THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS.
THIS NOTE AND THE 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 UNDER SAID ACT AND ANY APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SMARTSERV
ONLINE, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
SENIOR SECURED CONVERTIBLE NOTE
FOR VALUE RECEIVED, SMARTSERV ONLINE, INC., a Delaware corporation (the
"Borrower"), hereby promises to pay to CAMOFI Master LDC (the "Holder") or its
registered assigns or successors in interest, on order, the sum of Five Hundred
Thousand Dollars ($500,000.00), together with any accrued and unpaid interest
hereon, on February 28, 2005 (the "Maturity Date") if not sooner paid.
Capitalized terms used herein without definition shall have the meanings
ascribed to such terms in that certain Securities Purchase Agreement dated as of
the date hereof between the Borrower and the Holder (the "Purchase Agreement")
or that certain Loan Agreement dated as of the date hereof between the Borrower
and the Holder.
The following terms shall apply to this Note:
ARTICLE I
INTEREST & AMORTIZATION
1.1 Interest Rate. Subject to Section 5.6 hereof, interest payable on
this Note shall accrue at a rate per annum (the "Interest Rate") equal to the
WJS Prime Rate plus four percent (4%). Interest shall be (i) calculated on the
basis of a 360 day year and the actual number of days elapsed, compounded
monthly, and (ii) payable monthly, in arrears, commencing on October 1, 2005 and
on the first business day of each consecutive month thereafter until the
Maturity Date (and on the Maturity Date), whether by acceleration or otherwise
(each, a "Repayment Date").
1.2 Minimum Monthly Principal Payments. Amortizing payments of
the aggregate principal amount outstanding under this Note at any time
(the "Principal Amount") shall begin on March 1, 2006 and shall recur
on the first business day of each succeeding calendar month thereafter
until the Maturity Date (each, an "Amortization Date"). Subject to
Article II below, beginning on the first Amortization Date, the
Borrower shall make monthly payments to the Holder on each Repayment
Date, each in the amount of $20,833.33, together with any accrued and
unpaid interest to date on such portion of the Principal Amount plus
any and all other amounts which are then owing under this Note but have
not been paid (collectively, the "Monthly Amount").
ARTICLE II
CONVERSION REPAYMENT
2.1 Payment of Monthly Amount in Cash or Common Stock. Each calendar
month by the tenth (10th) business day prior to each Repayment Date (the "Notice
Date"), the Borrower, at its election, may deliver to the Holder a written
notice in the form to be provided by the Holder converting the Monthly Amount
payable on the next Repayment Date in either cash or Common Stock, or a
combination of both (each, a "Repayment Notice"): provided, however, that
payment in shares of Common Stock may only occur if during the 10 Trading Days
immediately prior to the applicable Repayment Date all of the Equity Conditions
have been met and the payment in shares of Common Stock would not exceed 25% of
the volume for any of the previous 10 Trading Days. For the purposes of this
Section 2.1, "Equity Conditions" shall mean, during the period in question, (i)
the Company shall have the duly honored all conversions scheduled to occur or
occurring by virtue of one or more Notices of Conversion, if any, (ii) all
liquidated damages and other amounts owing in respect of the Notes shall have
been paid; (iii) there is an effective Registration Statement pursuant to which
the Holder is permitted to utilize the prospectus thereunder to resell all of
the shares issuable pursuant to the Transaction Documents (and the Company
believes, in good faith, that such effectiveness will continue uninterrupted for
the foreseeable future), (iv) the Common Stock is trading on a Trading Market
(and the Company believes, in good faith, that trading of the Common Stock on a
Trading Market will continue uninterrupted for the foreseeable future), (v)
there is a sufficient number of authorized but unissued and otherwise unreserved
shares of Common Stock for the issuance of al of the shares issuable pursuant to
the Transaction Documents, (vi) there is then existing no Default or Event of
Default, (vii) all of the shares issued or issuable pursuant to the Transaction
Documents would not violate the limitations set forth in Section 3.2 hereof,
(viii) no public announcement of a pending or proposed transaction that in the
Lender's determination changes the nature of the business of the Borrow or
effects a change of control of the Borrower or an acquisition transaction has
occurred that has not been consummated and (ix) the closing price for the Common
Stock is at least 115% of the Borrower Conversion Price (as adjusted). If a
Repayment Notice is not delivered by the Borrower on or before the applicable
Notice Date for such Repayment Date, then the Borrower shall pay the Monthly
Amount due on such Repayment Date in cash. Any portion of the Principal Xxxxxx
paid in cash on a Repayment Date shall be paid to the Holder in an amount equal
to 102% of the Principal Amount due and owing to the Holder on the Repayment
Date. If the Borrower converts all or a portion of the Monthly Amount into
shares of Common Stock as provided herein, the number of such shares to be
issued by the Borrower to the Holder on the applicable Repayment Date shall be
the number determined by dividing (x) the portion of the Monthly Amount to be
paid in shares of Common Stock by (y) the then applicable Borrower Conversion
Price. For the purposes hereof, "Trading Market" means any of the NASD OTC
Bulletin Board, the NASDAQ SmallCap Market, the NASDAQ National Market, the
American Stock Exchange or the New York Stock Exchange For the purposes hereof,
the "Borrower Conversion Price" means the product of (a) 85% and (b). for the
purposes of this Section 2.1, "VWAP" means, for any date, the price determined
by the first of the following clauses that applies: (a) if the Common Stock is
then listed or quoted on a Trading Market, the daily volume weighted average
price of the Common Stock for such date (or the nearest preceding date) on the
primary Trading Market on which the Common Stock is then listed or quoted as
reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m. EST
to 4:02 p.m. EST) using the VAP function; (b) if the Common Stock is not then
listed
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or quoted on the Trading Market and if prices for the Common Stock are then
reported in the "Pink Sheets" published by the Pink Sheets, LLC (or a similar
organization or agency succeeding to its functions of reporting prices), the
most recent bid price per share of the Common Stock so reported; or (c) in all
other cases, the fair market value of a share of Common Stock as determined by a
nationally recognized-independent appraiser selected in good faith by the
Holder.
2.2 No Effective Registration. Notwithstanding anything to the contrary
herein, none of the Borrower's obligations to the Holder may be converted into
Common Stock unless (i) an effective current Registration Statement (as defined
in the Registration Rights Agreement) covering the shares of Common Stock to be
issued in connection with satisfaction of such obligations exists, (ii) no Event
of Default hereunder exists and is continuing, unless such Event of Default is
cured within any applicable cure period or is otherwise waived in writing by the
Holder in whole or in part at the Holder's option and (iii) an exemption from
registration of the Common Stock is available to pursuant to Rule 144 of the
Securities Act.
Any amounts converted by the Holder pursuant to this Section 2.2 shall
be deemed to constitute payments of outstanding fees, interest and principal
arising in connection with Monthly Amounts for the remaining Repayment Dates, in
chronological order.
2.3 Redemption in Cash. (a) The Borrower will have the option of
prepaying this Note ("Optional Redemption") by paying to the Holder a sum of
money equal to one hundred fifteen percent (115%) of the principal amount of
this Note together with accrued but unpaid interest thereon and any and all
other sums due, accrued or payable to the Holder arising under this Note, the
Security Agreement, or any Related Agreement (the "Redemption Amount")
outstanding on the day written notice of redemption (the "Notice of Redemption")
is given to the Holder. The Notice of Redemption shall specify the date for the
Optional Redemption (the "Redemption Payment Date") which date shall be seven
(7) business days after the date of the Notice of Redemption (the "Redemption
Period"). A Notice of Redemption shall not be effective with respect to any
portion of this Note for which the Holder has a pending election to convert
pursuant to Section 3.1, or for conversions initiated or made by the Holder
pursuant to Section 3.1 during the Redemption Period. The Redemption Amount
shall be determined as if the Holder's conversion elections had been completed
immediately prior to the date of the Notice of Redemption. On the Redemption
Payment Date, the Redemption Amount must be paid in good funds to the Holder. If
the Borrower fails to pay the Redemption Amount on the Redemption Payment Date
as set forth herein, then such Redemption Notice will be null and void.
(b) Simultaneously with the closing of a Qualified Financing, the
Borrower shall prepay in cash the product of (a) fifty percent (50%) and (b) one
hundred 115 percent (115%) of the principal amount of this Note together with
accrued but unpaid interest thereon.
ARTICLE III
CONVERSION RIGHTS
3.1 Holder's Conversion Rights. The Holder shall have the right, but
not the obligation, to convert all or any portion of the then outstanding
principal amount of this Note,
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together with interest and fees due hereon, into shares of Common Stock subject
to the terms and conditions set forth in this Article III. The Holder may
exercise such right by delivery to the Borrower of a written notice of
conversion not less than one (1) day prior to the date upon which such
conversion shall occur. The date upon which such conversion shall occur is (the
"Conversion Date").
3.2 Conversion Limitation. Notwithstanding anything contained herein to
the contrary, the Holder shall not be entitled to convert pursuant to the terms
of this Note an amount that would be convertible into that number of Conversion
Shares which would exceed the difference between the number of shares of Common
Stock beneficially owned by the Holder or issuable upon exercise of warrants
held by the Holder and 9.99% 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 Share
limitation described in this Section 3.2 upon 30 days' prior notice to the
Borrower or without any notice requirement upon an Event of Default.
3.3 Mechanics of Xxxxxx's Conversion. (a) If the Holder elects to
convert this Note into Common Stock, 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 Principal Amount, accrued interest and
fees being converted. On each Conversion Date (as hereinafter defined) and in
accordance with its Notice of Conversion, the Holder shall make the appropriate
reduction to the Principal Amount, accrued interest and fees as entered in its
records and shall provide written notice thereof to the Borrower within two (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 to be employed by the Holder shall be provided by
the Borrower to the Holder.
(a) Pursuant to the terms of the Notice of Conversion, the
Borrower will issue instructions to the transfer agent accompanied by an opinion
of counsel within one (1) business day of the date of the delivery to the
Borrower of the Notice of Conversion and shall cause the transfer agent to
transmit the certificates representing the Conversion Shares to the Holder by
crediting the account of the Holder's designated broker with the Depository
Trust Corporation ("DTC") through its Deposit Withdrawal Agent Commission
("DWAC") system within three (3) business days after receipt by the 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 Conversion Shares 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.
3.4 Conversion Mechanics.
(a) The number of shares of Common Stock to be issued upon
each conversion of this Note shall be determined by dividing that portion of the
principal and interest
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and fees to be converted, if any, by 0.50 (the "Holder Conversion Price"). In
the event of any conversions of outstanding principal amount under this Note in
part pursuant to this Article III, such conversions shall be deemed to
constitute conversions of outstanding principal amount applying to Monthly
Amounts for the remaining Repayment Dates in chronological order.
(b) The Borrower Conversion Price and the Holder Conversion
Price and the number and kind of shares or other securities to be issued upon
conversion is subject to adjustment from time to time upon the occurrence of
certain events, as follows:
A. 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 Borrower Conversion Price or the Holder
Conversion Price, as the case may be, shall be proportionately reduced in case
of a subdivision of shares or stock dividend or proportionately increased in the
case of a 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.
B. 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 full
conversion of this Note. The Borrower represents that upon issuance, such shares
will be duly and validly issued, fully paid and non-assessable. The Borrower
agrees that its issuance of this Note shall constitute full authority to its
officers, agents, and transfer agents who are charged with the duty of executing
and issuing stock certificates to execute and issue the necessary certificates
for shares of Common Stock upon the conversion of this Note.
C. Share Issuances. Subject to the provisions of this
Section 3.4, if the Borrower shall at any time prior to the conversion or
repayment in full of the Principal Amount issue any shares of Common Stock or
securities convertible into Common Stock to a person other than the Holder
(except (i) pursuant to Subsections A or B above; (ii) pursuant to options,
warrants, or other obligations to issue shares outstanding on the date hereof as
disclosed to the Holder in writing; or (iii) pursuant to options that may be
issued under any employee incentive stock option and/or any qualified stock
option plan adopted by the Borrower) for a consideration per share (the "Offer
Price") less than the Holder Conversion Price or in effect at the time of such
issuance, then the Holder Conversion Price shall be immediately reset to such
lower Offer Price at the time of issuance of such securities. For purposes
hereof, the issuance of any security of the Borrower convertible into or
exercisable or exchangeable for Common Stock shall result in an adjustment to
the Holder Conversion Price at the time of issuance of such securities.
D. 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 Amount and accrued interest thereon, shall thereafter be
deemed to evidence the right to purchase an adjusted number of such securities
and kind of securities as would have been issuable as the result of such
5
reclassification or other change with respect to the Common Stock immediately
prior to such reclassification or other change.
3.5 Issuance of New Note. Upon any partial conversion of this Note, a
new Note containing the same date and provisions of this Note shall, at the
request of the Holder, be issued by the Borrower to the Holder for the principal
balance of this Note and interest which shall not have been converted or paid.
The Borrower will pay no costs, fees or any other consideration to the Holder
for the production and issuance of a new Note.
ARTICLE IV
EVENTS OF DEFAULT
Upon the occurrence and continuance of an Event of Default beyond any
applicable grace period, 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. In the event of such an acceleration, within five
(5) days after written notice from the Holder to the Borrower (each occurrence
being a "Default Notice Period") 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 "Default Payment"). If, with respect to any
Event of Default, the Borrower cures the Event of Default, the Event of Default
will be deemed to no longer exist and any rights and remedies of the Holder
pertaining to such Event of Default will be of no further force or effect. The
Default Payment shall be applied first to any fees due and payable to the Holder
pursuant to the Note, the Purchase Agreement and the other Transaction
Documents, then to accrued and unpaid interest due on the Note and then to
outstanding principal balance of the Note.
The occurrence of any of the following events is an "Event of Default":
4.1 Failure to Pay Principal, Interest or other Fees. The Borrower
fails to pay when due any installment of principal, interest or other fees
hereon in accordance herewith, or the Borrower fails to pay when due any amount
due under any other promissory note issued by the Borrower to the Holder.
4.2 Breach of Covenant. The Borrower breaches any covenant or other
term or condition of this Note or the Purchase Agreement or any Related
Agreement in any material respect and such breach, if subject to cure, continues
for a period of fifteen (15) days after the occurrence thereof.
4.3 Breach of Representations and Warranties. Any material
representation or warranty of the Borrower made herein, in the Purchase
Agreement, or in any Related Agreement shall be false or misleading on the date
that such representation or warranty was made or deemed made, and if subject to
cure, shall not be cured for a period of ten (10) days.
4.4 Receiver or Trustee. The Borrower shall make an assignment for the
benefit of creditors, or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business; or such
a receiver or trustee shall otherwise be appointed.
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4.5 Judgments. Any money judgment, writ or similar final process shall
be entered or filed against the Borrower or any of its property or other assets
for more than $50,000, and shall remain unvacated, unbonded or unstayed for a
period of thirty (30) days.
4.6 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Borrower.
4.7 Stop Trade. An SEC stop trade order or Principal Market trading
suspension of the Common Stock shall be in effect for five (5) consecutive days
or five (5) days during a period of ten (10) consecutive days, excluding in all
cases a suspension of all trading on a Principal Market, provided that the
Borrower shall not have been able to cure such trading suspension within thirty
(30) days of the notice thereof or list the Common Stock on another Principal
Market within sixty (60) days of such notice. The "Principal Market" for the
Common Stock shall include the 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, or any securities exchange or other
securities market on which the Common Stock is then being listed or traded.
4.8 Failure to Deliver Common Stock or Replacement Note. The Borrower
shall fail to timely deliver Common Stock to the Holder pursuant to and in the
form required by this Note, and Section 9 of the Purchase Agreement, if such
failure to timely deliver Common Stock shall not be cured within two (2) days.
If the Borrower shall be required to issue a replacement Note to the Holder and
the Borrower shall fail to deliver such replacement Note within seven (7)
business days of the request for the replacement Note.
4.9 Default Under Transaction Documents. The occurrence and continuance
of any Event of Default (or similar term) as defined in any of the Transaction
Documents.
DEFAULT RELATED PROVISIONS
4.10 Payment Grace Period. Following the occurrence and continuance of
an Event of Default beyond any applicable cure period hereunder, the Borrower
shall pay the Holder a default interest rate of two percent (2%) per month on
all amounts due and owing under the Note, which default interest shall be
payable upon demand.
4.11 Conversion Privileges. The conversion privileges set forth in
Article III shall remain in full force and effect immediately from the date
hereof and until this Note is paid in full.
4.12 Cumulative Remedies. 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
7
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 the
Borrower at the address provided in the Purchase Agreement executed in
connection herewith, and to the Holder at the address provided in the Purchase
Agreement for the Holder, with copies to Xxxxxx Xxxxxx, Esq. Xxxxxx Xxxxxx
Xxxxxxxx LLP, 000 Xxxxxxx Xxxxxx, Xxx Xxxx, XX 00000, xxxxxxxxx number (212)
940-8776, or at such other address as the Borrower or the Holder may designate
by ten days' advance written notice to the other parties hereto. A Notice of
Conversion shall be deemed given when made to the Borrower pursuant to the
Purchase Agreement.
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, and any successor instrument issued pursuant to Section 3.5
hereof, as it may be amended or supplemented.
5.4 Assignability. This Note 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 in accordance with the
requirements of the Purchase Agreement.
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 other than Section 5-1401 of the New York General
Obligations Law. Any action brought by either party against the other concerning
the transactions contemplated by this Note shall be brought only in the state
courts of New York or in the federal courts located in the state of New York.
Both parties and the individual signing this Note on behalf of the Borrower
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. If 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. Nothing contained
herein shall be deemed or operate to preclude the Holder from bringing suit or
taking other legal action against the Borrower in any other jurisdiction to
collect on the Borrower's obligations to the Holder, to realize on any
collateral or any other security for such obligations, or to enforce a judgment
in favor of the Holder.
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
8
applicable law. If 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 Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.
5.8 Cost of Collection. If default is made in the payment of this Note,
the Borrower shall pay to the Holder reasonable costs of collection, including
reasonable attorney's fees.
[Balance of page intentionally left blank; signature page follows.]
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IN WITNESS WHEREOF, the Borrower has caused this Senior Secured
Convertible Note to be signed in its name effective as of this [ ] day of
August, 2005.
SMARTSERV ONLINE, INC.
By: /s/ Xxxxxx X. Xxxx
-----------------------------------
Name: Xxxxxx X. Xxxx
Title: Chief Executive Officer
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