SENIOR SUBORDINATED CONVERTIBLE NOTE
$4,000,000 Dated: November 8, 1996
FOR VALUE RECEIVED, the undersigned, STANDARD MANAGEMENT CORPORATION,
an Indiana corporation ("Maker" or the "Company"), promises to pay to the
order of GREAT AMERICAN RESERVE INSURANCE COMPANY, a Texas corporation
("Lender"), in immediately available funds at the office of the Lender at
▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇ or at such other
location as the holder hereof may designate from time to time, the
principal amount of Four Million Dollars ($4,000,000) as set forth in a
Note Agreement by and between Lender and Maker, (the "Agreement") to which
this is attached and incorporated therein, together with interest from the
date hereof (computed on the basis of a year of 360 days of twelve 30-day
months) on the outstanding principal balance, to be fixed at a rate equal
to 12% per annum or 14% per annum, in accordance with the following terms:
1. Principal and all unpaid interest which accrues thereon shall be
payable in full at December 31, 2003 (hereinafter the "Maturity").
Interest on the outstanding principal balance of this Note at the rate of
12% per annum, shall be due and payable in cash on a quarterly basis, on
January 1, April 1, July 1 and October 1 (commencing January 1, 1997). At
its option until December 31, 2000, the Company may pay quarterly interest
by notifying the Lender in writing to add the amount of the interest
payment then due and payable to the principal amount of this Note;
PROVIDED, HOWEVER, that for all periods in which the Company makes such
election this Note shall bear interest at a rate of 14% per annum. This
Note will bear interest on overdue principal (including any overdue
prepayment of principal) and on any overdue installment of interest at 3%
per annum over the per annum interest provided for hereunder. Maker may
prepay part or all of the principal due under this Note in accordance with
Section 2 of the Agreement.
2. This Note has been issued pursuant to, and in conjunction with
the Agreement pursuant to which Maker agreed to sell, and ▇▇▇▇▇▇ agreed to
purchase, the Senior Subordinated Convertible Note Due December 31, 2003
evidenced by this instrument. The terms and provisions of the Agreement
shall govern the terms and provisions of this Note and any conflict between
this Note and the Agreement shall be resolved by the Agreement.
3. This Note may not be offered for sale or sold, or otherwise
transferred in any transaction which would constitute a sale thereof within
the meaning of the Securities Act of 1933, as amended (the "1933 Act"),
unless (i) such security has been registered for sale under the 1933 Act
and registered or qualified upon applicable state securities laws relating
to the offer and sale of securities; or (ii) exemptions from the
registration requirements of the 1933 Act and the registration or
qualification requirements of all such state securities laws are available
and the Maker shall have received an opinion of counsel satisfactory to
Maker that the proposed sale or other disposition of such securities may be
effected without registration under the 1933 Act and would not result in
any violation of any applicable state securities laws relating to the
registration or qualification of securities for sale, such opinion to be
satisfactory to counsel to Maker.
4. The indebtedness evidenced by this Note is subordinated to the
prior payment when due of the principal of, premium, if any, and interest
on all "Senior Indebtedness" (as defined below) of Maker. Therefore, upon
any distribution of its assets in a liquidation or dissolution of Maker, or
in bankruptcy, reorganization, insolvency, receivership or similar
proceedings relating to Maker, Lender will not be entitled to receive
payment of the indebtedness evidenced by this Debenture until the holders
of Senior Indebtedness are paid in full. Upon the occurrence of an "Event
of Default" with respect to any Senior Indebtedness, as such Event of
Default may be defined in such instrument evidencing the Senior
Indebtedness, to the extent such Event of Default permits the holders of
such Senior Indebtedness to accelerate the maturity thereof, then upon
written notice thereof given to Maker by any holder of such Senior
Indebtedness or their representative, no payment shall be made by Maker in
respect to this Note until Maker has cured such Event of Default to the
satisfaction of the holders of such Senior Indebtedness. "Senior
Indebtedness" means the indebtedness outstanding under the Amended and
Restated Revolving Line of Credit between the Maker and Fleet National Bank
dated as of November 8, 1996.
5. The Agreement contains a statement of the events of default under
this Note.
6. The unpaid principal of this Note is convertible at the option of
the Lender, in whole or in part, upon surrender of this Note at the
principal office of the Company, into restricted shares of the Maker's
common stock at a conversion price ("Conversion Price") equal to $5.75 per
share of the Company's common stock; PROVIDED, however that if the Company
delivers a notice providing for the prepayment of the entire amount due and
owing under the Note issue to the Lender or its affiliate within twelve
(12) months of the date hereof, the Conversion Price shall be equal to
$6.00 per share. If the Company delivers a notice providing for the
prepayment of the amount due, the notice shall contain an indication in the
form of a bank commitment, registration statement or other indication
satisfactory to the Lender that the Company has the ability to prepay the
amount due. Upon such conversion, all principal due under this Note shall
be discharged and the Company released from all obligations thereunder,
however, accrued interest shall be paid to the date of conversion. At the
option of the Lender, accrued interest may also be subject to conversion in
the same manner as principal. The conversion price of the Note may be
subject to adjustment in the manner provided at Paragraph 7.
The shares of the Company's common stock issuable upon the exercise of
the conversion feature shall be "restricted securities" as that term is
defined under Rule 144 of the 1933 Act and, as a consequence, may not be
sold or otherwise transferred except pursuant to registration under the
1933 Act or an available exemption therefrom.
7. The number of shares issuable to the Lender upon conversion of
this Note is subject to adjustment from time to time as follows:
7.1 Reorganization, Merger or Sale of Assets. If at any time while
this Note, or any portion thereof, is outstanding there shall be (i) a
reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (ii) a merger or
consolidation with or into another corporation in which the Company is not
the surviving entity, or a reverse triangular merger in which the Company
is the surviving entity but the shares of the Company's capital stock
outstanding immediately prior to the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, or (iii) a sale or transfer of the Company's properties and
assets as, or substantially as, an entirety to any other person, then, as
part of such reorganization, merger, consolidation, sale or transfer,
lawful provision shall be made so that the holder of this Note shall
thereafter be entitled to receive upon conversion of the Note the number of
shares of stock or other securities or property of the successor
corporation resulting from such reorganization, merger, consolidation, sale
or transfer that a holder of the shares deliverable upon conversion of this
Note would have been entitled to receive in such reorganization,
consolidation, merger, sale or transfer if this Note had been converted
immediately before such reorganization, merger, consolidation, sale or
transfer, all subject to further adjustment as provided in this Section 7.
The foregoing provisions of this Section 7.1 shall similarly apply to
successive reorganizations, consolidations, mergers, sales and transfers
and to the stock or securities of any other corporation that are at the
time receivable upon the conversion of this Note. If the per share
consideration payable to Lender for shares in connection with any such
transaction is in a form other than cash or marketable securities, then the
value of such consideration shall be determined in good faith by the
Company's Board of Directors. In all events, appropriate adjustment (as
determined in good faith by the Company's Board of Directors) shall be made
in the application of the provisions of this Note with respect to the
rights and interest of Lender after the transaction, to the end that the
provisions of this Note shall be applicable after that event, as near as
reasonably may be, in relation to any shares or other property deliverable
after that event upon conversion of this Note.
7.2 Reclassification. If the Company, at any time while this Note,
or any portion thereof, remains outstanding, by reclassification of
securities or otherwise, shall change any of the securities as to which
conversion rights under this Note exist into the same or a different number
of securities of any other class or classes, this Note shall thereafter
represent the right to acquire such number and kind of securities as would
have been issuable as the result of such change with respect to the
securities that were subject to the conversion rights under this Note
immediately prior to such reclassification or other change and the
Conversion Price or number of shares received upon such conversion shall be
appropriately adjusted, all subject to further adjustment as provided in
this Section 7.
7.3 Split, Subdivision or Combination of Shares. If the Company at
any time while this Note, or any portion thereof, remains outstanding shall
split, subdivide or combine the securities as to which conversion rights
under this Note exist, into a different number of securities of the same
class, the number of shares issuable upon conversion shall be
proportionately decreased in the case of a split or subdivision or
proportionately increased in the case of a combination.
7.4 Adjustments for Dividends in Stock or Other Securities or
Property. If while this Note or any portion hereof, remains outstanding
and unexpired the holders of the securities as to which conversion rights
under this Note exist at the time shall have received, or, on or after the
record date fixed for the determination of eligible stockholders, shall
have become entitled to receive, without payment therefor, other or
additional stock or other securities or property (other than cash) of the
Company by way of dividend, then and in each case, this Note shall
represent the right to acquire upon conversion, in addition to the number
of shares of the security receivable upon conversion of this Note, and
without payment of any additional consideration therefor, the amount of
such other or additional stock or other securities or property (other than
cash) of the Company that such holder would hold on the date of such
conversion had it been the holder of record of the security receivable upon
conversion of this Note on the date hereof and had thereafter, during the
period from the date hereof to and including the date of such conversion,
retained such shares and/or all other additional stock, other securities or
property available by this Note as aforesaid during such period, giving
effect to all adjustments called for during such period by the provisions
of this Section 7.
7.5 Issuance of Shares Below Conversion Price.
(a) If while this Note, or any portion hereof, remains outstanding,
the Company shall offer and sell Additional Shares of Common Stock (as
hereinafter defined) for consideration per share less than the Conversion
Price in effect immediately prior to the issuance of such Additional Shares
of Common Stock, the Conversion Price in effect immediately prior to each
such issuance shall forthwith be adjusted upon such issuance to a price
equal to the price paid per share for such Additional Shares of Common
Stock.
(b) For the purpose of the calculations provided in this Section 7.5,
if at any time or from time to time after the date hereof the Company shall
issue any rights or options of the purchase of, or stock or other
securities convertible into, Additional Shares of Common Stock (such Common
Stock or securities being hereinafter referred to as "Convertible
Securities"), then, and in each case, if the Effective Price (as
hereinafter defined) of such rights, options or Convertible Securities
shall be less than the Conversion Price, the Company shall be deemed to
have issued at the time of the issuance of such rights or options or
Convertible Securities the maximum number of Additional Shares of Common
Stock issuable upon exercise or conversion thereof and to have received as
consideration for the issuance of such shares an amount equal to the total
amount of the consideration, if any, payable to the Company upon exercise
or conversion of such options or rights. "Effective Price" shall mean the
quotient determined by dividing the total of all of such consideration by
such maximum number of Additional Shares of Common Stock. No further
adjustment shall be made as a result of the actual issuance of Additional
Shares of Common Stock on the exercise of any such rights or options or the
conversion of any such Convertible Securities. In the case of Convertible
Securities which have a conversion price which is based, in whole or in
part, upon a discount of the market price or value of the Company's common
stock, then for the purposes of calculating the Effective Price, the
consideration shall be deemed to include the minimum conversion price
payable to Company.
If any such rights or options or the conversion privilege represented
by any such Convertible Securities shall expire prior to the Maturity
hereof without having been exercised, the adjustment to the number of
shares available hereunder upon the issuance of such rights, options or
Convertible Securities shall be readjusted to the number of shares that
would have been in effect had an adjustment been made on the basis that the
only Additional Shares of Common Stock so issued were the Additional Shares
of Common Stock, if any, actually issued or sold on the exercise of such
rights or options or rights of conversion of such Convertible Securities,
and such Additional Shares of Common Stock, if any, were issued or sold for
the consideration actually received by the Company for the granting of all
such rights or options, whether or not exercised, plus the consideration
received for issuing or selling the Convertible Securities actually
converted plus the consideration, if any, actually received by the Company
on the conversion of such Convertible Securities.
(c) For the purpose of the calculations provided for in this Section
7.5, if at any time or from time to time after the date hereof the Company
shall issue any rights or options for the purchase of Convertible
Securities, then, in each such case, if the Effective Price thereof is less
than the then Conversion Price, the Company shall be deemed to have issued
at the time of the issuance of such rights or options the maximum number of
Additional Shares of Common Stock issuable upon conversion of the total
amount of Convertible Securities covered by such rights or options and to
have received as consideration for the issuance of such Additional Shares
of Common Stock an amount equal to the amount of consideration, if any,
received by the Company for the issuance of such rights or options, plus
the consideration, if any, payable to the Company upon the conversion of
such Convertible Securities. "Effective Price" shall mean the quotient
determined by dividing the total amount of such consideration by such
maximum number of Additional Shares of Common Stock. No further adjustment
of such Conversion Price adjusted upon the issuance of such rights or
options shall be made as a result of the actual issuance of the Convertible
Securities upon the exercise of such rights or options or upon the actual
issuance of Additional Shares of Common Stock upon the conversion of such
Convertible Securities.
The provisions of subsection (b) above for readjustment upon the
expiration of rights or options or the rights of conversion of Convertible
Securities, shall apply mutatis mutandis to the rights, options and
Convertible Securities referred to in this subsection (c).
(d) The term "Additional Shares of Common Stock" as used herein shall
mean all shares of common stock issued or deemed issued by the Company
after the date hereof, other than (i) securities issued pursuant to or in
connection with the terms of the Agreement and this Note; (ii) shares of
the Company's common stock issued upon conversion of convertible securities
or the exercise of common stock purchase warrants outstanding as of the
date hereof; (iii) shares of the Company's common stock issuable to
employees, officers or directors pursuant to the Company's stock option
plan; and (iv) shares of the Company's common stock issued in connection
with the acquisition of a subsidiary.
7.6 No Impairment. Maker will not, by any voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by Maker, but will at all times in good
faith assist in the carrying out of all the provisions of this Section 7
and in the taking of all such action as may be necessary or appropriate in
order to protect the rights of Lender against impairment.
8. Lender, by acceptance hereof, acknowledges that this Note and the
shares to be issued upon conversion hereof are being acquired solely for
▇▇▇▇▇▇'s own account and not as nominee for any other party, and for
investment, and that Lender will not offer, sell or otherwise dispose of
this Note or any shares to be issued upon conversion hereof except under
circumstances that will not result in a violation of applicable federal and
state securities laws. Upon exercise of this Note, Lender shall, if
requested by Maker, confirm in writing, in a form satisfactory to Maker,
that the shares so purchased are being acquired solely for ▇▇▇▇▇▇'s own
account and not as a nominee for any other party, for investment, and not
with a view toward distribution or resale.
All shares issued upon exercise hereof shall be stamped or imprinted
with a legend in substantially the following form (in addition to any
legend required by state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES
AND ANY SECURITIES OR SHARES ISSUED UPON CONVERSION THEREOF MAY NOT BE SOLD
OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT.
9. Maker covenants that during the term that this Note is
outstanding, Maker will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of the
shares upon the conversion of this Note, from time to time, will take all
steps necessary to amend its Certificate of Incorporation (the
"Certificate") to provide sufficient reserves of shares of Common Stock
issuable upon the conversion of the Note. Maker further covenants that all
shares that may be issued upon the conversion of this Note and payment of
the Conversion Price, all as set forth herein, will be free from all taxes,
liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously or otherwise specified
herein). Maker agrees that its issuance of this Note shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute the issue the necessary certificates for the shares
upon the conversion of this Note.
10. Whenever the number of shares issuable or the Conversion Price
hereunder shall be adjusted pursuant to Section 7 hereof, the Company shall
issue a certificate signed by its Chief Financial Officer setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the
Conversion Price and number of shares purchasable hereunder after giving
effect to such adjustment, and shall cause a copy of such certificate to be
mailed (by first-class mail, postage prepaid) to Lender. All notices,
advices and communications under this Note shall be deemed to have been
given, if notice is given as specified in Section 9.7 of the Agreement.
11. Lender shall be entitled to the registration rights set forth in
a certain Registration Rights Agreement of even date herewith by and
between Maker and Lender.
12. Any term of this Note may be amended with the written consent of
the Company and the Holder. Any amendment effected in accordance with this
Section 12 shall be binding upon the Holder, each future holder and the
Company. No waivers of, or exceptions to, any term, condition or provision
of this Note, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such term, condition or
provision.
13. Maker and any other party now or hereafter liable for the payment
of this Note in whole or in part, hereby severally (i) waive demand,
presentment for payment, notice of nonpayment, protest, notice of protest,
notice of intent to accelerate, notice of acceleration and all other
notice, filing of suit and diligence in collecting this Note, (ii) agree to
release of any party primarily or secondarily liable hereon, (iii) agree
that the Lender shall not be required first to institute suit or exhaust
its remedies hereon against Maker or others liable or to become liable
hereon or to enforce its rights against them, and (iv) consent to any
extension or postponement of time of payment of this Note and to any other
indulgence with respect hereto without notice thereof to any of them.
14. This Note will not be transferable at any time on or prior to
Maturity except for transfers to affiliates, successors to the ultimate
parent of the Lender, by operation of law, pursuant to a merger of Lender
into another entity or pursuant to the sale of all or substantially all of
the assets of Lender that are in compliance with all Federal and State
securities laws with respect to this Note.
15. This Note shall bind Maker and its successors and assigns, and
the benefits hereof shall inure to the benefit of Lender and its successors
and assigns. All references herein to "Maker" and "Lender" shall be deemed
to apply to Maker and Lender, respectively, and to their respective
successors and assigns.
16. The corporate law of the State of Indiana shall govern all issues
and questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
interpretation and enforceability of the Note and the exhibits and
schedules hereto shall be governed by, and construed in accordance with,
the laws of the State of Indiana, without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of Indiana
or any other jurisdiction) that would cause the application of the laws of
any jurisdiction other than the State of Indiana.
17. The Lender and the Maker agree to submit to personal jurisdiction
and to waive any objection as to venue in the federal or state courts in
▇▇▇▇▇▇▇▇ County, State of Indiana. Service of process on the Maker or the
Lender in any action arising out of or relating to this Note shall be
effective if mailed to such party at the address listed in Section 10
hereof.
STANDARD MANAGEMENT CORPORATION
BY: /S/ ▇▇▇▇ ▇. ▇▇▇▇▇
TITLE: EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
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FORM OF
NOTICE OF CONVERSION
TO: STANDARD MANAGEMENT CORPORATION
(1) The undersigned hereby elects to purchase shares of
Common Stock of STANDARD MANAGEMENT CORPORATION pursuant to the terms of
the attached Note, and tenders herewith payment of the purchase price for
such shares in full.
(2) In converting this Note, the undersigned hereby confirms and
acknowledges that the shares of Common Stock to be issued upon conversion
thereof are being acquired solely for the account of the undersigned and
not as a nominee for any other party, and for investment, and that the
undersigned will not offer, sell or otherwise dispose of any such shares of
Common Stock except under circumstances that will not result in a violation
of the Securities Act of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name
as is specified below:
(Name)
(4) Please issue a new Note for the unexercised portion of the
attached Note in the name of the undersigned or in such other name as is
specified below:
(Name)
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