SENIOR SUBORDINATED SECURED CONVERTIBLE NOTE
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS NOTE NOR THE
SECURITIES INTO WHICH THIS NOTE IS CONVERTIBLE HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM
REASONABLY ACCEPTABLE TO GSE SYSTEMS, INC., THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS
OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 14(a) HEREOF. THE PRINCIPAL
AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON
CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF
PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.
THIS NOTE AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY, THE LIENS AND
SECURITY INTERESTS SECURING THE INDEBTEDNESS AND OTHER OBLIGATIONS INCURRED OR
ARISING UNDER OR EVIDENCED BY THIS NOTE AND THE RIGHTS AND OBLIGATIONS EVIDENCED
HEREBY WITH RESPECT TO SUCH LIENS ARE SECURED IN THE MANNER AND TO THE EXTENT
SET FORTH IN THE SECURITY AGREEMENT AND PLEDGE AGREEMENTS, AMONG OTHER
DOCUMENTS, DATED AS OF MAY 26, 2005, AMONG GSE SYSTEMS, INC. AND DOLPHIN DIRECT
EQUITY PARTNERS, LP, A DELAWARE LIMITED PARTNERSHIP, AND ARE SUBORDINATED IN THE
MANNER AND TO THE EXTENT SET FORTH IN THE SUBORDINATION AGREEMENT, DATED AS OF
SUCH DATE, AMONG GSE SYSTEMS, INC., AND DOLPHIN DIRECT EQUITY PARTNERS, LP AND
WACHOVIA BANK, NATIONAL ASSOCIATION.
GSE SYSTEMS, INC.
SENIOR SUBORDINATED SECURED CONVERTIBLE NOTE
Issuance Date: May 26, 2005
Principal: U.S. $2,000,000
FOR VALUE RECEIVED, GSE Systems, Inc., a Delaware corporation (the "Company"),
hereby promises to pay to the order of Dolphin Direct Equity Partners, LP, or
its registered assigns ("Holder"), the amount set forth above as the Principal
(as adjusted, pursuant to the terms hereof pursuant to conversion, redemption or
otherwise, the "Principal") when due, whether upon the Maturity Date (as defined
below), acceleration, redemption or otherwise (in each case in accordance with
the terms hereof) and to pay interest ("Interest") on any outstanding Principal
at a rate per annum equal to the Interest Rate (as defined below), from the date
set out above as the Issuance Date (the "Issuance Date") until the same becomes
due and payable, whether upon an Interest Date (as defined below), the Maturity
Date, acceleration, conversion, redemption or otherwise (in each case in
accordance with the terms hereof). This Convertible Note (including all
Convertible Notes issued in exchange, transfer or replacement hereof, this
"Note") is duly authorized and issued pursuant to the Securities Purchase
Agreement. Certain capitalized terms are defined in Section 26. References
herein to the Note or the Warrant mean all such Notes or Warrants to the extent
it, any or all of them are reissued, subdivided, transferred, substituted,
combined or otherwise restructured in any way, and references to the Holder
include all holders of all outstanding such Notes.
(1) MATURITY. On the Maturity Date, the Holder shall surrender this Note to the
Company and the Company shall pay to the Holder an amount in cash representing
all outstanding Principal, accrued and unpaid Interest. The "Maturity Date"
shall be March 31, 2009, as may be extended at the option of the Holder in the
event that, and for so long as, an Event of Default (as defined in Section 4(a))
shall have occurred and be continuing or any event shall have occurred and be
continuing which with the passage of time and the failure to cure would result
in an Event of Default.
(2) INTEREST; INTEREST RATE. Interest on this Note shall commence accruing at a
rate (the "Interest Rate") equal to 8% per annum on the Issuance Date and shall
be computed on the basis of a 365-day year and actual days elapsed and shall be
payable in arrears on the last day of each calendar quarter and on the Maturity
Date during the period beginning on the Issuance Date and ending on, and
including, the Maturity Date (each, an "Interest Date") with the first Interest
Date being June 30, 2005; provided however that the Interest Rate for each
calendar quarter during which the Registration Statement (as defined in the
Securities Purchase Agreement) shall have been effective during the entirety
thereof shall be as determined above and reduced by the product of (x) 2%
multiplied by (y) the whole number quotient, regardless of remainder, of (A) the
quotient of (1) the positive amount by which the average Closing Bid for the
last ten Trading Days of the then most recently completed calendar quarter
exceeds the Co nversion Price (as defined below) as of such date, divided by (2)
such Conversion Price, divided by (B) .25. From and after the occurrence of an
Event of Default, the Interest Rate shall be increased to twenty-four percent
(24%). In the event that such Event of Default is subsequently cured, the
increase referred to in the preceding sentence shall cease to be effective as of
the date of such cure; provided that the Interest as calculated at such
increased rate during the continuance of such Event of Default shall continue to
apply to the extent relating to the days after the occurrence of such Event of
Default through and including the date of cure of such Event of Default.
(3) CONVERSION OF NOTE. This Note shall be convertible into shares of common
stock of the Company, par value $.01 per share (the "Common Stock"), on the
terms and conditions set forth in this Section 3.
(a) Conversion Right. At any time or times on or after the Issuance Date,
until any time prior to the close of business on the Business Day prior to the
Maturity Date, the Holder shall be entitled to convert any portion of the
outstanding and unpaid Conversion Amount (as defined below) in multiples of
$1,000 principal amount into fully paid and nonassessable shares of Common Stock
in accordance with Section 3(c), at the Conversion Rate (as defined below). The
Company shall not issue any fraction of a share of Common Stock upon any
conversion. If the issuance would result in the issuance of a fraction of a
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up to the nearest whole share, or, at the option of the Company,
the Company may pay cash to the Holder for the value of any fractional share,
based on the Closing Bid Price as of the applicable Conversion Date. The Company
shall pay any and all taxes that may be payable with respect to the issuance and
delivery of Common Stock upon conversion of any Conversion Amount; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issue or delivery of shares
of Common Stock in a name other than that of the Holder and no such issue or
delivery to a Person other than the Holder shall be made unless and until the
Person requesting such issue and delivery has paid to the Company the amount of
any such tax or has established, to the satisfaction of the Company, that such
tax has been paid.
(b) Conversion Rate. The number of shares of Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be determined
by dividing (x) such Conversion Amount by (y) the Conversion Price (the
"Conversion Rate").
(i) "Conversion Amount" means the sum of (A) the portion of the
Principal to be converted, redeemed or otherwise with respect to which this
determination is being made, and (B) accrued and unpaid Interest with
respect to such Principal.
(ii) "Conversion Price" means, as of any Conversion Date (as defined
below) or other date of determination, and subject to adjustment as
provided herein, $1.925, subject to adjustment as provided herein.
(c) Mechanics of Conversion.
(i) Optional Conversion. To convert any Conversion Amount into shares
of Common Stock on any date (a "Conversion Date"), the Holder shall (A)
transmit by facsimile (or otherwise deliver) to the Company and the Company
shall have received on or prior to 11:59 p.m., New York Time, on such date,
a copy of an executed notice of conversion in the form attached hereto as
Exhibit I (the "Conversion Notice") to the Company and (B) if required by
Section 3(c)(iii), surrender this Note to the Company as soon as
practicable on or following such date (or an indemnification undertaking
with respect to this Note in the case of its loss, theft or destruction).
On or before the second Business Day following the date of receipt of a
Conversion Notice (the "Share Delivery Date"), the Company shall execute
and deliver, to the address as specified in the Conversion Notice, a
certificate, registered in the name of the Holder or its designee, for the
number of shares of Common Stock to which the Holder shall be entitled a nd
bearing a legend restricting transfer without compliance with applicable
securities laws. If this Note is required to be physically surrendered for
conversion and the outstanding Principal of this Note is greater than the
Principal portion of the Conversion Amount being converted, then the
Company shall execute and deliver, at the Company's expense, to the Holder
a new Note representing the outstanding Principal not converted. The Person
or Persons entitled to receive the shares of Common Stock issuable upon a
conversion of this Note shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on the Conversion Date.
(ii) Company's Failure to Timely Convert. If the Company shall fail to
issue a certificate to the Holder for the number of shares of Common Stock
to which the Holder is entitled upon conversion of any Conversion Amount on
or prior to the date which is five Business Days after the Conversion Date
(a "Conversion Failure"), then (A) the Company shall pay damages to the
Holder for each date of such Conversion Failure in an amount equal to 1.0%
of the product of (I) the sum of the number of shares of Common Stock not
issued to the Holder on or prior to the Share Delivery Date and to which
the Holder is entitled, and (II) the Closing Sale Price of the Common Stock
on the Share Delivery Date and (B) the Holder, upon written notice to the
Company, may void its Conversion Notice with respect to, and retain or have
returned, as the case may be, any portion of this Note that has not been
converted pursuant to such Conversion Notice; provided that the voiding of
a Conversion Notice shall not affect the Company's obligations to make any
payments which have accrued prior to the date of such notice pursuant to
this Section 3(c)(ii) or otherwise. In addition to the foregoing, if within
three (3) Trading Days after the Company's receipt of the facsimile copy of
a Conversion Notice the Company shall fail to execute and deliver a
certificate for the number of shares of Common Stock to which the Holder is
entitled upon such Holder's conversion of any Conversion Amount, and if on
or after such Trading Day the Holder purchases (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction of a sale
by the Holder of Common Stock issuable upon such conversion that the Holder
anticipated receiving from the Company (a "Buy-In"), then the Company
shall, within three Business Days after the Holder's request and in the
Holder's discretion, either (i) pay cash to the Holder in an amount equal
to the Holder's total purchase price (including brokerage commissions, if
any) for the shares of Common Stock so purchas ed (the "Buy-In Price"), at
which point the Company's obligation to deliver such certificate (and to
issue such Common Stock) shall terminate, or (ii) promptly honor its
obligation to issue to the Holder a certificate or certificates
representing such Common Stock and pay cash to the Holder in an amount
equal to the excess (if any) of the Buy-In Price over the product of (A)
such number of shares of Common Stock, times (B) the Closing Bid Price on
the Conversion Date.
(iii) Book-Entry. Notwithstanding anything to the contrary set forth
herein, upon conversion of any portion of this Note in accordance with the
terms hereof, the Holder shall not be required to physically surrender this
Note to the Company. Following any such conversion of any portion of this
Note, the outstanding Principal represented by this Note may be less than
the Principal stated on the face of this Note.
(iv) Pro Rata Conversion; Disputes. In the event that the Company
receives a Conversion Notice from more than one holder of Notes for the
same Conversion Date and the Company can convert some, but not all, of such
portions of the Notes submitted for conversion, the Company shall convert
from each holder of Notes electing to have Notes converted on such date a
pro rata amount of such holder's portion of its Notes submitted for
conversion based on the principal amount of Notes submitted for conversion
on such date by such holder relative to the aggregate principal amount of
all Notes submitted for conversion on such date. In the event of a dispute
as to the number of shares of Common Stock issuable to the Holder in
connection with a conversion of this Note, the Company shall issue to the
Holder the number of shares of Common Stock not in dispute and resolve such
dispute in accordance with Section 19.
(d) Limitation on Conversion. Until the 20-day period referred to in
Section 4(c) of the Securities Purchase Agreement has elapsed with the result of
permitting the Company to give effect to the Conversion Share Limit Termination
(as defined in the Securities Purchase Agreement), or the Company otherwise
complies with the Amex Stockholder Approval Requirements (as defined in the
Securities Purchase Agreement) with respect to the issuance of this Note,
notwithstanding any provision of this Note to the contrary, the Company shall
not effect any conversion of this Note, and the Holder of this Note shall not
have the right to convert this Note pursuant to Section 3(a), to the extent that
giving effect to such conversion would result in the actual issuance of a number
of shares of Common Stock, when aggregated with the number of shares of Common
Stock actually issued or issuable upon the exercise of the Warrant, in excess of
19.99% of the number of shares of Common Stock outstanding immediately prior to
the Subscription Date; provided that the calculation of such percentage at any
time shall be made without giving effect to, and assuming the absence of, any
adjustment contemplated by Section 7(b) or (c) hereof.
(4) EVENT OF DEFAULT.
(a) Each of the following events shall constitute an "Event of Default":
(i) the suspension from trading or failure of the Common Stock to be
listed on an Eligible Market for a period of five (5) consecutive days or
for more than an aggregate of ten (10) days in any 365-day period;
(ii) the Company's (A) failure to cure a Conversion Failure by
delivery of the required number of shares of Common Stock within ten (10)
Business Days after the applicable Conversion Date or (B) notice to any
holder of the Notes, including by way of public announcement, at any time,
of its intention not to comply with a request for conversion of any Notes
into shares of Common Stock that are tendered in accordance with the
provisions of the Notes;
(iii) at any time following the tenth consecutive Business Day that
the Holder's Authorized Share Allocation (as defined below) is less than
the number of shares of Common Stock that the Holder would be entitled to
receive upon a conversion of the full Conversion Amount of this Note
(without regard to any limitations on conversion set forth in Section 3(d)
or otherwise);
(iv) the Company's failure to pay to the Holder any amount of
Principal or Interest or other amounts when and as due under this Note or
any other Transaction Document; provided (A) in the case of a failure to
pay Interest when and as due, that such failure continues for a period of
at least five (5) Business Days if no other such failure shall have
occurred within twelve months of the date thereof and (B) in the case of a
failure to pay any such other amounts (other than Principal and Interest)
when and as due, that such failure continues for a period of at least five
(5) Business Days after notice is received by the Company specifying such
failure if no more than three other such failures cured within such period
shall have occurred within twelve months of the date thereof;
(v) (A) any of the Company or any of its Subsidiaries shall fail to
make any payment (whether of principal or interest and regardless of
amount) in respect of any Material Indebtedness, which payment failure
individually or when aggregated with all other such payment failures within
six months thereof shall be in the amount of at least $25,000, when and as
the same shall become due and payable (after giving effect to the
expiration of any grace or cure period set forth therein) or (B) any event
or condition occurs that results in any Material Indebtedness becoming due
prior to its scheduled maturity or that enables or permits (after giving
effect to the expiration of any grace or cure period set forth therein) the
holder or holders of any such Material Indebtedness or any trustee or agent
on its or their behalf to cause any such Material Indebtedness to become
due, or to require the prepayment, repurchase, redemption or defeasance
thereof, prior to its scheduled maturity;
(vi) the Company or any of its Subsidiaries, pursuant to or within the
meaning of Title 11, U.S. Code, or any similar Federal, foreign or state
law for the relief of debtors (collectively, "Bankruptcy Law"), (A)
commences a voluntary case, (B) consents to the entry of an order for
relief against it in an involuntary case, (C) consents to the appointment
of a receiver, trustee, assignee, liquidator or similar official (a
"Custodian"), (D) makes a general assignment for the benefit of its
creditors or (E) admits in writing that it is generally unable to pay its
debts as they become due;
(vii) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that (A) is for relief against the Company or any
of its Subsidiaries in an involuntary case, (B) appoints a Custodian of the
Company or any of its Subsidiaries or (C) orders the liquidation of the
Company or any of its Subsidiaries;
(viii) any representation or warranty made by the Company in any
Transaction Document shall have been incorrect in a material way when made;
(ix) the Company breaches in any material respect any covenant or
other term or condition of any Transaction Document (other than covenants,
terms or conditions, the breach of which constitutes an "Event of Default"
under any other subsection of this Section 4(a)), provided, in the case of
a breach of a covenant which is curable, that such breach continues for a
period of at least fifteen (15) consecutive days after such notice is
received by the Company specifying such breach if no more than one other
such breach cured within such time period shall have occurred within twelve
months of the date thereof.
(b) Redemption Right. Promptly after the occurrence of an Event of Default,
the Company shall deliver written notice thereof via facsimile and overnight
courier (an "Event of Default Notice") to the Holders. At any time (i) after the
earlier of (A) the Holders' receipt of an Event of Default Notice with respect
to an Event of Default and (B) the Holders otherwise becoming aware of an Event
of Default and (ii) during the continuance of such Event of Default, any Holder
may require the Company to redeem all or any portion of this Note by delivering
written notice thereof (the "Event of Default Redemption Notice") to the
Company, which Event of Default Redemption Notice shall indicate the portion of
this Note the Holder is electing to redeem. Each portion of this Note subject to
redemption by the Company pursuant to this Section 4(b) shall be redeemed by the
Company at a price equal to the greater of (i) the Conversion Amount to be
redeemed and (ii) the product of (A) the Conversion Rate with respect to such
Conversion Amount in effect at such time as the Holder delivers an Event of
Default Redemption Notice and (B) the Closing Sale Price of the Common Stock on
the date immediately preceding such Event of Default (the "Event of Default
Redemption Price"). Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 8.
(5) RIGHTS UPON FUNDAMENTAL TRANSACTION. The Company shall not enter into or be
party to a Fundamental Transaction unless (i) the Successor Entity assumes in
writing all of the obligations of the Company under this Note in accordance with
the provisions of this Section 5 and each other Transaction Document (as defined
in the Securities Purchase Agreement) pursuant to written agreements in form and
substance reasonably satisfactory to the Majority Holders and approved as such
by the Majority Holders prior to such Fundamental Transaction, and (ii) the
Successor Entity is a publicly traded corporation whose common stock is quoted
on or listed for trading on an Eligible Market. Upon the occurrence of any
Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Note referring to the "Company" shall refer
instead to the Successor Entity), and may exercise every right and power of, the
Company an d shall assume all of the obligations of the Company under this Note
with the same effect as if such Successor Entity had been named as the Company
herein. Upon consummation of the Fundamental Transaction, the Successor Entity
shall deliver to the Holder confirmation that there shall be issued upon
conversion of this Note at any time after the consummation of the Fundamental
Transaction, in lieu of the shares of the Company's Common Stock (or other
securities, cash, assets or other property) purchasable upon the conversion of
the Notes prior to such Fundamental Transaction, such shares of stock,
securities, cash, assets or any other property whatsoever (including warrants or
other purchase or subscription rights) which the Holder would have been entitled
to receive upon the happening of such Fundamental Transaction had this Note been
converted immediately prior to such Fundamental Transaction, as adjusted in
accordance with the provisions of this Note. The provisions of this Section
shall apply similarly a nd equally to successive Fundamental Transactions and
shall be applied without regard to any limitations, including as set forth in
Section 3(d), on the conversion of this Note.
(6) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS. If at any time the Company grants,
issues or sells any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property pro rata to all record holders of any
class of Common Stock (the "Purchase Rights"), then the Holder will be entitled
to acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions on the
convertibility of this Note) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
(7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.
(a) Adjustment of Conversion Price upon Issuance of Common Stock. If and
whenever on or after the Subscription Date, the Company issues or sells, or in
accordance with this Section 7(a) is deemed to have issued or sold, except any
such issuances or sales or deemed issuances or sales to Dolphin Direct Equity
Partners, LP, any shares of Common Stock (including the issuance or sale of
shares of Common Stock owned or held by or for the account of the Company, but
excluding shares of Common Stock issued or sold or deemed to have been issued or
sold by the Company in connection with any Excluded Security) for a
consideration per share (the "New Securities Issuance Price") less than a price
(the "Applicable Price") equal to the Conversion Price in effect immediately
prior to such issue or sale (the foregoing a "Dilutive Issuance"), then
immediately after such Dilutive Issuance, the Conversion Price then in effect
shall be reduced to an amount equal to the New Securities Issuance Price. For
purposes of deter mining the adjusted Conversion Price under this Section 7(a),
the following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants or sells
any Options and the lowest price per share for which one share of Common
Stock is issuable upon the exercise of any such Option or upon conversion
or exchange or exercise of any Convertible Securities issuable upon
exercise of such Option is less than the Applicable Price, then such share
of Common Stock shall be deemed to be outstanding and to have been issued
and sold by the Company at the time of the granting or sale of such Option
for such price per share. For purposes of this Section 7(a)(i), the "lowest
price per share for which one share of Common Stock is issuable upon the
exercise of any such Option or upon conversion or exchange or exercise of
any Convertible Securities issuable upon exercise of such Option" shall be
equal to the sum of the lowest amounts of consideration (if any) received
or receivable by the Company with respect to any one share of Common Stock
upon granting or sale of the Option, upon exercise of the Option and upon
conversion or exchange or exercise of any Convertible Security issuable
upon exercise of such Option. No further adjustment of the Conversion Price
shall be made upon the actual issuance of such share of Common Stock or of
such Convertible Securities upon the exercise of such Options or upon the
actual issuance of such Common Stock upon conversion or exchange or
exercise of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities and the lowest price per share
for which one share of Common Stock is issuable upon such conversion or
exchange or exercise thereof is less than the Applicable Price, then such
share of Common Stock shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the issuance of sale of such
Convertible Securities for such price per share. For the purposes of this
Section 7(a)(ii), the "price per share for which one share of Common Stock
is issuable upon such conversion or exchange or exercise" shall be equal to
the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to any one share of Common Stock
upon the issuance or sale of the Convertible Security and upon the
conversion or exchange or exercise of such Convertible Security. No further
adjustment of the Conversion Price shall be made upon the actual iss uance
of such share of Common Stock upon conversion or exchange or exercise of
such Convertible Securities, and if any such issue or sale of such
Convertible Securities is made upon exercise of any Options for which
adjustment of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 7(a), no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Rate of Conversion. If the purchase
price provided for in any Options, the additional consideration, if any,
payable upon the issue, conversion, exchange or exercise of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable or exercisable for Common Stock changes (excluding
circumstances limited to where such purchase price, additional
consideration or rate is only subject to prospective change) at any time,
the Conversion Price in effect at the time of such change shall be adjusted
to the Conversion Price which would have been in effect at such time had
such Options or Convertible Securities provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may
be, at the time initially granted, issued or sold. For purposes of this
Section 7(a)(iii), if the terms of any Option or Convertible Security that
was outstanding as of the Closing Date are changed in the manner de scribed
in the immediately preceding sentence, then such Option or Convertible
Security and the Common Stock deemed issuable upon exercise, conversion or
exchange thereof shall be deemed to have been issued as of the date of such
change. No adjustment shall be made if such adjustment would result in an
increase of the Conversion Price then in effect.
(iv) Calculation of Consideration Received. In case any Option is
issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties thereto,
the Options will be deemed to have been issued for a consideration of $.01.
If any Common Stock, Options or Convertible Securities are issued or sold
or deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the Company
therefor. If any Common Stock, Options or Convertible Securities are issued
or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company will be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Company will be the Closing Sale Price of such securities on the date of
receipt. If any Common Stock, Options or Convertible Securities are issued
to the owners of the non-surviving entity in connection with any merger in
which the Company is the surviving entity, the amount of consideration
therefor will be deemed to be the fair value of such portion of the net
assets and business of the non-surviving entity as is attributable to such
Common Stock, Options or Convertible Securities, as the case may be. The
fair value of any consideration other than cash or securities will be
determined jointly by the Company and the Majority Holders. If such parties
are unable to reach agreement within ten (10) days after the occurrence of
an event requiring valuation (the "Valuation Event"), the fair value of
such consideration will be determined within five (5) Business Days after
the tenth day following the Valuation Event by an independent, reputable
appraiser jointly selected by the Company and the Majority Holders. The
determination of such appraiser shall be deemed binding upon all parties
absent manifest error and the fees and expenses of such appraiser shall be
borne by the Company.
(v) Record Date. If the Company takes a record of the holders of
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible
Securities or (B) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the Common Stock deemed to have been issued or sold
upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(b) Adjustment of Conversion Price upon Subdivision or Combination of
Common Stock. If the Company at any time on or after the Subscription Date
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any time on or
after the Subscription Date combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination will be proportionately increased.
(c) Other Events. If any event occurs of the type contemplated by the
provisions of this Section 7 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features, other than pursuant
to an Approved Stock Plan), then the Company's Board of Directors will make an
appropriate adjustment in the Conversion Price so as to protect the rights of
the Holder under this Note; provided that no such adjustment will increase the
Conversion Price as otherwise determined pursuant to this Section 7.
(d) This Note Deemed Outstanding. If during the period beginning on and
including the Subscription Date and ending on the date immediately preceding the
Issuance Date, the Company entered into, or in accordance with Section 7(a)
would have been deemed to have entered into (had this Note been outstanding at
such time), any Dilutive Issuance or if any of the events or actions
contemplated by Sections 7(b) or (c) shall have occurred, then solely for
purposes of determining any adjustment under this Section 7 as a result of such
Dilutive Issuance, deemed Dilutive Issuance, action or event, this Note shall be
deemed to have been outstanding at the time of each such Dilutive Issuance,
deemed Dilutive Issuance, action or event.
(e) Security. This Note is secured to the extent and in the manner set
forth in the Security Agreement and the Pledge Agreements and is subordinated to
the extent and in the manner set forth in the Subordination Agreement.
(f) Non-circumvention. The Company hereby covenants and agrees that the
Company will not, by amendment of its Certificate of Incorporation, Bylaws or
through any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Note, and will at all times in good faith carry out all of the
provisions of this Note and take all action as may be required to protect the
rights of the Holder of this Note.
(g) Reservation of Authorized Shares.
(i) Reservation. The Company initially shall reserve out of its
authorized and unissued Common Stock a number of shares of Common Stock for
each of the Notes equal to 130% of the Conversion Rate with respect to the
Conversion Amount of each such Note as of the Issuance Date. So long as any
of the Notes are outstanding, the Company shall take all action necessary
to reserve and keep available out of its authorized and unissued Common
Stock, solely for the purpose of effecting the conversion of the Notes,
130% of the number of shares of Common Stock as shall from time to time be
necessary to effect the conversion of all of the Notes then outstanding
(the "Required Reserve Amount"). The initial number of shares of Common
Stock reserved for conversions of the Notes and each increase in the number
of shares so reserved shall be allocated pro rata among the holders of the
Notes based on the principal amount of the Notes held by each holder at the
Closing (as defined in the Securities Purchase Agreement) or increase in
the number of reserved shares, as the case may be (the "Authorized Share
Allocation"). In the event that a holder shall sell or otherwise transfer
any of such holder's Notes, each transferee shall be allocated a pro rata
portion of such holder's Authorized Share Allocation. Any shares of Common
Stock reserved and allocated to any Person which ceases to hold any Notes
shall be allocated to the remaining holders of Notes, pro rata based on the
principal amount of the Notes then held by such holders.
(ii) Insufficient Authorized Shares. If at any time while any of the
Notes remain outstanding the Company does not have a sufficient number of
authorized and unreserved shares of Common Stock to satisfy its obligation
to reserve for issuance upon conversion of the Notes at least a number of
shares of Common Stock equal to the Required Reserve Amount (an "Authorized
Share Failure"), then the Company shall immediately take all action
necessary to increase the Company's authorized shares of Common Stock to an
amount sufficient to allow the Company to reserve the Required Reserve
Amount for the Notes then outstanding. Without limiting the generality of
the foregoing sentence, as soon as practicable after the date of the
occurrence of an Authorized Share Failure, but in no event later than 90
days after the occurrence of such Authorized Share Failure, the Company
shall hold a meeting of its shareholders for the approval of an increase in
the number of authorized shares of Common Stock. In connection with such
meeting, the Company shall provide each shareholder with a proxy statement
and shall use its best efforts to solicit its shareholders' approval of
such increase in authorized shares of Common Stock and to cause its board
of directors to recommend to the shareholders that they approve such
proposal.
(8) HOLDER'S REDEMPTIONS.
(a) Mechanics. The Company shall deliver the applicable Event of Default
Redemption Price to the Holder within five Business Days after the Company's
receipt of the Holder's Event of Default Redemption Notice in accordance with
the terms hereof. In the event of any redemption of less than all of the
Conversion Amount of this Note, the Company shall execute and deliver to the
Holder a new Note representing the outstanding Principal that has not been
redeemed. In the event that the Company does not pay the Redemption Price to the
Holder within the time period required, at any time thereafter and until the
Company pays such unpaid Redemption Price in full, the Holder shall have the
option, in lieu of redemption, to require the Company to promptly return to the
Holder all or any portion of this Note representing the Conversion Amount that
was submitted for redemption and for which the applicable Redemption Price has
not been paid. Upon the Company's receipt of written notice of the exercise of
such opt ion, (x) the Event of Default Redemption Notice shall be null and void
with respect to such Conversion Amount, (y) the Company shall immediately return
this Note, or shall execute and deliver, a new Note to the Holder representing
such Conversion Amount and (z) the Conversion Price of this Note or such new
Notes shall be adjusted to the lesser of (A) the Conversion Price as in effect
on the date on which the Event of Default Redemption Notice is voided and (B)
the lowest Closing Bid Price during the period beginning on and including the
date on which the Event of Default Redemption Notice is delivered to the Company
and ending on and including the date on which the Event of Default Redemption
Notice is voided.
(b) Redemption by Other Holders. Upon the Company's receipt of notice from
any of the holders of the Other Notes for redemption or repayment as a result of
an event or occurrence substantially similar to the events or occurrences
described in Sections 4(b) (each, an "Other Redemption Notice"), the Company
shall promptly forward to the Holder by facsimile a copy of such notice. If the
Company receives an Event of Default Redemption Notice and one or more Other
Redemption Notices, during the period beginning on and including the date which
is three Business Days prior to the Company's receipt of the Holder's Event of
Default Redemption Notice and ending on and including the date which is three
Business Days after the Company's receipt of the Holder's Event of Default
Redemption Notice and the Company is unable to redeem all principal, interest
and other amounts designated in such Event of Default Redemption Notice and such
Other Redemption Notices received during such seven Business Day period, then t
he Company shall redeem a pro rata from each holder of the Notes (including the
Holder) based on the principal amount of the Notes submitted for redemption
pursuant to such Event of Default Redemption Notice and such Other Redemption
Notices received by the Company during such seven Business Day period.
(c) Restriction On Redemption and Dividends. Until all of the Notes have
been converted, redeemed or otherwise satisfied in accordance with their terms,
the Company shall not, and the Company shall not permit any of its Subsidiaries
to, directly or indirectly, redeem, repurchase or declare or pay any cash
dividend or distribution on its capital stock without the prior express written
consent of the Majority Holders.
(9) VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as required by law, including but not limited to the General
Corporation Law of the State of Delaware, and as expressly provided in this
Note.
(10) COVENANTS.
(a) Rank. Except as expressly provided otherwise in the Subordination
Agreement, all payments due under this Note (a) shall rank pari passu with all
other Notes issued in exchange, transfer or replacement of a Note, (b) shall
rank junior to the Existing Senior Indebtedness, and (c) shall rank senior to
all other Indebtedness of the Company and its subsidiaries, except (i)
capitalized leases (A) as are included as such in accordance with United States
generally accepted accounting principles, consistently applied, on the balance
sheet of the Company contained in its Quarterly Report for the quarter ended
March 31, 2005 as originally filed with the SEC or (B) that do not require the
payment in any fiscal year of the Company of an aggregate amount for all
capitalized leases not described in clause (A) of more than $50,000 and in
nature and other circumstances thereof consistent with past practice and (ii)
contingent obligations.
(b) Incurrence of Indebtedness. So long as this Note is outstanding, the
Company shall not, and the Company shall not permit any Subsidiary to, directly
or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness
senior in right of payment to this Note, other than the Existing Senior
Indebtedness.
(c) Existence of Liens. So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to, directly
or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge,
security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, "Liens"), other than the security interest securing
the Existing Senior Indebtedness and Permitted Liens (as defined in the Senior
Credit Agreement as in effect on the date hereof).
(11) PARTICIPATION. The Holder, as the holder of this Note, shall be entitled to
such dividends paid and distributions made to the holders of Common Stock to the
same extent as if the Holder had converted this Note into Common Stock (without
regard to any limitations on conversion herein or elsewhere) and had held such
shares of Common Stock on the record date for such dividends and distributions.
Payments under the preceding sentence shall be made concurrently with the
dividend or distribution to the holders of Common Stock.
(12) CHANGES OR AMENDMENTS TO NOTES. The Notes shall only be changed or amended
upon the written consent of the Majority Holders.
(13) TRANSFER. Subject to the provisions of the legends on the first page of
this Note, this Note may be offered, sold, assigned or transferred by the Holder
without the consent of the Company, provided that the transferee delivers to the
Company an undertaking to comply with the covenants contained in Sections 7(n)
and (o) of the Securities Purchase Agreement.
(14) REISSUANCE OF THIS NOTE.
(a) Transfer. If this Note is to be transferred, the Holder shall surrender
this Note to the Company, whereupon the Company will forthwith issue and deliver
upon the order of the Holder a new Note (in accordance with Section 14(d)),
registered as the Holder may request, representing the outstanding Principal
being transferred by the Holder and, if less then the entire outstanding
Principal is being transferred, a new Note (in accordance with Section 14(d)) to
the Holder representing the outstanding Principal not being transferred. The
Holder and any assignee, by acceptance of this Note, acknowledge and agree that,
by reason of the provisions of Section 3(c)(iii) and this Section 14(a),
following conversion or redemption of any portion of this Note, the outstanding
Principal represented by this Note may be less than the Principal stated on the
face of this Note.
(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company reasonably satisfactory
to the Company but in no event requiring the posting of any bond or similar
security and, in the case of mutilation, upon surrender and cancellation of this
Note, the Company shall execute and deliver to the Holder a new Note (in
accordance with Section 14(d)) representing the outstanding Principal.
(c) Note Exchangeable for Different Denominations. This Note is
exchangeable, upon the surrender by the Holder at the principal office of the
Company, for a new Note or Notes (in accordance with Section 14(d) and in
principal amounts of at least $50,000) representing the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.
(d) Issuance of New Notes. Whenever the Company is required to issue a new
Note pursuant to the terms of this Note, such new Note (i) shall be of like
tenor with this Note, (ii) shall represent, as indicated on the face of such new
Note, the Principal remaining outstanding (or in the case of a new Note being
issued pursuant to Section 14(a) or Section 14(c), the Principal designated by
the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued Interest on
the Principal of this Note from the Issuance Date.
(15) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
RELIEF. The remedies provided in this Note shall be cumulative and in addition
to all other remedies available under this Note and the other Transaction
Documents at law or in equity (including a decree of specific performance and/or
other injunctive relief), and nothing herein shall limit the Holder's right to
pursue actual and consequential damages for any failure by the Company to comply
with the terms of this Note. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder and shall not, except as provided in
the Security Agreement or otherwise expressly provided herein, be subject to any
other obligation of the Company (or the performance thereof). The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder 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 Holder shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
(16) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) the Company
defaults in any of its obligations under this Note and this Note is placed in
the hands of an attorney for collection or enforcement or is collected or
enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Note or to enforce the provisions of this Note or
(b) there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors' rights and involving a claim
under this Note, then the Company shall pay the costs reasonably incurred by the
Holder for such collection, enforcement or action or in connection with such
bankruptcy, reorganization, receivership or other proceeding, including, but not
limited to, reasonable attorneys' fees and disbursements.
(17) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by
the Company and the Holder and shall not be construed against any person as the
drafter hereof. The headings of this Note are for convenience of reference and
shall not form part of, or affect the interpretation of, this Note.
(18) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.
(19) DISPUTE RESOLUTION. If the Majority Holders at any time dispute the
determination of the Closing Bid Price, the Closing Sale Price, the arithmetic
calculation of the Conversion Rate or the Event of Default Redemption Price, the
Majority Holders may give the Company written notice of such dispute (a "Dispute
Notice"). The Company shall submit its determinations, related arithmetic
calculations and other information relating thereto to the Majority Holders via
facsimile within one Business Day of receipt of the Dispute Notice. If the
Majority Holders and the Company are unable to agree upon such determination or
calculation within one Business Day of such disputed determination or arithmetic
calculation being submitted to the Majority Holders, then the Company shall,
within one Business Day submit via facsimile (a) the disputed determination of
the Closing Bid Price or the Closing Sale Price to an independent, reputable
investment bank selected by the Majority Holders and subject to approval by the
Company or (b) the disputed arithmetic calculation of the Conversion Rate or
the Redemption Price to an independent accounting firm selected by the Majority
Holders and subject to approval by the Company. The Company, at the Company's
expense, shall cause the investment bank or the accountant, as the case may be,
to perform the determinations or calculations and notify the Company and the
Majority Holders of the results no later than five Business Days from the time
it receives the disputed determinations or calculations. Such investment bank's
or accountant's determination or calculation, as the case may be, shall be
binding upon all parties absent demonstrable error.
(20) NOTICES; PAYMENTS.
(a) Notices. Whenever notice is required to be given under this Note,
unless otherwise provided herein, such notice shall be given in accordance with
the Securities Purchase Agreement. The Company will give written notice to the
Holder (i) as soon as practicable and in no event later than two Business Days
following any adjustment of the Conversion Price, setting forth in reasonable
detail, and certifying, the calculation of such adjustment and (ii) at least ten
Business Days prior to the date on which the Company closes its books or takes a
record (A) with respect to any dividend or distribution upon the Common Stock,
(B) with respect to any pro rata subscription offer to holders of Common Stock
or (C) for determining rights to vote with respect to any Fundamental
Transaction, dissolution or liquidation, provided in each case that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to the Holder.
(b) Payments. Whenever any payment of cash is to be made by the Company to
any Person pursuant to this Note, such payment shall be made in lawful money of
the United States of America by a check drawn on the account of the Company and
sent via overnight courier service to such Person at such address as previously
provided to the Company in writing (which address, in the case of each of the
Purchasers, shall initially be as set forth on the Schedule of Buyers attached
to the Securities Purchase Agreement); provided that the Holder may elect to
receive a payment of cash via wire transfer of immediately available funds by
providing the Company with prior written notice setting out such request and the
Holder's wire transfer instructions. Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day, the same
shall instead be due on the next succeeding day which is a Business Day and, in
the case of any Interest Date which is not the date on which this Not e is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of Interest due on such date.
(21) CANCELLATION. After all Principal, accrued Interest and other amounts at
any time owed on this Note has been paid in full, this Note shall automatically
be deemed canceled, shall be surrendered to the Company for cancellation and
shall not be reissued.
(22) WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note and the
Securities Purchase Agreement.
(23) GOVERNING LAW. This Note shall be construed and enforced in accordance
with, and all questions concerning the construction, validity, interpretation
and performance of this Note shall be governed by, the internal laws of the
State of New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of New York.
(24) JURISDICTION. The Company hereby irrevocably consents and submits to the
exclusive jurisdiction of the United States District Court for the Southern
District of New York in connection with any dispute arising out of or relating
to this Note or the transactions contemplated hereby or by any other Transaction
Document, waives any objection to venue in such District (unless such court
lacks jurisdiction with respect to such dispute, in which case, the Company
irrevocably consents to the jurisdiction of the courts of the State of New York
located in New York County in connection with such dispute and waives any
objection to venue in the County of New York), and agrees that service of any
summons, complaint, notice or other process relating to such dispute may be
effected in the manner provided by Section 7(f) of the Securities Purchase
Agreement.
(25) WAIVER OF JURY TRIAL. THE COMPANY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY
WITH RESPECT TO ANY ACTION OR PROCEEDING RELATING TO THIS NOTE OR ANY AGREEMENT,
INSTRUMENT OR DOCUMENT EXECUTED AND DELIVERED IN CONNECTION HEREWITH OR
THEREWITH, INCLUDING THE TRANSACTION DOCUMENTS.
(26) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall
have the following meanings:
(a) "Approved Stock Plan" means any employee benefit plan that has been or
is approved by the Board of Directors of the Company, pursuant to which the
Company's securities may be issued to any employee, officer, director or
consultant for bona fide services actually provided to the Company.
(b) "Bloomberg" means Bloomberg Financial Markets.
(c) "Business Day" means any day other than Saturday, Sunday or other day
on which commercial banks in The City of New York are authorized or required by
law to remain closed.
(d) "Closing Bid Price" and "Closing Sale Price" means, for any security as
of any date, the last closing bid price and last closing trade price,
respectively, for such security on the Principal Market, as reported by
Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing bid price or the closing trade price,
as the case may be, then the last bid price or last trade price, respectively,
of such security prior to 4:00 p.m., New York Time, as reported by Bloomberg,
or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last closing bid price or last trade price,
respectively, of such security in the over-the-counter market on the electronic
bulletin board fo r such security as reported by Bloomberg, or, if no closing
bid price or last trade price, respectively, is reported for such security by
Bloomberg, the average of the bid prices, or the ask prices, respectively, of
any market makers for such security as reported in the "pink sheets" by Pink
Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Closing Bid
Price or the Closing Sale Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Closing Bid Price or the
Closing Sale Price, as the case may be, of such security on such date shall be
the fair market value as mutually determined by the Company and the Majority
Holders. If the Company and the Holder are unable to agree upon the fair market
value of such security, then such dispute shall be resolved pursuant to Section
19. All such determinations to be appropriately adjusted for any stock dividend,
stock split, stock combination or other similar transaction during the
applicable calculation period.
(e) "Closing Date" shall have the meaning set forth in the Securities
Purchase Agreement, which date is the date the Company initially issued Notes
pursuant to the terms of the Securities Purchase Agreement.
(f) "Convertible Securities" means any stock or securities (other than
Options) directly or indirectly convertible into or exercisable or exchangeable
for Common Stock.
(g) "Eligible Market" means the Principal Market, The New York Stock
Exchange, Inc. or The Nasdaq Stock Market (including the Nasdaq SmallCap
Market).
(h) "Excluded Securities" means any Common Stock issued or issuable: (i) in
connection with any Approved Stock Plan; (ii) upon conversion of the Notes or
the exercise of the Warrants; or (iii) upon conversion of any Options or
Convertible Securities outstanding on the day immediately preceding the
Subscription Date, provided that the terms of such Options or Convertible
Securities are not amended, modified or changed on or after the Subscription
Date in any respect adverse to the Holder.
(i) "Existing Senior Indebtedness" means the Indebtedness of the Company
and its subsidiaries in an aggregate principal amount not exceeding $1,500,000
under (A) the Financing and Security Agreement dated August 13, 2003 as amended
on March 30, July 2 and July 30, 2004 and as it may be amended from time to time
after the date hereof (the "Senior Credit Agreement"), among General Physics
Corporation, the Company, Skillright, Inc., GSE Power Systems, Inc., MSHI, Inc.
and Wachovia Bank, National Association, (B) the obligation of the Company to
repay GP Strategies Corporation ("GP") for payments made by GP pursuant to the
guaranty by GP of the Indebtedness of the Company under the Senior Credit
Agreement, and (C) any refinancing of such Indebtedness under the Senior Credit
Agreement.
(j) "Fundamental Transaction" means that the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another
Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (iii) allow another Person to make a purchase, tender or exchange offer that
is accepted by the holders of more than the 50% of the outstanding shares of
Common Stock (not including any shares of Common Stock held by the Person or
Persons making or party to, or associated or affiliated with the Persons making
or party to, such purchase, tender or exchange offer), or (iv) consummate a
stock purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more than
the 50% of the outstanding shares of Common Stock (not including any shares of
Common Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock
purchase agreement or other business combination), (v) changed the members
constituting its Board of Directors such that the individuals who constituted
the Board of Directors on the Closing Date or other governing body of the
Company (together with any new directors whose election to such Board of
Directors or whose nomination for election by the stockholders of the Company
was approved by a vote of 66-2/3% of the directors then still in office who were
either directors on the Closing Date or whose election or nomination for
election was previously so approved), cease for any reason to constitute a
majority of such Board of Directors then in office, or (vi) reorganize,
recapitalize or reclassify its Common Stock.
(k) "Hedging Agreement" means any interest rate protection agreement,
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement, foreign currency exchange agreement, commodity price protection
agreement, or other interest or currency exchange rate or commodity price
hedging arrangement designed to hedge against fluctuations in interest rates or
foreign exchange rates.
(l) "Indebtedness" means the Company's and its subsidiaries' (i)
indebtedness (including principal, interest, fees and charges) for borrowed
money or for the deferred purchase price of property or services other than
trade payables and accrued expenses arising in the ordinary course of business,
(ii) capitalized leases, (iii) contingent obligations, and (iv) all obligations
under any interest rate arrangement or under any similar type of agreement
entered into with any Person or bank.
(m) "Majority Holders" means the holder(s) at any time of a majority of the
aggregate principal amount of the Notes then outstanding.
(n) "Material Indebtedness" means Indebtedness (other than the Notes and
the Other Notes) of the Company or any one or more of its subsidiaries in an
aggregate principal amount exceeding $1,000,000. For purposes of determining the
amount of Material Indebtedness at any time, the "principal amount" of the
obligations in respect of any Hedging Agreement at such time shall be the
maximum aggregate amount that the Company and/or one or more of its Subsidiaries
would be required to pay if such Hedging Agreement were terminated at that time.
(s) "Options" means any rights, warrants or options to subscribe for or
purchase Common Stock or Convertible Securities.
(t) "Parent Entity" of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common stock or equivalent
equity security is quoted or listed on an Eligible Market, or, if there is more
than one such Person or Parent Entity, the Person or Parent Entity with the
largest public market capitalization as of the date of consummation of the
Fundamental Transaction.
(u) "Person" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, any other entity and a government or any department or agency
thereof.
(v) "Pledge Agreement(s) means the pledge agreement or agreements (as the
same may be amended or otherwise modified from time to time pursuant to the
terms thereof), dated the Subscription Date, among the Holder and the pledgor
party or parties thereto with respect to the pledge of the common stock or
equivalent equity security of one or more Subsidiaries.
(v) "Principal Market" means the American Stock Exchange.
(w) "SEC" means the United States Securities and Exchange Commission.
(x) "Securities Purchase Agreement" means that certain Senior Subordinated
Secured Convertible Note and Warrant Purchase Agreement dated the Subscription
Date by and between the Company and Holder pursuant to which the Company issued
the Note, as the same may be amended or modified from time to time in accordance
with the terms thereof.
(y) "Security Agreement" means the security agreement (as the same may be
amended or otherwise modified from time to time pursuant to the terms thereof)
dated the Subscription Date, between the Company and the Holder.
(z) "Subordination Agreement" means that certain subordination agreement
(as the same may be amended or otherwise modified from time to time pursuant to
the terms thereof) dated the Subscription Date, among the Company, the Holder
and Wachovia Bank, National Association, or any other subordination agreement
entered into with a holder of Existing Senior Indebtedness who has become such
in accordance with the conditions set forth in clauses (i) and (ii) of Section
7(o) of the Securities Purchase Agreement.
(aa) "Subscription Date" means May 26, 2005.
(bb) "Subsidiary" means each of and "Subsidiaries" means all of MSHI, Inc.,
GSE Power Systems AB, GSE Process Solutions, Inc., GSE Erudite Software, Inc.,
GSE Engineering Systems (Beijing) Company Ltd., GSE Power Systems, Inc., GP
International Engineering & Simulation, Inc., GSE Services Company LLC, GSE
Process Solutions BV, and each of the successors and assigns of any or all of
the foregoing.
(bb) "Successor Entity" means the Person, which may be the Company, formed
by, resulting from or surviving any Fundamental Transaction or the Person with
which such Fundamental Transaction shall have been made, provided that if such
Person is not a publicly traded entity whose common stock or equivalent equity
security is quoted or listed for trading on an Eligible Market, Successor Entity
shall mean such Person's Parent Entity.
(cc) "Trading Day" means any day on which the Common Stock is traded on the
Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock is then traded; provided that
"Trading Day" shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00 p.m., New York Time).
(dd) "Warrants" has the meaning ascribed to such term in the Securities
Purchase Agreement, and shall include all warrants issued in exchange therefor
or replacement thereof.
[Signature Page Follows]
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as
of the Issuance Date set out above.
GSE SYSTEMS, INC.
By: _____________________
Name:
Title:
EXHIBIT I
GSE SYSTEMS, INC.
CONVERSION NOTICE
Reference is made to the Convertible Note (the "Note") issued to the undersigned
by GSE Systems, Inc. (the "Company"). In accordance with and pursuant to the
Note, the undersigned hereby elects to convert the Conversion Amount (as defined
in the Note) of the Note indicated below into shares of Common Stock par value
$.01 per share (the "Common Stock"), as of the date specified below.
Date of Conversion:_____________________________________________________________
Aggregate Conversion Amount to be converted:____________________________________
Please confirm the following information:
Conversion Price:_______________________________________________________________
Number of shares of Common Stock to be issued:__________________________________
Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:
Issue to:_______________________________________________________________________
Facsimile Number:_______________________________________________________________
Authorization:__________________________________________________________________
By:_____________________________________________________________________________
Title:__________________________________________________________________________
Dated:__________________________________________________________________________
Account Number:_________________________________________________________________
(if electronic book entry transfer)
Transaction Code Number:________________________________________________________
(if electronic book entry transfer)
Note: Signatures must be guaranteed by an "eligible guarantor institution"
meeting the requirements of the Security Registrar, which requirements include
membership or participation in the Security Transfer Agent Medallion Program
("STAMP") or such other "signature guarantee program" as may be determined by
the Security Registrar in addition to, or in substitution for, STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.