Exhibit 10.5
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT
AND ANY APPLICABLE STATES SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO GVI SECURITY SOLUTIONS, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED.
SECURED CONVERTIBLE MINIMUM BORROWING NOTE
FOR VALUE RECEIVED, GVI SECURITY SOLUTIONS, INC., a Delaware
corporation (the "BORROWER") promises to pay to LAURUS MASTER FUND, LTD., c/o
Ironshore Corporate Services Ltd., P.O. Box 1234 G.T., Queensgate House, South
Church Street, Grand Cayman, Cayman Islands, Fax: 000-000-0000 (the "HOLDER") or
its registered assigns, on order, the sum of Five Million Dollars ($5,000,000),
or, if different, the aggregate principal amount of all "Loans" (as such term is
defined in the Security Agreement referred to below), in each case, without
duplication of any amounts owing by Borrower to Holder under the Revolving Note
(as defined in the Security Agreement referred to below), together with any
accrued and unpaid interest hereon, on May 27, 2007 (the "MATURITY DATE").
Capitalized terms used herein without definition shall have the
meanings ascribed to such terms in the Security Agreement between Borrower and
the Holder dated as of May 27, 2004 (as amended, modified and supplemented from
time to time, the "SECURITY AGREEMENT"). This is the Minimum Borrowing Note
referred to in the Security Agreement, and all forms, terms and provisions
thereof are expressly incorporated herein by reference.
The following terms shall apply to this Minimum Borrowing Note (the "Note"):
ARTICLE I
INTEREST
1.1. Interest Rate and Payments. Subject to Sections 4.1 and 5.7
hereof, interest payable on this Note shall accrue at a rate per annum equal to
the Contract Rate, and shall be payable monthly in arrears commencing on June 1,
2004 and on the first day of each consecutive calendar month thereafter (each,
an "INTEREST PAYMENT DATE").
ARTICLE II
ADVANCES, PAYMENTS UNDER NOTE
2.1. Mechanics of Advances. All Loans evidenced by this Note shall be made in
accordance with the terms and provisions of the Security Agreement.
2.2. Fixed Conversion Price. For purposes hereof, subject to Section
3.5 hereof, the "FIXED CONVERSION PRICE" means $3.38.
2.3. Optional Redemption in Cash. The Borrower will have the option
of prepaying this Note ("OPTIONAL REDEMPTION") by paying to the Holder a sum of
money equal to one hundred twenty percent (120%) of the principal amount of the
Loans outstanding under this Note together with accrued but unpaid interest
thereon and any and all other sums due, accrued or payable to the Holder arising
under this Note, the Security Agreement, or any Ancillary Agreement (as defined
in the Security Agreement) (the "REDEMPTION AMOUNT") on the Redemption Payment
Date (defined below) specified in the written notice of redemption (the "NOTICE
OF REDEMPTION"). The Notice of Redemption shall specify the date for such
Optional Redemption (the "REDEMPTION PAYMENT DATE") which date shall be seven
(7) business days after the date of the Notice of Redemption (the "REDEMPTION
Period"). A Notice of Redemption shall not be effective with respect to any
portion of this Note for which the Holder has previously delivered a Notice of
Conversion (defined below) pursuant to Section 3.1, or for any portion of this
Note for which a Notice of Conversion is delivered during the Redemption Period.
The Redemption Amount shall be determined as if the Holder's conversion
elections had been completed immediately prior to the date of the Notice of
Redemption. On the Redemption Payment Date, the Redemption Amount (plus any
additional interest and fees accruing on the Notes during the Redemption Period)
must be irrevocably paid in full in immediately available funds to the Holder.
In the event the Borrower fails to pay the Redemption Amount on the Redemption
Payment Date as set forth herein, then such Redemption Notice will be null and
void.
ARTICLE III
HOLDER'S CONVERSION RIGHTS
3.1. Optional Conversion. Subject to the terms of this Article III,
the Holder shall have the right, but not the obligation, at any time until the
Maturity Date, or thereafter during an Event of Default, and, subject to the
limitations set forth in Section 3.2 hereof, to convert all or any portion of
the principal amount of the Loans outstanding hereunder and/or accrued interest
and fees due and payable hereunder into fully paid and nonassessable shares of
the Common Stock at the Fixed Conversion Price. The shares of Common Stock to be
issued upon such conversion are herein referred to as the "CONVERSION SHARES."
3.2. Conversion Limitation. Notwithstanding anything contained
herein to the contrary, the Holder shall not be entitled to convert pursuant to
the terms of this Note an amount that would be convertible into that number of
Conversion Shares which would exceed the difference between the number of shares
of Common Stock beneficially owned by such Holder or issuable upon exercise of
warrants held by such Holder and 4.99% of the outstanding shares of Common Stock
of the Borrower. For the purposes of the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Exchange Act and Regulation 13d-3 thereunder. The Conversion Shares limitation
described in this Section 3.2 shall automatically become null and void without
any notice to Borrower upon the occurrence and during the continuance beyond any
applicable grace period of an Event of Default, or upon 75 days prior notice to
the Borrower.
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3.3. Mechanics of Xxxxxx's Conversion. In the event that the Holder
elects to convert this Note into Common Stock, the Holder shall give notice of
such election by delivering an executed and completed notice of conversion
("NOTICE OF CONVERSION") to the Borrower and such Notice of Conversion shall
provide a breakdown in reasonable detail of the Loans, accrued interest and fees
that are being converted. On each Conversion Date (as hereinafter defined) and
in accordance with its Notice of Conversion, the Holder shall make the
appropriate reduction to the Loans outstanding hereunder, accrued interest and
fees as entered in its records and shall provide written notice thereof to the
Borrower within two (2) business days after the Conversion Date. Each date on
which a Notice of Conversion is delivered or telecopied to the Borrower in
accordance with the provisions hereof shall be deemed a Conversion Date (the
"CONVERSION Date"). A form of Notice of Conversion to be employed by the Holder
is annexed hereto as Exhibit A. Pursuant to the terms of the Notice of
Conversion, the Borrower will within one (1) Business Day of the date of the
delivery to Borrower of the Notice of Conversion, instruct its counsel to issue
an opinion with respect to the issuance of the Conversion Shares, and instruct
the transfer agent to transmit the certificates representing the Conversion
Shares to the Holder either by hand delivery, or if it is capable, by crediting
the account of the Holder's designated broker with the Depository Trust
Corporation ("DTC") through its Deposit Withdrawal Agent Commission ("DWAC")
system within three (3) Business Days after receipt by the Borrower of the
Notice of Conversion. In the case of the exercise of the conversion rights set
forth herein the conversion privilege shall be deemed to have been exercised and
the Conversion Shares issuable upon such conversion shall be deemed to have been
issued upon the date of receipt by the Borrower of the Notice of Conversion. The
Holder shall be treated for all purposes as the record holder of such Common
Stock, unless the Holder provides the Borrower written instructions to the
contrary.
3.4. Late Payments. The Borrower understands that a delay in the
delivery of the shares of Common Stock in the form required pursuant to this
Article beyond three (3) Business Days after Xxxxxxxx's receipt of the
Conversion Notice (the "DELIVERY DATE") could result in economic loss to the
Holder. As compensation to the Holder for such loss, in the event Borrower fails
to instruct the transfer agent or its counsel within one (1) Business Day as
required by Section 3.3, and as a result thereof, certificates representing the
Conversion Shares are not delivered to the Holder on or before the Delivery
Date, the Borrower agrees to pay late payments to the Holder for late issuance
of such shares in the form required pursuant to this Article III upon conversion
of the Note, in the amount equal to $500 per Business Day for each day Borrower
fails to provide such instructions to its transfer agent and/or its counsel, but
solely if Borrower fails to provide such instructions to its transfer agent
and/or its counsel as provided in Section 3.3 above. The Borrower shall pay any
payments incurred under this Section in immediately available funds upon demand.
3.5. Adjustment Provisions. The Fixed Conversion Price and number
and kind of shares or other securities to be issued upon conversion determined
pursuant to Section 2.2 shall be subject to adjustment from time to time upon
the happening of certain events while this conversion right remains outstanding,
as follows:
A. Reclassification, etc. If the Borrower at any time shall,
by reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note, as to the
Loans outstanding hereunder and accrued interest thereon, shall thereafter be
deemed to evidence the right to purchase an adjusted number of such securities
and kind of securities as would have been issuable as the result of such change
with respect to the Common Stock immediately prior to such reclassification or
other change.
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B. Stock Splits, Combinations and Dividends. If the shares of Common Stock are
subdivided or combined into a greater or smaller number of shares of Common
Stock, or if a dividend is paid on the Common Stock in shares of Common Stock,
the Fixed Conversion Price shall be proportionately reduced in case of
subdivision of shares or stock dividend or proportionately increased in the case
of combination of shares, in each such case by the ratio which the total number
of shares of Common Stock outstanding immediately after such event bears to the
total number of shares of Common Stock outstanding immediately prior to such
event.
C. Share Issuances. Subject to the provisions of this Section
3.5, if the Borrower shall at any time prior to the conversion or repayment in
full of the Loans outstanding hereunder issue any shares of Common Stock or
securities convertible into Common Stock to a person other than the Holder
(except (i) pursuant to Subsections A or B above; (ii) pursuant to options,
warrants, or other obligations to issue shares outstanding on the date hereof as
disclosed to Holder in writing; (iii) pursuant to options that may be issued
under any employee incentive stock option and/or any qualified stock option plan
adopted by the Borrower; (iv) in connection with an underwritten public offering
of the Borrower's securities; (v) pursuant to a merger or acquisition
transaction approved by Borrower's Board of Directors; (vi) to a "strategic
partner" as determined by Borrower's Board of Directors; or (vii) to Holder or
any of its Affiliates) for a consideration per share (the "Offer Price") less
than the Fixed Conversion Price in effect at the time of such issuance, then the
Fixed Conversion Price shall be immediately reset to pursuant to the formula
below.
If the Company issues any additional shares pursuant to Section 3.5
C above then, and thereafter successively upon each such issue, the Fixed
Conversion Price shall be adjusted by multiplying the then applicable Fixed
Conversion Price by the following fraction:
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A + B
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(A + B) + [((C - D) x B) / C]
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A = Total amount of shares convertible pursuant to this Note.
B = Actual shares sold in the offering
C = Fixed Conversion Price
D = Offering price
D. Computation of Consideration. For purposes of any
computation respecting consideration received pursuant to Subsection C above,
the following shall apply:
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(a) in the case of the issuance of shares of Common Stock for
cash, the consideration shall be the amount of such cash, provided that in no
case shall any deduction be made for any commissions, discounts or other
expenses incurred by the Borrower for any underwriting of the issue or otherwise
in connection therewith;
(b) in the case of the issuance of shares of Common Stock for
a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value thereof as determined in
good faith by the Board of Directors of the Borrower (irrespective of the
accounting treatment thereof); and
(c) Upon any such exercise, the aggregate consideration
received for such securities shall be deemed to be the consideration received by
the Borrower for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the Borrower upon the conversion or
exchange thereof (the consideration in each case to be determined in the same
manner as provided in clauses (a) and (b) of this Subsection (D)).
3.6. Reservation of Shares. During the period the conversion right
exists, the Borrower will reserve from its authorized and unissued Common Stock
a sufficient number of shares to provide for the issuance of Common Stock upon
the full conversion of this Note. The Borrower represents that upon issuance,
such shares will be duly and validly issued, fully paid and non-assessable. The
Borrower agrees that its issuance of this Note shall constitute full authority
to its officers, agents, and transfer agents who are charged with the duty of
executing and issuing stock certificates to execute and issue the necessary
certificates for shares of Common Stock upon the conversion of this Note.
3.7. Registration Rights. The Holder has been granted registration
rights with respect to the shares of Common Stock issuable upon conversion of
this Note as more fully set forth in a Registration Rights Agreement dated the
date hereof.
ARTICLE IV
DEFAULT PAYMENTS
4.1. Default Payment. If an Event of Default occurs and is
continuing beyond any applicable grace period, the Holder, at its option, may
elect, in addition to all rights and remedies of Holder under the Security
Agreement and all obligations of Borrower under the Security Agreement, to
require the Borrower to make a Default Payment ("DEFAULT PAYMENT"). The Default
Payment shall be 115% of the outstanding principal amount of the Note, plus
accrued but unpaid interest, all other fees then remaining unpaid, and all other
amounts payable hereunder. The Default Payment shall be applied first to any
fees due and payable to Holder pursuant to the Notes or the Ancillary
Agreements, then to accrued and unpaid interest due on the Notes and then to
outstanding principal balance of the Notes.
4.2. Default Payment Date and Default Notice Period. The Default
Payment shall be due and payable on the fifth business day after an Event of
Default ("DEFAULT PAYMENT DATE") has occurred and is continuing beyond any
applicable grace period. The period between date upon which of an Event of
Default has occurred and is continuing beyond any applicable grace period and
the Default Payment Date shall be the "DEFAULT PERIOD." If during the Default
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Period, the Borrower cures the Event of Default, the Event of Default will no
longer exist and any additional rights the Holder had triggered by the
occurrence and continuance of an Event of Default will no longer exist. If the
Event of Default is not cured during the Default Notice Period, all amounts
payable hereunder shall be due and payable on the Default Payment Date, all
without further demand, presentment or notice, or grace period, all of which
hereby are expressly waived.
4.3. Default Interest Rate. Following the occurrence and during the
continuance of an Event of Default, interest on this Note shall automatically be
increased by three percent (3%) per annum, and all outstanding Obligations,
including unpaid interest, shall continue to accrue interest from the date of
such Event of Default at such interest rate applicable to such Obligations until
such Event of Default is cured or waived.
4.4. Cumulative Remedies. The remedies under this Note, the Security
Agreement and the Ancillary Agreements shall be cumulative.
ARTICLE V
MISCELLANEOUS
5.1. Failure or Indulgence Not Waiver. No failure or delay on the
part of the Holder hereof in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.
5.2. Notices. Any notice herein required or permitted to be given
shall be in writing and provided in accordance with the terms of the Security
Agreement.
5.3. Amendment Provision. The term "Note" and all reference thereto,
as used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented, and any successor instrument as it may be amended or supplemented.
5.4. Assignability. This Note shall be binding upon the Borrower and
its successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder in accordance with the
requirements of the Security Agreement.
5.5. Cost of Collection. If default is made in the payment of this
Note, the Borrower shall pay the Holder hereof reasonable costs of collection,
including reasonable attorneys' fees.
5.6. Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws. Any action brought by either party against the other
concerning the transactions contemplated by this Agreement shall be brought only
in the state courts of New York or in the federal courts located in the state of
New York. Both parties and the individual signing this Note on behalf of the
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Borrower agree to submit to the jurisdiction of such courts. The prevailing
party shall be entitled to recover from the other party its reasonable
attorney's fees and costs. In the event that any provision of this Note is
invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or unenforceability of any other provision of this
Note. Nothing contained herein shall be deemed or operate to preclude the Holder
from bringing suit or taking other legal action against the Borrower in any
other jurisdiction to collect on the Borrower's obligations to Holder, to
realize on any collateral or any other security for such obligations, or to
enforce a judgment or other court order in favor of Xxxxxx.
5.7. Maximum Payments. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Borrower to the Holder and thus refunded to the
Borrower.
5.8. Security Interest. The Holder of this Note has been granted a
security interest in certain assets of the Borrower more fully described in a
Master Security Agreement dated as of May 27, 2004.
5.9. Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.
[Balance of page intentionally left blank; signature page follows.]
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IN WITNESS WHEREOF, the Borrower has caused this Secured Convertible
Minimum Borrowing Note to be signed in its name effective as of this 27th day of
May, 2004.
GVI SECURITY SOLUTIONS, INC.
By:
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Name:
Title:
WITNESS:
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NOTICE OF CONVERSION
(To be executed by the Holder in order to convert the Note)
The undersigned hereby elects to convert $_________ of the principal
and $_________ of the interest due on the Secured Convertible Minimum Borrowing
Note issued by GVI Security Solutions, Inc. on May 27, 2004 into Shares of
Common Stock of GVI Security Solutions, Inc. according to the conditions set
forth in such Note, as of the date written below.
Date of Conversion:
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Conversion Price:
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Shares To Be Delivered:
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Signature:
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Print Name:
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Address:
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Holder DWAC
instructions --------------------------------------------------------
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