THE SECURITY REPRESENTED BY THIS INSTRUMENT WAS ORIGINALLY ISSUED ON
MARCH 17, 1999, AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED OR ANY APPLICABLE STATE SECURITIES LAW. THE TRANSFER
OF SUCH SECURITY IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE
SECURITIES PURCHASE AGREEMENT, DATED AS OF MARCH 17, 1999 AS AMENDED
AND MODIFIED FROM TIME TO TIME, BETWEEN THE ISSUER (THE "COMPANY") AND
THE PURCHASERS NAMED THEREIN. THE COMPANY RESERVES THE RIGHT TO REFUSE
THE TRANSFER OF SUCH SECURITY UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED
WITH RESPECT TO SUCH TRANSFER. A COPY OF SUCH CONDITIONS SHALL BE
FURNISHED WITHOUT CHARGE TO THE HOLDER HEREOF UPON WRITTEN REQUEST TO
THE COMPANY.
THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT, AS SUCH TERM IS
DEFINED IN SECTION 1271 ET SEQ. OF THE INTERNAL REVENUE CODE OF 1986,
AS AMENDED. UPON INQUIRY MADE BY ANY HOLDER HEREOF, ADDRESSED TO COVOL
TECHNOLOGIES, INC., ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇, ATTENTION:
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, COVOL TECHNOLOGIES, INC. WILL PROVIDE A STATEMENT
SETTING FORTH THE ISSUE PRICE, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT,
THE ISSUE DATE AND THE YIELD TO MATURITY WITH RESPECT TO THE NOTE HELD
BY SUCH HOLDER.
----------------------------------------------
$20,000,000 New York, New York
March 17, 1999
FOR VALUE RECEIVED, the undersigned, COVOL TECHNOLOGIES, INC.,
a Delaware corporation (the "Company"), hereby promises to pay to the order of
OZ Master Fund, Ltd. on the Maturity Date the principal amount of TWENTY MILLION
DOLLARS ($20,000,000) or such lesser principal amount thereof as may remain
outstanding, together with interest thereon calculated from the date hereof in
accordance with the provisions of this Note.
This Note was issued pursuant to a Securities Purchase
Agreement, dated as of March 17, 1999 (as amended and modified from time to
time, the "Purchase Agreement"), between the Company and certain investors, and
this Note is one of the "Notes" referred to in the Purchase Agreement. The
Purchase Agreement contains terms governing the rights of the holder of this
Note, and all provisions of the Purchase Agreement are hereby incorporated
herein in full by reference.
- 1 -
This Note is secured by and entitled to the benefits of the Security Agreement.
Except as defined in paragraph 8 hereof or unless otherwise indicated herein,
capitalized terms used in this Note have the same meanings set forth in the
Purchase Agreement.
1. Payment of Interest. Except as otherwise expressly provided
in paragraph 4(b) hereof, interest shall accrue at the rate of two and one-half
(2.5%) per annum on the unpaid principal amount of this Note outstanding from
time to time, or (if less) at the highest rate then permitted under applicable
law. The Company shall pay to the holder of this Note all accrued interest on
January 1 and July 1 of each year, beginning July 1, 1999 (collectively, the
"Interest Payment Dates"). Unless prohibited under applicable law, any accrued
interest which is not paid on the date on which it is due and payable shall bear
interest at twice the rate at which interest is then accruing on the principal
amount of this Note until such interest is paid. Any accrued interest which for
any reason has not theretofore been paid shall be paid in full on the date on
which the final principal payment on this Note is made. Interest shall accrue on
any principal payment due under this Note and, to the extent permitted by
applicable law, on any interest which has not been paid on the date on which it
is due and payable until such time as payment therefor is actually delivered to
the holder of this Note.
2. Pro Rata Payment. Except as otherwise expressly provided in
this Note, all payments to the holders of the Notes (whether for principal,
interest or otherwise) shall be made pro rata among such holders based upon the
aggregate unpaid principal amount of the Notes held by each such holder. If any
holder of a Note obtains any payment (whether voluntary, involuntary, by
application of offset or otherwise) of principal, interest or other amount with
respect to any Note in excess of such holder's pro rata share of such payments
obtained by all holders of the Notes (other than as expressly provided herein),
by acceptance of a Note, each such holder of a Note agrees to purchase from the
other holders of the Notes a participation in the Notes held by such other
holders of the Notes as is necessary to cause such holders to share the excess
payment ratably among each of them as provided in this paragraph.
3. Redemptions.
(a) Scheduled Redemptions. (i) At any time on and after the
third anniversary of the date of issuance of this Note, at the option of the
holder of this Note, the Company shall redeem the aggregate principal amount of
such Note designated by such holder at a price equal to the Optional Redemption
Price (plus accrued and unpaid interest thereon), and (ii) at any time following
the date of issuance of this Note, and prior to the third anniversary thereof,
at the option of the Company, the Company may redeem all or a part of the
outstanding aggregate principal amount of the Notes at a price equal to the
Optional Redemption Price (plus accrued and unpaid interest thereon); provided,
that the Company must redeem (A) at least $1,000,000 aggregate principal amount
of the Notes outstanding and (B) the Notes pro rata among the holders of the
Notes based upon the aggregate principal amount of the Notes held by each such
holder to exercise its option hereunder. Notwithstanding the foregoing, if at
any time following the date of issuance of this Note, the Company fails to
perform or observe Section 8.2(j) of the Purchase Agreement, at the option of
the holder of this Note, the Company shall redeem the aggregate principal amount
of such Note designated by such holder at a price equal to the Optional
Redemption Price (plus accrued and unpaid interest thereon).
- 2 -
(b) Redemption Payments. For each Note which is to be redeemed
hereunder, the Company shall be obligated on the applicable Redemption Date to
pay to the holder thereof (upon surrender by such holder at the Company's
principal office of the Note) an amount in cash in immediately available funds
equal to the Optional Redemption Price of such Note (plus all accrued and unpaid
interest thereon and any premium payable with respect thereto).
(c) Notice of Redemption. The Company shall mail written
notice of each redemption of any Notes (other than a redemption at the request
of a holder or holders of the Notes) to each holder thereof not more than sixty
(60) nor less than thirty (30) days prior to the date on which such redemption
is to be made. In case less than the aggregate principal amount of this Note is
redeemed, a new Note representing the aggregate principal amount of the
unredeemed Note shall be issued to the holder thereof without cost to such
holder within five (5) Business Days after surrender of this Note.
(d) Interest After Redemption Date. This Note shall not be
entitled to any interest accruing after the date on which the Optional
Redemption Price of such Note (plus all accrued and unpaid interest thereon) is
paid to the holder of such Note. On such date, all rights of the holder of the
Note shall cease, and such Note shall no longer be deemed to be issued and
outstanding.
(e) Redeemed or Otherwise Acquired Notes. Any Notes which are
redeemed or otherwise acquired by the Company shall be canceled and shall not be
reissued, sold or transferred.
(f) Other Redemptions or Acquisitions. The Company shall not,
nor shall it permit any Subsidiary to, redeem or otherwise acquire any Notes,
except as expressly authorized herein or pursuant to a purchase offer made pro
rata to all holders of the Notes on the basis of the aggregate principal amount
of the Notes held by each such holder.
(g) Payment of Accrued Interest. The Company may not redeem
any Note, unless all interest accrued on the outstanding Notes through the
immediately preceding Interest Payment Date has been paid in full.
(h) Change of Control. If a Change of Control has occurred or
the Company obtains knowledge that a Change of Control is proposed to occur, the
Company shall give prompt written notice of such Change of Control describing in
reasonable detail the material terms and date of consummation thereof to each
holder of the Notes, but in any event such notice shall not be given later than
five (5) days after the occurrence of such Change of Control, and the Company
shall give each holder of the Notes prompt written notice of any material change
in the terms or timing of such transaction. Any holder of a Note may require the
Company to redeem all or any portion of the outstanding principal amount of such
Note held by such holder at a price equal to the Optional Redemption Price by
giving written notice to the Company of such election prior to the later of (a)
twenty-one (21) days after receipt of the Company's notice and (b) five (5) days
prior to the consummation of the Change of Control (the "Expiration Date"). The
Company shall give prompt written notice of any such election to all other
holders of the Notes within five (5) days after the receipt thereof, and each
such holder shall have until the later of (i) the Expiration Date or (ii) ten
(10) days after receipt of such second notice to request redemption hereunder
(by giving written
- 3 -
notice to the Company) of all or any portion of the outstanding principal amount
of such Note held by such holder.
Upon receipt of such election(s), the Company shall be
obligated to redeem the aggregate principal amount of Notes specified therein on
the occurrence of the Change of Control. If any proposed Change of Control does
not occur, all requests for redemption in connection therewith shall be
automatically rescinded, or if there has been a material change in the terms or
the timing of the transaction, any holder of the Notes may rescind such holder's
request for redemption by giving written notice of such rescission to the
Company.
The term "Change of Control" means (a) any sale, transfer or
issuance or series of sales, transfers and/or issuances of Common Stock by the
Company or any holders thereof which results in any Person or group of Persons
(as the term "group" is used under the Exchange Act), beneficially owning (as
such term is used in the Exchange Act) more than 50% of the Common Stock
outstanding at the time of such sale, transfer or issuance or series of sales,
transfers and/or issuances, (b) any sale or transfer of more than 50% of the
assets of the Company and its Subsidiar ies on a consolidated basis (measured
either by book value in accordance with generally accepted accounting principles
consistently applied or by fair market value determined in the reasonable good
faith judgment of the Board of Directors) in any transaction or series of
transactions (other than sales in the ordinary course of business and excluding
the sale of the synthetic fuel facilities set forth on Schedule 8.1(e) of the
Purchase Agreement) and (c) any merger or consolidation to which the Company is
a party, except for a merger in which the Company is the surviving Company, the
terms of the Notes or Common Stock are not changed and the Notes are not
exchanged for cash, securities or other property, and after giving effect to
such merger, the holders of the Company's outstanding capital stock possessing a
majority of the voting power (under ordinary circumstances) to elect a majority
of the Board of Directors immediately prior to the merger shall continue to own
the Company's outstanding capital stock possessing the voting power (under
ordinary circumstances) to elect a majority of the Board of Directors.
Redemptions made pursuant to this paragraph 3(h) shall not
relieve the Company of its obligations to redeem the Notes pursuant to paragraph
3(a) above.
4. Events of Default.
(a) Definition. For purposes of this Note, an Event of Default
shall be deemed to have occurred if
(i) the Company fails to pay when due and payable
(whether at maturity, upon redemption or otherwise) the full amount of interest
then accrued on any Note (and such interest remains unpaid after one (1)
Business Day's notice) or the full amount of any principal payment on any Note;
(ii) the Company fails to perform or observe any
material provision contained in the Notes, the Purchase Agreement or in the
Related Documents, and (other than with respect to Section 8.1 or 8.2(m) of the
Purchase Agreement, Section 1(f)(i) of the Registration
- 4 -
Rights Agreement, or paragraph 5 hereof) such failure is not cured within
fifteen (15) days after the occurrence thereof;
(iii) any representation or warranty contained in the
Purchase Agreement or required to be furnished to any holder of the Notes
pursuant to the Purchase Agreement, or any information contained in writing
required to be furnished by the Company or any Subsidiary to any holder of the
Notes, is false or misleading in any material respect on the date made or
furnished;
(iv) the Company or any Subsidiary makes an
assignment for the benefit of creditors or admits in writing its inability to
pay its debts generally as they become due; or an order, judgment or decree is
entered adjudicating the Company or any Subsidiary bankrupt or insolvent; or any
order for relief with respect to the Company or any Subsidiary is entered under
the Federal Bankruptcy Code; or the Company or any Subsidiary petitions or
applies to any tribunal for the appointment of a custodian, trustee, receiver or
liquidator of the Company or any Subsidiary, or of any substantial part of the
assets of the Company or any Subsidiary, or commences any proceeding (other than
a proceeding for the voluntary liquidation and dissolution of any Subsidiary)
relating to the Company or any Subsidiary under any bankruptcy reorganization,
arrangement, insolvency, readjustment of debt, dissolution or liquidation law of
any jurisdiction; or the Company or any Subsidiary takes any action to authorize
any of the foregoing, or any such petition or application is filed, or any such
proceeding is commenced, against the Company or any Subsidiary and either (A)
the Company or any such Subsidiary by any act indicates its approval thereof,
consent thereto or acquiescence therein or (B) such petition, application or
proceeding is not dismissed within 60 days;
(v) one or more judgments in excess of $5,000,000 in
the aggregate is rendered against the Company or any Subsidiary and, such
judgment is not (A) discharged, bonded or otherwise satisfied within 30 days
from the entry thereof, (B) covered by adequate insurance, or (C) the execution
of such judgment is not stayed pending appeal, or within 30 days after the
expiration of any such stay, discharged or otherwise satisfied in full;
(vi) the Company or any Subsidiary defaults in the
performance of any obligations or agreements if the effect of such default is to
cause an amount exceeding $3,000,000 in the aggregate from the date of issuance
of the Note to become due prior to its stated maturity or the holder or holders
of any obligation or obligations cause an amount exceeding $3,000,000 to become
due prior to its stated maturity;
(vii) as determined on the date that the Company's
financial statements are available for each of its fiscal quarters, but no later
than forty-five (45) days following each such fiscal quarter, (A) beginning with
the fiscal quarter ended December 31, 1999, the Company's Consolidated EBITDA
for any fiscal quarter ending on the date set forth below is less than the
amount set forth below opposite such date, (B) beginning with the fiscal quarter
ended September 30, 2000, (x) the Company's Consolidated EBITDA for any fiscal
quarter ending on the date set forth below is less than the amount set forth
below opposite such date and (y) the Company's aggregate Consolidated EBITDA for
the four most recent fiscal quarters ending on the date set forth below is less
than the amount set forth below opposite such date:
- 5 -
LAST TWELVE
MONTHS
CONSOLIDATED CONSOLIDATED
--------------------------------------------------------------------------------
December 31, 1999 $5,000,000
March 31, 2000 5,500,000
June 30, 2000 5,750,000
September 30, 2000 6,000,000 $22,250,000
December 31, 2000 6,250,000 23,500,000
March 31, 2001 6,500,000 24,500,000
June 30, 2001 6,500,000 25,250,000
September 30, 2001 6,500,000 25,750,000
December 31, 2001 and 6,500,000 26,000,000
thereafter
or (C) beginning with the fiscal quarter ended December 31, 1999, the Company's
Debt-to-EBITDA Ratio for any fiscal quarter is in excess of 8:1;
Notwithstanding anything to the contrary in this paragraph
4(a)(vii), with respect to (A) and (B)(x) above, to the extent the Company's
Consolidated EBITDA for any fiscal quarter exceeds the amount set forth above
for such fiscal quarter, 100% of such excess amount may be carried forward to
the immediately succeeding fiscal quarter in determining the Company's
Consolidated EBITDA for such succeeding fiscal quarter; provided, that no
amounts once carried forward to the immediately succeeding fiscal quarter may be
carried forward again to any fiscal quarter thereafter.
(viii) without the prior written consent of the
holders of a majority of the
aggregate principal amount of the Notes outstanding, the Company or any
Subsidiary redeems, purchases or otherwise acquires directly or indirectly any
Securities, or the Company directly or indirectly pays or declares any dividend
or makes any distribution upon any Securities or any Indebtedness subordinated
to the Notes;
(ix) the Company consummates an Organic Change;
(x) any material provision of the Purchase Agreement,
the Notes or any Related Document shall at any time for any reason be declared
to be null and void, or the validity or enforceability thereof shall be
contested by any party thereto, or a proceeding shall be commenced by the
Company or any Governmental Authority or other regulatory body having
jurisdiction over the Company, seeking to establish the invalidity or
enforceability thereof, or the Company shall deny in writing that it has any
liability or obligation purported to be created under the Purchase Agreement or
any Related Document;
(xi) the Company or any Subsidiary or any ERISA
Affiliate shall have made a complete or partial withdrawal from a Multiemployer
Plan, and, as a result of such complete or partial withdrawal, the Company or
such Subsidiary or such ERISA Affiliate incurs a withdrawal liability in an
annual amount exceeding $1,000,000; or a Multiemployer Plan enters
reorganization
- 6 -
status under Section 4241 of ERISA, and, as a result thereof, the Company's,
such Subsidiary's or such ERISA Affiliate's annual contribution requirement with
respect to such Multiemployer Plan increases in an annual amount exceeding
$1,000,000;
(xii) any Termination Event with respect to any
Employee Plan shall have occurred, and 30 days after notice thereof shall have
been given to the Company by the Purchasers, (i) such Termination Event (if
correctable) shall not have been corrected, and (ii) the then current value of
such Employee Plan's vested benefits exceeds the then current value of assets
allocable to such benefits in such Employee Plan by more than $1,000,000 (or, in
the case of a Termination Event involving liability under Section 409, 502(i),
515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 4971 or 4975
of the Code, the liability is in excess of such amount);
(xiii) the Company or any Subsidiaries shall have
entered into any consent or settlement decree or agreement or similar
arrangement with a Governmental Authority or any judgment, order, decree or
similar action shall have been entered against the Company or any Subsidiary
based on or arising from the violation of or pursuant to any Environmental Law,
or the generation, storage, transportation, treatment, disposal or Release of
any Hazardous Material and, in connection with all of the foregoing, the Company
or any Subsidiaries incur Environmental Liabilities and Costs which are
unstayed, due and owing (and not otherwise covered by insurance) in an amount in
excess of $5,000,000 in the aggregate;
(xiv) any non-monetary judgment or order shall be
entered against the Company or any Subsidiary which does, or could reasonably be
expected to, result in a Material Adverse Change, and there shall be a period of
ten consecutive days during which a stay of enforcement of such judgment or
order shall not be in effect;
(xv) Section 29 of the Code is repealed, replaced or
amended and such repeal, replacement or amendment could reasonably be expected
to have a Material Adverse Effect on the Company;
(xvi) (A) any registration statement requested to be
filed pursuant to the Registration Rights Agreement (as defined in the Purchase
Agreement) which has been filed by the Company and declared effective by the
Securities and Exchange Commission shall not be filed or shall not have been
declared effective or shall cease to be effective or fail to be usable for its
intended purpose without being succeeded within two (2) business days by a
post-effective amendment to such registration statement that cures such failure
and that is itself immediately declared effective or (B) the Securities and
Exchange Commission shall issue any stop order suspending the effectiveness
under the Securities Act of any registration statement required to be filed and
declared effective by the Company pursuant to the Registration Rights Agreement
or any state securities commission suspends the qualification of the Notes for
offering or sale in any jurisdiction, or (C) any proceeding for purposes of
either (A) or (B) above is initiated;
(xvii) the occurrence of an Event of Noncompliance
under the Certificate of Designations (as defined in the Purchase Agreement); or
- 7 -
(xviii) the occurrence of a Material Adverse Change
(as defined in the Purchase Agreement).
The foregoing shall constitute Events of Default whatever the
reason or cause for any such Event of Default and whether it is voluntary or
involuntary or is effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body.
(b) Consequences of Events of Default.
(i) If any Event of Default has occurred and is
continuing (other than under subparagraph 4(a)(iii), (viii) or (xiii)), the
interest rate on the Notes shall increase immediately by an increment of one
percentage point to the extent permitted by law. Thereafter, until such time as
no Events of Default exist, the interest rate shall increase automatically at
the end of each succeeding 90-day period by an additional increment of one
percentage point to the extent permitted by law. Any increase of the interest
rate resulting from the operation of this subparagraph shall terminate as of the
close of business on the date on which no Events of Default exist (subject to
subsequent increases pursuant to this subparagraph).
(ii) If an Event of Default of the type described in
subparagraph 4(a)(iv) has occurred, the aggregate principal amount of the Notes
(together with all accrued interest thereon and all other amounts due and
payable with respect thereto) shall become immediately due and payable at the
Optional Redemption Price without any action on the part of the holders of the
Notes, and the Company shall immediately pay to the holders of the Notes all
amounts due and payable with respect to the Notes.
(iii) If any Event of Default (other than under
subparagraph 4(a)(iv) or (vii)) has occurred and is continuing, the holder or
holders of Notes representing a majority of the aggregate principal amount of
Notes then outstanding may declare all or any portion of the outstanding
principal amount of the Notes (together with all accrued interest thereon and
all other amounts due and payable with respect thereto) to be immediately due
and payable at the Optional Redemption Price and may demand immediate payment of
all or any portion of the outstanding principal amount of the Notes (together
with all such other amounts then due and payable) owned by such holder or
holders. The Company shall give prompt written notice of any such demand to the
other holders of Notes, each of which may demand immediate payment of all or any
portion of such holder's Note. If any holder or holders of the Notes demand
immediate payment of all or any portion of the Notes, the Company shall
immediately pay to such holder or holders all amounts due and payable with
respect to such Notes.
(iv) If any Event of Default of the type described in
subparagraph 4(a)(i) occurs, (A) notwithstanding subparagraph 5(a)(i), the Notes
shall become immediately convertible and (B) for each such occurrence, the
Minimum Conversion Price and the Conversion Price calculated at the time of
conversion shall be reduced by $1.00.
(v) If any Event of Default of the type described in
subparagraph 4(a)(v) occurs, (A) notwithstanding subparagraph 5(a)(i), the Notes
shall become immediately convertible
- 8 -
and (B) for each such occurrence, the Minimum Conversion Price and the
Conversion Price calculated at the time of conversion shall be reduced by an
amount equal to the quotient of (1) the amount of the judgment referred to in
subparagraph 4(a)(v) divided by (2) the number of shares of Common Stock Deemed
Outstanding at the time of the Event of Default.
(vi) If any Event of Default of the type described in
subparagraph 4(a)(i) (with respect to the failure to pay any redemption) occurs,
(A) notwithstanding Section 5(a)(i), this Note shall become immediately
convertible, (B) the Minimum Conversion Price shall be reduced to 75% of the
Minimum Conversion Price in effect immediately prior to such adjustment and (C)
the Conversion Price calculated at the time of conversion shall be reduced to
75% of the lesser of (1) the applicable Conversion Price in effect at the time
of conversion immediately prior to such adjustment and (2) the Market Price of a
share of Common Stock at the time of conversion. Thereafter, for each succeeding
90-day period that the Event of Default continues following the initial Event of
Default referred to above continues, (x) the Minimum Conversion Price shall be
reduced to 75% of the Minimum Conversion Price in effect immediately prior to
such adjustment, (y) the Conversion Price calculated at the time of conversion
shall be reduced to 75% of the lesser of (a) the Conversion Price in effect at
the time of conversion immediately prior to such adjustment and (b) the Market
Price of a share of Common Stock at the time of conversion. In no event shall
any Conversion Price adjustment hereunder be rescinded.
For example, assume that an Event of Default of the type described in
subparagraph 4(a)(i) (with respect to the failure to pay any
redemption) has occurred and this Note becomes immediately convertible.
Then assume that one year prior to such Event of Default there had been
a two-for-one stock split by the Company. Finally, assume that,
pursuant to Section 5(b)(i), the Maximum Conversion Price, the Minimum
Conversion Price and the Conversion Price at the time of conversion
would initially be $10.00, $6.67 and $10.00, respectively. In this
case, the Maximum Conversion Price, the Minimum Conversion Price and
the Conversion Price of $10.00, $6.67 and $10.00 would first be
decreased pursuant to Section 5(d) from $10.00 to $5.00, $6.67 to $3.34
and $10.00 to $5.00, respectively. Then, (i) the Minimum Conversion
Price would be reduced to 75% of $3.34, or $2.51 and (ii) if the Market
Price of a share of Common Stock at the time of conversion exceeds
$7.50, the Conversion Price calculated at the time of conversion would
be reduced to 75% of $5.00, or $3.75. If the Event of Default had
existed for an additional 90 days following the initial Event of
Default, (a) the Minimum Conversion Price at the time of conversion
would be reduced to 75% of $2.51, or $1.88 and (b) if the Market Price
of a share of Common Stock at the time of conversion exceeds $5.625,
the Conversion Price at the time of conversion would be reduced to 75%
of $3.75, or $2.8125. If the Event of Default had existed for an
additional 90 days following the initial Event of Default, (i) the
Minimum Conversion Price at the time of conversion would be further
reduced to 75% of $1.88, or $1.41 and (ii) if the Market Price of a
share of Common Stock at the time of conversion exceeds $4.21875, the
Conversion Price at the time of conversion would be further reduced to
75% of $2.8125, or $2.10938.
(vii) If any Event of Default of the type described
in subparagraph 4(a)(vii) occurs, notwithstanding Section 5(a)(i), this Note
shall become immediately convertible. Thereafter, for each succeeding fiscal
quarter that such an Event of Default occurs following the initial Event
- 9 -
of Default referred to above, the holders of the Notes may require the Company
to deposit in a Blocked Account an amount in cash equal to $2,500,000 plus an
amount that would generate a 35% internal rate of return on such $2,500,000 from
the date of issuance of the Notes through the date such funds are deposited in
such Blocked Account. Any interest paid pursuant to the Notes with respect to
$2,500,000 principal amount of the Notes shall be credited towards the
calculation of such 35% internal rate of return; provided, that if the cash
deposit referred to above is not deposited by the Company into such Blocked
Account within ten (10) days following a request by the holders of the Notes to
make such a deposit, the holders of the Notes shall have the right to direct (A)
the Licensees to pay earned licensee fees and (B) the Company to pay binder
profits directly to such Blocked Account pursuant to the terms of the Security
Agreement and the Side Agreements (each as defined in the Purchase Agreement).
(viii) If any Event of Default of the type described
in subparagraph 4(a)(ix) occurs, (A) notwithstanding subparagraph 5(a)(i), the
Notes shall become immediately convertible and (B) the Conversion Price
calculated at the time of conversion shall be reduced to the lesser of (1) the
Conversion Price immediately prior to the public announcement of such Organic
Change and (2) the lowest Conversion Price that could have been determined had
conversion occurred prior to the consummation of such Organic Change.
(ix) If any Event of Default exists, each holder of
the Notes shall also have any other rights which such holder is entitled to
under the Purchase Agreement or any other contract or agreement at any time and
any other rights which such holder may have pursuant to applicable law.
(x) The Company hereby waives diligence, presentment,
protest and demand and notice of protest and demand, dishonor and nonpayment of
this Note, and expressly agrees that this Note, or any payment hereunder, may be
extended from time to time and that the holder hereof may accept security for
this Note or release security for this Note, all without in any way affecting
the liability of the Company hereunder.
5. Conversion.
(a) Conversion Procedure.
(i) At any time following the third anniversary of
the date of issuance of this Note and prior to the payment of this Note in full,
each holder of this Note may convert all or any portion of the outstanding
principal amount of this Note into a number of shares of the Conversion Stock
determined by dividing the principal amount designated by such holder to be
converted, by the Conversion Price then in effect.
(ii) The holders of this Note may convert this Note
by delivering to the Company or its agent a written notice of conversion (the
"Notice of Conversion"), duly signed by or on behalf of the holder, stating the
aggregate principal amount of such holder's Note to be converted, in the form of
Exhibit A attached hereto. Such notices may be delivered to the Company or its
agent by telephone line facsimile, and shall be delivered prior to 6 p.m., New
York time, on the day prior to the date of requested conversion. The Company
will confirm its receipt of the
- 10 -
Notice of Conversion, and confirm the calculations therein or indicate
alternative calculations, by return facsimile by 11:00 a.m., New York time, on
the following Business Day. Failure of the Company to send such return facsimile
shall evidence its acceptance of the calculations in the Notice of Conversion.
(iii) Except as otherwise expressly provided herein,
each conversion of this Note shall be deemed to have been effected as of the
close of business on the date on which this Note has been surrendered for
conversion at the principal office of the Company. At such time as such
conversion has been effected, the rights of the holder of this Note as such
holder to the extent of the conversion shall cease, and the Person or Persons in
whose name or names any certificate or certificates for shares of Conversion
Stock are to be issued upon such conversion shall be deemed to have become the
holder or holders of record of the shares of Conversion Stock represented
thereby.
(iv) The conversion rights of any Note subject to
redemption hereunder shall terminate on the Redemption Date for such Note unless
the Company has failed to pay to the holder thereof the Optional Redemption
Price of such Note or portion thereof (plus all accrued interest thereon and any
premium payable with respect thereto).
(v) Notwithstanding any other provision hereof, if a
conversion of any portion of this Note is to be made in connection with a Change
of Control or other transaction affecting the Company, the conversion of any
portion of this Note may, at the election of the holder hereof, be conditioned
upon the consummation of such transaction, in which case such conversion shall
not be deemed to be effective until such transaction has been consummated.
(vi) On receipt by the Company from a holder of this
Note of a Notice of Conversion by telephone line facsimile transmission, meeting
the requirements for conversion in this Note, the Company shall deliver to the
converting holder:
(A) a certificate or certificates representing the
number of shares of Conversion Stock issuable by reason of such
conversion in such name or names and such denomination or denominations
as the converting holder has specified;
(B) payment in an amount equal to the sum of all
accrued interest with respect to the principal amount converted, which
has not been paid prior thereto, plus the amount payable under
subparagraph (vii) below; and
(C) a new Note representing any portion of the
principal amount which was represented by the Note surrendered to the
Company in connection with such conversion but which was not converted.
(vii) If any fractional share of Conversion Stock
would, except for the provisions hereof, be deliverable upon conversion of this
Note, the Company, in lieu of delivering such fractional share, shall pay an
amount equal to the Market Price of such fractional share as of the date of such
conversion.
- 11 -
(viii) The issuance of certificates for shares of
Conversion Stock upon conversion of this Note shall be made without charge to
the holder hereof for any issuance tax in respect thereof or other cost incurred
by the Company in connection with such conversion and the related issuance of
shares of Conversion Stock. Upon conversion of this Note, the Company shall take
all such actions as are necessary in order to insure that the Conversion Stock
issuable with respect to such conversion shall be validly issued, fully paid and
nonassessable.
(ix) The Company shall not close its books against
the transfer of Conversion Stock issued or issuable upon conversion of this Note
in any manner which interferes with the timely conversion of this Note. The
Company shall assist and cooperate with any holder of this Note required to make
any governmental filings or obtain any governmental approval prior to or in
connection with the conversion of this Note (including, without limitation,
making any filings required to be made by the Company).
(x) The Company shall at all times reserve and keep
available out of its authorized but unissued shares of Conversion Stock, solely
for the purpose of issuance upon the conversion of the Note, such number of
shares of Conversion Stock issuable upon the conversion of all outstanding
Notes. All shares of Conversion Stock which are so issuable shall, when issued,
be duly and validly issued, fully paid and nonassessable and free from all
taxes, liens and charges. The Company shall take all such actions as may be
necessary to assure that all such shares of Conversion Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Conversion
Stock may be listed (except for official notice of issuance which shall be
immediately delivered by the Company upon each such issuance).
(xi) The Company shall declare the payment of all
interest payable under subparagraph (vi)(B) above. If the Company is not
permitted under applicable law to pay any portion of the accrued interest with
respect to the principal amount being converted, the Company shall pay such
interest to the converting holder as soon thereafter as funds of the Company are
legally available for such payment. At the request of any such converting
holder, the Company shall provide such holder with written evidence of its
obligation to such holder. If for any reason the Company is unable to pay any
portion of the accrued interest with respect to the principal amount being
converted, such interest may, at the converting holder's option, be converted
into an additional number of shares of Conversion Stock determined by dividing
the amount of the unpaid interest to be applied for such purpose, by the lesser
of (A) the Conversion Price then in effect and (B) the Market Price of a share
of Common Stock.
(xii) If the shares of Conversion Stock issuable by
reason of conversion of this Note are convertible into or exchangeable for any
other stock or securities of the Company, the Company shall, at the converting
holder's option, upon surrender of this Note as provided herein together with
any notice, statement or payment required to effect such conversion or exchange
of Conversion Stock, deliver to such holder or as otherwise specified by such
holder a certificate or certificates representing the stock or securities into
which the shares of Conversion Stock issuable by reason of such conversion are
so convertible or exchangeable, registered in such name or names and in such
denomination or denominations as such holder has specified.
- 12 -
(b) Conversion Price.
(i) As used herein, the term "Conversion Price" shall
mean the quotient obtained by dividing (A) the Market Price of a share of the
Common Stock as of the date of conversion or such date for which the Conversion
Price is determined, as applicable, by (B) 1 and one-half (1.5); provided, that,
subject to Section 5(d), (1) if the Conversion Price calculated pursuant hereto
is equal to or greater than $10.00 per share of Common Stock, the Conversion
Price shall be $10.00 (the "Maximum Conversion Price") or (2) if the Conversion
Price calculated pursuant hereto is equal to or less than $6.67, the Conversion
Price shall be $6.67 (the "Minimum Conversion Price"). Notwithstanding the
foregoing, in order to prevent dilution of the conversion rights granted under
this subparagraph 5 and give effect to the Events of Default under subparagraph
4, upon each determination of the Conversion Price, the Conversion Price shall
first be calculated pursuant to this subparagraph 5(b)(i) and then shall be
subject to further adjustment pursuant to the provisions of subparagraph
5(b)(ii), 5(c), 5(e) and 5(f) and subparagraph 4(b)(iv), (v), (vi) and (viii),
as applicable.
(ii) If and whenever on or after the original date of
issuance of this Note, the Company issues or sells, or in accordance with
paragraph 5(c) is deemed to have issued or sold, any shares of Common Stock for
a consideration per share less than the Market Price in effect immediately prior
to such time of such issue or sale, then immediately upon such issue or sale or
deemed issue or sale the Minimum Conversion Price and Maximum Conversion Price
shall be reduced to the Minimum Conversion Price and Maximum Conversion Price
determined by multiplying such Minimum Conversion Price and Maximum Conversion
Price, as the case may be, by a fraction equal to the quotient obtained by
dividing (A) the sum of (1) the product derived by multiplying the Market Price
in effect immediately prior to the earlier of the date on which such issuance or
sale is made public and the date of such issue or sale by the number of shares
of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus
(2) the consideration, if any, received by the Company upon such issue or sale,
by (B) the product of (1) the Market Price in effect immediately prior to the
earlier of the date on which such issuance or sale is made public and the date
of such issue or sale and (2) the number of shares of Common Stock Deemed
Outstanding immediately after such issue or sale.
(iii) Notwithstanding the foregoing, there shall be
no adjustment in the Conversion Price as a result of any issue or sale (or
deemed issue or sale) of up to an aggregate number of 1,200,000 shares of Common
Stock to directors, officers and employees of the Company and its Subsidiaries
pursuant to stock option plans and stock ownership plans approved by the Board
of Directors (as such number of shares is proportionately adjusted for
subsequent stock splits, combinations and dividends affecting the Common Stock
and as such number includes all such stock options and purchase rights
outstanding at the time of the issuance of this Note).
(c) Effect on Conversion Price of Certain Events. For purposes
of determining the adjusted Conversion Price under paragraph 5(b), the following
shall be applicable:
(i) Issuance of Rights or Options. If the Company in
any manner grants or sells any Options and the price per share for which Common
Stock is issuable upon the exercise of such Options, or upon conversion or
exchange of any Convertible Securities issuable upon
- 13 -
exercise of such Options, is less than the Market Price in effect immediately
prior to the time of the granting or sale of such Options, then the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Options shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the granting or sale of such Options for such price per share. For
purposes of this paragraph, the "price per share for which Common Stock is
issuable" shall be determined by dividing (A) the total amount, if any, received
or receivable by the Company as consideration for the granting or sale of such
Options, plus the minimum aggregate amount of additional consideration payable
to the Company upon exercise of all such Options, plus in the case of such
Options which relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the issuance or
sale of such Convertible Securities and the conversion or exchange thereof, by
(B) the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options. No further
adjustment of the Conversion Price shall be made when Convertible Securities are
actually issued upon the exercise of such Options or when Common Stock is
actually issued upon the exercise of such Options or the conversion or exchange
of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the
Company in any manner issues or sells any Convertible Securities and the price
per share for which Common Stock is issuable upon conversion or exchange thereof
is less than the Market Price in effect immediately prior to the time of such
issue or sale, then the maximum number of shares of Common Stock issuable upon
conversion or exchange of such Convertible Securities shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
issuance or sale of such Convertible Securities for such price per share. For
the purposes of this paragraph, the "price per share for which Common Stock is
issuable" shall be determined by dividing (A) the total amount received or
receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof, by (B) the total maximum number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities. No further
adjustment of the Conversion Price shall be made when Common Stock is actually
issued upon the conversion or exchange of such Convertible Securities, and if
any such issue or sale of such Convertible Securities is made upon exercise of
any Options for which adjustments of the Conversion Price had been or are to be
made pursuant to other provisions of this paragraph 5, no further adjustment of
the Conversion Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If
the purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities or
the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock changes at any time, the Conversion Price in
effect at the time of such change shall be immediately adjusted to the
Conversion Price which would have been in effect at such time had such Options
or Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold; provided that if such adjustment would
result in an increase of the Conversion Price then in effect, such adjustment
shall not be effective until
- 14 -
thirty (30) days after written notice thereof has been given by the Company to
all holders of the Notes. For purposes of paragraph 5(c), if the terms of any
Option or Convertible Security which was outstanding as of the date of issuance
of the Preferred Stock are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such change; provided that no such
change shall at any time cause the Conversion Price hereunder to be increased.
(iv) Treatment of Expired Options and Unexercised
Convertible Securities. Upon the expiration of any Option or the termination of
any right to convert or exchange any Convertible Security without the exercise
of any such Option or right, the Conversion Price then in effect hereunder shall
be adjusted immediately to the Conversion Price which would have been in effect
at the time of such expiration or termination had such Option or Convertible
Security, to the extent outstanding immediately prior to such expiration or
termination, never been issued; provided that if such expiration or termination
would result in an increase in the Conversion Price then in effect, such
increase shall not be effective until thirty (30) days after written notice
thereof has been given to all holders of the Notes. For purposes of paragraph
5(c), the expiration or termination of any Option or Convertible Security which
was outstanding as of the date of issuance of the Preferred Stock shall not
cause the Conversion Price hereunder to be adjusted unless, and only to the
extent that, a change in the terms of such Option or Convertible Security caused
it to be deemed to have been issued after the date of issuance of this Note.
(v) Calculation of Consideration Received. If any
Common Stock, Option or Convertible Security is issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor shall be
deemed to be the amount received by the Company therefor (net of discounts,
commissions and related expenses). If any Common Stock, Option or Convertible
Security is issued or sold for a consideration other than cash, the amount of
the consideration other than cash received by the Company shall 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
shall be the Market Price thereof as of the date of receipt. If any Common
Stock, Option or Convertible Security is issued to the owners of the
non-surviving entity in connection with any merger in which the Company is the
surviving corporation, the amount of consideration therefor shall 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 Stock, Option or
Convertible Security, as the case may be. The fair value of any consideration
other than cash and securities shall be determined jointly by the Company and
the holders of a majority of the outstanding principal amount of the Notes. If
such parties are unable to reach agreement within a reasonable period of time,
the fair value of such consideration shall be determined by an independent
appraiser experienced in valuing such type of consideration jointly selected by
the Company and the holders of a majority of the outstanding principal amount of
the Notes. The determination of such appraiser shall be final and binding upon
the parties, and the fees and expenses of such appraiser shall be borne by the
Company.
(vi) Integrated Transactions. In case any Option is
issued in connection with the issue or sale of other securities of the Company,
together comprising one integrated
- 15 -
transaction in which no specific consideration is allocated to such Option by
the parties thereto, the Option shall be deemed to have been issued for a
consideration of $.01.
(vii) Treasury Shares. The number of shares of Common
Stock outstanding at any given time does not include shares owned or held by or
for the account of the Company or any Subsidiary, and the disposition of any
shares so owned or held shall be considered an issue or sale of Common Stock.
(viii) Record Date. If the Company takes a record of
the holders of Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (B) to subscribe for or purchase Common Stock, Options
or Convertible Securities, then such record date shall be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(d) Subdivision or Combination of Common Stock. If the Company
at any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, each of the Conversion Price, the Maximum Conversion
Price and the Minimum Conversion Price in effect immediately prior to such
subdivision shall be proportionately reduced, and if the Company at any time
combines (by reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, each of the
Conversion Price, the Maximum Conversion Price and the Minimum Conversion Price
in effect immediately prior to such combination shall be proportionately
increased.
(e) Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Company's assets or other
transaction, which in each case is effected in such a manner that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as an "Organic Change." Prior to the
consummation of any Organic Change, the Company shall make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the principal amount of the Notes then outstanding) to insure that each of the
holders of the Notes shall thereafter have the right to acquire and receive, in
lieu of or addition to (as the case may be) the shares of Conversion Stock
immediately theretofore acquirable and receivable upon the conversion of such
holder's Notes, such shares of stock, securities or assets as such holder would
have received in connection with such Organic Change if such holder had
converted its Notes immediately prior to such Organic Change. In each such case,
the Company shall also make appropriate provisions (in form and substance
satisfactory to the holders of a majority of the principal amount of the Notes
then outstanding) to insure that the provisions of this paragraph 5 and
paragraphs 6 and 7 hereof shall thereafter be applicable to the Notes
(including, in the case of any such consolidation, merger or sale in which the
successor entity or purchasing entity is other than the Company, an immediate
adjustment of the Conversion Price to the value for the Common Stock reflected
by the terms of such consolidation, merger or sale, and a corresponding
immediate adjustment in the number of shares of Conversion Stock acquirable and
receivable upon conversion of the Notes, if the value so
- 16 -
reflected is less than the Conversion Price in effect immediately prior to such
consolidation, merger or sale). The Company shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor entity (if other than the Company) resulting from consolidation or
merger or the entity purchasing such assets assumes by written instrument (in
form reasonably satisfactory to the holders of a majority of the principal
amount of the Notes then outstanding), the obligation to deliver to each such
holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holder may be entitled to acquire.
(f) Certain Events. If any event occurs of the type
contemplated by the provisions of this paragraph 5 but not expressly provided
for by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Board of Directors shall make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of the Notes;
provided that no such adjustment shall increase the Conversion Price as
otherwise determined pursuant to this paragraph 5 or decrease the number of
shares of Conversion Stock issuable upon conversion of the Notes then
outstanding.
(g) Notices.
(i) Immediately upon any adjustment of the Conversion
Price, the Company shall send written notice thereof to the holders of the
Notes, setting forth in reasonable detail and certifying the calculation of such
adjustment.
(ii) The Company shall send written notice to the
holder of this Note 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 Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Organic Change, dissolution or liquidation.
(iii) The Company shall also give at least twenty
(20) days prior written notice of the date on which any Organic Change,
dissolution or liquidation shall take place.
(iv) All notices, except those given pursuant to
paragraph 16, shall be delivered in accordance with paragraph 14.
(h) Conversion Limit. Notwithstanding anything herein to the
contrary, unless and until the Company shall have obtained the approval of its
stockholders for the issuance and sale of securities pursuant to the Purchase
Agreement which are convertible into and exercisable for, in the aggregate, more
than 19.9% of the common equity of the Company (calculated as provided in and
required by the rules of the Nasdaq Stock Market), to the extent the rules of
the Nasdaq Stock Market requiring a stockholder vote are applicable to such
issuance and sale, or the Company shall have obtained such other stockholder
approval as may be required to comply with the rules of such other national
securities exchange upon which the Common Stock may then be traded (such
percentage of Common Stock or other restriction, the "Conversion Limit"), the
Company will not be required to issue shares of Common Stock upon conversion of
this Note which when taken together with all other shares of Common Stock
previously issued upon conversion of the Preferred Stock and the conversion of
the Notes and exercise of the Warrants issued pursuant to the Purchase
- 17 -
Agreement, exceeds the Conversion Limit. In the event that the holders of this
Note deliver a Notice of Conversion with respect to all or any portion of the
outstanding principal amount of this Note and the number of shares of Common
Stock into which such portion of this Note shall be convertible in accordance
with the terms hereof exceeds the Conversion Limit, then in lieu of issuing any
shares in excess of the Conversion Limit ("Excess Shares"), the Company shall
pay to the holder on the date set for conversion an amount equal to the
principal amount of the Note being converted into Excess Shares multiplied by
the Optional Redemption Price (together with all accrued and unpaid interest
thereon).
6. Liquidating Dividends. If the Company declares a dividend
upon the Common Stock payable otherwise than in cash out of earnings or earned
surplus (determined in accordance with generally accepted accounting principles,
consistently applied) except for a stock dividend payable in shares of Common
Stock (a "Liquidating Dividend"), then the Company shall pay to the holders of
the Notes at the time of payment thereof the Liquidating Dividend which would
have been paid on the shares of Conversion Stock had the Notes been fully
converted immediately prior to the date on which a record is taken for such
Liquidating Dividend, or, if no record is taken, the date as of which the record
holders of Common Stock entitled to such dividends are to be determined.
7. Purchase Rights. If at any time the Company grants, issues
or sells any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property pro rata to the record holders of any
class of Common Stock (the "Purchase Rights"), then each holder of the Notes
shall be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such holder could have acquired if such
holder had held the number of shares of Conversion Stock acquirable upon
conversion of such holder's 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 Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
8. Definitions. For purposes of the Notes, the following
capitalized terms have the following meaning.
"Blocked Account" means a bank account designated by the
holders of the Notes over which the Company has relinquished control pursuant to
a letter in form and substance satisfactory to the holders of the Notes to the
bank at which such account is maintained.
"Business Day" means any day other than a Saturday, a Sunday
or a day on which banks in New York City are authorized or obligated by law or
executive order to close.
"Change of Control" has the meaning set forth in paragraph 3
hereof.
"Common Stock" means, collectively, the Company's Common
Stock, $.001 par value per share, and any capital stock of any class of the
Company hereafter authorized which is not limited to a fixed sum or percentage
of par or stated value in respect to the rights of the holders thereof to
participate in dividends or in the distribution of assets upon any liquidation,
dissolution or winding up of the Company.
- 18 -
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to
subparagraphs 5(c)(i) and 5(c)(ii) hereof whether or not the Options and
Convertible Securities are actually exercisable at such time.
"Consolidated EBITDA" means, for any period, the sum for such
period of (a) the consolidated net income (or deficit) of the Company and its
Subsidiaries for such period, taken as a whole, plus (b) the sum of, without
duplication, (i) income tax expense, (ii) interest expense, (iii) depreciation
expense, (iv) amortization expense and (v) any extraordinary non-cash loss less
(c) interest or investment income, less (d) any extraordinary non-cash gain, in
each case without giving effect to any net extraordinary gains or losses or
gains or losses for sales of assets other than in the ordinary course of
business, all as presented on the Company's financial statements and determined
in accordance with GAAP.
"Consolidated Net Indebtedness" means, at any time, (a) the
aggregate Indebtedness (as defined in the Purchase Agreement) of the Company and
its Subsidiaries at such time determined on a consolidated basis in accordance
with GAAP less (b) cash and cash equivalents as presented on the Company's
financial statements.
"Conversion Stock" means shares of the Company's Common Stock;
provided, that if there is a change such that the securities issuable upon
conversion of the Notes are issued by an entity other than the Company or there
is a change in the class of securities so issuable, then the term "Conversion
Stock" shall mean one share of the security issuable upon conversion of this
Note if such security is issuable in shares, or shall mean the smallest unit in
which such security is issuable if such security is not issuable in shares.
"Convertible Securities" means any stock or securities
(directly or indirectly) convertible into or exchangeable for Common Stock.
"Debt-to-EBITDA Ratio" means, for any fiscal quarter, the
ratio of (a) Consolidated Net Indebtedness as of the last day of such quarter to
(b) Consolidated EBITDA for such fiscal quarter.
"Events of Default" has the meaning set forth in paragraph 4
hereof.
"GAAP" means United States generally accepted accounting
principles in effect from time to time, consistently
applied.
"Interest Payment Dates" has the meaning set forth in
paragraph 1 hereof.
"Licensees" means each of PC Virginia Synthetic Fuel #1,
L.L.C., a Delaware limited liability company, PC West Virginia Synthetic Fuel
#1, L.L.C., a Delaware limited liability company, PC West Virginia Synthetic
Fuel #2, L.L.C., a Delaware limited liability company, and PC West Virginia
Synthetic Fuel #3, L.L.C., a Delaware limited liability company.
- 19 -
"Market Price" of any security means the average of the
closing prices of such security's sales on all securities exchanges on which
such security may at the time be listed, or, if there has been no sales on any
such exchange on any day, the average of the highest bid and lowest asked prices
on all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices quoted in
the Nasdaq Stock Market System as of 4:00 P.M., New York time, or, if on any day
such security is not quoted in the Nasdaq Stock Market System, the average of
the highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, in each such case averaged
over the period of the 30 days immediately preceding the day which "Market
Price" is being determined. If at any time such security is not listed on any
securities exchange or quoted in the Nasdaq Stock Market System or the
over-the-counter market, the "Market Price" shall be the fair value thereof
determined jointly by the Company and the holders of a majority of the principal
amount of the Notes outstanding. If such parties are unable to reach agreement
within a reasonable period of time, such fair value shall be determined by an
independent appraiser experienced in valuing securities jointly selected by the
Company and the holders of a majority of the principal amount of the Notes
outstanding. The determination of such appraiser shall be final and binding upon
the parties, and the Company shall pay the fees and expenses of such appraiser.
"Maturity Date" means the date that is the fifth anniversary
of the date of issuance of this Note.
"Notice of Conversion" has the meaning set forth in paragraph
5(a)(ii) hereof.
"Optional Redemption Price" of any Note as of any particular
date (expressed as a percentage of the outstanding principal amount of such Note
to be redeemed) shall be equal to (i) 100% from the date of issuance of the
Notes until and including the date that is thirty (30) months from such date of
issuance and (ii) 109.85% from the date following the date that is thirty (30)
months from the date of issuance of the Notes.
"Options" means any rights or options to subscribe for or
purchase Common Stock or Convertible Securities.
"Organic Change" has the meaning given that term in paragraph
5(e).
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof or other entity.
"Redemption Date" as to any principal amount of the Notes
means the date specified in the notice of any redemption at the Company's option
or at the holder's option or the applicable date specified herein in the case of
any other redemption.
"Securities" means any Capital Stock or other equity
securities of the Company.
- 20 -
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated a majority of
limited liability company, partnership, association or other business entity
gains or losses or shall be or control any managing director or general partner
of such limited liability company, partnership, association or other business
entity.
9. Registration of Transfer. Upon the surrender of any Note at
the Company's principal office, the Company shall, at the request of the holder
of such Note, execute and deliver (at the Company's expense) a new Note or Notes
in exchange therefor representing in the aggregate the principal amount
represented by the surrendered Note. Each such new Note shall be registered in
such name and shall represent such principal amount as is requested by the
holder of the surrendered Note and shall be substantially identical in form to
the surrendered Note, and interest shall accrue on the new Note from the date to
which interest has been fully paid on such surrendered Note.
10. Replacement. Upon receipt of evidence reasonably
satisfactory to the Company (an affidavit of the registered holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
a holder's Note, and in the case of any such loss, theft or destruction, upon
receipt of indemnity reasonably satisfactory to the Company (provided that if
the holder is a financial institution or other institutional investor its own
agreement shall be satisfacto ry), or, in the case of any such mutilation upon
surrender of such Note, the Company shall (at its expense) execute and deliver
in lieu of such Note a new Note of like kind representing the aggregate
principal amount represented by such lost, stolen, destroyed or mutilated Note
and dated the date of such lost, stolen, destroyed or mutilated Note, and
interest shall accrue on the new Note from the date to which interest has been
fully paid on such lost, stolen, destroyed or mutilated Note.
11. Cancellation. After all principal and accrued interest at
any time owed on this Note has been paid in full, this Note shall be surrendered
to the Company for cancellation and shall not be reissued.
12. Payments. All payments to be made to the holders of the
Notes shall be made in the lawful money of the United States of America in
immediately available funds.
13. Amendment and Waiver. No amendment, modification or waiver
shall be binding or effective with respect to any provision of this Agreement
without the prior written
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consent of the holders of at least 50.1% of the principal amount of the Notes
outstanding at the time such action is taken; provided that no such action shall
change (a) the rate at which or the manner in which interest on the Notes
accrues or the times at which such interest becomes payable or the amount
payable on redemption of the Notes or the times at which redemption of the Notes
is to occur, without the prior written consent of the holders of 100% of the
principal amount of the Notes then outstanding, (b) the Conversion Price of the
Notes or the number of shares or class of stock into which the Notes are
convertible, without the prior written consent of the holders of 100% of the
principal amount of the Notes then outstanding, or (c) the percentage required
to approve any change described in clauses (a) and (b) above, without the prior
written consent of the holders of 100% of the principal amount of the Notes then
outstanding; and provided further that no change in the terms hereof may be
accomplished by merger or consolidation of the Company with another corporation
or entity unless the Company has obtained the prior written consent of the
holders of the applicable percentage of the principal amount of the Notes then
outstanding.
14. Place of Payment and Notices. Except as otherwise
expressly provided hereunder, (a) payments of principal and interest shall be
delivered and (b) all notices referred to herein shall be (i) delivered in
person, (ii) transmitted by telecopy, (iii) sent by registered or certified
mail, postage prepaid with return receipt requested, or (iv) sent by reputable
overnight courier service, fees prepaid, to (x) the Company, at its principal
executive offices and (y) to any noteholder, at such holder's address as it
appears in the Purchase Agreement (unless otherwise indicated by any such
holder). Notices shall be deemed given upon personal delivery, upon receipt of
return receipt in the case of delivery by mail, upon acknowledgment by the
receiving telecopier or one day following deposit with an overnight courier
service.
15. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF NEW
YORK WITHOUT GIVING EFFECT TO THE LAWS OF CONFLICT OR CHOICE OF LAWS OF THE
STATE OF NEW YORK OR OF ANY OTHER JURISDICTION THAT WOULD RESULT IN THE
APPLICATION OF ANY LAWS OTHER THAN THOSE OF THE STATE OF NEW YORK.
16. CONSENT TO JURISDICTION; SERVICE OF PROCESS AND VENUE. ANY
LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS NOTE MAY BE BROUGHT IN ▇▇▇
▇▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇ IN THE COUNTY OF NEW YORK OR IN THE UNITED
STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION
AND DELIVERY OF THIS NOTE, THE COMPANY HEREBY IRREVOCABLY ACCEPTS IN RESPECT OF
ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID
COURTS. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT
OF ANY OF THE AFOREMENTIONED COURTS AND IN ANY SUCH ACTION OR PROCEEDING BY THE
MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO
THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE, SUCH SERVICE TO BECOME EFFECTIVE
TEN (10) DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE
HOLDERS OF THE NOTES TO SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW
OR TO
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COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER
JURISDICTION. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE JURISDICTION OR LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN
ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE COMPANY HAS OR
HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY
LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT,
ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS
PROPERTY, THE COMPANY HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS
OBLIGATIONS UNDER THIS NOTE.
17. WAIVER OF JURY TRIAL. THE COMPANY HEREBY WAIVES ANY RIGHT
TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM CONCERNING ANY
RIGHTS UNDER THIS NOTE OR UNDER ANY AMENDMENT DELIVERED OR WHICH IN THE FUTURE
MAY BE DELIVERED IN CONNECTION HEREWITH, OR ARISING FROM ANY RELATIONSHIP
EXISTING IN CONNECTION WITH THIS NOTE, AND AGREES THAT ANY SUCH ACTION,
PROCEEDING OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
THE COMPANY CERTIFIES THAT NO OFFICER, REPRESENTATIVE, AGENT OR ATTORNEY OF THE
HOLDERS OF THIS NOTE HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE HOLDERS
OF THIS NOTE WOULD NOT, IN THE EVENT OF ANY ACTION, PROCEEDING OR COUNTERCLAIM,
SEEK TO ENFORCE THE FOREGOING WAIVERS. THE COMPANY HEREBY ACKNOWLEDGES THAT THIS
PROVISION IS A MATERIAL INDUCEMENT FOR THE HOLDERS OF THIS NOTE ACCEPTING
DELIVERY HEREOF.
* * * * *
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IN WITNESS WHEREOF, the Company has executed and delivered
this Note as of the date first written above.
COVOL TECHNOLOGIES, INC.
Attest By /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
------------------------------
/s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ Its CFO
------------------------------- ------------------------------
Exhibit A
FORM OF NOTICE OF CONVERSION
____________________, 199_
BY FACSIMILE: or ______________ (alternate)
Covol Technologies, Inc.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
cc: [Name of Transfer Agent]
Re: Convertible Secured Note
The undersigned hereby elects to convert the principal amount of the
Convertible Secured Note indicated below, into shares of Common Stock, par value
$.001 per share of the Company, as of the following date:
Date to Effect Conversion:
Principal amount of Note being Converted:
Conversion Price (calculated as follows):
The number of shares of Common Stock to be received on conversion of $______
principal amount of the Note is _______ shares.
A-1
Delivery Instructions:
Certificates to be
issued in the name of:
Certificates to be
delivered to:
Date:
Authorized signature of Registered Holder
CONFIRMATION OF RECEIPT
OF NOTICE OF CONVERSION
AND CONVERSION CALCULATION:
Acknowledged:
COVOL TECHNOLOGIES, INC.
By: --------------------------------------------
Name: --------------------------------------------
Title: --------------------------------------------
A-2