EXHIBIT 4.2
NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
STATE SECURITIES LAW AND MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE ACT AND APPLICABLE STATE SECURITIES LAWS
THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE ARE SUBJECT
TO THE TERMS AND CONDITIONS OF THE REGISTRATION RIGHTS PROVISIONS ATTACHED
HERETO AS EXHIBIT A.
CONVERTIBLE PROMISSORY NOTE
$332,631.00 November 30, 2005
New York, New York
For good and valuable consideration, the receipt of which is hereby
acknowledged, Gales Industries, Incorporated, a Delaware corporation (the
"Company"), promises to pay to the order of Dario Peragallo or his registered
assigns (the "Holder"), the principal sum of Three Hundred Thirty Two Thousand
Six Hundred Thirty One Dollars ($332,631.00) on the earlier of (i) November 30,
2010 (the "Scheduled Due Date") and (ii) when, upon or after the occurrence of
an Event of Default (as defined below), such amount is declared due and payable
by the Holder or made automatically due and payable in accordance with the terms
hereof (the "Maturity Date").
From the date hereof to (and including) the Scheduled Due Date, interest
shall accrue on the unpaid principal sum of this Note at an adjustable rate
equal to the "Prime Rate" (as hereinafter defined), as adjusted as provided for
herein, plus 0.5% per annum. All accrued interest shall be paid together with
principal on the Maturity Date. Interest shall accrue on any portion of the
principal amount of this Note outstanding from time to time after the Scheduled
Due Date until payment thereof in full, at a floating rate equal to the Prime
Rate plus 7% per annum. For purposes hereof the "Prime Rate" means the rate
publicly announced by Citibank as its "prime rate" (even though Citibank may not
lend money at such rate) or, if Citibank ceases to quote such rate, the Federal
Funds rate. Interest shall be calculated on the basis of a 365 or 366 day year,
as the case may be, and the actual number of days elapsed and the rate of
interest charged hereunder shall change effective on the first day of each
calendar quarter (to wit, October 1, January 1, April 1 and July 1) to the Prime
Rate in effect as of the end of such date or the most recent business day. In no
event shall the Holder hereof, or any successor or permitted assign, be entitled
to receive, collect or retain any amount of interest paid hereon in excess of
that permitted by applicable law. All interest payable hereunder shall be paid,
subject to the provisions of Section 1(e) hereof, in the number of shares of
Common Stock (as defined below) equal to the quotient resulting from the
division of all such interest by the Conversion Price (as defined below).
All payments made pursuant to this Note shall be applied first to
reimbursable expenses, interest accrued, if any, and then principal.
This Note is issued pursuant to that certain Stock Purchase Agreement,
dated as of July 25, 2005 (as amended, the "Stock Purchase Agreement") entered
into among the Company, Peter Rettaliata, Air Industries Machining, Corp.
("AIM"), Jorge Peragallo, Luis Peragallo, and Dario Peragallo.
The following is a statement of rights of the Holder and the conditions to
which this Note is subject, and to which the Holder, by acceptance of this Note,
agrees:
1. Conversion. (a) From and after January 1, 2006, all, but not less than
all, of the outstanding principal amount of this Note together with interest
accrued thereon through and including the effective date of such conversion, is
convertible, at the option of Company, into shares of common stock of the
Company ("Common Stock") at a price of forty cents ($.40) per share (the
"Conversion Price"), subject to adjustment pursuant to the terms and provision
hereof (as so adjusted, the "Conversion Price"), provided that on the day that
the Conversion Notice (as hereinafter defined) is given by the Company to the
Holder and on the Conversion Date (as hereinafter defined), the following
conditions are satisfied: (i) (A) the shares of Common Stock issuable upon
conversion have been registered by the Company for resale by the Holder pursuant
to the Securities Act of 1933, as amended (the "Securities Act"), and the
registration statement effecting such registration (the "Registration
Statement") is then currently effective or (B) there is available an exemption
that would permit such shares of Common Stock to be immediately resold by the
Holder; and (ii) any lock-up agreement entered into by the Holder in favor of or
at the request of the Company has expired or been waived. Any notice of
conversion ("Conversion Notice") must be given by the Company to all Holders of
record of this Note no less than thirty (30) days nor more than forty-five (45)
days prior to the date set forth for conversion (the "Conversion Date"). The
Conversion Notice shall remain effective only if the Registration Statement
remains effective continually throughout the notice period or counsel for the
Company does not revoke its opinion as to the availability of an exemption
permitting immediate resale of the Common Stock. On the Conversion Date, the
outstanding principal amount of this Note, and all interest accrued thereon
through and including the Conversion Date, shall automatically and without
further notice be deemed converted into shares of Common Stock at the Conversion
Price then in effect and not later than three (3) business days after the
presentation of this Note, the Company will deliver to the Holder a certificate
or certificates representing the number of shares of Common Stock into which the
then-outstanding principal amount of and interest accrued on this Note was
converted on the Conversion Date, together with cash in lieu of fractional
shares of Common Stock pursuant to Section 1(e) hereof, if applicable.
(b) From and after the earlier of (i) January 1, 2007, and (ii) the first
date on which the Company intends to effect any capital reorganization of the
Company, any reclassification or recapitalization of the capital stock of the
Company, any merger, consolidation or other combination of the Company with or
into any other Company, or any sale or transfer of all or substantially all the
assets of the Company to any other person or any voluntary or involuntary
dissolution, liquidation or winding up of the Company, all, but not less than
all, of the outstanding principal amount of this Note together with interest
accrued thereon through and including the effective date of such conversion, is
convertible, at the option of the Holder, into shares of Common Stock at the
Conversion Price. To effect such conversion, the Holder shall deliver this Note
with a duly executed Conversion Notice in the form annexed hereto to the Company
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at the address set forth herein. For purposes of a conversion by the Holder, the
date upon which a Conversion Notice is received by the Company is referred to as
the Conversion Date. On the Conversion Date, the outstanding principal amount of
this Note, and all interest accrued thereon through and including the Conversion
Date, shall automatically and without further notice be deemed converted into
shares of Common Stock at the Conversion Price then in effect and not later than
three (3) business days after the presentation of this Note, the Company will
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock into which the then-outstanding principal amount of and
interest accrued on this Note was converted on the Conversion Date, together
with cash in lieu of fractional shares of Common Stock pursuant to Section 1(e)
hereof, if applicable.
(c) Upon request of the Company the Holder shall cooperate in the
registration under the Securities Act of the Common Stock issuable hereunder by
complying with its obligations under the Registration Rights Provisions annexed
hereto as Exhibit A (the "Registration Rights Provisions").
(d) Subject to the provisions of this Section 1(d) and 1(e), the number of
shares of Common Stock issuable upon conversion of this Note shall be the entire
principal amount of this Note together with all accrued but unpaid interest
thereon through and including the Conversion Date, divided by the Conversion
Price then in effect.
(i) If the Common Stock issuable upon conversion of the principal
amount of this Note shall be changed into the same or a different number of
shares of any other class or classes of stock or other equity security, whether
by capital reorganization, reclassification or otherwise (other than a
subdivision or combination of shares provided for below or a merger or
consolidation as provided for below) then, concurrently with the effectiveness
of such reorganization, recapitalization or other similar transaction, the
securities issuable upon conversion of this Note shall be adjusted such that
this Note shall be convertible into, in lieu of the number of shares of Common
Stock that the Holders would otherwise be entitled to receive, a number of
shares of such other class or classes of stock or other equity security
equivalent to the number of shares of such class or classes that would have been
issued to the Holders had they converted this Note immediately prior to such
change and had they thereafter, during the period from the date of such event to
and including the date of conversion, retained such securities receivable by
them as aforesaid during such period, subject to all other adjustments called
for during such period under this Section. The Conversion Price upon such
conversion shall be the Conversion Price that would otherwise be in effect
pursuant to the terms hereof. Notwithstanding anything herein to the contrary,
the Company will not effect any such reorganization reclassification or other
similar transactions unless prior to the consummation thereof, the entity that
may be required to deliver stock upon the conversion of this Note shall agree by
an instrument in writing to deliver such stock, cash, or other equity security
to the Holder.
(ii) If the Company at any time or from time to time makes or fixes
a record date for the determination of holders of Common Stock entitled to
receive any distributions payable in securities of the Company other than shares
of Common Stock and as otherwise adjusted in this Section, then and in such
event provision shall be made so that the Holder receives upon conversion
hereof, in addition to the number of shares of Common Stock receivable, the
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amount of securities of the Company that he would have received had this Note
been converted into Common Stock on the date of such event and had he
thereafter, during the period from the date of such event to and including the
date of conversion, retained such securities receivable as aforesaid during such
period, subject to all other adjustments called for during such period under
this Section.
(iii) In case the Company at any time or from time to time after the
date hereof shall (a) declare or pay any dividend on the Common Stock payable in
shares of Common Stock, (b) subdivide the outstanding shares of Common Stock
into a greater number of shares of Common Stock or (c) combine the outstanding
shares of Common Stock into a smaller number of shares of Common Stock, then,
and in each such case, the Conversion Price shall be adjusted to that price
determined by multiplying the Conversion Price in effect by a fraction (x) the
numerator of which shall be the number of issued and outstanding shares of
Common Stock immediately before such dividend, distribution, subdivision or
combination and (y) the denominator of which shall be the total number of issued
and outstanding shares of Common Stock immediately after such dividend,
distribution, subdivision or combination. Upon such adjustment of the Conversion
Price, the number of shares of Common Stock issuable upon conversion of this
Note shall be increased (in the case of a reduction in the Conversion Price) or
decreased (in the case of an increase in the Conversion Price) proportionately.
(iv) If the Company shall merge, consolidate or otherwise combine
with or into another entity, this Note shall automatically become convertible
into the same kind and number of shares of stock and other securities, cash or
property (and upon the same terms and with the same rights) as would have been
received by a holder of the number of shares of Common Stock into which this
Note could have been converted immediately prior to such merger, consolidation
or combination, without change to the Conversion Price. Notwithstanding anything
herein to the contrary, the Company will not effect any such merger,
consolidation or combination, unless prior to consummation thereof, the entity
that may be required to deliver stock, cash, securities or other assets upon the
conversion of this Note shall agree by an instrument in writing to deliver such
stock, cash, securities or other assets to the Holder.
(e) Upon a conversion hereunder, the Company shall not be required to
issue fractional shares of Common Stock or scrip representing fractional shares
of Common Stock. In lieu thereof, the Company may, if otherwise permitted, make
a cash payment in respect of any fractional share based on the Conversion Price
at such time. No cash payment of less than $1.00 shall be required to be given
unless specifically requested by the Holder. If the Company elects not, or is
unable, to make such a cash payment, the Holder shall be entitled to receive, in
lieu of the final fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock on conversion
of this Note shall be made without charge to the holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
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issuance and delivery of any such certificate upon conversion in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
(g) The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of this Note and the Convertible Promissory Note issued
to Peter Rettaliata pursuant to the Stock Purchase Agreement (the "Rettaliata
Note"), such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of this Note and the Rettaliata Note; and if
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of this Note and the Rettaliata Note,
the Company will promptly take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose.
(h) In each case of an adjustment or readjustment of the Conversion Price
or the number of shares of Common Stock or other securities issuable upon
conversion of this Note, the Company, at its own expense, shall cause its Chief
Financial Officer to compute such adjustment or readjustment in accordance with
the provisions hereof and prepare a certificate showing such adjustment or
readjustment, and shall send such certificate, by prepaid courier, to the
Holder. The certificate shall set forth such adjustment or readjustment, showing
in detail the facts upon which such adjustment or readjustment is based. No
adjustment in the Conversion Price shall be required to be made unless it would
result in an increase or decrease of at least one cent, but any adjustments not
made because of this sentence shall be carried forward and taken into account in
any subsequent adjustment otherwise required hereunder.
(i) Upon (i) the establishment by the Company of a record of the holders
of any class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, or (ii) any
capital reorganization of the Company, any reclassification or recapitalization
of the capital stock of the Company, any merger, consolidation or other
combination of the Company with or into any other Company, or any sale or
transfer of all or substantially all the assets of the Company to any other
person or any voluntary or involuntary dissolution, liquidation or winding up of
the Company, the Company shall send to the Holder at least twenty days prior to
the record date specified therein a notice specifying (A) the date on which any
such record is to be taken for the purpose of such dividend or distribution and
a description of such dividend or distribution, (B) the date on which any such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up is expected to become effective, and (C) the date, if
any, that is to be fixed as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up.
(j) The Company shall not amend its Certificate of Incorporation or
participate in any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action for the
purpose of avoiding or seeking to avoid the observance or performance of any of
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the terms to be observed or performed hereunder by the Company, but shall at all
times in good faith assist in carrying out all such action as may be reasonably
necessary or appropriate in order to protect the conversion rights of the
Holders of this Note against dilution or other impairment as provided herein.
2. Events of Default. If any of the events specified in this Section 2
shall occur (herein individually referred to as an "Event of Default"), the
Holder may, so long as such condition exists, in addition to any other right,
power or remedy granted to the Holder under this Note, the Stock Purchase
Agreement or applicable law, either by suit in equity or by action at law, or
both, declare the entire principal amount (and interest accrued thereon)
immediately due and payable without presentment, demand or notice of any kind,
all of which are expressly waived, provided, however, that upon the occurrence
of any Event of Default described in Section 2(c), 2(d) or 2(g) hereof, the
entire principal amount (and accrued interest thereon) and all other amounts
shall automatically become due and payable:
(a) Payment of principal of this Note or interest accrued thereon
shall be delinquent for a period of 10 days after the due date thereof.
(b) If the Company shall fail to observe any covenant or other
provision contained in this Note (other than with respect to payment), the Stock
Purchase Agreement or the Employment Agreement between the Company and Dario
Peragallo, and such failure of observance shall be continuing for 10 days after
the Holder has given written notice thereof;
(c) The institution by the Company of proceedings to be adjudicated
as bankrupt or insolvent, or the consent by it to institution of bankruptcy or
insolvency proceedings against it or the filing by it of a petition or answer or
consent seeking reorganization or release under the federal Bankruptcy Act, or
any other applicable federal or state law, or the consent by it to the filing of
any such petition or the appointment of a receiver, liquidator, assignee,
trustee or other similar official of the Company, or of any substantial part of
its property, or the making by it of an assignment for the benefit of creditors,
or the taking of corporate action by the Company in furtherance of any such
action;
(d) If, within 45 days after the commencement of an action against
the Company (and service of process in connection therewith on the Company)
seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or
similar relief under any present or future statute, law or regulation, such
action shall not have been resolved in favor of the Company or all orders or
proceedings thereunder affecting the operations or the business of the Company
stayed, or if the stay of any such order or proceeding shall thereafter be set
aside, or if, within 45 days after the appointment without the consent or
acquiescence of the Company of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company, such
appointment shall not have been vacated;
(e) Any default of the Company under any Indebtedness (as defined
below), whether such indebtedness now exists or is hereafter created, that gives
the holder thereof the right to accelerate such Indebtedness, and such
Indebtedness is in fact accelerated by the holder. For purposes hereof, the term
"Indebtedness" shall mean (i) all obligations of the Company for borrowed money,
(ii) all obligations of the Company evidenced by bonds, debentures, notes or
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other similar instruments, including without limitation the Rettaliata Note and
the Note (as defined in the Stock Purchase Agreement), (iii) all obligations of
the Company under a lease that are required to be classified and accounted for
as capital lease obligations under generally accepted accounting principles in
the United States, (iv) all obligations of the Company issued or assumed as the
deferred purchase price of property or services, all conditional sale
obligations and all obligations under any title retention agreement (but
excluding trade accounts payable and other accrued liabilities arising in the
ordinary course of business that are not overdue by 90 days or more or are being
contested in good faith by appropriate proceedings promptly instituted and
diligently conducted and any deferred purchase price represented by earn outs),
(v) all obligations for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction (other than those
issued or incurred in respect of trade payables arising in the ordinary course
of business), (vi) all obligations, whether or not assumed, which are secured by
liens on the property belonging to the Company or payable out of the proceeds
flowing therefrom, or (vii) all obligations under any guarantee by the Company
of any Indebtedness or other obligation of any other person or entity;
(f) One or more judgments for the payment of money in an amount in
excess of $100,000 in the aggregate shall be rendered against the Company or any
of its subsidiaries (or any combination thereof) and shall remain undischarged
for a period of ten consecutive days during which execution shall not be
effectively stayed, or any action is legally taken by a judgment creditor to
levy upon any such judgment; or
(g) Dario Peragallo shall have terminated his employment for Good
Reason (as defined in the Employment Agreement) or the Company or AIM shall have
terminated the employment of Dario Peragallo without Cause (as defined in the
Employment Agreement).
3. Miscellaneous.
3.1. Waiver and Amendment. The rights and remedies herein reserved
to any party shall be cumulative and in addition to any other or further rights
and remedies available at law or in equity. The waiver by any party hereto of
any breach of any provision of this Note shall not be deemed to be a waiver of
the breach of any other provision or any subsequent breach of the same
provision. This Note and its terms may be changed, waived or amended only by the
written consent of the Company and the Holder.
3.2. Governing Law. This Note shall be governed by and construed in
accordance with the law of the State of New York without regard to conflict of
law provisions. Any legal suit, action or proceeding arising out of or based
upon this Note shall be instituted in any federal or state court only in the
City and County of New York, State of New York. The aforementioned choice of
venue is intended to be mandatory and not permissive in nature, thereby
precluding the possibility of litigation arising out of this Note in any
jurisdiction other than that specified in this Section. The Holder and the
Company each waive, to the fullest extent permitted by applicable law, any right
it may have to assert the doctrine of forum non conveniens or similar doctrine
or to object to venue with respect to any proceeding brought in accordance with
this Section, and stipulates that the state and federal courts located in the
City and County of New York, State of New York, shall have in personam
jurisdiction and venue over them for the purpose of litigation any dispute,
controversy or proceeding arising out of or related to this Note.
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3.3. Successors and Assigns. All of the terms and provisions of this
Note shall be binding upon and inure to the benefits of the parties hereto and
their respective successors, heirs and permitted assigns.
3.4. Headings. The section headings contained in this Note are
intended solely for convenience of reference and do not themselves constitute a
part of this Note.
3.5. Severability. In case any provision contained herein (or part
thereof) shall for any reason be held to be invalid, illegal, or unenforceable
in any respect, such invalidity, illegality, or other unenforceability shall not
affect any other provision (or the remaining part of the affected provision)
hereof; but this Note shall be construed as if such invalid, illegal, or
unenforceable provision (or part thereof) had never been contained herein, but
only to the extent that such provision is invalid, illegal, or unenforceable.
3.6 Costs of Collection. The Company shall reimburse Holder for all
reasonable costs and expenses, including without limitation reasonable attorneys
fees and costs, incurred in connection with (i) drafting, negotiating, executing
and delivering any amendment, modification or waiver of, or consent with respect
to, any matter relating to the rights of Holder hereunder and (ii) enforcing any
provision of this Note and/or collecting any amounts due under this Note.
3.7. Notices. All notices, requests, demands or other communications
which are required to be or may be given or permitted hereunder shall be in
writing and shall be deemed to have been duly given when delivered in person or
after dispatch by a recognized overnight courier to the appropriate party to
whom the same is so given or made:
To Holder at: Dario Peragallo
20 Coles Place
Northport, New York 11768
To Company at: Gales Industries, Incorporated
333 East 66th Street, 9th Floor,
New York, New York 10021
or to such other address as a party has designated by notice in writing to the
other party in the manner provided by this Section. All such notices, requests,
demands or other communications shall be deemed to have been received on the
date of delivery thereof (if delivered by hand) and on the next day after
sending thereof (if by overnight courier).
3.8 Assignment by the Company. Neither this Note nor any of the
rights, interests or obligations hereunder may be assigned, by operation of law
or otherwise, in whole or in part, by the Company, without the prior written
consent of the Holder.
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3.9 No Set-Off. All payments by the Company under this Note shall be
made free and clear of and without any deduction for or on account of any
set-off or counterclaim.
3.10 Waiver of Presentment, Demand, Etc. To the fullest extent
permitted by applicable law, the Company expressly waives presentment, demand,
protest, notice of dishonor, notice of non-payment, notice of maturity, notice
of protest, presentment for the purpose of accelerating maturity of the
obligations under this Note, diligence in collection, and the benefit of any
exemption or insolvency laws.
3.11 Registration Rights. This Note is subject to and the Company
agrees to the Registration Rights provisions contained in Exhibit A hereto. By
accepting this Note or receiving any benefits hereunder, the Holder, and each
successor Holder, hereby agrees to the provisions set forth in Exhibit A hereto.
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed
and issued as of the date first written above.
GALES INDUSTRIES, INCORPORATED
By: /s/ Michael A. Gales
--------------------------
Name: Michael Gales
Title: Executive Chairman
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NOTICE OF CONVERSION
The undersigned hereby irrevocably elects to convert the annexed
Convertible Promissory Note (the "Note") into shares of Common Stock of Gales
Industries, Incorporated and requests that certificates for such shares, or the
shares issuable therefore pursuant to the terms of the Note, be issued in the
name of*:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(please print name, address, and social security number or employer
identification number)
Dated: ________________, 20___
Name of Note holder or Assignee:
- -----------------------------------
(please print)
Address:
- -----------------------------------
- -----------------------------------
- -----------------------------------
Signature:
------------------------------------
Signature Guaranteed: NOTE: THE ABOVE SIGNATURE MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE WITHIN NOTE IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER, UNLESS THE WITHIN NOTE HAS BEEN ASSIGNED.
- ----------
* If other than the Holder specified on the Note delivered with this Notice of
Conversion, the transfer is subject to compliance with applicable securities
laws and the payment by the Holder of any applicable transfer or similar taxes.
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Exhibit A to Note
REGISTRATION RIGHTS
The following provisions are part of the Convertible Promissory Note (the
"Note") that was initially issued to Dario Peragallo (the "Holder") on November
30, 2005, and any Note that is issued to any person who or which becomes a
Holder as permitted by the Note. References to the "Note" include each such
subsequently issued Note, collectively, the "Notes." As used below, the "Issuer"
means Gales Industries, Incorporated its successors and assigns including
without limitation the public company with which it enters into a "reverse
merger" transaction; "Registered Holder" means the Holder and "Registered
Holders" refers to the holders of the Notes. All capitalized terms below shall
have the same meanings as in the Note, unless otherwise defined. Paragraph
references below are to the paragraphs of this Exhibit A.
Registration Rights
(a) Registered Holders shall have certain registration rights as follows:
A. If Issuer shall determine to file with the Securities and
Exchange Commission (the "SEC") a registration statement ("Registration
Statement") under the Securities Act, registering any shares of Common Stock of
Issuer, whether or not for its own account or with respect to shares owned by
any person or entity, other than a Registration Statement relating to an
employee benefit plan or a registration effected on Form S-4, Issuer shall (i)
provide to each Registered Holder written notice thereof at least twenty days
prior to the filing of such Registration Statement; and (ii) include in such
Registration Statement, and in any underwriting involved therein, all of the
shares into which the Notes are convertible (the "Registrable Securities"),
subject to the remaining terms of this Section (a).
B. Within fifteen (15) days after the receipt of such notice from
Issuer, each Registered Holder shall give written notice to Issuer if the
Registered Holder desires to have included in the Registration Statement, and in
any underwriting involved therein, all of the Registrable Securities, and if a
Registered Holder fails to give such notice within such period, such Registered
Holder shall not have the right to have such Registered Holder's Registrable
Securities registered, pursuant to such Registration Statement; provided,
however, if such Registration Statement is the initial Registration Statement
filed by Issuer with the SEC registering shares of capital stock of Issuer
(other than a Registration Statement relating to an employee benefit plan or a
registration effected on Form S-4), then Issuer shall include in such
Registration Statement all the Registrable Securities held by each Registered
Holder regardless of whether or not any such Registered Holder has timely given
such written notice. If a Registered Holder gives such notice on a timely basis,
or if otherwise required pursuant to the foregoing provisions, then Issuer shall
include such Registered Holder's Registrable Securities in the Registration
Statement and in any underwriting relating thereto, at Issuer's sole cost and
expense, subject to the remaining terms of this Section (a).
C. If the Registration Statement (other than the initial
Registration Statement to be filed by the Company after the date hereof) relates
to an underwritten offering, and the managing underwriter determines in writing
that the total number of shares of Common Stock to be included in the offering,
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including the Registrable Securities, exceeds the amount which the managing
underwriter deems to be appropriate for such offering based on market factors,
the number of shares of the Registrable Securities of all Registered Holders
shall be reduced in the same proportion as the remainder of the shares in such
offering, other than those to be sold for the account of the Company, and each
Registered Holder's Registrable Securities included in such Registration
Statement will be reduced proportionately. For this purpose, if other securities
in the Registration Statement are derivative securities, their underlying shares
shall be included in the computation. Each Registered Holder shall enter into
such agreements as may be reasonably required by the managing underwriter,
provided, however, that if requested by such managing underwriter to enter into
any agreement not to sell or otherwise transfer or dispose of any Registrable
Securities or other securities of Issuer then held by such Registered Holder,
such Registered Holder shall enter into such an agreement only if (i) such
agreement is for a specified period of time that is customary under the
circumstances (not to exceed 360 days in any event) following the effective date
of the registration statement for such offering, (ii) such agreement contains
other terms customary in such agreements and (iii) all principal stockholders of
Issuer enter into agreements, substantially identical in form and substance with
such agreement of such Registered Holder, covering the same period of time. Each
Registered Holder shall pay to the underwriters commissions relating to the sale
of their respective Registrable Securities.
D. Other than the right to have all or any portion of its, his or
her Registrable Securities included in the Issuer's initial Registration
Statement after the date hereof, each Registered Holder shall have three
additional opportunities to have all or any portion of its, his or her
Registrable Securities registered under this Section (a) on a "piggy-back
basis"; provided the Issuer shall not be obligated to register any Registrable
Securities once they may be sold by the Holder thereof in accordance with Rule
144(k) promulgated under the Securities Act.
E. Each Registered Holder shall furnish in writing to Issuer such
information as Issuer shall reasonably require in connection with a Registration
Statement.
(b) In the event Issuer effects any registration under the Securities Act
of any Registrable Securities pursuant to Section (a), the Issuer shall
indemnify, to the extent permitted by law, and hold harmless each Registered
Holder whose Registrable Securities are included in such Registration Statement
(each, a "Seller"), any underwriter, any officer, director, employee or agent of
such Seller or underwriter, such Seller's separate legal counsel and independent
accountants, and each other person, if any, who controls such Seller or
underwriter within the meaning of Section 15 of the Securities Act, against any
losses, claims, damages or liabilities, judgment, fines, penalties, costs and
expenses, joint or several, or actions in respect thereof including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
(collectively, the "Claims"), to which each such indemnified party becomes
subject, under the Securities Act or otherwise, insofar as such Claims arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
such registration or any other document filed under a state securities or blue
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sky law (collectively, the "Registration Documents") or insofar as such Claims
arise out of or are based upon the omission or alleged omission to state in any
Registration Document a material fact required to be stated therein or necessary
to make the statements made therein, in the light of the circumstances under
which they were made, not misleading, or insofar as any Claim is based upon or
arises out of any violation by Issuer of any rule or regulation promulgated
under the Securities Act applicable to Issuer in connection with such
registration and will reimburse any such indemnified party for any legal or
other expenses reasonably incurred by such indemnified party in investigating or
defending any such Claim; provided that the Issuer shall not be liable in any
such case to the extent such Claim is based upon an untrue statement or alleged
untrue statement of a material fact or omission or alleged omission of a
material fact made in any Registration Document in reliance upon and in
conformity with written information furnished to Issuer by an instrument duly
executed by such Seller, which instrument provides specifically that such
written information is provided for use in the preparation of such Registration
Document.
(c) In connection with any registration statement in which any Seller is
participating, each Seller, severally and not jointly, to the extent permitted
by law, shall indemnify and hold harmless Issuer, each of its directors, each of
its officers who have signed such registration statement, each other person, if
any, who controls Issuer within the meaning of Section 15 of the Securities Act,
each other Seller and each underwriter, any officer, director, employee or agent
of any such other Seller or underwriter and each other person, if any, who
controls such other Seller or underwriter within the meaning of Section 15 of
the Securities Act against any Claims to which each such indemnified party may
become subject under the Securities Act or otherwise, insofar as such Claims are
based upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Document, or insofar as any Claim is based upon
the omission or alleged omission to state in any Registration Document a
material fact required to be stated therein or necessary to make the statements
made therein in the light of the circumstances under which they were made, not
misleading, and will reimburse any such indemnified party for any legal or other
expenses reasonably incurred by such indemnified party in investigating or
defending any such Claim; provided, however, that such indemnification or
reimbursement shall be payable only if, and only to the extent that, any such
Claim arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in any Registration Document in
reliance upon and in conformity with written information furnished to Issuer by
an instrument duly executed by such Seller, which instrument provides
specifically that such written information is provided for use in the
preparation of such Registration Documents.
(d) Any person entitled to indemnification under Sections (b) or (c) above
shall notify promptly the indemnifying party in writing of the commencement of
any Claim if a claim for indemnification in respect thereof is to be made
against an indemnifying party under Section (b) or (c), but the omission of such
notice shall not relieve the indemnifying party from any liability which it may
have to any indemnified party under Section (b) or (c) above or otherwise,
except to the extent that such failure shall materially adversely affect any
indemnifying party or its rights hereunder. In case any action is brought
against the indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and, to the extent that it chooses, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party; and, after notice from
the indemnifying party to the indemnified party that it so chooses, the
indemnifying party shall not be liable for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof; provided, however, that (i) if the indemnifying party fails to take
reasonable steps necessary to defend diligently the Claim within twenty (20)
days after receiving notice from the indemnified party that the indemnified
party believes it has failed to do so; (ii) if the indemnified party who is a
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defendant in any action or proceeding which is also brought against the
indemnifying party reasonably shall have concluded that there are legal defenses
available to the indemnified party which are not available to the indemnifying
party; or (iii) if representation of both parties by the same counsel is
otherwise inappropriate under applicable standards of professional conduct, the
indemnified party shall have the right to assume or continue its own defense as
set forth above (but with no more than one firm of counsel for all indemnified
parties in each jurisdiction, except to the extent any indemnified party or
parties reasonably shall have concluded that there are legal defenses available
to such party or parties which are not available to the other indemnified
parties or to the extent representation of all indemnified parties by the same
counsel is otherwise inappropriate under applicable standards of professional
conduct) and the indemnifying party shall be liable for any reasonable expenses
therefor; provided, that no indemnifying party shall be subject to any liability
for any settlement of a Claim made without its consent (which may not be
unreasonably withheld, delayed or conditioned). If the indemnifying party
assumes the defense of any Claim hereunder, such indemnifying party shall not
enter into any settlement without the consent of the indemnified party if such
settlement attributes liability to the indemnified party (which consent may not
be unreasonably withheld, delayed or conditioned).
(e) If for any reason a court of competent jurisdiction hold that the
indemnity provided in Section (b) or (c) above is unavailable to, or is
insufficient to hold harmless, an indemnified party, then the indemnifying party
shall, in lieu of indemnifying such indemnified party, contribute to the amount
paid or payable by such indemnified party as a result of any Claim in such
proportion as is appropriate to reflect the relative fault of such indemnifying
party and such indemnified party by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
such indemnifying party or by such indemnified party and such parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The obligation of any underwriters to contribute pursuant to
this subsection (e) shall be several in proportion to their respective
underwriting commitments and not joint.
(f) The provisions of Sections (b) through (e) hereof shall be in addition
to any other rights to indemnification or contribution which any indemnified
party may have pursuant to applicable law or contract and shall remain operative
and in full force and effect regardless of any investigation made or omitted by
or on behalf of any indemnified party and shall survive the transfer of the
Registrable Securities by any such party.
(g) If and whenever Issuer is required by the provisions of Section (a) to
register any Registrable Securities under the Securities Act, Issuer shall, as
expeditiously as possible under the circumstances:
A. Prepare and file with the SEC a registration statement with
respect to such Registrable Securities on any form that may be used by Issuer
and that shall permit the disposition of the Registrable Securities in
accordance with the intended method or methods of disposition thereof and use
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its best efforts to cause such registration statement to become effective as
soon as possible and remain effective thereafter as provided herein, provided
that prior to filing a registration statement or prospectus or any amendment or
supplement thereto, including documents incorporated by reference after the
initial filing of any registration statement, Issuer will (i) furnish to each
Registered Holder whose Registrable Securities are covered by such registration
statement, his, her or its counsel and the underwriters, if any, copies of all
such documents proposed to be filed sufficiently in advance of filing to provide
them with a reasonable opportunity to review such documents and comment thereon
and (ii) use its best efforts to reflect in each such document, when so filed
with the SEC, such comments as are reasonably proposed.
B. Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to keep such
registration statement effective and current and to comply with the provisions
of the Securities Act, and any regulations promulgated thereunder, with respect
to the sale or other disposition of all Registrable Securities covered by such
registration statement required to effect the distribution of the securities,
but in no event shall Issuer be required to keep such registration statement
effective for a period of more than three (3) years following the effective date
of such registration statement.
C. Furnish to the Sellers participating in the offering, and any
underwriters, copies (in such quantities as are reasonably requested) of
summary, preliminary, final, amended or supplemented prospectuses and any
amendments or supplements thereto that update previous prospectuses or
amendments or supplements thereto, in conformity with the requirements of the
Securities Act and any regulations promulgated thereunder, and other documents
as reasonably may be required in order to facilitate the disposition of the
securities, but only while Issuer is required under the provisions hereof to
keep such registration statement effective and current.
D. Use its best efforts to register or qualify the Registrable
Securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions of the United States as any Seller
participating in the offering or any underwriter shall reasonably request, keep
such registrations or qualifications in effect for so long as such registration
statement is required under the provisions hereof to be kept current and
effective, and do any and all other acts and things which may be reasonably
necessary or advisable to enable each participating Seller or underwriter to
consummate the disposition of the Registrable Securities in such jurisdictions.
E. Notify each Seller selling Registrable Securities and any
underwriters and confirm such advice in writing, (i) when such registration
statement or the prospectus included therein or any prospectus amendment or
supplement or post-effective amendment has been filed, and, with respect to such
registration statement or any post-effective amendment, when the same has become
effective, (ii) of any comments by the SEC, by the National Association of
Securities Dealers Inc., and by the blue sky or securities commissioner or
regulator of any state with respect thereto or any request by any such entity
for amendments or supplements to such registration statement or prospectus or
for additional information, (iii) of the issuance by the SEC of any stop order
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceedings for that purpose, (iv) of the receipt by the
Company of any notification with respect to the suspension of the qualification
of the Registrable Securities for sale in any jurisdiction or the initiation or
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threatening of any proceeding for such purpose, or (v) at any time when a
prospectus relating to any such Registrable Securities covered by such
registration statement is required to be delivered under the Securities Act, of
Issuer's becoming aware that the prospectus included in such registration
statement, as then in effect, such registration statement, any amendment
(including a post-effective amendment) or supplement thereto, or any document
incorporated by reference in any of the foregoing, includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances under which they were made, and promptly prepare and
furnish to each such Seller selling Registrable Securities or any underwriter a
number (as reasonably requested by such Seller or underwriter) of copies of a
prospectus supplemented or amended so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
the light of the circumstances under which they were made.
F. As soon as practicable after the effective date of such
registration statement, and in any event within eighteen (18) months thereafter,
make generally available to Sellers participating in the offering an earnings
statement covering a period of at least twelve (12) consecutive months beginning
after the effective date of such registration statement which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act, and Rule
158 thereunder. To the extent that Issuer files such information with the SEC in
satisfaction of the foregoing, Issuer need not deliver the above referenced
earnings statement to Seller.
G. Upon request, deliver promptly to counsel of each Seller
participating in the offering copies of all correspondence between the SEC and
Issuer, its counsel or auditors and all memoranda relating to discussions with
the SEC or its staff with respect to the registration statement and permit each
such Seller to do such investigation at such Seller's sole cost and expense,
upon reasonable advance notice, with respect to information contained in or
omitted from such registration statement as it deems reasonably necessary. Each
Seller agrees that it will use its best efforts not to interfere unreasonably
with Issuer's business when conducting any such investigation and each Seller
shall keep any such information received pursuant to this Subsection G
confidential.
H. For a reasonable period after the filing of such registration
statement, and throughout the period during which Issuer is required to keep
such registration statement effective and current, make reasonably available for
inspection by each Seller, any underwriter, and any attorney, accountant or
other agent retained by such Seller or underwriter, all relevant financial and
other information, books and records and properties of Issuer, and cause the
officers, directors, employees, counsel and independent certified public
accountants of Issuer to supply all relevant information reasonably requested by
such Seller, underwriter or any attorney, accountant or other agent retained by
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such Seller or underwriter in connection with such registration statement as is
customary for similar due diligence investigations; provided, however, that any
information that is designated in writing by Issuer, in good faith, as
confidential at the time of delivery of such information shall be kept
confidential by such Seller or any such attorney, accountant or agent, unless
such disclosure is made in connection with a court proceeding or required by
law, or such information becomes available to the public generally or through a
third party without an accompanying obligation of confidentiality.
I. Provide a transfer agent and registrar located in the United
States for all such Registrable Securities covered by such registration
statement not later than the effective date of such registration statement.
J. List the Registrable Securities covered by such registration
statement on such securities exchanges or automated quotation systems on which
the Common Stock may then be listed.
K. Pay all Registration Expenses (as hereinafter defined) incurred
in connection with a registration of Registrable Securities, whether or not such
registration statement shall become effective; provided that each Seller shall
pay all underwriting discounts, commissions, non-accountable expense allowances
and transfer taxes, if any, relating to the sale or disposition of such Seller's
Registrable Securities pursuant to a registration statement. As used herein,
"Registration Expenses" means all expenses incident to Issuer's performance of
or compliance with its obligations set forth herein, including, without
limitation, (i) all registration, qualification and filing fees, (ii) all fees,
costs and expenses of complying with state securities or blue sky laws
(including reasonable fees, expenses and disbursements of counsel in connection
with blue sky qualifications of the Registrable Securities but no other expenses
of the underwriters or their counsel), (iii) all printing, messenger, telephone
and delivery expenses, (iv) the fees, expenses and disbursements of counsel for
Issuer and Issuer's independent public accountants (including the expenses of
any special audit and "cold comfort" letters required by or incident to such
performance), (v) all fees, expenses and disbursements of any other individuals
or entities retained by Issuer in connection with the registration of the
Registrable Securities, (vi) Securities Act liability insurance if Issuer so
desires, (vii) all fees, costs and expenses incurred in connection with the
listing of the Registrable Securities on each national securities exchange or
automated quotation system on which Issuer has made application for the listing
of its Common Stock; and (viii) all internal expenses of Issuer (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties and expenses of any annual audit).
L. Permit each Seller to rely on any representations and warranties
made by Issuer to any underwriter or any opinion of counsel or "cold comfort"
letter delivered to any such underwriter, and indemnify each such Seller to the
same extent that Issuer indemnifies any such underwriter.
M. Otherwise use reasonably diligent efforts to comply with all
applicable provisions of the Securities Act and the rules and regulations of the
SEC promulgated thereunder in connection with the registration of Registrable
Securities.
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(b) With a view to making available the benefits of certain rules and
regulations of the SEC which may at any time permit the sale of the Registrable
Securities to the public without registration, after such time as a public
market exists for the Common Stock, Issuer shall use reasonably diligent efforts
to:
A. Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, beginning 90 days
after Issuer registers a class of securities under Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or completes a registered
offering under the Securities Act;
B. File with the SEC in a timely manner all reports and other
documents required of Issuer under the Securities Act and the Exchange Act (at
any time after it has become subject to such reporting requirements);
C. Furnish to any Registered Holder promptly upon request a written
statement as to its compliance with the reporting requirements of Rule 144 (at
any time after 90 days after Issuer completes a registered offering under the
Securities Act), and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of Issuer, and such other reports and
documents of Issuer and other information in the possession of or reasonably
obtainable by Issuer as a Registered Holder may reasonably request in availing
itself of any rule or regulation of the SEC allowing a Registered Holder to sell
Registrable Securities without registration under the Securities Act.
The parties have executed this Exhibit A to Note as of the date first written
above.
GALES INDUSTRIES INCORPORATED
By: /s/ Michael A. Gales
-------------------------
Name: Michael A. Gales
Title: Executive Chairman
/s/ Dario Peragallo
-----------------------------
Dario Peragallo
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