1
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE
AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE OR THE SHARES OF COMMON STOCK UNDER SAID
ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO PATH 1 NETWORK
TECHNOLOGIES INC., THAT SUCH REGISTRATION IS NOT REQUIRED.
CONVERTIBLE NOTE
FOR VALUE RECEIVED, PATH 1 NETWORK TECHNOLOGIES INC., a
Delaware corporation (the "BORROWER"), hereby promises to pay to LAURUS MASTER
FUND, LTD., c/o Ironshore Corporate Services Ltd., P.O. Box 1234 G.T.,
Queensgate House, South Church Street, Grand Cayman, Cayman Islands, Fax:
000-000-0000 (the "HOLDER") or its registered assigns or successors in interest,
on order, without demand, the outstanding principal amount of all loans made by
the Holder to the Borrower under the terms of this Note (each an "Advance" and
collectively the "Advances"). The aggregate principal amount of all Advances
outstanding hereunder shall not exceed ONE MILLION DOLLARS ($1,000,000), and no
Advance shall be made after February 18, 2006 (the "Maturity Date"). The amount
and date of each Advance shall be entered by the Holder into Holder's records,
which records shall be conclusive evidence of the subject matter thereof absent
manifest error.
Capitalized terms used herein without definition shall have
the meanings ascribed to such terms in the Purchase and Security Agreement
between the Borrower and the Holder dated the date hereof (the "PURCHASE
AGREEMENT").
The following terms shall apply to this Note:
ARTICLE I
INTEREST
1.1 Interest Rate. Except as modified by Section 1.2 below,
the Borrower shall pay interest at the Contract Rate on the unpaid principal
balance of the Note until such time as such balance or portion thereof is
collected in full in good funds in dollars of the United States of America.
Interest shall be payable in arrears commencing one month from the date hereof
and on the first business day of each consecutive calendar month thereafter, and
on the Maturity Date, accelerated or otherwise, due and payable as described
below.
1.2 Default Rate. After the Default Notice Period, the Default
Rate, as defined in the Purchase Agreement, shall apply to the amounts owed
hereunder.
ARTICLE II
ADVANCES UNDER NOTE
2.1 Authorized Person.
(a) Any officer of the Borrower who has been disclosed to the
Holder in writing as an authorized officer for such purposes (an "AUTHORIZED
PERSON") may request an Advance on any day other than a Saturday, Sunday or
other day when commercial banks located in New York, New York are not open for
commercial banking business. Such request shall be made in writing delivered to
the Holder by not later than 12:00 p.m. on the day of the requested Advance.
(b) The Borrower hereby authorizes the Holder to rely upon the
written instructions of any person identifying himself or herself as an
Authorized Person and upon any signature which the Holder believes to be
genuine, and the Borrower shall be bound thereby in the same manner as if such
person were authorized or such signature were genuine.
2.2 Limitation on Advances. It is expressly understood that the Holder
is under no obligation to make any Advance to the Borrower under this Note
(whether by reason of any provision hereof or otherwise) (i) if an Event of
Default, as hereinafter defined, has occurred and is continuing, or (ii) if such
Advance or any part thereof would cause the aggregate amount of all Advances
made hereunder to exceed the Accounts Availability.
ARTICLE III
CONVERSION RIGHTS
3.1. Conversion into the Borrower's Common Stock.
(a) To the extent that Advances have been made hereunder, the
Holder shall have the right, but not the obligation, from and after the date
hereof, and then at any time until the Maturity Date, to convert the principal
portion of the Advances made hereunder and/or interest and fees due and payable
into fully paid and nonassessable shares of common stock of the Borrower as such
stock exists on the date of issuance of this Note, or any shares of capital
stock of the Borrower into which such stock shall hereafter be changed or
reclassified (the "COMMON STOCK") at the Fixed Conversion Price as defined
below. In the event that the Holder elects to convert this Note into Common
Stock (to the extent permitted herein), the Holder shall give notice of such
election by delivering an executed and completed notice of conversion ("NOTICE
OF CONVERSION") to the Borrower and such Notice of Conversion shall provide a
breakdown in reasonable detail of the amount of Note principal, interest and
fees that are being converted. On each Conversion Date (as hereinafter defined)
and in accordance with its Notice of Conversion, the Holder shall make the
appropriate reduction to the Advances, interest and fees as entered in its
records and shall provide written notice thereof to the Borrower within 2
business days after the Conversion Date. Each date on which a Notice of
Conversion is delivered or telecopied to the Borrower in accordance with the
provisions hereof shall be deemed a Conversion Date (the "CONVERSION DATE"). A
form of Notice of Conversion that may be employed by the Holder is annexed
hereto as Exhibit A. The Borrower will cause the transfer agent to transmit the
certificates representing the shares of the Common Stock issuable upon
conversion of the Note to the Holder by crediting the account of the Holder's
designated broker with the Depository Trust Corporation ("DTC") through its
Deposit Withdrawal Agent Commission ("DWAC") system within three (3) business
days after receipt by the Borrower of the Notice of Conversion (the "DELIVERY
DATE").
In the case of the exercise of the conversion rights set forth
herein the conversion privilege shall be deemed to have been exercised and the
shares of Common Stock issuable upon such conversion shall be deemed to have
been issued upon the date of receipt by the Borrower of the Notice of
Conversion. The Holder shall be treated for all purposes as the record holder of
such Common Stock, unless the Holder provides the Borrower written instructions
to the contrary.
(b) Subject to adjustment as provided in Section 3.1(e)
hereof, the Conversion Price per share shall be $1.13 (the "FIXED CONVERSION
PRICE.") If after the Default Notice Period (as defined below) the Borrower has
not repaid in full the amounts then due hereunder or cured the Event of Default,
then the Conversion Price shall be reduced and shall be equal to the lower of
(i) the Fixed Conversion Price; or (ii) eighty percent (80%) of the average of
the three lowest closing prices for the Common Stock on NASD OTC Bulletin Board,
NASDAQ SmallCap Market, NASDAQ National Market System, American Stock Exchange,
or New York Stock Exchange (whichever of the foregoing is at the time the
principal trading exchange or market for the Common Stock, the "PRINCIPAL
Market"), or on any securities exchange or other securities market on which the
Common Stock is then being listed or traded, for the thirty (30) trading days
prior to but not including the Conversion Date.
(c) Notwithstanding anything contained herein to the contrary,
the Holder shall not be entitled to convert pursuant to the terms of this Note
an amount that would be convertible into that number of shares of Common Stock
which would exceed the difference between the number of shares of Common Stock
beneficially owned by such holder or issuable upon exercise of warrants held by
such holder and 4.99% of the outstanding shares of Common Stock of the Borrower.
For the purposes of the immediately preceding sentence, beneficial ownership
shall be determined in accordance with Section 13(d) of the Exchange Act and
Regulation 13d-3 thereunder. The Holder may void the conversion limitation
described in this section upon 75 days prior notice to the Borrower or upon an
Event of Default hereunder.
(d) The Borrower understands that a delay in the delivery of
the shares of Common Stock in the form required pursuant to this Article beyond
the Delivery Date could result in economic loss to the Holder. As compensation
to the Holder for such loss, the Borrower agrees to pay late payments to the
Holder for late issuance of the such shares in the form required pursuant to
this Article III upon conversion of the Note, in the amount equal to the greater
of (i) $500 per business day after the Delivery Date and (ii) the Borrower's
actual damages from such delayed delivery. The Borrower shall pay any payments
incurred under this Section in immediately available funds upon demand and, in
the case of actual damages, accompanied by reasonable documentation of the
amount of such damages.
(e) The Conversion Price and number and kind of shares or
other securities to be issued upon conversion shall be subject to adjustment
from time to time upon the happening of certain events while this conversion
right remains outstanding, as follows):
X. Xxxxxx, Sale of Assets, etc. The Borrower at any
time shall consolidate with
or merge into or sell or convey all or substantially all its assets to any other
corporation, this Note, as to the unpaid principal portion thereof and accrued
interest thereon shall thereafter be deemed to evidence the right to purchase
such number and kind of shares or other securities and property as would have
been issuable or distributable on account of such consolidation, merger, sale or
conveyance, upon or with respect to the number of shares of Common Stock the
Holder could have acquired immediately prior to such consolidation, merger, sale
or conveyance based on the Fixed Conversion Price Cap as of the closing date
thereof. The foregoing provision shall similarly apply to successive
transactions of a similar nature by any such successor or purchaser. Without
limiting the generality of the foregoing, the provisions of this Section shall
apply to such securities of such successor or purchaser after any such
consolidation, merger, sale or conveyance.
B. Reclassification, etc. If the Borrower at any time
shall, by reclassification
or otherwise, change the Common Stock into the same or a different number of
securities of any class or classes, this Note, as to the unpaid principal
portion thereof and accrued interest thereon, shall thereafter be deemed to
evidence the right to purchase an adjusted number of such securities and kind of
securities as would have been issuable as the result of such change with respect
to the number of shares of Common Stock into which the Note would have been
convertible immediately prior to such reclassification or other change at the
Fixed Conversion Price as of the effective date for such reclassification or
change.
C. Stock Splits, Combinations and Dividends. If the
shares of Common Stock are
subdivided or combined into a greater or smaller number of shares of Common
Stock, or if a dividend is paid on the Common Stock in shares of Common Stock,
the Fixed Conversion Price shall be proportionately reduced in case of
subdivision of shares or stock dividend or proportionately increased in the case
of combination of shares, in each such case by the ratio which the total number
of shares of Common Stock outstanding immediately after such event bears to the
total number of shares of Common Stock outstanding immediately prior to such
event.
D. Share Issuance. Subject to the provisions of this
Section, if the Borrower at
any time shall issue any shares of Common Stock prior to the conversion of the
portion of the principal amount of the Note permitted by Section 3.1(a)
(otherwise than as: (i) provided in Sections 3.1(e)A, 3.1(e)B or 3.1(e)C or this
subparagraph D; or (ii) pursuant to warrants or options that may be granted in
the future under any option plan of the Borrower, or any employment agreement,
joint venture, credit, leasing or other financing agreement or any joint venture
or other strategic arrangement, in each case now or hereinafter entered into by
the Borrower, (iii) pursuant to any agreement entered into by the Company or any
of its subsidiaries for the acquisition of another business (whether by stock
purchase or asset purchase, merger or otherwise; ((i), (ii) and (iii) above, are
hereinafter referred to as the "EXCLUDED ISSUANCES")) for a consideration less
than the Fixed Conversion Price that would be in effect at the time of such
issue, then, and thereafter successively upon each such issue, the Fixed
Conversion Price shall be reduced as follows: (i) the number of shares of Common
Stock outstanding immediately prior to such issue shall be multiplied by the
Fixed Conversion Price in effect at the time of such issue and the product shall
be added to the aggregate consideration, if any, received by the Borrower upon
such issue of additional shares of Common Stock; and (ii) the sum so obtained
shall be divided by the number of shares of Common Stock outstanding immediately
after such issue. The resulting quotient shall be the adjusted Fixed Conversion
Price. Except for the Excluded Issuances for purposes of this adjustment, the
issuance of any security of the Borrower carrying the right to convert such
security into shares of Common Stock or of any warrant, right or option to
purchase Common Stock shall result in an adjustment to the Conversion Price upon
the issuance of shares of Common Stock upon exercise of such conversion or
purchase rights.
(f) During the period the conversion right exists, the
Borrower will reserve from its authorized and unissued Common Stock a sufficient
number of shares to provide for the issuance of Common Stock upon the conversion
of this Note to the extent permitted by Section 3.1(a). The Borrower represents
that upon issuance, such shares will be duly and validly issued, fully paid and
non-assessable. The Borrower agrees that the Borrower's issuance of this Note
shall constitute full authority to the Borrower's officers, agents, and transfer
agents who are charged with the duty of executing and issuing stock certificates
to execute and issue the necessary certificates for shares of Common Stock upon
the conversion of this Note.
3.2 Registration Rights. The Holder has been granted
registration rights with respect to the shares of Common Stock issuable upon
conversion of this Note as more fully set forth in a Registration Rights
Agreement dated the date hereof (the "REGISTRATION RIGHTS AGREEMENT.")
ARTICLE IV
EVENT OF DEFAULT
If an Event of Default occurs and is continuing, the Holder
may make all sums of principal, accrued but unpaid interests and other fees then
remaining unpaid hereon and all other amounts payable hereunder due and payable
within 5 days of written notice from the Holder to the Borrower (each occurrence
being a "DEFAULT NOTICE PERIOD") of an Event of Default (as defined below). If
during the Default Notice Period, the Borrower cures the Event of Default, the
Event of Default will no longer exist and any rights the Holder had pertaining
to the Event of Default will no longer exist.
The occurrence of any of the following events is an Event of
Default ("EVENT OF DEFAULT"):
4.1 Failure to Pay Principal, Interest or other Fees. The
Borrower fails to pay any installment of principal, interest or other fees
hereon or on any other promissory note issued pursuant to the Loan Agreement,
Registration Rights Agreement and this Note when due.
4.2 Failure to Deliver Common Stock or Replacement Note. The
Borrower's failure to timely deliver Common Stock to the Holder pursuant to and
in the form required by this Note.
4.3 Breach of Covenant. The Borrower breaches any material
covenant or other term or condition of this Note, the Loan Agreement or the
Registration Rights Agreement in any material respect.
4.4 Breach of Representations and Warranties. Any material
representation or warranty of the Borrower made herein, in the Loan Agreement,
or in any agreement, statement or certificate given in writing pursuant hereto
or in connection therewith shall be false or misleading.
4.5 Stop Trade. An SEC stop trade order or Principal Market
trading suspension of the Common Stock for 5 consecutive days or 5 days during a
period of 10 consecutive days, excluding in all cases a suspension of all
trading on a Principal Market.
4.6 Default Under Related Agreement. An Event of Default
occurs under and as defined in the Loan Agreement dated as of the date hereof
between Borrower and Holder, as such agreement may be amended, modified and
supplemented from time to time.
If an Event of Default occurs and is continuing, the Holder
may make all sums of principal, interest and other fees then remaining unpaid
hereon and all other amounts payable hereunder immediately due and payable, all
without demand, presentment or notice, or grace period, all of which hereby are
expressly waived. In the event of an acceleration, the amount due and owing to
the Holder shall be 130% of the outstanding principal amount of the Note (plus
accrued and unpaid interest and fees, if any). The remedies under this Note
shall be cumulative.
ARTICLE V
MISCELLANEOUS
5.1 Failure or Indulgence Not Waiver. No failure or delay on
the part of the Holder hereof in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.
5.2 Notices. Any notice herein required or permitted to be
given shall be in writing and shall be deemed effectively given: (a) upon
personal delivery to the party notified, (b) when sent by confirmed telex or
facsimile if sent during normal business hours of the recipient, if not, then on
the next business day, (c) five days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (d) one day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All communications shall be sent
to (i) the Borrower at the address as set forth on the signature page to the
Loan Agreement executed in connection herewith and, as the case may be, to the
Borrower at the address as set forth in Section 6(g) of the Registration Rights
Agreement, in each case, and (ii) the Holder at the address set forth on the
signature page to the Loan Agreement for such Holder, with a copy to Xxxxxx X.
Xxxxxx, Esq., 000 Xxxx 00xx Xxxxxx, 0xx Xxxxx, Xxx Xxxx, Xxx Xxxx 00000,
facsimile number (000) 000-0000, or at such other address as the Borrower, the
Borrower or the Holder may designate by ten days advance written notice to the
other parties hereto made and delivered in accordance with this Section 5.2.
5.3 Amendment Provision. The term "Note" and all reference
thereto, as used throughout this instrument, shall mean this instrument as
originally executed, or if later amended or supplemented, then as so amended or
supplemented.
5.4 Assignability. This Note (except for Article III) shall be
binding upon the Borrower and its successors and assigns, and shall inure to the
benefit of the Holder and its successors and assigns, and may be assigned by the
Holder. Article III and Article V of this Note (excluding Section 5.6 and 5.7)
shall be binding upon the Borrower and its successors and assigns.
5.5 Governing Law. This Note shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to principles of conflicts of laws. Any action brought by either party against
the other concerning the transactions contemplated by this Agreement shall be
brought only in the state courts of New York or in the federal courts located in
the state of New York; provided, however that the Purchaser may choose to waive
this provision and bring an action outside the state of New York. Both parties
and the individual signing this Note on behalf of the Borrower, the Borrower and
the Holder agree to submit to the jurisdiction of such courts. The prevailing
party shall be entitled to recover from the other party its reasonable
attorney's fees and costs. In the event that any provision of this Note is
invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or unenforceability of any other provision of this
Note.
5.6 Maximum Payments. Nothing contained herein shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum permitted by
such law, any payments in excess of such maximum shall be credited against
amounts owed by the Borrower to the Holder and thus refunded to the Borrower.
5.7 Security Interest. The holder of this Note has been granted a security
interest in certain assets of the Borrower more fully described in the Loan
Agreement.
5.8 Construction. Each party acknowledges that its legal
counsel participated in the preparation of this Note and, therefore, stipulates
that the rule of construction that ambiguities are to be resolved against the
drafting party shall not be applied in the interpretation of this Note to favor
any party against the other.
IN WITNESS WHEREOF, the Borrower has caused this Note to be signed in
its name effective as of this 18th day of February, 2003.
PATH 1 NETWORK TECHNOLOGIES INC.
By:________________________________
NOTICE OF CONVERSION
(To be executed by the Holder in order to convert the Note)
The undersigned hereby elects to convert $_________ of the principal
and $_________ of the interest due on the Note issued by PATH 1 NETWORK
TECHNOLOGIES INC. on February __, 2003 into Shares of Common Stock of PATH 1
NETWORK TECHNOLOGIES INC. (the "Company") according to the conditions set forth
in such Note, as of the date written below.
Date of Conversion:_____________________________________________________________
Conversion Price:_______________________________________________________________
Shares To Be Delivered:_________________________________________________________
DTC Number:_____________________________________________________________________
Account Number:_________________________________________________________________
Signature:______________________________________________________________________
Print Name:_____________________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________
