Exhibit 10.4
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT (the "AGREEMENT"), is entered into and made
effective as of April 28, 2005, by and between VALENTEC SYSTEMS, INC., (the
"COMPANY"), and ▇▇▇▇▇▇▇▇▇▇ EQUITY PARTNERS, LTD. (the "SECURED PARTY").
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the Company shall issue to the Secured Party a secured promissory
note in the principal amount of One Million Dollars ($1,000,000) (the "NOTE");
WHEREAS, to induce the Secured Party to enter into the Note, the Company
hereby grants to the Secured Party a security interest in and to the pledged
property identified on Exhibit A hereto until the satisfaction of the
Obligations, as defined herein below.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
herein contained, and for other good and valuable consideration, the adequacy
and receipt of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE 1.
DEFINITIONS AND INTERPRETATIONS
-------------------------------
Section 1.1. Recitals.
--------
The above recitals are true and correct and are incorporated herein, in
their entirety, by this reference.
Section 1.2. Interpretations.
---------------
Nothing herein expressed or implied is intended or shall be construed to
confer upon any person other than the Secured Party any right, remedy or claim
under or by reason hereof.
Section 1.3. Obligations Secured.
-------------------
The obligations secured hereby are any and all obligations of the Company
now existing or hereinafter incurred to the Secured Party, whether oral or
written and whether arising before, on or after the date hereof including,
without limitation, those obligations of the Company to the Secured Party under
this Agreement, the Note, both Security Agreements (individually referred to as
a "SECURITY AGREEMENT" collectively the "SECURITY AGREEMENTS"), or both Pledge
and Escrow Agreements of even date herewith by and among the Company, and the
Secured Party and ▇▇▇▇▇ ▇▇▇▇▇▇▇▇, Esq. (individually referred to as a "PLEDGE
AGREEMENT" collectively referred to as the "PLEDGE AGREEMENTS") and any other
amounts now or hereafter owed to the Secured Party by the Company thereunder or
hereunder (collectively, the "OBLIGATIONS"). This Agreement, the Note, and the
Pledge Agreement are collectively referred to herein as the "TRANSACTION
DOCUMENTS".
ARTICLE 2.
PLEDGED PROPERTY, ADMINISTRATION OF COLLATERAL
----------------------------------------------
AND TERMINATION OF SECURITY INTEREST
------------------------------------
Section 2.1. Pledged Property.
----------------
(a) Company hereby pledges to the Secured Party, and creates in the
Secured Party for its benefit, a security interest in and to all of the property
of the Company as set forth in Exhibit A attached hereto and the products
thereof and the proceeds of all such items (collectively, the "PLEDGED
PROPERTY") for such time until the Obligations are paid in full.
(b) Simultaneously with the execution and delivery of this Agreement,
the Company shall make, execute, acknowledge, file, record and deliver to the
Secured Party any documents reasonably requested by the Secured Party to perfect
its security interest in the Pledged Property. Simultaneously with the execution
and delivery of this Agreement, the Company shall make, execute, acknowledge and
deliver to the Secured Party such documents and instruments, including, without
limitation, financing statements, certificates, affidavits and forms as may, in
the Secured Party's reasonable judgment, be necessary to effectuate, complete or
perfect, or to continue and preserve, the security interest of the Secured Party
in the Pledged Property, and the Secured Party shall hold such documents and
instruments as secured party, subject to the terms and conditions contained
herein.
Section 2.2. Rights; Interests; Etc.
-----------------------
(a) So long as no Event of Default (as hereinafter defined) shall have
occurred and be continuing:
(i) the Company shall be entitled to exercise any and all rights
pertaining to the Pledged Property or any part thereof for any purpose not
inconsistent with the terms hereof; and
(ii) the Company shall be entitled to receive and retain any and
all payments paid or made in respect of the Pledged Property.
(b) Upon the occurrence and during the continuance of an Event of
Default:
(i) All rights of the Company to exercise the rights which it
would otherwise be entitled to exercise pursuant to Section 2.2(a)(i) hereof and
to receive payments which it would otherwise be authorized to receive and retain
pursuant to Section 2.2(a)(ii) hereof shall be suspended, and all such rights
shall thereupon become vested in the Secured Party who shall thereupon have the
sole right to exercise such rights and to receive and hold as Pledged Property
such payments; PROVIDED, HOWEVER, that if the Secured Party shall become
entitled and shall elect to exercise its right to realize on the Pledged
Property pursuant to Article 5 hereof, then all cash sums received by the
Secured Party, or held by Company for the benefit of the Secured Party and paid
over pursuant to Section 2.2(b)(ii) hereof, shall be applied against any
outstanding Obligations; and
2
(ii) All interest, dividends, income and other payments and
distributions which are received by the Company contrary to the provisions of
Section 2.2(b)(i) hereof shall be received in trust for the benefit of the
Secured Party, shall be segregated from other property of the Company and shall
be forthwith paid over to the Secured Party; or
(iii) The Secured Party in its sole discretion shall be
authorized to sell any or all of the Pledged Property at public or private sale
in order to recoup all of the outstanding principal plus accrued interest owed
pursuant to the Note as described herein
(c) Each of the following events shall constitute a default under this
Agreement (each an "EVENT OF DEFAULT"):
(i) any default, whether in whole or in part, shall occur in the
payment to the Secured Party of principal, interest or other item comprising the
Obligations as and when due or with respect to any other debt or obligation of
the Company to a party other than the Secured Party;
(ii) any default, whether in whole or in part, shall occur in the
due observance or performance of any obligations or other covenants, terms or
provisions to be performed by the Company under this Agreement or the
Transaction Documents;
(iii) the Company shall: (1) make a general assignment for the
benefit of its creditors; (2) apply for or consent to the appointment of a
receiver, trustee, assignee, custodian, sequestrator, liquidator or similar
official for itself or any of its assets and properties; (3) commence a
voluntary case for relief as a debtor under the United States Bankruptcy Code;
(4) file with or otherwise submit to any governmental authority any petition,
answer or other document seeking: (A) reorganization, (B) an arrangement with
creditors or (C) to take advantage of any other present or future applicable law
respecting bankruptcy, reorganization, insolvency, readjustment of debts, relief
of debtors, dissolution or liquidation; (5) file or otherwise submit any answer
or other document admitting or failing to contest the material allegations of a
petition or other document filed or otherwise submitted against it in any
proceeding under any such applicable law, or (6) be adjudicated a bankrupt or
insolvent by a court of competent jurisdiction; or
(iv) any case, proceeding or other action shall be commenced
against the Company for the purpose of effecting, or an order, judgment or
decree shall be entered by any court of competent jurisdiction approving (in
whole or in part) anything specified in Section 2.2(c)(iii) hereof, or any
receiver, trustee, assignee, custodian, sequestrator, liquidator or other
official shall be appointed with respect to the Company, or shall be appointed
to take or shall otherwise acquire possession or control of all or a substantial
part of the assets and properties of the Company, and any of the foregoing shall
continue unstayed and in effect for any period of thirty (30) days.
3
ARTICLE 3.
ATTORNEY-IN-FACT; PERFORMANCE
-----------------------------
Section 3.1. Secured Party Appointed Attorney-In-Fact.
-----------------------------------------
Upon the occurrence of an Event of Default, the Company hereby appoints the
Secured Party as its attorney-in-fact, with full authority in the place and
stead of the Company and in the name of the Company or otherwise, from time to
time in the Secured Party's discretion to take any action and to execute any
instrument which the Secured Party may reasonably deem necessary to accomplish
the purposes of this Agreement, including, without limitation, to receive and
collect all instruments made payable to the Company representing any payments in
respect of the Pledged Property or any part thereof and to give full discharge
for the same. The Secured Party may demand, collect, receipt for, settle,
compromise, adjust, ▇▇▇ for, foreclose, or realize on the Pledged Property as
and when the Secured Party may determine. To facilitate collection, the Secured
Party may notify account debtors and obligors on any Pledged Property to make
payments directly to the Secured Party.
Section 3.2. Secured Party May Perform.
-------------------------
If the Company fails to perform any agreement contained herein, the Secured
Party, at its option, may itself perform, or cause performance of, such
agreement, and the expenses of the Secured Party incurred in connection
therewith shall be included in the Obligations secured hereby and payable by the
Company under Section 8.3.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES
------------------------------
The Company represents and warrants to the Secured Party that the following
representations and warranties are true and correct as of the date hereof. The
Company acknowledges that the Secured Party is relying on the representations
and warranties made by the Company hereunder and that such representations and
warranties are a material inducement to the Secured Party funding the Note. The
Company further acknowledges that without such representations and warranties of
the Company made hereunder, the Secured Party would not enter into the
Transaction Documents.
Section 4.1. Organization and Qualification
------------------------------
The Company and its subsidiaries are corporations duly organized and
validly existing in good standing under the laws of the jurisdiction in which
they are incorporated, and have the requisite corporate power to own their
properties and to carry on their business as now being conducted. Each of the
Company and its subsidiaries is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which the nature of
the business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not have
a material adverse effect on the Company and its subsidiaries taken as a whole.
4
Section 4.2. Authorization, Enforcement, Compliance with Other Instruments
-------------------------------------------------------------
The Company has the requisite corporate power and authority to enter into
and perform the Transaction Documents and any related agreements in accordance
with the terms hereof and thereof, (ii) the execution and delivery of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby, including, without limitation, the
issuance of the Note has been duly authorized by the Company's Board of
Directors and no further consent or authorization is required by the Company,
its Board of Directors or its stockholders, (iii) the Transaction Documents have
been duly executed and delivered by the Company, (iv) the Transaction Documents
constitute the valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors' rights and remedies. The
authorized officer of the Company executing the Transaction Documents knows of
no reason why the Company cannot perform the Company's obligations under the
Transaction Documents.
Section 4.3. Capitalization.
--------------
The authorized capital stock of the Company consists of 100 shares of
stock, all of which are designated as Common Stock, par value $0.01, of which
100 are outstanding. All of such outstanding shares have been validly issued and
are fully paid and nonassessable. Except as disclosed in the Disclosure
Schedules (the "DISCLOSURE SCHEDULE") attached hereto as Exhibit "B," no shares
of Common Stock are subject to preemptive rights or any other similar rights or
any liens or encumbrances suffered or permitted by the Company. Except as
disclosed in the Disclosure Schedule, as of the date of this Agreement, (i)
there are no outstanding options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its subsidiaries, (ii) there
are no outstanding debt securities and (iii) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of their securities under the Securities Act (except
pursuant to the Registration Rights Agreement between the Company and the
Secured Party dated the date hereof) and (iv) there are no outstanding
registration statements and there are no outstanding comment letters from the
SEC or any other regulatory agency. There are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Note as described in this Agreement. The Company has furnished
to the Secured Party true and correct copies of the Company's Certificate of
Incorporation, as amended and as in effect on the date hereof (the "CERTIFICATE
OF INCORPORATION"), and the Company's By-laws, as in effect on the date hereof
(the "BY-LAWS"), and the terms of all securities convertible into or exercisable
for Common Stock and the material rights of the holders thereof in respect
thereto other than stock options issued to employees and consultants.
5
Section 4.4. No Conflicts
------------
Except as disclosed in the Disclosure Schedule, the execution, delivery and
performance of the Transaction Documents by the Company and the consummation by
the Company of the transactions contemplated hereby will not (i) result in a
violation of the Certificate of Incorporation, any certificate of designations
of any outstanding series of preferred stock of the Company or the By-laws or
(ii) conflict with or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or result in a violation of any law, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations and the rules and regulations of The National Association of
Securities Dealers Inc.'s OTC Bulletin Board on which the Common Stock is
quoted) applicable to the Company or any of its subsidiaries or by which any
property or asset of the Company or any of its subsidiaries is bound or
affected. Except as disclosed in the Disclosure Schedule, neither the Company
nor its subsidiaries is in violation of any term of or in default under its
Certificate of Incorporation or By-laws or their organizational charter or
by-laws, respectively, or any material contract, agreement, mortgage,
indebtedness, indenture, instrument, judgment, decree or order or any statute,
rule or regulation applicable to the Company or its subsidiaries. The business
of the Company and its subsidiaries is not being conducted, and shall not be
conducted in violation of any law, ordinance, or regulation of any governmental
entity which would have a material adverse effect on the Company. Except as
specifically contemplated by this Agreement and as required under the Securities
Act and any applicable state securities laws, the Company is not required to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under or contemplated by this
Agreement in accordance with the terms hereof or thereof. Except as disclosed in
the Disclosure Schedule, all consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the date hereof. The
Company and its subsidiaries are unaware of any facts or circumstance, which
might give rise to any of the foregoing.
Section 4.5. Financial Statements
--------------------
As of their respective dates, the financial statements of the Company (the
"FINANCIAL STATEMENTS") for the two most recently completed fiscal years and any
subsequent interim period complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto. Such financial statements have been prepared in
accordance with generally accepted accounting principles, consistently applied,
during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may exclude footnotes or may be condensed
or summary statements) and, fairly present in all material respects the
financial position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). No other
information provided by or on behalf of the Company to the Investor contains any
untrue statement of a material fact or omits to state any material fact
6
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
Section 4.6. 10(b)
----
The Disclosure Schedule do not include any untrue statements of material
fact, nor do they omit to state any material fact required to be stated therein
necessary to make the statements made, in light of the circumstances under which
they were made, not misleading.
Section 4.7. Absence of Litigation
---------------------
Except as disclosed in the SED Documents, there is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending against or
affecting the Company, the Common Stock or any of the Company's subsidiaries,
wherein an unfavorable decision, ruling or finding would (i) have a material
adverse effect on the transactions contemplated hereby (ii) adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, this Agreement or any of the documents
contemplated herein, or (iii) except as expressly disclosed in the Disclosure
Schedule, have a material adverse effect on the business, operations,
properties, financial condition or results of operations of the Company and its
subsidiaries taken as a whole.
Section 4.8. Acknowledgment Regarding Secured Party's Acceptance of the
Note
----------------------------------------------------------
The Company acknowledges and agrees that the Secured Party is acting solely
in the capacity of an arm's length lender with respect to this Agreement and the
transactions contemplated hereby. The Company further acknowledges that the
Secured Party is not acting as a financial advisor or fiduciary of the Company
(or in any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by the Secured Party or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to such Secured Party's
acceptance of the Note. The Company further represents to the Secured Party that
the Company's decision to enter into this Agreement has been based solely on an
independent evaluation by the Company and its representatives.
Section 4.9. Intellectual Property Rights
----------------------------
The Company and its subsidiaries own or possess adequate rights or licenses
to use all trademarks, trade names, service marks, service ▇▇▇▇ registrations,
service names, patents, patent rights, copyrights, inventions, licenses,
approvals, governmental authorizations, trade secrets and rights necessary to
conduct their respective businesses as now conducted. The Company and its
subsidiaries do not have any knowledge of any infringement by the Company or its
subsidiaries of trademark, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service ▇▇▇▇
registrations, trade secret or other similar rights of others, and, to the
knowledge of the Company there is no claim, action or proceeding being made or
brought against, or to the Company's knowledge, being threatened against, the
Company or its subsidiaries regarding trademark, trade name, patents, patent
rights, invention, copyright, license, service names, service marks, service
▇▇▇▇ registrations, trade secret or other infringement; and the Company and its
7
subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing.
Section 4.10. Environmental Laws
------------------
The Company and its subsidiaries are (i) in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating to
the protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii)
have received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license or
approval.
Section 4.11. Title.
-----
Any real property and facilities held under lease by the Company and
its subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries.
Section 4.12. Insurance.
---------
The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as management of the Company believes to be prudent and customary in the
businesses in which the Company and its subsidiaries are engaged. Neither the
Company nor any such subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not materially
and adversely affect the condition, financial or otherwise, or the earnings,
business or operations of the Company and its subsidiaries, taken as a whole.
Section 4.13. Regulatory Permits
------------------
The Company and its subsidiaries possess all material certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, and
neither the Company nor any such subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit.
Section 4.14. Internal Accounting Controls
----------------------------
The Company and each of its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability, and (iii) the
8
recorded amounts for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
Section 4.15. No Material Adverse Breaches, etc.
----------------------------------
Except as disclosed in the Disclosure Schedule, neither the Company nor any
of its subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is expected in the future to have a
material adverse effect on the business, properties, operations, financial
condition, results of operations or prospects of the Company or its
subsidiaries. Except as disclosed in the Disclosure Schedule, neither the
Company nor any of its subsidiaries is in breach of any contract or agreement
which breach, in the judgment of the Company's officers, has or is expected to
have a material adverse effect on the business, properties, operations,
financial condition, results of operations or prospects of the Company or its
subsidiaries.
Section 4.16. Tax Status
----------
Except as set forth in the Disclosure Schedule, the Company and each of its
subsidiaries has made and filed all federal and state income and all other tax
returns, reports and declarations required by any jurisdiction to which it is
subject and (unless and only to the extent that the Company and each of its
subsidiaries has set aside on its books provisions reasonably adequate for the
payment of all unpaid and unreported taxes) has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provision
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim.
Section 4.17. Employee Relations
------------------
Neither the Company nor any of its subsidiaries is involved in any labor
dispute nor, to the knowledge of the Company or any of its subsidiaries, is any
such dispute threatened. None of the Company's or its subsidiaries' employees is
a member of a union and the Company and its subsidiaries believe that their
relations with their employees are good.
Section 4.18. Certain Transactions
--------------------
Except as set forth in the Disclosure Schedule and except for arm's length
transactions pursuant to which the Company makes payments in the ordinary course
of business upon terms no less favorable than the Company could obtain from
third parties and other than the grant of stock options disclosed in the
Disclosure Schedule, none of the officers, directors, or employees of the
Company is presently a party to any transaction with the Company (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
9
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
Section 4.17. Ownership of Pledged Property
-----------------------------
The Company warrants and represents that it is the legal and beneficial
owner of the Pledged Property free and clear of any lien, security interest,
option or other charge or encumbrance except for the security interest created
by this Agreement.
ARTICLE 5.
DEFAULT; REMEDIES
-----------------
Section 5.1. Default and Remedies.
--------------------
(a) If an Event of Default described in Section 2.2(c)(i) and (ii)
occurs, then in each such case the Secured Party may declare the Obligations to
be due and payable immediately, by a notice in writing to the Company, and upon
any such declaration, the Obligations shall become immediately due and payable
and the Secured Party can immediately exercise any of its rights and remedies
pursuant to the Transaction Documents or under any applicable law. If an Event
of Default described in Sections 2.2(c)(iii) or (iv) occurs and is continuing
for the period set forth therein, then the Obligations shall automatically
become immediately due and payable without declaration or other act on the part
of the Secured Party and the Secured Party can immediately exercise any of its
rights and remedies pursuant to the Transaction Documents and under any
applicable law.
(b) Upon the occurrence of an Event of Default, the Secured Party
shall: (i) be entitled to receive all distributions with respect to the Pledged
Property, (ii) to cause the Pledged Property to be transferred into the name of
the Secured Party or its nominee, (iii) to dispose of the Pledged Property, (iv)
to realize upon any and all rights in the Pledged Property then held by the
Secured Party, and (v) exercise any of its rights and remedies pursuant to the
Transaction Documents and any applicable law.
Section 5.2. Method of Realizing Upon the Pledged Property: Other Remedies.
-------------------------------------------------------------
Upon the occurrence of an Event of Default, in addition to any rights and
remedies available at law or in equity, the following provisions shall govern
the Secured Party's right to realize upon the Pledged Property:
(a) Any item of the Pledged Property may be sold for cash or other
value in any number of lots at brokers board, public auction or private sale and
may be sold without demand, advertisement or notice (except that the Secured
Party shall give the Company ten (10) days' prior written notice of the time and
place or of the time after which a private sale may be made (the "SALE
NOTICE")), which notice period is hereby agreed to be commercially reasonable.
At any sale or sales of the Pledged Property, the Company may bid for and
purchase the whole or any part of the Pledged Property and, upon compliance with
the terms of such sale, may hold, exploit and dispose of the same without
further accountability to the Secured Party. The Company will execute and
deliver, or cause to be executed and delivered, such instruments, documents,
10
assignments, waivers, certificates, and affidavits and supply or cause to be
supplied such further information and take such further action as the Secured
Party reasonably shall require in connection with any such sale.
(b) Any cash being held by the Secured Party as Pledged Property and
all cash proceeds received by the Secured Party in respect of, sale of,
collection from, or other realization upon all or any part of the Pledged
Property shall be applied as follows:
(i) to the payment of all amounts due the Secured Party for the
expenses reimbursable to it hereunder or owed to it pursuant to Section 8.3
hereof;
(ii) to the payment of the Obligations then due and unpaid.
(iii) the balance, if any, to the person or persons entitled
thereto, including, without limitation, the Company.
(c) In addition to all of the rights and remedies which the Secured
Party may have pursuant to this Agreement, the Secured Party shall have all of
the rights and remedies provided by law, including, without limitation, those
under the Uniform Commercial Code.
(i) If the Company fails to pay such amounts due upon the
occurrence of an Event of Default which is continuing, then the Secured Party
may institute a judicial proceeding for the collection of the sums so due and
unpaid, may prosecute such proceeding to judgment or final decree and may
enforce the same against the Company and collect the monies adjudged or decreed
to be payable in the manner provided by law out of the property of Company,
wherever situated.
(ii) The Company agrees that it shall be liable for any
reasonable fees, expenses and costs incurred by the Secured Party in connection
with enforcement, collection and preservation of the Transaction Documents,
including, without limitation, reasonable legal fees and expenses, and such
amounts shall be deemed included as Obligations secured hereby and payable as
set forth in Section 8.3 hereof.
Section 5.3. Proofs of Claim.
---------------
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relating to the Company or the property of the Company or of
such other obligor or its creditors, the Secured Party (irrespective of whether
the Obligations shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Secured Party shall
have made any demand on the Company for the payment of the Obligations), subject
to the rights of Previous Security Holders, shall be entitled and empowered, by
intervention in such proceeding or otherwise:
(i) to file and prove a claim for the whole amount of the
Obligations and to file such other papers or documents as may be necessary or
advisable in order to have the claims of the Secured Party (including any claim
11
for the reasonable legal fees and expenses and other expenses paid or incurred
by the Secured Party permitted hereunder and of the Secured Party allowed in
such judicial proceeding), and
(ii) to collect and receive any monies or other property payable
or deliverable on any such claims and to distribute the same; and any custodian,
receiver, assignee, trustee, liquidator, sequestrator or other similar official
in any such judicial proceeding is hereby authorized by the Secured Party to
make such payments to the Secured Party and, in the event that the Secured Party
shall consent to the making of such payments directed to the Secured Party, to
pay to the Secured Party any amounts for expenses due it hereunder.
Section 5.4. Duties Regarding Pledged Property.
---------------------------------
The Secured Party shall have no duty as to the collection or protection of
the Pledged Property or any income thereon or as to the preservation of any
rights pertaining thereto, beyond the safe custody and reasonable care of any of
the Pledged Property actually in the Secured Party's possession.
ARTICLE 6.
AFFIRMATIVE COVENANTS
---------------------
The Company covenants and agrees that, from the date hereof and until the
Obligations have been fully paid and satisfied, unless the Secured Party shall
consent otherwise in writing (as provided in Section 8.4 hereof):
Section 6.1. Existence, Properties, Etc.
---------------------------
(a) The Company shall do, or cause to be done, all things, or proceed
with due diligence with any actions or courses of action, that may be reasonably
necessary (i) to maintain Company's due organization, valid existence and good
standing under the laws of its state of incorporation, and (ii) to preserve and
keep in full force and effect all qualifications, licenses and registrations in
those jurisdictions in which the failure to do so could have a Material Adverse
Effect (as defined below); and (b) the Company shall not do, or cause to be
done, any act impairing the Company's corporate power or authority (i) to carry
on the Company's business as now conducted, and (ii) to execute or deliver this
Agreement or any other document delivered in connection herewith, including,
without limitation, any UCC-1 Financing Statements required by the Secured Party
to which it is or will be a party, or perform any of its obligations hereunder
or thereunder. For purpose of this Agreement, the term "MATERIAL ADVERSE EFFECT"
shall mean any material and adverse affect as determined by Secured Party in its
sole discretion, whether individually or in the aggregate, upon (a) the
Company's assets, business, operations, properties or condition, financial or
otherwise; (b) the Company's to make payment as and when due of all or any part
of the Obligations; or (c) the Pledged Property.
Section 6.2. Financial Statements and Reports.
--------------------------------
The Company shall furnish to the Secured Party such financial data as the
Secured Party may reasonably request. Without limiting the foregoing, the
Company shall furnish to the Secured Party (or cause to be furnished to the
Secured Party) the following:
12
(a) as soon as practicable and in any event within ninety (90) days
after the end of each fiscal year of the Company, the balance sheet of the
Company as of the close of such fiscal year, the statement of earnings and
retained earnings of the Company as of the close of such fiscal year, and
statement of cash flows for the Company for such fiscal year, all in reasonable
detail, prepared in accordance with generally accepted accounting principles
consistently applied, certified by the chief executive and chief financial
officers of the Company as being true and correct and accompanied by a
certificate of the chief executive and chief financial officers of the Company,
stating that the Company has kept, observed, performed and fulfilled each
covenant, term and condition of this Agreement during such fiscal year and that
no Event of Default hereunder has occurred and is continuing, or if an Event of
Default has occurred and is continuing, specifying the nature of same, the
period of existence of same and the action the Company proposes to take in
connection therewith;
(b) within thirty (30) days of the end of each calendar month, a
balance sheet of the Company as of the close of such month, and statement of
earnings and retained earnings of the Company as of the close of such month, all
in reasonable detail, and prepared substantially in accordance with generally
accepted accounting principles consistently applied, certified by the chief
executive and chief financial officers of the Company as being true and correct;
and
(c) promptly upon receipt thereof, copies of all accountants' reports
and accompanying financial reports submitted to the Company by independent
accountants in connection with each annual examination of the Company.
Section 6.3. Accounts and Reports.
--------------------
The Company shall maintain a standard system of accounting in accordance
with generally accepted accounting principles consistently applied and provide,
at its sole expense, to the Secured Party the following:
(a) as soon as available, a copy of any notice or other communication
alleging any nonpayment or other material breach or default, or any foreclosure
or other action respecting any material portion of its assets and properties,
received respecting any of the indebtedness of the Company in excess of $15,000
(other than the Obligations), or any demand or other request for payment under
any guaranty, assumption, purchase agreement or similar agreement or arrangement
respecting the indebtedness or obligations of others in excess of $15,000,
including any received from any person acting on behalf of the Secured Party or
beneficiary thereof; and
(b) within fifteen (15) days after the making of each submission or
filing, a copy of any report, financial statement, notice or other document,
whether periodic or otherwise, submitted to the shareholders of the Company, or
submitted to or filed by the Company with any governmental authority involving
or affecting (i) the Company that could have a Material Adverse Effect; (ii) the
Obligations; (iii) any part of the Pledged Property; or (iv) any of the
transactions contemplated in this Agreement or the Note.
Section 6.4. Maintenance of Books and Records; Inspection.
--------------------------------------------
The Company shall maintain its books, accounts and records in accordance
with generally accepted accounting principles consistently applied, and permit
13
the Secured Party, its officers and employees and any professionals designated
by the Secured Party in writing, upon reasonable notice and within the Company's
normal business hours, visit and inspect any of its properties (including but
not limited to the collateral security described in the Transaction Documents
and/or the Loan Instruments), corporate books and financial records, and to
discuss its accounts, affairs and finances with any employee, officer or
director thereof.
Section 6.5. Maintenance and Insurance.
-------------------------
(a) The Company shall maintain or cause to be maintained, at its own
expense, all of its assets and properties in good working order and condition,
making all necessary repairs thereto and renewals and replacements thereof.
(b) The Company shall maintain or cause to be maintained, at its own
expense, insurance in form, substance and amounts (including deductibles), which
the Company deems reasonably necessary to the Company's business, (i) adequate
to insure all assets and properties of the Company, which assets and properties
are of a character usually insured by persons engaged in the same or similar
business against loss or damage resulting from fire or other risks included in
an extended coverage policy; (ii) against public liability and other tort claims
that may be incurred by the Company; (iii) as may be required by the Transaction
Documents and/or applicable law and (iv) as may be reasonably requested by
Secured Party, all with adequate, financially sound and reputable insurers.
Section 6.6. Contracts and Other Collateral.
------------------------------
The Company shall perform all of its obligations under or with respect to
each instrument, receivable, contract and other intangible included in the
Pledged Property to which the Company is now or hereafter will be party on a
timely basis and in the manner therein required, including, without limitation,
this Agreement.
Section 6.7. Defense of Collateral, Etc.
---------------------------
The Company shall defend and enforce its right, title and interest in and
to any part of: (a) the Pledged Property; and (b) if not included within the
Pledged Property, those assets and properties whose loss could have a Material
Adverse Effect, the Company shall defend the Secured Party's right, title and
interest in and to each and every part of the Pledged Property, each against all
manner of claims and demands on a timely basis to the full extent permitted by
applicable law.
Section 6.8. Payment of Debts, Taxes, Etc.
-----------------------------
The Company shall pay, or cause to be paid, in accordance with its normal
and customary business practices and the business practices of its creditors,
all of its indebtedness and other liabilities and perform, or cause to be
performed, all of its obligations in accordance with the respective terms
thereof, and pay and discharge, or cause to be paid or discharged, all taxes,
assessments and other governmental charges and levies imposed upon it, upon any
of its assets and properties on or before the last day on which the same may be
paid without penalty, as well as pay all other lawful claims (whether for
services, labor, materials, supplies or otherwise) as and when due under Company
policy.
14
Section 6.9. Taxes and Assessments; Tax Indemnity.
------------------------------------
The Company shall (a) file all tax returns and appropriate schedules
thereto that are required to be filed under applicable law, prior to the date of
delinquency, (b) pay and discharge all taxes, assessments and governmental
charges or levies imposed upon the Company, upon its income and profits or upon
any properties belonging to it, prior to the date on which penalties attach
thereto, and (c) pay all taxes, assessments and governmental charges or levies
that, if unpaid, might become a lien or charge upon any of its properties;
PROVIDED, HOWEVER, that the Company in good faith may contest any such tax,
assessment, governmental charge or levy described in the foregoing clauses (b)
and (c) so long as appropriate reserves are maintained with respect thereto.
Section 6.10. Compliance with Law and Other Agreements.
----------------------------------------
The Company shall maintain its business operations and property owned or
used in connection therewith in compliance with (a) all applicable federal,
state and local laws, regulations and ordinances governing such business
operations and the use and ownership of such property, and (b) all agreements,
licenses, franchises, indentures and mortgages to which the Company is a party
or by which the Company or any of its properties is bound. Without limiting the
foregoing, the Company shall pay all of its indebtedness promptly in accordance
with the terms thereof.
Section 6.11. Notice of Default.
-----------------
The Company shall give written notice to the Secured Party of the
occurrence of any default or Event of Default under this Agreement, the
Transaction Documents or any other Loan Instrument or any other agreement of
Company for the payment of money, promptly upon the occurrence thereof.
Section 6.12. Notice of Litigation.
--------------------
The Company shall give notice, in writing, to the Secured Party of (a) any
actions, suits or proceedings wherein the amount at issue is in excess of
$50,000, instituted by any persons against the Company, or affecting any of the
assets of the Company, and (b) any dispute, not resolved within fifteen (15)
days of the commencement thereof, between the Company on the one hand and any
governmental or regulatory body on the other hand, which might reasonably be
expected to have a Material Adverse Effect on the business operations or
financial condition of the Company.
Section 6.13. Reporting Status
----------------
Until the date on which the entire outstanding principal and interest of
the Note has been satisfied, the Company shall file in a timely manner all
reports required to be filed with the SEC pursuant to the Exchange Act and the
regulations of the SEC thereunder, and the Company shall not terminate its
status as an issuer required to file reports under the Exchange Act even if the
Exchange Act or the rules and regulations thereunder would otherwise permit such
termination.
15
Section 6.14. Listings of Quotation
---------------------
The Company shall within ninety (90) days of the date hereof obtain and
maintain the listing or quotation of the Common Stock upon each national
securities exchange, automated quotation system or The National Association of
Securities Dealers Inc.'s Over-The-Counter Bulletin Board ("OTCBB") or other
market, if any, upon which shares of Common Stock are then listed or quoted
(subject to official notice of issuance). The Company shall maintain the Common
Stock's authorization for quotation on the OTCBB.
Section 6.15. Corporate Existence
-------------------
So long as any portion of the Note is outstanding, other than the
completion of a merger with a public shell company as contemplated herein, the
Company shall not directly or indirectly consummate any merger, reorganization,
restructuring, reverse stock split consolidation, sale of all or substantially
all of the Company's assets or any similar transaction or related transactions
(each such transaction, an "ORGANIZATIONAL CHANGE") unless, prior to the
consummation of an Organizational Change, the Company obtains the written
consent of the Secured Party. In any such case, the Company will make
appropriate provision with respect to such holders' rights and interests to
insure that the provisions of this Section 6.15 will thereafter be applicable to
the Note.
Section 6.16. Transactions With Affiliates
----------------------------
So long as any portion of the Note is outstanding, the Company shall not,
and shall cause each of its subsidiaries not to, enter into, amend, modify or
supplement, or permit any subsidiary to enter into, amend, modify or supplement
any agreement, transaction, commitment, or arrangement with any of its or any
subsidiary's officers, directors, person who were officers or directors at any
time during the previous two (2) years, stockholders who beneficially own five
percent (5%) or more of the Common Stock, or Affiliates (as defined below) or
with any individual related by blood, marriage, or adoption to any such
individual or with any entity in which any such entity or individual owns a five
percent (5%) or more beneficial interest (each a "RELATED PARTY"), except for
(a) customary employment arrangements and benefit programs on reasonable terms,
(b) any investment in an Affiliate of the Company, (c) any agreement,
transaction, commitment, or arrangement on an arms-length basis on terms no less
favorable than terms which would have been obtainable from a person other than
such Related Party, (d) any agreement transaction, commitment, or arrangement
which is approved by a majority of the disinterested directors of the Company,
for purposes hereof, any director who is also an officer of the Company or any
subsidiary of the Company shall not be a disinterested director with respect to
any such agreement, transaction, commitment, or arrangement. "AFFILIATE" for
purposes hereof means, with respect to any person or entity, another person or
entity that, directly or indirectly, (i) has a ten percent (10%) or more equity
interest in that person or entity, (ii) has ten percent (10%) or more common
ownership with that person or entity, (iii) controls that person or entity, or
(iv) shares common control with that person or entity. "CONTROL" or "CONTROLS"
for purposes hereof means that a person or entity has the power, direct or
indirect, to conduct or govern the policies of another person or entity.
16
Section 6.14. Restriction on Issuance of the Capital Stock
--------------------------------------------
So long as any portion of the Note is outstanding, the Company shall not,
without the prior written consent of the Secured Party, (i) issue or sell shares
of Common Stock or Preferred Stock, (ii) issue any warrant, option, right,
contract, call, or other security instrument granting the holder thereof, the
right to acquire Common Stock without, (iii) enter into any security instrument
granting the holder a security interest in any and all assets of the Company, or
(iv) file any registration statement on Form S-8.
Section 6.15. Transfer Agent
--------------
In the event that the Company's agency relationship with the transfer agent
is terminated for any reason prior to a date which is two (2) years after the
Closing Date, the Company shall immediately appoint a new transfer agent.
Section 6.16. Merger
------
The Company shall consummate the merger with Acorn Holding Corp. within
forty five (45) days from the date hereof.
ARTICLE 7.
NEGATIVE COVENANTS
------------------
The Company covenants and agrees that, from the date hereof until the
Obligations have been fully paid and satisfied, the Company shall not, unless
the Secured Party shall consent otherwise in writing:
Section 7.1. Liens and Encumbrances.
----------------------
The Company shall not directly or indirectly make, create, incur, assume or
permit to exist any assignment, transfer, pledge, mortgage, security interest or
other lien or encumbrance of any nature in, to or against any part of the
Pledged Property or of the Company's capital stock, or offer or agree to do so,
or own or acquire or agree to acquire any asset or property of any character
subject to any of the foregoing encumbrances (including any conditional sale
contract or other title retention agreement), or assign, pledge or in any way
transfer or encumber its right to receive any income or other distribution or
proceeds from any part of the Pledged Property or the Company's capital stock;
or enter into any sale-leaseback financing respecting any part of the Pledged
Property as lessee, or cause or assist the inception or continuation of any of
the foregoing.
Section 7.2. Certificate of Incorporation, By-Laws, Mergers,
Consolidations, Acquisitions and Sales.
-----------------------------------------------
Without the prior express written consent of the Secured Party, the Company
shall not: (a) Amend its Certificate of Incorporation or By-Laws; (b) issue or
sell its stock, stock options, bonds, notes or other corporate securities or
obligations; (c) be a party to any merger, consolidation or corporate
17
reorganization, (d) purchase or otherwise acquire all or substantially all of
the assets or stock of, or any partnership or joint venture interest in, any
other person, firm or entity, (e) sell, transfer, convey, grant a security
interest in or lease all or any substantial part of its assets, nor (f) create
any subsidiaries nor convey any of its assets to any subsidiary.
Section 7.3. Management, Ownership.
---------------------
The Company shall not materially change its ownership, executive staff or
management without the prior written consent of the Secured Party. The
ownership, executive staff and management of the Company are material factors in
the Secured Party's willingness to institute and maintain a lending relationship
with the Company.
Section 7.4. Dividends, Etc.
---------------
The Company shall not declare or pay any dividend of any kind, in cash or
in property, on any class of its capital stock, nor purchase, redeem, retire or
otherwise acquire for value any shares of such stock, nor make any distribution
of any kind in respect thereof, nor make any return of capital to shareholders,
nor make any payments in respect of any pension, profit sharing, retirement,
stock option, stock bonus, incentive compensation or similar plan (except as
required or permitted hereunder), without the prior written consent of the
Secured Party.
Section 7.5. Guaranties; Loans.
-----------------
The Company shall not guarantee nor be liable in any manner, whether
directly or indirectly, or become contingently liable after the date of this
Agreement in connection with the obligations or indebtedness of any person or
persons, except for (i) the indebtedness currently secured by the liens
identified on the Pledged Property identified on Exhibit A hereto and (ii) the
endorsement of negotiable instruments payable to the Company for deposit or
collection in the ordinary course of business. The Company shall not make any
loan, advance or extension of credit to any person other than in the normal
course of its business.
Section 7.6. Debt.
----
The Company shall not create, incur, assume or suffer to exist any
additional indebtedness of any description whatsoever in an aggregate amount in
excess of $25,000 (excluding any indebtedness of the Company to the Secured
Party, trade accounts payable and accrued expenses incurred in the ordinary
course of business and the endorsement of negotiable instruments payable to the
Company, respectively for deposit or collection in the ordinary course of
business).
Section 7.7. Conduct of Business.
-------------------
The Company will continue to engage, in an efficient and economical manner,
in a business of the same general type as conducted by it on the date of this
Agreement.
Section 7.8. Places of Business.
-----------------
The location of the Company's chief place of business is ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇▇▇, ▇▇, ▇▇▇▇▇. The Company shall not change the location of its chief place
18
of business, chief executive office or any place of business disclosed to the
Secured Party or move any of the Pledged Property from its current location
without thirty (30) days' prior written notice to the Secured Party in each
instance.
Section 7.9. Payment of Loans from Insiders.
------------------------------
The Company shall not apply any of the proceeds received under the Note to
repay any portion of the loans from any officers, directors or shareholders
while any portion of principal or interest of the Note is outstanding.
ARTICLE 8.
MISCELLANEOUS
-------------
Section 8.1. Notices.
-------
All notices or other communications required or permitted to be given
pursuant to this Agreement shall be in writing and shall be considered as duly
given on: (a) the date of delivery, if delivered in person, by nationally
recognized overnight delivery service or (b) five (5) days after mailing if
mailed from within the continental United States by certified mail, return
receipt requested to the party entitled to receive the same:
If to the Secured Party: ▇▇▇▇▇▇▇▇▇▇ Equity Partners, Ltd.
▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇-▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇ ▇▇▇▇▇▇
Portfolio Manager
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
With a copy to: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇, Esq.
▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇ - ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
19
And if to the Company: Valentec Systems, Inc.
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
With a copy to: ▇▇▇▇▇▇ ▇▇▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇.▇. - ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇.▇. ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Any party may change its address by giving notice to the other party
stating its new address. Commencing on the tenth (10th) day after the giving of
such notice, such newly designated address shall be such party's address for the
purpose of all notices or other communications required or permitted to be given
pursuant to this Agreement.
Section 8.2. Severability.
------------
If any provision of this Agreement shall be held invalid or unenforceable,
such invalidity or unenforceability shall attach only to such provision and
shall not in any manner affect or render invalid or unenforceable any other
severable provision of this Agreement, and this Agreement shall be carried out
as if any such invalid or unenforceable provision were not contained herein.
Section 8.3. Expenses.
--------
In the event of an Event of Default, the Company will pay to the Secured
Party the amount of any and all reasonable expenses, including the reasonable
fees and expenses of its counsel, which the Secured Party may incur in
connection with: (i) the custody or preservation of, or the sale, collection
from, or other realization upon, any of the Pledged Property; (ii) the exercise
or enforcement of any of the rights of the Secured Party hereunder or (iii) the
failure by the Company to perform or observe any of the provisions hereof.
Section 8.4. Waivers, Amendments, Etc.
-------------------------
The Secured Party's delay or failure at any time or times hereafter to
require strict performance by Company of any undertakings, agreements or
covenants shall not waiver, affect, or diminish any right of the Secured Party
under this Agreement to demand strict compliance and performance herewith. Any
waiver by the Secured Party of any Event of Default shall not waive or affect
any other Event of Default, whether such Event of Default is prior or subsequent
thereto and whether of the same or a different type. None of the undertakings,
agreements and covenants of the Company contained in this Agreement, and no
Event of Default, shall be deemed to have been waived by the Secured Party, nor
may this Agreement be amended, changed or modified, unless such waiver,
amendment, change or modification is evidenced by an instrument in writing
20
specifying such waiver, amendment, change or modification and signed by the
Secured Party.
Section 8.5. Continuing Security Interest.
----------------------------
This Agreement shall create a continuing security interest in the Pledged
Property and shall: (i) remain in full force and effect until payment in full of
the Obligations; and (ii) be binding upon the Company and its successors and
heirs and (iii) inure to the benefit of the Secured Party and its successors and
assigns. Upon the payment or satisfaction in full of the Obligations, the
Company shall be entitled to the return, at its expense, of such of the Pledged
Property as shall not have been sold in accordance with Section 5.2 hereof or
otherwise applied pursuant to the terms hereof.
Section 8.6. Independent Representation.
--------------------------
Each party hereto acknowledges and agrees that it has received or has had
the opportunity to receive independent legal counsel of its own choice and that
it has been sufficiently apprised of its rights and responsibilities with regard
to the substance of this Agreement.
Section 8.7. Applicable Law: Jurisdiction.
----------------------------
This Agreement shall be governed by and interpreted in accordance with the
laws of the State of New Jersey without regard to the principles of conflict of
laws. The parties further agree that any action between them shall be heard in
▇▇▇▇▇▇ County, New Jersey, and expressly consent to the jurisdiction and venue
of the Superior Court of New Jersey, sitting in ▇▇▇▇▇▇ County and the United
States District Court for the District of New Jersey sitting in Newark, New
Jersey for the adjudication of any civil action asserted pursuant to this
Paragraph.
Section 8.8. Waiver of Jury Trial.
--------------------
AS A FURTHER INDUCEMENT FOR THE SECURED PARTY TO ENTER INTO THIS AGREEMENT
AND TO MAKE THE FINANCIAL ACCOMMODATIONS TO THE COMPANY, THE COMPANY HEREBY
WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO
THIS AGREEMENT AND/OR ANY AND ALL OTHER DOCUMENTS RELATED TO THIS TRANSACTION.
Section 8.9. Entire Agreement.
----------------
This Agreement constitutes the entire agreement among the parties and
supersedes any prior agreement or understanding among them with respect to the
subject matter hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
21
IN WITNESS WHEREOF, the parties hereto have executed this Security
Agreement as of the date first above written.
VALENTEC SYSTEMS, INC.
By: /s/ ▇▇▇▇▇▇ ▇▇▇▇▇
------------------------------
Name: ▇▇▇▇▇▇ ▇▇▇▇▇
Title: CEO
SECURED PARTY:
▇▇▇▇▇▇▇▇▇▇ EQUITY PARTNERS,
LTD.
By: /s/ ▇▇▇▇ ▇▇▇▇▇▇
------------------------------
Name: ▇▇▇▇ ▇▇▇▇▇▇
Title: Portfolio Manager
22
EXHIBIT A
DEFINITION OF PLEDGED PROPERTY
For the purpose of securing prompt and complete payment and performance by
the Company of all of the Obligations, the Company unconditionally and
irrevocably hereby grants to the Secured Party a continuing security interest in
and to, and lien upon, the following Pledged Property of the Company:
(a) all goods of the Company, including, without limitation,
machinery, equipment, furniture, furnishings, fixtures, signs, lights, tools,
parts, supplies and motor vehicles of every kind and description, now or
hereafter owned by the Company or in which the Company may have or may hereafter
acquire any interest, and all replacements, additions, accessions, substitutions
and proceeds thereof, arising from the sale or disposition thereof, and where
applicable, the proceeds of insurance and of any tort claims involving any of
the foregoing;
(b) all inventory of the Company, including, but not limited to, all
goods, wares, merchandise, parts, supplies, finished products, other tangible
personal property, including such inventory as is temporarily out of Company's
custody or possession and including any returns upon any accounts or other
proceeds, including insurance proceeds, resulting from the sale or disposition
of any of the foregoing;
(c) all contract rights and general intangibles of the Company,
including, without limitation, goodwill, trademarks, trade styles, trade names,
leasehold interests, partnership or joint venture interests, patents and patent
applications, copyrights, deposit accounts whether now owned or hereafter
created;
(d) all documents, warehouse receipts, instruments and chattel paper
of the Company whether now owned or hereafter created;
(e) all accounts and other receivables, instruments or other forms of
obligations and rights to payment of the Company (herein collectively referred
to as "ACCOUNTS"), together with the proceeds thereof, all goods represented by
such Accounts and all such goods that may be returned by the Company's
customers, and all proceeds of any insurance thereon, and all guarantees,
securities and liens which the Company may hold for the payment of any such
Accounts including, without limitation, all rights of stoppage in transit,
replevin and reclamation and as an unpaid vendor and/or lienor, all of which the
Company represents and warrants will be bona fide and existing obligations of
its respective customers, arising out of the sale of goods by the Company in the
ordinary course of business;
(f) to the extent assignable, all of the Company's rights under all
present and future authorizations, permits, licenses and franchises issued or
granted in connection with the operations of any of its facilities;
(g) all products and proceeds (including, without limitation,
insurance proceeds) from the above-described Pledged Property.
A-1
EXHIBIT B
---------
DISCLOSURE SCHEDULE
-------------------
A-2