TAITRON COMPONENTS INCORPORATED
CONVERTIBLE SUBORDINATED NOTE
PURCHASE AGREEMENT
This Convertible Subordinated Note Purchase Agreement (The "Agreement") is
made and entered into as of May 18, 1996 by and between Taitron Components
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Incorporated, a California corporation (the "Company", and Tenrich Holdings Ltd.
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(the "Purchaser").
1. Authorization and Sale of Convertible Subordinated Notes.
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1.1 Authorization. The Company has authorized the execution and
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delivery of 8% Convertible Subordinated Notes (the "Notes"), in the aggregate
principal amount of at least U.S. $2,000,000, but not to exceed U.S. $3,000,000,
in substantially the form attached hereto as Exhibit A. The Notes are
Exhibit A. The Notes are convertible, as therein set forth, into the Company's
Class A Common Stock, par value $0.001 per share (the "Common Stock"), at the
conversion price and subject to the adjustments set forth in the Notes. The
Notes and the Common Stock are referred to herein collectively as the
"Securities."
1.2 Purchase and Sale of the Notes. On the terms and subject to the
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conditions of this Agreement, the Company agrees to sell to the Purchaser, and
the Purchaser agrees to purchase from the Company, a Note or Notes in the
principal amount of $3,000,000, for the purchase price of 100% of the principal
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amount thereof.
2. Closing Delivery.
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2.1 Closing Date. The closing of the purchase and sale of the Notes
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hereunder (the "Closing") shall be held at the offices of the Company, 25202
Anza Drive, Santa Clarita, California 91355, at 10:00 a.m. on May 18, 1996 or at
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such other time and place as is agreed to by the parties (the "Closing Date");
provided, however, that if any condition to Closing is not satisfied prior to
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the Closing Date, the Company shall have the right to extend the Closing for a
period not to exceed 30 days. At the Closing, the Company will deliver to the
Purchaser a Note or Notes substantially in the form of Exhibit A in the
principal amount set forth in Section 1.2 above, which Note(s) shall be
registered in the Purchaser's name, against payment of the purchase price
therefor in immediately available U.S. Dollar funds by bank cashiers check
payable to the order of the Company or by wire transfer to the account of the
Company.
3. Representations and Warranties of the Company. The Company represents
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and warrants to the Purchaser that:
3.1 Organization, Standing and Corporate Power. The Company is a
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corporation duly organized, validly existing and in good standing under the laws
of the State of California, with all requisite power and authority to own, lease
and operate its properties and carry on its business as presently conducted.
The Company has the corporate power and authority to enter into, execute and
deliver this Agreement and the Notes and to perform the provisions hereof and
thereof.
3.2 Authorization, etc. This Agreement and the Notes have been duly
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authorized by all necessary corporate action on the part of the Company, and
this Agreement constitutes, and upon their execution and delivery the Notes will
constitute, a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with their terms, except as such
enforceability may be limited by (a) applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights and (b) general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
3.3 Form 10-KSB, Form 10-QSB, Proxy Statement and Annual Report. You
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have heretofore been furnished with a copy of the Company's Form 10-KSB for the
fiscal year ended December 31, 1995, the Company's Form 10-QSB for the quarter
ended March 31, 1996, the Company's Proxy Statement for the Annual Meeting of
the Shareholders held on May 10, 1996 and the Company's 1995 Annual Report (the
"SEC Documents") which generally set forth information with respect to Company
and its business. Additional copies of such documents are attached hereto as
Exhibit B.
4. Representations and Warranties of the Purchaser. The Purchaser
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represents and warrants to the Company that:
4.1 Authorization. Assuming due execution and delivery by the Company,
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this Agreement constitutes the legal, valid, binding and enforceable obligation
of the Purchaser, except as such enforceability may be limited by (a) applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights and (b) general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law).
4.2 Investment. The Purchaser has been advised that the Securities
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have not been registered under the Securities Act of 1933, as amended (the
"Act"), in reliance on Regulation S under the Act, and in connection therewith,
the Purchaser understands that the
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Company is relying in part on the representations and warranties set forth in
this Section 4.2;
4.2.1 the Purchaser is not a citizen, national or resident of
the United States of America or its territories or possessions;
4.2.2 the Purchaser is, and will be at the time of the Closing,
located outside the United States, the purchase of the Notes and the performance
of the Purchaser's obligations hereunder and under any related agreements are
legally permitted by all laws and regulations to which the Purchaser is subject,
and all consents, approvals or authorizations of, and all designations,
declarations or filings with, any governmental authority or agency required in
the jurisdiction in which the Purchaser is located in connection with the valid
execution and delivery of this Agreement and the performance of the Purchaser's
obligations hereunder have been obtained by the Purchaser and will be effective
on the Closing Date;
4.2.3 the Purchaser is acquiring the Notes for the Purchaser's
own account and not with a view to, or for sale in connection with, any
distribution thereof;
4.2.4 the Purchaser is an "accredited investor" as that term is
defined in Rule 501(a) of Regulation D promulgated under the Act, is an
experienced and sophisticated investor, is able to fend for itself in the
transactions contemplated by this Agreement, and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the risks and merits of acquiring the Notes. The Purchaser has had, during the
course of this transaction and prior to its purchase of the Notes, the
opportunity to ask questions of, and receive answers from, the Company,
concerning the Company, its business and the terms and conditions of this
Agreement. The Purchaser represents and warrants that the nature and amount of
the Notes it is purchasing are consistent with its investment objectives,
abilities and resources and that it has the ability to bear the economic risk
associated with its investment in the Notes;
4.2.5 the Purchaser recognizes that the Company has no
obligation to register the Securities or to comply with any exemption from such
registration except as set forth in this Agreement; and
4.2.6 the Purchaser recognizes that no public market now exists
for the Notes and that a public market may never exist for the Notes.
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4.3 Lock-up Agreements. The Purchaser has been advised that the
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lock-up agreements entered into by each of the Company's directors, officers and
certain shareholders in connection with the Company's initial public offering of
its Common Stock expire on May 19, 1996.
5. Transfer of Securities. None of the Securities shall be transferable
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except upon the conditions specified in this Section 5, which conditions are
intended to insure compliance with the provisions of Regulation S of the Act in
respect to the transfer of such Securities.
5.1 Legend. Each certificate or other document evidencing any of the
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Securities shall be endorsed with a legend substantially in the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED
AND SOLD ONLY PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE OF THE UNITED
STATES WITHIN THE MEANING OF REGULATION S UNDER THE ACT. THESE SECURITIES MAY
NOT BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
5.2 Restricted Period. During the 40 day period immediately
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following the Closing Date, the Purchaser will not offer or sell any Securities
to a "U.S. Person" or for the account of a "U.S. Person" (as that term is
defined by Rule 902 of Regulation S).
5.3 Removal of Legend. If in the reasonable opinion of counsel for
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the Company, or the opinion of counsel for the Purchaser, which opinion is
reasonably satisfactory to counsel for the Company, all future dispositions of
the Securities by the Purchaser or any contemplated transferee would be exempt
from the registration and prospectus delivery requirements of the Act and the
qualification requirements of applicable state securities laws, then the legend
set forth in Section 5.1 above may be removed from the certificates representing
such Securities.
6. Registration Rights.
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6.1 Definitions. As used in this Section 6, the following terms
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shall have the following meanings:
6.1.1 The terms "Register," "Registered" and "Registration"
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refer to a registration effected by preparing and filing a registration
statement in compliance with the Act (the "Registration Statement"), and the
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declaration or ordering by the
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Securities and Exchange Commission (the "Commission") of the effectiveness of
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of such Registration Statement.
6.1.2 "Registrable Securities" shall mean (a) all shares of
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Common Stock not previously sold to the public that are issued or issuable upon
conversion of the Notes and (b) any shares of Common Stock issued as a dividend
or other distribution with respect to, or in exchange or in replacement or, the
shares specified in clause (a) above.
6.1.3 "Registration Expenses" shall mean all expenses
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incurred by the Company in complying with this Section 6, including, without
limitation, all federal and state registration, qualification and filing fees,
printing expenses, fees and disbursements of counsel for the Company, blue sky
fees and expenses and the expense of any special audits incident to or required
by any such registration.
6.2 Demand Registration on Form S-3. In the event that the
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Company receives from the Purchaser a written request that the Company effect a
Registration on Form S-3 (or any successor form to Form S-3 regardless of its
designation) at a time when the Company is eligible to Register securities on
Form S-3 for an offering of Registrable Securities, the Company will as soon as
practicable use its best efforts to effect Registration of the Registrable
Securities specified in such request. The Company shall have the right to
delay, for a period not exceeding 180 days from the notice given pursuant to
this Section 6.2, the filing of a Registration Statement pursuant to this
Section 6.2 if in the good faith judgement of the Board of Directors of the
Company such filing would, if not so delayed, materially and adversely affect a
then proposed or pending financial project, acquisition, merger or corporate
reorganization or otherwise be detrimental to the Company or its shareholders.
With respect to a Demand Registration under this Section 6.2, the Company may,
within 30 days of its receipt of written request therefor, give written notice
to the Purchaser that it intends to Register its securities under the Act, and
such Registration will thereafter be deemed a Company-initiated Registration and
not a Demand Registration under this Section 6.2 and will be governed by the
provisions of Section 6.3 of this Agreement. Any Registration Statement filed
pursuant to the request of the Purchaser under this Section 6.2 may, subject to
the provisions hereof, include other securities of the Company which are held by
persons who, by virtue of agreements with the Company, are entitled to include
their securities in such Registration. The Company shall be obligated pursuant
to this Section 6.2 to file only one Registration which becomes effective,
whether or not the Registration Statement at the time it becomes effective
covers all or a portion of the Registerable Securities. The Purchaser shall not
be deemed to have effected a Demand Registration pursuant to
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this Section 6.2 unless and until the Registration Statement is declared
effective. The Company shall not be obligated to Register the Registerable
Securities pursuant to this Section 6.2, if, in the reasonable opinion of
counsel to the Company, such Registerable Securities would be freely tradeable
without need of such Registration.
6.3 Piggyback Registration. If the Company shall propose to
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Register any shares of Common Stock (other than on Form S-8 or Form S-4 or any
successor form thereto), the Company shall give the Purchaser written notice of
such proposed Registration at least 20 days prior to the filing of such
Registration Statement. Upon written request received by the Company from the
Purchaser within 10 days after the giving of such written notice by the Company,
the Company shall include or cause to be included in any such Registration
Statement all or such portion of the Registerable Securities as the Purchaser
may request; provided, however, that the Company may at any time withdraw or
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cease proceeding with any such Registration with no liability to the Purchaser;
and provided further, that in connection with any Registration involving an
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underwriting, the managing underwriter may (if in its reasonable opinion
marketing factors so require) limit the number of shares (including the
Registration Securities) included in such offering (other than shares being
sold by the Company). In the event of any such limitation, the total number of
Registerable Securities to be offered for the account of the Purchaser and of
all other shares requested to be included therein by other shareholders who have
been granted Registration rights by the Company shall be reduced pro rata in
proportion to the respective number of shares requested to be included therein
by each participant to the extent necessary to reduce the total number of shares
proposed to be Registered to the number of shares recommended by the managing
underwriter.
6.4 Registration Procedures. The Company will: (a) use its best
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efforts to keep any Registration effective for a period of 90 days or until the
purchaser has completed the distribution described in the Registration Statement
relating thereto, whichever first occurs; and (b) furnish such number of
prospectuses (including preliminary prospectuses) and other documents as the
Purchaser from time to time may reasonably request.
6.5 Conversion of Notes. The Registration Rights set forth in
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this Section 6 are conditioned upon the conversion of the Notes into the Common
Stock with respect to which Registration is sought prior to the later of (a) the
effective date of the Registration Statement and (b) two days prior to the
closing date, if any, of the offering made by the Registration Statement.
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6.6 Expense of Registration. All Registration Expenses incurred in
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connection with any registration, qualification or compliance pursuant to
Section 6.2 or 6.3 shall be borne by the Company.
6.7 Information Furnished by the Purchaser. It shall be a condition
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precedent to the Company's obligations under this Section 6 that the Purchaser
furnish to the Company such information regarding the Purchaser and the proposed
distribution as the Company may reasonable request.
6.8 Indemnification.
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6.8.1 Indemnification by Purchaser. To the extent permitted by
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law, the Purchaser will indemnify the Company, each of its directors and
officers, each underwriter, if any, and each person who controls the Company or
such underwriter within the meaning of the Act (each such party referred to as
an "indemnified party"), against all claims, losses, damages and liabilities (or
actions in respect thereof) to the extent such claims, losses, damages and
liabilities arise out of or are based upon any untrue statement (or alleged
untrue statement) of a material fact contained in any such Registration
Statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and the Purchaser
will reimburse such indemnified parties for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case only to the extent that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such Registration Statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by the Purchaser and stated to be for use in connection
with the offering of securities of the Company; provided, however, that the
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obligations of the Purchaser hereunder shall be limited to an amount equal to
the proceeds received by the Purchaser from such Registration.
6.8.2 Indemnification by the Company. To the extent permitted
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by law, the Company will indemnify the Purchaser and each underwriter, if any,
and each person who controls any underwriter (all such parties referred to
collectively as "indemnified parties"), against all claims, losses, damages and
liabilities (or actions in respect thereof) to the extent such claims, losses,
damages or liabilities arise out of or are based upon any untrue statement (or
alleged untrue statement) of a material fact contained in any such Registration
Statement, prospectus, offering circular or other document or any omission (or
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alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by the Company of any rule or regulation promulgated under the Act
applicable to the Company and relating to any action or inaction required of the
Company in connection with any such Registration, qualification or compliance,
and the Company will reimburse such indemnified parties for any legal and any
other expenses reasonably incurred in connection with investigating or defending
any such claim, loss, damage, liability or action; provided, however, that the
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Company shall not be liable to the Purchaser or any underwriter or controlling
person in the event any such loss, claim, damage or liability arises out of or
is based upon any such untrue statement or omission made in such registration
statement, preliminary prospectus, summary prospectus, prospectus or amendment
or supplement thereto, or any other document, in reliance upon and in conformity
with written information furnished to the Company by the Purchaser or any such
underwriter or controlling person, specifically for use therein.
6.8.3 Indemnification Procedure. If any action is brought against
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an indemnified party in respect of which indemnity may be sought hereunder
against an indemnifying party, such indemnified party shall promptly notify the
indemnifying party in writing of the institution of such action and the
indemnifying party shall assume the defense of the action, including the
employment of counsel satisfactory to the indemnified party and payment as
incurred of all fees and expenses related thereto. The indemnified party shall
have the right to employ its own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (a) the employment of such counsel and the payment of fees and expenses
thereof shall have been authorized in writing by the indemnifying party in
connection with the defense of the action or (b) the indemnifying party shall
have failed promptly after notice by such indemnified party to assume the
defense of such action or proceeding and to employ counsel satisfactory to the
indemnified party in any such action or proceeding or (c) the named parties to
any such action or proceeding (including any impleaded parties) include both
such indemnified party and the indemnifying party, and such indemnified party
shall have been advised by counsel that there may be legal defenses available to
such indemnified party which are different from or additional to those available
to the indemnifying party (in which case, if such indemnified party notifies the
indemnifying party in writing that it elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action), it being understood, however, that
the indemnifying party shall not, in connection with any one such action or
proceeding or separate but substantially similar or related action or
proceedings in the same jurisdiction arising out of the same general allegations
or
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circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys (together with appropriate local counsel) at any time
for such indemnified party. Anything in this paragraph to the contrary
notwithstanding, the indemnifying party shall not be liable for any settlement
of any claim or action effected without its written consent. The indemnity
agreements contained in this Section 6.8 shall remain in full force and effect
regardless of any investigation made by or on behalf of any indemnified party,
and shall survive any termination of this Agreement.
6.8.4 Contribution. If the indemnification provided for
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above in this Section 6.8 from the indemnifying party is unavailable to an
indemnified party hereunder in respect of any losses, claims, damages,
liabilities or expenses, then the indemnifying party, in lieu of indemnifying
such indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect not only the relative
benefits received by the indemnified party and the indemnifying party, but also
the relative fault of the indemnifying party and indemnified party in connection
with the actions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
fault of the indemnifying party and indemnified party shall be determined by
reference to, among other things, whether any action in question, including any
untrue or alleged untrue statement of a material fact or ommission or alleged
omission to state a material fact, has been made by, or relates to information
supplied by, the indemnifying party or indemnified party, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such action. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include any legal or other fees or expenses reasonably incurred by
such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 6.8.4 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. If the full amount of the contribution specified in this Section
6.8.4 is not permitted by law, then such indemnified party shall be entitled to
contribution from the indemnifying party to the full extent permitted by law. No
party found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any party who
was not found guilty of such fraudulent misrepresentation.
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6.9 Transfer and Termination of Registration Rights. The
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Registration Rights set forth in this Section 6 may not be transferred by the
Purchaser and such Registration Rights shall terminate at such time as the
Purchaser is no longer the owner of at least 50% of the total number of
Registrable Securities into which the Notes could have been originally
converted (with appropriate adjustments for any stock splits or dividends).
7. Conditions to Obligations of Purchasers. The obligation of the
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Purchaser to purchase Notes at the Closing is subject to each of the following
conditions having been fulfilled on or prior to the Closing Date:
7.1 Representations and Warranties Correct; Performance of
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Obligations. The representations and warranties made by the Company in Section
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3 hereof shall be true and correct when made, and shall be true and correct on
the Closing Date with the same force and effect as if they had been made on and
as of said date and the Company shall have performed all obligations and
conditions herein required to be performed or observed by it on or prior to the
Closing Date.
7.2 Consents and Waivers. The Company shall have obtained any
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and all consents, permits and waivers and made all filings necessary for
consummation of the transactions contemplated by this Agreement.
7.3 Legal Investment. At the time of the Closing, the purchase
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of the Notes by the Purchaser hereunder shall be legally permitted by all laws
and regulations to which the Purchaser and the Company are subject.
8. Condition to Obligations of the Company. The Company's
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obligation to issue, sell and deliver the Notes to the Purchaser at the Closing
is subject to the following conditions having been fulfilled on or prior to the
Closing Date:
8.1 Representations and Warranties Correct; Performance of
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Obligations. The representations and warranties made by the Purchaser in
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Section 4 hereof shall be true and correct when made, and shall be true and
correct on the Closing Date with the same force and effect as if they had been
made on and as of said date and the Purchaser shall have performed all
obligations and conditions herein required to be performed or observed by it on
or prior to the Closing Date.
8.2 Consents and Waivers. The Company shall have obtained any
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and all consents, permits and waivers and made all filings necessary for
consummation of the transactions contemplated by this Agreement.
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8.3 Legal Investment. At the time of the Closing, the purchase
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of the Notes by the Purchaser hereunder shall be legally permitted by all laws
and regulations to which the Purchaser and the Company are subject.
8.4 U.S. $2,000,000 in Notes Sold. The Company shall have sold
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Notes with a principal amount of at least U.S. $2,000,000.
9. Financial Information. The Company will furnish the following
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reports to the Purchaser for so long as the Purchaser owns any of the Notes:
9.1 Annual Reports on 10-K. As soon as practicable after the
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end of each fiscal year, the Company's Annual Report on Form 10-KSB or Form
10-K, as applicable, and
9.2 Quarterly Reports on 10-Q. As soon as practicable after
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the end of the first, second and third quarterly accounting period in each
fiscal year, the Company's Quarterly Report on Form 10-QSB or 10-Q, as
applicable.
10. Miscellaneous.
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10.1 Successors and Assigns. Subject to the foregoing terms and
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conditions, and to the restrictions on transfer described in the Note, the
rights and obligations of the Company and the Purchaser shall inure to the
benefit of and be binding upon the respective executors, administrators, heirs,
transferees, successors and assigns of the Company and the Purchaser.
10.2 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
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CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
AGREEMENTS BETWEEN CALIFORNIA RESIDENTS ENTERED INTO AND TO BE PERFORMED
ENTIRELY WITHIN CALIFORNIA.
10.3 Survival. The representations, warranties, covenants and
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agreements made herein shall survive the execution of this Agreement and the
Closing of the transactions contemplated hereby, notwithstanding any
investigation made by the Purchaser. All statements as to factual matters
contained in any certificate, exhibit or other instrument delivered by or on
behalf of the Company pursuant hereto shall be deemed to be the representations
and warranties of the Company hereunder as of the date of such certificate or
instrument.
10.4 Entire Agreement. This Agreement, the Note and the other
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documents delivered pursuant hereto and thereto, constitute the full and entire
understanding and agreement between the parties with respect to the subjects
hereto and thereof.
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10.5 Notices. Except as otherwise provide herein, all
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communications hereunder shall be in writing or by either telecopier or
telegraph and, if to the company, shall be mailed, telecopied or telegraphed or
delivered to Taitron Components Incorporated, 25202 Anza Drive, Santa Clarita,
CA 91355 (telecopier: (805) 257-6415) Attention: Stewart Wang, President; and
if to the Purchaser, shall be mailed, telecopied, telegraphed or delivered to
Room 204, Oriental Centre, 67-71 Chatham Road, Tsimshatsui, Kowloon, HK.
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(telecopier: (852) 2367 6006) Attention: ___________________________________.
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All notices given by telecopy or telegraph shall be promptly confirmed by
letter. Any party hereto may by notice so given change its address for future
notice hereunder.
10.6 Severability. In case any provision of this Agreement
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shall be invalid, illegal or unenforceable, it shall, to the extent practicable,
be modified so as to make it valid, legal and enforceable and to retain as
nearly as practicable, the intent of the parties, and the validity, legality and
enforceability of the remaining provisions of this Agreement shall not in any
way be affected or impaired thereby.
10.7 Titles and Headings. The titles and headings contained
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in this Agreement are intended for reference and shall not by themselves
determine the construction or interpretation of this Agreement.
10.8 Counterparts. This Agreement may be executed in any
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number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
10.9 Withholding. The Company may withhold taxes from any
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interest payment or payments made under the Notes to the extent necessary to
satisfy the Company's obligation to withhold taxes under the laws of the United
States, of any State thereof, or any
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political subdivision thereunder, whether the Company is required to withhold to
enable it to claim an income tax deduction for interest paid, or otherwise.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed themselves or by their respective representatives thereunto duly
authorized as of the day and year first above written.
TAITRON COMPONENTS INCORPORATED
By: [Signature Appears Here]
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PURCHASER
Tenrich Holdings Limited
[Signature Appears Here]
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EXHIBIT A
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
ONLY PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE OF THE UNITED STATES WITHIN
THE MEANING OF REGULATION S UNDER THE ACT. THESE SECURITIES MAY NOT BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
TAITRON COMPONENTS INCORPORATED
8% SUBORDINATED CONVERTIBLE NOTE
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U.S. $3,000,000 May 18, 1996
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Subject to the terms and conditions of this 8% Subordinated Convertible
Note (the "Note"), TAITRON COMPONENTS INCORPORATED, a California corporation
(the "Company"), for value received, promises to pay to the order of Tenrich
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Holdings Ltd. or its registered assigns (the "Noteholder"), whose address is set
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forth in Section 9.3 below, the principal amount of (U.S. $3,000,000), plus
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simple interest on the unpaid principal balance from the date hereof at the rate
of eight percent (8%) per annum. Such principal amount plus all accrued but
previously unpaid interest will be due and payable on the fifth anniversary of
the Note Date. Interest payments shall be made annually on each anniversary of
the Note Date.
Principal and interest payable hereunder shall be paid to the Noteholder
in lawful money of the United States of America by wire transfer to such bank
account or at such other address or location as shall be specified by the
Noteholder. Overdue interest shall bear interest at the rate of eight percent
(8%) per annum from the date on which it is due until paid.
This Note is issued pursuant to that certain Convertible Subordinated
Note Purchase Agreement dated of even date herewith between the Company and the
Noteholder (the "Agreement").
The following is a statement of the rights of the Noteholder and the
terms and conditions to which this Note is subject, and to which the Company and
the Noteholder, by the acceptance of this Note, agree.
1. Definitions. As used in this Note, the following terms, unless the
-----------
context otherwise requires, shall have the following meanings:
1.1 "Company" shall mean the Company and shall include any corporation
-------
that shall succeed to or assume the obligations of the Company under this Note.
1.2 "Common Stock" shall mean the Class A Common Stock, par value
------------
$0.001 per share, of the Company.
1.3 "Conversion Price" shall mean the price, determined pursuant to the
----------------
provisions of Section 2 of this Note, at which shares of Common Stock shall be
deliverable upon conversion of this Note.
1.4 "Note Date" shall mean the date on which this Note was originally
---------
issued, which is set forth on the first page of this Note in the heading.
1.5 "Merger" shall mean any consolidation of the Company with, or
------
merger of the Company with or into, another corporation (other than a
consolidation or merger in which the Company is the surviving corporation and
which does not result in any reclassification of, or change in, the outstanding
shares of Common Stock), or any proposed sale or transfer to another corporation
of all or substantially all of the assets of the Company. The Company shall be
the "surviving corporation" in any Merger if the Company, or its shareholders
---------------------
immediately before the transaction, shall own (immediately after the
transaction) equity securities, other than warrants, options or similar rights
to subscribe to or purchase equity securities, of the surviving or acquiring
corporation, or its parent corporation, possessing more than 50% of the voting
power of the surviving or acquiring corporation or its parent corporation; and
in making the determination of ownership by the shareholders of a corporation,
immediately after the transaction, of equity securities pursuant to the
preceding clause, equity securities which they owned immediately before the
transaction as shareholders of another party to the transaction shall be
disregarded. For the purposes of this Section 1.5, voting power of a corporation
shall be calculated by assuming the conversion of all then outstanding
convertible equity securities (including those convertible at some future date)
but not assuming the exercise of any warrants, options or other rights to
subscribe to or purchase voting shares.
2. Conversion.
----------
2.1 Noteholder Conversion; Conversion Price. On the terms and subject
---------------------------------------
to the conditions set forth in this Note,
2
Noteholder may, at any time prior to payment in full of the principal amount of
this Note, convert all or any part then convertible of the then unpaid principal
amount of this Note, in increments of at least U.S. $100,000 (unless the unpaid
principal is less than U.S. $100,000 in which case the debenture must be
converted in full), into that number of shares of Common Stock that results from
dividing the Conversion Price in effect at the time of conversion into the
principal amount of this Note or a specified portion thereof to be converted.
The Conversion Price initially shall be U.S. $_____ (the average closing sales
price for the Common Stock (or the closing bid, if no sales were reported) as
quoted on the Nasdaq National Market on the last three market trading days prior
to the Closing Date). All calculations under this Section 2 shall be made to the
nearest cent.
2.2 Notice by Noteholder. Before the Noteholder shall be
--------------------
entitled to convert this Note pursuant to Section 2.1 above, the Noteholder
shall surrender this Note, duly endorsed, to the office of the Company or any
transfer agent for such Note and shall give written notice (the "Noteholder
Conversion Notice") to the Company at such office that the Noteholder elects to
convert the same. The Noteholder Conversion Notice shall indicate the amount of
unpaid principal of this Note that the Noteholder has elected to convert and
shall state the name and names in which the certificate or certificates for the
shares of Common Stock are to be issued.
2.3 Conversion Date. Conversion of all or part of this Note
---------------
pursuant to this Section 2 shall be deemed effective upon the date of surrender
and delivery of both this Note and the corresponding Noteholder Conversion
Notice.
2.4 Mechanics and Effect of Conversion.
----------------------------------
2.4.1 No Fractional Shares: New Notes. No fractional
--------------------------------
shares of Common Stock shall be issued upon conversion of this Note. In lieu of
any fractional shares to which the Noteholder would otherwise be entitled, the
Company shall pay the fair market value of that fractional share (as determined
by reference to the average closing sales price for the Common Stock (or the
closing bid, if no sales were reported) as quoted on the Nasdaq National Market
on the last market trading prior to the Conversion Date) in cash. At its
expense, the Company shall, as soon as practicable after the conversion of this
Note, issue and deliver to the Noteholder a certificate or certificates for the
number of shares of Common Stock to which the Noteholder shall be entitled upon
such conversion (or other securities or cash as the case may be), together with
a check payable to the Noteholder for any cash amounts payable as described
above in lieu of fractional shares. In the case of conversion by the Noteholder,
if less than the entire unpaid principal amount of this Note is being converted,
3
a new Note, of like tenor and date, shall be issued by the Company and executed
by the Noteholder representing the unpaid principal amount of this Note after
such conversion and carrying the same rights to interest (unpaid and to accrue)
carried by the non-converted portion of this Note before conversion so that
there will not be any loss or gain of interest thereon. Upon conversion of this
Note (whether partially or in full), the Company shall be forever released from
its obligation to pay the principal amount so converted, and from its obligation
to pay all accrued but previously unpaid interest on such principal amount.
2.4.2 No Payment of Interest Upon Conversion. No payment shall be
--------------------------------------
made with respect to accrued but previously unpaid interest on the converted
principal amount.
2.4.3 Regulatory Compliance. If any shares of Common Stock to be
---------------------
reserved for the purpose of conversion of this Note require registration or
listing with, or approval of, any governmental authority, stock exchange or
other regulatory body under any federal or state law or regulation or otherwise,
before such shares may be validly issued or delivered to the registered holder
thereof upon conversion, the Company will, as expeditiously as possible and at
its expense, endeavor to secure such registration, listing or approval.
2.4.4 Notice of Distribution. If the Company makes a record of the
----------------------
holders of Common Stock for the purpose of determining the holders thereof who
are entitled to receive any dividend (other than a cash dividend) or other
distribution, or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, the Company
shall mail to the Noteholder, at least 10 days prior to the record date
specified therein, a notice specifying the date on which any such record is to
be taken for the purpose of such dividend, distribution or right, and the amount
and character of such dividend, distribution or right.
2.4.5 Charges, Taxes and Expenses. Issuance of a certificate for
---------------------------
shares of Common Stock upon the conversion of this Note shall be made without
charge to the Noteholder for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificate shall be issued in
the name of the Noteholder or, subject to satisfaction of the provisions of
Section 5 of the Agreement, in such name or names as may be directed by the
Noteholder; provided, however, that upon any transfer involved in the issuance
-------- -------
or delivery of any certificate for shares of Common Stock or replacement Notes
in a name other than that in which the Note to which such issuance relates was
registered, the Company may require, as a condition thereto, the
4
payment of a sum sufficient to reimburse it for any transfer tax incidental
thereto.
2.5 Adjustment to Conversion Price. If the Company should at any
------------------------------
time or from time to time after the Note Date fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock, then,
following such record date (or the date of such dividend, distribution, split or
subdivision if no record date is fixed), and provided that such stock split,
dividend or other distribution is actually effected, the Conversion Price shall
be appropriately decreased so that the number of shares of Common Stock issuable
on conversion of this Note shall be increased in proportion to such increase in
the number of outstanding shares of Common Stock. If the number of shares of
Common Stock outstanding at any time after the Note Date is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date of such combination, the Conversion Price shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
this Note shall be decreased in proportion to such decrease in the number of
outstanding shares of Common Stock. For purposes of this Section 2.5, the
number of shares of Common Stock outstanding at any date shall include only the
shares of Common Stock then actually issued and outstanding.
2.6 Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or Merger transaction provided for elsewhere in this Section 2),
provision shall be make so that the Noteholder shall thereafter be entitled to
receive upon conversion of this Note the number of shares of stock or other
securities or property of the Company or otherwise, to which a holder of Common
Stock deliverable upon conversion would have been entitled upon such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 2 with respect to the rights of
the Noteholder after the recapitalization to the end that the provisions of this
Section 2, including adjustment of the Conversion Price and the number of shares
issuable upon conversion of this Note, shall be applicable after that event as
nearly equivalent as may be practicable.
2.7 Mergers. In the event of a proposed Merger, the Company shall
-------
deliver to the Noteholder a notice setting forth the principal terms of such
Merger no later than 20 days before the effective date of such Merger. The terms
of the Merger shall provide that after the consummation of the Merger, the
Noteholder may convert this Note into the number of shares of stock or other
securities or property which a holder of the number of shares of
5
Common Stock of the Company deliverable upon conversion of this Note would have
been entitled upon such Merger, and the surviving corporation shall be bound by
the terms of this Note. Appropriate adjustment (as determined by the Board of
Directors) shall be made in the application of the provisions herein set forth
with respect to the rights and interests thereafter of the Noteholder, to the
end that the provisions set forth herein (including all provisions with respect
to changes in and other adjustments to the Conversion Price provided in Sections
2.5 and 2.6 of this Note) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any shares of stock or other property
thereafter deliverable upon the conversion of this Note.
2.8 Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price or price provided in
Sections 2.5, 2.6 and 2.7 of this Note, upon request by the Noteholder, the
Company at its expense shall compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to the Noteholder a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Company
shall, upon written request at any time of the Noteholder, furnish or cause to
be furnished to the Noteholder a like certificate setting forth (a) such
adjustment and readjustment, (b) the Conversion Price in effect at the time, and
(c) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon the conversion
of this Note.
2.9 No Impairment. The Company will not, by amendment of its
-------------
Articles of Incorporation or through any reorganization, recapitalization,
transfer or assets, consolidation, merger dissolution, issuance or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 2 in order to protect the conversion rights of
the Noteholder from impairment.
2.10 Miscellaneous Conversion Price Matters. The Company shall at
--------------------------------------
all times reserve and keep available out of its authorized but unissued Common
Stock the full number of shares of Common Stock deliverable upon conversion of
all of the principal amount of this Note and shall, at its own expense, take all
such actions and obtain all such permits and orders as may be necessary to
enable the Company lawfully to issue such Common Stock to the registered
Noteholder(s) upon the conversion of this Note. The Company also hereby
covenants that its issuance of this Note shall constitute full authority to its
officers who are charged with the duty of executing stock certificates to
execute and issue the necessary
6
certificates for shares of the Common Stock upon conversion of this Note.
3. Treatment of Note. To the extent permitted by generally accepted
-----------------
accounting principles consistently applied, the Company shall treat, account and
report this Note as debt and not equity for accounting purposes and with respect
to any returns filed with federal, state or local tax authorities.
4. Subordination. The Company, for itself and its successors and
-------------
assigns, covenants and agrees, and the Noteholder and each successive holder of
this Note, by the acceptance of this Note, likewise covenants and agrees, that
the payment of the principal of and interest and premium, if any, on this Note
is hereby expressly subordinated, to the extent and in the manner hereinafter
set forth, in right of payment to the prior payment in full of all the Company's
"Senior Indebtedness," and that these subordination provisions are for the
benefit of the holders of Senior Indebtedness.
This Section 4 shall constitute a continuing Offer to all persons who, in
reliance upon such provisions, become holders of, or continue to hold, Senior
Indebtedness, and such provisions are made for the benefit of the holders of
Senior Indebtedness, and such holders are made obligees hereunder and they or
each of them may enforce such provisions. Without limiting the generality of
the foregoing, it is acknowledged and agreed that Union Bank, a Division of
Union Bank of California, N.A., is a holder of Senior Indebtedness, that such
provisions are made for its benefit, and that it may enforce such provisions.
4.1 Definitions. As used in this Section 4, and also in Section 5:
-----------
4.1.1 "Indebtedness" of any corporation shall mean the principal
------------
of (and premium, if any) and unpaid interest, fees and other payments due in
connection with (a) indebtedness which is for money borrowed from others;
(b) indebtedness of any other person for money borrowed guaranteed, directly or
indirectly, in any manner by such corporation, or in effect guaranteed, directly
or indirectly, by such corporation through an agreement, contingent or
otherwise; (c) all indebtedness secured by any mortgage, lien, pledge, charge or
other encumbrance upon property owned by such corporation, even though such
corporation has not in any manner become liable for the payment of such
indebtedness; (d) all indebtedness of such corporation created or arising under
any conditional sale, lease (intended primarily as a financing device), or other
title retention agreement with respect to property acquired by such corporation
wherein the rights and remedies of the seller, lessor or lender under such
agreement or lease in the event
7
of a default are limited to repossession or sale of such properties; (e) any
other obligation whether outstanding on the Note Date or thereafter created or
assumed with respect to which the Company shall be or become liable which the
Company shall designate as "Indebtedness"; and (f) deferrals, amendments,
refinancing, renewals, extensions and refundings of any such indebtedness.
4.1.2 "Senior Indebtedness" shall mean Indebtedness incurred or
-------------------
assumed by the Company, either before or after the date of this Agreement, which
is for money borrowed or evidenced by bonds, notes, reimbursement agreements in
respect of letters of credit, debentures or similar instruments (a) pursuant to
a short-term instrument which constitutes commercial paper, or (b) the holder or
holders of which are banks, savings institutions, trust companies, insurance
companies, investment trusts, pension funds, pension trusts, employees'
profit-sharing trusts, financial institutions or corporations engaged as the
substantial part of their business or operations in investing funds in
securities, or any other person lending the Company amounts in excess of U.S.
$100,000 or any of them, or (c) obligations which otherwise would have been
considered Senior Indebtedness except that they were created or arose under a
conditional sale, lease (intended primarily as a financing device) or other
similar title retention agreement with respect to the property of the Company or
its Subsidiaries wherein the rights and remedies of the seller, lessor or lender
under such agreement or lease are limited, in the event of default, to
repossession or sale of such properties; provided, however, that there shall be
-------- -------
excluded from the definition of Senior Indebtedness any borrowing which by its
terms ranks on a parity with or is subordinate to the Notes.
4.2 Payment in Event of Bankruptcy or Similar Event. Upon any
-----------------------------------------------
receivership, insolvency, assignment for the benefit of creditors, bankruptcy,
reorganization or arrangements with creditors (whether or not pursuant to
bankruptcy or other insolvency laws), sale of all or substantially all of the
assets, dissolution, liquidation or any other marshalling of the assets and
liabilities, of the Company, or otherwise (a) no amount shall be paid by the
Company in respect of the principal of or interest or premium, if any, on this
Note at the time outstanding, unless and until the principal, premium, if any,
and interest upon all Senior Indebtedness shall first be paid in full, in cash,
(b) no claim or proof of claim shall be filed with the company by or on behalf
of the Noteholder which shall assert any right to receive any payments in
respect of the principal of and interest or premium, if any, on this Note,
except subject to the payment in full of the principal of, premium, if any, and
interest on all of the Senior Indebtedness then outstanding, in cash, (c) any
payment or distribution of assets of the Company of any kind or character,
whether in cash,
8
property or securities to which the holders of the Notes would be entitled
except for the provisions of this Section 4, shall be paid by the liquidating
trustee or agent or other person making such payment or distribution, whether a
trustee in bankruptcy, a receiver or otherwise, directly to the holders of
Senior Indebtedness (pro rata to each holder on the basis of the respective
amounts of Senior Indebtedness owed to such holder), to the extent necessary to
pay in full, in cash, all Senior Indebtedness remaining unpaid after giving
effect to any prior or concurrent payment or distribution to the holders of the
Senior Indebtedness on the Senior Indebtedness, and (d) in the event that,
notwithstanding the foregoing, any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities (other
than payments described in the provisos below) shall be received by the holder
of any Note before all Senior Indebtedness is paid in full, in cash, such
payment or distribution shall be received and held in trust for and shall be
paid over to holders of Senior Indebtedness (pro rata to each such holder on the
basis of the respective amounts of Senior Indebtedness owed to such holder), for
application to the payment of all Senior Indebtedness remaining unpaid until all
such Senior Indebtedness shall have been paid in full, in cash, after giving
effect to any prior or concurrent payment or distribution to the holders of the
Senior Indebtedness on the Senior indebtedness; provided, however, that this
-------- -------
subparagraph (d) shall apply only to payments or distributions received by the
holder of any Note after the commencement by the Company of proceedings relating
to its winding up dissolution, liquidation or reorganization as described in
this Section; provided, however, that:
-------- -------
(1) in the event that a court of competent jurisdiction in
a reorganization proceeding under any applicable bankruptcy or reorganization
law authorizes payment or delivery of any cash, property, stock or obligation to
the Noteholder and such court takes into account the subordination of this Note
to Senior Indebtedness, the holder of Senior Indebtedness shall not be paid or
delivered any such cash, property, stock or obligations; and
(2) if the Noteholder, pursuant to a reorganization,
dissolution or liquidation proceeding, receives any stock or obligations of the
Company as reorganized, or by a corporation that has succeeded to the Company or
acquired the Company's property and assets, such stock or obligations shall not
be delivered to the holders of Senior Indebtedness, if such stock or obligations
are subordinate and junior at least to the full extent provided in this Section
4 to the payment of all Senior Indebtedness then outstanding.
4.3 Subordination When Senior Indebtedness Due, etc. In the event of
-----------------------------------------------
and during the continuance of any default by the
9
Company with respect to the payment of any Senior Indebtedness when due (whether
at a stated maturity date, upon acceleration or otherwise) and if any holder or
holders of any such Senior Indebtedness shall require, no payment of principal,
premium or interest on the Note shall be made by the Company until payment of
the full amount of such Senior Indebtedness then due has been made in cash;
provided, however, that the Noteholder shall, nevertheless, be entitled to
- -------- -------
receive such payment of the Note after the expiration of 180 days after the
occurrence of such default (a) if Noteholder shall have not received a
certificate from any holder or holders of such Senior Indebtedness, within 15
days after delivery to them of a request by the Noteholder at any time after
such 180th day, to the effect that such holders of Senior Indebtedness have
taken and are taking all such commercially reasonable actions as are necessary
or appropriate to enforce their rights to prompt payment of such Senior
Indebtedness, and (b) thereafter, if the Noteholder shall have not received such
a certificate within 15 days after delivery by it of a request therefor made
from time to time to such holder or holders of Senior Indebtedness, provided
that such request may not be made at any time within 60 days of the prior
receipt of such a certificate by the Noteholder.
4.4 Effect of Subordination. Nothing contained in this Section 4
-----------------------
shall impair, as between the Company and the Noteholder, the obligation of the
Company, which is absolute and unconditional, to pay the Noteholder the
principal hereof and interest hereon as and when the same become due and
payable, or shall prevent the Noteholder, upon default under this Note, from
exercising all rights, power and remedies otherwise provided herein or by
applicable law, all subject to the rights, if any, of the holders of Senior
Indebtedness under this Section 4.
4.5 Subrogation. Subject to the payment in full, in cash, of all
-----------
Senior Indebtedness and until this Note shall be paid in full, the Noteholder
shall be subrogated (equally and ratably with the holders of all Indebtedness of
the Company which, by its terms, ranks on a parity with this Note) to all rights
of any such holder of Senior Indebtedness to receive payments or distributions
of assets of the Company, but only to the extent the Noteholder has made any
payment to any holder of Senior Indebtedness pursuant to the subordination
provisions of this Note. No such payments or distributions applicable to the
Senior Indebtedness shall, as between the Company and its creditors, other than
the holders of Senior Indebtedness and the Noteholder, be deemed to be a payment
by the Company to or on account of this Note; and for the purposes of such
subrogation, no payments or distributions to the holders of Senior Indebtedness
to which the Noteholder would be entitled except for the provisions of this
Section 4 shall, as between the Company and its creditors, other than the
holders of Senior
10
Indebtedness and the Noteholder, be deemed to be a payment by the Company to or
on account of the Senior Indebtedness.
4.6 Reliance by Note Holders. Upon any payment or distribution of
------------------------
assets of the Company referred to in this Section 4, the holders of the Notes
shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction in which such dissolution, winding up, liquidation or
reorganization proceedings are pending or upon a certificate of the liquidating
trustee or agent or other person making any distribution the holders of Notes
for the purpose of ascertaining the amount of the Senior Indebtedness, the
holders thereof, the amounts paid or distributed thereon and all other facts
pertinent thereto or to this Section 4.
4.7 Rights of Holders of Senior Indebtedness Not to Be Impaired.
-----------------------------------------------------------
Subject to Section 4.3 hereof, no right of any present or future holder of any
Senior Indebtedness to enforce subordination as herein provided shall at any
time in any way be prejudiced or impair by any act or failure to act on the part
of the Company or by any act or failure to act, in good faith, by any such
holder or by any noncompliance by the Company with the terms, provisions and
covenants of this Note, regardless of any knowledge thereof which any such
holder may have or otherwise be charge with.
4.8 When Distribution Must Be Paid Over. In the event that the Company
-----------------------------------
shall make any payment to the Noteholder on account of the principal or interest
on the Note at the time when such payment is prohibited by Section 4.3, such
payment shall be held by the Noteholder, in trust for the benefit of, and shall
be forthwith over and delivered to, the holders of Senior Indebtedness (pro rata
as to each of such holders on the basis of the amount of Senior Indebtedness
held by them) or their representative or the trustee under the indenture or
other agreement (if any) pursuant to which Senior Indebtedness may have been
issued, as their respective interests may appear, for application to the payment
of all Senior Indebtedness remaining unpaid to the extent necessary to pay all
Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior
Indebtedness in full accordance with its terms, after giving effect to any
concurrent payment or distribution to or for the holders of Senior Indebtedness.
If a distribution is made to the holder of this Note that because of
this Section 4.8 should not have been made to it, the holder of this Note who
receives the distribution shall hold it in trust for the holders of Senior
Indebtedness and pay it over to them as their interests may appear.
4.9 Notices By Company. The Company shall promptly notify the Note-
------------------
holder of any facts known to the Company that would cause
11
a payment of principal of or interest of this Note to violate this Section 4,
but failure to give such notice shall not affect the subordination of this Note
to the Senior Indebtedness provided in this Section 4.
5. Events of Default. If any of the following events shall occur and be
-----------------
continuing (each individually referred to as an "Event of Default"), the
Noteholder may declare the entire unpaid principal and accrued interest on this
Note immediately due and payable, without any other presentment, demand, protest
or other notice of any kind or character, all of which are hereby expressly
waived; provided, however, that with respect to the Events of Default described
-------- -------
in Sections 5.2 and 5.3 below, the unpaid principal and accrued interest on this
Note shall automatically become immediately due and payable, without
presentment, demand, protest or other requirements of any kind, all of which are
hereby expressly waived by the Company:
5.1 Principal or Interest. (a) Any default in the payment of any
--------------------
part of the interest of this Note shall occur and such default shall be
continuing uncured or unwaived for 30 days after the Noteholder has given the
Company written notice thereof or (b) the Company's failure to observe any
covenant or other provision contained in this Note or the Agreement and such
failure of observation shall be continuing uncured or unwaived for 30 days
after the Noteholder has given the Company written notice thereof;
5.2 Involuntary Bankruptcy. Within 270 days after the
----------------------
commencement of an action against the Company seeking any bankruptcy,
insolvency, reorganization, liquidation, dissolution or similar relief under any
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 the stay of any such order or proceeding shall thereafter be
set aside, or within 270 days after the appointment without the consent or
acquiescence of the Company of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company, such
appointment shall not have been vacated;
5.3 Voluntary Bankruptcy. The Company shall have commenced a
--------------------
voluntary case under any applicable bankruptcy, insolvency or other similar law
now or hereafter in effect, or shall have consented to the entry of an order for
relief in an involuntary case under any such law, or shall have consented to the
appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian or similar official, of the Company or for any substantial
part of its property, or shall have made any general assignment for the benefit
of creditors, or shall have failed generally to pay its debts as they become due
or shall have
12
admitted in writing its inability to pay its debts generally as they become due,
or shall have taken any corporate action in furtherance of any of the foregoing;
or
5.4 Cross-Default. Any declared default of the Company under any Senior
-------------
Indebtedness of the Company for borrowed money that gives the holder thereof the
right to accelerate such Senior Indebtedness, and such Senior Indebtedness is in
fact accelerated by such holder, and such acceleration is continuing
unrescinded.
5.5 Remedies. If any of the foregoing Events of Default shall have
--------
occurred and be continuing, the Noteholder may proceed to protect and enforce
its rights under this Note by an action in law, suit in equity or other
appropriate proceeding, whether for specific performance of any agreement
contained in this Note or in the Agreement or for an injunction against a
violation of any terms of this Note or of the Agreement or in aid of the
exercise of any power granted by this Note, the Agreement or by law. In case any
action is brought arising from a breach of any provision of this Note, the non-
prevailing party shall pay to the prevailing party all of the prevailing party's
fees and expenses, including without limitation reasonable attorneys' fees,
relating to such action. No course of dealing and no delay on the part of the
Noteholder in exercising any right shall operate as a waiver thereof or
otherwise prejudice the Noteholder's rights, powers or remedies. No right, power
or remedy conferred by this Note or by the Agreement upon the Noteholder shall
be exclusive of any right, power or remedy referred to in this Note or the
Agreement, or now or hereafter available at law, in equity, by statute or
otherwise.
5.6 Unpaid Interest. In case any one or more Events of Default shall
---------------
occur and be continuing, any due but unpaid interest shall continue to remain
due and accrue interest thereon at the rate of eight percent (8%) per annum from
the date on which it is due until paid.
6. No Shareholder Rights. This Note shall not entitle the Noteholder to any
---------------------
voting rights or other rights as a shareholder of the Company, prior to
conversion hereof.
7. Redemption. This Note shall be subject to redemption under the
----------
circumstances set forth in this Section 7.
7.1 Optional Redemption. The Company, at its option, may redeem in whole
-------------------
or in part the principal amount of this Note at any time or from time to time on
or after the first anniversary of the Note Date. Upon redemption of this Note,
the Company also shall pay to the Noteholder the interest relating to such
redeemed principal amount which is accrued and unpaid to the date of redemption
plus a premium as set forth below in Section 7.2.
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7.2 Premium. The premium for purposes of this Section 7 shall be
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calculated as follows:
(a) if redemption of this Note pursuant to this Section 7
occurs on or after the first anniversary of the Note Date but before the second
anniversary of the Note Date, the premium shall be an amount equal to fifteen
percent (15%) of the principal amount of this Note which is so redeemed;
(b) if redemption of this Note pursuant to this Section 7
occurs on or after the second anniversary of the Note Date but before the third
anniversary of the Note Date, the premium shall be an amount equal to ten
percent (10%) of the principal amount of this Note which is so redeemed;
(c) if redemption of this Note pursuant to this Section 7
occurs on or after the third anniversary of the Note Date but before the fourth
anniversary of the Note Date, the premium shall be an amount equal to ten
percent (5%) of the principal amount of this Note which is so redeemed; and
(d) if the redemption of this Note occurs after the fourth
anniversary of the Note Date, there shall be no prepayment premium.
7.3 Notice of Redemption. At least 30 but not more than 60 days
--------------------
prior to the date fixed for any redemption (the "Redemption Date"), notice shall
be given to the Noteholder of the election of the Company to redeem all or a
specified portion of the principal amount of this Note (the "Redemption
Notice"). The Redemption Notice shall specify the place at which payment may be
obtained and the date on which the Noteholder's Conversion Rights as to the
amount to be redeemed shall terminate pursuant to Section 2 and calling upon the
Noteholder to surrender this Note to the Company in the manner and at the place
designated. On the Redemption Date, the Noteholder shall surrender this Note to
the Company in the manner and at the place designated in the Redemption Notice,
and thereupon redemption shall be made to the Noteholder and this Note shall be
cancelled. In the event that less than all of the principal amount of this Note
is redeemed, upon surrender of this Note to the Company, the Company shall
execute and deliver to the Noteholder a new Note of Notes of authorized
denominations in principal amount equal to the unpaid principal amount of this
Note.
7.4 Cessation of Rights. From and after the Redemption Date, unless
-------------------
there has been a default in redemption, all interest on the redeemed principal
amount shall cease to accrue and all rights of the Noteholder as a holder of
this Note shall cease with respect to the principal amount redeemed and, with
respect to such
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amount, this Note thereafter shall not be deemed to be outstanding for any
purpose whatsoever.
7.5 Undertaking. By acceptance of this Note, the Noteholder agrees
-----------
to execute and deliver such documents as may reasonably be requested from time
to time by the Company in order to implement the foregoing provisions of this
Section 7.
8. Registration, Transfer and Exchange of the Note. The Company shall
-----------------------------------------------
keep at its principal office a register in which it will provide for the
registration and transfer of this Note, at its own expense (excluding transfer
taxes). Transfer of this Note is restricted by, among other things, certain
provisions in the Agreement relating to the transfer of securities. Subject to
compliance with applicable laws and the restrictions on transfer described in
the Agreement, this Note and all rights hereunder are transferable and
assignable at the office of the Company, by the Noteholder in person or by the
duly authorized representative of the Noteholder, upon surrender of this Note.
If this Note is surrendered at said office for registration of transfer or
exchange (accompanied in the case of a registration or transfer by a written
instrument of transfer in satisfactory to the Company, at its expense, shall
deliver in exchange one or more new Notes in denominations as requested by the
Noteholder (but in no case less than U.S. $100,000), for the aggregate unpaid
principal amount. Any note or notes issued in a transfer or exchange shall
carry the same rights to interest (unpaid and to accrue) carried by this Note so
transferred or exchanged so that there will not be any loss or gain of interest
on the Note surrendered. Prior to due presentation for registration of
transfer, the Company may treat the person in whose name this Note is registered
as the owner and holder of this Note for the purpose of receiving payment of
principal of and interest on this Note and for all other purposes whatsoever.
Prior to the sale or transfer of any Note, the Noteholder shall
surrender said Note to the Company in exchange for a new Note in the principal
amount equal to the unpaid balance of principal of the Note surrendered.
9. Miscellaneous.
-------------
9.1 Successors and Assigns. Subject to the foregoing terms and
----------------------
conditions, and to the restrictions on transfer described in the Agreement, the
rights and obligations of the Company and the Noteholder shall inure to the
benefit of and be binding upon the respective executors, administrators, heirs,
transferees, successors and assigns of the Company and the Noteholder.
15
7.3 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
AGREEMENTS BETWEEN CALIFORNIA RESIDENTS ENTERED INTO AND TO BE PERFORMED
ENTIRELY WITHIN CALIFORNIA.
9.3 Notices. Except as otherwise provided herein, all communications
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hereunder shall be in writing or by either telecopier of telegraph and, if to
the Company, shall be mailed, telecopied or telegraphed or delivered to Taitron
Components Incorporated, 25202 Anza Drive, Santa Clarita, CA 91355 (telecopier:
(805) 257-6415) Attention: Stewart Wang, President; and if to the Noteholder,
shall be mailed, telecopied, telegraphed or delivered to Room 204, Oriental
------------------
Centre, 67-71 Chatham Road, Tsimshatsui, Kowloon, HK. (telecopier: (852) 2367
- ----------------------------------------------------- -----------
6006 ) Attention: . All notices given by telecopy
- ---------- ------------------------
or telegraph shall be promptly confirmed by letter. Any party hereto may by
notice so given change its address for future notice hereunder.
9.4 Severability. In case any provision of this Note shall be
------------
invalid, illegal or unenforceable, it shall, to the extent practicable, be
modified so as to make it valid, legal and enforceable and to retain as nearly
as practicable, the intent of the parties, and the validity, legality and
enforceability of the remaining provisions of this Note shall not in any way be
affected or impaired thereby.
9.5 Waiver and Amendment. Any provision of this Note may be amended,
--------------------
waived or modified upon the written consent of the transferee, successor or
assign of the Noteholder or, if such Note has been transferred by the
Noteholder, the holders of at least fifty-one per cent (51%) of the aggregate
principal amount of all of the Notes then outstanding.
9.6 Lost, Stolen, Mutilated or Destroyed Note. If this Note is
-----------------------------------------
lost, stolen, mutilated or destroyed, the Company shall, on such terms as to
indemnity or otherwise as it may reasonable impose (which shall , in the case of
a mutilated Note, include the surrender and cancellation thereof), issue a new
Note of like denomination and tenor as the Note so lost, stolen, mutilated or
destroyed.
7.4 Titles and Headings. The titles and headings contained in this
-------------------
Note are intended for reference and shall not by themselves determine the
construction or interpretation of this Note.
9.7 Entire Agreement. This Note, the Agreement and the other
----------------
documents delivered pursuant hereto and thereto, constitute the full and entire
understanding and agreement between the parties with respect to the subjects
hereof and thereof.
16
IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the
date first written above.
TAITRON COMPONENTS INCORPORATED
By: [SIGNATURE APPEARS HERE]
-----------------------------
Its:
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17