PURCHASE MONEY SECURITY AGREEMENT
THIS PURCHASE MONEY SECURITY AGREEMENT is entered into as of the 20th day
of September, 2001 by and between TAG-IT PACIFIC, INC., a Delaware corporation
("Pacific"), and TAG-IT DE MEXICO S.A. DE C.V., a Mexican corporation ("Mexico")
(Pacific and Mexico are referred to collectively as the "Debtor"), on the one
hand; and COATS AMERICAN, INC., a New Jersey corporation ("Coats"), and HILOS
TIMON S.A. DE C.V., a Mexican corporation ("Timon") (Coats and Timon are
referred to collectively as the "Secured Party"), on the other hand.
RECITALS:
A. Coats and Pacific are parties to a Supply Agreement dated as of
September 20, 2001 (the "Supply Agreement"), pursuant to which Pacific and its
affiliates (including without limitation Mexico) are to purchase thread products
from Coats and its affiliates (including without limitation Timon).
B. Pursuant to the Supply Agreement, payment for such thread products is
not due until sixty (60) days after the invoice date, and the Secured Party
would not have been willing to extend sixty (60) day payment terms, but for this
Security Agreement.
C. Coats' affiliate, Coats North America Consolidated, Inc. ("CNAC"), has
agreed to purchase 759,494 shares of newly issued Series C Convertible Preferred
stock of Pacific for a purchase price of Three Million Dollars ($3,000,000), and
CNAC would not have agreed to such purchase unless Pacific entered into the
Supply Agreement and the Debtor entered into this Security Agreement.
D. In addition to sales of thread products to the Debtor under the Supply
Agreement, the Secured Party may, but shall not be obligated to, sell products
other than thread products to the Debtor.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the Debtor and the Secured Party, the parties hereby agree as
follows:
1. DEFINITIONS.
(a) Terms used and not otherwise defined herein shall have the
meanings ascribed thereto in the Uniform Commercial Code as enacted in the
State of North Carolina (the "UCC").
(b) The term "Inventory" means all goods, merchandise or other
personal property of any description hereafter purchased or otherwise
acquired by Pacific or Mexico from Coats or Timon, other than goods,
merchandise or other personal property of any
description located in the United States or Mexico, and (i) held by Pacific
or Mexico for sale or to be furnished under a contract of service, or (ii)
consist of raw materials, work in process, or materials used or consumed in
a business, including without limitation, thread, yarn, thread products,
zippers, and trim items purchased or otherwise acquired by Pacific or
Mexico from Coats or Timon.
2. GRANT OF SECURITY INTEREST. To secure (i) the prompt payment to the
Secured Party for amounts owed for the purchase of the Inventory, when due in
accordance with Section 7 of the Supply Agreement, (ii) any interest now or
hereafter due under the Supply Agreement, and (iii) any attorneys' fees or other
amounts now or hereafter due under this Security Agreement or the Supply
Agreement (collectively, the "Secured Obligations"), Pacific and Mexico each
hereby grant to Coats and Timon a purchase money security interest in the
Inventory, but not in any accounts constituting proceeds of the Inventory.
3. REPRESENTATIONS AND WARRANTIES. The Debtor hereby represents and
warrants to the Secured Party that, until the later of (i) the expiration or
termination of the Supply Agreement, and (ii) the payment in full of the Secured
Obligations:
The exact legal name of Pacific is Tag-It Pacific, Inc. and the
jurisdiction of incorporation of Pacific is Delaware, and the exact legal
name of Mexico is Tag-It de Mexico S.A. de C.V. and the jurisdiction of
formation of Mexico is the country of Mexico. Neither Pacific nor Mexico
has in the past four months changed its name, been party to a merger,
consolidation or other change in structure or used any tradename except as
set forth on SCHEDULE 3 hereto. All Inventory will be located solely at the
addresses identified on SCHEDULE 3 hereto, unless and until the Secured
Party has received thirty (30) days prior written notice of a new location
specifying (i) the address of such new location, and (ii) the exact legal
name of the owner of the Inventory at such new location.
4. COVENANTS. The Debtor covenants that, until the later of (i) the
expiration or termination of the Supply Agreement, and (ii) the payment in full
of the Secured Obligations, the Debtor shall:
(a) OTHER LIENS. Defend the Inventory against the claims and demands
of all other parties claiming an interest therein and keep the Inventory
free from all liens.
(b) PRESERVATION OF COLLATERAL. Keep the Inventory in good order,
condition and repair and not use the Inventory in violation of the
provisions of this Security Agreement or any other agreement relating to
the Inventory or any policy insuring the Inventory or any applicable
statute, law, bylaw, rule, regulation or ordinance.
(c) CHANGES IN CORPORATE STRUCTURE OR LOCATION. Not, without providing
10 days prior written notice to the Secured Party and without filing such
amendments to any previously filed financing statements as the Secured
Party may require, (a) alter its corporate existence or, in one transaction
or a series of transactions, merge into or
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consolidate with any other entity, or sell all or substantially all of its
assets, (b) change its jurisdiction of incorporation or formation or (c)
change it registered corporate name.
(d) INSPECTION. Upon reasonable notice, and during reasonable hours,
at all times allow the Secured Party or its representatives to visit and
inspect the Inventory.
(e) FILING OF FINANCING STATEMENTS, NOTICES, ETC. The Debtor hereby
authorizes the Secured Party to prepare and file such financing statements
(including renewal statements) or amendments thereof or supplements thereto
or other instruments as the Secured Party may from time to time deem
necessary or appropriate in order to perfect and maintain the security
interests granted hereunder in accordance with the UCC or the Uniform
Commercial Code or comparable filing laws applicable in any other
jurisdiction. The Secured Party shall provide the Debtor with ten (10) days
prior written notice of any such filing, and such notice shall include a
copy of any such filing. The Debtor shall also execute and deliver to the
Secured Party such agreements, assignments or instruments (including
affidavits, notices, reaffirmations and amendments and restatements of
existing documents) as the Secured Party may reasonably request and do all
such other things as the Secured Party may reasonably deem necessary or
appropriate (i) to assure to the Secured Party its security interests
hereunder, (ii) to consummate the transactions contemplated hereby and
(iii) to otherwise protect and assure the Secured Party of its rights and
interests hereunder.
5. EVENTS OF DEFAULT.
Either of the following events will constitute an Event of Default
hereunder: (a) failure of the Debtor to pay when due the purchase price for any
of the Inventory when due, in accordance with Section 7 of the Supply Agreement
(including any applicable cure period specified in Section 16(b) of the Supply
Agreement); or (b) failure by the Debtor to comply with the terms and conditions
of this Security Agreement.
6. REMEDIES.
(a) GENERAL REMEDIES. Upon the occurrence of an Event of Default and
during the continuation thereof, the Secured Party shall have, in addition
to the rights and remedies provided herein, in the Supply Agreement, or by
law (including, but not limited to, levy of attachment, garnishment and the
rights and remedies set forth in the UCC), the rights and remedies of a
secured party under the Uniform Commercial Code or other law of the
jurisdiction where the rights and remedies are asserted, and further, the
Secured Party may, with or without judicial process or the aid and
assistance of others, (i) enter on any premises on which any of the
Inventory may be located and, without resistance or interference by the
Debtor, take possession of the Inventory, (ii) dispose of any Inventory on
any such premises, (iii) require the Debtor to assemble and make available
to the Secured Party at the expense of the Debtor any Inventory at any
place and time designated by the Secured Party which is reasonably
convenient to both parties, (iv) remove any Inventory from any such
premises for the purpose of effecting the sale or other disposition
thereof, and/or (v) without
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demand and without advertisement, notice, hearing or process of law, all of
which Debtor hereby waives to the fullest extent permitted by law, at any
place and time or times, sell and deliver any or all Inventory held by or
for it at public or private sale, by one or more contracts, in one or more
parcels, for cash, upon credit or otherwise, at such prices and upon such
terms as the Secured Party deems advisable, in its sole discretion (subject
to any and all mandatory legal requirements). Neither the Secured Party's
compliance with any applicable state or federal law in the conduct of such
sale, nor its disclaimer of any warranties relating to the Inventory, shall
be considered to adversely affect the commercial reasonableness of such
sale. In addition to all other sums due the Secured Party with respect to
the Secured Obligations, the Debtor shall pay the Secured Party all
reasonable costs and expenses incurred by the Secured Party, including, but
not limited to, reasonable attorneys' fees and court costs, in obtaining or
liquidating the Inventory, in enforcing payment of the Secured Obligations,
or in the prosecution or defense of any action or proceeding by or against
the Secured Party or the Debtor concerning any matter arising out of or
connected with this Security Agreement, any Inventory or the Secured
Obligations, including, without limitation, any of the foregoing arising in
or under or related to a case under the Bankruptcy Code, unless such costs
and expenses are incurred by Secured Party in an action between Debtor and
Secured Party, and Debtor is the substantially prevailing party in such
action. To the extent the rights of notice cannot be legally waived
hereunder, the Debtor agrees that any requirement of reasonable notice
shall be met if such notice is sent to the Debtor in accordance with the
notice provisions of Section 10 hereof at least 10 days before the time of
sale or other event giving rise to the requirement of such notice. The
Secured Party shall not be obligated to make any sale or other disposition
of the Inventory regardless of notice having been given. To the extent
permitted by applicable law, the Secured Party may be a purchaser at any
such sale. To the extent permitted by applicable law, the Debtor hereby
waives all of its rights of redemption with respect to any such sale.
Subject to the provisions of applicable law, the Secured Party may postpone
or cause the postponement of the sale of all or any portion of the
Inventory by announcement at the time and place of such sale, and such sale
may, without further notice, to the extent permitted by law, be made at the
time and place to which such sale was postponed, or the Secured Party may
further postpone such sale by announcement made at such time and place.
(b) ACCESS. In addition to the rights and remedies hereunder, upon the
occurrence of an Event of Default and during the continuation thereof, the
Secured Party shall have the right to enter and remain upon the various
premises of the Debtor without cost or charge to the Secured Party, and use
the same, together with materials, supplies, books and records of the
Debtor, for the purpose of collecting and liquidating the Inventory, or for
preparing for sale and conducting the sale of the Inventory, whether by
foreclosure, auction or otherwise. In addition, the Secured Party may
remove Inventory, or any part thereof, from such premises and/or any
records with respect thereto in order to effectively collect or liquidate
such Inventory.
(c) NONEXCLUSIVE NATURE OF REMEDIES. Failure by the Secured Party to
exercise any right, remedy or option under this Security Agreement, the
Supply Agreement, or as
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provided by law, or any delay by the Secured Party in exercising the same,
shall not operate as a waiver of any such right, remedy or option. No
waiver hereunder shall be effective unless it is in writing, signed by the
party against whom such waiver is sought to be enforced and then only to
the extent specifically stated therein, which in the case of the Secured
Party shall only be granted as provided herein. To the extent permitted by
law, neither the Secured Party, nor any party acting as attorney for the
Secured Party, shall be liable hereunder for any acts or omissions or for
any error of judgment or mistake of fact or law other than their gross
negligence or willful misconduct hereunder. The rights and remedies of the
Secured Party under this Security Agreement shall be cumulative and not
exclusive of any other right or remedy which the Secured Party may have.
(d) RETENTION OF COLLATERAL. The Secured Party may, after providing
the notices required by Sections 9-620 and 9-621 of the UCC or otherwise
complying with the requirements of the applicable law of the relevant
jurisdiction, accept or retain the Inventory in satisfaction of the Secured
Obligations. Unless and until the Secured Party shall have provided such
notices, however, the Secured Party shall not be deemed to have retained
any Inventory in satisfaction of any Secured Obligations for any reason.
(e) DEFICIENCY. In the event that the proceeds of any sale, collection
or realization are insufficient to pay all amounts to which the Secured
Party is legally entitled, the Debtor shall be jointly and severally liable
for the deficiency, together with interest thereon at the rate provided in
the Supply Agreement, together with reasonable attorneys' fees and other
costs with respect to collecting such deficiency. Any surplus remaining
after the full payment and satisfaction of the Secured Obligations shall be
returned to the Debtor or to whomsoever a court of competent jurisdiction
shall determine to be entitled thereto.
7. RIGHTS OF THE SECURED PARTY.
(a) ASSIGNMENT BY THE SECURED PARTY. The Secured Party may from time
to time, assign the Secured Obligations or any portion thereof, and the
assignee shall be entitled to all of the rights and remedies of the Secured
Party under this Security Agreement in relation thereto.
(b) THE SECURED PARTY'S DUTY OF CARE. Other than the exercise of
reasonable care to ensure the safe custody of the Inventory while being
held by the Secured Party hereunder, the Secured Party shall have no duty
or liability to preserve rights pertaining thereto, it being understood and
agreed that the Debtor shall be responsible for preservation of all rights
in the Inventory, and the Secured Party shall be relieved of all
responsibility for the Inventory upon surrendering it or tendering the
surrender of it to the Debtor. The Secured Party shall be deemed to have
exercised reasonable care in the custody and preservation of the Inventory
in its possession if the Inventory is accorded treatment substantially
equal to that which the Secured Party accords its own property, which shall
be no less than the treatment employed by a reasonable and prudent agent in
the industry, it being understood that the Secured Party shall not have
responsibility for taking any necessary steps to preserve rights against
any parties with respect to any of the Inventory.
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In the event of a public or private sale of Inventory pursuant to Section 6
hereof, the Secured Party shall have no obligation to clean-up, repair or
otherwise prepare the Inventory for sale.
8. AMENDMENTS; WAIVERS; MODIFICATIONS. This Security Agreement and the
provisions hereof may not be amended, waived, modified, changed, discharged or
terminated except in writing.
9. SUCCESSORS IN INTEREST. This Security Agreement shall create a
continuing security interest in the Inventory and shall be binding upon the
Debtor, its successors and permitted assigns and shall inure, together with the
rights and remedies of the Secured Party hereunder, to the benefit of the
Secured Party and its successors and assigns; provided, HOWEVER, that the Debtor
may not assign its rights or delegate its duties hereunder without the prior
written consent of Secured Party. To the fullest extent permitted by law, the
Debtor hereby releases the Secured Party, and its successors and assigns, from
any liability for any act or omission relating to this Security Agreement,
except for any liability arising from the gross negligence or willful misconduct
of the Secured Party, or its officers, employees or agents.
10. NOTICES. Any notice required or permitted under this Agreement shall be
in writing and shall be deemed to have been duly given and/or delivered (i) when
personally delivered, (ii) the second day following the day on which the same
has been delivered prepaid to a national (only in the case of notices within the
continental United States) or an international courier service, (iii) when
transmitted via telecopy (or other facsimile device) to the number set out below
and an appropriate answerback has been received by the sending party, (iv) when
transmitted via e-mail, or (v) three (3) days after the deposit in the United
States mails, registered or certified, return receipt requested and postage
prepaid, in each case addressed to the party to whom such notice is to be given
at the following address(es), or at the most recent address(es) specified by
written notice given to the other party in the same manner provided in this
section; PROVIDED, HOWEVER, that notice of an address change shall not be
effective until actually received:
SECURED PARTY: Coats American, Inc.
Two LakePointe Place
4135 South Stream Blvd.
Charlotte, NC 28217
Attention: Donna Armstrong
Fax: (704) 329-5970
E-mail: donna.armstrong@coats.com
with a copy to:
HILOS TIMON S.A. DE C.V.
Calz. Mexico Xochimilco 4985
Colonia Arenal Tepepan
Delegacion Tlalpan
14610 Mexico D.F.
Attention: David Williamson
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Fax: (011) 52 5447 0748
E-mail: david.williamson@coats.com
and:
Moore & Van Allen, PLLC
100 North Tryon Street, Suite 4700
Charlotte, NC 28202-4003
Attention: A. Mark Adcock
Fax: (704) 331-1159
E-mail: markadcock@mvalaw.com
DEBTOR: TAG-IT PACIFIC, INC.
21900 Burbank Blvd.
Woodland Hills, California 91367
Attn: Ronda Sallmen and Colin Dyne
Fax: (818) 444-4106
E-mail: rsallmen@tagitpacific.com
with a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P.
2029 Century Park East, 26th Floor
Los Angeles, California 90067
Attn: Murray Markiles
Fax: (310) 728-2233
E-mail: mmarkiles@akingump.com
Due to the uncertainties of clear transmission, notice shall not be deemed
effective if sent only by telecopier unless a clear text is actually received,
but as a courtesy, a party may send a copy of any notice by telecopier at the
same time as notice is sent by formal means.
11. COUNTERPARTS. This Security Agreement may be executed in any number of
counterparts, each of which where so executed and delivered shall be an
original, but all of which shall constitute one and the same instrument. It
shall not be necessary in making proof of this Security Agreement to produce or
account for more than one such counterpart.
12. HEADINGS. The headings of the sections and subsections hereof are
provided for convenience only and shall not in any way affect the meaning or
construction of any provision of this Security Agreement.
13. GOVERNING LAW. THIS SECURITY AGREEMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA.
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14. SEVERABILITY. If any provision of this Security Agreement is determined
to be illegal, invalid or unenforceable, such provision shall be fully severable
and the remaining provisions shall remain in full force and effect and shall be
construed without giving effect to the illegal, invalid or unenforceable
provisions.
15. ENTIRETY. This Security Agreement and the Supply Agreement represent
the entire agreement of the parties hereto and thereto, and supersede all prior
agreements and understandings, oral or written, if any, relating to the
transactions contemplated herein and therein.
16. SURVIVAL. All representations and warranties of the Debtor hereunder
shall survive the execution and delivery of this Security Agreement.
17. OTHER SECURITY. To the extent that any of the Secured Obligations are
now or hereafter secured by property other than the Inventory (including,
without limitation, real property and securities owned by the Debtor), or by a
guarantee, endorsement or property of any other person, then the Secured Party
shall have the right to proceed against such other property, guarantee or
endorsement upon the occurrence of any Event of Default, and the Secured Party
has the right, in its sole discretion, to determine which rights, security,
liens, security interests or remedies the Secured Party shall at any time
pursue, relinquish, subordinate, modify or take with respect thereto, without in
any way modifying or affecting any of them or any of the Secured Party's rights
or the Secured Obligations under this Security Agreement.
18. JOINT AND SEVERAL OBLIGATIONS OF DEBTOR.
(a) Each of Pacific and Mexico is accepting joint and several
liability hereunder.
(b) Each of Pacific and Mexico jointly and severally hereby
irrevocably and unconditionally accepts, not merely as a surety but also as
a co-debtor, joint and several liability with respect to the payment and
performance of all of the Secured Obligations, it being the intention of
the parties hereto that all the Secured Obligations shall be the joint and
several obligations of each of Pacific and Mexico without preferences or
distinction among them.
19. FURTHER ACTIONS. The Debtor agrees to, and to cause its Subsidiaries
to, execute and deliver such further documents, and to take such further
actions, as the Secured Party may reasonably request from time to time with
respect to the Secured Obligations or obligations with respect to inventory
purchased from the Secured Party or its affiliates by Subsidiaries of Debtor,
including without limitation the execution of security agreements with respect
to other jurisdictions, and documents to be filed in the public records of other
jurisdictions, or with respect to any Subsidiaries of Debtor that may hereafter
purchase inventory from the Secured Party or its affiliates. As used herein,
"Subsidiaries" shall include any entity with respect to which Pacific or Mexico
directly or indirectly (i) owns an equity interest of ten percent (10%) or more,
or (ii) has a right to profits of such entity in the amount of ten percent (10%)
or more.
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Each of the parties hereto has caused a counterpart of this Security
Agreement to be duly executed and delivered as of the date first above written.
DEBTOR: TAG-IT PACIFIC, INC.
a Delaware corporation
By: /S/ COLIN DYNE
-------------------------------------
Printed Name: COLIN DYNE
---------------------------
Title: CEO
----------------------------------
TAG-IT DE MEXICO, S.A. DE C.V.
By: /S/ COLIN DYNE
-------------------------------------
Printed Name: COLIN DYNE
---------------------------
Title: CEO
----------------------------------
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Accepted and agreed to as of the date first above written.
COATS AMERICAN, INC.
By: /S/ DONNA ARMSTRONG
--------------------------------------
Printed Name: DONNA ARMSTRONG
----------------------------
Title: V.P. FINANCE
-----------------------------------
HILOS TIMON S.A. DE C.V.
By: /S/ DAVID J. WILLIAMSON
--------------------------------------
Printed Name: DAVID J. WILLIAMSON
----------------------------
Title: FINANCE DIRECTOR
-----------------------------------
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SCHEDULE 3
A. MERGERS, CONSOLIDATIONS, CHANGE IN STRUCTURE OR USE OF TRADENAMES
Debtor uses the following trade names:
Tag-It
Pacific Trim
Managed Trim Solution
B. LOCATION(S) OF INVENTORY
Tijuana Mexico:
Fray Francisco Eusebio Kino #17004
Fracc. Garita de Otay
Tijuana Mexico B.C. C.P. 22509
Tlaxcala:
Lote 1 ABC s/n San Diego Xocoyucan
Ixtacuixtla, Tlaxcala C.P. 90700
Torreon:
Calzado Agro Industria #383
Plaza Jumbo, Parque Industrial Oriente
27278 Torreon, Coahuila, Mexico
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