THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES
AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR
PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH
ACT AND SUCH LAWS. THIS NOTE IS ALSO SUBJECT TO RESTRICTIONS ON TRANSFER AS SET
FORTH HEREIN.
THE PATHWAYS GROUP, INC.
SERIES A SENIOR SECURED NOTE
$5,000,000.00 Dated: July 28, 2000
FOR VALUE RECEIVED, the undersigned, The Pathways Group, Inc., a company
organized under the laws of Delaware (the "Company"), promises to pay to the
order of Upgrade International Corporation (the "Holder"), the principal
aggregate sum of up to Five Million Dollars ($5,000,000.00), on or before June
30, 2001 (the "Maturity Date") with interest from the date of each advance to
the Company at the rate of 10% per annum on such principal amount. Interest
shall be computed on the basis of a 365-day year and the actual number of days
elapsed. Interest shall be due and payable on the Maturity Date and shall accrue
until the entire principal amount is paid. All amounts due and owing hereunder
shall be payable in lawful money of the United States of America, in immediately
available funds, at the principal office of the Holder or at such other place as
the Holder may designate from time to time in writing to the Company. Any
payment on this Note coming due on a Saturday, a Sunday or a day which is a
legal holiday in the place at which a payment is to be made hereunder shall be
made on the next succeeding day which is a business day in such place, and any
such extension of the time of payment shall be included in the computation of
interest hereunder. This Note is issued pursuant and subject to and is entitled
to the benefits of a certain Financing Agreement dated as of June 30, 2000, by
and between the Company, Xxxxx X. Xxxx, XX, Xxxxxx Merchant Partners Group, LLC,
Harvest Opportunity Partners, L.P., (together, the "Original Parties") as
amended by that First Amendment to Financing Agreement dated July 13, 2000 by
and between the Original Parties, as amended by that Second Amendment to the
Financing Agreement, dated September __, 2000 by and between the Original
Parties, Holder and Upgrade Acquisition Inc. ("Sub") (the "Financing Agreement")
and a Security Agreement dated as of June 30, 2000, as amended, by and between,
among others, the Company and Holder and an Intellectual Property Security
Agreement dated as of June 30, 2000, by and between the Original Parties to be
amended to afford Holder the security benefits conferred thereon. Capitalized
words not defined herein shall have the meanings set forth in the Financing
Agreement. Except as otherwise provided in the Financing Agreement, the Notes
shall rank senior to or pari passu to all other Indebtedness of the Company
whether now outstanding or hereafter incurred.
1. General.
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Interest on this Note, computed on the basis of a 365-day year shall be
payable on the Maturity Date. The principal of this Note shall be payable in one
installment, together with accrued interest, on the Maturity Date.
This Note may be prepaid in whole or in part at any time and from time to
time at the option of the Company without payment of any penalty or premium
subject to the terms of that Conversion Agreement between the Company, Holder,
and Sub of even date herewith.
Subject to applicable law, upon and during the occurrence of an Event of
Default, this Note shall bear interest, from the date of the occurrence of such
Event of Default until such Event of Default is cured or waived, at a rate equal
to 12% per annum.
If, for any reason whatsoever, the interest paid or received on this Note
during its full term produces a rate which exceeds the maximum interest rate
permitted by law hereunder, the holder of this note shall refund to the payor,
or at the Holder's option, credit against the principal of this Note such
portion of said interest as shall be necessary to cause the interest paid on
this Note to produce a rate equal to such maximum lawful rate.
2. Covenants. The Company covenants and agrees that, until this Note
(including any accrued and unpaid interest) is paid in full:
2.1 The Company shall preserve and maintain its corporate
existence and its rights and franchises.
2.2 The Company shall comply, in all material respects, with all
applicable laws, rules, regulations and orders.
2.3 The Company shall pay promptly when due (i) all taxes,
assessments and governmental charges imposed upon it or upon its property, and
(ii) all claims (including, without limitation, claims for labor, materials,
supplies or services) which might, if unpaid, become a Lien (as hereinafter
defined) upon its property, unless, in each case, the validity or amount thereof
is being contested in good faith by appropriate proceedings and the Company has
maintained adequate reserves in accordance with generally accepted accounting
principles in the United States consistently applied with respect thereto.
2.4 The Company shall permit any representative of the Holder to
visit and inspect any property of the Company and its subsidiaries and to
examine books and records of the Company and its subsidiaries and to make copies
and take extracts therefrom, and to discuss the affairs, finances and accounts
of the Company and its subsidiaries with officers of the Company, all during
reasonable business hours, upon reasonable notice and as often as the Holder may
reasonably request, subject, in the case of any proprietary or confidential
material, to appropriate measures to ensure the confidentiality thereof
2.5 The Company shall maintain and keep, or cause to be maintained
and kept, its properties in all material respects in good repair, working order
and condition, and from time to time make or cause to be made all necessary
repairs, renewals, replacements and improvements so that the business carried on
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in connection therewith may be properly and advantageously conducted at all
times. The Company shall conduct continuously and operate actively its business
according to good business practices.
2.6 The Company shall not merge into or consolidate with any other
person, or sell, lease or otherwise dispose of all or any substantial part of
its property or assets to any other person, other than a merger of any of the
subsidiaries into the Company or any other subsidiary of the Company or a sale,
lease or other disposition of all or any substantial part of the property or
assets by any Subsidiaries to the Company or any other Subsidiary.
2.7 The Company shall not create, incur, suffer or permit to
exist, or assume or guarantee, directly or indirectly, or become or remain
liable with respect to any Indebtedness, whether direct, indirect, absolute,
contingent or otherwise, except the following: (a) Indebtedness under the
Initial Notes, the Line of Credit Notes and the Exchange Notes; (b) Indebtedness
secured by liens permitted by Section 2.8; (c) other liabilities existing on the
date of this Series A Senior Secured Note and heretofore disclosed to the Holder
in writing; (d) current accounts payable and unsecured current liabilities, not
the result of borrowing, to vendors, suppliers and persons providing services,
for expenditures for goods and services normally required by the Company in the
ordinary course of business and on ordinary trade terms; (e) the endorsement of
checks or other negotiable instruments in the ordinary course of business and
(f) other contingent obligations not to exceed $50,000 in the aggregate at any
one time outstanding.
2.8 The Company shall not create, incur, assume or suffer to
exist, any Lien on any of its property now owned or hereafter acquired to secure
any Indebtedness, other than:
(a) Liens to Holder pursuant to the Security Agreement and
Intellectual Property Security Agreement;
(b) Liens existing on the date hereof;
(c) Permitted Liens;
(d) Easements, rights-of-way, restrictions and other similar
charges or encumbrances not interfering with the ordinary conduct of the
business of the Company or any of its Subsidiaries
(e) Liens arising in connection with the financing of
acquisitions of equipment, inventory and other assets in connection with the
Company's business; provided such financings do not involve in excess of $25,000
per transaction or $250,000 in the aggregate at any one time; or
(f) Liens on properties or assets of a person existing at the
time such person becomes a Subsidiary or is combined or consolidated with or
into the Company or any Subsidiary, and not created in contemplation of such
event.
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For purposes of this Series A Senior Secured Note, "Lien" means any
mortgage, pledge, security interest, encumbrance, lien, charge or deposit
arrangement or other arrangement having the practical effect of the foregoing
and shall include the -interest of a vendor or lessor under any conditional sale
agreement, capitalized lease or other title retention agreement.
2.9 The Company shall not make any loan, advance, extension of
credit or capital contribution to, or make any Investment in, any person, or
make any commitment to make such extension of credit or Investment other than
(a) Permitted Investment Securities; (b) extensions of trade credit in the
ordinary course of business; (c) normal and reasonable advances in the ordinary
course of business to officers and employees, and (d) Investments in
Subsidiaries.
2.10 The covenants in Sections 2.7, 2.8 and 2.9 notwithstanding,
subject to Holder's and Sub's compliance with their lending commitments under
the Agreement and Plan of Reorganization between the Company, Sub and Holder of
even date herewith (the "Merger Agreement"), the Company shall not (i) create,
incur, suffer or permit to exist or assume or guarantee, directly or directly,
or become or remain liable with respect to any Indebtedness, (ii) create, incur,
assume or suffer to exist any Lien, or (iii) make any loan, advance, extension
or credit or capital contribution, that is otherwise prohibited by the terms of
the Merger Agreement for so long as such Merger Agreement remains in effect, and
has not been terminated pursuant to its terms.
2.11 The Company shall furnish to the Holder the following:
(a) as soon as available and in any event within 45 days
after the end of each of the first three quarters of each fiscal year of the
Company, an unaudited consolidated balance sheet of the Company and its
consolidated subsidiaries as at the end of each such quarter and unaudited
consolidated statements of operations and retained earnings and statement of
cash flows of the Company and its consolidated subsidiaries for such quarter and
for the period commencing at the end of the previous fiscal year and ending with
the end of such quarter, certified by a senior financial officer of the Company,
together with a certificate of such senior financial officer stating that no
Event of Default or any event which, with notice or lapse of time or both, would
constitute an Event of Default, has occurred and is continuing or, if an Event
of Default or such event has occurred and is continuing, a statement as to the
nature thereof and the actions taken or planned to be taken by the Company with
respect thereto;
(b) as soon as available and in any event within 120 days
after the end of each fiscal year of the Company, a consolidated balance sheet
of the Company and its consolidated subsidiaries as at the end of such year and
consolidated statements of operations and retained earnings and statement of
cash flows of the Company and its consolidated subsidiaries for the period
commencing at the end of the previous fiscal year and ending with the end of
such year, certified by the Company's current auditors or other independent
public accountants, together with a certificate of such accounting firm stating
that in the course of the regular audit of the business of the Company and its
consolidated Subsidiaries, which audit was conducted by such accounting firm in
accordance with generally accepted auditing standards in the United States, such
accounting firm has obtained no knowledge that an Event of Default or an event
which, with notice or lapse of time or both, would constitute an Event of
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Default, or if an Event of Default or such an event has occurred and is
continuing, a statement as to the nature thereof, and
(c) promptly and in any event within two business days after
the Company becomes aware of the existence of any Event of Default, any event
which, with the giving of notice or the lapse of time or both would constitute
an event of default, or any development or other information (other than
generally applicable economic or market factors) which is likely to materially
and adversely affect the properties, business, prospects, profits or financial
condition of the Company or the company's ability to perform its obligations
under this Note or the Transaction Documents, telephonic notice specifying the
nature of such event of default, event, development or information, including
the anticipated effect thereof, which notice shall be promptly confirmed in
writing within five days.
3. Defaults and Remedies.
3.1 Events of Default. An "Event of Default" shall occur if:
(a) the Company shall default in the payment of the principal
of or interest on this Note, when and as the same shall become due and payable,
whether at maturity or by acceleration or otherwise; or
(b) the Company shall default in the due observance or
performance of any other covenant, condition or agreement on the part of the
Company to be observed or performed pursuant to the terms of any Transaction
Document, and such default shall continue for 30 days after the earlier of (i)
the date the Company has knowledge of such default or (ii) the date written
notice thereof, specifying such default and, if such default is capable of being
remedied, requesting that the same be remedied, shall have been given to the
Company by the Holder; provided, that, in either event, such default is not
cured within 45 days of the date upon which the default occurred; or
(c) any representation, warranty, certification or statement
made by or on behalf of the Company in any finance documents, or in any
certificate or other document delivered pursuant hereto or thereto, shall have
been incorrect in any material respect when made unless the same is capable of
being cured or corrected and is promptly cured or corrected as soon as the
Company has knowledge thereof and prior to being cured or corrected does not
have a material adverse effect on the Company; or
(d) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed in a court of competent jurisdiction seeking
(A) relief in respect of the Company or any of its subsidiaries, or of a
substantial part of its property or assets, under Title 11 of the United States
Code, as now constituted or hereafter amended, or any other bankruptcy,
insolvency, receivership or similar law, (B) the appointment of a receiver,
trustee, custodian, sequestrator, conservator or similar official for the
Company or any of its subsidiaries, or for a substantial part of its property or
assets, or (C) the winding up or liquidation of the Company or any of its
subsidiaries; and such proceeding or petition shall continue undismissed for 60
days, or an order or decree approving or ordering any of the foregoing shall be
entered; or
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(e) the Company or any of its subsidiaries shall (A)
voluntarily commence any proceeding or file any petition seeking relief under
Title 11 of the United States Code, as now constituted or hereafter amended, or
any other bankruptcy, insolvency, receivership or similar law, (B) consent to
the institution of, or fail to contest in a timely and appropriate manner, any
proceeding or the filing of any petition described in paragraph (d) of this
Section 3.1, (C) apply for or consent to the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for the Company or any
subsidiary, or for a substantial part of its property or assets, (D) file an
answer admitting the material allegations of a petition filed against it in any
such proceeding, (E) make a general assignment for the benefit of creditors, (F)
become unable, admit in writing its inability or fail generally to pay its debts
as they become due or (G) take any action for the purpose of effecting any of
the foregoing; or
(f) one or more judgments for the payment of money in an
aggregate amount in excess of $250,000 (not including any amounts covered by
insurance) shall be rendered against the Company, any Subsidiary or both and the
same shall remain undischarged for a period of 45 days during which execution
shall not be effectively stayed, or any action shall be legally taken by a
judgment creditor to levy upon assets or properties of the Company or any of its
subsidiaries to enforce any such judgment; or
(g) the occurrence of any event or the existence of any
condition that results in the acceleration of the maturity of any Indebtedness
of the Company for borrowed money, the principal of which Indebtedness equals or
exceeds $250,000 or, by reason of the expiration of any applicable grace period
or otherwise, then enables the holder of such Indebtedness or any person acting
on such holder's behalf to accelerate the maturity thereof.
3.2 Acceleration. If an Event of Default occurs under clauses (d)
or (e) of Section 3.1 hereof, then the outstanding principal of and all accrued
interest on this Note shall automatically become immediately due and payable,
without presentment, demand, protest or notice of any kind, all of which are
expressly waived. If any other Event of Default occurs and is continuing, the
Holder by written notice to the Company may declare the principal of and accrued
interest on the Note to be due and payable immediately. Upon such declaration,
such principal and interest shall become immediately due and payable. The Holder
may rescind an acceleration and its consequences if all existing Events of
Default have been cured or waived, except nonpayment of principal or interest
that has become due solely because of the acceleration, and if the rescission
would not conflict with any judgment or decree.
4. Suits for Enforcement.
4.1 Upon the occurrence of any one or more Events of Default, the
Holder may proceed to protect and enforce its rights by suit in equity, action
at law or by other appropriate proceeding, whether for the specific performance
of any covenant or agreement contained in this Note or in aid of the exercise of
any power granted in this Note, or may proceed to enforce the payment of this
Note, or to enforce any other legal or equitable right of the Holder.
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4.2 The Holder may direct the time, method and place of conducting
any proceeding for any remedy available to itself.
4.3 In case of any default under this Note, the Company will pay
to the Holder such amount as shall be sufficient to cover the costs and expenses
of such Holder due to such default, including, without limitation, costs of
collection and reasonable fees, disbursements and other charges of counsel.
5. Remedies Cumulative. No remedy herein conferred upon the Holder is
intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise. To the extent permitted by applicable law, the Company and the Holder
severally waive presentment for payment, demand, protest and notice of dishonor.
6. Holder: Transfer.
6.1 The term "Holder" as used herein shall also include any
Permitted Transferee (as hereinafter defined) of this Note whose name has been
recorded by the Company in the register referred to in Section 6.2 hereof. The
Holder and each Permitted Transferee of this Note acknowledges that this Note
has not been registered under the Securities Act, and may be transferred only
upon receipt by the Company of an opinion of counsel, which opinion shall be
reasonably satisfactory in form and substance to the Company, stating that this
Note may be transferred without registration under the Securities Act in
reliance on an exemption therefrom. As used herein, a "Permitted Transferee" of
a Holder shall mean (A) any person, that directly or indirectly controls, is
controlled by or is under common control with the Holder, (B) with respect to a
Holder that is a corporation, the stockholders of such corporation, (C) with
respect to a Holder that is a limited partnership, the general or limited
partners of such partnership and (D) with respect to a Holder that is a limited
liability company, the members thereof.
6.2 The Company shall maintain a register in its office for the
purpose of registering the Note and any transfer thereof, which register shall
reflect and identify, at all times, the ownership of any interest in the Note.
Upon the issuance of this Note, the Company shall record the name of the initial
purchaser of this Note in such register as the first Holder. Thereafter, the
Company shall duly record the name of a transferee on such register promptly
after receipt of notice of a transfer and of the opinion referred to in Section
6.2 hereof.
7. Definitions.
As used herein, unless the context otherwise requires, the following terms
have the following respective meanings:
7.1 Business Day: any day other than a Saturday, Sunday or a day
on which national banks are authorized by law to close in the City of San
Francisco, State of California.
7.2 Indebtedness: (a) all indebtedness of the Company for borrowed
money; (b) all obligations relative to the face amount of all letters of credit,
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whether or not drawn, and banker's acceptances issued for the account of the
Company; (c) the present value of all obligations issued, undertaken or assumed
to pay the deferred purchase price of property or services (other than trade
payables entered into in the ordinary course of business on ordinary terms); (d)
all contingent liabilities of the Company in respect of any of the foregoing;
(e) all capital stock and warrants or other options therefor which have
mandatory put or redemption provisions which may be exercised prior to the
Maturity Date.
7.3 Investment: the purchase or acquisition of any securities or
indebtedness of, or the making of any loan, advance, transfer of property as a
capital contribution to, or the incurring of any liability, contingently or
otherwise, in respect of the indebtedness of, any person.
7.4 Permitted Investment Securities: (a) readily marketable
securities issued or fully guaranteed by the United States of America; (b)
commercial paper rated "Prime 1" by Xxxxx'x Investors Service, Inc. or A-1 by
Standard and Poor's with maturities of not more than 180 days; (c) certificates
of deposit or repurchase certificates issued by financial institutions
reasonably acceptable to the Holder, all of the foregoing not having a maturity
of more than one year from the date of issuance thereof, and (d) securities
received in settlement of liabilities created in the ordinary course of
business.
7.5 Subsidiary: any corporation or association (a) more than 50%
(by number of votes) owned by the Company or one or more of its Subsidiaries, or
any other business entity in which the Company or one or more of its
Subsidiaries owns more than a 50% interest in either the capital or profits of
such business entity, or (b) whose net earnings or portions thereof are
consolidated with the net earnings of the Company and are recorded in the books
of the Company for financial reporting purposes in accordance with generally
accepted accounting principles.
8. Notices. All notices, demands and other communications provided for
or permitted hereunder shall be made in writing and shall be by telecopier,
facsimile, courier service or personal delivery:
(a) if to the Company:
The Pathways Group, Inc.
0000 Xxxxx Xxxxxx Xxxxxx
Xxxxx Xxxx, Xxxxxxxxxx 00000
Attn: Xxxxx X. Xxxx, XX
Facsimile: (000) 000-0000
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with a copy to:
Salans Xxxxxxxxx Xxxxxxxxx Xxxxxxx & Xxxxxx
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attn: Xxxxxx X. Xxxxxx, Esq.
Facsimile: (000) 000-0000
(b) if to the Holder:
Upgrade International Corporation
0000 Xxxxxx Xxxxxx, Xxxxx 000
Xxxxxxx, XX 00000
Attn: President
Xxxxxxxxx: (000) 000-0000
with a copy to:
Xxxxx Xxxxxx Xxxxxxx, P.L.L.C.
0000 Xxxxx Xxxxxx, Xxxxx 0000
Xxxxxxx, XX 00000-1681
Attn: Xxxx Xxxxxx, Esq.
Facsimile: (000) 000-0000
All such notices and-communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; when delivered by courier, if
delivered by commercial overnight courier service; and when receipt is
acknowledged, if telecopied or sent by facsimile. Either party may change the
address to which notices, demands and other communications hereunder are to be
delivered by giving the other party notice in the manner herein set forth.
9. Amendment: Waivers.
9.1 No failure or delay on the part of the Company or the Holder
in exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Company or
the Holder at law, in equity or otherwise.
9.2 Any amendment, supplement or modification of or to any
provision of this Note, any waiver of any provision of this Note and any consent
to any departure by the Company from the terms of any provision of this Note,
shall be effective (i) only if it is made or given in writing and signed by the
Company and the Holder and (ii) only in the specific instance and for the
specific purpose for which made or given.
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10. Payments. If the date on which any such payment is required to be
made pursuant to the provisions of this Note occurs on a Saturday, Sunday or
legal holiday observed in the State of California, such payments shall be due
and payable on the immediately succeeding date which is not a Saturday, Sunday
or legal holiday so observed.
11. Holder Representations. By its acceptance hereof, the Holder
acknowledges that this Note is being registered under the Securities Act on the
ground that the issuance of the Note is exempt from registration under Section
4(2) of the Securities Act as not involving any public offering and that the
Company's reliance on such exemption is predicated in part on the
representations hereby made to the Company by the Holder that it is acquiring
this Note and the Shares into which this Note may be converted for investment
for its own account, with no present intention of dividing its participation
with others or reselling or otherwise distributing the same, subject,
nevertheless, to any requirement of law that the disposition of its property
shall at all times be within its control.
12. Covenants Bind Successors and Assigns. All the covenants,
stipulations, promises and agreements in this Note contained by or on behalf of
the Company shall bind its successors and assigns, whether so expressed or not.
13. Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California without regard to the
principles of conflicts of law of such State.
14. Consent to Jurisdiction. The Company hereby irrevocably consents to
the nonexclusive jurisdiction of the courts of the State of California and of
any federal court located in such State in connection with any action or
proceeding arising out of or relating to this Note.
15. Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provisions hereof shall not be in any way impaired,
unless the provisions held invalid, illegal or unenforceable shall substantially
impair the benefits of the remaining provisions hereof.
16. Variation in Pronouns. All pronouns and any variations thereof
refer to the masculine, feminine or neuter, singular or plural, as the context
may require.
17. Headings. The headings in this Note are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
THE PATHWAYS GROUP, INC.
By: /s/
----------------------------
Xxxxx X. Xxxx XX
Title: President
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