Promissory Note - Ritz Interactive Inc. and America Online Inc.
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED OR
QUALIFIED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND THUS
MAY NOT BE TRANSFERRED UNLESS REGISTERED OR QUALIFIED UNDER THAT ACT OR SUCH
LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION OR QUALIFICATION IS AVAILABLE.
PROMISSORY NOTE
$10,003,517 Due December 31, 2006
FOR VALUE RECEIVED, RITZ INTERACTIVE, INC., a Delaware corporation (the
"MAKER"), promises to pay to the order of America Online, Inc. ("PAYEE"), or its
registered assigns, the sum of Ten Million Three Thousand Five Hundred Seventeen
Dollars ($10,003,517) and to pay interest thereon at the rate of six percent
(6.00%) per annum (the "INTEREST RATE") from the date hereof until this
Promissory Note (as amended, modified or supplemented from time to time, this
"NOTE") is fully paid.
Principal and interest shall be payable as set forth below:
(1) On June 1, 2005, interest only shall be paid in the amount of
Eight Thousand Sixty-Seven and Thirty-Five Hundredths Dollars ($8,067.35); and
(2) Commencing on July 1, 2005 and on the first business day of each
succeeding month through and including December 31, 2006, interest only shall be
paid in the amount of Fifty Thousand Seventeen Dollars and Fifty-Nine Hundredths
Dollars ($50,017.59).
The unpaid principal amount of this Note, together with all accrued but
unpaid interest hereon, shall be paid by Maker to Payee on December 31, 2006
(the "DUE DATE").
During the occurrence and continuation of an Event of Default (defined
below) the Interest Rate shall be increased from 6.0% per annum to 8.0% per
annum. In no event shall Payee be entitled to interest exceeding the maximum
rate permitted by law. If any excess interest is provided for or shall be
adjudicated to be so provided for in this Note, then in such event: (i) the
provisions of this paragraph shall govern and control; (ii) the Maker shall not
be obligated to pay the amount of such interest to the extent that it is in
excess of the maximum amount permitted by law, and the same shall be construed
as a mutual mistake of the parties; and (iii) any such excess which may have
been collected or attributed shall be subtracted from the then unpaid principal
amount hereof, or refunded to the Maker.
Both principal hereof and interest thereon are payable at such place as
Payee may from time to time designate in writing, in lawful money of the United
States of America by check or wire transfer. Interest hereunder shall be
computed on the basis of a year of three hundred sixty (360) days for the actual
number of days elapsed.
This Note is subject to the terms and conditions set forth below:
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I. DEFINITIONS.
As used in this Note, the following terms shall mean:
"CHANGE OF CONTROL" shall mean (i) the sale, transfer or other disposition
of all or substantially all of the assets of the Maker; (ii) the merger or
consolidation of the Maker with any other person (other than a wholly-owned
subsidiary of the Maker) unless the Maker's stockholders' of record immediately
prior to such transaction will immediately after such transaction hold at least
50% of the voting power of the corporation; (iii) the acquisition in one or more
transactions of any voting securities of the Maker by any "Person" (as the term
person is used for purposes of Section 13(d) or 14(d) of the 1934 Act, but
excluding any Person that immediately prior to such transaction has Beneficial
Ownership of thirty percent (30%) or more of the then outstanding voting
securities of the Maker), immediately after which such Person has "Beneficial
Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of
fifty percent (50%) or more of the then outstanding voting securities of the
Maker or (iv) the acquisition in one or more transactions of Beneficial
Ownership of twenty percent (20%) or more of the then outstanding voting
securities of the Maker by any Person that immediately prior to such transaction
has Beneficial Ownership of thirty percent (30%) or more of the then outstanding
voting securities of the Maker; provided, however, that the acquisition by the
Maker or any corporation or other Person of which a majority of its voting power
or its voting equity securities or equity interest is owned, directly or
indirectly, by the Maker, of Beneficial Ownership of more than fifty percent
(50%) of the then outstanding voting securities of the Maker shall not
constitute a Change in Control.
"INVESTMENT" shall mean any loan or advance to a person, any purchase or
other acquisition of any capital stock or other securities or substantially all
of the assets of a person or any capital contribution to a person.
"NOTE" shall mean this Promissory Note and any note delivered in
substitution or exchange therefor as provided herein.
"EVENT OF DEFAULT" shall have the meaning given such term in SECTION 5
below.
"TRIGGERING EVENT" shall mean the closing of a public offering of Maker's
common stock pursuant to a registration statement under the Securities Act of
1933, as amended, or the closing of any Change of Control.
II. PREPAYMENT OF NOTE.
2.1 MANDATORY PREPAYMENT. Upon the occurrence of a Triggering Event, all
principal and accrued but unpaid interest on this Note shall immediately become
due and payable.
2.2 OPTIONAL PAYMENT. Maker, at its option, and with no prepayment
penalty, may make additional payments in reduction of the principal outstanding
on this Note in whole multiples of Ten Thousand Dollars ($10,000) on five (5)
days' written notice. Such optional prepayments of principal shall be applied
first to accrued interest and then to outstanding principal.
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III. REPLACEMENT OF NOTE.
Upon receipt of evidence reasonably satisfactory to the Maker of the
ownership of and the loss, theft, destruction or mutilation of this Note and (in
the case of loss, theft or destruction) upon delivery of an indemnity agreement
in an amount reasonably satisfactory to the Maker, or (in the case of
mutilation) upon surrender and cancellation of the mutilated Note, the Maker
will execute and deliver, in lieu thereof, a new Note of like tenor.
IV. COVENANTS.
4.1 AFFIRMATIVE COVENANTS. Until there are no outstanding amounts under
this Note, the Maker will:
4.1.1 Compliance with Laws. Comply with all applicable laws, rules,
regulations and orders.
4.1.2 Preservation of Corporate Existence. Preserve and maintain its
corporate existence.
4.1.3 Keeping of Books. Keep proper books and record and account, in
which full and correct entries shall be made of all financial
transactions and the assets and business of the Maker in accordance
with generally accepted accounting principles in effect from time to
time.
4.1.4 Transactions with Affiliates. Conduct all transactions
otherwise permitted under this Note with any of its affiliates on
terms that are fair and reasonable and no less favorable to the
Maker than it would obtain in a comparable arm's length transaction
with a person not an affiliate.
4.1.5 Reporting Requirements. Maker shall deliver to Payee:
(A) as soon as practicable, but in any event within one hundred
twenty (120) days after the end of each fiscal year of Maker (other
than fiscal year 2004 for which Maker shall have 180 days after the
end of the fiscal year), a statement of operations for such fiscal
year, a balance sheet of Maker and statement of shareholder's equity
as of the end of such year, and a cash flow statement for such year,
prepared in accordance with generally accepted accounting principles
and audited by independent public accountants of nationally
recognized standing; provided, that Maker shall provide as soon as
reasonably practicable after the end of each fiscal year of Maker,
an unaudited statement of operations for such fiscal year, an
unaudited balance sheet of Maker and an unaudited cash flow
statement for such year;
(B) as soon as practicable, but in any event within forty five (45)
days after the end of each of the quarters of each fiscal year of
Maker (other than Maker's first fiscal quarter of 2005, for which
Maker shall have ninety (90) days after the end of such fiscal
quarter), an unaudited statement of operations and cash flow
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statement, for such fiscal quarter and setting forth year-to-date
financial information, and an unaudited balance sheet as of the end
of such quarter;
(C) as soon as practicable, but in any event thirty (30) days prior
to the end of each fiscal year, a financial budget and business plan
for the next fiscal year; and
(D) such other information relating to the financial condition,
business, prospects or corporate affairs of Maker as Payee may from
time to time reasonably request; provided, however, that Maker shall
not be obligated pursuant to this provision to provide access to any
information which it reasonably considers a trade secret or other
proprietary intellectual property information, unless Payee has
agreed to maintain such information in confidence pursuant to a
written agreement reasonably acceptable to Maker.
4.2 NEGATIVE COVENANTS. Until there are no outstanding amounts under this
Note, the Maker will not:
4.2.1 Liens. Create or suffer to exist any lien, security interest
or other charge or encumbrance of any kind on or with respect to any
of its properties, whether now owned or hereafter acquired, other
than (i) liens for taxes, assessments and governmental charges, (ii)
liens imposed by law and other similar liens arising in the ordinary
course of business securing obligations that are not overdue for a
period of more than thirty (30) days, (iii) pledges or deposits to
secure public or statutory obligations, (iv) easements, rights of
way and other encumbrances on title to real property that do not
render title to the property encumbered thereby unmarketable or
materially adversely affect the use of such property for its present
purposes, and (v) the liens with respect to the obligations set
forth on Schedule 4.2.2 hereto.
4.2.2 Debt. Other than (x) the obligations under this Note, (y)
those obligations set forth on Schedule 4.2.2 hereto and (z)
indebtedness for borrowed money (including capitalized lease
obligations) that do not, in the aggregate (without duplication)
with those capital expenditures permitted under SECTION 4.2.4 and
Investments permitted pursuant to CLAUSE (ii) of SECTION 4.2.5,
exceed $1,000,000, directly or indirectly, create, incur, assume or
guaranty, or otherwise become or remain directly or indirectly
liable with respect to any (i) indebtedness for borrowed money, (ii)
obligations for the deferred purchase price of property or services
other than trade payables not overdue by more than sixty (60) days
incurred in the ordinary course of business, (iii) obligations
evidenced by notes, bonds, debentures or other similar instruments,
(iv) obligations, contingent or otherwise in respect of letters of
credit or similar extensions of credit, (v) debt of others
guarantied by Maker.
4.2.3 Dividends. Declare or make any dividend payment or other
distribution of assets, properties, cash, rights, obligations or
securities on account of any shares of any class of capital stock of
the Maker, or purchase, redeem or otherwise acquire for value any
shares of any class of capital stock of the Maker or any
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warrants, rights or options to acquire any such shares, now or
hereafter outstanding, except that so long as no Event of Default
shall have occurred and be continuing at the time of any action
described below or would result therefrom, the Maker may (i) declare
and make any dividend payment or other distribution payable in
common stock of the Maker, (ii) purchase, redeem or otherwise
acquire shares of its common stock or warrants, rights or options to
acquire any such shares with the proceeds received from the
substantially concurrent issue of new shares of its common stock, or
(iii) purchase, redeem or otherwise acquire shares of its common
stock or warrants, rights or options to acquire any such shares in
connection with repurchases of capital stock from employees, former
employees, and consultants or advisors of Maker pursuant to
restricted stock purchase agreements in effect as of April 6, 2000
or grants of options made under the Maker's 1999 Stock Option Plan
not to exceed more than $500,000 in any twelve month period.
4.2.4 Change in Nature of Business. Make any material change in the
nature of the business as carried on at the date hereof, except for
those changes that do not, in the aggregate (without duplication)
with (x) those Investments permitted under CLAUSE (ii) of SECTION
4.2.5 and (y) debt permitted pursuant to CLAUSE (z) of SECTION
4.2.2, result in cash capital expenditures by Maker in excess of
$1,000,000.
4.2.5 Investments in Other Persons. Make any Investment in any other
person other than (i) Investments in marketable securities and (ii)
cash Investments that do not, in the aggregate (without duplication)
with (x) those capital expenditures permitted under SECTION 4.2.4
and (y) debt permitted pursuant to CLAUSE (z) of SECTION 4.2.2,
exceed $1,000,000.
4.2.6 Issuance of Preferred Stock. Issue any preferred stock of the
Maker, unless such preferred stock is expressly made junior in right
of repayment to this Note.
V. EVENTS OF DEFAULT.
The occurrence and continuation of any of the events or conditions
described in this ARTICLE V shall be an "EVENT OF DEFAULT."
5.1 PAYEE ACTION. The failure by Maker to pay any installment of principal
or the failure to pay any installment of interest hereon within five business
days of the date when due shall, at the option of the Payee, entitle Payee to
declare all sums of principal and interest then remaining unpaid, due and
payable, all without demand, presentment, notice or protest, all of which hereby
are expressly waived, and permit Payee to exercise any other right available to
it at law or in equity, all of which rights and powers may be exercised
cumulatively.
5.2 ACCELERATION WITHOUT SPECIFIC ACTION. The occurrence of any of the
following Events of Default shall make all sums of principal and interest then
remaining unpaid, due and payable, all without demand, presentment, notice or
protest, all of which hereby are expressly
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waived, and permit Payee to exercise any other right available to it at law or
in equity, all of which rights and powers may be exercised cumulatively.
5.2.1 Bankruptcy. The voluntary institution of bankruptcy,
insolvency, reorganization or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the
relief of debtors by the Maker; or the institution of any such
proceedings against the Maker, which involuntary proceedings shall
not have been vacated by appropriate court order within sixty (60)
days of such institution.
5.2.2 Dissolution. Any order, judgment or decree shall have been
entered against the Maker decreeing the dissolution or liquidation
of the Maker and such order shall remain undischarged or unstayed
for a period of sixty (60) days.
5.2.3 Insolvency, Receiver or Trustee. The making by the Maker of a
general assignment for the benefit of creditors; or consent by the
Maker to the appointment of a receiver or trustee for it or for all
or substantially all of its property or business; or the appointment
otherwise of such a receiver or trustee or a committee of the
Maker's creditors.
5.3 BREACH OF COVENANT. The Maker shall fail to perform or observe (i) any
term, covenant or agreement contained in SECTION 4.1.2 or 4.2 or (ii) in all
material respects any other term, covenant or agreement contained in this Note
on its part to be performed or observed if such failure shall remain unremedied
for 30 days after written note thereof shall have been given to the Maker by
Payee.
VI. METHODS; ADDRESSES.
Any notice, demand or other communication required or permitted under the
terms of this Note shall be in writing and shall be made by telegram, telex or
electronic transmitter (including, without limitation, facsimile) or certified
or registered mail, return receipt requested, and shall be deemed to be received
by the addressee on the date delivery is confirmed, if sent by Federal Express,
Express Mail, or other similar overnight delivery service, the date of
electronic confirmation of receipt, if sent by telegram, telex, telecopy or
electronic transmitter, and three (3) business days after mailing, if sent by
certified or registered mail, with postage prepaid, and properly addressed.
Notices shall be addressed as provided below:
(a) If to Payee: America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166
Facsimile: (703) 265-3001
Attention: Senior Vice President - Corporate Finance
With copy to: America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166
Facsimile: (703) 265-3992
Attention: General Counsel
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(b) If to the Maker: Ritz Interactive, Inc.
2010 Main Street, Suite 400
Irvine, California 92614
Facsimile: (949) 255-1560
Attention: Scott Neamand
With a copy to: O'Melveny & Myers, LLP
114 Pacifica, Suite 100
Irvine, California 92618
Facsimile: (949) 737-2300
Attention: J. Jay Herron, Esq.
Any party may change its address for this purpose by giving a written
notice thereof as herein provided.
VII. MISCELLANEOUS.
7.1 GOVERNING LAW. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE MAKER
AND THE PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO CONFLICTS OF LAWS PRINCIPLES.
7.2 MODIFICATION. Neither this Note nor any provision hereof may be
amended, modified or waived unless agreed to in writing by the holder of this
Note and Maker.
7.3 SUBORDINATION. All future indebtedness of the Maker in excess of
$500,000 per instrument (with instruments made in favor of the same person or
such person's affiliates aggregated for this purpose) shall be subordinated to
the obligations of Maker to Payee evidenced by this Note. Upon Payee's request,
Maker and any holder of such debt shall execute a subordination agreement, in
form and substance reasonably acceptable to Payee and such holder, providing
that such debt is subordinated in right of payment to the obligations hereunder,
and requiring such holder to standstill in the exercise of its remedies prior to
the exercise of remedies of Payee, such standstill to be on terms reasonably
acceptable to Payee and the holders or prospective holders of such debt.
7.4 SEVERABILITY. Whenever possible, each provision of this Note will be
interpreted in such manner as to be effective and valid under applicable law,
but, if any provision of this Note is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of this Note.
7.5 SUCCESSORS. The terms contained in this Note shall bind the parties
hereto and their respective heirs, executors, administrators, distributees,
successors and assigns. Payee may assign and transfer this Note to any person
that is controlled by, controlling or under common control with the Payee.
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7.6 HEADINGS. The section headings in this Note are inserted for purposes
of convenience only and shall have no substantive effect.
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IN WITNESS WHEREOF, the parties have caused this Note to be signed and
delivered by their respective duly authorized officer and to be dated May 27,
2005.
MAKER: PAYEE:
RITZ INTERACTIVE, INC., a Delaware AMERICA ONLINE, INC., a Delaware
corporation corporation
By: /s/ Fred H. Lerner By: /s/ Arthur Minson
---------------------- -----------------------------
Its: President and Chief Executive Its: SVP, Corporate Finance
Officer
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SCHEDULE 4.2.2
1. In March 2002, the Maker entered into an agreement with Photoalley, Inc.
and CMA Business Credit Services to purchase the inventory, any rights to the
URL/internet sites and internet related assets, which includes customer email
lists, of Photoalley, Inc. Under the terms of the agreement, the Maker is
obligated to make monthly payments equal to a percentage of net revenues
generated from the internet sites for the period of five years.
2. In May 2002, the Maker entered into an agreement with CameraWorld.com,
Inc. and NACM-Oregon Service Company to purchase any rights to the URL/internet
sites and internet related assets, which includes customer email lists, of
CameraWorld.com. Under the terms of the agreement, the Maker is obligated to
make monthly payments equal to a percentage of net revenues generated from the
internet sites for the period of five years.
3. In August 2004, the Maker entered into an agreement with eAngler, Inc. to
purchase any rights to the URL/internet sites and internet related assets, which
includes customer email lists, of eAngler.com. Under the terms of the agreement,
the Maker is obligated to make monthly payments equal to a percentage of net
revenues generated from the internet sites for the period of three years,
provided that no payments are required to be made unless and until gross
revenues from the internet sites exceed approximately $1.4 million. In addition,
the Maker is obligated to make a payment of up to $25,000 in 2006.