SECURITY AGREEMENT
This
Security Agreement is dated as of September
22,
2006
(the “Agreement”)
by and
among Long-e International Group Co., Ltd., a British Virgin Islands corporation
(the “Borrower”
or
the
“Company”),
with
its primary place of business at Akara Xxxx. 00 Xx Xxxxxx Xxxxxx Wickhams Cay
1,
Road Town Tortola, British Virgin Islands, and the parties listed on
Schedule A hereto (collectively, the “Secured
Parties”),
which
parties are also parties to that certain Note and Warrant Purchase Agreement
(the “Purchase
Agreement”)
of
even date herewith by and among the Company and the Secured
Parties.
The
Borrower and the Secured Parties hereby agree as follows:
1. Certain
Definitions.
(a) “Agent”
has
the
meaning set forth in Section 10.
(b) “Collateral”
shall
mean the property described on Exhibit
A
hereto.
(c) “Financing
Statements”
means
UCC-1 financing statements, security agreements, chattel mortgages, assignments,
copyright security agreements or collateral assignments, patent or trademark
security agreements or collateral assignments, fixture filings and other
agreements or instruments executed, delivered, filed or recorded for the purpose
of granting or perfecting any Lien.
(d) “Lien”
means
any lien (statutory or other), mortgage, pledge, hypothecation, assignment,
deposit arrangement, security interest, charge, claim or other encumbrance
of
any kind (including any conditional sale or other title retention agreement,
or
any lease in the nature thereof).
(e) “Permitted
Liens”
means:
(i) Liens imposed by law, such as carriers’, warehousemen’s, materialmen’s
and mechanics’ liens, or Liens arising out of judgments or awards against
Borrower with respect to which Borrower at the time shall currently be
prosecuting an appeal or proceedings for review; (ii) Liens for taxes not
yet subject to penalties for nonpayment and Liens for taxes the payment of
which
is being contested in good faith and by appropriate proceedings and for which,
to the extent required by generally accepted accounting principles then in
effect, proper and adequate book reserves relating thereto are established
by
Borrower; (iii) Liens (A) upon or in any equipment acquired or held by the
Borrower to secure the purchase price of such equipment or indebtedness incurred
solely for the purpose of financing the acquisition of such equipment, or
(B) existing on such equipment at the time of its acquisition, provided
that the
Lien is confined solely to the property so acquired and improvements thereon,
and the proceeds of such equipment and other equipment financed by the holder
of
such Lien; (iv) Liens consisting of leases or subleases and licenses and
sublicenses granted to others in the ordinary course of Borrower’s
business not interfering in any material respect with the business of Borrower
and any interest or title of a lessor or licensor under any lease or license,
as
applicable; (v) Liens incurred or deposits made in the ordinary course of
Borrower business in connection with worker’s compensation, unemployment
insurance, social security and other like laws; (vi) Liens in favor of customs
and revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (vii) Liens of
landlords and of holders of deposit accounts (including rights of setoff),
in
each case incurred in the ordinary course of business; (viii) Liens in the
nature of easements, rights-of-way, restrictions, encroachments and other
irregularities or defects in title, in each case which do not interfere in
any
material respect with the ordinary conduct of the business of the Borrower
or
materially detract from the value of the Collateral; (ix) Liens in favor of
commercial lending institutions to which the Secured Parties have each expressly
consented in writing; and (x) Liens in favor of the Secured
Parties.
(f) “UCC”
means
the Uniform Commercial Code of the State of California, as amended from time
to
time.
(a) Grant.
Borrower, for valuable consideration, the receipt of which is acknowledged,
hereby grants to the Secured Parties a security interest in and Lien on all
of
the Collateral now owned or at any time hereafter acquired by the Borrower
or in
which the Borrower now has or at any time in the future may acquire any right,
title or interest.
(b) Continuing
Security Interest.
The
Borrower agrees that this Agreement shall create a continuing security interest
in the Collateral which shall remain in effect until the payment and performance
in full of all of the Obligations.
3. Obligations
Secured.
The
security interest granted hereby secures payment of all outstanding principal
and accrued interest under the Secured Convertible Promissory Notes (the
“Notes”)
of the
Borrower issued to the Secured Parties pursuant to the Purchase Agreement and
all other obligations of the Borrower to the Secured Parties under the Notes,
the Purchase Agreement and this Agreement (collectively, the “Obligations”).
4. Borrower’s
Representations, Warranties and Covenants.
Borrower hereby represents, warrants and covenants to the Secured Parties
that:
(a) Borrower’s
principal place of business is the address set forth above and Borrower keeps
its records concerning accounts, contract rights and other property at that
location. Borrower will promptly notify the Secured Parties in writing of the
establishment of any new place of business where any of the Collateral is kept.
Borrower is a corporation organized under the laws of the State of Delaware.
Borrower will notify the Secured Parties prior to changing either its form
or
jurisdiction of organization.
(b) Borrower
will at all times keep in a manner reasonably satisfactory to the Secured
Parties accurate and complete records of the Collateral and will keep such
Collateral insured to the extent similarly situated companies insure their
assets. The Secured Parties shall be entitled, at reasonable times and intervals
after reasonable notice to Borrower, to enter Borrower’s premises for purposes
of inspecting the Collateral and Borrower’s books and records relating
thereto.
2
(c) Borrower
will not, without the consent of the Majority Note Holders, create or permit
to
be created or suffer to exist any Lien, except Permitted Liens, of any kind
on
any of the Collateral.
(d) Borrower
shall not use the Collateral in any manner that is or would result in any
material violation of any applicable statute, ordinance, law or regulation
or in
material violation of any insurance policy maintained by Borrower with respect
to the Collateral.
(e) Other
Financing Statements.
Other
than Financing Statements in connection with any Permitted Lien and Financing
Statements in favor of the Secured Parties, no effective Financing Statement
naming the Borrower as debtor, assignor, grantor, mortgagor, pledgor or the
like
and covering all or any part of the Collateral is on file in any filing or
recording office in any jurisdiction. All Financing Statements affecting any
of
the Collateral or naming Borrower as debtor existing on the date hereof are
listed on Schedule 1 hereto.
(f) Notices,
Reports and Information.
The
Borrower will (i) notify the Secured Parties of any material claim made or
asserted against the Collateral by any person or entity and of any change in
the
composition of the Collateral or other event which could reasonably be expected
to materially adversely affect the value of the Collateral or either Secured
Party’s Lien thereon; (ii) furnish to the Secured Parties such statements and
schedules further identifying and describing the Collateral and such other
reports and other information in connection with the Collateral as either
Secured Party may reasonably request, all in reasonable detail; and (iii) upon
request of any Secured Party make such demands and requests for information
and
reports as the Borrower is entitled to make in respect of the
Collateral.
(g) Disposition
of Collateral.
The
Borrower will not surrender or lose possession of (other than to the Secured
Parties), sell, lease, rent, or otherwise dispose of or transfer any of the
Collateral, outside of the ordinary course of business, or any right or interest
therein, except to the extent permitted by this Agreement.
(h) Separate
Obligations and Liens.
The
Borrower acknowledges and agrees that (i) the Obligations represent separate
and
distinct indebtedness, obligations and liabilities of the Borrower to each
of
the Secured Parties, which the Borrower is separately obligated to each Secured
Party to pay and perform, in each case regardless of whether or not any
indebtedness, obligation or liability to any other Secured Party or any other
person or entity, or any agreement, instrument or guaranty that evidences any
such other indebtedness, liability or obligation, or any provision thereof,
shall for any reason be or become void, voidable, unenforceable or discharged,
whether by payment, performance, avoidance or otherwise; and (ii) the Lien
that
secures each of the Secured Parties’ respective Obligations (A) is separate and
distinct from any and all other Liens on the Collateral, (B) is enforceable
without regard to whether or not any other Lien shall be or become void,
voidable or unenforceable or the indebtedness, obligations or liabilities
secured by any such other Lien shall be discharged, whether by payment,
performance, avoidance or otherwise, and (C) shall not merge with or be impaired
by any other Lien.
(i) Payment
of Obligations.
Borrower will pay promptly when due all taxes, assessments and governmental
charges or levies imposed upon the Collateral or with respect to any of its
income or profits derived from the Collateral, as well as all claims of any
kind
(including, without limitation, claims for labor, materials and supplies)
against or with respect to the Collateral, except that no such charge need
be
paid if (i) the validity of such charge is being contested in good faith by
appropriate proceedings, (ii) such proceedings do not involve any material
danger of the sale, forfeiture or loss of any of the Collateral or any interest
in the Collateral and (iii) such charge is adequately reserved against on
Borrower’s books in accordance with generally accepted accounting
principles.
3
(j) Limitation
on Liens on Collateral.
Borrower will not create, incur or permit to exist, will defend the Collateral
against, and will take such other action as is necessary to remove, any Lien
(other than Permitted Liens) or other claim on or to the Collateral, and will
defend the right, title and interest of the Secured Parties in and to any of
the
Collateral against the claims and demands of all other persons and
entities.
(k) Trade
Secrets.
Borrower has taken and will continue to take all reasonable steps to protect
the
secrecy of and preserve its rights and interests in and to all of its trade
secrets and other proprietary rights and interests.
(l) No
Infringement.
To the
best of Borrower’s knowledge, no material infringement or unauthorized use
presently is being made of any of the Collateral, including without limitation
any of the intellectual property Collateral, by any person or entity, and
Borrower’s use of the Collateral does not and will not infringe upon the rights
or interests of any other person or entity.
(m) Further
Identification of Collateral.
Borrower will furnish to the Secured Parties from time to time statements and
schedules further identifying and describing the Collateral and such other
reports in connection with the Collateral as any Secured Party may reasonably
request, all in reasonable detail.
5. Financing
Statements.
Borrower shall at Borrower’s cost and within five (5) days of the date of this
Agreement cause to be filed and recorded Financing Statements in the state
of
[California] [add others], and Borrower at its cost shall upon request cause
to
be filed and recorded any other Financing Statements, including any statements
of continuation or assignment of any Financing Statements in respect of any
Lien
created pursuant to this Agreement, which may at any time be required or which,
in the opinion of the Secured Parties, may at any time be desirable. The
Borrower will promptly provide to the Secured Parties and Agent copies of
Financing Statements filed and recorded in connection with this Agreement.
To
the fullest extent permitted by applicable law, the Borrower authorizes the
Agent, each Secured Party, and any other agent acting on behalf of any Secured
Party, to file any Financing Statements describing the Collateral without the
signature of the Borrower.
6. Borrower’s
Rights Until Event of Default.
So long
as an Event of Default does not exist, Borrower shall have the right to use,
possess, license and sublicense the Collateral, (in each instance subject to
the
Lien in favor of the Secured Parties), manage its property, sell its inventory
and sell or dispose of any equipment that has become worn out or obsolete in
Borrower's business, in each instance in the ordinary course of
business.
4
7. Event
of Default.
The
following events shall be considered an “Event of Default” under this
Agreement:
(a) failure
to observe or perform any of its agreements, warranties, representations or
covenants in this Agreement, which failure is not cured within thirty (30)
days
after the earlier of (i) receipt of written notice thereof by a Secured Party
to
the Borrower or (ii) the date on which the Borrower had knowledge of such
failure; or
(b) the
occurrence of any Event of Default, as defined in the Purchase
Agreement.
8. Rights
and Remedies on Event of Default.
(a) During
the continuance of an Event of Default, Secured Parties, upon the election
of
the holders of a majority of the aggregate principal amount of the Notes (the
“Majority
Note Holders”),
shall
have the right, themselves or through any of their agents, with or without
notice to Borrower (as provided below), as to any or all of the Collateral,
by
any available judicial procedure, or without judicial process (provided,
however, that it is in compliance with the UCC), to exercise any and all rights
afforded to a secured party under the UCC or other applicable law. Without
limiting the generality of the foregoing, Secured Parties, upon the election
of
the Majority Note Holders, shall have the right to sell or otherwise dispose
of
all or any part of the Collateral, either at public or private sale, in lots
or
in bulk, with or without warranties or representations, and upon such terms
and
conditions, all as the Majority Note Holders, in their sole discretion, may
deem
advisable, and the Secured Parties shall have the right to purchase at any
such
sale to the extent permitted by applicable law. Borrower agrees that a notice
sent during the continuance of an Event of Default and at least ten (10) days
before the time of any intended public sale or of the time after which any
private sale or other disposition of the Collateral is to be made shall be
reasonable notice of such sale or other disposition. The proceeds of any such
sale, or other Collateral disposition shall be applied, first to the expenses
of
retaking, holding, storing, processing and preparing for sale, selling, and
the
like, and to Secured Parties’ reasonable attorneys’ fees and legal expenses in
connection therewith, and then to the Obligations and to the payment of any
other amounts required by applicable law, after which Secured Parties shall
account to Borrower for any surplus proceeds. If, upon the sale or other
disposition of the Collateral made in compliance with the requirements of the
UCC and other applicable law, the proceeds thereof are insufficient to pay
all
amounts to which Secured Parties are legally entitled, Borrower shall be liable
for the deficiency.
(b) Borrower
appoints each Secured Party, and any officer, employee or agent of such Secured
Party, with full power of substitution, as Borrower’s true and lawful
attorney-in-fact, effective as of the date hereof, with power, upon the Majority
Note Holders’ election, in its own name or in the name of Borrower, during the
continuance of an Event of Default, (i) to endorse any notes, checks, drafts,
money orders, or other instruments of payment in respect of the Collateral
that
may come into Secured Parties’ possession; (ii) to sign and endorse any drafts
against Borrower, assignments, verifications and notices in connection with
accounts, and other documents relating to Collateral; (iii) to pay or discharge
taxes or Liens at any time levied or placed on or threatened against the
Collateral; (iv) to demand, collect and issue receipt for, monies due in respect
of the Collateral; (v) to notify persons and entities obligated with respect
to
the Collateral to make payments directly to Secured Parties; and (vi) generally,
to do, at Secured Parties’ option and at Borrower’s expense, at any time, or
from time to time, all acts and things which Secured Parties deems necessary
to
protect, preserve and realize upon the Collateral and Secured Parties’ security
interest therein to effect the intent of this Agreement, all as fully and
effectually as Borrower might or could do. This power of attorney shall be
irrevocable as long as any of the Secured Obligations are
outstanding.
5
(c) All
of
Secured Parties’ rights and remedies with respect to the Collateral, whether
established hereby or by any other agreements, instruments or documents or
by
law shall be cumulative and may be exercised singly or
concurrently.
9. Secured
Parties’ Rights; Borrower Waivers.
Secured
Parties’ acceptance of partial or delinquent payment from Borrower under any
Note or hereunder, or Secured Parties’ failure to exercise any right hereunder,
shall not constitute a waiver of any obligation of Borrower hereunder, or any
right of Secured Parties hereunder, and shall not affect in any way the right
to
require full performance at any time thereafter. The Borrower waives, to the
fullest extent permitted by law, any right to require any Secured Party to
make
or give any presentments, demands for performance, notices of nonperformance,
protests, notices of protests or notices of dishonor in connection with any
of
the Collateral.
10. Collateral
Agent.
At any
time or times, in order to comply with any legal requirement in any jurisdiction
or in order to effectuate any provision of this Agreement as determined in
the
discretion of the Majority Note Holders, the Majority Note Holders may, without
the consent of or notice to the Borrower or any other Secured Party, appoint
any
Secured Party, or any bank or trust company or any other person or entity to
act
as collateral agent (the “Agent”),
either jointly with any Secured Party or separately, on behalf of the Secured
Parties with such power and authority as may be necessary for the effectual
operation of the provisions hereof and specified in the instrument of
appointment. The Borrower acknowledges that the rights and responsibilities
of
the collateral Agent under this Agreement or arising out of this Agreement
shall, as between the collateral Agent and the Secured Parties, be governed
by
the matters as among the Secured Parties and the collateral Agent to which
the
Borrower shall not be a third party or other beneficiary. __________________
is
hereby
designated and appointed by the Majority Note Holders as the collateral Agent
with respect to the Collateral.
11. Miscellaneous.
(a) Amendment
and Waiver.
Neither
this Agreement nor any part hereof may be changed, waived or amended except
by
an instrument in writing signed by the Majority Note Holders and by the
Borrower; and waiver on one occasion shall not operate as a waiver on any other
occasion.
(b) Notices.
Unless
otherwise provided, any notice required or permitted under this Agreement shall
be given in writing and shall be deemed effectively given upon personal delivery
to the party to be notified or five days (5) days (excluding Sundays and
holidays) after deposit with the United States Post Office, by registered or
certified mail, postage prepaid and addressed to such party at the address
set
forth below, or at such other address as such party may designate by ten (10)
days’ advance written notice to the other parties.
6
(c) Successors
and Assigns.
This
Agreement shall be binding upon and inure to the benefit of, the successors
and
assigns of the parties hereto, including, without limitation, all future holders
of the Note.
(d) Governing
Law.
The
laws of the State of [California] shall govern the construction of this
Agreement, without giving effect to the principles of conflicts of laws
thereof.
(e) Counterparts.
This
Agreement, and any of the other agreements, documents and instruments
contemplated hereby, may be executed 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. Delivery of an executed signature page to this Agreement,
and any of the other agreements, documents and instruments contemplated hereby,
by facsimile transmission shall be as effective as delivery of a manually signed
counterpart hereof or thereof.
(f) Titles
and Subtitles.
The
titles and subtitles used in this Agreement are used for convenience only and
are not to be considered in construing or interpreting this
Agreement.
(g) Severability.
If one
or more provisions of this Agreement are held to be unenforceable under
applicable law, such provision shall be excluded from this Agreement and the
balance of the Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
(h) Venue.
Borrower and Secured Parties agree that all actions or proceedings arising
in
connection with this Note shall be tried and litigated only in the state and
federal courts located in the County of Los Angeles, State of
California.
(i) Waiver
of Jury Trial.
TO THE
EXTENT EACH MAY LEGALLY DO SO, EACH PARTY HERETO HEREBY EXPRESSLY WAIVES ANY
RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION, CAUSE OF ACTION, OR
PROCEEDING ARISING UNDER OR WITH RESPECT TO THIS AGREEMENT, OR IN ANY WAY
CONNECTED WITH, OR RELATED TO, OR INCIDENTAL TO, THE DEALING OF THE PARTIES
HERETO WITH RESPECT TO THIS AGREEMENT, OR THE TRANSACTIONS RELATED THERETO,
IN
EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND IRRESPECTIVE OF WHETHER
SOUNDING IN CONTRACT, TORT, OR OTHERWISE. TO THE EXTENT EACH MAY LEGALLY DO
SO,
EACH PARTY HERETO HEREBY AGREES THAT ANY SUCH CLAIM, DEMAND, ACTION, OR
PROCEEDING SHALL BE DECIDED BY A COURT TRIAL WITHOUT A JURY AND THAT EITHER
PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF ANY OTHER PARTY HERETO TO THE
WAIVER OF ITS RIGHT TO TRIAL BY JURY.
(j) Indemnification.
Borrower agrees to defend, indemnify and hold harmless each Secured Party
(including the Agent) against any and all liabilities, costs and expenses
(including, without limitation, legal fees and expenses), other than those
arising solely from the gross negligence or willful misconduct of any of the
Secured Parties: (i) with respect to, or resulting from, any delay in paying,
any and all excise, sales or other taxes which may be payable or determined
to
be payable with respect to any of the Collateral, (ii) with respect to, or
resulting from, any delay in complying with any law, rule, regulation or order
of any governmental authority applicable to any of the Collateral and (iii)
in
connection with or arising as a consequence of holding any interest in any
of
the Collateral or any of transactions contemplated by this
Agreement.
7
(k) Definitions.
Except
as set forth in Section 1(a) or as otherwise defined herein, capitalized
terms shall have the meaning set forth in the Purchase Agreement.
[THE
REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
8
IN
WITNESS WHEREOF, this Agreement has been executed by the parties hereto as
of
the date first above written.
| BORROWER: | ||
| Long-e International Group Co., Ltd. | ||
| |
|
|
| By: |
/s/
Bu Shengfu
|
|
|
Bu Shengfu, Chief Executive Officer |
||
|
Address:
|
Akara Xxxx. 00 Xx Xxxxxx Xxxxxx Wickhams Cay 1 | |
| Road Town Tortola, British Virgin Islands | ||
| SECURED PARTIES: | ||
|
MidSouth
Investor Fund, L.P.
|
||
|
|
||
| By: |
/s/
Xxxxx X. Xxxxxxx
|
|
|
Xxxxx X. Xxxxxxx |
||
|
General
Partner
|
||
| By: | ||
|
______________ |
||
|
|
||
| By: | ||
|
|
||
SCHEDULE
A
SCHEDULE
OF SECURED PARTIES
MidSouth
Investor Fund, L.P.
0000
Xxxxxxxxx Xx. XX Xxxxx 000 Xxxxx
xxxxxxx,
Xxxxxxx 00000
EXHIBIT
A
DESCRIPTION
OF COLLATERAL
All
of
the following assets and properties of Borrower (herein referred to as
“Borrower” or “Debtor”) whether presently existing or hereafter created,
written, produced or acquired:
(i) all
accounts receivable, accounts, chattel paper, contract rights (excluding royalty
agreements, license agreements and distribution agreements), documents,
instruments, money, deposit accounts and solely those general intangibles
including payment intangibles, returns, repossessions, books and records
relating thereto, and equipment containing said books and records, all financial
assets, all investment property, including securities and securities
entitlements;
(ii) all
goods, including, without limitation, equipment and inventory (including,
without limitation, all export inventory), but excluding all computer programs
embedded in goods and any supporting information;
(iv) all
guarantees and other security therefor;
(v) all
letter-of-credit rights and letters of credit;
(vi) all
other
personal property assets of Borrower; and
(vii)
all
products and proceeds, including, without limitation, insurance proceeds,
of any
of the foregoing.
E-1
Schedule
1
Other
Financing Statements: None.
E-2
