EXHIBIT 2
to Schedule 13D/A
SENIOR NOTE AND WARRANT CONVERSION AGREEMENT
This SENIOR NOTE AND WARRANT CONVERSION AGREEMENT (this "AGREEMENT"),
dated as of February 28, 2005, is entered into by and among CSQ Holding Company,
a Delaware corporation ("NEWCO"), Cardiac Science, Inc., a Delaware corporation
("CSI"), and those purchasers whose names are listed on the signature pages
hereto (each, a "PURCHASER" and collectively, the "PURCHASERS").
RECITALS
WHEREAS, pursuant to that certain Senior Note and Warrant Purchase
Agreement, dated as of May 29, 2002, as amended July 1, 2003, as further amended
March 15, 2004, as amended again January 28, 2005 (the "PURCHASE AGREEMENT"), by
and among CSI and the Purchasers, the Purchasers purchased from CSI senior notes
in the aggregate principal amount of fifty million dollars ($50,000,000) (the
"SENIOR NOTES") and warrants to purchase an aggregate of 13,438,599 shares of
CSI common stock (the "WARRANTS");
WHEREAS, in connection with the issuance of the Senior Notes, (i) CSI,
its subsidiaries and the Purchasers entered into that certain Security
Agreement, dated as of May 30, 2002 (the "SECURITY AGREEMENT"), (ii) CSI, the
Purchasers, and other signatories thereto entered into that certain Registration
Rights Agreement, dated as of May 30, 2002, as amended and restated on July 20,
2004, as further amended and restated in accordance with Section 8 below (the
"REGISTRATION RIGHTS AGREEMENT"), and (iii) CSI's subsidiaries each entered into
those certain Guaranties, dated as of May 30, 2002, in favor of the Purchasers
(each a "GUARANTY," collectively, the "GUARANTIES," and referred to collectively
with the Security Agreement as the "ANCILLARY AGREEMENTS");
WHEREAS, each Purchaser currently owns all right, title and interest to
the Senior Note in the principal amount set forth by such Purchaser's name on
EXHIBIT A and currently owns all right, title and interest to the Warrants set
forth by such Purchaser's name on EXHIBIT B;
WHEREAS, CSI, Newco, Xxxxxxx Cardiology Systems, Inc., a Delaware
corporation ("XXXXXXX"), Rhythm Acquisition Corporation, a Delaware corporation
and wholly-owned subsidiary of Newco ("XXXXXXX MERGER SUB"), and Heart
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
Newco ("CSI MERGER SUB"), have entered into that certain Agreement and Plan of
Merger, dated of even date herewith (the "MERGER Agreement"), pursuant to which,
among other things, Xxxxxxx Merger Sub will merge with and into Xxxxxxx, and
Xxxxxxx will thereafter merge with and into Newco, with Newco being the
surviving corporation, and CSI Merger Sub will merge with and into CSI, with CSI
surviving as a wholly-owned subsidiary of Newco (collectively, the "Mergers");
and
WHEREAS, the Purchasers, CSI and Newco desire to cancel the Senior
Notes and Warrants in connection with the Merger in exchange for certain
consideration as set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth and for good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereby agree as follows:
1. DEFINITIONS. Capitalized terms used herein but not defined
herein shall have the meanings ascribed to such terms in the Merger Agreement, a
true and complete copy of which has been delivered to the Purchasers on the date
hereof.
"ACCRETED VALUE" shall mean the adjusted issue price (within
the meaning of Section 1272 of the Internal Revenue Code, as amended in 1986)
plus any accrued unpaid interest not included therein.
2. CANCELLATION OF SENIOR NOTES AND WARRANTS. The Purchasers
hereby agree and acknowledge that concurrently with the Effective Time (the
"CONVERSION TIME"), each Senior Note and Warrant held by the Purchasers shall be
automatically cancelled and terminated and shall be converted into the right to
receive the Senior Note and Warrant Consideration (as defined in Section 3
below) payable with respect to such Senior Notes and Warrants (the "NOTE AND
WARRANT CONVERSION").
3. SENIOR NOTE AND WARRANT CONSIDERATION. The consideration to
which the Purchasers shall be entitled as a result of the cancellation and
termination of the Senior Notes and Warrants, and the releases and waivers set
forth in this Agreement, shall consist of the following: (i) an aggregate of
twenty million dollars ($20,000,000), payable by Newco in cash immediately
following the Conversion Time, in the amounts set forth by each Purchaser's name
on EXHIBIT C hereto (the "CASH PAYMENT"), in exchange for each Purchaser's pro
rata portion of Senior Notes in an aggregate amount equal to twenty million
dollars ($20,000,000) of the Accreted Value of the Senior Notes and (ii) such
number of shares of Newco common stock (rounded down to the nearest whole share)
as is determined by multiplying (A) the quotient obtained by dividing
Fifty-Three Million Seven Hundred Fifty Thousand Dollars ($53,750,000) by the
closing sales price per share for CSI common stock as reported on the Nasdaq
National Market on the trading date immediately preceding the date of this
Agreement, which is $1.89, by (B) the Cardiac Exchange Ratio, as set forth by
each Purchaser's name on EXHIBIT D hereto (the "SHARES" and, collectively with
the "CASH PAYMENT," the "SENIOR NOTE AND WARRANT CONSIDERATION"). A portion of
the Shares received by the Purchasers under (ii) above in an amount equal to the
Accreted Value of the Senior Notes minus cash paid under (i) above shall be
received in exchange for the Senior Notes and the balance of such Shares shall
be received in exchange for the Warrants. The parties hereto hereby agree that
for all purposes the Senior Note and Warrant Consideration (including the entire
Cash Payment) will be allocated to the Senior Notes up to the Accreted Value of
the Senior Notes, with any remaining consideration allocated to the Warrants.
The Shares shall be issued to the Purchasers concurrently with shares of Newco
common stock to be issued at the Conversion Time to the former stockholders of
CSI.
4. CLOSING; CLOSING CONDITIONS. The closing of the Note and
Warrant Conversion (the "CLOSING") shall occur concurrently with, and subject to
the occurrence of, the Effective Time; PROVIDED, that unless otherwise agreed to
in writing by the Purchasers holding a majority of the outstanding principal
amount of Senior Notes, the Closing shall not occur prior to July 31, 2005. The
Closing shall be further conditioned upon the following:
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(a) the applicable waiting period(s) under the HSR Act with
respect to the Note and Warrant Conversion, if applicable, shall have expired or
been terminated; and
(b) the Merger Agreement shall not have been amended,
modified or waived in any manner that adversely affects the rights and
obligations of the Purchasers without the consent of the Purchasers holding a
majority of the outstanding principal amount of the Senior Notes.
5. RELEASES; WAIVERS; ACKNOWLEDGMENTS.
(a) The Purchasers, on behalf of themselves, and on behalf
of all predecessors, successors, assigns, representatives or agents of the
Purchasers, to the fullest extent permitted by law, hereby acknowledge that the
Senior Note and Warrant Consideration is in full satisfaction of any and all
rights the Purchasers may have with respect to the Senior Notes and Warrants,
including the right to demand or receive payment for all unpaid principal and
any accrued and unpaid interest under the Senior Notes (other than the Senior
Note and Warrant Consideration) and the right to purchase shares of CSI common
stock under the Warrants and, solely in their respective capacities as holders
of the Senior Notes or holders of the Warrants, effective solely upon full
receipt by the Purchasers of the Senior Note and Warrant Consideration, hereby
release CSI, Newco and their respective successors and assigns (collectively,
the "PURCHASER RELEASEES"), from any and all obligations they would otherwise
have with respect to the Senior Notes and Warrants (other than with respect to
any obligations arising under this Agreement or the Registration Rights
Agreement) (the "PURCHASER RELEASED Claims"). The Purchasers acknowledge that
they have been advised by legal counsel and have read and understand and waive
the protections of Section 1542 of the California Civil Code, which provides as
follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
(b) Effective solely upon delivery of the original Senior
Notes and Warrants to CSI for cancellation and termination against payment of
the Senior Note and Warrant Consideration, Newco and CSI, on behalf of
themselves, and on behalf of all predecessors, successors, assigns,
representatives or agents, to the fullest extent permitted by law, hereby
release each of the Purchasers and their respective successors and assigns
(collectively, the "COMPANY RELEASEES"), from any and all obligations they would
otherwise have relating to their investment in CSI (other than with respect to
any obligations arising under this Agreement or the Registration Rights
Agreement) (the "COMPANY RELEASED CLAIMS").
(c) Each of the parties hereto acknowledges that it may
hereafter discover facts in addition to, or different from, those which it now
knows or believes to be true with respect to the subject matter of this
Agreement, the Purchaser Released Claims and the Company Released Claims, as
applicable, but that notwithstanding the foregoing, it is its intention that
this release, upon becoming effective, operate to fully, finally, completely and
forever settle and release each Purchaser Releasee and Company Releasee, as
applicable, from each, every and all of the Purchaser Released Claims and the
Company Released Claims, as applicable, and that in furtherance of such
intention, the releases herein given shall be and remain in effect as full and
complete releases, notwithstanding the discovery or existence of any such
additional or different facts.
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(d) The Purchasers warrant and represent to each other that
as to any Purchaser Released Claim, the Purchaser releasing same is the sole and
absolute owner thereof, free and clear of all other rights and interests therein
and has the right, ability and sole power to release such Purchaser Released
Claims.
(e) The Purchasers agree to hold harmless and indemnify the
Purchaser Releasees from any liability or claim asserted by a Purchaser or any
of their Affiliates against a Purchaser Releasee which is based on a claim which
the Purchasers purported to release hereunder. Each of CSI and Newco agrees to
hold harmless and indemnify the Company Releasees from any liability or claim
asserted by CSI or Newco or any of their Affiliates against a Company Releasee
which is based on a claim which the CSI and Newco purported to release
hereunder.
(f) Each Purchaser hereby acknowledges, agrees and gives its
consent that there shall be no price-based anti-dilution adjustments as a result
of the transactions contemplated by this Agreement or the Merger Agreement to
any warrants held by it.
6. RIGHT TO DESIGNATE DIRECTOR. After the Conversion Time, so long
as the Purchasers continue to beneficially own at least 10% of Newco's
outstanding capital stock, calculated in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, the Purchasers shall have the
right, but not the obligation, to designate one director (the "PURCHASER
DESIGNEE") for election to Newco's Board of Directors and Newco shall cause such
Purchaser Designee to be nominated for election at any meeting of stockholders
at which directors in the class of which such Designee is a member are being
voted upon.
7. TERMINATION OF TRANSACTION DOCUMENTS. The Purchasers hereby
agree and acknowledge that by virtue of and conditioned upon the consummation of
the Mergers (and payment of the Senior Note and Warrant Consideration), as of
the Effective Time, the Purchase Agreement and the Ancillary Agreements shall be
automatically terminated and shall be of no further force or effect, and the
Purchasers authorize CSI, Newco or any of its respective representatives to file
(at the expense of CSI or Newco) any documents necessary to effect such
termination.
8. AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT.
Concurrently with the execution of this Agreement, the Purchasers and CSI shall
enter into a Second Amended and Restated Registration Rights Agreement among CSI
and the investors party thereto, in the form attached hereto as EXHIBIT E. The
Second Amended and Restated Registration Rights Agreement shall be effective
immediately prior to the Effective Time. In accordance with Section 7.2 of the
Second Amended and Restated Rights Agreement, upon the Effective Time, Newco
hereby agrees to assume the rights and obligations of CSI thereunder.
9. DELIVERY OF SENIOR NOTES AND WARRANTS. As of the Conversion
Time, the Purchasers shall deliver the original Senior Notes and Warrants to
Newco for cancellation and termination, together with such instruments as may be
reasonably requested by CSI or Newco to terminate the Purchasers' security
interest under the Security Agreement, against payment of the Senior Note and
Warrant Consideration.
10. REPRESENTATIONS AND WARRANTIES; COVENANTS.
(a) Each Purchaser, severally and not jointly, hereby
represents and warrants to CSI and Newco that (i) it is the true and lawful
owner of each Senior Note set forth on EXHIBIT A and each Warrant set forth on
EXHIBIT B, and (ii) each Senior Note set forth on EXHIBIT A and each
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Warrant set forth on EXHIBIT B is free and clear of all liens, restrictions,
charges, adverse claims and encumbrances whatsoever (other than under state and
federal securities laws). Additionally, subject to expiration of the applicable
waiting period(s) under the HSR Act, if any, each Purchaser, severally and not
jointly, hereby makes the representations and warranties with respect to the
Shares and this Agreement as previously made with respect to the Senior Notes
and Warrants and the Purchase Agreement, respectively, in Section 3 of the
Purchase Agreement.
(b) CSI and Newco, severally and not jointly, hereby
represents and warrants to the Purchasers that (i) such Person is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, (ii) such Person has the right, power and
authority to enter into, execute, deliver and perform its obligations under this
Agreement and its directors, members, managers, officers or agents executing and
delivering this Agreement are duly authorized to do so, (iii) this Agreement has
been duly and validly executed and delivered and constitutes the legal, valid
and binding obligation of such Person, enforceable in accordance with its terms
except as enforceability may be limited by bankruptcy, insolvency, fraudulent
conveyance or similar laws affecting creditors' rights generally and general
principles of equity (regardless of whether the application of such principles
is considered in a proceeding in equity or at law), (iv) the execution, delivery
and performance by such Person of this Agreement will not violate the
organizational documents of such Person, (v) the execution, delivery and
performance by such Person of this Agreement has been duly authorized by all
requisite organizational action on the part of such Person and do not and will
not violate, contravene or constitute a default under any law or any order of
any court, governmental authority or arbitrator, in each case where such
violation, contravention or default, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect, and (vi) no
authorization, approval or consent of, and no filing or registration with, any
court, governmental authority or third Person is or will be necessary for the
execution, delivery or performance by such Person of this Agreement or the
validity or enforceability thereof, except for such approvals which will have
been obtained prior to the Closing or will not have been required to be obtained
prior to the Closing.
(c) To the extent applicable, each party hereto agrees to
make an appropriate filing of a Notification and Report Form pursuant to the HSR
Act with respect to the Note and Warrant Conversion as promptly as practicable
following the determination that such a filing is applicable and to supply as
promptly as practicable any additional information and documentary material that
may be requested pursuant to the HSR Act and to take all other actions necessary
to cause the expiration or termination of the applicable waiting periods under
the HSR Act as soon as practicable.
11. FURTHER ASSURANCES. Each party hereto will, upon request of
another party hereto, execute and deliver any additional documents reasonably
requested by such requesting party as may be necessary or desirable to
consummate the transactions contemplated hereby.
12. MISCELLANEOUS. No provision of this Agreement may be amended,
modified, waived or discharged unless such amendment, waiver, modification or
discharge is agreed to in writing signed by Newco, CSI and the Purchasers
holding a majority of the outstanding principal amount of the Senior Notes. The
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. This
Agreement, the Merger Agreement and the Registration Rights Agreement constitute
the entire agreements with respect to the subject matter hereof and supercede
all prior agreements and undertakings, both written and oral, among the parties,
or of any of them, with respect to the subject matter hereof, and, except as
otherwise expressly provided herein, it is not intended to confer upon any other
person any rights
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or remedies hereunder. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts
executed and to be performed in the state. This Agreement may be executed in one
or more counterparts (including by facsimile), and by the different parties
hereto in separate counterparts, each of which when executed shall be deemed to
be an original, but all of which taken together shall constitute one and the
same agreement.
13. TERMINATION. Each party's obligations under this Agreement are
subject to, and contingent upon, consummation of the Mergers. In the event that
the Merger Agreement is terminated, the parties hereto shall have no further
obligations with respect to this Agreement. Either party may terminate this
Agreement if the Effective Time shall not have taken place by December 31, 2005,
in which case the parties hereto shall have no further obligations with respect
to this Agreement.
14. FEES AND EXPENSES. Each party hereto shall bear the cost of its
own fees and expenses incurred in connection with the transactions contemplated
by this Agreement and the Merger Agreement, including, but not limited to, its
legal fees and disbursements; PROVIDED, HOWEVER, that CSI (i) shall reimburse
the Purchasers for any filing fees under the HSR Act and (ii) shall reimburse
the Purchasers for any filing fees incurred in connection with Sections 7 and 9
of this Agreement and up to an aggregate of $5,000 in legal fees related
thereto.
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IN WITNESS WHEREOF, the undersigned have executed this Senior Note and
Warrant Conversion Agreement as of the date first written above.
NEWCO
CSQ HOLDING COMPANY
By: /s/ Xxxx X. Xxxxxx
---------------------------
Its: Chief Executive Officer
---------------------------
CSI
CARDIAC SCIENCE, INC.
By: /s/ Xxxxxxx X. Xxxxx
---------------------------
Its: CEO
---------------------------
PURCHASERS
PERSEUS ACQUISITION/RECAPITALIZATION
FUND, L.L.C.
By: /s/ Xxx X. Xxxxxx III
---------------------------
Its: Managing Director
---------------------------
PERSEUS MARKET OPPORTUNITY FUND, L.P.
By: /s/ Xxx X. Xxxxxx III
---------------------------
Its: Managing Director
---------------------------
CARDIAC SCIENCE CO-INVESTMENT, L.P.
By: /s/ Xxx X. Xxxxxx III
---------------------------
Its: Managing Director
---------------------------
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EXHIBIT A
SENIOR NOTES
-----------------------------------------------------------------------------------------------------------
NAME NOTE NO. PRINCIPAL AMOUNT
-----------------------------------------------------------------------------------------------------------
Perseus Acquisition/Recapitalization Fund, L.L.C. N-1 $21,788,285
-----------------------------------------------------------------------------------------------------------
Perseus Market Opportunity Fund, L.P. N-2 20,279,237
-----------------------------------------------------------------------------------------------------------
Cardiac Science Co-Investment, L.P. N-3 7,932,478
-----------------------------------------------------------------------------------------------------------
TOTAL: $50,000,000
-----------------------------------------------------------------------------------------------------------
EXHIBIT B
WARRANTS
-------------------------------------------------------------------------------------------------------
NAME WARRANT NO. SHARES
-------------------------------------------------------------------------------------------------------
Perseus Acquisition/Recapitalization Fund, L.L.C. W-1 4,357,657
-------------------------------------------------------------------------------------------------------
Perseus Market Opportunity Fund, L.P. W-2 4,055,847
-------------------------------------------------------------------------------------------------------
Cardiac Science Co-Investment, L.P. W-3 1,586,496
-------------------------------------------------------------------------------------------------------
Perseus Acquisition/Recapitalization Fund, L.L.C. W-4 1,318,911
-------------------------------------------------------------------------------------------------------
Perseus Market Opportunity Fund, L.P. W-5 1,227,564
-------------------------------------------------------------------------------------------------------
Cardiac Science Co-Investment, L.P. W-6 480,177
-------------------------------------------------------------------------------------------------------
Perseus Acquisition/Recapitalization Fund, L.L.C. W-7 179,526
-------------------------------------------------------------------------------------------------------
Perseus Market Opportunity Fund, L.P. W-8 167,086
-------------------------------------------------------------------------------------------------------
Cardiac Science Co-Investment, L.P. W-9 65,335
-------------------------------------------------------------------------------------------------------
TOTAL: 13,438,599
-------------------------------------------------------------------------------------------------------
EXHIBIT C
CASH PAYMENT AMOUNT
----------------------------------------------------------------------------------------------
NAME CASH PAYMENT AMOUNT
----------------------------------------------------------------------------------------------
Perseus Acquisition/Recapitalization Fund, L.L.C. $ 8,715,314
----------------------------------------------------------------------------------------------
Perseus Market Opportunity Fund, L.P. 8,111,695
----------------------------------------------------------------------------------------------
Cardiac Science Co-Investment, L.P. 3,172,991
----------------------------------------------------------------------------------------------
TOTAL: $20,000,000
----------------------------------------------------------------------------------------------
EXHIBIT D
NUMBER OF SHARES
----------------------------------------------------------------------------------------------
NAME NUMBER OF SHARES
----------------------------------------------------------------------------------------------
Perseus Acquisition/Recapitalization Fund, L.L.C. 1,239,281
----------------------------------------------------------------------------------------------
Perseus Market Opportunity Fund, L.P. 1,153,448
----------------------------------------------------------------------------------------------
Cardiac Science Co-Investment, L.P. 451,186
----------------------------------------------------------------------------------------------
TOTAL: 2,843,915
----------------------------------------------------------------------------------------------
EXHIBIT E
SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
