EXHIBIT 10.3
PROMISSORY NOTE
APRIL 28, 2005
JERSEY CITY, NEW JERSEY $1,000,000.00
FOR VALUE RECEIVED, the undersigned, VALENTEC SYSTEMS, INC., a Delaware
corporation (the "COMPANY"), promises to pay MONTGOMERY EQUITY PARTNERS, LTD
(the "LENDER") at 101 Hudson Street, Suite 3700, Jersey City, New Jersey 07302
or other address as the Lender shall specify in writing, the principal sum of
ONE MILLION DOLLARS ($1,000,000) and interest on the unpaid principal sum
advanced to the Company by the Lender at the annual rate of twenty four percent
(24%) on the unpaid balance pursuant to the following terms:
Contemporaneously with the execution and delivery of this Promissory
Note (the "NOTE"), the Company and the Lender are entering into a Pledge and
Escrow Agreement (the "PLEDGE AGREEMENT") and a Security Agreement (the
"SECURITY AGREEMENT") (collectively, this Note, the Pledge Agreement and the
Security Agreement are referred to as the "TRANSACTION DOCUMENTS").
1. FUNDING BY LENDER. Subject to the notification and satisfaction of the
conditions to the Closings set forth herein the amount of Six Hundred Thousand
Dollars ($600,000) shall be funded on the date hereof (the "INITIAL CLOSING").
The Lender shall fund an additional Four Hundred Thousand Dollars ($400,000) two
(2) business days prior to the filing of the registration statement, to be filed
pursuant to the Registration Rights Agreement of even date herewith (the
"REGISTRATION STATEMENT"), with the United States Securities and Exchange
Commission (the "SEC") (the "SECOND CLOSING") (collectively, referred to as the
"CLOSINGS" and individually referred to as the "CLOSING"). The Lender shall be
entitled to a five (5) business day grace period with respect to its obligation
to fund each Closing.
2. PRINCIPAL AND INTEREST. For value received, the Company hereby promises
to pay to the order of the Lender on the one (1) year anniversary of the date
hereof in lawful money of the United States of America and in immediately
available funds the principal sum up to One Million Dollars ($1,000,000) or such
lesser amount requested and received by the Company under this Note, together
with interest on the unpaid principal of this Note at the rate of twenty four
percent (24%) per year (computed on the basis of a 365-day year and the actual
days elapsed) from the date of this Note until paid as set forth in the PAYMENT
SCHEDULE (for the First Closing in the principal amount $600,000) attached
hereto.
3. MONTHLY PRINCIPAL PAYMENTS OF THE NOTE. Beginning on the date six (6)
months from the date hereof, the Company shall make monthly payments of the
outstanding principal of the Note and payments shall be due and payable each
succeeding month thereafter until all principal and interest has been paid as
set forth in the PAYMENT SCHEDULE attached hereto.
4. PREPAYMENT FEE; PENALTY. There shall be no prepayment fee or penalty.
5. MONTHLY PAYMENTS OF INTEREST. Interest shall accrue from the date
hereof. Beginning on the date one (1) month from the date hereof, the Company
shall make monthly payments of accrued and unpaid interest and payments of
accrued and unpaid interest shall due and payable each succeeding month
thereafter as set forth in the PAYMENT SCHEDULE attached hereto. Notwithstanding
the foregoing, the Company shall pay two (2) payments of interest directly from
the gross proceeds of each Closing.
6. RIGHT OF PREPAYMENT. Notwithstanding the payments pursuant to Section 2,
the Company at its option shall have the right to prepay, with three (3)
business days advance written notice, a portion or all outstanding principal of
the Note. The prepayment price shall be equal to the amount of principal
prepaid, plus accrued interest.
7. CONDITIONS TO THE LENDER'S OBLIGATIONS TO THE INITIAL CLOSING. The
obligation of the Lender hereunder to fund the Initial Closing is subject to the
satisfaction, at or before the Initial Closing, of each of the following
conditions, provided that these conditions are for the Lender's sole benefit and
may be waived by the Lender at any time in its sole discretion:
a. The Company shall have executed this Note, the Security
Agreement by and between the Company and the Lender of even date
herewith, and the Pledge Agreement, and delivered the same to
the Lender.
b. The representations and warranties set forth in Article 4 of the
Security Agreement of the Company shall be true and correct in
all material respects as of the date when made and as of the
Initial Closing as though made at that time and the Company
shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required
by this Note or the Security Agreement to be performed,
satisfied or complied with by the Company at or prior to the
Initial Closing.
c. The Company shall have filed a form UCC-1 or such other forms as
may be required to perfect the Lender's interest in the Pledged
Property and Pledged Collateral as detailed in the Security
Agreement dated the date hereof and provided proof of such
filing to the Lender.
d. The Lender shall have received an opinion of counsel in a form
satisfactory to the Lender.
e. The Company shall have provided to the Lender a certificate of
good standing form the Secretary of State of Delaware.
f. The Company shall have obtained the approval of its board of
directors and a majority of its outstanding shares of capital
stock (voting as separate classes, if required by applicable
law) to approve and ratify this transaction.
g. The Company shall have delivered to the Escrow Agent the Pledged
Shares as well executed and medallion guaranteed stock powers as
required pursuant to the Pledge Agreement.
2
8. CONDITIONS TO THE LENDER'S OBLIGATIONS TO THE SECOND CLOSING. The
obligation of the Lender hereunder to fund the Second Closing is subject to the
satisfaction, at or before the Second Closing, of each of the following
conditions, provided that these conditions are for the Lender's sole benefit and
may be waived by the Lender at any time in its sole discretion:
a. The representations and warranties set forth in Article 4 of the
Security Agreement of the Company shall be true and correct in
all material respects as of the date when made and as of the
Second Closing as though made at that time and the Company shall
have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by this
Note or the Security Agreement to be performed, satisfied or
complied with by the Company at or prior to the Second Closing.
b. The Company shall have certified that all conditions to the
Second Closing have been satisfied and that the Company will
file the Registration Statement with the SEC in compliance with
the rules and regulations promulgated by the SEC for filing
thereof two (2) business days after the Second Closing. If
requested by the Lender, the Lender shall have received a
certificate, executed by the two officers of the Company, dated
as of the Second Closing Date, to the foregoing effect. The
Lender shall have no obligation to fund at the Second Closing if
the Company has filed the Registration Statement.
c. The Company shall have consummated the merger with Acorn Holding
Corp., a Delaware corporation prior to the Second Closing but no
later than forty five (45) days from the date hereof.
d. As part of the merger, Acorn Holding Corp. shall have assumed
any and all obligations of the Company relating to the Lender
and Cornell Capital Partners, LP, including, without limitation,
this Note, the Amended Pledge Agreement, the Amended Security
Agreement and the Standby Equity Distribution Agreement between
the Company and Cornell Capital Partners, LP and related
documents all of even date herewith. The Company shall have
provided the Lender with the relevant merger documents within
one (1) day following the execution of the merger documents.
e. Following the consummation of the merger, Acorn Holding Corp. or
the surviving entity, shall have entered into a Security
Agreement with the Lender, providing a security interest in the
assets of Acorn Holding Corp. to secure the obligations of this
Note. Acorn Holding Corp. or the surviving entity, shall have
filed a form UCC-1 with regard to the Pledged Property and
Pledged Collateral as detailed in the Security Agreement, giving
the Lender a first position lien and shall have provided proof
of such filing to the Lender.
f. Following the consummation of the merger, Acorn Holding Corp. or
the surviving entity, shall have entered into a Pledge and
Escrow Agreement, pursuant to which Acorn Holding Corp. shall
provide the Lender a security interest in the Pledged Shares (as
that term is defined in the Pledge Agreement), to secure the
obligations of the Company under this Note, which Acorn Holding
3
Corp. or the surviving entity will have assumed in accordance
with the merger. In addition, the Pledgors (as such term is
defined in the Pledge and Escrow Agreement of even date
herewith) shall pledge all their respective shares of Acorn
Holding Corp. or the surviving entity to secure the obligations
of the Company under this Note.
g. Acorn Holding Corp. or the surviving entity, shall have issued
to the Investor the Commitment Shares (as such terms are defined
in the Standby Equity Distribution Agreement of even date
herewith between the Company and Cornell Capital Partners, LP.)
within one (1) day following the execution of the merger
documents.
h. Acorn Holding Corp. or the surviving entity shall have issued to
the Investor a warrant to purchase Two Hundred Thousand
(200,000) shares of common stock of Acorn Holding Corp. or the
surviving public entity for a period of two (2) years at an
exercise price of $0.01 per share within one (1) day following
the execution of the merger documents.
i. No Events of Default shall have occurred under this Note or the
Transaction Documents.
9. WAIVER AND CONSENT. To the fullest extent permitted by law and except as
otherwise provided herein, the Company waives demand, presentment, protest,
notice of dishonor, suit against or joinder of any other person, and all other
requirements necessary to charge or hold the Company liable with respect to this
Note.
10. COSTS, INDEMNITIES AND EXPENSES. In the event of default as described
herein, the Company agrees to pay all reasonable fees and costs incurred by the
Lender in collecting or securing or attempting to collect or secure this Note,
including reasonable attorneys' fees and expenses, whether or not involving
litigation, collecting upon any judgments and/or appellate or bankruptcy
proceedings. The Company agrees to pay any documentary stamp taxes, intangible
taxes or other taxes which may now or hereafter apply to this Note or any
payment made in respect of this Note, and the Company agrees to indemnify and
hold the Lender harmless from and against any liability, costs, attorneys' fees,
penalties, interest or expenses relating to any such taxes, as and when the same
may be incurred.
11. EVENT OF DEFAULT. An "EVENT OF DEFAULT" shall be deemed to have occurred
upon the occurrence of any of the following: (i) the Company should fail for any
reason or for no reason to make any payment of the interest or principal
pursuant to this Note within five (5) days of the date due as prescribed herein;
(ii) the Company shall fail to observe or perform any other covenant, agreement
or warranty contained in, or otherwise commit any material breach or default of
any material provision of this Note or any of the Transaction Documents (as
defined herein), which is not cured within five (5) days notice of the default;
(iii) the Company or any subsidiary of the Company shall commence, or there
shall be commenced against the Company or any subsidiary of the Company under
any applicable bankruptcy or insolvency laws as now or hereafter in effect or
any successor thereto, or the Company or any subsidiary of the Company commences
any other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or any
4
subsidiary of the Company or there is commenced against the Company or any
subsidiary of the Company any such bankruptcy, insolvency or other proceeding
which remains undismissed for a period of 61 days; or the Company or any
subsidiary of the Company is adjudicated insolvent or bankrupt; or any order of
relief or other order approving any such case or proceeding is entered; or the
Company or any subsidiary of the Company suffers any appointment of any
custodian, private or court appointed receiver or the like for it or any
substantial part of its property which continues undischarged or unstayed for a
period of sixty one (61) days; or the Company or any subsidiary of the Company
makes a general assignment for the benefit of creditors; or the Company or any
subsidiary of the Company shall fail to pay, or shall state that it is unable to
pay, or shall be unable to pay, its debts generally as they become due; or the
Company or any subsidiary of the Company shall call a meeting of its creditors
with a view to arranging a composition, adjustment or restructuring of its
debts; or the Company or any subsidiary of the Company shall by any act or
failure to act expressly indicate its consent to, approval of or acquiescence in
any of the foregoing; or any corporate or other action is taken by the Company
or any subsidiary of the Company for the purpose of effecting any of the
foregoing; or (iv) a breach by the Company of its obligations, or an event of
default, under any of the Transaction Documents, or any other agreements entered
into between the Company and the Lender which is not cured by any applicable
cure period set forth therein or within five (5) following notice of default.
Upon an Event of Default (as defined above), the entire principal balance and
accrued interest outstanding under this Note, and all other obligations of the
Company under this Note, shall be immediately due and payable without any action
on the part of the Lender, interest shall accrue on the unpaid principal balance
at twenty four percent (24%) per year or the highest rate permitted by
applicable law, if lower and the Lender shall be entitled to seek and institute
any and all remedies available to it.
12. MAXIMUM INTEREST RATE. In no event shall any agreed to or actual
interest charged, reserved or taken by the Lender as consideration for this Note
exceed the limits imposed by New Jersey law. In the event that the interest
provisions of this Note shall result at any time or for any reason in an
effective rate of interest that exceeds the maximum interest rate permitted by
applicable law, then without further agreement or notice the obligation to be
fulfilled shall be automatically reduced to such limit and all sums received by
the Lender in excess of those lawfully collectible as interest shall be applied
against the principal of this Note immediately upon the Lender's receipt
thereof, with the same force and effect as though the Company had specifically
designated such extra sums to be so applied to principal and the Lender had
agreed to accept such extra payment(s) as a premium-free prepayment or
prepayments.
13. SECURED NATURE OF THE NOTE. This Note is secured by the Pledged Property
as defined in the Security Agreements between the Company and the Lender, and
the Pledged Shares as defined in the Pledge and Escrow Agreements among the
Company, the Lender, and David Gonzalez, Esq., both of even date herewith.
14. ISSUANCE OF CAPITAL STOCK. So long as any portion of this Note is
outstanding, the Company shall not, without the prior written consent of the
Lender, (i) issue or sell shares of common stock or preferred stock (ii) issue
any warrant, option, right, contract, call, or other security instrument
granting the holder thereof, the right to acquire common stock (iii) enter into
any security instrument granting the holder a security interest in any and all
assets of the Company, or (iv) file any registration statement on Form S-8.
5
15. CANCELLATION OF NOTE. Upon the repayment by the Company of all of its
obligations hereunder to the Lender, including, without limitation, the
principal amount of this Note, plus accrued but unpaid interest, the
indebtedness evidenced hereby shall be deemed canceled and paid in full. Except
as otherwise required by law or by the provisions of this Note, payments
received by the Lender hereunder shall be applied first against expenses and
indemnities, next against interest accrued on this Note, and next in reduction
of the outstanding principal balance of this Note.
16. SEVERABILITY. If any provision of this Note is, for any reason, invalid
or unenforceable, the remaining provisions of this Note will nevertheless be
valid and enforceable and will remain in full force and effect. Any provision of
this Note that is held invalid or unenforceable by a court of competent
jurisdiction will be deemed modified to the extent necessary to make it valid
and enforceable and as so modified will remain in full force and effect.
17. AMENDMENT AND WAIVER. This Note may be amended, or any provision of this
Note may be waived, provided that any such amendment or waiver will be binding
on a party hereto only if such amendment or waiver is set forth in a writing
executed by the parties hereto. The waiver by any such party hereto of a breach
of any provision of this Note shall not operate or be construed as a waiver of
any other breach.
18. SUCCESSORS. Except as otherwise provided herein, this Note shall bind
and inure to the benefit of and be enforceable by the parties hereto and their
permitted successors and assigns.
19. ASSIGNMENT. This Note shall not be directly or indirectly assignable or
delegable by the Company. The Lender may assign this Note as long as such
assignment complies with the Securities Act of 1933, as amended.
20. NO STRICT CONSTRUCTION. The language used in this Note will be deemed to
be the language chosen by the parties hereto to express their mutual intent, and
no rule of strict construction will be applied against any party.
21. FURTHER ASSURANCES. Each party hereto will execute all documents and
take such other actions as the other party may reasonably request in order to
consummate the transactions provided for herein and to accomplish the purposes
of this Note.
22. NOTICES, CONSENTS, ETC. Any notices, consents, waivers or other
communications required or permitted to be given under the terms hereof must be
in writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one (1) trading day after deposit
with a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to Company: Valentec Systems, Inc.
2618 York Avenue
Minden, LA 71055
6
Attention: Robert Zummo
Telephone: (318) 382-4574
Facsimile: (318) 382-4583
With a Copy to: Schiff Hardin LLP
1101 Connecticut Avenue, N.W. - Suite 600
Washington, D.C. 20036
Attention: Ernest M. Stern, Esq.
Telephone: (202) 778-6461
Facsimile: (202) 778-6460
If to the Lender: Montgomery Equity Partners, Ltd.
101 Hudson Street, Suite 3700
Attention: Mark A. Angelo
Telephone: (201) 985-8300
Facsimile: (201) 985-8744
or at such other address and/or facsimile number and/or to the attention of such
other person as the recipient party has specified by written notice given to
each other party three (3) trading days prior to the effectiveness of such
change. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a nationally recognized overnight delivery
service, shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
23. REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The
Lender's remedies provided in this Note shall be cumulative and in addition to
all other remedies available to the Lender under this Note, at law or in equity
(including a decree of specific performance and/or other injunctive relief), no
remedy of the Lender contained herein shall be deemed a waiver of compliance
with the provisions giving rise to such remedy and nothing herein shall limit
the Lender's right to pursue actual damages for any failure by the Company to
comply with the terms of this Note. No remedy conferred under this Note upon the
Lender is intended to be exclusive of any other remedy available to the Lender,
pursuant to the terms of this Note or otherwise. No single or partial exercise
by the Lender of any right, power or remedy hereunder shall preclude any other
or further exercise thereof. The failure of the Lender to exercise any right or
remedy under this Note or otherwise, or delay in exercising such right or
remedy, shall not operate as a waiver thereof. Every right and remedy of the
Lender under any document executed in connection with this transaction may be
exercised from time to time and as often as may be deemed expedient by the
Lender. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Lender and that the remedy at law
for any such breach may be inadequate. The Company therefore agrees that, in the
event of any such breach or threatened breach, the Lender shall be entitled, in
7
addition to all other available remedies, to an injunction restraining any
breach, and specific performance without the necessity of showing economic loss
and without any bond or other security being required.
24. GOVERNING LAW; JURISDICTION. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
the internal laws of the State of New Jersey, without giving effect to any
choice of law or conflict of law provision or rule (whether of the State of New
Jersey or any other jurisdictions) that would cause the application of the laws
of any jurisdictions other than the State of New Jersey. Each party hereby
irrevocably submits to the exclusive jurisdiction of the Superior Court of the
State of New Jersey sitting in Hudson County, New Jersey and the United States
Federal District Court for the District of New Jersey sitting in Newark, New
Jersey, for the adjudication of any dispute hereunder or in connection herewith
or therewith, or with any transaction contemplated hereby or discussed herein,
and hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such suit, action or proceeding is brought in an
inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
25. NO INCONSISTENT AGREEMENTS. None of the parties hereto will hereafter
enter into any agreement, which is inconsistent with the rights granted to the
parties in this Note.
26. THIRD PARTIES. Nothing herein expressed or implied is intended or shall
be construed to confer upon or give to any person or entity, other than the
parties to this Note and their respective permitted successor and assigns, any
rights or remedies under or by reason of this Note.
27. WAIVER OF JURY TRIAL. AS A MATERIAL INDUCEMENT FOR THE LENDER TO LOAN TO
THE COMPANY THE MONIES HEREUNDER, THE COMPANY HEREBY WAIVES ANY RIGHT TO TRIAL
BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS AGREEMENT AND/OR ANY
AND ALL OF THE OTHER DOCUMENTS ASSOCIATED WITH THIS TRANSACTION.
28. ENTIRE AGREEMENT. This Note (including any recitals hereto) set forth
the entire understanding of the parties with respect to the subject matter
hereof, and shall not be modified or affected by any offer, proposal, statement
or representation, oral or written, made by or for any party in connection with
the negotiation of the terms hereof, and may be modified only by instruments
signed by all of the parties hereto.
[REMAINDER OF PAGE INTENTIONALY LEFT BLANK]
8
IN WITNESS WHEREOF, this Promissory Note is executed by the undersigned
as of the date hereof.
MONTGOMERY EQUITY PARTNERS, LTD
By: Yorkville Advisors, LLC
Its: General Partner
By: /s/ Mark Angelo
---------------
Name: Mark Angelo
Its: Portfolio Manager
VALENTEC SYSTEMS, INC.
By: /s/ Robert Zummo
----------------
Name: Robert Zummo
Title: CEO
9
SCHEDULE A
PAYMENT SCHEDULE
----------------
Principal $600,000
Interest 24%
Closing Date: April 28, 2005
- ---------------------------------------------------------------------------------------------------------
PAYMENT PAYMENT DUE DATE INTEREST PRINCIPAL TOTAL PAYMENT OUTSTANDING PRINCIPAL
- ---------------------------------------------------------------------------------------------------------
1 5/28/2005 $12,000.00 $0.00 $12,000.00 600,000
2 6/28/2005 $12,000.00 $0.00 $12,000.00 600,000
3 7/28/2005 $12,000.00 $0.00 $12,000.00 600,000
4 8/28/2005 $12,000.00 $0.00 $12,000.00 600,000
5 9/28/2005 $12,000.00 $0.00 $12,000.00 600,000
6 10/28/2005 $12,000.00 $0.00 $12,000.00 600,000
7 11/28/2005 $12,000.00 $90,000.00 $102,000.00 510,000
8 12/28/2005 $10,200.00 $90,000.00 $100,200.00 420,000
9 1/28/2006 $8,400.00 $90,000.00 $98,400.00 330,000
10 2/28/2006 $6,600.00 $90,000.00 $96,600.00 240,000
11 3/28/2006 $4,800.00 $90,000.00 $94,800.00 150,000
12 4/28/2006 $3,000.00 $150,000.00 $153,000.00 0
- ---------------------------------------------------------------------------------------------------------
$117,000.00 $600,000.00 $717,000.00
10