THIS SECURITY
HAS NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY
PORTION HEREOF OR INTEREST HEREIN MAY BE SOLD, ASSIGNED,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS THE SAME IS
REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW,
OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND THE
CORPORATION SHALL HAVE RECEIVED, AT THE EXPENSE OF THE HOLDER
HEREOF, EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO THE
CORPORATION (WHICH MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF
COUNSEL SATISFACTORY TO THE CORPORATION).
CONVERTIBLE PROMISSORY
NOTE
FOR VALUE
RECEIVED, MBI Financial, Inc., a Nevada corporation (the
“Company” or “MBIF”), promises to pay to
Mr. Arthur Feather (the “Holder”), or its
assigns, the principal sum of ONE-MILLION FIVE-HUNDRED THOUSAND
DOLLARS ($1,500,000), the outstanding principal amount subscribed
to hereof and hereby noted on the signature page below, together
with interest from the date of this Note on the unpaid principal
balance at a rate equal to 12% (twelve percent) per annum, computed
on the basis of the actual number of days elapsed and a year of
365 days. All unpaid principal, together with any then unpaid
and accrued interest and other amounts payable hereunder, shall be
due and payable on the “Maturity Date” which date shall
be the earlier of (i) September 30, 2006; or
(ii) within 5 (five) business days after the closing of
at least $2,000,000 of gross proceeds from one or more offerings of
the Company’s debt or equity securities, in which case, the
Company will use the proceeds from such future offerings of its
debt or equity securities to redeem the Notes as follows:
$1,000,000 of the first $2,000,000 raised in any such future
offerings will be used to pay down this Note and any amount raised
above $2,000,000 will be used to pay off the remainder the
principal amount of this Note, together with any and all accrued
and unpaid interest; or (iii) when such amounts are declared
due and payable by the Holder (or made automatically due and
payable) upon or after the occurrence of an Event of Default (as
defined below).
THE OBLIGATIONS
DUE UNDER THIS NOTE ARE DATED AS OF THE DATE HEREOF AND EXECUTED BY
THE COMPANY IN FAVOR OF THE HOLDER. ADDITIONAL RIGHTS OF THE HOLDER
ARE SET FORTH IN THE AGREEMENT.
The following is a
statement of the rights of the Holder and the conditions to which
this Note is subject, and to which the Holder, by the acceptance of
this Note, agrees:
1. DEFINITIONS.
As used in this Note, the following capitalized terms have the
following meanings:
1
(a) The
“Company” includes the corporation initially executing
this Note and any Person which shall succeed to or assume the
obligations of the Company under this Note.
(b)
“Certificate” shall mean the Articles of Incorporation
of Company as in effect on the date hereof.
(c)
“Equity Securities” of any Person shall mean
(a) all common stock, preferred stock, participations, shares,
partnership interests or other equity interests in and of such
Person (regardless of how designated and whether or not voting or
non-voting) and (b) all warrants, options and other rights to
acquire any of the foregoing.
(d)
“Event of Default” has the meaning given in
Section 7 hereof.
(e)
“Financial Statements” shall mean, with respect to any
accounting period for any Person, statements of operations,
retained earnings and cash flows of such Person for such period,
and balance sheets of such Person as of the end of such period,
setting forth in each case in comparative form figures for the
corresponding period in the preceding fiscal year if such period is
less than a full fiscal year or, if such period is a full fiscal
year, corresponding figures from the preceding fiscal year, all
prepared in reasonable detail and in accordance with generally
accepted accounting principles (except, with respect to quarterly
financial statements, for footnotes and year end adjustments).
Unless otherwise indicated, each reference to Financial Statements
of any Person shall be deemed to refer to Financial Statements
prepared on a consolidated basis.
(f)
“Holder” shall mean the Person specified in the
introductory paragraph of this Note or any Person who shall at the
time be the holder of this Note, pursuant to a transfer, assignment
or other transaction effected on the terms and subject to the
conditions set forth in this Note. “Holders” shall mean
the Holder, together with all other Persons who hold up to
$1,500,000 maximum principal amount of the Company’s 12%
Convertible Bridge Notes due September 30, 2006.
(g)
“Indebtedness” shall mean and include the aggregate
amount of, without duplication (a) all obligations for borrowed
money, (b) all obligations evidenced by bonds, debentures,
notes or other similar instruments, (c) all obligations to pay
the deferred purchase price of property or services (other than
accounts payable incurred in the ordinary course of business
determined in accordance with generally accepted accounting
principals), (d) all obligations with respect to capital
leases, (e) all guaranty obligations; (f) all obligations
created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such
Person, (g) all reimbursement and other payment obligations,
contingent or otherwise, in respect of letters of credit and/or
obligations under taxing authorities.
(h)
“Investment” of any Person shall mean any loan or
advance of funds by such Person to any other Person (other than
advances to employees of such Person for moving and travel expense,
drawing accounts and similar expenditures in the
ordinary
2
course of
business), any purchase or other acquisition of any Equity
Securities or Indebtedness of any other Person, any capital
contribution by such Person to or any other investment by such
Person in any other Person (including, without limitation, any
Indebtedness incurred by such Person of the type described in
clauses (a) and (b) of the definition of
“Indebtedness” on behalf of any other Person);
provided, however, that Investments shall not include accounts
receivable or other indebtedness owed by customers of such Person,
which are current assets and arose from sales or non-exclusive
licensing in the ordinary course of such Person’s
business.
(i)
“Lien” shall mean, with respect to any property, any
security interest, mortgage, pledge, lien, claim, charge or other
encumbrance in, of, or on such property or the income therefrom,
including, without limitation, the interest of a vendor or lessor
under a conditional sale agreement, capital lease or other title
retention agreement, or any agreement to provide any of the
foregoing, and the filing of any financing statement or similar
instrument under the Uniform Commercial Code or comparable law of
any jurisdiction.
(j)
“Material Adverse Effect” shall mean a material adverse
effect on (a) the business, assets, operations, or financial
or other condition of the Company; (b) the ability of the
Company to pay or perform the Obligations in accordance with the
terms of this Note and the other Transaction Documents and to avoid
a default or Event of Default under any Transaction Document; or
(c) the rights and remedies, taken as a whole, of Holder under
this Note, the other Transaction Documents or any related document,
instrument or agreement.
(k)
“Permitted Indebtedness” means:
(i) Indebtedness of Company in favor of the
Holder arising under this
(ii) The
existing Indebtedness set forth on the Company’s
Form 10- QSB filed with the Securities and Exchange Commission
(the “SEC”) for the quarterly period ended
March 31, 2006, as the same may have increased or decreased in
the ordinary course of the Company’s business after the date
thereof;
(iii) The
principal amount of any note of the Company, together with any and
all accrued and unpaid interest, for which Spencer Clarke LLC has
been engaged as the placement agent (collectively, the
“Interim Bridge Notes”);
(iv) Indebtedness
to trade creditors, including, without limitation, affiliates of
and service providers to the Company, incurred in the ordinary
course of business;
(v) Other
Indebtedness of Company, not exceeding $1.0 million in the
aggregate outstanding at any time;
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(vi) Contingent
obligations of Company consisting of guarantees (and other credit
support) of the obligations of vendors and suppliers of Company in
respect of transactions entered into in the ordinary course of
business;
(vii) Indebtedness
with respect to capital lease obligations and Indebtedness secured
by Permitted Liens;
(viii) Extensions,
renewals, refundings, refinancings, modifications, amendments and
restatements of any of the items of Permitted Indebtedness
(a) through (f) above, provided that the principal amount
thereof is not increased or the terms thereof are not modified to
impose more burdensome terms upon Company.
(l)
“Permitted Investments” shall mean and include:
(a) deposits with commercial banks organized under the laws of
the United States or a state thereof to the extent such deposits
are fully insured by the Federal Deposit Insurance Corporation;
(b) Investments in marketable obligations issued or fully
guaranteed by the United States and maturing not more than one
(1) year from the date of issuance; (c) Investments in
open market commercial paper rated at least “A1” or
“P1” or higher by a national credit rating agency and
maturing not more than one (1) year from the creation thereof;
(d) Investments pursuant to or arising under currency
agreements or interest rate agreements entered into in connection
with bona fide hedging arrangements; (e) Investments
consisting of deposit accounts of the Company in which the Holder
has a perfected security interest and deposit accounts of its
Subsidiaries maintained in the ordinary course of business; (f)
Investments existing on the Closing Date disclosed in the Schedule;
(g) Extensions of credit in the nature of accounts receivable
or notes receivable arising from the same or lease of goods or
services in the ordinary course of business; (h) Investments
consisting of the endorsement of negotiable instruments for deposit
or collection or similar transactions in the ordinary course of
business; (i) Investments (including debt obligations)
received in connection with the bankruptcy or reorganization of
customers or suppliers and in settlement of delinquent obligations
of, and other disputes with, customers or suppliers arising in the
ordinary course of business; (j) Investments consisting of
(i) compensation of employees, officers and directors of
borrower so long as the Board of Directors of Company determines
that such compensation is in the best interests of Company,
(ii) travel advances, employee relocation loans and other
employee loans and advances in the ordinary course of business,
(iii) loans to employees, officers or directors relating to
the purchase of equity securities of Company, (iv) other loans
to officers and employees approved by the Board of Directors; and
(k) other Investments aggregating not in excess of $1,000,000
at any time.
(m)
“Permitted Liens” shall mean and include:
(i) Liens for taxes or other governmental charges not at the
time delinquent or thereafter payable without penalty or being
contested in good faith, provided provision is made to the
reasonable satisfaction of Holder for the eventual payment thereof
if subsequently found payable; (ii) Liens of carriers,
warehousemen, mechanics, materialmen, vendors, and landlords
incurred in the
4
ordinary course
of business for sums not overdue or being contested in good faith,
provided provision is made to the reasonable satisfaction of Holder
for the eventual payment thereof if subsequently found payable;
(iii) deposits under workers’ compensation, unemployment
insurance and social security laws or to secure the performance of
bids, tenders, contracts (other than for the repayment of borrowed
money) or leases, or to secure statutory obligations of surety or
appeal bonds or to secure indemnity, performance or other similar
bonds in the ordinary course of business; (iv) Liens securing
obligations under a capital lease if such Liens do not extend to
property other than the property leased under such capital lease;
(v) Liens upon any equipment acquired or held by Company or
any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of
financing the acquisition of such equipment; (vi) easements,
reservations, rights of way, restrictions, minor defects or
irregularities in title and other similar charges or affecting the
value or use of such property; (vii) Liens in favor of the
Holder; (viii) Liens existing on the date hereof in favor of
holders of Senior Indebtedness; (ix) any liens existing as of
the date hereof and disclosed in the Schedule; (x) liens on
equipment leased by Company pursuant to an operating lease in the
ordinary course of business (including proceeds thereof and
accessions thereto) incurred solely for the purpose of financing
the lease of such equipment (including Liens arising from UCC
financing statements regarding such leases); (xi) liens
arising from judgements, decrees or attachments to the extent and
only so long as such judgment, decree or attachment does not
constitute an Event of Default under 7(h); (xii) liens in
favor of customs and revenue authorities arising as a matter of law
to secure payment of customs duties in connection with the
importation of goods; (xiii) liens arising solely by virtue of
any statutory or common law provision relating to banker’s
liens, rights off setoff or similar rights and remedies as to
deposit accounts or other funds maintained with a creditor
depository institution; (xiv) liens on the Company’s
inventory or accounts receivable to secure Indebtedness incurred in
connection with the financing of such accounts receivable or
inventory; and (xv) liens incurred in connection with the
extension, renewal, refunding, refinancing, modification, amendment
or restatement of the indebtedness secured by Liens of the type
described in clauses (i) and (xiv) above, provided that
any extension, renewal or replacement Lien shall be limited to the
property encumbered by the existing Lien and the principal amount
of the indebtedness being extended, renewed or refinanced does not
increase.
(n)
“Person” shall mean and include an individual, a
partnership, a corporation (including a business trust), a joint
stock company, a limited liability company, an unincorporated
association, a joint venture or other entity or a governmental
authority.
(o)
“Senior Indebtedness” shall mean the principal of,
unpaid interest on and other amounts due in connection with the
notes payable and other evidences of indebtedness outstanding at
the time of execution of this Note.
(p)
“Preferred shares” shall mean the Company’s
presently authorized Preferred Stock.
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(q)
“Subsidiary” shall mean (a) any corporation of
which more than 50% of the issued and outstanding equity securities
having ordinary voting power to elect a majority of the Board of
Directors of such corporation is at the time directly or indirectly
owned or controlled by Company, (b) any partnership, joint
venture, or other association of which more than 50% of the equity
interest having the power to vote, direct or control the management
of such partnership, joint venture or other association is at the
time directly or indirectly owned and controlled by Company
(c) any other entity included in the financial statements of
Company on a consolidated basis.
(r)
“Transaction Documents” shall mean this Note and the
Warrant (as defined in Section 11 hereof).
2. REPRESENTATIONS
AND WARRANTIES OF COMPANY. The Company represents and warrants to
the Holder as follows:
(a) Due
Incorporation and Qualification. Each of the Company and its
Subsidiaries (i) is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation; (ii) has the power and authority to own, lease
and operate its properties and carry on its business as now
conducted and as proposed to be conducted; and (iii) is duly
qualified, licensed to do business and in good standing as a
foreign corporation in each jurisdiction where the failure to be so
qualified or licensed could reasonably be expected to have a
Material Adverse Effect.
(b) Authority.
The execution, delivery and performance by Company of each
Transaction Document to be executed by Company and the consummation
of the transactions contemplated thereby (i) are within the
corporate power of Company and (ii) have been duly authorized
by all necessary corporate actions on the part of
Company.
(c) Enforceability.
Each Transaction Document executed, or to be executed, by Company
has been, or will be, duly executed and delivered by Company and
constitutes, or will constitute, a legal, valid and binding
obligation of Company, enforceable against Company in accordance
with its terms, except as limited by bankruptcy, insolvency or
other laws of general application relating to or affecting the
enforcement of creditors’ rights generally and general
principles of equity.
(d) Non-Contravention.
The execution and delivery by Company of the Transaction Documents
executed by Company and the performance and consummation of the
transactions contemplated thereby do not and will not
(i) violate the Certificate or Bylaws of the Company or any
material judgment, order, writ, decree, statute, rule or regulation
applicable to Company; (ii) violate any provision of, or
result in the breach or the acceleration of, or entitle any other
Person to accelerate (whether after the giving of notice or lapse
of time or both), any material mortgage, indenture, agreement,
instrument or contract to which Company is a party or by which it
is bound; or (iii) result in the creation or imposition of any
Lien upon any property, asset or revenue of Company (other than any
Lien arising under the Transaction Document) or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material
permit, license,
6
authorization
or approval applicable to Company, its business or operations, or
any of its assets or properties.
(e) Approvals.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any governmental authority or other
Person (including, without limitation, the shareholders of any
Person) is required in connection with the execution and delivery
of the Transaction Documents executed by Company and the
performance and consummation of the transactions contemplated
thereby, except for filings and notifications required by federal
and state securities laws in connection with the offer and sale of
this Note and the consummation of the transactions contemplated
hereby and thereby.
(f) No
Violation or Default. None of the Company or the Company’s
Subsidiaries is in violation of or in default with respect to
(i) its Certificate or Bylaws or equivalent charter document
or any material judgment, order, writ, decree, statute, rule or
regulation applicable to such Person; (ii) any material
mortgage, indenture, agreement, instrument or contract to which
such Person is a party or by which it is bound (nor is there any
waiver in effect which, if not in effect, would result in such a
violation or default), where, in each case, such violation or
default, individually, or together with all such violations or
defaults, could reasonably be expected to have a Material Adverse
Effect.
(g) Litigation.
No actions (including, without limitation, derivative actions),
suits, proceedings or investigations are pending or, to the
knowledge of the Company, threatened against the Company or the
Company’s Subsidiaries at law or in equity in any court or
before any other governmental authority which if adversely
determined (i) would (alone or in the aggregate) have a
Material Adverse Effect or (ii) seeks to enjoin, either
directly or indirectly, the execution, delivery or performance by
the Company of the Transaction Documents or the transactions
contemplated thereby.
(h) Title.
The Company and the Company’s Subsidiaries own and have good
and marketable title in fee simple absolute to, or a valid
leasehold interest in, all their respective real properties and
good title to their other respective assets and properties as
reflected in the most recent Financial Statements delivered to
Purchasers (except those assets and properties disposed of in the
ordinary course of business since the date of such Financial
Statements) and all respective assets and properties acquired by
Company and Company’s Subsidiaries since such date (except
those disposed of in the ordinary course of business). Such assets
and properties are subject to no Lien, except for Permitted
Liens.
(i) Equity
Securities. The authorized capital stock of the Company may be
found in the Company’s Form 10-QSB for the quarterly period
ended March 31, 2006 filed by the Company with the
SEC.
3. REPRESENTATIONS
AND WARRANTIES OF HOLDER. The Holder represents and warrants to the
Company that such Holder has been advised that neither
7
this Note nor
the securities which may be issued upon the conversion hereof have
been registered under the Securities Act, or any state securities
laws and, therefore, cannot be resold unless registered under the
Securities Act and applicable state securities laws or unless an
exemption from such registration requirements is available. Such
Holder is aware that the Company is under no obligation to effect
any such registration with respect to the Note or to file for or
comply with any exemption from registration. Such Holder has not
been formed solely for the purpose of making this investment and is
purchasing the Note to be acquired by such Holder hereunder for its
own account for investment, not as a nominee or agent, and not with
a view to, or for resale in connection with, the distribution
thereof. Such Holder has such knowledge and experience in financial
and business matters that such Purchaser is capable of evaluating
the merits and risks of such investment, is able to incur a
complete loss of such investment and is able to bear the economic
risk of such investment for an indefinite period of time. Such
Holder is an accredited investor as such term is defined in
Rule 501 of Regulation D under the Securities
Act.
4. INTEREST.
Accrued interest on the outstanding principal balance on this Note
shall be payable on the Maturity Date.
5. PREPAYMENT.
Upon 3 (three) days’ prior written notice to the Holder,
the Company may prepay this Note in whole or in part; provided that
any such prepayment will be applied first to the payment of
expenses due under this Note, second to interest accrued on this
Note and third, if the amount of prepayment exceeds the amount of
all such expenses and accrued interest, to the payment of principal
of this Note.
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