RESTATED SECURITY AGREEMENT
Exhibit
10.3
RESTATED
SECURITY AGREEMENT
THIS
AGREEMENT (the “Security
Agreement”),
signed February 19, 2004 but retroactively effective January 1, 2004, amends
and
restates in its entirety the SECURITY AGREEMENT dated January 13, 2004 between
and among AROTECH CORPORATION, a Delaware corporation (the “Buyer”),
FAAC
INCORPORATED, a Michigan corporation (the “Company”),
and
XXXX X. XXXXXX and XXX X. XXXX, the sole shareholders of the Company
(respectively “Jordan”
and
“Xxxx”
and
collectively the “Shareholders”).
WHEREAS,
pursuant to a STOCK PURCHASE/SALE AGREEMENT dated January 7, 2004 (the
“Agreement”),
(A) the
Buyer
has effective as of January 1, 2004 (the “Closing
Date”)
purchased from the Shareholders all of the outstanding shares of Common Stock
issued by the Company (the “Company
Common Stock”),
(B)
as partial consideration for the Company Common Stock, the Buyer, pursuant
to
Section 2.4 of the Agreement, has agreed to pay a portion of the purchase price
based upon the operations of the Company following the Closing Date (the
“Earnout
Consideration”)
and
(C) to secure payment of that Earnout Consideration, the Buyer has agreed to
grant to the Shareholders a second priority security interest and other rights
in the Company Common Stock and a first priority security interest in the
$6,000,000 in corporate bonds listed in Schedule A and any replacements or
substitutions thereof as permitted under the terms of this Agreement
(collectively, the “Debt
Instruments”).
NOW
THEREFORE, the Buyer, the Company and the Shareholders (each a “Party”
and two
or more collectively the “Parties”)
agree
as follows:
1. Grant
of Security Interest.
The
Buyer hereby grants to the Shareholders a security interest in and to the Debt
Instruments and the Company Common Stock (the “Security
Interest”)
to
secure the payment by the Buyer when due of all installments of the Earnout
Consideration. The Security Interest in the Debt Instruments is and will remain
a first priority security interest. The Security Interest in the Company Common
Stock is and will remain a second priority security interest, subordinate to
the
security interest granted by the Buyer to Smithfield Fiduciary, L.L.C.
(“Smithfield”)
but
will be senior to all other liens or security interests now or hereafter imposed
upon the Company Common Stock. The rights and obligations of the Buyer and
the
Shareholders under the Security Interest will be as prescribed in the Michigan
Uniform Commercial Code (the “Code”),
as
modified by the specific terms of this Agreement. The relative rights and
obligations of the Shareholders and Smithfield with respect to the Debt
Instruments and the Company Common Stock will be as prescribed in the LIEN
SUBORDINATION AND INTERECREDITORS AGREEMENT dated January 13, 2004, as amended
(the “Intercreditors
Agreement”)
between the Shareholders and Smithfield.
2. Covenants
Regarding Company Common Stock.
For so
long as any portion of the Earnout Consideration remains unpaid, unless
otherwise agreed in writing by the Shareholders, the Company shall, and the
Buyer shall cause the Company to, comply with each of the following covenants
with respect to the Company Common Stock (each a “Stock
Covenant”):
(a) Capitalization.
The
Company will not issue any capital stock to any party and will not make any
change to its capital structure.
(b) Dividends
and Distributions.
The
Company will not declare nor pay any dividends or other distributions in respect
of its capital stock.
(c) Income
Reinvestment.
Not
later than the January 31st
following the close of each calendar year, the Company will invest Fifty Percent
(50%) of its after-tax net income realized during that calendar year (as
determined in accordance with generally accepted accounting principles) in
a
debt instrument that meets the requirements detailed in Section 3(d) (an
“Income
Investment”),
which
debt instrument shall constitute an additional Debt Instrument for which the
Shareholders will have a first priority security interest as further security
for payment of the Earnout Consideration; and immediately upon making that
investment, perfect that security interest by the delivery of the original
copy
of the certificate or other document evidencing the Debt Instrument evidencing
that Income Investment to the “Escrow Agent” designated in Section
4.
(d) Debt
Financing.
The
Company will not incur any indebtedness other than indebtedness incurred in
the
ordinary course of the Company's business or indebtedness under a line-of-credit
loan from Smithfield or a licensed lending institution provided that the
proceeds of such loan are used only in the ordinary course of the Company’s
business and provided that the unpaid principal balance of that loan shall
at no
time exceed the lesser of the balance of the Company’s accounts receivable
securing that loan or $3,000,000.
(e) Fundamental
Transactions.
The
Buyer will refrain from any sale or encumbrance of all or any part of its
interest in the Company Common Stock and the Company will refrain from entering
into any merger, consolidation, joint venture or similar transaction and to
refrain from the sale of any of its assets other than the sale of inventories
in
the ordinary course of business.
If
and as
requested by the Shareholders from time to time, the Company shall, and the
Buyer shall cause the Company to, provide confirmation to the Shareholders
of
the Company’s compliance of each of these Stock Covenants and will permit the
Shareholders and their authorized representatives to have reasonable access
to
the books and records of the Company to verify that compliance.
3. Covenants
Regarding Debt Instruments.
For so
long as any portion of the Earnout Consideration remains unpaid, unless
otherwise agreed in writing by the Shareholders, the Company shall and the
Buyer
shall cause the Company to comply with each of the following covenants regarding
the Debt Instruments (each a “Debt
Instrument Covenant”):
(a)
No
Assignment.
Except
as provided in Section 3(c), the Company will not assign or negotiate any Debt
Instrument.
(b)
Interest
Payments.
For so
long as there is no “Event of Default” hereunder (as defined in Section 5), the
Company will be entitled to receive and retain all interest that is accrued
and
paid with respect to the Debt Instruments. If and for so long as any “Event of
Default” occurs and continues, such interest shall be re-invested in a new Debt
Instrument that meet the requirements detailed in Section 3(e).
(c) Principal
Payments.
Any
principal payments received with respect to the Debt Instruments shall be
re-invested in a new Debt Instrument that meet the requirements detailed in
Section 3(e).
(d)
Replacement
Debt Instruments.
The
Company reserves the right, following written notice delivered to the
Shareholders, to negotiate or otherwise liquidate any Debt Instrument and to
re-invest the entire proceeds from that negotiation or liquidation in a
substitute Debt Instrument provided that the substitute Debt Instrument meets
the requirements detailed in Section 3(e) and provided that the original copy
of
the Debt Instrument is immediately delivered to the “Escrow Agent" designated in
Section 4.
(e)
Debt
Instrument Requirements.
Each
substitute or additional Debt Instrument provided by the Buyer as collateral
under this Security Agreement shall comply with each of the following
requirements: (i) the Debt Instrument will be evidenced by a certificate or
other document that is deliverable to the “Escrow Agent” designated in Section
4, (ii) the Debt Instrument will qualify as “investment property” under Section
9-102(49) of the Code, (iii) the issuer of the Debt Instrument will be an entity
organized under the laws of one of the States of the United States and will
not
be the Buyer or any entity which owns more than two percent (2%) of the equity
securities of the Buyer and (iv) the Debt Instrument will be of an “investment
grade” having a Standard & Poor’s Rating of “BBB” or better.
4. Escrow
of Debt Instruments.
In order
to perfect the Shareholders’ security interest in the Debt Instruments, the
Buyer, upon the issuance of each Debt Instrument, will promptly deliver or
cause
the issuer to promptly deliver to HSBC Bank USA, 000 Xxxxx Xxxxxx, Xxx
Xxxx, Xxx Xxxx 00000, ABA No. 000-000-000 (the “Escrow Agent”) the original copy
of the certificate or other document evidencing that Debt Instrument. If and
at
each time that the Buyer desires to replace or substitute a Debt Instrument,
the
Shareholders will promptly cooperate with the Buyer in the release by the Escrow
Agent of the original copy of the certificate or other document evidencing
an
existing Debt Instrument in exchange for the delivery to the Escrow Agent of
the
original copy of the certificate or other document evidencing the replacement
or
substitute Debt Instrument. Each Debt Instrument will be held in escrow by
the
Escrow Agent pursuant to the terms of the ESCROW AGREEMENT signed on the date
of
this Security Agreement between and among the Company, the Buyer, the
Shareholders and the Escrow Agent (the “Escrow Agreement”). If and upon payment
in full of the Earnout Consideration and the release by the Escrow Agent to
the
Buyer of the original copies of the Debt Instruments pursuant to the Escrow
Agreement, the Shareholders will promptly sign and deliver to the Buyer any
document reasonably required by the Buyer to confirm that the Shareholders
have
no further security interest or other interest in the Debt
Instruments.
2
5. Default.
The
following shall constitute events of default under this Security Agreement
(and
“Event
of Default”):
(a) Breach
of Covenants.
The
breach by the Company of any Stock Covenant or Debt Instrument Covenant under
this Security Agreement and the failure to remedy such breach within ten (10)
days after written demand is delivered by the Shareholders to the Company and
the Buyer; or
(b) Failure
to Pay Earnout Consideration.
The
failure of the Buyer to pay any installment of the Earnout Consideration on
or
before its due date under the Agreement and the failure of the Buyer to remedy
such nonpayment within ten (10) days after written demand thereafter is
delivered by the Shareholders to the Buyer and the Company.
6. Remedial
Rights.
Upon the
occurrence of an Event of Default under this Security Agreement, the
Shareholders, by written notice to the Buyer and the Company, may elect one
or
the other (but not both) of the following rights:
(a) Code
Rights.
The
Shareholders shall have the right to exercise all remedial rights against the
Buyer and with respect to the either or both of the Debt Instrument(s) and
the
Company Common Stock as are accorded to a creditor and secured party under
the
provisions of the Code and other applicable law, but subject to the rights
of
Smithfield under its senior security interest with respect to the Company Common
Stock and subject to the commitment of the Shareholders in the Intercreditor
Agreement to first seek recourse for the Event of Default through the proceeds
of the Debt Instrument(s) and only thereafter through the Company Common Stock
in accordance with the provisions of the Intercreditor Agreement. If the
Shareholders elect to exercise their remedial rights under this Section, then,
in addition to any other actions that may be permitted under the Code (as
limited by the Intercreditor Agreement), the Shareholders may deliver written
notice to the Buyer and Escrow Agent identifying the Event of Default, affirming
that such Event of Default has not been remedied as permitted and required
under
this Security Agreement and demanding a release to the Shareholders of the
Debt
Instruments then held by the Escrow Agent under the Escrow Agreement (a “Demand
Notice”). Unless the Buyer, within twenty (20) days after the date of delivery
of the Demand Notice, delivers its written notice to the Shareholders and the
Escrow Agent stating that no Event of Default exists under this Security
Agreement, detailing specifically the basis for that statement and objecting
to
the release of the Debt Instruments to the Shareholders (an “Objection Notice”),
then the Escrow Agent shall within thirty (30) days after the date of delivery
of the Demand Notice release to the Shareholders the original copies of the
certificates or other documents evidencing the Debt Instruments then held under
the Escrow Agreement. If the Buyer delivers an Objection Notice within such
period, then the Escrow Agent shall refrain from the release of the Debt
Instruments to the Shareholders unless and until directed to do so by a written
directive signed by the Buyer and the Shareholders or the Order of a court
of
competent jurisdiction. If and at such time as the original copies of the
certificates or other documents evidencing the Debt Instruments are released
to
the Shareholders, the Shareholder shall promptly liquidate those Debt
Instruments in a commercially reasonable manner to the extent required to pay
any portion of the Earnout Consideration then due and payable and any Debt
Instruments not required to be liquidated for such purposes and any proceeds
of
liquidation of the Debt Instruments not required for such payment shall be
promptly returned or remitted to the Escrow Agent for holding and release as
otherwise provided in the Escrow Agreement.
3
(b) Option
To Reacquire Stock.
Subject
to the commitments of the Shareholders and the rights of Smithfield in the
Intercreditors Agreement, the Shareholders shall have the right to declare
a
forfeiture under the Security Interest and to reacquire the Company Common
Stock
(the “Reacquisition
Option”)
by (i)
waiving any right to any further payments of the Earnout Consideration under
the
Agreement and (ii) paying to Smithfield $6,000,000 in order to secure a release
of Smithfield’s security interest in the Company Common Stock (the “Release
Payment”).
As a
condition to the Shareholder’s exercise of the Reacquisition Option, the
Shareholders shall deliver a pre-exercise notice to the Buyer, the Company
and
Smithfield (the “Pre-Exercise
Notice”)
identifying the Event of Default, specifying the action(s) that will be required
to remedy that Event of Default and advising that if such remedial actions
are
not completed in sixty (60) days following the date of delivery of that
Pre-Exercise Notice, the Shareholders will have the right to exercise the
Reacquisition Option. Unless the remedial actions specified in the Pre-Exercise
Notice have been fully implemented within such sixty-day period, the
Shareholders, by further written notice to the Buyer, the Company and Smithfield
(the “Exercise
Notice”)
may
exercise the Reacquisition Option. (Alternatively, the Shareholders may elect
at
such time not to exercise the Reacquisition Option and, instead, to exercise
their remedial rights under Section 6(a).) If the Shareholders exercise the
Reacquisition Option, the closing of the reacquisition shall occur at the
offices of the Company on the tenth (10th)
business day following the date of delivery of the Exercise Notice. At that
closing, the Buyer will endorse and deliver to the Shareholders the original
Stock Certificate(s) representing the Company Common Stock and will execute
and
deliver to the Shareholders such other documents and will take such other
actions as the Shareholders reasonably require to confirm that the Buyer has
no
further interest in the Company as a shareholder, lender or otherwise. At that
closing, the Shareholders will sign and deliver to the Buyer and will take
any
other actions as the Buyer may reasonably require to confirm the waiver by
the
Shareholders of any right to any further payments of the Earnout Consideration.
At that closing, the Shareholders will remit the Release Payment to Smithfield
by wire transfer to an account designated by Smithfield and Smithfield will
sign
and deliver to the Shareholders and will take any other actions reasonably
required by the Shareholders to confirm that Smithfield has released and
discharged any security interest, lien or other interest that Smithfield holds
in the Company Common Stock. At that closing, any individuals designated by
the
Buyer to serve as directors or officers of the Company shall tender their
resignations from such positions. Time shall be of the essence with respect
to
the exercise and the implementation of the Reacquisition Option. The Buyer
and
the Company acknowledge that the availability of the Reacquisition Option is
of
the essence to the Shareholders in their agreeing to be bound by the Agreement
and this Security Agreement; that if the Shareholders have exercised the rights
of the Reacquisition Option that the damages that the Shareholders will or
may
incur if the reacquisition is not completed may be irreparable or not
susceptible to monetary determination; and that as a consequence of such
damages, the obligations of the Buyer and the Company under the Reacquisition
Option shall be specifically enforceable by injunctive relief through a court
of
competent jurisdiction.
7. Miscellaneous.
(a) Applicable
Law.
This
Security Agreement is being made under and shall be interpreted in accordance
with the laws of the State of Michigan.
(b) Notice.
Any
notice permitted or required under this Security Agreement shall be in writing
and shall be deemed delivered in the time and manner specified in the
Agreement.
(c) Entire
Agreement/Modification.
This
five (5) page document, together with the Agreement, constitutes the entire
agreement between the Parties with respect to the subject matter hereof and
shall not be cancelled or amended unless by a subsequent writing signed by
each
of the Parties. This document amends and replaces the SECURITY AGREEMENT between
and among the Parties signed January 13, 2004 and effective January 1,
2004.
SIGNATURES
ON NEXT PAGE
4
| COMPANY: | FAAC INCORPORATED | |
| |
|
|
| By: | /s/ | |
|
Xxxx X. Xxxxxx |
||
| President | ||
| BUYER | AROTECH CORPORATION | |
| |
|
|
| By: | /s/ | |
|
Xxxxxx Har-Oz |
||
| Vice President & General Counsel | ||
| SHAREHOLDERS: | ||
| |
|
|
| By: | /s/ | |
|
Xxxx X. Xxxxxx |
||
| By: | /s/ | |
|
Xxxxxxx X. Xxxx |
||
5
SCHEDULE
A
Ford
Motor Credit Co.
face
value: 1,000,000
coupon:
7.75%
maturity:
3/15/05
price:
105.827
interest
accrued: $31,000.00
total
cost: $1,089,270.00
yield:
2.350%
trade
date: 2/04/04
settlement
date: 2/09/04
rating:
A3/BBB-
Disney
Co
face
value: 1,000,000
coupon:
7.3%
maturity:
2/8/05
price:
105.69910
interest
accrued: $202.78
total
cost: $1,057,193.78
yield:
1.520%
trade
date: 2/04/04
settlement
date: 2/09/04
rating:
Baa1/BBB+
Federal
Loan Home Bank
face
value: 1,000,000
coupon:
1.41%
maturity:
3/2/05
price:
100.00
total
cost: $1,000,000.00
yield:
1.410%
trade
date: 2/04/04
settlement
date: 3/02/04
rating:
AAA
non
call
three month - callable quarterly thereafter.
Newcourt
Cr Group (leasing industry)
face
value: 1,000,000
coupon:
6.875%
maturity:
2/16/05
price:
105.423
interest
accrued: $33,229.17
total
cost: $1,087,459.17
yield:
1.480%
trade
date: 2/05/04
settlement
date: 2/10/04
rating:
X0/X
Xxxxxxx
Xx (publishing industry)
face
value: 660,000
coupon:
4.95%
maturity:
4/1/05
price:
103.950
interest
accrued: $11,706.75
total
cost: $697,776.75
yield:
1.447%
trade
date: 2/05/04
settlement
date: 2/10/04
rating:
A2/A
General
Motors Co.
face
value: 1,000,000
coupon:
6.25%
maturity:
5/1/05
price:
104.914
interest
accrued: $17,187.50
total
cost: $1,066,327.50
yield:
2.160%
trade
date: 2/05/04
settlement
date: 2/10/04
rating:
Baa1/BBB
