THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OF THE
UNITED STATES, AND MAY NOT BE OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE SECURITIES ACT OR
APPLICABLE STATE SECURITIES LAW, OR AN EXEMPTION FROM SUCH REGISTRATION.
$__________________
PARADISE MUSIC & ENTERTAINMENT, INC.
9% Senior Subordinated Convertible Note Due 2003
FOR VALUE RECEIVED, PARADISE MUSIC & ENTERTAINMENT, INC., a Delaware
corporation (the "Company"), HEREBY PROMISES TO PAY to the order of
________________- (the "Holder") the principal sum of _________________
($_____________) on March 7, 2003 (the "Maturity Date") and to pay interest on
the principal amount outstanding from time to time under this note (the
"Outstanding Principal Amount"), at the rate of 9% per annum, payable quarterly
in arrears on the last day of each calendar quarter during the term hereof and
on the final day when such principal amount becomes due (each such date, an
"Interest Payment Date").
This note is one of two convertible promissory notes (the "Note" and
collectively, the "Notes") of the Company referred to in the Securities Purchase
Agreement, dated as of March 7, 2000 by and among the Company, the Holder and
BayStar International, Ltd. (the "Purchase Agreement").
1. Definitions. For purposes hereof the following definitions shall
apply:
"Acceleration Price" shall have the meaning set forth in Section
5(b).
"Additional Shares of Common Stock" shall mean, all shares
(including treasury shares) of Common Stock issued or sold or deemed to be
issued by the Company after the date hereof, whether or not subsequently
reacquired or retired by the Company other than (i) shares of Common Stock
issued upon conversion of the Notes, (ii) shares of Common Stock issued upon
exercise of the Warrants, (iii) shares of Common Stock issued pursuant to
Approved Stock Plans and (iv) shares of Common Stock issued upon exercise of
options or warrants listed on Schedule 3(c) of the Purchase Agreement pursuant
to the terms as they exist on the date hereof and provided further that the
exercise price paid upon exercise of any such option or warrant is not lower
than the greater of (x) Average Market Price at the time of the grant of such
option or warrant and (y) Conversion Price as of the relevant exercise date.
"Adjusting Closing Bid Prices" shall have the meaning set forth in
Section 3(c).
"Approved Stock Plan" shall mean any contract, plan or agreement
which has been or shall be approved by the Board of Directors of the Company,
pursuant to which the Company's securities may be issued to any employee,
officer, director, consultant or other service provider of the Company in an
aggregate amount that does not exceed 110% of the number of securities issuable
as of March 7, 2000 pursuant to any currently existing Approved Stock Plan plus
the number of securities issuable pursuant to stock options, convertible
securities or warrants granted in connection with any Strategic Financing
provided that such number shall not exceed the number of securities issuable
immediately prior to the consummation of such Strategic Financing.
"Average Market Price" shall mean the average of the Closing Bid
Prices of the Common Stock for the five (5) trading days immediately preceding
the applicable date.
"Blockage Notice" shall have the meaning set forth in Section 18(b).
"Business Day" shall have the meaning set forth in Section 2(c).
"Buy in Actual Damages" shall have the meaning set forth in Section
3(d)(v).
"Closing Bid Price" shall mean, for any security as of any date, the
last closing bid price on the Nasdaq SmallCap Market Systems ("NASDAQ") as
reported by Bloomberg, L.P. ("Bloomberg"), or, if the NASDAQ is not the
principal securities exchange trading or market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing bid price of such security in
the over-the-counter market on the electronic bulletin board for such security
as reported by Bloomberg, or, if no closing bid price is reported for such
security by Bloomberg, the last closing trade price of such security as reported
by Bloomberg, or, if no last closing trade price is reported for such security
by Bloomberg, the average of the bid prices of any market makers for such
security as reported in the "pink sheets" by the National Quotation Bureau, Inc.
If the Closing Bid Price cannot be calculated for such security on such date, as
set forth above, the Closing Bid Price of such security shall be the fair market
value as determined in good faith by an investment banking firm selected jointly
by the Company and the Holders, with the fees and expenses of such determination
borne solely by the Company.
"Common Stock" shall mean, the common stock of the Company, $.01 par
value per share.
"Company" shall have the meaning set forth in the Preamble.
2
"Conversion Date" shall have the meaning set forth in Section
3(d)(i).
"Conversion Notice" shall have the meaning set forth in Section
3(d)(i).
"Conversion Price" shall mean $2.375
"Conversion Shares" shall have the meaning set forth in Section
5(d)(i)
"Convertible Securities" shall have the meaning set forth in Section
3(c)(iv).
"Default" shall have the meaning set forth in Section 19.
"Default Rate" shall have the meaning set forth in Section 2(a)(i).
"Delisting Period" shall have the meaning set forth in Section
5(d)(ii).
"Document" or "Documents" shall have the meaning set forth in
Section 7(a).
"Holder" shall have the meaning set forth in the Preamble.
"Holders" shall mean the BayStar Capital L.P. and BayStar
International, Ltd.
"Inability to Fully Convert Notice" shall have the meaning set forth
in Section 6(b).
"Indebtedness" shall have the meaning set forth in Section 19(a).
"Interest Payment Date" shall have the meaning set forth in the
Preamble.
"Issuance Date" shall mean March 7, 2000.
"Lien" shall have the meaning set forth in Section 8(g).
"Major Transaction Acceleration Price" shall have the meaning set
forth in Section 5(a).
"Major Transaction" shall have the meaning set forth in Section
5(c).
"Mandatory Payment" shall have the meaning set forth in Section
6(a)(i).
"Mandatory Payment Price" shall have the meaning set forth in
Section 6(a)(i).
3
"Market Price" shall mean, on any date specified herein, the amount
per share of the Common Stock equal to (i) the last reported sale price of such
Common Stock, regular way, on such date or, in case no such sale takes place on
such date, the average of the closing bid and asked prices thereof, regular way,
on such date, in either case as officially reported on the principal national
securities exchange on which such Common Stock is then listed or admitted for
trading, (ii) if such Common Stock is not then listed or admitted for trading on
any national securities exchange but is designated as a national market system
security by the NASD, the last reported trading price of the Common Stock on
such date, or in case no such sale takes place on such date, or if the Common
Stock is not so designated, the average of the closing bid and asked prices of
the Common Stock on such date as shown by the NASD automated quotations system,
or (iii) if such Common Stock is not then listed or admitted for trading on any
national exchange or quoted in the over-the-counter market, the fair value
thereof (as of a date which is within 20 days of the date as of which the
determination is to be made) determined in good faith jointly by the Board of
Directors of the Company and the Holder, provided, however, that if such parties
are unable to reach agreement within a reasonable period of time, the Market
Price shall be determined in good faith by an independent investment banking
firm selected jointly by the Company and the Holder or, if that selection cannot
be made within ten days, by an independent investment banking firm selected by
the American Arbitration Association in accordance with its rules, and provided
further, that the Company shall pay all of the fees and expenses of any third
parties incurred in connection with determining the Market Price.
"Maturity Date" shall have the meaning set forth in the Preamble.
"New Option Issuance Price" shall have the meaning set forth in
Section 3(c)(iv).
"Note" or "Notes" shall have the meaning set forth in the Preamble.
"Note Register" shall have the meaning set forth in Section 17(b).
"Notice of Acceleration at Option of Holder Upon Triggering Event"
shall have the meaning set forth in Section 5(e).
"Notice of Major Transaction" shall have the meaning set forth in
Section 5(e).
"Notice in Response to Inability to Convert" shall have the meaning
set forth in Section 6(b).
"Notice of Triggering Event" shall have the meaning set forth in
Section 5(f.)
"Options" shall have the meaning set forth in Section 3(c)(iv).
4
"Organic Change" shall mean, any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of the
Company's assets to another Person or other transaction which is effected in
such a way 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.
"Other Taxes" shall have the meaning set forth in Section 20.
"Outstanding Common Amount" shall have the meaning set forth in
Section 3(a).
"Outstanding Principal Amount" shall have the meaning set forth in
the Preamble.
"Permitted Debt" shall mean (a) indebtedness existing on the
Issuance Date and set forth on Schedule 3(c) to the Purchase Agreement, and
extensions, renewals and refinancing of such indebtedness; provided that such
extension, renewal or refinancing (i) is pursuant to terms that are not less
favorable to the Holders than the terms of the indebtedness being extended,
renewed or refinanced, (ii) after giving effect to the extension, renewal or
refinancing, such indebtedness is not greater than the amount of indebtedness
outstanding immediately prior to such extension, renewal or refinancing and
(iii) the extension, renewal or refinancing and does not change the persons
liable for such indebtedness; (b) indebtedness of wholly owned Subsidiaries of
the Company to the Company or to other wholly owned Subsidiaries of the Company;
(c) accounts payable to trade creditors for goods and services and current
operating liabilities (not the result of the borrowing of money) incurred now or
in the future in the ordinary course of the Company's or its Subsidiaries'
business, in accordance with customary terms and paid within a specified time,
unless contested in good faith by appropriate proceedings and reserved in
accordance with generally accepted accounting principles, consistently applied,
(d) indebtedness of the Company or its Subsidiaries under any capital leases now
outstanding and set forth on Schedule 3(c) to the Purchase Agreement or
thereafter entered into provided that the only security interest for such
indebtedness is the property leased under such capital lease, (e) other
indebtedness of the Company for borrowed money now or hereafter existing in
favor of a bank, insurance company or other financial institution, for principal
and interest (including interest accruing subsequent to the commencement of any
Proceeding), provided that such indebtedness is not convertible into any equity
securities of the Company and, provided further, that the terms of such
indebtedness do not provide for the holder thereof to receive any equity
securities of the Company for a purchase price per share less than the Market
Price as of the date of issuance of such equity security, it being understood
and agreed that the Company may grant to such bank, insurance company or other
financial institution a security interest in and to any and all assets of the
Company which security interest shall be specifically senior to the rights of
the Holders under this Note and with the further understanding that the Holders
will agree to negotiate in good faith to enter into subordination agreements
with the holders of such other indebtedness on commercially reasonable terms to
all
5
parties, (f) any other indebtedness of the Company or any of its Subsidiaries
incurred or guaranteed by the Company or any of its Subsidiaries in connection
with a Strategic Financing, including, for this purpose, all indebtedness of any
entity acquired by the Company, provided that such indebtedness incurred in
connection with a Strategic Financing is not convertible into any equity
securities of the Company and, provided further, that the terms of such
indebtedness do not provide for the holder thereof to receive any equity
securities of the Company for a purchase price per share less than the Market
Price as of the date of issuance of such equity security, and (g) the issuance
of any underwritten publicly registered or 144A debt securities provided that
such issuance has been effected with the assistance of a reputable underwriter
or financial advisor and is in an amount of not less than $10,000,000.
"Person" shall mean, an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
"Proceeding" shall mean, with respect to the Company or any of its
Subsidiaries, (i) any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other similar proceeding relating
to such Person or its properties as such, (ii) any proceeding for any
liquidation, dissolution or other winding up of such Person, voluntary or
involuntary, or (iii) any assignment for the benefit of creditors or marshaling
of the assets of such Person.
"Purchase Agreement" shall have the meaning set forth in the
Preamble.
"Registration Rights Agreement" shall mean, the Registration Rights
Agreement, dated as of March 7, 2000, by and among the Company and the Holders.
"Related Business" shall mean a company whose business is directly
related to or complementary to or is a reasonable extension of the Company's
current line of business as reasonably determined by the Company's Board of
Directors.
"Securities Act" means the Securities Act of 1933, as amended from
time to, and the rules and regulations thereunder, or any successor statute.
"Solvent" shall mean, with respect to any Person on a particular
date, that on such date (i) the fair value of the property of such Person is not
less than the total amount of the liabilities of such Person, (ii) the present
fair salable value of the assets of such Person is not less than the amount
required to pay the probable liability on such Person's existing debts as they
become absolute and matured, (iii) such Person is able to realize upon its
assets and pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (iv) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature and (v) such Person's property does not constitute unreasonably small
capital for such Person to carry out its business as currently conducted and as
proposed to be conducted including the capital needs of such
6
Person taking into account the capital requirements of the business conducted by
such Person and projected capital requirements and capital availability thereof.
"Strategic Financing" shall mean: any investment (whether by the
Company or any of its Subsidiaries) in another Related Business, or in real
property or other assets of another Related Business; provided that such
investment has the potential to promote a strategic objective of the Company or
any of its Subsidiaries as reasonably determined by the Company's Board of
Directors.
"Subsidiary" shall mean, any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other Persons performing similar functions are at the time
directly or indirectly owned by the Company.
"Suspension Days" shall have the meaning set forth in Section
5(d)(i).
"Suspension Period" shall have the meaning set forth in Section
5(d)(i).
"Taxes" shall have the meaning set forth in Section 20.
"Transfer Agent" shall have the meaning set forth in Section
3(d)(i).
"Triggering Event" shall have the meaning set forth in Section 5(d).
"Triggering Event Acceleration Price" shall have the meaning set
forth in Section 5(b).
"Warrants" shall mean, the Common Stock Purchase Warrants to
purchase up to an aggregate of 421,053 shares of the Company's Common Stock,
issued to the Holders by the Company pursuant to the terms of the Purchase
Agreement.
"Warrant Shares" shall have the meaning set forth in Section
5(d)(i).
2. General Provisions. (a) (i) Any amount of principal hereof that
is not paid when due (whether upon demand, by acceleration or otherwise) shall
bear interest from the day when due until such principal amount is paid in full,
payable on demand, at an interest rate per annum equal at all times to 15% per
annum (the "Default Rate"). All interest shall be computed on the basis of a
year of 360 days for the actual number of days (including the first day but
excluding the last day) elapsed. Notwithstanding any other provision of this
Note, interest paid or becoming due hereunder shall in no event exceed the
maximum rate permitted by applicable law.
(ii) All regularly scheduled interests payments made hereunder
may be made either (A) in cash or (B) at the option of the Company, by
capitalizing such interest and adding such capitalized amount to the Outstanding
Principal Amount of the Note; provided further that the Company may elect to
make such interest payments pursuant to clause (B) above, if and only if the
Company has delivered an
7
irrevocable written notice (the "Interest Payment Notice") to the Holder no less
than 45 days prior to the applicable Interest Payment Date stating that the next
interest payment shall be made by capitalizing such interest amount and adding
such amount to the Outstanding Principal Amount of the Note. If the Company
fails to deliver an Interest Payment Notice at least 45 days prior to any
Interest Payment Date, then interest payments on such interest Payment Date
shall be made solely in cash.
(b) All payments made to the Holder in accordance with the
terms hereof on account of principal hereof and all interest payments
capitalized and added to the Outstanding Principal Amount shall be noted by the
Holder on Schedule I attached hereto and hereby made a part hereof and shall be
binding absent manifest error; provided, however, that any error or omission by
the Holder in this regard shall not affect the obligation of the Company to pay
the full amount of the principal and interest due hereunder.
(c) If any amount payable hereunder shall be due on a Saturday
or a Sunday or a day on which commercial banking institutions in the City of New
York are authorized by law to be closed (any other day being a "Business Day"),
such payment may be made on the next succeeding Business Day, and such extension
of time shall in such case be included in the computation of interest payable
hereon.
(d) Both principal and interest are payable in lawful money of
the United States and in immediately available funds at the offices of Holder,
c/o BayStar Capital Management, LLC, 0000 X. Xxxxxx Xxxxxx, Xxxxx 000, Xxxxxx,
Xxxxxxxxx 00000, or at such other place as the Holder shall designate in writing
to the Company.
(e) This Note may be transferred in whole or in part only by
registration of such transfer on the Note Register maintained for such purpose
by the Company as provided in Section 17(b) hereof.
3. Holder's Conversion of Note.
(a) Conversion Right. The Holder shall have the right, at its
option, to convert the Note, in whole or in part, into fully paid, validly
issued and nonassessable shares of the Company's Common Stock at any time and
from time to time that this Note is outstanding. If this Note is converted in
part, the remaining portion of this Note not so converted shall remain entitled
to the conversion and other rights provided herein.
(b) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of the Note pursuant to Section 3(a) shall be
determined in accordance with the following formula:
8
P
---------------------
Conversion Price
P = Outstanding Principal Xxxxxx submitted for conversion plus
accrued but unpaid interest thereon (which shall include any capitalized
interest).
(c) Anti-Dilution. In order to prevent dilution of the rights
granted under this Note, the Conversion Price and the Closing Bid Prices for any
days during any measuring period prior to any of the events set forth below (the
"Adjusting Closing Bid Prices") will be subject to adjustment from time to time
as provided in this Section 3(c):
(i) Dividends and Distributions. If the Company shall
declare or pay to the holders of the Common Stock a dividend or other
distribution payable in shares of Common Stock or any other security convertible
into or exchangeable for shares of Common Stock, the Holder of the Note
thereafter surrendered for conversion shall be entitled to receive the number of
shares of Common Stock or other securities convertible into or exchangeable for
shares of Common Stock, as applicable, which such Holder would have owned or
been entitled to receive after the declaration and payment of such dividend or
other distribution as if the Note had been converted immediately prior to the
record date for the determination of stockholders entitled to receive such
dividend or other distribution.
(ii) Stock Splits and Combinations. If the Company shall
subdivide (by means of any stock split, stock dividend, recapitalization or
otherwise) the outstanding shares of Common Stock into a greater number of
shares of Common Stock, or combine (by means of any combination, reverse stock
split or otherwise) the outstanding shares of Common Stock into a lesser number
of shares, or issue by reclassification of shares of Common Stock any shares of
the Company, the Conversion Price and the Adjusting Closing Bid Prices in effect
immediately prior thereto shall be adjusted so that the Holder shall receive the
number of shares of Common Stock which the Holder would have owned or been
entitled to receive after the happening of any and each of the events described
above if the Note had been converted immediately prior to the happening of each
such event on the day upon which such subdivision or combination, as the case
may be, becomes effective.
(iii) Organic Changes. In case the Company shall effect
an Organic Change, then the Holder shall be given a written notice from the
Company informing such Holder of the terms of such Organic Change and of the
record date thereof for any distribution pursuant thereto, at least twenty (20)
days in advance of such record date, and, if such record date shall precede the
Maturity Date, the Holder shall have the right thereafter to receive, upon
conversion of the Note, the number of shares of stock or other securities,
property or assets of the Company, or of its successor or transferee or any
affiliate thereof, or cash receivable upon or as a result of such Organic
9
Change that would have been received by a holder of the number of shares of
Common Stock equal to the number of shares the Holder would have received had
such Holder converted the Note prior to such event at the Conversion Price
immediately prior to such event. In any such case, the Company will make
appropriate provision (in form and substance reasonably satisfactory to the
Holder) with respect to such Holders' rights and interests to insure that the
provisions of this Section 3(c)(iii) will thereafter be applicable to the Note
(including, in the case of any such Organic Change 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 Organic Change, if the value so reflected is less than the Conversion Price
in effect immediately prior to such Organic Change). The Company will not effect
any such Organic Change unless prior to the consummation thereof the successor
entity (if other than the Company) resulting from such Organic Change assumes,
by written instrument (in form and substance satisfactory to the Holder), the
obligation to deliver to Holder such shares of stock, securities or assets as,
in accordance with the foregoing provisions, such Holder may be entitled to
acquire. The provisions of this subparagraph (iii) shall similarly apply to
successive Organic Changes.
(iv) Adjustment upon Issuance of Options and Convertible
Securities. If the Company in any manner grants any rights or options to
subscribe for or to purchase one or more classes of its Common Stock (other than
pursuant to an Approved Stock Plan or upon conversion of the Notes) or any stock
or other securities convertible into or exchangeable for Common Stock (such
rights or options being herein called "Options" and such convertible or
exchangeable stock or securities being herein called "Convertible Securities")
and the price per share for which Common Stock is issuable upon the exercise of
such Options or upon conversion or exchange of such Convertible Securities (the
"New Option Issuance Price") is less than the Average Market Price immediately
prior to such time, then, from and after the time of such issue or sale, the
Conversion Price shall be reduced, if necessary, so that it shall not exceed the
New Option Issuance Price. For purposes of this Section 3(c)(iv), the New Option
Issuance Price shall mean the amount determined by dividing (A) the total
amount, if any, received or receivable by the Company as consideration for the
granting of such Options, plus the minimum aggregate amount of additional
consideration payable to the Company upon the 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 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 upon the actual
issuance of such Common Stock or of such Convertible Securities upon the
exercise of such Options or upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities.
10
(v) Change in Option Price or Rate of Conversion. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exchangeable for any class of Common Stock change at any time, the Conversion
Price at the time of such change shall be readjusted, effective on and after the
date of such change, to the Conversion Price which would have been in effect on
the date of such change had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional consideration
or changed conversion rate, as the case may be, at the time initially granted,
issued or sold; provided that no adjustment shall be made if such adjustment
would result in an increase of the Conversion Price then in effect.
(vi) Issuance of Additional Shares of Common Stock. In
case the Company at any time or from time to time after the date hereof shall
issue or sell Additional Shares of Common Stock (including Additional Shares of
Common Stock deemed to be issued pursuant to Section 3(c)(ii), (iv) or (v)),
without consideration or for a consideration per share less than the Average
Market Price in effect immediately prior to such issue or sale, then, and in
each such case, the Conversion Price shall be reduced, to a price determined by
multiplying such Conversion Price by a fraction
(A) the numerator of which shall be the sum of (i)
the number of shares of Common Stock outstanding immediately prior to such issue
or sale and (ii) the number of shares of Common Stock which the aggregate
consideration received by the Company for the total number of such Additional
Shares of Common Stock so issued or sold would purchase at the Market Price, and
(B) the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such issue or sale,
provided that, for the purposes of this Section 3(c)(vi), immediately after any
Additional Shares of Common Stock are deemed to have been issued pursuant to
Section 3(c)(ii), (iv) or (v), such Additional Shares of Common Stock shall be
deemed to be outstanding, and (y) treasury shares of Common Stock shall not be
deemed to be outstanding.
(vii) Other Dilutive Events. In case any event shall
occur as to which the provisions of this Section 3(c) are not strictly
applicable or if strictly applicable would not fairly protect the conversion
rights of the Holder in accordance with the essential intent and principles of
this Section 3(c), then, in each such case, the Board of Directors of the
Company shall make an adjustment in the application of such provisions, in
accordance with such essential intent and principles, so as to preserve, without
dilution, the conversion rights represented by this Note.
(viii) No Dilution or Impairment. The Company shall not,
by amendment of its certificate of incorporation or through any Organic Change
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Note, but will at all times in good
faith assist in the carrying out of all
11
such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder against dilution or
other impairment. Without limiting the generality of the foregoing, the Company
(i) shall take all such action as may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable shares of
Common Stock, free from all taxes, liens, security interests, encumbrances,
preemptive rights and charges on the conversion of this Note from time to time
outstanding, (ii) shall not take any action which results in any adjustment of
the Conversion Price or the Adjusting Closing Bid Prices if the total number of
shares of Common Stock issuable after the action upon the conversion of this
Note would exceed the total number of shares of Common Stock then authorized by
the Company's certificate of incorporation and available for the purpose of
issue upon such exercise, (iii) shall not permit the par value of any shares of
stock receivable upon the conversion of this Note to exceed the amount payable
therefor upon such exercise, and (iv) shall not issue any capital stock of any
class which, as to the Holders, is preferred as to dividends or as to the
distribution of assets upon voluntary or involuntary dissolution, liquidation or
winding-up, unless the rights of the holders thereof shall be limited to a fixed
sum or percentage of par value or a sum determined by reference to a formula
based on a published index of interest rates, an interest rate publicly
announced by a financial institution or a similar indicator of interest rates in
respect of participation in dividends and to a fixed sum or percentage of par
value in any such distribution of assets.
(ix) Notices.
(A) Immediately upon any adjustment pursuant
hereto of the Conversion Price or the Adjusting Closing Bid Prices, the Company
will give written notice thereof to the Holder, setting forth in reasonable
detail and certifying the calculation of such adjustment.
(B) The Company will give written notice to the
Holder at least twenty (20) days prior to the date on which the Company closes
its books or takes a record (I) with respect to any dividend or distribution
upon the Common Stock, or (II) for determining rights to vote with respect to
any Organic Change, dissolution or liquidation; provided that in no event shall
such notice be provided to the Holder prior to such information being made known
to the public.
(C) The Company will also give written notice to
the Holder at least fifteen (15) days prior to the date on which any Organic
Change, dissolution or liquidation will take place.
(x) Further Adjustments. Successive adjustments in the
Conversion Price and Adjusting Closing Bid Prices shall be made whenever any
event specified above shall occur. All calculations under this Section 3(c)
shall be made to the nearest cent. No adjustment in the Conversion Price or the
Adjusting Closing Bid Prices shall be made if the amount of such adjustment
would be less than $0.01, but any such amount shall be carried forward and an
adjustment with respect thereto shall be made at
12
the time of and together with any subsequent adjustment which, together with
such amount and any other amount or amounts so carried forward, shall aggregate
$0.01 or more.
(d) Mechanics of Conversion. Subject to the Company's
inability to fully satisfy its obligations under a Conversion Notice as provided
for in Section 6 below:
(i) Holder's Delivery Requirements. To convert the Note
into full shares of Common Stock on any date (the "Conversion Date"), the Holder
shall (A) deliver or transmit by facsimile, for receipt on or prior to 11:59
p.m., Eastern Time on such date, a copy of a fully executed notice of conversion
in the form attached hereto as Exhibit A (the "Conversion Notice"), to the
Company or its designated transfer agent (the "Transfer Agent") to the effect
that the Holder elects to convert a specified amount of the Outstanding
Principal Amount of this Note (plus accrued interest) and (B) surrender to a
common carrier for delivery to the Company or the Transfer Agent as soon as
practicable following such date, the originally executed Conversion Notice.
(ii) Company's Response. Upon receipt by the Company of
a facsimile copy of a Conversion Notice, the Company shall immediately send, via
facsimile, a confirmation of receipt of such Conversion Notice to the Holder.
Upon receipt by the Company or the Transfer Agent of the originally executed
Conversion Notice, the Company or the Transfer Agent (as applicable) shall, on
the next Business Day following the date of receipt (or the second Business Day
following the date of receipt if received after 11:00 a.m. local time of the
Company or Transfer Agent, as applicable), (A) issue and surrender to a common
carrier for overnight delivery to the address as specified in the Conversion
Notice, a certificate(s), registered in the name of the Holder or its designee,
for the number of shares of Common Stock to which the Holder shall be entitled,
(B) credit such aggregate number of shares of Common Stock to which the Holder
shall be entitled to the Holder's or its designee's balance account with The
Depository Trust Company or (C) if the Holder requests, issue shares in
electronic format (e.g. via DWAC).
(iii) Dispute Resolution. In the case of a dispute as to
the determination of the Conversion Price, the Company shall promptly issue to
the Holder the number of shares of Common Stock that is not disputed and shall
submit the disputed determinations or arithmetic calculations to the Holder via
facsimile within one (1) Business Day of receipt of such Xxxxxx's Conversion
Notice. If such Holder and the Company are unable to agree upon the
determination of the Conversion Price within one (1) Business Day of such
disputed determination or arithmetic calculation being submitted to the Holder,
then the Company shall within one (1) Business Day submit via facsimile the
disputed determination of the Conversion Price to an independent, reputable
accounting firm of national standing acceptable to the Company and the Holder.
The Company shall cause such accounting firm to perform the determinations or
calculations and notify the Company and the Holder of the results no later than
forty-eight (48) hours
13
from the time it receives the disputed determinations or calculations. Such
accounting firm's determination shall be binding upon all parties absent
manifest error. If as a result of such determination by the accounting firm the
Company is required to issue additional shares of Common Stock to the Holder,
the Company shall on the next Business Day following the date such determination
is made, issue such shares of Common Stock in accordance with the options set
forth in the last sentence of Section 3(d)(ii) above.
(iv) Record Holder. The Person or Persons entitled to
receive the shares of Common Stock issuable upon a conversion of the Note shall
be treated for all purposes as the record holder or holders of such shares of
Common Stock on the applicable Conversion Date.
(v) Company's Failure to Timely Convert. If the Company
shall fail (other than as a result of the situations described in Section 6(a)
with respect to which the Holder has elected, and the Company has satisfied its
obligations under, one of the options set forth in subparagraphs (i) through
(iv) of Section 6(a)) to issue to the Holder on a timely basis as described in
this Section 3(d), a certificate(s) for the aggregate number of shares of Common
Stock to which the Holder is entitled upon the Holder's conversion of the Note
as reflected in the applicable Conversion Notice, the Company shall pay damages
to the Holder equal to the greater of (A) actual damages incurred by the Holder
as a result of the Holder's needing to "buy in" shares of Common Stock to the
extent necessary to satisfy its securities delivery requirements ("Buy In Actual
Damages") and (B) if the Company fails to deliver such certificates within five
days after the last possible date which the Company could have issued such
Common Stock to the Holder without violating this Section 3(d), on each date
such conversion is not timely effected in an amount equal to 1% of the product
of (I) the number of shares of Common Stock not issued to the Holder on a timely
basis and to which the Holder is entitled and (II) the Closing Bid Price of the
Common Stock on the last possible date which the Company could have issued such
Common Stock to the Holder without violating this Section 3(d).
(e) Fractional Shares. The Company shall not issue any
fraction of a share of Common Stock upon any conversion. All shares of Common
Stock (including fractions thereof) issuable upon any conversion shall be
rounded up or down, whichever is closest, to the nearest whole share.
(f) Taxes. The Company shall pay any and all taxes which may
be imposed upon it with respect to the issuance and delivery of Common Stock
upon any conversion.
4. [Intentionally Left Blank.]
5. Acceleration Provisions.
(a) Acceleration Upon Major Transaction. In addition to all
other rights of the Holder contained herein (including, without limitation, the
provisions
14
of Section 3), after a Major Transaction, the Holder shall have the right, at
the Holder's option, to require that the Company prepay the then Outstanding
Principal Amount of the Note in an amount equal to the greater of (i) 125% of
the Outstanding Principal Amount of the Note on the date the Major Transaction
was consummated and (ii) the product of (A) the number of shares of Common Stock
that would be issued upon conversion of this Note in accordance with Section
3(b) hereof provided that the applicable Conversion Price shall be the lower of
(I) the Conversion Price on the date the Major Transaction was announced and
(II) the Conversion Price that would otherwise be in effect and (B) the Market
Price ("Major Transaction Acceleration Price"). The provisions of this Section
5(a) shall not be deemed to restrict the ability of the Holder to convert the
Note pursuant to the provisions of Section 3 at any time and from time to time
before the consummation of a Major Transaction.
(b) Acceleration Option Upon Triggering Event. In addition to
all other rights of the Holder contained herein (including, without limitation,
the provisions of Section 3), after a Triggering Event, the Holder shall have
the right, at the Holder's option, to declare all or a portion of the
Outstanding Principal Amount of the Note to be due and payable at a price equal
to the greater of (i) 125% of the Outstanding Principal Amount on the date the
Triggering Event occurred and (ii) the product of (A) the aggregate number of
shares of Common Stock for which the amount of the Note being converted would be
converted into as of the date immediately preceding such Triggering Event on
which the exchange or market on which the Common Stock is traded is open
multiplied by (B) the greater of (x) the Conversion Price calculated as if the
Conversion Date were the date immediately preceding such Triggering Event and
(y) the Market Price of the Common Stock on such date ("Triggering Event
Acceleration Price" and, collectively with "Major Transaction Acceleration
Price," the "Acceleration Price"). The provisions of this Section 5(b) shall not
be deemed to restrict the ability of the Holder to convert the Note pursuant to
the provisions of Section 3 at any time and from time before the Holder receives
the Triggering Event Acceleration Price.
(c) "Major Transaction". A "Major Transaction" shall be deemed
to have occurred at such time as any of the following events:
(i) the consolidation or merger of the Company with or
into another Person (other than pursuant to a migratory merger effected solely
for the purpose of changing the jurisdiction of incorporation of the Company or
pursuant to a merger after which the holders of the Company's outstanding
capital stock immediately prior to the merger own a number of shares of the
resulting company's outstanding capital stock sufficient to elect a majority of
the resulting company's board of directors);
(ii) the sale, transfer, lease, disposal or abandonment
of (whether in one transaction or in a series of transactions) substantially all
of the Company's assets (other than a sale or transfer to an entity controlling,
controlled by or under common control with the Company); or
15
(iii) a purchase, tender or exchange offer for more than
50% of the outstanding shares of Common Stock is made and accepted by the
holders thereof.
(d) "Triggering Event". A "Triggering Event" shall be deemed
to have occurred at such time as any of the following events:
(i) notice from the Company that Common Stock issued or
issuable upon conversion of the Note (the "Conversion Shares") or the Warrants
(the "Warrant Shares") cannot be sold under the Registration Statement covering
such Common Stock (the "Suspension Period"), for any period of ten (10)
consecutive trading days or any twenty (20) non-consecutive trading days during
any period of 180 consecutive days that is (A) after the date the Registration
Statement has been declared effective by the SEC and (B) prior to the time that
the Conversion Shares may be sold without limitation in accordance with Rule
144(k) under the Securities Act; provided that any demand for acceleration under
this Section 5(d)(i) must be made by the Holder within 15 days after receipt of
notice from the Company of the termination of the Suspension Period; and,
provided further that if the aggregate number of days in all Suspension Periods
(the "Suspension Days") is equal to or greater than forty-five (45) days, then
the Maturity Date may, at the option of the Holder, be extended by the aggregate
number of Suspension Days;
(ii) the failure of the Common Stock, Conversion Shares,
or Warrant Shares to be listed on the American Stock Exchange, the New York
Stock Exchange or the Nasdaq SmallCap Market System for a period of fifteen (15)
days during any period of twelve (12) months (the "Delisting Period") (i)
provided, however, that any demand for acceleration under this Section 5(d)(ii)
must be made by the Holder within 30 days after receipt of the Notice of
Triggering Event (as defined in Section 5(f)); or
(iii) the Company's notice to the Holder, including by
way of public announcement, at any time, of its intention not to comply with
proper requests for conversion of the Notes or exercise of the Warrants into
shares of Common Stock, including due to any of the reasons set forth in Section
6(a) below, except in any case in which the basis for such intention by the
Company is a bona fide dispute as to the right of the Holder to such conversion.
(e) Mechanics of Acceleration at Option of Holder Upon Major
Transaction. No sooner than fifteen (15) days nor later than ten (10) days prior
to the consummation of a Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver written notice
thereof via facsimile and overnight courier ("Notice of Major Transaction") to
the Holder. After receipt of a Notice of Major Transaction, the Holder may
require the Company to prepay the Note in accordance with Sections 5(a) and 5(c)
hereof by delivering written notice thereof via facsimile and overnight courier
("Notice of Acceleration at Option of Holder Upon Major
16
Transaction") to the Company, which Notice of Acceleration at Option of Holder
Upon Major Transaction shall indicate the applicable Acceleration Price, as
calculated pursuant to Section 5(a) above.
(f) Mechanics of Acceleration at Option of Holder Upon
Triggering Event. Within one (1) day after the occurrence of a Triggering Event,
the Company shall deliver written notice thereof via facsimile and overnight
courier ("Notice of Triggering Event") to the Holder. After receipt of a Notice
of Triggering Event, the Holder may require the Company to prepay the Note in
accordance with Sections 5(b) and 5(d) hereof by delivering written notice
thereof via facsimile and overnight courier ("Notice of Acceleration at Option
of Holder Upon Triggering Event") to the Company, which Notice of Acceleration
at Option of Holder Upon Triggering Event shall indicate the applicable
Acceleration Price, as calculated pursuant to Section 5(b) above.
(g) Payment of Acceleration Price. Upon the Company's receipt
of a Notice of Acceleration at Option of Holder Upon Triggering Event or a
Notice of Acceleration at Option of Holder Upon Major Transaction from the
Holder, the Company shall immediately notify the Holder by facsimile of the
mechanics of the delivery of the Holder's Note. The Company shall deliver the
applicable Acceleration Price to the Holder within the earlier of (i) twenty
(20) days after the Company's delivery of a Notice of Major Transaction or the
Company's receipt of the applicable notice to affect an acceleration, and (ii)
the closing of the Major Transaction upon which such Notice of Major Transaction
was predicated. In the event of a dispute as to the determination of the
arithmetic calculation of the Acceleration Price, such dispute shall be resolved
pursuant to Section 3(d)(iii) above. Promptly after receipt of the applicable
Acceleration Price in cash by wire transfer of immediately available funds, the
Holder shall deliver the Note to the Company or its Transfer Agent. Payments
provided for in this Section 5 shall have priority to payments to other
stockholders in connection with a Major Transaction.
6. Inability to Fully Convert Note.
(a) Holder's Option if Company Cannot Fully Convert. If, upon
the Company's receipt of a Conversion Notice, the Company cannot issue shares of
Common Stock registered for resale under the Registration Statement for any
reason, including, without limitation, because the Company (x) does not have a
sufficient number of shares of Common Stock authorized and available, (y) is
otherwise prohibited by applicable law or by the rules or regulations of any
stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Company or its securities, including
without limitation the NASDAQ, from issuing all of the Common Stock which is to
be issued to the Holder pursuant to a Conversion Notice or (z) fails to have a
sufficient number of shares of Common Stock registered for resale under the
Registration Statement, then the Company shall issue as many shares of Common
Stock as it is able to issue in accordance with the Holder's Conversion Notice
and pursuant to Section 3(d) above and, with respect to the unconverted portion
of the Note, the Holder,
17
solely at its option, can elect to (unless the Company issues and delivers the
Conversion Shares underlying the unconverted portion of the Note prior to the
Holder's election hereunder, in which case the Holder shall only be entitled to
receive Buy In Actual Damages under Section 3(d)(v)):
(i) require the Company to pay the Holder for the
portion of Outstanding Principal Amount of the Note plus accrued interest
thereon for which the Company is unable to issue Common Stock in accordance with
the Holder's Conversion Notice ("Mandatory Payment") in an amount (the
"Mandatory Payment Price") equal to the Triggering Event Acceleration Price as
of such Conversion Date;
(ii) if the Company's inability to fully convert the
Note is pursuant to Section 6(a)(z) above, require the Company to issue
restricted shares of Common Stock in accordance with the Holder's Conversion
Notice and pursuant to Section 3(d) above;
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted portion of the Note that was to
be converted pursuant to the Holder's Conversion Notice; or
(iv) if the Company's inability to fully convert the
Note is pursuant to the NASDAQ rules and regulations described in Section
6(a)(y) above, require the Company to issue shares of Common Stock in accordance
with the Holder's Conversion Notice and pursuant to Section 3(d) above at a
Conversion Price in cash equal to the Average Market Price of the Common Stock
on the date preceding the Holder's Notice in Response to Inability to Convert.
(b) Mechanics of Fulfilling Holder's Election. The Company
shall immediately send via facsimile to the Holder, upon receipt of a facsimile
copy of a Conversion Notice from the Holder which cannot be fully satisfied as
described in Section 6(a) above, a notice of the Company's inability to fully
satisfy the Holder's Conversion Notice (the "Inability to Fully Convert
Notice"). Such Inability to Fully Convert Notice shall indicate (i) the reason
why the Company is unable to fully satisfy the Holder's Conversion Notice, (ii)
the portion of the Outstanding Principal Amount of the Note plus accrued
interest thereon which cannot be converted and (iii) the applicable Mandatory
Payment Price. The Holder must within five (5) Business Days after receipt of
such Inability to Fully Convert Notice deliver written notice via facsimile to
the Company ("Notice in Response to Inability to Convert") of its election
pursuant to Section 6(a) above.
(c) Payment. If the Holder shall elect to have its Note
prepaid pursuant to Section 6(a)(i) above, the Company shall pay the Mandatory
Payment Price in immediately available funds to the Holder within ten (10) days
of the Company's receipt of the Holder's Notice in Response to Inability to
Convert. If the Company shall fail to pay the applicable Mandatory Payment Price
to the Holder on a timely basis as described in this Section 6(c) (other than
pursuant to a dispute as to the determination of
18
the arithmetic calculation of the Acceleration Price), in addition to any remedy
the Holder may have under this Note, such unpaid amount shall bear interest at
the Default Rate until paid in full. Until the full Mandatory Payment Price is
paid in full to the Holder, the Holder may void the request for the Mandatory
Payment with respect to the portion of the Note for which the full Mandatory
Payment Price has not been paid and in no event shall such voidance be deemed
forgiveness of any amounts due under this Note. Notwithstanding the foregoing,
if the Company fails to pay the applicable Mandatory Payment Price within such
ten (10) day time period due to a dispute as to the determination of the
arithmetic calculation of the Acceleration Price, such dispute shall be resolved
pursuant to Section 3(d)(iii) above.
(d) Pro-rata Conversion and Acceleration. In the event the
Company receives a Conversion Notice from more than one Holder on the same day
and the Company can convert and redeem some, but not all, of the Notes pursuant
to this Section 6, the Company shall convert and purchase from each Holder
electing to have such Note converted and purchased at such time an amount equal
to such Holder's pro-rata amount (based on the Outstanding Principal Amount of
the Note held by such Holder relative to aggregate Outstanding Principal Amount
of Notes outstanding) of all Notes being converted and redeemed at such time.
7. Representations and Warranties.
(a) The Company represents and warrants as follows: (i) the
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware; (ii) the execution, delivery and
performance by the Company of this Note and each other instrument, agreement and
document executed and delivered by the Company to the Holder whether now
existing or hereinafter executed and delivered in connection with this Note
(together with the Purchase Agreement, the other Note, the Warrants, the
Registration Rights Agreement and the other agreements, instruments and
documents heretofore or hereafter furnished in connection therewith are
hereinafter referred to individually as a "Document" and collectively as the
"Documents") are within the Company's corporate powers, have been duly
authorized by all necessary corporate action, and do not contravene (A) the
Company's charter or by-laws or (B) any law or any contractual restriction
binding on or affecting the Company; (iii) no authorization or approval or other
action by, and no notice to or filing with, any governmental authority,
regulatory body or third Person is required for the due execution, delivery and
performance by the Company of any Document; (iv) each Document constitutes the
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms; (v) the Company has all requisite
corporate power and authority to conduct its business as now conducted and to
consummate the transactions contemplated by the Documents; (vi) the Company is
duly qualified to conduct its business and is in good standing in each
jurisdiction in which the character of the properties owned or leased by it, or
in which the transaction of its business makes such qualification necessary
except where such failure to qualify would not have a Material Adverse Effect
(as defined in the Purchase Agreement); (vii) the Company's
19
most recent 10-K or 10-Q filed with the Securities and Exchange Commission,
whichever contains the Company's most recent financial statements, fairly
represents the financial condition of the Company and the results of operations
of the Company for the period ended on the date thereof, all in accordance with
generally accepted accounting principles consistently applied, and since the
date thereof there has been no material adverse change in the operations,
business, property, assets or condition of the Company; (viii) there is no
pending or to the Company's knowledge threatened action or proceeding affecting
the Company before any governmental agency or arbitrator which challenges or
relates to the Documents or any transactions contemplated in connection
therewith or which may materially adversely affect the financial condition or
operations of the Company; (ix) no fact is known to the Company which is
reasonably likely to have a material adverse effect on the business, operations,
condition, financial or otherwise, performance or prospects of the Company and
has not been disclosed in the Company's most recent 10-K or 10-Q filed with the
Securities and Exchange Commission; and (x) after giving effect to the
transactions contemplated by this Note and the other Documents, the Company is,
individually and with its Subsidiaries on a consolidated basis, Solvent.
(b) Each of the representations and warranties made by the
Company in the Purchase Agreement as in effect on the date hereof, without
regard to any amendment, modification or waiver of such provisions, is true and
correct on the date hereof as if made on the date hereof (except for those
representations and warranties that speak as of a specific date), which
representations and warranties (together with all related definitions and
ancillary provisions) are hereby incorporated by reference as if set forth
herein in their entirety, provided, that: (i) references to "this Agreement",
"herein", "hereunder", and words of similar import shall mean and be a reference
to this Note; (ii) references to an "Exhibit" and "Schedule" shall mean and be a
reference to the applicable Exhibit and Schedule to the Purchase Agreement (as
in effect on the date hereof, without regard to any amendment, modification or
waiver of such provisions and without regard to whether or not the Purchase
Agreement remains in effect); and (iii) references to Sections in such
representations and warranties shall be references to Sections of the Purchase
Agreement, provided that to the extent such referenced Sections are themselves
incorporated in this Note by reference, references herein to such Sections shall
be to such Sections as they are incorporated.
8. Covenants. So long as any principal or interest is due hereunder
and shall remain unpaid, the Company will, unless the Holder shall otherwise
consent in writing:
(a) Furnish to the Holder: (i) as soon as possible and in any
event within five days after the occurrence of a Default or any event that, with
the giving of notice or the lapse of time or both, would constitute a Default,
the written statement of the chief financial officer of the Company, setting
forth the details of such Default or event and the action that the Company
proposes to take with respect thereto and (ii) promptly upon request, such other
information concerning the condition or
20
operations, financial or otherwise, of the Company or any of its Subsidiaries as
the Holder from time to time may reasonably request;
(b) Comply, and cause each of its Subsidiaries to comply, in
all material respects with all applicable laws, rules, regulations and orders,
such compliance to include, without limitation, payment before the same become
delinquent all taxes, assessments and governmental charges imposed upon it or
upon its property except to the extent contested in good faith and for which
adequate reserves (as determined in accordance with generally accepted
accounting principles consistently applied) have been set aside;
(c) Maintain and preserve its existence, rights and
privileges, and obtain, maintain and preserve all permits, licenses,
authorizations and approvals that are necessary in the proper conduct of its
business;
(d) Keep adequate and proper records and books of account, in
which complete and correct entries will be made in accordance with generally
accepted accounting principals consistently applied, reflecting all financial
transactions of the Company;
(e) Comply with each of the affirmative and negative covenants
contained in the Purchase Agreement (as in effect on the date hereof, without
regard to any amendment, modification or waiver of such provisions and without
regard to whether or not the Purchase Agreement remains in effect) which
covenants are hereby incorporated by reference as if set forth herein in their
entirety provided that any reference changes provided for in Section 7(b) hereof
shall also be applicable to this Section 8(e);
(f) Not incur nor permit any of its Subsidiaries to incur any
indebtedness except Permitted Debt; and
(g) Not create or suffer to exist, or permit any of its
Subsidiaries to create or suffer to exist, any lien, mortgage, security
interest, charge or other encumbrance (each, a "Lien") upon or with respect to
any of their properties, rights or other assets, whether now owned or hereafter
acquired, or assign or otherwise transfer or permitted any of its Subsidiaries
to assign or otherwise transfer, any right to receive income, other than Liens
under any Permitted Debt.
9. Reservation of Shares. The Company shall, so long as any
principal or interest is due hereunder, reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Note, such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of the Note; provided that the
number of shares of Common Stock so reserved shall at no time be less than 125%
of the number of shares of Common Stock for which the Note is at any time
convertible.
21
10. No Impairment. The Company shall not intentionally take any
action which would impair the rights and privileges of the Note set forth herein
or the Holder.
11. Limitation on Number of Conversion Shares. Notwithstanding any
provision to the contrary contained herein, in no event shall the Holder be
entitled to convert this Note such that upon giving effect to such conversion,
the aggregate number of shares of Common Stock then beneficially owned by the
Holder and its "affiliates" as defined in Rule 144 of the Act would exceed 9.99%
of the total issued and outstanding shares of the Common Stock following such
conversion; provided, however, that Holder may elect to waive this restriction
upon not less than sixty-one (61) days prior written notice to the Company. For
purposes of this Section, beneficial ownership shall be calculated in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended.
12. Obligations Absolute. No provision of this Note shall alter or
impair the obligation of the Company, which is absolute and unconditional, to
convert this Note pursuant to the provisions of Section 3, and to pay the
principal of, and interest on, this Note at the time, place and rate, and in the
manner, herein prescribed.
13. Waivers of Demand, Etc. The Company hereby expressly waives
demand and presentment for payment, notice of nonpayment, protest, notice of
protest, notice of dishonor, notice of acceleration or intent to accelerate
(other than a Notice of Acceleration at Option of Holder Upon Triggering Event
or Notice of Acceleration at Option of Holder Upon Major Transaction as required
by Section 5(f)), bringing of suit and diligence in taking any action to collect
amounts called for hereunder and will be directly and primarily liable for the
payment of all sums owing and to be owing hereon, regardless of and without any
notice, diligence, act or omission as or with respect to the collection of any
amount called for hereunder.
14. Replacement Note. In the event that the Holder notifies the
Company that its Note has been lost, stolen or destroyed, a replacement Note
identical in all respects to the original Note (except for registration number
and Outstanding Principal Amount, if different than that shown on the original
Note) shall be issued by the Company to the Holder, provided that the Holder
executes and delivers to the Company an agreement reasonably satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection with
such Note, but in no event shall the aggregate amount of such indemnification
exceed the Outstanding Principal Amount of the Note.
15. Payment of Expenses; Indemnification. The Company agrees to pay
on demand (a) all accountable costs and expenses (including, without limitation,
fees and expenses of one counsel to the Holders) incurred by the Holders in
connection with the preparation, execution and delivery of this Note and the
other Documents, up to $50,000 (b) all reasonable costs and expenses, including,
without limitation, fees and expenses of counsel to the Holder incurred by the
Holder in connection with the
22
administration and amendment of this Note and the other Documents and (c) all
reasonable costs and expenses (including, without limitation, reasonable fees
and expenses of counsel to the Holder) incurred by the Holder in connection with
the enforcement of the Holder's rights and/or the collection of all amounts due
under this Note. The Company hereby agrees to indemnify and hold harmless the
Holder and its members, partners, agents, employees, affiliates and advisors
from and against any and all claims, damages, losses, liabilities and expenses
(including without limitation, all fees and other client charges of counsel to
the Holder) which may be incurred by or asserted against the Holder or any such
member, partner, agent, employee, affiliate or advisor in connection with or
arising out of any investigation, litigation or proceeding related to or arising
out of this Note or any other Document or any transaction contemplated hereby or
thereby, except for damages, losses, liabilities or expenses arising from
Holder's acts of gross negligence or willful misconduct. The obligations of the
Company under this paragraph shall survive the payment in full of this Note.
16. Restriction on Cash Dividends With Respect to Common Stock.
Until the Note has been converted or redeemed in its entirety as provided
herein, the Company shall not, directly or indirectly, declare or pay any cash
dividend on its Common Stock without the prior express written consent of the
Holder.
17. Assignment and Transfer of Note.
(a) Subject to the restrictions on transfer contained herein,
if applicable, this Note and all rights hereunder are transferable in whole or
in part, without charge to the Holder hereof, upon surrender of this Note with a
properly executed Form of Assignment attached hereto as Exhibit B at the
principal office of the Company (or at such office or agency as the Company may
designate in writing to the Holder).
(b) This Note shall be registered in a register (the "Note
Register") as it is issued and transferred, which Note Register shall be
maintained by the Company at its principal office or, at the Company's election
and expense, by the Company's Transfer Agent. The Company shall be entitled to
treat the registered holder of the Note on the Note Register as the owner in
fact thereof for all purposes and shall not be bound to recognize any equitable
or other claim to or interest in such Note on the part of any other Person, and
shall not be affected by any notice to the contrary, except that, if and when
any Note is properly assigned in blank, the Company may (but shall not be
obligated to) treat the bearer thereof as the owner of such Note for all
purposes. All of the rights provided to the Holder under this Note, if properly
assigned, may be exercised by a new holder without a new note first having been
issued.
18. [intentionally omitted]
19. Events of Default. If any of the following shall occur (each a
"Default"):
23
(a) the Company shall fail to pay (i) any principal of or
non-cash interest on this Note when due, or (ii) any cash interest on this Note
when due and such default remains unremedied for three days (whether in either
case such due date is by scheduled maturity, acceleration, demand or otherwise);
or (b) any representation or warranty made by the Company in this Note, in any
other Document heretofore or hereafter furnished by or on behalf of the Company
(including, without limitation, the Purchase Agreement) or in any document or
certificate in connection with the execution and delivery of this Note shall
have been incorrect in any material respect when made; or (c) the Company shall
fail to perform or observe any term, covenant or agreement contained in any
Document (including, without limitation, the failure to honor any Conversion
Notice or an Election to Purchase Shares (as defined in the Warrants)) to be
performed or observed by the Company, or (d) the Company shall fail to pay any
debt for borrowed money or other similar obligation or liability
("Indebtedness") (excluding Indebtedness evidenced by this Note) in excess of
$100,000 in the aggregate, or any interest or premium thereon, when due (whether
by scheduled maturity, required prepayment, acceleration, demand or otherwise)
and such failure shall continue after the applicable grace period, if any,
specified in the agreement or instrument relating to such Indebtedness, or any
other default under any agreement or instrument relating to any such
Indebtedness, or any other event, shall occur and shall continue after the
applicable grace period, if any, specified in such agreement or instrument, if
the effect of such default or event is to accelerate, or to permit the
acceleration of, the maturity of such Indebtedness; or any such Indebtedness
shall be declared to be due and payable, or required to be prepaid (other than
by a regularly scheduled required prepayment), prior to the stated maturity
thereof; or (e) one or more judgments or orders for the payment of money
exceeding any applicable insurance coverage shall be rendered against the
Company, and either (i) enforcement proceedings shall have been commenced by any
creditor upon any such judgment or order and the same shall not have been
dismissed within twenty (20) days, or (ii) there shall be any period of twenty
(20) consecutive days during which a stay of enforcement of any such judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; or
(f) the Company shall be generally not paying its debts as such debts become
due, or shall admit in writing its inability to pay its debts generally, or
shall make a general assignment for the benefit of creditors; or any proceeding
shall be instituted by or against the Company seeking to adjudicate it a
bankrupt or insolvent, or seeking dissolution, liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief or composition of it
or its debts under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, custodian or other similar official for the
Company or for any substantial part of its property and such proceeding shall
remain undismissed or unstayed for a period of thirty (30) days; or the Company
shall take any action to authorize or effect any of the actions set forth above
in this clause (f); or (g) any provision of this Note or any other Document
(including, without limitation, the Purchase Agreement) shall at any time for
any reason be declared to be null and void by a court of competent jurisdiction,
or the validity or enforceability thereof shall be contested by the Company, or
a proceeding shall be commenced by the Company seeking to establish the
invalidity or unenforceability thereof, or the Company
24
shall deny that it has any liability or obligation hereunder or thereunder; or
(h) a material adverse change in the condition or operations, financial or
otherwise, of the Company, as determined by the Holder in its sole discretion,
shall occur and 5 days prior written notice thereof shall have been given to the
Company by the Holder; or (i) the Registration Statement (as defined in the
Registration Rights Agreement) covering the Conversion Shares and Warrant Shares
shall not have been declared effective by the Securities and Exchange Commission
within 180 days after the Issuance Date; or (j) the Company shall not be
eligible to register securities, including the resale of the Conversion Shares
and Warrant Shares on a registration statement on Form S-3 under the Act on the
twentieth (20th) day following the Issuance Date;
then the Holder may (i) declare the Outstanding Principal Amount of this Note
and all other amounts due hereunder to be immediately due and payable, whereupon
the Outstanding Principal Amount of this Note and all such other amounts shall
become and shall be forthwith due and payable, without diligence, presentment,
demand, protest or other notice of any kind, all of which are hereby expressly
waived and all such amounts, if unpaid, shall bear interest at the Default Rate,
(ii) notwithstanding any provision to the contrary contained herein, convert
this Note at the lower of (I) the Conversion Price and (II) the Market Price, in
each case, on the date of such conversion, and (iii) exercise any and all of its
other rights under applicable law, hereunder and under the other Documents. In
such event, this Note shall be prepaid at a prepayment price equal to 125% of
the Outstanding Principal Amount of the Note plus accrued but unpaid interest
thereon.
20. Taxes, etc. All payments made by the Company hereunder will be
made without setoff, counterclaim or other defense. All such payments shall be
made free and clear of and without deduction for any present or future income,
stamp or other taxes, levies, imposts, deductions, charges, fees, withholding,
restrictions or conditions of any nature now or hereafter imposed, levied,
collected, withheld or assessed by any jurisdiction or by any political
subdivision or taxing authority thereof or therein, and all interest, penalties
or similar liabilities, excluding taxes on the overall net income of the Holder
(such non-excluded taxes are hereinafter collectively referred to as the
"Taxes"). If the Company shall be required by law to deduct or to withhold any
Taxes from or in respect of any amount payable hereunder, (i) the amount so
payable shall be increased to the extent necessary so that after making all
required deductions and withholdings (including Taxes on amounts payable to the
Holder pursuant to this sentence) the Holder receives an amount equal to the sum
it would have received had no such deductions or withholdings been made, (ii)
the Company shall make such deductions or withholdings and (iii) the Company
shall pay the full amount deducted or withheld to the relevant taxation
authority in accordance with applicable law. Whenever any Taxes are payable by
the Company, as promptly as possible thereafter the Company shall send the
Holder an official receipt showing payment. In addition, the Company agrees to
pay any present or future taxes, charges or similar levies which arise from any
payment made hereunder or from the execution, delivery, performance, recordation
or filing of, or otherwise with respect to, this Note or any other Document
(hereinafter referred to as "Other Taxes"). The Company will indemnify the
Holder for the full amount of Taxes or Other Taxes
25
(including, any Taxes or Other Taxes on amounts payable to the Holder under this
paragraph) paid by the Holder and any liability (including penalties, interest
and expenses) arising therefrom or with respect thereto, upon written demand by
the Holder therefor.
21. Miscellaneous.
(a) The Company agrees that all notices or other
communications provided for hereunder shall be in writing (including
telecommunications) and shall be mailed, telecopied or delivered to the Company
at the address of the Company set forth next to its signature, or at such other
address as may hereafter be specified by the Company to the Holder in writing.
All notices and communications shall be effective (i) upon receipt, if delivered
personally, (ii) upon receipt, when sent by facsimile, (iii) three (3) days
after being sent by U.S. certified mail, return receipt requested, or (iv) one
(1) Business Day after deposit with a nationally recognized overnight delivery
service, in each case properly addressed to the party to receive same.
(b) No failure on the part of the Holder to exercise, and no
delay in exercising, any right, power, privilege or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise thereof by
the Holder preclude any other or further exercise thereof or the exercise of any
other right, power, privilege or remedy of the Holder. No amendment or waiver of
any provision of this Note, nor consent to any departure by the Company
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Holder, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
(c) Any provision hereof which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective only to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
(d) The Company hereby (i) irrevocably submits to the
jurisdiction of the courts of the State of New York or the United States for the
Southern District of New York, in each case, sitting in New York County in any
action or proceeding arising out of or relating to this Note, (ii) waives any
defense based on doctrines of venue or forum non convenient, or similar rules or
doctrines, and (iii) irrevocably agrees that all claims in respect of such an
action or proceeding may be heard and determined in such courts. The Company (by
its acceptance hereof) waives any right to trial by jury in any action,
proceeding or counterclaim arising out of or relating to this Note.
26
(e) This Note shall be governed by, and construed in
accordance with, the laws of the State of New York without regard to conflicts
of law principles.
PARADISE MUSIC & ENTERTAINMENT, INC.
By:_____________________________________
Name:
Title:
Address:
00 Xxxx 00xx Xxxxxx
Xxx Xxxx, XX 00000
Attention: President
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
27
SCHEDULE I
PAYMENTS OF PRINCIPAL; INTEREST CAPITALIZED
Principal Capitalized Principal Notation
Paid or Prepaid Interest Balance Made By
--------------- -------- ------- -------
EXHIBIT A
PARADISE MUSIC & ENTERTAINMENT, INC.
CONVERSION NOTICE
Reference is made to the 9% Senior Subordinated Convertible Note due March __,
2003 (the "Note"), made by Paradise Music & Entertainment, Inc., a Delaware
corporation (the "Company"), to the order of BayStar Capital, L.P.. In
accordance with and pursuant to the Note, the undersigned hereby elects to
convert the amount under this Note indicated below into shares of Common Stock,
$.01 par value per share of the Company (the "Common Stock"), as of the date
specified below.
Date of Conversion:
---------------------------------------
Outstanding Principal Amount of Note
to be converted:
---------------------------------------
Please confirm the following information:
Conversion Price:
---------------------------------------
Number of shares of Common Stock
to be issued:
---------------------------------------
Please issue the Common Stock and, if applicable, any check drawn on an account
of the Company into which Note is being converted in the following name and to
the following address:
Issue to:
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
Facsimile Number:
---------------------------------------
Authorization:
---------------------------------------
By:
Title:
Dated:
---------------------------------------
Exhibit B
FORM OF ASSIGNMENT
[To be executed only upon assignment of the Note]
For value received, the undersigned registered Holder of the within Note hereby
sells, assigns and transfers unto the right represented by such Note, and
appoints _____________ Attorney to make such transfer on the Note Register of
Paradise Music & Entertainment, Inc., maintained for such purpose, with full
power of substitution in the premises.
Dated:____________
(Signature must conform in all
respects to the name of holder as
specified on the face of the Note)
________________________________________
(Street Address)
________________________________________
(City) (State) Zip Code)
Signed in the presence of:
