PROMISSORY NOTE
September 10, 1999
1. For value received, 1373224 Ontario Limited (the "Company") promises to
pay to Arthur Andersen Inc., or its permitted assigns (the "Holder") or
order at Commerce Court West, Toronto, Ontario, annually on November 30 of
each of the five fiscal years of the Company commencing November 30, 2000,
an amount equal to 50% of EBITDA of the Company for the immediately
preceding annual fiscal year; provided that such payment dates will be
automatically changed in the event that the fiscal year of the Company is
changed so that the payment dates will be those dates which fall 90 days
from the end of the Company's then current fiscal year.
2. For the purposes of this promissory note, EBITDA means, for any period,
the sum of (a) the net income of the Company for such period, plus (b)
interest charges and other debt service charges paid or accrued in respect
of such period, plus (c) income taxes whether paid or deferred which are
deducted in determining the net income for such period, if any, plus (d)
depreciation and amortization expense for such period, all as defined and
determined in accordance with generally accepted accounting principles in
Canada consistently applied; provided that in determining EBITDA for the
first fiscal year of the Company, inter-corporate charges ("Charges") to
the Company made by any company, or firm related to the Company for
services shall not exceed 90% of the annualized expenses of GalaVu
Entertainment Inc. for all similar annualized services incurred during the
period from February 1, 1999 to July 31, 1999 and for the following fiscal
years of the Company, the limit of the Charges shall not exceed the ratio
of the Charges to the total revenues of the Company for the initial fiscal
year applied to the revenues of the Company for each of the following
fiscal years.
3. In the event that the amount payable by the Company to the Holder in
accordance with paragraph 1 is less than the amount indicated below for
such fiscal year, then the Company will pay to the Holder within 30 days
following the issuance of the audited statements of Networks North Inc.
("NETN") for such fiscal year, and in any event no later than 90 days
following the Company's fiscal year end, such amount as will result in the
Holder receiving for such fiscal year the minimum amount indicated below:
-------------------------------------------------------
Fiscal Year Ending Amount
-------------------------------------------------------
2000 $ 300,000
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2001 $ 500,000
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2002 $ 750,000
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2003 $ 875,000
-------------------------------------------------------
2004 $ 875,000
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4. The amounts required to be paid by the Company to the Holder under
paragraph 3, at the option of the Company, exercisable in each fiscal year
may be paid in cash or in common shares of NETN, valued at the weighted
average trading price of shares of common stock of NETN on NASDAQ for the
20 days on which such shares traded on NASDAQ immediately preceding the
date of payment, provided that for the year ending August 31, 2000 the
minimum price per share will not be less than US$5.00. In the event that
the Company elects to pay in common shares then the amount required to be
paid will be converted into United States funds at the noon exchange rate
announced by the Bank of Canada on the second business day in Canada prior
to the date of payment.
5. This promissory note is secured by a security interest over all of the
undertaking, property and assets both present and future of the Company,
subject to Permitted Encumbrances as defined in such security and in
addition the promissory note is secured by a pledge of all of the issued
and outstanding shares from time to time of the Company (collectively, the
"Security").
6. The Company covenants with the Holder that so long as this promissory note
is outstanding it will: (a) furnish such information to the Holder as the
Holder from time to time may request in order to verify the calculation of
EBITDA for any period and permit the Holder at its expense to examine the
books and records of the Company and NETN and its other subsidiaries,
related and associated companies in respect of periods, both prior to and
after the date of this promissory note until all amounts owing pursuant to
this promissory note have been paid to the Holder; (b) carry on the
business carried on by GalaVu Entertainment Inc. and businesses ancillary
thereto and not engage in any other business without the consent of the
Holder, not to be unreasonably withheld; (c) it will not sell or otherwise
dispose of its assets out of the ordinary course of business and will not
merge or amalgamate or enter into any re-organization without the consent
of the Holder, not to be unreasonably withheld; and (d) not enter into any
transaction with a related party which is not on a commercially reasonable
arm's-length basis.
7. Upon default by the Company under the Security or in the payment or
performance of its obligations hereunder, in addition to any other
remedies which may be available, the Holder may upon notice to the Company
accelerate payment of the amounts referred to in paragraph 3 of this
promissory note and may enforce the Security in accordance with the terms
of the Security.
8. Any amounts not paid when due hereunder shall bear interest at the rate of
interest per annum quoted from time to time by Canadian Imperial Bank of
Commerce as its prime interest rate for Canadian dollar commercial loans
in Canada plus 2% per annum.
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9. The Holder may assign this promissory note to Canadian Imperial Bank of
Commerce ("CIBC") or any company within the CIBC group of companies
without the Company's consent, and may assign the promissory note to
others only with the consent of the Company, such consent not to be
unreasonably withheld. Upon default by the Company in the payment or
performance of its obligations hereunder, this note may be assigned
without the Company's consent.
DATED AT Toronto this 10th day of September, 1999.
1373224 ONTARIO LIMITED
By:_________________________________
Name:
Title:
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COVENANT
Networks North Inc. ("NETN") for valuable consideration covenants to allot and
issue and pay to the Holder such number of common shares of NETN at such times
as may be required by paragraph 4 of the above promissory note. Such shares will
be (i) validly issued pursuant to duly authorized resolutions of the board of
directors of NETN as fully paid and non-assessable shares in the capital of NETN
free of any lien, charge, encumbrance, security interest or adverse claim; (ii)
listed on NASDAQ ("NASDAQ"); and (iii) restricted securities within the meaning
of Rule 144 promulgated under the Securities Act and may not be sold pursuant to
Rule 144 for at least 12 months and thereafter may be sold only pursuant to Rule
144 or pursuant to a registration statement filed under the Securities Act or
other applicable exemption under the Securities Act; provided however that NETN
agrees that from the date hereof the Holder shall have unlimited tag along
rights in connection with all registration statements filed by NETN from time to
time including the pro rata right to participate with other selling shareholders
based upon the number of shares offered for sale by each holder, with customary
indemnity and contribution provisions from NETN in favour of any underwriters
and such selling shareholder and with all customary expenses of such
registration to be borne by NETN, and the expense for underwriting discounts or
commissions to be borne by such selling shareholder. In addition, NETN covenants
to file, as and when applicable, on a timely basis, all reports required to be
filed by it under the Exchange Act, and if at any time NETN is no longer
required to file such reports, at the request of the Vendor, NETN shall make
publicly available the information specified in subparagraph (c)(2) of Rule 144
of the Securities Act, and take such further action as may be reasonably
required from time to time, to enable the Vendor to transfer the Registrable
Securities without registration under the Securities Act within the limitation
of the exemption provided by Rule 144 or any similar rule or regulation adopted
by the SEC.
DATED AT Toronto this day of September, 1999.
NETWORKS NORTH INC.
By:________________________________
Title:
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LIMITED RECOURSE GUARANTEE
TO: Name of Creditor: Arthur Anderson Inc., in its capacity as receiver and
manager of GalaVu Entertainment Inc.
Address: 1900 - 79 Wellington Street West
P.O. Box 29, Toronto-Dominion Centre
Toronto, Ontario
M5K 1B9
Attention: Brian Deazeley
Facsimile: (416) 947-7788
RECITALS:
A. 1373224 ONTARIO LIMITED (the "Debtor") is indebted or liable or may become
indebted or liable to ARTHUR ANDERSON INC., in its capacity as receiver and
manager of GalaVu Entertainment Inc.(in such capacity together with its
successors and assigns, the "Creditor") pursuant to the provisions of a
promissory note dated on or about the date hereof, issued by the Debtor to the
Creditor (as such promissory note may be amended, modified, supplemented,
renewed, restated or replaced from time to time, the "Note"); and
B. It is in the interests of NETWORKS NORTH INC. (the "Guarantor") that the
Creditor extend credit to the Debtor, and therefore the Guarantor is prepared to
ensure that in all circumstances all such debts, obligations and liabilities are
duly repaid by the Debtor and for such purpose to issue this Guarantee to the
Creditor;
For valuable consideration, the receipt and sufficiency of which are
hereby conclusively acknowledged by the Guarantor, the Guarantor hereby agrees
in favour of the Creditor as follows:
1. Guarantee. The Guarantor hereby unconditionally and irrevocably guarantees
the prompt payment and performance to the Creditor, forthwith upon demand by the
Creditor, of all indebtedness, liabilities and obligations of the Debtor to the
Creditor, under, pursuant to or in connection with the Note and any unpaid
balance thereof (collectively, the "Obligations"); provided, however, that the
recourse of the Creditor under this Guarantee will be limited solely to
realizing on the security of the shares of the Debtor pledged by the Guarantor
in favour of the Creditor, pursuant to a securities pledge agreement dated as of
even date herewith.
2. Guarantee Unconditional. Subject to Section 1 hereof, the obligations of the
Guarantor under this Guarantee are continuing, unconditional and absolute and,
without limiting the generality of the foregoing, will not be released,
discharged, diminished, limited or otherwise affected by (and the Guarantor
hereby consents to or waives, as applicable, to the fullest extent
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permitted by applicable law):
(a) any extension, other indulgence, renewal, settlement, discharge,
compromise, waiver, subordination or release in respect of any
Obligation, security, person or otherwise;
(b) any modification or amendment of or supplement to the Obligations,
including any increase or decrease in the principal, the rates of
interest or other amounts payable thereunder;
(c) any release, non-perfection or invalidity of any direct or indirect
security for any Obligation;
(d) any change in the existence, structure, constitution, name, objects,
powers, business, control or ownership of the Debtor or any other
person, or any insolvency, bankruptcy, reorganization or other
similar proceeding affecting the Debtor or any other person or its
assets;
(e) the existence of any claim, set-off or other rights which the
Guarantor may have at any time against the Debtor, the Creditor, or
any other person, whether in connection herewith or any unrelated
transactions;
(f) any invalidity, illegality or unenforceability relating to or
against the Debtor or any provision of applicable law or regulation
purporting to prohibit the payment by the Debtor of the principal or
interest under the Obligations;
(g) any limitation, postponement, prohibition, subordination or other
restriction on the rights of the Creditor to payment of the
Obligations;
(h) any release, substitution or addition of any cosigner, endorser or
other guarantor of the Obligations;
(i) any defence arising by reason of any failure of the Creditor to make
any presentment, demand for performance, notice of non-performance,
protest, and any other notice, including notice of all of the
following: acceptance of this Guarantee, partial payment or
non-payment of all or any part of the Obligations and the existence,
creation, or incurring of new or additional Obligations;
(j) any defence arising by reason of any failure of the Creditor to
proceed against the Debtor or any other person, to proceed against,
apply or exhaust any security held from the Debtor or any other
person for the Obligations, to proceed against, apply or exhaust any
security held from the Guarantor or any other person for this
Guarantee or to pursue any other remedy in the power of the Creditor
whatsoever;
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(k) any law which provides that the obligation of a guarantor must
neither be larger in amount nor in other respects more burdensome
than that of the principal obligation or which reduces a guarantor's
obligation in proportion to the principal obligation;
(l) any defence arising by reason of any incapacity, lack of authority,
or other defence of the Debtor or any other person, or by reason of
any limitation, postponement, prohibition on the Creditor's right to
payment of the Obligations or any part thereof, or by reason of the
cessation from any cause whatsoever of the liability of the Debtor
or any other person with respect to all or any part of the
Obligations, or by reason of any act or omission of the Creditor or
others which directly or indirectly results in the discharge or
release of the Debtor or any other person or all or any part of the
Obligations or any security or guarantee therefor, whether by
contract, operation of law or otherwise;
(m) any defence arising by reason of any failure by the Creditor to
obtain, perfect or maintain a perfected or prior (or any) security
interest in or lien or encumbrance upon any property of the Debtor
or any other person, or by reason of any interest of the Creditor in
any property, whether as owner thereof or the holder of a security
interest therein or lien or encumbrance thereon, being invalidated,
voided, declared fraudulent or preferential or otherwise set aside,
or by reason of any impairment by the Creditor of any right to
recourse or collateral;
(n) any defence arising by reason of the failure of the Creditor to
marshall any assets;
(o) any defence based upon any failure of the Creditor to give to the
Debtor or the Guarantor notice of any sale or other disposition of
any property securing any or all of the Obligations or any guarantee
thereof, or any defect in any notice that may be given in connection
with any sale or other disposition of any such property, or any
failure of the Creditor to comply with any provision of applicable
law in enforcing any security interest in or lien upon any such
property, including any failure by the Creditor to dispose of any
such property in a commercially reasonable manner;
(p) any dealing whatsoever with the Debtor or other person or any
security, whether negligently or not, or any failure to do so;
(q) any defence based upon or arising out of any bankruptcy, insolvency,
reorganization, moratorium, arrangement, readjustment of debt,
liquidation or dissolution proceeding commenced by or against the
Debtor or any other person, including any discharge of, or bar
against collecting, any of the Obligations, in or as a result of any
such proceeding; or
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(r) any other act or omission to act or delay of any kind by the Debtor,
the Creditor, or any other person or any other circumstance
whatsoever, whether similar or dissimilar to the foregoing, which
might, but for the provisions of this Section 2, constitute a legal
or equitable discharge, limitation or reduction of the Guarantor's
obligations hereunder (other than the payment in full of all of the
Obligations).
The foregoing provisions apply (and the foregoing waivers will be effective)
even if the effect of any action (or failure to take action) by the Creditor is
to destroy or diminish the Guarantor's subrogation rights, the Guarantor's right
to proceed against the Debtor for reimbursement, the Guarantor's right to
recover contribution from any other guarantor or any other right or remedy.
3. Recourse against Debtor. Subject to Section 1 hereof, the Creditor is not
required to exhaust its recourse against the Debtor or others or under any other
security or guarantee before being entitled to payment from the Guarantor under
this Guarantee.
4. Settlement of Accounts. Any account settled or stated between the Creditor
and the Debtor will be accepted by the Guarantor as prima facie evidence that
the amount thereby appearing due by the Debtor to the Creditor is so due.
5. No Waiver. No delay on the part of the Creditor in exercising any of its
options, powers or rights, or partial or single exercise thereof, will
constitute a waiver thereof. No waiver of any of its rights hereunder, and no
modification or amendment of this Guarantee, will be deemed to be made by the
Creditor unless the same will be in writing, duly signed on behalf of the
Creditor, and each such waiver, if any, will apply only with respect to the
specific instance involved, and will in no way impair the rights of the Creditor
or the liabilities of the Guarantor to the Creditor in any other respect at any
other time.
6. Stay of Acceleration. If acceleration of the time for payment, or the
liability of the Debtor to make payment, of any amount specified to be payable
by the Debtor in respect of the Obligations is stayed, prohibited or otherwise
affected upon the insolvency, bankruptcy, reorganization or winding-up of the
Debtor or any moratorium affecting the payment of the Obligations, all such
amounts otherwise subject to acceleration or payment will nonetheless be deemed
for all purposes of this Guarantee to be and to become due and payable by the
Debtor and shall be payable by the Guarantor hereunder forthwith on demand by
the Creditor.
7. Reinstatement. If, at any time, all or any part of any payment previously
applied by the Creditor to any Obligation is or must be rescinded or returned by
the Creditor for any reason whatsoever (including, without limitation, the
insolvency, bankruptcy, or reorganization of the Debtor), such Obligation will,
for the purpose of this Guarantee, to the extent that such payment is or must be
rescinded or returned, be deemed to have continued in existence, notwithstanding
such application by the Creditor, and this Guarantee will continue to be
effective or be reinstated, as the case may be, as to such Obligation, all as
though such application by the Creditor had not been made.
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8. No Subrogation. Notwithstanding any payment made by the Guarantor under
this Guarantee or any setoff or application of funds of the Guarantor by the
Creditor, the Guarantor will have no right of subrogation to, and waives, to the
fullest extent permitted by law, any right to enforce any remedy which the
Creditor now has or may hereafter have against the Debtor, until all of the
Obligations have been indefeasibly paid in full; and until that time, the
Guarantor waives any benefit of, and any right to participate in, any security,
whether real or personal property, now or hereafter held by the Creditor for the
Obligations.
9. Additional Security. This Guarantee is in addition and without prejudice to
any security of any kind (including other guarantees) now or hereafter held by
the Creditor and any other rights or remedies that the Creditor might have.
10. Governing Law; Attornment. This Guarantee will be governed by and construed
in accordance with the laws of the Province of Ontario. Without prejudice to the
ability of the Creditor to enforce this Guarantee in any other proper
jurisdiction, the Guarantor irrevocably submits and attorns to the non-exclusive
jurisdiction of the courts of such province. To the extent permitted by
applicable law, the Guarantor irrevocably waives any objection (including any
claim of inconvenient forum) that it may now or hereafter have to the venue of
any legal proceeding arising out of or relating to this Guarantee in the courts
of such Province.
11. Successors and Assigns. This Guarantee will extend and enure to the benefit
of the Creditor and its successors and assigns and will be binding upon the
Guarantor and its successors. The Guarantor's obligations hereunder will not be
assigned or delegated. The Creditor may from time to time, and without notice to
or the consent of the Guarantor, assign or transfer all or any of the
Obligations or any interest therein; and, notwithstanding any such assignment or
transfer or any subsequent assignment or transfer thereof, any such Obligation
or part thereof so transferred or assigned will remain an "Obligation" for the
purposes of this Guarantee and any immediate and successive assignee or
transferee of any Obligation or any interest therein will, to the extent of the
interest so assigned or transferred, be entitled to the benefit of, and the
right to enforce, this Guarantee to the same extent as if such person were the
Creditor.
12. Time. Time is of the essence with respect to this Guarantee and the time for
performance of the obligations of the Guarantor under this Guarantee may be
strictly enforced by the Creditor.
13. Severability. If any provision of this Guarantee is determined to be
illegal, unconscionable or unenforceable, all other terms and provisions hereof
will nevertheless remain effective and will be enforced to the fullest extent
permitted by law.
14. Communication. Any communication required or permitted to be given under
this Guarantee will be in writing and will be effectively given if (i) delivered
personally, (ii) sent
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by prepaid courier service or mail, or (iii) sent prepaid by facsimile
transmission or other similar means of electronic communication, in each case to
the address or facsimile number of the Guarantor or Creditor set out in this
Guarantee. Any communication so given will be deemed to have been given and to
have been received on the day of delivery if so delivered, or on the day of
facsimile transmission or sending by other means of recorded electronic
communication provided that such day is a business day and the communication is
so delivered or sent prior to 4:30 p.m. (local time at the place of receipt).
Otherwise, such communication will be deemed to have been given and to have been
received on the following business day. Any communication sent by mail will be
deemed to have been given and to have been received on the fifth business day
following mailing, provided that no disruption of postal service is in effect.
The Guarantor and the Creditor may from time to time change their respective
addresses or facsimile numbers for notice by giving notice to the other in
accordance with the provisions of this Section.
15. Interpretation. Unless otherwise expressly provided in this Guarantee, if
any matter in this Guarantee is subject to the consent or approval of the
Creditor or is to be acceptable to the Creditor, such consent, approval or
determination of acceptability will be in the sole discretion of the Creditor.
If any provision in this Guarantee refers to any action taken or to be taken by
the Guarantor, or which the Guarantor is prohibited from taking, such provision
will be interpreted to include any and all means, direct or indirect, of taking,
or not taking, such action. The division of this Guarantee into sections and
paragraphs, and the insertion of headings, is for convenience of reference only
and will not affect the construction or interpretation of this Guarantee. Unless
the context otherwise requires, words importing the singular include the plural
and vice versa, and words importing gender include all genders. When used in
this Guarantee, the word "including" (or includes) means "including (or
includes) without limitation". Any reference in this Guarantee to a "Section"
means the relevant Section of this Guarantee. Any reference in this Guarantee to
a "person" will be deemed to include an individual, corporation, partnership,
trust, unincorporated organization, government and the heirs, executors,
administrators or other legal representatives of an individual. Any reference to
a "business day" will be deemed to include any day which is not a Saturday,
Sunday or a statutory holiday in the Province of Ontario.
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16. Copy of Guarantee. The Guarantor acknowledges receipt of an executed copy of
this Guarantee.
Dated: September 10, 1999.
14 Meteor Drive NETWORKS NORTH INC.
Toronto, Ontario
M9W 1A4
Facsmile: (416) 675-8838 By:____________________________
Attention: The President Name:
Title:
c/s
By:____________________________
Name:
Title:
DEED OF HYPOTHEC
OF
1373224 ONTARIO LIMITED
TO: Arthur Anderson Inc., in its capacity as receiver and
manager of GalaVu Entertainment Inc.
Address: 1900 - 79 Wellington Street West
P.O. Box 29, Toronto-Dominion Centre
Toronto, Ontario
M5K 1B9
Attention: Brian Deazeley
Facsimile: (416) 947-7788
RECITALS:
A. Pursuant to the provisions of a promissory note dated as of the date hereof
issued by 1373224 ONTARIO LIMITED (together with its successors and assigns, the
"Debtor") to and in favour of ARTHUR ANDERSON INC. in its capacity as receiver
and manager of GalaVu Entertainment Inc. (in such capacity, together with its
successors and assigns, the "Creditor"), the Debtor is indebted and liable to
the Creditor (such note as may from time to time be modified, amended, restated,
renewed, supplemented or replaced, the "Note");
B. To secure the payment and performance of the Obligations (this term, and
other capitalized terms used in this Agreement, have the meanings set forth in
Section 1, unless otherwise defined), the Debtor has agreed to grant to the
Creditor the Hypothec over the Collateral in accordance with the terms of this
Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of
which are acknowledged by the Debtor, the Debtor hereby agrees with the
Creditor, as follows:
1. Defined Terms. In this Agreement, terms defined in the recitals have the
meanings given to such terms in the recitals and the following terms shall have
the respective meanings set out below:
"Accounts" means all accounts receivable, book debts and other forms of
obligations now owned or hereafter received or acquired by or belonging or owing
to the Debtor (including under any trade names, styles or divisions thereof)
whether arising out of property leased by it or services rendered by it or from
any other transaction, whether or not the same involves the lease of property or
performance of services by the Debtor and all of the Debtor's rights in, to and
under all lease orders now held or hereafter received or acquired by it for
property or services, and all of the Debtor's rights to any property represented
by any of the foregoing (including returned or repossessed property and unpaid
lessor's rights) and including all rights to payment for goods sold or leased or
for services rendered which are not evidenced by an instrument or Chattel Paper,
whether or not it has been earned by performance, and all moneys due or to
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become due to the Debtor under all contracts for the lease of property and/or
the performance of services by it (whether or not yet earned by performance) or
in connection with any other transaction, now in existence or hereafter arising,
including the right to receive the proceeds of said lease orders and contracts,
and all collateral security and guarantees of any kind given by any Person with
respect to any of the foregoing;
"Books and Records" means all books, records, files, papers, disks,
documents and other repositories of data recording in any form or medium,
evidencing or relating to the Accounts which are at any time owned by the Debtor
or to which the Debtor (or any Person on the Debtor's behalf) has access;
"Business Day" means any day other than a Saturday, Sunday or statutory
holiday in the Province of Quebec.
"Charge" means any mortgage, hypothec, prior claim, pledge, lien, charge,
assignment, finance lease, title retention agreement or arrangement, security
interest or other encumbrance of any nature, or any other security agreement or
arrangement creating in favour of any creditor a right in respect of a
particular property;
"Chattel Paper" means one or more than one writing or agreement that
evidence both a monetary obligation and a Charge on or a lease of specific
Goods;
"Collateral" means the subject matter of the Hypothec and for greater
certainty includes all present and future movable property, assets and
undertaking over which the Debtor has granted the Hypothec pursuant to this
Agreement;
"Consumer Goods" means Goods that are used or acquired for use primarily
for personal, family or household purposes;
"Contracts" means all contracts, licenses and agreements to which the
Debtor is now or in the future a party or pursuant to which the Debtor has
acquired rights or in the future acquires rights, as such contracts may from
time to time be amended, supplemented or otherwise modified, including: (a) all
present and future rights of the Debtor to receive moneys due and to become due
to it thereunder or in connection therewith; (b) all present and future rights
of the Debtor to damages arising out of, or for, breach or default in respect
thereof; and (c) all present and future rights of the Debtor to perform and to
exercise all rights and remedies thereunder;
"Default" means the occurrence of any of the following events or
conditions:
(a) default under the Note which continues for more than 30 days after
notice of such default is given by the Creditor to the Debtor; or
(b) the Debtor is in default under the general security agreement
granted by the Debtor in favour of the Creditor on or about the date
hereof (as such general security agreement may be amended, modified,
supplemented, renewed, restated or replaced from time to time).
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"Document of Title" means any writing that purports to be issued by or
addressed to a Person and purports to cover such Goods in such Person's
possession as are identified or fungible portions of an identified mass, and
that in the ordinary course of business is treated as establishing that the
Person in possession of it is entitled to receive, hold and dispose of the
document and the Goods it covers including any warehouse receipt or bill of
lading, whether or not negotiable;
"Equipment" means all Goods that are not Inventory or Consumer Goods,
including all machinery, equipment and furniture now owned or hereafter acquired
by the Debtor or in which the Debtor now has or hereafter may acquire any right,
title or interest and any and all additions, substitutions and replacements
thereof, wherever located, together with all attachments, components, parts,
equipment and accessories installed therein or affixed thereto;
"Goods" means all corporeal movable property other than Chattel Paper,
Documents of Title, Instruments, Money and Securities;
"Hypothec" means the hypothecs constituted by Section 2;
"Instrument" means a bill, note or cheque within the meaning of the Bills
of Exchange Act (Canada) or any other writing that evidences a right to the
payment of money and is of a type that in the ordinary course of business is
transferred by delivery with any necessary endorsement or assignment, or a
letter of credit and an advice of credit if the letter or advice states that it
must be surrendered upon claiming payment thereunder, but does not include a
writing that constitutes part of Chattel Paper, a Document of Title or
Securities;
"Intangible" means all incorporeal movable property including choses in
action that are not Goods, Chattel Paper, Documents of Title, Instruments or
Securities and Intangible includes Intellectual Property Rights;
"Intellectual Property Rights" means all industrial and intellectual
property rights, including copyrights, patents, trade-marks, industrial designs,
know how and trade secrets and all Contracts related to any such industrial and
intellectual property rights;
"Inventory" means all inventory, wherever located, now owned or hereafter
acquired by the Debtor or in which the Debtor now has or hereafter may acquire
or become entitled to any right, title or interest, including all Goods and
other personal property now or hereafter owned by the Debtor which are held for
sale or lease or are furnished or are to be furnished under a contract of
service or that are raw materials, work in process or materials used or consumed
or to be used or consumed in the Debtor's business or profession, or in the
processing, packaging or shipping of the same, and all finished Goods;
"Money" means a medium of exchange authorized or adopted by the Parliament
of Canada as part of the currency of Canada or by a foreign government as part
of its currency;
"Obligations" means all present and future debts, liabilities and
obligations of the Debtor to the Creditor under, in connection with or pursuant
to the Note and any unpaid balance thereof;
-4-
"Permits" means all permits, licenses, authorizations, approvals,
franchises, rights-of-way, easements and entitlements that the Debtor has,
requires or is required to have, to own, possess or operate any of its property
or to operate and carry on any part of its business;
"Person" will be broadly interpreted and includes an individual, a
partnership, a corporation, a limited liability company, a trust, a joint
venture, an association, an unincorporated organization, the government of a
country or any political subdivision thereof, any department or agency thereof,
a regulatory agency or any other juridical entity and the heirs, executors,
administrators or other legal representatives of an individual;
"Prime Rate" means the rate announced by Canadian Imperial Bank of
Commerce from time to time as its prime rate for Canadian dollar commercial
loans made in Canada.
"Proceeds" means identifiable or traceable personal or movable property in
any form derived directly or indirectly from any sale, exchange, collection,
disposition or other dealing with Collateral or the proceeds therefrom, and
includes any payment representing insurance recoveries, indemnity or
compensation for loss or damage to Collateral or proceeds therefrom; and
"Securities" means a document that is: (a) issued in bearer, order or
registered form; (b) of a type commonly dealt with upon securities exchanges or
markets or commonly recognized in any area in which it is issued or dealt in as
a medium for investment; (c) one of a class or series or which by its terms is
divisible into a class or series of documents; and (d) evidence of a share,
participation or other interest in property or in an enterprise or is evidence
of an obligation of the issuer.
2. Grant of Hypothec. As general and continuing collateral security for the
payment and performance of all Obligations (including all reasonable costs and
expenses incurred for recovering possession of or conserving the Collateral or
enforcing any remedies or recourses hereunder), the Debtor hereby hypothecates
to and in favour of the Creditor for a principal amount of five million dollars
($5,000,000) in lawful currency of Canada with interest thereon at the rate of
twenty-five per cent per annum (25%) of the above amount in lawful currency of
Canada, the undertaking of the Debtor and of all of its movable property and
assets, corporeal and incorporeal, present and future, including each and every
one of the following:
(i) Accounts;
(ii) Chattel Paper;
(iii) Contracts;
(iv) Documents of Title;
(v) Equipment;
(vi) Goods;
(vii) Instruments;
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(viii) Intangibles;
(ix) Permits;
(x) Inventory;
(xi) Money;
(xii) Securities; and
(xiii) to the extent not otherwise included, all Proceeds, both present
and future, of any and all of the foregoing;
If any of the Collateral, under the legal provisions applicable thereto, cannot
be hypothecated without a default of the Debtor occurring with respect to such
provisions or without compliance with certain formalities, the Hypothec is
constituted thereon under the suspensive condition of obtaining the required
authorizations or consents or fulfilling the required formalities with respect
to such Collateral, and the Hypothec shall take effect, retroactively as of the
date hereof, at the time such consents or authorizations are obtained or such
formalities have been complied with. The Debtor shall hold such Collateral in
trust for and as mandatary of the Creditor for the full benefit and enjoyment of
the Creditor until such time as the suspensive condition has been fulfilled in
respect of such Collateral.
3. Enforcement of Hypothec; Remedies. During the continuance of a Default:
(a) the Creditor may, at its option, declare that the Hypothec hereby
constituted has become enforceable;
(b) the Creditor shall be entitled, subject to the compulsory formalities
provided by law, if any, to exercise for the benefit of the Creditor any of the
rights and recourses provided for in Chapter V of Title III of Book VI of the
Civil Code of Quebec and in the Code of Civil Procedure of Quebec and all
provisional measures available hereunder or at law; and
(c) the Creditor may thereupon forthwith withdraw the authorization to
collect granted to Debtor pursuant to this Agreement, in accordance with Article
2745 of the Civil Code of Quebec. Upon withdrawing its authorization to collect,
the Creditor may collect, realize, sell or otherwise deal with Accounts,
Contracts and Proceeds or any part thereof in such manner, upon such terms and
conditions and at such time or times, whether before or after default, as may
seem to it advisable and without notice to Debtor. The Creditor shall not be
liable or accountable for any failure to collect, realize, sell or obtain
payment of the Accounts, Contracts and Proceeds or any part thereof and shall
not be bound to institute proceedings for the purpose of collecting, realizing
or obtaining payment of the same or for the purpose of preserving any rights of
the Debtor, the Creditor or any other Person in respect of the same. All moneys
collected or received by the Debtor in respect of the Accounts, Contracts and
Proceeds shall be received as mandatary and agent of the Creditor, and shall be
forthwith paid over to the Creditor. All moneys collected or received by the
Creditor in respect of the Accounts, Contracts and Proceeds may be applied on
account of such parts of the Obligations as to the Creditor seems best or in the
discretion of the
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Creditor may be released to the Debtor, all without prejudice to the liability
of the Debtor or the Creditor's right to hold and otherwise realize on the
Collateral.
4. Rights of Creditor; Limitations on Creditor's Obligations.
(a) Limitations on Creditor's Liability. The Creditor will not be liable
to the Debtor or any other Person for any failure or delay in exercising any of
the rights of the Creditor under this Agreement (including any failure to take
possession of, collect, sell, lease or otherwise dispose of any Collateral, or
to preserve rights against prior parties). None of the Creditor, any receiver,
or any agent of the Creditor is required to take, or will have any liability for
any failure to take or delay in taking, any steps necessary or advisable to
preserve rights against other Persons under any Collateral in its possession.
Neither the Creditor nor a receiver will be liable for any, and the Debtor will
bear the full risk of all, loss or damage to any and all of the Collateral
(including any Collateral in the possession of the Creditor or any Receiver)
caused for any reason other than the negligence or wilful misconduct of the
Creditor or such Receiver.
(b) Notice to Account Debtors and Contracting Parties. During the
continuance of a Default the Creditor may, and upon the request of the Creditor
during such continuance, the Debtor shall, in compliance with Articles 1641 and
1642 of the Civil Code of Quebec, notify account debtors on the Accounts and
parties to the Contracts, that the Accounts and the Contracts have been
hypothecated to the Creditor and that payments in respect thereof shall be made
directly to the Creditor, the whole without prejudice to the Creditor's rights
pursuant to the Civil Code of Quebec to withdraw authority to collect. The
Creditor may, following the withdrawal of the authorization to collect, in its
own name or in the name of others, communicate with account debtors on the
Accounts and parties to the Contracts to verify with them to its satisfaction
the existence, amount and terms of any Account or any amount payable under any
Contract.
(c) Collections on Accounts, Contracts and Proceeds. The Creditor hereby
authorizes the Debtor to collect the Accounts and payments under the Contracts
in the normal course of its business and for the purpose of carrying on same.
During the continuance of a Default, the Creditor may curtail or terminate said
authority at any time, upon serving upon the Debtor and registering in the
Register of Personal and Movable Real Rights a notice of withdrawal of
authorization to collect. If required by the Creditor at any time during the
continuance of a Default, any payments of Accounts or under Contracts, when
collected by the Debtor, shall be forthwith (and, in any event, within two
Business Days) deposited by the Debtor in the exact form received, duly endorsed
by the Debtor to the Creditor if required, in a special collateral account
maintained by the Creditor, subject to withdrawal by the Creditor, as
hereinafter provided, and, until so deposited, shall be held by the Debtor in
trust for and as mandatary of the Creditor segregated from other funds of the
Debtor. All such amounts while held by the Creditor (or by the Debtor in trust
for the Creditor and as mandatary of the Creditor) and all income in respect
thereof shall continue to be collateral security for the Obligations and shall
not constitute payment thereof until applied as hereinafter provided.
(d) Analysis of Accounts. If a Default has occurred and is continuing, the
Creditor will have the right to analyze and verify the Accounts in any manner
and through any medium that it reasonably considers advisable, and the Debtor
will furnish all such assistance and information as the Creditor may require in
connection therewith. If a Default has occurred and is
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continuing, the Creditor may in its own name or in the name of others (including
the Debtor) communicate with account debtors on the Accounts and parties to the
Contracts to verify with them to its satisfaction the existence, status, amount
and terms of any Account or any Contract. If a Default has occurred and is
continuing, upon the Creditor's reasonable request and at the expense of the
Debtor, the Debtor will furnish to the Creditor reports showing reconciliations,
aging and test verifications of, and trial balances for, the Accounts.
(e) Maximum Principal Amount. Notwithstanding the maximum principal amount
secured and the maximum applicable interest rate set out in section 2 above, the
Debtor shall only be liable to the Creditor for the actual principal amount
outstanding from time to time and for the actual interest applicable to such
principal amount from time to time in accordance with the Note.
5. Representations and Warranties. The Debtor hereby represents and warrants to
the Creditor that the Debtor's principal place of business and chief executive
office, and the place where it keeps its Books and Records, are at the address
set out in Schedule A to this Agreement and its full legal name is specified on
the signature page of this Agreement. The location of all other existing places
where the Debtor carries on business, or keeps tangible Collateral, the location
of all jurisdictions in which account debtors of the Debtor are located.
6. Covenants. The Debtor covenants and agrees with the Creditor that:
(a) Further Documentation; Hypothecation of Instruments. The Debtor will
from time to time and at its expense, promptly and duly execute and deliver such
further instruments and documents and take such further action as the Creditor
may reasonably request for the purpose of obtaining or preserving the full
benefits of this Agreement and the Hypothec hereby constituted and of the
rights, powers, remedies and recourses herein granted or by law provided
including the filing of any applications for registration, applications for
correction or any other financing, financing change statements or renewals under
any applicable legislation in effect in any jurisdiction with respect to the
Hypothec created hereby.
(b) Notices. The Debtor will advise the Creditor promptly, in reasonable
detail, of: (i) any change in the name of the Debtor; or (ii) any change in the
location of any place of business or the head office of the Debtor.
7. Waiver. To the extent permitted by applicable law, the Debtor waives all
claims, damages and demands (other than claims, damages and demands resulting
from loss or damage to any and all of the Collateral caused by the gross
negligence or wilful misconduct of the Creditor) it may acquire against the
Creditor arising out of the exercise by the Creditor of any rights or remedies
under this Agreement or at law.
8. Creditor's Appointment as Mandatary. The Debtor hereby irrevocably
constitutes and appoints the Creditor and any officer or agent of the Creditor
its mandatary, with full power of substitution as its mandatary, with full
irrevocable power and authority in the place and name of the Debtor or in its
own name, from time to time in the Creditor's discretion, during the continued
existence of a Default, to take any and all appropriate action and to execute
any and all documents and instruments which, in the opinion of such mandatary,
may be necessary or
-8-
desirable to accomplish the purposes of this Agreement. Nothing in this Section
affects the right of the Creditor as secured party or any other Person on the
Creditor's behalf, to sign and file or deliver (as applicable) all such
applications for registration or correction, financing statements, financing
change statements, notices, verification agreements and other documents relating
to the Collateral and this Agreement as the Creditor or such other Person
considers appropriate.
9. Application of Proceeds. All Proceeds of Collateral received by the Creditor
may be applied to discharge or satisfy any expenses (including among other
things any Creditor's reasonable remuneration and other expenses of enforcing
the Creditor's rights under this Agreement), Charges, borrowings, taxes and
other outgoings affecting the Collateral or which are considered advisable by
the Creditor to preserve, repair, process, maintain or enhance the Collateral or
prepare it for sale, lease or other disposition, or to keep in good standing any
Charges on the Collateral ranking in priority to any of the Hypothec, or to
sell, lease or otherwise dispose of the Collateral. The balance of such Proceeds
may, at the sole discretion of the Creditor, be held in an interest bearing
account as collateral security for the Obligations and/or be applied to such of
the Obligations in such manner and at such times as the Creditor in its
reasonable discretion considers appropriate and thereafter will be accounted for
as required by law.
10. Continuing Liability of Debtor. The Debtor will remain liable for any
Obligations that are outstanding following realization of all or any part of the
Collateral.
11. Interest. If any amount payable to the Creditor under this Agreement is not
paid when due, the Debtor will pay to the Creditor immediately on demand,
interest on such amount from the date due until paid, at a nominal annual rate
equal at all times to the Prime Rate plus 2%. All amounts payable by the Debtor
to the Creditor under this Agreement, and all interest on all such amounts,
compounded monthly on the last Business Day of each month, will form part of the
Obligations and will be secured by the security interests created by this
Agreement.
12. Severability. If any term, agreement, provision, condition, obligation or
covenant set out in this Agreement is determined to be invalid or unenforceable
by a court of competent jurisdiction from which no further appeal lies or is
taken, that term, agreement, provision, condition, obligation or covenant shall
be deemed to be severed herefrom and the remaining terms, agreements,
provisions, conditions, obligations and covenants of this Agreement shall not be
affected thereby and shall remain valid and enforceable.
13. Cumulative Remedies. The Creditor shall not by any act, delay, indulgence,
omission or otherwise be deemed to have waived any right, remedy or recourse
hereunder or to have acquiesced in any breach of any of the terms and conditions
hereof. Without limiting the generality of the foregoing, this Agreement may not
be waived, amended, supplemented or otherwise modified except by a written
instrument executed by the Debtor and the Creditor. No failure to exercise, nor
any delay in exercising, on the part of the Creditor, any right, power, remedy
or recourse hereunder shall operate as a waiver thereof. No single or partial
exercise of any right, power, remedy or recourse hereunder shall preclude any
other or further exercise thereof or the exercise of any other right, power,
remedy or recourse. A waiver by the Creditor of any right, power, remedy or
recourse hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Creditor would otherwise have on any future occasion.
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The rights, powers, remedies and recourses herein provided are cumulative, may
be exercised singly, concurrently or successively and are not exclusive of any
other rights, powers remedies and recourses provided by law.
14. Other Security and No Novation. In the event that the Creditor, its
successors or assigns, in addition to the Hypothec created herein, holds any
further additional security on account of the Obligations, or any part thereof,
no single or partial exercise by the Creditor or its successors and assigns of
any of its remedies under this Agreement or under any such additional securities
shall preclude any other and further exercise of any other right, power or
remedy pursuant to this Agreement or pursuant to any of such additional
security. The Creditor shall at all times have the right to proceed against all
or any portion of the Collateral or such additional security in such order and
in such manner as it shall in its discretion deem fit without waiving any rights
which the Creditor may have with respect to any and all of such security, and
the exercise of any such powers or remedies from time to time shall in no way
affect any other powers or remedies which the Creditor may have pursuant to this
Agreement, any such additional security, or in law or in equity or otherwise.
Without limiting the generality of the foregoing, the Debtor hereby acknowledges
and agrees that this Agreement is given in addition to and not in substitution
for any other security given by the Debtor in connection with the Obligations,
without any novation.
Should the Obligations of the Debtor be fully repaid at any time or from
time to time, without the Hypothec hereby created being released and discharged
by the Creditor, the Hypothec herein created shall remain effective and secure
the payment, execution and performance of any new Obligations, to the same
extent and for the amounts herein expressed, as if the existing Obligations had
never been repaid and the Debtor is and will continue to be bound hereby; the
Debtor agreeing that it shall be deemed to have obliged itself again in respect
of any such new Obligations pursuant to this Agreement and the Hypothec herein
created shall secure the payment, performance and execution of any and all such
new Obligations.
15. Dealings by Creditor. The Creditor may grant extensions of time and other
indulgences, take and give up security, accept compositions, grant releases and
discharges and otherwise deal with the Debtor and any other Person, and with any
or all of the Collateral, and with other security and sureties, as it may see
fit, all without prejudice to the Obligations or to the rights of the Creditor
under this Agreement.
16. Communication. Any communication required or permitted to be given under
this Agreement will be given in the manner as provided for in the Purchase
Agreement.
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Province of Quebec.
18. Interpretation. The division of this Agreement into sections and paragraphs,
and the insertion of headings, is for convenience of reference only and shall
not affect the construction or interpretation of this Agreement. Unless the
context otherwise requires, words importing the singular include the plural and
vice versa, and words importing gender include all genders. When used in this
Agreement the word "including" means "including without limitation".
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19. Successors and Assigns. This Agreement shall extend and enure to the benefit
of the Creditor and its successors and assigns and shall be binding upon the
Debtor and its successors and assigns. The Debtor may not assign this Agreement,
or any of its rights or obligations under this Agreement, without the prior
written consent of the Creditor. The Creditor may assign this Agreement, or any
of its rights and obligations under this Agreement, without the prior written
consent of the Debtor.
20. English Language. The parties confirm their express wish that this hypothec
and all documents related thereto be drawn up in English. Les parties confirment
leur volonte expresse de voir la presente hypotheque et tous les documents qui y
sont afferents soient rediges en anglais.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement at Toronto,
Ontario, as of 10th day of September, 1999.
1373224 ONTARIO LIMITED
By:_____________________________________
Name:
Title:
By:_____________________________________
Name:
Title:
ARTHUR ANDERSON INC., in its capacity as
receiver and manager of GalaVu
Entertainment Inc.
By:_____________________________________
Name:
Title: