SENIOR NOTE AND WARRANT CONVERSION AGREEMENT
This
SENIOR NOTE AND WARRANT CONVERSION AGREEMENT (this “Agreement”), dated
as of February 28, 2005, is entered into by and among CSQ Holding Company, a
Delaware corporation (“Newco”),
Cardiac Science, Inc., a Delaware corporation (“CSI”), and
those purchasers whose names are listed on the signature pages hereto (each, a
“Purchaser” and
collectively, the “Purchasers”).
RECITALS
WHEREAS,
pursuant to that certain Senior Note and Warrant Purchase Agreement, dated as of
May 29, 2002, as amended July 1, 2003, as further amended March 15, 2004, as
amended again January 28, 2005 (the “Purchase
Agreement”), by
and among CSI and the Purchasers, the Purchasers purchased from CSI senior notes
in the aggregate principal amount of fifty million dollars ($50,000,000) (the
“Senior
Notes”) and
warrants to purchase an aggregate of 13,438,599 shares of CSI common stock (the
“Warrants”);
WHEREAS,
in connection with the issuance of the Senior Notes, (i) CSI, its subsidiaries
and the Purchasers entered into that certain Security Agreement, dated as of May
30, 2002 (the “Security
Agreement”), (ii)
CSI, the Purchasers, and other signatories thereto entered into that certain
Registration Rights Agreement, dated as of May 30, 2002, as amended and restated
on July 20, 2004, as further amended and restated in accordance with Section 8
below (the “Registration
Rights Agreement”), and
(iii) CSI’s subsidiaries each entered into those certain Guaranties, dated as of
May 30, 2002, in favor of the Purchasers (each a “Guaranty,”
collectively, the “Guaranties,” and
referred to collectively with the Security Agreement as the “Ancillary
Agreements”);
WHEREAS,
each Purchaser currently owns all right, title and interest to the Senior Note
in the principal amount set forth by such Purchaser’s name on Exhibit
A and
currently owns all right, title and interest to the Warrants set forth by such
Purchaser’s name on Exhibit
B;
WHEREAS,
CSI, Newco, ▇▇▇▇▇▇▇ Cardiology Systems, Inc., a Delaware corporation
(“▇▇▇▇▇▇▇”),
Rhythm Acquisition Corporation, a Delaware corporation and wholly-owned
subsidiary of Newco (“▇▇▇▇▇▇▇
Merger Sub”), and
Heart Acquisition Corporation, a Delaware corporation and wholly-owned
subsidiary of Newco (“CSI
Merger Sub”), have
entered into that certain Agreement and Plan of Merger, dated of even date
herewith (the “Merger
Agreement”),
pursuant to which, among other things, ▇▇▇▇▇▇▇ Merger Sub will merge with and
into ▇▇▇▇▇▇▇, and ▇▇▇▇▇▇▇ will thereafter merge with and into Newco, with Newco
being the surviving corporation, and CSI Merger Sub will merge with and into
CSI, with CSI surviving as a wholly-owned subsidiary of Newco (collectively, the
“Mergers”);
and
WHEREAS,
the Purchasers, CSI and Newco desire to cancel the Senior Notes and Warrants in
connection with the Merger in exchange for certain consideration as set forth in
this Agreement.
AGREEMENT
NOW,
THEREFORE, in consideration of the mutual covenants hereinafter set forth and
for good and valuable consideration, receipt of which is hereby acknowledged,
the parties hereby agree as follows:
1. Definitions.
Capitalized
terms used herein but not defined herein shall have the meanings ascribed to
such terms in the Merger Agreement, a true and complete copy of which has been
delivered to the Purchasers on the date hereof.
“Accreted
Value” shall
mean the adjusted issue price (within the meaning of Section 1272 of the
Internal Revenue Code, as amended in 1986) plus any accrued unpaid interest not
included therein.
2. Cancellation
of Senior Notes and Warrants. The
Purchasers hereby agree and acknowledge that concurrently with the Effective
Time (the “Conversion
Time”), each
Senior Note and Warrant held by the Purchasers shall be automatically cancelled
and terminated and shall be converted into the right to receive the Senior Note
and Warrant Consideration (as defined in Section 3 below) payable with respect
to such Senior Notes and Warrants (the “Note
and Warrant Conversion”).
3. Senior
Note and Warrant Consideration. The
consideration to which the Purchasers shall be entitled as a result of the
cancellation and termination of the Senior Notes and Warrants, and the releases
and waivers set forth in this Agreement, shall consist of the following: (i) an
aggregate of twenty million dollars ($20,000,000), payable by Newco in cash
immediately following the Conversion Time, in the amounts set forth by each
Purchaser’s name on Exhibit
C hereto
(the “Cash
Payment”), in
exchange for each Purchaser’s pro rata portion of Senior Notes in an aggregate
amount equal to twenty million dollars ($20,000,000) of the Accreted Value of
the Senior Notes and (ii) such number of shares of Newco common stock (rounded
down to the nearest whole share) as is determined by multiplying (A) the
quotient obtained by dividing Fifty-Three Million Seven Hundred Fifty Thousand
Dollars ($53,750,000) by the closing sales price per share for CSI common stock
as reported on the Nasdaq National Market on the trading date immediately
preceding the date of this Agreement, which is $1.89, by (B) the Cardiac
Exchange Ratio, as set forth by each Purchaser’s name on Exhibit
D hereto
(the “Shares” and,
collectively with the “Cash
Payment,” the
“Senior
Note and Warrant Consideration”). A
portion of the Shares received by the Purchasers under (ii) above in an amount
equal to the Accreted Value of the Senior Notes minus cash paid under (i) above
shall be received in exchange for the Senior Notes and the balance of such
Shares shall be received in exchange for the Warrants. The parties hereto hereby
agree that for all purposes the Senior Note and Warrant Consideration (including
the entire Cash Payment) will be allocated to the Senior Notes up to the
Accreted Value of the Senior Notes, with any remaining consideration allocated
to the Warrants. The Shares shall be issued to the Purchasers concurrently with
shares of Newco common stock to be issued at the Conversion Time to the former
stockholders of CSI.
4. Closing;
Closing Conditions. The
closing of the Note and Warrant Conversion (the “Closing”) shall
occur concurrently with, and subject to the occurrence of, the Effective Time;
provided, that
unless otherwise agreed to in writing by the Purchasers holding a majority of
the outstanding principal amount of Senior Notes, the Closing shall not occur
prior to July 31, 2005. The Closing shall be further conditioned upon the
following:
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(a) the
applicable waiting period(s) under the HSR Act with respect to the Note and
Warrant Conversion, if applicable, shall have expired or been terminated;
and
(b) the
Merger Agreement shall not have been amended, modified or waived in any manner
that adversely affects the rights and obligations of the Purchasers without the
consent of the Purchasers holding a majority of the outstanding principal amount
of the Senior Notes.
5. Releases;
Waivers; Acknowledgments.
(a) The
Purchasers, on behalf of themselves, and on behalf of all predecessors,
successors, assigns, representatives or agents of the Purchasers, to the fullest
extent permitted by law, hereby acknowledge that the Senior Note and Warrant
Consideration is in full satisfaction of any and all rights the Purchasers may
have with respect to the Senior Notes and Warrants, including the right to
demand or receive payment for all unpaid principal and any accrued and unpaid
interest under the Senior Notes (other than the Senior Note and Warrant
Consideration) and the right to purchase shares of CSI common stock under the
Warrants and, solely in their respective capacities as holders of the Senior
Notes or holders of the Warrants, effective solely upon full receipt by the
Purchasers of the Senior Note and Warrant Consideration, hereby release CSI,
Newco and their respective successors and assigns (collectively, the
“Purchaser
Releasees”), from
any and all obligations they would otherwise have with respect to the Senior
Notes and Warrants (other than with respect to any obligations arising under
this Agreement or the Registration Rights Agreement) (the “Purchaser
Released Claims”). The
Purchasers acknowledge that they have been advised by legal counsel and have
read and understand and waive the protections of Section 1542 of the California
Civil Code, which provides as follows:
A GENERAL
RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO
EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
(b) Effective
solely upon delivery of the original Senior Notes and Warrants to CSI for
cancellation and termination against payment of the Senior Note and Warrant
Consideration, Newco and CSI, on behalf of themselves, and on behalf of all
predecessors, successors, assigns, representatives or agents, to the fullest
extent permitted by law, hereby release each of the Purchasers and their
respective successors and assigns (collectively, the “Company
Releasees”), from
any and all obligations they would otherwise have relating to their investment
in CSI (other than with respect to any obligations arising under this Agreement
or the Registration Rights Agreement) (the “Company
Released Claims”).
(c) Each of
the parties hereto acknowledges that it may hereafter discover facts in addition
to, or different from, those which it now knows or believes to be true with
respect to the subject matter of this Agreement, the Purchaser Released Claims
and the Company Released Claims, as applicable, but that notwithstanding the
foregoing, it is its intention that this release, upon becoming effective,
operate to fully, finally, completely and forever settle and release each
Purchaser Releasee and Company Releasee, as applicable, from each, every and all
of the Purchaser Released Claims and the Company Released Claims, as applicable,
and that in furtherance of such intention, the releases herein given shall be
and remain in effect as full and complete releases, notwithstanding the
discovery or existence of any such additional or different facts.
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(d) The
Purchasers warrant and represent to each other that as to any Purchaser Released
Claim, the Purchaser releasing same is the sole and absolute owner thereof, free
and clear of all other rights and interests therein and has the right, ability
and sole power to release such Purchaser Released Claims.
(e) The
Purchasers agree to hold harmless and indemnify the Purchaser Releasees from any
liability or claim asserted by a Purchaser or any of their Affiliates against a
Purchaser Releasee which is based on a claim which the Purchasers purported to
release hereunder. Each of CSI and Newco agrees to hold harmless and indemnify
the Company Releasees from any liability or claim asserted by CSI or Newco or
any of their Affiliates against a Company Releasee which is based on a claim
which the CSI and Newco purported to release hereunder.
(f) Each
Purchaser hereby acknowledges, agrees and gives its consent that there shall be
no price-based anti-dilution adjustments as a result of the transactions
contemplated by this Agreement or the Merger Agreement to any warrants held by
it.
6. Right
to Designate Director. After the
Conversion Time, so long as the Purchasers continue to beneficially own at least
10% of Newco’s outstanding capital stock, calculated in accordance with Rule
13d-3 of the Securities Exchange Act of 1934, as amended, the Purchasers shall
have the right, but not the obligation, to designate one director (the
“Purchaser
Designee”) for
election to Newco’s Board of Directors and Newco shall cause such Purchaser
Designee to be nominated for election at any meeting of stockholders at which
directors in the class of which such Designee is a member are being voted
upon.
7. Termination
of Transaction Documents. The
Purchasers hereby agree and acknowledge that by virtue of and conditioned upon
the consummation of the Mergers (and payment of the Senior Note and Warrant
Consideration), as of the Effective Time, the Purchase Agreement and the
Ancillary Agreements shall be automatically terminated and shall be of no
further force or effect, and the Purchasers authorize CSI, Newco or any of its
respective representatives to file (at the expense of CSI or Newco) any
documents necessary to effect such termination.
8. Amended
and Restated Registration Rights Agreement.
Concurrently with the execution of this Agreement, the Purchasers and CSI shall
enter into a Second Amended and Restated Registration Rights Agreement among CSI
and the investors party thereto, in the form attached hereto as Exhibit
E. The
Second Amended and Restated Registration Rights Agreement shall be effective
immediately prior to the Effective Time. In accordance with Section 7.2 of the
Second Amended and Restated Rights Agreement, upon the Effective Time, Newco
hereby agrees to assume the rights and obligations of CSI
thereunder.
9. Delivery
of Senior Notes and Warrants. As of
the Conversion Time, the Purchasers shall deliver the original Senior Notes and
Warrants to Newco for cancellation and termination, together with such
instruments as may be reasonably requested by CSI or Newco to terminate the
Purchasers’ security interest under the Security Agreement, against payment of
the Senior Note and Warrant Consideration.
10. Representations
and Warranties; Covenants.
(a) Each
Purchaser, severally and not jointly, hereby represents and warrants to CSI and
Newco that (i) it is the true and lawful owner of each Senior Note set forth on
Exhibit
A and each
Warrant set forth on Exhibit
B, and
(ii) each Senior Note set forth on Exhibit
A and each
Warrant set forth on Exhibit
B is free
and clear of all liens, restrictions, charges, adverse claims and encumbrances
whatsoever (other than under state and federal securities laws). Additionally,
subject to expiration of the applicable waiting period(s) under the HSR Act, if
any, each Purchaser, severally and not jointly, hereby makes the representations
and warranties with respect to the Shares and this Agreement as previously made
with respect to the Senior Notes and Warrants and the Purchase Agreement,
respectively, in Section 3 of the Purchase Agreement.
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(b) CSI and
Newco, severally and not jointly, hereby represents and warrants to the
Purchasers that (i) such Person is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, (ii) such
Person has the right, power and authority to enter into, execute, deliver and
perform its obligations under this Agreement and its directors, members,
managers, officers or agents executing and delivering this Agreement are duly
authorized to do so, (iii) this Agreement has been duly and validly executed and
delivered and constitutes the legal, valid and binding obligation of such
Person, enforceable in accordance with its terms except as enforceability may be
limited by bankruptcy, insolvency, fraudulent conveyance or similar laws
affecting creditors’ rights generally and general principles of equity
(regardless of whether the application of such principles is considered in a
proceeding in equity or at law), (iv) the execution, delivery and performance by
such Person of this Agreement will not violate the organizational documents of
such Person, (v) the execution, delivery and performance by such Person of this
Agreement has been duly authorized by all requisite organizational action on the
part of such Person and do not and will not violate, contravene or constitute a
default under any law or any order of any court, governmental authority or
arbitrator, in each case where such violation, contravention or default,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect, and (vi) no authorization, approval or consent of, and
no filing or registration with, any court, governmental authority or third
Person is or will be necessary for the execution, delivery or performance by
such Person of this Agreement or the validity or enforceability thereof, except
for such approvals which will have been obtained prior to the Closing or will
not have been required to be obtained prior to the Closing.
(c) To the
extent applicable, each party hereto agrees to make an appropriate filing of a
Notification and Report Form pursuant to the HSR Act with respect to the Note
and Warrant Conversion as promptly as practicable following the determination
that such a filing is applicable and to supply as promptly as practicable any
additional information and documentary material that may be requested pursuant
to the HSR Act and to take all other actions necessary to cause the expiration
or termination of the applicable waiting periods under the HSR Act as soon as
practicable.
11. Further
Assurances. Each
party hereto will, upon request of another party hereto, execute and deliver any
additional documents reasonably requested by such requesting party as may be
necessary or desirable to consummate the transactions contemplated
hereby.
12. Miscellaneous. No
provision of this Agreement may be amended, modified, waived or discharged
unless such amendment, waiver, modification or discharge is agreed to in writing
signed by Newco, CSI and the Purchasers holding a majority of the outstanding
principal amount of the Senior Notes. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. This Agreement, the Merger Agreement and the
Registration Rights Agreement constitute the entire agreements with respect to
the subject matter hereof and supercede all prior agreements and undertakings,
both written and oral, among the parties, or of any of them, with respect to the
subject matter hereof, and, except as otherwise expressly provided herein, it is
not intended to confer upon any other person any rights or remedies hereunder.
This Agreement shall be governed by and construed in accordance with the laws of
the State of Delaware applicable to contracts executed and to be performed in
the state. This Agreement may be executed in one or more counterparts (including
by facsimile), and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement.
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13. Termination.
Each
party’s obligations under this Agreement are subject to, and contingent upon,
consummation of the Mergers. In the event that the Merger Agreement is
terminated, the parties hereto shall have no further obligations with respect to
this Agreement. Either party may terminate this Agreement if the Effective Time
shall not have taken place by December 31, 2005, in which case the parties
hereto shall have no further obligations with respect to this Agreement.
14. Fees
and Expenses. Each
party hereto shall bear the cost of its own fees and expenses incurred in
connection with the transactions contemplated by this Agreement and the Merger
Agreement, including, but not limited to, its legal fees and disbursements;
provided,
however, that CSI
(i) shall reimburse the Purchasers for any filing fees under the HSR Act and
(ii) shall reimburse the Purchasers for any filing fees incurred in connection
with Sections 7 and 9 of this Agreement and up to an aggregate of $5,000 in
legal fees related thereto.
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IN
WITNESS WHEREOF, the undersigned have executed this Senior Note and Warrant
Conversion Agreement as of the date first written above.
| NEWCO | ||
| CSQ Holding Company | ||
| |
|
|
| By: | /s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇ | |
|
| ||
| Its: Chief Executive Officer | ||
| CSI | ||
| Cardiac Science, Inc. | ||
| |
|
|
| By: | /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ | |
|
| ||
| Its: CEO | ||
| PURCHASERS | ||
| Perseus Acquisition/Recapitalization Fund, L.L.C. | ||
| |
|
|
| By: | /s/ ▇▇▇ ▇. ▇▇▇▇▇▇ III | |
|
| ||
| Its: Managing Director | ||
| Perseus Market Opportunity Fund, L.P. | ||
| |
|
|
| By: | /s/ ▇▇▇ ▇. ▇▇▇▇▇▇ III | |
|
| ||
| Its: Managing Director | ||
| Cardiac Science Co-Investment, L.P. | ||
| |
|
|
| By: | /s/ ▇▇▇ ▇. ▇▇▇▇▇▇ III | |
|
| ||
| Its: Managing Director | ||
7
Exhibit
A
Senior
Notes
|
Name |
Note
No. |
Principal
Amount | ||
|
Perseus
Acquisition/Recapitalization Fund, L.L.C. |
N-1 |
$21,788,285 | ||
|
Perseus
Market Opportunity Fund, L.P. |
N-2 |
20,279,237 | ||
|
Cardiac
Science Co-Investment, L.P. |
N-3 |
7,932,478 | ||
|
Total: |
$50,000,000 |
Exhibit
B
Warrants
|
Name |
Warrant
No. |
Shares | ||
|
Perseus
Acquisition/Recapitalization Fund, L.L.C. |
W-1 |
4,357,657 | ||
|
Perseus
Market Opportunity Fund, L.P. |
W-2 |
4,055,847 | ||
|
Cardiac
Science Co-Investment, L.P. |
W-3 |
1,586,496 | ||
|
Perseus
Acquisition/Recapitalization Fund, L.L.C. |
W-4 |
1,318,911 | ||
|
Perseus
Market Opportunity Fund, L.P. |
W-5 |
1,227,564 | ||
|
Cardiac
Science Co-Investment, L.P. |
W-6 |
480,177 | ||
|
Perseus
Acquisition/Recapitalization Fund, L.L.C. |
W-7 |
179,526 | ||
|
Perseus
Market Opportunity Fund, L.P. |
W-8 |
167,086 | ||
|
Cardiac
Science Co-Investment, L.P. |
W-9 |
65,335 | ||
|
Total: |
13,438,599 |
Exhibit
C
Cash
Payment Amount
|
Name |
Cash
Payment Amount | |
|
Perseus
Acquisition/Recapitalization Fund, L.L.C. |
$8,715,314 | |
|
Perseus
Market Opportunity Fund, L.P. |
8,111,695 | |
|
Cardiac
Science Co-Investment, L.P. |
3,172,991 | |
|
Total: |
$20,000,000 |
Exhibit
D
Number
of Shares
|
Name |
Number
of Shares | |
|
Perseus
Acquisition/Recapitalization Fund, L.L.C. |
1,239,281 | |
|
Perseus
Market Opportunity Fund, L.P. |
1,153,448 | |
|
Cardiac
Science Co-Investment, L.P. |
451,186 | |
|
Total: |
2,843,915 |