SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, For Use
of the Commission Only
(As Permitted by Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
AMERICAN CHAMPION ENTERTAINMENT, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
AMERICAN CHAMPION ENTERTAINMENT, INC.
1694 The Alameda, Suite 100, San Jose, CA 95126
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 10, 1999
San Jose, California
November 8, 1999
The Special Meeting of Stockholders of American Champion Entertainment,
Inc. (the "Company"), a Delaware corporation and holding company for
America's Best Karate, a California corporation, which wholly owns
American Champion Media, Inc., a Delaware corporation ("AC Media"), which
wholly owns American Champion Marketing Group, Inc., a Delaware
corporation ("AC Marketing") will be held at 1694 The Alameda, Suite 100,
San Jose, California on Friday, December 10, 1999, at 7:00pm, for the
following purposes:
1. To amend the Company's Bylaws from "a majority" to "one-third" of
outstanding shares to constitute a quorum at all meetings of
stockholders (Proposal No. 1); and
2. To amend the Company's Bylaws to increase the maximum number of
seats on the Board of Directors from 9 to 15 with the exact number
of directors for each year to be determined by the Board (Proposal
No. 2); and
3. To approve the increase of the number of shares of the Company's
common stock, $.0001 par value per share (the "Common Stock")
issuable under the Company's 1997 Employee Stock Option Plan from 4,800,000 to
7,000,000 (Proposal No. 3); and
4. To approve the increase of the number of shares of Common Stock
issuable under the Company's 1997 Non-Employee Directors Stock
Option Plan from 550,000 to 800,000 (Proposal No. 4); and
5. To approve the two Securities Purchase Agreements, dated June 18,
1999 and September 24, 1999, and all transactions contemplated
thereby, including the issuance of $1,750,000 and $1,000,000 of
convertible debentures respectively, issued on June 18, 1999 and
September 24, 1999 respectively (Proposal No. 5); and
6. To approve a reverse stock split of the outstanding shares of the
Company's Common Stock, if necessary, at a ratio to effect the market price of
the Company's Common Stock to be at a level in compliance with the continued
listing requirements of the Nasdaq SmallCap Market (Proposal No. 7); and
7. To transact such other business as may properly come before the
Special Meeting and any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement which is attached and made a part of this Notice.
The Board of Directors has fixed the close of business on October 15, 1999
as the record date for determining the stockholders entitled to notice of
and to vote at the Special Meeting and any adjournment or postponement
thereof.
All stockholders are cordially invited to attend the Special Meeting in
person. However, whether or not you expect to attend the Special Meeting
in person, you are urged to mark, date, sign and return the enclosed proxy
card as promptly as possible in the postage-prepaid envelope provided to
ensure your representation and the presence of a quorum at the Special
Meeting. If you send in your proxy card and then decide to attend the
Special Meeting to vote your shares in person, you may still do so. Your
proxy is revocable in accordance with the procedures set forth in the
Proxy Statement.
By Order of the Board of Directors,
/s/ ANTHONY K. CHAN, SECRETRY
Anthony K. Chan, Secretary
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. IF A QUORUM IS NOT REACHED, THE COMPANY WILL
HAVE THE ADDED EXPENSE OF RE-ISSUING THESE PROXY MATERIALS. IF YOU ATTEND
THE MEETING AND SO DESIRE, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.
THANK YOU FOR ACTING PROMPTLY
PROXY STATEMENT
OF
AMERICAN CHAMPION ENTERTAINMENT, INC.
1694 The Alameda
Suite 100
San Jose, CA 95126
GENERAL
This Proxy Statement is furnished in connection with the
solicitation of the enclosed proxy by, and on behalf of, the Board of
Directors of American Champion Entertainment, Inc. (the "Company"), a
Delaware corporation and holding company for America's Best Karate, a
California corporation, which wholly owns American Champion Media, Inc., a
Delaware corporation ("AC Media"), which wholly owns American Champion
Marketing Group, Inc., a Delaware corporation ("AC Marketing") for use at the
Special Meeting of Stockholders of the Company to be held at 1694 The Alameda,
Suite 100, San Jose, California on Friday, December 10, 1999, at 7:00 p.m.
(the "Meeting"). Only stockholders of record on October 15, 1999, (the
"Record Date") will be entitled to vote at the Meeting. At the close of
business on the Record Date, the Company had outstanding 10,463,585 shares of
its $0.0001 par value common stock (the "Common Stock").
Any person giving a proxy in the form accompanying this Proxy
Statement has the power to revoke it prior to its exercise. Any proxy
given is revocable prior to the Meeting by an instrument revoking it or by
a duly executed proxy bearing a later date delivered to the Secretary of
the Company. Such proxy is also revoked if the stockholder is present at
the Meeting and elects to vote in person.
The Company will bear the entire cost of preparing, assembling,
printing and mailing the proxy materials furnished by the Board of
Directors to stockholders. Copies of the proxy materials will be
furnished to brokerage houses, fiduciaries and custodians to be forwarded
to the beneficial owners of the Common Stock. In addition to the
solicitation of proxies by use of the mail, some of the officers,
directors and regular employees of the Company may (without additional
compensation) solicit proxies by telephone or personal interview, the
costs of which the Company will bear.
This Proxy Statement and the accompanying form of proxy is being
sent or given to stockholders on or about November 12, 1999.
Stockholders of the Company's Common Stock are entitled to one vote
for each share held. Such shares may not be voted cumulatively.
Each validly returned proxy (including proxies for which no specific
instruction is given) which is not revoked will be voted "FOR" each of the
proposals as described in this Proxy Statement and, at the proxy holders'
discretion, on such other matters, if any, which may come before the
Meeting (including any proposal to adjourn the Meeting).
Determination of whether a matter specified in the Notice of Special
Meeting of Stockholders has been approved will be determined as follows.
For each matter specified in the Notice of Special Meeting of
Stockholders, the affirmative vote of a majority of the shares of Common
Stock present at the Meeting in person or by proxy and entitled to vote on
such matter is required for approval. Abstentions will be considered
shares present in person or by proxy and entitled to vote and, therefore,
will have the effect of a vote against the matter. Broker non-votes will
be considered shares not present for this purpose and will have no effect
on the outcome of the vote. Directions to withhold authority, abstentions
and broker non-votes will be counted for purposes of determining whether
a quorum is present for the Meeting.
PROPOSAL NO. 1
AMEND THE COMPANY'S BYLAWS REGARDING QUORUM AT A MEETING
At the Special Meeting, the stockholders of the Company are being
asked to approve the amendment of the Company's Bylaws to state that the
holders of "one-third" of the Company's outstanding stock entitled to
vote shall constitute a quorum at all meetings of the stockholders.
The Board of Directors believes that since the Company is growing with
acquisitions being negotiated and that more shares are anticipated to be issued,
it is in the best interests of the Company to reduce the quorum requirement to
one-third of outstanding shares to ensure that matters brought before the
stockholders can be acted upon.
Article II, Section 4 currently provides as follows:
Section 4. Quorum. Except as otherwise provided by law, the
holders of a majority of the Corporation's stock issued and
outstanding and entitled to vote at a meeting, present in
person or represented by proxy, without regard to class or
series, shall constitute a quorum at all meetings of the
stockholders for the transaction of business...
The Company's Board of Directors has approved the following
amendment to Article II, Section 4, subject to approval of such
amendment by the holders of the Company's Common Stock as specified
below:
Section 4. Quorum. Except as otherwise provided by law, the
holders of one-third of the Corporation's stock issued and
outstanding and entitled to vote at a meeting, present in
person or represented by proxy, without regard to class or
series, shall constitute a quorum at all meetings of the
stockholders for the transaction of business...
Recommnedation of the Board for Proposal No. 1:
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT OF THE BYLAWS AS
DESCRIBED ABOVE.
PROPOSAL NO. 2
AMEND THE COMPANY'S BYLAWS TO INCREASE THE
MAXIMUM NUMBER OF SEATS ON THE BOARD OF DIRECTORS
At the Special Meeting, the stockholders of the Company are being
asked to approve the amendment of the Company's Bylaws to increase the
maximum number of seats on the Board of Directors from 9 to 15 with the
exact number of directors for each year to be determined by the Board.
The Board of Directors recommends this increase in anticipation that
senior management members of future acquiree companies may request to
have presence on the Company's Board. Currently, there are no candidates
recommended by the Board to fill these seats.
Article III, Section 2 currently provides as follows:
Section 2. Number and Term. The authorized number of
directors shall be not less than five (5) nor more than nine
(9)...
The Company's Board of Directors has approved the following
amendment to Article III, Section 2, subject to approval of such
amendment by the holders of the Company's Common Stock as specified
below:
Section 2. Number and Term. The authorized number of
directors shall be not less than five (5) nor more than fifteen
(15) with the exact number of directors for each year to be
determined by the Board...
Recommnedation of the Board for Proposal No. 2:
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT OF THE BYLAWS AS
DESCRIBED ABOVE.
PROPOSAL NO. 3
INCREASE THE NUMBER OF SHARES ISSUABLE UNDER THE
1997 EMPLOYEE STOCK OPTION PLAN
At the Special Meeting, the Company's stockholders are being asked
to approve an increase in the number of shares issuable pursuant to the
Company's 1997 Employee Stock Option Plan (the "1997 Stock Plan") from
4,800,000 to 7,000,000. The following is a summary of principal features
of the 1997 Stock Plan. The summary, however, does not purport to be a
complete description of all the provisions of the 1997 Stock Plan. Any
stockholder of the Company who wishes to obtain a copy of the actual plan
document may do so upon written request to the Company's Secretary,
Anthony K. Chan, at the Company's principal offices at 1694 The Alameda,
Suite 100, San Jose California 95126.
The 1997 Stock Plan was adopted by the Board of Directors and
stockholders of the Company in March 1997 and became effective upon the
closing of the IPO. The total number of shares of Common Stock subject to
issuance under the 1997 Stock Plan was originally 350,000, subject to
adjustments as provided in the 1997 Stock Plan. However, the 1997 Stock
Plan was first amended in May 1998 and then further amended in May 1999 to
increase the total number of shares of Common Stock subject to issuance
under the 1997 Stock Plan first to 800,000 and then further to 4,800,000.
The 1997 Stock Plan provides for the grant of stock options
(including incentive stock options as defined in Section 422 of the Code
and non-qualified stock options), stock appreciation rights ("SARs") and
other stock awards (including restricted stock awards and stock bonuses)
to employees of the Company or its affiliates or any consultant or advisor
engaged by the Company who renders bona fide services to the Company or
the Company's affiliates in connection with its business; provided, that
such services are not in connection with the offer or sale of securities
in a capital raising transaction. Prior to the date when securities are
first registered pursuant to Section 12 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the 1997 Stock Plan will be
administered by the Company's Board of Directors.
The Plan is administered by the Compensation Committee of the Board
of Directors (the "Committee") which will be comprised of "disinterested
persons" within the meaning of Rule 16b-3 of the Securities Exchange Act
of 1934, as amended. Stock options may be granted by the Committee on such
terms, including vesting and payment forms, as it deems appropriate in its
direction; provided, that no option may be exercised later than ten years
after its grant, and the purchase price for incentive stock options and
non-qualified stock options shall not be less than 100% and 85% of the
fair market value of the Common Stock at the time of grant, respectively.
SARs may be granted by the Committee on such terms, including
payment forms, as the Committee deems appropriate, provided that a SAR
granted in connection with a stock option shall become exercisable and
lapse according to the same vesting schedule and lapse rules established
for the stock option (which shall not exceed ten years from the date of
grant). A SAR shall not be exercisable during the first six months of its
term and only when the fair market value of the underlying Common Stock
exceeds the SAR's exercise price and is exercisable subject to any other
conditions on exercise imposed by the Committee. In the event of a change
in control of the Company, the Committee retains the discretion to
accelerate the vesting of stock options and SARs and to remove
restrictions on transfer of restricted stock awards. Unless terminated by
the Board of Directors, the 1997 Stock Plan continues until December 2007.
Upon the occurrence of an event constituting a Change of Control, in the
sole discretion of the Committee, all options and SARs will become
immediately exercisable in full for the remainder of their terms and
restrictions on stock granted pursuant to a Restricted Stock Award will
lapse.
The Committee and the Board of Directors of the Company believe it
is an important operating strategy to continue to provide incentives to
the Company's employees and other individuals and to recruit competent
persons to join the Company. The Committee and the Board of Directors have
concluded that an increase to 7,000,000 shares reserved under the Plan
provides adequate flexibility to provide such incentives.
Recommendation of the Board for Proposal No. 3:
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE INCREASE OF SHARES
ISSUABLE UNDER THE 1997 EMPLOYEE STOCK OPTION PLAN FROM 4,800,000 TO
7,000,000.
PROPOSAL NO. 4
INCREASE THE NUMBER OF SHARES ISSUABLE UNDER THE
1997 NON-EMPLOYEE DIRECTORS EMPLOYEE STOCK OPTION PLAN
At the Special Meeting, the Company's stockholders are being asked
to approve an increase in the number of shares issuable pursuant to the
Company's 1997 Non-Employee Stock Option Plan (the "Director Plan") from
550,000 to 800,000. The following is a summary of principal features of
the 1997 Director Plan. The summary, however, does not purport to be a
complete description of all the provisions of the 1997 Director Plan. Any
stockholder of the Company who wishes to obtain a copy of the actual plan
document may do so upon written request to the Company's Secretary,
Anthony Chan, at the Company's principal offices at 1694 The Alameda,
Suite 100, San Jose California 95126.
The Company's 1997 Non-Employee Directors Stock Option Plan (the
"Directors Plan") was adopted by the Board of Directors and stockholders
of the Company in March 1997 and became effective upon the closing of the
Company's Initial Public Offering. The Directors Plan provides for the
automatic grant to each of the Company's non-employee directors of (i) an
option to purchase 5,000 shares of Common Stock on the date of such
director's initial election or appointment to the Board of Directors (the
"Initial Grant") and (ii) an option to purchase 2,000 shares of Common
Stock on each anniversary thereof on which the director remains on the
Board of Directors (the "Annual Grant"). The options will have an exercise
price of 100% of the fair market value of the Common Stock on the date of
grant and have a 10-year term. Initial Grants become exercisable in two
equal annual installments commencing on the first anniversary of date of
grant thereof and Annual Grants become fully exercisable beginning on the
first anniversary of the date of grant. Both Initial and Annual Grants are
subject to acceleration in the event of certain corporate transactions.
Any options which are vested at the time the optionee ceases to be a
director shall be exercisable for one year thereafter. Options which are
not vested automatically terminate in the event the optionee ceases to be
a director of the Company. Options which are vested on the date the
optionee ceased to be a director due to death or disability generally
remain exercisable for five years thereafter. If the Company is a party to
a transaction involving a sale of substantially all its assets, a merger
or consolidation, all then outstanding options under the Directors Plan
may be canceled. However, during the 30 day period preceding the effective
date of such transaction, all partly or wholly unexercised options will be
exercisable, including those not yet exercisable pursuant to the vesting
schedule. In May 1999, the Directors Plan was amended to increase to
550,000 shares reserved under the Directors Plan.
The Committee and the Board of Directors of the Company believe it
is an important operating strategy to continue to provide incentives to
non-employee directors and to attract qualified nominees to the Company's
Board of Directors. The Committee and the Board of Directors have
concluded that an increase to 800,000 shares reserved under the Directors
Plan provides adequate flexibility to provide such incentives.
Recommendation of the Board for Proposal No. 4:
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE INCREASE OF SHARES
ISSUABLE UNDER THE 1997 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN FROM
550,000 TO 800,000.
PROPOSAL NO. 5
APPROVAL OF THE ISSUANCE OF CONVERTIBLE DEBENTURES
IN THE AMOUNTS OF $1,750,000 AND $1,000,000
At the Special Meeting, the Company's stockholders are being asked
to ratify the Security Purchase Agreements, and the exhibits thereto,
dated as of June 18, 1999 ("June Debentures") and dated as of September
24, 1999 ("September Debentures"), by and among the Company and private
acredited investors (collectively, the "Agreements"), and the transactions
contemplated thereby including the private offering (the "Offering") of
the $1,750,000 and the $1,000,000 of 7% Convertible Debentures and Common
Stock purchase warrants pursuant to such transactions.
The following summarizes the terms of the offerings and is qualified
in its entirety by the Agreements themselves and the exhibits thereto, a
copy of which is attached hereto as Appendix A and incorporated by
reference herein. Stockholders are encouraged to review the attached
Agreement and its exhibits.
Pursuant to the authorization of the Board of Directors of the
Company, management of the Company negotiated and executed the Agreements
pursuant to which the investors agreed under certain terms and conditions
to invest up to $1,750,000 and $1,000,000 respectively, into the Company
in 7% Convertible Debentures due June 17, 2002 (the "June Debentures") and
due September 30, 1999 (the "September Debentures") respectively.
Additionally, the Company agreed, among other things, to issue to the
investors warrants to purchase the Company's Common Stock (the
"Warrants"). Pursuant to the June Debentures, the Company issued to the
investors on June 18, 1999, $1,750,000 in debentures and Warrants to
purchase 175,000 shares of the Company's Common Stock at an exercise price
of $1.890625 per share with an expiration date of June 17, 2002. Pursuant
to the September Debentures, the Company issued to the investors on
September 24, 1999, $1,000,000 in debentures and Warrants to purchase
100,000 shares of the Company's Common Stock at an exercise price of
$0.796875 per share with an expiration date of September 30, 2002.
The terms and conditions of the Debentures are summarized as follows:
The interest rate on the Debentures is 7% per annum, payable twice
annually in cash or in shares of the Company's Common Stock.
Dates of maturity are June 17, 2002 for the June Debentures and
September 30, 2002 for the September Debentures.
The Debentures are convertible into the number of shares of the
Company's Common Stock equal to the principal amount and accrued and unpaid
interest outstanding under the Debentures on the conversion date divided by
the lower of: (a) 77.5% of the Market Price on the conversion date for the
June Debentures and 75% of the Market Price for the September Debentures, or
(b) 117.5% of the Market Price on the date the Debenture is issued.
For the June Debentures, at its option, the Company may redeem the
Debentures if the Market Price(1) of the Common Stock is below $1 for
20 consecutive days, for an amount equal to the accrued and unpaid
interest under the Debentures plus 122.5% of the outstanding
principal under the Debentures. For the September Debentures, the
Company does not have to option to redeem the Debentures.
In no event (subject to certain exceptions, including a Company
default under any Debenture or the Agreement) shall an Investor be
entitled to convert any Debenture to the extent that, after such
conversion, the sum of (1) the number of shares of Common Stock
beneficially owned by the Investor and its affiliates, and (2) the
number of shares of Common Stock issuable upon the conversion of
the Debenture would result in beneficial ownership by the Investor
and its affiliates of more than 9.99% of the outstanding shares of
Common Stock.
The Agreement also has the following additional terms:
The Company was required to file not later than 30 days after the
closing date with the Securities and Exchange Commission a
registration statement to register the Common Stock issuable upon
conversion of the Debentures and exercise of the Warrants to allow
the Investors to resell such Common Stock to the public.
(1) Market Price is defined in the agreement as (x) the average closing
bid price of the Common Stock as reported by Bloomberg, LP or the average
closing bid price on the over-the-counter market, (i) if a period of time is
specified in the relevant provision of the Debenture, for such period, and (ii)
if no period of time is specified in the relevant provision of the Debenture,
then for the 5 days ending on the trading day immediately preceeding the
relevant date, or (y) if the Common Stock is listed on a stock exchange, the
lowest trade price on such exchange on the date idicated in the Debenture as
reported in the Wall Street Journal.
Nasdaq Rule Requiring Stockholder Approval
Because the Company's Common Stock is listed on The Nasdaq SmallCap,
the Company is subject to the Nasdaq's corporate governance rules,
including Rule 4310(c)(25)(H)(i)(d)(2) (the "Nasdaq Rule") which provides
that an issuer must obtain stockholder approval for the sale or issuance
of common stock (or securities convertible into common stock) equal to 20%
or more of the common stock outstanding before the issuance for less than
the greater of book or market value of the stock. The conversion of the
Debentures and/or the exercise of the Warrants may be made at a price less
than the greater of book or market value of the stock and it is also
possible that the Debentures may be convertible and/or the Warrants may be
exercisable into more than 20% of the currently outstanding shares of the
Company's Common Stock. Investors have recognized that the Company may be
limited in the number of shares of Common Stock it may issue, and that the
Common Stock issuable upon conversion of the Debentures and upon exercise
of the Warrants may result in the issuance of shares in excess of the
Nasdaq Rule. Such issuance will require the Company to obtain the consent
of its stockholders.
Under the Agreement, the Company has agreed to take all steps
necessary to have the vote of the Company's stockholders regarding
authorization of the Company's issuance to the holders of the Debentures
of shares of Common Stock in excess of 20% of the outstanding shares of
Common Stock. If the Company does not obtain stockholder approval as
proposed herein, the conversion rate of the Debentures will be adjusted to
90% of what it otherwise would have been. In addition, the Debenture
provides that if the Company cannot issue the shares of Common Stock upon
conversion of a Debenture without violating the Nasdaq Rule, the Investors
have the option, exercisable in the Investors' sole and absolute
discretion, to elect any one of the following remedies:
Require the Company to issue shares of Common Stock pursuant to the
conversion of the Debentures at a conversion price equal to the
average of the lowest trade price per share of Common Stock for any
five consecutive trading days (subject to certain adjustments
provided in the Debenture) during the 60 trading days immediately
preceding the date of the notice of conversion; or
Require the Company to redeem each unconverted portion of the
Debentures for an amount equal to (the "Cap Redemption Amount"):
V x M
CP where:
"V" means the outstanding principal plus accrued interest through the
date of redemption of an unconverted Debenture;
"CP" means the conversion rate in effect on the date of redemption; and
"M" means the highest Market Price during the period beginning on the
date of redemption and ending on the date of payment of the Cap
Redemption Amount.
Certain Relationships And Related Transactions
Pursuant to the Agreement, the officers and directors of the Company
who, directly or indirectly, hold shares of the Company's Common Stock and
their spouses who reside with such officer or director, have each granted
to the Investors an irrevocable proxy to vote in favor of this Proposal
No. 5.
Recommendation of the Board for Proposal No. 5:
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE OF CONVERTIBLE
DEBENTURES IN THE AMOUNTS OF $1,750,000 AND $1,000,000.
PROPOSAL NO. 6
REVERSE STOCK SPLIT OF THE COMPANY'S STOCK TO
COMPLY WITH LISTING REQUIREMENT OF NASDAQ SMALLCAP MARKET
At the Special Meeting, the Company's stockholders are being asked to
approve a reverse stock split of the outstanding shares of the Company's
Common Stock, if necessary, at a ratio to effect the market price of the
Company's Common Stock to be at a level in compliance with the continued
listing requirements of the Nasdaq SmallCap Market.
The Company has received a notification from Nasdaq dated
September 23, 1999 which stated:
"...the Company's common stock has failed to maintain a minimum
bid price greater than or equal to $1.00 over the last thirty
consecutive trading days, as required under Marketplace Rule
4310(c)(4)."
"The Company will be provided ninety (90) calendar days, or until
December 22, 1999 to regain compliance with this Rule. If at
anytime before December 2, 1999, the bid price of the Company's
shares is equal to or greater than $1.00 for a minimum of ten
consecutive trading days, Staff will determine if compliance with
this requirement has been achieved. However, if the Company is
unable to demonstrate compliance with this requirement on or
before December 22, 1999, its securities will be delisted at the
opening of business on December 27, 1999."
"The Company may appeal Staff's determination to a Nasdaq Listing
Qualifications Panel (the "Panel"), pursuant to he procedures set
forth in the Nasdaq Marketplace Rule 4800 Series. A hearing
request will stay the Company's delisting pending the Panel's
decision."
The Board of Directors views that it in the best interests of the
Company to maintain its listing status with the Nasdaq SmallCap Market and
recommends a reverse-split of the Company's outstanding shares, at a minimum of
2 for 1 or a maximum of 10 for 1, depending on the stock price at the day of
the reverse stock split, in order to comply with the Nasdaq continued listing
requirements including the minimum $1.0 bid price rule.
Stockholders should be aware that in the event the Company does
effectuate a reverse stock split, the initial resulting price of the Common
Stock is intented to be between $1.50 and $2.00 per share so as to account for
any decrease in the stock price. At $1.50 to $2.00 per share, the Company will
have created a cushion which may result in the stock price remaining above $1.0
minimum bid price for 10 consecutive trading days.
Recommendation of the Board for Proposal No. 6:
THE BOARD RECOMMENDS A VOTE FOR THE APPROVAL OF A REVERSE STOCK SPLIT OF THE
COMPANY'S OUTSTANDING SHARES IN SUCH AN AMOUNT AS THE BOARD OF DIRECTORS SHALL
DETERMINE, SO AS TO COMPLY WITH THE CONTINUED LISTING REQUIREMENTS.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of October 15,
1999 and as adjusted to reflect the issuance by the Company of shares of
Common Stock upon exercise of options and warrants, certain information
with respect to stock ownership of (i) all persons known by the Company to
be beneficial owners of 5% or more of its outstanding shares of Common
Stock; (ii) each director; and (iii) all directors and officers as a
group, together with their respective percentage ownership of such shares.
Unless otherwise indicated, the beneficial owners have sole voting and
investment power over the shares of Common Stock listed below.
<TABLE>
<CAPTION>
Number of Percentage of
Name and Address of Shares of Ownership
Beneficial Ownership(1) Common Stock
<S> <C> <C>
Anthony K. Chan 1,113,438(2) 8.75%
George Chung 1,117,838(3) 8.79%
William T. Duffy 107,000(4) ***
Alan Elkes 332,000(5) 2.61%
E. DAvid Gable 144,444(6) 1.14%
Jan D. Hutchins 290,000(7) 2.28%
Ronald M. Lott 138,131(8) 1.09%
Joy M. Tashjian 100,000(9) ***
Mae Lyn Woo 65,600(10) ***
All officers and directors
as a group (9 persons).....3,408,451(11) 26.8%
</TABLE>
_______________________
* Does not give effect to the conversion of the outstanding
Debentures or, except as stated in the footnotes below, to the issuance
of shares of Common Stock upon exercise of any warrants.
*** Represents less than one percent.
(1) The addresses for the directors and executive officers are the same
as that of the Company.
(2) Includes 607,500 shares subject to presently exercisable options
granted under the Company's 1997 Stock Plan. Does not include
660,000 subject to options which are not presently exercisable or
exercisable within 60 days.
(3) Includes (i) 607,500 shares subject to presently exercisable options
granted under the Company's 1997 Stock Plan and (ii) 4,400 shares
owned by Mr. Chung's wife. Does not include 660,000 subject to
options which are not presently exercisable or exercisable within 60
days.
(4) Includes 107,000 shares subject to presently exercisable options
granted under the Company's 1997 Stock Plan. Does not include 9,500
subject to options which are not presently exercisable or
exercisable within 60 days.
(5) Includes (i) 207,000 shares subject to presently exercisable options
granted under the Company's 1997 Stock Plan, and (ii) 75,000 shares
subject to presently exercisable warrants. Does not include 9,500
subject to options which are not presently exercisable or
exercisable within 60 days.
(6) Includes 100,000 shares subject to presently exercisable options
granted under the Company's 1997 Stock Plan.
(7) Includes 270,000 shares subject to presently exercisable options
granted under the Company's 1997 Stock Plan. Does not include
240,000 subject to options which are not presently exercisable or
exercisable within 60 days.
(8) Includes 117,000 shares subject to presently exercisable options
granted under the Company's 1997 Stock Plan. Does not include 9,500
subject to options which are not presently exercisable or
exercisable within 60 days.
(9) Includes 100,000 shares subject to presently exercisable options
granted under the Company's 1997 Stock Plan. Does not include
250,000 subject to options which are not presently exercisable or
exercisable within 60 days.
(10) Includes 65,000 shares subject to presently exercisable options
granted under the Company's 1997 Stock Plan. Does not include
100,000 subject to options which are not presently exercisable or
exercisable within 60 days.
(11) Includes an aggregate of 2,256,000 shares subject to presently
exercisable warrants options granted under the Company's 1997 Stock
Plan. Does not include 1,938,500 subject to options which are not
presently exercisable or exercisable within 60 days.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain summary information with
respect to the compensation paid to the Company's Chief Executive
Officer and President, and the Company's Chairman of the Board, for
services rendered in all capacities to the Company for the period up to
October 15, 1999. Other than as listed below, the Company had no
executive officers whose total annual salary and bonus exceeded $100,000
for that fiscal year:
<TABLE>
<CAPTION>
Name Position Year Salary
(1)
<S> <C> <C> <C>
Anthony K. Chan President, 1999 $ 127,262
Chief 1998 $ 130,828
Executive 1997 $ 101,704
Officer 1996 $ 57,600
Geroge Chung Chairman of 1999 $ 127,262
the Board 1998 $ 138,739
1997 $ 107,284
1996 $ 57,600
</TABLE>
<TABLE>
<CAPTION>
Long-Term Compensation
Awards Payouts
Restricted Securities LTIP All Other
Other Stock Underlying Payouts Compen
Compen- Award(s) Options/ ($) sation
Name sation Bonus ($) SARs ($)
(#)(1)(2)
<S> <C> <C> <C> <C> <C> <C>
Anthony K. Chan --- --- --- 1,100,000 --- ---
--- --- --- 80,000 --- ---
--- --- --- 87,500 --- ---
--- --- --- 0 --- ---
Geroge Chung --- --- --- 1,100,000 --- ---
--- --- --- 80,000 --- ---
--- --- --- 87,500 --- ---
--- --- --- 0 --- ---
</TABLE>
________________
(1) Information provided for 1999 is up to October 15 only, and that for
1996 represent compensation received by Messrs. Chan and Chung, as
President and Chief Executive Officer, respectively, of America's Best
Karate, the predecessor to the Company.
(2) Options were granted under the Company's 1997 Stock Plan.
STOCK OPTIONS GRANTS AND EXERCISES
Option/SAR Grants within 1999 (up to October 15, 1999)
Individual Grants
<TABLE>
<CAPTION>
Securities % of Total
Underlying Option to Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/SH) Expiration Date
<S> <C> <C> <C> <C>
Anthony K. Chan 100,000 2.3% $1.03125 5/18/09
1,000,000 23.5% $0.93750 6/06/09
1,100,000 25.8%
George Chung 100,000 2.3% $1.03125 5/18/09
1,000,000 23.5% $0.93750 6/06/09
1,100,000 25.8%
</TABLE>
The following table shows the value at October 15, 1999 of
unexercised options held by the named executive officers:
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-end Option Values
<TABLE>
<CAPTION>
Number of securities Value of unexercised in-the-
underlying unexercised money options at fiscal
options at fiscal year-end year-end
(#) ($)
Name Shares acquired on Value Realized
exercise (#) ($) Exerciseable/unexercisable Exercisable/unexercisable*
<S> <C> <C> <C> <C>
Anthony K. Chan, 0 0 607,500/660,000 $0/$0
President and Chief
Executive Officer
George Chung, 0 0 607,500/660,000 $0/$0
Chairman of the
Board
</TABLE>
- ---------------------------
* Assumes a fair market value of $0.3750 per share at the close of
October 15, 1999.
The compensation for the Company's key management will be evaluated
from time to time by the Board. The Board may, in its discretion, award
these individuals cash bonuses, options to purchase shares of the Common
Stock under the Company's Equity Incentive Plan and such other
compensation, including equity-based compensation, as the Board, or a
committee thereof, shall approve from time to time.
EMPLOYMENT CONTRACTS
In March 1997, the Company entered into employment agreements,
effective as of August 5, 1997, the closing date of the Company's initial
public offering, with each of Mr. Chung, Mr. Chan and Mr. Berryessa
pursuant to which Mr. Chung continues to serve as the Company's Chairman
of the Board, Mr. Chan continues to serve as the Company's President,
Chief Executive Officer and Chief Financial Officer and Mr. Berryessa
continues to serve as the Company's Vice-President. Each agreement has a
term of five years. Pursuant to the agreements, in 1997 the Company paid
to Messrs. Chung, Chan and Berryessa a base salary of $100,000, $100,000
and $65,000 per year, respectively. Each agreement also provides for the
following bonuses: (i) options to purchase 87,500, 87,500 and 25,000
shares of Common Stock of the Company, respectively, exercisable at 120%
of the Company's initial public offering price of the Common Stock of the
Company which was $6.00, which options were granted on July 30, 1997, and
(ii) $200,000, $200,000 and $100,000, respectively, if all of the warrants
issued to the Company's initial public offering are exercised by the
holders thereof within the five-year exercise period of such warrants. In
addition, the executives are also entitled to certain fringe benefits. If
any of Messrs. Chung, Chan or Berryessa is terminated other than for
cause, death or disability, the Company is obligated to pay such executive
an amount equal to his base salary then in effect for the remaining term
of the agreement.
In March 1997, the Company and AC Media, entered into a two-year
employment agreement with Jan D. Hutchins effective as of August 5, 1997,
the closing date of the Company's initial public offering, pursuant to
which Mr. Hutchins serves as President of AC Media and is responsible for
supervising the production and marketing of the AC Media's media projects.
Pursuant to the agreement Mr. Hutchins received an annual base salary of
$39,600 in 1997. The employment agreement also provides for the following
bonuses: (i) 4,000 shares of Common Stock of the Company upon the public
offering, subject to compliance with applicable laws (these shares were
issued at no cost to Mr. Hutchins and were capitalized into the Company's
film costs, because of Mr. Hutchins contributions to the Company's film
production, at their fair market value at the time of issuance);
(ii) options to purchase 20,000 shares of Common Stock of the Company,
exercisable at 120% of the public offering price of the Common Stock of
the Company which was $6.00, which options were granted on July 30,1997;
and (iii) $100,000 in cash if all of the warrants issued to the public in
the Company's initial public offering are exercised by the holders thereof
within two years of the consummation of the offering. The employment
agreement also provides for certain fringe benefits. If Mr. Hutchins is
terminated for reasons other than for cause, death or disability, the
Company is obligated to pay Mr. Hutchins an amount equal to his base
salary then in effect for the remaining term of the agreement. None of
the above-referenced employment agreements contain non-competition
provisions.
In July 1998, the Company amended its employment agreements with
certain of its management as follows: The Employment Agreements with
Messrs. Anthony Chan and George Chung were amended to provide for annual
salaries of $150,000 and for the granting of 20,000 options per year
pursuant to the Company's 1997 Stock Option Plan; the Employment Agreement
with Don Berryessa was amended to provide for an annual salary of $105,000
and for the granting of 15,000 options per year pursuant to the Company's
1997 Stock Option Plan; the Employment Agreement with Jan D. Hutchins was
amended to provide for an annual salary of $75,000 and for the granting of
10,000 options per year pursuant to the Company's 1997 Stock Option Plan.
In June 1999, the Company entered into an employment with Joy M.
Tashjian to serve as the President and CEO of the Company's wholly owned
subsidiary American Champion Marketing Group. The term of employment is
through December 31, 2001 and the annual salary is $150,000. Ms. Tashjian
was granted 350,000 options from the Company's 1997 Stock Plan at the
execution of the agreement and another 150,000 options will be granted in
June 2000.
Don Berryessa terminated from the Company effective June 30, 1999.
Mae Lyn Woo was appointed the Chief Operations Officer in place of Mr.
Berryessa. Ms. Woo's annual salary was adjusted to $100,000 and she was
granted 100,000 options from the Company's 1997 Stock Plan.
TRANSACTIONS WITH MANAGEMENT
Messrs. Chung and Chan are the guarantors of two loans from Karen
T.I. Shen and Thomas Jung Woo originally totaling $27,000 and bearing
interest at 14% per annum which are due and payable in 1999 and 2000, and
are the direct obligors on a loan in the original principal amount of
$100,000 from the Michael Triantos M.D. Inc. Money Purchase and Profit
Sharing Pension Plans Trust which is being treated as a debt of the
Company which loan bears interest at the rate of 12% per annum.
In a letter dated October 29, 1996, the Company agreed to pay Joe
and Jennifer Montana, significant stockholders of the Company, $50,000 in
cash, payable 30 days prior to the release of the Company's second Fitness
Product, entitled "MONTANA EXERCISE VIDEO." In such letter, the Company
also agreed to pay, and has paid, Joe and Jennifer Montana an additional
$50,000 from the proceeds of the Company's initial public offering and a
royalty payment of $1 per video tape sold. See "Business-Fitness
Products." Joe and Jennifer Montana have both been training in the
Company's karate schools for approximately three years. The "MONTANA
EXERCISE VIDEO" stars the former superstar quarterback and his wife
Jennifer in a kick-boxing video. Jennifer Montana also co-hosts the Kanga
Roddy Series.
In June 1997, Mr. George Chung, the Chairman of the Board, loaned at
no interest approximately $17,673 to the Company in order to allow the
Company to repay its loan with the Bank of Canton. On July 2, 1997, Mr.
Chung also loaned at no interest approximately $35,400 to the Company in
order to allow the Company to repay its loan from Silicon Valley Bank. The
Company repaid the outstanding principal balance of the June 1997 and July
1997 loans from the proceeds of the Company's initial public offering.
None of the transactions with officers or shareholders of the
Company and their affiliates were made on terms less favorable to the
Company than those available from unaffiliated parties. In future
transactions of this nature, the Company will ensure that more favorable
terms are not available to it from unaffiliated third parties before
engaging officers or shareholders of the Company or their affiliates.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Proposals of stockholders intended to be presented at next year's
Annual Meeting of Stockholders must be received by Anthony K. Chan, at the
Company's principal offices at 1894 The Alameda, Suite 100, San Jose
California 95126, no later than January 31, 2000.
OTHER PROPOSED ACTION
The Board of Directors is not aware of any other business which will
come before the Meeting, but if any such matters are properly presented,
the proxies solicited hereby will be voted in accordance with the best
judgment of the persons holding the proxies. All shares represented by
duly executed proxies will be voted at the Meeting.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who own more than 10% of the Company's
Common Stock (collectively, "Reporting Persons") to file with the
Securities and Exchange Commission ("SEC") initial reports of ownership
and changes in ownership of the Company's Common Stock. Reporting Persons
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) reports they file. To the Company's knowledge, based solely
on its review of the copies of such reports received or written
representations from certain Reporting Persons that no other reports were
required, the Company believes that during its fiscal year ended December
31, 1998, all Reporting Persons complied with all applicable filing
requirements.
AVAILABILITY OF CERTAIN DOCUMENTS REFERRED TO HEREIN
THIS PROXY STATEMENT REFERS TO CERTAIN DOCUMENTS OF THE COMPANY
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS ARE
AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS
PROXY STATEMENT IS DELIVERED, UPON ORAL OR WRITTEN REQUEST, WITHOUT
CHARGE, DIRECTED TO ANTHONY K. CHAN, AMERICAN CHAMPION ENTERTAINMENT,
INC., 1894 THE ALAMEDA, SUITE 100, SAN JOSE CALIFORNIA 95126., TELEPHONE
NUMBER (408) 288-8199. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, SUCH REQUESTS SHOULD BE MADE BY NOVEMBER 27, 1999.
OTHER MATTERS
The Board of Directors knows of no other business that will be
presented to the Special Meeting. If any other business is properly
brought before the Special Meeting, proxies in the enclosed form will be
voted in respect thereof as the proxy holders deem advisable.
It is important that the proxies be returned promptly and that your
shares be represented. Stockholders are urged to mark, date, execute and
promptly return the accompanying proxy card in the enclosed envelope.
By Order of the Board of Directors,
/s/ ANTHONY K. CHAN, SECRETRY
Anthony K. Chan, Secretary
San Jose, California
November 8, 1999
PROXY PROXY
AMERICAN CHAMPION ENTERTAINMENT, INC.
PROXY FOR SPECIAL MEETING TO BE HELD ON DECEMBER 10, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Anthony K. Chan or George Chung, or
either of them, as proxies, each with the power to appoint his substitute,
to represent and to vote all the shares of common stock of American
Champion Entertainment, Inc. (the "Company"), which the undersigned would
be entitled to vote, at the Company's Special Meeting of Stockholders to
be held on December 10, 1999 and at any adjournments thereof, subject to
the directions indicated on the reverse side hereof.
In their discretion, the Proxies are authorized to vote upon any
other matter that may properly come before the meeting or any adjournments
thereof.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE,
BUT IF NO CHOICES ARE INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION
OF ALL NOMINEES AND FOR THE PROPOSALS LISTED ON THE REVERSE SIDE.
IMPORTANT--This Proxy must be signed and dated on the reverse side.
THIS IS YOUR PROXY CARD
YOUR VOTE IS IMPORTANT!
Dear Stockholder:
We cordially invite you to attend the Special Meeting of
Stockholders of American Champion Entertainment, Inc. to be held at 1694
The Alameda, Suite 100, San Jose, California on Friday, December 10,
1999 at 7:00 p.m. (local time).
Please read the proxy statement which describes the proposals and
presents other important information, and complete, sign and return your
proxy promptly in the enclosed envelope.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1-7
1. To amend the Company's Bylaws from a "majority" to "one-third" of
outstanding shares to constitute a quorum at all meetings of stockholders.
For [_] Against [_] Abstain [_]
2. To amend the Company's Bylaws to increase the maximum number of seats on
the Board of Directors from 9 to 15 with the exact number of directors for
each year to be determined by the Board.
For [_] Against [_] Abstain [_]
3. To approve the increase of the number of shares of Common Stock issuable
under the Company's 1997 Employee Stock Option Plan from 4,800,000 to
7,000,000.
For [_] Against [_] Abstain [_]
4. To approve the increase of the number of shares of Common Stock issuable
under the Company's 1997 Non-Employee Directors Stock Option Plan from
550,000 to 800,000.
For [_] Against [_] Abstain [_]
5. To approve the two Securities Purchase Agreements, dated June 18, 1999 and
September 24, 1999, and all transactions contemplated thereby, including the
issuance of $1,750,000 and $1,000,000 of convertible debentures respectively,
issued on June 18, 1999 and September 24, 1999 respectively.
For [_] Against [_] Abstain [_]
6. To approve a reverse stock split of the outstanding shares of the
Company's Common Stock, if necessary, at a ratio to effect the market price
of the Company's Common Stock to be at a level in compliance with the
continued listing requirements of the Nasdaq SmallCap Market.
For [_] Against [_] Abstain [_]
If you plan to attend the Special Meeting please mark this box [_]
Dated:________________, 1999
Signature
__________________________________________________________________________
Name (printed)
__________________________________________________________________________
Title
__________________________________________________________________________
Important: Please sign exactly as name appears on this proxy. When
signing as attorney, executor, trustee, guardian, corporate officer, etc.,
please indicate full title.
APPENDIX A
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of the date of
acceptance set forth below, is entered into by and between AMERICAN
CHAMPION ENTERTAINMENT, INC., a Delaware corporation, with headquarters
located at 1694 The Alameda, Suite 100, San Jose, CA 95126-2219 (the
"Company"), and each entity named on a signature page hereto (each, a
"Buyer") (each agreement with a Buyer being deemed a separate and
independent agreement between the Company and such Buyer, except that each
Buyer acknowledges and consents to the rights granted to each other Buyer
under such agreement and the Transaction Agreements, as defined below,
referred to therein).
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and
delivering this Agreement in accordance with and in reliance upon the
exemption from securities registration afforded, inter alia, by Rule 506
under Regulation D ("Regulation D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of
1933, as amended (the "1933 Act"), and/or Section 4(2) of the 1933 Act;
and
WHEREAS, the Buyer wishes to purchase, upon the terms and
subject to the conditions of this Agreement, 7% Convertible Debentures of
the Company which will be convertible into shares of Common Stock, $.0001
par value per share of the Company (the "Common Stock"), upon the terms
and subject to the conditions of such Convertible Debentures, together
with the Warrants (as defined below) exercisable for the purchase of
shares of Common Stock (the "Warrant Shares"), and subject to acceptance
of this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties
agree as follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. Purchase; Certain Definitions. (i) The undersigned
hereby agrees to purchase from the Company 7% Convertible Debentures in
the principal amount set forth on the Buyer's signature page of this
Agreement (the "Debentures"), out of a total offering of $1,750,000 of
such Debentures, and having the terms and conditions and being in the form
attached hereto as Annex I. The purchase price for the Debentures shall
be as set forth on the signature page hereto and shall be payable in
United States Dollars.
(ii) As used herein, the term "Securities" means the
Debentures, the Common Stock issuable upon conversion of the Debentures,
the Warrants and the Warrant Shares.
(iii) As used herein, the term "Purchase Price" means the
purchase price for the Debentures.
(iv) As used herein, the term "Closing Date" means the date
of the closing of the purchase and sale of the Debentures, as provided
herein.
(v) As used herein, the term "Effective Date" means the
effective date of the Registration Statement covering the Registrable
Securities (as those terms are defined in the Registration Rights
Agreement defined below).
(vi) As used herein, the term "Market Price of the Common
Stock" means (x) the average closing bid price of the Common Stock for the
five (5) trading days ending on the trading day immediately before the
date indicated in the relevant provision hereof (unless a different
relevant period is specified in the relevant provision), as reported by
Bloomberg, LP or, if not so reported, as reported on the over-the-counter
market or (y) if the Common Stock is listed on a stock exchange, the
lowest trade price on such exchange on the date indicated in the relevant
provision hereof, as reported in The Wall Street Journal.
b. Form of Payment; Delivery of Debentures.
(i) Except as specified below, the Buyer shall pay the
Purchase Price for the Debentures by delivering immediately available good
funds in United States Dollars to the escrow agent (the "Escrow Agent")
identified in the Joint Escrow Instructions attached hereto as Annex II
(the "Joint Escrow Instructions") on the date prior to the Closing Date.
(ii) No later than the Closing Date, but in any event
promptly following payment by the Buyer to the Escrow Agent of the
Purchase Price, the Company shall deliver the Debentures and the Warrants,
each duly executed on behalf of the Company, to the Escrow Agent.
(iii) By signing this Agreement, each of the Buyer and the
Company, subject to acceptance by the Escrow Agent, agrees to all of the
terms and conditions of, and becomes a party to, the Joint Escrow
Instructions, all of the provisions of which are incorporated herein by
this reference as if set forth in full.
(iv) By separate letter to the Escrow Agent, the Company is
acknowledging that it has received certain funds from or on behalf of one
or more of the Buyers on account of the Purchase Price obligation of each
such Buyer. Any such funds will not be deposited in escrow with the
Escrow Agent but shall nevertheless (i) be deemed paid on account of such
identified Buyer's Purchase Price and (ii) be deemed part of the Purchase
Price for determining amounts, if any, due to any party other than the
Company as contemplated by the Joint Escrow Instructions, but (iii) shall
not be deemed part of the Escrow Property for purposes of determining the
amount of the funds payable to the Company thereunder.
c. Method of Payment. Subject to the provisions of Section
1(b) hereof, payment into escrow of the Purchase Price shall be made by
wire transfer of funds to:
Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
For credit to the account of Krieger & Prager, Esqs.
Account No.: [To be provided to the Buyer by Krieger &
Prager]
Re: American Champion Entertainment 6/99 Transaction
Not later than 5:00 p.m., New York time, on the date which is two (2) New
York Stock Exchange trading days after the Company shall have accepted
this Agreement and returned a signed counterpart of this Agreement to the
Escrow Agent by facsimile, the Buyer shall deposit with the Escrow Agent
the Purchase Price for the Debentures in currently available funds. Time
is of the essence with respect to such payment, and failure by the Buyer
to make such payment, shall allow the Company to cancel this Agreement.
d. Escrow Property. The Purchase Price and the Debentures
and Warrants delivered to the Escrow Agent as contemplated by Sections
1(b) and (c) hereof are referred to as the "Escrow Property."
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO
INFORMATION; INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees
with, the Company as follows:
a. Without limiting Buyer's right to sell the Common Stock
pursuant to the Registration Statement (as that term is defined in the
Registration Rights Agreement defined below), the Buyer is purchasing the
Debentures and the Warrants and will be acquiring the shares of Common
Stock issuable upon conversion of the Debentures (the "Converted Shares")
and the Warrant Shares for its own account for investment only and not
with a view towards the public sale or distribution thereof and not with
a view to or for sale in connection with any distribution thereof.
b. The Buyer is (i) an "accredited investor" as that term
is defined in Rule 501 of the General Rules and Regulations under the 1933
Act by reason of Rule 501(a)(3), (ii) experienced in making investments of
the kind described in this Agreement and the related documents, (iii)
able, by reason of the business and financial experience of its officers
(if an entity) and professional advisors (who are not affiliated with or
compensated in any way by the Company or any of its affiliates or selling
agents), to protect its own interests in connection with the transactions
described in this Agreement, and the related documents, and (iv) able to
afford the entire loss of its investment in the Securities.
c. All subsequent offers and sales of the Debentures and
the shares of Common Stock representing the Converted Shares and the
Warrant Shares (such Common Stock sometimes referred to as the "Shares")
by the Buyer shall be made pursuant to registration of the Shares under
the 1933 Act or pursuant to an exemption from registration.
d. The Buyer understands that the Debentures are being
offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities
laws and that the Company is relying upon the truth and accuracy of, and
the Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in order
to determine the availability of such exemptions and the eligibility of
the Buyer to acquire the Debentures. The Buyer represents and warrants
that the address of its principal place of business is as set forth on the
Buyer's signature page of this Agreement.
e. The Buyer and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of
the Company and materials relating to the offer and sale of the Debentures
and the offer of the Shares which have been requested by the Buyer,
including Annex V hereto. The Buyer and its advisors, if any, have been
afforded the opportunity to ask questions of the Company and have received
complete and satisfactory answers to any such inquiries. Without limiting
the generality of the foregoing, the Buyer has also had the opportunity to
obtain and to review the Company's (1) Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1998, (2) Proxy Statements for the
Company's annual meeting of shareholders held on or about May 5, 1999 and
(3) Registration Statement on Form S-3/A filed with the SEC on February
12, 1999 (the "Company's SEC Documents").
f. The Buyer understands that its investment in the
Securities involves a high degree of risk.
g. The Buyer understands that no United States federal or
state agency or any other government or governmental agency has passed on
or made any recommendation or endorsement of the Securities.
h. This Agreement has been duly and validly authorized,
executed and delivered on behalf of the Buyer and is a valid and binding
agreement of the Buyer enforceable in accordance with its terms, subject
as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally.
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that, except
as provided in Annex V hereto:
a. Concerning the Debentures and the Shares. There are no
preemptive rights of any stockholder of the Company, as such, to acquire
the Debentures, the Warrants or the Shares.
b. Reporting Company Status. The Company is a corporation
duly organized, validly existing and in good standing under the laws of
the State of Delaware and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The
Company is duly qualified as a foreign corporation to do business and is
in good standing in each jurisdiction where the nature of the business
conducted or property owned by it makes such qualification necessary,
other than those jurisdictions in which the failure to so qualify would
not have a material adverse effect on the business, operations or
condition (financial or otherwise) or results of operation of the Company
and its subsidiaries taken as a whole. The Company has registered its
Common Stock pursuant to Section 12 of the 1934 Act, and the Common Stock
is listed and traded on The NASDAQ/SmallCap Market. The Company has
received no notice, either oral or written, with respect to the continued
eligibility of the Common Stock for such listing, and the Company has
maintained all requirements for the continuation of such listing.
c. Authorized Shares. The Company has sufficient
authorized and unissued Shares as may be reasonably necessary to effect
the conversion of the Debentures and to issue the Warrant Shares. The
Converted Shares and the Warrant Shares have been duly authorized and,
when issued upon conversion of, or as interest on, the Debentures or upon
exercise of the Warrants, each in accordance with its respective terms,
will be duly and validly issued, fully paid and non-assessable and will
not subject the holder thereof to personal liability by reason of being
such holder.
d. Securities Purchase Agreement; Registration Rights
Agreement and Stock. This Agreement and the Registration Rights
Agreement, the form of which is attached hereto as Annex IV (the
"Registration Rights Agreement"), and the transactions contemplated
thereby, have been duly and validly authorized by the Company, this
Agreement has been duly executed and delivered by the Company and this
Agreement is, and the Debentures, the Warrants and the Registration Rights
Agreement, when executed and delivered by the Company, will be, valid and
binding agreements of the Company enforceable in accordance with their
respective terms, subject as to enforceability to general principles of
equity and to bankruptcy, insolvency, moratorium, and other similar laws
affecting the enforcement of creditors' rights generally.
e. Non-contravention. The execution and delivery of this
Agreement and the Registration Rights Agreement by the Company, the
issuance of the Securities, and the consummation by the Company of the
other transactions contemplated by this Agreement, the Registration Rights
Agreement, and the Debentures do not and will not conflict with or result
in a breach by the Company of any of the terms or provisions of, or
constitute a default under (i) the articles of incorporation or by-laws of
the Company, each as currently in effect, (ii) any indenture, mortgage,
deed of trust, or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are
bound, including any listing agreement for the Common Stock except as
herein set forth, (iii) to its knowledge, any existing applicable law,
rule, or regulation or any applicable decree, judgment, or order of any
court, United States federal or state regulatory body, administrative
agency, or other governmental body having jurisdiction over the Company or
any of its properties or assets, or (iv) the Company's listing agreement
for its Common Stock, except such conflict, breach or default which would
not have a material adverse effect on the business, operations or
condition (financial or otherwise) or results of operations of the Company
and its subsidiaries, taken as a whole, or on the transactions
contemplated herein.
f. Approvals. No authorization, approval or consent of any
court, governmental body, regulatory agency, self-regulatory organization,
or stock exchange or market or the stockholders of the Company is required
to be obtained by the Company for the issuance and sale of the Securities
to the Buyer as contemplated by this Agreement, except such
authorizations, approvals and consents that have been obtained or that are
contemplated by this Agreement to be obtained on a date after the date
hereof.
g. SEC Filings. None of the Company's SEC Documents
contained, at the time they were filed, any untrue statement of a material
fact or omitted to state any material fact required to be stated therein
or necessary to make the statements made therein in light of the
circumstances under which they were made, not misleading. Except for
certain filings required to be filed by persons subject and pursuant to
Section 16 of the 1934 Act, the Company has since August 1, 1997 timely
filed all requisite forms, reports and exhibits thereto with the SEC.
h. Absence of Certain Changes. Since December 31, 1998,
there has been no material adverse change and no material adverse
development in the business, properties, operations, condition (financial
or otherwise), or results of operations of the Company, except as
disclosed in the Company's SEC Documents. Since December 31, 1998, except
as provided in the Company's SEC Documents, the Company has not (i)
incurred or become subject to any material liabilities (absolute or
contingent) except liabilities incurred in the ordinary course of business
consistent with past practices; (ii) discharged or satisfied any material
lien or encumbrance or paid any material obligation or liability (absolute
or contingent), other than current liabilities paid in the ordinary course
of business consistent with past practices; (iii) declared or made any
payment or distribution of cash or other property to stockholders with
respect to its capital stock, or purchased or redeemed, or made any
agreements to purchase or redeem, any shares of its capital stock; (iv)
sold, assigned or transferred any other tangible assets, or canceled any
debts or claims, except in the ordinary course of business consistent with
past practices; (v) suffered any substantial losses or waived any rights
of material value, whether or not in the ordinary course of business, or
suffered the loss of any material amount of existing business; (vi) made
any changes in employee compensation, except in the ordinary course of
business consistent with past practices; or (vii) experienced any material
problems with labor or management in connection with the terms and
conditions of their employment.
i. Full Disclosure. There is no fact known to the Company
(other than general economic conditions known to the public generally or
as disclosed in the Company's SEC Documents) that has not been disclosed
in writing to the Buyer that (i) would reasonably be expected to have a
material adverse effect on the business, operations or condition
(financial or otherwise) or results of operations of the Company and its
subsidiaries, taken as a whole, (ii) would reasonably be expected to
materially and adversely affect the ability of the Company to perform its
obligations pursuant to this Agreement or any of the agreements
contemplated hereby (collectively, including this Agreement, the
"Transaction Agreements"), or (iii) would reasonably be expected to
materially and adversely affect the value of the rights granted to the
Buyer in the Transaction Agreements.
j. Absence of Litigation. Except as set forth in the
Company's SEC Documents, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board or body pending or, to
the knowledge of the Company, threatened against or affecting the Company,
wherein an unfavorable decision, ruling or finding would have a material
adverse effect on the properties, business or financial condition, or
results of operation of the Company and its subsidiaries taken as a whole
or the transactions contemplated by any of the Transaction Agreements or
which would adversely affect the validity or enforceability of, or the
authority or ability of the Company to perform its obligations under, any
of the Transaction Agreements.
k. Absence of Events of Default. Except as set forth in
Section 3(e) hereof, no Event of Default (or its equivalent term), as
defined in the respective agreement to which the Company is a party, and
no event which, with the giving of notice or the passage of time or both,
would become an Event of Default (or its equivalent term) (as so defined
in such agreement), has occurred and is continuing, which would have a
material adverse effect on the business, operations or condition
(financial or otherwise) or results of operations of the Company and its
subsidiaries, taken as a whole.
l. Prior Issues. During the twelve (12) months preceding
the date hereof, the Company has not issued any convertible securities.
The presently outstanding unconverted principal amount of each such
issuance as of the date of this Agreement is set forth in Annex V.
m. No Undisclosed Liabilities or Events. The Company has
no liabilities or obligations other than those disclosed in the Company's
SEC Documents or those incurred in the ordinary course of the Company's
business since December 31, 1998, and which individually or in the
aggregate, do not or would not have a material adverse effect on the
properties, business, condition (financial or otherwise), or results of
operations of the Company and its subsidiaries, taken as a whole. Except
for the transactions contemplated by the Transaction Agreements, no event
or circumstances has occurred or exists with respect to the Company or its
properties, business, condition (financial or otherwise), or results of
operations, which, under applicable law, rule or regulation, requires
public disclosure or announcement prior to the date hereof by the Company
but which has not been so publicly announced or disclosed. There are no
proposals currently under consideration or currently anticipated to be
under consideration by the Board of Directors or the executive officers of
the Company which proposal would (x) change the certificate of
incorporation or other charter document or by-laws of the Company, each as
currently in effect, with or without shareholder approval, which change
would reduce or otherwise adversely affect the rights and powers of the
shareholders of the Common Stock or (y) materially or substantially change
the business, assets or capital of the Company, including its interests in
subsidiaries.
n. No Default. The Company is not in default in the
performance or observance of any material obligation, agreement, covenant
or condition contained in any indenture, mortgage, deed of trust or other
material instrument or agreement to which it is a party or by which it or
its property is bound.
o. No Integrated Offering. Neither the Company nor any of
its affiliates nor any person acting on its or their behalf has, directly
or indirectly, at any time since July 1, 1998 made any offer or sales of
any security or solicited any offers to buy any security under
circumstances that would eliminate the availability of the exemption from
registration under Rule 506 of Regulation D in connection with the offer
and sale of the Securities as contemplated hereby.
p. Dilution. The number of Shares issuable upon conversion
of the Debentures and the exercise of the Warrants may increase
substantially in certain circumstances, including, but not necessarily
limited to, the circumstance wherein the trading price of the Common Stock
declines prior to the conversion of the Debentures. The Company's
executive officers and directors have studied and fully understand the
nature of the Securities being sold hereby and recognize that they have a
potential dilutive effect. The board of directors of the Company has
concluded, in its good faith business judgment, that such issuance is in
the best interests of the Company. The Company specifically acknowledges
that its obligation to issue the Shares upon conversion of the Debentures
and upon exercise of the Warrants is binding upon the Company and
enforceable regardless of the dilution such issuance may have on the
ownership interests of other shareholders of the Company, and the Company
will honor every Notice of Conversion (as defined in the Debentures)
relating to the conversion of the Debentures and every Notice of Exercise
Form (as contemplated by the Warrants) relating to the exercise of the
Warrants unless the Company is subject to an injunction (which injunction
was not sought by the Company) prohibiting the Company from doing so.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1)
the Debentures have not been and are not being registered under the
provisions of the 1933 Act and, except as provided in the Registration
Rights Agreement, the Securities have not been and are not being
registered under the 1933 Act, and may not be transferred unless (A)
subsequently registered thereunder or (B) the Buyer shall have delivered
to the Company an opinion of counsel, reasonably satisfactory in form,
scope and substance to the Company, to the effect that the Securities to
be sold or transferred may be sold or transferred pursuant to an exemption
from such registration; (2) any sale of the Securities made in reliance on
Rule 144 promulgated under the 1933 Act may be made only in accordance
with the terms of said Rule and further, if said Rule is not applicable,
any resale of such Securities under circumstances in which the seller, or
the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance
with some other exemption under the 1933 Act or the rules and regulations
of the SEC thereunder; and (3) neither the Company nor any other person is
under any obligation to register the Securities (other than pursuant to
the Registration Rights Agreement) under the 1933 Act or to comply with
the terms and conditions of any exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees
that the Debentures and the Warrants, and, until such time as the Common
Stock has been registered under the 1933 Act as contemplated by the
Registration Rights Agreement and sold in accordance with an effective
Registration Statement, certificates and other instruments representing
any of the Securities shall bear a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer
of any such Securities):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD
OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION
OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
c. Registration Rights Agreement. The parties hereto agree
to enter into the Registration Rights Agreement on or before the Closing
Date.
d. Filings and Shareholder Consent. (i) The Company
undertakes and agrees to make all necessary filings in connection with the
sale of the Debentures to the Buyer under any United States laws and
regulations applicable to the Company, or by any domestic securities
exchange or trading market, and to provide a copy thereof to the Buyer
promptly after such filing.
(ii) Subject to the conditions of the immediately following
sentence, the Company undertakes and agrees to take all steps necessary to
have a meeting and vote of the shareholders of the Company no later than
the Meeting Date (as defined below) regarding authorization of the
Company's issuance to the holders of the Debentures and Warrants of shares
of Common Stock in excess of twenty percent (20%) of the outstanding
shares of Common Stock on the date of this Agreement in accordance with
NASDAQ Rule 4310(c)(25)(H). The terms of the immediately preceding
sentence shall apply only once the Company has issued, after the date of
this Agreement, either (x) to the Holder Class Members of any specific
Holder Class, shares of Common Stock which, in the aggregate equal or
exceed seventy-five percent of the Conversion Limit of that Holder Class
(as such terms are defined below), or (y) to any one or more holders of
all Debentures contemplated by this Agreement shares of Common Stock
which, in the aggregate, equal or exceed ten percent (10%) of the
outstanding shares of Common Stock on the date hereof. The earliest date
on which the issuance of such shares contemplated by the immediately
preceding sentence occurs shall constitute, with further notice from a
Buyer, a "Meeting Requirement Date." The term "Meeting Date" means the
date which is seventy-five (75) days after the Meeting Requirement Date.
The Company will recommend to the shareholders that such authorization be
granted and will seek proxies from shareholders not attending the meeting
(if such meeting is required to effectuate such authorization) naming a
director or officer of the Company as such shareholder's proxy and
directing the proxy to vote, or giving the proxy the authority to vote, in
favor of such authorization. Upon determination that the shareholders
have voted in favor of such authorization, the Company shall cause its
counsel to issue to the Buyer an unqualified opinion (the "Authorization
Opinion") that such authorization has been duly adopted by all necessary
corporate action of the Company and that the Company will be able to
issue, without restriction as to the number of such shares, all shares of
Common Stock as may be issuable upon conversion of the Debentures and
without any limits imposed by the Cap Regulations (as defined in the
Debentures) adopted on or before and in effect on the date of the
Authorization Opinion. The Authorization Opinion shall state that the
Buyer may rely thereon in connection with the transactions contemplated by
this Agreement and the other Transaction Agreements regarding its holdings
of the Debentures. If, for any reason, (x) the Authorization Opinion is
not issued within five (5) business days after such meeting, (y) the
meeting is not held by the Meeting Date or (z) the requisite shareholder
approval is not obtained at the meeting, then in lieu of issuing any
shares in violation of NASDAQ Rule 4310(c)(25)(H) or any of the other Cap
Regulations, the Company shall redeem the outstanding Unconverted
Debentures (as defined in the Debentures) as set forth in Section 6 of the
Debenture within thirty (30) days after the Meeting Date.
(iii) In furtherance of the provisions of the immediately
preceding subparagraph (ii) hereof, the Company (a) commits to using its
best efforts to obtain any shareholder authorization contemplated by said
subparagraph (ii), and (b) represents to the Buyer that the Company has
obtained the binding irrevocable commitment or proxy (each, a "Principal
Voter Proxy") of each Principal Voter (as defined below) that such
Principal Voter will vote in favor of any shareholder authorization
contemplated by said subparagraph (ii). Each Principal Voter Proxy shall
be issued in favor of the Buyer or the Buyer's designee and shall state
that, among other things, as a result of the Principal Voter's direct or
indirect relationship to the Company on the date the Principal Voter Proxy
is given, such Principal Voter Proxy is deemed coupled with an interest in
favor of the Buyer. A "Principal Voter" is a person who meets any one or
more of the following criteria: (A) a person who is a director or
principal officer of the Company (each, a "Company Principal") and who,
directly or indirectly, holds any shares of Common Stock of the Company;
(B) a spouse of a Company Principal who resides in the household of the
Company Principal (a "Principal's Spouse") and who, directly or
indirectly, holds any shares of Common Stock of the Company, (C) a parent,
sibling or child of a Company Principal who resides in the household of a
Company Principal or of a Principal's Spouse (each, a "Principal's
Relative") and who, directly or indirectly, holds any shares of Common
Stock or (D) any other person or entity, including, without limitation,
for profit or non-profit corporations, partnerships and trusts, whose
voting rights regarding Common Stock of the Company is subject to the
direction, control or other influence of any Company Principal,
Principal's Spouse or Principal's Relative. The Company will deliver such
Principal Voter Proxies to the Buyer or the Buyer's designee within ten
(10) business days after the Closing Date.
e. Reporting Status. So long as the Buyer beneficially
owns any of the Debentures, the Company shall file all reports required to
be filed by the Company with the SEC pursuant to Section 13 or 15(d) of
the 1934 Act, and the Company shall not voluntarily terminate its status
as an issuer required to file reports under the 1934 Act even if the 1934
Act or the rules and regulations thereunder would permit such termination.
The Company will take all reasonable action under its control to continue
the listing and trading of its Common Stock (including, without
limitation, all Registrable Securities) on The NASDAQ SmallCap Market and
will comply in all material respects with the Company's reporting, filing
and other obligations under the by-laws or rules of the National
Association of Securities Dealers, Inc. ("NASD") or The NASDAQ SmallCap
Market.
f. Use of Proceeds. Unless otherwise consented by the
Buyer, the Company shall use the proceeds from the sale of the Debentures
(excluding amounts paid by the Company for legal fees, finder's fees and
escrow fees in connection with the sale of the Debentures) for internal
working capital purposes, and, except as expressly provided herein, shall
not, directly or indirectly, use such proceeds for any loan to or
investment in any other corporation, partnership, enterprise or other
person, including any of its affiliates, or to repay any debt to any of
its affiliates.
g. Certain Agreements. The Company covenants and agrees
that it will not, without the prior written consent of the Buyer, enter
into any subsequent or further offer or sale of Common Stock or securities
convertible into Common Stock with any third party on any date which is
prior to one hundred twenty (120) days after the Effective Date . The
foregoing provision shall not restrict the Company from issuing shares of
Common Stock upon the exercise of (x) certain warrants for the purchase of
up to approximately 2,372,626 shares outstanding as of the date hereof and
(y) certain options granted or be granted pursuant to the 1997 Stock
Option Plan or the 1997 Non-Employee Directors Stock Option Plan.
h. Available Shares. The Company shall have at all times
authorized and reserved for issuance, free from preemptive rights, shares
of Common Stock sufficient to yield two hundred percent (200%) of the
number of shares of Common Stock issuable (i) at conversion as may be
required to satisfy the conversion rights of the Buyer pursuant to the
terms and conditions of the Debentures and (ii) upon exercise as may be
required to satisfy the exercise rights of the Buyer pursuant to the terms
and conditions of the Warrants.
i. Warrants. The Company agrees to issue to the Buyer on
the Closing Date transferable, divisible warrants (the "Warrants") for the
purchase of ten thousand (10,000) shares of Common Stock for every
$100,000 principal of Debentures purchased by the Buyer. The Warrants
shall bear an exercise price equal to one hundred twenty-five percent
(125%) of the Market Price of the Common Stock on the Closing Date (the
"Warrant Exercise Price"). The Warrants will expire on the third
anniversary of the Closing Date. The Warrants shall be in the form annexed
hereto as Annex VI, together with registration rights as provided in the
Registration Rights Agreement.
j. Limitation on Conversions. Anything in the other
provisions of this Agreement or any of the other Transaction Agreements to
the contrary notwithstanding, the following provisions are applicable to
conversion effected under the Debentures:
(i) Attached to this Agreement as Annex VIII is a schedule
of all of the Buyers who were the original signatories to this Agreement
(each, an "Original Holder") and the original principal amount (the
"Original Debenture Amount") of the Debenture issued to each such Original
Holder as contemplated by this Agreement (each, an "Original Debenture").
For identification purposes and for the purposes of this Section only,
Annex VIII also identifies the "Holder Class" for each Original Debenture.
Each Original Debenture will include an identification of its relevant
Holder Class. Any reissue of an Original Debenture to the Original Holder
or to any direct or indirect assignee or transferee of all or part of such
Original Debenture shall include an identification of the same Holder
Class. The Original Holder of each Holder Class and any other party at
any time holding a Debenture of the same Holder Class are referred to
collectively as the "Holder Class Members."
(ii) If and for so long as the Cap Regulations are applicable
to limit the issuance of shares on conversion of the Debentures (but not
thereafter), the number of shares that the Company will issue to all
Holder Class Members of a specific Holder Class on conversion of the
Debentures of that Holder Class shall not, in the aggregate, exceed the
Conversion Limit (as defined below).
(iii) As of the Closing Date, the term "Conversion Limit"
means the number of shares equal to (A) 19.99% of the number of
outstanding shares of Common Stock of the Company as of the Closing Date,
which number is specified on Annex V annexed hereto; provided, however,
that such number is subject to adjustment for subsequent stock splits,
stock dividends and other similar actions or transactions affecting the
capital formation of the Company), multiplied by (B) the relevant Holder
Class Allocable Share (as defined below).
(iv) If, for any reason whatsoever, there are no Debentures
of a specific Holder Class outstanding (a "Closed Class"), the Company
shall promptly give written notice (the "Closed Class Notice") of such
fact to the then holders of outstanding Debentures of all other Holder
Classes. The Closed Class Notice shall (A) identify the date on which the
Holder Class became a Closed Class, and (B) specify both the number of
shares issued, in the aggregate to all Holder Class Members of the Closed
Class (the "Closed Class Issued Shares") and the most recent Conversion
Limit that was applicable to the Closed Class (the "Closed Class
Conversion Limit"). The term "Remaining Shares" means the excess, if any,
of the Closed Class Conversion Limit over the Closed Class Issued
Shares.
(v) The Conversion Limit in effect on the Closing Date or as
subsequently adjusted as provided below shall be adjusted or further
adjusted, as the case may be, on the next date on which there is a new
Closed Class which results in Remaining Shares (a "Closed Class Date").
As of the Closed Class Date, the Conversion Limit then in effect will be
adjusted for each Holder Class as to which there are still outstanding
Debentures to be equal to the sum of (A) the Conversion Limit in effect
immediately prior to the Closed Date, plus (B) the Remaining Share
Conversion Limit (as defined below). The Conversion Limit, as so
adjusted, shall then be deemed to be the Conversion Limit for all Holder
Classes as to which Debentures are still outstanding on the relevant
Closed Class Date, subject to further adjustment, as provided in this
subparagraph (v) in the event there is a subsequent Closed Class Date.
(vi) The "Remaining Share Conversion Limit" means the number
of shares equal to (C) the Remaining Shares, multiplied by (D) the
relevant Adjusted Holder Class Allocable Share (as defined below).
(vii) The term "Holder Class Allocable Share" means the
fraction of which the numerator is the Original Debenture Amount of the
relevant Holder Class and the denominator is the aggregate Original
Debenture Amount of all Holder Classes.
(viii) The term "Adjusted Holder Class Allocable Share"
means, with respect to each Holder Class as to which there are outstanding
Debentures on the Closed Class Date, the fraction of which the numerator
is the Original Debenture Amount of the relevant Holder Class and the
denominator is the aggregate Original Debenture Amount of all Holder
Classes as to which there are there are outstanding Debentures on the
Closed Class Date.
(ix) Nothing in this Section 4(j) shall be deemed to (A)
permit a transfer or assignment of the Debenture unless otherwise
permitted by other provisions of this Agreement or the Debenture or (B)
limit or otherwise modify the obligations of the Company to take certain
actions or to make certain payments to the Buyer or other parties (such as
but not necessarily limited to, actions with respect to the meeting
contemplated by Section 4(d)(ii) hereof or payments on redemption of the
Debentures), or adversely affect the rights of the Buyer or such other
parties with respect thereto, as provided elsewhere in this Agreement, the
Debentures or any of the other Transaction Agreements.
k. Grant of Security Interest to Buyers. To secure its
obligations to the Buyers and to all direct and indirect permitted
transferees and assignees of their interests in this Agreement and the
other Transaction Agreements, including, but not necessarily limited to,
the Debentures (any one or more of the Buyers and such transferees and
assignees individually and collectively referred to as the "Secured
Party"), the Company (sometimes referred to as the "Debtor") hereby
grants, conveys, transfers and assigns to the Secured Party a security
interest in and to the Collateral (as defined in Annex VII hereto) to the
fullest extent permissible under the Uniform Commercial Code or other
governing security interests granted by debtors or obligors to creditors
or obligees as in effect in each jurisdiction in which the Debtor's
property may be found or deemed situate. Additional terms relating to the
grant of this security interest are specified in Annex VII annexed hereto,
the terms of which are incorporated herein by reference as if set forth
herein in full.
5. TRANSFER AGENT INSTRUCTIONS.
a. Promptly following the delivery by the Buyer of the
Purchase Price for the Debentures in accordance with Section 1(c) hereof,
the Company will irrevocably instruct its transfer agent to issue Common
Stock from time to time upon conversion of the Debentures in such amounts
as specified from time to time by the Company to the transfer agent,
bearing the restrictive legend specified in Section 4(b) of this Agreement
prior to registration of the Shares under the 1933 Act, registered in the
name of the Buyer or its nominee and in such denominations to be specified
by the Buyer in connection with each conversion of the Debentures. The
Company warrants that no instruction other than such instructions referred
to in this Section 5 and stop transfer instructions to give effect to
Section 4(a) hereof prior to registration and sale of the Shares under the
1933 Act will be given by the Company to the transfer agent and that the
Shares shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement, the
Registration Rights Agreement, and applicable law. Nothing in this
Section shall affect in any way the Buyer's obligations and agreement to
comply with all applicable securities laws upon resale of the Securities.
If the Buyer provides the Company with an opinion of counsel reasonably
satisfactory to the Company that registration of a resale by the Buyer of
any of the Securities in accordance with clause (1)(B) of Section 4(a) of
this Agreement is not required under the 1933 Act, the Company shall
(except as provided in clause (2) of Section 4(a) of this Agreement)
permit the transfer of the Securities and, in the case of the Converted
Shares or the Warrant Shares, as the case may be, promptly instruct the
Company's transfer agent to issue one or more certificates for Common
Stock without legend in such name and in such denominations as specified
by the Buyer.
b. Subject to the completeness and accuracy of the Buyer's
representations and warranties herein, upon the conversion of any
Debentures by a person who is a non-U.S. Person, and following the
expiration of any then applicable Restricted Period (as those terms are
defined in Regulation S), the Company, shall, at its expense, take all
necessary action (including the issuance of an opinion of counsel) to
assure that the Company's transfer agent shall issue stock certificates
without restrictive legend or stop orders in the name of Buyer (or its
nominee (being a non-U.S. Person) or such non-U.S. Persons as may be
designated by Buyer) and in such denominations to be specified at
conversion representing the number of shares of Common Stock issuable upon
such conversion, as applicable. Nothing in this Section 5, however, shall
affect in any way Buyer's or such nominee's obligations and agreement to
comply with all applicable securities laws upon resale of the Securities.
c. Subject to the provisions of this Agreement, the Company
will permit the Buyer to exercise its right to convert the Debentures in
the manner contemplated by the Debentures.
d. The Company understands that a delay in the issuance of
the Shares of Common Stock beyond the Delivery Date (as defined in the
Debentures) could result in economic loss to the Buyer. As compensation
to the Buyer for such loss, the Company agrees to pay late payments to the
Buyer for late issuance of Shares upon Conversion in accordance with the
following schedule (where "No. Business Days Late" is defined as the
number of business days beyond the Delivery Date):
Late Payment For Each $10,000
of Debenture Principal
No. Business Days Late Amount Being Converted
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
>10 $1,000 +$200 for each Business
Day Late beyond 10 days
The Company shall pay any payments incurred under this Section in
immediately available funds upon demand. Nothing herein shall limit the
Buyer's right to pursue actual damages for the Company's failure to issue
and deliver the Common Stock to the Buyer. Furthermore, in addition to
any other remedies which may be available to the Buyer, in the event that
the Company fails for any reason to effect delivery of such shares of
Common Stock by close of business on the Delivery Date, the Buyer will be
entitled to revoke the relevant Notice of Conversion by delivering a
notice to such effect to the Company, whereupon the Company and the Buyer
shall each be restored to their respective positions immediately prior to
delivery of such Notice of Conversion.
e. If, by the relevant Delivery Date, the Company fails for
any reason to deliver the Shares to be issued upon conversion of a
Debenture and after such Delivery Date, the holder of the Debentures being
converted (a "Converting Holder") purchases, in an open market
transaction or otherwise, shares of Common Stock (the "Covering Shares")
in order to make delivery in satisfaction of a sale of Common Stock by the
Converting Holder (the "Sold Shares"), which delivery such Converting
Holder anticipated to make using the Shares to be issued upon such
conversion (a "Buy-In"), the Company shall pay to the Converting Holder,
in addition to all other amounts contemplated in other provisions of the
Transaction Agreements, and not in lieu thereof, the Buy-In Adjustment
Amount (as defined below). The "Buy-In Adjustment Amount" is the amount
equal to the excess, if any, of (x) the Converting Holder's total purchase
price (including brokerage commissions, if any) for the Covering Shares
over (y) the net proceeds (after brokerage commissions, if any) received
by the Converting Holder from the sale of the Sold Shares. The Company
shall pay the Buy-In Adjustment Amount to the Company in immediately
available funds immediately upon demand by the Converting Holder. By way
of illustration and not in limitation of the foregoing, if the Converting
Holder purchases shares of Common Stock having a total purchase price
(including brokerage commissions) of $11,000 to cover a Buy-In with
respect to shares of Common Stock it sold for net proceeds of $10,000, the
Buy-In Adjustment Amount which Company will be required to pay to the
Converting Holder will be $1,000.
f. In lieu of delivering physical certificates representing
the Common Stock issuable upon conversion, provided the Company's transfer
agent is participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer program, upon request of the Buyer and its
compliance with the provisions contained in this paragraph, so long as the
certificates therefor do not bear a legend and the Buyer thereof is not
obligated to return such certificate for the placement of a legend
thereon, the Company shall use its best efforts to cause its transfer
agent to electronically transmit the Common Stock issuable upon conversion
to the Buyer by crediting the account of Buyer's Prime Broker with DTC
through its Deposit Withdrawal Agent Commission system.
g. The Company will authorize its transfer agent to give
information relating to the Company directly to the Buyer or the Buyer's
representatives upon the request of the Buyer or any such representative.
The Company will provide the Buyer with a copy of the authorization so
given to the transfer agent.
6. DELIVERY INSTRUCTIONS.
The Debentures shall be delivered by the Company to the Escrow
Agent pursuant to Section 1(b) hereof, on a delivery against payment
basis, subject to the specific provisions hereof, no later than on the
Closing Date.
7. CLOSING DATE.
a. The Closing Date shall occur on the date which is the
first NYSE trading day after the fulfillment or waiver of all closing
conditions pursuant to Sections 8 and 9 hereof or such other date and time
as is mutually agreed upon by the Company and the Buyer.
b. The closing of the purchase and issuance of Debentures
shall occur on the Closing Date at the offices of the Escrow Agent and
shall take place no later than 12:00 Noon, New York time, on such day or
such other time as is mutually agreed upon by the Company and the Buyer.
c. Notwithstanding anything to the contrary contained
herein, the Escrow Agent will be authorized to release the Escrow Property
only upon satisfaction of the conditions set forth in Sections 8 and 9
hereof.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell
the Debentures to the Buyer pursuant to this Agreement on the Closing Date
is conditioned upon:
a. The execution and delivery of this Agreement by the
Buyer;
b. Except as contemplated by Section 1 hereof, delivery by
the Buyer to the Escrow Agent of good funds as payment in full of an
amount equal to the Purchase Price for the Debentures in accordance with
this Agreement;
c. The accuracy on such Closing Date of the representations
and warranties of the Buyer contained in this Agreement, each as if made
on such date, and the performance by the Buyer on or before such date of
all covenants and agreements of the Buyer required to be performed on or
before such date; and
d. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or
requiring any consent or approval which shall not have been obtained.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to
purchase the Debentures on the Closing Date is conditioned upon:
a. The execution and delivery of this Agreement and the
Registration Rights Agreement by the Company;
b. Delivery by the Company to the Escrow Agent of the
Debentures and Warrants in accordance with this Agreement;
c. The accuracy in all material respects on such Closing
Date of the representations and warranties of the Company contained in
this Agreement, each as if made on such date, and the performance by the
Company on or before such date of all covenants and agreements of the
Company required to be performed on or before such date;
d. On such Closing Date, the Registration Rights Agreement
shall be in full force and effect and the Company shall not be in default
thereunder;
e. On such Closing Date, the Buyer shall have received an
opinion of counsel for the Company, dated such Closing Date, in form,
scope and substance reasonably satisfactory to the Buyer, substantially to
the effect set forth in Annex III attached hereto;
f. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or
requiring any consent or approval which shall not have been obtained; and
g. From and after the date hereof to and including the
Closing Date, the trading of the Common Stock shall not have been
suspended by the SEC or the NASD and trading in securities generally on
the New York Stock Exchange or The NASDAQ/SmallCap Market shall not have
been suspended or limited, nor shall there be any outbreak or escalation
of hostilities involving the United States or any material adverse change
in any financial market that in either case in the reasonable judgment of
the Buyer makes it impracticable or inadvisable to purchase the
Debentures.
10. GOVERNING LAW: MISCELLANEOUS.
a. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Delaware for contracts to be
wholly performed in such state and without giving effect to the principles
thereof regarding the conflict of laws. Each of the parties consents to
the jurisdiction of the federal courts whose districts encompass any part
of the City of New York or the state courts of the State of New York
sitting in the City of New York in connection with any dispute arising
under this Agreement and hereby waives, to the maximum extent permitted by
law, any objection, including any objection based on forum non conveniens,
to the bringing of any such proceeding in such jurisdictions. To the
extent determined by such court, the Company shall reimburse the Buyer for
any reasonable legal fees and disbursements incurred by the Buyer in
enforcement of or protection of any of its rights under any of the
Transaction Agreements.
b. Failure of any party to exercise any right or remedy
under this Agreement or otherwise, or delay by a party in exercising such
right or remedy, shall not operate as a waiver thereof.
c. This Agreement shall inure to the benefit of and be
binding upon the successors and assigns of each of the parties hereto.
d. All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may
require.
e. A facsimile transmission of this signed Agreement shall
be legal and binding on all parties hereto.
f. This Agreement may be signed in one or more
counterparts, each of which shall be deemed an original.
g. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of,
this Agreement.
h. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability
shall not affect the validity or enforceability of the remainder of this
Agreement or the validity or enforceability of this Agreement in any other
jurisdiction.
i. This Agreement may be amended only by an instrument in
writing signed by the party to be charged with enforcement thereof.
j. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
11. NOTICES. Any notice required or permitted hereunder
shall be given in writing (unless otherwise specified herein) and shall be
deemed effectively given on the earliest of
(a) the date delivered, if delivered by personal delivery as
against written receipt therefor or by confirmed facsimile
transmission,
(b) the seventh business day after deposit, postage prepaid,
in the United States Postal Service by registered or certified
mail, or
(c) the third business day after mailing by international
express courier, with delivery costs and fees prepaid,
in each case, addressed to each of the other parties thereunto entitled at
the following addresses (or at such other addresses as such party may
designate by ten (10) days' advance written notice similarly given to each
of the other parties hereto):
COMPANY: AMERICAN CHAMPION ENTERTAINMENT, INC.
1694 The Alameda, Suite 100
San Jose, CA 95126-2219
Attn: Anthony K. Chan, President
Telephone No.: (408) 288-8199
Telecopier No.: (408) 288-8098
with a copy to:
Sichenzia Ross & Friedman
135 West 50th Street, 20th Floor
New York, NY 10020
Attn: Gregory Sichenzia, Esq.
Telephone No.: (212) 664-1200
Telecopier No.: (212) 664-7329
BUYER: At the address set forth on the signature page of this
Agreement.
with a copy to:
Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
Telephone No.: (212) 689-3322
Telecopier No. (212) 213-2077
ESCROW AGENT: Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
Telecopier No. (212) 213-2077
Telephone No.: (212) 689-3322
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
Company's and the Buyer's representations and warranties herein shall
survive the execution and delivery of this Agreement and the delivery of
the Debentures and payment of the Purchase Price, and shall inure to the
benefit of the Buyer and the Company and their respective successors and
assigns.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK.]
IN WITNESS WHEREOF, this Agreement has been duly executed by
the Buyer or one of its officers thereunto duly authorized as of the date
set forth below.
AMOUNT AND PURCHASE PRICE OF DEBENTURES: $
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Securities
Purchase Agreement to be duly executed on its behalf this ________ day of
___________________, 1999.
________________________________ ____________________________________
Address Printed Name of Subscriber
________________________________
By:_________________________________
________________________________ (Signature of Authorized Person)
Telecopier No.___________________ __________________________________
Printed Name and Title
_________________________________
Jurisdiction of Incorporation
or Organization
As of the date set forth below, the undersigned hereby accepts this
Agreement and represents that the foregoing statements are true and
correct and that it has caused this Securities Purchase Agreement to be
duly executed on its behalf.
AMERICAN CHAMPION ENTERTAINMENT, INC.
By: ____________________________
Anthony K. Chan
Title: President & CEO
Date: _______________________
(Form of Debenture)
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON
CONVERSION HEREOF HAVE BEEN REGISTERED WITH THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE OR UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. THE SECURITIES ARE RESTRICTED AND MAY NOT BE
OFFERED, RESOLD, PLEDGED OR TRANSFERRED EXCEPT AS PERMITTED
UNDER THE ACT PURSUANT TO REGISTRATION OR EXEMPTION OR SAFE
HARBOR THEREFROM.
NNo. US $
Holder Class:
AMERICAN CHAMPION ENTERTAINMENT, INC.
7% CONVERTIBLE DEBENTURE DUE JUNE 17, 2002
THIS DEBENTURE is one of a duly authorized issue of up to $1,750,000
in Debentures of AMERICAN CHAMPION ENTERTAINMENT, INC., a corporation
organized and existing under the laws of the State of Delaware (the
"Company") designated as its 7% Convertible Debentures. Such Debentures
may be issued in series, each of which may have a different maturity date,
but which otherwise have substantially similar terms.
FOR VALUE RECEIVED, the Company promises to pay to __________________________
the registered holder hereof (the "Holder"), the principal sum of ___________
and 00/100 Dollars (US $ ) on June 17, 2002 (the "Maturity Date")
and to pay interest on the principal sum outstanding from time to time in
arrears (i) semi- annually, on the last day of June and December of each year
prior to the Maturity Date, (ii) upon conversion as provided herein or (iii)
on the Maturity Date, at the rate of 7% per annum accruing from the date of
initial issuance of this Debenture. Accrual of interest shall commence on the
first such business day to occur after the date hereof and shall continue to
accrue on a daily basis until payment in full of the principal sum has been
made or duly provided for. Subject to the provisions of Section 4 below (the
terms of which shall govern as if this sentence were not included in this
Debenture), prior to the Maturity Date, interest on this Debenture is payable,
at the option of the Company, in shares of Common Stock of the Company, $.0001
par value ("Common Stock") at the Conversion Rate (as defined below) in effect
on the date of payment, or in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts, at the address last appearing on the Debenture Register of the
Company as designated in writing by the Holder from time to time.
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of Ten Thousand
Dollars (US$10,000) and integral multiples thereof. The Debentures are
exchangeable for an equal aggregate principal amount of Debentures of
different authorized denominations, as requested by the Holder
surrendering the same. No service charge will be made for such
registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax
laws or other applicable laws at the time of such payments, and Holder
shall execute and deliver all required documentation in connection
therewith.
3. This Debenture has been issued subject to investment
representations of the original purchaser hereof and may be transferred or
exchanged only in compliance with the Securities Act of 1933, as amended
(the "Act"), and other applicable state and foreign securities laws and
the terms of the Securities Purchase Agreement (defined below). In the
event of any proposed transfer of this Debenture, the Company may require,
prior to issuance of a new Debenture in the name of such other person,
that it receive reasonable transfer documentation including legal opinions
that the issuance of the Debenture in such other name does not and will
not cause a violation of the Act or any applicable state or foreign
securities laws. Prior to due presentment for transfer of this Debenture,
the Company and any agent of the Company may treat the person in whose
name this Debenture is duly registered on the Company's Debenture Register
as the owner hereof for the purpose of receiving payment as herein
provided and for all other purposes, whether or not this Debenture be
overdue, and neither the Company nor any such agent shall be affected by
notice to the contrary.
4. A. The Holder of this Debenture is entitled, at its option,
subject to the following provisions of this Section 4, to convert this
Debenture at any time into shares of Common Stock of the Company at a
conversion price for each share of Common Stock ("Conversion Rate") equal
to the lower of (i) seventy-seven and one-half percent (77.5%) of the
Market Price (as defined below) on the Conversion Date (as defined below)
or (ii) one hundred seventeen and one-half percent of the Market Price on
the Closing Date (as defined in the Securities Purchase Agreement).
B. Conversion shall be effectuated by faxing a Notice of
Conversion (as defined below) to the Company and the Company's transfer
agent, Continental Stock Transfer & Trust Company, 2 Broadway, New York,
NY 10004, telephone (212) 509-4000, facsimile (212) 509-5150, executed by
the Holder of this Debenture evidencing such Holder's intention to convert
this Debenture or a specified portion hereof in the form annexed hereto as
Exhibit A. Interest accrued or accruing from the date of issuance to the
date of conversion or to the date contemplated by clause (i) of the second
paragraph of this Debenture shall, at the option of the Holder, be paid in
cash or Common Stock at the Conversion Rate then applicable as of the
Conversion Date or the periodic interest payment date, as the case may be.
No fractional shares of Common Stock or scrip representing fractions of
shares will be issued on conversion, but the number of shares issuable
shall be rounded to the nearest whole share. The date on which notice of
conversion is given (the "Conversion Date") shall be deemed to be the date
on which the Holder faxes or otherwise delivers the conversion notice
("Notice of Conversion") to the Company so that it is received by the
Company on or before such specified date, provided that, if such
conversion would convert the entire remaining principal of this Debenture,
the Holder shall deliver to the Company the original Debentures being
converted no later than five (5) business days thereafter. Facsimile
delivery of the Notice of Conversion shall be accepted by the Company at
facsimile number (408) 288-8098; Attn: Anthony K. Chan, President.
Certificates representing Common Stock upon conversion will be delivered
to the Holder at the address specified in the Notice of Conversion (which
may be the Buyer's address for notices as contemplated by Section 11 of
the Securities Purchase Agreement or a different address), via express
courier, by electronic transfer or otherwise, within five (5) business
days if the address for delivery is in the United States and within seven
(7) business days if the address for delivery is outside the United States
(such fifth business day or seventh business day, as the case may be, the
"Delivery Date") after (i) the date on which the Notice of Conversion is
delivered to the Company as contemplated in this paragraph B or (ii) the
date an interest payment on this Debenture, which the Company has elected
to pay by the issuance of Common Stock, as contemplated herein, was due.
C. For purposes of this Debenture, the term "Market Price"
means (x) the average closing bid price of the Common Stock as reported by
Bloomberg, LP or the average closing bid price on the over-the-counter
market, (i) if a period of time of more than one day is specified in the
relevant provision of this Debenture, for such period, and (ii) if no
period of time is specified in the relevant provision of this Debenture,
then for the five (5) trading days ending on the trading day immediately
preceding the relevant date, or (y) if the Common Stock is listed on a
stock exchange, the lowest trade price on such exchange on the date
indicated in the relevant provision hereof, as reported in The Wall Street
Journal.
D. Any principal amount of this Debenture not previously
converted or redeemed as of the Maturity Date, shall be deemed to be
automatically converted, without further action of any kind (including,
but not necessarily limited to, the giving of a Notice of Conversion) by
the Holder, as of the Maturity Date at the Conversion Rate applicable on
the Maturity Date ("Mandatory Conversion").
E. Notwithstanding any other provision hereof, of the
Warrants or of any of the other Transaction Agreements (as those terms are
defined in the Securities Purchase Agreement), in no event (except (i)
with respect to an automatic conversion, if any, of a Debenture as
provided in the Debentures, (ii) as specifically provided in this
Debenture as an exception to this provision, or (iii) while there is
outstanding a tender offer for any or all of the shares of the Company's
Common Stock) shall the Holder be entitled to convert any Debenture, or
shall the Company have the obligation to convert all or any portion of
this Debenture (and the Company shall not have the right to pay interest
on this Debenture), to the extent that, after such conversion, the sum of
(1) the number of shares of Common Stock beneficially owned by the Holder
and its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of the
Debentures or unexercised portion of the Warrants), and (2) the number of
shares of Common Stock issuable upon the conversion of the Debentures with
respect to which the determination of this proviso is being made, would
result in beneficial ownership by the Holder and its affiliates of more
than 9.99% of the outstanding shares of Common Stock (after taking into
account the shares to be issued to the Holder upon such conversion). For
purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), except as
otherwise provided in clause (1) of such sentence. The Holder, by its
acceptance of this Debenture, further agrees that if the Holder transfers
or assigns any of the Debentures to a party who or which would not be
considered such an affiliate, such assignment shall be made subject to the
transferee's or assignee's specific agreement to be bound by the
provisions of this Section 4(E) as if such transferee or assignee were the
original Holder hereof. Nothing herein shall preclude the Holder from
disposing of a sufficient number of other shares of Common Stock
beneficially owned by the Holder so as to thereafter permit the continued
conversion of this Debenture.
5. A. Notwithstanding any other provision hereof to the
contrary, after the Closing Date, if the Market Price of the Common Stock
is below the Trading Price (as defined below) for a period of twenty (20)
consecutive trading days, then, for as long as the Market Price of the
Common Stock remains below the Trading Price, the Company shall have the
right to redeem all or any portion of this Debenture in cash for an amount
(the "Redemption Amount") equal to (a) one hundred twenty two and one-half
percent (122.5%) of such outstanding principal plus (b) all accrued but
unpaid interest thereon through the date the Redemption Amount is paid to
the Holder (the "Redemption Payment Date"). The term "Trading Price" means
a Market Price of the Common Stock of less than $1 (which amount is
subject to equitable adjustment as contemplated by Sections 9 through 11,
inclusive, hereof).
B. The Company shall give written notice of such redemption
to the Holder (the "Notice of Redemption"). Anything in the preceding
provisions of this Section 5 to the contrary notwithstanding, the
Redemption Amount shall, unless otherwise agreed to in writing by the
Holder after receiving the Notice of Redemption, be paid to the Holder in
good funds within three (3) business days from the date of the Notice of
Redemption. After receiving a Notice of Redemption, the Holder shall no
longer have the right to issue a Notice of Conversion without the consent
of the Issuer. If prior to receiving a Notice of Redemption, the Holder
had issued a Notice of Conversion, the Holder will have the right to
cancel such Notice of Conversion by written notice to the Company. If
such previously given Notice of Conversion is not so canceled, the Company
shall honor such Notice of Conversion and the Notice of Redemption shall
not apply to the principal portion of the Debenture thereby being
converted.
C. In the event payment of the Redemption Amount is not
timely made, any rights of the Company to redeem outstanding Debentures
shall terminate, and the Notice of Redemption shall be null and void.
D. Any redemption contemplated by this Debenture shall be
made only in cash by the payment of immediately available good funds to
the Holder.
6. The Holder recognizes that the Company may be limited in the
number of shares of Common Stock it may issue (a) by virtue of (i) the
number of authorized shares, or (ii) the applicable rules and regulations
of the principal securities market on which the Common Stock is listed or
traded, including, but not necessarily limited to, NASDAQ Rule
4310(c)(25)(H) (collectively, the "Cap Regulations") or (b) the provisions
of Section 4(j) of the Securities Purchase Agreement (collectively, with
the Cap Regulations, the "Issuance Limitations"). Without limiting the
other provisions hereof, (w) the Company will take all steps reasonably
necessary to be in a position to issue shares of Common Stock on
conversion of the Debentures without violating the Cap Regulations and (x)
if, despite taking such steps, the Company still can not issue such shares
of Common Stock without violating the Issuance Regulations, the Holder of
this Debenture (to the extent the same can not be converted in compliance
with the Issuance Regulations (an "Unconverted Debenture"), shall have the
right to require the Company to redeem each Unconverted Debenture for an
amount (the "Cap Redemption Amount"), payable in cash, equal to (y) one
hundred thirty percent (130%) of the principal of the Unconverted
Debenture, plus (z) all accrued but unpaid interest on the Debenture
through the date of redemption (the "Cap Redemption Date") specified in
the notice from the Holder electing this remedy.
7. Subject to the terms of the Securities Purchase Agreement,
dated June 17 , 1999 (the "Securities Purchase Agreement"), between
the Company and the Holder (or the Holder's predecessor in interest), no
provision of this Debenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of, and
interest on, this Debenture at the time, place, and rate, and in the coin
or currency, herein prescribed. This Debenture and all other Debentures
now or hereafter issued of similar terms are direct obligations of the
Company.
8. A. The obligations of the Company under this Debenture are
secured under the terms of the Securities Purchase Agreement.
B. No recourse shall be had for the payment of the
principal of, or the interest on, this Debenture, or for any claim based
hereon, or otherwise in respect hereof, against any incorporator,
shareholder, officer or director, as such, past, present or future, of the
Company or any successor corporation, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the
acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
9. The Company agrees that for as long as this Debenture remains
outstanding, the Company will not, without the consent of the Holder,
enter into a merger (other than where the Company is the surviving entity)
or consolidation with another corporation or other entity or a sale or
transfer of all or substantially all of the assets of the Company to
another person (collectively, a "Sale"). If, with such consent, the
Company enters into a Sale and the holders of the Common Stock are
entitled to receive stock, securities or property in respect of or in
exchange for Common Stock, then as a condition of such Sale, the Company
and any such successor, purchaser or transferee will agree that the
Debenture may thereafter be converted on the terms and subject to the
conditions set forth above into the kind and amount of stock, securities
or property receivable upon such merger, consolidation, sale or transfer
by a holder of the number of shares of Common Stock into which this
Debenture might have been converted immediately before such merger,
consolidation, sale or transfer, subject to adjustments which shall be as
nearly equivalent as may be practicable. In the event of any such
proposed Sale, (i) the Holder hereof shall have the right to convert by
delivering a Notice of Conversion to the Company within fifteen (15) days
of receipt of notice of such Sale from the Company, but (ii) in the event
the Holder hereof shall elect not to convert, the Company may prepay all
outstanding principal and accrued interest on this Debenture by paying the
Redemption Amount contemplated by Section 5 hereof, less all amounts
required by law to be deducted, upon which tender of payment following
such notice (which payment shall be made in the manner contemplated by
Section 5 hereof), the right of conversion shall terminate.
10. The Company agrees that for as long as this Debenture
remains outstanding, the Company will not, without the consent of the
Holder, spin off or otherwise divest itself of a part of its business or
operations or dispose all or of a part of its assets in a transaction (the
"Spin Off") in which the Company does not receive compensation for such
business, operations or assets, but causes securities of another entity
(the "Spin Off Securities") to be issued to security holders of the
Company. If, for any reason, prior to the Conversion Date or the
Redemption Payment Date, the Company, with the consent of the Holder,
consummates a Spin Off, then the Company shall cause (i) to be reserved
Spin Off Securities equal to the number thereof which would have been
issued to the Holder had all of the Holder's Debentures outstanding on the
record date (the "Record Date") for determining the amount and number of
Spin Off Securities to be issued to security holders of the Company (the
"Outstanding Debentures") been converted as of the close of business on
the trading day immediately before the Record Date (the "Reserved Spin Off
Shares"), and (ii) to be issued to the Holder on the conversion of all or
any of the Outstanding Debentures, such amount of the Reserved Spin Off
Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a
fraction, of which (I) the numerator is the principal amount of the
Outstanding Debentures then being converted, and (II) the denominator is
the principal amount of the Outstanding Debentures.
11. If, at any time while any portion of this Debenture remains
outstanding, the Company effectuates a stock split or reverse stock split
of its Common Stock or issues a dividend on its Common Stock consisting of
shares of Common Stock, the Market Price as of the Closing Date shall be
equitably adjusted to reflect such action. By way of illustration, and
not in limitation, of the foregoing (i) if the Company effectuates a 2:1
split of its Common Stock, thereafter, with respect to any conversion for
which the Company issues the shares after the record date of such split,
the Market Price as of the Closing Date shall be deemed to be one-half of
what it had been calculated to be immediately prior to such split; (ii) if
the Company effectuates a 1:10 reverse split of its Common Stock,
thereafter, with respect to any conversion for which the Company issues
the shares after the record date of such reverse split, the Market Price
as of the Closing Date shall be deemed to be ten times what it had been
calculated to be immediately prior to such split; and (iii) if the Company
declares a stock dividend of one share of Common Stock for every 10 shares
outstanding, thereafter, with respect to any conversion for which the
Company issues the shares after the record date of such dividend, the
Market Price as of the Closing Date shall be deemed to be the amount of
such Market Price calculated immediately prior to such record date
multiplied by a fraction, of which the numerator is the number of shares
(10) for which a dividend share will be issued and the denominator is such
number of shares plus the dividend share(s) issuable or issued thereon
(11).
12. The Holder of the Debenture, by acceptance hereof, agrees that
this Debenture is being acquired for investment and that such Holder will
not offer, sell or otherwise dispose of this Debenture or the Shares of
Common Stock issuable upon conversion thereof except under circumstances
which will not result in a violation of the Act or any applicable state
Blue Sky or foreign laws or similar laws relating to the sale of
securities.
13. This Debenture shall be governed by and construed in
accordance with the laws of the State of Delaware. Each of the parties
consents to the jurisdiction of the federal courts whose districts
encompass any part of the City of Wilmington or the state courts of the
State of Delaware sitting in the City of Wilmington in connection with any
dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on
forum non coveniens, to the bringing of any such proceeding in such
jurisdictions. To the extent determined by such court, the Company shall
reimburse the Holder for any reasonable legal fees and disbursements
incurred by the Holder in enforcement of or protection of any of its
rights under any of this Debenture.
14. The following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal or
interest on this Debenture and same shall continue for
a period of five (5) business days; or
b. Any of the representations or warranties made by the
Company herein, in the Securities Purchase Agreement,
the Registration Rights Agreement (as defined in the
Securities Purchase Agreement) or in any certificate or
financial or other written statements heretofore or
hereafter furnished by the Company in connection with
the execution and delivery of this Debenture or the
Securities Purchase Agreement shall be false or
misleading in any material respect at the time made; or
c: Subject to the terms of the Securities Purchase
Agreement, the Company fails to authorize or to cause
its Transfer Agent to issue shares of Common Stock upon
exercise by the Holder of the conversion rights of the
Holder in accordance with the terms of this Debenture,
fails to transfer or to cause its Transfer Agent to
transfer any certificate for shares of Common Stock
issued to the Holder upon conversion of this Debenture
and when required by this Debenture or the Registration
Rights Agreement, and such transfer is otherwise lawful,
or fails to remove any restrictive legend on any
certificate or fails to cause its Transfer Agent to
remove such restricted legend, in each case where such
removal is lawful, as and when required by this
Debenture, the Agreement or the Registration Rights
Agreement, and any such failure shall continue uncured
for five (5) business days; or
d. The Company shall fail to perform or observe, in any
material respect, any other covenant, term, provision,
condition, agreement or obligation of any Debenture in
this series and such failure shall continue uncured for
a period of thirty (30) days after written notice from
the Holder of such failure; or
e. The Company shall fail to perform or observe, in any
material respect, any covenant, term, provision,
condition, agreement or obligation of the Company under
the Securities Purchase Agreement or the Registration
Rights Agreement and such failure shall continue
uncured for a period of thirty (30) days after written
notice from the Holder of such failure (other than a
failure to cause the Registration Statement to become
effective no later than the Required Effective Date, as
defined and provided in the Registration Rights
Agreement, as to which no such cure period shall apply);
or
f. The Company shall (1) admit in writing its inability to
pay its debts generally as they mature; (2) make an
assignment for the benefit of creditors or commence
proceedings for its dissolution; or (3) apply for or
consent to the appointment of a trustee, liquidator or
receiver for its or for a substantial part of its
property or business; or
g. A trustee, liquidator or receiver shall be appointed for
the Company or for a substantial part of its property or
business without its consent and shall not be discharged
within sixty (60) days after such appointment; or
h. Any governmental agency or any court of competent
jurisdiction at the instance of any governmental agency
shall assume custody or control of the whole or any
substantial portion of the properties or assets of the
Company and shall not be dismissed within sixty (60)
days thereafter; or
i. Any money judgment, writ or warrant of attachment, or
similar process in excess of Two Hundred Thousand
($200,000) Dollars in the aggregate shall be entered or
filed against the Company or any of its properties or
other assets and shall remain unpaid, unvacated,
unbonded or unstayed for a period of sixty (60) days or
in any event later than five (5) days prior to the date
of any proposed sale thereunder; or
j. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors
shall be instituted by or against the Company and, if
instituted against the Company, shall not be dismissed
within sixty (60) days after such institution or the
Company shall by any action or answer approve of,
consent to, or acquiesce in any such proceedings or
admit the material allegations of, or default in
answering a petition filed in any such proceeding; or
k. The Company shall have its Common Stock suspended or
delisted from an exchange or over-the-counter market
from trading for in excess of ten (10) trading days.
Then, or at any time thereafter, and in each and every such case, unless
such Event of Default shall have been waived in writing by the Holder
(which waiver shall not be deemed to be a waiver of any subsequent
default) at the option of the Holder and in the Holder's sole discretion,
the Holder may consider this Debenture immediately due and payable,
without presentment, demand, protest or notice of any kinds, all of which
are hereby expressly waived, anything herein or in any note or other
instruments contained to the contrary notwithstanding, and the Holder may
immediately enforce any and all of the Holder's rights and remedies
provided herein or any other rights or remedies afforded by law.
15. Nothing contained in this Debenture shall be construed as
conferring upon the Holder the right to vote or to receive dividends or to
consent or receive notice as a shareholder in respect of any meeting of
shareholders or any rights whatsoever as a shareholder of the Company,
unless and to the extent converted in accordance with the terms hereof.
16. In the event for any reason, any payment by or act of the
Company or the Holder shall result in payment of interest which would
exceed the limit authorized by or be in violation of the law of the
jurisdiction applicable to this Debenture, then ipso facto the obligation
of the Company to pay interest or perform such act or requirement shall be
reduced to the limit authorized under such law, so that in no event shall
the Company be obligated to pay any such interest, perform any such act or
be bound by any requirement which would result in the payment of interest
in excess of the limit so authorized. In the event any payment by or act
of the Company shall result in the extraction of a rate of interest in
excess of a sum which is lawfully collectible as interest, then such
amount (to the extent of such excess not returned to the Company) shall,
without further agreement or notice between or by the Company or the
Holder, be deemed applied to the payment of principal, if any, hereunder
immediately upon receipt of such excess funds by the Holder, with the same
force and effect as though the Company had specifically designated such
sums to be so applied to principal and the Holder had agreed to accept
such sums as an interest-free prepayment of this Debenture. If any part
of such excess remains after the principal has been paid in full, whether
by the provisions of the preceding sentences of this Section 16 or
otherwise, such excess shall be deemed to be an interest-free loan from
the Company to the Holder, which loan shall be payable immediately upon
demand by the Company. The provisions of this Section 16 shall control
every other provision of this Debenture.
IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed by an officer thereunto duly authorized.
Dated: , 1999
AMERICAN CHAMPION ENTERTAINMENT, INC.
By:__________________________________
Anthony K. Chan
(Print Name)
President & CEO
(Title)
June Debentures Investors / September Debentures Investors/
Investment Amounts Investment Amounts
Olympia Partners, LLC The Endeavour Capital Fund S.A.
$450,000 $250,000
LCBS, Inc. Amro International S.A.
$250,000 $250,000
The Endeavour Capital Fund S.A. Esquire Trade and Finance
$400,000 $250,000
Amro International S.A. Austinvest Anstalt Balzers
$250,000 $250,000
David Avidon
$50,000
Steven A. Chananya
$65,000
Justyn Feldman
$25,000
David Mugrabi
$25,000
David Reimer
$25,000
Peter T. Roselle
$50,000
Eva Rosen
$80,000
Scott Rosen
$80,000
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of
, 1999 (this "Agreement"), is made by and between AMERICAN CHAMPION
ENTERTAINMENT, INC., a Delaware corporation (the "Company"), and each
entity named on a signature page hereto (each, an "Initial Investor")
(each agreement with an Initial Investor being deemed a separate and
independent agreement between the Company and such Initial Investor,
except that each Initial Investor acknowledges and consents to the rights
granted to each other Initial Investor under such agreement).
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions of the
Securities Purchase Agreement, dated as of June , 1999, between the
Initial Investor and the Company (the "Securities Purchase Agreement";
terms not otherwise defined herein shall have the meanings ascribed to
them in the Securities Purchase Agreement), the Company has agreed to
issue and sell to the Initial Investor one or more 7% Convertible
Debentures of the Company, in an aggregate principal amount not exceeding
$1,750,000 (the "Debentures"), together with the Warrants issued to the
Initial Investors; and
WHEREAS, the Debentures are convertible into shares of Common
Stock (the "Conversion Shares") upon the terms and subject to the
conditions contained in the Debentures and the Warrants may be exercised
for the purchase of shares of Common Stock (the "Warrant Shares") upon the
terms and conditions of the Warrants; and
WHEREAS, to induce the Initial Investor to execute and deliver
the Securities Purchase Agreement, the Company has agreed to provide
certain registration rights under the Securities Act of 1933, as amended,
and the rules and regulations thereunder, or any similar successor statute
(collectively, the "Securities Act"), with respect to the Conversion
Shares and the Warrant Shares;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and the Initial Investor hereby agree as
follows:
1. Definitions; Application.
As used in this Agreement, the following terms shall have the
following meanings:
(a) "Investor" means the Initial Investor and any permitted
transferee or assignee who agrees to become bound by the provisions of
this Agreement in accordance with Section 9 hereof.
(b) "Potential Material Event" means any of the following:
(i) the possession by the Company of material information not ripe for
disclosure in a registration statement, which shall be evidenced by
determinations in good faith by the Board of Directors of the Company that
disclosure of such information in the registration statement would be
detrimental to the business and affairs of the Company; or (ii) any
material engagement or activity by the Company which would, in the good
faith determination of the Board of Directors of the Company, be adversely
affected by disclosure in a registration statement at such time, which
determination shall be accompanied by a good faith determination by the
Board of Directors of the Company that the registration statement would be
materially misleading absent the inclusion of such information.
(c) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415
under the Securities Act or any successor rule providing for offering
securities on a continuous basis ("Rule 415"), and the declaration or
ordering of effectiveness of such Registration Statement by the United
States Securities and Exchange Commission (the "SEC").
(d) "Registrable Securities" means the Conversion Shares and
the Warrant Shares and any shares which might be issued to the Investor in
lieu of interest through the maturity date of the Debentures.
(e) "Registration Statement" means a registration statement
of the Company under the Securities Act covering the Registrable
Securities..
2. Registration.
(a) Mandatory Registration.
(i) The Company shall prepare and file with the SEC, no
later than thirty (30) days after the Closing Date (the "Required Filing
Date") either a Registration Statement on Form S-3 or an amendment to an
existing Registration Statement, in either event registering for resale by
the Investor a sufficient number of shares of Common Stock for the Initial
Investors to sell the Registrable Securities (or such lesser number as may
be required by the SEC, but in no event less than the aggregate number of
shares equal to (x) two hundred percent (200%) of (I) the aggregate
number of shares into which the Debentures would be convertible at the
time of filing of such Registration Statement (assuming for such purposes
that all Debentures had been eligible to be converted, and had been
converted, into Conversion Shares in accordance with their terms, whether
or not such eligibility or conversion had in fact occurred as of such
date) and (II) the aggregate number of shares which the Company might
issue in lieu of interest on the Debentures through the maturity date of
the Debentures (assuming for such purposes that all interest accrued on
the full principal amount of the Debentures through such maturity date and
had then been converted into shares of Common Stock in accordance with the
terms of the Debentures, whether or not such accrual or conversion had in
fact occurred as of such date) and (y) which would be issued upon exercise
of all of the Warrants at the time of filing of the amendment to Form S-3
(assuming for such purposes that all Warrants had been eligible to be
exercised for the maximum number of shares contemplated thereby and had
been exercised in accordance with their terms, whether or not such
eligibility or exercise had in fact occurred as of such date). The
Registration Statement (i) shall include only the Registrable Securities
and the shares referred to in Exhibit 1 annexed hereto and (ii) shall also
state that, in accordance with Rules 416 and 457 under the Securities Act,
it also covers such indeterminate number of additional shares of Common
Stock as may become issuable upon conversion of the Debentures and the
exercise of the Warrants to prevent dilution resulting from stock splits,
or stock dividends. The Company will use its reasonable best efforts to
cause such Registration Statement to be declared effective on a date (a
"Required Effective Date") which is no later than the earlier of (x) five
(5) days after notice by the SEC that it may be declared effective or (y)
ninety (90) days after the Closing Date.
(ii) If at any time (an "Increased Registered Shares
Date"), the number of shares of Common Stock into which the Debentures may
be converted and which would be issued upon exercise of the Warrants
exceeds the aggregate number of shares of Common Stock then registered,
the Company shall either (x) amend the Registration Statement filed by the
Company pursuant to the preceding provisions of this Section 2, if such
Registration Statement has not been declared effective by the SEC at that
time, to register two hundred percent (200%) of all shares of Common Stock
into which the Debentures may currently or in the future be converted and
which would be issued currently or in the future upon exercise of the
Warrants, or (y) if such Registration Statement has been declared
effective by the SEC at that time, file with the SEC an additional
Registration Statement on Form S-3 (an "Additional Registration
Statement") or other available form to register two hundred percent (200%)
of the shares of Common Stock into which the Debentures may currently or
in the future be converted and which would be issued currently or in the
future upon exercise of the Warrants that exceed the aggregate number of
shares of Common Stock already registered. The Company will use its
reasonable best efforts to cause such Registration Statement to be
declared effective on a date (a "Required Effective Date") which is no
later than (q) with respect to a Registration Statement under clause (x)
of this subparagraph (ii), the Required Effective Date contemplated by the
immediately preceding subparagraph (i) and (r) with respect to an
Additional Registration Statement, the earlier of (I) five (5) days after
notice by the SEC that it may be declared effective or (II) forty-five
(45) days after the Increased Registered Shares Date.
(b) Payments by the Company.
(i) If the Registration Statement covering the
Registrable Securities is not filed in proper form with the SEC no later
than the Required Filing Date, the Company will make payment to the
Initial Investor in such amounts and at such times as shall be determined
pursuant to this Section 2(b).
(ii) If the Registration Statement covering the
Registrable Securities is not effective by the relevant Required Effective
Date or if the Investor is restricted from making sales of Registrable
Securities covered by a previously effective Registration Statement at any
time after the Effective Date other than (x) during a Suspension Period
(as defined below) or (y) due to "blue sky" requirements, except that this
clause (y) shall not apply if the Initial Investor gives the Company
written notice requesting the Company to make appropriate "blue sky"
filings to qualify or register the offering or to confirm the availability
of an exemption from qualification or registration in one or more specific
jurisdictions (the date such restriction commences, a "Restricted Sale
Date"), then the Company will make payments to the Initial Investor in
such amounts and at such times as shall be determined pursuant to this
Section 2(b).
(iii) The amount (the "Periodic Amount") to be paid by
the Company to the Initial Investor shall be determined as of each
Computation Date (as defined below) and such amount shall be equal to (A)
the Periodic Amount Percentage (as defined below)of the purchase price
paid by the Initial Investor (the "Purchase Price") for all Debentures
purchased pursuant to the Securities Purchase Agreement for the period
from the date following the Required Filing Date or the Required
Effective Date, as the case may be, to the first relevant Computation
Date, and (B) the Periodic Amount Percentage of the Purchase Price to each
Computation Date thereafter. The "Periodic Amount Percentage" means, (x)
with respect to payments due as contemplated by Section 2(b)(i) hereof,
two percent (2.0%), pro rated daily, and (y) with respect to payments due
as contemplated by Section 2(b)(ii) hereof, two percent (2.0%), pro rated
daily. After the Effective Date, the Purchase Price shall be deemed to
refer to the sum of (q) the principal amount of all Debentures not yet
converted and (r) the Held Shares Value (as defined below). The "Held
Shares Value" means, for shares acquired by the Investor upon a conversion
within the thirty (30) days preceding the Restricted Sale Date, but not
yet sold by the Investor, the principal amount of the Debentures converted
into such Conversion Shares; provided, however, that if the Investor
effected more than one conversion during such thirty (30) day period and
sold less than all of such shares, the sold shares shall be deemed to be
derived first from the conversions in the sequence of such conversions
(that is, for example, until the number of shares from the first of such
conversions have been sold, all shares shall be deemed to be from the
first conversion; thereafter, from the second conversion until all such
shares are sold). By way of illustration and not in limitation of the
foregoing, if the Registration Statement is timely filed but is not
declared effective until one hundred sixty-five (165) days after the
Closing Date, the Periodic Amount will aggregate five percent (5.0%) of
the Purchase Price of the Debentures (2.0% for days 91-120, plus 2.0% for
days 121-150 and 1.0% for days 151-165).
(iv) Each Periodic Amount will be payable by the
Company in cash or other immediately available funds to the Investor on
the day after the Required Filing Date or the Required Effective Date, as
the case may be, and on the earlier of each thirtieth day thereafter or
the third business day after the date the Registration Statement is filed
or is declared effective or has its restrictions removed Effective Date,
as the case may be, without requiring demand therefor by the Investor.
(v) The parties acknowledge that the damages which may
be incurred by the Investor if the Registration Statement is not filed by
the Required Filing Date or if the Registration Statement has not been
declared effective by the Required Effective Date may be difficult to
ascertain. The parties agree that the Periodic Amount represent a
reasonable estimate on the part of the parties, as of the date of this
Agreement, of the amount of such damages.
(vi) Notwithstanding the foregoing, the amounts payable
by the Company pursuant to this provision shall not be payable to the
extent any delay in the effectiveness of the Registration Statement occurs
because of an act of, or a failure to act or to act timely by the Initial
Investor or its counsel, or in the event all of the Registrable Securities
may be sold pursuant to Rule 144 or another available exemption under the
Act.
(vii) "Computation Date" means (i) the date which is the
earlier of (A) thirty (30) days after the Required Filing Date, any
relevant Required Effective Date or a Restricted Sale Date, as the case
may be, or (B) the date after the Required Filing Date, such Required
Effective Date or Restricted Sale Date on which the Registration Statement
is filed (with respect to payments due as contemplated by Section 2(b)(i)
hereof) or is declared effective or has its restrictions removed (with
respect to payments due as contemplated by Section 2(b)(ii) hereof), as
the case may be, and (ii) each date which is the earlier of (A) thirty
(30) days after the previous Computation Date or (B) the date after the
previous Computation Date on which the Registration Statement is filed
(with respect to payments due as contemplated by Section 2(b)(i) hereof)
or is declared effective or has its restrictions removed (with respect to
payments due as contemplated by Section 2(b)(ii) hereof), as the case may
be.
3. Obligations of the Company. In connection with the
registration of the Registrable Securities, the Company shall do each of
the following:
(a) Prepare promptly, and file with the SEC by the Required
Filing Date, a Registration Statement with respect to not less than the
number of Registrable Securities provided in Section 2(a) above, and
thereafter use its reasonable best efforts to cause such Registration
Statement relating to Registrable Securities to become effective by the
Required Effective Date and keep the Registration Statement effective at
all times until the earliest (the "Registration Period") of (i) the date
that is three (3) years after the Initial Closing Date, (ii) the date
when the Investors may sell all Registrable Securities under Rule 144
without volume or other restrictions or limits or (iii) the date the
Investors no longer own any of the Registrable Securities, which
Registration Statement (including any amendments or supplements thereto
and prospectuses contained therein) shall 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 in which they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement
and the prospectus used in connection with the Registration Statement as
may be necessary to keep the Registration Statement effective at all times
during the Registration Period, and, during the Registration Period,
comply with the provisions of the Securities Act with respect to the
disposition of all Registrable Securities of the Company covered by the
Registration Statement until such time as all of such Registrable
Securities have been disposed of in accordance with the intended methods
of disposition by the seller or sellers thereof as set forth in the
Registration Statement;
(c) The Company shall permit a single firm of counsel
designated by the Initial Investors to review the Registration Statement
and all amendments and supplements thereto a reasonable period of time
(but not less than three (3) business days) prior to their filing with the
SEC, and not file any document in a form to which such counsel reasonably
objects;
(d) Furnish to each Investor whose Registrable Securities are
included in the Registration Statement and its legal counsel identified to
the Company, (i) promptly after the same is prepared and publicly
distributed, filed with the SEC, or received by the Company, one (1) copy
of the Registration Statement, each preliminary prospectus and prospectus,
and each amendment or supplement thereto, and (ii) such number of copies
of a prospectus, and all amendments and supplements thereto and such other
documents, as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;
(e) As promptly as practicable after becoming aware thereof,
notify each Investor of the happening of any event of which the Company
has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of
a material fact or omits 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, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement or other appropriate filing with the SEC to correct such untrue
statement or omission, and deliver a number of copies of such supplement
or amendment to each Investor as such Investor may reasonably request;
(f) As promptly as practicable after becoming aware thereof,
notify each Investor who holds Registrable Securities being sold (or, in
the event of an underwritten offering, the managing underwriters) of the
issuance by the SEC of a Notice of Effectiveness or any notice of
effectiveness or any stop order or other suspension of the effectiveness
of the Registration Statement at the earliest possible time;
(g) Notwithstanding the foregoing, if at any time or from
time to time after the date of effectiveness of the Registration
Statement, the Company notifies the Investors in writing of the existence
of a Potential Material Event, the Investors shall not offer or sell any
Registrable Securities, or engage in any other transaction involving or
relating to the Registrable Securities, from the time of the giving of
notice with respect to a Potential Material Event until such Investor
receives written notice from the Company that such Potential Material
Event either has been disclosed to the public or no longer constitutes a
Potential Material Event; provided, however, that the Company may not so
suspend the right to such holders of Registrable Securities for more than
two twenty (20) day periods in the aggregate during any 12-month period
("Suspension Period") with at least a ten (10) business day interval
between such periods, during the periods the Registration Statement is
required to be in effect, and, provided further that the Company shall, if
lawful to do so, provide the Investor with at least two (2) business days'
notice of the existence (but not the substance of0 a Potential Material
Event;
(h) Use its reasonable efforts to secure and maintain
designation of all the Registrable Securities covered by the Registration
Statement on the "Small Capitalization Market" of the National Association
of Securities Dealers Automated Quotations System ("NASDAQ") within the
meaning of Rule 11Aa2-1 of the SEC under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the quotation of the
Registrable Securities on The NASDAQ SmallCap Market; or if, despite the
Company's reasonable efforts to satisfy the preceding clause, the Company
is unsuccessful in doing so, to secure NASDAQ/OTC Bulletin Board
authorization and quotation for such Registrable Securities and, without
limiting the generality of the foregoing, to arrange for at least two
market makers to register with the National Association of Securities
Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities;
(i) Provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective
date of the Registration Statement;
(j) Cooperate with the Investors who hold Registrable
Securities being offered to facilitate the timely preparation and delivery
of certificates for the Registrable Securities to be offered pursuant to
the Registration Statement and enable such certificates for the
Registrable Securities to be in such denominations or amounts as the case
may be, as the Investors may reasonably request, and, within three (3)
business days after a Registration Statement which includes Registrable
Securities is ordered effective by the SEC, the Company shall deliver, and
shall cause legal counsel selected by the Company to deliver, to the
transfer agent for the Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) an appropriate instruction and opinion of such counsel; and
(k) Take all other reasonable actions necessary to expedite
and facilitate disposition by the Investor of the Registrable Securities
pursuant to the Registration Statement.
4. Obligations of the Investors. In connection with the
registration of the Registrable Securities, the Investors shall have the
following obligations:
(a) It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with
respect to the Registrable Securities of a particular Investor that such
Investor shall furnish to the Company such information regarding itself,
the Registrable Securities held by it, and the intended method of
disposition of the Registrable Securities held by it, as shall be
reasonably required to effect the registration of such Registrable
Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least ten (10)
days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify each Investor of the information the
Company requires from each such Investor (the "Requested Information") if
such Investor elects to have any of such Investor's Registrable Securities
included in the Registration Statement. If at least five (5) business
days prior to the filing date the Company has not received the Requested
Information from an Investor (a "Non-Responsive Investor"), then the
Company may file the Registration Statement without including Registrable
Securities of such Non-Responsive Investor;
(b) Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of
the Registration Statement hereunder, unless such Investor has notified
the Company in writing of such Investor's election to exclude all of such
Investor's Registrable Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice
from the Company of the happening of any event of the kind described in
Section 3(e) or 3(f), above, such Investor will immediately discontinue
disposition of Registrable Securities pursuant to the Registration
Statement covering such Registrable Securities until such Investor's
receipt of the copies of the supplemented or amended prospectus
contemplated by Section 3(e) or 3(f) and, if so directed by the Company,
such Investor shall deliver to the Company (at the expense of the Company)
or destroy (and deliver to the Company a certificate of destruction) all
copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
(d) Each Investor agrees to comply with the provisions of
Section 3(g) above.
5. Expenses of Registration. All reasonable expenses
(other than underwriting discounts and commissions of the Investor)
incurred in connection with registrations, filings or qualifications
pursuant to Section 3, but including, without limitation, all
registration, listing, and qualifications fees, printers and accounting
fees, the fees and disbursements of counsel for the Company and a fee for
a single counsel for the Investor not exceeding $3,500, shall be borne by
the Company.
6. Indemnification. In the event any Registrable
Securities are included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Investor who holds such Registrable
Securities, the directors, if any, of such Investor, the officers, if any,
of such Investor, each person, if any, who controls any Investor within
the meaning of the Securities Act or the Exchange Act (each, an
"Indemnified Person" or "Indemnified Party"), against any losses, claims,
damages, liabilities or expenses (joint or several) incurred
(collectively, "Claims") to which any of them may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations in the Registration Statement, or any post-
effective amendment thereof, or any prospectus included therein: (i) any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any post-effective amendment thereof or
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, (ii) any untrue statement or alleged untrue statement of a
material fact contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein
any material fact necessary to make the statements made therein, in light
of the circumstances under which the statements therein were made, not
misleading or (iii) any violation or alleged violation by the Company of
the Securities Act, the Exchange Act, any state securities law or any rule
or regulation under the Securities Act, the Exchange Act or any state
securities law (the matters in the foregoing clauses (i) through (iii)
being, collectively, "Violations"). Subject to clause (b) of this Section
6, the Company shall reimburse the Investors, promptly as such expenses
are incurred and are due and payable, for any legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary
contained herein, the indemnification agreement contained in this Section
6(a) shall not (I) apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Indemnified
Person expressly for use in connection with the preparation of the
Registration Statement or any such amendment thereof or supplement
thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; (II) be available to the extent such
Claim is based on a failure of the Investor to deliver or cause to be
delivered the prospectus or the amendment or supplement thereto made
available by the Company; (III) be available to the extent such Claim is
based on the delivery of a prospectus by the Investor after receiving
notice from the Company under Section 3(e), (f) or (g) hereof (other than
a notice regarding the effectiveness of the Registration Statement or any
amendment or supplement thereto), or (IV) apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior
written consent of the Company, which consent shall not be unreasonably
withheld or delayed. Each Investor will indemnify the Company and its
officers, directors and agents (each, an "Indemnified Person" or
"Indemnified Party") against any claims arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company, by or on behalf of such Investor,
expressly for use in connection with the preparation of the Registration
Statement or any amendment or supplement thereto, subject to such
limitations and conditions as are applicable to the Indemnification
provided by the Company to this Section 6. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf
of the Indemnified Person and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9.
(b) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of
any action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made
against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume control of the defense
thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be. In
case any such action is brought against any Indemnified Person or
Indemnified Party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly with any
other indemnifying party similarly notified, assume the defense thereof,
subject to the provisions herein stated and after notice from the
indemnifying party to such Indemnified Person or Indemnified Party of its
election so to assume the defense thereof, the indemnifying party will not
be liable to such Indemnified Person or Indemnified Party under this
Section 6 for any legal or other reasonable out-of-pocket expenses
subsequently incurred by such Indemnified Person or Indemnified Party in
connection with the defense thereof other than reasonable costs of
investigation, unless the indemnifying party shall not pursue the action
to its final conclusion. The Indemnified Person or Indemnified Party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and reasonable out-of-
pocket expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of
the action with counsel reasonably satisfactory to the Indemnified Person
or Indemnified Party provided such counsel is of the opinion that all
defenses available to the Indemnified Party can be maintained without
prejudicing the rights of the indemnifying party. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party
of any liability to the Indemnified Person or Indemnified Party under this
Section 6, except to the extent that the indemnifying party is prejudiced
in its ability to defend such action. The indemnification required by
this Section 6 shall be made by periodic payments of the amount thereof
during the course of the investigation or defense, as such expense, loss,
damage or liability is incurred and is due and payable.
7. Contribution. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for
which it would otherwise be liable under Section 6 to the fullest extent
permitted by law; provided, however, that (a) no contribution shall be
made under circumstances where the maker would not have been liable for
indemnification under the fault standards set forth in Section 6; (b) no
seller of Registrable Securities guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any seller of Registrable Securities who was
not guilty of such fraudulent misrepresentation; and (c) except where the
seller has committed fraud (other than a fraud by reason of the
information included or omitted from the Registration Statement as to
which the Company has not given notice as contemplated under Section 3
hereof) or intentional misconduct, contribution by any seller of
Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable
Securities.
8. Reports under Exchange Act. With a view to making
available to the Investors the benefits of Rule 144 promulgated under the
Securities Act or any other similar rule or regulation of the SEC that may
at any time permit the Investors to sell securities of the Company to the
public without registration ("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(c) furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by
the Company that it has complied with the reporting requirements of Rule
144, the Securities Act and the Exchange Act, (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports
and documents so filed by the Company and (iii) such other information as
may be reasonably requested to permit the Investors to sell such
securities pursuant to Rule 144 without registration.
9. Assignment of the Registration Rights. The rights to
have the Company register Registrable Securities pursuant to this
Agreement shall be automatically assigned by the Investors to any
transferee of the Registrable Securities (or all or any portion of any
Debenture of the Company which is convertible into such securities) only
if: (a) the Investor agrees in writing with the transferee or assignee to
assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such assignment, (b) the Company
is, within a reasonable time after such transfer or assignment, furnished
with written notice of (i) the name and address of such transferee or
assignee and (ii) the securities with respect to which such registration
rights are being transferred or assigned, (c) immediately following such
transfer or assignment the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act and
applicable state securities laws, (d) at or before the time the Company
received the written notice contemplated by clause (b) of this sentence
the transferee or assignee agrees in writing with the Company to be bound
by all of the provisions contained herein, and (e) the transferee, at the
time of the transfer, held not less than either (i) $100,000 in principal
amount of the Debentures or such number of Registrable Securities issued
on conversion of such amount of Debentures or any combination thereof or
(ii) Warrants to purchase 2,750 Warrant Shares or such number of Warrant
Shares or any combination thereof. In the event of any delay in filing or
effectiveness of the Registration Statement as a result of such
assignment, the Company shall not be liable for any damages or the
payments set forth in Section 2(b)(ii) hereof arising from such delay.
10. Amendment of Registration Rights. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors
who hold an eighty (80%) percent interest of the Registrable Securities.
Any amendment or waiver effected in accordance with this Section 10 shall
be binding upon each Investor and the Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of
Registrable Securities whenever such person or entity owns of record such
Registrable Securities. If the Company receives conflicting instructions,
notices or elections from two or more persons or entities with respect to
the same Registrable Securities, the Company shall act upon the basis of
instructions, notice or election received from the registered owner of
such Registrable Securities and shall be indemnified and held harmless by
such registered owner for doing so.
(b) Notices required or permitted to be given hereunder
shall be given in the manner contemplated by the Agreement, (i) if to the
Company or to the Initial Investor, to their respective address
contemplated by the Agreement, and (iii) if to any other Investor, at such
address as such Investor shall have provided in writing to the Company, or
at such other address as each such party furnishes by notice given in
accordance with this Section 11(b).
(c) Failure of any party to exercise any right or remedy
under this Agreement or otherwise, or delay by a party in exercising such
right or remedy, shall not operate as a waiver thereof.
(d) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Delaware for contracts to be
wholly performed in such state and without giving effect to the principles
thereof regarding the conflict of laws. Each of the parties consents to
the jurisdiction of the federal courts whose districts encompass any part
of the City of New York or the state courts of the State of New York
sitting in the City of New York in connection with any dispute arising
under this Agreement and hereby waives, to the maximum extent permitted by
law, any objection, including any objection based on forum non coveniens,
to the bringing of any such proceeding in such jurisdictions. To the
extent determined by such court, the Company shall reimburse the Buyer for
any reasonable legal fees and disbursements incurred by the Buyer in
enforcement of or protection of any of its rights under this Agreement.
(e) If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability
shall not affect the validity or enforceability of the remainder of this
Agreement or the validity or enforceability of this Agreement in any other
jurisdiction.
(f) Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors
and assigns of each of the parties hereto.
(g) All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may
require.
(h) The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning
thereof.
(i) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
shall constitute one and the same agreement. This Agreement, once
executed by a party, may be delivered to the other party hereto by
telephone line facsimile transmission of a copy of this Agreement bearing
the signature of the party so delivering this Agreement.
(j) The Company acknowledges that any failure by the Company
to perform its obligations under Section 3(a) hereof, or any delay in such
performance could result in loss to the Investors, and the Company agrees
that, in addition to any other liability the Company may have by reason of
such failure or delay, the Company shall be liable for all direct damages
caused by any such failure or delay, unless the same is the result of
force majeure. Neither party shall be liable for consequential damages.
(k) This Agreement constitutes the entire agreement among
the parties hereto with respect to the subject matter hereof. There are
no restrictions, promises, warranties or undertakings, other than those
set forth or referred to herein. This Agreement supersedes all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof. This Agreement may be amended only by an instrument
in writing signed by the party to be charged with enforcement thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed by their respective officers thereunto duly authorized as
of the day and year first above written.
COMPANY:
AMERICAN CHAMPION ENTERTAINMENT, INC.
By:________________________________
Name: Anthony K. Chan
Title: President & CEO
INITIAL INVESTOR:
____________________________________
[Print Name]
By:_________________________________
Name:
Title:
( Form of Warrant )
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT
BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER
SAID ACT, A "NO ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION
WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE
144 OF THE SECURITIES AND EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT
FROM SUCH REGISTRATION.
AMERICAN CHAMPION ENTERTAINMENT, INC.
COMMON STOCK PURCHASE WARRANT
1. Issuance; Certain Definitions.
In consideration of good and valuable consideration, the receipt of which is
hereby acknowledged by AMERICAN CHAMPION ENTERTAINMENT, INC. a Delaware
corporation (the "Company"),_________________ or registered assigns (the
"Holder") is hereby granted the right to purchase at any time until 5:00 P.M.,
New York City time, on ______________ , 2002 (the "Expiration
Date"),___________________________( ) fully paid and nonassessable
shares of the Company's Common Stock, par value $.0001 per share (the "Common
Stock") at an initial exercise price per share (the "Exercise Price") of $
_________________, subject to further adjustment as set forth herein.
2. Exercise of Warrants.
2.1 General. This Warrant is exercisable in whole or
in part at any time and from time to time at the Exercise Price per share
of Common Stock payable hereunder, payable in cash or by certified or
official bank check. Upon surrender of this Warrant Certificate with the
annexed Notice of Exercise Form duly executed (which Notice of Exercise
Form may be submitted either by delivery to the Company or by facsimile
transmission as provided in Section 8 hereof), together with payment of
the Exercise Price for the shares of Common Stock purchased, the Holder
shall be entitled to receive a certificate or certificates for the shares
of Common Stock so purchased.
2.2 Limitation on Exercise. Notwithstanding the
provisions of this Warrant, Securities Purchase Agreement, dated June
17 , 1999 (the "Securities Purchase Agreement"), between the Company
and the Holder (or the Holder's predecessor in interest) or of the other
Transaction Agreements (as defined in the Securities Purchase Agreement),
in no event (except (i) with respect to an automatic conversion, if any,
of a Debenture as provided in the Debentures, (ii) as specifically
provided in this Warrant as an exception to this provision, or (iii) while
there is outstanding a tender offer for any or all of the shares of the
Company's Common Stock) shall the Holder be entitled to exercise this
Warrant, or shall the Company have the obligation to issue shares upon
such exercise of all or any portion of this Warrant, to the extent that,
after such exercise the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership
of the unconverted portion of the Debentures or unexercised portion of the
Warrants), and (2) the number of shares of Common Stock issuable upon the
exercise of the Warrants with respect to which the determination of this
proviso is being made, would result in beneficial ownership by the Holder
and its affiliates of more than 9.99% of the outstanding shares of Common
Stock (after taking into account the shares to be issued to the Holder
upon such exercise). For purposes of the proviso to the immediately
preceding sentence, beneficial ownership shall be determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), except as otherwise provided in clause (1) of such sentence.
The Holder, by its acceptance of this Warrant, further agrees that if the
Holder transfers or assigns any of the Warrants to a party who or which
would not be considered such an affiliate, such assignment shall be made
subject to the transferee's or assignee's specific agreement to be bound
by the provisions of this Section 2.2 as if such transferee or assignee
were the original Holder hereof.
3. Reservation of Shares. The Company hereby agrees that
at all times during the term of this Warrant there shall be reserved for
issuance upon exercise of this Warrant such number of shares of its Common
Stock as shall be required for issuance upon exercise of this Warrant (the
"Warrant Shares").
4. Mutilation or Loss of Warrant. Upon receipt by the
Company of evidence satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or
destruction) receipt of reasonably satisfactory indemnification, and (in
the case of mutilation) upon surrender and cancellation of this Warrant,
the Company will execute and deliver a new Warrant of like tenor and date
and any such lost, stolen, destroyed or mutilated Warrant shall thereupon
become void.
5. Rights of the Holder. The Holder shall not, by virtue
hereof, be entitled to any rights of a stockholder in the Company, either
at law or equity, and the rights of the Holder are limited to those
expressed in this Warrant and are not enforceable against the Company
except to the extent set forth herein.
6. Protection Against Dilution.
6.1 Adjustment Mechanism. If an adjustment of the
Exercise Price is required pursuant to this Section 6, the Holder shall be
entitled to purchase such number of additional shares of Common Stock as
will cause (i) the total number of shares of Common Stock Holder is
entitled to purchase pursuant to this Warrant, multiplied by (ii) the
adjusted Exercise Price per share, to equal (iii) the dollar amount of the
total number of shares of Common Stock Holder is entitled to purchase
before adjustment multiplied by the total Exercise Price before
adjustment.
6.2 Capital Adjustments. In case of any stock split
or reverse stock split, stock dividend, reclassification of the Common
Stock, recapitalization, merger or consolidation, or like capital
adjustment affecting the Common Stock of the Company, the provisions of
this Section 6 shall be applied as if such capital adjustment event had
occurred immediately prior to the date of this Warrant and the original
Exercise Price had been fairly allocated to the stock resulting from such
capital adjustment; and in other respects the provisions of this Section
shall be applied in a fair, equitable and reasonable manner so as to give
effect, as nearly as may be, to the purposes hereof. A rights offering to
stockholders shall be deemed a stock dividend to the extent of the bargain
purchase element of the rights.
6.3 Adjustment for Spin Off. If, for any reason,
prior to the exercise of this Warrant in full, the Company spins off or
otherwise divests itself of a part of its business or operations or
disposes all or of a part of its assets in a transaction (the "Spin Off")
in which the Company does not receive compensation for such business,
operations or assets, but causes securities of another entity (the "Spin
Off Securities") to be issued to security holders of the Company, then
(a) the Company shall cause (i) to be reserved Spin Off
Securities equal to the number thereof which would have been issued
to the Holder had all of the Holder's unexercised Warrants
outstanding on the record date (the "Record Date") for determining
the amount and number of Spin Off Securities to be issued to
security holders of the Company (the "Outstanding Warrants") been
exercised as of the close of business on the trading day immediately
before the Record Date (the "Reserved Spin Off Shares"), and (ii) to
be issued to the Holder on the exercise of all or any of the
Outstanding Warrants, such amount of the Reserved Spin Off Shares
equal to (x) the Reserved Spin Off Shares multiplied by (y) a
fraction, of which (I) the numerator is the amount of the
Outstanding Warrants then being exercised, and (II) the denominator
is the amount of the Outstanding Warrants; and
(b) the Exercise Price on the Outstanding Warrants shall be
adjusted immediately after consummation of the Spin Off by
multiplying the Exercise Price by a fraction (if, but only if, such
fraction is less than 1.0), the numerator of which is the Average
Market Price of the Common Stock (as defined below) for the five (5)
trading days immediately following the fifth trading day after the
Record Date, and the denominator of which is the Average Market
Price of the Common Stock on the five (5) trading days immediately
preceding the Record Date; and such adjusted Exercise Price shall be
deemed to be the Exercise Price with respect to the Outstanding
Warrants after the Record Date. As used herein, the term "Average
Market Price of the Common Stock" means the average closing bid
price of a share of Common Stock, as reported by Bloomberg, LP or,
if not so reported, as reported on the over-the-counter market for
the relevant period.
7. Transfer to Comply with the Securities Act; Registration
Rights.
(a) This Warrant has not been registered under the Securities
Act of 1933, as amended, (the "Act") and has been issued to the Holder for
investment and not with a view to the distribution of either the Warrant
or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares
or any other security issued or issuable upon exercise of this Warrant may
be sold, transferred, pledged or hypothecated in the absence of an
effective registration statement under the Act relating to such security
or an opinion of counsel satisfactory to the Company that registration is
not required under the Act. Each certificate for the Warrant, the Warrant
Shares and any other security issued or issuable upon exercise of this
Warrant shall contain a legend on the face thereof, in form and substance
satisfactory to counsel for the Company, setting forth the restrictions on
transfer contained in this Section.
(b) Reference is made to the Registration Rights Agreement of
even date herewith, to which the Company and the Holder (or Holder's
direct or indirect assignor, if any) are parties (the "Registration Rights
Agreement"). The Warrant Shares are Registrable Securities, as that term
is used in the Registration Rights Agreement. Subject to the provisions
of the Registration Rights Agreement, the Company agrees to file an
amendment, which shall include the Warrant Shares, to its registration
statement on Form S-3 (as so amended, the "Registration Statement"),
pursuant to the Act, by the Required Filing Date and to have the
registration of the Warrant Shares completed and effective by the Required
Effective Date (as those terms are defined in the Registration Rights
Agreement).
8. Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage pre-paid. Any such notice shall be
deemed given when so delivered personally, telegraphed, telexed or sent by
facsimile transmission, or, if mailed, two days after the date of deposit
in the United States mails, as follows:
(i) if to the Company, to:
AMERICAN CHAMPION ENTERTAINMENT, INC.
1694 The Alameda, Suite 100
San Jose, CA 95126-2219
Attn: Anthony K. Chan, President
Telephone No.: (408) 288-8199
Telecopier No.: (408) 288-8098
with a copy to:
Sichenzia Ross & Friedman
135 West 50th Street, 20th Floor
New York, NY 10020
Attn: Gregory Sichenzia, Esq.
Telephone No.: (212) 664-1200
Telecopier No.: (212) 664-7329
(ii) if to the Holder, to:
with a copy to:
Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
Telephone No.: (212) 689-3322
Telecopier No. (212) 213-2077
Any party may by notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices
hereunder.
9. Supplements and Amendments; Whole Agreement. This
Warrant may be amended or supplemented only by an instrument in writing
signed by the parties hereto. This Warrant contains the full
understanding of the parties hereto with respect to the subject matter
hereof and thereof and there are no representations, warranties,
agreements or understandings other than expressly contained herein and
therein.
10. Governing Law. This Warrant shall be deemed to be a
contract made under the laws of the State of Delaware and for all purposes
shall be governed by and construed in accordance with the laws of such
State applicable to contracts to be made and performed entirely within
such State.
11. Counterparts. This Warrant may be executed in any
number of counterparts and each of such counterparts shall for all
purposes be deemed to be an original, and all such counterparts shall
together constitute but one and the same instrument.
12. Descriptive Headings. Descriptive headings of the
several Sections of this Warrant are inserted for convenience only and
shall not control or affect the meaning or construction of any of the
provisions hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as
of the th day of 1999.
AMERICAN CHAMPION ENTERTAINMENT, INC.
By:_________________________________
Name: Anthony K. Chan
Its: President & CEO
Attest:
________________________
Name: George Chung
Title: Chairman of the Board
