AGREEMENT
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THIS AGREEMENT ("Agreement") is made and entered into as of the 25th day of
June, 1998, by and between, Terrace Holdings, Inc., a Delaware corporation
(hereinafter referred to as the "Company"), and those investors listed on
Schedule A (hereafter referred to as "Purchasers").
RECITALS:
WHEREAS, the Company is in the food and produce processing and distribution
business and has negotiated an acquisition agreement with Banner Beef and
Seafood ("Banner") and requires interim financing to consummate such acquisition
and for working capital purposes;
WHEREAS, Purchasers desire to provide such interim financing by their
purchase, and the issuance by the Company of Convertible Subordinated Notes (in
the form attached hereto as Exhibit B) and warrants (in the form attached hereto
as Exhibit C) to purchase Common Stock of the Company.
NOW THEREFORE, in consideration of the terms and conditions hereinafter set
forth, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS
1.1 "Market Price". As used in this Agreement, the term "Market Price"
shall mean, the closing price of the Company's Common Stock as reported by the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
on any given date.
1.2 "Paid in Kind" ("PIK"). As used in this Agreement, "Paid in Kind"
shall mean, payment in the form of the issuance of the Company's 8% Cumulative
Preferred Stock.
1.3 "Change of Control" shall mean (a) the occurrence of any event
(whether in one or more transactions) which results in a transfer of control of
the Company or any of its subsidiaries to a person who is not an Original Owner
or (b) any merger or consolidation of or with the Company or any of its
subsidiaries or sale of all or substantially all of the property or assets of
the Company or any of its subsidiaries. For purposes of this definition,
"control of the Company or any of its subsidiaries" shall mean the power, direct
or indirect (x) to vote 50% or more of the securities having ordinary voting
power for the election of directors of the Company or any of its subsidiaries or
(y) to direct or cause the direction of the management and policies of the
Company or any of its subsidiaries.
1.4 "Change of Ownership" shall mean (a) 50% or more of the common stock
of the Company or any of its subsidiaries is no longer owned or controlled by
(including for the purposes of the calculation of percentage ownership, any
shares of common stock into which any capital stock of the Company or any of its
subsidiaries held by any of the Original Owners is convertible or for which any
such shares of the capital stock of the Company or any of its subsidiaries or of
any other person may be exchanged and any shares of common stock issuable to
such Original Owners upon
exercise of any warrants, options or similar rights which may at the time of
calculation be held by such Original Owners) a person who is an Original Owner
or (b) any merger, consolidation or sale of substantially all of the property or
assets of the Company or any of its subsidiaries; provided, that the sale by the
Company of any shares of the capital stock of A-1-A Produce and Provisions,
Inc., Fresh Inc., and Banner Beef and Seafood, Inc. shall be deemed a sale of
substantially all of the Company's assets.
1.5 "Original Owners" shall mean Xxxxxx Xxxxxxx and Xxxxxxxx X. Xxxxx.
1.6 "Principal Subsidiaries" shall mean A-One-A Produce & Provisions,
Inc., Fresh, Inc., and Banner Beef and Seafood Co., Inc. (when acquired).
2. LOAN
2.1 Payment for and Issuance of Securities. Upon payment at Closing as
set forth herein, by the Purchasers to the Company, the Company shall issue to
Purchasers, its Convertible Subordinated Notes ("Notes") in the aggregate
principal amount of $2,625,000 ("Amount") in the amounts and names as set forth
on Schedule A hereto. Payment therefor shall be made by each Purchaser at
Closing in the amount of 95% of the purchased Amount by each Purchaser as set
forth on Schedule A hereto for an aggregate purchase price equal to $2,500,000.
The Company shall also issue warrants to purchase an aggregate of 400,000 shares
of Common Stock of the Company ("Warrants"). Schedule A lists the amounts and
numbers of each warrant to be sold and issued to each Purchaser.
2.2 Interest. The Notes will bear interest at 12% per annum, payable
quarterly in arrears. To the extent that more than 50% of the Amount of the
Notes is outstanding on the date that is four months after their issuance, the
interest rate on such outstanding Notes shall be increased to 14% per annum.
2.3 Conversion and Exercise. The Notes are convertible and the Warrants
will be exercisable into shares of Common Stock of the Company at the sole
option of the Purchasers at a per share conversion and exercise price of $1.25,
respectively, subject to adjustment as provided in Sections 2.4 and 2.11 below
(the "C/E Price"). Such option to convert or exercise may be elected by
Purchasers at any time subsequent to the expiration of the 60-day "Temporary
Reduced Warrant Exercise Period" currently planned for the Company's existing
public warrants in its pending registration statement on file with the
Securities and Exchange Commission ("SEC") on Form SB-2 (SEC File No. 333-45195)
(the "Registration Statement") and as defined in such Registration Statement (
"Temporary Reduced Warrant Exercise Period"). The C/E Price will be subject to
adjustment as set forth in Sections 2.4 and 2.11 hereof.
2.4 Reset Provisions.
(a) The C/E Price will be automatically reset to the lower of $1.25
or 80% of the average of the Market Prices for the 30 trading days of the
Company's Common Stock, immediately preceding the date which is 180 days from
the date of issuance of the Notes and Warrants hereunder.
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The C/E Price shall be reset to the lower of $1.25 or 80% of the average of the
Market Prices for the 30 trading days immediately preceding the date which is
one year from the date of issuance of the Notes and Warrants hereunder and
thereupon the Purchasers' option to convert the Notes and to exercise the
Warrants as provided in Section 2.3 hereof shall be extended an additional 30
days. The Conversion Price (as defined in Section 2.7 below) for any Preferred
(as defined in Section 2.7 hereof) issued to a holder of Notes hereunder will be
automatically reset to the lower of $1.25 or 80% of the average of the Market
Prices of the Company's Common Stock (i) for the 30 day trading days immediately
preceding the date which is 180 days from the date hereof and (ii) for the 30
trading days immediately preceding the date which is one year from the date
hereof. The exercise price for the Option referred to in Section 6.2(vi) hereof
(the "Option Exercise Price") and issued hereunder will be automatically reset
to the lower of $1.25 or 80% of the average of the Market Prices of the
Company's Common Stock (i) for the 30 trading days immediately preceding the
date which is 180 days from the date hereof and (ii) for the 30 trading days
immediately preceding the date which is one year from the date hereof.
(b) The C/E Price and the Conversion Price for the Preferred and the
Option Exercise Price shall also be reset in accordance with the foregoing
Section 2.4(a) upon the delisting of the Common Stock of the Company from
NASDAQ, except that the percentage of average Market Prices used in such reset
calculations shall be 60% instead of 80%.
2.5 Mandatory Prepayment. Principal and accrued and unpaid interest on
the Notes will be prepaid in whole or in part from the first net cash proceeds
received by the Company from the exercise of any warrants covered by, or the
issuance of any equity securities or notes or other debt security by the Company
under, its currently pending Registration Statement or otherwise.
2.6 Optional Redemption. Subsequent to the "Temporary Reduced Warrant
Exercise Period," principal and accrued and unpaid interest on the Notes may be
prepaid or converted any time without penalty, by the Company unless otherwise
previously prepaid or converted by the Company or converted by the holder
thereof.
2.7 Preferred Stock.
(a) The Company shall designate a series of preferred stock out of
its currently authorized but unissued shares of preferred stock sufficient in
number to convert the principal and accrued but unpaid interest of the Notes at
the initial C/E Price. Such series shall be the Company's Redeemable Convertible
8% Cumulative Preferred Stock ("Preferred"). Such Preferred shall be entitled to
a preference upon liquidation in an amount to be agreed upon by Purchaser and
the Company prior to such exchange. Such Preferred shall also be convertible
into Common Stock of the Company at the option of the holder thereof at the rate
of one share of Preferred for one share of common and the conversion price
therefor shall be entitled to adjustment identical to the adjustment provided
for the C/E Price as set forth in Section 2.11 hereof and as provided in Section
2.4 hereof (the "Conversion Price"). Dividends on the Preferred shall be in an
amount equal to 8% per annum and shall be cumulative irrespective of whether
declared or paid and are payable in cash or in "PIK" (as defined). Any dividend
paid in PIK shall result in an 8% reduction in the Conversion Price of the
Preferred.
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(b) The Company shall have the right, subject to applicable law, to
redeem the Preferred, in whole or in part, at a redemption price equal to the
Conversion Price for such Preferred plus any cumulated but unpaid dividends on
the Preferred. The Company shall designate the Preferred and file a Certificate
of Designation with terms and provisions consistent with those provided herein
and otherwise acceptable to the holders of the Notes within thirty days of the
date hereof.
(c) The Company shall have the right at any time and from time to
time after the expiration of the 60-day Temporary Reduced Warrant Exercise
Period, to convert the Amount of the Notes into shares of its Preferred at the
Conversion Price of the Preferred by notifying the holders of the Notes thereof
in writing. Accrued but unpaid interest on the Notes shall be paid in cash in
connection with any such conversion.
(d) The holder of any shares of Preferred shall have the right to
sell to the Company, and the Company agrees to repurchase any shares of
Preferred from such holder upon notice thereof at any time after the date which
is three years from the consummation of the Xxxxxxxx financing arrangements with
the Company (as defined in Section 4.2(iv) hereof).
2.8 Change of Control. The holders shall have the right to convert any
outstanding principal and accrued but unpaid interest of the Notes and exercise
the Warrants for Common Stock of the Company at the C/E Price and the holders
shall have the right to convert the Preferred into shares of Common Stock of the
Company at the Conversion Price if there is a merger, sale, Change of Control,
Change of Ownership, material reconstitution of the Board of Directors of the
Company, as described in Section 7.3(g) hereof, significant change in
management, or sale of all or substantially all of the assets of the Company.
2.9 Terms. The Notes will mature one year from the date of issuance
thereof. The Warrants will expire four years from the date of issuance thereof.
2.10 Ranking. The Notes will rank senior to all existing and future
equity securities of the Company.
2.11 Anti-dilution Adjustments. If any of the Company's securities are
exercised or converted at a price less than the C/E Price or if the Company
issues or offers to sell its securities to a person or entity other than holders
hereunder at a price less than the then C/E Price or on more favorable terms and
conditions than those afforded to holders hereunder in connection with this
Agreement, the Company agrees to retroactively apply such lower price and adjust
the then C/E Price, the Conversion Price for the Preferred Stock and the Option
Exercise Price and the terms and conditions to securities of holders hereunder.
The terms of this paragraph shall not apply to issuances of Common Stock upon
exercise of rights, options and warrants outstanding as at the date of this
Agreement, to shares issued upon exercise of options granted under stockholder
approved option plans or upon exercise of options or other rights granted, and
to be granted in the future, as compensation to Company employees, directors or
bona fide consultants.
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3. DISCLOSURE; REGISTRATION
3.1 Disclosure. The Company will disclose the transaction in its SEC
filings and public documents but will only refer to Purchasers as "institutional
lenders," "private investors" or similar appellation. If required by the SEC to
disclose Purchasers' identity, the Company will use its best effort to limit
such disclosure to a confidential one to the SEC.
3.2 Registration Rights. Each holder of Notes, Warrants, Preferred or
Options issued pursuant hereto shall be entitled to the registration rights set
forth below with respect to any Registrable Shares. For purposes hereof,
Registrable Shares shall mean any shares of Common Stock of the Company
underlying such Notes, Warrants, Preferred or Options and issued to a holder
thereof in connection with exercise of the Warrants, exercise of the Options,
conversion of the Notes or conversion of any Preferred. The Company will use its
best efforts to file a registration statement and to register the Registrable
Shares as soon as is practicable. The Company may file such registration
statement on Form S-3 under the Securities Act of 1933, as amended (the "Act"),
if available. The Company will bear all costs and expenses associated with any
such registration. If such registration statement with respect to such
Registrable Shares has not been declared effective on or before January 1, 1999,
the Company will pay to each Purchaser a penalty of 3% of the outstanding
principal and accrued but unpaid interest of the Notes for each 60-day period
thereafter in which such registration statement is not declared effective.
3.3 Demand Registration. Each holder of Registrable Shares shall have a
one-time right to at any time request that the Company file a registration
statement with the Securities and Exchange Commission (the "SEC") on any form
which the Company is entitled to use. Such request shall be in writing, shall
specify the Registrable Shares of Common Stock intended to be sold or disposed
of by such Holder, shall state the intended method of disposition by such
holder, and the Company shall be obligated to effect such registration as
promptly as practicable, subject in any event to all applicable securities laws
and, of such registration related to an underwriting, all requirements of the
Company's investment banker.
3.4 Piggyback Registration. The Company agrees that, at any time or times
hereafter, until three years from the date hereof, as and when it intends to
register any of its securities under the Act whether for its own account and/or
on behalf of selling stockholders (except in connection with an offering solely
to its employees or an offering solely related to an acquisition on a Form S-4
or any subsequent similar form), the Company will notify each holder of such
intention and, upon request from any holder, will use its best efforts to cause
the Registrable Shares designated by such holder to be registered under the Act.
The number of Registrable Shares to be included in such offering may be reduced
if and to the extent that the underwriter of securities included in the
registration statement and offered by the Company shall be of the opinion that
such inclusion would adversely affect the marketing of the securities to be sold
by the Company therein; provided, however, that the percentage of the reduction
of such shares shall be no greater than the percentage reduction of securities
of other selling stockholders, as such percentage reductions are determined in
the good faith judgment of the Company. The Company will use its best efforts to
keep each such registration statement current for such period of time as is not
otherwise burdensome to the Company.
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Any registration statement referred to in this Section 3.4 shall be
prepared and processed in accordance with the following terms and conditions:
(i) each holder will cooperate in furnishing promptly to the
Company in writing any information requested by the Company in connection
with the preparation, filing and processing of such registration statement.
(ii) To the extent requested by an underwriter of securities
included in the registration statement and offered by the Company, each
holder will defer the sale of its Registrable Shares for a period
commencing twenty (20) days prior and terminating sixty (60) days after the
effective date of the registration statement, provided that any principal
shareholders of the Company who also have shares included in the
registration statement will also defer their sales for a similar period.
(iii) The Company will furnish to each holder such number of
prospectuses or other documents incident to such registration as may from
time to time be reasonably requested, and cause its Registrable Shares to
be qualified under the blue-sky laws of those states reasonably requested
by the holders.
(iv) The Company will indemnify each holder (and any officer,
director or controlling person of each holder) and any underwriters acting
on behalf of each holder and any other holder against all claims, losses,
expenses, damages and liabilities (or actions in respect thereof) to which
they may become subject under the Act or otherwise, arising out of or based
upon any untrue or alleged untrue statement of any material facts contained
in any registration statement filed pursuant hereto, or any documents
relating thereto, including all amendments and supplements, or arising out
of or based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein contained not misleading, and will reimburse each holder
(or such other aforementioned parties) or such underwriters for any legal
and all other expenses reasonably incurred in accordance with investigating
or defending any such claim, loss, damage, liability or action; provided,
however, that the Company will not be liable where the untrue or alleged
untrue statement or omission or allege omission is based upon information
furnished in writing to the Company by any holder or any underwriter
obtained by any holer expressly for use therein, or as a result of any
holder's or any such underwriter's failure to furnish to the Company
information duly requested in writing by counsel for the Company
specifically for use therein. This indemnity agreement shall be in addition
to any other liability the Company may have. The indemnity agreement of the
Company contained in this paragraph shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Registrable Shares.
(v) Each holder will indemnify the Company (and any officer,
director or controlling person of the Company) and any underwriters acting
on behalf of the Company against all claims, losses, expenses, damages and
liabilities (or actions in respect thereof) to which they may become
subject under the Act or otherwise, arising out of or based upon any
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untrue or alleged untrue statement filed pursuant hereto, or any document
relating thereto, including all amendments, and supplements, or arising out
of or based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein contained not misleading, and, will reimburse the
Company (or such other aforementioned parties) or such underwriters for any
legal and other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability, or
action; provided, however, that each holder will be liable as aforesaid
only to the extent that such untrue or alleged untrue statement or omission
or alleged omission is based upon information furnished in writing to the
Company by such holder or any underwriter obtained by such holder expressly
for use therein, or as a result of its or such underwriter's failure to
furnish the Company with information duly requested in writing by counsel
for the Company specifically for use therein. This indemnity agreement
contained in this paragraph shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the
Registrable Shares.
(vi) Promptly after receipt by an indemnified party under this
Section 3.4 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party, promptly notice the indemnifying party of the
commencement thereof, but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than under this Section 3.4. In case any such action is
brought against any indemnified party, and it notifies the indemnifying
party of the commencement thereof, the indemnifying party will be entitled
to participate in, and, to the extent that it may wish jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party, and after
notice from the indemnifying party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified
party under this Section 3.4 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof,
other than reasonable costs of investigation or out-of-pocket expenses or
losses or cost incurred in collaborating in the defense.
(vii) The Company shall bear all costs and expenses incident to any
registration pursuant to this Section 3.4.
3.5 Investment Representations; No Market for Notes, Warrants or
Preferred. Purchasers acknowledge that the securities described herein are
being acquired for investment purposes only under this Agreement and are not
registered under the Act or any state securities law ("Blue Sky Law").
Purchasers represent and warrant that they each are "accredited investors" as
that term is defined under the Act and the regulations promulgated thereunder.
Purchasers acknowledge that there is no existing public or other market for the
Notes, Warrants or Preferred, nor is such a market likely to develop.
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4. DEFAULT.
4.1 If one or more of the following described Events of Default shall
occur and be continuing, that is to say:
(i) The Company shall default in the payment of principal of or
interest on this Note when due, or the Company or any of its subsidiaries
shall default in the payment of any other sums due the Company pursuant to
the terms of this Agreement, the Notes, the Warrants or any other
agreement, document or instrument delivered in connection herewith or
therewith; or
(ii) The Company or any of its Principal Subsidiaries shall default
in any payment of principal of or interest on any other obligation for
borrowed money beyond any period of grace provided with respect thereto, or
in the performance of any other agreement, term or condition contained in
any agreement or instrument under or by which any such obligation is
created, evidenced or secured if the effect of such default is to cause
such obligation to become due prior to its stated maturity; or
(iii) Any representation or warranty made by the Company or any of
its Principal Subsidiaries in this Agreement, the Notes, the Warrant or in
any other agreement, document or instrument delivered in connection
herewith or therewith shall prove to have been false or misleading in any
material respect as of the time made or furnished; or
(iv) The Company or any of its Principal Subsidiaries shall default
in the observance or performance of any other covenant, condition or
provision of this Agreement, the Notes, the Warrants, the Preferred or of
any other agreement, document or instrument delivered in connection
herewith or therewith; or
(v) The Company's earnings before interest, taxes, depreciation and
amortization for the year ending December 31, 1998, is less than $1,600,000
or for the year ending December 31, 1999, is less than $2,000,000;
then, and in any such event, (i) the holders of the Notes shall be entitled by
written, telephonic or telegraphic notice to the Company to declare the Notes
and interest accrued thereon and all other liabilities of the Company hereunder
to be forthwith due and payable and the same shall thereupon become due and
payable without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived; (ii) the holders of the Notes shall be
entitled to an additional aggregate 250,000 Warrants to purchase the Company's
Common Stock; and (iii) the holders of the Notes shall be entitled to any and
all other remedies available hereunder or at law or in equity.
4.2 If one or more of the following described Events of Default shall
occur and be continuing, that is to say:
(i) A proceeding shall have been instituted in respect of the Company
or any of its Principal Subsidiaries:
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(1) seeking the entry of an order for relief against the Company
or any of its subsidiaries, or seeking a declaration that Company or
any of its Principal Subsidiaries is insolvent, or resulting in a
finding that Company or any of its Principal Subsidiaries is
insolvent, or seeking the dissolution, arrangement, adjustment,
composition or other similar relief with respect to Company or any of
its Principal Subsidiaries, its assets or its debts under any law now
or hereafter in effect relating to bankruptcy, insolvency, relief of
debtors, or protection of creditors, or
(2) seeking the appointment of a receiver, trustee, custodian,
liquidator, assignee, sequestrator or other similar official for the
Company or any of its Principal Subsidiaries or for all or any
substantial part of its property, and such proceeding results in the
entry, making or grant of any such order, finding or appointment, or
such proceeding shall remain undismissed or unstayed for a period of
thirty consecutive days, or, if such proceeding is brought under the
federal bankruptcy code, the Company or any of its Principal
Subsidiaries, as the case may be, fails to file a proper answer
(including a request that the petitioner post adequate bond under
Section 303(e) of said code) thereto within ten (10) days of receipt
of notice of said proceeding; or
(ii) the Company or any of its Principal Subsidiaries shall
become insolvent, shall become generally unable to pay its debts as
they become due, shall voluntarily suspend transaction of its
business, shall make a general assignment for the benefit of
creditors, shall institute a proceeding described in the foregoing
paragraph 4.1.5 (i) (2) hereof or shall by any act indicate its
consent to or acquiescence in any proceeding or action described in
said paragraph 4.1.5 (i) 2 hereof (whether or not such proceeding is
actually instituted or diligently prosecuted), or shall dissolve,
wind-up or liquidate itself, or shall take any action in furtherance
of any of the foregoing; or
(iii) any Change of Ownership or Change of Control shall occur;
or
(iv) the failure of the Company to consummate its financing
arrangements with IBJ Xxxxxxxx Business Credit Corporation
("Xxxxxxxx") on the terms outlined in Schroder's commitment letter
dated May 29, 1998 to the Company within 36 days from the date hereof;
then, and in any such event, (i) principal and interest accrued but unpaid
with respect to the Notes and all other liabilities of the Company
hereunder shall thereupon become and be forthwith due and payable without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived; (ii) the holders of the Notes shall be entitled to an
additional aggregate 250,000 Warrants to purchase the Company's Common
Stock; and (iii) the holders of the Notes shall be entitled to any and all
other remedies available hereunder or at law or in equity.
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4.3 Upon the occurrence of an Event of Default as described in Section
4.1(i), (ii), (iii) or (iv) hereof, the Company shall have the right to cure
such breach within 30 days after notice shall have been given to the Company.
5. FEES AND EXPENSES.
5.1 Fees Payable Upon Default. If the Company shall default in the
payment of any amounts owing under the Notes, the Company shall pay all costs
incurred by a holder(s) of such Notes in any effort to collect the amounts due
under such Note including, without limitation, a reasonable sum for attorneys'
fees.
5.2 Other Fees. The Company shall pay to Purchasers at Closing, a
"Commitment Fee" equal to 3% of the Amount at the time of issuance. Purchasers
will be entitled to a "Breakup Fee" of 4% of the Amount if the Company completes
a comparable transaction within one year with another party. The Company will
pay all reasonable legal fees and expenses and out-of-pocket expenses of the
Purchasers related to this transaction whether or not this transaction is
consummated. The Company authorizes the Purchasers to deduct such fees and
expenses from the payment to be paid under Section 2.1 hereof.
6. CLOSING.
6.1 Closing and Closing Date. Subject to the provisions of this
Agreement, the consummation of the transactions contemplated by this Agreement
(the "Closing") shall be held at the offices of Terrace Holdings, Inc., 0000
X.X. 00xx Xxxxxx, Xxxxxxx Xxxxx, Xxxxxxx, at 10:00 a.m. (local time), June 24,
1998, or at such later date, place or time as the parties shall otherwise
mutually agree upon (the date of the Closing being referred to herein as the
"Closing Date." All Closing transactions shall be deemed to take place
simultaneously, and no Closing transaction shall be deemed consummated until all
transactions to take place at the Closing have been consummated and all Closing
conditions enumerated in Section 6.2 have been met.
6.2 Conditions of Closing. Closing will be subject to the following
conditions, each of which may be waived by Purchasers, in their sole discretion:
(i) Purchasers shall have completed their due diligence
investigation and shall have received all necessary documentation,
sufficient information and access to such information on a timely basis to
Purchasers' sole satisfaction;
(ii) As a result of the consummation of this Agreement, no default
with the Company shall be existing, pending or occurring;
(iii) The Company shall secure a one year lockup on Common Stock held
by insiders by execution of a Lock Up Agreement in form and substance
acceptable to the Purchaser and their counsel on terms to be determined by
the parties;
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(iv) No material adverse change in the business, financial condition,
operations, assets, liabilities, management or prospects of the Company
from the date hereof exists or is pending at the time of Closing;
(v) Execution and delivery of a definitive agreement between the
Company and Banner for the acquisition of Banner by the Company; and
(vi) Purchasers will receive an option in form and substance
acceptable to Purchaser and their counsel to purchase an aggregate of
500,000 shares of the Company's Common Stock (the "Option Shares") at a
price determined on the basis of the average closing price for the
Company's Common Stock for the ten trading days immediately following the
expiration of the "Temporary Reduced Warrant Exercise Period (the "Tenth
Trading Day Date")." Said Option shall expire 90 days after the Tenth
Trading Day Date. If such "Temporary Reduced Warrant Exercise Period" does
not commence on or before August 31, 1998, such option price shall be
calculated using the first ten trading days in September, 1998 and the
Option shall expire on December 31, 1998.
6.3 Actions, Proceedings, Etc. All actions, proceedings, agreements,
instruments and documents required to carry out the transactions contemplated by
this Agreement shall have been completed in a manner reasonably satisfactory to
Purchasers and approved by its counsel, including but not limited to (i)
execution of the Notes (attached hereto as Exhibit B) and (ii) execution of the
Warrant Certificates (attached hereto as Exhibit C).
7. REPRESENTATIONS AND WARRANTIES; COVENANTS; NEGATIVE COVENANTS.
7.1 Representations and Warranties. The Company represents and warrants
that:
(a) Corporate Existence and Qualification. The Company (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and (ii) is duly qualified and in good standing in
every state in which it is doing business or in which the failure to be so
qualified would or could have a material adverse effect on its business or
properties. The Company's subsidiaries are corporations duly organized, validly
existing and in good standing under the laws of the relevant jurisdiction of
incorporation.
(b) Corporate Authority. The Company has all necessary corporate power
and authority to execute, deliver and perform its obligations under this
Agreement, the Notes, the Warrant and any and all other agreements, documents or
instruments executed in connection herewith or therewith (the "Transaction
Documents") and all such action has been duly authorized by all necessary
corporate proceedings on its part.
(c) No Conflict. Neither the execution and delivery of the Transaction
Documents, the consummation of the transactions therein contemplated, nor
compliance with the terms and provisions thereof will conflict with or result in
a breach of any term, condition or provision of the Articles of Incorporation or
By-laws of the Company or any of its subsidiaries or
11
of any law, regulation, order, writ, injunction or decree of any court or
governmental instrumentality or agency or of any agreement or instrument to
which any of them is a party or by which any of them is bound or to which any of
them is subject or constitute a default thereunder or result in the creation or
imposition of any lien, charge or encumbrance of any nature whatsoever upon any
of the property of the Company or any of its subsidiaries.
(d) Valid Agreement. The Transaction Documents have been duly and
validly executed and delivered by the Company and the Preferred Shares and any
Option Shares, will be duly and validly executed on their date of delivery, and
each constitutes, or will constitute, a valid and legally binding agreement of
the Company enforceable in accordance with its terms, except as limited by
bankruptcy, insolvency, fraudulent conveyance or other laws of general
application relating to or affecting the enforcement of creditors, rights; and
no authorization, approval, exemption or consent by any governmental or public
body or authority is required in connection with the execution, delivery and
carrying out of the terms of the Transaction Documents.
(e) Franchises, Etc. The Company and its subsidiaries has obtained all
necessary franchises, certificates, licenses and permits required to engage in
its business or operations, and is not in default under any term or condition
contained in any such franchise, certificate, license or permit.
(f) Conformity to Applicable Laws. The Company and each of its
subsidiaries is in compliance and conformity with all laws, ordinances, rules,
regulations and all other legal requirements (including such of the same as
pertain to consumer protection, equal opportunity, health, occupational safety,
pension, employment, environmental and securities matters) the violation of
which would have an adverse effect on their business, properties or condition
(financial or otherwise). Neither the Company nor any of its subsidiaries has
received and has no basis to expect any order or notice of any violation or
claim of violation of any such law, ordinance, rule or regulation.
(g) Taxes. The Company and each of its subsidiaries has filed all
federal, state and local tax returns required to be filed and has paid or made
adequate provision for the payment of all federal, state and local taxes,
charges and assessments.
(h) Insolvency. The issuance of the Notes by the Company under this
Agreement does not and will not render the Company insolvent; the Company is not
contemplating making any filing of a petition under any state or federal
bankruptcy or insolvency law or the liquidation of all or a major portion of its
property, and the Company has no knowledge of any person contemplating the
filing of any such petition against them or either or them.
(i) Financial Information. The Company has furnished to Purchasers
copies of its 10-KSB filed with the SEC for the year ended December 31, 1997
(the "10-KSB") and its 10-QSB filed with the SEC for the quarter ended March 31,
1998 (the "10-QSB"). The financial statements contained in the 10-KSB and 10-QSB
fairly represent the financial condition of the Company and have been prepared
in accordance with Generally Accepted Accounting Principles ("GAAP"). Since the
date of the 10-QSB, there has been no change in the assets, liabilities or
12
financial condition of the Company from that reflected in the 10-QSB except for
changes in the ordinary course of business which in the aggregate have not been
materially adverse.
(j) Judgments/Actions. Except as disclosed to the Purchasers in
writing, there are no actions, suits, or proceedings pending or, to the
knowledge of the Company, threatened against the Company or any of its
subsidiaries or any of their properties at law, or in equity, or by or before
any governmental authority, governmental department, commission, board, bureau,
agency, or instrumentality, or any arbitrator, which, if determined adversely,
could cause a material adverse effect, or which question the validity of any
Transaction Documents.
(k) Absence of Defaults Under Other Agreements. Neither the Company
nor any subsidiary of the Company is not in default (i) in the performance,
observance, or fulfillment of any of the obligations, covenants, or conditions
contained in any agreement or agreement or instrument to which it is a party,
(ii) under any requirement of law, or (iii) as a result of a demand of any
governmental authority, which default or violation might cause a material
adverse effect on their business, properties or condition (financial or
otherwise).
7.2 Affirmative Covenants. The Company covenants that until payment
in full of the Notes and unless otherwise consented to in writing by the holders
of the Notes, it will, and it will cause each of its subsidiaries to:
(a) Financial Information. Furnish to the holders of the Notes as soon
as practicable, and in any event within one hundred twenty (120) days after the
end of each fiscal year of the Company, a consolidated balance sheet for the
Company and its subsidiaries as of the end of such fiscal year and the related
statements of income, changes in financial position and retained earnings for
such fiscal year, setting forth in each case in comparative form figures for the
preceding fiscal year, all in reasonable detail and certified by independent
public accountants of recognized standing selected by the Company. Furnish to
the holders of the Notes as soon as practicable, and in any event within forty-
five (45) days after the end of each fiscal quarter of the Company, a
consolidated unaudited balance sheet and the related statements of income for
the Company and its subsidiaries, as of the end of such fiscal quarter.
(b) Event of Default. Furnish to the holders of the Notes forthwith
upon any officer's obtaining knowledge that an Event of Default as described in
Section hereof, or any condition, event, act or omission which with the giving
of notice or the lapse of time or both would constitute such an Event of
Default, has occurred and is continuing, a certificate of its President
specifying the nature thereof, the period of existence thereof and the action it
has taken or proposes to take with respect thereto.
(c) Litigation, etc. Furnish to the holders of the Notes forthwith
upon any officer's obtaining actual knowledge thereof, a certificate of its
President describing any pending or threatened litigation, governmental
proceeding, governmental investigation, notice of lien or labor or other dispute
which could reasonably be expected to materially adversely affect the business,
properties or condition (financial or otherwise) of the Company.
13
(d) Compliance with Governmental Requirements. Comply, in all material
respects with all laws, ordinances, rules, regulations, decrees, orders, writs,
injunctions or other governmental requirements applicable to it or its business
the noncompliance with which might, individually or in the aggregate, involve
any substantial risk of any material adverse effect on the business, properties
or condition (financial or otherwise) of the Company or of any material
impairment of the Company's ability to perform its obligations under the
Transaction Documents; provided, however, that nothing in this Section shall
require the Company to comply with any such requirement so long as the validity
thereof or its applicability shall be contested in good faith by appropriate
proceedings diligently conducted.
(e) Corporate Existence, etc. Maintain the corporate existence of the
Company and each subsidiary and the qualification of the Company and each
subsidiary to do business and good standing in each jurisdiction in which such
qualification is necessary for the proper conduct of its business; maintain, in
full force and effect all licenses, permits and other authorizations necessary
for the ownership and operation by the Company and each subsidiary of its
properties and business; and maintain and keep, all the property of the Company
and each subsidiary in good repair, working order and condition and make or
cause to be made all necessary or appropriate repairs, renewals, replacements
and substitutions, so that the efficiency of all such property shall at all
times be properly preserved and maintained; provided, however, that nothing
contained in this Section shall require the Company to maintain or retain assets
which the Company deems inadequate, unproductive, surplus or otherwise not in
its best interests.
(f) Taxes. Pay or cause to be paid all taxes, fees, assessments and
governmental charges or levies upon any of the property or assets of the Company
or its subsidiaries or upon the Company or its subsidiaries or their income or
profits before the same shall become delinquent, and all lawful claims of
whatsoever nature which, if unpaid, might become a lien or charge upon any such
property, assets, income or profits; provided, however, that the Company and its
subsidiaries shall not be required to pay and discharge any such tax, fee,
assessment, charge, levy or claim so long as the validity thereof shall be
contested in good faith by appropriate proceedings diligently conducted (unless
and until foreclosure, distraint, sale or other similar process shall have been
commenced).
(g) Books and Records. Maintain proper books of record and account in
accordance with generally accepted accounting practices.
(h) Insurance. Continue to maintain insurance in form, amount, and
substance acceptable to the holders of the Notes including, without limitation,
worker's compensation and general liability insurance written by companies
acceptable to the holders of the Notes upon all facets of its business, of such
character and amounts as are customarily maintained by companies engaged in like
business; (ii) furnish to the holders of the Notes, upon request, a statement of
the insurance coverage; and (iii) obtain other or additional insurance promptly,
upon reasonable request of the holders of the Notes, to the extent that such
insurance may be available.
(i) Further Assurances. (i) Promptly correct, or cause to be promptly
corrected, any defect, error, or omission which may be discovered in the
contents of the Transaction
14
Documents or in the execution or acknowledgment thereof; and (ii) execute,
acknowledge, deliver, and record or file, or cause to be executed, acknowledged,
delivered, and recorded or filed, such further instruments, and do such further
acts as may be necessary, desirable, or proper to carry out more effectively the
purposes of the Transaction Documents.
7.3 Negative Covenants. The Company covenants that until payment,
conversion or redemption in full of the Note(s), it will not, and will cause its
subsidiaries to not, without the prior written consent of the holders of the
Notes:
(a) Liens. Create, incur, issue, assume or suffer to exist any
mortgage, pledge, lien or other encumbrance on or security interest in any of
its ("Liens"), whether now owned or hereafter acquired, except:
(i) Liens for taxes or other governmental charges which are not
due or remain payable without penalty or-which are being contested in
good faith and by appropriate proceedings diligently conducted;
(ii) deposits or pledges to secure workmen's compensation,
unemployment insurance, old age benefits or other social security
obligations or in connection with or to secure the performance of
bids, tenders, trade contracts or leases or to secure statutory
obligations or surety or appeal bonds or other pledges or deposits of
like nature and all in the ordinary course of business;
(iii) mechanics', carriers', workmen's, repairmen's or other
like Liens arising in the ordinary course of business in respect of
obligations not yet due or which are being contested in good faith and
by appropriate proceedings diligently conducted; and
(iv) Liens in favor of IBJ Xxxxxxxx Business Credit Corporation
in connection with the financing on the terms outlined in the
commitment letter dated May 29, 1998, with respect thereto (the "IBJ
Commitment").
(b) Indebtedness. Create, incur, assume or suffer to exist any
Indebtedness (as defined below), except:
(i) Indebtedness under this Agreement and the Note(s);
(ii) Indebtedness with respect to the IBJ Commitment; and
(iii) Current accounts payable arising out of transactions
(other than borrowings) in the ordinary course of business.
For purposes hereof, "Indebtedness" of any corporation shall mean all
obligations for borrowed money or for the deferred purchase price of property
which in accordance with generally accepted accounting principles would be
included in determining total liabilities as shown on the liability side
15
of a balance sheet as of the date Indebtedness is to be determined and shall
include any obligation of such corporation created or arising under any lease of
fixed assets under which such corporation is a lessee and which, in accordance
with Statement of Financial Accounting Standards No. 13 of the Financial
Accounting Standards Board, would be required to be capitalized on a balance
sheet of such corporation.
(c) Contingent Liabilities. Assume, guarantee, endorse or otherwise
become or remain directly or indirectly liable in connection with the
obligations of any other person, firm or corporation, except for the endorsement
of negotiable or other instruments for deposit or collection or similar
transactions in the ordinary course of its business.
(d) Loans and Advances. Make or have outstanding any loans or advances
or extend credit to any person, firm or corporation, except:
(i) loans or advances in the ordinary course of business to
employees and suppliers; and
(ii) trade credit extended under usual and customary terms in the
ordinary course of business.
(e) Merger and Disposition of Assets. Sell, lease, abandon or
otherwise dispose of all or any substantial portion of the Company's or any of
its subsidiaries, properties or assets, or consolidate or merge with any other
person, firm or corporation, or purchase or otherwise acquire all or any
substantial portion of the property or assets of any other person, firm or
corporation, or permit any other person, firm or corporation to consolidate or
merge with it.
(f) Dividends. Declare, make, pay, become or remain liable to make or
pay, any dividend or other distribution of any nature (whether in cash,
property, securities or otherwise) on account of or in respect of any shares of
Common Stock of the Company or on account of the purchase, redemption,
retirement or acquisition of any shares of Common Stock of the Company.
(g) Change of Ownership. Permit or suffer any Change of Control,
Change of Ownership or change in the identity, authority, or responsibilities of
any person having senior management and policy authority with respect to the
Company and/or any direct or indirect change (including any change in beneficial
ownership) in the ownership of the issued and outstanding Common Stock as of the
date of this Agreement.
(h) No Change in Accounting Practices. Materially change accounting
practices, methods, or standards or the reporting format for any information
furnished to the holders of the Notes under the terms and provisions of the
Transaction Documents, which accounting practices shall conform with GAAP
throughout the terms of the Transaction Documents.
(i) No Transactions With Affiliates. Enter into any transaction with
an affiliate, including, without limitation, the purchase, sale, or exchange of
property of the Company or any of its subsidiaries or the rendering of any
service, unless the transaction is in the ordinary course of and
16
pursuant to the reasonable requirements of Company's business and upon fair and
reasonable terms no less favorable to Company or any of its subsidiaries than
would be obtained in a comparable arm's length transaction with a person to an
affiliate.
(j) No Adverse Transactions. Enter into any transaction which
materially and adversely affects or may materially and adversely affect the
Company's ability to pay the notes or permit or agree to any material extension,
compromise, or settlement or make any material change or modification of any
kind or nature with respect to any account, including any of the terms relating
thereto, other than discounts and allowances in the ordinary course of business.
8. MISCELLANEOUS
8.1 Termination of the Agreement. This Agreement may be terminated
and the transaction contemplated hereby may be abandoned at any time, but not
later than the Closing Date:
(a) by mutual consent of the parties; or
(b) by Purchasers or the Company if, through no material fault of
the party so electing to terminate, the Closing shall not have
occurred on or prior to June 30, 1998.
In the event of the termination of this Agreement by any party as above
provided, without material fault of any party, no party shall have any liability
hereunder, including any liability for damages. In the event that a condition
precedent to a party's obligation is not met, nothing contained herein shall be
deemed to require any party to terminate this Agreement rather than to waive
such condition precedent and proceed with the Closing.
8.2 Waivers. No action taken pursuant to this Agreement, including
any investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any provision or
agreement contained herein or in any other documents. The waiver by any party
hereto of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach. Any party hereto may, at or
before the Closing, waive any conditions to its obligations hereunder which are
not fulfilled.
8.3 Binding Effect; Benefits. This Agreement shall inure to the benefit
of the parties hereto and shall be binding upon the parties hereto and their
respective successors and assigns. Except as otherwise set forth herein, nothing
in this Agreement, expressed or implied, is intended to confer on any person
other than the parties hereto or their respective successors and assigns any
rights, remedies, obligations, or liabilities under or by reason of this
Agreement.
8.4 Assignment. Without limitation, and without the consent, prior,
written or otherwise, of the Company, this Agreement and all of the rights and
obligations hereunder may be assigned by the Purchasers to any entity owned or
controlled by, or affiliated with any of them. The Company shall consent in
writing to any such assignment.
17
8.5 Notices. All notices, requests, demands and other communications
which are required to be or may be given under this Agreement shall be in
writing and shall be deemed to have been duly given when delivered in person or
upon receipt when transmitted by facsimile or telex or after dispatch by
certified or registered first class mail, postage prepaid, return receipt
requested, to the party to whom the same is so given or made:
If to the Company, to:
Terrace Holdings, Inc.
0000 X.X. 00xx Xxxxxx
Xxxxxxx Xxxxx, Xxxxxxx 00000
Facsimile: 000-000-0000
With a copy to:
Xxxxxx X. Xxxxxxx, Esq.
Fishman, Merrick, Miller, Genelly,
Springer, Xxxxxx & Xxxxxxxx, P.C.
000 Xxxxx Xxxxxx Xxxxxx, Xxxxx 0000
Xxxxxxx, Xxxxxxxx 00000
Facsimile: 000-000-0000
If to Purchasers, in care of:
Xxxxx XxXxx Xxxxxxxx, Esq.
Xxxxxx & Carnelutti
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000-0000
Facsimile: 000-000-0000
8.6 Entire Agreement. This Agreement (including the Schedule and
Exhibits hereto) constitute the entire agreement and supersede all prior
agreements and understandings, oral and written, among the parties hereto with
respect to the subject matter hereof and supersede all prior agreements,
representations, warranties, statements, promises and understandings, whether
written or oral, with respect to the subject matter hereof. No party hereto
shall be bound by or charged with any written or oral arguments,
representations, warranties, statements, promises or understandings no
specifically set forth in this Agreement or in any Exhibit hereto, or in
certificates and instruments to be delivered pursuant hereto on or before the
Closing.
8.7 Headings; Certain Terms. The section and other headings contained
in this Agreement are for reference purposes only and shall not be deemed to be
a part of this Agreement or to affect the meaning or interpretation of this
Agreement. As used in this Agreement, the term "including" means "including, but
not limited to" unless otherwise specified; the word "or" means "and/or," and
the word "person" means and refers to any individual, corporation, trust,
partnership,
18
joint venture, government or governmental authority, or any other entity; and
the plural and singular forms are used interchangeably.
8.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when executed, shall be deemed to be an original and
all of which together shall be deemed to be one and the same instrument.
8.9 Governing Law. This Agreement and all other Transaction Documents
shall be construed in accordance with the laws of the State of New York, without
giving effect to the choice of law principles or rules thereof. The parties
hereto hereby agree that any action relating hereto may be maintained in a court
of competent subject matter jurisdiction located in the State of New York, and
hereby consent to the jurisdiction of any such court for all purposes connected
herewith.
8.10 Severability. If any term or provision of this Agreement shall to
any extent be invalid or unenforceable, the remainder of this Agreement shall
not be affected thereby, and each term and provision of the agreement shall be
valid and enforced to the fullest extent permitted by law.
8.11 Amendments. This Agreement may not be modified or changed except
by an instrument or instruments in writing signed by the party or parties
against whom enforcement of any such modification or amendment is sought.
8.12 Disclosures. Any disclosure by either party hereto pursuant to
any specific provision of this Agreement shall be deemed a disclosure for all
other purposes of this Agreement.
8.13 Survival of Representations. All representations, warranties,
covenants and agreements contained herein or made in writing in connection
herewith shall survive the execution and delivery of this Agreement and the
other Transaction Documents and the issuance of the Notes.
8.14 Section References. All references contained in this Agreement
to any section number are references to sections of this Agreement unless
otherwise specifically stated.
8.15 Brokers and Finders. Each party represents and warrants there
are no brokers, finders or similar persons to whom compensation will be due or
owing as a result of consummation of the transactions contemplated by this
Agreement and each party hereby agrees to indemnify and hold the other party
harmless against any such claims.
19
IN WITNESS WHEREOF, the parties hereto have signed this Agreement, or
have caused this Agreement to be signed in their respective names by an officer
thereunder duly authorized, as of the date first above written.
TERRACE HOLDINGS, INC.
By: ____________________________________________
Xxxxxxxx X. Xxxxx, Executive Vice- President
PURCHASER:
By: ____________________________________________
20
SCHEDULE A
----------
PURCHASER
Name, Address, Social Security Principal Amount Number of Number of Purchase
Number or FEIN Number of Notes Warrants Options Price
------------------------------ ---------------- --------- --------- --------
Network Funds III, Ltd. $2,625,000 400,000 500,000 $2,500,000
21
CONVERTIBLE SUBORDINATED NOTE
-----------------------------
$2,625,000 June 25, 1998
FOR VALUE RECEIVED, the undersigned, Terrace Holdings, Inc. (hereinafter
referred to as the "Company"), hereby promises to pay to the order of Network
Funds III, Ltd. or any successor holder of this Note (hereafter referred to as
"Purchaser"), at Purchaser's principal place of business, or such other place or
places as Purchaser may designate in writing, the principal sum of Two Million
Six Hundred Twenty Five Thousand Dollars ($2,625,000).
This Note is one of a series of Notes aggregating $2,625,000 principal
amount issued pursuant to that certain Agreement dated the date hereof by and
between the Company and the purchasers as identified in Schedule A thereto (the
"Agreement"). This Note is entitled to all rights and benefits as provided in
the Agreement including, but not limited to, rights and benefits with respect to
conversion, anti-dilution and reset provisions as provided therein.
1. Payment. The principal amount and unpaid interest accruing under this
Note shall be payable one year from the date of this Note.
2. Interest. This Note shall initially bear interest at of 12% per annum.
Interest shall be payable quarterly in arrears. All payments by the Company
hereunder shall be applied first to accrued interest, then to principal
currently due in accordance with the terms hereof, the balance (if any) to
prepayment of principal. Interest will be calculated on the basis of the actual
number of days elapsed over a year of three hundred sixty (360) days. Should any
payment become due and payable on any day other than a Business Day (as such
term is hereafter defined), the date of such payment shall be extended to the
next succeeding Business Day, and, in the case of a payment of principal or past
due interest or any installment of either thereof, interest shall accrue and be
payable thereon for the period of such extension at the applicable rate or rates
specified herein. "Business Day" shall mean each day (other than Saturday or
Sunday) when banks are open for the conducting of customary commercial banking
activities in the State of New York. Interest is payable in cash. To the extent
that more than 50% of the series of Notes of which this Note is a part are
outstanding four months after the date hereof, the interest rate with respect to
such Notes shall be increased 14% per annum.
3. Fees and Expenses on Default. If the Company shall default in the
payment of any amounts owing under this Note or if an Event of Default shall
occur as described in the Agreement, the Company shall pay all costs incurred by
Purchaser to collect the amounts due under this Note, including, without
limitation, a reasonable sum for attorneys' fees.
4. Manner of Payment. The Company shall make payment of principal or
interest on this Note to the Purchaser by depositing a check or the certificate
evidencing the securities issued in payment thereof, payable to the Purchaser,
in the United States mails and addressed to the Purchaser at his principal
business address.
5. Prepayment. The Company shall be entitled to prepay all or any portion
of the principal and unpaid interest of this Note at any time or from time to
time, without penalty; provided,
however, that any such prepayment on this Note shall first be credited against
any accrued and unpaid interest on this Note.
6. Conversion. This Note is issued under the provisions of the Agreement.
Subject to the provisions of the Agreement (including NASDAQ requirements) and
this Note, the Purchaser has the right, at Purchaser's sole option, at any time
subsequent to the expiration of the 60-day "Temporary Reduced Warrant Exercise
Period" currently planned for the Company's existing publicly-traded warrants in
its pending registration statement on file with the Securities and Exchange
Commission ("SEC"), on Form SB-2 (SEC File No. 333-45195), and as defined in
such registration statement and before the principal amount is paid in full, to
convert the principal of this Note, or any portion thereof, into fully paid and
non-assessable shares of Common Stock of the Company at the Conversion Price of
$1.25 per share as adjusted as provided hereunder and in the Agreement (the
"Conversion Price").
7. Anti-dilution Adjustment. If at any time before the full payment of
this Note, any of the Company's securities are exercised or converted at a price
less than the Conversion Price or the Company issues or offers to sell its
securities to a person or entity other than holders hereof at a price less than
the then Conversion Price or on more favorable terms and conditions than those
afforded to the holders hereof in connection with this Note or the Agreement,
the Company agrees to retroactively apply such lower price and adjust the then
Conversion Price and the terms and conditions of securities of the holders
hereof. The terms of this paragraph shall not apply to issuances of Common Stock
of the Company upon exercise of rights, options and warrants outstanding as at
the date of this Note, to shares issued upon exercise of options granted under
stockholder approved option plans or upon exercise of options or other rights
granted, and to be granted in the future, as compensation to Company employees,
directors or bona fide consultants.
8. Reset Provisions. The Conversion Price will be automatically reset to
the lower of $1.25 or 80% of the Market Price of the Company's Common Stock, on
the date which is 180 days from the date of issuance of this Note hereunder. To
the extent that principal or interest is due and owing with respect to this Note
on the date of maturity hereof, the Conversion Price shall be reset to the lower
of $1.25 or 80% of the Market Price on such date and thereupon the Purchasers'
option to convert this Note shall be extended an additional 30 days. In
addition, this Note shall also be entitled to the benefits of any other reset
provisions provided in the Agreement.
9. Preferred Stock.
(a) The Company shall designate a series of preferred stock out of
its currently authorized but unissued shares of preferred stock sufficient in
number to convert the principal and accrued but unpaid interest of this Note at
the Conversion Price. Such series shall be the Company's Redeemable Convertible
8% Cumulative Preferred Stock ("Preferred"). Such Preferred shall be entitled to
a preference upon liquidation, shall be convertible into Common Stock of the
Company at the option of the holder thereof at the rate of one share of
Preferred for one share of Common Stock and the Conversion Price therefor shall
be entitled to adjustment as provided for herein and in the Agreement (the
"Conversion Price"). Dividends on the Preferred shall be in an amount equal
2
to 8% per annum and shall be cumulative irrespective of whether declared or paid
and are payable in cash or in "PIK" as defined in the Agreement. Any dividend
paid in PIK shall result in an 8% reduction in the Conversion Price of the
Preferred.
(b) The Company shall have the right, subject to applicable law, to
redeem the Preferred, in whole or in part, at a redemption price equal to the
Conversion Price for such Preferred plus any cumulated but unpaid dividends on
the Preferred. The Company shall designate the Preferred and file a Certificate
of Designation with terms and provisions consistent with those provided herein
and otherwise acceptable to the holders of the Notes within thirty days of the
date hereof.
(c) The Company shall have the right at any time and from time to
time after the expiration of the 60-day Temporary Reduced Warrant Exercise
Period, to convert the principal amount of the Notes into shares of its
Preferred at the Conversion Price of the Preferred by notifying the holder of
this Note thereof in writing. Accrued but unpaid interest on this Note shall be
paid in cash in connection with any such conversion.
(d) The holders of any shares of Preferred shall have the right to
sell to the Company, and the Company agrees to repurchase any shares of
Preferred from such holders upon notice thereof at any time after the date which
is three years from the consummation of the Xxxxxxxx financing arrangements with
the Company (as defined in the Agreement).
10. Event of Default. If one or more of the Events of Default described in
the Agreement shall occur and be continuing, the holder hereof shall be entitled
to all rights and benefits of the Agreement with respect to any such Event of
Default.
11. Waivers. No delay or omission of Purchaser to exercise any right or
power under, or with respect to, this Note shall impair any such right or power
or shall be construed to be a waiver of any default or acquiescence thereof. No
waiver of any default shall be construed, taken or held to be a waiver of any
other default of a similar nature or otherwise. Presentment, protest and notice
of dishonor are hereby expressly waived.
12. Amendments and Modifications. This Note may not be amended or
modified, nor shall any revision hereof be effective, except by an instrument in
writing expressing such intention executed by Purchaser and the Company.
13. Choice of Law. This Note shall be governed and controlled as to
validity, enforcement, interpretation, construction, effect and in all other
respects, including, but not limited to, the legality of the interest charged
hereunder, by the statutes, laws and decisions of the State of New York, without
giving effect to the choice of law principles or rules thereof. The parties
hereto hereby agree that any action relating hereto may be maintained in a court
of competent subject matter jurisdiction located in the State of New York, and
consent to the jurisdiction of any such court for all purposes connected
herewith.
3
14. Binding Effect. This Note may be transferred by Purchaser at any time
and from time to time without the consent of the Company. This Note shall be
binding upon the Company and shall inure to the benefit of Purchaser and
Purchasers' successors and assigns.
15. Severability. Any provision of this Note which is unenforceable or
contrary to applicable law, and the inclusion of which would affect the
validity, legality or enforcement of this Note, shall be of no effect, and, in
such case, all the remaining terms and provisions of this Note shall be fully
effective, as though no such invalid provision had ever been included in this
Note.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Note as
of the day and year first above written.
TERRACE HOLDINGS, INC.
By: ___________________________
Title: ___________________________
Attest:
___________________________
Secretary
4
CONVERSION NOTICE
To Be Executed by the Registered Holder
in Order to Convert Note
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to convert
$_____________ amount of principal and accrued and unpaid interest of the above
Note into fully paid, non-assessable shares of Common Stock as above set forth,
and requests that certificates for such shares of Common Stock shall be issued
in the name of
__________________________________________________
(please insert taxpayer identification
or other identifying number)
and to be delivered to
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
(please print or type name and address)
____________________________________ ____________________________
Registered Holder Date
SIGNATURE GUARANTEED
5
NOTICE OF CONVERSION TO PREFERRED STOCK
________________________________________________
Registered Holder
You are hereby notified that in accordance with the "Preferred Stock"
provisions above set forth, Terrace Holdings, Inc. (the "Company") hereby
converts the above Note into ________________ shares of its Redeemable
Convertible 8% Cumulative Preferred Stock ("Preferred") as hereinabove (and in
that certain Agreement dated as of June 25, 1998 between and among the Company
and the original holder hereof and others) described. Certificate(s) evidencing
such shares of Preferred will be issued upon tender of the original of the above
Note to the Company at its principal offices. Notwithstanding lack of tender to
the Company of the original of the above Note as aforesaid, as of
__________________________________
(Date)
such Note shall be deemed null and void and of no further force or effect except
to receive certificate(s) evidencing said shares of Preferred and cash in
payment of accrued but unpaid interest with respect to such Note and in
accordance with the terms contained in the above Note and the aforementioned
Agreement.
Terrace Holdings, Inc.
By:________________________________________
Date of this Notice:_______________________
6
WARRANT CERTIFICATE
-------------------
The securities represented by this Certificate were issued on June
25, 1998, without registration under the Securities Act of 1933, as
amended, or any applicable state securities law. No transfer, sale or
other disposition of these securities or any interest therein may be
made except under an effective registration statement under said Act
covering such securities unless the Corporation has received an
opinion of counsel satisfactory to it that such transfer or resale
does not require registration under said Act.
VOID AFTER JUNE 30, 2002
STOCK PURCHASE WARRANT CERTIFICATE FOR PURCHASE OF
400,000 SHARES OF COMMON STOCK
OF
TERRACE HOLDINGS, INC.
THIS CERTIFIES THAT FOR VALUE RECEIVED
Network Funds III, Ltd.
-------------------------------------------------------------------------------
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Common Stock Purchase Warrants ("Warrants") specified above. Each
Warrant initially entitles the Registered Holder to purchase, subject to the
terms and conditions set forth in this Certificate, one fully paid and
nonassessable share of Common Stock, $.001 par value ("Common Stock"), of
TERRACE HOLDINGS, INC., a Delaware corporation (the "Company"), at any time
between the Closing Date(as herein defined) and the Expiration Date (as
hereinafter defined), upon the presentation and surrender of this Warrant
Certificate attached hereto duly executed, at the corporate offices of the
Company accompanied by payment of $1.25 per share or such amount as adjusted
herein (the "Purchase Price") in lawful money of the United States of America in
cash or by official bank or certified check made payable to TERRACE HOLDINGS,
INC.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the applicable terms and
conditions set forth in the Agreement dated June 25, 1998, (the "Agreement") by
and between the Company and the purchasers therein set forth on Schedule A
thereto. The holder of this Warrant Certificate and each Warrant represented
hereby shall be entitled to all rights and benefits of the Agreement.
This Warrant Certificate and each Warrant represented hereby are subject to
anti-dilution adjustment to the extent the Company issues Common Stock or
securities convertible into, or exercisable for the purchase of, Common Stock at
a price per share of Common Stock less than the Purchase Price, in which event
the Purchase Price under this Warrant shall be adjusted to such lower price per
share.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates
identical hereto for the balance of such Warrants.
The term "Closing" shall have the same meaning as stated in the Agreement.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on June 30,
2002, or such earlier date as the Warrants shall be redeemed. If such date shall
in the State of New York be a holiday or a day on which the banks are authorized
to close, the then Expiration Date shall mean 5:00 p.m. (New York time) the next
following day which in the State of New York is not a holiday or a day on which
the banks are authorized to close.
This Warrant Certificate and the Warrants represented hereby shall be
entitled to the reset provisions, antidilution provisions, registration rights
and all other rights as provided in the Agreement.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Company, for a new Warrant
Certificate or Warrant Certificates identical hereto representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by the Registered Holder at the
time of such surrender. Upon due presentment with any transfer fee in addition
to any tax or other governmental charge imposed in connection therewith, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Agreement.
Prior to due presentment for registration of transfer hereof, the Company
may deem and treat the Registered Holder as the absolute owner hereof and of
each Warrant represented hereby (notwithstanding any notations of ownership or
writing hereon made by anyone other than a duly authorized officer of the
Company) for all purposes and shall not be affected by any notice to the
contrary.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York, without giving effect to the choice of
law principles or rules thereof. The parties hereto hereby agree that any action
relating hereto may be maintained in a court of competent subject matter
jurisdiction located in the State of New York, and consent to the jurisdiction
of any such court for all purposes connected herewith.
2
The Warrants evidenced hereby are not registered under the federal or any
state securities laws and are issued and sold by the Company in reliance in part
upon the investment and other representations from the issues in compliance with
Regulation D promulgated under the Securities Act of 1933, as amended, or other
applicable federal or state exemptive provisions.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
TERRACE HOLDINGS, INC.
By: ___________________________________
Its
Date: as of June 25, 1998
----------------------------------------------
3
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
______ Warrants represented by the above Warrant Certificate, and to purchase
the securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
__________________________________________________
(please insert taxpayer identification
or other identifying number)
and to be delivered to
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below:
__________________________________________________
__________________________________________________
__________________________________________________
(Address)
__________________________________
(Date)
__________________________________
(Taxpayer Identification Number)
__________________________________________
Registered Holder
SIGNATURE GUARANTEED
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
_________________________________
Registered Holder
FOR VALUE RECEIVED, hereby sells, assigns, and transfers unto
__________________________________________________
(please insert taxpayer identification or
other identifying number)
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
(please print or type name and address)
of the Warrants represented by this Warrant Certificate, and hereby irrevocably
constitutes and appoints ___________________________ Attorney to transfer this
Warrant Certificate on the books of the Company, with full power of substitution
in the premises.
__________________________________
(Date)
SIGNATURE GUARANTEED
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OR THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
___________________________________________
Registered Holder
