EXHIBIT 4.1
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
Peter Rettaliata 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.
<PAGE>
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
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
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<PAGE>
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
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<PAGE>
hereof, in addition to the number of shares
of Common Stock receivable, the
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
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.
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(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 Dario Peragallo pursuant to the Stock
Purchase Agreement (the "Peragallo
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 Peragallo 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 Peragallo 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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<PAGE>
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 Peter
Rettaliata, 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 Peragallo 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) Peter Rettaliata
