<PAGE>
EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
Between
STAN LEE MEDIA, INC.
and
the Investors Signatory Hereto
SECURITIES PURCHASE AGREEMENT dated as of November 30, 2000 (the
"Agreement"), between Stan Lee Media, Inc., a Colorado corporation (the
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"Company"), and the persons signatory hereto (each an "Investor" and together
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the "Investors").
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WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investors,
and the Investors shall purchase from the Company, in one or more closings, up
to an aggregate of (i) $2,200,000 principal amount of the Company's 6%
Convertible Debentures due 2003 (the "Convertible Debentures") and (ii) warrants
(the "Warrants") to purchase 150,000 shares of the Company's common stock, no
par value (the "Common Stock").
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) ("Section 4(2)") and/or Section 4(6) ("Section 4(6)") of the United
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States Securities Act of 1933 and/or Regulation D ("Regulation D") and the other
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rules and regulations promulgated thereunder (the "Securities Act"), and/or upon
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such other exemption from the registration requirements of the Securities Act as
may be available with respect to any or all of the investments in securities to
be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
In addition to the definitions set forth in the text of this Agreement, the
following capitalized terms shall have the meanings ascribed to them below:
"Capital Shares" shall mean the Common Stock and any shares of any other class
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of common stock, whether now or hereafter authorized, having the right to
participate in the distribution of earnings and assets of the Company.
"Capital Share Equivalents" shall mean any securities, rights, or obligations
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that are convertible into or exchangeable for or give any right to subscribe for
any Capital Shares of the Company or any warrants, options or other rights to
subscribe for, purchase or otherwise acquire Capital Shares or any such
convertible or exchangeable securities.
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"Closing" shall mean each closing of the purchase and sale of the Convertible
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Debentures and Warrants pursuant to Section 2.1.
"Closing Date" shall mean each date on which (x) all conditions to Closing have
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been satisfied or waived as provided in Section 2.1(d) hereof and (y) a Closing
shall have occurred.
"Code" shall mean the United States Internal Revenue Code of 1986, as amended,
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including the Treasury Regulations promulgated thereunder, as applicable.
"Common Stock" shall mean the Company's common stock, no par value per share.
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"Conversion Shares" shall mean the shares of Common Stock issuable upon
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conversion of the Convertible Debentures, including any shares of Common Stock
issued in payment of interest under the Convertible Debentures.
"Convertible Debentures" shall mean the $2,200,000 principal amount of the
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Company's 6% Convertible Debentures due 2003, in the form of Exhibit A hereto.
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"Damages" shall mean any loss, claim, damage, judgment, penalty, deficiency,
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liability, costs or expenses (including, without limitation, reasonable
attorneys' fees and disbursements and reasonable costs and expenses of expert
witnesses and investigation).
"Disclosure Schedule" shall mean the written disclosure schedule delivered on or
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prior to the date hereof by the Company to the Investors that is arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Agreement.
"Effective Date" shall mean the date on which the SEC first declares effective
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a Registration Statement registering the resale of the Registrable Securities as
set forth in the Registration Rights Agreement.
"Environmental Laws" shall mean foreign, Federal, state and local laws and
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regulations relating to the protection of human health and safety, the
environment, hazardous or toxic substances or wastes, pollutants or
contaminants.
"Escrow Agent" shall have the meaning set forth in the Escrow Agreement.
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"Escrow Agreement" shall mean the Escrow Agreement in substantially the form of
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Exhibit D hereto executed and delivered contemporaneously with this Agreement.
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"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and
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the rules and regulations promulgated thereunder.
"GAAP" shall mean United States generally accepted accounting principles as
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shall be in effect from time to time.
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"Intellectual Property" shall mean all trademarks, trade names, service marks,
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service mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, governmental authorizations, trade secrets,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures) and other
similar proprietary rights, information and knowledge.
"Irrevocable Transfer Agent Instructions" shall mean the Irrevocable Transfer
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Agent Instructions, in the form of Exhibit F attached hereto, from the Company
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to the Company's transfer agent.
"IRS" means the United States Internal Revenue Service.
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"Legend" shall mean the legend set forth in Section 9.1.
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"Market Price" on any given date shall mean the average of the two lowest
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closing bid prices of the Common Stock on the Principal Market (as reported by
Bloomberg L.P.) for the period of five consecutive Trading Days ending on the
Trading Day immediately prior to the date for which the Market Price is to be
determined.
"Material Adverse Effect" shall mean any effect on the business, operations,
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properties, prospects, or financial condition of the Company that is material
and adverse to the Company and its subsidiaries and affiliates, taken as a
whole, or any condition, circumstance, or situation that would prohibit or
otherwise interfere with the ability of the Company to enter into and perform
any of its obligations under any of the Transaction Documents in any material
respect.
"Outstanding," when used with reference to any Capital Shares, shall mean, at
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any date as of which the number of such Capital Shares is to be determined, all
issued and outstanding Capital Shares, and shall include all such Capital Shares
issuable in respect of outstanding scrip or any certificates representing
fractional interests in such Capital Shares; provided, however, that
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"Outstanding" shall not mean any such Capital Shares then directly or indirectly
owned or held by or for the account of the Company.
"Person" shall mean an individual, a corporation, a partnership, a limited
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liability company, an association, a trust or other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Principal Amount" shall mean, at any time, the unpaid principal balance of one
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or more Convertible Debentures.
"Principal Market" shall mean the American Stock Exchange, the New York Stock
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Exchange, the NASDAQ National Market, or the NASDAQ SmallCap Market, whichever
is at the time the principal trading exchange or market for the Common Stock,
based upon share volume.
"Purchase Price" shall mean the Principal Amount of the Convertible Debentures
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purchased.
<PAGE>
"Registrable Securities" shall mean the Conversion Shares and the Warrant
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Shares until (i) the Registration Statement has been declared effective by the
SEC, and all Conversion Shares and Warrant Shares have been disposed of pursuant
to the Registration Statement, (ii) all Conversion Shares and Warrant Shares are
transferable under circumstances under which all of the applicable conditions of
Rule 144 (or any similar provision then in force) under the Securities Act
("Rule 144") are met, or (iii) all Conversion Shares and Warrant Shares have
been otherwise transferred to holders who may trade such shares without
restriction under the Securities Act, and the Company has delivered a new
certificate or other evidence of ownership for such securities not bearing a
restrictive Legend.
"Registration Rights Agreement" shall mean the agreement regarding the filing
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of the Registration Statement for the resale of the Registrable Securities,
entered into between the Company and the Investors in the form annexed hereto as
Exhibit C.
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"Registration Statement" shall mean a registration statement on Form S-3 if use
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of such form is then available to the Company pursuant to the rules of the SEC
and, if not, on such other form promulgated by the SEC for which the Company
then qualifies and which counsel for the Company shall deem appropriate, and
which form shall be available for the resale by the Investors of the Registrable
Securities to be registered thereunder in accordance with the provisions of this
Agreement and the Registration Rights Agreement and in accordance with the
intended method of distribution of such securities), for the registration of the
resale by the Investors of the Registrable Securities under the Securities Act.
"Regulation D" shall have the meaning set forth in the recitals of this
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Agreement.
"SEC" shall mean the Securities and Exchange Commission.
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"SEC Documents" shall mean the Company's Annual Report on Form 10-KSB for the
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fiscal year ended December 31, 1999 and each report, proxy statement and
registration statement filed by the Company with the SEC pursuant to the
Exchange Act or the Securities Act since the filing of such Annual Report
through the date hereof.
"Section 4(2)" and "Section 4(6)" shall have the meanings set forth in the
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recitals of this Agreement.
"Securities" shall mean the Convertible Debentures, the Warrants, the Conversion
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Shares and the Warrant Shares, individually and collectively.
"Securities Act" shall have the meaning set forth in the recitals of this
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Agreement.
"Subsidiary" shall mean any entity in which the Company, directly or indirectly,
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owns at least 50% of the outstanding capital stock or holds an equity or similar
interest.
<PAGE>
"Tax" or "Taxes" means Federal, state, county, local, foreign, or other income,
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gross receipts, ad valorem, franchise, profits, sales or use, transfer,
registration, excise, utility, environmental, communications, real or personal
property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not.
"Tax Return" means any return, information report or filing with respect to
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Taxes, including any schedules attached thereto and including any amendment
thereof.
"Trading Day" shall mean any day during which the Principal Market shall be
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open for business.
"Transaction Documents" shall mean this Agreement, the Convertible Debentures,
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the Warrants, the Registration Rights Agreement, the Escrow Agreement, the
Irrevocable Transfer Agent Instructions and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by
this Agreement.
"Warrants" shall mean the warrants to purchase Common Stock substantially in
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the form of Exhibit B to be issued to the Investors hereunder.
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"Warrant Shares" shall mean all shares of Common Stock or other securities
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issued or issuable pursuant to exercise of the Warrants.
<PAGE>
ARTICLE II
Purchase and Sale of Convertible Debentures and Warrants
Section 2.1. Investment.
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(a) Upon the terms and subject to the conditions set forth herein, on the
Closing Dates specified on the signature pages hereof, the Company agrees to
sell to the Investors, and the Investors agree to purchase from the Company,
severally but not jointly, an aggregate of up to $2,200,000 principal amount of
Convertible Debentures, together with Warrants to purchase up to an aggregate of
150,000 Warrant Shares, for the Purchase Price.
(b) Upon execution and delivery of this Agreement, each Investor shall
deliver to the Escrow Agent immediately available funds in an amount equal to
the amount of the Convertible Debenture(s) to be purchased at the Closing, as
set forth on the signature page hereto, and the Company shall deliver to the
Escrow Agent the Convertible Debentures and the Warrants to be delivered at the
Closing, in each case to be held by the Escrow Agent pursuant to the Escrow
Agreement.
(c) The Closing shall occur via facsimile and overnight courier on the
relevant Closing Date, at which time the Escrow Agent (x) shall release to the
Investor the Convertible Debenture(s) and the Warrant(s) to be issued on such
Closing Date and (y) shall release to the Company the Purchase Price for the
Convertible Debenture(s) purchased at such Closing (after all fees to be paid on
such Closing Date have been paid as set forth in the Escrow Agreement), pursuant
to the terms of the Escrow Agreement.
(d) Each Closing shall be subject to the satisfaction of the conditions to
Closing set forth below:
(i) The obligation of the Company hereunder to issue and sell the
Convertible Debenture(s) and issue the Warrant(s) to each Investor at
the Closing is subject to the satisfaction, at or before the relevant
Closing Date, of each of the following conditions, provided that these
conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion by providing each Investor
with prior written notice thereof:
(A) The Investors shall have executed each of the Transaction
Documents to be executed by them and delivered the same to the
Company.
(B) The Escrow Agent shall have delivered to the Company the
Purchase Price for the Convertible Debentures and Warrants being
purchased by the Investors at the Closing by wire transfer of
immediately available funds pursuant to the written wire
instructions provided by the Company.
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(C) The representations and warranties of the Investors shall be
true and correct as of the date when made and as of the Closing
Date as though made at that time (except for representations and
warranties that speak as of a specific date), and the Investors
shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by them at or prior
to the Closing Date.
(ii) The obligation of each Investor hereunder to purchase the
Convertible Debenture(s) and Warrant(s) at the Closing is subject to the
satisfaction, at or before the relevant Closing Date, of each of the
following conditions, provided that these conditions are for each
Investor's sole benefit and may be waived by such Investor at any time in
its sole discretion:
(A) The Company shall have executed each of the Transaction
Documents to be executed by it and delivered copies of the same
to such Investor.
(B) The Common Stock shall be authorized for quotation on a
Principal Market, trading in the Common Stock shall not have been
suspended by such Principal Market or the SEC at any time
beginning on the date hereof and through and including the
Closing Date, and, except as set forth on the Disclosure
Schedule, the Company shall not have been notified of any pending
or threatened proceeding or other action to delist or suspend the
Common Stock.
(C) The representations and warranties of the Company shall be
true and correct as of the date when made and as of the Closing
Date as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company
shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by the Company at or
prior to the Closing Date. Such Investor shall have received a
certificate, executed by the Company's Chief Executive Officer,
dated as of the Closing Date, to the foregoing effect and as to
such other matters as may be reasonably requested by such
Investor.
(D) Such Investor shall have received the opinion of the
Company's counsel dated as of the Closing Date, in form, scope
and substance reasonably satisfactory to such Investor and in
substantially the form of Exhibit E attached hereto.
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(E) The Company shall have executed and delivered to such
Investor the Convertible Debenture(s) (in such denominations as
such Investor shall request) being purchased by such Investor at
the Closing.
<PAGE>
(F) The Company shall have executed and delivered to such
Investor the Warrant(s) (in such denominations as such Investor
shall request) being purchased by such Investor at such Closing.
(G) The Board of Directors of the Company shall have adopted
resolutions consistent with Section 4.2 below and in a form
reasonably acceptable to such Investor (the "Resolutions").
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(H) The Company shall have delivered the Irrevocable Transfer
Agent Instructions to its transfer agent, and such transfer agent
shall have acknowledged receipt thereof in writing.
(I) The Company shall have delivered to such Investor a
certificate evidencing the incorporation and good standing of the
Company and each Subsidiary in such corporation's state of
incorporation issued by the Secretary of State of such state of
incorporation as of a date within ten days of the Closing Date.
(J) The Company shall have delivered to such Investor a
certified copy of its Articles of Incorporation as certified by
the Secretary of State of the State of Colorado within ten days
of the Closing Date.
(K) The Company shall have delivered to such Investor a
certificate, executed by the Company's Secretary dated the
Closing Date, as to (i) the resolutions described in Section 4.2,
(ii) the Articles of Incorporation and (iii) the Bylaws, each as
in effect on the Closing Date.
(L) The Company shall have delivered to such Investor such other
documents relating to the transactions contemplated by this
Agreement as such Investor or its counsel may reasonably request.
Section 2.2. Liquidated Damages. The parties hereto acknowledge and agree that
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the amounts payable by the Company to the Investors pursuant to the Registration
Rights Agreement with respect to a Registration Default thereunder shall
constitute liquidated damages and not penalties. The parties further acknowledge
that (i) the amount of loss or damages likely to be incurred as a result of such
Registration Default is incapable or is difficult to precisely estimate, (ii)
the amounts payable as a result of a Registration Default bear a reasonable
proportion to and are not plainly or grossly disproportionate to the probable
loss likely to be incurred by the Investors in connection with the failure by
the Company to timely cause the registration of the Registrable Securities under
the Registration Rights Agreement and (iii) the parties are sophisticated
business persons and have been represented by sophisticated and able legal and
financial counsel and negotiated this Agreement at arm's-length.
<PAGE>
ARTICLE III
Representations and Warranties of the Investors
Each Investor, severally and not jointly, represents and warrants to the Company
that:
Section 3.1. Intent. Such Investor is entering into this Agreement for its own
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account and not with a view to or for sale in connection with any distribution
of the Common Stock. Such Investor has no present arrangement (whether or not
legally binding) at any time to sell the Securities to or through any person or
entity; provided, however, that by making the representations herein, such
Investor does not agree to hold such Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time in
accordance with Federal and state securities laws applicable to such
disposition.
Section 3.2. Sophisticated Investor. Such Investor is a sophisticated investor
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(as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor
(as defined in Rule 501 of Regulation D), and such Investor has such experience
in business and financial matters that it has the capacity to protect its own
interests in connection with this transaction and is capable of evaluating the
merits and risks of an investment in the Securities. Such Investor acknowledges
that an investment in the Securities is speculative and involves a high degree
of risk.
Section 3.3. Authority. This Agreement and each of the Transaction Documents
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that are required to be executed by such Investor have been duly authorized and
validly executed and delivered by such Investor and are valid and binding
agreements of such Investor enforceable against it in accordance with their
terms, subject to applicable bankruptcy, insolvency, or similar laws relating
to, or affecting generally the enforcement of, creditors' rights and remedies or
other equitable principles of general application.
Section 3.4. Not an Affiliate. Such Investor is not an officer, director or
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"affiliate" (as that term is defined in Rule 405 of the Securities Act) of the
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Company.
Section 3.5. Absence of Conflicts. The execution, delivery and performance of
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this Agreement and each other Transaction Document, and the consummation of the
transactions contemplated hereby and thereby, and compliance with the
requirements hereof and thereof by such Investor, will not violate any law,
rule, regulation, order, writ, judgment, injunction, decree or award binding on
such Investor or (a) violate any provision of any indenture, instrument or
agreement to which such Investor is a party or is subject, or by which such
Investor or any of its assets is bound; (b) conflict with or constitute a
material default thereunder; (c) result in the creation or imposition of any
lien pursuant to the terms of any such indenture, instrument or agreement, or
constitute a breach of any fiduciary duty owed by such Investor to any third
party; or (d) require the approval of any third party (which has not been
obtained) pursuant to any material contract, agreement, instrument, relationship
or legal obligation to which such Investor is subject or to which any of its
assets, operations or management may be subject.
<PAGE>
Section 3.6. Disclosure; Access to Information. Such Investor has received all
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documents, records, books and other publicly available information pertaining to
such Investor's investment in the Company as such Investor has requested. Such
Investor acknowledges that the Company is subject to the periodic reporting
requirements of the Exchange Act, and such Investor has reviewed copies of all
SEC Documents deemed relevant by such Investor.
Section 3.7. Manner of Sale. At no time was Investor presented with or
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solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
Section 3.8 Acknowledgment Regarding Investor's Purchase of Convertible
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Debentures. The Investor acknowledges and agrees that it is acting solely in
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the capacity of arm's-length purchaser with respect to the Transaction Documents
and the transactions contemplated thereby. The Investor further acknowledges
that it is not acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to the Transaction Documents and the
transactions contemplated thereby and any advice given by the Investor or any of
its representatives or agents in connection with the Transaction Documents and
the transactions contemplated thereby is merely incidental to such Investor's
purchase of Securities. The Investor further represents to the Company that the
Investor's decision to enter into the Transaction Documents has been based
solely on the independent evaluation by the Investor and its representatives.
Section 3.9 No Misrepresentation. The representations and warranties of the
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Investor contained in this Agreement, any schedule, annex or exhibit hereto and
any agreement, instrument or certificate furnished by the Investor to the
Company pursuant to this Agreement, do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
ARTICLE IV
Representations and Warranties of the Company
<PAGE>
The Company represents and warrants to the Investors that, except as set
forth on the Disclosure Schedule prepared by the Company and attached hereto:
Section 4.1. Organization of the Company. The Company is a corporation duly
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incorporated, validly existing and in good standing under the laws of the State
of Colorado and has all requisite corporate authority to own its properties and
to carry on its business as now being conducted. The Company's Subsidiaries are
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated and have the requisite
corporate power and authority to own their properties and to carry on their
business as now being conducted. The Company does not have any Subsidiaries and
does not own more than fifty percent (50%) of or control any other business
entity except as set forth in the SEC Documents. The Company and each of its
Subsidiaries is duly qualified and is in good standing as a foreign corporation
to do business in every jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, other than
those in which the failure so to qualify would not have a Material Adverse
Effect.
Section 4.2. Authority. (i) The Company has the requisite corporate power and
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corporate authority to enter into and perform its obligations under the
Transaction Documents and to issue the Securities pursuant to their respective
terms; (ii) the execution, issuance and delivery of the Transaction Documents,
the Convertible Debentures and the Warrants by the Company and the consummation
by it of the transactions contemplated hereby have been duly authorized by all
necessary corporate action and no further consent or authorization of the
Company or its Board of Directors or stockholders is required, except insofar as
the Company is required to obtain the approval of its stockholders in accordance
with the corporate governance rules of the Nasdaq Stock Market for issuances of
Common Stock in excess of the Exchange Cap (as that term is defined in the
Convertible Debentures); and (iii) the Transaction Documents have been duly
executed and delivered by the Company and constitute valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or other equitable principles of
general application. The Company has duly and validly authorized and reserved
for issuance shares of Common Stock sufficient in number for the conversion of
the Convertible Debentures and for the exercise of the Warrants. The Company
understands and acknowledges the potentially dilutive effect on the Common Stock
of the issuance of the Conversion Shares and the Warrant Shares. The Company
further acknowledges that its obligation to issue Conversion Shares upon
conversion of the Convertible Debentures and Warrant Shares upon exercise of the
Warrants in accordance with this Agreement, the Convertible Debentures and/or
the Warrants is absolute and unconditional regardless of the dilutive effect
that such issuance may have on the ownership interests of other stockholders of
the Company and notwithstanding the commencement of any case under 11 U.S.C. (S)
101 et seq. (the "Bankruptcy Code").
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Section 4.3. Capitalization. The authorized capital stock of the Company
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consists of 100,000,000 shares of Common Stock, no par value, of which
13,529,792 shares were issued and outstanding as of November 1, 2000 and
10,000,000 shares of preferred stock, par value $0.001 per share, of which
<PAGE>
1,500,000 shares of Series A and 4,000 shares of Series B were issued and
outstanding as of November 1, 2000. Except for (i) outstanding options,
warrants and convertible securities as set forth in the SEC Documents, and (ii)
as set forth in the Disclosure Schedule, there are no outstanding Capital Share
Equivalents nor any agreements or understandings pursuant to which any Capital
Share Equivalents may become outstanding. The Company is not a party to any
agreement granting preemptive, registration or anti-dilution rights to any
person with respect to any of its equity or debt securities. All of the
outstanding shares of Common Stock of the Company have been duly and validly
authorized and issued and are fully-paid and nonassessable.
Section 4.4. Common Stock. The Company has registered its Common Stock
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pursuant to Section 12(b) or (g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company is in
compliance with all requirements for the continued listing or quotation of its
Common Stock, and such Common Stock is currently listed or quoted on, a
Principal Market. As of the date hereof, the Principal Market is the Nasdaq
SmallCap Market, and except as set forth in the SEC Documents, the Company has
not received any notice regarding, and to its knowledge there is no threat of,
the termination or discontinuance of the eligibility of the Common Stock for
such listing.
Section 4.5. SEC Documents. The Company has delivered to the Investors true
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and complete copies of the SEC Documents. The Company has not provided the
Investors any information that, according to applicable law, rule or regulation,
should have been disclosed publicly prior to the date hereof by the Company, but
which has not been so disclosed. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and rules and regulations of the SEC
promulgated thereunder, and the SEC Documents did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents complied in all material
respects with applicable accounting requirements and the rules and regulations
of the SEC or other applicable rules and regulations with respect thereto at the
time of such inclusion. Such financial statements have been prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except (i) as may be otherwise indicated in such financial statements or the
notes thereto or (ii) in the case of unaudited interim statements, to the extent
they exclude footnotes or may be condensed or summary statements) and fairly
present in all material respects the financial position of the Company as of the
dates thereof and the results of operations and cash flows for the periods then
ended (subject, in the case of unaudited interim statements, to normal year-end
audit adjustments). Neither the Company nor any of its subsidiaries has any
material indebtedness, obligations or liabilities of any kind (whether accrued,
absolute, contingent or otherwise, and whether due or to become due) that would
have been required to be reflected in, reserved against or otherwise described
in the financial statements or in the notes thereto in accordance with GAAP,
which was not fully reflected in, reserved against or otherwise described in the
financial statements or the notes thereto included in the SEC Documents or was
not incurred in the ordinary course of business consistent with the Company's
past practices since the last date of such financial statements. No other
written information provided by or on behalf of the Company to the Investors
that is not included in the SEC Documents, including, without limitation,
information referred to in Section
<PAGE>
3.6 of this Agreement, contains any untrue statement of a material fact or omits
to state any material fact necessary in order to make the statements therein, in
the light of the circumstance under which they are or were made, not misleading.
Section 4.6. Exemption from Registration; Valid Issuances. Subject to the
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accuracy of the Investors' representations in Article III, the Company's sale of
the Convertible Debentures and its issuance of the Warrants under this
Agreement does not, and the Company's issuance of the Conversion Shares on the
Investor's conversion of the Convertible Debentures and the Warrant Shares on
the exercise of the Warrants will not, require registration under the Securities
Act and/or any applicable state securities law. When issued in accordance with
the terms of the Convertible Debentures or issued and paid for in accordance
with the Warrants, the Conversion Shares and the Warrant Shares, as the case may
be, will be duly and validly issued, fully-paid, and nonassessable. Neither the
sales of the Securities pursuant to, nor the Company's performance of its
obligations under, the Transaction Documents will (i) result in the creation or
imposition by the Company of any liens, charges, claims or other encumbrances
upon any of the Securities or, except as contemplated herein, any of the assets
of the Company, or (ii) entitle the holders of Outstanding Capital Shares to
preemptive or other rights to subscribe for or acquire the Capital Shares or
other securities of the Company. None of the Securities will subject the
Investors to personal liability to the Company or its creditors by reason of an
Investor's possession thereof.
Section 4.7. No General Solicitation or Advertising in Regard to this
--------------------------------------------------------
Transaction. Neither the Company nor any of its affiliates nor any person
-----------
acting on its or their behalf (i) has conducted or will conduct any general
solicitation (as that term is used in Rule 502(c) of Regulation D) or general
advertising with respect to the sale of the Convertible Debentures or the
Warrants, or (ii) has made any offers or sales of any security or solicited any
offers to buy any security under any circumstances that would require
registration of the Securities under the Securities Act.
Section 4.8. No Conflicts. The Company's execution, delivery and performance
------------
of the Transaction Documents, the Company's performance of its obligations under
the Convertible Debentures, and the Company's consummation of the transactions
contemplated hereby and thereby do not and will not (i) result in a violation of
the Company's Articles of Incorporation or By-Laws or (ii) conflict with, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture or
instrument, or any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company is a party, or (iii) result in a violation of any
law, rule, regulation, order, judgment or decree (including Federal and state
securities laws and regulations and the rules and regulations of the Principal
Market) except the applicable rules and regulations of the Nasdaq Stock Market
with regard to issuances of Common Stock in excess of the Exchange Cap that may
require the Company to obtain the approval of its stockholders, applicable to
the Company or by which any property or asset of the Company is bound or
affected. The Company is not otherwise in violation of any term of or in
default under its Articles of Incorporation or By-laws, or any contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or
order or any statute, rule or regulation applicable to the Company, except for
possible conflicts, defaults, terminations, amendments, accelerations,
cancellations and violations that would not individually or in the aggregate
have a Material Adverse Effect. The
<PAGE>
Company's business is not being conducted in violation of any law, ordinance or
regulation of any governmental entity, except for possible violations that
either singly or in the aggregate would not result in a Material Adverse Effect.
Except as specifically contemplated by this Agreement and as required by the
Securities Act, the Company is not required to obtain any consent, authorization
or order of, or make any filing or registration with, any court or governmental
agency or any regulatory or self-regulatory organization, in order for it to
execute, deliver or perform any of its obligations under or contemplated by the
Transaction Documents, in each case in accordance with the terms hereof or
thereof. All consents, authorizations, orders, filings and registrations that
the Company is required to obtain pursuant to the preceding sentence have been
obtained or effected on or prior to the date hereof. The Company is not in
violation of the listing requirements of the Principal Market as in effect on
the date hereof and is not aware of any facts which would reasonably lead to
delisting of the Common Stock by the Principal Market in the foreseeable future.
Section 4.9. No Material Adverse Change. Since December 31, 1999, no Material
--------------------------
Adverse Effect has occurred or exists with respect to the Company, except as
disclosed in any SEC Documents filed at least five (5) days prior to the date
hereof and available on EDGAR. The Company has not taken any steps, and does
not currently expect to take any steps, to seek protection pursuant to the
Bankruptcy Code or any law generally affecting creditors' rights nor does the
Company have any knowledge or reason to believe that its creditors intend to
initiate involuntary bankruptcy proceedings.
Section 4.10. No Undisclosed Events, Liabilities, Developments, or
----------------------------------------------------
Circumstances. As of the date hereof, no event, liability, development or
-------------
circumstance has occurred or exists with respect to the Company or its
Subsidiaries or their respective businesses, properties, operations or financial
condition, that would be required to be disclosed by the Company under
applicable securities laws on a registration statement filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and that has
not been publicly announced.
Section 4.11. No Integrated Offering. The Company has not, directly or
----------------------
indirectly, made any offers or sales of any security, or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the Securities Act or cause this offering of Securities to
be integrated with prior offerings of securities by the Company for purposes of
the Securities Act or any applicable stockholder approval provisions, including,
without limitation, under the rules and regulations of the Principal Market; nor
will the Company or any of its Subsidiaries, to the best of its ability, take
any action or steps that would require registration of the Securities under the
Securities Act or cause the offering of the Securities to be integrated with
other offerings.
Section 4.12. Litigation and Other Proceedings. Except as disclosed in the SEC
--------------------------------
Documents, there are no lawsuits or proceedings pending or, to the knowledge of
the Company, threatened, against the Company or any Subsidiary or any of their
officers or directors in their capacities as such, nor has the Company received
any written or oral notice of any such action, suit, proceeding or
investigation, which could reasonably be expected to have a Material Adverse
Effect. Except as set forth in the SEC Documents, no judgment, order, writ,
injunction or decree or award has been
<PAGE>
issued by or, to the knowledge of the Company, requested of any court,
arbitrator or governmental agency that could result in a Material Adverse
Effect.
Section 4.13. [Intentionally omitted]
Section 4.14. Material Non-Public Information. The Company has not disclosed
-------------------------------
to the Investors any material non-public information that (i) if disclosed,
would reasonably be expected to have a material effect on the price of the
Common Stock or (ii) according to applicable law, rule or regulation, should
have been disclosed publicly by the Company prior to the date hereof, but which
has not been so disclosed.
Section 4.15. Insurance. The Company and each subsidiary maintains property
---------
and casualty, general liability, workers' compensation, environmental hazard,
personal injury and other similar types of insurance with financially sound and
reputable insurers that is adequate and consistent with industry standards and
the Company's historical claims experience. Neither the Company nor any
Subsidiary has been refused any insurance coverage sought or applied for, and
neither the Company nor any such Subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operations of the Company and its Subsidiaries, taken as a whole.
Section 4.16. Tax Matters.
-----------
(a) The Company and each Subsidiary have filed all Tax Returns that
they are required to file under applicable laws; all such Tax Returns are true
and accurate and have been prepared in compliance with all applicable laws; the
Company has paid all Taxes due and owing by it or any Subsidiary (whether or not
such Taxes are required to be shown on a Tax Return) and has withheld and paid
over to the appropriate taxing authorities all Taxes which it or any Subsidiary
is required to withhold from amounts paid or owing to any employee, stockholder,
creditor or other third parties; and since December 31, 1999, the charges,
accruals and reserves for Taxes with respect to the Company (including any
provisions for deferred income taxes) reflected on the books of the Company are
adequate to cover any Tax liabilities of the Company as if its current tax year
were treated as ending on the date hereof.
(b) No claim has been made by a taxing authority in a jurisdiction
where the Company does not file tax returns that the Company or any Subsidiary
is or may be subject to taxation by that jurisdiction. There are no foreign,
Federal, state or local tax audits or administrative or judicial proceedings
pending or being conducted with respect to the Company or any Subsidiary; no
information related to Tax matters has been requested by any foreign, Federal,
state or local taxing authority; and, except as disclosed above, no written
notice indicating an intent to open an audit or other review has been received
by the Company or any subsidiary from any foreign, Federal, state or local
taxing authority. There are no material unresolved questions or claims
concerning the Company's Tax liability. The Company (A) has not executed or
entered into a closing agreement pursuant to (S) 7121 of the Code or any
predecessor provision thereof or any similar provision of
<PAGE>
state, local or foreign law; and (B) has not agreed to, and is not required to,
make any adjustments pursuant to (S) 481 (a) of the Code or any similar
provision of state, local or foreign law by reason of a change in accounting
method initiated by the Company or any of its subsidiaries, and has no knowledge
that the IRS has proposed any such adjustment or change in accounting method,
and does not have any application pending with any taxing authority requesting
permission for any changes in accounting methods that relate to the business or
operations of the Company. The Company has not been a United States real
property holding corporation within the meaning of (S) 897(c)(2) of the Code
during the applicable period specified in (S) 897(c)(1)(A)(ii) of the Code.
(c) The Company has not made an election under (S) 341(f) of the
Code. The Company, to its best knowledge, is not liable for the Taxes of another
person that is not a Subsidiary of the Company under (A) Treas. Reg. (S) 1.1502-
6 (or comparable provisions of state, local or foreign law), (B) as a transferee
or successor, (C) by contract or indemnity or (D) otherwise. The Company is not
a party to any tax sharing agreement. The Company has not made any payments, is
not obligated to make payments and is not a party to an agreement that could
obligate it to make any payments that would not be deductible under (S) 280G of
the Code.
Section 4.17. Property. Neither the Company nor any of its Subsidiaries owns
---------
any real property. Except as set forth in the SEC Documents, each of the
Company and its Subsidiaries owns all of the personal property that it owns,
free and clear of all liens, encumbrances and other adverse interests, except
such as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such property
by the Company and/or its Subsidiary; and to the Company's knowledge, any real
property, mineral or water rights, and buildings that the Company holds under
lease as a tenant are held by it under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and intended to be made of such property, mineral or water rights, and buildings
by the Company and its Subsidiaries.
Section 4.18. Intellectual Property. Each of the Company and its Subsidiaries
---------------------
owns or possesses adequate and enforceable rights or licenses to use all
Intellectual Property necessary for the conduct of its business as now being
conducted. None of the Company's or any Subsidiary's Intellectual Property
necessary to conduct its business as now conducted or as proposed to be
conducted has expired or terminated, or is expected to expire or terminate
within two years from the date of this Agreement, except for the expiration or
termination of Intellectual Property that individually or collectively would
not have a Material Adverse Effect. To the Company's knowledge, except as
disclosed in the SEC Documents, neither the Company nor any of its subsidiaries
is infringing upon or in conflict with any right of any other person with
respect to any Intellectual Property. Except as disclosed in the SEC Documents,
no adverse claims have been asserted by any person to the ownership or use of
any Intellectual Property, and the Company has no knowledge of any basis for
such claim.
Section 4.19. Internal Controls and Procedures. The Company maintains books
--------------------------------
and records and internal accounting controls that provide reasonable assurance
that (i) all transactions to which the Company or any Subsidiary is a party or
by which its properties are bound are executed with management's authorization;
(ii) the recorded accounting of the Company's consolidated assets is compared
with existing assets at regular intervals; (iii) access to the Company's
consolidated assets
<PAGE>
is permitted only in accordance with management's authorization; and (iv) all
transactions to which the Company or any Subsidiary is a party or by which its
properties are bound are recorded as necessary to permit preparation of the
financial statements of the Company in accordance with GAAP.
Section 4.20. Payments and Contributions. Neither the Company, any Subsidiary,
--------------------------
nor any of its directors, officers or, to its knowledge, other employees has (i)
used any Company funds for any unlawful contribution, endorsement, gift,
entertainment or other unlawful expense relating to political activity; (ii)
made any direct or indirect unlawful payment of Company funds to any foreign or
domestic government official or employee; (iii) violated or is in violation of
any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv)
made any bribe, rebate, payoff, influence payment, kickback or other similar
payment to any person with respect to Company matters.
Section 4.21. Acknowledgment Regarding Investors' Purchase of Convertible
-----------------------------------------------------------
Debentures. The Company acknowledges and agrees that each of the Investors is
----------
acting solely in the capacity of arm's-length purchaser with respect to the
Transaction Documents and the transactions contemplated thereby. The Company
further acknowledges that no Investor is acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated thereby and any advice
given by any of the Investors or any of their respective representatives or
agents in connection with the Transaction Documents and the transactions
contemplated thereby is merely incidental to such Investor's purchase of the
Securities. The Company further represents to each Investor that the Company's
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives.
Section 4.22. Labor Matters. Neither the Company nor any of its Subsidiaries
-------------
is involved in any union labor dispute nor, to the knowledge of the Company or
any of its Subsidiaries, is any such dispute threatened. Neither the Company
nor any of its Subsidiaries is a party to a collective bargaining agreement, and
the Company and its Subsidiaries believe that relations with their employees are
good. No executive officer (as defined in Rule 501(f) of the Securities Act)
has notified the Company that such officer intends to leave the Company or
otherwise terminate such officer's employment with the Company.
Section 4.23. Environmental Laws. The Company and its Subsidiaries (i) are in
-------------------
compliance with any and all applicable Environmental Laws, (ii) have received
all permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or approval
where, in each of the three foregoing cases, the failure to so comply would
have, individually or in the aggregate, a Material Adverse Effect.
Section 4.24. Regulatory Permits. The Company and its Subsidiaries possess all
------------------
certificates, authorizations and permits issued by the appropriate Federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such items would not have,
individually or in the aggregate, a Material Adverse Effect, and neither the
<PAGE>
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.
Section 4.25. Absence of Events of Default. No "Event of Default" (as defined
----------------------------
in any agreement or instrument to which the Company is a party) and no event
which, with notice, lapse of time or both, would constitute an Event of Default
(as so defined), has occurred and is continuing, which would have a Material
Adverse Effect.
Section 4.26. Certain Transactions. Except as set forth in the SEC Documents
--------------------
filed at least five days prior to the date hereof and other than the grant of
stock options disclosed in the Disclosure Schedule, none of the officers or
directors of the Company is presently a party to any transaction with the
Company or any of its Subsidiaries (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer or director or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer or director has a
substantial interest or is an officer, director, trustee or partner.
Section 4.27. Application of Takeover Protections. The Company and its Board
-----------------------------------
of Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination or other
similar anti-takeover provision under the laws of the state of its incorporation
that is or could become applicable to the Investors as a result of the
transactions contemplated by this Agreement, including, without limitation, the
Company's issuance of the Securities and the Investor's ownership of the
Securities.
Section 4.28. No Other Agreements. The Company has not, directly or
-------------------
indirectly, made any agreements with any Investors relating to the terms or
conditions of the transactions contemplated by the Transaction Documents, except
as set forth in the Transaction Documents.
Section 4.29. No Misrepresentation. The representations and warranties of the
--------------------
Company contained in this Agreement, any schedule, annex or exhibit hereto and
any agreement, instrument or certificate furnished by the Company to the
Investors pursuant to this Agreement, do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
ARTICLE V
Covenants of the Investors
Each Investor, severally and not jointly, covenants with the Company that:
Section 5.1 Best Efforts. It shall use its best efforts to timely satisfy
------------
each of the conditions to be satisfied by it as provided in Article II of this
Agreement.
<PAGE>
Section 5.2. No Short Selling. As long as Investor owns any Convertible
----------------
Debentures, it will not enter into any put option, short position or other
similar instrument or position with respect to the Common Stock; provided,
however, that the Investor may enter into any short sale or other hedging or
similar arrangement it deems appropriate with respect to Conversion Shares
commencing on the day it delivers a Conversion Notice with respect to such
Conversion Shares, so long as such arrangements do not involve more than the
number of such Conversion Shares (determined as of the date of the Conversion
Notice).
ARTICLE VI
Covenants of the Company
Section 6.1. Best Efforts. The Company shall use its best efforts to timely
------------
satisfy each of the conditions to be satisfied by it as provided in Article II
of this Agreement.
Section 6.2. Registration Rights. The Company shall cause the Registration
-------------------
Rights Agreement to remain in full force and effect, and the Company shall
comply in all material respects with the terms thereof.
Section 6.3. Reservation of Common Stock. As of the date hereof, the Company
---------------------------
has reserved, for the purpose of enabling the Company to issue the Conversion
Shares and the Warrant Shares pursuant to any conversion of the Convertible
Debentures or exercise of the Warrants, not less than 200% of the number of
shares of Common Stock needed to provide for the issuance of the Conversion
Shares and the Warrant Shares.
Section 6.4. Listing of Common Stock. The Company shall maintain the listing
-----------------------
of the Common Stock on a Principal Market and, as soon as required by the rules
of the Principal Market and any other national securities exchange or automated
quotation system, if any, upon which shares of Common Stock are listed, shall
list the Conversion Shares and the Warrant Shares on the Principal Market and
each such other exchange or system. The Company further agrees, if the Company
applies to have the Common Stock traded on any other Principal Market, that it
will include in such application the Conversion Shares and the Warrant Shares,
and will take such other action as is necessary or desirable in the opinion of
the Investors to cause the Conversion Shares and Warrant Shares to be listed on
such other Principal Market as promptly as possible. The Company will take all
action necessary to continue the listing and trading of its Common Stock on a
Principal Market (including, without limitation, maintaining sufficient net
tangible assets) and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the Principal Market
and shall provide Investors with copies of any correspondence to or from such
Principal Market, which questions or threatens delisting of the Common Stock,
within three (3) Trading Days of the Company's receipt thereof, until the
Investors have disposed of all of their Registrable Securities.
Section 6.5. Exchange Act Registration. The Company will cause its Common
-------------------------
Stock to continue to be registered under Section 12(b) or (g) of the Exchange
Act, will use its best efforts to comply in
<PAGE>
all respects with its reporting and filing obligations under the Exchange Act,
and will not take any action or file any document (whether or not permitted by
the Exchange Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under the Exchange Act until the Investors have disposed of all of their
Registrable Securities.
Section 6.6. Legends. The certificates evidencing the Registrable Securities
-------
shall be free of legends, except as set forth in Article IX.
Section 6.7. Corporate Existence; Conflicting Agreements. The Company will
-------------------------------------------
take all steps necessary to preserve and continue its corporate existence,
except to the extent provided by Section 6.8. The Company shall not enter into
any agreement, the terms of which agreement would restrict or impair the right
or ability of the Company to perform any of its obligations under this Agreement
or any of the other Transaction Documents.
Section 6.8. Consolidation; Merger. The Company shall not, at any time after
---------------------
the date hereof, effect any merger or consolidation of the Company with or into,
or a transfer of all or substantially all of the assets of the Company to,
another entity (a "Consolidation Event") unless the resulting successor or
-------------------
acquiring entity (if not the Company) assumes by written instrument or by
operation of law the obligation to deliver to the Investors such shares of stock
and/or securities as the Investors are entitled to receive pursuant to this
Agreement and the Convertible Debentures.
Section 6.9. Issuance of Convertible Debentures and Warrant Shares. The sale
-----------------------------------------------------
of the Convertible Debentures and the Warrants and the issuance of the Warrant
Shares pursuant to exercise of the Warrants and the Conversion Shares upon
conversion of the Convertible Debentures shall be made in accordance with the
provisions and requirements of Section 4(2), Section 4(6) or Regulation D and
any applicable state securities law. The Company shall file a Form D with
respect to the Convertible Debentures as required under Regulation D and provide
a copy thereof to each Investor promptly after such filing. The Company shall
take such action as reasonably necessary to qualify the Convertible Debentures
for, or obtain exemption for the Convertible Debentures for, sale to the
Investors at the Closing pursuant to this Agreement under applicable securities
or "Blue Sky" laws of the states of the United States, and shall provide
evidence of any such action so taken to the Investors on or prior to the Closing
Date. The Company shall make all filings and reports relating to the offer and
sale of the Securities required under the applicable securities or "Blue Sky"
laws of the states of the United States following the Closing Date.
Section 6.10. Intentionally Omitted
Section 6.11. Relief in Bankruptcy. The Company shall not seek judicial relief
--------------------
from its obligations hereunder, except pursuant to the Bankruptcy Code. In the
event the Company is a debtor under the Bankruptcy Code, the Company hereby
waives to the fullest extent permitted any rights to relief it may have under 11
U.S.C. (S) 362 in respect of the conversion of the Convertible Debentures and
the exercise of the Warrants. The Company agrees, without cost or expense to
the Investors, to take or consent to any and all action necessary to effectuate
relief under 11 U.S.C. (S) 362.
<PAGE>
Section 6.12. Use of Proceeds. The Company will use the proceeds from the sale
---------------
of the Convertible Debentures for general corporate purposes.
Section 6.13. Information. Until all Registrable Securities may be sold
-----------
without registration under the Securities Act, the Company shall send to each
holder of Registrable Securities copies of any notices and other information
made available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the
stockholders.
Section 6.14. Transactions With Affiliates. So long as (i) any Convertible
----------------------------
Debentures or Warrants are outstanding or (ii) any Investor owns Conversion
Shares and/or Warrant Shares with a market value equal to or greater than
$500,000, the Company shall not, and shall cause each of its Subsidiaries not
to, enter into, amend, modify or supplement, or permit any Subsidiary to enter
into, amend, modify or supplement, any agreement, transaction, commitment or
arrangement with any of its or any Subsidiary's officers, directors, persons who
were officers or directors at any time during the previous two years,
stockholders who beneficially own 5% or more of the Common Stock, or affiliates
or with any individual related by blood, marriage or adoption to any such
individual or with any entity in which any such entity or individual owns a 5%
or more beneficial interest (each a "Related Party"), except for (a) customary
-------------
employment arrangements and benefit programs on reasonable terms, (b) any
agreement, transaction, commitment or arrangement on an arm's-length basis on
terms no less favorable than terms that would have been obtainable from a person
other than such Related Party, or (c) any agreement, transaction, commitment or
arrangement that is approved by a majority of the disinterested directors of the
Company. For purposes hereof, any director who is also an officer of the
Company or any Subsidiary of the Company shall not be a disinterested director
with respect to any such agreement, transaction, commitment or arrangement.
"Affiliate" for purposes of this Section means, with respect to any Person,
---------
another Person that, directly or indirectly, (i) has a 5% or more equity
interest in that Person, (ii) has 5% or more common ownership with that Person,
(iii) controls that Person, or (iv) shares common control with that Person.
"Control" or "controls" for purposes of this Agreement means that a Person has
------- --------
the power, direct or indirect, to conduct or govern the policies of another
Person.
ARTICLE VII
Survival; Indemnification
Section 7.1. Survival. The representations, warranties and covenants made by
--------
each of the Company and each Investor in this Agreement, the annexes, schedules
and exhibits hereto and in each instrument, agreement and certificate entered
into and delivered by them pursuant to this Agreement, shall survive the Closing
and the consummation of the transactions contemplated hereby. In the event of a
breach or violation of any of such representations, warranties or covenants, the
party to whom such representations, warranties or covenants have been made shall
have all rights and remedies for such breach or violation available to it under
the provisions of this Agreement, irrespective of any investigation made by or
on behalf of such party on or prior to the Closing Date.
<PAGE>
Section 7.2. Indemnity. The Company shall indemnify and hold harmless the
---------
Investors, their respective Affiliates and their respective officers, directors,
partners and members (each an "Indemnified Party"), from and against any and all
Damages, and shall reimburse the Indemnified Parties for all reasonable out-of-
pocket expenses (including the reasonable fees and expenses of legal counsel),
in each case promptly as incurred by such Indemnified Party and to the extent
arising out of or in connection with:
(i) any misrepresentation, omission of fact or breach of any of
the Company's representations or warranties contained in
any of the Transaction Documents, the annexes, schedules or
exhibits thereto or any instrument, agreement or
certificate entered into or delivered by the Company
pursuant hereto or thereto; or
(ii) any failure by the Company to perform in any material
respect any of its covenants, agreements, undertakings or
obligations set forth in any of the Transaction Documents,
the annexes, schedules or exhibits thereto or any
instrument, agreement or certificate entered into or
delivered by the Company pursuant hereto or thereto; or
(iii) any action instituted against the Investors, or any of
them, by any stockholder of the Company who is not an
Affiliate of an Investor, with respect to any of the
transactions contemplated by the Transaction Documents.
Section 7.3. Notice. Promptly after receipt by an Indemnified Party seeking
------
indemnification pursuant to Section 7.2 of written notice of any investigation,
claim, proceeding or other action in respect of which indemnification is being
sought (each, a "Claim"), the Indemnified Party promptly shall notify the
-----
Company of the commencement thereof; but the omission so to notify the Company
shall not relieve it from any liability that it otherwise may have to the
Indemnified Party, except to the extent that the Company is actually prejudiced
by such omission or delay. In connection with any Claim as to which both the
Indemnified Party and the Company are parties, the Company shall be entitled to
assume the defense thereof. Notwithstanding the assumption of the defense of
any Claim by the Company, the Indemnified Party shall have the right to employ
separate legal counsel and to participate in the defense of such Claim, and the
Company shall bear the reasonable fees, out-of-pocket costs and expenses of such
separate legal counsel to the Indemnified Party if (and only if): (x) the
Company shall have agreed to pay such fees, out-of-pocket costs and expenses,
(y) the Indemnified Party reasonably shall have concluded that representation of
the Indemnified Party and the Company by the same legal counsel would not be
appropriate due to actual or, as reasonably determined by legal counsel to the
Indemnified Party, potentially differing interests between such parties in the
conduct of the defense of such Claim, or if there may be legal defenses
available to the Indemnified Party that are in addition to or disparate from
those available to the Company, or (z) the Company shall have failed to employ
legal counsel reasonably satisfactory to the Indemnified Party within a
reasonable period of time after notice of the commencement of such Claim. If
the Indemnified Party employs separate legal counsel in circumstances other than
as described in clauses (x), (y) or (z) above, the fees, costs and expenses of
such legal counsel shall be borne exclusively by the Indemnified Party. Except
as provided above, the Company shall not, in
<PAGE>
connection with any Claim in the same jurisdiction, be liable for the fees and
expenses of more than one firm of legal counsel for the Indemnified Party
(together with appropriate local counsel). The Company shall not, without the
prior written consent of the Indemnified Party (which consent shall not
unreasonably be withheld), settle or compromise any Claim or consent to the
entry of any judgment that does not include an unconditional release of the
Indemnified Party from all liabilities with respect to such Claim or judgment.
Section 7.4. Direct Claims. In the event an Indemnified Party should have a
-------------
claim for indemnification that does not involve a claim or demand being asserted
by a third party, the Indemnified Party promptly shall deliver notice of such
claim to the Company. If the Indemnified Party disputes the claim, such dispute
shall be resolved by mutual agreement of the Indemnified Party and the Company
or by binding arbitration conducted in accordance with the procedures and rules
of the American Arbitration Association as set forth in Article X. Judgment
upon any award rendered by any arbitrators may be entered in any court having
competent jurisdiction thereof.
ARTICLE VIII
Due Diligence Review; Non-Disclosure of Non-Public Information.
Section 8.1. Due Diligence Review. Subject to Section 8.2, the Company shall
--------------------
make available for inspection and review by the Investors, advisors to and
representatives of the Investors (who may or may not be affiliated with the
Investors and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investors pursuant to the Registration Statement, any such registration
statement or amendment or supplement thereto or any blue sky, Nasdaq or other
filing, all SEC Documents and other filings with the SEC, and all other publicly
available corporate documents and properties of the Company as may be reasonably
necessary for the purpose of such review, and cause the Company's officers,
directors and employees to supply all such publicly available information
reasonably requested by the Investors or any such representative, advisor or
underwriter in connection with such Registration Statement (including, without
limitation, in response to all questions and other inquiries reasonably made or
submitted by any of them), prior to and from time to time after the filing and
effectiveness of the Registration Statement for the sole purpose of enabling the
Investors and such representatives, advisors and underwriters and their
respective accountants and attorneys to conduct initial and ongoing due
diligence with respect to the Company and the accuracy of the Registration
Statement.
<PAGE>
Section 8.2. Non-Disclosure of Non-Public Information.
----------------------------------------
(a) The Company shall not disclose material non-public information to
the Investors, advisors to or representatives of the Investors unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides the Investors, such advisors and
representatives with the opportunity to accept or refuse to accept such non-
public information for review. Other than disclosure of any comment letters
received from the SEC staff with respect to the Registration Statement, the
Company may, as a condition to disclosing any non-public information hereunder,
require the Investors' advisors and representatives to enter into a
confidentiality agreement in form and content reasonably satisfactory to the
Company and the Investors.
(b) Nothing herein shall require the Company to disclose material
non-public information to the Investors or their advisors or representatives,
and the Company represents that it does not disseminate material non-public
information to any investors who purchase stock in the Company in a public
offering, to money managers or to securities analysts; provided, however, that
notwithstanding anything herein to the contrary, the Company will, as
hereinabove provided, promptly notify the advisors and representatives of the
Investors and, if any, underwriters, of any event or the existence of any
circumstance (without any obligation to disclose the specific event or
circumstance) of which it becomes aware, constituting material non-public
information (whether or not requested of the Company specifically or generally
during the course of due diligence by such persons or entities), which, if not
disclosed in the prospectus included in the Registration Statement would cause
such prospectus to include a material misstatement or to omit a material fact
required to be stated therein in order to make the statements therein, in light
of the circumstances in which they were made, not misleading. Nothing contained
in this Section 8.2 shall be construed to mean that such persons or entities
other than the Investors (without the written consent of the Investors prior to
disclosure of such information as set forth in Section 8.2(a)) may not obtain
non-public information in the course of conducting due diligence in accordance
with the terms of this Agreement and nothing herein shall prevent any such
persons or entities from notifying the Company of their opinion that based on
such due diligence by such persons or entities, that the Registration Statement
contains an untrue statement of a material fact or omits a material fact
required to be stated in the Registration Statement or necessary to make the
statements contained therein, in light of the circumstances in which they were
made, not misleading.
ARTICLE IX
Legends; Transfer Agent Instructions
Section 9.1. Legends. Unless otherwise provided below, each certificate
-------
representing Registrable Securities will bear the following legend or equivalent
(the "Legend"):
------
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN
<PAGE>
RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, OR
OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM SUCH
REGISTRATION.
Section 9.2. Transfer Agent Instructions. Upon the execution and delivery
---------------------------
hereof, the Company is issuing to the transfer agent for its Common Stock (and
shall issue to any substitute or replacement transfer agent for its Common Stock
upon the Company's appointment of any such substitute or replacement transfer
agent) Irrevocable Transfer Agent Instructions substantially in the form of
Exhibit F hereto. Such Irrevocable Transfer Agent Instructions shall be
---------
irrevocable by the Company from and after the date hereof or from and after the
issuance thereof to any such substitute or replacement transfer agent, as the
case may be.
Section 9.3. No Other Legend or Stock Transfer Restrictions. No legend other
----------------------------------------------
than the one specified in Section 9.1 has been or shall be placed on the share
certificates representing the Registrable Securities and no instructions or
"stop transfer orders," "stock transfer restrictions," or other restrictions
have been or shall be given to the Company's transfer agent with respect thereto
other than as expressly set forth in this Article IX.
Section 9.4. Investors' Compliance. Nothing in this Article shall affect in
---------------------
any way each Investor's obligations to comply with all applicable securities
laws upon resale of the Common Stock.
Section 9.5. Transfers without Registration. If an Investor provides the
------------------------------
Company with an opinion of counsel, in generally acceptable form, that
registration of a resale by such Investor of any Securities is not required
under the Securities Act, the Company shall permit the transfer and, in the case
of the Conversion Shares, promptly instruct its transfer agent to issue one or
more certificates in such name and in such denominations as specified by such
Investor and, if such opinion provides that such legends can be removed,
without any restrictive legends.
Section 9.6. Injunctive Relief. The Company acknowledges that a breach by it
-----------------
of its obligations hereunder will cause irreparable harm to the Investors by
vitiating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations under this Article XI will be inadequate and agrees, in the event of
a breach or threatened breach by the Company of the provisions of this Article
XI, that the Investors shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach and requiring immediate
issuance and transfer, without the necessity of showing economic loss and
without any bond or other security being required.
<PAGE>
ARTICLE X
Choice of Law; Arbitration
Section 10.1. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California applicable to contracts
made in California without regard to its principles of conflicts of laws.
Section 10.2. Arbitration. Any dispute under this Agreement shall be submitted
------------
to arbitration under the American Arbitration Association (the "AAA") in Los
---
Angeles, California, and shall be finally and conclusively determined by the
decision of a board of arbitration consisting of three (3) members (hereinafter
referred to as the "Board of Arbitration") selected according to the rules
--------------------
governing the AAA. The Board of Arbitration shall meet on consecutive business
days in Los Angeles, California, and shall reach and render a decision in
writing (concurred in by a majority of the members of the Board of Arbitration)
with respect to the amount, if any, that the losing party is required to pay to
the other party in respect of a claim filed. In connection with rendering its
decisions, the Board of Arbitration shall adopt and follow the laws of the State
of California. To the extent practical, decisions of the Board of Arbitration
shall be rendered no more than thirty (30) calendar days following commencement
of proceedings with respect thereto. The Board of Arbitration shall cause its
written decision to be delivered to all parties involved in the dispute. Any
decision made by the Board of Arbitration (either prior to or after the
expiration of such thirty (30) calendar day period) shall be final, binding and
conclusive on the parties to the dispute, and entitled to be enforced to the
fullest extent permitted by law and entered in any court of competent
jurisdiction. The Board of Arbitration shall be authorized and is hereby
directed to enter a default judgment against any party failing to participate in
any proceeding hereunder within the time periods set forth in the AAA rules. The
non-prevailing party to any arbitration (as determined by the Board of
Arbitration) shall pay the expenses of the prevailing party, including
reasonable attorneys' fees, in connection with such arbitration. Any party shall
be entitled to obtain injunctive relief from a court in any case where such
relief is available, and the non-prevailing party to any such injunctive
proceeding shall pay the expenses of the prevailing party, including reasonable
attorneys' fees, in connection with such proceeding.
<PAGE>
ARTICLE XI
Assignment
Neither this Agreement nor any rights of the Investors or the Company hereunder
may be assigned by any party to any other person. Notwithstanding the
foregoing, (a) the provisions of this Agreement shall inure to the benefit of,
and be enforceable by, any permitted transferee of any Securities, and (b) upon
the prior written consent of the Company, which consent shall not unreasonably
be withheld or delayed, each Investor's interest in this Agreement may be
assigned at any time, in whole or in part, to any other Person (including any
affiliate of the Investor) who agrees to make the representations and warranties
contained in Article III and who agrees to be bound by the terms of this
Agreement.
ARTICLE XII
Notices
All notices, demands, requests, consents, approvals, and other communications
required or permitted hereunder shall be in writing and, unless otherwise
specified herein, shall be (i) hand delivered, (ii) deposited in the mail,
registered or certified, return receipt requested, postage prepaid, (iii)
delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by facsimile, addressed as set forth below or to such other address
as such party shall have specified most recently by written notice. Any notice
or other communication required or permitted to be given hereunder shall be
deemed effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the first business day
following the date of sending by reputable courier service, fully prepaid,
addressed to such address, or (c) upon actual receipt of such mailing, if
mailed. The addresses for such communications shall be:
If to the Company: Stan Lee Media, Inc.
15821 Ventura Boulevard, Suite 675
Encino, California 91436
Attn: Rick C. Madden,
Executive Vice President and
General Counsel
Tel: (818) 461-1757
Fax: (818) 728-9336
If to the Investors: As set forth on the signature pages hereto
<PAGE>
with a copy to: Mark Orenstein, Esq.
(shall not constitute notice) Snow Becker Krauss P.C.
605 Third Avenue
New York, New York 10158-0125
Telephone: (212) 687-3860
Facsimile: (212) 949-7052
Either party hereto may from time to time change its address or facsimile number
for notices under this Article XII by giving written notice of such changed
address or facsimile number to the other party hereto as provided in this
Article XII.
ARTICLE XIII
Miscellaneous
Section 13.1. Counterparts/ Facsimile/ Amendments. This Agreement may be
-----------------------------------
executed in multiple counterparts, each of which may be executed by fewer than
all of the parties, and shall be deemed to be an original instrument that shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by all parties.
Section 13.2. Entire Agreement. This Agreement, the other Transaction
----------------
Documents, which include, but are not limited to, the Convertible Debentures,
the Warrants, the Escrow Agreement, the Registration Rights Agreement and the
Irrevocable Transfer Agent Instructions, set forth the entire agreement and
understanding of the parties relating to the subject matter hereof and supersede
all prior and contemporaneous agreements, negotiations and understandings
between and among the parties, both oral and written, relating to the subject
matter hereof. The terms and conditions of all Exhibits to this Agreement are
incorporated herein by this reference and shall constitute part of this
Agreement as is fully set forth herein.
Section 13.3. Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without such provision; provided that such severability shall be ineffective if
it materially changes the economic benefit of this Agreement to any party.
Section 13.4. Headings. The headings used in this Agreement are used for
--------
convenience only and are not to be considered in construing or interpreting this
Agreement.
Section 13.5. Number and Gender. One or more Investors may be parties to this
-----------------
Agreement, which Investors may be natural persons or entities. All references
to plural Investors shall apply equally to a single Investor if there is only
one Investor, and all references to an Investor as "it" shall apply equally to a
natural person.
<PAGE>
Section 13.6. Reporting Entity for the Common Stock. The reporting entity
-------------------------------------
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement shall
be Bloomberg, L.P. or any successor thereto. The written agreement of the
Investors and the Company shall be required to employ any other reporting
entity.
Section 13.7. Replacement of Certificates. Upon (i) receipt of evidence
---------------------------
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing any Securities and (ii) in the case of
any such loss, theft or destruction of such certificate, upon delivery of an
indemnity agreement or security reasonably satisfactory in form to the Company
(which shall not include the posting of any bond) or (iii) in the case of any
such mutilation, on surrender and cancellation of such certificate, the Company
at its expense will execute and deliver, in lieu thereof, a new certificate of
like tenor.
Section 13.8. Fees and Expenses. Each of the Company and the Investors agrees
-----------------
to pay its own expenses incident to the performance of its obligations
hereunder, except that the Company shall pay the fees, expenses and
disbursements of Snow Becker Krauss P.C., the Investors' counsel, all as set
forth in the Escrow Agreement.
Section 13.9. Brokerage. Each of the parties hereto represents that it has had
---------
no dealings in connection with this transaction with any finder or broker who
will demand payment of any fee or commission from the other party except for
Astor Capital, whose fee shall be paid by the Company. The Company on the one
hand, and the Investors, on the other hand, each agree to indemnify the other
against and hold the other harmless from any and all liabilities to any person
claiming brokerage commissions or finder's fees on account of services purported
to have been rendered on behalf of the indemnifying party in connection with
this Agreement or the transactions contemplated hereby.
Section 13.10. Publicity. Subject to applicable law, the Company agrees that it
---------
will not issue any press release or other public announcement of the
transactions contemplated by this Agreement without the prior consent of the
Investors, which shall not be unreasonably withheld nor delayed by more than two
(2) Trading Days from their receipt of such proposed release. No release shall
name the Investors without their express consent.
Section 13.11. Further Assurances. Each party shall do and perform, or cause to
------------------
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
Section 13.12. Termination. The Company shall have the right to terminate this
-----------
Agreement if an aggregate of $2,200,000 principal amount of Convertible
Debentures has not been sold by December 8, 2000.
<PAGE>
Section 13.13. No Strict Construction. The language used in this Agreement
----------------------
will be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
Section 13.14. Remedies. Each Investor and each Holder of Securities shall
--------
have all rights and remedies set forth in this Agreement and the Convertible
Debentures and all rights and remedies that such Holders have been granted at
any time under any other agreement or contract and all of the rights that such
Holders have under any law. Any person or entity having any rights under any
provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law.
Section 13.15. Payment Set Aside. To the extent that the Company makes a
-----------------
payment or payments to the Investors hereunder or pursuant to the Convertible
Debentures or the Investors enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, by a
trustee, receiver or any other person or entity under any law (including,
without limitation, any bankruptcy law, state or federal law, common law or
equitable cause of action), then to the extent of any such restoration the
obligation or part thereof originally intended to be satisfied shall be revived
and continued in full force and effect as if such payment had not been made or
such enforcement or setoff had not occurred.
[THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by the undersigned, thereunto duly authorized, as of the date first set
forth above.
STAN LEE MEDIA, INC.
By: /s/
---------------------------------------------
Name: Stephen Gordon
Title: Executive Vice President-Operations
Investor:
By: /s/
---------------------------------------------
Name:
Authorized Signatory
Jurisdiction of Incorporation:
Principal Amount of Convertible Debentures
Purchased: $1,000,000
Number of Warrants: 75,000
Purchase Price (principal amount of
Convertible Debentures
Purchased): $1,000,000
Date of Closing: November 30, 2000
