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EXHIBIT 10.23
SECURITY AND PLEDGE AGREEMENT
This Security and Pledge Agreement (herein "AGREEMENT") is entered into
as of this 27th day of January, 1998, between JALATE, LTD., a California
corporation ("DEBTOR"), and XXXXXXX X. XXXXXXX, an individual ("SECURED PARTY"),
as agent for the Holders (defined below).
RECITALS
A. Debtor has executed those certain Subordinated Secured Promissory
Notes all dated as of even date herewith, in the amounts and in favor of the
parties ("HOLDERS") as set forth on SCHEDULE I hereto (the "NOTES").
B. Pursuant to an Agency and Intercreditor Agreement (the "INTERCREDITOR
AGREEMENT") between Secured Party and the Holders, Secured Party has been
appointed "Agent" for the Holders, and Debtor is required to grant a security
interest in certain Collateral as more particularly described herein as security
for the repayment of the Notes.
NOW, THEREFORE, for value received, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
1. COLLATERAL. Debtor hereby conveys, assigns, transfers, delivers,
pledges and grants to Secured Party a security interest in and to each and all
of the following property (herein called the "COLLATERAL"):
(1) Forty (40) shares of Common Stock of Air Shop Ltd., a New
York corporation ) ("AIR SHOP") (the "COMMON STOCK");
(2) Three Thousand (3,000) shares of Preferred Stock of Air Shop
(the "PREFERRED STOCK" and together with the Common Stock, the "STOCK");
(3) Any additional shares of capital stock of Air Shop that
Debtor acquires pursuant to the certain letter agreement between Debtor and Air
Shop dated October 17, 1997 (the "LETTER AGREEMENT"), a copy of which is
attached hereto as SCHEDULE 2;
(4) All of Debtor's rights under the Letter Agreement; and
(5) All proceeds, products, Distributions (defined below)
additions, substitutions and accessions of and to any and all of the foregoing.
For purposes of this Agreement, the term "Distributions" shall mean all stock
dividends, liquidating dividends, shares of stock resulting from stock splits,
reclassifications, warrants, options, noncash dividends and other distributions
on or with respect to the Stock whether similar
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or dissimilar to the foregoing, except that Distributions shall not mean cash
dividends paid on the Stock.
2. INDEBTEDNESS SECURED. This Agreement and the aforesaid security
interest is granted to Secured Party to secure the following (all of which are
herein called the "INDEBTEDNESS"):
(1) the prompt and unconditional payment and performance of all
indebtedness and obligations of Debtor to the Holders heretofore, now or
hereafter existing under the Notes, and any other document or agreement now or
hereafter executed in connection therewith or as security for any part thereof,
and any and all renewals, amendments, modifications, increases, extensions or
rearrangements thereof; and
(2) the reimbursement and payment by Debtor of all advances,
charges, costs and expenses, (including reasonable attorneys' fees and legal
expenses) incurred by Secured Party and/or the Holders in connection with
exercising any right, power or remedy conferred by this Agreement, the Notes or
by law.
3. DELIVERY AND POSSESSION. The certificates representing the Stock,
accompanied by instruments of assignment thereof, duly executed in blank by
Debtor, have been delivered to Secured Party contemporaneously herewith.
4. TERMINATION. Secured Party shall promptly return the Collateral to
Debtor, and this Agreement will be of no further force and effect, at such time
as the Indebtedness has been paid in full.
5. EVENT OF DEFAULT. Any one or more of the following events shall
constitute an event of default (an "EVENT OF DEFAULT") under this Agreement:
(1) Debtor shall fail to pay all or any part of the Indebtedness
when due, whether at scheduled maturity, by acceleration or otherwise
and such failure shall continue for more than three (3) business days
after notice from Secured Party; or
(2) Debtor shall fail to observe or perform any material term,
covenant or condition on its part to be performed or observed under the
Notes or this Agreement and such failure shall continue for more than
thirty (30) days after notice from Secured Party; or
(3) Debtor shall: (i) become insolvent or admit in writing its
inability to pay its debts as they mature; (ii) make a general
assignment for the benefit of creditors or to an agent authorized to
liquidate any substantial amount of its assets; (iii) become the subject
of an "order for relief" within the meaning of the United States
Bankruptcy Code; (iv) file a petition in bankruptcy, or for
reorganization, or to effect a plan or other arrangement with creditors;
(v) file an
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answer to a creditor's petition, admitting the material allegations
thereof for an adjudication of bankruptcy or for reorganization or to
effect a plan or other arrangement with creditors; (vi) apply to a court
for the appointment of a receiver or custodian for any of its assets or
properties; (vii) have a receiver or custodian appointed for any of its
assets or properties, with or without consent, and such receiver shall
not be discharged within ninety (90) days after appointment; or (viii)
adopt a plan of complete liquidation of its assets;
(4) Any warranty, representation or statement made to Secured
Party by Debtor in this Agreement shall have been false or incomplete in
any material respect as of the time when made; or
(5) Any of the Notes or this Agreement shall cease to be an
enforceable obligation or any of the same are rescinded, revoked or
modified in any way without the express written consent of Secured
Party.
Secured Party agrees that, unless an Event of Default occurs and is
continuing, Secured Party shall not be entitled to exercise any of Debtor's
rights under the Letter Agreement and Debtor shall continue to be able to
exercise all of such rights. Notwithstanding the foregoing, Debtor agrees that
(i) it will not waive any of its rights under the Letter Agreement without the
prior written consent of Secured Party and (ii) if it is unable to exercise any
of its rights under the Letter Agreement, it will assign such rights to Secured
Party. Debtor also agrees to fulfill all of its obligations under the Letter
Agreement in a timely manner. Debtor further agrees that Secured Party is not
required to perform any of Debtor's obligations under the Letter Agreement.
6. ACCELERATION, SECURED PARTY'S RIGHTS AND REMEDIES.
(1) Upon the occurrence of an Event of Default specified in
Section 5(3) above, then, without notice, demand or action of any kind
by Secured Party, the entire amount of the Indebtedness shall be
immediately due and payable. Upon the occurrence of any other Event of
Default specified in this Agreement, Secured Party shall have the right,
upon notice to Debtor, to declare the entire amount of the Indebtedness
immediately due and payable.
(2) Upon the occurrence of an Event of Default, Secured Party
shall have all the rights and remedies of a secured party under the
Uniform Commercial Code in effect at the time in Texas (the "CODE") and
other applicable laws and under this Agreement and all other instruments
and agreements evidencing, securing, governing or guaranteeing the
Indebtedness. Without limiting the generality of the foregoing, Secured
Party may exercise the following rights and remedies, without further
notice to Debtor:
(i) Proceed to selectively and successively enforce and
exercise any and all rights and remedies which Secured Party may
have under this Agreement, any other applicable agreement or
applicable law, including,
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without limitation: (A) commencing one or more actions against Debtor
and reducing the claims of Secured Party against Debtor to judgment, (B)
foreclosure or other enforcement of Secured Party's security interest in
the Collateral, or any portion thereof, or other enforcement of Secured
Party's rights and remedies in respect of and to recover upon the
Collateral, through judicial action or otherwise, including all
available remedies under the applicable provisions of the Code, and (C)
payment or discharge of any claim or lien, prior or subordinate, in
respect of or affecting the Collateral;
(ii) Sell, lease or otherwise dispose of the Collateral at
private or public sale (provided that any sale of any portion of the
Collateral constituting securities shall be made in compliance with
federal and applicable state securities laws), in bulk or in parcels
and, where permitted by law, without having the Collateral present at
the place of sale. Secured Party will give Debtor reasonable notice of
the time and place of any public sale or other disposition thereof or
the time after which any private sale or other disposition thereof is to
be made. The requirements of reasonable notice shall be met if such
notice is given to Debtor at least ten (10) days before the time of any
such sale or disposition;
(iii) Exercise any and all rights and remedies of Debtor relating
to the Collateral, including, but not by way of limitation, the right to
collect, demand, receive, settle, compromise, adjust or xxx for all
amounts due thereon or thereunder and the right either in Secured
Party's own name or in the name of Debtor, to take such legal or other
action as Debtor might have taken except for this Agreement. For
purposes of enforcing Secured Party's rights under this Section 6,
effective upon the occurrence of an Event of Default, Debtor irrevocably
constitutes and appoints Secured Party and any officer or agent thereof,
with full power of substitution, as its true and lawful attorney-in-fact
with full irrevocable power and authority in the place and stead of
Debtor and in the name of Debtor or in its own name from time to time in
Secured Party's discretion for the purposes of this Agreement, to take
any and all appropriate action and to execute any and all documents and
instruments which may be necessary or desirable to accomplish the
purposes of this Agreement.
(iv) Vote any or all of the Stock and to give all consents,
waivers and ratifications in respect thereof and otherwise to act with
respect thereto as though it were the absolute owner thereof.
(v) Cause any or all of the Stock to be transferred into the name
of the Secured Party or the names of any of its nominees.
(3) In the event Secured Party shall elect to selectively and
successively enforce its rights and remedies in respect of any of the
Collateral,
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pursuant to any applicable agreements or otherwise, such action shall
not be deemed a waiver or discharge of any other right, remedy, lien or
encumbrance until such time as Secured Party shall have been paid in
full the Indebtedness.
7. APPLICATION OF PROCEEDS. If Secured Party shall sell or otherwise
dispose of all or any portion of the Collateral as a result of the exercise of
its rights as a result of the occurrence of an Event of Default, the proceeds of
such sale or disposition shall be applied by Secured Party in the following
order:
(1) To the payment of reasonable costs and expenses related to
any sale of the Collateral and the exercise of any other right given to Secured
Party pursuant hereto.
(2) To the payment of the Indebtedness.
(3) To the payment of Debtor or its successors or assigns.
8. EXPENSES. Debtor agrees to pay to the Secured Party all reasonable
advances, charges, costs and expenses incurred in connection with the exercise
by the Secured Party of any right, power or remedy conferred by this Agreement
or by law (including but not limited to reasonable attorneys' fees).
9. DEBTOR'S REPRESENTATIONS AND WARRANTIES. Debtor represents and
warrants to Secured Party that so long as this Agreement is in effect:
9.1 ENFORCEABLE AGREEMENT. This Agreement is the valid and
binding obligation of Debtor, enforceable in accordance with its terms, subject
to bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or relating to creditors' rights generally and general principles of
equity.
9.2 NO OTHER CLAIM. There is no other claim, lien, security
interest or encumbrance on or against any of the Collateral.
9.3 NO FINANCING STATEMENT. No financing statement is on file in
any public office covering any of the Collateral, except (i) in favor of Secured
Party and (ii) that Xxxxxx Financial, Inc. and/or Xxxxx Fargo Bank have filed
financing statements, but have waived their security interests, if any, in the
Collateral.
9.4 POWER AND AUTHORITY. Debtor has full corporate power and
authority to enter into and perform its obligations under this Agreement, and
neither the execution, delivery and performance of this Agreement, nor the
creation of the security interests hereunder, will conflict with, or result in
the breach or violation of, any material agreement or instrument binding on or
enforceable against Debtor or the Collateral. The execution, delivery and
performance of this Agreement, and the creation of the security interest
hereunder, have been duly authorized by all necessary corporate
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action, and will not violate or contravene the Articles of Incorporation or
Bylaws of Debtor.
10. COVENANTS. Debtor covenants and agrees with Secured Party that, from
and after the date of this Agreement and until the Indebtedness is paid in full:
10.1 FURTHER ASSURANCE. Debtor will from time to time, at its
sole expense, promptly execute and deliver all further instruments and
documents, and take all further action that may be reasonably necessary or
desirable, or that Secured Party may reasonably request, in order to continue,
perfect and protect any security interest granted hereby or to enable Secured
Party to exercise and enforce its rights and remedies hereunder with respect to
any Collateral. Without limiting the generality of the foregoing, Debtor will
execute and file such financing or continuation statements or amendments thereto
and such other instruments or notices as may be reasonably necessary or
desirable, or as Secured Party may request, in order to perfect and preserve the
security interest granted or intended to be granted hereby. Debtor hereby
authorizes Secured Party to file one or more financing or continuation
statements and amendments thereto relative to all or part of the Collateral
without the signature of such Debtor, where permitted by law, and to execute the
same as attorney-in-fact for such Debtor to the extent such Debtor's signature
is required by law.
10.2. MAINTENANCE OF OFFICE. Debtor shall keep its chief place of
business and chief executive office and the offices where it keeps its records
concerning the Collateral within the State of California and shall notify
Secured Party at least thirty (30) days prior to any change from the location
specified on the signature page hereof. Debtor will not change its name,
identity or corporate structure to such an extent that any financing statement
filed by Secured Party in connection with this Agreement would become seriously
misleading, unless it shall have given Secured Party at least 30 days prior
written notice thereof and prior to effecting any such change taken such steps
as Secured Party may deem reasonably necessary or advisable to continue the
perfection and priority of the security interest granted pursuant hereto.
10.3 DISPOSITION OF COLLATERAL. Debtor shall not (1) sell,
assign, or otherwise dispose of or grant any option with respect to any of the
Collateral, or (ii) create or suffer to exist any lien, security interest,
option or other charge or encumbrance upon or with respect to any of the
Collateral other than the lien contemplated by this Agreement; provided,
however, that notwithstanding the foregoing, Debtor may at any time sell all or
part of the Collateral, provided that the Indebtedness is repaid in full
concurrently therewith. Secured Party agrees to cooperate with Debtor in
effecting any such sale, including by releasing its security interest in any
such Collateral in connection with the consummation of the sale thereof.
11. GENERAL PROVISIONS.
11.1 COMPLETE AGREEMENT: MODIFATIONS. This Agreement, the Notes
and any documents referred to herein or therein or executed contemporaneously
herewith
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constitute the parties' entire agreement with respect to the subject matter
hereof and supersede all agreements, representations, warranties, statements,
promises and understandings, whether oral or written, with respect to the
subject matter hereof. This Agreement may not be amended, altered or modified
except by a writing signed by the parties.
11.2 ADDITIONAL DOCUMENTS. Each party hereto agrees to execute
any and all further documents and writings and to perform such other actions
which may be or become necessary or expedient to effectuate and carry out this
Agreement.
11.3 NOTICES. Unless otherwise specifically permitted by this
Agreement, all notices under this Agreement shall be in writing and shall be
delivered by personal service, telecopy, Federal Express or comparable overnight
service or certified mail, postage prepaid, to such address as may be designated
from time to time by the relevant party, and which shall initially be:
Jalate, Ltd.
0000 Xxxxxxxx Xxxxxx
Xxxx xx Xxxxxxxx, Xxxxxxxxxx 00000
Fax: (000) 000-0000
Attn: Xxxxxxxxx X. Xxxxxxx
Vice President-Finance and
Chief Financial Officer
Xxxxxxx X. XxXxxxx
0000 Xxxxxxxxxxx Xxxx
Xxxxxxx, Xxxxx 00000
Fax: (000) 000-0000
Any notice sent by certified mail shall be deemed to have been given
five (5) business days after the date on which it is mailed. All other notices
shall be deemed given when received. No objection may be made to the manner of
delivery of any notice actually received in writing by an authorized agent of a
party.
11.4 NO THIRD-PARTY BENEFITS. None of the provisions of this
Agreement shall be for the benefit of, or enforceable by, any third-party
beneficiary, except that each of the Holders is a third-party beneficiary of
this Agreement whose rights may only be exercised by Secured Party in accordance
with the terms of the Intercreditor Agreement.
11.5 NO ASSIGNMENT. Neither of the parties may assign any of his
or its rights under this Agreement without the prior written consent of the
other, which shall not be unreasonably withheld; provided, however, that Secured
Party may assign this Agreement to any successor agent under the Intercreditor
Agreement.
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11.6 SUCCESSORS AND ASSIGNS. The covenants, representations,
warranties and agreements herein set forth shall be binding upon Debtor and
shall inure to the benefit of Secured Party and his permitted successors and
assigns. Subject to the foregoing, the term "Debtor," as used throughout this
Agreement shall, regardless of use of the singular form, include the successors,
legal representatives and permitted assigns of Debtor.
11.7 GOVERNING LAW: JURISDICTION. This Agreement has been
negotiated in part in, the conveyance, assignment, transfer and delivery has
been made in, and the security interest granted hereby is granted in, and each
shall be governed by the laws of, the State of Texas in all respects, including
matters of construction, validity, enforcement and performance, regardless of
the choice of law provisions of Texas or any other jurisdiction. Any and all
disputes between the parties which may arise pursuant to this Agreement and not
resolved by them will be heard and determined before an appropriate federal or
state court located in Houston, Texas. The parties hereto acknowledge that such
courts have the jurisdiction to interpret and enforce the provisions of this
Agreement and the parties waive any and all objections that they may have as to
personal jurisdiction or venue in any of the above courts.
11.8 WAIVERS STRICTLY CONSTRUED. With regard to any power, remedy
or right provided herein or otherwise available to any party hereunder (i) no
waiver or extension of time shall be effective unless expressly contained in a
writing signed by the waiving party; and (ii) no alteration, modification or
impairment shall be implied by reason of any previous waiver, extension of time,
delay or omission in exercise, or by any other indulgence.
11.9 RULES OF CONSTRUCTION.
11.9.1 HEADINGS. The Article and Section headings in this
Agreement are inserted only as a matter of convenience, and in no way define,
limit, or extend or interpret the scope of this Agreement or of any particular
Article or Section.
11.9.2 TENSE AND CASE. Throughout this Agreement, as the
context may require, references to any word used in one tense or case shall
include all other appropriate tenses or cases.
11.9.3 SEVERABILITY. The validity, legality or
enforceability of the remainder of this Agreement will not be affected even if
one or more of the provisions of this Agreement will be held to be invalid,
illegal or unenforceable in any respect.
11.9.4 AGREEMENT NEGOTIATED. The parties hereto are
sophisticated and have been represented throughout this transaction by lawyers
who have carefully negotiated the provisions hereof. As a consequence, the
parties do not believe that the presumptions of any laws or rules relating to
the interpretation of contracts against the drafter of any particular clause
should be applied in this case and therefore waive their effects.
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11.9.5 TERMS DEFINED IN UNIFORM COMMERCIAL CODE. Except as
the context may otherwise require, any term used herein that is defined in the
Texas Uniform Commercial Code shall have the meaning given therein.
11.10 COUNTERPARTS. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date FIRST above written.
"Secured Party"
________________________________________
Xxxxxxx X. XxXxxxx
"Debtor"
JALATE, LTD., a California corporation
/s/ XXXXXXXXX X. XXXXXXX
----------------------------------------
By: Xxxxxxxxx X. Xxxxxxx
Its: Vice President and Chief
Financial Officer
Address:
0000 Xxxxxxxx Xxxxxx
Xxx Xxxxxxx, Xxxxxxxxxx 00000
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"Secured Party"
/s/ XXXXXXX X. XXXXXXX
----------------------------------------
Xxxxxxx X. XxXxxxx
"Debtor"
JALATE, LTD., a California corporation
________________________________________
By: Xxxxxxxxx X. Xxxxxxx
Its: Vice President and Chief
Financial Officer
Address:
0000 Xxxxxxxx Xxxxxx
Xxx Xxxxxxx, Xxxxxxxxxx 00000
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SCHEDULE 1
NOTES AND HOLDERS
Holder Note Amount Percentage
------ ----------- ----------
Xxx X. Xxxxxxx $237,500 25%
Xxxxxxxxx X. Xxxxxxx $142,500 15%
Xxxx X. Xxxxx $95,000 10%
Xxxxxxx X. XxXxxxx $475,000 50%
-------- ----
Total $950,000 100%
-------- ----
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SCHEDULE 2
LETTER AGREEMENT
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Airshop Ltd.
000 Xxxx 00xx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
October 17, 1997
Jalate, Ltd.
0000 Xxxxxxxx Xxxxxx
Xxx Xxxxxxx, Xxxxxxxxxx 00000
Attn: Xxxx Xxxxxxx
Xxxxxxxxx Xxxxxxx
000 Xxxx 00xx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Dear Xx. Xxxxxxx and Xx. Xxxxxxx:
The purpose of this letter is to set forth the terms and conditions of
our agreement (the "Agreement") regarding an equity investment by Jalate, Ltd.
(the "Purchaser") in Airshop Ltd. (the "Company"), consisting of the purchase
by Buyer of (i) shares (the "Common Shares") of common stock (the "Common
Stock") of the Company representing forty percent (40%) of the outstanding
capital stock of the Company on a fully-diluted basis and (ii) 3,000 shares
(the "Preferred Shares") of convertible preferred stock of the Company,
liquidation preference $100 per share (the "Preferred Stock").
1. Sale and Purchase of Common Shares and Preferred Shares. Subject to
the terms and conditions hereof, the Company agrees to sell to the Purchaser,
and the Purchaser agrees to purchase from the Company, (i) Common Shares
representing forty percent (40%) of the outstanding capital stock of the
Company on a fully-diluted basis (measured as of the Closing Date (as defined
below)) for an aggregate purchase price of $200,000 and (ii) 3,000 Preferred
Shares for an aggregate purchase price of $300,000.
2. Closing; Payment. The closing (the "Closing") of the purchase and
sale of the Common Shares and the Preferred Shares shall take place at the
offices of Irell & Xxxxxxx LLP, located at 0000 Xxxxxx xx xxx Xxxxx, Xxxxx 000,
Xxx Xxxxxxx, Xxxxxxxxxx 00000-0000 (Telephone (000) 000-0000, Fax (310)
000-0000) as soon as practicable following the satisfaction or waiver of the
conditions to the Closing, or at such other place, date or time as the parties
shall agree upon (said date is referred to as the "Closing Date"), but in no
event later than October 31, 1997. At the Closing, the Purchaser shall pay the
aggregate purchase price of $500,000 for the Common Shares and the Preferred
Shares by (i) cancellation of any indebtedness then owing by the Company to the
Purchaser and, if such indebtedness is less than $500,000, (ii) wire
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transfer in immediately available funds of the balance of such aggregate
purchase price to an account designated in writing by the Company at least one
business day prior to the Closing.
3. DELIVERY OF STOCK CERTIFICATES. At the Closing, or as soon as
practicable thereafter, the Company shall deliver to the Purchaser certificates
evidencing the Purchaser's ownership of the Common Shares and the Preferred
Shares as set forth in Section 1 hereof.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Purchaser that:
a. The Company is a corporation duly organized and existing in good
standing under the laws of New York and has the corporate power to own its
property, to carry on its business as now being conducted, to enter this
Agreement, to issue and sell the Common Shares and the Preferred Shares, and to
carry out the provisions hereof. The Company is duly qualified to do business
as a foreign corporation in each other jurisdiction where the nature of the
property owned or leased by it or the conduct of its business requires such
qualification, except where the failure to be so qualified would not be
reasonably likely to have a material adverse effect on the Company's business,
financial condition or results of operations. The Company does not presently
own or control, directly or indirectly, any interest in any other corporation,
partnership, trust, joint venture, association or other entity.
b. The authorized capital stock of the Company, on the Closing
Date, will consist of Three Hundred (300) shares of Common Stock and Four
Thousand (4,000) shares of Preferred Stock and the issued and outstanding
capital stock of the Company, on the Closing Date, and immediately prior to the
purchase of the Common Shares and the Preferred Shares, will consist of Ten (10)
shares of Common Stock, all of which shares are owned by Xxxxxxxxx Xxxxxxx.
After giving effect to the consummation of the transactions at the Closing,
there will be validly issued and outstanding, fully paid and nonassessable, One
Hundred (100) shares of Common Stock (sixty (60) of which will be owned by
Xxxxxxxxx Xxxxxxx and forty (40) of which will be owned by the Purchaser), and
Three Thousand (3,000) shares of Preferred Stock (all of which will be owned by
the Purchaser), all of which shares shall have been issued in full compliance
with all federal and state securities laws.
c. The Company will not have outstanding as of the Closing Date any
options, warrants or rights to purchase any of its Common Stock, nor have
agreed to grant any such options, warrants or rights, nor have issued or agreed
to issue any security convertible into Common Stock, nor have issued or agreed
to issue any other debt or equity security (other than bank notes).
d. All corporate action on the part of the Company, its officers,
directors and shareholders necessary for the authorization, execution, delivery
of, and the performance of all obligations of the Company under, this
Agreement, and the
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authorization, issuance, reservation for issuance and delivery of the Common
Shares and the Preferred Shares and of the shares of Common Stock issuable upon
conversion of the Preferred Shares has been taken or will be taken prior to the
Closing. This Agreement is a valid and binding obligation of the Company
enforceable in accordance with its terms, subject, as to enforcement of
remedies, to applicable bankruptcy, insolvency, moratorium, reorganization and
similar laws affecting creditors' rights generally and to general equitable
principles. The Common Stock and the Preferred Stock is not subject to any
preemptive rights, rights of first refusal or other similar rights.
e. The execution and delivery of this Agreement, consummation of
the transactions contemplated hereby, and compliance with the terms and
provisions hereof will not conflict with or result in a breach (with or without
the passage of time or the giving of notice or both) of the terms and
conditions of, or constitute any default under the Certificate of Incorporation
or Bylaws of the Company or of any contract or agreement to which it is now a
party, except where such conflict, breach or default of any such contract or
agreement, either individually or in the aggregate, would not be reasonably
likely to have a material adverse effect on the Company's business, financial
condition or result of operations.
f. The Company has furnished the Purchaser with its balance sheet
dated September 30, 1997 (the "BALANCE SHEET DATE"), and an income statement
flows for the nine-month period ended September 30, 1997 (such financial
statements being collectively referred to herein as the "FINANCIAL
STATEMENTS"). Such Financial Statements (i) were prepared in accordance with
generally accepted accounting principles, consistently applied, (ii) are in
accordance with the books and records of the Company, and (iii) are true,
correct and complete in all material respects and present fairly the financial
condition of the Company at the date or dates therein indicated and the results
of operations for the period or periods therein specified. Except as accrued in
the Financial Statements or set forth in the notes thereto, the Company has no
debts, liabilities or obligations (whether absolute, accrued, contingent, or
otherwise, mature or unmatured, and whether due or to become due), which debts,
liabilities or obligations are either required to be reflected in the Financial
Statements or the notes thereto in accordance with generally accepted
accounting principles or material to the Company, except for debts, liabilities
and obligations incurred since the Balance Sheet Date in the ordinary course of
business and consistent with past practice. All debts, liabilities and
obligations of the Company incurred after the Balance Sheet Date were incurred
in the ordinary course of business and are usual and normal in amount (in
relation to the Company's past practice). The Company has good and marketable
title to all assets set forth on the balance sheets of the Financial
Statements, except for such assets as have been spent, sold or transferred in
the ordinary course of business since their respective dates.
g. To the best knowledge of the Company, no representation or
warranty by the Company in this Agreement or in any statement or certificate
signed by an officer of the Company furnished or to be furnished to the
Purchaser pursuant to this Agreement contains or will contain any untrue
statement of a material fact which would
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cause the statements made herein or therein in the light of the circumstances
materially misleading.
h. Neither the Company, nor any agent acting on its behalf, has
offered or will offer any or all of the Common Shares or the Preferred Shares
or any part thereof for sale to, or has solicited, or will solicit, any offers
to buy the Common Shares or the Preferred Shares from any person or persons so
as to bring the issuance or sale of the Common Shares or the Preferred Shares
within the provisions of Section 5 of the Securities Act of 1933, as amended
(the "SECURITIES ACT").
5. Representations and Warranties of the Purchaser. The Purchaser
represents and warrants to the Company that:
a. The Purchaser is an "accredited investor" as such term is defined
in Regulation D adopted by the Securities and Exchange Commission and Purchaser
is acquiring the Common Shares and the Preferred Shares purchased hereunder for
the Purchaser's own account for investment and not with a present view to, or
for sale or other disposition in connection with, any distribution thereof, nor
with any present intention of selling or otherwise disposing of the same, and
the Purchaser by reason of the Purchaser's business or financial experience has
the capacity to protect the Purchaser's own interests in connection with the
purchase of the Common Shares and the Preferred Shares.
b. The Purchaser has reviewed all documents and other materials the
Purchaser has requested for the purpose of examining the financial, business
and other status of the Company.
6. Conditions to Obligations of the Purchaser. The Purchaser's
obligation to purchase the Common Shares and the Preferred Shares on the
Closing Date as provided in Sections 1 and 2 hereof shall be subject to the
satisfaction of the following conditions, any of which may be waived by the
Purchaser in writing:
a. The representations and warranties contained in Section 4 hereof
shall be true in all material respects as of the Closing Date; there shall
exist no condition, event or fact constituting, or which with notice or lapse
of time, or both, would constitute a default in the observance of any of the
Company's undertakings or covenants hereunder; and no event shall have occurred
which would be reasonably likely to have a material adverse effect on the
Company's business, financial condition, results of operations or prospects.
b. All corporate and other proceedings, including, without limiting
the generality of the foregoing, the amendment of the Company's Certificate of
Incorporation (and the filing thereof) to effect the stock split and provide
for the Preferred Stock as contemplated by clause (f) below, which are required
to be taken in connection with the transactions contemplated hereby and all
documents incident thereto shall be satisfactory in form and substance to the
Purchaser and Purchaser's counsel.
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c. The offer and sale of the Common Shares and the Preferred Shares
to the Purchaser pursuant to this Agreement shall be exempt from the
registration requirements of the Securities Act and the registration and
qualification requirements of all other applicable state securities laws.
d. The Company shall have obtained any and all necessary consents
and approvals, including those of any governmental entity, agency or
instrumentality, necessary or appropriate for consummation of the transactions
contemplated by this Agreement.
e. The Company shall have (a) amended its bylaws to provide that
(i) the Board of Directors (the "BOARD") of the Company shall consist of three
(3) directors and (ii) the presence of all members of the Board or any committee
thereof shall be necessary for a quorum, unless in advance of any meeting of the
Board or any committee thereof, all of the members of the Board or of such
committee agree in writing that a majority of the members of the Board or of
such committee, as applicable, shall constitute a quorum for the purposes of
that meeting and (b) reconstituted the Board to consist of Xxxxxx Xxxxx,
Xxxxxxxxx Xxxxxxx and Xxxxxx Xxxxxxxx.
f. The Company shall have amended its articles of incorporation to
(i) effect a six-for-one stock split of the Common Stock and (ii) provide for
the Preferred Stock. The Preferred Stock shall (i) have a liquidation preference
of $100 per share, (ii) have a ten percent (10%) dividend, payable "in-kind" for
two years and in cash thereafter, (iii) automatically convert into Common Stock
when the Company has four consecutive fiscal quarters of earnings before income
and taxes of at least $1 with a conversion rate determined by dividing (x) the
liquidation preference of a share of Preferred Stock, plus accumulated but
unpaid dividends through the date of conversion, by (y) the greater of (i) ten
(10) times the after-tax net income per fully-diluted share of Common Stock
("ATNI") for the Company's then-most recently completed fiscal year and (ii) the
quotient of (a) $500,000 divided by (b) the number of shares of Common Stock
then-outstanding on a fully-duluted basis, (iv) be redeemable at the option of
the Company at any time, (v) be subject to repurchase by the Company at the
option of the holder beginning three (93) years after issuance, and (vi) have
such other customary rights, preferences and privileges as shall be agreed by
the Company and the Purchaser in good faith.
g. Xxxxxxxxx Xxxxxxx shall have entered into a five-year employment
agreement to serve as chief creative officer of the Company and providing for a
$50,000 annual salary (to be reviewed by the entire Board in January 1998) and
an annual bonus by unanimous agreement of the Board based on EBIT (earnings
before interest and taxes) and containing other terms and conditions
satisfactory to the Purchaser.
h. At the Closing there shall have been delivered to the Purchaser
or Purchaser's counsel a certificate, dated as of the Closing Date, signed by an
authorized
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officer of the Company, certifying that the conditions specified in clauses
(a), (c), (e), (f) and (g) of this Section 6 have been fulfilled.
7. Covenants of the Company. The Company covenants and agrees that:
until the consummation of an underwritten public offering of the Company's
Common Stock in which the gross proceeds to the Company are at least
$15,000,000 (a "QUALIFYING IPO"):
a. In order to permit the Purchaser to maintain its percentage
ownership interest in the Company (as represented by its ownership of Common
Stock and without regard to possible conversion of the Preferred Shares into
shares of Common Stock), if the Company offers to sell its Common Stock,
Preferred Stock or other equity security, any option, warrant or other security
which may be exercised or exchanged for equity securities of the corporation,
or any debt convertible into equity securities of the corporation, it will
concurrently offer to the Purchaser for a period of thirty (30) days from
receipt of a notice to that effect from the Company specifying the terms and
conditions of the offering, at a price and on terms no less favorable than the
price and terms of such offer, that number of such securities being offered
necessary to prevent a reduction in the Purchaser's then-percentage ownership
of the Company's Common Stock calculated on a fully diluted basis as of the
closing of the offering and taking into account all similar rights held by
other holders of the Company's debt or equity securities.
If the Purchaser elects not to exercise its rights set forth in this
Section 7(a), then, for a period of ten (10) days after the Purchaser so
notifies the Company, Xxxxxxxxx Xxxxxxx shall have the right to purchase the
securities not purchased by the Purchaser. The Purchaser and Xx. Xxxxxxx may
elect to allocate between themselves the securities that Purchaser has the
right to purchase pursuant to this Section 7(a).
b. The Board shall consist of three members and as of the Closing
shall consist of Xxxxxx Xxxxx, Xxxxxxxxx Xxxxxxx and Xxxxxx Xxxxxxxx. The
number of directors may be increased or decreased, and the composition of the
Board may be changed, only by unanimous agreement of the Board, except that, at
the request of the Purchaser, the Company agrees to take any such actions as
may be necessary to change the Purchaser's nominee(s) on the Board. At all
times, the Purchaser shall be entitled to proportional representation (based on
its then-percentage ownership interest of the fully-diluted Common Stock) on
the Board and each Board committee (and in any event shall be entitled to have
at least one nominee on the Board and each Board committee).
c. Commencing October 1, 1998, (i) the Purchaser shall have the
right to manufacture any and all private label merchandise included in the
Company's catalogs or advertised on the Company's website(s) and (ii) at least
forty percent (40%) of the products advertised in each catalog shall be private
label merchandise. Prior to October 1, 1998, the Purchaser and the Company
shall mutually cooperate to maximize the percentage of the Company's private
label merchandise that is manufactured by the Purchaser and included in the
Company's catalogs, provided that this shall not be
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deemed to require that any specified percentage of the Company's private label
merchandise be manufactured by the Purchaser or that private label merchandise
constitute any specified percentage of the Company's catalog offerings.
d. The Purchaser shall be entitled to include at least four (4) of
its own products without charge in each of the Company's catalogs and on the
Company's website(s).
e. Without the consent of the Purchaser's nominee(s) on the Board,
the Company shall not (i) revise its existing Business Plan or adopt a new
Business Plan, (ii) authorize or engage in any capital expenditure (or series
of related capital expenditures) in excess of $15,000 or (iii) enter into any
contract, agreement or arrangement having a value of more than $20,000.
8. Rights of First Refusal. (a) Until the consummation of a Qualifying
IPO, the Company shall have a right of first refusal to purchase any shares of
Common Stock or Preferred Stock which Purchaser seeks to sell or assign (a
"FIRST REFUSAL SALE"). The Purchaser shall provide the Company with thirty (30)
days written notice of any proposed First Refusal Sale, including the proposed
terms and conditions thereof (including price). The Company shall have thirty
(30) days from receipt of such notice in which to notify the Purchaser in
writing that it will exercise its right of first refusal. if the Company
exercises its right of first refusal, the closing of the sale by the Purchaser
to the Company shall occur fifteen (15) days after the date of the Company's
exercise notice at the Company's principal executive offices or at such other
time and place as the parties may agree. If the Company does not exercise its
right of first refusal, the Purchaser shall have ninety (90) days from the date
of its initial notice to the Company to consummate its First Refusal Sale on
terms and conditions (including price) no more favorable to the transferee than
those presented to the Company. If the proposed First Refusal Sale does not
occur prior to the end of such ninety (90) day period, the Purchaser may not
sell or assign any shares of Common stock or Preferred Stock without again
complying with the requirements set forth in this paragraph (if then
applicable).
The Company's right of first refusal shall not apply to any sale or
assignment of shares of Common Stock or Preferred Stock by the Purchaser to any
of its affiliates.
(b) Until the consummation of a Qualifying IPO, the Purchaser shall have a
right of first refusal to purchase any shares of Common Stock which Xxxxxxxxx
Xxxxxxx seeks to sell or assign (a "XXXXXXX FIRST REFUSAL SALE"). Xx. Xxxxxxx
shall provide the Purchaser with thirty (30) days written notice of any
proposed Xxxxxxx First Refusal Sale, including the proposed terms and
conditions thereof (including price). The Purchaser shall have thirty (30) days
from receipt of such notice in which to notify Xx. Xxxxxxx in writing that it
will exercise its right of first refusal. If the Purchaser exercises its right
of first refusal, the closing of the sale by Xx. Xxxxxxx to the Purchaser shall
occur fifteen (15) days after the date of the Purchaser's exercise notice at
the Purchaser's principal executive offices or at such other time and place as
the parties
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may agree. If the Purchaser does not exercise its right of first refusal, Xx.
Xxxxxxx shall have ninety (90) days from the date of her initial notice to the
Purchaser to consummate her Xxxxxxx First Refusal Sale on terms and conditions
(including price) no more favorable to the transferee than those presented to
the Purchaser. If the proposed Xxxxxxx First Refusal Sale does not occur prior
to the end of such ninety (90) day period, Xx. Xxxxxxx may not sell or assign
any shares of Common Stock without again complying with the requirements set
forth in this paragraph (if then applicable).
The Purchaser's right of first refusal shall not apply to any sale or
assignment of shares of Common Stock by Xx. Xxxxxxx to any of her affiliates.
9. Option to Purchase Additional Shares of Common Stock. Effective at
the Closing, the Company grants to the Purchaser an option to purchase a number
of additional shares of Common Stock (the "ADDITIONAL COMMON SHARES") that,
when added to any other shares of Common Stock then owned by the Purchaser,
would result in the Purchaser owning, immediately following exercise of he
option, fifty-one percent (51%) of the then-outstanding Common Stock of the
Company on a fully-diluted basis. The option may be exercised in whole or in
part on only one occasion and shall expire if not theretofore exercised on
December 31, 2000. The exercise price per Additional Common Share shall be
equal to the greater of (i) $5,000, subject to adjustment for stock splits,
stock dividends, combinations, reclassifications and other similar events and
(ii) ten (10) times the after-tax net income per fully-diluted share of Common
Stock ("ATNI") for the year ended December 31, 1998 (if the option is exercised
on or prior to December 31, 1999) or, if not so exercised by then, ten (10)
times ATNI for the year ended December 31, 1999. Any dispute between the
parties as to the calculation of the applicable ATNI not resolved by them shall
be resolved by an independent accounting firm acceptable to the Company and the
Purchaser.
If the Purchaser exercises its option at a time when the exercise price
has not been or cannot be finally determined, the Purchaser shall pay an
estimated exercise price of $5,000 per share (i.e., the price per share paid by
the Purchaser for the Common Shares), adjusted for stock splits, stock
dividends, combinations, reclassifications and other similar events. If the
exercise price as finally determined is greater than the estimated exercise
price, the Purchaser shall, within ten (10) days of such determination, pay the
balance of the exercise price to the Company. If the exercise price as finally
determined is less than the estimated exercise price, the Company shall, within
ten days of such determination, refund the excess payment of the exercise price
to the Purchaser.
The Purchaser acknowledges and agrees that, if it acquires ownership of
more than fifty percent (50%) of the outstanding Common Stock on a
fully-diluted basis, whether by exercise of the option granted to it pursuant
to this Section 9 or otherwise, Xx. Xxxxxxx shall retain the creative control
provided for in the employment agreement contemplated by Section 6(g) hereof.
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10. Termination. This Agreement may be terminated at any time prior to the
Closing:
a. by mutual consent of the Company and the Purchaser;
b. by the Purchaser, provided that it has not breached any of its
obligations hereunder in any material respect, if any of the conditions
specified in Section 6 have not been met or waived at such time as such
condition is no longer capable of satisfaction; or
c. by either the Purchaser or the Company (provided that the
terminating party has not breached any of its obligations hereunder in any
material respect) if the Closing has not occurred by October 31, 1997.
11. Miscellaneous. The miscellaneous provisions set forth in Exhibit 11
are incorporated herein in their entirety by this reference.
If the foregoing accurately reflects our agreement with regard to the
proposed equity investment by the Purchaser in the Company, please sign and
return a copy of this letter to the undersigned, at which time this Agreement
will be the binding agreement of the Company and the Purchaser.
Very truly yours
/s/ XXXXXXXXX XXXXXXX
----------------------------------------
Xxxxxxxxx Xxxxxxx
ACCEPTED AND AGREED TO:
JALATE, LTD.
By: /s/ X.X. XXXXXXX
-----------------------------------
Name: X.X. Xxxxxxx
---------------------------------
Title: VP Finance
--------------------------------
XXXXXXXXX XXXXXXX
(as to Section 8(b) and the
miscellaneous provisions)
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EXHIBIT 11
Miscellaneous Provisions
a. This Agreement constitutes the entire agreement between the
parties hereto pertaining to the subject matter contained herein and supersedes
any and all other prior or contemporaneous agreements, arrangements, and
understandings, either oral or in writing, between the parties hereto with
respect to the subject matter hereof. Each party to this Agreement acknowledges
and represents that no representations, warranties, covenants, conditions,
inducements, promises or agreements, oral or otherwise, other than as set forth
herein, have been made by any party hereto, or anyone acting on behalf of any
party.
b. Each party to this Agreement shall make, execute, acknowledge
and deliver such other instruments and documents and take all such other action
as may be reasonably required to effectuate the purposes of this Agreement and
to consummate the transactions contemplated hereby. In particular, but not by
way of limitation of the foregoing, Xx. Xxxxxxx agrees to take such actions in
her capacity as a stockholder of the Company as are necessary to effectuate the
conditions to Closing set forth in Section 6 and the Purchaser's rights
pursuant to Section 7(b).
c. No waiver of any term, provision, condition or breach of this
Agreement, whether by conduct or otherwise, in any one or more instances, shall
be deemed to be or construed as a further or continuing waiver of any such
term, provision, condition or breach of this Agreement. No failure or delay by
a party to exercise any right it may have by reason of the breach or default of
any other party shall operate as a waiver of default or modification of this
Agreement or prevent the exercise of any right while the party continues to be
in default.
d. The Company acknowledges that the Purchaser would not have an
adequate remedy at law for money damages in the event that any of the covenants
or agreements of the Company set forth in Sections 7 and 9 hereof were not
performed in accordance with its terms and therefore agrees that the Purchaser
shall be entitled to specific enforcement of such covenants or agreements and
to injunctive and other equitable relief in addition to any other remedy to
which it may be entitled, at law or in equity.
e. It is intended that each section of this Agreement should be
viewed as separate and divisible, and in the event that any section, provision,
covenant, or condition of this Agreement shall be held to be invalid, void, or
unenforceable, the remainder of the provisions shall remain in full force and
effect and shall in no way be affected, impaired, or invalidated.
f. The provisions of this Agreement may be altered, amended, or
repealed, in whole or in part, only on the written consent of the Company and
the Purchaser (and, as to Section 8(b), Xx. Xxxxxxx).
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g. All notices, requests, demands and other communications which a
party is required to or may desire to give any other party in connection with
this Agreement shall be in writing, and shall be personally delivered, delivered
by facsimile transmission, or delivered by United States registered or certified
mail, postage prepaid with return receipt requested, addressed as follows:
If to the Company: Xxxxxxxxx Xxxxxxx
Airshop Ltd.
000 Xxxx 00xx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Fax No. (000) 000-0000
If to the Purchaser: Xxxx Xxxxxxx
Jalate, Ltd.
0000 Xxxxxxxx Xxxxxx
Xxx Xxxxxxx, Xxxxxxxxxx 00000
Fax No. (000) 000-0000
If to Xxxxxxxxx Xxxxxxx: Xxxxxxxxx Xxxxxxx
Airshop Ltd.
000 Xxxx 00xx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Fax No. (000) 000-0000
If notice is given by personal delivery in accordance with the provisions of
this clause (g), such notice shall conclusively be deemed given at the time of
delivery. If notice is given by confirmed facsimile transmission in accordance
with the provisions of this clause (g), such notice shall conclusively be deemed
given at the time of the transmission. If notice is given by mail in accordance
with the provisions of this clause (g), such notice shall conclusively be deemed
given 48 hours after deposit thereof in the United States mail. The addresses or
addresses set forth above may be changed form time to time by a notice sent to
the other parties.
h. This Agreement shall be governed by and construed under the laws
of the State of California, without reference to conflict of laws principles.
Any and all disputes between the parties which may arise pursuant to this
Agreement not covered by arbitration shall be brought and heard only in an
appropriate state or federal court located in the County of Los Angeles,
California. The parties hereto acknowledge that such courts have, in the absence
of arbitration, the exclusive jurisdiction to interpret and enforce the
provisions of this Agreement, and the parties waive any and all objections that
they may have as to personal jurisdiction or venue in any of the above courts.
i. Except for actions seeking injunctive relief, which may be
brought before any court having jurisdiction, any dispute, controversy or claim,
regardless of the legal or equitable theory involved, arising out of or with
reference to this Agreement, or the interpretation, making, performance, breach
or termination thereof, which is not
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settled by agreement between the parties, shall be finally resolved, at the
request of either party to the dispute, by confidential binding arbitration
conducted in Los Angeles, California in accordance with the then most applicable
rules of the American Arbitration Association, and judgment upon any award
rendered by the arbitrator may be entered by any state or federal court having
jurisdiction thereof. In any such arbitration, the arbitrator shall have the
jurisdiction and authority to issue any remedy (but only such remedy) that a
court of competent jurisdiction could have provided based upon the facts found
by the arbitrator. After soliciting the views of each party, the arbitrator
shall order such discovery as he or she may consider reasonable and appropriate
given the subject matter of the dispute. At the conclusion of the proceeding,
the arbitrator shall issue a written opinion setting forth the legal analysis
and basis for his or her decision and material findings of fact. In the event
either party to the dispute shall suspend its or her performance on the basis
that its or her performance has been excused by a material breach by the other
party, either party seeking performance may request preliminary relief from the
arbitrator and the parties agree to cooperate to have such issue heard on an
expedited basis. The arbitrator may hear such issue on a preliminary basis and
may grant such preliminary relief, and under such conditions, as the arbitrator
shall deem to be appropriate and equitable. In the event the parties are unable
to agree upon an arbitrator, the parties shall select a single arbitrator from a
list designated by the nearest office of the American Arbitration Association of
seven arbitrators, all of whom shall be retired judges who have had experience
in the corporate law, who are actively involved in hearing private cases and who
are resident in the greater Los Angeles area. If the parties are unable to
select an arbitrator from the list provided by the American Arbitration
Association, then the parties shall each strike names alternatively from the
list, with the first to strike being determined by lot. After each party has
used three strikes, the remaining name on the list, with the first to strike
being determined by lot. After each party has used three strikes, the remaining
name on the list shall be the arbitrator. The parties intend that this agreement
to arbitrate be valid, enforceable and irrevocable and that it provide the
exclusive remedy with respect to all disputes within its scope. The fees and
expenses of the arbitrator shall initially be divided evenly between the
parties. Thereafter they shall be treated as costs pursuant to subparagraph (j).
j. If any action at law or equity, including an action for
declaratory relief, or any proceeding in arbitration, is brought to enforce or
interpret the provisions of this Agreement, the successful or prevailing party
shall be entitled to recover reasonable attorneys' fees, and other costs
incurred in that action or proceeding which may be set by the court or the
arbitration panel in the same action or any separate action brought for that
purpose, in addition to any other relief to which such party may be entitled.
k. Captions contained in this Agreement are inserted only
as a matter of convenience and shall not affect the construction or
interpretation of any of its provisions.
l. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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m. Any calculations of the Purchaser's ownership interest in the
Company on a fully-diluted basis shall not take into account any possible
conversion of the Preferred Shares into shares of Common Stock, although such
possible conversion shall be taken into account in determining EBIT and ATNI.
13
