<PAGE>
Exhibit 2.1.3
THE
SECURITY REPRESENTED BY THIS INSTRUMENT WAS ORIGINALLY ISSUED ON
JULY
3,
2006, AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS
AMENDED. THE TRANSFER OF SUCH SECURITY IS SUBJECT TO THE
CONDITIONS
SPECIFIED IN THE ASSET PURCHASE AGREEMENT, DATED AS OF MAY 1, 2006,
AS
AMENDED AND MODIFIED FROM TIME TO TIME, BY AND AMONG MCDOWELL
RESEARCH
LTD., THOMAS HAUKE, EARL MARTIN, SR., JAMES EVANS, FRANK
ALEXANDER,
ULTRALIFE BATTERIES, INC. (THE "COMPANY") AND MR ACQUISITION
CORPORATION,
AND
THE COMPANY RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH
SECURITY
UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH
TRANSFER.
UPON
WRITTEN REQUEST, A COPY OF SUCH CONDITIONS SHALL BE FURNISHED BY
THE
COMPANY TO THE HOLDER HEREOF WITHOUT CHARGE.
THIS
NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS
AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT: (i)
PURSUANT TO
AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT (ii) TO THE
EXTENT
APPLICABLE, PURSUANT TO RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE
UNDER
THE
ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON
THE
DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL,
REASONABLY
SATISFACTORY TO COUNSEL FOR THE COMPANY, AND AN EXEMPTION FROM
REGISTRATION
UNDER THE ACT IS AVAILABLE.
----------
SUBORDINATED CONVERTIBLE
PROMISSORY NOTE
FOR
VALUE RECEIVED, ULTRALIFE BATTERIES, INC., a Delaware corporation
with
offices at 2000 Technology Parkway, Newark, New York 14513 (the
"Company"),
hereby promises to pay to the order of MCDOWELL RESEARCH, LTD.,
which has an
address of 300 South 8th Street, Waco, Texas 76701, or registered
assigns
("Holder") the principal sum of Twenty Million Dollars
($20,000,000), or such
lesser principal amount to which this Note shall have been adjusted
in
accordance with the provisions of the Asset Purchase Agreement,
together with
interest thereon calculated from the date hereof, in accordance
with the
provisions of this Note.
<PAGE>
This
Note was issued pursuant to the Asset Purchase Agreement, dated as
of
May 1, 2006 (the "Purchase Agreement"), by and among the Holder,
Thomas Hauke,
Earl Martin, Sr., James Evans, Frank Alexander, the Company and MR
Acquisition
Corporation and the applicable provisions thereof are hereby
incorporated herein
in full by reference. The Purchase Agreement contains terms
governing the rights
of the Holder of this Note and the Holder is entitled to the
benefits thereof.
All capitalized terms used herein and not otherwise defined shall
have the
meanings given thereto in the Purchase Agreement.
1.
INTEREST. Except as otherwise expressly provided herein, interest
shall
accrue on the unpaid principal amount of this Note outstanding from
the date
hereof until such time as payment thereof is actually delivered to
the Holder
(including after acceleration, maturity, or judgment) at the rate
of four
percent (4%) per annum. All interest shall be calculated on the
basis of actual
days elapsed divided by a 360 day year.
Upon
the occurrence of an Event of Default, at Holder's option interest
on
the outstanding principal hereunder shall accrue at a rate per
annum from time
to time equal to the rate of interest then in effect on this Note
plus two
percent (2%) per annum. Any increase in the interest rate shall be
in addition
to the Holder's other available remedies.
2.
PAYMENTS. Interest shall be due and payable quarterly in arrears of
each
year that this Note is outstanding, commencing on October 1, 2006
and continuing
on the first day of each calendar quarter thereafter until the
principal hereof
shall have become due and payable, and on the Maturity Date
hereof.
All
unpaid accrued interest and all outstanding principal shall be due
and
payable in full on July 3, 2011 (the "Maturity Date").
3.
VOLUNTARY PREPAYMENTS. This Note may be prepaid by the Company in
whole
or in part at any time after sixty (60) days prior written notice
to Holder
(during which period Holder may exercise its conversion rights
hereunder).
4.
CONVERSION RIGHTS.
(a)
The Holder may convert the outstanding principal amount of this
Note
(or a portion of such outstanding principal amount as provided in
Section 4(c))
into fully paid and nonassessable shares of Common Stock of the
Company (the
"Conversion Shares") at any time, and from time to time, prior to
the time the
outstanding principal amount of this Note is paid in full (subject
to the notice
periods and conversion rights related thereto described elsewhere
in this Note),
at the Conversion Price (defined below) then in effect
(collectively, the
"Conversion Rights"); provided, however, that if the closing price
of the
Company's Common Stock as quoted on Nasdaq on the Closing Date is
greater than
$12.00 per share, then the Holder will be precluded from exercising
the
conversion rights under this Note until the first anniversary date
of this Note.
The initial per share conversion price (the "Conversion Price")
shall be Fifteen
and no/100 Dollars ($15.00). The Conversion Price is subject to
adjustment as
provided in Section 5.
(b)
The provisions of this Note that apply to conversion of the
outstanding
principal amount of this Note also apply to a partial conversion of
this Note.
The Holder is not entitled to
2
<PAGE>
any rights of a holder of Conversion Shares until the Holder has
converted this
Note (or a portion thereof) into Conversion Shares, and only to the
extent that
this Note is deemed to have been converted into Conversion Shares
under this
Section 4.
(c)
To convert all or a portion of this Note, the Holder must (a)
complete
and sign a notice of election to convert substantially in the form
of Exhibit I
hereto (each, a "Conversion Notice"), (b) surrender the Note to the
Company, and
(c) furnish appropriate endorsements or transfer documents if
required by the
Company. The date on which the Holder satisfies all of such
requirements is the
conversion date (the "Conversion Date"). As soon as practicable,
and in any
event within ten (10) business days after the Conversion Date, the
Company will
deliver, or cause to be delivered, to the Holder a certificate for
the number of
whole Conversion Shares issuable upon such conversion and a check
for any
fractional Conversion Share determined pursuant to Section 4(d).
The person in
whose name the certificate for Conversion Shares is to be
registered shall
become the stockholder of record on the Conversion Date and, as of
the
Conversion Date, the rights of the Holder as to this Note shall
cease as to the
portion thereof so converted; provided, however, that no surrender
of a Note on
any date when the stock transfer books of the Company shall be
closed shall be
effective to constitute the person entitled to receive the
Conversion Shares
upon such conversion as the stockholder of record of such
Conversion Shares on
such date, but such surrender shall be effective to constitute the
person
entitled to receive such Conversion Shares as the stockholder of
record thereof
for all purposes at the close of business on the next succeeding
day on which
such stock transfer books are open; provided further that such
conversion shall
be at the Conversion Price in effect on the date that this Note
shall have been
surrendered for conversion, as if the stock transfer books of the
Company had
not been closed.
In
the case of a partial conversion of this Note, upon such
conversion, the
Company shall execute and deliver to the Holder, at the expense of
the Company,
a new Note in an aggregate principal amount equal to the
unconverted portion of
the principal amount.
(d)
No fractional Conversion Shares shall be issued upon exercise of
the
Conversion Rights. Instead of any fractional Conversion Share which
would
otherwise be issuable upon conversion of this Note, the Company
shall calculate
and pay a cash adjustment in respect of such fraction (calculated
to the nearest
1/100th of a share) in an amount equal to the same fraction of the
Conversion
Price at the close of business on the Conversion Date.
(e)
The issuance of certificates for Conversion Shares upon exercise of
any
of the Conversion Rights shall be made without charge to the Holder
for such
certificates or for any tax in respect of the issuance of such
certificates, and
such certificates shall be issued in the name of, or in such names
as may be
directed by, the Holder; provided, however, that in the event that
certificates
for Conversion Shares are to be issued in a name or names other
than the name of
the Holder, such Note, when surrendered for conversion, shall be
accompanied by
an instrument of transfer, in form satisfactory to the Company,
duly executed by
the Holder or his duly authorized attorney; and provided further,
moreover, that
the Company shall not be required to pay any tax which may be
payable in respect
of any transfer involved in the issuance and delivery of any such
certificates
in a name or names 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 or is not applicable.
3
<PAGE>
(f)
The Company shall at all times reserve and keep available, free
from
preemptive rights, out of its authorized and unissued Common Stock,
solely for
the purpose of effecting the conversion of this Note, the full
number of
Conversion Shares then issuable upon the conversion in full of this
Note.
If
the Company or an affiliate of the Company shall at any time after
the
date hereof and prior to the conversion of the Note in full issue
any rights to
subscribe for shares of Common Stock or any other securities of the
Company or
of such affiliate to all the stockholders of the Company, the
Holder of the
unconverted portion of the Note shall be entitled, in addition to
the shares of
Common Stock or other securities receivable upon the Conversion
thereof, to
receive such rights at the time such rights are distributed to the
other
stockholders of the Company, to be calculated on an as-converted
basis.
5.
ADJUSTMENTS TO CONVERSION RIGHTS.
(a)
General. In order to prevent dilution of the rights granted under
this
Note, the Conversion Price and the number of Conversion Shares
shall be subject
to adjustment from time to time as provided in this Section 5(a).
It is the
intention of the Company that the Conversion Price shall at all
times be the
lower of (i) the Conversion Price on the date of this Note and (ii)
the
Conversion Price determined by adjustment pursuant to the remainder
of this
Section 5(a). In the event that at any time the Common Stock of the
Company
shall be exchanged for, or changed into, a different kind and/or a
number of
shares of stock of the Company or of another corporation by reason
of a merger,
consolidation, sale of assets, recapitalization, reclassification,
stock
dividend, stock split-up or combination of shares or otherwise,
then, until any
further adjustment is r
