LOAN AGREEMENT
Between
American Champion Entertainment, Inc.
and
the Lenders Signatory Hereto
LOAN AGREEMENT dated as of April 10, 2000 (the "Agreement"),
between the Lenders signatory hereto (each an "Lender" and together the
"Lenders"), and American Champion Entertainment, Inc., a corporation
organized and existing under the laws of the State of Delaware (the
"Company").
WHEREAS, the parties desire that, upon the terms and subject to
the conditions contained herein, the Company shall borrow from the
Lenders, and the Lenders shall lend to the Company in the aggregate
(i) $1,000,000 in exchange for the Company's 8% Convertible Debentures
(as defined below) and (ii) Warrants (as defined below) to purchase
shares of the Common Stock (as defined below) as described herein.
WHEREAS, such investments will be made in reliance upon the
provisions of Section 4(2) ("Section 4(2)") and/or 4(6) of the United
States Securities Act and/or Regulation D ("Regulation D") and the
other rules and regulations promulgated thereunder (the "Securities
Act"), and/or upon such other exemption from the registration
requirements of the Securities Act as may be available with respect to
any or all of the investments in securities to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
Section 1.1. "Capital Shares" shall mean the Common Stock and any
shares of any other class of common stock whether now or hereafter
authorized, having the right to participate in the distribution of
earnings and assets of the Company.
Section 1.2. "Capital Shares Equivalents" shall mean any securities,
rights, or obligations that are convertible into or exchangeable for or
give any right to subscribe for any Capital Shares of the Company or
any Warrants, options or other rights to subscribe for or purchase
Capital Shares or any such convertible or exchangeable securities.
Section 1.3. "Closing" shall mean the closing of the purchase and sale
of the Convertible Debentures and Warrants pursuant to Section 2.1.
Section 1.4. "Closing Date" shall mean the date on which all conditions
to the Closing have been satisfied (as defined in Section 2.1 (b)
hereto) and the Closing shall have occurred.
Section 1.5. "Common Stock" shall mean the Company's common stock,
$0.0001 par value per share.
Section 1.6. "Conversion Shares" shall mean the shares of Common Stock
issuable upon conversion of the Convertible Debentures.
Section 1.7. "Convertible Debentures" shall mean the Company's 8%
Convertible Debentures in the form of Exhibit A hereto.
Section 1.8. "Damages" shall mean any loss, claim, damage, judgment,
penalty, deficiency, liability, costs and expenses (including, without
limitation, reasonable attorney's fees and disbursements and reasonable
costs and expenses of expert witnesses and investigation).
Section 1.9. "Effective Date" shall mean the date on which the SEC
first declares effective a Registration Statement registering the
resale of the Registrable Securities as set forth in the Registration
Rights Agreement.
Section 1.10. "Escrow Agent" shall have the meaning set forth in the
Escrow Agreement.
Section 1.11. "Escrow Agreement" shall mean the Escrow Agreement in
substantially the form of Exhibit D hereto executed and delivered
contemporaneously with this Agreement.
Section 1.12. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
Section 1.13. "Legend" shall mean the legend set forth in Section 9.1.
Section 1.14. "Market Price" on any given date shall mean the closing
bid price on the Principal Market (as reported by Bloomberg L.P.) of
the Common Stock on the Trading Day immediately prior to the date for
which the Market Price is to be determined.
Section 1.15. "Material Adverse Effect" shall mean any effect on the
business, operations, properties, prospects, stock price or financial
condition of the Company that is material and adverse to the Company
and its subsidiaries and affiliates, taken as a whole, and/or any
condition, circumstance, or situation that would prohibit or otherwise
interfere with the ability of the Company to enter into and perform any
of its obligations under this Agreement, the Registration Rights
Agreement, the Escrow Agreement, the Convertible Debentures or the
Warrants in any material respect.
Section 1.16. "Outstanding" when used with reference to shares of
Common Stock or Capital Shares (collectively the "Shares"), shall mean,
at any date as of which the number of such Shares is to be determined,
all issued and outstanding Shares, and shall include all such Shares
issuable in respect of outstanding scrip or any certificates
representing fractional interests in such Shares; provided, however,
that "Outstanding" shall not mean any such Shares then directly or
indirectly owned or held by or for the account of the Company.
Section 1.17. "Person" shall mean an individual, a corporation, a
partnership, a limited liability company, an association, a trust or
other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
Section 1.18. "Principal Market" shall mean the American Stock
Exchange, the New York Stock Exchange, the NASDAQ National Market, the
NASDAQ Small-Cap Market or the OTC Bulletin Board, whichever is at the
time the principal trading exchange or market for the Common Stock,
based upon share volume.
Section 1.19. "Purchase Price" shall mean the principal amount of the
Convertible Debentures.
Section 1.20. "Registrable Securities" shall mean the Conversion Shares
and the Warrant Shares until (i) the Registration Statement has been
declared effective by the SEC, and all Conversion Shares and Warrant
Shares have been disposed of pursuant to the Registration Statement,
(ii) all Conversion Shares and Warrant Shares have been sold under
circumstances under which all of the applicable conditions of Rule 144
(or any similar provision then in force) under the Securities Act
("Rule 144") are met, (iii) all Conversion Shares and Warrant Shares
have been otherwise transferred to holders who may trade such shares
without restriction under the Securities Act, and the Company has
delivered a new certificate or other evidence of ownership for such
securities not bearing a restrictive legend or (iv) such time as, in
the opinion of counsel to the Company, all Conversion Shares and
Warrant Shares may be sold without any time, volume or manner
limitations pursuant to Rule 144(k) (or any similar provision then in
effect) under the Securities Act.
Section 1.21. "Registration Rights Agreement" shall mean the agreement
regarding the filing of the Registration Statement for the resale of
the Registrable Securities, entered into between the Company and the
Lenders as of the Closing Date in the form annexed hereto as Exhibit C.
Section 1.22. "Registration Statement" shall mean a registration
statement on Form S-3 (if use of such form is then available to the
Company pursuant to the rules of the SEC and, if not, on such other
form promulgated by the SEC for which the Company then qualifies and
which counsel for the Company shall deem appropriate, and which form
shall be available for the resale by the Lenders of the Registrable
Securities to be registered thereunder in accordance with the
provisions of this Agreement, the Registration Rights Agreement and in
accordance with the intended method of distribution of such
securities), for the registration of the resale by the Lender of the
Registrable Securities under the Securities Act.
Section 1.23. "Regulation D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.24. "SEC" shall mean the Securities and Exchange Commission.
Section 1.25. "Section 4(2)" and "Section 4(6)" shall have the meanings
set forth in the recitals of this Agreement.
Section 1.26. "Securities Act" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.27. "SEC Documents" shall mean the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1999 and each
report, proxy statement or registration statement filed by the Company
with the SEC pursuant to the Exchange Act or the Securities Act since
the filing of such Annual Report through the date hereof.
Section 1.28. "Shares" shall have the meaning set forth in Section 1.16.
Section 1.29. "Trading Day" shall mean any day during which the
Principal Market shall be open for business.
Section 1.30. "Warrants" shall mean the Warrants substantially in the
form of Exhibit B to be issued to the Lenders hereunder.
Section 1.31. "Warrant Shares" shall mean all shares of Common Stock or
other securities issued or issuable pursuant to exercise of the
Warrants.
ARTICLE II
Purchase and Sale of Convertible Debentures and Warrants
Section 2.1. Investment.
(a) Upon the terms and subject to the conditions set forth
herein, the Company agrees to sell, and the Lenders agree to purchase
the Convertible Debentures together with the Warrants at the Purchase
Price on the Closing Date as follows:
(i) Upon execution and delivery of this Agreement, each
Lender shall deliver to the Escrow Agent immediately
available funds in their proportionate amount of the
Purchase Price as set forth on the signature pages
hereto, and the Company shall deliver the Convertible
Debentures and the Warrants to the Escrow Agent, in
each case to be held by the Escrow Agent pursuant to
the Escrow Agreement.
(ii) Upon satisfaction of the conditions set forth in
Section 2.1(b), the Closing ("Closing") shall occur
at the offices of the Escrow Agent at which the
Escrow Agent (x) shall release the Convertible
Debentures and the Warrants to the Lenders and (y)
shall release the Purchase Price (after all fees have
been paid as set forth in the Escrow Agreement),
pursuant to the terms of the Escrow Agreement.
(b) The Closing is subject to the satisfaction or waiver by the
party sought to be benefited thereby of the following conditions:
(i) acceptance and execution by the Company and by the
Lenders, of this Agreement and all Exhibits hereto;
(ii) delivery into escrow by each Lender of immediately
available funds in the amount of the Purchase Price
of the Convertible Debentures and the Warrants, as
more fully set forth in the Escrow Agreement;
(iii) all representations and warranties of the Lenders
contained herein shall remain true and correct as of
the Closing Date (as a condition to the Company's
obligations);
(iv) all representations and warranties of the Company
contained herein shall remain true and correct as of
the Closing Date (as a condition to the Lenders'
obligations);
(v) the Company shall have obtained all permits and
qualifications required by any state for the offer
and sale of the Convertible Debentures and Warrants,
or shall have the availability of exemptions
therefrom;
(vi) the sale and issuance of the Convertible Debentures
and the Warrants hereunder, and the proposed issuance
by the Company to the Lenders of the Common Stock
underlying the Convertible Debentures and the
Warrants upon the conversion or exercise thereof
shall be legally permitted by all laws and
regulations to which the Lenders and the Company are
subject and there shall be no ruling, judgment or
writ of any court prohibiting the transactions
contemplated by this Agreement;
(vii) delivery of the original fully executed Convertible
Debentures and Warrants certificates to the Escrow
Agent;
(viii) delivery to the Escrow Agent of an opinion of Sichenzia, Ross and
Friedman, counsel to the Company, in the form
of Exhibit E hereto;
(ix) delivery to the Escrow Agent of the Irrevocable
Instructions to Transfer Agent in the form attached
hereto as Exhibit F; and
(x) delivery to the Escrow Agent of the Registration
Rights Agreement.
Section 2.2. The Warrants. The Company shall issue fifty thousand
(50,000) Warrants to the Lenders pro-rata among all Lenders in
proportion their respective initial purchases of the Convertible
Debentures pursuant to this Agreement. The exercise price of such
Warrants shall be 115% of the Market Price on the Closing Date. The
term of such Warrants shall be three (3) years from the date of
issuance.
Section 2.3. Liquidated Damages. The parties hereto acknowledge and
agree that the sums payable pursuant to the Registration Rights
Agreement shall constitute liquidated damages and not penalties. The
parties further acknowledge that (a) the amount of loss or damages
likely to be incurred is incapable or is difficult to precisely
estimate, (b) the amounts specified in such Sections bear a reasonable
proportion and are not plainly or grossly disproportionate to the
probable loss likely to be incurred by the Lenders in connection with
the failure by the Company to timely cause the registration of the
Registrable Securities and (c) the parties are sophisticated business
parties and have been represented by sophisticated and able legal and
financial counsel and negotiated this Agreement at arm's length.
ARTICLE III
Representations and Warranties of Lenders
Each Lender, severally and not jointly, represents and warrants to the
Company that:
Section 3.1. Intent. The Lender is entering into this Agreement for its
own account and not with a view to or for sale in connection with any
distribution of the Convertible Debentures, the Warrants or the
Conversion Shares. The Lender has no present arrangement (whether or
not legally binding) at any time to sell the Convertible Debentures,
the Warrants, any Conversion Shares or Warrant Shares to or through any
person or entity; provided, however, that by making the representations
herein, the Lender does not agree to hold such securities for any
minimum or other specific term and reserves the right to dispose of the
Conversion Shares and Warrant Shares at any time in accordance with
federal and state securities laws applicable to such disposition.
Section 3.2. Sophisticated Lender. The Lender is a sophisticated
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an
accredited investor (as defined in Rule 501 of Regulation D), and
Lender has such experience in business and financial matters that it
has the capacity to protect its own interests in connection with this
transaction and is capable of evaluating the merits and risks of an
investment in the Convertible Debentures, the Warrants and the
underlying Common Stock. The Lender acknowledges that an investment in
the Convertible Debentures, the Warrants and the underlying Common
Stock is speculative and involves a high degree of risk.
Section 3.3. Authority. This Agreement and each agreement attached as
an Exhibit hereto which is required to be executed by Lender has been
duly authorized and validly executed and delivered by the Lender and is
a valid and binding agreement of the Lender enforceable against it in
accordance with its terms, subject to applicable bankruptcy,
insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable
principles of general application.
Section 3.4. Not an Affiliate. The Lender is not an officer, director
or "affiliate" (as that term is defined in Rule 405 of the Securities
Act) of the Company.
Section 3.5. Absence of Conflicts. The execution and delivery of this
Agreement and each agreement which is attached as an Exhibit hereto and
executed by the Lender in connection herewith, and the consummation of
the transactions contemplated hereby and thereby, and compliance with
the requirements hereof and thereof by the Lender, will not violate any
law, rule, regulation, order, writ, judgment, injunction, decree or
award binding on Lender or (a) violate any provision of any indenture,
instrument or agreement to which Lender is a party or is subject, or by
which Lender or any of its assets is bound; (b) conflict with or
constitute a material default thereunder; (c) result in the creation or
imposition of any lien pursuant to the terms of any such indenture,
instrument or agreement, or constitute a breach of any fiduciary duty
owed by Lender to any third party; or (d) require the approval of any
third-party (which has not been obtained) pursuant to any material
contract, agreement, instrument, relationship or legal obligation to
which Lender is subject or to which any of its assets, operations or
management may be subject.
Section 3.6. Disclosure; Access to Information. The Lender has received
all documents, records, books and other publicly available information
pertaining to Lender's investment in the Company that have been
requested by the Lender. The Company is subject to the periodic
reporting requirements of the Exchange Act, and the Lender has reviewed
copies of all SEC Documents deemed relevant by Lender.
Section 3.7. Manner of Sale. At no time was Lender presented with or
solicited by or through any leaflet, public promotional meeting,
television advertisement or any other form of general solicitation or
advertising.
ARTICLE IV
Representations and Warranties of the Company
The Company represents and Warrants to the Lenders that, except as set
forth on the Disclosure Schedule prepared by the Company and attached
hereto:
Section 4.1. Organization of the Company. The Company is a corporation
duly incorporated and existing in good standing under the laws of the
State of Delaware and has all requisite corporate authority to own its
properties and to carry on its business as now being conducted. The
Company does not have any subsidiaries and does not own more that fifty
percent (50%) of or control any other business entity except as set
forth in the SEC Documents. The Company is duly qualified and is in
good standing as a foreign corporation to do business in every
jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, other than those in
which the failure so to qualify would not have a Material Adverse
Effect.
Section 4.2. Authority. (i) The Company has the requisite corporate
power and corporate authority to enter into and perform its obligations
under this Agreement, the Registration Rights Agreement, the Escrow
Agreement, and the Warrants and to issue the Convertible Debentures,
the Conversion Shares, the Warrants and the Warrant Shares pursuant to
their respective terms, (ii) the execution, issuance and delivery of
this Agreement, the Registration Rights Agreement, the Escrow
Agreement, the Convertible Debentures, the Convertible Debentures and
the Warrants by the Company and the consummation by it of the
transactions contemplated hereby have been duly authorized by all
necessary corporate action and no further consent or authorization of
the Company or its Board of Directors or stockholders is required, and
(iii) this Agreement, the Registration Rights Agreement, the Escrow
Agreement, the Convertible Debentures and the Warrants have been duly
executed and delivered by the Company and at the Closing shall
constitute valid and binding obligations of the Company enforceable
against the Company in accordance with their terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, or
similar laws relating to, or affecting generally the enforcement of,
creditors' rights and remedies or by other equitable principles of
general application. The Company has duly and validly authorized and
reserved for issuance shares of Common Stock sufficient in number for
the conversion of the Convertible Debentures and for the exercise of
the Warrants. The Company understands and acknowledges the potentially
dilutive effect to the Common Stock of the issuance of the Conversion
Shares. The Company further acknowledges that its obligation to issue
Conversion Shares upon conversion of the Convertible Debentures and
Warrant Shares upon exercise of the Warrants in accordance with this
Agreement and the Convertible Debentures is absolute and unconditional
regardless of the dilutive effect that such issuance may have on the
ownership interests of other stockholders of the Company and
notwithstanding the commencement of any case under 11 U.S.C. 101 et
seq. (the "Bankruptcy Code"). The Company shall not seek judicial
relief from its obligations hereunder except pursuant to the Bankruptcy
Code. In the event the Company is a debtor under the Bankruptcy Code,
the Company hereby waives to the fullest extent permitted any rights to
relief it may have under 11 U.S.C. 362 in respect of the conversion
of the Convertible Debentures and the exercise of the Warrants. The
Company agrees, without cost or expense to the Lenders, to take or
consent to any and all action necessary to effectuate relief under 11
U.S.C. 362
Section 4.3. Capitalization. The authorized capital stock of the
Company consists of 40,000,000 shares of Common Stock, $0.0001 par
value per share, of which 6,368,647 shares are issued and outstanding
as of April 3, 2000 and 6,000,000 shares of preferred stock, $0.0001
par value per share, none of which shares are issued and outstanding
as of April 3, 2000. Except as set forth in the SEC Documents and as
set forth in the Disclosure Schedule, there are no outstanding Capital
Shares Equivalents nor any agreements or understandings pursuant to
which any Capital Shares Equivalents may become outstanding. The
Company is not a party to any agreement granting registration or anti-
dilution rights to any person with respect to any of its equity or debt
securities. All of the outstanding shares of Common Stock of the
Company have been duly and validly authorized and issued and are fully
paid and non-assessable.
Section 4.4. Common Stock. The Company has registered its Common Stock
pursuant to Section 12(b) or (g) of the Exchange Act and is in full
compliance with all reporting requirements of the Exchange Act, and the
Company is in compliance with all requirements for the continued
listing or quotation of its Common Stock, and such Common Stock is
currently listed or quoted on, the Principal Market. As of the date
hereof, the Principal Market is the NASDAQ Small-Cap Market and the
Company has not received any notice regarding, and to its knowledge
there is no threat, of the termination or discontinuance of the
eligibility of the Common Stock for such listing.
Section 4.5. SEC Documents. The Company has made available to the
Lenders true and complete copies of the SEC Documents. The Company has
not provided to the Lenders any information that, according to
applicable law, rule or regulation, should have been disclosed publicly
prior to the date hereof by the Company, but which has not been so
disclosed. As of their respective dates, the SEC Documents complied in
all material respects with the requirements of the Exchange Act, and
rules and regulations of the SEC promulgated thereunder and the SEC
Documents did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The
financial statements of the Company included in the SEC Documents
complied in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto at the time
of such inclusion. Such financial statements have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they
exclude footnotes or may be condensed or summary statements) and fairly
present in all material respects the financial position of the Company
as of the dates thereof and the results of operations and cash flows
for the periods then ended (subject, in the case of unaudited interim
statements, to normal year-end audit adjustments). Neither the Company
nor any of its subsidiaries has any material indebtedness, obligations
or liabilities of any kind (whether accrued, absolute, contingent or
otherwise, and whether due or to become due) that would have been
required to be reflected in, reserved against or otherwise described in
the financial statements or in the notes thereto in accordance with
GAAP, which was not fully reflected in, reserved against or otherwise
described in the financial statements or the notes thereto included in
the SEC Documents or was not incurred in the ordinary course of
business consistent with the Company's past practices since the last
date of such financial statements.
Section 4.6. Exemption from Registration; Valid Issuances. Subject to
the accuracy of the Lenders' representations in Article III, the sale
of the Convertible Debentures, the Conversion Shares, the Warrants and
the Warrant Shares will not require registration under the Securities
Act and/or any applicable state securities law. When issued and paid
for in accordance with the Warrants and validly converted in accordance
with the terms of the Convertible Debentures, the Conversion Shares and
the Warrant Shares will be duly and validly issued, fully paid, and
non-assessable. Neither the sales of the Convertible Debentures, the
Conversion Shares, the Warrants or the Warrant Shares pursuant to, nor
the Company's performance of its obligations under, this Agreement, the
Registration Rights Agreement, the Escrow Agreement, the Convertible
Debentures or the Warrants will (i) result in the creation or
imposition by the Company of any liens, charges, claims or other
encumbrances upon the Convertible Debentures, the Conversion Shares,
the Warrants or the Warrant Shares or, except as contemplated herein,
any of the assets of the Company, or (ii) entitle the holders of
Outstanding Capital Shares to preemptive or other rights to subscribe
for or acquire the Capital Shares or other securities of the Company
The Convertible Debentures, the Conversion Shares, the Warrants and the
Warrant Shares shall not subject the Lenders to personal liability to
the Company or its creditors by reason of the possession thereof.
Section 4.7. No General Solicitation or Advertising in Regard to this
Transaction. Neither the Company nor any of its affiliates nor, to the
knowledge of the Company, any person acting on its or their behalf (i)
has conducted or will conduct any general solicitation (as that term is
used in Rule 502(c) of Regulation D) or general advertising with
respect to the sale of the Convertible Debentures or the Warrants, or
(ii) made any offers or sales of any security or solicited any offers
to buy any security under any circumstances that would require
registration of the Convertible Debentures, the Conversion Shares, the
Warrants or the Warrant Shares under the Securities Act.
Section 4.8. No Conflicts. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby, including without limitation the
issuance of and payment of interest upon the Convertible Debentures,
the Conversion Shares, the Warrants and the Warrant Shares, do not and
will not (i) result in a violation of the Company's Certificate of
Incorporation or By-Laws or (ii) conflict with, or constitute a
material default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any material
agreement, indenture or instrument, or any "lock-up" or similar
provision of any underwriting or similar agreement to which the Company
is a party, or (iii) result in a violation of any federal, state or
local law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations) applicable to the
Company or by which any material property or asset of the Company is
bound or affected, nor is the Company otherwise in violation of,
conflict with or default under any of the foregoing (except in each
case for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not have,
individually or in the aggregate, a Material Adverse Effect). The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate would not have a
Material Adverse Effect. The Company is not required under any Federal,
state or local law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or
perform any of its obligations under this Agreement or issue and sell
the Convertible Debentures or the Warrants in accordance with the terms
hereof (other than any SEC, Principal Market or state securities
filings that may be required to be made by the Company subsequent to
Closing, any registration statement that may be filed pursuant hereto,
and any shareholder approval required by the rules applicable to
companies whose common stock trades on the Principal Market); provided
that, for purposes of the representation made in this sentence, the
Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Lenders herein. Without limiting
the foregoing, none of the transactions contemplated by this Agreement
or the conversion of any Convertible Debentures, at any conversion
price, will trigger the issuance of any Series C Preferred Stock.
Section 4.9. No Material Adverse Change. Since December 31, 1999, no
Material Adverse Effect has occurred or exists with respect to the
Company, except as disclosed in the SEC Documents.
Section 4.10. No Undisclosed Events or Circumstances. Since December 31,
1999, no event or circumstance has occurred or exists with respect to
the Company or its businesses, properties, prospects, operations or
financial condition, that, 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
in the SEC Documents.
Section 4.11. No Integrated Offering. Other than pursuant to an
effective registration statement under the Securities Act, or pursuant
to the issuance or exercise of employee stock options, or pursuant to
its discussion with the Lenders in connection with the transactions
contemplated hereby, the Company has not issued, offered or sold the
Convertible Debentures, the Warrants or any shares of Common Stock
(including for this purpose any securities of the same or a similar
class as the Convertible Debentures, the Warrants or Common Stock, or
any securities convertible into a exchangeable or exercisable for the
Convertible Debentures or Common Stock or any such other securities)
within the six-month period next preceding the date hereof, and the
Company shall not permit any of its directors, officers or affiliates
directly or indirectly to take, any action (including, without
limitation, any offering or sale to any Person of the Convertible
Debentures, Warrants or shares of Common Stock), so as to make
unavailable the exemption from Securities Act registration being relied
upon by the Company for the offer and sale to Lenders of the
Convertible Debentures (and the Conversion Shares) or the Warrants (and
the Warrant Shares) as contemplated by this Agreement.
Section 4.12. Litigation and Other Proceedings. Except as disclosed in
the SEC Documents, there are no lawsuits or proceedings pending or, to
the knowledge of the Company, threatened, against the Company or any
subsidiary, nor has the Company received any written or oral notice of
any such action, suit, proceeding or investigation, which could
reasonably be expected to have a Material Adverse Effect. Except as
set forth in the SEC Documents, no judgment, order, writ, injunction or
decree or award has been issued by or, to the knowledge of the Company,
requested of any court, arbitrator or governmental agency which could
result in a Material Adverse Effect.
Section 4.13. No Misleading or Untrue Communication. The Company and, to
the knowledge of the Company, any person representing the Company, or
any other person selling or offering to sell the Convertible Debentures
or the Warrants in connection with the transaction contemplated by this
Agreement, have not made, at any time, any oral communication in
connection with the offer or sale of the same which contained any
untrue statement of a material fact or omitted to state any material
fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading.
Section 4.14. Material Non-Public Information. The Company has not
disclosed to the Lenders any material non-public information that (i)
if disclosed, would reasonably be expected to have a material effect on
the price of the Common Stock or (ii) according to applicable law, rule
or regulation, should have been disclosed publicly by the Company prior
to the date hereof but which has not been so disclosed.
Section 4.15. Insurance. The Company and each subsidiary maintains
property and casualty, general liability, workers' compensation,
environmental hazard, personal injury and other similar types of
insurance with financially sound and reputable insurers that is
adequate, consistent with industry standards and the Company's
historical claims experience. The Company has not received notice
from, and has no knowledge of any threat by, any insurer (that has
issued any insurance policy to the Company) that such insurer intends
to deny coverage under or cancel, discontinue or not renew any
insurance policy presently in force.
Section 4.16. Tax Matters.
(a) The Company and each subsidiary has filed all Tax Returns
which it is required to file under applicable laws; all such Tax
Returns are true and accurate and has been prepared in compliance with
all applicable laws; the Company has paid all Taxes due and owing by it
or any subsidiary (whether or not such Taxes are required to be shown
on a Tax Return) and have withheld and paid over to the appropriate
taxing authorities all Taxes which it is required to withhold from
amounts paid or owing to any employee, stockholder, creditor or other
third parties; and since December 31, 1998, the charges, accruals and
reserves for Taxes with respect to the Company (including any
provisions for deferred income taxes) reflected on the books of the
Company are adequate to cover any Tax liabilities of the Company if its
current tax year were treated as ending on the date hereof.
(b) No claim has been made by a taxing authority in a jurisdiction
where the Company does not file tax returns that the Company or any
subsidiary is or may be subject to taxation by that jurisdiction.
There are no foreign, federal, state or local tax audits or
administrative or judicial proceedings pending or being conducted with
respect to the Company or any subsidiary; no information related to Tax
matters has been requested by any foreign, federal, state or local
taxing authority; and, except as disclosed above, no written notice
indicating an intent to open an audit or other review has been received
by the Company or any subsidiary from any foreign, federal, state or
local taxing authority. There are no material unresolved questions or
claims concerning the Company's Tax liability. The Company (A) has not
executed or entered into a closing agreement pursuant to 7121 of the
Internal Revenue Code or any predecessor provision thereof or any
similar provision of state, local or foreign law; and (B) has not
agreed to or is required to make any adjustments pursuant to 481 (a)
of the Internal Revenue Code or any similar provision of state, local
or foreign law by reason of a change in accounting method initiated by
the Company or any of its subsidiaries or has any knowledge that the
IRS has proposed any such adjustment or change in accounting method, or
has any application pending with any taxing authority requesting
permission for any changes in accounting methods that relate to the
business or operations of the Company. The Company has not been a
United States real property holding corporation within the meaning of
897(c)(2) of the Internal Revenue Code during the applicable period specified
in 897(c)(1)(A)(ii) of the Internal Revenue Code.
(c) The Company has not made an election under 341(f) of the
Internal Revenue Code. The Company is not liable for the Taxes of
another person that is not a subsidiary of the Company under (A) Treas.
Reg 1.1502-6 (or comparable provisions of state, local or foreign
law), (B) as a transferee or successor, (C) by contract or indemnity or
(D) otherwise. The Company is not a party to any tax sharing
agreement. The Company has not made any payments, is obligated to make
payments or is a party to an agreement that could obligate it to make
any payments that would not be deductible under 280G of the Internal
Revenue Code.
(d) For purposes of this Section 4.16:
"IRS" means the United States Internal Revenue Service.
"Tax" or "Taxes" means federal, state, county, local,
foreign, or other income, gross receipts, ad valorem,
franchise, profits, sales or use, transfer, registration,
excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or
other withholding, employment, social security, severance,
stamp, occupation, alternative or add-on minimum, estimated
and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and
interest attributable thereto) whether disputed or not.
"Tax Return" means any return, information report or filing
with respect to Taxes, including any schedules attached
thereto and including any amendment thereof.
Section 4.17. Property. Neither the Company nor any of its subsidiaries
owns any real property. Each of the Company and its subsidiaries has
good and marketable title to all personal property owned by it, free
and clear of all liens, encumbrances and defects except such as do not
materially affect the value of such property and do not materially
interfere with the use made and proposed to be made of such property by
the Company; and to the Company's knowledge any real property, mineral
or water rights, and buildings held under lease by the Company as
tenant are held by it under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the
use made and intended to be made of such property, mineral or water
rights, and buildings by the Company.
Section 4.18. Intellectual Property. Each of the Company and its
subsidiaries owns or possesses adequate and enforceable rights to use
all patents, patent applications, trademarks, trademark applications,
trade names, service marks, copyrights, copyright applications,
licenses, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures) and other similar rights and proprietary knowledge
(collectively, "Intangibles") necessary for the conduct of its business
as now being conducted. To the Company's knowledge, except as
disclosed in the SEC Documents neither the Company nor any of its
subsidiaries is infringing upon or in conflict with any right of any
other person with respect to any Intangibles. Except as disclosed in
the SEC Documents, no adverse claims have been asserted by any person
to the ownership or use of any Intangibles and the Company has no
knowledge of any basis for such claim.
Section 4.19. Internal Controls and Procedures. The Company maintains
books and records and internal accounting controls which provide
reasonable assurance that (i) all transactions to which the Company or
any subsidiary is a party or by which its properties are bound are
executed with management's authorization; (ii) the recorded accounting
of the Company's consolidated assets is compared with existing assets
at regular intervals; (iii) access to the Company's consolidated assets
is permitted only in accordance with management's authorization; and
(iv) all transactions to which the Company or any subsidiary is a
party or by which its properties are bound are recorded as necessary to
permit preparation of the financial statements of the Company in
accordance with U.S. generally accepted accounting principles.
Section 4.20. Payments and Contributions. Neither the Company, any
subsidiary, nor any of its directors, officers or, to its knowledge,
other employees has (i) used any Company funds for any unlawful
contribution, endorsement, gift, entertainment or other unlawful
expense relating to political activity; (ii) made any direct or
indirect unlawful payment of Company funds to any foreign or domestic
government official or employee; (iii) violated or is in violation of
any provision of the Foreign Corrupt Practices Act of 1977, as amended;
or (iv) made any bribe, rebate, payoff, influence payment, kickback or
other similar payment to any person with respect to Company matters.
Section 4.21. No Misrepresentation. The representations and warranties of
the Company contained in this Agreement, any schedule, annex or exhibit
hereto and any agreement, instrument or certificate furnished by the
Company to the Lenders pursuant to this Agreement, do not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
ARTICLE V
Covenants of the Lenders
Each Lender, severally and not jointly, covenants with the
Company that:
Section 5.1. Compliance with Law. The Lender's trading activities with
respect to shares of the Company's Common Stock will be in compliance
with all applicable state and federal securities laws, rules and
regulations and rules and regulations of the Principal Market on which
the Company's Common Stock is listed.
ARTICLE VI
Covenants of the Company
Section 6.1. Registration Rights. The Company shall cause the
Registration Rights Agreement to remain in full force and effect and
the Company shall comply in all material respects with the terms
thereof.
Section 6.2. Reservation of Common Stock. As of the date hereof, the
Company has reserved and the Company shall continue to reserve and keep
available at all times, free of preemptive rights, shares of Common
Stock for the purpose of enabling the Company to issue the Conversion
Shares and the Warrant Shares pursuant to any conversion of the
Convertible Debentures or exercise of the Warrants. The number of
shares so reserved from time to time, as theretofore increased or
reduced as hereinafter provided, may be reduced by the number of shares
actually delivered pursuant to any conversion of the Convertible
Debentures or exercise of the Warrants and the number of shares so
reserved shall be increased or decreased to reflect potential increases
or decreases in the Common Stock that the Company may thereafter be
obligated to issue by reason of adjustments to the Warrants.
Section 6.3. Listing of Common Stock. The Company hereby agrees to
maintain the listing of the Common Stock on a Principal Market, and as
soon as reasonably practicable following the Closing to list the
Conversion Shares and the Warrant Shares on the Principal Market, if
required. The Company further agrees, if the Company applies to have
the Common Stock traded on any other Principal Market, it will include
in such application the Conversion Shares and the Warrant Shares, and
will take such other action as is necessary or desirable in the opinion
of the Lenders to cause the Conversion Shares and Warrant Shares to be
listed on such other Principal Market as promptly as possible. The
Company will take all action to continue the listing and trading of its
Common Stock on a Principal Market and will comply in all respects with
the Company's reporting, filing and other obligations under the bylaws
or rules of the Principal Market and shall provide Lenders with copies
of any correspondence to or from such Principal Market which questions
or threatens delisting of the Common Stock, within three (3) Trading
Days of the Company's receipt thereof, until the Lenders have disposed
of all of their Registrable Securities.
Section 6.4. Exchange Act Registration. The Company will cause its
Common Stock to continue to be registered under Section 12(b) or (g) of
the Exchange Act, will use its best efforts to comply in all respects
with its reporting and filing obligations under the Exchange Act, and
will not take any action or file any document (whether or not permitted
by the Exchange Act or the rules thereunder) to terminate or suspend
such registration or to terminate or suspend its reporting and filing
obligations under said Act until the Lenders have disposed of all of
their Registrable Securities.
Section 6.5. Legends. The certificates evidencing the Registrable
Securities shall be free of legends, except as set forth in Article IX.
Section 6.6. Corporate Existence; Conflicting Agreements. The Company
will take all steps necessary to preserve and continue the corporate
existence of the Company. The Company shall not enter into any
agreement, the terms of which agreement would restrict or impair the
right or ability of the Company to perform any of its obligations under
this Agreement or any of the other agreements attached as exhibits
hereto or under the Convertible Debentures.
Section 6.7. Consolidation; Merger. The Company shall not, at any time
after the date hereof, effect any merger or consolidation of the
Company with or into, or a transfer of all or substantially all of the
assets of the Company to, another entity (a "Consolidation Event")
unless the resulting successor or acquiring entity (if not the Company)
assumes by written instrument or by operation of law the obligations of
the Company to the Lenders pursuant to this Agreement and the
Convertible Debentures.
Section 6.8. Issuance of Convertible Debentures and Warrant Shares. The
sale of the Convertible Debentures and the Warrants and the issuance of
the Warrant Shares pursuant to exercise of the Warrants and the
Conversion Shares upon conversion of the Convertible Debentures shall
be made in accordance with the provisions and requirements of Section
4(2), 4(6) or Regulation D and any applicable state securities law.
The Company shall make any necessary SEC and "blue sky" filings
required to be made by the Company in connection with the sale of the
Securities to the Lenders as required by all applicable laws, and shall
provide a copy thereof to the Lenders promptly after such filing.
Section 6.9. Future Financing. The Company agrees that it will enter into
an equity financing arrangement for up to Five Million Dollars ($5,000,000)
arranged through Union Atlantic, L.C. or other equity
financing agreement approved by all of the Lenders within thirty (30)
days of the Closing Date (the "Equity Financing Agreement"). The
Company agrees that it will use the proceeds of the Equity Financing
Agreement or any other sale of its securities to redeem all of the
Convertible Debentures. The Company agrees that it will not enter into
any sale of its securities for cash at a discount to the then-current
bid price until the earlier of repayment in full of all of the
Convertible Debentures, or 120 days after the effective date of the
Registration Statement except for any sales (i) pursuant to any
presently existing employee benefit plan which plan has been approved
by the Company's stockholders, (ii) pursuant to any compensatory plan
for a full-time employee or key consultant, (iii) pursuant to any
transaction arranged through Union Atlantic, L.C. or (iv) with the
prior approval of a majority in interest of the Lenders, which will not
be unreasonably withheld, in connection with a strategic partnership or
other business transaction, the principal purpose of which is not
simply to raise money.
Section 6.10. Pro-Rata Redemption. The Company agrees that if it shall
redeem any of the Convertible Debentures, that it shall make such
redemption pro-rata among all Lenders in proportion their respective
initial purchases of such securities pursuant to this Agreement.
ARTICLE VII
Survival; Indemnification
Section 7.1. Survival. The representations, warranties and covenants
made by each of the Company and each Lender in this Agreement, the
annexes, schedules and exhibits hereto and in each instrument,
agreement and certificate entered into and delivered by them pursuant
to this Agreement, shall survive the Closing and the consummation of
the transactions contemplated hereby. In the event of a breach or
violation of any of such representations, warranties or covenants, the
party to whom such representations, warranties or covenants have been
made shall have all rights and remedies for such breach or violation
available to it under the provisions of this Agreement, irrespective of
any investigation made by or on behalf of such party on or prior to the
Closing Date.
Section 7.2. Indemnity. (a) The Company hereby agrees to indemnify and
hold harmless the Lenders, their respective Affiliates and their
respective officers, directors, partners and members (collectively, the
"Lender Indemnitees"), from and against any and all Damages, and agrees
to reimburse the Lender Indemnitees for all reasonable out-of-pocket
expenses (including the reasonable fees and expenses of legal counsel),
in each case promptly as incurred by the Lender Indemnitees and to the
extent arising out of or in connection with:
(i) any misrepresentation, omission of fact or breach of
any of the Company's representations or warranties contained in
this Agreement, the annexes, schedules or exhibits hereto or any
instrument, agreement or certificate entered into or delivered by
the Company pursuant to this Agreement; or
(ii) any failure by the Company to perform in any material
respect any of its covenants, agreements, undertakings or
obligations set forth in this Agreement, the annexes, schedules
or exhibits hereto or any instrument, agreement or certificate
entered into or delivered by the Company pursuant to this
Agreement; or
(iii) any action instituted against the Lenders, or any of
them, by any stockholder of the Company who is not an Affiliate
of an Lender, with respect to any of the transactions
contemplated by this Agreement.
(b) Each Lender, severally and not jointly, hereby agrees to
indemnify and hold harmless the Company, its Affiliates and their
respective officers, directors, partners and members (collectively, the
"Company Indemnitees"), from and against any and all Damages, and
agrees to reimburse the Company Indemnitees for reasonable all out-of-
pocket expenses (including the reasonable fees and expenses of legal
counsel), in each case promptly as incurred by the Company Indemnitees
and to the extent arising out of or in connection with any
misrepresentation, omission of fact, or breach of any of the Lender's
representations or warranties contained in this Agreement, the annexes,
schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Lender pursuant to this
Agreement. Notwithstanding anything to the contrary herein, the Lender
shall be liable under this Section 7.2(b) for only that amount as does
not exceed the net proceeds to such Lender as a result of the sale of
Registrable Securities pursuant to the Registration Statement.
Section 7.3. Notice. Promptly after receipt by either party hereto
seeking indemnification pursuant to Section 7.2 (an "Indemnified
Party") of written notice of any investigation, claim, proceeding or
other action in respect of which indemnification is being sought (each,
a "Claim"), the Indemnified Party promptly shall notify the party from
whom indemnification pursuant to Section 7.2 is being sought (the
"Indemnifying Party") of the commencement thereof; but the omission to
so notify the Indemnifying Party shall not relieve it from any
liability that it otherwise may have to the Indemnified Party, except
to the extent that the Indemnifying Party is actually prejudiced by
such omission or delay. In connection with any Claim as to which both
the Indemnifying Party and the Indemnified Party are parties, the
Indemnifying Party shall be entitled to assume the defense thereof.
Notwithstanding the assumption of the defense of any Claim by the
Indemnifying Party, the Indemnified Party shall have the right to
employ separate legal counsel and to participate in the defense of such
Claim, and the Indemnifying Party shall bear the reasonable fees, out-
of-pocket costs and expenses of such separate legal counsel to the
Indemnified Party if (and only if): (x) the Indemnifying Party shall
have agreed to pay such fees, out-of-pocket costs and expenses, (y) the
Indemnified Party reasonably shall have concluded that representation
of the Indemnified Party and the Indemnifying Party by the same legal
counsel would not be appropriate due to actual or, as reasonably
determined by legal counsel to the Indemnified Party, potentially
differing interests between such parties in the conduct of the defense
of such Claim, or if there may be legal defenses available to the
Indemnified Party that are in addition to or disparate from those
available to the Indemnifying Party, or (z) the Indemnifying Party
shall have failed to employ legal counsel reasonably satisfactory to
the Indemnified Party within a reasonable period of time after notice
of the commencement of such Claim. If the Indemnified Party employs
separate legal counsel in circumstances other than as described in
clauses (x), (y) or (z) above, the fees, costs and expenses of such
legal counsel shall be borne exclusively by the Indemnified Party.
Except as provided above, the Indemnifying Party shall not, in
connection with any Claim in the same jurisdiction, be liable for the
fees and expenses of more than one firm of legal counsel for the
Indemnified Party (together with appropriate local counsel). The
Indemnifying Party shall not, without the prior written consent of the
Indemnified Party (which consent shall not unreasonably be withheld),
settle or compromise any Claim or consent to the entry of any judgment
that does not include an unconditional release of the Indemnified Party
from all liabilities with respect to such Claim or judgment.
All fees and expenses of the Indemnified Party (including
reasonable costs of defense and investigation in a manner not
inconsistent with this Section and all reasonable attorneys' fees and
expenses) shall be paid to the Indemnified Party, as incurred, within
ten (10) Trading Days of written notice thereof to the Indemnifying
Party (regardless of whether it is ultimately determined that an
indemnified party is not entitled to indemnification hereunder;
provided, that the Indemnifying Party may require such Indemnified
Party to undertake to reimburse all such fees and expenses to the
extent it is finally judicially determined that such Indemnified Party
is not entitled to indemnification hereunder).
Section 7.4. Direct Claims. In the event one party hereunder should
have a claim for indemnification that does not involve a claim or
demand being asserted by a third party, the Indemnified Party promptly
shall deliver notice of such claim to the Indemnifying Party. If the
Indemnified Party disputes the claim, such dispute shall be resolved by
mutual agreement of the Indemnified Party and the Indemnifying Party or
by binding arbitration conducted in accordance with the procedures and
rules of the American Arbitration Association as set forth in Article
X. Judgment upon any award rendered by any arbitrators may be entered
in any court having competent jurisdiction thereof.
ARTICLE VIII
Due Diligence Review; Non-Disclosure of Non-Public Information.
Section 8.1. Due Diligence Review. Subject to Section 8.2, the Company
shall make available for inspection and review by the Lenders, advisors
to and representatives of the Lenders (who may or may not be affiliated
with the Lenders and who are reasonably acceptable to the Company), any
underwriter participating in any disposition of the Registrable
Securities on behalf of the Lenders pursuant to the Registration
Statement, any such registration statement or amendment or supplement
thereto or any blue sky, Nasdaq or other filing, all SEC Documents and
other filings with the SEC, and all other publicly available corporate
documents and properties of the Company as may be reasonably necessary
for the purpose of such review, and cause the Company's officers,
directors and employees to supply all such publicly available
information reasonably requested by the Lenders or any such
representative, advisor or underwriter in connection with such
Registration Statement (including, without limitation, in response to
all questions and other inquiries reasonably made or submitted by any
of them), prior to and from time to time after the filing and
effectiveness of the Registration Statement for the sole purpose of
enabling the Lenders and such representatives, advisors and
underwriters and their respective accountants and attorneys to conduct
initial and ongoing due diligence with respect to the Company and the
accuracy of the Registration Statement.
Section 8.2. Non-Disclosure of Non-Public Information.
(a) The Company shall not disclose material non-public
information to the Lenders, advisors to or representatives of the
Lenders unless prior to disclosure of such information the Company
identifies such information as being non-public information and
provides the Lenders, such advisors and representatives with the
opportunity to accept or refuse to accept such non-public information
for review. Other than disclosure of any comment letters received from
the SEC staff with respect to the Registration Statement, the Company
may, as a condition to disclosing any non-public information hereunder,
require the Lenders' advisors and representatives to enter into a
confidentiality agreement in form and content reasonably satisfactory
to the Company and the Lenders.
(b) Nothing herein shall require the Company to disclose
material non-public information to the Lenders or their advisors or
representatives, and the Company represents that it does not
disseminate material non-public information to any Lenders who purchase
stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything
herein to the contrary, the Company will, as hereinabove provided,
promptly notify the advisors and representatives of the Lenders and, if
any, underwriters, of any event or the existence of any circumstance
(without any obligation to disclose the specific event or circumstance)
of which it becomes aware, constituting material non-public information
(whether or not requested of the Company specifically or generally
during the course of due diligence by such persons or entities), which,
if not disclosed in the prospectus included in the Registration
Statement would cause such prospectus to include a material
misstatement or to omit a material fact required to be stated therein
in order to make the statements, therein in light of the circumstances
in which they were made, not misleading. Nothing contained in this
Section 8.2 shall be construed to mean that such persons or entities
other than the Lenders (without the written consent of the Lenders
prior to disclosure of such information as set forth in Section 8.2(a))
may not obtain non-public information in the course of conducting due
diligence in accordance with the terms of this Agreement and nothing
herein shall prevent any such persons or entities from notifying the
Company of their opinion that based on such due diligence by such
persons or entities, that the Registration Statement contains an untrue
statement of a material fact or omits a material fact required to be
stated in the Registration Statement or necessary to make the
statements contained therein, in light of the circumstances in which
they were made, not misleading.
ARTICLE IX
Legends; Transfer Agent Instructions
Section 9.1. Legends. Unless otherwise provided below, each certificate
representing Registrable Securities will bear the following legend or
equivalent (the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN
RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED, OR OTHERWISE DISPOSED OF, EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM SUCH REGISTRATION.
Section 9.2. Transfer Agent Instructions. Upon the execution and
delivery hereof, the Company is issuing to the transfer agent for its
Common Stock (and to any substitute or replacement transfer agent for
its Common Stock upon the Company's appointment of any such substitute
or replacement transfer agent) instructions substantially in the form
of Exhibit F hereto. Such instructions shall be irrevocable by the
Company from and after the date hereof or from and after the issuance
thereof to any such substitute or replacement transfer agent, as the
case may be.
Section 9.3. No Other Legend or Stock Transfer Restrictions. No legend
other than the one specified in Section 9.1 has been or shall be placed
on the share certificates representing the Registrable Securities and
no instructions or "stop transfer orders," "stock transfer
restrictions," or other restrictions have been or shall be given to the
Company's transfer agent with respect thereto other than as expressly
set forth in this Article IX.
Section 9.4. Lenders' Compliance. Nothing in this Article shall affect
in any way each Lender's obligations to comply with all applicable
securities laws upon resale of the Common Stock.
ARTICLE X
Choice of Law; Arbitration
Section 10.1. Governing Law/Arbitration. This Agreement shall be
governed by and construed in accordance with the laws of the State of
New York applicable to contracts made in New York by persons domiciled
in New York City and without regard to its principles of conflicts of
laws. Any dispute under this Agreement shall be submitted to
arbitration under the American Arbitration Association (the "AAA") in New
York City, New York, and shall be finally and conclusively determined by
the decision of a board of arbitration consisting of three (3) members
(hereinafter referred to as the "Board of Arbitration") selected
according to the rules governing the AAA. The Board of Arbitration shall
meet on consecutive business days in New York City, New York, and shall
reach and render a decision in writing (concurred in by a majority of the
members of the Board of Arbitration) with respect to the amount, if any,
which the losing party is required to pay to the other party in respect
of a claim filed. In connection with rendering its decisions, the Board
of Arbitration shall adopt and follow the laws of the State of New York
unless the matter at issue is the corporation law of the company's state
of incorporation, in which event the corporation law of such jurisdiction
shall govern such issue. To the extent practical, decisions of the Board
of Arbitration shall be rendered no more than thirty (30) calendar days
following commencement of proceedings with respect thereto. The Board of
Arbitration shall cause its written decision to be delivered to all
parties involved in the dispute. Any decision made by the Board of
Arbitration (either prior to or after the expiration of such thirty (30)
calendar day period) shall be final, binding and conclusive on the
parties to the dispute, and entitled to be enforced to the fullest extent
permitted by law and entered in any court of competent jurisdiction. The
Board of Arbitration shall be authorized and is hereby directed to enter
a default judgment against any party failing to participate in any
proceeding hereunder within the time periods set forth in the AAA rules.
The non-prevailing party to any arbitration (as determined by the Board
of Arbitration) shall pay the expenses of the prevailing party, including
reasonable attorney's fees, in connection with such arbitration. Any
party shall be entitled to obtain injunctive relief from a court in any
case where such relief is available, and the non-prevailing party to any
such injunctive proceeding shall pay the expenses of the prevailing
party, including reasonable attorney's fees, in connection with such
proceeding.
ARTICLE XI
Assignment
Section 11.1. Assignment. Neither this Agreement nor any rights of the
Lenders or the Company hereunder may be assigned by either party to any
other person. Notwithstanding the foregoing, (a) the provisions of
this Agreement shall inure to the benefit of, and be enforceable by,
any permitted transferee of any of the Convertible Debentures or
Warrants purchased or acquired by any Lender hereunder with respect to
the Convertible Debentures or Warrants held by such person, and (b)
upon the prior written consent of the Company, which consent shall not
unreasonably be withheld or delayed, each Lender's interest in this
Agreement may be assigned at any time, in whole or in part, to any
other person or entity (including any Affiliate of the Lender) who
agrees to make the representations and warranties contained in Article
III and who agrees to be bound by the terms of this Agreement.
ARTICLE XII
Notices
Section 12.1. Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder
shall be in writing and, unless otherwise specified herein, shall be
(i) hand delivered, (ii) deposited in the mail, registered or
certified, return receipt requested, postage prepaid, (iii) delivered
by reputable air courier service with charges prepaid, or (iv)
transmitted by facsimile, addressed as set forth below or to such other
address as such party shall have specified most recently by written
notice. Any notice or other communication required or permitted to be
given hereunder shall be deemed effective (a) upon hand delivery or
delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated
below (if delivered on a business day during normal business hours
where such notice is to be received), or the first business day
following such delivery (if delivered other than on a business day
during normal business hours where such notice is to be received) or
(b) on the first business day following the date of sending by
reputable courier service, fully prepaid, addressed to such address, or
(c) upon actual receipt of such mailing, if mailed. The addresses for
such communications shall be as set forth in the Escrow Agreement.
Either party hereto may from time to time change its address or
facsimile number for notices under this Section 12.1 by giving written
notice of such changed address or facsimile number to the other party
hereto as provided in this Section 12.1.
ARTICLE XIII
Miscellaneous
Section 13.1. Counterparts/ Facsimile/ Amendments. This Agreement may be
executed in multiple counterparts, each of which may be executed by
less than all of the parties and shall be deemed to be an original
instrument which shall be enforceable against the parties actually
executing such counterparts and all of which together shall constitute
one and the same instrument. Except as otherwise stated herein, in
lieu of the original documents, a facsimile transmission or copy of the
original documents shall be as effective and enforceable as the
original. This Agreement may be amended only by a writing executed by
all parties.
Section 13.2. Entire Agreement. This Agreement, the agreements attached
as Exhibits hereto, which include, but are not limited to the
Convertible Debentures, the Warrants, the Escrow Agreement, and the
Registration Rights Agreement, set forth the entire agreement and
understanding of the parties relating to the subject matter hereof and
supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to
the subject matter hereof. The terms and conditions of all Exhibits to
this Agreement are incorporated herein by this reference and shall
constitute part of this Agreement as is fully set forth herein.
Section 13.3. Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction
to be illegal, unenforceable or void, this Agreement shall continue in
full force and effect without said provision; provided that such
severability shall be ineffective if it materially changes the economic
benefit of this Agreement to any party.
Section 13.4. Headings. The headings used in this Agreement are used for
convenience only and are not to be considered in construing or
interpreting this Agreement.
Section 13.5. Number and Gender. There may be one or more Lenders
parties to this Agreement, which Lenders may be natural persons or
entities. All references to plural Lenders shall apply equally to a
single Lender if there is only one Lender, and all references to an
Lender as "it" shall apply equally to a natural person.
Section 13.6. Reporting Entity for the Common Stock. The reporting
entity relied upon for the determination of the trading price or
trading volume of the Common Stock on any given Trading Day for the
purposes of this Agreement shall be Bloomberg, L.P. or any successor
thereto. The written mutual consent of the Lenders and the Company
shall be required to employ any other reporting entity.
Section 13.7. Replacement of Certificates. Upon (i) receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of a certificate representing the Convertible Debentures
or any Conversion Shares or Warrants or any Warrant Shares and (ii) in
the case of any such loss, theft or destruction of such certificate,
upon delivery of an indemnity agreement or security reasonably
satisfactory in form to the Company (which shall not include the
posting of any bond) or (iii) in the case of any such mutilation, on
surrender and cancellation of such certificate, the Company at its
expense will execute and deliver, in lieu thereof, a new certificate of
like tenor.
Section 13.8. Fees and Expenses. Each of the Company and the Lenders
agrees to pay its own expenses incident to the performance of its
obligations hereunder, except that the Company shall pay the fees,
expenses and disbursements of counsel to the Lenders, in an amount
equal to $10,000, all as set forth in the Escrow Agreement.
Section 13.9. Finder's and Broker's Fees. Each of the parties hereto
represents that it has had no dealings in connection with this
transaction with any finder or broker who will demand payment of any
fee or commission from the other party except for Union Atlantic, L.C.
whose fee shall be paid by the Company. The Company on the one hand,
and the Lenders, on the other hand, agree to indemnify the other
against and hold the other harmless from any and all liabilities to any
person claiming brokerage commissions or finder's fees on account of
services purported to have been rendered on behalf of the indemnifying
party in connection with this Agreement or the transactions
contemplated hereby.
Section 13.10. Publicity. The Company agrees that it will not issue any
press release or other public announcement of the transactions
contemplated by this Agreement without the prior consent of the
Lenders, which shall not be unreasonably withheld nor delayed by more
than two (2) Trading Days from their receipt of such proposed release.
No release shall name the Lenders without their express consent.
IN WITNESS WHEREOF, the parties hereto have caused this Loan
Agreement to be executed by the undersigned, thereunto duly authorized,
as of the date first set forth above.
AMERICAN CHAMPION ENTERTAINMENT,
INC.
By:
Anthony Chan, President & CEO
LENDERS:
Amount subscribed for: AMRO International, S.A.
$333,334
By:
H.U. Bachofen, Director
Amount subscribed for: The Endeavour Capital Fund, S.A.
$333,333 By: Endeavour Management, Inc.
By:
Shmuli Margulies, President
Amount subscribed for: Celeste Trust Reg.
$166,667
By:
Thomas Hackl, Authorized
Signatory
Amount subscribed for: Balmore, S.A.
$166,666
By:
Francois Morax, Authorized
Signatory
