Common Shares pursuant to Section 3. All Conversion Amounts converted by the
Holder after the Mandatory Redemption Notice Date shall reduce the Conversion Amount of this Note
required to be redeemed on the Mandatory Redemption Date. Redemptions made pursuant to this
Section 9 shall be made in accordance with Section 12.
(b) Pro Rata Redemption Requirement. If the Company elects to cause a Mandatory
Redemption pursuant to Section 9(a), then it must simultaneously take the same
18
action with respect to the Other Notes. If the Company elects to cause a Mandatory Redemption
pursuant to Section 9(a) (or similar provisions under the Other Notes) with respect to less than
all of the Conversion Amounts of the Notes then outstanding, then the Company shall require
redemption of a Conversion Amount from each of the holders of the Notes equal to the product of (i)
the aggregate Conversion Amount of Notes which the Company has elected to cause to be redeemed
pursuant to Section 9(a), multiplied by (ii) the fraction, the numerator of which is the sum of the
aggregate initial principal amount of the Notes purchased by such holder of outstanding Notes and
the denominator of which is the sum of the aggregate initial principal amount of the Notes
purchased by all holders holding outstanding Notes (such fraction with respect to each holder is
referred to as its Redemption Allocation Percentage, and such amount with respect to each holder
is referred to as its Pro Rata Redemption Amount); provided, however that in the event that any
holders Pro Rata Redemption Amount exceeds the outstanding Principal amount of such holders Note,
then such excess Pro Rata Redemption Amount shall be allocated amongst the remaining holders of
Notes in accordance with the foregoing formula. In the event that the initial holder of any Notes
shall sell or otherwise transfer any of such holders Notes, the transferee shall be allocated a
pro rata portion of such holders Redemption Allocation Percentage and Pro Rata Redemption Amount.
(10) NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will
not, by amendment of its Articles of Incorporation, Bylaws or through any reorganization, transfer
of assets, consolidation, merger, scheme of arrangement, 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 of this Note, and will at all times in good faith carry out all of the provisions of this
Note and take all action as may be required to protect the rights of the Holder of this Note.
(11) RESERVATION OF AUTHORIZED SHARES.
(a) Reservation. The Company initially shall reserve out of its authorized and
unissued Common Shares a number of Common Shares for each of the Notes equal to 130% of the
Conversion Rate with respect to the Conversion Amount of each such Note as of the Issuance Date.
So long as any of the Notes are outstanding, the Company shall take all action necessary to reserve
and keep available out of its authorized and unissued Common Shares, solely for the purpose of
effecting the conversion of the Notes, 130% of the number of Common Shares as shall from time to
time be necessary to effect the conversion of all of the Notes then outstanding; provided that at
no time shall the number of Common Shares so reserved be less than the number of shares required to
be reserved by the previous sentence (without regard to any limitations on conversions) (the
Required Reserve Amount). The initial number of Common Shares reserved for conversions of the
Notes and each increase in the number of shares so reserved shall be allocated pro rata among the
holders of the Notes based on the principal amount of the Notes held by each holder at the Closing
(as defined in the Securities Purchase Agreement) or increase in the number of reserved shares, as
the case may be (the Authorized Share Allocation). In the event that a holder shall sell or
otherwise transfer any of such holders Notes, each transferee shall be allocated a pro rata
portion of such holders Authorized Share Allocation. Any Common Shares reserved and allocated to
any Person which ceases to hold any Notes shall be allocated to the remaining holders of Notes, pro
rata based on the principal amount of the Notes then held by such holders.
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(b) Insufficient Authorized Shares. If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and unreserved Common
Shares to satisfy its obligation to reserve for issuance upon conversion of the Notes at least a
number of Common Shares equal to the Required Reserve Amount (an Authorized Share Failure), then
the Company shall immediately take all action necessary to increase the Companys authorized Common
Shares to an amount sufficient to allow the Company to reserve the Required Reserve Amount for the
Notes then outstanding. Without limiting the generality of the foregoing sentence, as soon as
practicable after the date of the occurrence of an Authorized Share Failure, but in no event later
than sixty (60) days after the occurrence of such Authorized Share Failure, the Company shall hold
a meeting of its shareholders for the approval of an increase in the number of authorized Common
Shares. In connection with such meeting, the Company shall provide each shareholder with a proxy
statement and shall use its best efforts to solicit its shareholders approval of such increase in
authorized Common Shares and to cause its board of directors to recommend to the shareholders that
they approve such proposal.
(12) HOLDERS REDEMPTIONS.
(a) Mechanics. The Company shall deliver the applicable Event of Default Redemption
Price to the Holder within five (5) Trading Days after the Companys receipt of the Holders Event
of Default Redemption Notice. If the Holder has submitted a Change of Control Redemption Notice in
accordance with Section 5(b), the Company shall deliver the applicable Change of Control Redemption
Price to the Holder concurrently with the consummation of such Change of Control if such notice is
received prior to the consummation of such Change of Control and within five (5) Trading Days after
the Companys receipt of such notice otherwise (the Change of Control Redemption Date). The
Company shall deliver the Mandatory Redemption Price to the Holder on the Mandatory Redemption
Date. In the event of a redemption of less than all of the Conversion Amount of this Note, the
Company shall promptly cause to be issued and delivered to the Holder a new Note (in accordance
with Section 18(d)) representing the outstanding Principal which has not been redeemed. In the
event that the Company does not pay the applicable Redemption Price to the Holder within the time
period required, at any time thereafter and until the Company pays such unpaid Redemption Price in
full, the Holder shall have the option, in lieu of redemption, to require the Company to promptly
return to the Holder all or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price has not been paid. Upon the
Companys receipt of such notice, (x) the Redemption Notice shall be null and void with respect to
such Conversion Amount, (y) the Company shall immediately return this Note, or issue a new Note (in
accordance with Section 18(d)) to the Holder representing such Conversion Amount and (z) the
Conversion Price of this Note or such new Notes shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the Redemption Notice is voided and (B) the
lowest Closing Bid Price of the Common Shares during the period beginning on and including the date
on which the Redemption Notice is delivered to the Company and ending on and including the date on
which the Redemption Notice is voided.
(b) Redemption by Other Holders. Upon the Companys receipt of notice from any of the
holders of the Other Notes for redemption or repayment as a result of an event or occurrence
substantially similar to the events or occurrences described in Section 4(b) or Section 5(b) (each,
an Other Redemption Notice), the Company shall immediately, but no later than
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one (1) Trading Day of its receipt thereof, forward to the Holder by facsimile a copy of such
notice. If the Company receives a Redemption Notice and one or more Other Redemption Notices,
during the seven (7) Trading Day period beginning on and including the date which is three (3)
Trading Days prior to the Companys receipt of the Holders Redemption Notice and ending on and
including the date which is three (3) Trading Days after the Companys receipt of the Holders
Redemption Notice and the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received during such seven
(7) Trading Day period, then the Company shall redeem a pro rata amount from each holder of the
Notes (including the Holder) based on the principal amount of the Notes submitted for redemption
pursuant to such Redemption Notice and such Other Redemption Notices received by the Company during
such seven (7) Trading Day period.
(13) VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as provided by law, the Utah Revised Business Corporation Act and as expressly
provided in this Note.
(14) COVENANTS.
(a) Rank. Other than Indebtedness set forth in Section 2 of Schedule 3(dd) to the
Securities Purchase Agreement, all payments due under this Note (a) shall rank pari passu with all
Other Notes and (b) shall be senior to all other Indebtedness of the Company and its Subsidiaries.
(b) Incurrence of Indebtedness. So long as this Note is outstanding, the Company
shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, incur or
guarantee, assume or suffer to exist any Indebtedness, other than (i) the Indebtedness evidenced by
this Note and the Other Notes and (ii) Permitted Indebtedness.
(c) Existence of Liens. So long as this Note is outstanding, the Company shall not,
and the Company shall not permit any of its Subsidiaries to, directly or indirectly, allow or
suffer to exist any mortgage, lien, pledge, charge, security interest or other encumbrance upon or
in any property or assets (including accounts and contract rights) owned by the Company or any of
its Subsidiaries (collectively, Liens) other than Permitted Liens.
(d) Restricted Payments. The Company shall not, and the Company shall not permit any
of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or make any
payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by
way of open market purchases, tender offers, private transactions or otherwise), all or any portion
of any Permitted Indebtedness, whether by way of payment in respect of principal of (or premium, if
any) or interest on, such Indebtedness if at the time such payment is due or is otherwise made or,
after giving effect to such payment, an event constituting, or that with the passage of time and
without being cured would constitute, an Event of Default has occurred and is continuing.
(e) Minimum Revenue Test. So long as this Note is outstanding, the Company shall
achieve, as of the end of each Fiscal Quarter, Revenue equal to or exceeding the
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Minimum Revenue Threshold (the Minimum Revenue Test). The Company shall announce its
operating results (the Operating Results) for each Fiscal Quarter no later than the forty-fifth
(45th) day after the end of each Fiscal Quarter or, with respect to the last Fiscal
Quarter of the Companys fiscal year, the ninetieth (90th) day after such quarter (the
Announcement Date). On each Announcement Date, the Company shall announce whether it has
satisfied or failed the Minimum Revenue Test for the Fiscal Quarter to which such Operating Results
announcement relates. In the event the Company has failed to satisfy such test, the Company shall
include in its announcement a statement that due to the Companys failure to meet the Minimum
Revenue Test, the Company is obligated to pay a Special Installment Amount to the Holder on the
next scheduled Installment Date. On each Announcement Date, the Company shall provide to the
holders of Notes a certification, executed on behalf of the Company by its Chief Financial Officer,
certifying that the Company has satisfied or failed, as applicable, the Minimum Revenue Test for
such Fiscal Quarter.
(15) RIGHTS UPON DISTRIBUTION OF ASSETS. If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common
Shares, by way of return of capital or otherwise (including, without limitation, any distribution
of cash, shares or other securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a
Distribution), at any time after the issuance of this Note, then, in each such case any
Conversion Price in effect immediately prior to the close of business on the record date fixed for
the determination of holders of Common Shares entitled to receive the Distribution shall be
reduced, effective as of the close of business on such record date, to a price determined by
multiplying such Conversion Price by a fraction of which (i) the numerator shall be the Closing Bid
Price of the Common Shares on the trading day immediately preceding such record date minus the
value of the Distribution (as determined in good faith by the Companys Board of Directors)
applicable to one Common Share, and (ii) the denominator shall be the Closing Bid Price of the
Common Shares on the trading day immediately preceding such record date.
(16) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote, at a meeting
duly called for such purpose or the written consent without a meeting, of the Required Holders
shall be required for any change or amendment to this Note or the Other Notes. Any change or
amendment so approved shall be binding upon all existing and future holders of this Note and any
Other Notes.
(17) TRANSFER. This Note and any Common Shares issued upon conversion of this Note
may be offered, sold, assigned or transferred by the Holder without the consent of the Company,
subject only to the provisions of Section 2(f) of the Securities Purchase Agreement.
(18) REISSUANCE OF THIS NOTE.
(a) Transfer. If this Note is to be transferred, the Holder shall surrender this Note
to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder
a new Note (in accordance with Section 18(d)), registered as the Holder may request, representing
the outstanding Principal being transferred by the Holder and, if less then the entire outstanding
Principal is being transferred, a new Note (in accordance with Section
22
18(d)) to the Holder representing the outstanding Principal not being transferred. The Holder
and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the
provisions of Section 3(c)(iii) following conversion or redemption of any portion of this Note, the
outstanding Principal represented by this Note may be less than the Principal stated on the face of
this Note.
(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note,
and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to
the Company in customary form and, in the case of mutilation, upon surrender and cancellation of
this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with
Section 18(d)) representing the outstanding Principal.
(c) Note Exchangeable for Different Denominations. This Note is exchangeable, upon
the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes
(in accordance with Section 18(d) and in principal amounts of at least $100,000) representing in
the aggregate the outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time of such surrender.
(d) Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii)
shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or
in the case of a new Note being issued pursuant to Section 18(a) or Section 18(c), the Principal
designated by the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining outstanding under
this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as
indicated on the face of such new Note, which is the same as the Issuance Date of this Note, (iv)
shall have the same rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest on the Principal of this Note, from the Issuance Date.
(19) 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 and any of the other Transaction Documents at law or in equity (including
a decree of specific performance and/or other injunctive relief), and nothing herein shall limit
the Holders right to pursue actual damages resulting from any failure by the Company 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 and shall not, except as expressly provided herein, be subject to any other obligation of
the Company (or the performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any
such breach may be inadequate. The Company therefore agrees that, in the event of any such breach
or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to
an injunction restraining any breach, without the necessity of showing economic loss and without
any bond or other security being required.
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(20) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is placed
in the hands of an attorney for collection or enforcement or is collected or enforced through any
legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to
enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization,
receivership of the Company or other proceedings affecting Company creditors rights and involving
a claim under this Note, then the Company shall pay the costs reasonably incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy, reorganization,
receivership or other proceeding, including, but not limited to, attorneys fees and disbursements.
(21) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by the
Company and all the Purchasers and shall not be construed against any person as the drafter hereof.
The headings of this Note are for convenience of reference and shall not form part of, or affect
the interpretation of, this Note.
(22) 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.
(23) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the arithmetic
calculation of the Conversion Rate or any Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within one (1) Trading Day of receipt, or
deemed receipt, of the Conversion Notice or Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are unable to agree upon
such determination or calculation within one (1) Trading Day of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall, within one (1)
Trading Day submit via facsimile (a) the disputed determination of the Closing Bid Price, the
Closing Sale Price or the Weighted Average Price to an independent, reputable investment bank
selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of
the Conversion Rate or any Redemption Price to the Companys independent, outside accountant. The
Company, at the Companys expense, shall cause the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and the Holder of the
results no later than five (5) Trading Days from the time it receives the disputed determinations
or calculations. Such investment banks or accountants determination or calculation, as the case
may be, shall be binding upon all parties absent demonstrable error.
(24) NOTICES; PAYMENTS.
(a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of
all actions taken pursuant to this Note, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the foregoing, the Company
will give written notice to the Holder (i) immediately upon any adjustment of the
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Conversion Price, setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least twenty (20) days prior to the date on which the Company closes its
books or takes a record (A) with respect to any dividend or distribution upon the Common Shares,
(B) with respect to any pro rata subscription offer to holders of Common Shares or (C) for
determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public prior to or in
conjunction with such notice being provided to the Holder.
(b) Payments. Whenever any payment of cash is to be made by the Company to any Person
pursuant to this Note, such payment shall be made in lawful money of the United States of America
by a check drawn on the account of the Company and sent via overnight courier service to such
Person at such address as previously provided to the Company in writing (which address, in the case
of each of the Purchasers, shall initially be as set forth on the Schedule of Buyers attached to
the Securities Purchase Agreement); provided that the Holder may elect to receive a payment of cash
via wire transfer of immediately available funds by providing the Company with prior written notice
setting out such request and the Holders wire transfer instructions. Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a Trading Day, the
same shall instead be due on the next succeeding day which is a Trading Day and, in the case of any
Interest Date which is not the date on which this Note is paid in full, the extension of the due
date thereof shall not be taken into account for purposes of determining the amount of Interest due
on such date.
(25) CANCELLATION. After all Principal, accrued Interest and other amounts at any
time owed on this Note have been paid in full, this Note shall automatically be deemed canceled,
shall be surrendered to the Company for cancellation and shall not be reissued.
(26) WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the delivery,
acceptance, performance, default or enforcement of this Note and the Securities Purchase Agreement.
(27) GOVERNING LAW. This Note shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation and performance of this Note
shall be governed by, the internal laws of the State of New York, without giving effect to any
choice of law or conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions other than the
State of New York. 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 and waive trial by jury. Both parties agree to
submit to the jurisdiction of such courts. The prevailing party shall be entitled to recover from
the other party its reasonable attorneys 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 enforceability of any other provision
of this Note. Nothing contained herein shall be deemed or operate to preclude the Holder from
bringing suit or taking other legal action against the
25
Company in any other jurisdiction to collect on the Companys obligations to the Holder, to
realize on any collateral or any other security for such obligations, or to enforce a judgment or
other court ruling in favor of the Holder.
(28) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall have
the following meanings:
(a) Accelerated Payment Option Warrants means warrants exercisable for a number of Common
Shares equal to 65% of the quotient of (x) the Accelerated Amount being paid pursuant to Section 8
divided by (y) the Conversion Price on the applicable Installment Date. Such warrants shall be in
substantially the form of the Warrant attached as Exhibit B to the Securities Purchase Agreement,
except that the expiration date of such warrants shall be five (5) years from the issuance date
thereof.
(b) AMEX means the American Stock Exchange.
(c) Approved Share Plan means any employee benefit plan which has been approved by the Board
of Directors of the Company, pursuant to which the Companys securities including, but not limited
to, Options to acquire Common Stock, may be issued to any employee, officer or director for
services provided or to be provided to the Company.
(d) Bloomberg means Bloomberg Financial Markets.
(e) Change of Control means any Fundamental Transaction other than (i) any reorganization,
recapitalization or reclassification of the Common Shares in which holders of the Companys voting
power immediately prior to such reorganization, recapitalization or reclassification continue after
such reorganization, recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, the voting power of the surviving entity or entities necessary to elect a
majority of the members of the board of directors (or their equivalent if other than a corporation)
of such entity or entities, or (ii) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.
(f) Closing Bid Price and Closing Sale Price means, for any security as of any date, the
last closing bid price and last closing trade price, respectively, for such security on the
Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the closing trade price, as
the case may be, then the last bid price or last trade price, respectively, of such security prior
to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last closing bid price or
last trade price, respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not
apply, the last closing bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such
security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any
market makers for such security as reported in the pink sheets by Pink Sheets LLC (formerly
26
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price
cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing
Bid Price or the Closing Sale Price, as the case may be, of such security on such date shall be the
fair market value as mutually determined by the Company and the Holder. If the Company and the
Holder are unable to agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 23. All such determinations to be appropriately adjusted for any
share dividend, share split, share combination or other similar transaction during the applicable
calculation period.
(g) Closing Date shall have the meaning set forth in the Securities Purchase Agreement,
which date is the date the Company initially issued Notes pursuant to the terms of the Securities
Purchase Agreement.
(h) Common Shares Deemed Outstanding means, at any given time, the number of Common Shares
actually outstanding at such time, plus the number of Common Shares deemed to be outstanding
pursuant to Sections 7(a)(i) and 7(a)(ii) hereof regardless of whether the Options or Convertible
Securities are actually exercisable at such time, but excluding any Common Shares owned or held by
or for the account of the Company or issuable upon conversion or exercise, as applicable, of the
Notes and the Warrants.
(i) Company Conversion Price means, as of any date of determination, that price which shall
be the lower of (i) the applicable Conversion Price and (ii) the price computed as 92.5% of the
arithmetic average of the Weighted Average Price of the Common Shares on the Principal Market or
NASDAQ during each of the twelve (12) consecutive Trading Days commencing on the Trading Day
immediately after the applicable Installment Date (such period, the Company Conversion Measuring
Period); provided, however, that if such arithmetic average of the Weighted Average Price during
the Company Conversion Measuring Period shall yield a price that is less than $1.00, then the
Company Conversion Price shall be computed as 90% of the arithmetic average of the Weighted Average
Price of the Common Shares on the Principal Market or NASDAQ during the Company Conversion
Measuring Period.
(j) Contingent Obligation means, as to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person incurring such
liability, or the primary effect thereof, is to provide assurance to the obligee of such liability
that such liability will be paid or discharged, or that any agreements relating thereto will be
complied with, or that the holders of such liability will be protected (in whole or in part)
against loss with respect thereto.
(k) Conversion Share Ratio means, as to any applicable date of determination, the quotient
of (i) the number of Pre-Installment Conversion Shares or Pre-Maturity Conversion Shares, as
applicable, delivered in connection with such Installment Date or Maturity Date, as applicable
divided by (ii) the number of Post-Installment Conversion Shares or Post-Maturity
Conversion Shares, as applicable relating to such Installment Date or Maturity Date, as the case
may be.
27
(l) Convertible Securities means any shares or securities (other than Options) directly or
indirectly convertible into or exercisable or exchangeable for Common Shares.
(m) Eligible Market means the Principal Market, The New York Stock Exchange, Inc or NASDAQ.
(n) Equity Conditions means that each of the following conditions is satisfied: (i) on each
day during the period beginning three (3) months prior to the applicable date of determination and
ending on and including the applicable date of determination (the Equity Conditions Measuring
Period), either (x) the Registration Statement filed pursuant to the Registration Rights Agreement
shall be effective and available for the resale of all remaining Registrable Securities in
accordance with the terms of the Registration Rights Agreement and there shall not have been any
Grace Periods (as defined in the Registration Rights Agreement) or (y) all Common Shares issuable
upon conversion or redemption of the Notes, payment of Installment Amounts and exercise of the
Warrants shall be eligible for sale without restriction and without the need for registration under
any applicable federal or state securities laws and such shares shall be freely tradable on AMEX or
NASDAQ; (ii) on each day during the Equity Conditions Measuring Period, the Common Shares are
designated for quotation on the Principal Market or NASDAQ and shall not have been suspended from
trading on such exchange or market (other than suspensions of not more than two (2) days and
occurring prior to the applicable date of determination due to business announcements by the
Company) nor shall delisting or suspension by such exchange or market been threatened or pending
either (A) in writing by such exchange or market or (B) by falling below the minimum listing
maintenance requirements of such exchange or market; (iii) during the one (1) year period ending on
and including the date immediately preceding the applicable date of determination, the Company
shall have delivered Conversion Shares upon conversion of the Notes and Common Shares upon exercise
of the Warrants to the holders on a timely basis as set forth in Section 3(c)(ii) hereof (and
analogous provisions under the Other Notes) and Section 2(a) of the Warrants; (iv) any applicable
Common Shares to be issued in connection with the event requiring determination may be issued in
full without violating Section 3(d) hereof and the rules and regulations of the Principal Market;
(v) during the Equity Conditions Measuring Period, the Company shall not have failed to timely make
any payments within five (5) Trading Days of when such payment is due pursuant to any Transaction
Document; (vi) during the Equity Conditions Measuring Period, there shall not have occurred either
(A) the public announcement of a pending, proposed or intended Fundamental Transaction which has
not been abandoned, terminated or consummated or (B) an Event of Default or an event that with the
passage of time or giving of notice would constitute an Event of Default; (vii) the Company shall
have no knowledge of any fact that would cause (x) the Registration Statements required pursuant to
the Registration Rights Agreement not to be effective and available for the resale of all remaining
Registrable Securities in accordance with the terms of the Registration Rights Agreement or (y) any
Common Shares issuable upon conversion or redemption of the Notes, payment of Installment Amounts
and Common Shares issuable upon exercise of the Warrants not to be eligible for sale without
restriction pursuant to Rule 144(k) and any applicable state securities laws; (viii) the Company
otherwise shall have been in material compliance with and shall not have materially breached any
provision, covenant, representation or warranty of any Transaction Document; and (ix) the
28
Common Shares have not traded below $0.50 per share in the immediately preceding twenty (20)
consecutive Trading Days.
(o) Equity Conditions Failure means that during any period commencing with (i) the delivery
of the Company Installment Notice through the applicable Installment Date or Installment Settlement
Date, as applicable, or (ii) the delivery of the Maturity Election Notice through the Maturity
Settlement Date, the Equity Conditions have not been satisfied (or waived in writing by the
Holder).
(p) Excluded Securities means any Common Shares issued or issuable: (i) in connection with
any Approved Share Plan; (ii) upon conversion of the Notes or the exercise of the Warrants; (iii)
pursuant to a bona fide firm commitment underwritten public offering at a price per Common Shares
not less than the Conversion Price in effect at the time of such offering with a nationally
recognized underwriter which generates gross proceeds to the Company of at least $50,000,000 (other
than an at-the-market offering as defined in Rule 415(a)(4) under the 1933 Act and equity
lines); (iv) in connection with any strategic acquisition or strategic transaction, whether
through an acquisition of shares or a merger of any business, assets or technologies, the primary
purpose of which is not to raise equity capital in an amount not to exceed, in the aggregate twenty
percent (20%) of the outstanding Common Shares in any twelve (12) month period; and (v) upon
conversion of any Options or Convertible Securities which are outstanding on the day immediately
preceding the Subscription Date, provided that the terms of such Options or Convertible Securities
are not amended, modified or changed on or after the Subscription Date.
(q) Fiscal Quarter means each of the fiscal quarters adopted by the Company for financial
reporting purposes that correspond to the Companys fiscal year that ends on December 31, or such
other fiscal quarter adopted by the Company for financial reporting purposes in accordance with
GAAP.
(r) Fundamental Transaction means that the Company shall, directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into (whether or not the Company, is
the surviving corporation) another Person, or (ii) sell, assign, transfer, convey or otherwise
dispose of all or substantially all of the properties or assets of the Company to another Person,
or (iii) be subject to an offer from another Person or group of related Persons (as defined in
Sections 13(d) and 14(d) of the Exchange Act) other than the Holder to make a purchase, tender or
exchange offer that is accepted by the holders of more than the 50% of the outstanding Voting
Shares (not including any Voting Shares held by the Person or Persons making or party to, or
associated or affiliated with the Persons making or party to, such purchase, tender or exchange
offer), or (iv) consummate a share purchase agreement or other business combination (including,
without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with
another Person or group of related Persons (as defined in Sections 13(d) and 14(d) of the Exchange
Act) whereby such other Person or group acquires more than the 50% of the outstanding Voting Shares
(not including any Voting Shares held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such share purchase agreement
or other business combination), or (v) reorganize, recapitalize or reclassify the Common Shares.
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(s) GAAP means United States generally accepted accounting principles, consistently applied.
(t) Holder Pro Rata Amount means a fraction (i) the numerator of which is the Principal
amount of this Note on the Closing Date and (ii) the denominator of which is the aggregate
principal amount of all Notes issued to the initial purchasers pursuant to the Securities Purchase
Agreement on the Closing Date.
(u) Indebtedness of any Person means, without duplication (i) all indebtedness for borrowed
money, (ii) all obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) capital leases in accordance with generally
accepted accounting principles (other than trade payables entered into in the ordinary course of
business), (iii) all reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (iv) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under any conditional
sale or other title retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even though the rights and
remedies of the seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles, consistently
applied for the periods covered thereby, is classified as a capital lease, (vii) all indebtedness
referred to in clauses (i) through (vi) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien,
pledge, charge, security interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which owns such assets or
property has not assumed or become liable for the payment of such indebtedness, and (viii) all
Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to
in clauses (i) through (vii) above.
(v) Initial Company Conversion Price means, as of any date of determination, that price
which shall be the lower of (i) the applicable Conversion Price and (ii) the price computed as
92.5% of the arithmetic average of the Weighted Average Price of the Common Shares on the Principal
Market or NASDAQ during each of the five (5) consecutive Trading Days ending on the Trading Day
immediately prior to the Installment Date (such period, the Initial Company Measuring Period);
provided, however, that if the Initial Company Conversion Price as calculated pursuant to the
foregoing shall yield a price that is less than $1.00, then the Initial Company Conversion Price
shall be computed as 90% of the arithmetic average of the Weighted Average Price of the Common
Shares on the Principal Market or NASDAQ during the Initial Company Measuring Period.
(w) Initial Maturity Conversion Price means, as of any date of determination, that price
which shall be the lower of (i) the applicable Conversion Price and (ii) the price computed as
92.5% of the arithmetic average of the Weighted Average Price of the Common Shares on the Principal
Market or NASDAQ during each of the five (5) consecutive Trading Days ending on the Trading Day
immediately prior to the Maturity Date (such period, the Initial Maturity Measuring Period);
provided, however, that if such arithmetic average
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of the Weighted Average Price during the Initial Maturity Measuring Period shall yield a price
that is less than $1.00, then the Initial Maturity Conversion Price shall be computed as 90% of the
arithmetic average of the Weighted Average Price of the Common Shares on the Principal Market or
NASDAQ during the Initial Maturity Measuring Period.
(x) Installment Amount means, for each Installment Date, an amount equal to the lesser of
(i) (A) the quotient of (x) the aggregate outstanding Principal of this Note as of the first
(1st) Installment Date hereunder divided by (y) the number of whole months from
such Installment Date through the Maturity Date and (ii) the Principal amount outstanding under
this Note, in each case, plus any accrued and unpaid interest on such amount, as any such
Installment Amount may be reduced pursuant to the terms of this Note, whether upon conversion,
redemption or otherwise.
(y) Installment Balance Conversion Shares means, for any Installment Date, a number of
Common Shares equal to (i) the Post-Installment Conversion Shares for such date minus (ii)
the amount of any Pre-Installment Conversion Shares delivered on such date; provided that in the
event that the amount of Pre-Installment Conversion Shares exceeds the Post-Installment Conversion
Shares for such date (such excess, the Installment Conversion Shares Excess), the outstanding
Principal under this Note shall be reduced by the product of (x) the Installment Conversion Share
Excess and (y) the Company Conversion Price and the Installment Balance Conversion Shares shall
equal zero (0).
(z) Installment Date means, March 1, 2006, and the first (1st) day of each month
thereafter prior to the Maturity Date.
(aa) Maturity Balance Conversion Shares means a number of Common Shares equal to (i) the
Post-Maturity Conversion Shares for such date minus (ii) the amount of any Pre-Maturity
Conversion Shares delivered on such date; provided that in the event that the amount of
Pre-Maturity Conversion Shares exceeds the Post-Maturity Conversion Shares for such date (such
excess, the Maturity Conversion Shares Excess), then the Maturity Balance Conversion Shares shall
equal zero (0).
(bb) Maturity Conversion Price means that price which shall be the lower of (i) the
applicable Conversion Price and (ii) the price computed as 92.5% of the arithmetic average of the
Weighted Average Price of the Common Shares on the Principal Market or NASDAQ during each of the
twelve (12) consecutive Trading Days beginning on the Trading Day immediately following the
Maturity Date (such period, the Maturity Conversion Measuring Period); provided, however, that if
such arithmetic average of the Weighted Average Price during the Maturity Conversion Measuring
Period shall yield a price that is less than $1.00, then the Maturity Conversion Price shall be
computed as 90% of the arithmetic average of the Weighted Average Price of the Common Shares on the
Principal Market or NASDAQ during the Maturity Conversion Measuring Period.
(cc) Maturity Date means October 27, 2008; provided further, however, that the Maturity Date
may be extended at the option of the Holder (i) in the event that, and for so long as, an Event of
Default shall have occurred and be continuing or any event shall have occurred and be continuing
which with the passage of time and the failure to cure would
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result in an Event of Default and (ii) through the date that is ten (10) Business Days after
the consummation of a Change of Control in the event that a Change of Control is publicly announced
or a Change of Control Notice (is delivered prior to the Maturity Date.
(dd) Minimum Revenue Threshold means (i) for the period beginning October 1, 2005 through
and including the first (1st) Fiscal Quarter of 2006, $3,000,000 and (ii) for each
Fiscal Quarter thereafter, $2,000,000.
(ee) NASDAQ means the Nasdaq National Market.
(ff) Options means any rights, warrants or options to subscribe for or purchase Common
Shares or Convertible Securities.
(gg) Parent Entity of a Person means an entity that, directly or indirectly, controls the
applicable Person and whose common shares or equivalent equity security are quoted or listed on an
Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent
Entity with the largest public market capitalization as of the date of consummation of the
Fundamental Transaction.
(hh) Permitted Indebtedness means (i) Indebtedness incurred by the Company, or their
Subsidiaries that is made expressly subordinate in right of payment to the Indebtedness evidenced
by this Note, as reflected in a written agreement acceptable to the Required Holders and approved
by the Required Holders in writing, and which Indebtedness does not provide at any time for the
payment, prepayment, repayment, redemption, repurchase or defeasance, directly or indirectly, of
any principal or premium, if any, thereon until 91 days after the Maturity Date or later, (ii)
Indebtedness secured by Permitted Liens, (iii) Indebtedness to trade creditors incurred in the
ordinary course of business, (iv) Indebtedness set forth in Section 2 of Schedule 3(dd) to the
Securities Purchase Agreement and (v) Indebtedness the proceeds of which are used to redeem, repay
or otherwise retire the Notes, in whole or in part; provided that in the event such Indebtedness is
not used to redeem, repay or retire the Notes in full, such Indebtedness shall rank junior to the
Notes in accordance with Section 14(a).
(ii) Permitted Liens means (i) any Lien for taxes not yet due or delinquent or being
contested in good faith by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a liability that is not yet due or delinquent, (iii)
any Lien created by operation of law, such as materialmens liens, mechanics liens and other
similar liens, arising in the ordinary course of business with respect to a liability that is not
yet due or delinquent or that are being contested in good faith by appropriate proceedings, and
(iv) Liens (A) upon or in any equipment acquired or held by the Company or any of its Subsidiaries
to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of
financing the acquisition or lease of such equipment, or (B) existing on such equipment at the time
of its acquisition, provided that the Lien is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment.
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(jj) Person means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, any other entity and a government
or any department or agency thereof.
(kk) Post-Installment Conversion Shares means, for any Installment Date, that number of
Common Shares equal to the applicable Company Conversion Amount for such Installment Date
divided by the Company Conversion Price (without taking into account the delivery of any
Pre-Installment Conversion Shares).
(ll) Post-Maturity Conversion Shares means that number of Common Shares equal to the
outstanding Principal on the Maturity Date divided by the Maturity Conversion Price
(without taking into account the delivery of any Pre-Maturity Conversion Shares), rounded up to the
nearest whole Common Share.
(mm) Principal Market means AMEX.
(nn) Redemption Notices means, collectively, the Event of Default Redemption Notices, Change
of Control Redemption Notices, any Company Installment Notices (in the event a Company Redemption
is elected in any such notices) and Mandatory Redemption Notices and, each of the foregoing,
individually, a Redemption Notice.
(oo) Redemption Premium means (i) in the case of the Events of Default described in Section
4(a)(i) (vi) and (ix) (xii), 125% or (ii) in the case of the Events of Default described in
Section 4(a)(vii) (viii), 100%.
(pp) Redemption Prices means, collectively, the Event of Default Redemption Price, Change of
Control Redemption Price, any Company Installment Redemption Price (in the event a Company
Redemption is elected with respect to any Installment Date) and Mandatory Redemption Price and,
each of the foregoing, individually, a Redemption Price.
(qq) Registration Rights Agreement means that certain registration rights agreement dated as
of the Subscription Date by and among the Company and the initial holders of the Notes relating to,
among other things, the registration of the resale of the Common Shares issuable upon conversion of
the Notes and exercise of the Warrants.
(rr) Required Holders means the holders of Notes representing at least a majority of the
aggregate principal amount of the Notes then outstanding.
(ss) Revenue means, for any period, the revenue of the Company and its Subsidiaries for such
period determined on a consolidated basis] in accordance with GAAP.
(tt) SEC means the United States Securities and Exchange Commission.
(uu) Securities Purchase Agreement means that certain securities purchase agreement dated as
of the Subscription Date by and among the Company and the initial holders of the Notes pursuant to
which the Company issued the Notes.
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(vv) Special Installment Amount means the product of (i) $1,000,000, multiplied by
(ii) the Holder Pro Rata Amount.
(ww) Subscription Date means October 26, 2005.
(xx) Successor Entity means the Person, which may be the Company, formed by, resulting from
or surviving any Fundamental Transaction or the Person with which such Fundamental Transaction
shall have been made, provided that if such Person is not a publicly traded entity whose common
shares or equivalent equity security are quoted or listed for trading on an Eligible Market,
Successor Entity shall mean such Persons Parent Entity.
(yy) Trading Day means any day on which the Common Shares are traded on the Principal
Market, or, if the Principal Market is not the principal trading market for the Common Shares, then
on the principal securities exchange or securities market on which the Common Shares are then
traded; provided that Trading Day shall not include any day on which the Common Shares is
scheduled to trade on any such exchange or market for less than 4.5 hours or any day that the
Common Shares are suspended from trading during the final hour of trading on any such exchange or
market (or if such exchange or market does not designate in advance the closing time of trading on
such exchange or market, then during the hour ending at 4:00:00 p.m., New York Time).
(zz) Voting Shares of a Person means capital shares of such Person of the class or classes
pursuant to which the holders thereof have the general voting power to elect, or the general power
to appoint, at least a majority of the board of directors, managers or trustees of such Person
(irrespective of whether or not at the time capital shares of any other class or classes shall have
or might have voting power by reason of the happening of any contingency).
(aaa) Warrants has the meaning ascribed to such term in the Securities Purchase Agreement,
and shall include all warrants issued in exchange therefor or replacement thereof.
(bbb) Weighted Average Price means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during the period beginning
at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is
the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the
Principal Market publicly announces is the official close of trading) as reported by Bloomberg
through its Volume at Price functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on the electronic
bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of trading), and ending at
4:00:00 p.m., New York Time (or such other time as such market publicly announces is the official
close of trading) as reported by Bloomberg, if no dollar volume-weighted average price is reported
for such security by Bloomberg for such hours, the average of the highest closing bid price and the
lowest closing ask price of any of the market makers for such security as reported in the pink
sheets by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Weighted Average
Price cannot be calculated for a security on a
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particular date on any of the foregoing bases, the Weighted Average Price of such security on
such date shall be the fair market value as mutually determined by the Company and the Holder. If
the Company and the Holder are unable to agree upon the fair market value of such security, then
such dispute shall be resolved pursuant to Section 23. All such determinations to be appropriately
adjusted for any share dividend, share split, share combination or other similar transaction during
the applicable calculation period.
(29) DISCLOSURE. Upon receipt or delivery by the Company of any notice in accordance
with the terms of this Note, unless the Company has in good faith determined that the matters
relating to such notice do not constitute material, nonpublic information relating to the Company
or its Subsidiaries, the Company shall within one (1) Business Day after any such receipt or
delivery publicly disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains material, nonpublic
information, relating to the Company or its Subsidiaries, the Company shall indicate to such Holder
contemporaneously with delivery of such notice, and in the absence of any such indication, the
Holder shall be allowed to presume that all matters relating to such notice do not constitute
material, nonpublic information relating to the Company or its Subsidiaries.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the Issuance
Date set out above.
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Telkonet, Inc. |
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By: |
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/s/ Ronald W. Pickett |
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Name: Ronald W. Pickett |
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Title: President and Chief
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EXHIBIT I
TELKONET, INC.
CONVERSION NOTICE
Reference is made to the Senior Convertible Note (the Note) issued to the undersigned by
Telkonet, Inc. (the Company). In accordance with and pursuant to the Note, the undersigned
hereby elects to convert the Conversion Amount (as defined in the Note) of the Note indicated below
into shares of common stock, par value $0.001 per share (the Common Shares), as of the date
specified below.
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Aggregate Conversion Amount to be converted: |
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Please confirm the following information:
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Number of Common Shares to be issued: |
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Please apply the Aggregate Conversion Amount to reduce the Installment
Amount(s) to be paid on the following Installment Date(s) as indicated below:
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Reduction in Installment Amount(s): |
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Please issue the Common Shares into which the Note is being converted in the
following name and to the following address:
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Account Number: |
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(if electronic book entry transfer) |
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Transaction Code Number: |
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(if electronic book entry transfer) |
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ACKNOWLEDGMENT
The Company hereby acknowledges this Conversion Notice and hereby directs StockTrans to issue
the above indicated number of Common Shares in accordance with the Transfer Agent Instructions
dated October [___], 2005 from the Company and acknowledged and agreed to by StockTrans.
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