ANCILLARY AGREEMENT
Agreement
dated as of October 10, 2008 by and among Blue Holdings, Inc., a Nevada
corporation (“BH”), Xxxx
Xxxx, the founder of BH (“Founder”), and Headgear, Inc., a Virginia
corporation (“HG”). BH, Founder and HG shall be referred
to individually as a “Party” and collectively as the
“Parties.”
R E C I T A L S
A. BH
manufactures and sells denim apparel, including jeans under the names
“Taverniti,” Antik,” and “Yanuk.”
B. HG
manufactures and sells apparel and footwear.
C. The
parties signed a letter of intent in July 2008, (the “LOI”) regarding the
establishment of a joint venture company to co-market designated apparel product
lines to selected retailers. Thereafter, to more fully define their rights and
obligations the parties entered into a Joint Venture Agreement dated October 10,
2008 (the “JV Agreement”).
D. As
contemplated by the JV Agreement, contemporaneously herewith BH and HG are
entering into an Operating Agreement with respect to the governance of Blue Holdings Head Gear JV
LLC, a newly
formed Delaware limited liability company (the “Company”), in which each of them
will have a 50% equity interest.
NOW,
THEREFORE, in consideration of the above Recitals and the mutual promises,
agreements and covenants set forth in this Agreement, the parties hereto agree
as follows:
1. Conversion of BH Preferred
Stock. Upon execution of this Agreement, the Founder will, and
will cause certain related parties, to convert the shares of preferred stock of
BH indicated on Schedule 1 into the number of shares of BH Common Stock
indicated on Schedule 1. Schedule 1 shall reference both the shares
of preferred stock and the identity of the related parties.
2. Escrow of
Securities. (a) Upon execution of this Agreement,
the Founder and if necessary, certain Related Parties will deposit 10,415,975
share of BH common stock, 707,916 Warrants (exercisable at 40 cents per share)
(the “Escrow Securities”) into an escrow account with ________ (the “Escrow
Agent”). For so long as the Escrow Securities are in escrow, the
current owners shall retain all voting rights and the right to receive any
distributions or other rights that may accrue with respect thereto except for
the proceeds of any sale of the Escrow Securities or the sale of any of the
assets of BH.
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(b)
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If:
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(i) the Founder is
released from all personal guarantees to FTC (BH’s factor), which for the
purposes of this Agreement shall include HG (or another guarantor acceptable to
FTC) becoming a co-guarantor on such obligation. Each party shall have a right
of contribution from the other party of up to 50% of any payment required under
the FTC guarantee,
(ii) Neither HG nor the Company
defaults in any of its material obligations in favor of BH under the JV
Agreement or the Operating Agreement,
(iii) the JV has not been terminated or
dissolved, and
(iv) For the period
July 1, 2009 to June 30, 2010, the Company’s sales revenues is equal to or
greater than 150% of the full
price sales revenue of BH in 2008 for the BH brands to be distributed by
the Company, based upon the audited figures of BH’s 2008 actual retail sales to
customers paying “full price” and during 2008 and during such period the Company
generates a net profit of $1.5 million or more. BH’s sales figures
shall be audited by a CPA firm of HG’s choosing. Likewise, BH shall
be entitled to receive weekly sales figures from the Company and monthly
earnings reports, and all sales and earnings reports shall be subject to review
by a CPA firm of BH’s choosing.
The sales
figures referenced in the foregoing Section 2(b)(iv) are based BH’s
representation to HG that 2008 sales would reach
$20,000,000.00 Accordingly, the Parties agree that if the
above-referenced audited sales figure is less than $20,000,000.00, all Sales
& Income Targets shall be reduced on a pro rata basis.
Then the
Escrow Securities shall be released to HG. Further, if the Escrowed
Securities are released to HG and if the Founder shall convert any portion of
the Convertible Promissory Note into shares, HG shall have the right to buy ½ of
the shares issued as a result of such conversion from Founder at the conversion
price.
(c) If on
or before, December 31, 2010, HG is not eligible to receive any Escrow
Securities pursuant to the foregoing clauses all Escrow Securities shall be
returned to the original owner thereof.
(d)
The Founder hereby represents and warrants that as of the date hereof, he and
his wife owned, directly or through various entities, 20,829,950 shares of the
Common Stock of BH, a warrant to purchase 1,415,832 shares of BH at 40 cents per
share and a Convertible Promissory Note convertible into 4,045,233 shares at 40
cents per share and that none of their children or any entity
controlled by any of them owns in the aggregate more than 200,00
shares of the Company. If the children or any entity directly or
indirectly controlled by the Founder, his spouse or children owned in the
aggregate more than 200,000 shares of BH as of July 16, 2008, the Founder shall
increase the escrow by ½ of such amount Founder represents that there
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3. Option to Purchase Shares BH
Common Stock.
Upon the
execution of this Agreement, BH will xxxxx XX an option in the form of Exhibit 5
to purchase 10,000,000 shares of BH Common Stock at a per share exercise price
of $0.25, which option may be exercised in whole or in part for a period of
three years after the Escrow Securities are released to HG as a result of the
satisfaction of the conditions set forth in Section 2(b).
BH
will grant to Xxxx Xxxx an option in the form of exhibit 5 to purchase 3,000,000
shares of BH common stock at a per share exercise price of $0.25 which option
may be exercised in whole part for a period of three years after the Escrow
Securities are released to HG.
4. Board
Seat. HG shall be entitled to one seat on the Board of
directors of BH. The individual must be one as to which BH has no
reasonable objection.
5. Taverniti and Yanuk
Brands. Immediately upon formation of the Company, Founder
shall assign to BH all of his revenues and distributions derived from his
holdings in Taverniti Holdings LLC, the entity that owns all trademarks for the
“Taverniti so jeans” brand. Promptly after the date hereof Founder
shall execute such documents as are necessary to transfer his interests in
Taverniti Holdings, LLC to BH and deposit the same with the Escrow
Agent. No later than August 30, 2010, Founder shall obtain all
necessary consents to transfer to BH his ownership interest in Taverniti
Holdings LLC, and if HG is entitled to receive the Escrowed Securities,
Founder’s interest in Taverniti Holdings shall be transferred to BH no later
than August 31, 2010. Until such transfer is completed, the
Founder will not otherwise transfer his interest in Taverniti Holdings LLC. As
consideration for his interest in Taverniti Holdings, upon deposit of the
Assignment of his interest in Taverniti Holdings into Escrow, BH shall deposit 5
million shares of its common stock into escrow which shall be released upon
released of the Assignment.
Immediately
upon formation of the Company, Founder shall assign to BH all of his revenues
and distributions derived from the Yanuk brand, except that Founder shall retain
his right to all revenues and distributions derived from international licenses
of the brand. Promptly after the date hereof Founder shall execute
such documents as are necessary to transfer his interests in Yanuk to BH and
deposit the same with the Escrow Agent. No later than August 30,
2010, if HG is entitled to receive the Escrowed Securities, Founder’s
interest in Yanuk shall be transferred to BH no later than August 31,
2010. Until such transfer is completed, the Founder will not
otherwise transfer his interest in Yanuk. Notwithstanding his
transfer of his interest in Yanuk, Founder shall be entitled to retain the
rights to all international licensing revenues derived from the Yanuk
brand. As consideration for his interest in Yanuk, upon deposit of
the Assignment of his interest in Yanuk into Escrow, BH shall deposit 2 million
shares of its common stock into escrow which shall be released upon released of
the Assignment.
There
shall be delivered to HG copies of all international licenses pertaining to
Yanuk or Taverniti, which shall be held in confidence.
5.1 Merger. If
the conditions are satisfied and the Escrow Securities are released from Escrow
as provided in Section 2(b), and there has been no material changes in the
holdings of BH (with the exception of changes resulting from the rights granted
to HG in 5.2 below) then promptly thereafter and in all events no later than
January 2, 2011, without any additional consideration to HG, the Company or its
operations shall be merged or consolidated into BH, the form of such transaction
to be as determined to be in the mutual interests of the parties.
5.2 Rights of First Refusal and
Consent. Promptly after the date hereof HG and BH shall enter
into an agreement whereby BH shall grant to HG (i) a right of first refusal
whereby if BH shall intend to sell any of its equity securities for cash, HG
shall have the right to purchase such amounts as is necessary to preserve its
relative ownership in BH and (ii) a right of consent whereby BH shall not issue
any of its securities (other than those underlying options issued to its
employees other than Xxxx Xxxx, in the ordinary course of business) for
consideration other than cash without the prior consent of HG.
6. Term and Termination.
(a) This Agreement shall become effective upon the execution hereof by BH and
HG, and it shall continue in effect until the dissolution of the
Company.
7. Governing Law. The
validity, performance, construction and effect of this Agreement shall be
governed by the laws of the State of New York, without regard to conflict of law
principles.
8. Waiver of Jury Trial.
Each Party hereby waives any right to a trial by jury in any action, lawsuit or
proceeding to enforce or defend any right under this JV Agreement, or any
amendment thereto, and agrees that any action, lawsuit or proceeding will be
tried before a court and not before a jury.
9. Non-Waiver of Other
Remedies. Failure of any Party to insist upon the strict and punctual
performance of any provision hereof shall not constitute waiver of nor estoppel
against asserting the right to require such performance, nor shall a waiver or
estoppel in one instance constitute a waiver or estoppel with respect to a later
breach whether of similar nature or otherwise. Subject to the
foregoing, nothing in this Agreement shall prevent a Party from enforcing its
rights by such remedies as may be available in lieu of or in addition to
termination
10. Notices. All notices,
requests, demands and other communications under this Agreement or in connection
herewith shall be given by letter (delivered by hand or by air courier) or by
facsimile transmission confirmed by such letter, and shall be addressed to the
Parties as follows:
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If to
BH:
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0000
Xxxxxxxx Xxxxxx
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Xxxxxxxx,
Xxxxxxxxxx
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Attention:
Xxxxx Xxxxxx
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Fax:
000 000-0000
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With a copy:
to:
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Xxxxxxx
X. XxXxxx, Esq.
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Xxxxx
& Xxx Xxxxxx, LLP
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0
Xxxx Xxxxxx
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Xxx
Xxxx, Xxx Xxxx 00000
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Fax:
000 000 0000
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If to
HG
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Headgear,
Inc.
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0000
Xxxxxxxx Xxxxx Xxxx
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Xxxxxxxx
Xxxxx, XX 00000-0000
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Attn:
Xxxx
Xxxxxx, Chief Executive Officer
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Fax:
___-_________
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With a copy
to:
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Xxxx
X. XxXxxxxx, Esq.
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Xxxxxxxxxxx
& XxXxxxxx, LLP
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00
Xxxxxxxx, Xxxxx 0000
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Xxx
Xxxx, Xxx Xxxx 00000
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Fax: 000-000-0000
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If to
Founder:
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Xxxx
Xxxx
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Apt.
35A
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000
X00xx Xxxxxx
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Xxx
Xxxx, Xxx Xxxx 00000
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With a copy:
to:
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Xxxxxxx
X. XxXxxx, Esq.
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Xxxxx
& Xxx Xxxxxx, LLP
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0
Xxxx Xxxxxx
Xxx
Xxxx, Xxx Xxxx 00000
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Any notice, request, demand or other
communication shall be effective (i) if given by facsimile, at the time such
facsimile is transmitted and the appropriate confirmation is received (or, if
such time is not during a normal business day, at the beginning of the following
business day), or (ii) if given by air courier, when delivered at the applicable
address specified above. Either Party may change its address at any time by
written notice to the other Party given pursuant to this Section
11.
11. Entire Agreement.
This Agreement supersedes all previous and contemporaneous representations,
understandings or agreements, oral or written, between the Parties with respect
to the subject matter hereof, and the agreements and documents contemplated
hereby contain the entire understanding of the Parties as to the terms and
conditions of their relationship. No changes, alterations or modifications
hereto shall be effective unless they are in writing and are signed by an
authorized representative of each Party. In the event of any conflict
between this Agreement and the Joint Venture Agreement among the parties, the
terms of this agreement shall govern.
12. Expenses. Each Party
shall pay all costs and expenses that it incurs with respect to the negotiation,
execution, delivery and performance of this Agreement.
13. Severability. In the
event that any provision of this Agreement becomes or is declared by a court or
other tribunal of competent jurisdiction to be illegal, invalid, unenforceable
or void, such provision(s) shall be limited or eliminated to the extent
necessary so that this Agreement shall otherwise remain in full force and effect
without said provision
14. Assignment. Neither
this Agreement nor any rights hereunder shall be assignable, directly or
indirectly, by any Party hereto without the prior written consent of the other
Parties, which consent shall not be unreasonably withheld or
delayed.
15. Headings. The
headings in this Agreement are included for convenience of reference only and do
not substantively affect the terms or interpretation of this
Agreement
16. Counterparts. This
Agreement may be executed in one or more counterparts, each of which, when
executed, shall be deemed to be an original and all of which together will be
deemed to be one and the same instrument. Delivery of an executed counterpart of
a signature page to this Agreement by facsimile transmission shall be effective
as delivery of a manually executed counterpart of this Agreement.
IN
WITNESS WHEREOF, the Parties have executed this Agreement as of the date first
set forth above.
| BLUE HOLDINGS, INC. | |||
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By:
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/s/ Xxxx Xxxxxx | |
| Xxxx Xxxxxx | |||
| Title: | Chief Executive Officer | ||
| HEADGEAR, INC. | |||
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By:
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/s/ Xxxx Xxxxxx | |
| Xxxx Xxxxxx | |||
| Title: | Chief Executive Officer | ||
Schedule
1
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Preferred Stock
Conversion
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Name of Holder
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Number of Shares of
Preferred
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Converts into Number of Common
Shares
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Xxxx
Xxxx
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1,000,000
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4,623,589
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