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EXHIBIT 10.4
THIS NOTE IS NONNEGOTIABLE
____% CONVERTIBLE SUBORDINATED NOTE
DUE __________, 2002
$___________________ Nashville, Tennessee
______________, 1998
SERVICE EXPERTS, INC., a Delaware corporation (the "Company"), for
value received, hereby promises to pay ________________ ("Shareholder") the
principal amount of _______________ ($____________), together with accrued
interest thereon at the rate of ____% per annum (computed on the basis of a
365-day year) from the date hereof. Principal shall be payable in four equal
annual installments beginning one year from the date hereof. Interest shall be
payable quarterly on each January 1, April 1, July 1 and October 1 after the
date hereof. The final principal installment and all accrued and unpaid interest
shall be due and payable _____ __, 2002 (the "Maturity Date"). Payments of
principal and interest on this Note shall be made in lawful money of the United
States of America at the principal office of Shareholder, or at such other
office or agency as the holder shall have designated by written notice to the
Company. The Company shall have the right to prepay this Note in whole or in
part without penalty upon thirty (30) days prior written notice.
1. Events of Default. If any of the following conditions or events
(each an "Event of Default" and collectively, the "Events of Default") shall
occur and be continuing:
(a) if the Company shall default in the payment of any principal
on this Note when the same becomes due and payable, whether at maturity or
otherwise, and such payment shall not have been made within thirty (30) days
after written notice of default shall have been received by the Company from the
holder of this Note; or
(b) if the Company shall default in the payment of any
interest on the Note when the same becomes due and payable and such default
shall continue more than thirty (30) days after written notice of default shall
have been received by the Company from the holder of this Note; or
(c) if the Company shall make an assignment for the benefit of
creditors, or shall admit in writing its inability to pay its debts as they
become due, or shall file a voluntary petition in bankruptcy, or shall be
adjudicated as bankrupt or insolvent, or shall file any petition or answer
seeking for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, or shall file any answer admitting or not contesting the
material allegations of a petition filed against the Company in any such
proceeding, or shall seek or consent to or acquiesce in the appointment of any
custodian, trustee, receiver or liquidator of the Company or such subsidiary or
of all or any substantial part of the properties of the Company or such
subsidiary, or if the Company or its directors or majority shareholders shall
take any action looking to the dissolution or liquidation of the Company; or
(d) if, within sixty (60) days after the commencement of an
involuntary bankruptcy proceeding or other action against the Company seeking
any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such action shall not have been dismissed or all orders or
proceedings thereunder affecting the operations or the business of the Company
stayed, or if the stay of any such order or proceeding shall thereafter be set
aside, or if, within sixty (60) days after the appointment without the consent
or acquiescence of the Company or
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any custodian, trustee, receiver or liquidator of the Company or of all or any
substantial part of the properties of the Company, such appointments shall not
have been vacated;
then, and in any such Event of Default, the holder hereof may at any time
(unless all defaults shall theretofore have been remedied) at its option, by
written notice to the Company, declare this Note to be due and payable,
whereupon this Note shall forthwith mature and become due and payable, together
with interest accrued and unpaid hereon, without presentment, demand, protest or
notice, all of which are hereby waived.
2. Conversion.
2.1 Conversion Privilege
2.1.1 Conversion by Shareholder. This Note
may, at the election of the holder hereof and at any time prior to the earlier
of the Maturity Date or the prepayment in full of this Note, be converted into
the number of fully paid and nonassessable shares of Common Stock, $0.01 par
value per share, of the Company (the "Common Stock") determined by dividing (x)
the principal amount being converted by (y) the conversion price of $______
(which is 140% of the Closing Price), as adjusted from time to time in
accordance with Sections 2.4 and 2.5 hereof (such conversion price, as so
adjusted and readjusted and in effect at any time, being herein called the
"Conversion Price"). As used herein, "Closing Price" means the average closing
sales price of a share of the Common Stock as reported on the New York Stock
Exchange for the five trading days immediately preceding the date hereof.
2.1.2 Conversion by the Company. In the event
the closing sales price of a share of Common Stock as reported on the New York
Stock Exchange exceeds the Conversion Price on five (5) consecutive trading
days, the Company, at its election, may convert this Note into the number of
fully paid and nonassessable shares of Common Stock determined by dividing (x)
the principal amount outstanding by (y) the Conversion Price. Upon such
conversion and without any further action by the parties hereto, the holder
hereof will not be entitled to any additional principal or interest payments
hereunder. Upon receipt of written notice from the Company informing the holder
of the conversion of the Note, the holder shall convert the Note in accordance
with the provisions of Section 2.2 below.
2.2 Manner of Conversion, Partial Conversion, Etc.
2.2.1. Surrender of Note. This Note may be
converted by the holder hereof by surrender of this Note any time prior to the
Maturity Date, accompanied by written notice stating that such holder elects to
convert all or a portion of the principal amount thereof and stating the name or
names, together with addresses, in which the certificate or certificates for
shares of Common Stock are to be issued. Any conversion shall be deemed to have
been effected (i) with respect to a conversion under Section 2.1.1, immediately
prior to the close of business on the date on which this Note shall have been so
surrendered to the Company and (ii) with respect to a conversion under Section
2.1.2, immediately prior to the close of business on the fifth consecutive
trading day that the closing sales price of a share of Common Stock as reported
on the New York Stock Exchange exceeds the Conversion Price; and at such time
the rights of the holder as to that portion of this Note so converted shall
cease, and the person in whose name or names any certificate or certificates for
shares of Common Stock (or other securities) shall be issuable upon such
conversion shall be deemed to have become the holder or holders of record
thereof.
2.2.2. Accrued Interest, Etc. The Company will
have no obligation to pay to the holder converting this Note any accrued but
unpaid interest on the principal amount so converted up to and including the
date of conversion.
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2.3. Delivery of Stock Certificates; Fractional Shares. As
promptly as practicable after the conversion of this Note in whole or in part,
and in any event within ten (10) days thereafter, the Company at its expense
will issue and deliver to the holder of this Note, or as such holder (upon
payment by such holder of any applicable transfer taxes and subject to
compliance with securities laws) may direct, a certificate or certificates for
the number of full shares of Common Stock issuable upon such conversion, plus,
in lieu of any fractional share to which such holder would otherwise be
entitled, cash equal to such fraction multiplied by the market value of one full
share of Common Stock as of the close of business on the date of such
conversion, as determined by the Board of Directors. Upon issuance, such
certificates may bear a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN
ACCORDANCE WITH THE TERMS OF THE LETTER AGREEMENT, DATED ___________,
1998, BETWEEN THE REGISTERED HOLDER HEREOF AND SERVICE EXPERTS, INC., A
COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF SERVICE
EXPERTS, INC."
2.4. Adjustment of Conversion Price. The Conversion Price
shall be adjusted from time to time as follows:
2.4.1. In case the Company shall hereafter (i) pay a
dividend or make a distribution on its Common Stock in shares of Common Stock,
(ii) subdivide its outstanding shares of Common Stock into a greater number of
shares, (iii) combine its outstanding shares of Common Stock into a smaller
number of shares, or (iv) issue by reclassification of its Common Stock any
shares of capital stock of the Company, the Conversion Price in effect
immediately prior to such action shall be adjusted so that the Holder of this
Note or any portion hereof thereafter surrendered for conversion shall be
entitled to receive the number of shares of Common Stock or other capital stock
of the Company which he would have owned immediately following such action had
this Note or such portion hereof been converted immediately prior thereto. Any
adjustment made pursuant to this subsection 2.4.1 shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an adjustment
made pursuant to this subsection 2.4.1, the Holder of this Note or such portion
hereof thereafter surrendered for conversion shall become entitled to receive
shares of two or more classes of capital stock or shares of Common Stock and
other capital stock of the Company, the Board of Directors (whose determination
shall be conclusive) shall reasonably determine the allocation of the adjusted
Conversion Price between or among shares of such classes of capital stock or
shares of Common Stock and other capital stock.
2.4.2. If the amount of any single adjustment of the
Conversion Price required pursuant to this subsection 2.4.2 would be less than
one cent ($0.01) at the time such adjustment is otherwise so required to be
made, such amount shall be carried forward and adjustment with respect thereto
made at the time of and together with any subsequent adjustment which, together
with such amount and any other amount or amounts so carried forward, shall
aggregate at least one cent ($0.01) when the Conversion Price is adjusted.
2.5. Adjustments for Consolidation, Merger, Sale of Assets,
Reorganization, Etc. If at any time the Company shall be a party to any
transaction (including without limitation a merger, consolidation, sale of all
or substantially all of the Company's assets or recapitalization of the Common
Stock) in which the previously outstanding Common Stock shall be changed into or
exchanged for different securities of the Company or changed into or exchanged
for common stock or other securities of another company or interests in a
noncorporate entity or other property (including cash) or any combination of any
of the foregoing (each such transaction being hereinafter referred to as the
"Transaction," the
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Company (in the case of a recapitalization of the Common Stock) or such other
company or entity (in each other case) being hereinafter referred to as the
"Acquiring Company," and the common stock (or equivalent equity interests) of
the Acquiring Company being hereinafter referred to as the "Acquirer's Stock"),
then as a condition to the consummation of the Transaction, lawful and adequate
provisions shall be made so that, upon the basis and the terms and in the manner
provided in this Section 2.5, the holder of this Note, upon the conversion
thereof at any time after the consummation of the Transaction, shall be entitled
to receive, in lieu of the Common Stock issuable upon such conversion prior to
such consummation the stock and other securities, cash and property to which the
holder would have been entitled upon the consummation of the Transaction if the
holder had converted this Note immediately prior thereto (subject to adjustments
from and after the date of the consummation of the Transaction (the
"Consummation Date") as nearly equivalent as possible to the adjustments
provided for in Section 2.4 and this Section 2.5).
2.6. Notices of Record Date, Etc. In the event of
(a) any action by the Company which would require an
adjustment to the Conversion Price pursuant to Section 2.4, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the Common Stock, any consolidation or
merger involving the Company and any other person, any transfer of all or
substantially all the assets of the Company to any other person or any other
transaction described in Section 2.5 hereof, or
(c) any voluntary or involuntary dissolution, liquidation
or winding-up of the Company,
the Company will mail to the holder of this Note, at least ten (10) days prior
to the date of any action referred to in the notice referred to herein, a notice
specifying (i) the date on which any such record is to be taken for the purpose
of determining the holders of record of Common Stock entitled to receive such
dividend, distribution or right, and the amount and character of such dividend,
distribution or right, and (ii) the date or expected date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation, winding-up or other transaction referred to in
Section 2.4 or 2.5 hereof is to take place, and the time, if any such time is to
be fixed, as of which the holders of record of Common Stock shall be entitled or
obligated to exchange their shares of Common Stock for the securities or other
property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation,
winding-up or other transaction referred to in Section 2.4 or 2.5 hereof. In
addition, promptly after the occurrence of any event which results in an
adjustment of the Conversion Price, the Company shall mail to the holder of this
Note a notice of such adjustment together with a statement setting forth the
computations relating thereto. Failing to give such notice or any default
therein shall not affect the legality or validity of the proceedings described
in Subsection (a), (b) or (c) of this Section 2.6.
2.7. Reservation of Stock, Etc., Issuable on Conversion. The
Company will at all times reserve and keep available, solely for issuance and
delivery upon the conversion of this Note, the number of shares of Common Stock
(or other securities), whether authorized but unissued shares reserved by it
which are free from preemptive rights or issued shares which have been
reacquired by it, from time to time issuable upon the conversion of this Note at
the time outstanding. The Company hereby covenants that all such securities
shall be duly authorized and, when issued upon such conversion, shall be validly
issued and, in the case of shares, fully paid and nonassessable with no
liability on the part of the holders thereof.
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2.8. Conversion Agent. The Company may, upon ten (10) days
prior written notice to the holder of this Note, appoint a bank or trust company
as agent for the purpose of accepting this Note surrendered for conversion and
issuing Common Stock upon the conversion of this Note pursuant to Section 2.2,
and thereafter (as long as the authority of such agent shall continue in effect)
any such surrender and conversion and issuance shall be made at such office to
and by such agent.
3. Subordination.
3.1. Definition. For purposes of this Section 3.1 the term
"Senior Debt" shall mean any indebtedness for borrowed money, the payment of
which the Company is at the time of determination responsible or liable as
obligor, guarantor or otherwise, other than (a) indebtedness as to which, in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is expressly provided that such indebtedness is junior and
subordinate to other indebtedness and obligations of the Company, (b)
indebtedness which by its terms refers explicitly to this Note and states that
such indebtedness shall not be senior thereto and shall be equally subordinated
and equally junior, and (c) indebtedness of the Company in respect of this Note.
Senior Debt shall continue to be Senior Debt and entitled to the benefits of the
subordination provisions set forth herein irrespective of any amendment,
modification, or waiver of any term of the Senior Debt or extension or renewal
of the Senior Debt.
3.2. Note Subordinate to Senior Debt. The Company, for itself,
its successors and assigns, covenants and agrees, and each holder, by its
acceptance of this Note or any portion hereof, likewise covenants and agrees,
that this Note shall be subordinated and subject, to the extent and in the
manner herein set forth, in right of payment to the prior payment in full of all
Senior Debt. The provisions of this Section 3 are made for the benefit of all
holders of Senior Debt, and any such holder may proceed to enforce such
provisions.
3.3. Other Subordinated Indebtedness. This Note shall rank on
a parity with all other of the Company's Subordinated Convertible Notes.
3.4. Payment Over of Proceeds Upon Dissolution, Etc. No
payment on account of principal of (or premium, if any) or interest on this Note
shall be made, if any default or event of default with respect to any Senior
Debt, which permits or with the giving of notice or passage of time or both
would permit the holders thereof (or a trustee on their behalf) to accelerate
the maturity thereof, shall have occurred and be continuing.
In the event this Note is declared due and payable
before the maturity date hereof, or upon any payment or distribution of assets
of the Company of any kind or character, whether in cash, property or
securities, to creditors upon any dissolution or winding-up or total or partial
liquidation or reorganization of the Company, whether voluntary or involuntary
or in bankruptcy, insolvency, receivership or other proceedings, or upon any
assignment by the Company for the benefit of creditors or any other marshalling
of the assets of the Company, all principal of (and premium, if any) and
interest due or to become due upon all Senior Debt (including any interest
thereon occurring after the commencement of any such proceeding) shall first be
paid in full before the holder of this Note shall be entitled to retain any
assets (other than shares of stock of the Company as reorganized or readjusted
or securities of the Company or any other corporation provided for by a plan of
reorganization or readjustment, the payment of which is subordinated, at least
to the same extent as this Note, to the payment of all Senior Debt which may at
the time be outstanding, provided that the rights of the holders of the Senior
Debt are not altered by such reorganization or readjustment) so paid or
distributed in respect of this Note (for principal, premium, if any, or
interest); and upon such dissolution or winding-up or liquidation or
reorganization or assignment or marshalling of assets, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities (other than
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shares of stock of the Company as reorganized or readjusted or securities of the
Company or any other corporation provided for by a plan or reorganization or
readjustment, the payment of which is subordinated, at least to the same extent
as this Note, to the payment of all Senior Debt which may at the time be
outstanding or committed, provided that the rights of the holders of the Senior
Debt are not altered by such reorganization or readjustment), to which the
holders of this Note would be entitled, except for the provisions of this
Section, shall be paid by the Company or by any receiver, trustee in bankruptcy,
liquidating trustee, agent or other person making such payment or distribution,
or by the holders of this Note if received by them or it, directly to the
holders of Senior Debt (pro rata to each such holder as their interests may
appear on the basis of the respective amounts of Senior Debt held by such
holder, including any interest thereon accruing after the commencement of any
such proceedings) or their representatives, to the extent necessary to pay all
Senior Debt in full, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Debt, before any payment or
distribution is made to the holders of this Note.
Should any payment, distribution, security or proceeds
thereof, the receipt of which is prohibited by this Agreement, be received by
the Shareholder prior to the satisfaction of all Senior Debt, the Shareholder
will forthwith deliver the same to the holders of the Senior Debt in precisely
the form received (except for the endorsement or assignment of the Shareholder
where necessary), for application on any indebtedness, due or not due, of the
Company to the Shareholder, and, until so delivered, the same shall be held in
trust by the Shareholder as property of the holders of the Senior Debt. In the
event of the failure of the Shareholder to make any such endorsement or
assignment, the holders of the Senior Debt, or any of their officers or
employees, are hereby irrevocably authorized to make the same.
No holder of Senior Debt shall be prejudiced in his
right to enforce subordination of this Note by any act or failure to act on the
part of the Company.
Subject to the payment in full of all Senior Debt, the
holder of this Note shall be subrogated (equally and ratably with the holders of
all indebtedness of the Company which, by its express terms, ranks on a parity
with this Note and is entitled to like rights of subrogation) to the rights of
the holders of Senior Debt to receive payments or distributions of assets of the
Company applicable to the Senior Debt until this Note shall be paid in full. For
purposes of such subrogation, no payments or distributions on the Senior Debt
pursuant to this Section shall, as between the Company, its creditors other than
the holders of Senior Debt, and the holder of this Note, be deemed to be a
payment by the Company to or on account of the Senior Debt, and no payments or
distributions to the holders of this Note of assets by virtue of the subrogation
herein provided for shall, as between the Company, its creditors other than the
holder of Senior Debt, and the holders of this Note, be deemed to be a payment
to or on account of this Note. The provisions of this Section are and are
intended solely for the purpose of defining the relative rights of the holder of
this Note, on the one hand, and the holders of Senior Debt, on the other hand,
and nothing contained in this Section or in this Note is intended to or shall
impair the obligation of the Company, which is unconditional and absolute, to
pay the principal of (and premium, if any) and interest on this Note as and when
the same shall become due and payable in accordance with its terms, or to affect
the relative rights of the holders of this Note and creditors of the Company
other than the holders of Senior Debt, nor shall anything herein prevent the
holders of this Note from exercising all remedies otherwise permitted by
applicable law upon default under this Note, subject to the rights, if any,
under this Section, of the holders of Senior Debt in respect of cash, property
or securities of the Company otherwise payable or delivered to the holders of
this Note upon the exercise of any such remedy.
Nothing contained in this Section 3.4 shall prevent
conversion of this Note.
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4. Miscellaneous.
4.1. Governing Law. This Note shall be governed by the laws of
the State of Tennessee.
4.2. Notices. All notices delivered pursuant to the terms
hereof shall be deemed effective upon receipt thereof.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed
by its duly authorized officer on the date first above written.
SERVICE EXPERTS, INC.
By:
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Title:
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