Contract
EXHIBIT 10.5
THIS SECURITY HAS NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY PORTION HEREOF OR INTEREST HEREIN MAY
BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS THE
SAME IS REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR UNLESS
AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND THE CORPORATION SHALL HAVE RECEIVED, AT
THE EXPENSE OF THE HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO THE
CORPORATION
(WHICH MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION).
FOR VALUE RECEIVED, MBI Financial, Inc., a Nevada corporation (the
“Company” or “MBIF”), promises to pay to Xx. Xxxxxx Xxxxxxx
(the “Holder”), or its assigns, the principal sum of ONE-MILLION FIVE-HUNDRED THOUSAND DOLLARS
($1,500,000), the outstanding principal amount subscribed to hereof and hereby noted on the
signature page below, together with interest from the date of this Note on the
unpaid principal balance at a rate equal to 12% (twelve percent) per annum, computed on the
basis of the actual number of days elapsed and a year of 365 days. All unpaid principal,
together with any then unpaid and accrued interest and other amounts payable hereunder, shall be
due and payable on the “Maturity Date” which date shall be the earlier of (i) September 30,
2006; or (ii) within 5 (five) business days after the closing of at least $2,000,000 of gross
proceeds from one or more offerings of the Company’s debt or equity securities, in which case,
the Company will use the proceeds from such future offerings of its debt or equity securities to
redeem the Notes as follows: $1,000,000 of the first $2,000,000 raised in any such future
offerings will be used to pay down this Note and any amount raised above
$2,000,000 will be used to pay off the remainder the principal amount of this
Note, together with any and all accrued and unpaid interest; or (iii) when such amounts are
declared due and payable by the Holder (or made automatically due and payable) upon or after the
occurrence of an Event of Default (as defined below).
THE OBLIGATIONS DUE UNDER THIS NOTE ARE DATED AS OF THE DATE HEREOF AND EXECUTED
BY THE COMPANY IN FAVOR OF THE HOLDER. ADDITIONAL RIGHTS OF THE HOLDER ARE SET FORTH IN
THE AGREEMENT.
The following is a statement of the rights of the Holder and the conditions to which
this Note is subject, and to which the Holder, by the acceptance of this Note, agrees:
1. DEFINITIONS. As used in this Note, the following capitalized terms have the following
meanings:
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(a) The “Company” includes the corporation initially executing this Note and any Person
which shall succeed to or assume the obligations of the Company under this Note.
(b) “Certificate” shall mean the Articles of Incorporation of Company as in effect on the
date hereof.
(c) “Equity Securities” of any Person shall mean (a) all common stock, preferred
stock, participations, shares, partnership interests or other equity interests in and
of such Person (regardless of how designated and whether or not voting or non-voting)
and (b) all warrants, options and other rights to acquire any of the foregoing.
(d) “Event of Default” has the meaning given in Section 7 hereof.
(e) “Financial Statements” shall mean, with respect to any accounting period for
any Person, statements of operations, retained earnings and cash flows of such Person for such
period, and balance sheets of such Person as of the end of such period, setting forth in each
case in comparative form figures for the corresponding period in the preceding fiscal year if
such period is less than a full fiscal year or, if such period is a full fiscal year,
corresponding figures from the preceding fiscal year, all prepared in reasonable
detail and in accordance with generally accepted accounting principles
(except, with respect to quarterly financial statements, for footnotes and year end
adjustments). Unless otherwise indicated, each reference to Financial Statements of any Person
shall be deemed to refer to Financial Statements prepared on a consolidated basis.
(f) “Holder” shall mean the Person specified in the introductory paragraph
of this Note or any Person who shall at the time be the holder of this Note, pursuant to a
transfer, assignment or other transaction effected on the terms and subject to the
conditions set forth in this Note. “Holders” shall mean the Holder, together with all other
Persons who hold up to $1,500,000 maximum principal amount of the Company’s 12% Convertible
Bridge Notes due September 30, 2006.
(g) “Indebtedness” shall mean and include the aggregate amount of, without duplication (a)
all obligations for borrowed money, (b) all obligations evidenced by bonds,
debentures, notes or other similar instruments, (c) all obligations to pay the
deferred purchase price of property or services (other than accounts payable incurred in the
ordinary course of business determined in accordance with generally accepted accounting
principals), (d) all obligations with respect to capital leases, (e) all guaranty obligations;
(f) all obligations created or arising under any conditional sale or other title retention
agreement with respect to property acquired by such Person, (g) all
reimbursement and other payment obligations, contingent or otherwise, in respect of
letters of credit and/or obligations under taxing authorities.
(h) “Investment” of any Person shall mean any loan or advance of funds by such Person to
any other Person (other than advances to employees of such Person for moving and travel
expense, drawing accounts and similar expenditures in the ordinary
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course of business), any purchase or other acquisition of any Equity
Securities or
Indebtedness of any other Person, any capital contribution by such Person to or any other
investment by such Person in any other Person (including, without limitation, any
Indebtedness incurred by such Person of the type described in clauses (a) and (b) of the
definition of “Indebtedness” on behalf of any other Person); provided, however, that
Investments shall not include accounts receivable or other indebtedness owed by
customers of such Person, which are current assets and arose from sales or non-exclusive
licensing in the ordinary course of such Person’s business.
(i) “Lien” shall mean, with respect to any property, any security interest, mortgage,
pledge, lien, claim, charge or other encumbrance in, of, or on such property or the income
therefrom, including, without limitation, the interest of a vendor or lessor under a
conditional sale agreement, capital lease or other title retention agreement, or any agreement
to provide any of the foregoing, and the filing of any financing statement or similar
instrument under the Uniform Commercial Code or comparable law of any jurisdiction.
(j) “Material Adverse Effect” shall mean a material adverse effect on (a) the business,
assets, operations, or financial or other condition of the Company; (b) the ability
of the Company to pay or perform the Obligations in accordance with the terms of this Note and
the other Transaction Documents and to avoid a default or Event of Default under any
Transaction Document; or (c) the rights and remedies, taken as a whole, of Holder
under this Note, the other Transaction Documents or any related document, instrument
or agreement.
(k) “Permitted Indebtedness” means:
Note;
(i) Indebtedness of Company in favor of the Holder arising under this
(ii) The existing Indebtedness set forth on the Company’s Form 10-
QSB filed with the Securities and Exchange Commission (the “SEC”) for the quarterly period
ended March 31, 2006, as the same may have increased or decreased in the ordinary
course of the Company’s business after the date thereof;
(iii) The principal amount of any note of the Company, together with any and all accrued and
unpaid interest, for which Xxxxxxx Xxxxxx LLC has been engaged
as the placement agent (collectively, the “Interim Bridge Notes”);
(iv) Indebtedness to trade creditors, including, without limitation, affiliates of
and service providers to the Company, incurred in the ordinary course of business;
(v) Other Indebtedness of Company, not exceeding $1.0 million in the aggregate outstanding at
any time;
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(vi) Contingent obligations of Company consisting of guarantees (and
other credit support) of the obligations of vendors and suppliers of Company in respect of
transactions entered into in the ordinary course of business;
(vii) Indebtedness with respect to capital lease obligations and
Indebtedness secured by Permitted Liens;
(viii) Extensions, renewals, refundings, refinancings, modifications, amendments and
restatements of any of the items of Permitted Indebtedness (a) through
(f) above, provided that the principal amount thereof is not increased or the terms thereof are
not modified to impose more burdensome terms upon Company.
(l) “Permitted Investments” shall mean and include: (a) deposits with commercial
banks organized under the laws of the United States or a state thereof to the extent such
deposits are fully insured by the Federal Deposit Insurance Corporation; (b) Investments in
marketable obligations issued or fully guaranteed by the United States and maturing not more
than one (1) year from the date of issuance; (c) Investments in open market commercial paper
rated at least “A1” or “P1” or higher by a national credit rating agency and maturing not
more than one (1) year from the creation thereof; (d) Investments pursuant to or
arising under currency agreements or interest rate agreements entered into in connection
with bona fide hedging arrangements; (e) Investments consisting of deposit accounts of
the Company in which the Holder has a perfected security interest and deposit
accounts of its Subsidiaries maintained in the ordinary course of business; (f)
Investments existing on the Closing Date disclosed in the Schedule; (g) Extensions of
credit in the nature of accounts receivable or notes receivable arising from the same or lease
of goods or services in the ordinary course of business; (h) Investments consisting of the
endorsement of negotiable instruments for deposit or collection or similar transactions
in the ordinary course of business; (i) Investments
(including debt obligations) received in connection with the bankruptcy or reorganization
of customers or suppliers and in settlement of delinquent obligations of, and other
disputes with, customers or suppliers arising in the ordinary course of business;
(j) Investments consisting of (i) compensation of employees, officers and directors of
borrower so long as the Board of Directors of Company determines that
such compensation is in the best interests of Company, (ii) travel advances, employee
relocation loans and other employee loans and advances in the ordinary course of
business, (iii) loans to employees, officers or directors relating to the purchase of equity
securities of Company, (iv) other loans to officers and employees approved by the Board
of Directors; and (k) other Investments aggregating not in excess of $1,000,000 at any time.
(m) “Permitted Liens” shall mean and include: (i) Liens for taxes or other
governmental charges not at the time delinquent or thereafter payable without penalty or being
contested in good faith, provided provision is made to the reasonable satisfaction of Holder
for the eventual payment thereof if subsequently found payable; (ii) Liens of
carriers, warehousemen, mechanics, materialmen, vendors, and landlords incurred in the
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ordinary course of business for sums not overdue or being contested in good
faith, provided provision is made to the reasonable satisfaction of Holder for the
eventual
payment thereof if subsequently found payable; (iii) deposits under workers’ compensation,
unemployment insurance and social security laws or to secure the performance of bids,
tenders, contracts (other than for the repayment of borrowed money)
or leases, or to secure statutory obligations of surety or appeal bonds or to
secure indemnity, performance or other similar bonds in the ordinary course of
business; (iv) Liens securing obligations under a capital lease if such Liens do not extend to
property other than the property leased under such capital lease; (v) Liens upon any
equipment acquired or held by Company or any of its Subsidiaries to secure the purchase price
of such equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment; (vi) easements, reservations, rights of way,
restrictions, minor defects or irregularities in title and other similar charges or affecting
the value or use of such property; (vii) Liens in favor of the Holder; (viii) Liens existing on
the date hereof in favor of holders of Senior Indebtedness; (ix) any liens existing as of the
date hereof and disclosed in the Schedule; (x) liens on equipment leased by Company
pursuant to an operating lease in the ordinary course of business (including
proceeds thereof and accessions thereto) incurred solely for the purpose of financing the lease
of such equipment (including Liens arising from UCC financing statements regarding such leases);
(xi) liens arising from judgements, decrees or attachments to the extent and only
so long as such judgment, decree or attachment does not constitute an Event of Default under
7(h); (xii) liens in favor of customs and revenue authorities arising as a matter of law to
secure payment of customs duties in connection with the importation of goods;
(xiii) liens arising solely by virtue of any statutory or common law provision relating to
banker’s liens, rights off setoff or similar rights and remedies as to deposit accounts or other
funds maintained with a creditor depository institution; (xiv) liens on
the Company’s inventory or accounts receivable to secure Indebtedness incurred
in connection with the financing of such accounts receivable or inventory; and (xv)
liens incurred in connection with the extension, renewal, refunding, refinancing, modification,
amendment or restatement of the indebtedness secured by Liens of the type described in clauses
(i) and (xiv) above, provided that any extension, renewal or replacement Lien shall
be limited to the property encumbered by the existing Lien and the principal amount
of the indebtedness being extended, renewed or refinanced does not increase.
(n) “Person” shall mean and include an individual, a partnership, a corporation
(including a business trust), a joint stock company, a limited liability company, an
unincorporated association, a joint venture or other entity or a governmental authority.
(o) “Senior Indebtedness” shall mean the principal of, unpaid interest on and other
amounts due in connection with the notes payable and other evidences of indebtedness
outstanding at the time of execution of this Note.
(p) “Preferred shares” shall mean the Company’s presently authorized
Preferred Stock.
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(q) “Subsidiary” shall mean (a) any corporation of which more than 50% of the
issued and outstanding equity securities having ordinary voting power to elect a
majority of the Board of Directors of such corporation is at the time directly or indirectly
owned or controlled by Company, (b) any partnership, joint venture, or other association
of which more than 50% of the equity interest having the power to vote, direct or control the
management of such partnership, joint venture or other association is at the time
directly or indirectly owned and controlled by Company (c) any other entity included in the
financial statements of Company on a consolidated basis.
(r) “Transaction Documents” shall mean this Note and the Warrant (as defined in
Section 11 hereof).
2. REPRESENTATIONS AND WARRANTIES OF COMPANY. The
Company represents and warrants to the Holder as follows:
(a) Due Incorporation and Qualification. Each of the Company and its Subsidiaries
(i) is a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation; (ii) has the power and authority to own, lease and
operate its properties and carry on its business as now conducted and as proposed to
be conducted; and (iii) is duly qualified, licensed to do business and in good standing as a
foreign corporation in each jurisdiction where the failure to be so qualified
or licensed could reasonably be expected to have a Material Adverse Effect.
(b) Authority. The execution, delivery and performance by Company of each Transaction
Document to be executed by Company and the consummation of the transactions contemplated
thereby (i) are within the corporate power of Company and (ii) have been duly authorized by all
necessary corporate actions on the part of Company.
(c) Enforceability. Each Transaction Document executed, or to be executed, by
Company has been, or will be, duly executed and delivered by Company and
constitutes, or will constitute, a legal, valid and binding obligation of Company,
enforceable against Company in accordance with its terms, except as limited
by bankruptcy, insolvency or other laws of general application relating to or
affecting the enforcement of creditors’ rights generally and general principles of equity.
(d) Non-Contravention. The execution and delivery by Company of the
Transaction Documents executed by Company and the performance and consummation
of the transactions contemplated thereby do not and will not (i) violate the Certificate or
Bylaws of the Company or any material judgment, order, writ, decree, statute, rule
or regulation applicable to Company; (ii) violate any provision of, or result in the breach or
the acceleration of, or entitle any other Person to accelerate (whether after the giving of
notice or lapse of time or both), any material mortgage, indenture, agreement, instrument
or contract to which Company is a party or by which it is bound; or (iii) result
in the creation or imposition of any Lien upon any property, asset or revenue of
Company
(other than any Lien arising under the Transaction Document) or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license,
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authorization or approval applicable to Company, its business or operations, or any of its
assets or properties.
(e) Approvals. No consent, approval, order or authorization of, or
registration, declaration or filing with, any governmental authority or other
Person
(including, without limitation, the shareholders of any Person) is required in connection with
the execution and delivery of the Transaction Documents executed by Company and the performance
and consummation of the transactions contemplated thereby, except for filings and notifications
required by federal and state securities laws in connection with the offer and sale of this Note
and the consummation of the transactions contemplated hereby and thereby.
(f) No Violation or Default. None of the Company or the Company’s Subsidiaries
is in violation of or in default with respect to (i) its Certificate or Bylaws or equivalent
charter document or any material judgment, order, writ, decree, statute, rule or regulation
applicable to such Person; (ii) any material mortgage, indenture, agreement, instrument
or contract to which such Person is a party or by which it is bound (nor is there any
waiver in effect which, if not in effect, would result in such a violation or
default), where, in each case, such violation or default, individually, or together with all
such violations or defaults, could reasonably be expected to have a Material Adverse
Effect.
(g) Litigation. No actions (including, without limitation, derivative actions),
suits, proceedings or investigations are pending or, to the knowledge of the Company,
threatened against the Company or the Company’s Subsidiaries at law or in equity in
any court or before any other governmental authority which if adversely determined
(i) would (alone or in the aggregate) have a Material Adverse Effect or (ii) seeks to enjoin,
either directly or indirectly, the execution, delivery or performance by the Company of the
Transaction Documents or the transactions contemplated thereby.
(h) Title. The Company and the Company’s Subsidiaries own and have good and marketable
title in fee simple absolute to, or a valid leasehold interest in, all their respective real
properties and good title to their other respective assets and properties as
reflected in the most recent Financial Statements delivered to Purchasers
(except those assets and properties disposed of in the ordinary course of business since the
date of such Financial Statements) and all respective assets and properties acquired by Company
and Company’s Subsidiaries since such date (except those disposed of in the ordinary course of
business). Such assets and properties are subject to no Lien, except for Permitted Liens.
(i) Equity Securities. The authorized capital stock of the Company may be found in the
Company’s Form 10-QSB for the quarterly period ended March 31, 2006 filed by the
Company with the SEC.
3. REPRESENTATIONS AND WARRANTIES OF HOLDER. The Holder represents and warrants to the
Company that such Holder has been advised that neither
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this Note nor the securities which may be issued upon the conversion hereof have been
registered under the Securities Act, or any state securities laws and, therefore, cannot be
resold unless registered under the Securities Act and applicable state securities laws or unless
an exemption from such registration requirements is available. Such Holder is aware
that the Company is under no obligation to effect any such registration with respect
to the Note or to file for or comply with any exemption from registration. Such Holder has not
been formed solely for the purpose of making this investment and is purchasing the Note to be
acquired by such Holder hereunder for its own account for investment, not
as a nominee or agent, and not with a view to, or for resale in connection with,
the distribution thereof. Such Holder has such knowledge and experience in financial and
business matters that such Purchaser is capable of evaluating the merits and risks of such
investment, is able to incur a complete loss of such investment and is able to bear the
economic risk of such investment for an indefinite period of time. Such Holder is
an accredited investor as such term is defined in Rule 501 of Regulation D under
the Securities Act.
4. INTEREST. Accrued interest on the outstanding principal balance on this
Note shall be payable on the Maturity Date.
5. PREPAYMENT. Upon 3 (three) days’ prior written notice to the Holder, the Company may
prepay this Note in whole or in part; provided that any such prepayment will be applied first to
the payment of expenses due under this Note, second to interest accrued on this Note and third,
if the amount of prepayment exceeds the amount of all such expenses and accrued interest, to the
payment of principal of this Note.
6. CERTAIN COVENANTS. While any amount is outstanding under the Note, without the prior
written consent of the Holders of a majority of the Notes in interest of then-outstanding
principal amount of the Notes, which consent shall not be unreasonably withheld or delayed:
(a) Indebtedness. Neither Company nor any of its Subsidiaries shall create, incur, assume
or permit to exist any Indebtedness except Senior Indebtedness and Permitted
Indebtedness.
(b) Liens. Neither the Company nor any of its Subsidiaries shall create, incur, assume
or permit to exist any Lien on or with respect to any of its assets or property
of any character, whether now owned or hereafter acquired, except for Permitted Liens.
(c) Asset Dispositions. Neither the Company nor any of its Subsidiaries shall sell,
lease, transfer, license or otherwise dispose of any of its assets or property
(collectively, a “Transfer”), whether now owned or hereafter acquired, except (i) transfers
in the ordinary course of its business consisting of the sale of inventory and
sales of worn-out or obsolete equipment and (ii) transfers not in excess of $1.0 million for
fair value and other than to any affiliate of the Company.
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(d) Mergers, Acquisitions, Etc. Neither the Company nor any of its
Subsidiaries shall consolidate with or merge into any other Person or permit any other Person to
merge into it, or acquire all or substantially all of the assets or capital stock of any other
Person.
(e) Investments. Neither the Company nor any of its Subsidiaries shall
make any Investment except for Permitted Investments. Without previous notice to
Holder, Company will not sell an amount greater than $100,000 in equity securities, with the
exception of (i) the $2,000,000 offering contemplated in definition of the Maturity
Date in the Private Placement Memorandum; (ii) compensatory and incentive awards of Equity
Securities to employees of and consultants to the Company consistent with its prior
practices; and (iii) for issuances of Equity Securities in connection with the exercise
of conversion rights of the holders of the Interim Bridge Notes and of warrants or options
to purchase Company securities granted by the Company prior to the date hereof.
(f) Dividends, Redemptions, Etc. Neither the Company nor any of its Subsidiaries
shall (i) pay any dividends or make any distributions on its Equity Securities; (ii)
purchase, redeem, retire, decease or otherwise acquire for value any of its Equity Securities;
(iii) return any capital to any holder of its Equity Securities; (iv) make any distribution of
assets, Equity Securities, obligations or securities to any holder of its Equity Securities; or
(v) set apart any sum for any such purpose; other than payments of principal and interest on
outstanding Interim Bridge Notes and repurchases of shares from terminated employees
pursuant to the terms of restricted stock purchase agreements, and provided, however, that any
Subsidiary may pay cash dividends to Company.
(g) Indebtedness Payments. Neither the Company nor any of its Subsidiaries shall
(i) prepay, redeem, purchase, decrease or otherwise satisfy in any manner prior to the
scheduled repayment thereof any Indebtedness for borrowed money
(other than (A) amounts due under this Note and (B) Senior Indebtedness) or lease
obligations, (ii) amend, modify or otherwise change the terms of any Indebtedness
for borrowed money (other than (A) obligations under this Note and (B)
Senior Indebtedness) or lease obligations so as to accelerate the scheduled repayment thereof or
(iii) repay any notes to officers, directors or stockholders.
(h) Information Rights; Notices. The Company shall furnish to the Holder the following:
(i) Quarterly Financial Statements. Within ninety (90) days after the last day of each
quarter, a copy of the Financial Statements of the Company for such quarter and for
the fiscal year to date, certified by the chief financial officer or controller
of the Company to present fairly the financial condition, results of operations and other
information presented therein and to have been prepared in accordance with generally
accepted accounting principals consistently applied, subject to normal year
end adjustments and except that no footnotes need be included with such
Financial Statements;
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(ii) Annual Financial Statements. Within ninety (90) days after the close
of each fiscal year of the Company, (i) copies of the audited Financial Statements of Company
for such year, audited by a recognized independent certified public
accountants, (ii) copies of the unqualified opinions and management letters delivered by such
accountants in connection with such Financial Statements, and (iii) a report
containing a description of projected business prospects (including capital expenditures) and
management’s discussion and analysis of financial condition and results of operation
of Company and its Subsidiaries;
(iii) SEC Reports. At such time as the Company is subject to the reporting
requirement of the Exchange Act, as soon as possible and in no event later than five (5)
business days after they are sent, made available or filed, copies of all registration
statements and reports filed by Company with the Securities and Exchange Commission and all
reports, proxy statements and financial statements sent or made available by Company
to its stockholders generally; and
(iv) Notice of Defaults. Promptly upon the occurrence thereof, written notice of the
occurrence of any Event of Default hereunder or any event of default with respect to any Senior
Indebtedness.
(i) Inspection Rights. The Holder and its representatives shall have the right,
at any time during normal business hours, upon reasonable prior notice, and at the expense of
the Holder, to visit and inspect the properties of the Company and its corporate,
financial and operating records, and make abstracts therefrom, and to discuss the Company’s
affairs, finances and accounts with its directors, officers and independent public accountants.
(j) Use of Proceeds. The Company shall use the proceeds it receives from sales of Notes
to all of the Holders as set forth in the Company’s Private Placement Memorandum
dated June 28, 2006.
(k) Board Seat. As of the final closing, the Company shall, for a period of three years,
elect one designee representing all Holders this Note to serve as one of the members of the
Company’s Board of Directors and such board shall meet at least quarterly. The
Company shall compensate such designated director in the same manner
as it compensates its other non-management directors and reimburse such designee for all
reasonable costs incurred in attending the Company’s Board meetings. To the extent
permitted by law, the Company shall indemnify the Holders and their director designee for the
actions of such designee as a director of the Company. In the event the Company maintains a
liability insurance policy affording coverage for the acts of its officers and directors, it
will include the Holders and their director designee as an insured under such policy. If the
Holders do not exercise their option to designate a member of the Company’s Board
of Directors, the Holders can nonetheless have the right to send a representative
(who need not be the same individual from meeting to meeting) to observe each meeting of the
Board of Directors.
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7. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an “Event of Default” under this Note and the other Transaction Documents:
(a) Failure to Pay. The Company shall fail to pay (i) when due any principal
payment on the due date hereunder or (ii) any interest or other payment required under the terms
of this Note or any other Transaction Document on the date due and such payment shall not
have been made within five (5) days of Company’s receipt of the Holder’s written
notice to Company of such failure to pay; or
(b) Breaches of Certain Covenants. The Company or any of its Subsidiaries shall fail to
observe or perform any covenant, obligation, condition or agreement set forth
in Section 6(d), 6(f) or 6(j) of this Note; or
(c) Breaches of Other Covenants. The Company or any of its Subsidiaries shall fail to
observe or perform any other covenant, Transaction Documents (other than those specified in
Sections 7(a) and 7(b)) and (i) such failure shall continue for fifteen
(15) days, or (ii) if such failure does not result from the payment of money or the failure
to pay money and is not curable within such fifteen (15) day period, but is reasonably capable
of cure within forty-five (45) days, either (A) such failure shall continue for
forty-five (45) days or (B) the Company or its Subsidiary shall not have commenced a cure in a
manner reasonably satisfactory to the Holders within the initial fifteen (15) day period; or
(d) Representations and Warranties. Any representation, warranty, certificate, or other
statement (financial or otherwise) made or furnished by or on behalf
of the Company to the Holder in writing in connection with this Note or any of the other
Transaction Documents, or as an inducement to the Holder to enter into this Note and the other
Transaction Documents, shall be false, incorrect, incomplete or misleading in any material
respect when made or furnished, except any such false, incorrect, incomplete or misleading
statement which will not result in a Material Adverse Effect on the Company;
or
(e) Other Payment Obligations. The Company or any of its Subsidiaries shall (i)(A) fail
to make any payment when due under the terms of any bond, debenture, note or other evidence of
Indebtedness, including the Senior Indebtedness, to be paid by such Person (excluding this Note
and the other Transaction Documents but including any other evidence of Indebtedness of Company
or any of its Subsidiaries to the Holder) and such failure shall continue beyond any period of
grace provided with respect thereto, or
(B) default in the observance or performance of any other agreement, term or condition contained
in any such bond, debenture, note or other evidence of Indebtedness, and (ii) the effect of such
failure or default is to cause, or permit the holder or holders thereof to cause, Indebtedness
in an aggregate amount of Two Hundred Fifty Thousand Dollars
($250,000) or more to become due prior to its stated date of maturity, unless such
acceleration shall have been rescinded or forgone and such failure to pay cured within thirty
(30) days from the date of such acceleration; or
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(f) Voluntary Bankruptcy or Insolvency Proceedings. The Company or any
of its Subsidiaries shall (i) apply for or consent to the appointment of a receiver, trustee,
liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable,
or admit in writing its inability, to pay its debts generally as they mature, (iii) make
a general assignment for the benefit of its or any of its creditors, (iv) be
dissolved or liquidated in full or in part, (v) become insolvent (as such term may
be defined or interpreted under any applicable statute), (vi) commence a voluntary
case or other proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in
effect or
consent to any such relief or to the appointment of or taking possession of its property by any
official in an involuntary case or other proceeding commenced against it, or (vii) take any
action for the purpose of effecting any of the foregoing; or
(g) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a
receiver, trustee, liquidator or custodian of the Company or any of its Subsidiaries or of all
or a substantial part of the property thereof, or an involuntary case
or other proceedings seeking liquidation, reorganization or other relief with respect to the
Company or any of its Subsidiaries or the debts thereof under any bankruptcy, insolvency
or other similar law now or hereafter in effect shall be commenced and an order for relief
entered or such proceeding shall not be dismissed or discharged within sixty (60) days of
commencement; or
(h) Judgments. A final judgment or order for the payment of money in excess of Two
Hundred Fifty Thousand Dollars ($250,000) (exclusive of amounts covered by insurance
issued by an insurer not an affiliate of Company) shall be rendered against the Company or any
of its Subsidiaries and the same shall remain undischarged for a period of thirty (30) days
during which execution shall not be effectively stayed, or any judgment, writ, assessment,
warrant of attachment, or execution or similar process shall be issued or levied against a
substantial part of the property of the Company or any
of its Subsidiaries and such judgment, writ, or similar process shall not be
released, stayed, vacated or otherwise dismissed within thirty (30) days after issue or levy; or
(i) Transaction Documents. Any Transaction Document or any material term thereof shall
cease to be, or be asserted by the Company not to be, a legal, valid and binding obligation of
Company enforceable in accordance with its terms or if the Liens of the Holder in any of the
assets of Company or its Subsidiaries shall cease to be or shall not be valid and perfected
Liens or the Company or any Subsidiary shall assert that such Liens are not valid and perfected
Liens.
8. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or existence
of any Event of Default (other than an Event of Default referred to in Sections 7(f) and
7(g)) and at any time thereafter during the continuance of such Event of Default,
the Holders may, by written notice to the Company, declare all outstanding Obligations
payable by the Company hereunder to be immediately due and payable without
presentment, demand, protest or any other notice of any kind, all of which are hereby
12
expressly waived, anything contained herein or in the other Transaction Documents to the
contrary notwithstanding. Upon the occurrence or existence of any Event of Default
described in Sections 7(f) and 7(g), immediately and without notice, all outstanding
Obligations payable by Company hereunder shall automatically become immediately due and payable,
without presentment, demand, protest or any other notice of any kind, all of which are hereby
expressly waived, anything contained herein or in the other Transaction Documents to the
contrary notwithstanding. In addition to the foregoing remedies, upon the occurrence or
existence of any Event of Default, the Holders may exercise any other right, power or remedy
granted to it by the Transaction Documents or otherwise permitted to it by law, either
by suit in equity or by action at law, or both.
9. SUBORDINATION. The indebtedness evidenced by this Note is hereby expressly
subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the
prior payment in full of the Senior Indebtedness.
(a) Insolvency Proceedings. If there shall occur any receivership, insolvency,
assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements
with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or
substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets
and liabilities of the Company, (i) no amount shall be paid by the Company in respect of the
principal of, interest on or other amounts due with respect to
this Note at the time outstanding, unless and until the principal of and interest
on the Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim or proof
of claim shall be filed with the Company by or on behalf of Holder of this Note which shall
assert any right to receive any payments in respect of the principal of and interest on this
Note except subject to the payment in full of the principal of and interest on all of the Senior
Indebtedness then outstanding.
(b) Default on Senior Indebtedness. If there shall occur an event of default which has
been declared in writing with respect to any Senior Indebtedness, as defined therein, or in
the instrument under which it is outstanding, permitting the holder to accelerate the
maturity thereof and the Holder shall have received written notice thereof from the holder of
such Senior Indebtedness, then, unless and until such event of default shall have been cured or
waived or shall have ceased to exist, or all Senior Indebtedness shall have been paid in full,
no payment shall be made in respect of the principal of or interest on this Note, unless within
one hundred eighty (180) days after the happening of such event of default, the maturity
of such Senior Indebtedness shall not have been accelerated. Not more than one notice
may be given to Holder pursuant to the terms of this Section 9(b) during any 360 day period.
(c) Further Assurances. By acceptance of this Note, the Holder agrees to execute and
deliver customary forms of subordination agreement requested from time to time by holders of
Senior Indebtedness, and as a condition to the Holder’s rights hereunder, the Company
may require that the Holder execute such forms of subordination agreement; provided that such
forms shall not impose on the Holder terms less favorable than those provided herein.
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(d) Other Indebtedness. No Indebtedness which does not constitute Senior
Indebtedness shall be senior in any respect to the indebtedness represented by this Note.
(e) Subrogation. Subject to the payment in full of all Senior Indebtedness, the Holder shall
be subrogated to the rights of the holder(s) of such Senior Indebtedness
(to the extent of the payments or distributions made to the holder(s) of such
Senior Indebtedness pursuant to the provisions of this Section 9) to receive payments
and distributions of assets of the Company applicable to the Senior Indebtedness. No such
payments or distributions applicable to the Senior Indebtedness shall, as between the
Company and its creditors, other than the holders of Senior Indebtedness and the Holder,
be deemed to be a payment by the Company to or on account of this Note; and for
purposes of such subrogation, no payments or distributions to the holders of Senior
Indebtedness to which the Holder would be entitled except for the provisions of
this Section 9 shall, as between the Company and its creditors, other than the
holders of Senior Indebtedness and the Holder, be deemed to be a payment by the Company to or
on account of the Senior Indebtedness.
(f) No Impairment. Subject to the rights, if any, of the holders of Senior Indebtedness
under this Section 9 to receive cash, securities or other properties otherwise payable or
deliverable to the Holder, nothing contained in this Section 9 shall impair, as between the
Company and the Holder, the obligation of the Company, subject to the terms and
conditions hereof, to pay to the Holder the principal hereof and interest hereon
as and when the same become due and payable, or shall prevent the Holder, upon default hereunder,
from exercising all rights, powers and remedies otherwise provided herein or
by applicable law.
(g) Lien Subordination. Any Lien of the Holder, whether now or hereafter existing in
connection with the amounts due under this Note, on any assets or property of the Company or any
proceeds or revenues therefrom which the Holder may have at any time as security for any amounts
due and obligations under this Note shall be subordinate
to all Liens now or hereafter granted to a holder of Senior Indebtedness by Company or
by law, notwithstanding the date, order or method of attachment or perfection of any such
Lien or the provisions of any applicable law.
(h) Reliance of Holders of Senior Indebtedness. The Holder, by its acceptance
hereof, shall be deemed to acknowledge and agree that the foregoing subordination
provisions are, and are intended to be, an inducement to and a
consideration of each holder of Senior Indebtedness, whether such Senior Indebtedness was
created or acquired before or after the creation of the indebtedness evidenced by this Note, and
each such holder of Senior Indebtedness shall be deemed conclusively to have relied on such
subordination provisions in acquiring and holding, or in continuing to hold, such
Senior Indebtedness.
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10. CONVERSION.
(a) Conversion by Holder. At any time prior to payment in full of the principal balance of
this Note, the Holder shall have the right, at the Holder’s option, to convert this Note, in
accordance with the provisions of Section 10(b) hereof, in whole or in part, into fully paid
and nonassessable shares of Common Stock, provided that the Holder shall provide at
least thirty (15) days notice to the Company of Holder’s election to convert this Note into
shares of MBIF’s Common Stock. The number of shares of MBIF’s Common Stock into which this
Note may be converted shall be determined by dividing the aggregate amount of this
Note to be converted by the Conversion Price (as defined below) in effect at the time
of such conversion. The initial “Conversion Price” shall be equal to $1.00 per share. The
Conversion Price shall be subject to adjustment from time
to time pursuant to Section 12 hereof and the terms of the Company’s Certificate.
(b) Conversion Procedure. Conversion Pursuant to Section 10(a). Before the Holder shall
be entitled to convert this Note into shares of MBIF’s Common Stock, it shall surrender this
Note, duly endorsed, at the office of the Company and shall give written notice,
postage prepaid, to the Company at its principal corporate office, of the election to convert
the same pursuant to Section 10(a), and shall state therein the amount
of the unpaid principal amount of this Note, together with accrued but unpaid interest, to
be converted and the name or names in which the certificate or certificates for shares of MBIF’s
Common Stock are to be issued, subject to compliance by the Holder of this Note
with the transfer restrictions applicable to this Note. The Company shall, as soon as
practicable thereafter (but in any event within ten (10) days thereafter), issue and deliver
to the Holder of this Note a certificate or certificates for the number of shares of MBIF’s
Common Stock to which the Holder shall be entitled upon conversion (bearing such
legends as are required by applicable state and federal securities laws), together with a
replacement Note (if any principal amount is not converted) and any other securities and
property to which the Holder is entitled upon such conversion under the terms of
this Note, including a check payable to Holder for any cash amounts payable as described in
Section 10(c). The conversion shall be deemed to have been made immediately prior to the close
of business on the date of the surrender of this Note, and the Person or Persons entitled to
receive the shares of MBIF’s Common Stock upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of MBIF’s Common Stock as of
such date.
(c) Fractional Shares; Interest; Effect of Conversion. No fractional shares shall be
issued upon conversion of this Note. In lieu of the Company issuing any fractional
shares to the Holder upon the conversion of this Note, the Company shall pay
to the Holder an amount equal to the product obtained by multiplying the Conversion
Price by the fraction of a share not issued pursuant to the previous sentence. In addition, the
Company shall pay to the Holder any interest accrued on the amount converted and
on the amount to be paid to the Company pursuant to the previous sentence. Upon
conversion of this Note in full and the payment of the amounts specified in this Section
10(c), the Company shall be forever released and discharged from all its obligations and
liabilities under this Note.
15
11. ISSUANCES OF WARRANTS.
(a) The Holder shall receive, for no additional consideration, a stock purchase warrant
(the “Warrant”) in a form attached to this Note, entitling the Holder to purchase shares of the
Company’s Common Stock.
(b) The Company shall issue to the Holder a Warrant entitling the Holder to purchase a
number of shares of the Company’s Common Stock equal to 150% of the number of shares
of Common Stock into which this Note initially is convertible.
(c) Each Warrant to be issued by the Company pursuant to this Section 11
shall have an initial exercise price equal to $1.00. Each Warrant survives for a period of 5
(five) years from the date when it is issued.
(d) The shares of MBIF’s Common Stock issuable upon the exercise of any Warrants issued
pursuant to this Section 11 shall be entitled to “piggy back” registration rights.
12. CONVERSION PRICE ADJUSTMENTS.
(a) Adjustments for Stock Splits and Subdivisions. In the event the Company should
at any time or from time to time after the date of issuance hereof fix a record date for the
effectuation of a split or subdivision of the outstanding shares of MBIF’s Common
Stock or other distribution payable in additional shares of MBIF’s Common Stock or
other securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of MBIF’s Common Stock
(hereinafter referred to as “MBIF’s Common Stock Equivalents”) without payment of any
consideration by such holder (including the additional shares of MBIF’s Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed), the
Conversion Price of this Note shall be appropriately decreased so that the number
of shares of MBIF’s Common Stock issuable upon conversion of this Note shall be
increased in proportion to such increase of outstanding shares.
(b) Adjustments for Reverse Stock Splits. If the number of shares of MBIF’s Common Stock
outstanding at any time after the date hereof is decreased by a combination of the
outstanding shares of MBIF’s Common Stock, then, following the record date of such
combination, the Conversion Price for this Note shall be appropriately increased so that the
number of shares of MBIF’s Common Stock issuable on conversion hereof shall be decreased in
proportion to such decrease in outstanding shares.
(c) Notices of Record Date, etc. In the event of:
(i) Any taking by the Company of a record of the holders of any class
of securities of the Company for the purpose of determining the holders thereof who are entitled
to receive any dividend (other than a cash dividend payable out of earned surplus
16
at the same rate as that of the last such cash dividend theretofore paid)
or other distribution, or any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to receive any other
right; or
(ii) Any capital reorganization of the Company, any reclassification or recapitalization of
the capital stock of the Company or any transfer of all or substantially
all of the assets of the Company to any other Person or any consolidation or merger
involving the Company; or
(iii) Any voluntary or involuntary dissolution, liquidation or winding-up
of the Company, the Company will mail to Holder of this Note at least ten (10) days prior
to the earliest date specified therein, a notice specifying (A) the date on which any such
record is to be taken for the purpose of such dividend, distribution or right, and
the amount and character of such dividend, distribution or right; and (B) the date on which any
such reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding-up is expected to become effective and the record date for
determining stockholders entitled to vote thereon.
(d) Reservation of Stock Issuable Upon Conversion. The Company shall at
all times reserve and keep available out of its authorized but unissued shares of MBIF’s Common
Stock solely for the purpose of effecting the conversion of this Note such number of
its shares of MBIF’s Common Stock as shall from time to time be sufficient to effect the
conversion of the Note; and if at any time the number of authorized but unissued
shares of MBIF’s Common Stock shall not be sufficient to effect the conversion
of the entire outstanding principal amount of this Note, without limitation of such other
remedies as shall be available to the holder of this Note, the Company will use its best efforts
to take such corporate action as may, in the opinion of counsel, be necessary to increase its
authorized but unissued shares of MBIF’s Common Stock to such number of shares as shall be
sufficient for such purposes.
13. SUCCESSORS AND ASSIGNS. Neither this Note nor any of the rights, interests or
obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by
the Company without the prior written consent of the Holder or by the Holder without the prior
written consent of the Company. Subject to the foregoing and the restrictions on transfer
described in Section 15 below, the rights and obligations
of the Company and the Holder shall be binding upon and benefit the successors, assigns, heirs,
administrators and transferees of the parties.
14. WAIVER AND AMENDMENT. Any provision of this Note may be amended, waived or
modified upon the written consent of the Company and the Holder.
15. TRANSFER OF THIS NOTE OR SECURITIES ISSUABLE ON CONVERSION HEREOF. With respect to
any offer, sale or other disposition of this Note or any securities into which
this Note may be converted, the Holder will give written notice to the Company
prior thereto, describing briefly the manner thereof, together with a written opinion of
the Holder’s counsel, to the effect that such offer, sale
17
or other distribution may be effected without registration or qualification
under any federal or state law then in effect. Promptly upon receiving such written
notice and reasonably satisfactory opinion, if so requested and subject to Section 13, the
Company,
as promptly as practicable, shall notify the Holder that the Holder may sell or otherwise
dispose of this Note or such securities, all in accordance with the terms of the
notice delivered to the Company. If a determination has been made pursuant to this Section 15
that the opinion of counsel for the Holder is not reasonably satisfactory to the Company, the
Company shall so notify the Holder promptly after such determination has been made.
Each Note thus transferred and each certificate representing the securities thus
transferred shall bear a legend as to the applicable restrictions on transferability in order
to ensure compliance with the Act, unless in the opinion of counsel for the Company such legend
is not required in order to ensure compliance with the Act. The Company may issue stop
transfer instructions to its transfer agent in connection with such restrictions.
16. NOTICES. Any notice, request or other communication required or permitted
hereunder shall be in writing and shall be deemed to have been duly given if
personally delivered or mailed by registered or certified mail, postage prepaid,
or by recognized overnight courier, or by facsimile transmission or personal
delivery, addressed (i) if to the Holder, at such Holder’s address set forth at the
end of this Agreement, or at such other address as such Holder shall have furnished the
Company in writing, or (ii) if to the Company, at its address or fax number set forth at the
end of this Agreement, or at such other address as the Company shall have furnished to the
Holder in writing. Any party hereto may by notice so given change its address for future
notice hereunder. Notice shall conclusively be deemed to have been given when received.
17. PAYMENT. Payment shall be made in lawful tender of the United States.
18. EVENT OF DEFAULT CONSEQUENCES. During any period in which
an Event of Default has occurred and is continuing, the Holder shall have the right, at the
Holder’s option, to convert this Note into shares of Common Stock of the Company at an initial
conversion price of $0.50 per share.
19. EXPENSES; WAIVERS. If action is instituted to collect this Note, the Company promises
to pay all costs and expenses, including, without limitation, reasonable
attorneys’ fees and costs, incurred by one counsel representing all Holders designated
in accordance with Section 21 herein below, in connection with such action. The Company hereby
waives notice of default, presentment or demand for payment, protest or notice of
nonpayment or dishonor and all other notices or demands relative to this instrument. The
Company shall pay on demand all reasonable fees and expenses, including reasonable
attorneys’ fees and expenses, incurred by the Holder with respect to the enforcement or
attempted enforcement of any of the obligations of the Company to the Holder under the
Transaction Documents or in preserving any of the Holder’s rights and remedies (including,
without limitation, all such fees and expenses incurred in connection with any “workout”
or restructuring affecting the Transaction Documents or the obligations thereunder or any
bankruptcy or similar proceeding involving Company
or any of its Subsidiaries).
18
20. REPLACEMENT NOTE. Upon receipt by the Company of evidence
reasonably satisfactory to it of the ownership of and the loss, theft, destruction
or mutilation of any Note and (a) in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to it; or (b) in the case of mutilation, upon surrender
thereof; the Company, at its expense, will execute and deliver in lieu thereof a new Note
executed in the same manner as the Note being replaced, in the same principal amount as the
unpaid principal amount of such Note and dated the date to which interest shall have been paid
on such Note or, if no interest shall have yet been so paid, dated the date of such Note.
21. ACTION OF HOLDERS. Any action required or permitted to be taken
by the Holders of this Note and the other Notes, and any demand, sent, forbearance or waiver,
shall be effective only with the consent or other affirmative action of the majority
in interest of then-outstanding principal amount of the Notes. No such demand, consent, waiver or
forbearance shall be of any force or effect without such consent or other action.
22. GOVERNING LAW. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the laws of the State of New York, without regard to the conflicts of law provisions of the
State of New York or of any other state.
IN WITNESS WHEREOF, the Company has caused this Note to be issued as
of the date first written above.
| MBI FINANCIAL, INC. | ||||
By:
|
/S/ Xxxxxxx XxXxxxxx | |||
Its:
|
CEO, MBI Financial | |||
| Fax Number: (000) 000-0000 | ||||
| HOLDER | ||||
| Amount: $1,500,000 | ||||
Signature:
|
/s/ Xxxxxx X. Xxxxxxx | |||
| Name: Xxxxxx X. Xxxxxxx | ||||
| Address: 00000 Xxxxx Xxxx | ||||
| Fax Number: 000.000.0000 | ||||
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