Exhibit 4.1
Note Agreement Dated July 3, 2003
NOTE AGREEMENT
12% Convertible Subordinated Notes
Due June 30, 2005
To each of the Purchasers
of the above Notes listed in
the Schedule of Purchasers
attached hereto as Schedule I and Schedule II:
Gentlemen:
TeraForce Technology Corporation, a Delaware corporation (the
"Company"), is offering for sale up to $2,000,000 of 12% convertible
subordinated notes due June 30, 2005 (the "Notes"). The terms and conditions
governing the Notes are contained in this Agreement. In connection with your
purchase of the Notes, the Company has agreed to issue to you, a warrant to
purchase shares of Common Stock as set forth in the Warrant Agreement between
you and the Company dated the date hereof (the "Warrant"). As purchasers of the
Notes, you are acquiring one or more of the Notes to be issued pursuant to this
Agreement. Accordingly, the Company hereby agrees with you (each herein called a
"Purchaser" and together, the "Purchasers") and with the Agent appointed under
Section 11.2 hereof as follows:
1. AUTHORIZATION OF NOTES. The Company will authorize the issue
and sale of up to $2,000,000 in aggregate principal amount of its Notes. Each
Note issued hereunder will be dated the date of its issuance, will mature on
June 30, 2005, will bear interest on its unpaid principal balance from the date
of issuance at the rate of 12% per annum, computed on the basis of a 360-day
year of twelve 30 day months, payable at maturity, June 30, 2005, and will have
the other terms and provisions provided herein and in the form of Note attached
hereto as Exhibit A. The term "Note" or "Notes" as used herein shall include
each Note delivered pursuant to any provision of this Agreement and each Note
delivered in substitution or exchange for any such Note pursuant to any such
provision. Certain capitalized terms used in this Agreement are defined in
Section 15.
2. PURCHASE AND SALE OF NOTES. The Company will issue and sell to
you and, subject to the terms and conditions of this Agreement, you will
purchase from the Company, at the closings provided for in Section 3, the
principal amount of Notes specified opposite your name in the Schedule I or II
of Purchasers at the purchase price of 100% of the principal amount or value
thereof.
3. CLOSING. The initial sale of the Notes to be purchased by you
(the "Initial Closing") will take place at a closing to occur no later than June
30, 2003, unless extended by the Company's board of directors, in its sole
discretion, until July15, 2003. The Initial Closing shall be contingent upon the
satisfaction of the Company's receipt of the minimum subscriptions as set forth
in Section 6.1(d) hereof. A final sale of the Notes ("Final Closing") shall
occur upon the earlier of (i) June 30, 2003, unless such date is extended by the
Company, in its sole discretion, to a date no later than July 15, 2003 or (ii)
the date subscriptions for Notes in the aggregate principal amount of $2,000,000
have been received. Each such closing described above in this Section 3 is
referred to herein as a "Closing." The date of each such Closing is referred to
herein as a "Closing Date," the date of the Initial Closing is referred to
herein as the "Initial Closing Date," and the date of the Final Closing is
referred to herein as the "Final Closing Date." The Purchasers in the Initial
Closing will be set forth in Schedule I and the Purchasers in the Final Closing
shall be set forth in Schedule II.
At the respective Closing, the Company will deliver to you the Notes to
be purchased by you at such Closing, in the form of one Note (or such greater
number of Notes as you may request in denominations of not less than One Hundred
Thousand and No/100 Dollars ($100,000.00) per Note and integral multiples
thereof unless otherwise agreed to by the Company), each dated the date of the
Closing and registered in your name (or in the name of your nominee as indicated
on the Schedule of Purchasers or otherwise made known in writing by you to the
Company prior to the Closing), against delivery by you to the Company or its
order of immediately available funds in the amount of the purchase price
therefor. As soon as practicable after the Final Closing Date, the Company shall
mail to you a notice stating the Conversion Price of the Notes at the address
listed on the appropriate Schedule.
4. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to you that:
4.1 ORGANIZATION, QUALIFICATION, STANDING, CAPITAL STOCK, ETC. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation, has the corporate power to
own its properties and to carry on its businesses as the same are now being
conducted and is duly qualified to do business and is in good standing in each
jurisdiction in which the character of the properties owned by it or the nature
of its businesses makes such qualification necessary. The authorized capital
stock of the Company consists of 200,000,000 shares of Common Stock, $0.01 par
value, of which 118,422,183 shares are issued and outstanding as of the date of
this Agreement, and 50,000,000 shares of preferred stock, $0.01 par value, of
which no shares are issued and outstanding as of the date of this Agreement. All
of the outstanding shares of Common Stock have been validly issued and are fully
paid and nonassessable. The Company has reserved 40,558,435 shares of Common
Stock for issuance pursuant to (a) currently outstanding rights, options and
warrants, (b) the Notes to be issued pursuant to this Note Agreement, (c) the
Warrants to be issued in connection with the sale of the Notes, (d) the warrant
to be issued to Odyssey Capital, LLC, and (e) convertible debt instruments.
Except as stated in this Section 4.1, the Company has not reserved any
additional shares for issuance (except as expressly required by the Agreement)
and has not agreed to issue any shares of its Common Stock. Except for those
described in the Memorandum and in SEC Filings, there are not outstanding, nor
is the Company subject to any agreement, arrangement, or understanding under
which there may become outstanding, any option, warrant, or other right to
purchase or subscribe to, or security convertible into or exchangeable for, any
shares of capital stock of any class of the Company.
4.2 FINANCIAL STATEMENTS, SUBSEQUENT CHANGES, ETC. The financial
statements and other financial data and information contained in or referred to
in SEC Filings and the Memorandum, are complete and correct in all material
respects and fairly present in all material respects the financial condition of
the Company at the respective dates of said statements or information for the
respective periods covered thereby. Such financial statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved (except as otherwise noted
therein). There were no material liabilities, direct or indirect, fixed or
contingent, of the Company as of the respective dates of such statements and
information which are not reflected therein or in the notes thereto. Except as
disclosed in the SEC Filings and the Memorandum, there has been no material
change in the condition, financial or otherwise, or operations of the Company
since March 31, 2003, nor has the Company, except for the execution, delivery,
and performance of this Agreement, incurred any indebtedness for borrowed money,
incurred any material liability, contingent or otherwise, except in the ordinary
course of business, or entered into any material commitment or other transaction
not in the ordinary course of business since such date.
4.3 OTHER INFORMATION AS TO THE COMPANY. The SEC Filings and the
Memorandum do not contain any misstatement of a material fact or omits to state
any material fact necessary to be stated therein or necessary in order to make
the statements therein not misleading. In the event the Company has furnished to
you written information which corrects information previously furnished, the
information last furnished is deemed to govern for purposes of this Section 4.3.
4.4 LITIGATION. Except as set forth in the SEC Filings and the
Memorandum, there is no action, suit or proceeding at law or in equity or by or
before any governmental instrumentality or agency or any arbitrator now pending
or, to the Company's knowledge, threatened, against, or affecting the Company,
or any of its properties or rights, which, if adversely determined, might,
either in any case or in the aggregate result in a Material Adverse Change, or
result in any substantial liability not adequately covered by insurance, or for
which adequate reserves are not maintained on the Company's balance sheet.
4.5 LICENSES. Except as disclosed in the SEC Filings and the
Memorandum and which would not have a Material Adverse Change, the Company has
all permits, licenses and other authority as are necessary to enable it to
conduct its business as now conducted and as proposed to be conducted, and to
the best of the Company's knowledge, the Company is not in default under any
such permits, licenses or other authority.
4.6 DUE AUTHORIZATION AND COMPLIANCE WITH OTHER INSTRUMENTS. This
Agreement and the Notes have been duly and validly authorized by all requisite
corporate proceeding and this Agreement constitutes, and the Notes when executed
and delivered will be, valid and legally binding obligations of the Company
enforceable
2
against the Company in accordance with their terms except as enforceability is
limited by bankruptcy, insolvency, reorganization, moratorium, or other laws
relating to or affecting generally the enforcement of creditors' rights and
except to the extent that availability of equitable remedies are subject to the
discretion of courts before which any proceeding therefor may be brought and the
Notes will be entitled to the benefits of this Agreement and are not subject to
any preemptive or similar rights on the part of any holder or holders of shares
of capital stock of the Company.
4.7 BURDENSOME AND CONFLICTING AGREEMENTS AND VIOLATIONS OF
CHARTER PROVISIONS. The Company is not bound by any agreement or instrument or
subject to any charter or other corporate restriction which materially and
adversely affects its business, properties, operations, prospects or condition,
financial or otherwise. The Company is not in violation of its charter or bylaws
or of any agreement or instrument by which it is bound, or of any statute, law,
rule or regulation, or of any judgment, decree, writ, injunction, order or award
of any arbitrator, court or governmental authority applicable to it, in a manner
that could result in the imposition of substantial penalties or result in a
Material Adverse Change. Neither the authorization, execution and delivery of
this Agreement or the Notes, the consummation of the transactions herein and
therein contemplated, nor the fulfillment of or compliance with the terms hereof
and thereof, will conflict with or result in a breach of any of the terms of the
charter or by-laws, or of any material statute, law, rule or regulation, or of
any judgment, decree, writ, injunction, order or award of any arbitrator, court
or governmental authority, or of any instrument, which is applicable to the
Company or by which the Company is bound, or result in the imposition of any
lien upon any of the properties or assets of the Company, other than consents to
obtained prior to Closing.
4.8 CONSENTS AND APPROVALS. Except as disclosed in the SEC Filings
or the Memorandum or would not have a Material Adverse Change, the Company has
obtained or made provisions to obtain all material (a) governmental consents,
approvals and authorizations, and registrations and filings with governmental
authorities, and (b) consents, approvals, waivers and notifications of
stockholders, creditors, lessors and other non-governmental persons, in each
case, in connection with the execution and delivery of this Agreement and the
Notes, and the consummation of the transactions herein and therein contemplated.
4.9 TAX RETURNS AND PAYMENTS. The Company has filed all required
information and tax returns and reports and has paid, or adequately provided for
the payment of, all taxes, assessments and other governmental charges that are
material in amount imposed upon it or upon any of its assets, income or
franchises, other than any such charges which are currently payable without
penalty or interest. The charges, accruals and reserves on the books of the
Company with respect to taxes for all fiscal periods are adequate, in the
opinion of the Company, and the Company knows of no actual or proposed tax
assessment that is material in amount for any fiscal period or of any basis
therefor against which adequate reserves have not been set up.
4.10 OFFERING OF THE SECURITIES. Neither the Company nor anyone
authorized to act on its behalf (other than the Agent) has or will directly or
indirectly sell or offer the Notes or any part thereof or any similar
instruments to, or solicit any offer to buy any thereof from, any Person so as
to bring the issue and sale of any thereof within the provisions of Section 5 of
the Securities Act. In connection with the offering of the Notes, the Company
has agreed to pay Odyssey Capital, LLC, among other things, (a) a fee equal to
5% of the gross proceeds to the Company from the sale of the Notes, and (b) a
four-year warrant to purchase shares of the Common Stock, the number of shares
of which may be acquired under such warrant shall be equal to (i) ten percent
(10%) of the principal balance of the Notes as of the Final Closing Date,
divided by (ii) the initial Conversion Price.
4.11 OUTSTANDING REGISTRATION RIGHTS. Except as described in the
Memorandum and the SEC Filings, the Company is not a party to any contract or
agreement pursuant to which any other party or parties thereto have the right to
require the Company (on a best efforts basis or otherwise) (a) to register
securities of the Company under the Securities Act for sale by or on behalf of
such party or parties or (b) to notify such party or parties of the Company's
intention to file a registration statement under the Securities Act and at the
request of such party or parties to include therein securities of the Company
for sale by or on behalf of such party or parties.
4.12 OTHER ADVERSE FACTS, ETC. To the best of the Company's
knowledge, there are no existing facts or circumstances which materially and
adversely affect, or (insofar as the Company can now foresee) in the future may
materially and adversely affect, the business, prospects, results of operations
or condition, financial or otherwise, of the Company which are not disclosed in
the SEC Filings and the Memorandum.
4.13 PRIOR ISSUES. During the twelve (12) months preceding the date
hereof, the Company has not issued any securities, except as provided in the
Company's SEC Filings.
3
4.14. RIGHTS OF OTHERS AFFECTING THE TRANSACTION. There are no
preemptive rights of any shareholder of the Company, as such, to acquire the
Notes. No other party has a currently exercisable right of first refusal, which
would be applicable to any, or all of the transactions contemplated by the
Memorandum, Note Agreement or Notes.
4.15 NO INTEGRATED OFFERING. Neither the Company nor any of its
affiliates nor any person acting on its or their behalf has, directly or
indirectly, at any time in the six months prior to the date hereof, made any
offer or sales of any security or solicited any offers to buy any security under
circumstances that would eliminate the availability of the exemption from
registration under Rule 506 of Regulation D of the Securities Act in connection
with the offer and sale of the Notes as contemplated hereby.
5. PREPAYMENT OF NOTES.
5.1 OPTIONAL PREPAYMENT. Commencing 120 days after the Final
Closing Date, the Company may, at its option, upon notice as provided in Section
5.2, prepay the Notes either in whole or in part (and if in part, on a pro rata
basis), which prepayment shall include the payment of any and all accrued and
unpaid interest to and including the date of prepayment (the "Optional
Prepayment Date") on the portion of the principal amount being prepaid.
(a) PREPAYMENT ON OR BEFORE JUNE 1, 2004. If the Company
elects to redeem all or any portion of the Notes after 120 days following the
Final Closing Date and on or before June 1, 2004, each Note so redeemed shall be
redeemed against payment of an amount in cash equal to 110% of the outstanding
principal balance of the Note, plus accrued and unpaid interest to and including
the Optional Prepayment Date.
(b) PREPAYMENT AFTER JUNE 1, 2004. If the Company elects
to redeem all or any portion of the Notes after June 1, 2004, each Note so
redeemed shall be redeemed against payment of an amount in cash equal to 105% of
the outstanding principal balance of the Note, plus accrued and unpaid interest
to and including the Optional Prepayment Date.
5.2 NOTICE OF OPTIONAL PREPAYMENTS. The Company will give each
holder of any Notes written notice of any optional prepayment of Notes under
Section 5.1 not less than 30 days and not more than 60 days prior to the
Optional Prepayment Date, such notice to specify the Optional Prepayment Date,
the aggregate amount of principal of the Notes to be prepaid, and the principal
amount of each Note held by such holder to be prepaid. Notwithstanding the
above, if the Company gives notice of an Optional Prepayment, the Purchaser
shall have the right to convert the Note to Common Stock in accordance with
Section 14 hereof, provided that the Purchaser delivers notice of conversion
prior to the Optional Prepayment Date.
5.3 MATURITY; SURRENDER. With respect to a prepayment of the Notes
pursuant to Section 5.1, any Note paid or prepaid in full shall, after such
payment or prepayment in full, be surrendered to the Company and canceled. The
Company's failure to pay the prepayment amount of any Note on an Optional
Prepayment Date pursuant to an optional prepayment under Section 5.1 shall not
constitute an Event of Default under this Agreement. Notwithstanding the
provisions contained herein, if upon notice of an Optional Prepayment, a
Noteholder elects to convert his Note into shares of Common Stock pursuant to
Section 14 hereof, and subsequent to such election, the Company fails to pay the
prepayment amount on the Optional Prepayment Date, then (x) the conversion of
the Note shall be invalidated, (y) the Note shall be reinstated as though it had
never been canceled, and (z) upon the surrender (and endorsement, if required by
the Company) of the certificates representing the shares issued upon such
conversion, the shares represented thereby shall no longer be deemed to be
outstanding.
6. CONDITIONS PRECEDENT
6.1 CLOSING. Your obligation to purchase from the Company the
principal amount of Notes specified opposite your name in the appropriate
Schedule of Purchasers at any Closing shall be subject to the following
conditions precedent:
(a) OPINIONS OF COMPANY COUNSEL. You shall have received
from ▇▇▇▇▇▇ and ▇▇▇▇▇, LLP, counsel for the Company, an opinion, dated
the Initial Closing Date and updated on the Final Closing Date,
addressed to you to the effect that:
(i) the Company is a corporation validly
existing and in good standing under the laws of its respective state of
incorporation, has the corporate power to own its properties and to
carry on its business as now being conducted;
4
(ii) the Company has full corporate power and
authority to execute and deliver this Agreement, to make and deliver
the Notes and to perform and observe the terms and provisions of this
Agreement and of the Notes;
(iii) this Agreement has been duly authorized,
executed, and delivered by the Company and constitutes the legal,
valid, and binding obligation of the Company, enforceable in accordance
with its terms, subject to applicable bankruptcy, insolvency,
rearrangement, moratorium, reorganization, or similar debtor relief
laws affecting the rights of creditors generally from time to time in
effect and except to the extent that availability of equitable remedies
are subject to the discretion of the court before which any proceeding
therefor may be brought and that rights to indemnification may be
limited by applicable law;
(iv) the Notes sold to you on the Closing Date
have been duly authorized, executed, and delivered by the Company,
constitute the valid and legally binding obligations of the Company,
are not usurious under applicable state laws, and are entitled to the
benefits of this Agreement, subject to applicable bankruptcy,
insolvency, rearrangement, moratorium, reorganization, or similar
debtor relief laws affecting the rights of creditors generally from
time to time in effect and except to the extent that availability of
equitable remedies are subject to the discretion of the court before
which any proceeding therefor may be brought; and
(v) neither the execution and delivery of this
Agreement and the Notes, nor performance and observance of the terms
and provisions hereof and thereof, violate or conflict with the
Certificate of Incorporation or Bylaws of the Company.
(b) REPRESENTATIONS AND DEFAULTS. The representations and
warranties made by the Company herein shall be true and correct in all
material respects on and as of the Closing Date and no Event of Default
as defined in Section 11 hereof, nor any condition or event which,
after notice or lapse of time, or both, would constitute such an Event
of Default, shall exist; and the Company shall deliver to you on the
Closing Date a certificate of the President of the Company to the
foregoing effect.
(c) DOCUMENTS. All proceedings to be taken in connection
with the transactions contemplated by this Agreement to be consummated
at or prior to the Closing Date, and all documents incident thereto,
shall be satisfactory in form and substance to you and you shall have
received original counterparts or certified or other copies of all
documents which you may have reasonably requested in connection with
said transactions and of all corporate proceedings in connection
therewith, in form and substance satisfactory to you and your counsel.
(d) MINIMUM OFFERING. The Company shall have received
subscriptions for the purchase of a minimum of $300,000 in original
principal amount of the Notes.
(e) NO MATERIAL ADVERSE CHANGE. As of the Closing Date,
the Company shall provide a certificate of its President stating that
no Material Adverse Change has occurred in the business or financial
condition of the Company since March 31, 2003.
7. COVENANTS OF THE COMPANY. The Company covenants and agrees
that, so long as any of the Notes are outstanding, it will comply with the
following provisions, subject to the provisions of Section 17 hereof:
AFFIRMATIVE COVENANTS
7.1 USE OF PROCEEDS. The Company will apply all proceeds (net of
costs directly related to the preparation and negotiation of this Agreement and
the offering and sale of the Notes) derived from the sale of the Notes as set
forth in the Memorandum.
7.2 PAYMENT OF PRINCIPAL AND INTEREST. The Company will make all
payments of principal of and interest on the Notes at the time the same shall
become due thereunder or hereunder.
7.3 TAXES. The Company will promptly pay and discharge all lawful
taxes, assessments, and governmental charges or levies (other than taxes,
assessments, and other governmental charges imposed by foreign jurisdictions or
otherwise which in the aggregate are not material to the business or assets of
the Company) imposed
5
on it or upon its income or profits, or upon any of its properties, real or
personal, before the same shall become in default, as well as all lawful claims
for labor, materials, and supplies or otherwise which, if unpaid, might become a
lien or charge upon its properties or any part thereof; provided, however, that
the Company shall not be required to pay or cause to be paid any such tax,
assessment, charge, levy or claim prior to institution of foreclosure
proceedings if the validity thereof shall be contested in good faith by
appropriate proceedings and if the Company shall have established reserves
deemed by the Company adequate with respect to such tax, assessment, charge,
levy, or claim or as may be required by generally accepted accounting principles
consistently applied.
7.4 INSURANCE. The Company will maintain all current, and will use
its best efforts to obtain all additional, liability, property damage and other
insurance on its insurable property against fire and other hazards with
financially sound and responsible insurance carriers with which the Company is
doing or will do business, or (in the absence of any such requirements) in the
relative proportionate amounts usually carried by reasonable and prudent
companies conducting businesses similar to that of the Company.
7.5. MAINTENANCE OF EXISTENCE AND PROPERTIES. The Company will keep
its corporate existence in full force and effect. The Company will keep its
properties in good repair, working order, and condition, and from time to time
will make all needful and proper repairs, renewals, replacements, extensions,
additions, betterments, and improvements thereto, so that the business carried
on may be properly conducted at all times in accordance with prudent business
management. The Company will comply with all applicable laws and regulations
(including Environmental Laws), decrees, orders, judgments, licenses and
permits, including without limitation all environmental permits ("Applicable
Laws"), except where noncompliance with such Applicable Laws would not cause a
Material Adverse Change.
7.6 FINANCIAL STATEMENTS. The Company will keep books of record
and accounts in which full, true and correct entries in all material respects in
accordance with generally accepted accounting principles will be made of all
dealings or transactions in relation to its business and activities.
7.7 FILINGS UNDER THE EXCHANGE ACT. So long as the Noteholders
beneficially own the Notes or the shares of Common Stock that may be issued upon
conversion of such Notes, the Company shall file all reports required to be
filed with the Commission pursuant to Section 13 and 15(d) of the Exchange Act
and shall not terminate its status as an issuer required to file reports under
the Exchange Act where the rules and regulations thereunder would permit such
termination. The Company will take all reasonable action under its control to
maintain the continued listing and quotation and trading of the its Common Stock
on the OTC Bulletin Board and will comply with the Company's reporting, filing
and other obligations under the by-laws or rules of the National Association of
Securities Dealers, Inc. applicable to it at least so long as the Noteholder
beneficially owns the Notes.
7.8 LISTING ON SECURITIES EXCHANGES AND NASDAQ. In the event the
Company applies for listing on any national securities exchange or on the Nasdaq
Stock Market, the Company will include the shares of Common Stock underlying the
Notes in any such application.
7.9 SHARES RESERVED FOR ISSUANCE. The Company shall reserve, free
from preemptive rights, out of its authorized but unissued shares, sufficient
shares to provide for the conversion of the Notes from time to time as such
Notes are presented for conversion; provided that nothing contained herein shall
be construed to preclude the Company from satisfying its obligations in respect
of the conversion of Notes by delivery of repurchased shares of Common Stock
which are held in the treasury of the Company.
7.10 SHARES ISSUED UPON CONVERSION. The Company covenants that all
shares of Common Stock which may be issued upon conversion of Notes will upon
issue be fully paid and nonassessable by the Company and free of preemptive
rights. If any shares of Common Stock to be reserved for the purpose of
conversion of Notes hereunder require registration with or approval of any
governmental authority under any federal or state law before such shares may be
validly issued or delivered upon conversion, then the Company covenants that it
will in good faith and as expeditiously as possible endeavor to secure such
registration or approval, as the case may be; provided, however, that nothing in
this Section shall be deemed to affect in any way the obligations of the Company
to convert Notes into Common Stock.
7.11 STATEMENT BY OFFICER AS TO DEFAULT. The Company will deliver
to the Agent, within 90 days of the end of each fiscal quarter of the Company, a
certificate signed by its president stating whether to the best of his knowledge
the Company is in default in performance and observance of any of the terms,
provisions and conditions of this Agreement or an Event of Default has occurred
and, if the Company shall be in default or an Event of Default has occurred,
specifying all such defaults or Events of Default in the nature and status
thereof of which he has knowledge.
6
NEGATIVE COVENANTS
7.12 RESTRICTION ON FILING REGISTRATION STATEMENTS. The Company
shall not file a registration statement with the Commission on Form S-8 under
the Securities Act, unless such registration statement is registering shares of
Common Stock to be issued to a director, officer or employee.
7.13. LIMITATION ON SENIOR INDEBTEDNESS. The Company shall not
directly or indirectly create, incur or suffer to exist any Senior Indebtedness
in aggregate principal amount exceeding at any time the sum of One Million
Dollars ($1,000,000.00) without the prior written consent of at least 51% of the
aggregate principal amount of the Notes outstanding at the time of the
transaction is authorized by the Company's board of directors; provided however,
that solely for purposes of calculating the limitation contained in this Section
7.13 there shall be excluded from such calculation any amount of Senior
Indebtedness outstanding the date hereof owing to (a) Bank One, N.A. in the
amount of $4.2 million, (b) O.S. ▇▇▇▇▇, Jr. in the amount of $650,000, (c)
FirstCapital Bank, SSB in the amount of $1,000,000, and (d) any restructuring or
refinancing of the Senior Indebtedness listed in subsections (a), (b) or (c).
7.14 VARIABLE RATE TRANSACTIONS. The Company shall not enter into
any Variable Rate Transactions unless the holders of at least 51% of the
aggregate principal amount of the Notes outstanding at the time the Variable
Rate Transaction is authorized have approved such transaction in writing.
8. PAYMENT, REGISTRATION AND TRANSFER OF NOTES. The Company will
promptly and punctually pay the interest on the Notes held by you without any
presentment thereof; and the Company will pay all amounts payable to you in
respect of principal of and interest on the Notes to you or your nominees at the
address specified in Schedule I or Schedule II, or at such other place as you
may from time to time designate in writing. The Company agrees to maintain an
office (or to appoint an agent having an office) in Richardson, Texas, or such
other city as the Company may designate by notice in writing to the Agent, at
which Notes may be surrendered for transfer and reissuance, for exchange,
replacement, conversion, or cancellation. The Company shall keep or cause to be
kept, at the office or agency so maintained, a register or registers in which
the Company or its agents shall register the names and addresses of the holders
of the Notes and shall transfer registered Notes in accordance with this
Agreement. Upon surrender for transfer of any registered Note duly assigned by
the registered holder (or its duly authorized attorney) to the transferee(s)
thereof and subject to satisfaction of the requirements set forth in Section
12.4, the Company shall execute and deliver a new registered Note (or Notes in
appropriately subdivided denominations of principal), dated the most recent date
to which interest shall have been paid on the surrendered Note, in an equal
principal amount with notation of payments of principal made thereon, or in a
principal amount equal to the original principal amount as reduced by payments
of principal theretofore made on the Note surrendered, in the name of, and
payable to the order of, the transferee(s) thereof. No service charge shall be
assessed for any transfer, registration, reissuance, or notation of payment
hereunder.
9. SUBORDINATION OF NOTES. The Company covenants and agrees and
each Noteholder, by his acceptance thereof, whether upon original issue or upon
transfer or assignment, likewise covenants and agrees that the payment of the
principal of and interest on each and all of the Notes is hereby expressly made
subordinate in accordance with the provisions of this Section 9, and each Person
holding any Notes, accepts and agrees to be bound hereby.
9.1 SUBORDINATION TO SENIOR INDEBTEDNESS. The indebtedness
evidenced by, and payment of the principal of and interest on, the Notes shall
be subordinate and subject in right of payment to the extent and in the manner
set forth in this Section 9 to the prior payment in full of all Senior
Indebtedness.
9.2 NO PAYMENT OF NOTES IN CERTAIN EVENTS. To the extent and in
the manner set forth in this Section 9.2, no part of the Notes shall have any
claim to the assets of the Company on parity with or prior to the claim of the
Senior Indebtedness. In the event and during the continuation of a Senior
Indebtedness Default, no payment of principal or interest shall be made on the
Notes unless and until such Senior Indebtedness Default shall have been waived
or remedied, nor shall any such payment be made if after giving effect, as if
paid, to such payment, any Senior Indebtedness Default would exist; provided,
that with respect to a Senior Indebtedness Default other than a default in the
payment of principal (including mandatory prepayments) of or interest on Senior
Indebtedness, nothing in this Section 9.2 shall prevent any regularly scheduled
payment of principal or interest of the Notes for a period longer than the
longer of (i) 120 days or (ii) any period during which the Senior Indebtedness
in respect of which a Senior Indebtedness Default so exists is or has been
declared due and payable in its entirety and (x) such acceleration has not been
rescinded or annulled or (y) such Senior Indebtedness has not been paid in full.
7
9.3 PRIORITY OF PAYMENT OF SENIOR INDEBTEDNESS IN CERTAIN EVENTS.
Upon any payment or distribution of assets of the Company of any kind or
character, whether in cash, property, or securities, to creditors upon any
dissolution or winding up or total or partial liquidation or reorganization of
the Company, whether voluntary or involuntary, assignment for the benefit of
creditors, or in bankruptcy, insolvency, receivership, reorganization or other
proceedings, all Senior Indebtedness shall first be paid in full or payment
thereof provided for in money or money's worth before the holders of the Notes
shall be entitled to retain any assets so paid or distributed in respect thereof
(for principal or interest); and upon any such dissolution or winding up or
liquidation or reorganization any payment or distribution of assets of the
Company of any kind or character, whether in cash, property, or securities, to
which the holders of the Notes would be entitled, except for these provisions,
shall be paid by the Company or by any receiver, trustee in bankruptcy,
liquidating trustee, agent, or other Person making such payment or distribution,
or by the Noteholders if received by them, directly to the holders of Senior
Indebtedness (pro rata to each holder on the basis of the respective amounts of
Senior Indebtedness held by such holder) or their representatives, to the extent
necessary to pay all Senior Indebtedness in full, in money or money's worth,
after giving effect to any concurrent payment or distribution to or for the
holders of such Senior Indebtedness, before any payment or distribution is made
to the Noteholders.
9.4 PAYMENTS DUE HOLDERS OF SENIOR INDEBTEDNESS. In the event that
any payment or distribution of assets of the Company of any kind or character,
whether in cash, property, or securities, which, by virtue of the provisions of
Sections 9.2 or 9.3 should not be paid to the Noteholders, shall nevertheless be
received by the Noteholders before all Senior Indebtedness is paid in full, or
provision made for such payment, in accordance with its terms, such payments or
distribution shall be held in trust for the benefit of, and shall be paid over
or delivered to, the holders of such Senior Indebtedness or their representative
or representatives, or to the trustee or trustees under any agreement pursuant
to which any instruments evidencing any of such Senior Indebtedness may have
been issued, as their respective interests may appear, or to a bank or trust
company having a combined capital and surplus of not less than $10,000,000 which
is in good standing and has its principal office in the State of Texas, to be
held in escrow, for application to the payment of all Senior Indebtedness
remaining unpaid to the extent necessary to pay all such Senior Indebtedness in
full in accordance with its terms, after giving effect to any concurrent payment
or distribution to or for the holders of such Indebtedness.
9.5 NOTICE OF ACCELERATION. The Noteholders, acting by and through
the Agent, agree to give the holders of Senior Indebtedness notice in writing 30
days prior to declaring the unpaid principal amount of the Notes immediately due
and payable pursuant to the provisions of Section 11.
9.6 ENFORCEMENT, SUBROGATION, ETC. The foregoing subordination
provisions shall be for the benefit of the present and future holders of the
Senior Indebtedness and may be enforced directly by such holders against the
Noteholders. Upon any payment or distribution of assets of the Company referred
to in Section 9.3, the Noteholder shall be entitled to rely upon a certificate
of the receiver, trustee in bankruptcy, liquidating trustee, Company, agent, or
other Person making such payment or distribution, delivered to the Noteholder
for the purpose of ascertaining the Persons entitled to participate in such
distribution, to the holders of the Senior Indebtedness and other indebtedness
of the Company, the amount thereof or payable thereon, the amount or amounts
paid or distributed thereon and all other facts pertaining thereto or to the
provisions of this Section 9. Subject to the payment in full of all Senior
Indebtedness, the Noteholders (together and pro rata with the holders of any
other indebtedness of the Company which is subordinate in right of payment to
the payment of other indebtedness of the Company, but is not subordinate in
right of payment to the Notes and by its terms grants the right of subrogation
to the holders thereof) shall be subrogated to the rights of the holders of
Senior Indebtedness to receive payments or distributions of assets of the
Company made on the Senior Indebtedness until the principal of and interest on
the Notes shall be paid in full; and, for the purposes of such subrogation, no
payments or distributions to the holders of Senior Indebtedness of any cash,
property, or securities to which the Noteholders would be entitled except for
these provisions shall, as between the Company, its creditors other than the
holders of Senior Indebtedness, and the Noteholders, be deemed to be a payment
by the Company to or on account of Senior Indebtedness, it being understood that
these provisions are and are intended solely for the purpose of defining the
relative rights of the Noteholders, on the one hand, and the holders of Senior
Indebtedness, on the other hand.
9.7 OBLIGATIONS UNIMPAIRED. Nothing contained in this Section 9 is
intended to or shall impair as between the Company, its creditors other than the
holders of Senior Indebtedness and the Noteholders, the obligation of the
Company, which shall be absolute and unconditional, to pay to the Noteholders
the principal of and interest on the Notes as and when the same shall become due
and payable in accordance with the terms thereof, or is intended to or shall
affect the relative rights against the Company of the Noteholders and creditors
of the Company other than the holders of Senior Indebtedness, nor shall anything
herein or therein prevent the Noteholder from exercising all remedies otherwise
permitted by applicable law upon default, subject to the rights, if any, under
this
8
Section 9 of the holders of Senior Indebtedness in respect of any required
notice of the exercise of any such remedy or cash, property, or securities of
the Company otherwise payable or deliverable to such holder. Each Noteholder by
his acceptance thereof shall be deemed to acknowledge and agree that the
subordination provisions of this Section 9 are, and are intended to be, an
inducement and a consideration to each holder of any Senior Indebtedness,
whether such Senior Indebtedness, was created or acquired before or after the
issuance of the Notes, to acquire and continue to hold, or to continue to hold,
such Senior Indebtedness and each holder of Senior Indebtedness shall be deemed
conclusively to have relied on such subordination provisions in acquiring and
continuing to hold, or in continuing to hold, such Senior Indebtedness.
10. SUBSTITUTION OF NOTES. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction, or mutilation of any Note,
and of indemnity satisfactory to it (which, in the case of any original
purchaser of the Notes, shall be a contractual obligation of such purchaser) and
upon surrender, at the office or agency maintained in accordance with Section 8
hereof, and cancellation of any Note, if mutilated, the Company will execute and
deliver a new Note of like tenor, in lieu of such Note, dated the most recent
date to which interest on such Note shall have been paid.
11. EVENTS OF DEFAULT.
11.1 DEFINITION; REMEDIES. If any one or more of the following
events (herein called "Events of Default") shall occur and be continuing:
(a) default shall be made in the payment of principal of
any of the Notes when and as the same shall become due and payable,
either at maturity or by acceleration or otherwise;
(b) default shall be made in the payment of interest on
the Notes when the same becomes due and payable;
(c) default shall be made in the due performance or
observance of any other covenant, agreement, or provision herein to be
performed or observed by the Company or a material breach shall exist
in any representation or warranty herein contained, and such default or
material breach shall have continued for a period of 30 days after
written notice thereof to the Company from the Agent or from any holder
or holders of Notes aggregating not less than 51% of the aggregate
principal amount of the Notes then outstanding; provided, however, that
if any such default or material breach shall be such that it cannot be
cured or corrected within such 30-day period, such period shall be
extended for such additional period of time (not exceeding 30
additional days) as shall be necessary to effect such cure or
correction if curative or corrective action is instituted within said
30-day period and thereafter diligently pursued; or
(d) the Company shall (i) apply for or consent to the
appointment of a receiver, trustee, or liquidator of the Company or any
of its assets, (ii) make a general assignment for the benefit of
creditors, (iii) be adjudicated a bankrupt or insolvent or (iv) file a
voluntary petition in bankruptcy, or a petition or answer seeking
reorganization or an arrangement with creditors to take advantage of
any bankruptcy, reorganization, insolvency, readjustment of debt,
moratorium, dissolution, liquidation, or debtor relief law, or any
chapter of any such law, or an answer admitting the material
allegations of a petition filed against it in any proceeding under any
such law or chapter, or corporate action shall be taken by the Company
for the purpose of effecting any of the foregoing; (v) or an order,
judgment, or decree shall be entered, without the application,
approval, or consent of the Company, by any court of competent
jurisdiction, approving a petition seeking liquidation or
reorganization of the Company of all or a substantial part of the
assets of the Company, and provided that such order, judgment, or
decree remains in effect for more than 60 consecutive days;
(e) a Senior Indebtedness Default shall occur and
continue for a period of 30 days;
(f) default shall occur with respect to any other
indebtedness for borrowed money of the Company (other than the Notes or
Senior Indebtedness) or under any agreement under which indebtedness
may be issued by the Company and such default shall continue for more
than the period of grace, if any, therein specified, if the aggregate
amount of such indebtedness for which such default shall have occurred
exceeds $300,000;
(g) default shall occur with respect to any contractual
obligation of the Company under or pursuant to any contract, lease, or
other agreement to which the Company is a party and such default shall
9
continue for more than the period of grace, if any, therein specified,
if the aggregate amount of the Company's contractual liability arising
out of such default exceeds or is reasonably estimated to exceed
$300,000;
(h) final judgment for the payment of money in excess of
$300,000 shall be rendered against the Company and the same shall
remain undischarged for a period of 30 days during which execution
shall not be effectively stayed;
(i) default shall occur if (A) the Company's Net Revenues
for the twelve months ending March 30, 2004 is less than $15 million,
which shall be calculated upon the filing of the Company's Form 10-Q
for the quarter ending June 30, 2004, or (B) the Company fails to file
its Form 10-Q for the quarter ending June 30, 2004 within 50 days from
June 30, 2004; or
(j) upon a Change of Control;
then and in each and every such case the Agent (upon the written authorization
of the holders of Notes aggregating not less than 51% of the aggregate principal
amount of the Notes then outstanding) may by notice in writing to the Company
declare the unpaid principal of all the Notes together with accrued interest
thereon to be forthwith due and payable and thereupon such principal and
interest shall be due and payable without presentment, protest, or further
demand or notice of any kind, all of which are hereby expressly waived.
This Section 11, however, is subject to the condition that, if at any
time after the occurrence of an Event of Default hereunder, and before the entry
of any judgment or decree against the Company for the payment of all or any
portion of the Notes then outstanding, the Noteholders aggregating not less than
51% of the aggregate principal amount of the Notes then outstanding (acting
either by and through the Agent or otherwise) may, by written notice to the
Company, either temporarily suspend or permanently rescind and annul such
declaration of an Event of Default and its consequences (including, without
limitation, the acceleration of the Notes as a result of such Event of Default);
but no such suspension or rescission and annulment shall extend to or affect any
prior, concurrent, or subsequent default or Event of Default (other than the
ones identified by the Noteholders declaring them due as the ones upon which
such declaration was based) or impair any right consequent thereon.
Notwithstanding anything to the contrary herein, if default shall be
made in the payment of any principal of, or interest on, any Note when and as
the same shall become due and payable, at maturity (but not merely by virtue of
an acceleration pursuant to the foregoing provisions of this Section 11.1), the
Noteholder may by notice in writing to the Company declare the unpaid principal
of such Note, with accrued interest, to be forthwith due and payable and
thereupon such principal and interest shall be due and payable without
presentment, protest, or further demand or notice of any kind, all of which are
hereby expressly waived.
If any Noteholder shall demand payment thereof or take any other action
(of which the Company has actual knowledge) in respect of a default occurring in
the payment of any principal of, or interest on, any Note when and as the same
shall become due and payable, the Company will forthwith give written notice
thereof to the Agent, who will in turn give written notice of the same to each
holder of record of the Notes then outstanding.
11.2 APPOINTMENT OF AGENT FOR NOTEHOLDERS. The Noteholders hereby
appoint the Agent as the Noteholders' agent and representative hereunder, with
full right of substitution, to act for and on behalf of the Noteholders, until
removed pursuant to Section 13.8 hereof. Except as otherwise expressly provided
in this Agreement, the Agent is hereby granted the right, power and authority,
and is hereby instructed by the Noteholders, to do on behalf of the Noteholders
all things which, in the Agent's judgment, are necessary, proper or desirable to
carry out the responsibilities of exercising the remedies herein afforded to the
Noteholders, including but not limited to the right, power and authority from
time to time to do the following: (i) communicate on behalf of the Noteholders
with the Company with respect to the subject matter of this Agreement, (ii)
provide the Noteholders with copies of any and all communications or notices
sent or received under this Agreement or otherwise pertaining to the subject
matter hereof, (iii) if and as required, exercise, in the name and on behalf of
the Noteholders, the remedies provided for in this Agreement, and (iv) take such
other actions as the Noteholders, by majority vote of the holders of Notes
aggregating not less than 51% of the aggregate principal amount of the Notes
then outstanding, may direct in writing.
11.3. NO AUTHORITY TO AMEND. Without the unanimous written consent
of the Noteholders, the Agent shall not have the authority to amend, modify, or
waive the terms of this Agreement, or to consent to any action or failure to
act, the effect of which would (i) postpone the date fixed for repayment of the
Notes, or interest thereon, to
10
Noteholders, (ii) reduce the amount of interest on any amounts payable to the
Noteholders hereunder, or (iii) subject the Noteholders to any additional
obligations. The Agent hereby agrees, however, to execute and join in any
amendment, modification or waiver of any of the terms of this Agreement approved
either under the provisions of this Section 11.3 or those of Section 16 hereof.
11.4. REMEDIES NOT EXCLUSIVE. No right or remedy by the terms of
this Agreement conferred upon or reserved to the Agent (or to the Noteholders)
is intended to be exclusive of any other right or remedy, but each and every
such right or remedy shall be cumulative and shall be in addition to any other
right or remedy given hereunder or now or hereafter existing at law or in equity
or by statute. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
11.5. DIRECTING TIME, METHOD AND PLACE OF REMEDY. The holders of not
less than 51% in aggregate principal amount of the Notes may in writing direct
the time, method and place of conducting any proceeding for any remedy available
to the Agent, or for exercising any power conferred upon the Agent under this
Agreement, provided that such direction shall not be otherwise than in
accordance with the provisions of law and of this Agreement, and the Agent may
take any other action deemed proper by the Agent which is not inconsistent with
such direction.
11.6. POSSESSION OF NOTES NOT REQUIRED. All right of action
(including the right to file and prove claims) and claims under this Agreement
or under any of the Notes may be prosecuted and enforced by the Agent without
the possession of any of the Notes or the production thereof in any suit or
proceeding relating thereto; and any such suit or proceeding instituted by the
Agent shall be brought in its name as Agent for the Noteholders, and any
recovery of judgment shall, after provision for the payment of all amounts
payable to the Agent pursuant to Section 13.7 hereof, be for the equal benefit
of the holders of the outstanding Notes in respect of which such judgment has
been recovered.
11.7. PRIOR NOTIFICATION TO AGENT. Except as specifically provided
in Section 11.1 hereof, no holder of any Note shall have any right to cause an
acceleration of the maturity of the Notes, or institute any suit, action or
proceeding in equity or at law with respect to this Agreement, or for the
appointment of a receiver or any other remedy hereunder, unless such holder
shall have previously given to the Agent written notice of a continuing Event of
Default, and unless (i) the holders of not less than 51% in aggregate principal
amount of the Notes shall have made written request to the Agent to institute
such action, suit or proceeding in its own name as Agent hereunder, and the
Agent shall have declined to take such action or shall have failed to do so
within 30 days thereafter and (ii) no annulment of such Event of Default and its
consequences pursuant to Section 11.1 hereof (or other direction inconsistent
with such request) shall have been given to the Agent during such 30-day period
by the holders of not less than 51% in aggregate principal amount of the
outstanding Notes, it being understood and intended that no one or more
Noteholders shall have any right in any manner whatsoever by his or their action
to enforce any right hereunder except in the manner herein provided, and that
all proceedings at law or in equity shall be instituted, had and maintained in
the manner herein provided and for the ratable and equal benefit of all holders
of outstanding Notes. Notwithstanding any other provision of this Agreement, the
right of any holder of any Note to receive payment of the principal of and
interest on such Note on or after the respective due dates expressed in such
Notes, and to institute suit for enforcement of any such payment on or after
such respective dates in accordance with the provisions hereof and to institute
suit therefor, shall not be impaired or affected without the consent of such
holder. Further, nothing in this Section 11.7 shall be construed as impairing
the right of any holder or holders of Notes aggregating not less than 51% of the
aggregate principal amount of the Notes then outstanding to give the notice of
default to the Company as specified in Section 11.1(c) hereof upon or after the
occurrence of an event described therein.
11.8. NOTIFICATION OF EVENT OF DEFAULT. The Agent shall, within 30
days after the occurrence of an Event of Default, give to the Noteholders
written notice of all Events of Default known to the Agent, unless such
default(s) shall have been cured or waived before the giving of such notice. The
Agent shall likewise give to the Noteholders written notice of all written
communications given by the Agent to, or received by the Agent from, the
Company.
11.9. COSTS OF COLLECTION. The Company covenants that, if default be
made in any payment of principal of or interest on any Note, it will pay to the
holder thereof such further amount as shall be reasonably sufficient to cover
the cost and expense of collection, including, without limitation, court costs
and reasonable compensation to the attorneys and counsel of the holder for all
services rendered in that connection.
11
11.10. NO COURSE OF DEALING. No course of dealing between the Company
and any Noteholder or any delay on the part of the Noteholder in exercising any
rights thereunder or hereunder shall operate as a waiver of any rights of any
such holder.
12. REPRESENTATIONS OF PURCHASER. Each Purchaser represents and
warrants to the Company as of the date hereof, as follows:
12.1. INVESTMENT REPRESENTATIONS. The Purchaser is acquiring the
Notes for investment purposes and not with a view to the resale or distribution
of all or any part thereof. The Purchaser acknowledges that the Notes have not
been registered under the Securities Act, or the securities or "blue sky" laws
of any state or other domestic or foreign jurisdiction, and that none of such
securities may be sold, transferred or otherwise disposed of except pursuant to
an effective registration statement thereunder or an applicable exemption
therefrom.
12.2. AUTHORITY. The execution and delivery of this Agreement, and
the consummation of the transactions contemplated hereby by the Purchaser has
been duly and validly authorized by all requisite action on the part of the
Purchaser. This Agreement has been duly executed and delivered by the Purchaser
and constitutes the valid and binding obligations of Purchaser, enforceable
against the Purchaser in accordance with its terms except as the same may be
limited by equitable principles and by bankruptcy, insolvency, moratorium and
other laws of general application affecting the enforcement of creditors'
rights.
12.3 ACCREDITED INVESTOR. Each Purchaser (i) has such knowledge and
experience in financial and business matters that such Purchaser is capable of
evaluating the merits and risks of his or her investment in the Notes and has
the financial ability to assume the monetary risk associated therewith; (ii) is
able to bear the complete loss of his or her investment in the Notes; has
received such documents and information from the Company as such Purchaser has
requested and has had the opportunity to ask questions of and receive answers
from the Company and the terms and conditions of the offering of the notes and
to obtain additional information ; (iv) is an "accredited investor" as defined
in Rule 501(a) of Regulation D promulgated under the Securities Act; and (v) is
not relying upon any statements or instruments made or issued by any person
other than the Company in making a decision to invest in the Notes.
12.4. RESTRICTIVE LEGENDS. Each Note shall (unless otherwise
permitted by the provisions of Section 12.5 hereof) and certificate for Common
Stock issued upon conversion of a Note and each certificate for Common Stock
issued to a subsequent transferee shall be stamped or otherwise imprinted with a
legend in substantially the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Securities
Act") or any state securities act. The securities have been acquired
for investment and may not be sold, transferred, pledged or
hypothecated unless (i) they shall have been registered under the
Securities Act and any applicable state securities act, or (ii) the
corporation shall have been furnished with an opinion of counsel,
satisfactory to counsel for the corporation, that registration is not
required under any such act."
12.5. NOTICE OF PROPOSED TRANSFERS. (a) Except as otherwise provided
in paragraph (b) of this Section 12.4, prior to any transfer or attempted
transfer of any Note or shares of Common Stock, the holder thereof shall give
written notice to the Company of such holder's intention to effect such
transfer. Each such notice shall describe the manner and circumstances of the
proposed transfer and shall be accompanied by an opinion of counsel for such
holder satisfactory to the Company, to the effect that such transfer may be
effected without registration of such Note under the Securities Act. If such
notice is accompanied by such an opinion, such holder shall be entitled to
transfer such Note in conformity with the terms of such notice, and, if the
opinion of counsel so specifies, the Note issued upon any such transfer shall
not bear the restrictive legend set forth in Section 12.4. Such holder shall
indemnify the Company for any transfer effected pursuant to this Section
12.5(a).
(b) The procedure set forth in paragraph (a) of this Section 12.4
shall not apply to any transfer by you (or a transferee pursuant to this
paragraph (b)) of any Note to any of your Subsidiaries or Affiliates; provided,
however, that at the time of such transfer the transferee shall execute and
deliver to the Company an "investment letter" containing substantially the
representations provided in Sections 12.1, 12.2 and 12.3 hereof with respect to
the Notes that are the subject of such transfer and its agreement to be bound by
the provisions of this Section 12 and such transfer is otherwise exempt from
registration under the securities Act and applicable state securities laws.
Notes issued upon such transfer shall bear the appropriate restrictive legend
set forth in Section 12.4 hereof.
12
12.6 TRANSFER OF YOUR RIGHTS. Your rights under this Section 12
shall inure to the benefit of all Persons who shall at any time be the holders
of Notes originally purchased by you hereunder, pro rata in accordance with
their respective interests, and each such holder, by such holder's acceptance of
such Note, as the case may be, agrees to be and shall be deemed to be bound by
all of your covenants set forth in this Section 12, to the extent that such
covenants are applicable to such holder's Notes.
13. AGENT FOR NOTEHOLDERS.
13.1. ACCEPTANCE BY AGENT. The Agent hereby accepts the agency
hereby created. The Agent undertakes, prior to an Event of Default, and after
the curing or waiving of all Events of Default which may have occurred, to
perform such duties and only such duties as are specifically set forth in this
Agreement, and no implied covenants or obligations shall be read into this
Agreement against the Agent. In case of an Event of Default (which has not been
cured or waived) the Agent undertakes to exercise such of the rights and powers
vested in it by this Agreement and to use the same degree of care and skill in
their exercise, as a prudent man would exercise or use under the circumstances
in the conduct of his own affairs.
13.2. PROVISIONS GOVERNING AGENT'S ACTIONS. In the absence of bad
faith on the part of the Agent:
(a) the Agent may conclusively rely as to the truth of
the statement and the correctness of the opinions expressed therein,
upon certificates or opinions furnished to the Agent and conforming to
the requirements of this Agreement; but in the case of any such
certificates or opinions which by any provision hereof are specifically
required to be furnished to the Agent, the Agent shall be under a duty
to examine the same to determine whether or not they conform to the
requirements of this Agreement;
(b) the Agent shall not be personally liable for any
error of judgment made in good faith by a responsible officer of the
Agent unless it shall be proved that the Agent was grossly negligent in
ascertaining the pertinent facts or otherwise acted in a grossly
negligent manner or in bad faith;
(c) the Agent shall not be personally liable with respect
to any action taken or omitted to be taken by it in good faith in
accordance with the direction of the holders of not less than 51% in
aggregate principal amount of Notes at the time outstanding relating to
the time, method, and place of conducting any proceeding for any remedy
available to the Agent, or exercising any trust or power conferred upon
the Agent under this Agreement; and
(d) the Agent may consult with counsel, and a written
opinion of counsel shall be full and complete authorization and
protection in respect of any action taken or suffered by it hereunder
in good faith and in accordance with such opinion of counsel.
13.3. FULL POWER TO GIVE NOTICES. Whenever it is provided in this
Agreement that the Agent shall taken any action upon the happening of a
specified event or upon the fulfillment of any condition or upon the request of
the Company or of Noteholders, the Agent shall have full power to give any and
all notices and to do any and all acts and things incidental to such action.
13.4. NO PERSONAL LIABILITY OF AGENT. None of the provisions of this
Agreement shall require the Agent to advance or expend or risk its own funds or
otherwise incur personal financial liability in the performance of any of its
duties or in the exercise of any of the rights or powers herein conferred if
there is reasonable ground for believing that the repayment of such funds or
adequate indemnity against risk or liability is not reasonably assured to it.
13.5. AGENT AS NOTEHOLDER. The Agent, in its individual or any other
capacity, may become the owner or holder of Notes and may otherwise deal with
the Company with the same rights it would have if it were not Agent.
13.6. MONEYS HELD BY AGENT IN TRUST. All moneys received by the
Agent other than as compensation or reimbursement for the Agent's services
hereunder, shall, until used or applied as herein provided, be held in trust for
the purposes for which they were paid, but need not be segregated from other
funds except as to the extent required by law.
13.7. COMPENSATION TO AGENT. The Company covenants and agrees to pay
to the Agent from time-to-time, and the Agent shall be entitled to receive,
reasonable compensation for all services rendered by the Agent in the exercise
and performance of any of its powers and duties hereunder. The liability of the
Company with
13
respect to the foregoing covenant shall survive the satisfaction and discharge
of the Notes. If default is made in such payment by the Company, the Agent shall
have a lien therefor prior to the Note on all property or funds held or
collected by the Agent, as such, except funds held in trust for the benefit of
the Noteholders.
13.8. REMOVAL OF AGENT. The Agent may be removed at any time by the
holders of at least 51% in aggregate principal amount of the Notes then
outstanding by filing with the Agent so removed and with the Company written
evidence provided of such action in that regard taken by such percentage of the
Noteholders.
13.9. RESIGNATION OF AGENT; APPOINTMENT OF SUCCESSOR AGENT. In case
at any time the Agent (a) shall resign or shall be removed or (b) shall become
incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver
of the Agent or of its property shall be appointed, or any public officer shall
take charge or control of the Agent or of its property or affairs for the
purpose of rehabilitation, conservation or liquidation, then a vacancy shall be
deemed to exist in the office of the Agent and a successor Agent may be
appointed by the holders of at least 51% in aggregate principal amount of the
Notes then outstanding by the filing with the successor Agent, the Company and
the retiring Agent of written evidence of the action in that regard taken by
such percentage of the Noteholders; provided that unless a successor Agent shall
have been appointed by the Noteholders as aforesaid, the Company by instrument
executed by order of its Board of Directors may appoint a temporary successor
Agent to fill such vacancy.
If no successor Agent shall have been appointed pursuant to the
foregoing provisions of this Section 13.9 or shall have accepted appointment
within three months after a vacancy shall have occurred in the office of Agent,
the holder of any Note then outstanding or the retiring Agent may apply to any
court of competent jurisdiction to appoint a successor Agent. The court to which
a Noteholder applies to have a successor Agent appointed, may appoint a
successor Agent as it deems proper.
Any appointment of a successor Agent pursuant to this Section 13.9
shall become effective upon acceptance of appointment by the successor Agent.
Any successor Agent appointed hereunder shall execute, acknowledge and deliver
to its predecessor Agent, and also to the Company, an instrument accepting such
appointment hereunder, and thereupon the resignation or removal of the
predecessor Agent shall become effective and such successor Agent, without any
further act, deed or conveyance, shall become fully vested with all the
properties, rights, powers, trusts, duties and obligations of its predecessor
hereunder, with like effect as if originally named as Agent herein; but the
Agent ceasing to act shall nevertheless, on the written request of the Company
or of the successor Agent, or of the holders of at least 10% in aggregate
principal amount of the Notes then outstanding, execute, acknowledge and deliver
such instruments and so such other things as may reasonably be required for more
fully and certainly vesting and confirming in such successor Agent all such
rights, powers, trusts, duties and obligations of the predecessor Agent, and the
Agent ceasing to act shall also, upon like request, pay over, assign and deliver
to the successor Agent any money or other property which may then be in its
possession as Agent. Should any instrument from the Company be required by the
new Agent for more fully and certainly vesting in and confirming to such new
Agent such properties, rights, powers, trusts, duties and obligations, any and
all such instruments shall, on request, be executed, acknowledged and delivered
by the Company.
Upon acceptance of appointment by a successor Agent as provided in this
Section 13.9, the Company shall mail notice by first class mail postage prepaid
of the succession of such Agent hereunder to the holders of all Notes at their
addresses as they shall appear on the registry books of the Company maintained
pursuant to this Agreement. If the Company shall fail to mail such notice within
10 days after acceptance of appointment by the successor Agent, the successor
Agent shall cause such notice to be mailed at the expense of the Company.
13.10. SUCCESSOR TO AGENT BY MERGER. Any corporation into which the
Agent may be merged or converted or with which it may be consolidated or any
corporation resulting from any merger, conversion or consolidation to which the
Agent shall be a party or any corporation succeeding to all or substantially all
of the business of the Agent, shall be successor Agent under this Agreement,
without the execution or filing of any paper or the performance of any further
act on the part of any of the parties hereto.
13.11. AGENT NOT RESPONSIBLE FOR RECITALS. The recitals of fact
contained herein shall be taken as the statement of the Company and the Agent
assumes no responsibility for the correctness of the same. The Agent makes no
representations as to the validity of this Agreement or of the Notes.
13.12. RELEASE OF AGENT BY NOTEHOLDERS. Each Noteholder hereby
releases and discharges the Agent from any loss, liability, damages, costs and
expenses (including, without limitation, attorneys' fees and expenses) incurred
or suffered at any time during the term of this Agreement by such Noteholder, as
a result of any action taken or omitted from being taken by the Agent in
connection with this Agreement; provided, however, that such
14
Noteholder shall not be deemed to have released or discharged the Agent under
this Section 13.12 for any loss, liability, damages, costs or expenses resulting
from or attributable to gross negligence or willful misconduct on the part of
the Agent.
13.13. INDEMNIFICATION OF AGENT BY THE COMPANY. The Company hereby
agrees to indemnify and hold harmless the Agent, from and against any and all
losses, liabilities (including liabilities for penalties), actions, suits,
judgments, demands, damages, costs and expenses (including, without limitation,
attorneys' fees and expenses) incurred or suffered by the Agent, as a result of
any action taken or omitted from being taken by the Agent in connection with
this Agreement or otherwise incurred or suffered by, made upon, or assessed
against the Agent; provided, however, that the Company shall not be required to
indemnify and hold harmless the Agent against any such losses, liabilities
(including liabilities for penalties), actions, suits, judgments, demands,
damages, costs or expenses resulting from or attributable to gross negligence or
willful misconduct on the part of the Agent. The Company's obligations under
this Section 13.13 shall survive the termination of this Agreement and the
repayment of the Notes.
14. CONVERSION OF NOTES.
14.1. CONVERSION PRIVILEGE AND CONVERSION PRICE. At any time from
the Final Closing Date until maturity, provided that the Note is then
outstanding, the Noteholder may, at his option, convert any or all such
indebtedness, principal and accrued interest, on the terms and conditions set
forth in this Section 14, into fully paid and non-assessable shares of Common
Stock. The number of shares of Common Stock which shall be issued upon
conversion of a Note shall be determined by dividing the outstanding
indebtedness on such Note (plus accrued interest thereon) by the Conversion
Price (as defined herein) in effect at the time of conversion. The "Conversion
Price" per share at which shares of Common Stock shall initially be issuable
upon conversion of the indebtedness shall be the lesser of (a) the average
closing price of the Common Stock for the thirty (30) trading days prior to the
Initial Closing Date, (b) the average closing price of the Common Stock for the
thirty (30) trading days prior to the Final Closing Date, and (c) $0.16 per
share; provided however, that the Conversion Price shall be subject to
adjustment pursuant to Section 14.4.
14.2. EXERCISE OF CONVERSION PRIVILEGE. To exercise the conversion
privilege, the Noteholder shall give written notice to the Company stating that
the Noteholder irrevocably elects to convert such indebtedness. Conversion shall
be deemed to have been effected on the date when such delivery is made, and such
date is referred to herein as the "Conversion Date." As promptly as practicable
on or after the conversion date, the Company shall issue and shall deliver at
such office or agency a certificate or certificates for the number of full
shares of Common Stock issuable upon conversion, together with payment in lieu
of any fraction of a share, as provided in Section 14.3. In the case of any Note
that is converted in part only, upon such conversion the Company shall execute
and the Company shall deliver to the holder thereof, at the expense of the
Company, a new Note or Notes of authorized denominations in principal amount
equal to the unconverted portion of such Note.
No payment or adjustment shall be made upon any conversion on account
of any interest accrued on the Notes surrendered for conversion after such
surrender or on account of any dividends on the Common Stock issued upon
conversion.
Notes shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Notes for conversion in
accordance with the foregoing provisions, and at such time the rights of the
holders of such Notes as holders shall cease, and the Person or Persons entitled
to receive the shares of Common Stock issuable upon conversion shall be treated
for all purposes as the record holder or holders of such shares of Common Stock
at such time.
14.3. FRACTIONAL SHARES. No fractional shares of Common Stock shall
be issued upon conversion of Notes. If more than one Note shall be surrendered
for conversion at one time by the same holder, the number of full shares which
shall be delivered upon conversion thereof shall be computed on the basis of the
aggregate principal amount of the Notes (or specified portions thereof) so
surrendered. Instead of any fractional share of Common Stock that would
otherwise be delivered upon conversion of any Note or Notes (or specified
Portions thereof), the Company shall pay a cash adjustment in respect of such
fraction in an amount equal to the same fraction of the market price per share
of Common Stock (as deemed by the Board of Directors or in any manner prescribed
by the Board of Directors) at the close of business on the day of conversion.
15
14.4 Adjustment of Conversion Price.
(a) THE CONVERSION PRICE SHALL BE SUBJECT TO ADJUSTMENT
AS FOLLOWS:
(i) IF THE COMPANY, AT ANY TIME WHILE ANY NOTES
ARE OUTSTANDING, (a) SHALL PAY A CASH DIVIDEND OR OTHERWISE MAKE A
DISTRIBUTION OR DISTRIBUTIONS ON SHARES OF ITS COMMON STOCK PAYABLE IN
SHARES OF COMMON STOCK, (b) SUBDIVIDE OUTSTANDING SHARES OF COMMON
STOCK INTO A LARGER NUMBER OF SHARES, (c) COMBINE OUTSTANDING SHARES OF
COMMON STOCK INTO A SMALLER NUMBER OF SHARES, OR (d) ISSUE BY
RECLASSIFICATION OF SHARES OF COMMON STOCK ANY SHARES OF CAPITAL STOCK
OF THE COMPANY, THE CONVERSION PRICE SHALL BE MULTIPLIED BY A FRACTION
OF WHICH THE NUMERATOR SHALL BE THE NUMBER OF SHARES OF COMMON STOCK
(EXCLUDING TREASURY SHARES, IF ANY) OUTSTANDING BEFORE SUCH EVENT AND
OF WHICH THE DENOMINATOR SHALL BE THE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING AFTER SUCH EVENT. ANY ADJUSTMENT MADE PURSUANT TO THIS
SECTION 14.4 SHALL BECOME EFFECTIVE IMMEDIATELY AFTER THE RECORD DATE
FOR THE DETERMINATION OF STOCKHOLDERS ENTITLED TO RECEIVE SUCH DIVIDEND
OR DISTRIBUTION AND SHALL BECOME EFFECTIVE IMMEDIATELY AFTER THE
EFFECTIVE DATE IN THE CASE OF A SUBDIVISION, COMBINATION OR
RE-CLASSIFICATION.
(ii) IF THE COMPANY, AT ANY TIME WHILE ANY NOTES
ARE OUTSTANDING, SHALL DISTRIBUTE TO ALL HOLDERS OF COMMON STOCK
EVIDENCES OF ITS INDEBTEDNESS OR ASSETS OR RIGHTS OR WARRANTS TO
SUBSCRIBE FOR OR PURCHASE ANY SECURITY (EXCLUDING THOSE REFERRED TO IN
SECTION 14.4(a)(i) ABOVE), THEN IN EACH SUCH CASE THE CONVERSION PRICE
SHALL BE DETERMINED BY MULTIPLYING THE CONVERSION PRICE IN EFFECT
IMMEDIATELY PRIOR TO THE RECORD DATE FIXED FOR DETERMINATION OF
STOCKHOLDERS ENTITLED TO RECEIVE SUCH DISTRIBUTION BY A FRACTION OF
WHICH THE DENOMINATOR SHALL BE THE MARKET PRICE OF COMMON STOCK
DETERMINED AS OF THE RECORD DATE MENTIONED ABOVE, AND OF WHICH THE
NUMERATOR SHALL BE SUCH MARKET PRICE OF THE COMMON STOCK ON SUCH RECORD
DATE LESS THE THEN FAIR MARKET VALUE AT SUCH RECORD DATE OF THE PORTION
OF SUCH ASSETS OR EVIDENCE OF INDEBTEDNESS SO DISTRIBUTED APPLICABLE TO
ONE OUTSTANDING SHARE OF COMMON STOCK AS DETERMINED BY THE COMPANY'S
BOARD OF DIRECTORS IN GOOD FAITH; PROVIDED, HOWEVER, THAT IF THE
NOTEHOLDER DISPUTES SUCH AMOUNT, THE NOTEHOLDER MAY SELECT A NATIONALLY
RECOGNIZED OR MAJOR REGIONAL INVESTMENT BANKING FIRM OR FIRM OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS OF RECOGNIZED STANDING (AN
"APPRAISER") PAID FOR BY THE NOTEHOLDER AND THE COMPANY EQUALLY, IN
WHICH CASE THE FAIR MARKET VALUE SHALL BE EQUAL TO THE AVERAGE OF THE
DETERMINATIONS BY THE COMPANY'S BOARD OF DIRECTORS AND SUCH APPRAISER.
IN EITHER CASE THE ADJUSTMENTS SHALL BE DESCRIBED IN A STATEMENT
PROVIDED TO THE NOTEHOLDER OF THE NOTES OF THE PORTION OF ASSETS OR
EVIDENCES OF INDEBTEDNESS SO DISTRIBUTED OR SUCH SUBSCRIPTION RIGHTS
APPLICABLE TO ONE SHARE OF COMMON STOCK. SUCH ADJUSTMENT SHALL BE MADE
WHENEVER ANY SUCH DISTRIBUTION IS MADE AND SHALL BECOME EFFECTIVE
IMMEDIATELY AFTER THE RECORD DATE MENTIONED ABOVE.
(iii) In case the Company (i) consolidates with or
merges into any other entity and is not the continuing or surviving
entity of such consolidation or merger, or (ii) permits any other
entity to consolidate with or merge into the Company and the Company is
the continuing or surviving Company but, in connection with such
consolidation or merger, the Common Stock is changed into or exchanged
for common stock or other securities of any other entity or cash or any
other assets, or (iii) transfers all or substantially all of its
properties and assets to any other entity, or (iv) effects a
reorganization or reclassification of the equity of the Company in such
a way that holders of Common Stock shall be entitled to receive stock,
securities, cash or assets with respect to or in exchange for Common
Stock, then, and in each such case, proper provision shall be made so
that, upon the exercise of the Notes at any time after the consummation
of such consolidation, merger, transfer, reorganization or
reclassification, the Noteholder shall be entitled to receive (at the
Conversion Price in effect for Common Stock issuable upon such
conversion of the Notes immediately prior to such consummation), in
lieu of Common Stock issuable upon such exercise of the Note prior to
such consummation, the stock and other securities, cash and assets to
which the Noteholder would have been entitled upon such consummation if
such Holder had so exercised the Note immediately prior thereto.
(iv) In the event that the Company issues or
sells any Common Stock or securities which are convertible into or
exchangeable for its Common Stock, or any rights, options or warrants
to subscribe for or to purchase of its Common Stock for "Consideration"
(as defined below) at a price per share ("Per Share Selling Price")
which is less than the Conversion Price in effect immediately prior to
the time of such issue or sale, then the Conversion Price shall be
adjusted downward to equal such lower Per Share Selling Price effective
concurrently with such issue or sale. Notwithstanding the foregoing,
the foregoing adjustments shall not apply to the issuance of (A) shares
of Common Stock upon exercise of rights, options, warrants and other
convertible securities outstanding on the date of this Agreement and
listed in the Company's SEC Filings, or (B) shares of Common Stock
issued upon the exercise of stock options granted pursuant to the
Company's employee stock option plan in effect from time to time (and
as amended if approved by the stockholders of the Company).
16
For purposes of this Section 14.4(a)(iv), the following provision will
be applicable
(V) In the case of an issue or sale for cash of shares of
Common Stock, the "Consideration" received by the Company therefor
shall be deemed to be the amount of cash received, before deducting
therefrom any commissions or expenses paid by the Company.
(W) In case of the issuance (otherwise than upon
conversion or exchange of obligations or shares of stock of the
Company) of additional shares of Common Stock for a consideration other
than cash or a consideration partly other than cash, the amount of the
consideration other than cash received by the Company for such shares
shall be deemed to be the fair value of such consideration as
determined in good faith by the Company's board of directors.
(X) In the case of the issuance by the Company in any
manner of any rights to subscribe for or to purchase shares of Common
Stock, or any options for the purchase of shares of Common Stock or
stock convertible into Common Stock, all shares of Common Stock or
stock convertible into Common Stock to which the holders of such rights
or options shall be entitled to subscribe for or purchase pursuant to
such rights or options shall be deemed to be outstanding as of the date
of the offering of such rights or the granting of such options, as the
case may be, and the minimum aggregate consideration named in such
rights or options for the shares of Common Stock or stock convertible
into Common Stock covered thereby, plus the consideration, if any,
received by the Company for such rights or options, shall be deemed to
be the "Consideration" received by the Company (as of the date of the
offering of such rights or the granting of such options, as the case
may be) for the issuance of such shares.
(Y) In case of the issuance or issuances by the Company
in any manner of any obligations or of any shares of
stock of the Company that shall be convertible into
or exchangeable for Common Stock, all shares of
Common Stock issuable upon the conversion or exchange
of such obligations or shares shall be deemed to be
issued as of the date such obligations or shares are
issued, and the amount of the "Consideration"
received by the Company for such additional shares of
Common Stock shall be deemed to be the total of (x)
the amount of consideration received by the Company
upon the issuance of such obligations or shares, as
the case may be, plus (y) the minimum aggregate
consideration, if any, other than such obligations or
shares, receivable by the Company upon such
conversion or exchange, except in adjustment of
dividends.
(Z) The amount of the "Consideration" received by the
Company upon the issuance of any rights or options
referred to in subparagraph (X) above or upon the
issuance of any obligations or shares which are
convertible or exchangeable as described in
subparagraph (Y) above, and the amount of the
consideration, if any, other than such obligations or
shares so convertible or exchangeable, receivable by
the Company upon the exercise, conversion or exchange
thereof shall be determined in the same mariner
provided in subparagraphs (V) and (W) above with
respect to the consideration received by the Company
in case of the issuance of additional shares of
Common Stock; provided, however, that if such
obligations or shares of stock so convertible or
exchangeable are issued in payment or satisfaction of
any dividend upon any stock of the Company other than
Common Stock, the amount of the "Consideration"
received by the Company upon the original issuance of
such obligations or shares of stock so convertible or
exchangeable shall be deemed to be the value of such
obligations or shares of stock, as of the date of the
adoption of the resolution declaring such dividend,
as determined by the board of directors as of that
date. Upon the expiration of any rights or options
referred to in subparagraph (X), or the termination
of any right of conversion or exchange referred to in
subparagraph (Y), or any change in the number of
shares of Common Stock deliverable upon exercise of
such options or tights or upon conversion of or
exchange of such convertible or exchangeable
securities, the Conversion Price then in effect shall
forthwith be readjusted to such Conversion Price as
would have obtained had the adjustments made upon the
issuance of such options, rights or convertible or
exchangeable securities been made upon the basis of
the delivery of only the number of shares of Common
Stock actually delivered or to be delivered upon the
exercise of such rights or options or upon the
conversion or exchange of such securities.
17
(b) Notwithstanding the foregoing provisions, no adjustment in the
Conversion Price shall be required unless such adjustment would require an
increase or decrease in such Conversion Price of more than $.01; provided,
however, that any adjustments which by reason of this paragraph (b) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment.
(c) All calculations under this Section 14.4 shall be made to the
nearest cent.
(d) Whenever the Conversion Price is adjusted as herein provided,
the Company shall determine the adjusted Conversion Price in accordance with
this Section 14.4 and shall prepare an Officers' Certificate setting forth such
adjusted Conversion Price and showing in detail the facts upon which such
adjustment is based; such Officers' Certificate shall forthwith be filed with
the Agent, who may rely on such Officers' Certificate as conclusive evidence of
the correctness of such adjustment, and a notice stating that the Conversion
Price has been adjusted and setting forth the adjusted Conversion Price shall as
soon as practicable be mailed by or on behalf of the Company to the holders at
their last addresses as they shall on the appropriate Schedule.
14.5 NOTICE OF CERTAIN EVENTS. In case at any time:
(a) the Company shall declare a dividend (or any other
distribution) payable to the holders of Common Stock otherwise than in cash; or
(b) there shall occur any reclassification of Common Stock (other
than a subdivision or combination of outstanding shares of Common stock) or any
consolidation or merger to which the Company is a party and for which approval
of any stockholders of the Company is required, or the sale or transfer of all
or substantially all the assets of the Company; or
(c) there shall occur the voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then the Company shall cause to be filed at the office or agency maintained for
the purpose of exchange of Notes, and shall cause to be mailed to the holders of
Notes at their last addresses, at least 20 days prior to the record date or
other applicable date hereinafter specified, or two days after such date as it
receives actual notice of such event, whichever is later, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend, or,
if a record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, or (y) the date, if known by the
Company, on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up is expected to become effective.
14.6 TRANSFER TAXES. The Company will pay any and all documentary,
stamp, transfer or similar taxes that may be payable in respect of the transfer
and delivery of shares of Common Stock pursuant hereto (but not income, capital
gains or similar taxes imposed on Noteholders in respect of such transactions);
provided, however, that the Company shall not be required to pay any such tax
which may be payable in respect of any transfer involved in the delivery of
shares of Common Stock in a name other than that in which the Notes converted
were registered, and no such transfer or delivery shall be made unless and until
the Person requesting such transfer has paid to the Company the amount of any
such tax, or has established, to the satisfaction of the Company, that such tax
has been paid.
15. DEFINITIONS.
"Affiliates" of any Person shall mean any Person directly or indirectly
controlling, controlled by or under direct or indirect common control with such
Person. A Person shall be deemed to control a corporation if such Person
possesses, directly or indirectly, the power to direct or cause the direction of
the management and policies of such corporation, whether through the ownership
of voting securities, by contract or otherwise.
"Agreement" shall mean this Note Agreement governing the 12%
Convertible Subordinated Notes due June 30, 2005, as amended and modified
pursuant to Section 16 hereof.
"Agent" shall mean Odyssey Capital, LLC, its successors as appointed
under Section 11.2 hereof, and any successor Agent as provided in Section 13.9
hereof.
18
"Applicable Law" shall have the meaning given such term in Section 7.5
hereof.
"Business Day" shall mean any day on which national banks located in
Texas are open for the conduct of banking business.
"Change of Control" shall mean any transaction in which (i) all or
substantially all of the Company's assets are sold as an entirety to any Person
or related group of Persons; (ii) there shall be consummated any consolidation
or merger of the Company in which (A) the Company is not the continuing or
surviving corporation (other than a consolidation or merger with a wholly owned
subsidiary of the Company in which all shares of Common Stock outstanding
immediately prior to the effectiveness thereof are changed into or exchanged for
the same consideration) or (B) pursuant to which the Common Stock would be
converted into cash, securities or other property, in each case other than a
consolidation or merger of the Company in which the holders of the Common Stock
immediately prior to the consolidation or merger have, directly or indirectly,
at least a majority of the total voting power of all classes of capital stock
entitled to vote generally in the election of directors of the continuing or
surviving corporation immediately after such consolidation or merger in
substantially the same proportion as their ownership of Common Stock immediately
before such transaction; (iii) any Person, or any Persons acting together which
would constitute a "group" for purposes of Section 13(d) of the Exchange Act,
together with any affiliates thereof, shall beneficially own (as defined in Rule
13d-3 under the Exchange Act) at least 50% of the total voting power of all
classes of capital stock of the Company entitled to vote generally in the
election of directors of the Company; or (iv) at any time during any one-year
period, individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by such
board of directors or whose nomination for election by the stockholders of the
Company was approved by a vote of 66-2/3% of the directors then still in office
who were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the board of directors of the Company then in office.
"Closing" shall have the meaning given such term in Section 3 hereof.
"Commission" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Company's presently authorized Common
Stock, $.01 par value.
"Conversion Price" shall have the meaning given such term in Section
14.1 hereof.
"Environmental Law" shall mean all federal, state, local and foreign
laws and regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws and regulations relating to emissions, discharges, releases or threatened
releases of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling to materials of environmental concern.
"Event of Default" shall have the meaning given such term in Section 11
hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Market Price" shall mean the price of one share of Common Stock
determined as follows: (i) if the Common Stock is listed on the New York Stock
Exchange, the American Stock Exchange or the BBX, the closing bid price on such
exchange on the date of valuation; (ii) if (i) does not apply and the Common
Stock is listed on the Nasdaq National Market System, the Nasdaq Small-Cap
Market or the OTC Bulletin Board, the mean between the last reported bid price
thereof on the date of valuation; (iii) if neither (i) nor (ii) apply but the
Common Stock is quoted in the over-the-counter market, another recognized
exchange or on the pink sheets, the mean between the last reported "bid" and
"asked" prices thereof on the date of valuation; and (iv) if neither clause (i),
(ii) or (iii) above applies, the fair market value thereof as determined by the
Company's board of directors in good faith.
"Material Adverse Change" shall mean any single circumstance or event
(or series of circumstances or events) having a material adverse effect on the
assets, properties, financial condition, business operations or prospects of the
Company.
19
"Materials of Environmental Concern" shall mean chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum and
petroleum products.
"Maximum Rate" shall mean the maximum non-usurious rate of interest
which, under all applicable statutes, rules and regulations, the Purchasers are
permitted to contract for, charge, take, reserve, or receive on the Notes. If
the statutes, rules and regulations of the State of Texas are applicable for
purposes of determining the maximum rate, then such term means the "weekly
ceiling" from time to time in effect under Texas Finance Code Section 303.001 as
limited by Texas Finance Code Section 303.009. The Company agrees that Chapter
346 of the Texas Finance Code, as amended (which regulates certain revolving
credit loan accounts and revolving tri-party accounts), does not apply to the
Note Agreement or Notes.
"Memorandum" shall mean the Private Placement Memorandum dated May 29,
2003, as may be hereafter amended, modified or supplemented, relating to the
offering and sale of the Notes.
"Net Revenues" shall be computed and shall have the meaning given such
term in the Company's income statement incorporated in the Company's Form 10-K
for the period ending December 31, 2002.
"Noteholder" or "Noteholders" shall mean any Person in whose name at
the time a particular Note shall be registered on the registry books of the
Company maintained for that purpose in accordance with the terms of this
Agreement.
"Notes" shall have the meaning given such term in Section 1 hereof.
"Officers' Certificate" means a certificate signed by the chairman of
the board of directors or the president or a vice president, and by the
treasurer, or the secretary of the Company, and delivered to the Agent.
"Optional Prepayment Date" shall mean the date fixed for prepayment of
the Notes pursuant to Section 5.1.
"Person" shall mean and include an individual, a partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a
government or any department or agency thereof, and any other entity.
"Responsible Officers of the Agent" shall mean the managers, the
president, every vice president, secretary, and treasurer, of the Agent.
"SEC Filings" shall mean the Company's Form 10-K for the fiscal year
ended December 31, 2003; the Company's Form 10-Q for the quarter ended March 31,
2003; and the Company's Current Reports on Form 8-K and 8-K/A filed on January
15, 2003, March 25, 2003, and March 26, 2003.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Senior Indebtedness" shall mean all indebtedness of the Company,
whether outstanding at the time of execution of this Agreement or thereafter
created, which is not by its express terms subordinated in right of payment to
or on par with the Notes. Indebtedness means (i) all indebtedness for money
borrowed, which is created, assumed, incurred or guaranteed in any manner by the
Company or for which the Company is otherwise responsible or liable or (ii)
leases that are capitalized under generally accepted accounting principles.
"Senior Indebtedness Default" shall mean a default in payment of the
principal of or sinking fund installments, if any, due with respect to, fees in
respect of or interest on, any Senior Indebtedness, or any default, or any event
which, with notice or lapse of time or both, would constitute a default, in any
other agreement, term or condition contained in any agreement under which any
Senior Indebtedness is issued.
"Subsidiary" shall mean any Person of which at the time of
determination the party in question and/or one or more of its subsidiaries owns
or controls directly or indirectly more than 50% of the shares of voting stock
of such Person.
"Variable Rate Transaction" shall mean a transaction in which the
Company issues or sells (i) any debt or equity securities that are convertible
into, exchangeable or exercisable for, or include the right to receive
additional shares of, Common Stock either (x) at a conversion, exercise or
exchange rate or other price that is based upon and/or varies with the trading
prices of or quotations for the Common Stock at any time after the initial
issuance of such debt or equity securities, or (y) with a fixed conversion,
exercise or conversion price that is subject to being
20
reset at some future date after the initial issuance of such debt or equity
security or upon the occurrence of specified or contingent events directly or
indirectly related to the business of the Company or the market for the Common
Stock (but excluding standard stock split anti-dilution provisions), or (ii) any
securities of the Company pursuant to an "equity line" structure which provides
for the sale, from time to time, of securities of the Company which are
registered for resale under the Act.
16. WAIVERS; MODIFICATIONS OF AGREEMENT. Any provision in this
Agreement to the contrary notwithstanding, changes in or additions to this
Agreement may be made, and compliance with any covenant or condition herein set
forth may be omitted, if the Company (a) shall obtain from the holders of record
of Notes aggregating not less than 51% of the aggregate principal amount of the
Notes at the time outstanding (and, in the case of any such change, addition, or
omission adversely affecting the rights pursuant to Section 11 hereof of any
holder of record of Notes, additionally from the holders of not less than 100%
of the number of Notes at the time outstanding) their consent thereto in writing
and (b) shall deliver copies of such consent in writing to any such holders of
record who did not execute the same; provided, however, that without the consent
in writing of the holder of each Note (or, in the case of any change, addition,
or omission adversely affecting the rights pursuant to Section 11 hereof of any
holder of record of Notes, as aforesaid) affected thereby, no such consent shall
be effective to reduce the principal of or rate of interest payable on, or to
postpone any date fixed for the payment of principal of or any installment of
interest on, any Note, to increase the percentage specified in Section 11 hereof
of the principal amount of the Notes the holders of which may, in accordance
with the provisions of such Section 11, accelerate the maturity of the Notes
upon an Event of Default or to reduce the percentage of the principal amount of
the Notes the consent of the holders of which shall be required under this
Section 16.
17. SURVIVAL OF COVENANTS, ETC. All covenants, agreements,
representations, and warranties made herein and in the Notes and in any
certificate delivered pursuant hereto shall survive any investigation made by
you and the execution and delivery to you of the Notes to be purchased by you
and your payment therefor.
18. BROKERS; ISSUANCE TAXES. The Company will hold you free and
harmless from any (a) claim, demand, liability for, or expense in connection
with, any broker's or finders' fees or commissions claimed by any Person
asserted to be acting on behalf of the Company in connection with this Agreement
or the transactions contemplated herein and (b) taxes, if any, payable upon, or
on account of, issuance of the Notes.
19. GOVERNING LAW; VENUE. THIS AGREEMENT AND THE NOTES ARE BEING
DELIVERED IN TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAWS
OF THE STATE OF TEXAS WITHOUT CONSIDERATION OF ITS CONFLICT OF LAW PROVISIONS.
The Company hereby expressly and irrevocably agrees and consents that any suit,
action or proceeding arising out of or relating to this Agreement, the Notes, or
the transactions contemplated herein or therein may be instituted by any
Noteholder in any State or Federal court sitting in Dallas County, Texas, United
States of America, and, by the execution and delivery of this Agreement, the
Company expressly waives any objection that it may have now or hereafter to the
laying of the venue or to the jurisdiction of any such suit, action or
proceeding, and irrevocably submits generally and unconditionally to the
jurisdiction of any such court in any such suit, action or proceeding.
20. NOTICES. Any notice, consent, request, or other communication
required or permitted hereunder shall be in writing and shall be deemed given
when either (a) personally delivered to the intended recipient or (b) sent, by
certified or registered mail, return-receipt requested, addressed to the
intended recipient as follows:
if to the Company to: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Attn: President
if to any of you, to the address given for such of you on Schedule I or Schedule
II hereto; if to any other Noteholder to the address of such holder given to the
Company in accordance with Section 8. Any Person (other than the Company) may
change the address to which notice is to be sent pursuant to the preceding
sentence by giving notice of such new address to the Company in accordance with
this Section 20. The Company may change the address to which notice is to be
sent hereunder by giving notice of such change, in accordance with this Section
20, to each Person against whom such change shall be effective. Any notice
mailed as aforesaid shall, unless otherwise provided herein, be deemed given on
the fifth day after deposited in the United States mail in accordance with the
first sentence of this Section 20.
21
21. PARTIES IN INTEREST. All of the terms and provisions of this
Agreement shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns.
22. BUSINESS DAYS. Should any installment of the principal of or
interest on any Note become due and payable upon a day other than a day on which
national banks located in Texas are open for the conduct of banking business,
the maturity thereof shall be extended to the next succeeding day upon which
such banks are open for the conduct of banking business and, in the case of an
installment of principal, interest shall be payable thereon at the rate per
annum specified in such Note during such extension.
23. HEADINGS. The headings of the various sections and subsections
hereof have been inserted for convenience of reference only and shall not be
deemed to in any way modify any of the terms or provisions hereof.
24. COUNTERPARTS. This Agreement may be signed by each party
hereto upon a separate copy, in which event all of said copies shall constitute
a single counterpart of this Agreement. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, and it shall not
be necessary in making proof of this Agreement to produce or account for more
than one such counterpart.
25. SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
26. FINAL AGREEMENT. This Agreement, together with those documents
expressly referred to herein, constitutes the final agreement of the parties
concerning the matters referred to herein, and supersedes all prior agreements
and understandings.
27. SAVINGS CLAUSE. Regardless of any provision contained in the
Notes or Note Agreement, Purchaser shall never be entitled to receive collect or
apply as interest (whether the termed interest herein or deemed to be interest
by operation of law or judicial determination) on the Note any amount in excess
of interest calculated at the Maximum Rate, and, in the event that any Purchaser
ever receives, collects or applies as interest any such excess then the amount
which would be excessive interest shall be deemed to be a partial prepayment of
principal and treated hereunder as such; and, if the principal amount of the
Note is paid in full, then any remaining excess shall forthwith be paid to the
Company. In determining whether or not the interest paid or payable under any
specific contingency exceeds interest calculated at the Maximum Rate, the
Company and Purchasers shall, to the maximum extent permitted under applicable
law: (a) characterize any non-principal payment as an expense, fee or premium
rather than as interest; (B) exclude voluntary principal prepayments and the
effects thereof; and (C) amortize, prorate, allocate, and spread, in equal
parts, the total amount of interest throughout the entire contemplated term of
the Note; provided that, if the Note is paid and performed in full prior to the
end of the full contemplated term thereof, and if the interest received for the
actual period of existence thereof exceeds interest calculated at the Maximum
Rate, then Purchaser shall refund to the Company the amount of such excess or
credit the amount of such excess against the principal amount of the Note and,
in such event, Purchasers shall not be subject to any penalties provided by any
laws for contracting for, charging, taking, reserving, or receiving interest in
excess of interest calculated at the Maximum Rate.
28. TERMINATION. This Agreement will terminated upon the repayment
or conversion of all obligations outstanding under the Notes
[THE REMAINDER OF THIS PAGE HAS INTENTIONALLY BEEN LEFT BLANK.]
22
If the foregoing is in accordance with your understanding, please sign
the form of confirmation and acceptance on the enclosed counterpart of this
Agreement and return the same to the Company, whereupon this Agreement shall be
a binding agreement between you and the Company.
Very truly yours,
TeraForce Technology Corporation
By:_____________________________________________
▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Executive Vice-President and
Chief Financial Officer
I HEREBY ACCEPT AND AGREE TO THE
TERMS AND CONDITIONS CONTAINED IN
THIS NOTE AGREEMENT:
By:______________________________
Name:____________________________
Title:___________________________
APPOINTMENT AS AGENT ACCEPTED:
Odyssey Capital, LLC
By:______________________________
▇▇▇▇ ▇▇▇▇▇▇▇▇, President
23
