NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK OR ANY OTHER SECURITIES
ISSUABLE UPON CONVERSION OF THIS NOTE HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THIS NOTE HAS BEEN ACQUIRED, AND ANY SHARES OF COMMON
STOCK OR ANY OTHER SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE ARE REQUIRED
TO BE ACQUIRED, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO DISTRIBUTION OR
RESALE, AND MAY NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR THIS NOTE AND/OR
SUCH SHARES OR OTHER SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO
THE ISSUER OF THIS NOTE AND SUCH SHARES OR OTHER SECURITIES TO THE EFFECT THAT
REGISTRATION IS NOT REQUIRED UNDER SUCH ACT AND SUCH STATE SECURITIES LAWS.
▇▇▇▇▇▇ Financial Corporation
10% Senior Subordinated Secured Convertible Promissory Note
Dated: December 5, 2003 Principal Amount: $___,000.00
Garden City, New York
For Value Received, the undersigned, ▇▇▇▇▇▇ Financial Corporation (together
with its successors and assigns, "▇▇▇▇▇▇"), a Delaware corporation, hereby
promises to pay to ________________, [an individual residing in the State of
_____________] [a _________ {state and type of entity}] ("Lender"), the
principal sum of _______________________ Thousand Dollars ($___,000.00),
together with interest as set forth below. This 10% Senior Subordinated Secured
Convertible Promissory Note (this "Note") is issued (a) pursuant to, and is the
"Note" referred to, in that certain Subscription Agreement between ▇▇▇▇▇▇ and
Lender, as accepted by ▇▇▇▇▇▇ on December 5, 2003 (the "Subscription
Agreement"), and (b) in connection with, and is a "Note" referred to in, that
certain Security Agreement, dated as of December 5, 2003 (the "Security
Agreement"), by and between ▇▇▇▇▇▇, Lender and the original registered owners of
10% Senior Subordinated Secured Convertible Promissory Notes of ▇▇▇▇▇▇ (together
with this Note, the "Secured Notes") identical in form to this Note (other than
the name of the lender, principal amount and issuance date) in the aggregate
original principal amount (together with the original principal amount of this
Note) of between $650,000.00 and $1,600,000.00, each as entered into in
connection with the private placement offering (the "Private Placement") of
▇▇▇▇▇▇ of the Secured Notes made pursuant to a Private Placement Memorandum,
dated October 7, 2003 (the "PPM"). The Company has granted the placement agent
for the Private Placement the right to sell additional Secured Notes up to
$240,000 in aggregate principal amount solely to cover over-allotments in the
Private Placement. This Note is made subject to the terms and conditions of the
Security Agreement as if set forth in full in this Note.
1. Interest Rate. Until an event of Default shall have occurred, the
principal amount evidenced by this Note shall bear interest at the rate of 10%
per annum, computed on the basis of a 360-day year for the actual number of days
elapsed (the "Applicable Interest Rate"). Upon the occurrence of an event of
Default, the outstanding principal amount and any accrued but unpaid interest
thereon shall bear interest until paid at the Applicable Interest Rate plus an
additional 2% per annum (the "Default Interest Rate").
2. Payment Date; Payment Method; Prepayment.
(a) Payment Dates. Payment of all accrued and unpaid interest due under
this Note shall be payable semi-annually, in arrears, on the first business day
(each, an "Interest Payment Date") of the months of January and July of each
calendar year in which any principal amount evidenced by this Note remains
outstanding, commencing with July 1, 2004. Payment of any outstanding principal
amount evidenced by this Note (and any accrued but unpaid interest thereon)
shall be made on the earlier of (i) December 4, 2006 or (ii) the date on which
the Company (A) is merged with or combines with another entity in which the
Company is not deemed the surviving corporation under the applicable provisions
of the General Corporation Law of the State of Delaware (the "DGCL") or (B)
sells all or substantially all of its assets within the meaning of the DGCL (in
either of such events, the "Maturity Date"). Upon payment in full of the
principal evidenced by this Note (and any accrued but unpaid interest thereon),
▇▇▇▇▇▇, by ▇▇▇▇▇▇'s acceptance of this Note, agrees to mark this Note
"CANCELLED" and return this Note as so marked to ▇▇▇▇▇▇ within five days after
such payment in full is received. For purposes of this Note, the term "business
day" shall mean any day other than a Saturday, Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
(b) Payment Method. Payment of the principal evidenced by this Note (and
any accrued but unpaid interest thereon) shall be made by check, subject to
collection, tendered to Lender, via postage-paid, first class mail, at the
address for the giving of notices as set forth in Section 8 of this Note.
(c) Voluntary Prepayment. ▇▇▇▇▇▇ may pay, without penalty or premium, the
principal amount evidenced by this Note (and any accrued but unpaid interest
thereon), in whole or part, at any time up to the Maturity Date upon no less
than ten days' prior notice (the "Prepayment Notice Period") to Lender. Any
partial prepayment shall first be applied against any accrued and unpaid
interest due under this Note and then to the principal amount evidenced by this
Note. In the event of a voluntary prepayment being less than the full amount
outstanding under this Note (including any accrued but unpaid interest), upon
surrender of this Note in connection with said partial prepayment, ▇▇▇▇▇▇ shall
deliver to Lender a new note substantially in the form of this Note and
evidencing as principal any amount not so prepaid. Notwithstanding the
immediately preceding sentence, following any partial prepayment of principal
evidenced by this Note, this Note shall be deemed to evidence a debt of ▇▇▇▇▇▇
only to the extent of the remaining principal amount outstanding following such
partial repayment(s) (plus any accrued and unpaid interest).
3. Default; Acceleration.
(a) Any of the following shall constitute an "event of Default" under this
Note:
2
(i) the failure by ▇▇▇▇▇▇ to pay any amounts required to be paid under this
Note or any of the other Secured Notes on or before the date on which such
payment was due;
(ii) the breach or noncompliance by ▇▇▇▇▇▇ of any of its material
representations, warranties or covenants contained in the Security Agreement;
(iii) ▇▇▇▇▇▇ shall
(A) apply for or consent to the appointment of a receiver or trustee of
▇▇▇▇▇▇'▇ assets,
(B) make a general assignment for the benefit of creditors,
(C) file a petition or other request no matter how denominated ("Petition")
seeking relief under Title 11 of the United States Code or under any other
federal or state bankruptcy, reorganization, insolvency, readjustment of debt,
dissolution or liquidation law or statute ("Bankruptcy Statute"), or
(D) file an answer admitting the material allegations of a Petition filed
against it in any proceeding under any Bankruptcy Statute;
(iv) there shall have entered against ▇▇▇▇▇▇ an order for relief under any
Bankruptcy Statute; or
(v) a Petition seeking an order for relief under any Bankruptcy Statute is
filed by any one other than ▇▇▇▇▇▇ and without ▇▇▇▇▇▇'▇ consent or agreement
which is not dismissed or stayed within 60 days after the date of such filing,
or such Petition is not dismissed upon the expiration of any stay thereof.
(b) Subject to the provisions of paragraph 3(d), upon the occurrence of an
event of Default, the unpaid principal amount evidenced by this Note (and any
accrued but unpaid interest thereon) shall be immediately due and payable.
(c) Until the occurrence of an event of Default, the principal amount
evidenced by this Note shall bear interest at the Applicable Interest Rate and
upon an event of Default, any unpaid principal amount under this Note and any
accrued but unpaid interest through the date of effectiveness of such event of
Default shall bear interest until paid at the Default Interest Rate.
(d) (i) In the event that ▇▇▇▇▇▇ shall fail to tender payment of all
outstanding principal evidenced by this Note on or prior to the
Maturity Date, ▇▇▇▇▇▇ shall issue and deliver to Lender shares (each,
a "Penalty Share") of the common stock, par value $.10 per share (the
"Common Stock"), of ▇▇▇▇▇▇, at the per diem rate equal to 0.003125
Penalty Shares for every $1.00 of principal evidenced by this Note not
so tender (i.e., 2,343.75 Penalty Shares per month for each $25,000 of
principal not paid on the Maturity Date), for the period from the
Maturity Date to the date of payment of such principal. Issuance of
any Penalty Shares shall be made monthly, in arrears, commencing one
month following the Maturity Date, and, with respect to the final
issuance of Penalty Shares, within twenty days of the date when
payment in full of all such principal is tendered to Lender. The
Penalty Shares shall not be registered under the Securities Act of
1933, as amended (the "Securities Act"), or any state securities laws
and ▇▇▇▇▇▇ shall be under no obligation to register any Penalty Shares
under the Securities Act.
3
(ii) So long as ▇▇▇▇▇▇ shall issue and tender Penalty Shares in accordance
with the provisions of subparagraph 3(d)(i), the failure to pay interest under
this Note shall not be deemed an event of Default.
4. Subordination. This Note shall at all times be wholly subordinate and
junior in right of payment to all Senior Indebtedness to the extent and in the
manner provided in this Section 4. This Note shall at all times be deemed equal
and pari passu in right of payment to all Indebtedness evidenced by the Secured
Notes.
(a) Definitions. As used in this Section 4 and Section 12, the following
terms shall have the following meanings:
(i) "Indebtedness" shall mean (A) all indebtedness for borrowed money or
for the deferred purchase price of property or services (other than current
trade liabilities incurred in the ordinary course of business and payable in
accordance with customary practices), (B) any other indebtedness that is
evidenced by a note, bond, debenture or similar instrument, (C) all obligations
under financing leases, (D) all obligations in respect of acceptances issued or
created, (E) all obligations secured by any lien on property and (F) all
guarantee obligations;
(ii) "Senior Covenant Default" shall mean any event of default as defined
under any agreement pertaining to Senior Indebtedness, other than a Senior
Payment Default;
(iii) "Senior Indebtedness" means all Indebtedness of ▇▇▇▇▇▇ currently or
in the future outstanding to Branch Banking & Trust Company ("Mortgagee") under
that certain North Carolina Deed of Trust, dated July 3, 2002, between Mortgagee
and ▇▇▇▇▇▇;
(iv) "Senior Default" shall mean a Senior Payment Default or a Senior
Covenant Default;
(v) "Senior Payment Default" shall mean any default in the payment of any
Senior Indebtedness; and
(vi) "Subordinated Indebtedness" shall mean the principal evidenced by the
Secured Notes (and all accrued and upon interest thereon), including this Note,
and any other obligations of ▇▇▇▇▇▇ arising out of the Secured Notes, including
this Note.
(b) General. Upon the maturity of any Senior Indebtedness by lapse of time,
acceleration, required prepayment or otherwise, such Senior Indebtedness shall
first be paid in full in cash or in a manner satisfactory to the payees of such
Senior Indebtedness, or such payment duly provided for in cash or in a manner
satisfactory to the payees of such Senior Indebtedness, before any payment is
made on account of the Subordinated Indebtedness or by ▇▇▇▇▇▇ or Affiliates (as
defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended) of
▇▇▇▇▇▇ to acquire this Note. Notwithstanding any provision in this Section 4 to
the contrary, (i) for so long as no Senior Default has occurred and is
continuing, or would occur as a result of such a payment, ▇▇▇▇▇▇ may pay and
Lender may receive and retain all regularly scheduled payments of principal and
interest (other than at the Default Interest Rate) under the Secured Notes,
including this Note, and (ii) for so long as no Senior Default has occurred and
is continuing or would occur as a result of any such prepayment, ▇▇▇▇▇▇ may
prepay the principal amount evidenced by the Secured Notes, including this Note,
in accordance with the provisions of paragraph 2(c), and Lender may receive such
prepayments.
(c) Limitation on Payment.
4
(i) Upon receipt by ▇▇▇▇▇▇ and Lender of a Blockage Notice (as defined
below), then, unless and until (A) all Senior Defaults that gave rise to the
Blockage Notice shall have been remedied or effectively waived or shall have
ceased to exist or (B) the Senior Indebtedness in respect of which such Senior
Defaults shall have occurred shall have been paid in full in cash or in a manner
satisfactory to the payees of such Senior Indebtedness, no direct or indirect
payment (in cash, property, securities or by set-off or otherwise) of or on
account of the principal evidenced by the Secured Notes, including this Note, or
accrued and unpaid interest or as a sinking fund for the Secured Notes,
including this Note, or in respect of any redemption, retirement, purchase or
other acquisition of the Secured Notes, including this Note, shall be made.
Notwithstanding the foregoing, in the case of a Blockage Notice that relates to
a Senior Covenant Default, the foregoing restrictions shall commence upon
▇▇▇▇▇▇'▇ receipt of such Blockage Notice and shall expire 270 days thereafter.
Any principal and interest paid with respect to the Secured Notes, including
this Note, prior to the receipt of the Blockage Notice in question by Lender
hereof may be kept by such holders of the Secured Notes, including Lender; and
(ii) For purposes of this Section 4, a "Blockage Notice" is a notice of the
holder of Senior Indebtedness that a Senior Default has in fact occurred and is
continuing, given to ▇▇▇▇▇▇ and the holders of the Secured Notes, including
Lender.
Notwithstanding any provision contained herein to the contrary, once all
Senior Defaults which gave rise to the Blockage Notice in question shall have
been remedied or effectively waived or shall have ceased to exist, or the Senior
Indebtedness in respect of which such Senior Defaults shall have occurred shall
have been paid in full in cash or in a manner satisfactory to the payees of such
Senior Indebtedness, thereafter (unless another Blockage Period shall then be in
effect) all amounts which would have been payable under the Secured Notes,
including this Note, but for the existence of the Blockage Notice delivered with
respect to the Senior Default in question shall be payable in their entirety.
(d) Limitation on Remedies. As long as any Senior Indebtedness remains
outstanding, upon the occurrence of an event of Default under this Note, Lender
shall not, unless the payees of any Senior Indebtedness shall have caused such
Senior Indebtedness to become due prior to its stated maturity or any event of
Default pursuant to subparagraphs 3(a)(iii) through (v) of this Note shall have
commenced, declare or join in any declaration of this Note to be due and payable
by reason of such event of Default or otherwise take any action against ▇▇▇▇▇▇
(including, without limitation, commencing any legal action against ▇▇▇▇▇▇ or
filing or joining in the filing of any insolvency petition against ▇▇▇▇▇▇) or
exercise or cause to be exercised any other contractual rights available to it
prior to the expiration of 30 days after the written notice of ▇▇▇▇▇▇'s ability
to accelerate on account of the occurrence of such event of Default (a "Remedy
Notice") shall have been given by ▇▇▇▇▇▇ to ▇▇▇▇▇▇ and, to the extent known by
▇▇▇▇▇▇, the payees of the Senior Indebtedness (a "Remedy Standstill Period").
Notwithstanding the foregoing, the Remedy Standstill Period shall be
inapplicable or cease to be effective if the payees of any Senior Indebtedness
shall have caused such Senior Indebtedness to become due prior to its stated
maturity or an event of Default pursuant to subparagraphs 3(a)(iii) through (v)
shall have occurred.
5
Upon the expiration or termination of any Remedy Standstill Period, Lender
shall be entitled to exercise any of its rights with respect to this Note other
than any right to accelerate the maturity date of this Note based upon the
occurrence of any event of Default in respect thereto which has been cured or
otherwise remedied during the Remedy Standstill Period.
(e) Subordination Upon Certain Events. Upon the occurrence of any event of
Default with respect to ▇▇▇▇▇▇ under subparagraphs 3(a)(iii) through (v) of this
Note:
(i) upon any payment or distribution of assets of ▇▇▇▇▇▇ to creditors of
▇▇▇▇▇▇, payees of Senior Indebtedness shall be entitled to receive indefeasible
payment in full of all obligations with respect to the Senior Indebtedness
before Lender shall be entitled to receive any payment in respect of the
Subordinated Indebtedness;
(ii) until all Senior Indebtedness is paid in full in cash or in a manner
satisfactory to the payees of such Senior Indebtedness, any distribution to
which Lender would be entitled but for this Section 4 shall be made to the
payees of Senior Indebtedness, as their interests may appear, except that Lender
may, pursuant to a plan of reorganization under Chapter 11 of the Bankruptcy
Code of 1978, as amended, or any similar provision of any successor legislation
thereto, receive securities that are subordinate to the Senior Indebtedness to
at least the same extent as this Note if pursuant to such plan the distributions
to the payees of the Senior Indebtedness in the form of cash, securities or
other property, by set-off or otherwise, provide for payment of the full amount
of the allowed claim of the payees of the Senior Indebtedness;
(iii) for purposes of this Section 4, a distribution may consist of cash,
securities or other property, by set-off or otherwise; and
(iv) notwithstanding the foregoing provisions of paragraphs 4(b), (c) or
(e), if payment or delivery by ▇▇▇▇▇▇ of cash, securities or other property to
Lender is authorized by an order or decree giving effect, and stating in such
order or decree that effect is given, to the subordination of this Note to the
Senior Indebtedness, and made by a court of competent jurisdiction in a
proceeding under any applicable bankruptcy or reorganization law, payment or
delivery by such ▇▇▇▇▇▇ of such cash, securities or other property shall be made
to Lender in accordance with such order or decree.
(f) Payments and Distributions Received. If Lender shall have received any
payment from or distribution of assets of ▇▇▇▇▇▇ in respect of the Subordinated
Indebtedness in contravention of the terms of this Section 4 before all Senior
Indebtedness is paid in full in cash or in a manner satisfactory to the payees
of such Senior Indebtedness, then, and in such event, such payment or
distribution shall be received and held in trust for and shall be promptly paid
over or delivered to the payees of Senior Indebtedness to the extent necessary
to pay all such Senior Indebtedness in full in cash or in a manner satisfactory
to the payees of such Senior Indebtedness.
(g) Proofs of Claim. If, while any Senior Indebtedness is outstanding, any
event of Default under subparagraphs 3(a)(iii) through (v) occurs with respect
to ▇▇▇▇▇▇, Lender shall duly and promptly take such action as any payee of
Senior Indebtedness may reasonably request to collect any payment with respect
to this Note for the account of the payees of the Senior Indebtedness and to
file appropriate claims or proofs of claim in respect of this Note. Upon the
failure of Lender to take any such action, each payee of Senior Indebtedness is
hereby irrevocably authorized and empowered (in its own name or otherwise), but
shall have no obligation, to demand, sue for, collect and receive every payment
or distribution referred to in respect of this Note and to file claims and
proofs of claim and take such other action as it may deem necessary or advisable
for the exercise or enforcement of any of the rights or interests of Lender with
respect to this Note.
6
(h) Subrogation. After all amounts payable under or in respect of Senior
Indebtedness are paid in full in cash or in a manner satisfactory to the payees
of such Senior Indebtedness, Lender shall be subrogated to the rights of payees
of Senior Indebtedness to receive payments or distributions applicable to Senior
Indebtedness to the extent that distributions otherwise payable to Lender have
been applied to the payment of Senior Indebtedness. A distribution made under
this Section 4 to a payee of Senior Indebtedness which otherwise would have been
made to Lender is not, as between ▇▇▇▇▇▇ and Lender, a payment by ▇▇▇▇▇▇ on
Senior Indebtedness.
(i) Relative Rights. By acceptance of this Note, ▇▇▇▇▇▇ agrees that this
Section 4 defines the relative rights of ▇▇▇▇▇▇ and the payees of Senior
Indebtedness. Nothing in this Section 4 shall: (A) impair, as between ▇▇▇▇▇▇ and
Lender, the obligations of ▇▇▇▇▇▇, which are absolute and unconditional, to pay
the principal amount evidenced by this Note (and accrued and unpaid interest,
including default interest) in accordance with its terms; (B) affect the
relative rights of Lender and creditors of ▇▇▇▇▇▇ other than payees of Senior
Indebtedness or (C) prevent Lender from exercising its available remedies upon
an event of Default, subject to the rights, if any, under this Section 4 of
payees of Senior Indebtedness.
(j) Subordination May Not Be Impaired by ▇▇▇▇▇▇. No right of any payee of
any Senior Indebtedness to enforce the subordination of the Indebtedness
evidenced by the Secured Notes, including this Note, shall be impaired by any
failure to act by ▇▇▇▇▇▇ or such payee of Senior Indebtedness or by the failure
of ▇▇▇▇▇▇ or such payee to comply with the terms of the Secured Notes, including
this Note. The provisions of this Section 4 shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of any of the Senior
Indebtedness is rescinded or must otherwise be returned by any payee of Senior
Indebtedness as a result of the insolvency, bankruptcy or reorganization of
▇▇▇▇▇▇ or any of its subsidiaries or otherwise, all as though such payment had
not been made.
(k) Payments. A payment with respect to principal of or interest on the
Subordinated Indebtedness shall include, without limitation, payment of
principal evidenced by the Secured Notes, including this Note (and accrued and
unpaid interest), any depositing of funds for the defeasance of the Subordinated
Indebtedness, any sinking fund and any payment on account of mandatory
prepayment or optional prepayment provisions.
(l) Section Not to Prevent Events of Default. The failure to make a payment
on account of principal of or interest on or other amounts constituting
Subordinated Indebtedness by reason of any provision of this Section 4 shall not
be construed as preventing the occurrence of an event of Default under Section
3.
7
(m) Subordination Not Impaired; Benefit of Subordination. Lender agrees and
consents that, without notice to or assent by the holders of the Secured Notes,
including Lender, and without affecting the liabilities and obligations of
▇▇▇▇▇▇ and the rights and benefits of the payees of the Senior Indebtedness set
forth in this Section 4:
(i) the obligations and liabilities of ▇▇▇▇▇▇ and any other party or
parties for or upon the Senior Indebtedness may, from time to time, be
increased, renewed, refinanced, extended, modified, amended, restated,
compromised, supplemented, terminated, waived or released;
(ii) the payees of Senior Indebtedness, and any representative or
representatives acting on behalf thereof, may exercise or refrain from
exercising any right, remedy or power granted by or in connection with any
agreements relating to the Senior Indebtedness; and
(iii) any balance or balances of funds with any payee of Senior
Indebtedness at any time outstanding to the credit of ▇▇▇▇▇▇ may, from time to
time, in whole or in part, be surrendered or released;
all as the payees of the Senior Indebtedness, and any representative or
representatives acting on behalf thereof, may deem advisable, and all
without impairing, abridging, diminishing, releasing or affecting the
subordination of the Subordinated Indebtedness to the Senior Indebtedness
provided for herein.
(n) Modification of Section 4. The provisions of this Section 4 are for the
benefit of the payees from time to time of Senior Indebtedness and, so long as
any Senior Indebtedness remains unpaid, may not be modified, rescinded or
canceled in whole or in part without the prior written consent thereto of all
payees of Senior Indebtedness.
(o) Covenants of Lender. Until all of the Senior Indebtedness has been
fully paid:
(i) Lender shall not hereafter give any subordination in respect of this
Note;
(ii) Lender shall not release, exchange, extend the time of payment of,
compromise, set off or otherwise discharge any part of this Note or modify or
amend this Note; and
(iii) Lender hereby undertakes and agrees for the benefit of the payees of
Senior Indebtedness that, upon the occurrence and during the continuance of a
Senior Default, it shall take any actions reasonably requested by any payee of
Senior Indebtedness to effectuate the full benefit of the subordination
contained herein.
(p) Miscellaneous.
(i) To the extent permitted by applicable law, ▇▇▇▇▇▇ and ▇▇▇▇▇▇ hereby
waive (A) notice of acceptance hereof by the payees of the Senior Indebtedness,
and (B) all diligence in the collection or protection of or realization upon the
Senior Indebtedness.
(ii) ▇▇▇▇▇▇ and ▇▇▇▇▇▇ hereby expressly agree that the payees of Senior
Indebtedness may enforce any and all rights derived herein by suit, either in
equity or law, for specific performance of any agreement contained in this
Section 4 or for judgment at law and any other relief whatsoever appropriate to
such action or procedure.
(iii) Lender acknowledges and agrees that the foregoing subordination
provisions are, and are intended to be, an inducement and a consideration to
each payee of Senior Indebtedness, whether such Senior Indebtedness was created
or acquired before or after the issuance of this Note, and each payee of Senior
Indebtedness shall be deemed conclusively to have relied upon such subordination
provisions in acquiring and continuing to hold such Senior Indebtedness.
8
5. Conversion Right.
(a) Conversion Option. Lender shall have the option (the "Conversion
Option"), exercisable at any time and from time to time on or prior to the
earlier of (i) the Maturity Date and the last date of the Prepayment Notice
Period to convert all or any portion of the principal amount evidenced by this
Note, and all (but not a portion of) accrued and unpaid interest on such
principal to be converted, into such whole number of fully-paid and
non-assessable shares (each, a "Conversion Share") of Common Stock as is equal
to the quotient obtained by dividing (i) the amount of principal (and accrued
and unpaid interest thereon) being so converted by (ii) the Conversion Price (as
hereinafter defined), as last adjusted and then in effect. The Conversion Price,
until adjusted as provided in paragraph 5(d), shall be (x) $0.71 for the period
terminating on December 5, 2005 (i.e., 35,211 Conversion Shares for each $25,000
of principal, and accrued and unpaid interest thereon, so converted) or (y)
$1.25 for the period commencing on December 6, 2005 and terminating on the
Maturity Date (i.e., 20,000 Conversion Shares for each $25,000 of principal, and
accrued and unpaid interest thereon, so converted).
(b) Method of Exercise. Lender shall exercise the Conversion Option by
delivering to ▇▇▇▇▇▇, during regular business hours, this Note with the
Conversion Notice attached as Appendix A to this Note duly completed and
executed. Conversion shall be deemed to have been effected immediately prior to
the close of business on the date (the "Conversion Date") upon which such
delivery is properly made. As promptly as practicable following the Conversion
Date, ▇▇▇▇▇▇ shall issue and deliver to Lender (or to such other party as
designated by Lender), at the place designated by Lender, a stock certificate to
which Lender is entitled and a check or cash in respect of any fractional
interest in a share of Common Stock as provided in paragraph 5(b). Lender (or
the party in whose name the stock certificate(s) evidencing the Conversion
Shares are to be issued) shall be deemed to have become the holder of record of
the Conversion Shares immediately prior to the close of business on the
applicable Conversion Date unless the transfer books of the Corporation are
closed on that date, in which event Lender shall be deemed to have become the
holder of record of the Conversion Shares immediately prior to the close of
business on the next succeeding date on which the transfer books are open, but
the Conversion Price shall be that in effect on the Conversion Date. Upon
conversion of only a portion of the principal and accrued and unpaid interest
evidenced by this Note, ▇▇▇▇▇▇ shall issue and deliver to Lender, at the sole
expense of ▇▇▇▇▇▇, a new note, substantially in the form of this Note,
evidencing the remaining principal outstanding and due Lender which new Note
shall be dated as of the last date upon which accrued interest under this Note
shall have been paid.
(c) Fractional Shares. No fractional shares of Common Stock or scrip shall
be issued upon conversion of indebtedness evidenced by this Note. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion, ▇▇▇▇▇▇ shall pay a cash adjustment in respect of such fractional
share in an amount equal to the product resulting from multiplying (i) the
Conversion Price as in effect on the relevant Conversion Date by (ii) such
fractional share. A fractional share shall not be entitled to interest or
dividends, and Lender shall not be entitled to any rights as stockholders of
▇▇▇▇▇▇ with respect of such fractional interest.
9
(d) Adjustment to Conversion Price. The Conversion Price shall be subject
to adjustment from time to time as provided in this Paragraph 5(d).
(i) If ▇▇▇▇▇▇ shall at any time, (A) pay a dividend on outstanding Common
Stock in shares of Common Stock or effect a distribution to holders of
outstanding Common Stock payable in shares of Common Stock, (B) subdivide
outstanding Common Stock, (C) combine outstanding Common Stock into a smaller
number of shares of Common Stock or (D) issue any securities of ▇▇▇▇▇▇ in a
reclassification of the Common Stock (including any such reclassification in
connection with a consolidation or merger in which ▇▇▇▇▇▇ is the continuing or
surviving corporation), the Conversion Price in effect immediately prior to such
an event shall be adjusted so that Lender, upon surrendered of this Note for
conversion, in whole or part, shall be entitled to receive the number and kind
of shares of Common Stock and other securities which Lender would have owned or
have been entitled to receive after the happening of such event had the Note
been converted immediately prior to the happening of such event. An adjustment
made pursuant to this subparagraph (i) shall become effective (x) immediately
after the record date, in the case of a dividend, or (y) immediately after the
effective date in the case of a subdivision, combination or reclassification.
(ii) If ▇▇▇▇▇▇ shall at any time or from time to time issue (A) shares of
Common Stock, (B) rights, options, warrants or other securities entitling the
holder thereof to subscribe for, purchase, convert to, exchange for or otherwise
acquire Common Stock (excluding any such issuance that results in an adjustment
under subparagraph 5(d)(i) or (C) rights, options, warrants or other securities
entitling the holder thereof to subscribe for, purchase, convert to, exchange
for or otherwise acquire such convertible or exchangeable securities (in each
case, other than Excluded Securities (as defined in subparagraph 5(d)(iii) and
other than issuances that result in an adjustment under subparagraph 5(d)(i),
without consideration or for a consideration per share of Common Stock less than
the Conversion Price in effect immediately prior to the issuance of such Common
Stock or such rights, options, warrants or other securities, the Conversion
Price in effect immediately prior to each such issuance shall forthwith be
adjusted to a price equal to the (1) per share issuance price of such shares of
Common Stock, (2) per share exercise price of such rights, options, warrants or
other securities, or (3) per share subscription price of such rights, options
warrants or other securities, as the case may be.
(iii) For purposes of subparagraph 5(d)(ii), the term "Excluded Securities"
shall mean: shares of Common Stock:
(A) issued to employees or directors of, or consultants to, ▇▇▇▇▇▇,
pursuant to any option, warrant, agreement, plan or arrangement approved by the
Board of Directors of ▇▇▇▇▇▇ (or committee of the Board of Directors of ▇▇▇▇▇▇),
but only to the extent that the maximum aggregate number of shares of Common
Stock so issued or issuable pursuant to all such options, warrants, agreements,
plans and arrangements does not exceed (x) 500,000 shares of Common Stock in the
aggregate in any fiscal year of ▇▇▇▇▇▇ or (y) 2,500,000 shares of Common Stock
in the aggregate (in each case subject to adjustment to reflect stock splits,
stock dividends, stock combinations, recapitalizations and like occurrences),
10
(B) issued upon the exercise of the warrants and options exercisable for
Common Stock outstanding as of the date of the PPM,
(C) issuable upon exercise of warrants issued to Strasbourger ▇▇▇▇▇▇▇
Tulcin ▇▇▇▇▇ Incorporated ("Strasbourger ▇▇▇▇▇▇▇") in connection with the
Private Placement,
(D) issuable upon conversion of any of the Secured Notes,
(E) issuable in connection with any acquisition by ▇▇▇▇▇▇ of the equity
securities or assets of a bona fide third party, provided that the per share
acquisition price (including, but not limited to, goodwill and other
intangibles), as determined in good faith by the Board of Directors of ▇▇▇▇▇▇,
irrespective of any accounting treatment, equals or exceeds the per share
current Market Price on the effective date of such acquisition, and
(F) issued in connection with any equity or debt financing in which
Strasbourger ▇▇▇▇▇▇▇ shall be entitled, directly or indirectly, to a fee or
commission of any kind.
(iv) For the purpose of subparagraph 5(d)(iii), the current Market Price
per share of Common Stock at any date shall be deemed to be the average daily
Closing Price of the shares of Common Stock for twenty consecutive trading days
ending within fifteen days before the date in question. The term "Closing Price"
of the shares of Common Stock for a day or days shall mean (i) if the shares of
Common Stock are listed or admitted for trading on a national securities
exchange, the last reported sales price regular way, or, in case no such
reported sale takes place on such day or days, the average of the reported
closing bid and asked prices regular way, in either case on the principal
national securities exchange on which the shares of the Common Stock are listed
or admitted for trading, or (ii) if the shares of Common Stock are not listed or
admitted for trading on a national securities exchange, (A) the last transaction
price for the Common Stock on The Nasdaq Stock Market ("Nasdaq") or, in the case
no such reported transaction takes place on such day or days, the average of the
reported closing bid and asked prices thereof quoted on Nasdaq, or (B) if the
shares of Common Stock are not quoted on Nasdaq, the average of the closing bid
and asked prices of the Common Stock as quoted on the Over-The-Counter Bulletin
Board maintained by the National Association of Securities Dealers, Inc. (the
"Bulletin Board"), or (C) if the shares of Common Stock are not quoted on Nasdaq
nor on the Bulletin Board, the average of the closing bid and asked prices of
the common stock in the over-the-counter market, as reported by The Pink Sheets,
LLC, or an equivalent generally accepted reporting service, or (iii) if on any
such day or days the shares of Common Stock are not quoted by any such
organization, the fair market value of the shares of Common Stock on such day or
days, as determined in good faith by the Board of Directors of ▇▇▇▇▇▇, shall be
used.
(e) Certificate and Notice of Adjustment to Conversion Price. Whenever the
Conversion Price shall be adjusted as provided in paragraph 5(d), ▇▇▇▇▇▇ shall
forthwith file, at the office of ▇▇▇▇▇▇, a statement, signed by its chief
financial officer, showing in detail the facts requiring such adjustment and the
Conversion Price then in effect. ▇▇▇▇▇▇ also shall cause a copy of such
statement to be sent to Lender. Where appropriate, such copy may be given in
advance and may be included as part of a notice required to be mailed under the
provisions of paragraph 5(f).
11
(f) Advanced Notice of Adjustment Events. In the event ▇▇▇▇▇▇ shall propose
to take any action of the types described in paragraph 5(d), ▇▇▇▇▇▇ shall give
notice to Lender, which notice shall specify the record date, if any, with
respect to such action and the date on which such action is to take place. Such
notice shall also set forth such facts with respect thereto as shall be
reasonably necessary to indicate the effect of such action (to the extent such
effect may be at the date of such notice) on the Conversion Price and the
number, kind or class of shares or other securities or property which shall be
deliverable or purchasable upon the occurrence of such action or deliverable
upon conversion of the principal and accrued interest evidenced by this Note. In
the case of any action which would require the fixing of a record date, such
notice shall be given at least twenty days prior to the date so fixed, or, in
case of all other action, such notice shall be given at least 30 days prior to
the taking of such proposed action. Failure to give such notice, or any defect
therein, shall not affect the legality or validity of any such action.
(g) Liability for Taxes on Conversion Shares. ▇▇▇▇▇▇ shall pay all
documentary, stamp and other transactional taxes attributable to the issuance of
Conversion Shares or other securities issuable upon conversion of any portion of
the principal and accrued interest evidenced by this Note if issued in the name
of Lender. In all other cases, such taxes shall be paid by ▇▇▇▇▇▇.
(h) Reservation of Conversion Shares. ▇▇▇▇▇▇ shall reserve, free from
preemptive rights, out of its authorized but unissued shares of Common Stock a
sufficient number of shares of Common Stock for issuance as Conversion Shares.
(i) Status of Conversion Shares. All Conversion Shares which may be issued
in connection with the conversion provisions set forth in this Section 5 will,
upon delivery by ▇▇▇▇▇▇, be duly and validly issued, fully paid and
non-assessable, with no personal liability attaching to the ownership of such
Conversion Shares, and free from all taxes, liens or charges with respect
thereto and not subject to any preemptive rights.
6. Automatic Conversion.
(a) Mandatory Conversion.
(i) The outstanding principal amount of this Note and all accrued and
unpaid interest owing under this Note shall automatically be converted into
shares (each, a "Mandatory Conversion Share") of Common Stock, at the Conversion
Price then in effect, as of the date (the "Mandatory Conversion Date")
immediately following the twentieth consecutive trading date on which each of
the following events shall have occurred:
(A) the Closing Price (as defined in subparagraph 5(d)(iv)) of the Common
Stock equals or exceeds $3.00 (the "Threshold Price") and
(B) the trading volume of the Common Stock equals or exceeds 50,000 shares.
(ii) The Mandatory Conversion Date shall be suspended, and the automatic
conversion pursuant to subparagraph 6(a)(i) shall not be effective, until such
date as the Mandatory Conversion Shares are:
(A) subject to an effective registration statement under the Securities
Act, or
12
(B) available for resale pursuant to Rule 144 promulgated under the
Securities Act.
(b) Issuance of Mandatory Conversion Shares. On the Mandatory Conversion
Date, each Mandatory Conversion Share issuable upon conversion of the principal
amount represented by this Note shall be deemed issued and the principal amount
evidenced by this Note and all accrued and unpaid interest owing under this Note
shall be deemed paid in full.
(c) Surrender of Note. Promptly after the Mandatory Conversion Date, this
Note shall be surrendered by ▇▇▇▇▇▇ to ▇▇▇▇▇▇. Upon surrender of this Note to
▇▇▇▇▇▇, or to such other agent or agents as may be appointed by ▇▇▇▇▇▇, Lender
shall be entitled to a certificate representing the number of Conversion Shares
that the outstanding principal amount evidenced by this Note and all accrued and
unpaid interest owing under this Note has been converted into at the Conversion
Price as in effect on the Mandatory Conversion Date, and this Note as
surrendered shall be cancelled. Until so surrendered, this Note will be deemed
from and after the Mandatory Conversion Date, for all corporate purposes, to
represent solely the right to receive the Mandatory Conversion Shares at the
Conversion Price as in effect on the Mandatory Conversion Date and the Lender
shall not be entitled to vote or receive any dividend or other distribution
payable to holders of shares of Common Stock, nor shall Lender be deemed a
creditor of ▇▇▇▇▇▇ at any time after the Mandatory Conversion Date; provided,
however, that, upon the surrender of this Note in exchange for a certificate
representing the applicable number of Conversion Shares, there shall be paid to
the holder of the certificate representing the Mandatory Conversion Shares
issued upon such exchange of such certificate for this Note, the amount of
dividends or other distributions which theretofore became payable and were not
paid with respect to the number of Mandatory Conversion Shares represented by
the certificate issued upon such surrender. In no event shall the persons
entitled to receive such dividends or distributions be entitled to receive
interest thereon. Notwithstanding anything to the contrary in this Paragraph
6(c), neither ▇▇▇▇▇▇ nor any other party hereto shall be liable to Lender or any
other party for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(d) No fractional Mandatory Conversion Shares or scrip shall be issued upon
conversion of indebtedness evidenced by this Note pursuant to this Section 6.
Instead of any fractional Mandatory Conversion Shares which would otherwise be
issuable upon conversion, ▇▇▇▇▇▇ shall pay a cash adjustment in respect of such
fractional Mandatory Conversion Share in an amount equal to the product
resulting from multiplying (i) the Conversion Price as in effect on the
Mandatory Conversion Date by (ii) such fractional Mandatory Conversion Share. A
fractional Mandatory Conversion Share shall not be entitled to interest or
dividends, and Lender shall not be entitled to any rights as a stockholder of
▇▇▇▇▇▇ with respect of such fractional interest.
(e) ▇▇▇▇▇▇ hereby covenants that all Mandatory Conversion Shares which are
issuable upon the conversion of the outstanding principal amount of this Note
under this Section 6 will, upon issuance in accordance with the terms hereof, be
validly issued, fully-paid and non-assessable and free from all taxes, liens and
charges with respect to the issue thereof.
13
(f) Liability for Taxes on Mandatory Conversion Shares. ▇▇▇▇▇▇ shall pay
all documentary, stamp and other transactional taxes attributable to the
issuance of Mandatory Conversion Shares or other securities issuable upon
conversion of any portion of the principal and accrued interest evidenced by
this Note if issued in the name of Lender. In all other cases, such taxes shall
be paid by ▇▇▇▇▇▇.
(g) Reservation of Mandatory Conversion Shares. ▇▇▇▇▇▇ shall reserve, free
from preemptive rights, out of its authorized but unissued shares of Common
Stock a sufficient number of shares of Common Stock for issuance as Mandatory
Conversion Shares.
(h) Status of Mandatory Conversion Shares. All Mandatory Conversion Shares
which may be issued in connection with the conversion provisions set forth in
this Section 6 will, upon delivery by ▇▇▇▇▇▇, be duly and validly issued, fully
paid and non-assessable, with no personal liability attaching to the ownership
of such Mandatory Conversion Shares, and free from all taxes, liens or charges
with respect thereto and not subject to any preemptive rights.
7. Enforcement. All disputes regarding the enforcement or construction of
this Note shall be resolved in accordance with the Security Agreement and may
not be resolved independently of the enforcement or construction of the Security
Agreement which has been made a part hereof.
8. Assignment. This Note is not assignable by ▇▇▇▇▇▇, and any purported
assignment of this Note shall be null and void and of no effect.
9. Governing Law. This Note and all rights and obligations hereunder shall
be governed by and construed in accordance with the laws of the State of New
York applicable to agreements made and be performed wholly within such State,
without regard to such State's conflicts of laws principles.
10. Notices. All requests, demands, notices and other communications
required or otherwise given under this Agreement shall be sufficiently given if
(a) delivered by hand, against written receipt therefor, (b) forwarded by
overnight courier requiring acknowledgment of receipt or (c) mailed by postage
prepaid, registered or certified mail, return receipt requested, addressed, in
the case of clauses (b) or (c) of this Section 8 as follows:
If to ▇▇▇▇▇▇, to: ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, President
▇▇▇▇▇▇ Financial Corporation
▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇ - ▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
with a copy to: ▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
Snow ▇▇▇▇▇▇ ▇▇▇▇▇▇ P.C.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
If to Lender, to: The address of Lender as set forth
in the Subscription Agreement
14
or, in the case of any of the parties hereto, at such other address as such
party shall have furnished in writing, in accordance with this Section 10, to
the other parties hereto. Each such request, demand, notice or other
communication shall be deemed given (a) on the date of delivery by hand, (b) on
the first business day following the date of delivery to an overnight courier or
(c) three business days following mailing by registered or certified mail.
11. Director Nominee. Upon issuance of Secured Notes in the aggregate
amount of at least $650,000, the holders of a majority of the outstanding
principal amount of the Secured Notes shall have the right to designate in
writing one person as the designee of the holders of all of the Secured Notes
for membership on the board of directors of ▇▇▇▇▇▇. Upon notification of such
designation, ▇▇▇▇▇▇ shall increase its board of directors by one member and
elect such designee to fill the newly-created board vacancy. For so long as at
least $650,000 in aggregate principal amount of Secured Notes remain
outstanding, ▇▇▇▇▇▇ shall use its best efforts to cause the designee of the
holders of the Notes to be elected as a director of the Company at all
applicable meetings of the stockholders of ▇▇▇▇▇▇. In the event that the
membership of the board of directors of the Company shall contain of eight or
more individuals, other than designees of the holders of the Secured Notes, the
number of designees referred to in this Section 11 shall be increased to two
and, in the event that the membership of the board of directors shall contain
twelve or more individuals, other than designees of the holders of the Secured
Notes, the number of designees referred to in this Section 11 shall be increased
to three.
12. Further Covenants of ▇▇▇▇▇▇. Until the Subordinated Indebtedness is
paid in full or other than with the written consent of either (x) Strasbourger
▇▇▇▇▇▇▇ or (y) the holders of Secured Notes aggregating more than 50% of the
entire then outstanding principal amount of Secured Notes, ▇▇▇▇▇▇ shall not:
(a) incur indebtedness for borrowed money, except where such borrowed money
is (i) utilized, in whole or part, to retire all Senior Indebtedness and/or
Subordinated Indebtedness or (ii) incurred in connection with the acquisition of
a business (whether in the form of a stock or asset acquisition or otherwise);
(b) increase the principal amount of the Senior Indebtedness to more than
$150,000; or
(c) pay or declare any dividend payable in cash on the Common Stock or any
other equity securities of ▇▇▇▇▇▇.
15
IN WITNESS WHEREOF, this Note has been duly executed and delivered as of
the date first above written.
▇▇▇▇▇▇ Financial Corporation
By:
-------------------------
▇▇▇▇▇▇▇▇ ▇▇▇▇▇, President
ATTEST:
By:
------------------------
▇▇▇▇▇ ▇▇▇▇▇▇, Secretary
16
Appendix A
CONVERSION NOTICE
To ▇▇▇▇▇▇ Financial Corporation:
The undersigned registered owner of this Note hereby irrevocably exercises
the option to convert the principal evidenced by this Note, or portion hereof
below designated, and all accrued and unpaid interest on such principal for
shares of Common Stock of ▇▇▇▇▇▇ Financial Corporation or securities or other
property or cash in accordance with the terms of this Note, and directs that the
shares, other securities, other property or cash deliverable upon the
conversion, together with any check in payment for fractional shares and a new
note evidencing any remaining principal amount, be issued and delivered to the
registered holder of this Note unless a different name has been indicated below.
If the shares or other securities are to be registered in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto.
(Sign exactly as name appears on the cover of this
Note and the signature(s) must be guaranteed)
Principal Amount of this Note to be Converted: $
Fill in for registration of shares or other securities if to be delivered,
and of a new note if to be issued, otherwise than to the registered holder.
Name:
Social Security or Other Taxpayer Identification Number:
Address:
A-1