Exhibit 99.1
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
Original Issue Date: June 18, 2007
$615,000
12% SENIOR SECURED CONVERTIBLE NOTE
THIS 12% SENIOR SECURED CONVERTIBLE NOTE is authorized and issued by
ENVIRONMENTAL SERVICE PROFESSIONALS, INC., a Nevada corporation, having a
principal place of business at 0000 Xxxx Xxxxxxxx Xxxxxx Xxx, Xxxxx 000, Xxxx
Xxxxxxx, Xxxxxxxxxx 00000 (the "COMPANY"), designated as its 12% Senior Secured
Convertible Note (this "NOTE").
FOR VALUE RECEIVED, the Company promises to pay to Boca Funding, LLC or
its registered assigns (the "HOLDER"), or shall have paid pursuant to the terms
hereunder, the principal sum of Six Hundred and Fifteen Thousand Dollars
($615,000) by the Maturity Date, and to pay interest to the Holder on the
aggregate unconverted and then outstanding principal amount of this Note in
accordance with the provisions hereof. This Note is subject to the following
additional provisions:
SECTION 1. DEFINITIONS. For the purposes hereof, in addition to the
terms defined elsewhere in this Note, the following terms shall have the
following meanings:
"ALTERNATE CONSIDERATION" shall have the meaning set forth in
Section 5(d).
"BUSINESS DAY" means any day except Saturday, Sunday and any
day which shall be a federal legal holiday in the United States or a
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day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"CHANGE OF CONTROL TRANSACTION" means the occurrence after the
date hereof of any of (i) an acquisition after the date hereof by an
individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company,
by contract or otherwise) of in excess of 33% of the voting securities
of the Company, or (ii) the Company merges into or consolidates with
any other Person, or any Person merges into or consolidates with the
Company and, after giving effect to such transaction, the stockholders
of the Company immediately prior to such transaction own less than 66%
of the aggregate voting power of the Company or the successor entity of
such transaction, or (iii) the Company sells or transfers its assets,
as an entirety or substantially as an entirety, to another Person and
the stockholders of the Company immediately prior to such transaction
own less than 66% of the aggregate voting power of the acquiring entity
immediately after the transaction, (iv) a replacement at one time or
within a three year period of more than one-half of the members of the
Company's board of directors which is not approved by a majority of
those individuals who are members of the board of directors on the date
hereof (or by those individuals who are serving as members of the board
of directors on any date whose nomination to the board of directors was
approved by a majority of the members of the board of directors who are
members on the date hereof), or (v) the execution by the Company of an
agreement to which the Company is a party or by which it is bound,
providing for any of the events set forth above in (i) or (iv).
"COMMON STOCK" means the common stock, par value $0.001 per
share, of the Company and stock of any other class of securities into
which such securities may hereafter have been reclassified or changed
into.
"COMMON STOCK EQUIVALENTS" means any securities of the Company
or the Subsidiaries which would entitle the holder thereof to acquire
at any time Common Stock, including, without limitation, any debt,
preferred stock, rights, options, warrants or other instrument that is
at any time convertible into or exercisable or exchangeable for, or
otherwise entitles the holder thereof to receive, Common Stock.
"CONVERSION SHARES" means the shares of Common Stock issuable
upon conversion of this Note.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"EXEMPT ISSUANCE" means the issuance of (a) shares of Common
Stock or options to employees, officers or directors of the Company
pursuant to a stock or option plan, in effect on the date hereof, duly
adopted by a majority of the non-employee members of the Board of
Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose, (b) securities
upon the exercise or exchange of any securities exercisable or
exchangeable for or convertible into shares of Common Stock issued and
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outstanding on the date hereof, provided that such securities have not
been amended since the date of this Agreement to increase the number of
such securities or to decrease the exercise, exchange or conversion
price of any such securities, or securities issued upon exercise of the
Warrants, (c) securities issued pursuant to acquisitions or strategic
transactions approved by a majority of the disinterested directors of
the Company, provided any such issuance shall only be to a Person which
is, itself or through its subsidiaries, an operating company in a
business synergistic with the business of the Company and in which the
Company receives benefits in addition to the investment of funds, but
shall not include a transaction in which the Company is issuing
securities primarily for the purpose of raising capital or to an entity
whose primary business is investing in securities, (d) up to 200,000
shares of Common Stock issued to consultants, service providers or in
connection with capital raising transactions or (e) any other security
if approved in writing by the Holder in its sole and absolute
discretion.
"INDEBTEDNESS" shall mean (a) any liabilities for borrowed
money or amounts owed in excess of $10,000 (other than trade accounts
payable incurred in the ordinary course of business), (b) all
guaranties, endorsements and other contingent obligations in respect of
Indebtedness of others, whether or not the same are or should be
reflected in the Company's balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;
and (c) the present value of any lease payments in excess of $10,000
due under leases required to be capitalized in accordance with GAAP.
"MATURITY DATE" shall mean the earlier of December 18, 2007,
the consummation of the Qualified Transaction or such earlier date as
this Note is required or permitted to be repaid as provided hereunder.
"ORIGINAL ISSUE DATE" shall mean the date of the first
issuance of the Note regardless of the number of transfers of any Note
and regardless of the number of instruments which may be issued to
evidence such Note.
"PERMITTED INDEBTEDNESS" shall mean the Indebtedness existing
on the Original Issue Date, as set forth on SCHEDULE A attached hereto.
"PERMITTED LIENS" shall mean the individual and collective
reference to the following: (a) Liens for taxes, assessments and other
governmental charges or levies not yet due or Liens for taxes,
assessments and other governmental charges or levies being contested in
good faith and by appropriate proceedings for which adequate reserves
(in the good faith judgment of the management of the Company) have been
established in accordance with GAAP, (b) Liens imposed by law which
were incurred in the ordinary course of business, such as carriers',
warehousemen's and mechanics' Liens, statutory landlords' Liens, and
other similar Liens arising in the ordinary course of business, and (x)
which do not individually or in the aggregate materially detract from
the value of such property or assets or materially impair the use
thereof in the operation of the business of the Company and its
consolidated Subsidiaries or (y) which are being contested in good
faith by appropriate proceedings, which proceedings have the effect of
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preventing the forfeiture or sale of the property or asset subject to
such Lien and (c) Liens incurred in connection with Permitted
Indebtedness under clause (b) thereunder provided that such Liens are
not secured by assets of the Company or its Subsidiaries other than the
assets so acquired or leased.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"QUALIFIED TRANSACTION" means a financing or series of related
financings occurring after the date hereof in which the Company sells
shares of Common Stock or Common Stock Equivalents with an aggregate
gross sale price of not less than $1,000,000 or issues indebtedness in
a principal amount of not less than $1,000,000, or agrees to do any of
the foregoing.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"SUBSIDIARY" shall mean each of National Professional Services
Inc., a Delaware corporation, Pacific Environmental Sampling, Inc., a
California corporation, Allstate Home Inspection & Environmental
Testing, Ltd., a Vermont corporation.
"TRANSACTION DOCUMENTS" means this Note, the Warrant, the
Guarantee and the Security Agreement.
"TRADING DAY" means a day on which the Common Stock is traded
on a Trading Market.
"TRADING MARKET" means the following markets or exchanges on
which the Common Stock is listed or quoted for trading on the date in
question: the Nasdaq Global Select Market, the Nasdaq Global Market,
the Nasdaq Capital Market, the American Stock Exchange, the New York
Stock Exchange or the OTC Bulletin Board.
"VWAP" means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Trading Market, the daily volume weighted average
price of the Common Stock for such date (or the nearest preceding date)
on the Trading Market on which the Common Stock is then listed or
quoted as reported by Bloomberg Financial L.P. (based on a Trading Day
from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the
Common Stock is not then listed or quoted on a Trading Market and if
prices for the Common Stock are then quoted on the OTC Bulletin Board,
the volume weighted average price of the Common Stock for such date (or
the nearest preceding date) on the OTC Bulletin Board; (c) if the
Common Stock is not then listed or quoted on the OTC Bulletin Board and
if prices for the Common Stock are then reported in the "Pink Sheets"
published by the Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid
price per share of the Common Stock so reported; or (d) in all other
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cases, the fair market value of a share of Common Stock as determined
by an independent appraiser selected in good faith by the Holder and
reasonably acceptable to the Company.
SECTION 2. CONDITIONS; RANKING; INTEREST; USE OF PROCEEDS; AUTOMATIC
PREPAYMENT; REGISTRATION RIGHTS.
a) On the Original Issue Date, the Holder shall advance the principal
amount of this Note to the Company by wire of immediately available funds (less
any other amounts that may be deducted therefrom pursuant to the terms of this
Note). Prior to the Holder having the obligation of making the foregoing
advance, the following shall have occurred to the satisfaction of the Holder in
its sole discretion: (i) this Note shall have been duly executed and delivered
by the Company to the Holder; (ii) the Guarantee (the "Guarantee") shall have
been duly executed and delivered to the Holder by of each of the Subsidiaries;
(iii) a Security Agreement (the "SECURITY AGREEMENT") from the Company and each
of the Subsidiaries to the Holder with respect to all of their respective
assets, shall have been duly executed and delivered by the Company and the
Subsidiaries; (iv) a warrant to purchase 275,000 shares of Common Stock shall
have been duly executed and delivered by the Company to the Holder (the
"WARRANT"); (v) 750,000 shares of Common Stock shall be issued to Holder (the
"CLOSING SHARES"); (vi) an opinion of counsel to the Company, in form and
substance satisfactory to the Holder, shall have been delivered to the Holder;
(vii) the Company shall have paid to the Holder, a due diligence fee in the
amount of $30,000; (viii) there shall have been delivered to the Holder true and
complete copies of resolutions of the Boards of Directors of the Company and the
Subsidiaries authorizing the transactions contemplated hereby; and (ix) there
shall have been delivered a certificate of a duly authorized officer of the
Company certifying as to the validity of the representatives and warranties made
herein and certain related matters.
b) RANKING This note shall rank senior to all current and future
indebtedness of the Company, and shall be secured by the Collateral (as defined
in the Security Agreement).
c) PAYMENT OF INTEREST. The Company shall pay interest to the Holder on
the outstanding principal amount of this Note at the rate of 12% per annum,
payable on July 18, 2007 and on the same day of each month thereafter and on the
Maturity Date (except that, if any such date is not a Business Day, then such
payment shall be due on the next succeeding Business Day) (each such date, an
"INTEREST PAYMENT DATE"), in cash.
d) INTEREST CALCULATIONS. Interest shall be calculated on the basis of
a 360-day year and shall accrue daily commencing on the Original Issue Date
until payment in full of the principal sum, together with all accrued and unpaid
interest and other amounts which may become due hereunder, has been made.
Interest hereunder will be paid to the Person in whose name this Note is
registered on the records of the Company regarding registration and transfers of
this Note (the "NOTE REGISTER").
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e) LATE FEE. All overdue accrued and unpaid interest to be paid
hereunder shall entail a late fee at the rate of 18% per annum (or such lower
maximum amount of interest permitted to be charged under applicable law) ("LATE
FEES") which will accrue daily, from the date such interest is due hereunder
through and including the date of payment. Upon and after an Event of Default
hereunder, interest hereunder shall accrue at the rate of 18% per annum (or such
lower maximum amount of interest permitted to be charged under applicable law).
f) PREPAYMENT. Except as otherwise set forth in this Note, the Company
may not prepay any portion of the principal amount of this Note without the
prior written consent of the Holder.
g) MANDATORY PREPAYMENT. Notwithstanding anything to the contrary
contained herein, upon consummation of, and simultaneously with, a Qualified
Transaction, the Company shall prepay this Note in full (including any accrued
interest up through the date of such prepayment), PLUS an amount, as an economic
make-whole premium, equal to the interest that would have otherwise accrued at
the interest rate hereunder on the principal amount of the Note from the date of
prepayment to the stated Maturity Date (December 18, 2007) had such Qualified
Transaction not occurred and such prepayment not been made.
h) REGISTRATION RIGHTS. If the Company shall determine to prepare and
file with the Securities and Exchange Commission (the "Commission") a
registration statement (a "Registration Statement") relating to an offering for
its own account or the account of others under the Securities Act of any of its
equity securities, other than on Form S-4 or Form S-8 (each as promulgated under
the Securities Act), or their then equivalents, relating to equity securities to
be issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to the Holder a written notice of
such determination and, if within ten days after the date of such notice, the
Holder shall so request in writing, the Company shall include in such
registration statement all or any part of the Conversion Shares and the Closing
Shares (together, the "Registrable Securities") as the Holder requests to be
registered so long as such Registrable Securities are proposed to be disposed in
the same manner as those set forth in the Registration Statement. The Company
shall use its best efforts to cause any Registration Statement to be declared
effective by the Commission as promptly as is possible following it being filed
with the Commission and to remain effective until all Conversion Shares subject
thereto have been sold. All fees and expenses incident to the performance of or
compliance with this Section 2(h) by the Company shall be borne by the Company
whether or not any Registrable Securities are sold pursuant to the Registration
Statement. The Company shall, notwithstanding any full or partial exercise of
this Note or repayment hereof, indemnify and hold harmless the Holder, the
officers, directors, members, partners, agents, brokers, investment advisors and
employees of each of them, each person who controls the Holder (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act),
and the officers, directors, members, shareholders, partners, agents and
employees of each such controlling person, to the fullest extent permitted by
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applicable law, from and against any and all losses, claims, damages,
liabilities, costs (including, without limitation, reasonable attorneys' fees)
and expenses (collectively, "Losses"), as incurred, arising out of or relating
to (1) any untrue or alleged untrue statement of a material fact contained in
the Registration Statement, any prospectus included therein or any form of
prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein (in the case of any prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading or (2) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act or any state securities law, or any rule or
regulation thereunder, in connection with the performance of its obligations
under this Section 2(h), except to the extent, but only to the extent, that such
untrue statements or omissions referred to in (1) above are based solely upon
information regarding the Holder furnished in writing to the Company by the
Holder expressly for use therein. The rights of the Holder under this Section
2(h) shall survive any full or partial conversion or prepayment of this Note
until all Registrable Securities have been either registered under a
Registration Statement or been sold pursuant to an exemption to the registration
requirements of the Securities Act. Notwithstanding anything else herein to the
contrary, if the representative of the underwriter in any underwritten offering
advises the Company in writing that marketing factors require a limitation on
the number of shares included in the registration statement related to such
offering, the number of shares included in such registration statement shall be
allocated, first, to the shares to be sold on a primary basis by the Company,
second, to the Registrable Securities, and third, to the shares held by all
other security holders.
SECTION 3. REGISTRATION OF TRANSFERS AND EXCHANGES.
a) DIFFERENT DENOMINATIONS. This Note is exchangeable for an equal
aggregate principal amount of Notes of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange.
b) SECURITIES LAWS COMPLIANCE. This Note may be transferred or
exchanged only in compliance with applicable federal and state securities laws
and regulations.
c) RELIANCE ON NOTE REGISTER. Prior to due presentment to the Company
for transfer of this Note, the Company and any agent of the Company may treat
the Person in whose name this Note is duly registered on the Note Register as
the owner hereof for the purpose of receiving payment as herein provided and for
all other purposes, whether or not this Note is overdue, and neither the Company
nor any such agent shall be affected by notice to the contrary.
SECTION 4. CONVERSION.
a) VOLUNTARY CONVERSION. At any time after the Original Issue Date
until this Note is no longer outstanding, this Note shall be convertible into
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shares of Common Stock at the option of the Holder, in whole or in part at any
time and from time to time (subject to the limitations on conversion set forth
in Section 4(c) hereof). The Holder shall effect conversions by delivering to
the Company the form of Notice of Conversion attached hereto as Annex A (a
"NOTICE OF CONVERSION"), specifying therein the principal amount of this Note to
be converted and the date on which such conversion is to be effected (a
"CONVERSION DATE"). If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of Conversion
is provided hereunder. To effect conversions hereunder, the Holder shall not be
required to physically surrender this Note to the Company unless the entire
principal amount of this Note plus all accrued and unpaid interest thereon has
been so converted. Conversions hereunder shall have the effect of lowering the
outstanding principal amount of this Note in an amount equal to the applicable
conversion. The Holder and the Company shall maintain records showing the
principal amount converted and the date of such conversions. The Company shall
deliver any objection to any Notice of Conversion within 1 Business Day of
receipt of such notice. In the event of any dispute or discrepancy, the records
of the Holder shall be controlling and determinative in the absence of manifest
error. The Holder and any assignee, by acceptance of this Note, acknowledge and
agree that, by reason of the provisions of this paragraph, following conversion
of a portion of this Note, the unpaid and unconverted principal amount of this
Note may be less than the amount stated on the face hereof.
b) CONVERSION PRICE. The conversion price in effect on any Conversion
Date shall be equal to $0.58, subject to adjustment herein (the "CONVERSION
PRICE").
c) CONVERSION LIMITATIONS. The Company shall not effect any conversion
of this Note, and the Holder shall not have the right to convert any portion of
this Note, pursuant to Section 4(a) or otherwise, to the extent that after
giving effect to such conversion, the Holder (together with the Holder's
affiliates), would beneficially own in excess of 4.99% of the number of shares
of the Common Stock outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of this Note with
respect to which the determination of such sentence is being made, but shall
exclude the number of shares of Common Stock which would be issuable upon (A)
conversion of the remaining, nonconverted portion of this Note beneficially
owned by the Holder or any of its affiliates and (B) exercise or conversion of
the unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any other Notes or the Warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates. Except as set
forth in the preceding sentence, for purposes of this Section 4(c), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder. To the extent that the
limitation contained in this section applies, the determination of whether this
Note is convertible (in relation to other securities owned by the Holder) and of
which a portion of this Note is convertible shall be in the sole discretion of
such Holder. To ensure compliance with this restriction, the Holder will be
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deemed to represent to the Company upon delivery of the Notice of Conversion
that such Notice of Conversion has not violated the restrictions set forth in
this paragraph and the Company shall have no obligation to verify or confirm the
accuracy of such determination. In addition, a determination as to any group
status as contemplated above shall be determined in accordance with Section
13(d) of the Exchange Act and the rules and regulations promulgated thereunder.
For purposes of this Section 4(c), in determining the number of outstanding
shares of Common Stock, the Holder may rely on the number of outstanding shares
of Common Stock as reflected in (x) the Company's most recent Form 10-Q, Form
10-QSB, Form 10-K or Form 10-KSB, as the case may be, (y) a more recent public
announcement by the Company or (z) any other notice by the Company or the
Company's Transfer Agent setting forth the number of shares of Common Stock
outstanding. Upon the written or oral request of the Holder, the Company shall
within two Trading Days confirm orally and in writing to the Holder the number
of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Company, including this Note, by
the Holder or its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported. The provisions of this Section
4(c) may be waived by the Holder, at the election of the Holder, upon not less
than 61 days' prior notice to the Company, and the provisions of this Section
4(c) shall continue to apply until such 61st day (or such later date, as
determined by the Holder, as may be specified in such notice of waiver). The
provisions of this paragraph shall be implemented in a manner otherwise than in
strict conformity with the terms of this Section 4(c) to correct this paragraph
(or any portion hereof) which may be defective or inconsistent with the intended
4.99% beneficial ownership limitation herein contained or to make changes or
supplements necessary or desirable to properly give effect to such 4.99%
limitation. The limitations contained in this paragraph shall apply to a
successor holder of this Note. The holders of Common Stock of the Company shall
be third party beneficiaries of this Section 4(c) and the Company may not waive
this Section 4(c) without the consent of holders of a majority of its Common
Stock.
d) MECHANICS OF CONVERSION
i. CONVERSION SHARES ISSUABLE UPON CONVERSION OF PRINCIPAL
AMOUNT. The number of shares of Common Stock issuable upon a conversion
hereunder shall be determined by the quotient obtained by dividing (x)
the outstanding principal amount of this Note and accrued interest to
be converted by (y) the Conversion Price.
ii. DELIVERY OF CERTIFICATE UPON CONVERSION. Not later than
five Trading Days after the Conversion Date, the Company will deliver
or cause to be delivered to the Holder a certificate or certificates
representing the Conversion Shares which shall be free of restrictive
legends and trading restrictions (other than those required by law)
representing the number of shares of Common Stock being acquired upon
the conversion of such portion of this Note. The Company shall, if
available and if allowed under applicable securities laws, use its best
efforts to deliver any certificate or certificates required to be
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delivered by the Company under this Section electronically through the
Depository Trust Corporation or another established clearing
corporation performing similar functions.
iii. FAILURE TO DELIVER CERTIFICATES. If in the case of any
Notice of Conversion such certificate or certificates are not delivered
to or as directed by the Holder by the third Trading Day after the
Conversion Date, the Holder shall be entitled by written notice to the
Company at any time on or before its receipt of such certificate or
certificates thereafter, to rescind such conversion, in which event the
Company shall immediately return the certificates representing the
principal amount of this Note tendered for conversion.
iv. OBLIGATION ABSOLUTE; PARTIAL LIQUIDATED DAMAGES. If the
Company fails for any reason to deliver to the Holder such certificate
or certificates pursuant to Section 4(d)(ii) by the fifth Trading Day
after the Conversion Date, the Company shall pay to such Holder, in
cash, as liquidated damages and not as a penalty, for each $1,000 of
principal amount being converted, $10 per Trading Day for each Trading
Day after such fifth Trading Day until such certificates are delivered.
The Company's obligations to issue and deliver the Conversion Shares
upon conversion of this Note in accordance with the terms hereof are
absolute and unconditional, irrespective of any action or inaction by
the Holder to enforce the same, any waiver or consent with respect to
any provision hereof, the recovery of any judgment against any Person
or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach
by the Holder or any other Person of any obligation to the Company or
any violation or alleged violation of law by the Holder or any other
person, and irrespective of any other circumstance which might
otherwise limit such obligation of the Company to the Holder in
connection with the issuance of such Conversion Shares; PROVIDED,
HOWEVER, such delivery shall not operate as a waiver by the Company of
any such action the Company may have against the Holder. In the event
the Holder of this Note shall elect to convert any portion of this
note, the Company may not refuse conversion based on any claim that the
Holder or any one associated or affiliated with the Holder has been
engaged in any violation of law, agreement or for any other reason,
unless, an injunction from a court, on notice, restraining and or
enjoining conversion of all or part of this Note shall have been sought
and obtained and the Company posts a surety bond for the benefit of the
Holder in the amount of 150% of the principal amount of this Note
outstanding, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall
be payable to such Holder to the extent it obtains judgment. In the
absence of an injunction precluding the same, the Company shall issue
Conversion Shares or, if applicable, cash, upon a properly noticed
conversion. Nothing herein shall limit a Xxxxxx's right to pursue
actual damages or declare an Event of Default pursuant to Section 7
herein for the Company's failure to deliver Conversion Shares within
the period specified herein and such Holder shall have the right to
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pursue all remedies available to it at law or in equity including,
without limitation, a decree of specific performance and/or injunctive
relief. The exercise of any such rights shall not prohibit the Holder
from seeking to enforce damages pursuant to any other Section hereof or
under applicable law.
v. COMPENSATION FOR BUY-IN ON FAILURE TO TIMELY DELIVER
CERTIFICATES UPON CONVERSION. In addition to any other rights available
to the Holder, if the Company fails for any reason to deliver to the
Holder such certificate or certificates pursuant to Section 4(d)(ii) on
dates set forth therein, and if the Holder is required by its brokerage
firm to purchase (in an open market transaction or otherwise) Common
Stock to deliver in satisfaction of a sale by such Holder of the
Conversion Shares which the Holder anticipated receiving upon such
conversion (a "BUY-IN"), then the Company shall (A) pay in cash to the
Holder (in addition to any remedies available to or elected by the
Holder) the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the Common Stock so
purchased exceeds (y) the product of (1) the aggregate number of shares
of Common Stock that such Holder anticipated receiving from the
conversion on multiplied by (2) the actual sale price of the Common
Stock at the time of the sale (including brokerage commissions, if any)
giving rise to such purchase obligation and (B) at the option of the
Holder, either reissue (if surrendered) this Note in a principal amount
equal to the principal amount of the attempted conversion or deliver to
the Holder the number of shares of Common Stock that would have been
issued had the Company timely complied with its delivery requirements
under Section 4(d)(ii). For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to an attempted conversion of this Note with respect to which
the actual sale price of the Conversion Shares at the time of the sale
(including brokerage commissions, if any) giving rise to such purchase
obligation was a total of $10,000 under clause (A) of the immediately
preceding sentence, the Company shall be required to pay the Holder
$1,000. The Holder shall provide the Company written notice indicating
the amounts payable to the Holder in respect of the Buy-In.
Notwithstanding anything contained herein to the contrary, if a Holder
requires the Company to make payment in respect of a Buy-In for the
failure to timely deliver certificates hereunder and the Company timely
pays in full such payment, the Company shall not be required to pay
such Holder liquidated damages under Section 4(d)(iv) in respect of the
certificates resulting in such Buy-In.
vi. RESERVATION OF SHARES ISSUABLE UPON CONVERSION. The
Company covenants that it will at all times reserve and keep available
out of its authorized and unissued shares of Common Stock solely for
the purpose of issuance upon conversion of this Note and payment of
interest on this Note, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other
than the Holder (and the other holders of the Notes), not less than
such number of shares of the Common Stock as shall be issuable (taking
11
into account the adjustments and restrictions of Section 5) upon the
conversion of the outstanding principal amount of this Note and accrued
interest hereunder. The Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable.
vii. FRACTIONAL SHARES. Upon a conversion hereunder the
Company shall not be required to issue stock certificates representing
fractions of shares of the Common Stock, but may if otherwise
permitted, make a cash payment in respect of any final fraction of a
share based on the VWAP at such time. If the Company elects not, or is
unable, to make such a cash payment, the Holder shall be entitled to
receive, in lieu of the final fraction of a share, one whole share of
Common Stock.
viii. TRANSFER TAXES. The issuance of certificates for shares
of the Common Stock on conversion of this Note shall be made without
charge to the Holder hereof for any documentary stamp or similar taxes
that may be payable in respect of the issue or delivery of such
certificate, provided that the Company shall not be required to pay any
tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name
other than that of the Holder of this Note so converted and the Company
shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to
the satisfaction of the Company that such tax has been paid.
SECTION 5. CERTAIN ADJUSTMENTS.
a) STOCK DIVIDENDS AND STOCK SPLITS. If the Company, at any time while
this Note is outstanding: (A) pays a stock dividend or otherwise makes a
distribution or distributions on shares of its Common Stock or any other equity
or equity equivalent securities payable in shares of Common Stock (which, for
avoidance of doubt, shall not include any shares of Common Stock issued by the
Company pursuant to this Note, including as interest thereon), (B) subdivides
outstanding shares of Common Stock into a larger number of shares, (C) combines
(including by way of reverse stock split) outstanding shares of Common Stock
into a smaller number of shares, or (D) issues by reclassification of shares of
the Common Stock any shares of capital stock of the Company, then 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
immediately before such event and of which the denominator shall be the number
of shares of Common Stock outstanding immediately after such event. Any
adjustment made pursuant to this Section 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.
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b) SUBSEQUENT EQUITY SALES. If the Company or any Subsidiary thereof,
as applicable, at any time while this Note is outstanding, shall offer, sell,
grant any option to purchase or offer, sell or grant any right to reprice its
securities, or otherwise dispose of or issue (or announce any offer, sale, grant
or any option to purchase or other disposition) any Common Stock or Common Stock
Equivalents entitling any Person to acquire shares of Common Stock, at an
effective price per share less than the then Conversion Price (such lower price,
the "BASE CONVERSION PRICE" and such issuances collectively, a "DILUTIVE
ISSUANCE"), as adjusted hereunder (if the holder of the Common Stock or Common
Stock Equivalents so issued shall at any time, whether by operation of purchase
price adjustments, reset provisions, floating conversion, exercise or exchange
prices or otherwise, or due to warrants, options or rights per share which is
issued in connection with such issuance, be entitled to receive shares of Common
Stock at an effective price per share which is less than the Conversion Price,
such issuance shall be deemed to have occurred for less than the Conversion
Price on such date of the Dilutive Issuance), then the Conversion Price shall be
reduced to equal the Base Conversion Price. Such adjustment shall be made
whenever such Common Stock or Common Stock Equivalents are issued.
Notwithstanding the foregoing, no adjustment will be made under this Section
5(b) in respect of an Exempt Issuance. The Company shall notify the Holder in
writing, no later than the Business Day following the issuance of any Common
Stock or Common Stock Equivalents subject to this section, indicating therein
the applicable issuance price, or of applicable reset price, exchange price,
conversion price and other pricing terms (such notice the "DILUTIVE ISSUANCE
NOTICE"). For purposes of clarification, whether or not the Company provides a
Dilutive Issuance Notice pursuant to this Section 5(b), upon the occurrence of
any Dilutive Issuance, after the date of such Dilutive Issuance the Holder is
entitled to receive a number of Conversion Shares based upon the Base Conversion
Price regardless of whether the Holder accurately refers to the Base Conversion
Price in the Notice of Conversion.
c) PRO RATA DISTRIBUTIONS. If the Company, at any time while this Note
is outstanding, shall distribute to all holders of Common Stock (and not to the
holders of the Note) evidences of its indebtedness or assets (including cash and
cash dividends) or rights or warrants to subscribe for or purchase any security,
then in each such case the Conversion Price shall be adjusted by multiplying
such 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 VWAP determined as of the record
date mentioned above, and of which the numerator shall be such VWAP 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 the Common Stock as determined by the Board of Directors in
good faith. In either case the adjustments shall be described in a statement
provided to the Holder 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.
13
d) FUNDAMENTAL TRANSACTION. If, at any time while this Note is
outstanding, (A) the Company effects any merger or consolidation of the Company
with or into another Person, (B) the Company effects any sale of all or
substantially all of its assets in one or a series of related transactions, (C)
any tender offer or exchange offer (whether by the Company or another Person) is
completed pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, cash or property, or (D) the Company
effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such case, a
"FUNDAMENTAL TRANSACTION"), then upon any subsequent conversion of this Note,
the Holder shall have the right to receive, for each Conversion Share that would
have been issuable upon such conversion immediately prior to the occurrence of
such Fundamental Transaction, the same kind and amount of securities, cash or
property as it would have been entitled to receive upon the occurrence of such
Fundamental Transaction if it had been, immediately prior to such Fundamental
Transaction, the holder of one share of Common Stock (the "ALTERNATE
CONSIDERATION"). For purposes of any such conversion, the determination of the
Conversion Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in respect
of one share of Common Stock in such Fundamental Transaction, and the Company
shall apportion the Conversion Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different components of
the Alternate Consideration. If holders of Common Stock are given any choice as
to the securities, cash or property to be received in a Fundamental Transaction,
then the Holder shall be given the same choice as to the Alternate Consideration
it receives upon any conversion of this Note following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions, any
successor to the Company or surviving entity in such Fundamental Transaction
shall issue to the Holder a new Note consistent with the foregoing provisions
and evidencing the Holder's right to convert such Note into Alternate
Consideration. The terms of any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring any such successor or
surviving entity to comply with the provisions of this paragraph (d) and
insuring that this Note (or any such replacement security) will be similarly
adjusted upon any subsequent transaction analogous to a Fundamental Transaction.
e) CALCULATIONS. All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be. For
purposes of this Section 5, the number of shares of Common Stock deemed to be
issued and outstanding as of a given date shall be the sum of the number of
shares of Common Stock (excluding treasury shares, if any) issued and
outstanding.
f) NOTICE TO THE HOLDER.
i. ADJUSTMENT TO CONVERSION PRICE. Whenever the Conversion
Price is adjusted pursuant to any of this Section 5, the Company shall
14
promptly mail to each Holder a notice setting forth the Conversion
Price after such adjustment and setting forth a brief statement of the
facts requiring such adjustment.
ii. NOTICES TO HOLDER. If (A) the Company shall declare a
dividend (or any other distribution) on the Common Stock; (B) the
Company shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock; (C) the Company shall authorize the
granting to all holders of the Common Stock rights or warrants to
subscribe for or purchase any shares of capital stock of any class or
of any rights; (D) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common
Stock, any consolidation or merger to which the Company is a party, any
sale or transfer of all or substantially all of the assets of the
Company, of any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property; (E) the Company
shall authorize the voluntary or involuntary dissolution, liquidation
or winding up of the affairs of the Company; then, in each case, the
Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of this Note, and shall cause to be mailed to
the Holder at its last addresses as it shall appear upon the stock
books of the Company, at least 20 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record
is not to be taken, the date as of which the holders of the Common
Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on
which such reclassification, consolidation, merger, sale, transfer or
share exchange is expected to become effective or close, and the date
as of which it is expected that holders of the Common Stock of record
shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share
exchange; PROVIDED, that the failure to mail such notice or any defect
therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice. The Holder is
entitled to convert this Note during the 20-day period commencing the
date of such notice to the effective date of the event triggering such
notice.
SECTION 6. COVENANTS. As long as any portion of this Note remains
outstanding, the Company agrees as follows:
a) other than Permitted Liens and liens in favor of the Holder, the
Company and its subsidiaries shall not enter into, create, incur, assume or
suffer to exist any liens, security interests, charges, claims or other
encumbrances of any kind (collectively, "Liens"), on or with respect to any of
its or its Subsidiaries' property or assets now owned or hereafter acquired or
any interest therein or any income or profits therefrom;
15
b) the Company shall not amend its charter documents, including without
limitation, its certificate of incorporation and bylaws, in any manner that
adversely affects any rights of the Holder;
c) the Company shall not, and shall not permit any Subsidiary to, enter
into, create, incur, assume or suffer to exist any Indebtedness, unless such
Indebtedness is expressly subordinate to this Note as to payment and security;
d) the Company shall comply with its obligations under the Warrant and
the other Transaction Documents;
e) the Company shall comply with law and duly observe and conform in
all material respects to all valid requirements of governmental authorities
relating to the conduct of its business or to its properties or assets;
f) the Company shall not, and shall not permit any Subsidiary to,
engage in any transactions with any officer, director, employee or any affiliate
of the Company, including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
entity in which any officer, director, or any such employee has a substantial
interest or is an officer, director, trustee or partner, in each case in excess
of $50,000 other than (i) for payment of salary or consulting fees for services
rendered and (ii) reimbursement for expenses incurred on behalf of the Company;
g) the Company shall not, and shall not permit any Subsidiary to, (i)
declare or pay any dividends or make any distributions to any holder(s) of
Common Stock or other equity securities of the Company (other than distributions
to the Company from the Subsidiaries), (ii) purchase or otherwise acquire for
value, directly or indirectly, any Common Stock or other equity security of the
Company, (iii) form any subsidiary, or (iii) transfer, assign, pledge, issue or
otherwise permit any equity or other ownership interests in the Subsidiaries to
be beneficially owned or held by any person other than the Company (other than
the pledge evidenced by the Security Agreement); provided, however, nothing in
this Section 6(g) shall be deemed to prohibit the formation of any wholly-owned
subsidiary in connection with the merger of that subsidiary with and into either
of Advance Roofing Solutions, Inc., International Association of Management,
Inc. or the Entities (as defined in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2006) (collectively, the "Anticipated Mergers"),
to the extent any such subsidiary becomes a Guarantor;
h) the Company shall not, and shall not permit any Subsidiary to, (i)
merge or consolidate or sell or dispose of all its assets or any substantial
portion thereof or (ii) in any way or manner alter its organizational structure
16
or change of entity; provided, however, nothing in this Section 6(h) shall be
deemed to prohibit the consummation of the Anticipated Mergers if the survivors
of such mergers become Guarantors;
i) the Company shall, and shall cause each Subsidiary to, promptly pay
and discharge, or cause to be paid and discharged, when due and payable, all
lawful taxes, assessments and governmental charges or levies imposed upon the
income, profits, property or business of the Company; provided, however, that
any such tax, assessment, charge or levy need not be paid if the validity
thereof shall currently be contested in good faith by appropriate proceedings
and if the Company shall have set aside on its books adequate reserves with
respect thereto, and provided, further, that the Company will pay all such
taxes, assessments, charges or levies forthwith upon the commencement of
proceedings to foreclose any lien which may have attached as security therefore;
j) the Company shall maintain in full force and effect its corporate
existence, rights and franchises and all licenses and other rights to use
property owned or possessed by it and reasonably deemed to be necessary to the
conduct of its business;
k) the Company shall advise the Holder, within twenty-four hours after
it receives notice of issuance by the Commission, any state securities
commission or any other regulatory authority of any stop order or of any order
preventing or suspending any offering of any securities of the Company, or of
the suspension of the qualification of the Common Stock for offering or sale in
any jurisdiction, or the initiation of any proceeding for any such purpose;
l) the Company shall conduct its businesses in a manner so that it will
not become subject to the Investment Company Act of 1940, as amended; and
m) the Company will keep its properties in good repair, working order
and condition, reasonable wear and tear excepted, and from time to time make all
necessary and proper repairs, renewals, replacements, additions and improvements
thereto; and the Company will at all times comply with each provision of
allleases to which it is a party or under which it occupies property if the
breach of such provision could reasonably be expected to have a Material Adverse
Effect.
SECTION 7 EVENTS OF DEFAULT.
a) "EVENT OF DEFAULT", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
i. any default in the payment of (A) the principal amount of
any Note, or (B) interest (including Late Fees) on, or liquidated
damages in respect of, any Note, as and when the same shall become due
and payable (whether on a Conversion Date or the Maturity Date or by
acceleration or otherwise);
17
ii. the Company shall fail to observe or perform any other
covenant or agreement contained in this Note (other than a breach by
the Company of its obligations to deliver shares of Common Stock to the
Holder upon conversion which breach is addressed in clause (ix) below)
which failure is not cured, if possible to cure, within 5 Business Days
after notice of such default sent by the Holder or by any other Holder;
iii. a default or event of default (subject to any grace or
cure period provided for in the applicable agreement, document or
instrument) shall occur under (A) any of the Transaction Documents, or
(B) any other material agreement, lease, document or instrument to
which the Company or any Subsidiary is bound, which failure is not
cured, if possible to cure, within 5 Business Days after notice of such
default sent by the Holder or by any other Holder;
iv. any representation or warranty made herein, in any other
Transaction Documents, in any written statement pursuant hereto or
thereto, or in any other report, financial statement or certificate
made or delivered to the Holder or any other holder of Notes shall be
untrue or incorrect in any material respect as of the date when made or
deemed made;
v. (i) the Company or any of its Subsidiaries shall commence a
case, as debtor, under any applicable bankruptcy or insolvency laws as
now or hereafter in effect or any successor thereto, or the Company or
any Subsidiary commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction whether
now or hereafter in effect relating to the Company or any Subsidiary
thereof or (ii) there is commenced a case against the Company or any
Subsidiary thereof, under any applicable bankruptcy or insolvency laws,
as now or hereafter in effect or any successor thereto which remains
undismissed for a period of 60 days; or (iii) the Company or any
Subsidiary thereof is adjudicated by a court of competent jurisdiction
insolvent or bankrupt; or any order of relief or other order approving
any such case or proceeding is entered; or (iv) the Company or any
Subsidiary thereof suffers any appointment of any custodian or the like
for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or (v) the Company or
any Subsidiary thereof makes a general assignment for the benefit of
creditors; or (vi) the Company shall fail to pay, or shall state that
it is unable to pay, or shall be unable to pay, its debts generally as
they become due; or (vii) the Company or any Subsidiary thereof shall
call a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or (viii) the Company or any
Subsidiary thereof shall by any act or failure to act expressly
indicate its consent to, approval of or acquiescence in any of the
foregoing; or (ix) any corporate or other action is taken by the
18
Company or any Subsidiary thereof for the purpose of effecting any of
the foregoing;
vi. the Company or any Subsidiary shall default in any of its
obligations under any mortgage, credit agreement or other facility,
indenture agreement, factoring agreement or other instrument under
which there may be issued, or by which there may be secured or
evidenced any indebtedness for borrowed money or money due under any
long term leasing or factoring arrangement of the Company in an amount
exceeding $100,000, whether such indebtedness now exists or shall
hereafter be created and such default shall result in such indebtedness
becoming or being declared due and payable prior to the date on which
it would otherwise become due and payable;
vii. The Company shall not comply with the listing or
quotation requirements of the Trading Market, the Company shall have
received notification from the Trading Market that it does not comply
with the listing or quotation requirements of the Trading Market or the
Common Stock shall not be eligible for quotation on or, for any reason,
including by order of the Commission or the Trading Market, quoted for
trading on a Trading Market and shall not again be eligible for and
quoted or listed for trading thereon within three Trading Days;
viii. The Company shall be a party to any Change of Control
Transaction or Fundamental Transaction, shall agree to sell or dispose
of all or in excess of 33% of its assets in one or more transactions
(whether or not such sale would constitute a Change of Control
Transaction) or shall redeem or repurchase more than a de minimis
number of its outstanding shares of Common Stock or other equity
securities of the Company (other than redemptions of Conversion Shares
and repurchases of shares of Common Stock or other equity securities of
departing officers and directors of the Company; provided such
repurchases shall not exceed $50,000, in the aggregate, for all
officers and directors during the term of this Note);
ix. the Company shall fail for any reason to deliver
certificates to a Holder prior to the fifth Trading Day after a
Conversion Date pursuant to and in accordance with Section 4(d) or the
Company shall provide notice to the Holder, including by way of public
announcement, at any time, of its intention not to comply with requests
for conversions of any Notes in accordance with the terms hereof; or
x. any monetary judgment, writ or similar final process shall
be entered or filed against the Company or any of its property or other
assets for than $100,000, and shall remain unvacated, unbonded or
unstayed for a period of 45 calendar days; or
19
b) REMEDIES UPON EVENT OF DEFAULT. If any Event of Default occurs, the
full principal amount of this Note, together with interest and other amounts
owing in respect thereof, to the date of acceleration shall become, at the
Holder's election, immediately due and payable in cash. The Holder need not
provide and the Company hereby waives any presentment, demand, protest or other
notice of any kind, and the Holder may immediately and without expiration of any
grace period enforce any and all of its rights and remedies hereunder and all
other remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Xxxxxx at any time prior to payment hereunder and the
Holder shall have all rights as a Note holder until such time, if any, as the
full payment under this Section shall have been received by it. No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.
20
SECTION 8. REPRESENTATIONS AND WARRANTIES. The Company hereby
represents and warrants to the Holder as follows:
a) Each of the Company and each of the Subsidiaries has been
duly organized and is validly existing under the laws of its
jurisdiction of organization and has all requisite power and authority
to execute, deliver and perform its obligations under this Note and all
other Transaction Documents to which it is a party. The Company does
not directly or indirectly own or have any investment in the capital
stock of or any proprietary interest in any Person other than the
Subsidiaries. Each of this Note and all other Transaction Documents
have been duly authorized, executed and delivered by the Company and
each of the Subsidiaries that is a party thereto and constitutes its
legal, valid and binding obligation, enforceable against it in
accordance with the terms hereof and thereof. The execution, delivery
and performance by the Company and each of the Subsidiaries of this
Note and all other Transaction Documents to which each is a party, and
the incurrence by them of their respective obligations hereunder and
thereunder, do not contravene or conflict with any law applicable to
the Company or any of the Subsidiaries or other instrument binding on
or otherwise affecting the Company or any of the Subsidiaries or give
rise to any lien, security interest or other charge or encumbrance
(other than in favor of the Holder) upon any of the Company's or the
Subsidiary's properties. No consent or approval of or notice to or
filing with any governmental authority or other third party is or will
be required as a condition to the validity or enforceability of this
Note or the other Transaction Documents, other than such consents which
have been obtained and are in full force and effect.
b) The Company and the Subsidiaries have good and marketable
title to their assets disclosed in its most recent SEC Reports (as
defined below). The Company and each of the Subsidiaries are in
compliance in all material respects with all laws and regulatory
requirements to which it or its properties are subject. Except as set
forth in the SEC Reports, there is no litigation pending, or, to the
knowledge of the Company, threatened against the Company or any of the
Subsidiaries that could reasonably be expected to have a material
adverse effect on the financial condition, business, properties or
prospects of the Company and its subsidiaries, taken as a whole (a
"MATERIAL ADVERSE Effect"). The Company's principal place of business
is the address set forth at the beginning of this Note. The Company has
paid all federal, foreign, state and local taxes required to be paid by
it on or prior to the date they were due. All documents, instruments
and other written material heretofore or hereafter furnished to the
Holder pursuant to the terms of any Transaction Document contain no
misstatements of a material fact and do not fail to disclose any
material fact and the Company has not failed to disclose to the Holders
any information that could result in a Material Adverse Effect.
21
c) The Company has filed all reports, schedules, forms,
statements and other documents required to be filed by it under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), and the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"),
including pursuant to Section 13(a) or 15(d) thereof, for the two years
preceding the date hereof (or such shorter period as the Company was
required by law or regulation to file such material) (the foregoing
materials, including the exhibits thereto and documents incorporated by
reference therein, being collectively referred to herein as the "SEC
Reports") on a timely basis or has received a valid extension of such
time of filing and has filed any such SEC Reports prior to the
expiration of any such extension. As of their respective dates, the SEC
Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of
the Commission promulgated thereunder, as applicable, and none of the
SEC Reports, when filed, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The
financial statements of the Company included in the SEC Reports comply
in all material respects with applicable accounting requirements and
the rules and regulations of the Commission with respect thereto as in
effect at the time of filing. Such financial statements have been
prepared in accordance with United States generally accepted accounting
principles applied on a consistent basis during the periods involved
("GAAP"), except as may be otherwise specified in such financial
statements or the notes thereto and except that unaudited financial
statements may not contain all footnotes required by GAAP, and fairly
present in all material respects the financial position of the Company
and its consolidated subsidiaries as of and for the dates thereof and
the results of operations and cash flows for the periods then ended,
subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments.
d) Since the date of the latest audited financial statements
included within the SEC Reports, (i) there has been no event,
occurrence or development that has had or that could reasonably be
expected to result in a Material Adverse Effect, (ii) the Company has
not incurred any liabilities (contingent or otherwise) other than (A)
trade payables and accrued expenses incurred in the ordinary course of
business consistent with past practice and (B) liabilities not required
to be reflected in the Company's financial statements pursuant to GAAP
or disclosed in filings made with the Commission, (iii) the Company has
not altered its method of accounting, (iv) the Company has not declared
or made any dividend or distribution of cash or other property to its
stockholders or purchased, redeemed or made any agreements to purchase
or redeem any shares of its capital stock and (v) the Company has not
issued any equity securities to any officer, director or affiliate,
except pursuant to existing Company stock option plans.
22
e) The Company is in material compliance with all provisions
of the Xxxxxxxx-Xxxxx Act of 2002 which are applicable to it as of the
Closing Date. The Company and its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with GAAP and to maintain asset accountability, (iii) access to assets
is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences. The
Company has established disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and
designed such disclosure controls and procedures to ensure that
information required to be disclosed by the Company in the reports it
files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the
Commission's rules and forms. The Company's certifying officers have
evaluated the effectiveness of the Company's disclosure controls and
procedures as of the end of the period covered by the Company's most
recently filed SEC Report (such date, the "EVALUATION DATE"). The
Company presented in its most recently filed SEC Report the conclusions
of the certifying officers about the effectiveness of the disclosure
controls and procedures based on their evaluations as of the Evaluation
Date. Since the Evaluation Date, there have been no changes in the
Company's internal control over financial reporting (as such term is
defined in the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, the Company's internal control
over financial reporting.
f) The Company is not, and is not an affiliate of, and
immediately after the transactions contemplated hereby, will not be or
be an affiliate of, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
g) The Common Stock is registered pursuant to Section 12(g) of
the Exchange Act, and the Company has taken no action designed to, or
which to its knowledge is likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act nor has the
Company received any notification that the Commission is contemplating
terminating such registration.
h) The Company has not received notice of a default and is not
in default under, or with respect to, any contractual obligation, nor
does any condition exist that with notice or lapse of time or both
would constitute a default thereunder.
i) There are no brokerage commissions, finder's fees or
similar fees or commissions payable by the Company in connection with
the transactions contemplated hereby based on any agreement or
understanding with the Company or any action taken by any such Person.
23
j) The Closing Shares are duly authorized, validly issued,
fully paid and non-assessable and were issued in compliance with the
registration requirements of applicable federal and state securities
laws, and are free and clear of all liens and encumbrances.
SECTION 9. MISCELLANEOUS.
a) NOTICES. Any and all notices or other communications or
deliveries to be provided by the Holder hereunder, including, without
limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight
courier service, addressed to the Company, at the address set forth
above, facsimile number (000) 000-0000, ATTN: XXXX X. XXXXXXXXXX or
such other address or facsimile number as the Company may specify for
such purposes by notice to the Holder delivered in accordance with this
Section. Any and all notices or other communications or deliveries to
be provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile telephone
number or address of such Xxxxxx appearing on the books of the Company,
or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:30 p.m. (New York
City time), (ii) the date after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 5:30 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the second Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or
(iv) upon actual receipt by the party to whom such notice is required
to be given.
b) ABSOLUTE OBLIGATION. Except as expressly provided herein,
no provision of this Note shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of,
interest and liquidated damages (if any) on, this Note at the time,
place, and rate, and in the coin or currency, herein prescribed. This
Note is a direct debt obligation of the Company.
c) LOST OR MUTILATED NOTE. If this Note shall be mutilated,
lost, stolen or destroyed, the Company shall execute and deliver, in
exchange and substitution for and upon cancellation of a mutilated
Note, or in lieu of or in substitution for a lost, stolen or destroyed
Note, a new Note for the principal amount of this Note so mutilated,
lost, stolen or destroyed but only upon receipt of evidence of such
loss, theft or destruction of such Note, and of the ownership hereof,
and indemnity, if requested, all reasonably satisfactory to the
Company.
d) GOVERNING LAW. All questions concerning the construction,
validity, enforcement and interpretation of this Note shall be governed
by and construed and enforced in accordance with the internal laws of
24
the State of New York, without regard to the principles of conflicts of
law thereof. Each party agrees that all legal proceedings concerning
the interpretations, enforcement and defense of the transactions
contemplated by any of the Transaction Documents (whether brought
against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the
state and federal courts sitting in the City of New York, Borough of
Manhattan (the "NEW YORK COURTS"). Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the New York Courts for the
adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein (including with
respect to the enforcement of any of the Transaction Documents), and
hereby irrevocably waives, and agrees not to assert in any suit, action
or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, or such New York Courts are improper or
inconvenient venue for such proceeding. Each party hereby irrevocably
waives personal service of process and consents to process being served
in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it
under this Note and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Each party hereto hereby irrevocably
waives, to the fullest extent permitted by applicable law, any and all
right to trial by jury in any legal proceeding arising out of or
relating to this Note or the transactions contemplated hereby. If
either party shall commence an action or proceeding to enforce any
provisions of this Note, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its attorneys
fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such action or proceeding. Any
enforcement action relating to this Note may be brought by motion for
summary judgment in lieu of a complaint pursuant to Section 3213 of the
New York Civil Practice Law and Rules.
e) WAIVER. Any waiver by the Company or the Holder of a breach
of any provision of this Note shall not operate as or be construed to
be a waiver of any other breach of such provision or of any breach of
any other provision of this Note. The failure of the Company or the
Holder to insist upon strict adherence to any term of this Note on one
or more occasions shall not be considered a waiver or deprive that
party of the right thereafter to insist upon strict adherence to that
term or any other term of this Note. Any waiver must be in writing.
f) SEVERABILITY. If any provision of this Note is invalid,
illegal or unenforceable, the balance of this Note shall remain in
effect, and if any provision is inapplicable to any person or
circumstance, it shall nevertheless remain applicable to all other
persons and circumstances. If it shall be found that any interest or
other amount deemed interest due hereunder violates applicable laws
governing usury, the applicable rate of interest due hereunder shall
automatically be lowered to equal the maximum permitted rate of
interest. The Company covenants (to the extent that it may lawfully do
so) that it shall not at any time insist upon, plead, or in any manner
25
whatsoever claim or take the benefit or advantage of, any stay,
extension or usury law or other law which would prohibit or forgive the
Company from paying all or any portion of the principal of or interest
on this Note as contemplated herein, wherever enacted, now or at any
time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may
lawfully do so) hereby expressly waives all benefits or advantage of
any such law, and covenants that it will not, by resort to any such
law, hinder, delay or impeded the execution of any power herein granted
to the Holder, but will suffer and permit the execution of every such
as though no such law has been enacted.
g) NEXT BUSINESS DAY. Whenever any payment or other obligation
hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day.
h) HEADINGS. The headings contained herein are for convenience
only, do not constitute a part of this Note and shall not be deemed to
limit or affect any of the provisions hereof.
i) ASSUMPTION. Any successor to the Company or surviving
entity in a Fundamental Transaction shall (i) assume in writing all of
the obligations of the Company under this Note and the other
Transaction Documents pursuant to written agreements in form and
substance satisfactory to the Holder (such approval not to be
unreasonably withheld or delayed) prior to such Fundamental Transaction
and (ii) to issue to the Holder a new Note of such successor entity
evidenced by a written instrument substantially similar in form and
substance to this Note, including, without limitation, having a
principal amount and interest rate equal to the principal amounts and
the interest rates of the Notes held by the Holder and having similar
ranking to this Note, and satisfactory to the Holder in its sole
discretion. The provisions of this Section 8(i) shall apply similarly
and equally to successive Fundamental Transactions and shall be applied
without regard to any limitations of this Note.
*********************
26
IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed by a duly authorized officer as of the date first above indicated.
ENVIRONMENTAL SERVICE PROFESSIONALS, INC.
By: /s/ Xxxxxx Xxxxxx
-----------------------------------------
Name: Xxxxxx Xxxxxx
Title: CEO
27
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 12% Senior
Secured Convertible Note of Environmental Service Professionals, Inc., a Nevada
corporation (the "Company"), into shares of common stock, par value $0.001 per
share (the "Common Stock"), of the Company according to the conditions hereof,
as of the date written below. If shares are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith such certificates and opinions
as reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
By the delivery of this Notice of Conversion the undersigned represents
and warrants to the Company that its ownership of the Common Stock does not
exceed the amounts determined in accordance with Section 13(d) of the Exchange
Act, specified under Section 4 of said Note.
The undersigned agrees to comply with the prospectus delivery
requirements under the applicable securities laws in connection with any
transfer of the aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Note to be Converted:
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on Account of Conversion at Issue.
Number of shares of Common Stock to be issued:
Signature:
Name:
Address:
