Spy Restructures Debt

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CARLSBAD, Calif.—On Sept. 6, 2012, SPY Inc. and SPY's wholly-owned subsidiary, Spy Optic Inc. entered into two transactions to restructure their debt. The first was an amendment to their existing debt instruments issued by Spy Optic to Costa Brava Partnership III, L.P. and the entry into a registration rights agreement with Costa Brava. The second was a debt financing in the amount of $1 million with Harlingwood, LLC.

Under the agreement with Costa Brava, Spy has amended the Third Amended and Restated $10 million Promissory Note (Term Note) dated Aug. 2, 2012 and originally issued to Costa Brava on June 21, 2011, as well as an amendment to the Second Amended and Restated $7 million Promissory Note (Line of Credit Note) dated Aug. 2, 2012 and originally issued to Costa Brava on Dec. 20, 2010. As amended, Spy Optic is now obligated to repay up to $4 million of its indebtedness, at the election of Costa Brava, in the event that SPY or its subsidiaries complete certain debt or equity financings in an aggregate amount of $4 million or more between Sept. 6, 2012 and Dec. 31, 2012. Any amount so repaid will reduce dollar-for-dollar Costa Brava's Line of Credit commitment. The amendments to the Costa Brava Term Note and the Costa Brava Line of Credit Note that the paid in kind interest that accrues monthly under such promissory notes may not be paid in cash until the promissory notes mature on April 1, 2014. Spy Optic has previously elected to pay all interest in kind under both promissory notes since Jan. 1, 2012.

SPY and Costa Brava also entered into a registration rights agreement dated Sept. 6, 2012 stating that SPY is required to provide notice to Costa Brava of certain proposed public offerings of SPY's common stock and, if Costa Brava requests, register the shares of common stock into which the Costa Brava Term Note may be converted, subject to certain conditions and limitations described in the registration rights agreement. Costa Brava beneficially owns approximately 48.5 percent, or 49.8 percent on an as converted basis, of SPY's common stock as of Sept. 6, 2012. Seth Hamot, chairman of the SPY board of directors, is the president and sole member of the sole general partner of Costa Brava.

SPY and Spy Optic also entered into a convertible note purchase agreement on Sept. 6, 2012 with Harlingwood which states Spy Optic has issued a promissory note to Harlingwood in the principal amount of $1 million and that SPY and Harlingwood have entered into a registration rights agreement. The convertible note purchase agreement included representations and warranties by each of the SPY, Spy Optic and Harlingwood that are customary for an agreement for the sale of such securities. The agreement with Harlingwood accrues interest at the rate of 12 percent a year, which is payable in kind as an addition to the outstanding principal amount due on the last day of each calendar month in arrears. The note matures on April 1, 2014. Additionally, Spy Optic has agreed to pay an initial facility fee to Harlingwood of $10,000 by Sept. 17, 2012 and future facility fees on each anniversary of the note until the note matures equal to the lesser of $10,000 or 1 percent of the average daily outstanding principal amount due.

In the event of default, the note will accrue interest at 14 percent and Harlingwood may declare the outstanding amounts then due under the note immediately due and payable. In addition, Harlingwood may declare the outstanding amounts then due under the note immediately due and payable in the event that Costa Brava declares the amounts due under either the Costa Brava Term Note or Costa Brava Line of Credit Note immediately due and payable.

SPY and Harlingwood also entered into a registration rights agreement dated Sept. 6, 2012 which states that SPY is required to provide notice to Harlingwood of certain proposed public offerings of SPY's common stock and, if Harlingwood so requests, register the shares of common stock into which the note may be converted, subject to certain conditions and limitations described in the registration rights agreement. Harlingwood beneficially owns approximately 5.5 percent, or 9.6 percent on an as converted basis of SPY's common stock as of Sept. 6, 2012. Fir Geenen, a member of SPY's board of directors, is the manager of the limited liability company that is the manager of Harlingwood.