Exhibit 10.7
EXECUTION COPY
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD,
TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES
LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
ALL INDEBTEDNESS EVIDENCED HEREBY AND REFERENCED HEREIN IS SUBORDINATED
IN RIGHT OF PAYMENT TO THE PRIOR PAYMENT IN FULL OF ALL INDEBTEDNESS
OWED TO KEYBANK NATIONAL ASSOCIATION.
KAHIKI FOODS, INC.
SECOND CLOSING
CONVERTIBLE PROMISSORY NOTE
$1,000,000 Wilmington, Delaware
June 3, 2005
FOR VALUE RECEIVED, the undersigned, Kahiki Foods, Inc., an Ohio
corporation ("BORROWER" or the "COMPANY"), hereby promises to pay to the order
of Townsends, Inc. ("TOWNSENDS"), a Delaware corporation, or its assigns (the
"HOLDER"), the principal sum of ONE MILLION DOLLARS ($1,000,000) (the "PRINCIPAL
AMOUNT") plus any other amount necessary to equal the Redemption Price (as
defined below) on December 31, 2009, except as otherwise set forth herein, and
with interest thereon from time to time as provided herein.
1. PURCHASE AGREEMENT.
(a) General. This Convertible Promissory Note (the "NOTE") is
issued by the Borrower, pursuant to the Note Purchase Agreement (the "PURCHASE
AGREEMENT"), dated as of December 21, 2004, between the Borrower and Townsends
and is subject to the terms thereof. As conditions to the closing of the
Purchase Agreement, the Borrower and the Holder have also entered into that
certain Supply Agreement (the "SUPPLY AGREEMENT"), dated as of December 21,
2004, and that certain Copack and Storage Agreement (the "COPACK AGREEMENT"),
dated as of December 21, 2004 (the Purchase Agreement, Supply Agreement, and
Copacking Agreement collectively referred to herein as the "TRANSACTION
DOCUMENTS"). The Holder is entitled to the benefits of this Note and the
Purchase Agreement, and may enforce the agreements of the Borrower contained
herein and therein and exercise the remedies provided for hereby and thereby or
otherwise available in respect hereto and thereto.
(b) Capitalized Terms. Capitalized terms used herein and not
defined herein have the meanings ascribed to such terms in the Purchase
Agreement.
2. INTEREST AND PRINCIPAL AMORTIZATION.
(a) Basic Interest. The Borrower promises to pay interest
("INTEREST") on the Principal Amount of this Note at the rate of five percent
(5%) per annum (the "INTEREST RATE"). Interest on this Note shall accrue from
and including the date of issuance through and until payment of the Redemption
Price (as defined below), and shall be computed on the basis of a 360-day year
of twelve (12) 30-day months. All payments on this Note shall be paid in U.S.
Dollars by wire transfer of immediately available funds to such bank account as
is designated in writing by the Holder from time to time. Interest shall accrue
and be paid at maturity unless an Event of Non-Compliance has occurred in which
case it shall be payable on the first business day of each month. All payments
of Interest and/or portions of the outstanding Principal Amount shall be
reflected by the Holder on the Payment and Accrual Schedule in the form attached
hereto as Exhibit A (the "PAYMENT AND ACCRUAL SCHEDULE") although the Holder's
failure to make such entries shall not relieve the Borrower of any of its
obligations under this Note. All of the Holder's entries upon the Payment and
Accrual Schedule shall be conclusively presumed true and correct absent manifest
error (notwithstanding the expiration of any applicable cure periods).
(b) Event of Non-Compliance Rate of Interest. Notwithstanding
the foregoing provisions of Section 2(a), but subject to applicable law, upon
occurrence of an Event of Non-Compliance (as hereafter defined) any unpaid
Principal Amount on this Note shall, for each day from the date of such Event of
Non-Compliance until the earlier to occur of (i) the date such Event of
Non-Compliance is cured or waived (including any cure or waiver after any
applicable cure period) and (ii) the date of repayment in full of the Redemption
Price, bear interest at a rate (the "NON-COMPLIANCE RATE") equal to the sum of
(A) the Interest Rate payable from time to time as provided in Section 2(a)
above and (B) ten percent (10%) per annum, provided, however, that if an Event
of Non-Compliance shall continue for more than one (1) year without being cured
or waived then the Non-Compliance Rate shall increase by an additional five
percent (5%) per annum on the first (1st) anniversary of the Event of
Non-Compliance and on each such anniversary thereafter so long as any Event of
Non-Compliance shall continue without being cured or waived. During any Event of
Non-Compliance, all Interest shall be payable on the first business day of each
month.
(c) No Usurious Interest. In the event that any interest
rate(s) provided for in this Section 2, shall be determined to be unlawful, such
Interest Rate(s) shall be computed at the highest rate permitted by applicable
law. Any payment by the Borrower of any Interest in excess of that permitted by
law shall be deemed applied to the Principal Amount of this Note without
prepayment premium or penalty; if no such Principal Amount is outstanding, such
excess shall be returned to the Borrower.
(d) Principal Amortization. An amount equal to the Redemption
Price (as defined in Section 2(e) below) shall be due on the Maturity Date, and
there shall be no required amortization of the Principal Amount due hereunder.
(e) Redemption Price Generally. As used in this Note,
"REDEMPTION PRICE" means (i) prior to December 21, 2006 the greater of (A) one
hundred and fifty percent (150%) of the original Principal Amount or (B) one
hundred percent (100%) of the then outstanding Principal Amount of this Note
plus Interest accrued and unpaid thereon through such
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date or (ii) after December 21, 2006, the greater of (x) two hundred percent
(200%) of the original Principal Amount or (y) one hundred percent (100%) of the
then outstanding Principal Amount of this Note plus Interest accrued and unpaid
thereon through such date, plus in the case of both (i) and (ii), reasonable
out-of-pocket costs and expenses of Holder (including, without limitation,
reasonable fees, charges and disbursements of counsel), if any, associated with
such payment.
3. CONVERSION.
(a) Optional Conversion. The full amount of the outstanding
Principal Amount and any accrued and unpaid Interest as of any particular date
on this Note shall, at the Holder's option, convert into (i) Preferred Stock (if
authorized) or (ii) Common Stock (as such terms are defined in the Purchase
Agreement) of the Company, in each case at $2.25 per share (as such price may be
adjusted after the date hereof, the "NOTE CONVERSION PRICE"), subject to the
adjustments provided in the anti-dilution provisions of the Certificate of
Designation attached to the Purchase Agreement as Exhibit F, which shall apply
to this Section 3 whether or not the Preferred Stock has been authorized by the
Company (either such conversion defined in this Section 3(a)(i) or Section
3(a)(ii), the "OPTIONAL CONVERSION").
(b) Mandatory Conversion. Upon (i) shareholder approval,
adoption and filing of an amendment to the Articles of Incorporation of the
Company containing provisions substantially in the form of Exhibit F to the
Purchase Agreement and (ii) the Company's issuance of duly authorized Preferred
Stock to Townsends, the outstanding Principal Amount and any accrued and unpaid
Interest under this Note shall immediately convert into such Preferred Stock at
the Note Conversion Price then in effect at the date of such conversion (the
"MANDATORY CONVERSION").
(c) Conversion Procedure. An Optional Conversion shall be
effected by surrendering this Note to the Borrower, accompanied by written
notice to the Borrower that the Holder elects to convert the Principal Amount
and Interest amounts outstanding under this Note (the "CONVERSION AMOUNT") into
Preferred Stock or Common Stock, as the case may be (the "CONVERSION NOTICE").
Interest accrued or accruing on the Conversion Amount from the date hereof to
the date of the Conversion Notice shall be paid in Preferred Stock or Common
Stock, as the case may be, calculated at the same Note Conversion Price as the
Principal Amount as determined above, and shall constitute payment in full of
any such interest on the same terms as would otherwise apply to the conversion
of the Principal Amount hereof. No fractional shares or scrip representing
fractions of Preferred Stock or Common Stock will be issued on conversion, but
the number of shares of Preferred Stock or Common Stock to be issued on
conversion shall be rounded up to the nearest whole share. The date on which the
Conversion Notice is given shall be deemed to be the date on which the Holder
has delivered this Note, with the accompanying written notice of its Optional
Conversion, duly executed by the Holder.
(d) Rights Upon Conversion. Upon either of an Optional
Conversion or Mandatory Conversion, the Holder shall be entitled to receive the
same rights and preferences accorded, contractually or otherwise, to any holder
of the relevant class of the Company's Preferred Stock or Common Stock, as
appropriate. Such rights may include, but not be limited to, any information
rights, voting rights, preemptive rights, tag-along rights, registration rights
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and/or co-sale rights granted to purchasers of any equity of the Company issued
after the date hereof (the "NEW EQUITY"). Furthermore, the Holder, at its
option, shall have the right to execute and become a party to any agreements
entered into by any purchaser of such New Equity, either with the Company or
with any other such purchaser in connection with the purchaser's purchase or
ownership of any such New Equity.
4. MANDATORY PREPAYMENTS.
(a) Change of Control. Upon a Change of Control (as defined in
Section 4(b) herein), the Borrower shall pay the entire Redemption Price to the
Holder.
(b) A "CHANGE OF CONTROL" shall occur if the Borrower engages
in any of the following: (a) merger or consolidation into or with any other
corporation or entity, (b) sale, conveyance, transfer, license, lease or other
disposition of all or substantially all of the assets of the Borrower or (c)
acquisition by any person of more than 50% of the voting power of all securities
of the Borrower generally entitled to vote in the election of directors of the
Borrower.
(c) Notice. The Borrower shall give written notice to the
Holder of any mandatory prepayment pursuant to this Section 4 at least five (5)
business days prior to the date of such mandatory prepayment in the manner
provided in Section 15 herein.
5. OPTIONAL PREPAYMENT.
(a) General. Upon notice given to the Holder as provided in
Section 4(c), the Borrower, at its option, may prepay all (but not less than
all) of this Note at any time by payment of the Redemption Price.
(b) Notice. The Borrower shall give written notice of
prepayment of this Note not less than seven (7) nor more than sixty (60) days
prior to the date fixed for such prepayment. Such notice of prepayment shall be
given in the manner provided in Section 15 herein.
6. DEFAULTS AND REMEDIES.
(a) Events of Default. An "EVENT OF DEFAULT" shall occur if:
(i) the Borrower shall default in the payment of the
Redemption Price of this Note, when and as the same shall become due and
payable, whether at maturity or at a date fixed for prepayment or by
acceleration or otherwise; or
(ii) the Borrower shall default in the payment of any
Interest when and as the same shall become due and payable and such default
shall continue for a period of three (3) days; or
(iii) the Borrower shall default in the due
observance or performance of any covenant, condition, representation or
warranty, certification or agreement on the part of the Borrower to be observed
or performed (after giving effect to any applicable cure periods) pursuant to
the terms hereof or pursuant to the terms of any of the Transaction Documents;
or
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(iv) the Borrower shall default in the payment of
principal on any other Funded Indebtedness where the principal amount
outstanding is in excess of $100,000; or
(v) an involuntary proceeding shall be commenced or
an involuntary petition shall be filed in a court of competent jurisdiction
against the Borrower seeking (A) relief in respect of the Borrower or of a
substantial part of the property or assets of the Borrower, under Title 11 of
the United States Code, as now constituted or hereafter amended, or any other
Federal or state bankruptcy, insolvency, receivership or similar law, (B) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for the Borrower or for a substantial part of the property or
assets of the Borrower, or (C) the winding up or liquidation of the Borrower;
and such proceeding or petition shall continue undismissed for sixty (60) days,
or an order or decree approving or ordering any of the foregoing shall be
entered; or
(vi) if the Borrower shall (A) voluntarily commence
any proceeding or file any petition seeking relief under Title 11 of the United
States Code, as now constituted or hereafter amended, or any other Federal or
state bankruptcy, insolvency, receivership or similar law, (B) consent to the
institution of, or fail to contest in a timely and appropriate manner, any
proceeding or the filing of any petition described in this Section 6(a), (C)
apply for or consent to the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for the Borrower, or for a
substantial part of the property or assets of the Borrower, (D) file an answer
admitting the material allegations of a petition filed against it in any such
proceeding, (E) make a general assignment for the benefit of creditors, (F)
become unable, admit in writing its inability or fail generally to pay its debts
as they become due or (G) take any action for the purpose of effecting any of
the foregoing; or
(vii) if the Borrower shall become insolvent or
otherwise become unable to meet its financial obligations as they become due; or
(viii) one or more judgments for the payment of money
in an aggregate amount in excess of $100,000 (to the extent not covered by
insurance) shall be rendered against the Borrower and the same shall remain
undischarged for a period of 60 days during which execution shall not be
effectively stayed, or any action shall be legally taken by a judgment creditor
to levy upon assets or properties of the Borrower to enforce any such judgment.
(b) Acceleration; Forced Sale. If an Event of Default occurs
pursuant to Section 6(a)(vi) or Section 6(a)(vii) then the Redemption Price
shall automatically become immediately due and payable in cash, without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived. If any other Event of Default occurs and is continuing the
Holder, by written notice to the Borrower, may declare the Redemption Price to
be immediately due and payable in cash. The Holder may rescind an acceleration
and all or any part of its consequences if all existing Events of Default have
been cured or waived, and if the rescission would not conflict with any judgment
or decree. Any notice or rescission shall be given in the manner specified in
Section 15 herein. If an Event of Default remains uncured for more than two (2)
years, in addition to any other remedies, the Holder may cause the Company to
seek and enter into a Change of Control transaction that generates sufficient
proceeds to pay the Holder the Redemption Price.
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(c) Event of Non-Compliance. If an Event of Default occurs
pursuant to Section 6(a) (each an "EVENT OF NON-COMPLIANCE") then the
Noncompliance Rate of Interest shall apply as set forth in Section 2(b).
7. TSAO SUBORDINATION. Any amount owed to Michael Tsao or Alice Tsao
(or their Affiliates) by the Borrower shall at all times be wholly subordinate
and junior in right of payment to this Note.
8. SUITS FOR ENFORCEMENT.
(a) Upon the occurrence of any one or more Events of Default,
the Holder of this Note may proceed to protect and enforce its rights hereunder
by suit in equity, action at law or by other appropriate proceeding, whether for
the specific performance of any covenant or agreement contained in the Purchase
Agreement or this Note or in aid of the exercise of any power granted in the
Purchase Agreement or this Note, or may proceed to enforce the payment of this
Note, or to enforce any other legal or equitable right of the Holders of this
Note.
(b) In case of any default under this Note, the Borrower will
pay to the Holder such amounts as shall be sufficient to cover the costs and
expenses of such Holder due to such default.
9. REMEDIES CUMULATIVE. No remedy herein conferred upon the Holder is
intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.
10. REMEDIES NOT WAIVED. No course of dealing between the Borrower and
the Holder or any delay on the part of the Holder in exercising any rights
hereunder shall operate as a waiver of any right.
11. TRANSFER.
(a) Permitted Transfers. Subject to the provisions of this
Section 11, this Note may be transferred or assigned, in whole or in part, by
the Holder at any time to any Person.
(b) Transferees. The term "HOLDER" as used herein shall also
include any transferee of this Note whose name has been recorded by the Borrower
in the Note Register. No transfers of this Note shall be permitted unless each
transferee of this Note acknowledges that this Note has not been registered
under the Securities Act, and may be transferred (i) only pursuant to an
effective registration under the Securities Act and any applicable state
securities law or (ii) if the Company first shall have been furnished with an
opinion of legal counsel or otherwise reasonably satisfactory to the Company to
the effect that such transfer is exempt from, or in compliance with, the
registration requirements of the Securities Act and such state laws and that
such transferee has represented that it is acquiring this Note for investment
purposes only and not with a view toward resale or distribution thereof.
Notwithstanding the foregoing, this Note may be transferred by Townsends to any
of its Affiliates without the requirement of an opinion of legal counsel, so
long as such transfer is in compliance with federal and state securities laws.
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(c) Note Register. The Borrower shall maintain a register (the
"NOTE REGISTER") in its principal offices for the purpose of registering the
Note and any transfer or partial transfer thereof, which register shall reflect
and identify, at all times, the ownership of record of any interest in the Note.
Upon the issuance of this Note, the Borrower shall record the name and address
of the initial purchaser of this Note in the Note Register as the first Holder.
Upon surrender for registration of transfer or exchange of this Note at the
principal offices of the Borrower, the Borrower shall, at its expense, execute
and deliver one or more new Notes of like tenor and of denominations of a like
aggregate Principal Amount, registered in the name of the Holder or a transferee
or transferees. Every Note surrendered for registration of transfer or exchange
shall be duly endorsed, or be accompanied by written instrument of transfer duly
executed by the Holder of such Note or such holder's attorney duly authorized in
writing. The failure of the Borrower to adequately maintain the Note Register in
compliance with this Section 11(c) shall not in any way alter, invalidate or
modify any Holder's interest in the Note.
12. WAIVER OF NOTICE, PRESENTMENT AND DISHONOR. Each party liable under
this Note in any capacity, whether as maker, endorser, surety, guarantor or
otherwise: (a) waives presentment, demand, protest and notice of presentment,
notice of protest and notice of dishonor of this debt and each and every other
notice of any kind with respect to this Note, and (b) agrees that the holder of
this Note, at any time or times, without notice to it or its consent, may grant
extensions of time, without limit as to the number or the aggregate period of
such extensions, for the payment of any principal, interest or other sums due
hereunder.
13. REPLACEMENT OF NOTE. On receipt by the Borrower of an affidavit of
an authorized representative of the Holder stating the circumstances of the
loss, theft, destruction or mutilation of this Note in form and substance
reasonably satisfactory to Borrower (and in the case of any such mutilation, on
surrender and cancellation of such Note), the Borrower will promptly execute and
deliver, in lieu thereof, a new Note of like tenor (including, without
limitation, the legend regarding the subordination of certain rights of the
holder hereunder). If required by the Borrower, such Holder must provide
indemnity sufficient in the reasonable judgment of the Borrower to protect the
Borrower from any loss which the Borrower may suffer if a lost, stolen or
destroyed Note is replaced.
14. COVENANTS BIND SUCCESSORS AND ASSIGNS. All the covenants,
stipulations, promises and agreements in this Note contained by or on behalf of
the Borrower shall bind its successors and assigns, whether so expressed or not.
15. NOTICES. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, telecopier
(with receipt confirmed telephonically), reputable commercial overnight courier
service or personal delivery at the addresses specified in Section 6.5 of the
Purchase Agreement. All such notices and communications shall be deemed to have
been duly given when: delivered by hand, if personally delivered; when delivered
by courier, if delivered by a reputable commercial overnight courier service; if
mailed, upon receipt thereof; or if telecopied, when receipt is acknowledged.
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16. AMENDMENT. Amendments and modifications of this Note may be made
only in the manner provided in Section 6.7 of the Purchase Agreement and subject
to the terms of the Purchase Agreement.
17. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED IN
ACCORDANCE WITH, AND ENFORCED UNDER, THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE.
18. JURISDICTION, JURY TRIAL WAIVER, ETC.
(a) THE COMPANY HEREBY IRREVOCABLY AGREES THAT ANY LEGAL
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE SHALL BE BROUGHT
ONLY IN THE COURTS OF THE STATE OF DELAWARE OR OF THE UNITED STATES OF AMERICA
FOR THE DISTRICT OF DELAWARE IN EACH CASE IN THE COUNTY OF NEW CASTLE AND HEREBY
EXPRESSLY SUBMITS TO THE PERSONAL JURISDICTION AND VENUE OF SUCH COURTS FOR THE
PURPOSES THEREOF AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND ANY CLAIM
THAT SUCH COURTS ARE AN INCONVENIENT FORUM. THE COMPANY HEREBY IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY
SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED
OR CERTIFIED MAIL, POSTAGE PREPAID, PURSUANT TO SECTION 15 ABOVE.
(b) THE COMPANY HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH
RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF THIS NOTE, ANY RIGHTS OR
OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.
19. SEVERABILITY. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof. The parties hereto further agree to replace such
invalid, illegal or unenforceable provision with a substitute provision that
will achieve, to the fullest extent possible, the economic, business and other
purposes of such invalid, illegal or unenforceable provision.
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20. HEADINGS. The headings in this Note are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
KAHIKI FOODS, INC.
By: /s/ Michael Tsao
------------------------
Michael Tsao
Chief Executive Officer
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EXHIBIT A
PAYMENT AND ACCRUAL SCHEDULE
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DATE INTEREST ACCRUAL INTEREST PAID UNPAID INTEREST NOTATION
MADE BY
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