Exhibit 10.4
ROYALTY AGREEMENT
This Royalty Agreement (this “
Agreement ”) is
entered into as of July 10, 2007 (the “ Effective Date ”), by and
between Perfect Circle Projectiles, LLC, an Illinois limited
liability company (“ Seller ”), and PCP Acquisition,
Inc., a Colorado corporation (“ Buyer ”). Each of Seller and
Buyer shall be referred to herein individually as a “
Party ,” and
collectively as the “ Parties .”
RECITALS
WHEREAS, pursuant to Section 7.1(e) of the Asset
Purchase Agreement dated as of the Effective Date by and among
Seller, Gary E. Gibson, Buyer and Security With Advanced
Technology, Inc. (the “ Purchase
Agreement ”), Buyer and Seller
agreed to enter into this Agreement as a condition to the closing
of the transactions contemplated by the Purchase
Agreement;
WHEREAS, pursuant to the terms and conditions
contained herein, Buyer agrees to pay royalties to Seller for all
Spherical Projectile (as defined in the Purchase Agreement) rounds
of Products (as defined in the Purchase Agreement) that contain an
irritant or other inhibiting substance (“
Live Rounds ”)
and all other Spherical Projectile rounds (“
Inert Rounds ”)
of Products acquired by Buyer pursuant to the Purchase Agreement
and produced during the Term (as defined below); and
WHEREAS, unless otherwise defined herein,
capitalized terms used herein shall have the meanings assigned to
them in the Purchase Agreement.
NOW, THEREFORE, for and in consideration of the
mutual promises and covenants contained herein and other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Parties agree as follows:
(a)
Subject to Section 2 below and the limitations set
forth in Section 6.10 of the Purchase Agreement, Buyer shall pay to
Seller (i) $0.12 per Live Round and (ii) $0.06 per Inert Round of
Products produced by Buyer during the Term (the “
Royalty ”). The
Royalty shall be payable quarterly within 45 days after the end of
each calendar quarter (or portion thereof) during the Term for the
period commencing on the Effective Date and ending on the sixth
anniversary of the Effective Date (the “
Term ”).
(b)
With each Royalty payment, Buyer shall deliver to
Seller a written certificate of a qualified officer of Buyer
certifying the number of Live Rounds and Inert Rounds of Products
produced by Buyer during the immediately preceding
quarter.
|
2.
|
Minimum Annual Royalty Payments
.
|
(a)
Notwithstanding Section 1, Buyer shall pay an annual
minimum Royalty (the “ Annual
Minimum Royalty ”) to Seller during
the Term as follows: (a) the Annual Minimum
Royalty for the first year during the Term shall be
$105,000; (b) the Annual Minimum Royalty for the second year during
the Term shall be $157,000; and (c) Annual Minimum Royalty for the
third, fourth, fifth and sixth years during the Term shall be
$210,000; for a cumulative amount of total Annual Minimum Royalty
of $1,102,000. If in any year during the Term the aggregate amount
of the Royalty payments made during such year is less than the
applicable Annual Minimum Royalty for such year (a “
!Shortfall ”), then Buyer shall make an additional payment to Seller
in the amount of the Shortfall together with the fourth quarter
Royalty payment for such year.
(b)
Buyer shall have the right to pre-pay any or all of
the Annual Minimum Royalty without premium or penalty.
3.
Security Interest .
Buyer hereby grants to Seller a first priority security interest in
all of the Product Rights and Patents as defined in the Purchase
Agreement (the “ Assets
”) to secure Buyer’s payment of the
Annual Minimum Royalties. Seller is authorized to file financing
statements, amendments, termination statements, continuation
statements and any other filing it may deem reasonably necessary in
connection with its security interest in the Assets without
Buyer’s signature. The security interest shall automatically
terminate upon the payment in full of all Annual Minimum Royalties.
Upon any such termination of the security interest, (i) all
security interests arising under this Agreement shall automatically
be released, discharged and terminated and (ii) Seller will
promptly execute and deliver such UCC termination statements and
other documentation and instruments (all in form and substance
reasonably acceptable to Buyer and all without any representation,
warranty or recourse of any kind whatsoever) as may be reasonably
requested and provided to Seller to effect such release and
termination.
4.
Audit Rights . Seller
may, upon reasonable notice to Buyer, during Buyer’s business
hours, but in no event more than once each calendar year during the
Term, inspect or ha
