THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO NETFABRIC HOLDINGS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
SECURED CONVERTIBLE NOTE
------------------------
FOR VALUE RECEIVED, each of NETFABRIC HOLDINGS, INC., a Delaware (the
"Parent"), and the other companies listed on Exhibit A attached hereto (such
other companies together with the Parent, each a "Company" and collectively, the
"Companies"), jointly and severally, promises to pay to LAURUS MASTER FUND,
LTD., c/o M&C Corporate Services Limited, P.O. Box 309 GT, ▇▇▇▇▇▇ House, South
Church Street, ▇▇▇▇▇▇ Town, Grand Cayman, Cayman Islands, Fax: ▇▇▇-▇▇▇-▇▇▇▇ (the
"Holder") or its registered assigns or successors in interest, the sum of One
Million Five Hundred Thousand Dollars ($1,500,000) or, if different, the
aggregate principal amount of all Loans (as defined in the Security Agreement
referred to below), together with any accrued and unpaid interest hereon, on
February 10, 2009 (the "Maturity Date") if not sooner paid.
Capitalized terms used herein without definition shall have the meanings
ascribed to such terms in the Security Agreement among the Companies and the
Holder dated as of the date hereof (as amended, modified and/or supplemented
from time to time, the "Security Agreement").
The following terms shall apply to this Note (this "Note"):
ARTICLE I
CONTRACT RATE
1.1 Contract Rate. Subject to Sections 4.2 and 5.10, interest payable on
the outstanding principal amount of this Note (the "Principal Amount") shall
accrue at a rate per annum equal to the "prime rate" published in The Wall
Street Journal from time to time (the "Prime Rate"), plus one percent (1.0%)
(the "Contract Rate"). The Contract Rate shall be increased or decreased as the
case may be for each increase or decrease in the Prime Rate in an amount equal
to such increase or decrease in the Prime Rate; each change to be effective as
of the day of the change in the Prime Rate. Subject to Section 1.2, the Contract
Rate shall not at any time be less than eight percent (8.0%). Interest shall be
(i) calculated on the basis of a 360 day year, and (ii) payable monthly, in
arrears, commencing on March 1, 2006 on the first business day of each
consecutive calendar month thereafter through and including the Maturity Date
and on the Maturity Date, whether by acceleration or otherwise.
1
1.2 Contract Rate and Payments. The Contract Rate shall be calculated on
the last business day of each calendar month hereafter (other than for increases
or decreases in the Prime Rate which shall be calculated and become effective in
accordance with the terms of Section 1.1) until the Maturity Date (each a
"Determination Date")
ARTICLE II
LOANS; PAYMENTS UNDER THIS NOTE
2.1 Loans. All Loans evidenced by this Note shall be made in accordance
with the terms and provisions of the Security Agreement.
2.2 No Effective Registration. Notwithstanding anything to the contrary
herein, the Holder shall not be required to accept shares of Common Stock as
payment following a conversion by the Holder if there fails to exist an
effective current Registration Statement (as defined in the Registration Rights
Agreement) covering the shares of Common Stock to be issued, or if an Event of
Default hereunder exists and is continuing, unless such requirement is otherwise
waived in writing by the Holder in whole or in part at the Holder's option.
2.3 Optional Redemption in Cash. The Companies will have the option of
prepaying this Note ("Optional Redemption") by paying to the Holder a sum of
money equal to i) one hundred thirty percent (130%) of the principal amount of
this Note together with accrued but unpaid interest thereon and any and all
other sums due, accrued or payable to the Holder arising under this Note, the
Security Agreement, or any other Ancillary Agreement if such redemption is made
on or before February 10, 2007; ii) one hundred twenty five percent (125%) of
the principal amount of this Note together with accrued but unpaid interest
thereon and any and all other sums due, accrued or payable to the Holder arising
under this Note, the Security Agreement, or any other Ancillary Agreement if
such redemption is made after February 10, 2007 but on or before February 10,
2008 or iii) one hundred twenty percent (120%) of the principal amount of this
Note together with accrued but unpaid interest thereon and any and all other
sums due, accrued or payable to the Holder arising under this Note, the Security
Agreement, or any other Ancillary Agreement if such redemption is made after
February 10, 2008 but on or before February 10, 2009 (each such respective
amount being a "Redemption Amount") outstanding on the Redemption Payment Date
(as defined below). The Company shall deliver to the Holder a written notice of
redemption (the "Notice of Redemption") specifying the date for such Optional
Redemption (the "Redemption Payment Date"), which date shall be seven (7) days
after the date of the Notice of Redemption (the "Redemption Period"). A Notice
of Redemption shall not be effective with respect to any portion of this Note
for which the Holder has previously delivered a Notice of Conversion (defined
below) pursuant to Section 3.1, or for conversions elected to be made by the
Holder pursuant to Section 3.1 during the Redemption Period. The Redemption
Amount shall be determined as if such ▇▇▇▇▇▇'s conversion elections had been
completed immediately prior to the date of the Notice of Redemption. On the
Redemption Payment Date, the Redemption Amount (plus any additional interest and
fees accruing on the Notes during the Redemption Period) must be irrevocably
paid in full in immediately available funds to the Holder. In the event the
Companies fail to pay the Redemption Amount on the Redemption Payment Date, then
such Redemption Notice shall be null and void.
2
ARTICLE III
CONVERSION RIGHTS AND FIXED CONVERSION PRICE
3.1 Optional Conversion. Subject to the terms of this Article III, the
Holder shall have the right, but not the obligation, at any time until the
Maturity Date, or during an Event of Default (as defined in Article IV), and,
subject to the limitations set forth in Section 3.2 hereof, to convert all or
any portion of the outstanding Principal Amount and/or accrued interest and fees
due and payable into fully paid and nonassessable shares of the Common Stock at
the Fixed Conversion Price. For purposes hereof, subject to Section 3.6 hereof,
the initial "Fixed Conversion Price" means $0.91. The shares of Common Stock to
be issued upon such conversion are herein referred to as the "Conversion
Shares."
3.2 Conversion Limitation. Notwithstanding anything contained herein to the
contrary, the Holder shall not be entitled to convert pursuant to the terms of
this Note an amount that would be convertible into that number of Conversion
Shares which would exceed the difference between (i) 9.99% of the outstanding
shares of Common Stock and (ii) the number of shares of Common Stock
beneficially owned by the Holder. For purposes of the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Exchange Act and Regulation 13d-3 thereunder. The Conversion Shares
limitation described in this Section 3.2 shall automatically become null and
void following notice to the Parent upon the occurrence and during the
continuance of an Event of Default, upon 75 days prior notice to the Parent, or
upon receipt by the Holder of a Notice of Redemption. Notwithstanding anything
contained herein to the contrary, the provisions of this Section 3.2 are
irrevocable and may not be waived by the Holder or any Company.
3.3 Mechanics of ▇▇▇▇▇▇'s Conversion. In the event that the Holder elects
to convert this Note into Common Stock, the Holder shall give notice of such
election by delivering an executed and appropriately completed notice of
conversion in substantially the form of Exhibit B hereto ("Notice of
Conversion") to the Parent and such Notice of Conversion shall provide a
breakdown in reasonable detail of the Principal Amount and accrued and unpaid
interest and fees that are being converted. On each Conversion Date (as
hereinafter defined) and in accordance with its Notice of Conversion, the Holder
shall make the appropriate reduction to the Principal Amount and accrued and
unpaid interest and fees as entered in its records and shall provide written
notice thereof to the Parent within two (2) Business Days after the Conversion
Date. Each date on which a Notice of Conversion is delivered or telecopied to
the Parent in accordance with the provisions hereof shall be deemed a Conversion
Date (the "Conversion Date"). Pursuant to the terms of the Notice of Conversion,
the Parent will issue instructions to the transfer agent accompanied by an
opinion of counsel within two (2) Business Days of the date of the delivery to
the Parent of the Notice of Conversion and shall cause the transfer agent to
transmit the certificates representing the Conversion Shares to the Holder by
crediting the account of the Holder's designated broker with the Depository
Trust Corporation ("DTC") through its Deposit Withdrawal Agent Commission
("DWAC") system within [three (3) Business Days] after receipt by the Parent of
the Notice of Conversion (the "Delivery Date"). In the case of the exercise of
the conversion rights set forth herein the conversion privilege shall be deemed
to have been exercised and the Conversion Shares issuable upon such conversion
shall be deemed to have been issued upon the date of receipt by the Parent of
3
the Notice of Conversion. The Holder shall be treated for all purposes as the
record holder of the Conversion Shares, unless the Holder provides the Parent
written instructions to the contrary.
3.4 Late Payments. Each Company understands that a delay in the delivery of
the Conversion Shares in the form required pursuant to this Article beyond the
Delivery Date could result in economic loss to the Holder. As compensation to
the Holder for such loss, in addition to all other rights and remedies which the
Holder may have under this Note, applicable law or otherwise, the Companies
shall, jointly and severally, pay late payments to the Holder for any late
issuance of Conversion Shares in the form required pursuant to this Article III
upon conversion of this Note, in the amount equal to $500 per Business Day after
the Delivery Date. The Companies shall, jointly and severally, make any payments
incurred under this Section in immediately available funds upon demand.
3.5 Conversion Mechanics. The number of shares of Common Stock to be issued
upon each conversion of this Note shall be determined by dividing that portion
of the principal and interest and fees to be converted, if any, by the then
applicable Fixed Conversion Price.
3.6 Adjustment Provisions. The Fixed Conversion Price and number and kind
of shares or other securities to be issued upon conversion determined pursuant
to Section 3.1 shall be subject to adjustment from time to time upon the
occurrence of certain events during the period that this conversion right
remains outstanding, as follows:
(a) Reclassification. If the Parent at any time shall, by
reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note, as to the
unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed
to evidence the right to purchase an adjusted number of such securities and kind
of securities as would have been issuable as the result of such change with
respect to the Common Stock (i) immediately prior to or (ii) immediately after
such reclassification or other change at the sole election of the Holder.
(b) Stock Splits, Combinations and Dividends. If the shares of Common
Stock are subdivided or combined into a greater or smaller number of shares of
Common Stock, or if a dividend is paid on the Common Stock or any preferred
stock issued by the Parent in shares of Common Stock, the Fixed Conversion Price
shall be proportionately reduced in case of subdivision of shares or stock
dividend or proportionately increased in the case of combination of shares, in
each such case by the ratio which the total number of shares of Common Stock
outstanding immediately after such event bears to the total number of shares of
Common Stock outstanding immediately prior to such event.
3.7 Reservation of Shares. During the period the conversion right exists,
the Parent will reserve from its authorized and unissued Common Stock a
sufficient number of shares to provide for the issuance of Conversion Shares
4
upon the full conversion of this Note and the Option. The Parent represents that
upon issuance, the Conversion Shares will be duly and validly issued, fully paid
and non-assessable. The Parent agrees that its issuance of this Note shall
constitute full authority to its officers, agents, and transfer agents who are
charged with the duty of executing and issuing stock certificates to execute and
issue the necessary certificates for the Conversion Shares upon the conversion
of this Note.
3.8 Registration Rights. The Holder has been granted registration rights
with respect to the Conversion Shares as set forth in a Registration Rights
Agreement.
3.9 Issuance of New Note. Upon any partial conversion of this Note, a new
Note containing the same date and provisions of this Note shall, at the request
of the Holder, be issued by the Parent to the Holder for the principal balance
of this Note and accrued interest which shall not have been converted or paid.
Subject to the provisions of Article IV of this Note, the Parent shall not pay
any costs, fees or any other consideration to the Holder for the production and
issuance of a new Note.
ARTICLE IV
EVENTS OF DEFAULT AND DEFAULT RELATED PROVISIONS
4.1 Events of Default. The occurrence of an Event of Default under the
Security Agreement shall constitute an event of default ("Event of Default")
hereunder.
4.2 Default Interest. Following the occurrence and during the continuance
of an Event of Default, the Companies shall, jointly and severally, pay
additional interest on the outstanding principal balance of this Note in an
amount equal to two percent (2%) per month, and all outstanding Obligations,
including unpaid interest, shall continue to accrue interest at such additional
interest rate from the date of such Event of Default until the date such Event
of Default is cured or waived. In the event, an Event of Default is occuring for
a partial month, the default interest rate should only apply for such period.
4.3 Default Payment. Following the occurrence and during the continuance of
an Event of Default, the Holder, at its option, may elect, in addition to all
rights and remedies of the Holder under the Security Agreement and the Ancillary
Agreements and all obligations of each Company under the Security Agreement and
the Ancillary Agreements, to require the Companies, jointly and severally, to
make a Default Payment ("Default Payment"). The Default Payment shall be 120% of
the outstanding principal amount of the Note, plus accrued but unpaid interest,
all other fees then remaining unpaid, and all other amounts payable hereunder.
The Default Payment shall be applied first to any fees due and payable to the
Holder pursuant to the Notes and/or the Ancillary Agreements, then to accrued
and unpaid interest due on the Notes, the Security Agreement and then to the
outstanding principal balance of the Notes. The Default Payment shall be due and
payable immediately on the date that the Holder has exercised its rights
pursuant to this Section 4.3.
ARTICLE V
MISCELLANEOUS
5
5.1 Conversion Privileges. The conversion privileges set forth in Article
III shall remain in full force and effect immediately from the date hereof until
the date this Note is indefeasibly paid in full and irrevocably terminated.
5.2 Cumulative Remedies. The remedies under this Note shall be cumulative.
5.3 Failure or Indulgence Not Waiver. No failure or delay on the part of
the Holder hereof in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
5.4 Notices. Any notice herein required or permitted to be given shall be
in writing and shall be deemed effectively given: (a) upon personal delivery to
the party notified, (b) when sent by confirmed telex or facsimile if sent during
normal business hours of the recipient, if not, then on the next business day,
(c) five days after having been sent by registered or certified mail, return
receipt requested, postage prepaid, or (d) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the
respective Company at the addresses provided for such Company in the Security
Agreement executed in connection herewith, and to the Holder at the address
provided in the Security Agreement for such Holder, with a copy to ▇▇▇▇ ▇.
▇▇▇▇▇▇, Esq., ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇
number (▇▇▇) ▇▇▇-▇▇▇▇, or at such other address as the respective Company or the
Holder may designate by ten days advance written notice to the other parties
hereto.
5.5 Amendment Provision. The term "Note" and all references thereto, as
used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented, and any successor instrument as such successor instrument may be
amended or supplemented.
5.6 Assignability. This Note shall be binding upon each Company and its
successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder in accordance with the
requirements of the Security Agreement. No Company may assign any of its
obligations under this Note without the prior written consent of the Holder, any
such purported assignment without such consent being null and void.
5.7 Cost of Collection. In case of any Event of Default under this Note,
the Companies shall, jointly and severally, pay the Holder's reasonable costs of
collection, including reasonable attorneys' fees.
5.8 Governing Law, Jurisdiction and Waiver of Jury Trial.
(a) THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAW.
(b) EACH COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL
COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY,
ON THE ONE HAND, AND THE HOLDER, ON THE OTHER HAND, PERTAINING TO THIS NOTE, THE
SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY
6
AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE,
THE SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY AGREEMENTS; PROVIDED, THAT
EACH COMPANY ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE
HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK;
AND FURTHER PROVIDED, THAT NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE TO
PRECLUDE THE HOLDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER
JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY
OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF THE HOLDER. EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN
ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT,
AND EACH COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK
OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACH COMPANY
HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS
ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS,
COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL
ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH IN THE SECURITY AGREEMENT AND
THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY'S
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.
(c) EACH COMPANY DESIRES THAT ITS DISPUTES BE RESOLVED BY A JUDGE
APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE
BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, EACH COMPANY HERETO WAIVES
ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO
RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE
HOLDER, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL
TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS NOTE, THE
SECURITY AGREEMENT, ANY OTHER ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED
HERETO OR THERETO.
5.9 Severability. 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.
7
5.10 Maximum Payments. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum rate
permitted by such law, any payments in excess of such maximum rate shall be
credited against amounts owed by the Companies to the Holder and thus refunded
to the Companies.
5.11 Security Interest and Guarantee. The Holder has been granted a
security interest (i) in certain assets of the Companies as more fully described
in the Security Agreement and (ii) pursuant to the Stock Pledge Agreement dated
as of the date hereof. The obligations of the Companies under this Note are
guaranteed by certain Subsidiaries of the Companies pursuant to the Subsidiary
Guaranty dated as of the date hereof.
5.12 Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.
5.13 Registered Obligation. This Note is intended to be a registered
obligation within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)
and the Company (or its agent) shall register the Note (and thereafter shall
maintain such registration) as to both principal and any stated interest.
Notwithstanding any document, instrument or agreement relating to this Note to
the contrary, transfer of this Note (or the right to any payments of principal
or stated interest thereunder) may only be effected by (i) surrender of this
Note and either the reissuance by the Company of this Note to the new holder or
the issuance by the Company of a new instrument to the new holder, or (ii)
transfer through a book entry system maintained by the Company (or its agent),
within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).
[Balance of page intentionally left blank; signature page follows]
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IN WITNESS WHEREOF, each Company has caused this Secured Convertible
Minimum Borrowing Note to be signed in its name effective as of this 10th day of
February, 2006.
NETFABRIC HOLDINGS, INC.
By:__________________________________
Name:
Title:
WITNESS:
----------------------------------
NETFABRIC CORPORATION
By:__________________________________
Name:
Title:
WITNESS:
----------------------------------
UCA SERVICES, INC.
By:__________________________________
Name:
Title:
WITNESS:
----------------------------------
9
EXHIBIT A
---------
OTHER COMPANIES
---------------
NetFabric Corporation, Inc.
UCA Services, Inc.
10
EXHIBIT B
---------
NOTICE OF CONVERSION
--------------------
(To be executed by the Holder in order to convert the Secured Convertible
Minimum Borrowing Note)
The undersigned hereby elects to convert $_________ of the principal and
$_________ of the interest due on the Secured Convertible Minimum Borrowing Note
dated as of _________, 200__ (the "Note") issued by NETFABRIC HOLDINGS, INC.
(the "Parent") and the other Companies named and as defined therein into shares
of Common Stock of the Parent in accordance with the terms and conditions set
forth in the Note, as of the date written below.
Date of Conversion: _______________________________________________________
Conversion Price: _______________________________________________________
Shares To Be Delivered: _______________________________________________________
Signature: _______________________________________________________
Print Name: _______________________________________________________
Address: _______________________________________________________
Holder DWAC instructions _______________________________________________________
11