Promissory Note - Varitek Industries Inc. and SMH Varitek LLC
November 27, 2002
FOR VALUE RECEIVED, the undersigned, Varitek Industries, Inc., a Texas corporation (Maker), promises to pay to the order of SMH Varitek LLC, a Delaware limited liability company, or any successor holder of this Note (Holder), at the address of 600 Travis Street, Suite 3100, Houston, Texas 77002, or such other place as Holder may designate, the principal amount of One Million Five Hundred Thousand Dollars ($1,500,000), together with interest thereon as provided below.
1. Interest. Prior to any default, no interest shall accrue on the outstanding principal balance of this Note. Holder acknowledges receipt of the non-cash consideration provided to it in connection with this Note in lieu of cash interest payments. Following any default, interest shall accrue on the outstanding principal balance hereof at the fixed rate of 8% per annum.
2. Payments. All outstanding principal and interest shall be payable on November 27, 2003 (the Maturity Date).
3. Prepayment. Maker may pay all or any part of the principal owing on this Note at any time or times prior to maturity without payment of any premium or penalty.
4. Security. Payment of this Note is and shall be secured by a security interest in all of Makers intellectual property rights, as provided in the Security Agreement of even dated herewith between Maker and Holder (Security Agreement).
5. Guaranty. Payment of this Note is and shall be guaranteed by a pledge of the Makers stock owned by Randy S. Bayne and Harry L. Bayne (Makers Principal Stockholders), as provided in the Stock Pledge Agreement of even date herewith among Makers Principal Stockholders and Holder (Stock Pledge Agreement).
6. Representation on Makers Board. In consideration for Holder making a loan to Maker, Makers Principal Stockholders have executed the Stockholders Agreement of even date herewith (Stockholders Agreement), pursuant to which each stockholder has agreed to vote his shares for one director nominee to Makers board selected by Holder and Randy S. Bayne has agreed to transfer certain shares to Holder.
7. Grant of Warrants. In consideration for Holder making a loan to Maker, Maker has issued to Holder a five-year warrant to purchase 1,500,000 shares of Makers common stock at a price of $0.01 per share.
8. Conversion into Stock/ Resale Registration Rights. If at any time before the Maturity Date, Maker closes an underwritten public offering of its common stock or other form of security convertible into common stock pursuant to an effective registration statement under the Securities Act of 1933, as amended, or a managed private offering (New Offering) which results in proceeds received by Maker, net of underwriting discounts and commissions, of at least $3,500,000 then, upon the closing of such New Offering, the principal amount remaining outstanding under this Note as of such date shall be converted into a number of the same type of Makers capital shares issued in the New Offering based on a conversion price equal to the per share price at which the Makers capital shares were offered and sold in
the New Offering (the Conversion Shares). The $3,500,000 minimum required for the New Offering shall be reduced by the amount, if any, received by Maker in excess of $600,000 (net of offering costs and commissions) from one or more sales of its Series A Preferred Stock after November 1, 2002.
Maker agrees to register on behalf of Holder the resale of all of the Conversion Shares by Holder or any of its affiliates, or if the Conversion Shares are not in the form of common stock, all of the common stock underlying the Conversion Shares (the Registerable Securities), in either (i) any registration statement filed by Maker with respect to any capital stock of Maker (including, without limitation, any common stock issuable upon conversion of shares of preferred stock) sold pursuant to the terms of the Placement Agent Agreement dated on or about March 20, 2002, between Maker and Sanders Morris Harris, Inc. or (ii) upon written request by Holder or any of its affiliates, any other appropriate registration statement necessary to effectuate resales of the Registerable Securities by Holder or any of its affiliates, if any Registerable Securities have not been registered under the preceding clause (i). Maker further agrees to maintain the effectiveness of said resale registration statement(s) until the earlier of the sale, transfer or assignment of all of the Registerable Securities or the availability of the resale of all of the Registerable Securities in reliance on Rule 144(k). Maker shall bear all of the expenses of the registration statement(s) and the maintenance of its effectiveness (including, without limitation, filing fees, printing costs, attorneys fees, accountants fees, including the fees relating to any comfort letters, and similar expenses), except that Holder shall be responsible for any brokers fees or commissions related to the actual transfer or assignment of the Registerable Securities. Maker shall provide Holder with a reasonable number of copies of the current prospectus necessary to effectuate resales pursuant to said registration statement(s) during the term of its effectiveness.
9. Default. Each of the following events shall constitute an event of default (Event of Default) and Holder, in addition to any remedies available to it at law or in equity, shall thereupon have the option to declare Maker in default under this Note and declare due all obligations of Maker to Holder (it also being understood that the occurrence of any of the Events of Default set forth in subsections (c) or (d) automatically shall constitute an Event of Default and cause an immediate acceleration of Makers indebtedness to Holder):
(a) the failure of Maker to make any payment required hereunder when due;
(b) the default by Maker in the performance or observance of any other term, covenant, condition or obligation contained in this Note, which default is not cured within 15 days after Makers written notice thereof;
(c) the filing of any petition by Maker under any provision of the Federal Bankruptcy Code or any state law relating to insolvency; or the filing of any such petition against Maker, unless such petition and all proceedings thereunder are dismissed within 60 days from such filing; or the appointment of a trustee or receiver for all or any assets of Maker, unless such appointment is vacated or dismissed within 60 days from the date of such appointment;
(d) an adjudication that Maker is insolvent or bankrupt;
(e) the default by Maker in the performance or observance of any term, covenant, condition or obligation contained in the Security Agreement, which default is not cured in accordance with the terms of the Security Agreement; or
(f) the default by Makers Principal Stockholders in the performance or observance of any term, covenant, condition or obligation contained in the Stock Pledge Agreement or Stockholders Agreement, which default is not cured in accordance with the terms of such agreement.
10. Collection Costs. Upon the occurrence of any Event of Default, Maker agrees to pay Holder, upon demand, any and all costs, expenses and fees, including without limitation, reasonable attorneys fees incurred before or after suit is commenced in order to enforce payment hereof, and in the event suit is brought to enforce payment hereof, that such costs, expenses and fees shall be determined by a court proceeding without a jury.
11. Waiver. Maker hereby acknowledges and agrees that the failure by Holder to insist upon Makers strict performance of this Note or the failure by Holder to exercise its remedies hereunder shall not be deemed a waiver of such default, and shall not be a waiver by Holder of any of Holders rights or remedies hereunder or at law or in equity.
12. Usury. No provision of this Note shall require the payment or permit the collection of interest in excess of the maximum permitted by law. If any excess interest is herein provided for, or shall be adjudicated to be so, the provisions of this Section shall govern, and neither Maker nor its successors or assigns shall be obligated to pay the amount of such interest to the extent that it is in excess of the amount permitted by law, and any such amount paid, at the option of Holder, shall either be applied against the principal balance of this Note due at maturity or rebated to Maker within 30 days after such determination.
All sums contracted for, charged or received by Holder for the use, forbearance or detention of the indebtedness evidenced by this Note shall, to the extent required to avoid or minimize usury and to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full sated term of this Note so that the interest rate does not exceed the maximum nonusurious rate of interest permitted for that day by whichever applicable federal or Texas laws permits the higher interest rate, stated as a rate per annum. The provisions of this Section shall control all agreements, whether now or hereafter existing and whether written or oral, between Maker and Holder.
13. Transfer. This Note is not transferable by the Holder without the express written permission of Maker.
14. Governing Law. All amounts payable hereunder are payable in lawful money of the United States of America. This Note shall be governed by and construed in accordance with the laws of the State of Texas, without regard to its conflicts of laws principles.
15. Representations and Warranties of Maker. Maker hereby represent and warrants to Holder as follows:
(a) Maker has full power, authority and capacity to issue this Note and to perform and comply with all covenants and obligations contained herein.
(b) This Note has been duly executed and delivered by Maker and constitutes the legal, valid and binding obligations of Maker, enforceable against Maker in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors rights generally.
(c) Neither the execution and delivery of this Note, nor the performance by Maker of its obligations hereunder, will (i) require the consent of any other party to any agreement or commitment by which Maker is bound, (ii) with or without the giving of notice or the lapse of time or both, conflict with or result in a breach of any terms or provisions of, or result in the creation or imposition of any lien, claim, charge or encumbrance upon Makers assets under any material agreements or other instrument, or
(iii) violate any applicable law, rule, regulation, judgment, decree or order of any court or governmental instrumentality.
IN WITNESS WHEREOF, this Note has been duly executed to be effective as of the 27th day of November, 2002.
VARITEK INDUSTRIES, INC.,
a Texas Corporation
/s/ RANDY S. BAYNE
Randy S. Bayne
President and CEO