AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON _______, 1998
REGISTRATION NO. ________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
DIGITAL LAVA INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
------------
Delaware 7371 95-4584080
(State or Other (Primary Standard (I.R.S.
Jurisdiction of Industrial Classification Employer identification
Incorporation Or Code Number) No.)
Organization)
10850 Wilshire Boulevard, Suite 1260 10850 Wilshire Boulevard, Suite 1260
Los Angeles, CA 90024 Los Angeles, CA 90024
(310) 470-1149 (Address of Principal Place or
(Address and Telephone Number Intended Principal Place
of Principal Executive Offices) of Business)
------------
Joshua D.J. Sharfman
Chief Executive Officer
Digital Lava Inc.
10850 Wilshire Boulevard, Suite 1260
Los Angeles, California 90024
(310) 470-1149
(Name, Address, And Telephone Number Of Agent For Service)
COPIES TO:
Jeffrey D. Abbey, Esq. Lawrence B. Fisher, Esq.
Ehrenreich Eilenberg Krause & Zivian LLP Orrick, Herrington & Sutcliffe LLP
11 East 44th Street 30 Rockefeller Plaza
New York, New York 10017 New York, New York 10112
(212) 986-9700 (212) 506-5000
------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
<PAGE>
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: [ ]
Calculation of Registration Fee
<TABLE>
<CAPTION>
==========================================================================================================
Title of each Class Amount Propose Maximum Proposed Maximum Amount of
of Securities to to be Offering Price Aggregate Offering Registration
be Registered(1) Registered Per Unit(2) Price(2) Fee
==========================================================================================================
<S> <C> <C> <C> <C>
Common Stock, par value
$.0001 per share
("Common Stock") (3) .......... 2,760,000 $ 7.50 $20,700,000 $ 5,755
Redeemable Common Stock
Purchase Warrants
("Redeemable Warrants")(4) .... 1,380,000 $ 0.10 $ 138,000 $ 39
Common Stock issuable
upon exercise of
Redeemable Warrants(5) ........ 1,380,000 $ 9.00 $12,420,000 $ 3,453
Representative's
Warrants(6) ................... 240,000 $ .0001 $ 24 --
Common Stock issuable
upon exercise of
Representative's
Warrants(6) ................... 240,000 $ 9.00 $ 2,160,000 $ 601
Redeemable Warrants issuable
upon exercise of
Representative's
Warrants(6) ................... 120,000 $ 0.10 $ 12,000 $ 4
Common Stock issuable upon
exercise of Redeemable Warrants
issuable upon exercise of
Representative's
Warrants(6) ................... 120,000 $ 9.00 $ 1,080,000 $ 301
Common Stock(7) ................ 822,103 $ 7.50 $ 6,165,773 $ 1,714
- ----------------------------------------------------------------------------------------------------------
Total .......................... $42,675,797 $ 11,867
==========================================================================================================
</TABLE>
(1) Pursuant to Rule 416, there are also being registered such additional
securities as may become issuable pursuant to the anti-dilution pr ovisions
of the Redeemable Warrants, the Representative's Warrants and the
Redeemable Warrants underlying the Representative's Warrants.
<PAGE>
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) of the Securities Act of 1933, as amended.
(3) Includes 360,000 shares of Common Stock that the Underwriters have the
option to purchase to cover over-allotments, if any.
(4) Includes 180,000 Redeemable Warrants that the Underwriters have the option
to purchase to cover over-allotments, if any.
(5) Includes 180,000 shares of Common Stock issuable upon exercise of
Redeemable Warrants that the Underwriters have the option to purchase to
cover over-allotments, if any.
(6) In connection with the Registrant's sale of the securities offered hereby,
the Registrant is granting to the Representative of the several
Underwriters warrants to purchase 240,000 Shares of Common Stock and
120,000 Redeemable Warrants.
(7) Consists of currently outstanding shares held by Selling Stockholders.
------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 (A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE AMENDED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE RELATED REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION OR ANY APPLICABLE STATE SECURITIES
COMMISSION BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY STATE IN WHERE THE OFFER OR SALE
IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 23, 1998
PROSPECTUS
LOGO
DIGITAL LAVA INC.
1,200,000 UNITS
(EACH UNIT CONSISTING OF TWO SHARES OF
COMMON STOCK AND ONE REDEEMABLE WARRANT)
This is an initial public offering of 1,200,000 units, each unit consisting
of two shares of common stock and one redeemable common stock purchase warrant,
of Digital Lava Inc. The shares of common stock and the redeemable warrants
comprising the units will be separately tradeable immediately following the
completion of this offering. Each warrant entitles the holder to purchase, at
any time over a four-year period commencing 12 months after the date of this
Prospectus, one share of Common Stock at a price per share of $___ [120% of the
initial public offering price per share of the Common Stock]. The warrant
exercise price is subject to adjustment under certain circumstances. Commencing
________, 1999 [18 months after the date of this Prospectus], the warrants will
be subject to redemption by the Company, in whole but not in part, at $.10 per
warrant on 30 days' prior written notice, provided that the average closing sale
price of the Common Stock as reported on the American Stock Exchange equals or
exceeds $___ per share [150% of the initial public offering price per share of
the Common Stock] for any 20 trading days within a period of 30 consecutive
trading days ending on the fifth trading day prior to the date of notice of
redemption.
There is currently no public market for the units, the common stock or the
redeemable warrants. Digital Lava anticipates that the initial public offering
price per unit will be $15.10. It is anticipated that the common stock and the
warrants will be listed on the American Stock Exchange under the symbols "LV"
and "LVW," respectively.
This prospectus also relates to the sale of shares of common stock held by
certain selling stockholders identified in this prospectus. Such shares may not
be sold for a period of nine months from the effective date of this prospectus
without the prior written consent of Security Capital Trading, Inc. Digital Lava
will not receive any proceeds from the sale of such shares.
Investing in the common stock and warrants involves certain risks. You
should purchase these securities only if you can afford a complete loss. See
"Risk Factors" beginning on page 8.
Per share Total
--------- -----
Public Offering Price.......................... $ $
Underwriting Discounts and Commissions......... $ $
Proceeds to the Company........................ $ $
Proceeds to Selling Stockholders............... $ $
<PAGE>
Neither the Securities and Exchange Commission nor any State securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
SECURITY CAPITAL TRADING, INC.
The date of this Prospectus is ___________, 1998.
<PAGE>
[Inside Front Cover Page]
[Top of the Page: VideoVisor ... desktop video that works. A solution for
distance learning, corporate training and communications applications."]
[Center: Picture of VideoVisor screen, including picture of speaker, a chart of
the broadbrand methods of connecting FDDI networks and captions pointing to the
individual components of the network.]
[Bottom of the Page: Awards received by Digital Lava for its products and a
slogan, "Digital Lava ... we're changing the way the world views video"]
-2-
<PAGE>
TABLE OF CONTENTS
Prospectus Summary........................................................... 4
Risk Factors................................................................. 8
Use of Proceeds.............................................................. 16
Dividend Policy.............................................................. 17
Capitalization............................................................... 18
Dilution..................................................................... 19
Selected Financial Data...................................................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................................................. 21
Business..................................................................... 27
Management................................................................... 37
Certain Transactions......................................................... 40
Principal Stockholders....................................................... 42
Selling Stockholders......................................................... 44
Description of Securities.................................................... 46
Shares Eligible for Future Sale.............................................. 49
Underwriting................................................................. 50
Legal Matters................................................................ 53
Experts...................................................................... 53
Additional Information....................................................... 53
Index to Financial Statements................................................F-1
-3-
<PAGE>
PROSPECTUS SUMMARY
You should read the entire Prospectus, including the "Risk Factors" section
and the Financial Statements and the notes to the Financial Statements,
carefully. The terms the "Company" and "Digital Lava" refers to us and our
predecessor.
Unless stated otherwise, all information in this Prospectus (i) assumes an
initial public offering price of $7.50 per share; (ii) gives effect to a 1 for
9.01 reverse stock split to be effected immediately prior to the completion of
this offering; (iii) gives effect to the conversion of all outstanding shares of
Preferred Stock of the Company into shares of Common Stock, which will occur
immediately prior to the completion of this offering; (iv) gives effect to the
"Recapitalization," described in "Description of Securities" which will occur
immediately prior to the completion of this offering; and (v) does not give
effect to the (a) exercise of the representative's over-allotment option, (b)
exercise of the warrants, (c) exercise of the Representative's warrants,
including the exercise of the warrants underlying the Representative's warrants
and (d) issuance of shares of common stock upon the exercise of warrants
currently outstanding.
THE COMPANY
Digital Lava is a leading provider of video publishing software products
and services for corporate training, communications, distance learning, research
and other applications. Our video publishing technology provides companies,
educational institutions and government agencies with a way to re-purpose,
publish and deploy on-demand video content and information to desktop computer
users. Our video publishing product line includes vPrism(TM) and VideoVisor(TM)
software. vPrism allows users to organize and manage video content, link video
to other types of files and publish video with all of the linked information as
VideoCapsule(TM) files on CD-ROM or DVD, or stream the interactive video
information over intranets or the Internet. VideoVisor is a desktop productivity
tool that allows end-users to access VideoCapsule files and navigate, rearrange,
annotate, subtitle text and transcripts, and view synchronized video, notes and
links. Our VideoVisor software won the "Best New Streaming Product" award at the
Desktop Video Communications (DVC) 1998 Spring Conference in Santa Clara,
California and a "Networked Multimedia People's Choice Award" at the 1998 DVC
Fall Conference in Boston. We also provide turnkey video encoding, publishing
and web hosting services.
We believe that the continuing emergence of rich multimedia capabilities,
such as streaming audio and video on the Internet, presents a significant new
market opportunity for software applications that enhance the effectiveness and
productivity of professionals and consumers who rely on video information. We
believe that as the Internet continues to evolve as a mass communications medium
and as corporations, educational institutions and government agencies seek to
eliminate the high cost and time requirements of travel through the increased
use of video, an increasing amount of video content, including business,
distance learning and consumer programs, will be delivered over the Internet.
RealNetworks, Inc., one of our strategic partners and a leader in the streaming
media market, has already registered over 35 million users of its RealPlayer
Internet streaming software. We believe that our video publishing software
technology is essential to this evolution because it provides a more compelling
and productive user experience than broadcast television and videotape, allowing
the Internet to effectively compete with such traditional video delivery
methods.
We have independent software vendor ("ISV") licensing, development,
distribution and reseller relationships with a number of software industry
leaders. We are an ISV for Microsoft Corporation's NetShow products and license
Microsoft's Internet Explorer Administration Kit to integrate Microsoft's web
browser into our products. RealNetworks, Inc. has developed custom software to
integrate their
-4-
<PAGE>
RealPlayer intranet and Internet software into VideoVisor, and the Company has a
licensing and distribution agreement with RealNetworks to distribute the
integrated, bundled products to end-user clients. We also convert MicroVideo
Learning System, Inc.'s video training courseware to our proprietary format and
resell the published content to our customers. In addition, we have a worldwide
distribution agreement with FVC.COM (formally First Virtual Corporation), a
leading manufacturer of high quality corporate and distance learning video
solutions, under which FVC.COM distributes a distance learning solution, called
the Virtual Classroom(TM), that bundles our vPrism and VideoVisor software. We
also sell turnkey video hosting services to corporate and other customers
pursuant to a Web hosting service agreement with VStream, Inc., and resell our
products and services domestically and internationally through a number of
systems integrators, video software resellers and training companies, including
Roscor Corporation, AE Business Solutions, Producers Studio, IRM Training Pty.
Ltd., VCS Technologies, Inc., WingsNet, Inc., StorNet, Inc. and DocuVideo
Productions.
Our customers include large corporations and business enterprises, such as
Shell Chemicals Company, American General Life Insurance Company, Ardent
Software, Inc., ASI Entertainment, Inc., Bellcore, Diedrich Coffee, Inc. and
Rand Corporation. Our customers also include schools, universities and research
institutions such as Northwestern University, Los Angeles Unified School
District, The Smithsonian Institute, and Educational Testing Service.
Our objective is to be the leading provider of video publishing software
and services that enable the delivery of a broad range of interactive
video-based content over the Internet, intranets and CD/DVD-ROM discs. To
achieve this objective, we intend to further extend our technology leadership
through continued product development and new product offerings, building brand
recognition and our marketing and sales efforts, pursuing strategic
relationships, enhancing and expanding internal operations and expanding
internationally.
We were formed as a limited liability company in July 1995 and merged into
a Delaware corporation in November 1996. Our address is 10850 Wilshire
Boulevard, Suite 1260, Los Angeles, California 90024, and our telephone number
is (310) 470-1149. Our Web site can be accessed at www.digitallava.com.
Information contained on our Web site is not part of this Prospectus.
VideoVisor(TM), vPrism(TM), VideoCapsule(TM), ClipList(TM), TempoLink(TM),
Digital Lava Inc.(TM), Changing the way the world views video(TM), the Digital
Lava logo(TM), the Powered by Digital Lava logo(TM), the VideoVisor logo(TM),
the vPrism logo(TM), Powered by Digital Lava(TM), VideoPlayList(TM), VideoVisor
Server(TM), VideoVisor Professional(TM), VideoVisor Web(TM), VideoVisor Web
Publisher(TM) and VideoVisor iView(TM) are unregistered trademarks, service
marks and trade names of the Company. This Prospectus also includes trademarks,
service marks and trade names other than those identified in this paragraph, all
of which are the property of their respective holders.
THE OFFERING
Securities Offered .................. 1,200,000 Units, consisting of two
shares of Common Stock (the "Common
Stock") and one Redeemable Common Stock
Purchase Warrant (the "Warrants"). The
Common Stock and the Warrants will be
separately tradeable immediately
following the completion of this
offering.
Terms of Warrants ................... Each Warrant entitles the holder to
purchase, at any
-5-
<PAGE>
time over a four year period commencing
12 months after the date of this
Prospectus, one share of Common Stock at
a price per share of $ _____ [120% of
the initial public offering price per
share]. The Warrant exercise price is
subject to adjustment under certain
circumstances. Commencing ________, 1999
[18 months after the date of this
Prospectus], the Warrants will be
subject to redemption by us, in whole
but not in part, at $.10 per Warrant on
30 days' prior written notice, provided
that the average closing sale price of
the Common Stock as reported on the Amex
equals or exceeds $___ per share [150%
of the initial public offering price of
the Common Stock] for any 20 trading
days within a period of 30 consecutive
trading days ending on the fifth trading
day prior to the date of notice of
redemption. See "Description of
Securities."
Common Stock Outstanding
Before the Offering(1)(2) ......... 1,953,758 shares
Common Stock Outstanding
After the Offering(1)............... 4,353,758 shares
Warrants Outstanding
After the Offering.................. 1,200,000 Warrants
Use of Proceeds ..................... Product development, sales and
marketing, repayment of indebtedness,
facilities and other capital
expenditures, expansion of internal
operations and working capital and
general corporate purposes. See "Use of
Proceeds."
Proposed Amex Symbols ............... Common Stock LV
Warrants LVW
Risk Factors ........................ For a discussion of certain risks you
should consider before investing in the
Company's securities, see "Risk
Factors."
- ----------
(1) Does not include: (i) 140,473 shares of Common Stock reserved for issuance
upon the exercise of options outstanding upon completion of this offering
under the Company's 1996 Incentive and NonQualified Stock Option Plan (the
"Plan"); (ii) 109,527 shares of Common Stock reserved for issuance upon the
exercise of options that may be granted under the Plan; and (iii) 407,075
shares of Common Stock reserved for issuance upon the exercise of warrants
currently outstanding. See "Description of Securities."
(2) Gives effect to the Recapitalization.
-6-
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended Six Months Ended
------------------------------ ------------------------------
December 31, December 31, June 30, June 30,
1996 1997 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ............................................... $ -- $ 564,572 $ 286,008 $ 391,897
Cost of revenues ....................................... -- 122,976 90,135 91,867
----------- ----------- ----------- -----------
Gross profit ........................................... -- 441,596 195,873 300,030
----------- ----------- ----------- -----------
Operating costs and expenses:
Selling, general and administrative ................ 1,522,757 3,316,961 1,649,082 2,003,064
Research and development ........................... 421,087 445,162 216,976 267,514
----------- ----------- ----------- -----------
Total operating costs and expenses ............... 1,943,844 3,762,123 1,866,058 2,270,578
----------- ----------- ----------- -----------
Loss from operations ................................... (1,943,844) (3,320,527) (1,670,185) 1,970,548
Interest expense ....................................... 450,563 924,842 527,534 809,465
Net loss ............................................... $(2,384,657) $(4,245,369) $(2,197,719) $(2,780,013)
=========== =========== =========== ===========
Basic and diluted loss per share (1) ................... $ (91.69) $ (30.70) $ (16.55) (18.53)
=========== =========== =========== ===========
Weighted average common shares used in
basic and diluted loss per share (1) ............... 26,008 138,305 132,755 150,051
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------------------
Pro Forma
As Adjusted
Balance Sheet Data: Actual Pro Forma (2) (2) (3)
----------- ------------- -----------
<S> <C> <C> <C>
Cash and cash equivalents................................................... $ 44,187 $ 44,187 $11,537,417
Working capital (deficit)................................................... (5,775,855) (4,246,672) 10,870,017
Total assets................................................................ 927,442 927,442 12,420,672
Total liabilities........................................................... 6,595,833 5,066,650 1,443,191
Total stockholders' deficit................................................. (5,668,391) (4,139,208) 10,977,481
</TABLE>
- -----------------
(1) For information concerning the computation of net loss per share, see Note
2 of Notes to Financial Statements.
(2) Gives effect to the following Recapitalization: (i) conversion of the
Series A, B, B-1 and C Convertible Preferred stock; (ii) the recording of a
dividend to the holders of the Series B and C Convertible Preferred Stock
due to a change in conversion ratios; (iii) the return and cancellation of
shares of Common Stock and Series A Preferred Stock held by certain
officers of the Company; (iv) the conversion of certain notes payable,
accrued interest thereon and warrants issued in connection with the notes
into Common Stock and the recording of an extraordinary loss on the
extinguishment of debt based upon the difference in the fair value of (a)
the notes, accrued interest and warrants converted and (b) the Common Stock
issued in exchange; and (v) the conversion of certain warrants exercisable
for shares of Common Stock into Common Stock. See "Description of
Securities -- Recapitalization."
(3) As adjusted to give effect to (i) the sale of Common Stock and Warrants
offered hereby at an initial public offering price of $7.50 per share of
Common Stock and $.10 per Warrant, (ii) the repayment of outstanding notes
payable in the aggregate principal amount of $3,359,750 and accrued
interest and fees in the amount of $411,420 at June 30, 1998, and (iii) the
recognition of the unamortized portion of the debt discount associated with
the notes payable as an expense. See "Use of Proceeds."
-7-
<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information
in this Prospectus before deciding to invest in shares of Common Stock and
Warrants. This Prospectus contains forward-looking statements that involve risks
and uncertainties. Such statements can be identified by the use of words such as
"may," "will," "expect," "anticipate," "estimate," "continue," or other similar
words. These statements discuss future expectations, contain projections of
results of operations or of financial condition, or state other
"forward-looking" information. When considering such statements, you should keep
in mind the risk factors described below and other cautionary statements in this
Prospectus. The risk factors described below and other factors noted throughout
this Prospectus, including certain risks and uncertainties, could cause our
actual results to differ materially from those contained in any forward-looking
statement.
Limited Operating History; Accumulated Deficit; Anticipated Future Losses;
Ability to Continue as a Going Concern. We were originally formed as a limited
liability company in July 1995 and were merged into a corporation in November
1996. We did not recognize any revenue until 1997. Therefore, we have only a
limited operating history upon which you may judge our performance and
prospects. We have incurred significant losses since inception and we expect to
continue to incur substantial operating losses for the foreseeable future. As of
June 30, 1998, we had an accumulated deficit of $9,748,311. To become
profitable, we must, among other things, establish widespread market acceptance
of our existing products, successfully develop and deliver new products and
services, respond quickly and effectively to competitive, market and
technological developments, expand sales and marketing operations, broaden
customer support capabilities, control expenses and continue to attract and
retain qualified personnel. We may not become profitable in the future. Our
independent accountants have included an explanatory paragraph stating that our
financial statements have been prepared assuming that we will continue as a
going concern and that we have suffered recurring losses from operations and
have a working capital deficiency which cause substantial doubt as to our
ability to do so. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Financial Statements and Notes
thereto."
Unpredictability of Future Revenues; Potential Fluctuation in Quarterly
Operating Results. As a result of our limited operating history and the emerging
nature of the markets in which we compete, we may not be able to achieve
anticipated revenues. We expect to experience significant fluctuations in our
future quarterly operating results due to a variety of factors, many of which
are outside our control, including:
- demand for products and services;
- market acceptance of our new products and services;
- price reductions or changes in pricing;
- mix of products and services;
- mix of distribution channels;
- mix of international and North American revenues;
- costs of litigation and intellectual property protection;
- competitive factors;
- growth in the use of the Internet;
- technical difficulties with respect to the use of our products; and
- general economic conditions and economic conditions specifically
related to the Internet.
We believe that our quarterly revenues, expenses and operating results could
vary significantly in the future, and that you should not rely upon
period-to-period comparisons as indications of future performance.
-8-
<PAGE>
Product Development; Rapid Technological Change. The markets for our
products are characterized by evolving industry standards, changing technologies
and frequent new product introductions and enhancements. Our future success will
depend in part on our ability to enhance our existing products and to develop
and introduce new products and features that meet changing customer requirements
and emerging industry standards. We may not successfully complete the
development or introduction of products on a timely basis, if at all. In
addition, our current or future products may not achieve market acceptance.
Products or technologies developed by others may render our products or
technologies noncompetitive or obsolete. Any failure by us to anticipate or
respond adequately to changing technologies, or any significant delays in
product development or introduction, could cause customers to delay or decide
against purchases of our products and would have a material adverse effect on
our business.
Risk of Product Defects and Product Liability. Software products as complex
as those offered by us often contain undetected errors or failures when first
introduced or as new versions are released. In addition, to the extent that we
may have to develop new products that operate in new environments, such as the
Internet, the possibility for program errors and failures may increase due to
factors such as the use of new technologies or the need for more rapid product
development that is characteristic of the Internet market. Despite pre-release
testing by us and by current and potential customers, there still may be errors
in new products, even after commencement of commercial shipments. The occurrence
of such errors could result in delay, or failure to achieve, market acceptance
of our products, which could have a material adverse effect on our business. In
addition, because our products are used in business-critical applications, any
errors or failures in such products may give rise to substantial product
liability claims, which also could have a material adverse effect on our
business.
Customer Concentration. In the past, we derived a majority of our revenues
in each period from one customer. For the six months ended June 30, 1998, one
customer accounted for approximately 50.5% of revenues. For the six months ended
June 30 1997, a separate customer accounted for 81.9% of revenues. Although the
volume of sales for our customers varies from year-to-year, the loss of a major
customer could have a material adverse effect on our business.
Competition. The markets for our products and services are relatively new,
constantly evolving and intensely competitive. Barriers to entry are low and we
expect that competition will intensify in the future. Many of our current and
potential competitors have longer operating histories, greater name recognition
and significantly greater financial, technical and marketing resources. As a
result, our competitors may be able to develop products comparable or superior
to ours or adapt more quickly to new technologies or evolving customer
requirements. In addition, we may, as a strategic response to changes in the
competitive environment, implement pricing, licensing, service or marketing
changes designed to extend our current brand and technology franchise. Continued
price concessions or the emergence of other pricing or distribution strategies
by competitors may have a material adverse effect on our business, financial
condition and results of operations.
Possible Need for Additional Financing. We anticipate that the net proceeds
from this offering and cash provided by operations will allow us to meet our
cash requirements for at least 12 months following the date of this Prospectus.
This expectation is based on our current operating plan which can change as a
result of many factors, and we may require additional funding sooner than
anticipated. In addition, unplanned acquisition and development opportunities
and other contingencies may arise, which also could require additional capital.
Sources of funds may include the issuance of common or preferred stock sold in a
public offering or in private placements, or the issuance of debt or bank
financing. If additional capital is raised through the sale of equity or
convertible debt securities, our stockholders may be diluted. We may not be able
to obtain capital on a timely basis, on favorable terms, or at all. If we are
unable to obtain such financing, or generate funds from operations sufficient to
meet our needs, we would be materially adversely affected. See "Use of
Proceeds."
-9-
<PAGE>
Risks Associated with Interim Financing. We are currently planning on
raising up to $500,000 of capital through the issuance of promissory notes and
warrants to help us meet our cash requirements until we receive the net proceeds
from this offering. We anticipate that such notes would be paid at the closing
of this offering and that we will issue warrants to purchase an aggregate of
250,000 shares of Common Stock, assuming $500,000 is raised, at 130% of the
initial public offering price per share. We may not be able to obtain such
capital on a timely basis, on favorable terms, or at all. If we are unable to
obtain such capital, or generate funds from operations sufficient to meet our
needs, our business could be adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Repayment of Indebtedness. We have allocated approximately 25.5% of the net
proceeds of this offering for repayment of certain promissory notes issued in
private placements which are currently outstanding in the aggregate principal
amount of $3,359,750. An aggregate principal amount of $1,719,500 of such notes
matured on or before August 1, 1998, and, therefore, we are currently in default
on the repayment of such notes. Holders of an aggregate principal amount of
$1,519,500 of such notes have agreed to waive such default and extend the
maturity date of such notes to the earlier of December 31, 1998 or the
consummation of this offering. The holders of the remaining $200,000 aggregate
principal amount of such notes have not agreed to waive default or extend the
maturity date of their notes, and, therefore, we remain in default on such
notes. In addition, an aggregate of an additional $1,750,000 of the notes we are
repaying with proceeds of this offering are due on November 20, 1998. If this
offering is not completed by November 20, 1998, and we have not reached an
agreement to extend the term of such notes with each of the holders, then we
will be in default on such notes and the holders may foreclose on our assets. In
such event, it is unlikely that we will be able to complete this offering. See
"Use of Proceeds" and "Description of Securities -- Recapitalization."
Uncertain Protection of Intellectual Property; Risks Associated With
Licensed Third-Party Technology. Our success depends in part on our ability to
protect our proprietary software and other intellectual property. To protect our
proprietary rights, we generally rely on patent, copyright, trademark and trade
secret laws, confidentiality agreements with employees and third parties, and
license agreements with consultants, vendors and customers, although we have not
signed such agreements in every case. Despite such protections, a third party
could copy or otherwise obtain and use our products or technology, or develop
similar technology independently.
We currently have one patent pending in the United States relating to our
product architecture and technology. The pending patent application may not be
granted, or, if granted, may not provide us with any competitive advantage. Many
of our current and potential competitors dedicate substantially greater
resources to protection and enforcement of intellectual property rights,
especially patents. If a patent has been issued or is issued in the future that
would cover our product, we would need to either obtain a license or design
around the patent. We may not be able to obtain such a license on acceptable
terms, if at all, nor design around the patent.
To license many of our products, we rely in part on "shrinkwrap" and
"clickwrap" licenses that are not signed by the end user and, therefore, may be
unenforceable under the laws of certain jurisdictions. As with other software
products, our products are susceptible to unauthorized copying and uses that may
go undetected, and policing such unauthorized use is difficult. In general, our
efforts to protect our intellectual property rights through patent, copyright,
trademark and trade secret laws may not be effective to prevent misappropriation
of our technology, or to prevent the development and design by others of
products or technologies similar to or competitive with ours.
We also rely on certain technology that we license from third parties,
including software that is integrated with internally developed software and
used in our products, to perform key functions. In the future, such third-party
technology licenses may not be available to us on commercially reasonable terms.
The loss of
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any of these technologies could have a material adverse effect on our business,
financial condition and results of operations.
We attempt to avoid infringing known proprietary rights of third parties in
our product development efforts. However, we have not conducted and do not
conduct comprehensive patent searches to determine whether the technology used
in our products infringes patents held by third parties. In addition, it is
difficult to proceed with certainty in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies. If we
were to discover that our products violate third-party proprietary rights, we
may not be able to obtain licenses to continue offering such products without
substantial reengineering or that any effort to undertake such reengineering
would be successful, that any such licenses would be available on commercially
reasonable terms, if at all, or that litigation could be avoided or settled
without substantial expense and damage awards. Any claims relating to the
infringement of third-party proprietary rights, even if not meritorious, could
result in the expenditure of significant financial and managerial resources and
could result in injunctions preventing us from distributing certain products.
Such claims could materially adversely affect our business, financial condition
and results of operations.
Developing Market. The markets for our products and services are in the
early stages of development and are evolving rapidly, with continuing new
developments in technology, product distribution methods, and marketing and
licensing relationships. The development of a market for our products also
depends on increased use of the Internet and intranets for information,
publication, distribution and commerce relating to video and multimedia.
Critical issues concerning use of the Internet and intranets (including
security, reliability, cost, ease of use and quality of service) remain
unresolved and may affect the growth of and the degree to which business is
conducted over the Internet and intranets. If the market for our products and
services fails to grow, develops more slowly than expected or becomes saturated
with competing products or services, our business will be materially adversely
affected.
Dependence on Key Personnel. We are dependent on the continued employment
and performance of our executive officers and key employees, particularly Joshua
Sharfman, Chief Executive Officer (and President, upon completion of this
offering), and Thomas Stigler, Vice President of Sales and Business Strategy. We
have entered into employment agreements with Messrs. Sharfman and Stigler which
commence on the closing of this offering. We do not maintain any key man life
insurance. The loss of the services any of our executive officers or key
employees could have a material adverse effect on our business. See
"Management."
Management of Growth. Our rapid growth has placed, and is expected to
continue to place, a significant strain on our managerial, technical,
operational and financial resources. To manage our expected growth, we will have
to implement and improve our operational and financial systems and train and
manage our growing employee base. We will also need to maintain and expand our
relationships with customers, marketing partners, licensees, licensors, and
other third parties. Our current and planned personnel, financial and operating
procedures and controls may not be adequate to support our future operations. If
we are unable to manage our growth effectively, our business will be materially
adversely affected.
Risks Associated with International Expansion. A component of our strategy
is to expand internationally by opening international sales offices and
developing international distribution and sales networks. We may be unable to
successfully market, sell and deliver our products internationally. In addition,
we will be subject to the risks of doing business abroad, including political or
economic instability in a region, changes in diplomatic and trade relationships,
tariffs and other barriers and restrictions, restrictions on the transfer of
funds, currency fluctuations, potentially adverse tax consequences and the
burdens of complying with foreign laws and regulations. Such factors could
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materially adversely affect our business in the future.
Year 2000 Compliance. The "year 2000 problem" is pervasive and complex as
virtually all computer operations will be affected in some way. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or fail. We have not completed our
assessment of the potential impact of year 2000 on our systems, nor are we
certain that all of our vendors, suppliers and customers are year 2000
compliant. Any year 2000 compliance problem affecting us or our customers could
have a material adverse effect on our business.
Sales and Other Taxes. We currently do not collect sales or similar taxes
with respect to the sale of products, license of technology, or provision of
services in states and countries other than states in which we have offices.
However, one or more states or foreign countries may seek to impose sales or
other tax obligations on companies that engage in online commerce within their
jurisdictions. A successful assertion by one or more states or any foreign
country that we should collect sales or other taxes on the sale of products,
license of technology, or provision of services, or remit payment of sales or
other taxes for prior periods, could have a material adverse effect on our
business.
Control by Management. After completion of this offering, our executive
officers and directors will beneficially own approximately 22.5% (20.8% if the
Underwriters' over-allotment is exercised in full) of our outstanding shares. As
a result, these executive officers and directors may continue to be able to
control the outcome of matters requiring a stockholder vote, including the
election of the members of the Board of Directors. This control could adversely
affect the market price of the shares of Common Stock or delay or prevent a
change in control of Digital Lava. See "Principal Stockholders."
Broad Discretion Over Use of Proceeds. We intend to use approximately
$3,891,000, or 25.5%, of the net proceeds of the offering to repay outstanding
indebtedness, including accrued interest and fees, and the balance for the other
purposes described under "Use of Proceeds." Although our current estimate as to
the amount of such net proceeds that will be used for each such other purpose is
set forth under "Use of Proceeds," we reserve the right to change the amount of
such net proceeds that will be used for any purpose to the extent that
management determines that such change is advisable. Accordingly, management
will have broad discretion as to the application of the net proceeds of the
offering. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Governmental Regulation and Legal Uncertainty. We are not currently
directly regulated by any governmental agency, other than laws and regulations
generally applicable to businesses, although certain United States export
controls and import controls of other countries, including controls on the use
of encryption technologies, may apply to our products. Due to the increasing
popularity and use of the Internet, it is possible that a number of laws and
regulations may be adopted in the United States and abroad relating to the
Internet. In addition, the applicability to the Internet of the existing laws
governing issues such as property ownership, content, taxation, defamation and
personal privacy is uncertain. Any such export or import restrictions, new
legislation or regulation or governmental enforcement of existing regulations
may limit the growth of the Internet, increase our cost of doing business,
restrict our business or increase our legal exposure, which could have a
material adverse effect on our business.
Liability for Internet Content. Because content from our Web site is
distributed to others, we may be subjected to claims of negligence, copyright,
patent or trademark infringement, defamation, indecency and other claims. Such
claims have been brought, sometimes successfully, against Internet content
distributors. In addition, we could be subjected to claims based upon the
content that is accessible from our Web site through links to other Web sites.
Although we maintain general liability insurance, our insurance may not cover
potential claims of this type or may not be adequate to indemnify us for all
liability that may be
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imposed. Any imposition of liability that is not covered by insurance or is in
excess of insurance coverage could have a material adverse effect on our
business.
Lack of Experience of Representative. Security Capital Trading Inc., the
Representative, commenced operations in June 1995. The Representative has
co-managed and participated as an underwriter in only two previous public
offerings of securities. No assurances can be given that Security Capital will
be able to participate as a market maker of the Common Stock or Warrants or that
any broker-dealer will become a market maker for the Common Stock or Warrants.
See "Underwriting."
Shares Eligible for Future Sale. 3,222,103 of the 4,353,758 shares of
Common Stock (assuming no exercise of outstanding options or warrants) and
1,200,000 Warrants to be outstanding upon completion of this offering (3,582,103
shares of Common Stock and 1,380,000 Warrants if the Over-Allotment Option is
exercised in full) will be immediately freely tradeable without restriction
under the Securities Act of 1933, as amended (the "Securities Act"), except for
any securities purchased by an "affiliate" of the Company (as that term is
defined in the Securities Act), which will be subject to the resale limitations
of Rule 144 under the Securities Act.
The remaining 1,131,655 of the shares of Common Stock to be outstanding
upon the completion of the offering will be "restricted securities" as defined
in Rule 144. All of such restricted shares will have been held for more than one
year as of the date of this Prospectus and, therefore, all of such shares will
be eligible for public sale beginning 90 days after the date of this Prospectus
in accordance with the requirements of Rule 144, subject to the lock-up
agreements described below.
Holders of warrants to purchase an aggregate of 393,756 shares of Common
Stock have certain registration rights with regard to the resale of the shares
issuable upon exercise of such warrants. Additionally, holders of options to
purchase an aggregate of 178,978 shares of Common Stock from certain of our
founders have certain registration rights with regard to the resale of the
shares underlying such options. Following the completion of this offering, such
holders could require the Company to register for resale the shares issuable
upon exercise of such warrants and the shares underlying such options and such
shares would then be freely tradeable, subject to the lock-up agreements
described below.
Each of our officers and directors, all other holders of shares of Common
Stock, and all holders of options and warrants to acquire shares of Common Stock
have agreed not to, directly or indirectly, offer, sell, transfer, pledge,
assign, hypothecate or otherwise encumber or dispose of any of our securities,
whether or not presently owned, for a period of 12 months (nine months, in the
case of the Selling Stockholders) after the date of this Prospectus, without our
prior written consent and the prior written consent of the Representative. See
"Shares Eligible for Future Sale."
Potential Adverse Effect of Representative's Warrants. At the consummation
of the offering, we will sell to the Representative and/or its designees, for
nominal consideration, warrants (the "Representative's Warrants") to purchase up
to 240,000 shares of Common Stock and/or 120,000 Warrants. The holders of the
Representative's Warrants will have, at nominal cost, the opportunity to profit
from a rise in the market price of the Common Stock and/or Warrants without
assuming the risk of ownership, with a resulting dilution in the interest of
other security holders. As long as the Representative's Warrants remain
unexercised, our ability to obtain additional capital might be adversely
affected. Moreover, the Representative may be expected to exercise the
Representative's Warrants at a time when we would, in all likelihood, be able to
obtain any needed capital through a new offering of our securities on terms more
favorable than those provided by the Representative's Warrants. See
"Underwriting."
Speculative Nature of the Warrants. The Warrants do not confer any rights
of Common Stock ownership on their holders, such as voting rights or the right
to receive dividends, but rather merely
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represent the right to acquire shares of Common Stock at a fixed price for a
limited period of time. The Warrants are subject to modification and the Warrant
exercise price is subject to adjustment under certain circumstances. Following
the completion of this offering, the market value of the Warrants will be
uncertain and the market price of the Common Stock may never equal or exceed the
exercise price of the Warrants and, consequently, it may never be profitable for
holders of the Warrants to exercise the Warrants.
Redemption of Warrants. Commencing _______________, 2000 [18 months after
the date of this Prospectus], the Warrants will be subject to redemption at
$0.10 per Warrant on thirty days' prior written notice to the warrantholders if
the average closing sale price of the Common Stock as reported on the Amex
equals or exceeds $___ per share [150% of the initial public offering price of
the Common Stock] for any 20 trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. If we decide to redeem the Warrants, holders of the
Warrants will lose their rights to purchase shares of Common Stock issuable upon
exercise of such Warrants unless the Warrants are exercised before they are
redeemed. Upon receipt of a notice of redemption, holders would be required to:
(i) exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so; (ii) sell the Warrants at the current market
price, if any, when they might otherwise wish to hold the Warrants; or (iii)
accept the redemption price, which is likely to be substantially less than the
market value of the Warrants at the time of redemption. See "Description of
Securities--Warrants."
Restrictions on Resale of Shares Underlying the Warrants. The Warrants are
not exercisable unless, at the time of the exercise, we have a current
prospectus covering the shares of Common Stock issuable upon exercise of the
Warrants, and such shares have been registered, qualified or deemed to be exempt
under the securities laws of the state of residence of the exercising holder of
the Warrants. Although we have agreed to use our best efforts to keep a
registration statement covering the shares of Common Stock issuable upon the
exercise of the Warrants effective for the term of the Warrants, if we fail to
do so for any reason, the Warrants may be deprived of value.
The Common Stock and Warrants are detachable and separately transferable
immediately following completion of the offering. Purchasers may buy Warrants in
the aftermarket or may move to jurisdictions in which the shares underlying the
Warrants are not so registered or qualified during the period that the Warrants
are exercisable. In that event, we would be unable to issue shares to those
persons desiring to exercise their Warrants, and holders of Warrants would have
no choice but to attempt to sell the Warrants in a jurisdiction where such sale
is permissible or allow them to expire unexercised. See "Description of
Securities."
Possible Volatility of Stock Price. The securities markets have from time
to time experienced significant price and volume fluctuations that may be
unrelated to the operating performance of particular companies. In addition, the
market prices of the common stock of many publicly traded software companies
have in the past been, and can in the future be expected to be, especially
volatile. Economic and other external factors, as well as period-to-period
fluctuations in our financial results, may have a significant impact on the
market prices of the Common Stock and the Warrants.
Immediate and Substantial Dilution. The initial public offering price per
share of Common Stock and Warrants is substantially higher than the net tangible
book value per share of the outstanding Common Stock. Purchasers of Units will
experience immediate and substantial dilution of $4.98 per share in net tangible
book value per share, or approximately 66.4% of the assumed initial public
offering price of $7.50 per Share. To the extent outstanding options and
warrants to purchase shares of Common Stock are exercised or additional shares
of Common Stock are issued in the future, there may be further dilution. See
"Dilution."
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Dividend Policy. We do not anticipate paying any cash dividends in the
foreseeable future and intend to retain earnings, if any, to develop, operate
and expand our business. See "Dividend Policy."
Anti-Takeover Considerations. Certain provisions of our Amended and
Restated Certificate of Incorporation and Bylaws could make it more difficult
for a third party to acquire control of the Company, even if a change in control
would be beneficial to stockholders. Our Amended and Restated Certificate of
Incorporation and Bylaws require advance notice of special stockholder meetings
and permit the Board of Directors to issue up to 5,000,000 shares of Preferred
Stock without stockholder approval. These provisions could also limit the price
that investors may be willing to pay in the future for the Common Stock. See
"Description of Securities."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby, after deduction of underwriting discounts and other estimated expenses
relating to the offering, are estimated to be approximately $15,264,000 (or
$17,628,660 if the Over-Allotment Option is exercised in full). The Company
intends to use the net proceeds as follows:
Percent
Net of
Proceeds Total
------------ -------
Product development expenses(1) ..................... $ 3,000,000 19.6%
Sales and marketing expenditures(2) ................. 5,000,000 32.8
Facilities and other capital expenditures(3) ........ 400,000 2.6
Expansion of internal operations(4) ................. 300,000 2.0
Repayment of certain indebtedness(5) ................ 3,891,000 25.5
Working capital and general corporate purposes(6) ... 2,673,000 17.5
----------- -----
Total ....................................... $15,264,000 100%
=========== =====
- ----------
(1) The Company intends to significantly increase its investment in product
development activities associated with the development of new products,
including new products to be used on the Internet, and the continued
enhancement of the Company's existing products. The Company also expects to
make expenditures for the licensing of technology, for the acquisition of
additional software products, and for the hiring of additional,
experienced, software engineers and development management.
(2) The Company intends to increase its sales and marketing efforts by
increasing the size of its sales and marketing staff, increasing
advertising and trade show related activities, expanding the level of
technical support offered to its dealers and customers and opening sales
offices in several locations.
(3) The Company intends to lease additional space for sales and administrative
offices, and to invest in additional computers, networking systems,
furniture, fixtures, leasehold improvements, and related equipment. See
"Business--Facilities."
(4) The Company intends to expand internal operations, including further
improvement of the Company's management information systems and the
continued development of the Company's website.
(5) The Company intends to repay (i) an aggregate principal amount of
$1,750,000 of promissory notes, due November 20, 1998, bearing interest at
12% per annum, and a 10% success fee due when paid and (ii) an aggregate
principal amount of $1,609,750 of promissory notes, originally issued from
March 1996 through July 1997, plus a 10% success fee and accrued interest
on a portion of such notes. In addition, if the Company completes an
anticipated interim financing of up to $500,000, the aggregate principal
amount of the notes issued in connection with such financing, plus accrued
interest, would be paid from the net proceeds at the closing of this
offering. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Description of Securities -
Recapitalization."
(6) The Company intends to use approximately $580,000 of the net proceeds to
pay consultants' fees and employee bonuses due upon completion of this
offering.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of the offering, based upon the current status of its
operations, its current plans and current economic conditions. Proceeds may be
reapportioned among the categories listed above. The amount and timing of
expenditures will vary depending upon a number of factors, including progress of
the Company's operations, technical
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advances, terms of collaborative arrangements, and changes in competitive
conditions. The Company also expects, when the opportunity arises, to acquire or
invest in complementary businesses, products or technologies. The Company has no
present understandings, commitments or agreements with respect to any material
acquisition or investment.
The Company currently anticipates that the net proceeds of this offering,
along with cash provided by operations, will enable it to meet its operational
and capital requirements for at least the 12 months following the date of this
Prospectus. However, there can be no assurance that the net proceeds of this
offering and cash provided by operations will satisfy the Company's requirements
for any particular period of time. To the extent capital resources are
insufficient to meet future capital requirements, the Company will have to raise
additional funds to satisfy the Company's requirements. There can be no
assurance that such funds will be available on favorable terms, or at all. See
"Risk Factors--Possible Need for Additional Financing."
Pending application of the net proceeds of the offering, the Company
intends to invest such net proceeds in short-term, interest bearing securities,
such as bank certificates of deposit, United States government obligations or
money market instruments.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company presently intends to reinvest earnings to fund the
development and expansion of its business and, therefore, does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. The
declaration of dividends in the future will be at the discretion of the Board of
Directors and will depend upon the earnings, capital requirements and financial
position of the Company, general economic conditions and other pertinent
factors.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998, (a) on an actual basis, (b) on a pro forma basis (see footnote 1
below) and (c) on a pro forma, as adjusted basis (see footnote 2 below). This
table should be read in conjunction with the Company's Financial Statements and
related notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------------------
Pro Forma
Pro Forma As Adjusted
Actual (1) (1) (2)
------------ ------------ ------------
-----------------------------------------------
<S> <C> <C> <C>
Notes payable, net of debt discount $ 4,501,629 $ 3,305,789 $ 93,750
============ ============ ============
Stockholders' deficit:
Convertible preferred stock, $.0001 par value; Series A, B, B-1 and C;
5,000,000 shares authorized; 99,757 shares issued
and outstanding, actual; none issued and outstanding,
pro forma (liquidation preference of $1,626,965) 9 -- --
Common stock, $.0001 par value; 35,000,000 shares
authorized; 133,403 issued and outstanding, actual; 1,953,758 shares
issued and outstanding, pro forma; 4,353,758 issued
and outstanding, pro forma as adjusted (3) 13 -- 0
Additional paid-in capital 4,079,898 9,672,586 24,936,746
Accumulated deficit (9,748,311) (13,811,989) (13,959,700)
------------ ------------ ------------
Total stockholders' deficit and total capitalization $ (5,668,391) $ (4,139,403) $ 10,977,046
============ ============ ============
</TABLE>
(1) Gives effect to the following Recapitalization: (i) conversion of the
Series A, B, B-1 and C Convertible Preferred stock; (ii) the recording of a
dividend to the holders of the Series B and C Convertible Preferred Stock
due to a change in conversion ratios; (iii) the return and cancellation of
shares of Common Stock and Series A Preferred Stock held by certain
officers of the Company; (iv) the conversion of certain notes payable,
accrued interest thereon and warrants issued in connection with the notes
into Common Stock and the recording of an extraordinary loss on the
extinguishment of debt based upon the difference in the fair value of (a)
the notes, accrued interest and warrants converted and (b) the Common Stock
issued in exchange; and (v) the conversion of certain warrants exercisable
for shares of Common Stock into Common Stock. See "Description of
Securities -- Recapitalization."
(2) As adjusted to give effect to (i) the sale of Common Stock and Warrants
offered hereby at an assumed initial offering price of $7.50 per share of
Common Stock and $.10 per Warrant, (ii) the repayment of outstanding notes
payable in the aggregate principle amount of $3,359,750 and accrued
interest and fees in the amount of $411,420 at June 30, 1998, and (iii) the
recognition of the unamortized portion of the debt discount associated with
the notes payable as an expense. See "Use of Proceeds."
(3) Does not include: (i) 140,473 shares of Common Stock reserved for issuance
upon the exercise of options granted under the Plan immediately prior to
the consummation of this Offering; (ii) 109,527 shares of Common Stock
reserved for issuance upon the exercise of options that may be granted
under the Plan; and (iii) 407,075 shares of Common Stock reserved for
issuance upon the exercise of warrants outstanding immediately prior to the
consummation of this Offering. See "Management 1996 Incentive and
Non-Qualified Stock Option Plan" and "Description of Securities."
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DILUTION
As of June 30, 1998, the pro forma net tangible book value (deficit) of the
Company was $(4,139,208), or approximately $(2.12) per share of Common Stock.
Pro forma net tangible book value (deficit) per share represents the amount of
total tangible assets less total liabilities divided by the number of shares of
Common Stock issued and outstanding, after giving effect to the
Recapitalization, including (i) the recording of an extraordinary loss on the
extinguishment of debt based upon the difference in the fair value of (a) the
notes, accrued interest and warrants converted and (b) the Common Stock issued
in exchange and (ii) the recording of a dividend to the holders of the Series B
and C Convertible Preferred Stock due to the change in the conversion ratios.
See "Description of Securities." After giving effect to (i) the sale of the
Common Stock and Warrants offered hereby (after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company), (ii)
the repayment of outstanding notes payable in the principal amount of $3,359,750
and accrued interest and fees in the amount of $411,420 at June 30, 1998 and
(iii) the recognition of the unamortized portion of the debt discount associated
with the notes payable as an expense, the pro forma, as adjusted, net tangible
book value of the Company at June 30, 1998 would have been $10,977,483, or
approximately $2.52 per share of Common Stock. This represents an immediate
increase in net tangible book value of $4.64 per share of Common Stock to
existing stockholders and an immediate dilution in net tangible book value of
$4.98 per share of Common Stock to new investors. The following table
illustrates this per share dilution:
Assumed initial public offering price
per share of Common Stock ................................. $7.50
Pro forma net tangible book value(deficit)
prior to the offering ..................................... $(2.12)
Increase per share attributable to the offering ............. 4.64
-----
Pro forma, as adjusted, net tangible book value per
share after the offering .................................. 2.52
-----
Dilution per share to new investors(1) ...................... $4.98
=====
- ----------
(1) If the Over-Allotment Option is exercised in full, the pro forma, as
adjusted, net tangible book value after the offering would have been
$13,342,143 or $2.83 per share of Common Stock, resulting in dilution to
new investors of $4.67 per share of Common Stock.
The following table summarizes, as of June 30, 1998, on a pro forma basis
to reflect the same adjustments described above, the number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
price per share paid by (i) existing stockholders of Common Stock, and (ii) new
stockholders in the offering, assuming the sale of the Common Stock and Warrants
offered hereby. The calculations are based upon total consideration given by new
investors and existing stockholders before any deduction of underwriting
discounts and offering expenses payable by the Company.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
--------------------- --------------------- Average Price
Number Percent Amount Percent Per Share
----------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1) 1,953,758 45% $ 2,557,220 12% $1.31
New investors(2) ....... 2,400,000 55% 18,000,000 88% $7.50
----------- ------- ----------- -------
Total .......... 4,353,758 100% $20,557,220 100%
=========== ======= =========== =======
</TABLE>
- ----------
(1) Gives effect to the following Recapitalization: (i) conversion of the
Series A, B, B-1 and C Convertible Preferred stock; (ii) the return and
cancellation of shares of Common Stock and Series A Preferred Stock held by
certain officers of the Company; (iii) the conversion of certain notes
payable, accrued interest thereon and warrants issued in connection with
the notes into Common Stock; and (iv) the conversion of certain warrants
exercisable for shares of Common Stock into Common Stock. See "Description
of Securities -- Recapitalization."
(2) Attributes no value to the Warrants.
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<PAGE>
SELECTED FINANCIAL INFORMATION
The following table presents selected financial data for the Company. The
historical selected financial data as of December 31,1997 and for the years
ended December 31, 1996 and 1997 are derived from and should be read in
conjunction with the audited Financial Statements of the Company included
elsewhere in the Prospectus. The historical selected financial data of the
Company as of December 31, 1996 is derived from audited financial statements of
the Company not included herein. The historical selected financial data as of
June 30, 1998 and for six months ended June 30, 1997 and 1998 are derived from
and should be read in conjunction with the unaudited financial statements of the
Company included elsewhere in the Prospectus. In the opinion of management, the
unaudited financial statements include all material adjustments (consisting of
only normal, recurring adjustments) necessary for a fair presentation of the
financial position and results of operations for the period. The data presented
below should be read in conjunction with "Managements Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
accompanying notes thereto appearing elsewhere in the Prospectus.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
------------------------------ ------------------------------
December 31, December 31, June 30, June 30,
1996 1997 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Software licenses .................................. $ -- $ 273,989 $ 98,824 $ 264,185
Consulting and services ............................ -- 290,583 187,184 127,712
----------- ----------- ----------- -----------
Total revenues ................................... -- 564,572 286,008 391,897
----------- ----------- ----------- -----------
Cost of revenues:
Software licenses .................................. -- 1,968 710 7,428
Consulting and services ............................ -- 121,008 89,425 84,439
----------- ----------- ----------- -----------
Total cost of revenues ........................... -- 122,976 90,135 91,867
----------- ----------- ----------- -----------
Gross profit ........................................... -- 441,596 195,873 300,030
----------- ----------- ----------- -----------
Operating costs and expenses:
Selling, general and administrative ................ 1,522,757 3,316,961 1,649,082 2,003,064
Research and development ........................... 421,087 445,162 216,976 267,514
----------- ----------- ----------- -----------
Total operating costs and expenses ............... 1,943,844 3,762,123 1,866,058 2,270,578
----------- ----------- ----------- -----------
Loss from operations ................................... (1,943,844) (3,320,527) (1,670,185) 1,970,548
Interest expense ....................................... 450,563 924,842 527,534 809,465
Net loss ............................................... $(2,384,657) $(4,245,369) $(2,197,719) $(2,780,013)
=========== =========== =========== ===========
Basic and diluted loss per share (1) ................... $ (91.69) $ (30.70) $ (16.55) (18.53)
=========== =========== =========== ===========
Weighted average common shares used in
basic and diluted loss per share (1) ............... 26,008 138,305 132,755 150,051
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998
-------------------------------
December 31, December 31,
Balance Sheet Data: 1996 1997 Actual Pro Forma (2)
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents .............................. $ 5,185 $ 173,262 $ 44,187 $ 44,187
Working capital (deficit) .............................. (1,022,306) (3,713,347) (5,775,855) (4,246,672)
Total assets ........................................... 100,598 525,678 927,442 927,442
Total liabilities ...................................... 1,034,180 4,142,923 6,595,833 5,066,650
Total stockholders' deficit ............................ (933,582) (3,617,245) (5,668,391) (4,139,208)
</TABLE>
- -----------
(1) For information concerning the computation of net loss per share, see Note
2 of Notes to Financial Statements.
(2) Gives effect to the following Recapitalization: (i) conversion of the
Series A, B, B-1 and C Convertible Preferred stock; (ii) the recording of a
dividend to the holders of the Series B and C Convertible Preferred Stock
due to a change in conversion ratios; (iii) the return and cancellation of
shares of Common Stock and Series A Preferred Stock held by certain
officers of the Company; (iv) the conversion of certain notes payable,
accrued interest thereon and warrants issued in connection with the notes
into Common Stock and the recording of an extraordinary loss on the
extinguishment of debt based upon the difference in the fair value of (a)
the notes, accrued interest and warrants converted and (b) the Common Stock
issued in exchange; and (v) the conversion of certain warrants exercisable
for shares of Common Stock into Common Stock. See "Description of
Securities -- Recapitalization."
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
Company's Financial Statements and Notes thereto and the other financial
information included elsewhere in this Prospectus. In addition to historical
information, this Management Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Prospectus contain forward-looking
information that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated by such forward-looking
information as a result of certain factors, including but not limited to, those
set forth under "Risk Factors" and elsewhere in this Prospectus.
Overview
Digital Lava Inc. originally operated as LAVA, L.L.C., a New Jersey limited
liability company that was formed in July 1995. In November 1996, LAVA, L.L.C.
merged into Digital Lava Inc., a Delaware corporation. Pursuant to such
transaction, the ownership interests in LAVA, L.L.C. were exchanged for shares
of Series A, Series B, Series B-1 and Series C Convertible Preferred Stock of
Digital Lava Inc.
The Company invested significant resources in sales, marketing, development
and other operating activities during the six-month period ended June 30,1998.
The Company believes that its success depends largely on building superior
technology and quality into its products, extending its technological lead on
the competition and developing brand recognition early in a product's life
cycle. Accordingly, the Company expects to continue spending heavily on these
activities in the near future. Despite these heavy investments in marketing and
product development, the historical growth in software license fees may not be
sustainable in the future. In light of the Company's limited operating history
and rapid improvements in technology and marketing of its products, the Company
believes that period-to-period comparisons of its revenues and operating
results, including its gross profit and operating expenses as a percentage of
total net revenues, are not necessarily meaningful and should not be relied upon
as indications of future performance.
The Company has incurred significant net losses and negative cash flows
from operations since inception, and as of June 30, 1998, had an accumulated
deficit of $9,748,311. The Company intends to continue to invest heavily in
technology and infrastructure development, and marketing and promotion. As a
result, the Company believes that it will continue to incur operating losses and
negative cash flows from operations for the foreseeable future and that the rate
at which such losses will be incurred may increase from current levels. There
can be no assurance that the Company will be able to achieve or sustain revenue
growth, profitability, or positive cash flow on either a quarterly or annual
basis.
Results of Operations
Comparison of Six Months Ended June 30, 1998 to Six Months Ended June 30, 1997
Revenues
Revenues increased to $391,897 for the six months ended June 30, 1998 from
$286,008 for the six months ended June 30, 1997. The increase of $105,889 or
37.0% was primarily due to the realization of
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<PAGE>
the impact of sales of VideoVisor which was released in August 1997. Software
license revenues accounted for approximately 67.4% and 34.6% of revenues for the
six months ended June 30, 1998 and 1997, respectively. Consulting and services
revenues accounted for approximately 32.6% and 65.4% of revenues for the six
months ended June 30, 1998 and 1997, respectively. The Company's largest
customer accounted for approximately 50.5% and 81.9% of revenues for the six
months ended June 30, 1998 and 1997, respectively. The Company anticipates that
software license revenue will continue to account for a larger share of revenues
for the foreseeable future.
Cost of Revenues
Cost of revenues consist primarily of the cost of materials, freight and
applicable labor incurred for the delivery of the product or service. Costs of
revenues increased to $91,867, or 23.4% of revenues, for the six months ended
June 30, 1998 from $90,135, or 31.5% of revenues, for the six months ended June
30, 1997. This increase was primarily due to the increase in material and labor
cost incurred in the first six months of 1998. The Company expects its cost of
revenue to continue to increase in dollar amount while declining as a percentage
of revenue as the Company expands its customer base.
Operating Costs and Expenses
Selling, General and Administrative Expense. Selling, general and
administrative expenses consist primarily of salaries, taxes and benefits and
related costs for general corporate functions, including executive management,
finance, accounting, facilities, legal, fees for professional services and
depreciation and amortization. Selling, general and administrative increased to
$2,003,064 for the six months ended June 30, 1998, from $1,649,082 for the six
months ended June 30, 1997. The increase was primarily due to increases in
public relations efforts, trade shows, additional personnel and professional
fees required to build an infrastructure to support the Company's products and
anticipated growth. In addition, selling, general and administrative expenses
for the six months ended June 30, 1998 and June 30, 1997 included non-cash
compensation expenses of $392,420 and $851,705, respectively, which represent
the granting of stock options and warrants to non-employees in exchange for
services rendered to the Company. The Company expects that it will incur
additional selling, general and administrative expenses in absolute dollars as
the Company continues to hire personnel and incurs expense related to the
further growth of the business and its operation as a public company.
Research and Development Expenses. Research and development expenses
consist primarily of expenditures related to technology and software development
expenses. Research and development expenses increased to $267,514, or 68.3% of
revenues, for the six months ended June 30, 1998 from $216,976, or 75.9% of
revenues, for the six months ended June 30, 1997. The dollar increase was
primarily attributed to the increased number of developers needed to accelerate
the release of products in 1998 and to expand research efforts in the area of
Web enabled applications. Research and development expenses decreased as a
percentage of revenue because of the growth level in revenues relative to the
growth in the cost structure for research and development. The Company believes
that significant investments in technology and content development are required
to maintain a technological lead and remain competitive and, therefore, expects
that its research and development expenses will continue to increase in absolute
dollars for the foreseeable future, however, research and development expenses
are presently anticipated to continue to decline as a percentage of revenues.
Interest Expense. Interest expense includes interest income from the
Company's cash balances, interest expense related to the Company's financing
obligations, and the amortization of debt discount. Interest expense increased
to $809,465 for the six months ended June 30, 1998 from $527,534 for the six
months ended June 30, 1997. The increase is due to the amount of notes payable
issued by the Company in the six month period ended June 30, 1998. Interest
expense for the six months ended June 30, 1998 and
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<PAGE>
June 30, 1997 included amortization of debt discount and issuance costs related
to warrants issued in connection with notes payable of $293,785 and $440,976,
respectively.
Net Loss. For the six months ended June 30, 1998, the Company's net loss
totaled $2,780,013 as compared to $2,197,719 for the six months ended June 30,
1997.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996.
Revenues
Revenues increased to $564,572 for the year ended December 31, 1997 from
zero for the year ended December 31, 1996. The increase in revenues were
primarily due to the realization of the impact of sales of vPrism and VideoVisor
which were released in 1997, and associated services revenue. Software license
revenues accounted for approximately 48.5% of revenues for the year ended
December 31, 1997 while consulting and services revenues accounted for
approximately 51.5% of revenues for the same period. The Company's largest
customer accounted for approximately 43.1% of revenues for the year ended
December 31, 1997. The Company anticipates that software license revenue will
account for a larger share of revenues in the future.
Cost of Revenues
Costs of revenues for the year ended December 31, 1997 were $122,976, or
21.8% of revenues. There were no cost of sales for the year ended December 31,
1996. This increase was primarily due to the increase in material and labor cost
incurred in delivering the products and services. The Company expects its cost
of revenue to continue to increase in dollar amount while declining as a
percentage of revenue as the Company expands its customer base.
Operating Costs and Expenses
Selling, General and Administrative Expense. Selling, general and
administrative expenses were $3,316,961 and $1,522,757 for the years ended
December 31, 1997 and 1996, respectively. The increase was primarily due to
increases in trade shows, additional personnel and legal and professional fees
required to build an infrastructure to support the Company's products and
anticipated growth. In addition, selling, general and administrative expenses
for the years ended December 31, 1997 and 1996 included non-cash compensation
expenses of $866,589 and $261,996, respectively, which represent the granting of
stock options and warrants to non-employees in exchange for services rendered to
the Company.
Research and Development Expenses. Research and development expenses were
$445,162, or 78.9% of revenues, and $421,087 for the years ended December 31,
1997 and 1996, respectively. The increase was primarily attributed to the
increased number of developers and professional services needed to release
vPrism and VideoVisor in 1997.
Interest Expense. Interest expense increased to $924,842 for the year ended
December 31, 1997 from $450,563 for the year ended December 31, 1996. The
increase is due to the amount of notes payable issued by the Company in 1997.
Interest expense for the years ended December 31, 1997 and 1996 included
amortization of debt discount and issuance costs related to warrants issued in
connection with notes payable of $716,433 and $396,368, respectively.
Net Loss. For the year ended December 31, 1997, the Company's net loss
totaled $4,245,369 as compared to $2,384,657 for the year ended December 31,
1996.
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<PAGE>
Net Operating Loss Carryforwards. At December 31, 1997, the Company had
available net operating loss carryforwards of approximately $2,800,000 to offset
future taxable income for federal and state tax purposes. The utilization of the
loss carryforwards to reduce future income taxes will depend upon the Company's
ability to generate sufficient taxable income prior to the expiration of the net
operating loss carryforwards. The federal and state carryforwards expire
beginning in the years 2011, and 2005 respectively. However, the Internal
Revenue Code of 1986, as amended, limits the maximum annual use of net operating
loss and tax credit carryforwards in certain situations where changes occur in
the stock ownership of a corporation. As a result of this offering, a change in
ownership is likely to occur which would substantially restrict the Company's
use of the net operating loss carryforwards for federal and state income tax
purposes. See Note 11 of Notes to Financial Statements.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations primarily
through the private placement of its convertible preferred stock, common stock
and convertible notes. As of June 30, 1998, the Company had $44,187 in cash.
Net cash used in operating activities increased to $2,195,803 for the year
ended December 31, 1997 from $1,664,962 for 1996, and increased to $1,155,083
for the six months ended June 30, 1998 from $829,433 for the six months ended
June 30, 1997. The increase in net cash used resulted primarily from increasing
net losses.
Cash flows used in investing activities decreased to $55,620 for 1997 from
$105,519 for 1996 resulting primarily from the reduced investment in computers
and related equipment. Net cash used in investing activities decreased to
$23,992 for the six months ended June 30, 1998, compared to $48,060 for the six
months ended June 30, 1997 again due to the reduction in computers and related
equipment necessary to support operations.
Net cash provided by financing activities increased to $2,419,500 for 1997
from $1,769,680 for 1996. The increase was due to the increase in the issuance
of equity and notes payable. Net cash provided by financing activities decreased
to $1,050,000 for the six months ended June 30, 1998 compared to $1,194,500 for
the six months ended June 30, 1997. The decrease was due primarily to a
reduction in proceeds from notes payable received in the six months ended June
30, 1998.
The Company's capital requirements depend on numerous factors, including
market acceptance of the Company's products and services, the amount of
resources the Company devotes to investments in its products, the resources the
Company devotes to marketing and selling its services and its brand promotions
and other factors. The Company has experienced a substantial increase in its
capital expenditures since its inception consistent with the growth in the
Company's operations and staffing, and anticipates that this will continue for
the foreseeable future. Additionally, the Company will continue to evaluate
possible investments in businesses, products and technologies, and plans to
expand its sales and marketing programs and conduct more aggressive brand
promotions. The Company currently anticipates that the net proceeds of the
offering and available funds will be sufficient to meet its anticipated needs
for working capital and capital expenditures for at least the next 12 months.
If the net proceeds of the offering, together with the Company's internally
generated cash flow, are not sufficient to satisfy its financing needs, the
Company will be required to seek additional funding through bank borrowings,
additional public or private sales of its securities, including equity
securities, or through other arrangements. The Company currently has no credit
facility or other committed sources of capital,
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<PAGE>
however it intends to secure a credit facility after the completion of the
offering. There can be no assurance that additional funds, if required, will be
available to the Company on favorable terms, if at all. See "Use of Proceeds"
and "Risk Factors - Possible Need for Additional Financing".
The Company is currently planning on raising up to $500,000 of capital
through the issuance of promissory notes and warrants to help it meet its cash
requirements until it receives the net proceeds from this offering. The Company
anticipates that such notes would be paid at the closing of this offering and
that it will issue warrants to purchase an aggregate of 250,000 shares of Common
Stock, assuming $500,000 is raised, at 130% of the initial public offering price
per share. The Company may not be able to obtain such capital on a timely basis,
on favorable terms, or at all. If it is unable to obtain such capital, or
generate funds from operations sufficient to meet its needs, its business could
be adversely affected. See "Risk Factors - Risks Associated with Interim
Financing."
The Company granted a security interest in all of its assets to investors
participating in the bridge financing completed in February 1998 as collateral
to secure the Company's obligations to such investors under the $1,750,000 of
promissory notes issued in connection with such bridge financing. In connection
with the Recapitalization, the Company has also granted a security interest in
all of its assets to holders of an aggregate principal amount of $187,500 of
promissory notes who agreed to extend the term of such notes to June 30, 1999.
See "Description of Securities -- Recapitalization."
Recently Issued Accounting Standards
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income, defined as all changes in equity from non-owner
sources. Adoption of SFAS No. 130 did not have a material effect on the
Company's financial position or results of operations.
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way public enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to stockholders. Adoption of SFAS No. 131 did not have
a material effect on the Company's financial position or results of operations.
Effective January 1, 1998, the Company adopted American Institute of
Certified Public Accountants Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"). SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements such as software products,
upgrades, enhancements, post-contract customer support, installation and
training to be allocated to each element based on the relative fair values of
the elements. The adoption of SOP 97-2 did not have an effect on the Company's
financial position or results of operations.
Year 2000 Risk
The Company is working to resolve the potential impact of the year 2000 on
the ability of the Company's computerized information systems to accurately
process information that may be date sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures. The Company utilizes a number of
computer programs across its entire operation. The Company has not completed its
assessment of the potential impact of the year 2000 on its systems, nor has the
Company been able to complete its assessment of any year 2000 issues which may
affect third-parties, including the Company's current and prospective suppliers.
The Company
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<PAGE>
currently believes that the costs of addressing this issue will not have a
material adverse impact on the Company's financial position. However, if the
Company and third-parties upon which it relies are unable to address this issue
in a timely manner, it could result in a material financial risk to the Company,
including the possibility that the Company may be liable to such third parties
for a material failure of its systems due to year 2000 issues. In order to
assure that this does not occur, the Company plans to devote all resources
required to resolve any significant year 2000 issues in a timely manner. Any
year 2000 compliance problems of either the Company, its customers or vendors
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Risk Factors - Year 2000 Compliance".
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<PAGE>
BUSINESS
Overview
Digital Lava is a leading provider of video publishing software products
and services for corporate training, communications, distance learning, research
and other applications. The Company's video publishing technology provides
companies, educational institutions and government agencies with a way to
re-purpose, publish and deploy on-demand video content and information to
desktop computer users. The Company's video publishing product line includes
vPrism(TM) and VideoVisor(TM) software. vPrism allows users to organize and
manage video content, link video to other types of files and publish video with
all of the linked information as VideoCapsule(TM) files on CD-ROM or DVD, or
stream the interactive video information over intranets or the Internet.
VideoVisor is a desktop productivity tool that allows end-users to access
VideoCapsule files and navigate, rearrange, annotate, subtitle text and
transcripts, and view synchronized video, notes and links. The Company's
VideoVisor software won the "Best New Streaming Product" award at the Desktop
Video Communications (DVC) 1998 Spring Conference in Santa Clara, California and
a "Networked Multimedia People's Choice Award" at the 1998 DVC Fall Conference
in Boston. Digital Lava also provides turnkey video encoding, publishing and Web
hosting services.
The Company believes that the continuing emergence of rich multimedia
capabilities, such as streaming audio and video on the Internet, presents a
significant new market opportunity for software applications that enhance the
effectiveness and productivity of professionals and consumers who rely on video
information. The Company also believes that as the Internet continues to evolve
as a mass communications medium and as corporations, educational institutions
and government agencies seek to eliminate the high cost and time requirements of
travel through the increased use of video, an increasing amount of video
content, including business, distance learning and consumer programs, will be
delivered over the Internet. RealNetworks, one of the Company's strategic
partners and a leader in the streaming media market, has already registered over
35 million users of its RealPlayer Internet streaming software. The Company
believes that its video publishing software technology is essential to this
evolution because it provides a more compelling and productive user experience
than broadcast television and videotape, allowing the Internet to effectively
compete with such traditional video delivery methods.
The Company's customers include large corporations and business
enterprises, such as Shell Chemicals Company, American General Life Insurance
Company, Ardent Software, Inc., ASI Entertainment, Inc., Bellcore, Diedrich
Coffee, Inc. and Rand Corporation. Our customers also include schools,
universities and research institutions such as Northwestern University, Los
Angeles Unified School District, The Smithsonian Institute, and Educational
Testing Service.
Industry Background
The Company believes the demand for its desktop video publishing solutions
in the distance learning, corporate training and communications markets will be
fueled by the convergence of trends and technologies that enable computer-based
and Internet-based video training and communications solutions to be deployed
increasingly as substitutes for videotapes, instructor-led training, live
meetings and other traditional forms of communications and training. These
trends and enabling technologies include the proliferation of multimedia-capable
computers and networking solutions throughout all levels of organizations,
advances in PC processing power, high speed communications capabilities, the
emergence
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<PAGE>
of the Internet and corporate intranets as platforms for a wide variety of
business applications, and the continued growth of streaming media applications.
Streaming media technology enables the transmission and playback of
continuous "streams" of multimedia content, such as audio and video, over a
network. The introduction of streaming media platforms from companies such as
RealNetworks, Microsoft and Apple Computer are now providing software developers
the opportunity to efficiently deliver a new generation of rich media content
and applications over the Internet and private intranets. On the Internet, many
businesses and content providers now offer audio, video and other multimedia
content as a means of enriching and differentiating their companies.
RealNetworks estimates that more than 145,000 hours per week of live audio and
video content are broadcast over the Web using their proprietary streaming
technology, with a substantially greater amount of recorded media already
available on-demand. The Company believes that the use of streaming media for
business and enterprise applications is growing. Lotus Development Corporation,
makers of Lotus Notes, the market leader in collaborative enterprise software,
recently announced their plan to integrate RealNetworks, RealPlayer with Lotus
Notes client software, enabling 25 million Lotus Notes users worldwide to view
and hear streaming media content at their desktops. Additionally, Netscape
Communications Corporation recently announced that it plans to bundle and
distribute RealNetworks, RealPlayer software as an integral part of its Netscape
Communicator browser software, providing Netscape users with access to streaming
media content without separately having to download the RealPlayer software.
The primary advantages of desktop video distance learning, training and
communications applications over traditional forms include performance
improvements and potential cost savings in the form of reduced instructor
salaries, compressed training times and reduced travel costs. Additional
benefits could come from improved retention, consistent content quality and the
ability to deliver content on CD-ROM or through an Intranet or the Internet.
Internet-based applications offer additional advantages over other forms of
video distribution. Video content can be easily deployed and updated without the
need to create and redistribute CD-ROMs. The ease and speed of deployment
associated with Internet-based deployment allows for "just-in-time" delivery of
video information, broadens the potential use of published video content within
the enterprise and offers a cost- and time-effective method to accumulate and
retain enterprise knowledge. Because of these benefits, the Company believes
that many organizations will target network-based video deployment as an
important corporate intranet application.
The overall market for business and training software is expected to grow
over the next several years. According to International Data Corporation
("IDC"), the worldwide business software applications market is expected to
double over the next five years, with license revenues from business software
applications growing from $50 billion in 1997 to over $100 billion in 2002.
In the United States, corporations are making substantial investments to
train their employees. Video, in the form of videotapes, is already widely used
within corporations to record and distribute training and communications
content. A 1997 U.S. corporate training study conducted by Training Magazine
found that 74 percent of the respondents were using videotapes for training. The
same survey also found that U.S. companies budgeted an estimated $58.6 billion
for employer-provided training in 1997. The Company believes that training on
new information technologies ("IT") within corporations is growing rapidly
worldwide. According to a recent study published by IDC's IT Training and
Education Services research program, the global IT training and education market
is expected to surpass $28.3 billion by 2002.
The Company believes that its video publishing technology can leverage the
growing demand for business, video training, communications and distance
learning applications. The Company's software and
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<PAGE>
services provide a rapid, flexible, and low-cost alternative to videotapes,
instructor-led training, live meetings, and other traditional forms of
communications and training, providing a more compelling and productive user
experience.
Digital Lava's Solution
Today, most desktop video applications provide the user with a passive,
linear experience, similar to viewing a television program or videotape. The
Company's video publishing software provides a fast and easy way for enterprises
to transform video information into highly interactive multimedia programs, and
to deliver them at a fraction of the cost of live meetings or of developing
custom multimedia or computer-based-training programs. The Company's software
products, vPrism and VideoVisor, are designed to be easily integrated into a
customer's personal computer system.
The Company's software technology provides companies and enterprises a
means to rapidly re-purpose, publish and deploy interactive video content for
corporate training, communications and distance learning applications. With
vPrism software, video content publishers can rapidly develop and deploy video
programs that transform the passive, linear viewing experience into an engaging
and interactive multimedia application that can be easily deployed to desktop
computer users across an enterprise. Any video, including video of corporate
training, classroom lectures and communications, can be synchronously linked
with digitally formatted files or programs, including Web pages, documents,
images and transcripts. With VideoVisor software, users can productively access
the published video content to view, navigate and manipulate video integrated
with a variety of other types of related information such as text, graphics,
animation and image. The Company supports an open architecture allowing for easy
integration of digital video and audio content with other types of information
that are typically stored on the Internet, a corporate intranet, or locally on
the user's computer or server.
The Company believes that the markets for its video publishing software and
services will expand as the enabling technologies, like streaming media and the
Internet, continue to mature. The Company's products and services can provide
distance learning, training and communications solutions in a variety of
vertical industries. For example, universities and local school districts can
leverage published interactive video to deliver stored instructional content to
students at their desks. Hospitals can publish and deploy medical video training
to enable teams of doctors in different locations to diagnose and treat
patients. Sales professionals can deliver video-enabled presentations to
prospective customers and train on new products. Manufacturing companies can
achieve efficiencies by offering factory floor workers just-in-time video
training. Other video applications include sales and reseller training for new
product launches, soft skills training, new employee orientation training,
information technology and systems training, and both internal and external
corporate communications.
Strategy
The Company's objective is to be the leading video publishing software
technology company, providing software and services that enable the delivery of
a broad range of multimedia content over the Internet and intranets. To achieve
this objective, the Company's strategy includes the following key elements:
Extend Technology Leadership. The Company is establishing a reputation as a
leader in video publishing technology and intends to continue to maintain its
reputation for quality and innovation by expanding the features and breadth of
its publishing and desktop video product offerings. The Company plans to
introduce a new version of VideoVisor, called "VideoVisor Professional(TM)," in
November 1998. The Company believes that the fundamental architecture of its
products can be expanded to support
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additional features and functions like the synchronized deployment of additional
data types, enhanced desktop video manipulation, and Web-based video
collaboration. As part of this strategy, the Company has devoted and will
continue to commit significant resources to the development of technologies that
increase the ease-of-use and functionality of its video publishing solutions.
Build Brand Recognition and Strengthen Sales and Marketing Efforts. The
Company believes that its technology leadership, market position and brand name
are significant assets that the Company can leverage to maintain and increase
its market share and diversify its revenue base. The Company intends to
capitalize on the growth in demand for video publishing software by continuing
to develop, market and support industry-leading products and services. The
Company believes that the introduction of such products and services will expand
the Company's user base and build greater brand recognition. The Company also
plans to strengthen its marketing, sales and customer support efforts as the
size of its market opportunity and customer base increases.
Pursue Strategic Relationships. The Company has independent software vendor
("ISV"), licensing, development, distribution and reseller relationships with a
number of software industry leaders. Among other relationships, the Company is
an ISV for the Microsoft Corporation's NetShow products and licenses Microsoft's
Internet Explorer Administration Kit to integrate Microsoft's Web browser into
VideoVisor. RealNetworks has developed custom software to integrate their
RealPlayer intranet and Internet software into VideoVisor, and the Company has a
licensing and distribution agreement with RealNetworks to distribute the
integrated, bundled products to end-user clients. The Company intends to
continue to establish strategic relationships with industry-leading hardware,
software and content companies. See "--Strategic Relationships".
Enhance and Expand Internal Operations. The Company intends to invest
substantially in operations and systems in anticipation of future growth. This
effort includes improving its management information systems, opening sales
offices in multiple locations, integrating sales activities, investing in
customer service, expanding its public relations, advertising, and trade show
activities, and developing on-line training and support programs which will help
support an outside network of resellers and distributors.
Expand Internationally. The Company intends to expand its international
customer base over the next several years by opening international sales
offices, hiring additional employees, developing international distribution and
sales networks, enhancing its software products by adding localized versions and
multi-language support and increasing its expenditures for marketing.
Products and Services
The Company develops and sells software products and services that enable
the delivery of on-demand interactive video and multi-media content over the
Internet, intranets, local area networks, and on CD-ROM and DVD media. The
Company's software products, VideoVisor and vPrism, provide an open framework in
which video, other desktop applications and data can link, collaborate and
seamlessly integrate on the desktop. The Company also provides various other
services designed to promote widespread usage of the Company's technology.
vPrism. vPrism is easy-to-use software that assists in assimilating and
managing digital video and other information from diverse sources, organizes its
content, creates links to other important data, and then rapidly publishes the
information in a VideoCapsule file. VideoCapsules may be distributed on CD-ROM
and DVD media and streamed over LANs, WANs, intranets and the Internet, using
video server solutions provided by RealNetworks, Silicon Graphics, InfoValue
Computing, Starlight Networks, FVC.COM, and Microsoft. The Company provides
these tools for commercial video producers, electronic title
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companies, training companies, video content distributors, universities, and
global 2000 corporations. vPrism also provides a unique and powerful solution
for researchers who use video to collect video data. Primary researchers and
market researchers, for example, use vPrism for video archiving, video event
logging, analysis and coding.
vPrism provides the video publisher with several key benefits. First, the
system is easy-to-use and does not require proficiency in the use of a
programming, scripting or authoring language. Second, vPrism allows the
publisher to create powerful interactive video programs very rapidly. Depending
on the length of video, a completely interactive, indexed and linked
VideoCapsule program can be produced in a few hours. This is significantly
faster than traditional computer-based-training authoring tools. Third, as a
result of the rapid publishing time, video-based content can be published at a
much lower cost than with traditional computer based training authoring tools.
vPrism is commercially available on the Apple Macintosh OS operating
system. The Company plans to announce the availability of a Microsoft Windows95
version during the last quarter of 1998. vPrism is designed to manage hundreds
of hours of digital video content and is available as a standalone system or in
a workgroup configuration.
VideoVisor. VideoVisor is a personal computer application that is designed
to make users more productive when accessing video and VideoCapsule-formatted
information. VideoVisor, when used in conjunction with VideoCapsules, makes
desktop video an interactive information resource, allowing users to manage and
manipulate video data much like word processors manipulate textual data. With
VideoVisor, end-users can manage, navigate, manipulate and integrate video with
other information on their desktop computers. Users may search and annotate
video, re-arrange and organize video content, subtitle text and transcripts,
access notes, and link to other files, Web sites, images and applications.
VideoVisor is easy-to-use and aimed at users who require instant access to video
and related information and the ability to manipulate and save that information
on their desktop computer.
VideoVisor provides users with several key benefits. First, the software
results in increased user productivity, saving time and enhancing the quality of
the end-user's experience. Second, VideoVisor provides corporations and large
organizations with a powerful, low-cost and effective software platform for
deploying video communications, training, distance learning and other on-demand
video-rich applications. Third, VideoVisor is a powerful external communications
tool that can be used for reseller and channel training, advertising, marketing,
education and other 'extranet' applications.
The Company's VideoVisor software won the "Best New Streaming Product"
award at the Desktop Video Communications (DVC) 1998 Spring Conference in Santa
Clara, California and a "Networked Multimedia People's Choice Award" at the 1998
DVC Fall Conference in Boston.
VideoVisor is available for the Windows95 and Windows-NT platforms.
VideoVisor supports standard digital video formats and VideoCapsule files
published in a variety of formats, including MPEG-1, MPEG- 2, MPEG-4, QuickTime,
RealVideo, ASF (Netshow), AVI and MOV. VideoVisor conforms to Microsoft Office,
Active-X and DirectShow standards. The Company plans to introduce a new version
of the product, VideoVisor Professional, during November 1998.
Consulting and Programming Services. The Company provides a range of
consulting and programming services that principally relate to the creation and
maintenance of video publishing content and applications based on the Company's
technology. Commonly provided services include custom programming development,
when consistent with strategic product and business objectives, application
consulting and training.
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Video Publishing and Encoding Services. The Company provides turnkey video
publishing and video encoding services to support its customers in the
deployment of the Company's software products. Services are often bundled with
software license proposals to provide a complete turnkey solution to prospective
clients. The Company also offers turnkey video hosting services to corporate and
other customers pursuant to a Web hosting service agreement with VStream, Inc.
Customer Service and Support
The Company currently provides free customer support, including defect
correction, telephone and Web-based technical support, for companies and
organizations that license its VideoVisor software. It does intend to charge
customers for significant version upgrades of its VideoVisor software. Customers
that license vPrism currently receive 12 months of free post sales support.
After one year, customers may elect to sign an extended maintenance contract.
The Company maintains a technical support hotline to answer inquiries and
provides technical information on the Web site. The Company's support staff also
responds to e-mail inquiries. The Company tracks support requests and product
defects. The Company uses customer feedback as a source of ideas for product
improvements and enhancements.
Strategic Relationships
The Company has independent software vendor ("ISV") licensing, development,
distribution, and reseller relationships with a number of software industry
leaders. The Company is a NetShow ISV. NetShow is Microsoft's proprietary
software to view on-demand streaming media over the Internet and intranets. As a
NetShow ISV, the Company has the opportunity to work with Microsoft to (i) raise
the Company's visibility through Microsoft press releases and designation as a
NetShow ISV on Microsoft's NetShow website, (ii) provide the Company with
technical assistance with regard to NetShow, (iii) assist the Company in its
marketing efforts, including invitations to NetShow demonstrations at
conferences and tradeshow exhibits and (iv) gain access to mailing lists of
Microsoft registered product users. The Company was selected to participate in
the NetShow JumpStart CD demonstration disc. The Company also licenses
Microsoft's Internet Explorer Administration Kit pursuant to a royalty-free
license and distribution agreement. Such agreement permits the Company to
customize Microsoft's Internet Explorer Web browser for integration with
VideoVisor and distribute the bundled products to the Company's end-users. The
bundled products allow end-users to view "streamed" video content synchronized
with other Web browser content on an intranet or the Internet.
The Company has entered into a consulting and development agreement with
RealNetworks, Inc., pursuant to which RealNetworks has developed custom software
to allow the Company to integrate RealNetworks' RealPlayer software, used for
viewing on-demand streaming media over the Internet and intranets, with
VideoVisor. Under a licensing and distribution agreement with RealNetworks, the
Company is a RealMedia Architecture Partner and licenses RealNetworks'
RealPlayer client software for integration with VideoVisor, distributes the
integrated, bundled products to end-user clients, and is authorized to resell
RealNetworks' server software products. Under this agreement, the Company also
has the opportunity to work with RealNetworks to: (i) raise the visibility of
the Company through press releases and promotional mailings; (ii) raise the
visibility of the Company through its website; and (iii) assist the Company in
its marketing efforts by including the Company in RealNetworks user conferences
and potentially at tradeshows and conference events.
The Company has entered into a non-binding letter of intent with Xing
Technology Corporation, pursuant to which Xing has agreed to provide the Company
with its MPEG File-Only Software Player and MPEG Streaming-Compatible Software
Player, used for viewing on-demand streaming media over the
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Internet and intranets, to be integrated with or sold as an "add-on" to
VideoVisor, and has agreed to grant the Company worldwide distribution rights
for the bundled products. The bundled products allow end-users to view
"streamed" video content, including broadcast-quality MPEG-2 formatted video, on
an intranet or the Internet. Xing has also agreed to grant the Company worldwide
rights to resell the MPEG Streaming-Compatible Software Player for two years
after commercial availability. Additionally, the Company has agreed to grant
Xing wordwide rights to resell VideoVisor for two years. The letter of intent is
subject to a definitive agreement to be negotiated between the parties, and
there is no assurance that a definitive agreement will be entered into, or, if
entered into, will be on favorable terms to the Company. Furthermore, Xing's
MPEG-2 Streaming-Compatible Software Player is not yet commercially available,
and there can be no assurances that it will become commercially available in the
near future, if at all.
The Company has a worldwide distribution agreement with FVC.COM (formally
First Virtual Corporation), a leading manufacturer of high quality corporate and
distance learning video solutions. Under this agreement, FVC.COM bundles
VideoVisor with its video networking and NGI access applications to create
Virtual Classroom(TM), which allows students to access course content and
complementary resources 24 hours a day. FVC.COM distributes its video networking
products through channel partners such as Ascend Communications, Inc., American
Nortel Communications, Inc., IBM Corporation, Ingram Micro, Inc. and Bay
Networks, Inc.
The Company also offers turnkey video hosting services to corporate and
other customers pursuant to a Web hosting service agreement with VStream, Inc.
Pursuant to such agreement, the Company re-purposes and publishes video content
in its proprietary format, and, through VStream, "hosts" the customers'
published video content so that it is available for on-demand streaming across
the Internet using either RealNetworks or Microsoft NetShow video servers.
Pursuant to an agreement with MicroVideo Learning Systems, Inc., the
Company converts MicroVideo's software video training courseware to the
Company's proprietary format and resells the published content to the Company's
customers. In addition, the Company allows WingsNet, Inc. to publish its video
course content into the Company's proprietary format for resale to end-users.
Sales, Marketing and Distribution
Sales. The Company has focused and will continue to focus its sales and
marketing efforts on the corporate training, communications and distance
learning markets for the next several years. Once the Company has firmly
established itself in these markets, the Company plans to expand into other
vertical business markets and consumer markets. The Company markets its products
and services through a direct sales force and through resellers. The Company's
direct sales force markets the Company's products and services primarily to
corporate customers worldwide. The Company is in the process of significantly
expanding its direct sales force in North America and plans to increase the
number of direct sales representatives from one to seven by the end of the first
quarter of 1999.
Marketing. The Company participates in trade shows, conferences and
seminars, provides product information through the Company's Web site, and
promotes the Company and its products to industry analysts and the media. The
Company's marketing programs are aimed at informing potential partners and
prospects about the capabilities and benefits of the Company's products and
services, increasing brand name awareness, and stimulating demand across all
market segments. The Company has an agreement with Schwartz Communications,
Inc., a leading high-tech public relations agency, to provide ongoing public
relations and promotional services to gain access to major media and markets.
The Company currently has two employees in marketing and plans to increase its
marketing staff to four employees following the offering.
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Distribution. The Company has entered into various reseller relationships
with systems integrators, video software resellers and training companies,
including Roscor Corporation, AE Business Solutions, Producers Studio, IRM
Training Pty. Ltd., VCS Technologies, Inc., WingsNet, Inc., StorNet, Inc. and
DocuVideo Productions, pursuant to which such companies resell the Company's
products and services to end-users and video publishers in the United States,
Australia and New Zealand. The Company also currently distributes its products
domestically and internationally through its direct sales force based in the
United States. The Company may establish international subsidiaries that market
and sell the Company's products and services outside the United States in the
future.
Competition
The market for software and services for the Internet and intranets is
relatively new, constantly evolving and intensely competitive. The Company
expects that competition will intensify in the future. Many of the Company's
current and potential competitors have longer operating histories, greater name
recognition and significantly greater financial, technical and marketing
resources than the Company. The Company's principal competitors in the
development and distribution of video publishing solutions include Eloquent,
Inc., Veon, Inc., Vsoft, Inc., VStream, Inc., LiveNote, Inc., Adobe Systems,
Inc. and Visionary Information Systems, Inc. The Company also competes or may
compete with computer-based training (CBT) software companies including
Macromedia, Inc., Asymetrix Corporation, and Allen Communications, Inc. The
Company also competes or may compete with more general purpose audio and video
streaming software companies including Microsoft, RealNetworks, VDOnet
Corporation, Xing Technology Corporation, Cubic VideoComm, Inc., Motorola, Inc.,
Vosaic LLC and Oracle Corporation. The Company's vPrism and VideoVisor software
also competes indirectly with delivery systems for multimedia content other than
audio and video, such as Flash by Macromedia and Enliven by Narrative
Communications Corp. Many of such competitors have longer operating histories,
greater name recognition and significantly greater financial, technical and
marketing resources than the Company. As a result, such competitors may be able
to develop products comparable or superior to the Company's or adapt more
quickly to new technologies or evolving customer requirements.
Competitive factors in this market include the quality and reliability of
software; features for creating, editing and publishing content; ease of use and
interactive user features; scalability and cost per user; and compatibility with
the user's existing network components and software systems. To expand its user
base and further enhance the user experience, the Company must continue to
innovate and improve the performance of its software. The Company is committed
to the continued market penetration of its brand, products and services. The
Company may, as a strategic response to changes in the competitive environment,
implement pricing, licensing, service or marketing changes designed to extend
its current brand and technology franchise. For example, the Company may elect
to reduce the price for select versions of its software or even make select
versions available for download free of charge. Continued price concessions or
the emergence of other pricing or distribution strategies by competitors may
have a material adverse effect on the Company's business, financial condition
and results of operations.
Intellectual Property
The Company's success depends in part on its ability to protect its
proprietary software and other intellectual property. To protect its proprietary
rights, the Company relies generally on patent, copyright, trademark and trade
secret laws, confidentiality agreements with employees and third parties, and
license agreements with consultants, vendors and customers, although the Company
has not signed such agreements in every case. Despite such protections, a third
party could copy or otherwise obtain and use the Company's products or
technology, or develop similar technology independently.
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The Company currently has one patent pending in the U.S. relating to its
product architecture and technology. The pending patent application may not be
granted, or, if granted, may not provide any competitive advantage to the
Company. Many of the Company's current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a patent has issued or issues in the
future which covers the Company's products, the Company would need to either
obtain a license or design around the patent. The Company may not be able to
obtain such a license on acceptable terms, if at all, nor design around the
patent.
The Company attempts to avoid infringing known proprietary rights of third
parties in its product development efforts. However, the Company has not
conducted and does not conduct comprehensive patent or trademark searches to
determine whether it infringes patents or other proprietary rights held by third
parties. In addition, it is difficult to proceed with certainty in a rapidly
evolving technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to
similar technologies. If the Company were to discover that its products violate
third-party proprietary rights, there can be no assurance that it would be able
to obtain licenses to continue offering such products without substantial
reengineering or that any effort to undertake such reengineering would be
successful, that any such licenses would be available on commercially reasonable
terms, if at all, or that litigation regarding alleged infringement could be
avoided or settled without substantial expense and damage awards. Any claims
against the Company relating to the infringement of third-party proprietary
rights, even if not meritorious, could result in the expenditure of significant
financial and managerial resources and in injunctions preventing the Company
from distributing certain products. Such claims could materially adversely
affect the Company.
To license many of its products, the Company relies in part on "shrinkwrap"
and "clickwrap" licenses that are not signed by the end user and, therefore, may
be unenforceable under the laws of certain jurisdictions. As with other software
products, the Company's products are susceptible to unauthorized copying and
uses that may go undetected, and policing such unauthorized use is difficult. In
general, the Company's efforts to protect its intellectual property rights
through patent, copyright, trademark and trade secret laws may not be effective
to prevent misappropriation of its technology, or to prevent the development and
design by others of products or technologies similar to or competitive with
those developed by the Company. The Company's failure or inability to protect
its proprietary rights could materially adversely affect the Company's business,
financial condition and results of operations.
The Company also relies on certain technology that it licenses from third
parties, including software that is integrated with internally developed
software and used in the Company's products, to perform key functions. In the
future, such third-party technology licenses may not be available to the Company
on commercially reasonable terms. The loss of any of these technologies could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors -- Uncertain Protection of
Intellectual Property; Risks Associated with Licensed Third-Party Technology."
Employees
The Company currently has 14 full-time employees and two part-time
employees, including four in product development, three in customer service,
four in sales and marketing and five in finance and administration. All of such
employees except one are based at the Company's executive offices in Los
Angeles, California. The Company intends to hire additional employees in product
development, sales and marketing. None of the Company's employees is subject to
a collective bargaining agreement, and the Company believes that its relations
with its employees are good.
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Facilities
The Company's executive offices are located in west Los Angeles, California
in an office building in which the Company leases an aggregate of 3,585 square
feet at a current monthly rental of $6,811.50. The lease agreement terminates on
June 2, 2000. The Company has an option to extend the lease agreement for one
additional 3 year term.
The Company anticipates that it will require additional space within the
next 12 months, and that suitable additional space will be available on
commercially reasonable terms, although there can be no assurance in this
regard. The Company does not own any real estate.
Legal Proceedings
The Company is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the ordinary course of its business.
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MANAGEMENT
Directors and Officers
Set forth below are the directors and officers of the Company:
Name Age Position
- ---- --- --------
Dr. James W. Stigler 44 Chairman of the Board
Joshua D.J. Sharfman 41 Chief Executive Officer,
President and Director
Thomas H. Stigler 41 Vice President, Sales and
Business Strategy and Director
Roger Berman 44 Director
Gerald Porter 54 Director
Danny Gampe 44 Chief Financial Officer
Patricia Bodner 36 Vice President of Worldwide
Marketing
Michael Goodell 42 Vice President of Consulting
and Services
Dr. James W. Stigler has served as Chairman of the Board for the Company
since its inception in July 1995. He is currently a part-time employee of the
Company. Dr. Stigler is a professor, author and researcher in the fields of
education, psychology and video research. Since 1991, Dr. Stigler has served as
a Professor at the University of California, Los Angeles. From 1983 to 1991, Dr.
Stigler served as an Associate Professor at the University of Chicago. Dr.
Stigler holds an A.B. degree from Brown University, a Masters degree from the
University of Pennsylvania and a Ph.D. from the University of Michigan. Dr.
Stigler is the brother of Thomas Stigler.
Joshua D.J. Sharfman has served as Chief Executive Officer and a Director
of the Company since May 1996, and will become President upon completion of this
offering. From 1994 to 1996, Mr. Sharfman served as Vice President of Research
and Development at ParcPlace-Digitalk, Inc., a cross-platform object-oriented
software firm. From 1993 to 1994, he operated his own software development
consulting firm. From 1984 to 1993, Mr. Sharfman served as Executive Vice
President of Research and Development at Dassault Systemes USA, a wholly owned
subsidiary of Dassault Systemes SARL, and in a variety of marketing and
development management functions at CADAM Inc., both of which are CAD/CAM
software vendors. From 1981 to 1984, Mr. Sharfman served as Section Head of the
Electro-Optical and Data Systems Group at Hughes Aircraft Company. Since 1980,
Mr. Sharfman has also served as an Adjunct Professor of Engineering at the
University of Southern California. Mr. Sharfman holds a B.S. degree from the
University of California, Los Angeles and a M.S. degree from the University of
Southern California.
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Thomas H. Stigler has served as Vice President, Sales and Business Strategy
and a Director of the Company since November 1995. From January to November
1995, Mr. Stigler served as an Account Executive at Sybase, Inc, a database
software company. From January 1993 to January 1995, Mr. Stigler served as
District Manager of the Gulf Coast Region for Hitachi Data Systems Corp. From
December 1980 to January 1993, Mr. Stigler held several sales and management
positions at IBM Corporation including Account Executive and Marketing Manager.
Mr. Stigler holds a B.S. degree in Radio, TV and Film from Northwestern
University. Mr. Stigler is the brother of Dr. James Stigler.
Roger Berman has served as a Director of the Company since its inception in
July 1995. He is currently a part-time employee of the Company. From July 1995
to December 1997, Mr. Berman was the President of the Company. Prior to joining
the Company, Mr. Berman served as President of St. Eve International, Inc., an
apparel company, from May 1992 to July 1995 and Sherne Lingerie, Inc. from
January 1986 to December 1991. Mr. Berman holds a B.A degree from Hamilton
College and an MBA from New York University.
Gerald Porter has served as a Director of the Company since January 1996.
Mr. Porter has been a consultant in the software services industry since 1995.
From 1989 to 1995, Mr. Porter served as President of Systems and Computer
Technology Corp., a software development company. Prior to 1989, Mr. Porter held
several senior positions in the banking industry, including Senior Vice
President at Bank of America and Chief Operating Officer at American Security
Bank. Mr. Porter holds a B.A. degree from Edinboro University in Pennsylvania.
Danny Gampe has served as Chief Financial Officer of the Company since
January 1998. From 1997 to January 1998, Mr. Gampe served as Vice President of
Finance and Administration for eShare Technologies, an Internet software
development firm. From 1992 to 1997, Mr. Gampe served as Chief Financial Officer
of Robbins Research International, a seminar development company. From 1991 to
1992, Mr. Gampe served as Manager of Financial Planning & Analysis at Wahlco
Environmental Systems, Inc. Mr. Gampe holds a B.A. degree from the University of
California at Long Beach and an MBA from the University of Redlands. In
addition, Mr. Gampe has been a Certified Management Accountant since 1993.
Patricia Bodner has served as Vice President of Marketing for the Company
since May 1997. From September 1995 to December 1996, Ms. Bodner served as
Senior Vice President of Marketing for Inscape, a joint-venture between Warner
Music Group, HBO and Nash New Media. From November 1994 to August 1995, Ms.
Bodner served as Vice President of Marketing for BMG Video, a division of BMG
Entertainment of North America. From November 1991 to November 1994, Ms. Bodner
served as Vice President of Marketing at New Line Home Video, a division of Time
Warner Inc. From September 1986 to November 1991, Ms. Bodner served as National
Sales Promotion Manager at Warner Home Video, a division of Time Warner Inc. Ms.
Bodner holds a B.A. degree from the University of Wisconsin-Madison.
Michael Goodell has served as Vice President of Consulting and Services for
the Company since October 1997. From June 1979 to September 1997, Mr. Goodell
held several positions at IBM Corporation, including Principal of Consulting,
Manager of Industry Marketing, Marketing Manager and Senior Sales
Representative. Mr. Goodell holds a B.S. and a M.S. degree from Rice University.
Directors' Compensation
The Company's Directors who are not full-time employees of the Company
receive $1,000 for attendance at each meeting of the Board of Directors or any
committee thereof and will be reimbursed for their out-of-pocket expenses in
connection with their attendance. No directors' fees have been paid to date.
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Committees of the Board
Upon completion of this offering, the Board of Directors will have two
standing committees: the Audit Committee and the Compensation Committee. The
Audit Committee will review with the Company's independent public accountants
the scope and adequacy of the audit to be performed by such independent public
accountants, the accounting practices, procedures and policies of the Company,
and all related party transactions. The Compensation Committee will recommend to
the Board the compensation to be paid to officers and directors, administer the
Plan and approve the grant of options under the Plan. At least two disinterested
directors will be added to the Board of Directors and such directors will
comprise both committees.
Executive Compensation
Summary Compensation. The following table sets forth the total compensation
paid during 1997 to the Company's Chief Executive Officer and other executive
officers of the Company whose 1997 compensation exceeded $100,000.
Annual Compensation Long Term Compensation Awards
----------------------- -----------------------------
Securities
Name and Underlying All Other
Principal Position Salary($) Bonus($) Options(#) Compensation
- ------------------ --------- -------- ---------- ------------
Joshua Sharfman, 190,000 -- -- --
Chief Executive
Officer
Thomas Stigler, 177,501 -- -- --
Vice President,
Sales/Business
Strategy
No options were granted in 1997 to either of the officers named in the
above table and such officers held no stock options as of December 31, 1997.
Employment Agreements
The Company has entered into an employment agreement with Joshua Sharfman,
Chief Executive Officer (and President, upon completion of this offering,) of
the Company, which will commence on the closing date of the offering and expire
on the second anniversary of such date. Pursuant to the terms of the employment
agreement, Mr. Sharfman will receive an annual base salary of $230,000, 40,000
stock options exercisable at the initial public offering price per share, and a
one-time cash bonus of $60,000. Mr. Sharfman will be eligible to receive
additional stock options, bonuses and a higher salary at the discretion of the
Board of Directors. In addition, the employment agreement provides that Mr.
Sharfman will receive a severance payment equal to his annual salary if he is
terminated without cause or required to perform a material portion of his
services at a location more than 25 miles from the Company's current location in
Los Angeles, California, and a severance payment equal to eight months' pay (or
pay through the end of the term if less than eight months) if he elects to
resign after the appointment of an executive officer senior
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in position or responsibility to him or designation of another person as the
President or Chief Executive Officer of the Company.
The Company has entered into an employment agreement with Thomas Stigler,
Vice President of Sales and Business Strategy of the Company, which will
commence on the closing date of the offering and expire on the second
anniversary of such date. Pursuant to the terms of the employment agreement, Mr.
Stigler will receive an annual base salary of $230,000, 40,000 stock options
exercisable at the initial public offering price per share, and a one-time cash
bonus of $60,000. Mr. Stigler will be eligible to receive additional stock
options, bonuses and a higher salary at the discretion of the Board of
Directors. In addition, the employment agreement provides that Mr. Stigler will
receive a severance payment equal to his annual salary if he is terminated
without cause or required to perform a material portion of his services at a
location more than 25 miles from the Company's current location in Los Angeles,
California, and a severance payment equal to eight months' pay (or pay through
the end of the term if less than eight months) if he elects to resign after the
appointment of an executive officer in charge of sales and marketing or
designation of another person as Vice President of Sales and Business Strategy
of the Company.
1996 Incentive and Non-Qualified Stock Option Plan
The Board of Directors has adopted the Company's 1996 Incentive and
Non-Qualified Stock Option Plan (the "Plan"). The Plan provides for the grant of
incentive stock options to employees (including employee directors) and
non-qualified stock options to employees, directors and consultants. A total of
250,000 shares of Common Stock have been reserved for issuance under the Plan.
Upon the completion of this offering, 140,473 options will be outstanding
under the Plan at a weighted average exercise price per share of $7.58, assuming
an initial public offering price of $7.50 per share. All of such outstanding
options will be fully vested and exercisable. The plan is administered by the
Board of Directors and, following the completion of the offering, the
Compensation Committee thereof. Options granted under the plan will vest as
determined by the Compensation Committee, and may accelerate and become fully
vested in the event of an acquisition of the Company if so determined. The
exercise of options granted under the Plan will be as determined by the
Compensation Committee, although the exercise price of incentive stock options
must be at least equal to the fair market value of the Common Stock on the date
of grant. The Board of Directors may amend or modify the Plan at any time. The
Plan will terminate in 2006 unless terminated earlier by the Board of Directors.
CERTAIN TRANSACTIONS
The law firm of Ehrenreich Eilenberg Krause & Zivian LLP ("EEKZ LLP") has
performed legal services for the Company in connection with this offering and
may perform legal services for the Company following this offering. In 1996 and
1997, the Company issued to Eilenberg & Zivian, an affiliate of EEKZ LLP,
warrants to purchase an aggregate of 23,543 shares of Common Stock at an
exercise price of $6.37. Eilenberg & Zivian is also the owner of 9,334 shares of
Common Stock which it received from the Company in exchange for services in
1995. Pursuant to an agreement dated as of December 1, 1997, and amended and
restated as of May 1, 1998, E&Z Investments, an affiliate of EEKZ LLP, has
currently exercisable options to purchase an aggregate of 16,650 shares of
Common Stock at an exercise price of $.90 per share from Messrs. James Stigler
and Berman. E&Z Investments also has currently exercisable options, assigned to
it by Judson Cooper, to purchase an aggregate of 8,325 shares of Common Stock
from Messrs. James Stigler, Thomas Stigler, Berman and Sharfman at an exercise
price of $.90 per share.
The Company has entered into a consulting agreement with Prism Ventures LLC
("Prism") pursuant to which Prism has agreed to provide certain financial
consulting services to the Company. The agreement is
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<PAGE>
for the 1998 calendar year and Prism will receive an aggregate of $300,000,
payable on the earlier of the closing date of this offering or December 31,
1998. In 1997, Prism received $100,000 from the Company for consulting services.
Judson Cooper is a member of Prism.
Pursuant to an agreement dated as of January 31, 1997, and amended and
restated as of May 1, 1998, Judson Cooper was granted currently exercisable
options to purchase an aggregate of 162,358 shares of Common Stock from Messrs.
James Stigler, Thomas Stigler, Berman and Sharfman at an exercise price of
$0.90. Of such options, Mr. Cooper assigned options to purchase 8,325 shares to
E&Z Investments.
The Company has entered into a consulting agreement with Roger Berman
pursuant to which Mr. Berman has agreed to provide certain financial consulting
services to the Company. The agreement has a term of two years and begins on the
closing date of this offering. Mr. Berman will receive $60,000 upon the closing
of this offering and an annual fee of $60,000. Mr. Berman is currently a
part-time employee and a Director of the Company. At the closing of this
offering, he will cease to be an employee of the Company.
The Company has entered into a consulting agreement with James Stigler
pursuant to which Dr. Stigler has agreed to provide certain consulting services
to the Company, including development, financial and strategic advisory
services. The agreement has a term of two years and begins on the closing date
of this offering. Dr. Stigler will receive $40,000 upon the closing of this
offering and an annual fee of $24,000. Dr. Stigler is currently a part-time
employee and Chairman of the Board of Directors of the Company. At the closing
of this offering, he will cease to be an employee of the Company.
The Company borrowed $20,000 in October 1998 from James Stigler. The loan
was in the form of a promissory note, accrues interest at the rate of 12% per
annum and is payable in October 1999.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock, as of September 30, 1998 by (a) each person known
by the Company to be the beneficial owner of more than 5% of the outstanding
shares of Common Stock, (b) each director and executive officer of the Company
and (c) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Percentage of Common Stock
Shares Beneficially Owned
Name and Address of Beneficial of Common Stock ----------------------------------
Owner(1) Beneficially Owned(2) Before Offering After Offering
- ------------------------------ --------------------- --------------- --------------
<S> <C> <C> <C>
Dr. James W. Stigler 304,424(3) 15.6% 7.0%
Thomas H. Stigler 242,949(4) 12.2% 5.5%
Roger Berman 202,949(5) 10.4% 4.7%
Judson Cooper 154,033(6) 7.9% 3.5%
Joshua D.J. Sharfman 141,475(7) 7.1% 3.2%
Gerald Porter 83,330(8) 4.3% 1.9%
Kenneth Mendoza 101,475 5.2% 2.3%
Michael Goodell 16,649(9) * *
Patricia Bodner 7,770(10) * *
Danny Gampe 5,550(11) * *
All Executive Officers and Directors as 1,005,096(12) 48.6% 22.5%
a Group (8 persons)
</TABLE>
- ----------
* less than 1%
(1) Unless otherwise indicated, the address of each beneficial owner is 10850
Wilshire Boulevard, Suite 1260, Los Angeles, CA 90024.
(2) Beneficial ownership has been determined in accordance with the rules of
the Securities Exchange Commission and includes voting or investment power
with respect to shares. Except as indicated by footnote, and subject to
community property laws, the persons named in the table above have sole
voting and investment power with respect to the number of shares indicated
as beneficially owned by them. The number of shares of Common Stock
outstanding used in calculating the percentage ownership for each listed
person includes the shares of Common Stock underlying options or warrants
held by such person and exercisable within 60 days of September 30, 1998
but excludes shares of Common Stock underlying options or warrants held by
any other person. Percentage of beneficial ownership is based on 1,953,758
shares of Common Stock outstanding pro forma as of September 30, 1998 and
4,353,758 shares of Common Stock outstanding after completion of the
offering.
(3) Includes an aggregate of 69,209 shares which are subject to currently
exercisable options held by Judson Cooper and E&Z Investments ("EZ"), an
affiliate of Ehrenreich Eilenberg Krause & Zivian LLP.
(4) Includes (i) 40,000 shares issuable upon the exercise of options which will
become exercisable on the effective date of this offering and (ii) 40,589
shares which are subject to currently exercisable options held by Judson
Cooper and EZ.
(5) Includes an aggregate of 48,915 shares which are subject to currently
exercisable options held by Judson Cooper and EZ.
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<PAGE>
(6) Consists of shares issuable upon the exercise of currently exercisable
options to purchase shares of Common Stock from Messrs. James Stigler,
Thomas Stigler, Berman and Sharfman at an exercise price of $0.90. Mr.
Cooper's address is 181 Harbor Drive, Stamford, CT 06902.
(7) Includes (i) 40,000 shares issuable upon the exercise of options which will
become exercisable on the effective date of this offering and (ii) 20,295
shares which are subject to currently exercisable options held by Judson
Cooper and EZ.
(8) Includes 3,330 shares issuable upon the exercise of options which will
become exercisable on the effective date of this offering.
(9) Consists of 16,649 shares issuable upon the exercise of options which will
become exercisable on the effective date of this offering.
(10) Consists of 7,770 shares issuable upon the exercise of options which will
become exercisable on the effective date of this offering.
(11) Consists of 5,550 shares issuable upon the exercise of options which will
become exercisable on the effective date of this offering.
(12) Includes an aggregate of 113,299 shares issuable upon the exercise of
options which will become exercisable on the effective date of this
offering.
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<PAGE>
SELLING STOCKHOLDERS
The registration statement, of which this Prospectus forms a part, also
relates to the registration by the Company, for the account of the Selling
Stockholders, of an aggregate of 822,103 shares of Common Stock. The Selling
Stockholders Shares are not being underwritten by the Representative in
connection with this offering. The Selling Stockholders have agreed with the
Company not to directly or indirectly offer, sell, transfer or otherwise
encumber or dispose of any of their Common Stock for a period of nine (9) months
after the date of this Prospectus. See "Shares Eligible for Future Sale" and
"Underwriting."
The sale of the Selling Stockholders Shares by the Selling Stockholders may
be effected from time to time in transactions (which may include block
transactions by or for the account of the Selling Stockholders) in the
over-the-counter market or in negotiated transactions, or through the writing of
options on the Selling Stockholders Shares, a combination of such methods of
sale, or otherwise. Sales may be made at fixed prices which may be changed, at
market prices prevailing at the time of sale, or at negotiated prices.
The Selling Stockholders may effect such transactions by selling the
Selling Stockholders Shares directly to purchasers, through broker-dealers
acting as agents for the Selling Stockholders, or to broker-dealers who may
purchase shares as principals and thereafter sell the Selling Stockholders
Shares from time to time in the over-the-counter market, in negotiated
transactions, or otherwise. Such broker-dealers, if any, may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders and/or the purchaser for whom such broker-dealers may act
as agents or to whom they may sell as principals or both (which compensation as
to a particular broker-dealer may be in excess of customary commissions).
The Selling Stockholders and broker-dealers, if any, acting in connection
with such sales, might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act and any commission received by them and any
profit upon the resale of such securities might be deemed to be underwriting
discounts and commissions under the Securities Act.
Sales of any shares of Common Stock by the Selling Stockholders may depress
the price of the Common Stock in any market that may develop for the Common
Stock.
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock by each of the
Selling Stockholders as of September 30, 1998 and as adjusted to reflect the
sale of shares offered pursuant to this Prospectus. None of the Selling
Stockholders has had any position with, held any office of, or had any other
material relationship with the Company.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Number of Shares Owned After
Name of Beneficial Owner (1) Offering Being Offered Offering (2)
- ---------------------------- ------------------- ---------------- ------------
<S> <C> <C> <C>
Richard Stone 161,250 161,250 0
Navida, Inc. 127,500 127,500 0
Shahrokh Sedaghat 47,917(3) 45,000 2,917
Shapour and Parvindokht 45,000 45,000 0
Sedaghat
Theodore Friedman 33,750 33,750 0
Eli Jacobsen 30,000 30,000 0
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Number of Shares Owned After
Name of Beneficial Owner (1) Offering Being Offered Offering (2)
- ---------------------------- ------------------- ---------------- ------------
<S> <C> <C> <C>
David Stone 30,000 30,000 0
Glen Sutton III 30,000 30,000 0
Norman Veitzer 30,000 30,000 0
Harold Wrobel 30,000 30,000 0
Broadway Partners 22,500 22,500 0
Christine Walley 22,500 22,500 0
Sheila Sconiers 19,500 19,500 0
Stephanie Rubin 18,599(4) 7,500 11,099
John Hancock Global 16,667 16,667 0
Technology Fund
Joseph Habert 15,000 15,000 0
Georgia Schley 15,000 15,000 0
Arthur Steinberg IRA 15,000 15,000 0
R. Steinberg Pension Trust 15,000 15,000 0
Grace Terry 15,000 15,000 0
Walter Terry 15,000 15,000 0
Eric Appell 11,017(5) 8,100 2,917
Ester Dusi 7,500 7,500 0
John Glorieux 7,500 7,500 0
Jerry Heymann 7,500 7,500 0
Andreas Iseli 7,500 7,500 0
Mitchell Steinberg 7,500 7,500 0
Stephan Williams 7,500 7,500 0
Lawrence Manus 5,000 5,000 0
John Muzinsky 3,750 3,750 0
Michael Zylberman 3,750 3,750 0
Frank Loccisano 3,334 3,334 0
Christopher Creamer 3,000 3,000 0
Chana Sasha Foundation 1,667 1,667 0
Andrew Holder 1,667 1,667 0
R. Merrill Hunter 1,667 1,667 0
Marc Roberts 1,667 1,667 0
Robert Steinberg 1,500 1,500 0
Keith Alliotts 417 417 0
Ryan Schinman 417 417 0
</TABLE>
- ----------
(1) The Company believes the persons named in the table above, based upon
information furnished by such persons, have sole voting and investment
power with respect to the number of shares beneficially owned
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<PAGE>
by them.
(2) Assumes that all shares of Common Stock being registered will be sold.
(3) Includes 2,917 shares issuable upon the exercise of currently exercisable
warrants.
(4) Includes 11,099 shares issuable upon the exercise of currently exercisable
warrants held by the Whitestone Group, an entity controlled by Ms. Rubin's
husband. Ms. Rubin disclaims any beneficial ownership of any stock owned by
the Whitestone Group.
(5) Includes 2,917 shares issuable upon the exercise of currently exercisable
warrants.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 35,000,000 shares
of Common Stock, $.0001 par value and 5,000,000 shares of Preferred Stock,
$.0001 par value (the "Preferred Stock"). Upon completion of the offering, there
will be 4,353,758 shares of Common Stock issued and outstanding, no shares of
Preferred Stock outstanding and 1,200,000 Warrants issued and outstanding.
Recapitalization
Immediately prior to the completion of this offering, the Company will
amend its Certificate of Incorporation to effect a 1 for 9.01 reverse stock
split and complete a recapitalization (the "Recapitalization") of its
authorized, issued and outstanding capital stock and debt. Prior to the reverse
split and the Recapitalization, the Company will have outstanding: 1,201,960
shares of Common Stock; 809,565 shares of Series A Preferred Stock; 50,740
shares of Series B Preferred Stock; 8,500 shares of Series B-1 Preferred Stock;
and 30,000 shares of Series C Preferred Stock (all of such Preferred Stock
automatically converts to Common Stock upon an initial public offering of the
Common Stock). In addition, prior to the Recapitalization, the Company will have
outstanding an aggregate principal amount of $4,769,500 of promissory notes. An
aggregate principal amount of $1,719,500 of such notes matured on or before
August 1, 1998 and, therefore, prior to the Recapitalization, the Company was in
default on such notes. In connection with the Recapitalization, (i) holders of
an aggregate principal amount of $2,632,000 of such notes agreed to extend the
term of their notes to the earlier of the closing date of this offering or
December 31, 1998 and convert one-half of the outstanding principal of their
notes (the remaining one-half of which, along with certain related fees, will be
paid at the closing of this offering), the accrued interest on such notes and
the warrants received in connection with the issuance of such notes into an
aggregate of 789,600 shares of Common Stock; (ii) holders of an aggregate
principal amount of $187,500 of such notes agreed to extend the term of such
notes to June 30, 1999 (one-half of the principal amount of which, and accrued
interest, will be paid at the closing of this offering); (iii) holders of an
aggregate principal amount of $200,000 of such notes did not agree to terms with
the Company and, therefore, the Company remains in default on such notes; (iv)
10,844 shares of Common Stock and an aggregate of 8,676 shares of Series A
Preferred Stock held by certain officers and directors and an employee of the
Company will be canceled; (v) holders of outstanding warrants to acquire 114,667
shares of Common Stock agreed to convert such warrants into 32,503 shares of
Common Stock; (vi) holders of an aggregate of 3,000 shares of Series B-1
Preferred Stock agreed to exchange such shares for an aggregate of 3,600 shares
of Series B Preferred Stock; and (vii) the Company will amend its Certificate of
Incorporation to increase the conversion ratios of the Series B and C Preferred
Stock from 10:1 to 20.0228:1 and 19.0258:1, respectively. All information set
forth below gives effect to the Amended and Restated Certificate of Amendment to
be filed immediately prior to the completion of this offering.
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<PAGE>
Description of Units.
Each of the 1,200,000 Units offered in this offering consists of two shares
of Common Stock and one Warrant. The shares of Common Stock and the Warrants
comprising the Units will be separately tradeable immediately following the
completion of this offering.
Common Stock
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
any outstanding Preferred Stock. Upon the liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to receive ratably the
net assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
Preferred Stock
Upon the closing of this offering, the Board of Directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of Preferred Stock in one or more series and to fix the right,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, (which may be greater or
lessor than the voting rights of the Common Stock), rights and terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series without any further
vote or action by the stockholders. The issuance of such shares of Preferred
Stock could adversely affect the voting power of holders of Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plans to issue any
additional shares of Preferred Stock.
Outstanding Warrants
Immediately prior to the completion of the offering, warrants to purchase
an aggregate of 407,075 shares of Common Stock at a weighted average exercise
price of $8.66 per share will be outstanding. Of such warrants, warrants to
purchase 373,756 will be exercisable immediately prior to the completion of the
offering.
Registration Rights
Holders of warrants to purchase an aggregate of 393,756 of Common Stock
have certain registration rights with regard to the resale of the shares
issuable upon exercise of such warrants. Additionally, holders of options to
purchase an aggregate of 178,978 shares of Common Stock from certain of the
Company's founders have certain registration rights with regard to the resale of
the shares underlying such options. Following the completion of this offering,
such holders could require the Company to register for resale the shares
issuable upon exercise of such warrants and the shares underlying such options
and such shares would then be freely tradeable, subject to the lock-up
agreements such holders have entered into with the Company and the
Representative. See "Shares Eligible for Future Sale."
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<PAGE>
Description of Warrants
The following is a brief summary of certain provisions of the Warrants but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company and
American Stock Transfer & Trust Company (the "Warrant Agent"), a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase, at any time commencing _____________, 1999 [12 months after
date of this Prospectus] until __________________, 2003 [60 months after the
date of this Prospectus] one share of Common Stock at a price of $___________
[120% of the initial public offering price of the Common Stock] per share,
subject to adjustment in accordance with the anti-dilution and other provisions
referred to below. Commencing ________, 1999 [18 months after the date of this
Prospectus], the warrants will be subject to redemption by the Company, in whole
but not in part, at $.10 per warrant on 30 days' prior written notice, provided
that the average closing sale price of the Common Stock as reported on the
American Stock Exchange equals or exceeds $___ per share [150% of the initial
public offering price per share of the Common Stock] for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
prior to the date of notice of redemption. The holder of any Warrant may
exercise such Warrant by surrendering the certificate representing the Warrant
to the Warrant Agent, with the subscription form thereon properly completed and
executed, together with payment of the exercise price. No fractional shares will
be issued upon the exercise of the Warrants. The exercise price of the Warrants
bears no relationship to any objective criteria of value and should in no event
be regarded as an indication of any future market price of the Securities
offered hereby.
Adjustments. The exercise price of the Warrants and the number of shares of
Common Stock issuable upon the exercise of the Warrants are subject to
adjustment in certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock.
Transfer, Exchange and Exercise. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date sixty (60) months after the date of
this Prospectus, at which time the Warrants will become wholly void and of no
value. If a market for the Warrants develops, the holder may sell the Warrants
instead of exercising them. There can be no assurance, however, that a market
for the Warrants will develop or, if developed, will continue.
Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders.
Indemnification
The Amended and Restated Certificate of Incorporation (the "Certificate")
of the Company provides that, to the fullest extent permitted by applicable law,
as amended from time to time, the Company will indemnify any person who was or
is a party or is threatened to be made a party to an action, suit or proceeding
(whether civil, criminal, administrative or investigative) by reason of the fact
that such person is or was director, officer, employee or agent of the Company
or serves or served any other enterprise at the request of the Company.
In addition, the Certificate provides that a director of the Company shall
not be personally liable to the
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<PAGE>
Company or its stockholders for monetary damages for breach of the director's
fiduciary duty. However, the Certificate does not eliminate or limit the
liability of a director for any of the following reasons: (i) a breach of the
director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or that involve intentional misconduct or knowing
violation of law; (iii) a transaction from which the director derived an
improper personal benefit; or (iv) for unlawful payments of dividends or
unlawful stock redemptions or repurchases.
The Company will purchase and maintain Directors' and Officers' Insurance
as soon as the Board of Directors determines practicable, in amounts which they
consider appropriate, insuring the directors against any liability arising out
of the director's status as a director of the Company regardless of whether the
Company has the power to indemnify the director against such liability under
applicable law.
The Company has been advised that it is the position of the Commission that
insofar as the foregoing provisions may be invoked to disclaim liability for
damages arising under the Securities Act, such provisions are against public
policy as expressed in the Securities Act and are, therefore, unenforceable.
Certain Charter and By-Law Provisions
Certain provisions of the Company's Certificate and Bylaws may have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could limit the price certain investors might be willing to pay
in the future for shares of the Company's Common Stock. Certain of these
provisions allow the Company to issue Preferred Stock without stockholder
approval and provide that special meetings of stockholders of the Company may be
called only by the President of the Company, the Board of Directors or holders
of not less than a majority of the votes entitled to be cast at the special
meeting. These provisions may make it more difficult for stockholders to take
certain corporate actions and could have the effect of delaying or preventing a
change in control of the Company.
Transfer Agent And Registrar
The transfer agent and registrar for the Common Stock and the warrant agent
for the Warrants is American Stock Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Company's
Common Stock. Future sales of substantial amounts of Common Stock in the public
market or the availability of such shares for sale, could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon completion of this offering, the Company will have 4,353,758 shares of
Common Stock outstanding, assuming no exercise of outstanding options and
warrants or the Representative's Over-allotment Option. After the offering,
3,222,103 of the 4,353,758 shares of Common Stock will be freely tradeable
without restriction under the Securities Act, except for any shares purchased by
an "affiliate" of the Company (as that term is defined under the rules and
regulations of the Securities Act), which will be subject to the resale
limitations of Rule 144 under the Securities Act.
The remaining 1,131,655 shares of Common Stock were issued by the Company
in private transactions in reliance upon one or more exemptions contained in the
Securities Act, will be deemed "restricted securities"
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<PAGE>
within the meaning of Rule 144 promulgated pursuant to the Securities Act and
may be publicly sold only if registered under the Securities Act or sold
pursuant to exemptions therefrom. Because all of such restricted shares will
have been held for more than one year as of the date of this Prospectus, all of
such shares will be eligible for public sale beginning 90 days after the
effective date of this Prospectus in accordance with the requirements of Rule
144, as amended, subject to the lock-up agreements described below.
In general, under Rule 144(e), as currently in effect, a stockholder (or
stockholders whose shares are aggregated), including an affiliate, who has
beneficially owned for at least one year shares of Common Stock that are treated
as "restricted securities," would be entitled to sell publicly, within any
three-month period, up to the greater of 1% of the then outstanding shares of
Common Stock (43,538 shares immediately after the completion of this offering)
or the average weekly reported trading volume in the Common Stock during the
four calendar weeks preceding the date on which notice of sale is given,
provided certain requirements are satisfied. In addition, affiliates of the
Company must comply with additional requirements of Rule 144 in order to sell
shares of Common Stock (including shares acquired by affiliates in this
offering). Under Rule 144, a stockholder deemed not to have been an affiliate of
the Company at any time during the 90 days preceding a sale by him, and who has
beneficially owned for at least two years shares of Common Stock that are
treated as "restricted securities," would be entitled to sell those shares
without regard to the foregoing requirements.
Holders of warrants to purchase an aggregate of 393,756 shares of Common
Stock have certain registration rights with regard to the resale of the shares
issuable upon exercise of such warrants. Additionally, holders of options to
purchase an aggregate of 178,978 shares of Common Stock from certain of the
Company's founders have certain registration rights with regard to the resale of
the shares underlying such options. Following the completion of this offering,
such holders could require the Company to register for resale the shares
issuable upon exercise of such warrants and the shares underlying such options
and such shares would then be freely tradeable, subject to the lock-up
agreements described below.
Each officer and director of the Company, all other holders of shares of
Common Stock, and all holders of options and warrants to acquire shares of
Common Stock have agreed not to, directly or indirectly, offer, sell, transfer,
pledge, assign, hypothecate or otherwise encumber or dispose of any of the
Company's securities, whether or not presently owned, for a period of 12 months
(nine months in the case of the Selling Stockholders) after the date of this
Prospectus, without the prior written consent of the Company and the
Representative.
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Security
Capital Trading, Inc. is acting as Representative (the "Representative"), have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement (the "Underwriting Agreement") to purchase from the
Company, and the Company has agreed to sell to the Underwriters on a firm
commitment basis, the Units set forth opposite their names.
Underwriters Number of Units
------------ ---------------
Security Capital Trading, Inc.
----------
Total: 1,2000,000
==========
-50-
<PAGE>
The Underwriters are committed to purchase all Units offered hereby if any
such Units are purchased. The Underwriting Agreement provides that the
obligations of the several Underwriters are subject to the conditions precedent
specified therein.
The Company has been advised by the Representative that it initially
proposes to offer the Units to the public at the public offering price set forth
on the cover page of this Prospectus and may allow to certain dealers who are
members of the National Association of Securities Dealers, Inc. ("NASD")
concessions not in excess of $____ per Unit, of which amount a sum not in excess
of $__________ per Unit may in turn be reallowed by such dealers to other
dealers. After the commencement of the offering, the public offering price,
concessions and reallowances may be changed. The Representative has informed the
Company that it does not expect sales to discretionary accounts by the
Underwriters to exceed five percent of the Common Stock and Warrants offered by
the Company hereby.
The Company has granted to the Underwriters an option, exercisable within
45 days of the date of this Prospectus, to purchase from the Company at the
offering price, less underwriting discounts and the non-accountable expense
allowance, all or part of an additional 120,000 Units on the same terms and
conditions of the offering for the sole purpose of covering over-allotments, if
any.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Representative a non-accountable expense allowance equal to
three percent of the gross proceeds derived from the sale of the Units
underwritten, $50,000 of which has been paid to date.
Each of the Company's officers and directors, all other holders of shares
of Common Stock, and all holders of options and warrants to acquire shares of
Common Stock have agreed not to, directly or indirectly, offer, sell, transfer,
pledge, assign, hypothecate or otherwise encumber or dispose of any of the
Company's securities, whether or not presently owned, for a period of 12 months
(nine months, in the case of the Selling Stockholders) after the date of this
Prospectus, without the prior written consent of the Company and the prior
written consent of the Representative. If at any time commencing 180 days after
the date of this Prospectus, the closing sale or bid price of the Common Stock
is greater than 150% of the initial public offering price of the Common Stock
offered hereby for a period of five (5) consecutive trading days, the
Representative will, upon request, release any securities subject to a lock-up
agreement specified above. An appropriate legend shall be marked on the face of
certificates representing all such securities. In addition, the Company has
agreed not to sell or offer for sale any of its securities for a period of six
(6) months from the date of this Prospectus without the consent of the
Representative, except in connection with strategic transactions or mergers and
acquisitions for which no consent is required.
In connection with the offering, the Company has agreed to issue and sell
to the Representative and/or its designees, at the closing of the proposed
underwriting, for nominal consideration, five year Representative's Warrants
(the "Representative's Warrants") to purchase 120,000 Units. The
Representative's Warrants are exercisable at any time during a period of four
years commencing at the beginning of the second year after their issuance and
sale at a price of $ [120% of the initial public offering price per Unit] per
Unit. The shares of Common Stock, Warrants and shares of Common Stock underlying
the Warrants issuable upon exercise of the Representative's Warrants are
identical to those offered to the public hereby. The Representative's Warrants
contain anti-dilution provisions providing for adjustment of the number of
securities issuable upon the exercise thereof under certain circumstances. The
Representative's Warrants grant to the holders thereof and to the holders of the
underlying Common Stock and Warrants certain rights of registration of the
Common Stock and Warrants underlying the Representative's Warrants.
The Company has agreed to grant the Representative a right of first refusal
for a period of three (3) years
-51-
<PAGE>
after the effective date of the Registration Statement for any sale of
securities made by the Company or any future affiliates or subsidiaries.
The Company has also agreed to provide for a finder's fee to the
Representative if the Company completes a merger, acquisition, joint venture or
any other capital business transaction in which the Representative introduces
the Company to the other party or parties, for a period of five years following
the effective date of the Registration Statement, equal to 5% of the first
$3,000,000 of consideration involved in such transaction, 4% of the next
$3,000,000 of consideration, 3% of the next $2,000,000 of consideration, 2% of
the next $2,000,000 of consideration and 1% of the excess, if any, over
$10,000,000 of consideration.
The Company has agreed that for five (5) years from the effective date of
the Registration Statement, the Representative may designate one person for
election to the Company's Board of Directors (the "Designation Right"). In the
event that the Representative elects not to exercise its Designation Right, then
it may designate one person to attend all meetings of the Company's Board of
Directors for a period of three years. The Company has agreed to reimburse the
Representative's designee for all out-of-pocket expenses incurred in connection
with the designee's attendance at meetings of the Board of Directors.
In connection with this offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market prices of the Common Stock
and Warrants. Such transactions may include stabilization transactions effected
in accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase the Units, Common Stock and/or Warrants for the purpose of
stabilizing their respective market prices. The Underwriters also may create a
short position for the account of the Underwriters by selling more Units in
connection with the offering than they are committed to purchase from the
Company, and in such case may purchase Common Stock and Warrants in the open
market following completion of the offering to cover all or a portion of such
short position. The Underwriters may also cover all or a portion of such short
position, up to 120,000 Units, by exercising the Over-Allotment Option referred
to above. In addition, the Representatives may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter ( or dealer participating in the offering) for the account of other
Underwriters, the selling concession with respect to the Common Stock and
Warrants that are distributed in the offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the prices of the
Common Stock and Warrants at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
Prior to this offering, there has been no public market for the Units,
Common Stock or Warrants. Accordingly, the initial public offering price of the
Units was determined by negotiation between the Company and the Representative.
Among the factors considered in determining such prices and terms, in addition
to the prevailing market conditions, were the history of and the prospects for
the industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure and such other
factors that were deemed relevant. The offering price does not necessarily bear
any relationship to the assets, results of operations or net worth of the
Company.
Security Capital Trading, Inc., the Representative, commenced operations in
June 1995. The Representative has co-managed and participated as an underwriter
in only two public offerings of Common Stock and Warrants. Accordingly, the
Representative has limited experience as a co-manager or underwriter of public
offerings of securities. In addition, the Representative is a relatively small
firm and no assurance can be given that the Representative will be able to
participate as a market maker in the Common Stock or Warrants. No assurance can
be given that any broker-dealer will be a market maker in either of the Common
Stock or the Warrants.
-52-
<PAGE>
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the Securities being offered by this Prospectus will be
passed upon for the Company by Ehrenreich Eilenberg Krause & Zivian LLP , New
York, New York. Such firm beneficially owns of 57,852 shares of Common Stock.
Orrick, Herrington & Sutcliffe LLP, New York, New York, has acted as counsel to
the Underwriters in connection with this offering.
EXPERTS
The financial statements of Digital Lava Inc. as of December 31, 1997 and
for the years ended December 31, 1997 and 1996 included in this Prospectus have
been so included in reliance on the report (which contains an explanatory
paragraph relating to the Company's ability to continue as a going concern as
described in Note 2 to such financial statements) of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of such firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Securities offered
hereby. This Prospectus, which forms a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement, as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Securities offered hereby,
reference is made to the Registration Statement. Statements contained in this
Prospectus as to the contents of any contract or other document that has been
filed as an exhibit to the Registration Statement are qualified in their
entirety by reference to such exhibits for a complete statement of their terms
and conditions. The Registration Statement and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549 or at
certain of the regional offices of the Commission located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, upon payment of the fees prescribed by the
Commission. Copies of such material may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street N.W., Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a Web site (http://www.sec.gov)
through which the Registration Statement and other information can be retrieved.
Following the offering, the Company will be subject to the reporting and
other requirements of the Exchange Act and intends to furnish its shareholders
annual reports containing financial statements audited by its independent
auditors and to make available quarterly reports containing unaudited financial
statements for each of the first three quarters of each year.
-53-
<PAGE>
DIGITAL LAVA INC.
Index to Financial Statements
Page
Report of Independent Accountants........................................... F-2
Balance Sheet............................................................... F-3
Statement of Operations..................................................... F-4
Statement of Stockholders' Deficit.......................................... F-5
Statement of Cash Flows..................................................... F-6
Notes to Financial Statements............................................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Digital Lava Inc.
The reverse stock split described in Note 12 to the financial statements has not
been consummated at October 23, 1998. When it has been consummated, we will be
in a position to furnish the following report:
"In our opinion, the accompanying balance sheet and related statements of
operations, of stockholders' deficit and of cash flows present fairly, in
all material respects, the financial position of Digital Lava Inc. at
December 31, 1997, and the results of its operations and its cash flows for
the years ended December 31, 1996 and 1997 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses and
negative cash flows from operations, has deficits in working capital and
stockholders' equity, and expects to incur future losses. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described
in Note 2. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty."
PricewaterhouseCoopers LLP
New York, New York
July 31, 1998 except
as to Note 12 which is as of
October 22, 1998
F-2
<PAGE>
DIGITAL LAVA INC.
<TABLE>
Balance Sheet
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Pro Forma
December 31, June 30, June 30, 1998
1997 1998 (Note 14)
----------- ----------- -------------
(Unaudited)
Assets
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 173,262 $ 44,187 $ 44,187
Accounts receivable 167,112 625,854 625,854
Other current assets 89,202 53,265 53,265
Deferred costs -- 96,672 96,672
----------- ----------- -------------
Total current assets 429,576 819,978 819,978
Fixed assets, net 94,137 90,503 90,503
Other assets 1,965 16,961 16,961
----------- ----------- -------------
$ 525,678 $ 927,442 $ 927,442
=========== =========== =============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 391,245 $ 303,421 $ 303,421
Accrued interest 239,439 757,069 423,726
Accrued expenses 60,151 300,593 300,593
Notes payable, net of debt discount 3,452,088 4,501,629 3,305,789
Deferred revenue -- 733,121 733,121
----------- ----------- -------------
Total current liabilities 4,142,923 6,595,833 5,066,650
----------- ----------- -------------
Commitments and contingencies (Notes 11 and 12)
Stockholders' deficit:
Convertible preferred stock - Series A, B, B-1
and C, $.0001 par value; 5,000,000 shares authorized; 99,757 shares
issued and outstanding at December 31, 1997 and June 30, 1998,
respectively; none issued and outstanding pro forma (liquidation
preference of $1,626,965) 9 9 --
Common stock, $0.0001 par value; 35,000,000 shares
authorized; 133,403 shares issued and outstanding at
December 31, 1997 and June 30, 1998, respectively; 1,953,758
issued and outstanding pro forma 13 13 195
Additional paid-in capital 3,351,031 4,079,898 9,672,586
Accumulated deficit (6,968,298) (9,748,311) (13,811,989)
----------- ----------- -------------
Total stockholders' deficit (3,617,245) (5,668,391) (4,139,208)
----------- ----------- -------------
$ 525,678 $ 927,442 $ 927,442
=========== =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DIGITAL LAVA INC.
<TABLE>
Statement of Operations
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
1996 1997 1997 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Software licenses $ -- $ 273,989 $ 98,824 $ 264,185
Consulting and services -- 290,583 187,184 127,712
----------- ----------- ----------- -----------
Total revenues -- 564,572 286,008 391,897
Cost of revenues:
Cost of software licenses -- 1,968 710 7,428
Cost of consulting and services -- 121,008 89,425 84,439
----------- ----------- ----------- -----------
Total cost of revenues -- 122,976 90,135 91,867
----------- ----------- ----------- -----------
Gross profit -- 441,596 195,873 300,030
----------- ----------- ----------- -----------
Operating costs and expenses:
Selling, general and administrative 1,522,757 3,316,961 1,649,082 2,003,064
Research and development 421,087 445,162 216,976 267,514
----------- ----------- ----------- -----------
Total operating costs and expenses 1,943,844 3,762,123 1,866,058 2,270,578
----------- ----------- ----------- -----------
Loss from operations (1,943,844) (3,320,527) (1,670,185) (1,970,548)
Other income and expenses:
Interest expense (450,563) (924,842) (527,534) (809,465)
Other income 9,750 -- -- --
----------- ----------- ----------- -----------
Total other income and expenses (440,813) (924,842) (527,534) (809,465)
----------- ----------- ----------- -----------
Net loss $(2,384,657) $(4,245,369) $(2,197,719) $(2,780,013)
=========== =========== =========== ===========
Basic and diluted loss per
share (Note 2) $ (91.69) $ (30.70) $ (16.55) $ (18.53)
----------- ----------- ----------- -----------
Weighed average common shares
used in basic and diluted (Note 2) 26,008 138,305 132,755 150,051
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DIGITAL LAVA INC.
<TABLE>
Statement of Stockholders' Deficit
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock
----------------------------------------------------------------
Shares Amount Shares Amount
----------- ----------- --------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 89,852 $ 9 1,799 $ --
Issuance of convertible preferred stock for cash -- -- 2,506 --
Issuance of convertible preferred stock warrants
in conjunction with notes payable -- -- -- --
Issuance of convertible preferred stock warrants
for services -- -- -- --
Modification of outstanding convertible preferred
stock warrants -- -- -- --
Issuance of convertible preferred stock for services -- -- 388 --
Issuance of convertible preferred stock in exchange
for elimination of anti-dilution rights -- -- 939 --
Issuance of common stock warrants in
conjunction with notes payable -- -- -- --
Issuance of common stock for services -- -- -- --
Net loss -- -- -- --
----------- ----------- --------- --------
Balance, December 31, 1996 89,852 9 5,632 --
Issuance of common stock warrants in
conjunction with notes payable -- -- -- --
Issuance of common stock warrants for services -- -- -- --
Modification of outstanding convertible preferred
stock warrants -- -- -- --
Modification of outstanding common stock warrants -- -- -- --
Issuance of common stock for services -- -- -- --
Options issued by management and principal stockholders for
services performed by consultants -- -- -- --
Issuance of common stock for elimination of
anti-dilution rights -- -- -- --
Net loss -- -- -- --
----------- ----------- --------- --------
Balance, December 31, 1997 89,852 9 5,632 --
Unaudited:
Modification of outstanding convertible preferred
stock warrants -- -- -- --
Modification of outstanding common stock warrants -- -- -- --
Issuance of common stock warrants for services -- -- -- --
Issuance of common stock warrants in
conjunction with notes payable -- -- -- --
Modification of options issued by management and principal
stockholders for services performed by consultants -- -- -- --
Net loss
----------- ----------- --------- --------
Balance, June 30, 1998 (unaudited) 89,852 $ 9 5,632 $ --
=========== =========== ========= ========
<CAPTION>
Series B-1 Convertible Series C Convertible
Preferred Stock Preferred Stock
---------------------------------------------------------
Shares Amount Shares Amount
---------- -------- ----------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 610 $ -- -- $ --
Issuance of convertible preferred stock for cash 333 -- 2,498 --
Issuance of convertible preferred stock warrants
in conjunction with notes payable -- -- -- --
Issuance of convertible preferred stock warrants
for services -- -- -- --
Modification of outstanding convertible preferred
stock warrants -- -- -- --
Issuance of convertible preferred stock for services -- -- 832 --
Issuance of convertible preferred stock in exchange
for elimination of anti-dilution rights -- -- -- --
Issuance of common stock warrants in
conjunction with notes payable -- -- -- --
Issuance of common stock for services -- -- -- --
Net loss -- -- -- --
---------- -------- ----------- --------
Balance, December 31, 1996 943 -- 3,330 --
Issuance of common stock warrants in
conjunction with notes payable -- -- -- --
Issuance of common stock warrants for services -- -- -- --
Modification of outstanding convertible preferred
stock warrants -- -- -- --
Modification of outstanding common stock warrants -- -- -- --
Issuance of common stock for services -- -- -- --
Options issued by management and principal stockholders for
services performed by consultants -- -- -- --
Issuance of common stock for elimination of
anti-dilution rights -- -- -- --
Net loss -- -- -- --
---------- -------- ----------- --------
Balance, December 31, 1997 943 -- 3,330 --
Unaudited:
Modification of outstanding convertible preferred
stock warrants -- -- -- --
Modification of outstanding common stock warrants -- -- -- --
Issuance of common stock warrants for services -- -- -- --
Issuance of common stock warrants in
conjunction with notes payable -- -- -- --
Modification of options issued by management and principal
stockholders for services performed by consultants -- -- -- --
Net loss
---------- -------- ----------- --------
Balance, June 30, 1998 (unaudited) 943 $ -- 3,330 $ --
========== ======== =========== ========
<CAPTION>
Common Stock Additional
-------------------------- Paid-In Accumulated
Shares Amount Capital Deficit
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 -- $ -- $ 216,991 $ (338,272)
Issuance of convertible preferred stock for cash -- -- 469,680 --
Issuance of convertible preferred stock warrants
in conjunction with notes payable -- -- 803,170 --
Issuance of convertible preferred stock warrants
for services -- -- 50,800 --
Modification of outstanding convertible preferred
stock warrants -- -- 35,000 --
Issuance of convertible preferred stock for services -- -- 110,000 --
Issuance of convertible preferred stock in exchange
for elimination of anti-dilution rights -- -- 1 --
Issuance of common stock warrants in
conjunction with notes payable -- -- 2,500 --
Issuance of common stock for services 112,315 11 101,185 --
Net loss -- -- -- (2,384,657)
----------- ----------- ----------- -----------
Balance, December 31, 1996 112,315 11 1,789,327 (2,722,929)
Issuance of common stock warrants in
conjunction with notes payable -- -- 501,319 --
Issuance of common stock warrants for services -- -- 5,100 --
Modification of outstanding convertible preferred
stock warrants -- -- 153,535 --
Modification of outstanding common stock warrants -- -- 59,663 --
Issuance of common stock for services 4,440 -- 10,000 --
Options issued by management and principal stockholders for
services performed by consultants -- -- 832,089 --
Issuance of common stock for elimination of
anti-dilution rights 16,648 2 (2) --
Net loss -- -- -- (4,245,369)
----------- ----------- ----------- -----------
Balance, December 31, 1997 133,403 13 3,351,031 (6,968,298)
Unaudited:
Modification of outstanding convertible preferred
stock warrants -- -- 30,978 --
Modification of outstanding common stock warrants -- -- 10,050 --
Issuance of common stock warrants for services -- -- 46,020 --
Issuance of common stock warrants in
conjunction with notes payable -- -- 295,419 --
Modification of options issued by management and principal
stockholders for services performed by consultants -- -- 346,400 --
Net loss -- -- -- (2,780,013)
----------- ----------- ----------- -----------
Balance, June 30, 1998 (unaudited) 133,403 $ 13 $ 4,079,898 $(9,748,311)
=========== =========== =========== ===========
<CAPTION>
Total
-----------
<S> <C>
Balance, December 31, 1995 $ (121,272)
Issuance of convertible preferred stock for cash 469,680
Issuance of convertible preferred stock warrants
in conjunction with notes payable 803,170
Issuance of convertible preferred stock warrants
for services 50,800
Modification of outstanding convertible preferred
stock warrants 35,000
Issuance of convertible preferred stock for services 110,000
Issuance of convertible preferred stock in exchange
for elimination of anti-dilution rights 1
Issuance of common stock warrants in
conjunction with notes payable 2,500
Issuance of common stock for services 101,196
Net loss (2,384,657)
-----------
Balance, December 31, 1996 (933,582)
Issuance of common stock warrants in
conjunction with notes payable 501,319
Issuance of common stock warrants for services 5,100
Modification of outstanding convertible preferred
stock warrants 153,535
Modification of outstanding common stock warrants 59,663
Issuance of common stock for services 10,000
Options issued by management and principal stockholders for
services performed by consultants 832,089
Issuance of common stock for elimination of
anti-dilution rights --
Net loss (4,245,369)
-----------
Balance, December 31, 1997 (3,617,245)
Unaudited:
Modification of outstanding convertible preferred
stock warrants 30,978
Modification of outstanding common stock warrants 10,050
Issuance of common stock warrants for services 46,020
Issuance of common stock warrants in
conjunction with notes payable 295,419
Modification of options issued by management and principal
stockholders for services performed by consultants 346,400
Net loss (2,780,013)
-----------
Balance, June 30, 1998 (unaudited) $(5,668,391)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DIGITAL LAVA INC.
<TABLE>
Statement of Cash Flows
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
---------------------------- -----------------------------
1996 1997 1997 1998
------------ ------------ ------------- ------------
Cash flows from operating activities: (Unaudited)
<S> <C> <C> <C> <C>
Net loss $(2,384,657) $(4,245,369) $(2,197,719) $(2,780,013)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Deferred costs -- -- -- (96,672)
Deferred revenues -- -- -- 733,121
Depreciation and amortization 31,891 104,890 29,910 111,711
Amortization of debt discount 396,368 716,433 440,976 293,785
Compensation from grant of non-employee
stock options and warrants 261,996 866,589 851,705 392,420
Changes in assets and liabilities
affecting operating cash flows:
Accounts receivables -- (167,112) (130,213) (458,742)
Other assets -- (3,406) -- (20,941)
Accounts payable 12,006 334,601 30,240 (87,824)
Accrued interest 57,279 15,411 59,958 517,630
Accrued expenses (39,845) 182,160 85,710 240,442
----------- ----------- ----------- -----------
Net cash used in operating activities (1,664,962) (2,195,803) (829,433) (1,155,083)
----------- ----------- ----------- -----------
Cash flows used in investing activities:
Acquisition of fixed assets (105,519) (55,620) (48,060) (23,992)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 1,300,000 2,869,500 1,644,500 1,050,000
Repayment of notes payable -- (450,000) (450,000) --
Proceeds from issuance of preferred stock 469,680 -- -- --
----------- ----------- ----------- -----------
Net cash provided by financing activities 1,769,680 2,419,500 1,194,500 1,050,000
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (801) 168,077 317,007 (129,075)
Cash and cash equivalents at beginning of
period 5,986 5,185 5,185 173,262
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 5,185 $ 173,262 $ 322,192 $ 44,187
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Nature of Business and Reorganization
Nature of Business
Digital Lava Inc. (the "Company") develops and markets video publishing
software applications for corporate training, communications, distance
learning, research and other applications. The Company's technology allows
users to organize and manage video content, link video to other types of
files and publish video with all of the linked information on CD-ROM or
DVD, corporate intranets or the public Internet.
Reorganization
The Company originally operated as LAVA L.L.C., a New Jersey limited
liability company (the "LLC") which was formed in July 1995. Pursuant to a
Merger Agreement dated November 26, 1996 by and among Digital Lava Inc., a
Delaware Corporation formed in June 1996 specifically for the purpose of
this merger, and the LLC, the ownership interests in the LLC were exchanged
for shares of series A, B, B-1 and C convertible preferred stock of Digital
Lava Inc. (hereinafter all references to the Company refer to Digital Lava
Inc. and its predecessor, the LLC). The accompanying financial statements
and footnotes reflect the reorganization for all periods presented.
2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. Since inception, the Company has
suffered recurring losses and negative cash flows from operations, has
deficits in working capital and stockholders' equity, and expects to incur
future losses. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The Company's ability to continue
as a going concern is dependent upon its ability to generate sufficient
cash flow to meet its obligations as they come due. In this regard,
management has implemented a plan to raise additional equity financing
through an initial public offering and believes that such financing,
together with existing cash balances and other sources of liquidity (i.e.,
debt, equity, etc), will be sufficient to meet its cash needs. The
accompanying financial statements do not include any adjustments relating
to the recoverability of the carrying amount of recorded assets or the
amount of liabilities that might result from the outcome of these
uncertainties.
Unaudited interim information
The information presented as of June 30, 1998, and for the six month
periods ended June 30, 1997 and 1998, has not been audited. In the opinion
of management, the unaudited interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position as of June 30, 1998, and
the results of its operations and its cash flows for the six months ended
June 30, 1997 and 1998, and the stockholders deficit for the six months
ended June 30, 1998.
F-7
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the management of the Company to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Cash equivalents
The Company considers all highly liquid investments purchased with an
initial maturity of 90 days or less to be cash equivalents and investments
with original maturities of greater than 90 days to be short-term
investments.
Fair value of financial instruments
All current assets and liabilities are carried at cost, which approximates
fair value because of the short maturity of those instruments.
Concentration of risk
Financial instruments which potentially subject the Company to
concentration of credit risk consists primarily of accounts receivable. The
company maintains an allowance for uncollectable accounts receivable based
upon expected collectibility and generally does not require collateral. At
December 31, 1997, no allowance for uncollectable accounts was deemed
necessary by management. For the year ended December 31, 1997, one customer
accounted for approximately 43% of the Company's total net revenues.
Property and equipment
Property and equipment comprised of computer and office equipment and is
stated at cost, less accumulated depreciation of $67,002 at December 31,
1997. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, generally 3 to 7 years. Maintenance
and repair expenses are charged to operations as incurred.
Revenue recognition
Revenues from the licensing of the Company's software products are
recognized upon shipment to the customer, pursuant to an executed software
licensing agreement when no significant vendor obligations exist and
collection is probable. If acceptance by the customer is required, revenue
is recognized upon customer acceptance. Consulting and service revenues
consist of short-term professional service contracts, such as system
development, consulting and video encoding and capsule creation, are
deferred until significant contractual obligations have been fulfilled.
Costs associated with professional service contracts, such as salaries and
materials, are deferred until the related revenue is recognized.
F-8
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Software development costs
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as
incurred until technological feasibility has been established. After
technological feasibility is established, any additional costs would be
capitalized. Through December 31, 1997, software development has been
substantially completed concurrently with the establishment of
technological feasibility and, accordingly, no costs have been capitalized.
Income taxes
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. A valuation allowance is
provided if it is more likely than not that some or all of the deferred tax
asset will not be realized.
Prior to November 1996, the Company operated as a limited liability company
that was treated as a partnership for federal and state income tax
purposes. As a result, all federal and state tax matters for the Company
prior to November 1996 are the responsibility of the members. There are no
pro forma income taxes presented for the period from January 1, 1996 to
November 1996 as the Company incurred losses for both book and tax
purposes.
Stock based compensation
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company accounts for its stock-based compensation arrangements pursuant to
APB Opinion No. 25, Accounting for Stock Issued to Employees. In accordance
with the provisions of SFAS No. 123, the Company discloses the pro forma
effects of accounting for these arrangements using the minimum value method
to determine fair value.
Loss per share
Basic earnings per share ("Basic EPS") is computed by dividing net loss
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share ("Diluted
EPS") gives effect to all dilutive potential common shares outstanding
during a period. In computing Diluted EPS, the treasury stock method is
used in determining the number of shares assumed to be purchased from the
conversion of common stock equivalents. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 98, common stock and convertible
preferred stock issued for nominal consideration prior to the anticipated
effective date of the initial public offering ("IPO"), are included in the
calculation of basic and diluted net loss per share as if they were
outstanding for all periods presented.
Net loss per share for the years ended December 31, 1996 and 1997 does not
include the effect of 99,757 (997,570 on an as-if converted basis) shares
of convertible preferred stock outstanding, 5,550 and 42,842, respectively,
of stock options outstanding with a weighted average exercise price of
$9.01 per share, 17,370 (173,670 on an as-if converted basis) warrants to
purchase outstanding shares of a series A convertible preferred stock with
exercise prices ranging from $38.29 to $180.20 per share, or
F-9
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
27,747 and 435,984, respectively, of warrants to purchase common stock with
exercise prices ranging from $3.83 to $11.26 per share, because their
effects are anti-dilutive.
New accounting pronouncements
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income ("SFAS 130"). SFAS No. 130 establishes
standards for reporting comprehensive income, defined as all changes in
equity from nonowner sources. Adoption of SFAS No. 130 did not have a
material effect on the Company's financial position or results of
operations.
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information.
SFAS No. 131 establishes standards for the way public enterprises report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports issued to stockholders. Adoption of
SFAS No. 131 did not have a material effect on the Company's financial
position or results of operations.
Effective January 1, 1998, the Company adopted American Institute of
Certified Public Accountants Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2). SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements such as software
products, upgrades, enhancements, post-contract customer support,
installation and training to be allocated to each element based on the
relative fair values of the elements. The adoption of SOP 97-2 did not have
an effect on the Company's financial position or results of operations.
3. Accrued Expenses
Accrued expenses comprised the following:
December 31,
1997
-----------
Accrued payroll $46,097
Other accrued liabilities 14,054
-------
$60,151
=======
4. Related Party Transactions
In January 1997, certain members of management and principal stockholders
of the Company granted a consultant options to acquire up to 15,724 of
their shares of series A convertible preferred stock and 22,463 of their
shares of common stock in exchange for services provided to the Company.
The options have an exercise price of $45.05 per share of series A
convertible preferred stock and $4.51 per share of common stock. The
Company has recorded the fair value of the options, in the amount of
F-10
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
$754,554 as a contribution of capital by the stockholders and as general
and administrative expense. As discussed in Note 12, these options were
amended in May 1998.
In December 1997, certain members of management and principal stockholders
of the Company granted options to acquire 1,665 of their shares of series A
convertible preferred stock to a consultant in exchange for certain legal
and advisory services provided to the Company. The options have an exercise
price of $45.05 per share. The Company has recorded the fair value of the
options, in the amount of $77,535, as a contribution of capital by the
stockholders and as general and administrative expense. As discussed in
Note 12, these options were amended in May 1998.
Since inception, the Company has received ongoing consulting and legal
services from stockholders. Services rendered for years ended December 31,
1996 and 1997, amounted to $244,316 and $235,669, respectively, of which
$153,475 is included in accounts payable at December 31, 1997.
5. Notes Payable
December 31,
1997
------------
Notes payable:
Notes payable ................................ $ 2,117,500
Convertible notes payable .................... 902,000
Secured convertible notes payable ............ 700,000
-----------
3,719,500
Less: debt discount .......................... (267,412)
-----------
$ 3,452,088
===========
Notes payable
From March 1996 to July 1996, the Company issued an aggregate of $750,000
in unsecured promissory notes. The notes, as amended, bear interest at
rates ranging from 9% to 12% per annum and are due and payable on the
earlier of December 31, 1998 or upon the date the Company obtains financing
in which gross proceeds exceed $3.5 million. In conjunction with the
issuance of the notes, the holders were granted warrants to purchase 10,821
shares of series A convertible preferred stock at exercise prices ranging
from $67.58 to $180.20 per share. The value of the warrants at the time of
issuance of $535,400 was determined using the Black-Scholes model and
amortized as interest expense over the initial term of the notes. In July
1996 and February and August 1997, in exchange for waiving the acceleration
of the maturity date caused by the Company raising additional financing in
excess of a specified amount and extending the maturity date of the notes
until December 31, 1998, the exercise price of the warrants were reduced to
prices ranging from $45.05 to $67.58. The total incremental difference
between the value of the warrants before and after the modification of the
terms, as determined using the Black-Scholes model, was $35,000 and
$140,535 for the years ended December 31, 1996 and December 31, 1997,
respectively, and is being amortized as interest expense over the remaining
life of the debt. The warrants are exercisable at any time prior to dates
ranging from March 2006 to July 2006. None of the warrants have been
exercised as of June 30, 1998.
F-11
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
In February and March 1997, the Company issued an aggregate of $200,000 in
unsecured promissory notes. The notes, as amended, bear interest at 12% per
annum and are due and payable on the earlier of December 31, 1998 or upon
the date the Company obtains financing in which gross proceeds exceed $3.5
million. In conjunction with the issuance of the notes, the holders of the
notes were granted warrants to purchase 23,431 shares of common stock at an
exercise price of $6.76. The value of the warrants at the time of issuance
of $18,156 was determined using the Black-Scholes model and was amortized
as interest expense over the initial term of the notes. In August 1997, in
exchange for waiving the acceleration of the maturity date of the notes
caused by the Company raising additional financing in excess of a specified
amount until December 31, 1998, the exercise price of the warrants was
reduced to $4.51. The total incremental difference between the value of the
warrants before and after the modification of the warrant terms, as
determined using the Black-Scholes model, was $8,444 and is being amortized
as interest expense over the remaining life of the notes. The warrants are
exercisable at any time prior to March 2007. None of the warrants have been
exercised as of June 30, 1998.
In September 1996, the Company completed a private placement of 9 units to
new investors, each consisting of a $50,000 senior promissory note which
bears interest at 12% per annum and was due and payable on the earlier of
April 3, 1997 or upon the date the Company obtains financing in which gross
proceeds exceed $1.5 million. In addition, each unit included warrants to
purchase 555 shares of series A convertible preferred stock at an exercise
price of $112.63 per share. Proceeds received from the offering of $450,000
were repaid in April 1997. The value of the 4,995 warrants at the time of
issuance of $258,970 was determined using the Black-Scholes model and was
amortized as interest expense over the period the notes were outstanding.
The warrants are exercisable at any time prior to September 2006. None of
the warrants have been exercised as of June 30, 1998.
During the period from December 1996 to February 1997, the Company
completed a private placement of 7 units to existing investors, each
consisting of a $50,000 senior promissory note which bears interest at 12%
per annum and, through various amendments, is payable on the earlier of
December 31, 1998 or upon the date the Company obtains financing in which
gross proceeds exceed $2.0 million. In addition, each unit included
warrants to purchase 5,549 shares of common stock at an exercise price of
$11.26 per share. Proceeds from the offering totaled $350,000. The total
value of the 38,843 warrants at the time of issuance of $8,500 was
determined using the Black-Scholes model and was amortized as interest
expense over the initial term of the notes. In August 1997, in exchange for
the waiving the acceleration of the maturity date of the notes caused by
the Company raising additional financing in excess of a specified amount
until December 31, 1998, the exercise price of the warrants was reduced to
$6.76. The incremental difference between the value of the warrants before
and after the modification of the terms, as determined using the
Black-Scholes model, was $16,800 and is being amortized as interest expense
over the remaining life of the debt. The warrants are exercisable at any
time prior to February 2007. None of the warrants have been exercised as of
June 30, 1998.
During the period from April 1997 to May 1997, the Company completed a
private placement of 32.7 units to new investors, each consisting of a
$25,000 senior promissory note, which bears interest at 6% per annum and,
as amended, is due and payable on the earlier of (i) dates ranging from
April 15 1998 to May 30, 1998 or (ii) upon the closing of an initial public
offering. In addition, each unit included warrants to purchase 2,775 shares
of common stock at an exercise price of $9.01 per share. Proceeds from the
offering totaled $817,500. The value of the 90,743 warrants at the time of
issuance of $58,043
F-12
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
was determined using the Black-Scholes model and was amortized as interest
expense over the initial term of the notes. In October and November 1997,
in exchange for extending the maturity date of the notes until December 31,
1998, the exercise price of the warrants was reduced to $8.11 per share.
The incremental difference between the value of the warrants before and
after the modification of the terms of the warrants, as determined using
the Black-Scholes model, was $8,175 and was amortized as interest expense
over the remaining life of the debt. The warrants are exercisable at any
time prior to dates ranging from April 2003 to May 2005. None of the
warrants have been exercised as of June 30, 1998. As of May 30, 1998, the
Company was in default of the repayment terms of these notes. As described
in Note 12, the Company renegotiated the terms for promissory notes with an
aggregate principle amount of $630,000 and amended the notes for the
remaining $187,500.
Convertible notes payable
During the period from June 1997 to July 1997, the Company completed a
private placement of 36.08 units to new investors, each consisting of a
$25,000 convertible promissory note which bears interest at 6% per annum
and were due and payable on the earlier of (i) dates ranging from June 25,
1998 to July 28, 1998 or (ii) upon the closing of an initial public
offering. In addition, each unit included warrants to purchase 2,775 shares
of common stock at an exercise price of $8.74 per share. Proceeds from the
offering totaled $902,000. Outstanding principal and accrued interest is
mandatorily convertible upon the date the Company obtains financing in
which gross proceeds exceed $3.5 million at a price equal to the price
obtained in the equity offering. The value of the 100,122 warrants at the
time of issuance of $114,554 was determined using the Black-Scholes model
and was amortized as interest expense over the original maturity of the
notes. In December 1997, in exchange for extending the maturity date of the
notes, the exercise price of the warrants was reduced to $7.30 per share.
The incremental difference between the value of the warrants before and
after the modification of the terms of the warrants, as determined using
the Black-Scholes model, was $19,844 and is being amortized as interest
expense over the remaining life of the debt. The warrants are exercisable
at any time prior to dates ranging from June to July 2005. None of the
warrants have been exercised as of June 30, 1998. As of July 28, 1998, the
Company was in default of the repayment terms of the notes and as such they
are no longer convertible. As described in Note 12, the Company
renegotiated the terms for promissory notes with an aggregate principle
amount of $702,000. The remaining promissory notes with an aggregate
principle amount of $200,000 remain in default.
Secured convertible notes payable
In November and December 1997, the Company completed a bridge financing of
70 units (the "Bridge Units") to investors, each consisting of a $10,000
secured convertible promissory note which bears interest at 12% per annum
plus a one time fee of 10% of the principal amount loaned ("10% Success
Fee") payable upon the payment of the note which is due and payable on the
earlier of (i) November 20, 1998, (ii) upon the closing of an initial
public offering or (iii) upon the date the Company obtains financing in
which gross proceeds exceed $5.0 million. In addition, each unit included
warrants to purchase 1,180 shares of common stock at an exercise price of
$8.56 per share. Proceeds from the offering totaled $700,000 as of December
31, 1997. Outstanding principal, accrued interest and the 10% Success Fee
is convertible at each holder's option based on a $15 million valuation of
the Company or at a price equal to the price obtained in a private
placement of equity securities. The 10% Success Fee and the value of the
82,600 warrants granted at the time of issuance of $168,812 are being
F-13
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
amortized as interest expense over the period the notes are outstanding.
The warrants are exercisable at any time prior to February 2003. None of
the warrants have been exercised as of June 30, 1998
Finder warrants
In September 1996, in connection with the September 1996 issuance of
promissory notes, the Company issued warrants to purchase 444 shares of
series A convertible preferred stock at exercise prices ranging from
$112.63 to $180.20 per share as a finders fee. The value of the warrants
granted of $8,800 was determined using the Black-Scholes model and was
amortized as debt issuance costs over the period the notes were
outstanding. The warrants are exercisable at any time prior to September
30, 2006. None of the warrants have been exercised as of June 30, 1998.
In connection with the April 1997 to July 1997 private placements of
promissory notes, the Company issued warrants to purchase 61,378 shares of
common stock at exercise prices ranging form $8.74 to $11.26 per share as a
finders fee. The value of the warrants granted of $79,005 was determined
using the Black-Scholes model and was amortized as debt issuance costs over
the original maturity date of the related notes. The warrants are
exercisable at any time prior to dates ranging from February 2003 to July
2008. None of the warrants have been exercised as of June 30, 1998.
In connection with the November and December 1997 bridge financing, the
Company issued warrants to purchase 27,748 shares of common stock at an
exercise price of $8.56 per share as a finders fee. The value of the
warrants granted of $56,750 was determined using the Black-Scholes model
and was amortized as debt issuance costs over the original maturity date of
the related notes. The warrants are exercisable at any time prior to
February 2003. None of the warrants have been exercised as of June 30,
1998.
Amortization of debt issue costs for the year ended December 31, 1996 and
1997 was $9,910 and $59,889, respectively, of which $91,167 of unamortized
costs is included in other current assets at December 31, 1997.
6. Convertible Preferred Stock
Convertible preferred stock, $.0001 par value, consists of the following:
Shares Issued Liquidation
and Outstanding Preference
Shares December 31, December 31,
Series: Authorized 1997 1997
---------- -------------- -------------
A 966,065 89,852 $ 809,565
B 50,740 5,632 507,400
B-1 8,500 943 85,000
C 30,000 3,330 225,000
Undesignated 3,944,695 -- --
---------- ---------- ----------
5,000,000 99,757 $1,626,965
========== ========== ==========
F-14
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
The Company has reserved 17,370 shares of series A preferred stock for the
exercise of series A warrants issued.
From August 1995 to June 1996, the Company sold 4,304, 943 and 2,498 shares
of series B, B-1 and C convertible preferred stock, respectively, in a
private placement raising gross proceeds of $686,599.
During the year ended December 31, 1996, the Company issued 388 and 832
shares of series B and C convertible preferred stock, respectively, for
services. The fair market value of the stock issued of $110,000 was
recognized as general and administrative expense.
Conversion and voting rights
Each issued share of convertible preferred stock is convertible, in full
and not in part, into ten shares of common stock, subject to certain
adjustments, at the option of the holder and automatically converts upon
the completion of an underwritten public offering. A total of 997,570
shares of common stock have been reserved for issuance in the event of the
conversion of convertible preferred stock. Each share of preferred stock
has a number of votes equal to the number of shares of common stock into
which it is convertible.
Dividends
Each series of preferred stock issued is entitled to receive dividends when
and if declared by the Board. The dividends are noncumulative and payable
in preference to any dividends on common stock. As of December 31, 1997,
the Company had not declared any dividends.
Liquidation
In the event of liquidation, the series C preferred shareholders are
entitled to receive, prior to any distribution to any other shareholders,
approximately $67.58 per share plus all declared and unpaid dividends. The
series B and B-1 preferred shareholders are entitled to receive, after
distribution to series C preferred shareholders and prior to any
distribution to any other shareholders, approximately $90.10 per share plus
all declared and unpaid dividends. The series A preferred shareholders are
entitled to receive, after distribution to series C, B and B-1 preferred
shareholders and prior to any distribution to any other shareholders,
approximately $9.01 per share plus all declared and unpaid dividends. In
addition, the series A preferred shareholders are entitled to share ratably
with the holders of common stock in any remaining distribution.
Anti-dilution
Holders of series B, B-1 and C convertible preferred stock conversion
prices are subject to anti-dilution protection for issuances by the Company
of additional equity shares. In November 1996, in exchange for the issuance
of 939 additional shares of series B convertible preferred stock, holders
of the series B convertible preferred stock agreed to cancel their
anti-dilution protection provision. Also, in August 1997, in exchange for
the issuance of 16,648 shares of common stock and warrants to purchase
16,648 shares of common stock at an exercise price of $9.01 per share, the
holder of the series C convertible preferred stock
F-15
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
agreed to cancel the anti-dilution protection provision contained in the
original agreement.
7. Common Stock
In November 1996, the Company issued 112,315 shares of common stock to an
officer of the Company. The fair market value of common stock issued of
$101,196 was recognized as compensation expense.
In January and March 1997, the Company issued an aggregate of 4,440 shares
of common stock in exchange for consulting services. The fair market value
of the common stock at the time of issuance of $10,000 was recognized as
general and administrative expense.
8. Warrants
In November 1996, in exchange for legal services provided, the Company
issued warrants to purchase 1,110 shares of series A convertible preferred
stock at an exercise price of $135.15 per share. The value of the warrants
granted of $50,800 was determined using the Black-Scholes model and was
recognized as general and administrative expense. In August 1997, in
consideration for additional legal services performed, the strike price of
the warrants were reduced to $67.58 per share. The incremental difference
between the value of the warrants before and after the modification of
$13,000 was recognized as general and administrative expense. The warrants
are exercisable at any time prior to November 2006. None of the warrants
have been exercised as of June 30, 1998.
In January 1997, in exchange for legal services provided, the Company
issued warrants to purchase 11,099 shares of common stock at an exercise
price of $13.52 per share. The value of the warrants granted of $5,100 was
determined using the Black-Scholes model and was recognized as general and
administrative expense. In August 1997, in consideration for additional
legal services performed, the strike price of the warrants were reduced to
$6.76 per share. The incremental difference between the value of the
warrants before and after the modification of $6,400 was recognized as
general and administrative expense. The warrants are exercisable at any
time prior to dates ranging from June to December 2003. None of the
warrants have been exercised as of June 30, 1998.
A number of the warrants granted to consultants and in connection with the
debt offerings during 1996 and 1997 contain anti-dilution provisions
requiring adjustment, if at a later date, securities are issued at prices
below the respective warrants exercise price. The following table is a
summary of the shares issuable upon exercise of warrants outstanding as of
December 31, 1997 as adjusted for events which have triggered anti-dilution
provisions contained in the respective warrant agreements:
F-16
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Exercise
Shares Price
Issuable Per
Expiration Upon Common
Issuance Date Date Exercise Share
---------------- ------------ ------------
<S> <C> <C> <C>
March 1996 March 2006 55,494 $ 4.5050
July 1996 July 2006 52,719 4.5050
September 1996 September 2006 65,368 9.8867
September 1996 September 2006 3,014 14.5998
November 1996 November 2006 11,668 6.4277
December 1996 February 2007 22,198 6.7575
January 1997 January 2007 11,668 6.4277
February 1997 February 2007 16,648 6.7575
February 1997 March 2007 11,715 6.7575
March 1997 March 2007 11,715 6.7575
April 1997 April 2003 57,159 8.1090
May 1997 May 2003 33,574 8.1090
May 1997 May 2003 46,365 11.2625
June 1997 June 2005 44,519 7.3675
July 1997 July 2005 77,973 7.3675
August 1997 August 2007 16,648 9.0100
November 1997 February 2003 57,225 8.4865
December 1997 February 2003 53,060 8.4865
------- -----------
Total shares and average exercise
price 648,730 $ 7.6996
======= ===========
</TABLE>
9. Employee Benefits
1996 stock option plan
The Company's 1996 Stock Option Plan (the "1996 Option Plan") permits the
grant of both "incentive stock options" designed to qualify under the
Internal Revenue Code Section 422 and non-qualified stock options.
Incentive stock options may only be granted to employees of the Company
whereas non-qualified stock options may be granted to non-employees,
directors and consultants. A total of 166,482 shares of Common Stock have
been reserved for issuance under the 1996 Option Plan. Each option, once
vested, allows the optionee the right to purchase one share of the
Company's Common Stock. The Board of Directors determines the exercise
price of the options; options granted to date generally vest ratably over
four years and expire ten years from the date of grant. Compensation
expense equal to the difference between the assumed fair value of the
Company's Common Stock at the grant date and the exercise price of the
options, if any, is recognized ratably over the vesting period.
Stock option activity can be summarized as follows:
F-17
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Options Outstanding
--------------------------
Options Weighted Average
Available Shares Exercise Price
---------- -------- ---------------
Balance at December 31, 1995
Authorized 166,482
Granted (6,438) 6,438 $ 9.01
Canceled 888 (888) $ 9.01
-------- --------
Balance at December 31, 1996 160,932 5,550 $ 9.01
Granted (42,287) 42,287 $ 9.01
Canceled 4,995 (4,995) $ 9.01
-------- --------
Balance at December 31, 1997 123,640 42,842 $ 9.01
======= ========
At December 31, 1997, options to purchase 42,842 shares were exercisable of
which 16,010 shares were vested. Options outstanding at December 31, 1997
have a weighted average remaining contractual life of 9.5 years and
weighted average exercise price of $9.01. Options granted through December
31, 1997 were granted at exercise prices in excess of fair market value at
grant date. The weighted average grant-date fair value of such options
granted during the years ended December 31, 1996 and 1997 under the minimum
value method was less than $.01 per share.
In October 1997, the Company accelerated the vesting of options to purchase
2,498 shares of common stock, which were granted in March 1997, and granted
additional options to purchase 2,220 shares of common stock which were
immediately vested to a former employee in lieu of severance pay. The
assumed fair value of such options was less than $1,000 based on the Black
Scholes model.
The fair value of each option grant is estimated on the date of grant using
the minimum value method as prescribed in SFAS 123. Assumptions used for
options granted during the years ended December 31, 1996 and 1997 were as
follows:
1996 1997
------ ------
Risk free interest rate 6.194% 6.183%
Expected lives (years) 5 5
Expected dividends -- --
Pro forma information regarding net income or loss is required by SFAS 123.
For purposes of pro forma disclosure, the estimated fair value of the
options are amortized to expense over the options' vesting period. Had
compensation cost for these options been determined consistent with the
minimum value method pursuant to SFAS No. 123, the difference between the
Company's net income as reported and as adjusted for the compensation costs
for the years ended December 31, 1996 and 1997 would not have been material
The minimum value method requires input of highly subjective assumptions in
which changes in those assumptions could materially effect the fair value
estimate. In addition, the minimum value method is only allowed for
non-public entities, as public entities are required to include an expected
volatility factor in addition to factors described above. As such, the
effects on pro forma disclosures of applying SFAS 123 are not likely to be
representative of the effects on pro forma disclosures of future years.
F-18
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
10. Income Taxes
There are no income tax assets, liabilities or income tax expense included
in the financial statements. The Company has incurred losses since
inception for both book and tax purposes and as of December 31, 1997, the
Company has net operating loss carryforwards for federal and state purposes
of approximately $2,800,000. Federal and state net operating loss
carryforwards begin expiring in the years 2011 and 2005 respectively. These
losses may be subject to limitation on future year's utilization should
certain ownership changes occur.
Temporary differences between the financial statement and tax bases of
assets and liabilities are primarily attributable to net operating loss
carryforwards and capitalized costs. A full valuation allowance has been
provided for the entire amount of the deferred tax assets arising from
these differences as a result of management's current belief that it is
more likely than not that the benefits related to such temporary
differences will not be realized.
11. Commitments and Contingencies
Operating leases
The Company leases its facility under non-cancelable operating lease which
expires in June 2000. The Company may extend the term of the lease for an
additional three-year period at the then current fair market value. Rent
expense under this lease was $23,582 and $51,169 for the years ended
December 31, 1996 and 1997. Future minimum lease payments required under
the non-cancelable operating lease are $81,738, $81,738, and $34,058 for
the years ending December 31, 1998, 1999 and 2000, respectively.
In March 1997, the Company entered into a development and two-year software
licensing agreement for the development and license of software to be
included and distributed with one of the Company's software products. Under
the terms of the agreement, royalties are payable on a per unit basis in
relation to sales volume and sales price, and include a one time payment
and guaranteed minimum annual commitment. At December 31, 1997, the Company
is committed to payments of $20,000 in respect of future minimum royalty
obligations over the remainder of this agreement.
12. Subsequent Events
In January and February 1998, the Company issued 105 additional Bridge
Units to investors, raising gross proceeds of $1,050,000. The 10% Success
Fee and the value of the 123,900 warrants granted at the time of issuance
of $253,217 are being amortized as interest expense over the period the
notes are outstanding. In connection with this offering, the Company also
issued additional warrants to acquire 20,582 shares of its common stock as
a finder's fee. The value of such warrants at the time of issuance of
$42,203 was recorded as debt issuance costs is being amortized over the
life of the notes. The warrants are exercisable at any time prior to
February 2003. None of the warrants have been exercised as of June 30,
1998.
F-19
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Effective January 1, 1998, the Company entered into a consulting agreement
expiring on December 31, 1998. Under the terms of the agreement, the
consultant is to receive $300,000, payable on the earlier of (i) the
consummation of an initial public offering of the Company's common stock,
or (ii) December 31, 1998, for financial and strategic advisory consulting
services.
In March 1998, in exchange for waiving the acceleration of the maturity
date caused by the Company raising additional financing in excess of a
specified amount and extending the maturity date of the promissory notes
issued during the period from March to July 1996 until December 31, 1998,
the exercise price of the warrants issued in connection with such
promissory notes were reduced to $38.29 per share of series A convertible
preferred stock. The total incremental difference between the value of the
warrants before and after the modification of the warrant terms, as
determined using the Black-Scholes model, was $30,978 and is being
amortized as interest expense over the remaining life of the debt.
In March 1998, in exchange for waiving the acceleration of the maturity
date caused by the Company raising additional financing in excess of a
specified amount and extending the maturity date of the promissory notes
issued during the period from October 1996 to March 1997 until December 31,
1998, the exercise price of the warrants issued in connection with such
promissory notes was reduced to exercise prices ranging from $3.63 to $5.63
per share of common stock. The total incremental difference between the
value of the warrants before and after the modification of the warrant
terms, as determined using the Black-Scholes model, was $10,050 and is
being amortized as interest expense over the remaining life of the debt.
In May 1998, the Company issued a consultant warrants to acquire 11,099
shares of its common stock at an exercise price of $4.51 per share. The
value of the warrants granted of $38,100 was determined using the
Black-Scholes model and was recognized as general and administrative
expense. The warrants are exercisable at any time prior to May 2004. None
of the warrants have been exercised as of June 30, 1998.
Effective May 1998, certain members of management and principal
stockholders of the Company (the "Founders") amended the option grant made
to a consultant of the Company in January 1997 (see Note 4). Under the
revised terms and in exchange for additional consulting services provided
to the Company, the strike price of the options were reduced to $9.01 per
share of series A convertible preferred and $.90 per share of common stock.
The total incremental difference between the value of the warrants before
and after the modification of the warrant terms, as determined using the
Black-Scholes model, in the amount of $321,470, was recorded as a
contribution of capital by the stockholders and general and administrative
expense. The options are exercisable for a period of ten years.
Effective May 1998, the Founders amended the option grant made to a
consultant of the Company in December 1997 (see Note 4). Under the revised
terms and in exchange for additional consulting and legal services provided
to the Company, the strike price of the options were reduced to $9.01 per
share of series A convertible preferred stock. The total incremental
difference between the value of the warrants before and after the
modification of the warrant terms, as determined using the Black-Scholes
model, in the amount of $24,930, was recorded as a contribution of capital
by the stockholders and general and administrative expense.
F-20
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
In September 1998, the Company and two members of management entered into
two-year consulting agreements effective upon the closing of the IPO. Under
the terms of the agreements, the Company is required to pay bonuses of
$100,000 upon the closing of the IPO and aggregate annual consulting fees
of $84,000.
In September 1998, the Company entered into a consulting agreement
effective upon consummation of the IPO. Under the terms of the agreement,
the Company will issue warrants to acquire an aggregate of 20,000 shares of
common stock at an exercise price equal to 90% of the price obtained in the
IPO.
In September 1998, the Company entered into two-year employment agreements
with certain officers of the Company effective upon consummation of the
IPO. Pursuant to the agreements, upon the consummation of the IPO the
Company is required to pay $120,000 in bonuses and issue options to
purchase 80,000 shares of common stock at an exercise price equal to the
price obtained in the initial public offering. In addition, the Company is
required to pay annual aggregate salaries of $460,000.
In September 1998, the Board of Directors increased the number of shares
reserved for issuance under the 1996 Stock Option Plan to 250,000 shares.
In September 1998, the Company entered into an agreement to settle an
outstanding dispute regarding finders fees on one of the Company's note
issuances. Under the terms of the agreement, the Company will issue
warrants to acquire 22,198 shares of Common Stock at an exercise price of
$4.05 per share and pay $62,500 in cash.
In October 1998, the Company issued at $20,000 note payable to a principal
stockholder. The note bears interest at 12% per annum and is payable in
October 1999.
Proposed public offering
In June 1998, the Company entered into an agreement with an underwriter
(the "Underwriter"), whereby the Underwriter has agreed in principle to
sell shares of the Company's common stock in an IPO.
Stock options
In August 1998, Board of Directors declared that upon the consummation of
an initial public offering, the Company will cancel certain outstanding
stock options of employees and consultants and reissue fully vested stock
options at an exercise price equal to the IPO price. The number of shares
granted will be based on the number of stock options such employee or
consultant held divided by the 1 for 9.01 reverse split.
Recapitalization
In August and September 1998, effective upon consummation of the IPO, the
Company renegotiated the terms of an aggregate of $2,632,000 of outstanding
promissory notes originally issued from March 1996 through July 1997, with
the note holders. Under the revised terms, and in exchange for extending
the maturity date of such notes until December 31, 1998, the Company will
re-pay one-half of the face value of the notes and any 10% Success Fee in
cash upon the closing of the IPO. The remaining one-
F-21
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
half of the face value of the notes, accrued but unpaid interest and the
outstanding warrants issued in connection with the financings will convert
into common stock equal to 225% of the original principal amount of the
notes based upon the IPO price per share (789,600 shares based upon an
assumed initial offering price of $7.50 per share) (the "Note
Conversions").
In August and September 1998, the Company entered into agreements,
effective upon consummation of the IPO, to convert outstanding warrants to
acquire 114,667 shares of common stock issued in connection with the Bridge
Units in exchange for 32,503 shares of common stock (the "Warrant
Conversions").
In August and September 1998, effective upon consummation of the IPO, the
Company renegotiated the terms of an aggregate of $187,500 in outstanding
notes payable with the note holders. Under the revised terms, the Company
will re-pay one-half of the face value of the notes and accrued interest in
cash upon the closing of the IPO. The remaining one-half of the face value
of the notes will bear interest at 12% per annum and are due and payable on
June 30, 1999.
In September 1998, the Company's stockholders authorized the Company to
amend its Certificate of Incorporation to effect a 1 for 9.01 reverse stock
split applicable to all issued and outstanding shares of the Company's
common and preferred stock. The Company intends to effect the amendment to
its Certificate of Incorporation immediately prior to the completion of its
IPO. All common and preferred shares, stock options, warrants and related
per share data reflected in the accompanying financial statements and notes
thereto have been adjusted to give retroactive effect to the stock split.
In September 1998, the Company's shareholders authorized the Company to
amend its Certificate of Incorporation to change the conversion rate of the
series B and C convertible preferred stock to 20.0228 to 1 and 19.0258 to
1, respectively. In addition, the holder of the series C convertible
preferred stock agreed to cancel warrants to acquire 16,648 shares of
common stock issued in August 1997 in connection with the waiver of the
anti-dilution protection provision on the series C convertible preferred
stock. The Company intends to effect the amendment to its certificate of
incorporation immediately prior to the completion of its IPO.
In September 1998, effective upon completion of the IPO, officers of the
Company have agreed to return 10,844 shares of common stock and 8,676
shares of series A convertible preferred stock to the Company. The Company
will cancel the returned shares.
13. Unaudited Pro Forma Information
Pro forma balance sheet
Upon completion of the Company's IPO, all shares of the Company's
convertible preferred stock and certain debt, accrued interest and warrants
will convert into Common Stock of the Company. The unaudited pro forma
balance sheet has been presented assuming such conversions had occurred on
June 30, 1998 and reflects the following items: (i) conversion of the
series A, B, B-1 & C convertible preferred stock; (ii) the recording of a
dividend of $678,806 to the holders of the Series B & C convertible
preferred stock based upon the fair value of the additional shares received
upon conversion due to the change in conversion rates described in Note 12;
(iii) the return and cancellation of common
F-22
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
stock by officers of the Company described in Note 12; (iv) the Note
Conversions described in Note 12 and the recording of an extraordinary loss
on the extinguishment of debt in the amount of $3,384,882 based upon the
difference between the fair value of (a) the notes, accrued interest and
warrants returned to the Company, and (b) the common stock issued in
exchange; and (v) the Warrant Conversions.
For the periods ended December 31, 1997 and June 30, 1998, the pro forma
basic and diluted loss per share reflecting the recapitalization would have
been $(4.11) and $(1.14), respectively. The pro forma weighted average
shares outstanding at December 31, 1997 and June 30, 1998 would have been
1,834,867 and 2,035,326, respectively.
F-23
<PAGE>
[Back cover page]
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this Prospectus. You must not
rely on any unauthorized information. This Prospectus does not offer to sell or
buy any shares in any jurisdiction where it is unlawful. The information in this
Prospectus is current only as of the date of this Prospectus.
LOGO
DIGITAL LAVA INC.
1,200,000 UNITS
(EACH UNIT CONSISTING OF TWO SHARES OF
COMMON STOCK AND ONE REDEEMABLE WARRANT)
SECURITY CAPITAL TRADING, INC.
___________, 1998.
Until ____________, 1998 (25 days after the date of this Prospectus) all dealers
that buy, sell or trade these securities, whether or not participating in this
offering, may be required to deliver a Prospectus. This is in addition to the
dealers' obligation to deliver a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgements, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the Registrant. The
Delaware General Corporation Law provides that Section 145 is not exclusive of
other rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Article __ of the Registrant's Bylaws provides for indemnification by the
Registrant of its directors, officers and employees to the fullest extent
permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases, redemptions or
other distributions, or (iv) for any transaction from which the director derived
an improper personal benefit. The Registrant's Certificate of Incorporation
provides for such limitation of liability.
The Registrant intends to obtain directors, and officers, insurance
providing indemnification for certain of the Registrant's directors, officers
and employees for certain liabilities.
Reference is also made to the Underwriting Agreement to be filed as Exhibit
1.1 to the registration Statement for information concerning the Underwriters'
obligation to indemnify the registrant and its officers and directors in ceratin
circumstances.
Item 25. Other Expenses of Issuance and Distribution.
SEC Registration Fee $ 11,867
American Stock Exchange Listing Fee $ 32,500
NASD Filing Fee $ 4,768
Accounting Fees and Expenses* $175,000
Printing and Engraving* $ 60,000
Legal Fees and Expenses* $175,000
Blue Sky Fees and Expenses* $ 20,000
Transfer Agent and Registrar Fees* $ 5,000
Miscellaneous Expenses* $ 15,865
--------
Total $500,000
========
- -----------
* Estimated.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
The following discussion gives retroactive effect to the one for 9.01
reverse stock split and the recapitalization to be effected immediately prior to
the completion of this offering. Since its organization in July 1995, the
Company has sold and issued the following unregistered securities in
transactions which were exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2) of the Securities Act, as they were
transactions not involving a public offering:
In July 1995, the Company issued an aggregate of 811,797 shares of Common
Stock to Roger Berman, James Stigler, Thomas Stigler and Kenneth Mendoza for
nominal consideration in connection with the formation of the Company.
From August 1995 to June 1996, the Company sold an aggregate of 200,826
shares of Common Stock to 19 accredited investors and 7 non-accredited investors
for $686,599 in cash.
In March and April 1996, the Company issued an aggregate of 17,557 shares
of Common Stock to two consultants and its legal counsel, Eilenberg & Zivian, in
consideration for services performed for the Company.
In September 1996, in connection with a $450,000 bridge financing completed
in such month, the Company issued warrants to purchase an aggregate of 70,128
shares of Common Stock to two accredited investors.
In November 1996, the Company issued 101,475 shares of Common Stock to
Joshua Sharfman, Chief Executive Officer of the Company, in consideration for
services performed for the Company.
In November 1996 and January 1997, the Company issued warrants to purchase
an aggregate of 23,543 shares of Common Stock to Eilenberg & Zivian in
consideration for services performed for the Company.
In May 1997, in connection with the issuance of an aggregate principal
amount of $187,500 of promissory notes, the Company issued warrants to purchase
an aggregate of 20,813 shares of Common Stock to five accredited investors.
In May 1997, in connection with a $817,500 bridge financing completed in
April and May 1997, the Company issued warrants to purchase an aggregate of
46,368 shares of Common Stock to three finders.
In July 1997, in connection with the issuance of an aggregate principal
amount of $200,000 of promissory notes, the Company issued warrants to purchase
an aggregate of 23,932 shares of Common Stock to four accredited investors.
In July 1997, in connection with a $902,000 bridge financing completed in
June and July 1997, the Company issued warrants to purchase an aggregate of
16,191 shares of Common Stock to three finders.
In February 1998, in connection with the issuance of an aggregate principal
amount of $775,000 of promissory notes, the Company issued warrants to purchase
an aggregate of 91,151 shares of Common Stock to nine accredited investors.
In February 1998, in connection with a $1,750,000 bridge financing
completed from December 1997 to February 1998, the Company issued warrants to
purchase an aggregate of 48,330 shares of Common Stock to two finders.
In May 1998, the Company issued warrants to purchase an aggregate of 11,100
shares of Common Stock to a consultant in consideration for services performed
for the Company.
In September 1998, the Company issued warrants to purchase an aggregate of
22,199 shares of Common Stock to a finder in consideration for such finder's
release of any claims against the Company under the finder's agreement with the
Company.
II-2
<PAGE>
In October 1998, the Company issued warrants to purchase an aggregate of
20,000 shares of Common Stock to a consultant in consideration for services
performed for the Company.
In January 1998 and October 1998, the Company issued warrants to purchase
an aggregate of 13,319 shares of Common Stock to a consultant in consideration
for services performed for the Company.
In connection with the recapitalization to be completed immediately prior
to the completion of the offering, the Company will issue an aggregate of
789,600 shares of Common Stock to holders of an aggregate principal amount of
$2,632,000 of promissory notes in exchange for one-half of the outstanding
principal of their notes, the accrued interest on such notes and the warrants
received in connection with the issuance of such notes.
In connection with the recapitalization to be completed immediately prior
to the completion of the offering, the Company will issue an aggregate of 32,503
shares of Common Stock to holders of an aggregate principal amount of $975,000
of promissory notes in exchange for outstanding warrants to acquire 114,667
shares of Common Stock received in connection with the issuance of such notes.
Item 27. Exhibits.
Exhibit
Number Description of Exhibits
- -------- -----------------------
1(a) Form of Underwriting Agreement
1(b)* Form of Finder's Agreement
3(a)* Amended and Restated Certificate of Incorporation, in effect as of the
date hereof
3(b)* Form of Amendment to Amended and Restated Certificate of Incorporation
3(c)* Form of Amended and Restated Certificate of Incorporation
3(d) Bylaws of the Company, in effect as of the date hereof
3(e)* Form of Amended and Restated Bylaws of the Company
4(a) Form of Common Stock Certificate
4(b)* Form of Warrant Agreement
4(c)* Form of Representative's Warrant Agreement
4(d) 1996 Incentive and Non-Qualified Stock Option Plan (1)
4(e) Warrant Agreement dated as of September 30, 1996 between the Company and
Millenium Capital Management (2)
4(f) Warrant Agreement dated as of September 30, 1996 between the Company and
Miracle Investments Co. (2)
4(g) Registration Rights Agreement between the Company, Miracle Investments
Co. and Millenium Capital Management
4(h) Warrant Agreement dated November 1, 1996 between the Company and
Eilenberg & Zivian(2)(3)
4(i) Warrant Agreement dated January 27, 1997 between the Company and
Eilenberg & Zivian (2)(3)
4(j) Warrant Agreement dated May 30, 1997 between the Company and certain
investors and finders(2)
4(k) Registration Rights Agreement dated May 30, 1997 between the Company and
certain investors and finders
4(l) Letter Agreement dated October 6, 1998 between the Company and certain
investors
4(m) Warrant Agreement dated July 11, 1997 between the Company and certain
investors and finders(2)
4(n) Registration Rights Agreement dated July 11, 1997 between the Company
and certain investors and finders
4(o)* Warrant Agreement between the Company and Schwartz Communications
4(p) Warrant Agreement dated February 19, 1998 between the Company and
certain investors and finders (2)
4(q) Registration Rights Agreement dated February 19, 1998 between the
Company and certain investors and finders
II-3
<PAGE>
4(r) Form of Promissory Note dated February 19, 1998 between the Company and
certain investors
4(s) Warrant Agreement dated May 1, 1998 between the Company and The
Whitestone Group (2)
4(t) Registration Rights Agreement dated May 1, 1998 between the Company and
The Whitestone Group
4(u) Letter Agreement between the Company and certain investors and finders
dated July 15, 1998
4(v) Letter Agreement between the Company and certain investors and finders
dated July 16, 1998
4(w) Letter Agreement between the Company and certain investors and finders
dated July 29, 1998
4(x) Warrant Agreement dated as of October 7, 1998 between the Company and
certain consultants
4(y) Registration Rights Agreement dated as of October 7, 1998 between the
Company and certain consultants
4(z) Letter Agreement as of October 7, 1998 between the Company and certain
investors
4(aa) Amended and Restated Option Agreement dated as of May 1, 1998 between
the Company, Judson Cooper and certain founders of the Company (2)
4(ab) Amended and Restated Option Agreement dated as of May 1, 1998 between
the Company, E&Z Investments and certain founders of the Company (2)
4(ac)* Warrant Agreement between the Company and United Resources Partners
5(a)* Opinion of Ehrenreich Eilenberg Krause & Zivian LLP
10(a) Employment Agreement dated September 1, 1998 between the Company and
Thomas Stigler
10(b) Employment Agreement dated September 1, 1998 between the Company and
Joshua D.J. Sharfman
10(c) Consulting Agreement dated September 1, 1998 between the Company and
Roger Berman
10(d) Consulting Agreement dated September 1, 1998 between the Company and Dr.
James Stigler
10(e) Consulting Agreement dated September 1, 1998 between the Company and
Prism Ventures LLC
23(a)* Consent of Ehrenreich Eilenberg Krause & Zivian LLP (included in opinion
filed as Exhibit 5(a))
23(b) Consent of PricewaterhouseCoopers LLP
24(a) Power of Attorney (included in Part II of the Registration Statement
under the caption "Signatures")
27(a) Financial Data Schedule
- -------------------
* To be filed by amendment
1 Does not reflect increase in number of shares issuable under the Plan
pursuant to resolution of Board of Directors.
2 These agreements were entered into prior to the reverse split of the
Company's Common Stock and, therefore, do not reflect such reverse split.
3 These warrant agreements do not reflect exercise price changes made
pursuant to resolutions of the Board of Directors.
Item 28. Undertakings.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or otherwise,
the undersigned Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the undersigned Registrant of expenses incurred or paid by a director, officer
or controlling person of the undersigned Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
undersigned Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
(b) The undersigned Registrant in all instances will provide to the
Underwriter at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of a registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the
undersigned Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of the registration statement as of the time it was declared
effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(d) The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii)Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
undersigned Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on the 23rd
day of October, 1998.
DIGITAL LAVA INC.
By: /s/ Joshua D.J. Sharfman
-------------------------------
Joshua D.J. Sharfman
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in their
respective capacities and on the respective dates set forth opposite their
names. Each person whose signature appears below hereby authorizes each of
Joshua D.J. Sharfman and Danny Gampe and each with full power of substitution,
to execute in the name and on behalf of such person any amendment or any
post-effective amendment to this Registration Statement, and any registration
statement relating to any offering made in connection with the offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the same,
with exhibits thereto, and other documents in connection therewith, making such
changes in this Registration Statement as the Registrant deems appropriate, and
appoints each of Joshua D.J. Sharfman and Danny Gampe, each with full power of
substitution, attorney-in-fact to sign any amendment and any post-effective
amendment to this Registration Statement and to file the same, with exhibits
thereto, and other documents in connection therewith.
Signatures Title Date
- ---------- ----- ----
/s/ James Stigler
- -------------------------
James Stigler Chairman and Director October 23, 1998
/s/ Danny Gampe
- -------------------------
Danny Gampe Chief Financial Officer October 23, 1998
(Principal Financial and
Accounting Officer)
/s/ Roger Berman
- -------------------------
Roger Berman Director October 23, 1998
/s/ Thomas Stigler
- -------------------------
Thomas Stigler Director October 23, 1998
/s/ Gerald Porter
- -------------------------
Gerald Porter Director October 23, 1998
/s/ Joshua D.J. Sharfman
- -------------------------
Joshua D.J. Sharfman Chief Executive Officer October 23, 1998
and Director (Principal
Executive Officer)
II-6
1,200,000 Units, Each Unit Consisting of
Two Shares of Common Stock and One Redeemable Warrant
DIGITAL LAVA, INC.
FORM OF UNDERWRITING AGREEMENT
New York, New York
_____________, 1998
Security Capital Trading, Inc.
As Representative of the
Several Underwriters listed
on Schedule A hereto
520 Madison Avenue
New York, NY 10022
Ladies and Gentlemen:
Digital Lava, Inc., a Delaware corporation (the "Company") confirms its
agreement with Security Capital Trading, Inc. ("Security Capital") and each of
the several underwriters named in Schedule A hereto (collectively, the
"Underwriters", which term shall also include any underwriter substituted as
hereinafter provided in Section 11) for whom Security Capital is acting as
representative (in such capacity, Security Capital shall hereinafter be referred
to as "you" or the "Representative"), with respect to the sale by the Company
and the purchase by the Underwriters, acting severally and not jointly, of the
respective number of units ("Units") set forth in Schedule A hereto, each Unit
consisting of two (2) shares of the Company's Common Stock, $0.0001 par value
("Common Stock") and one (1) redeemable warrant (the "Redeemable Warrants").
Each Redeemable Warrant is exercisable for one share of Common Stock. The Common
Stock and Redeemable Warrants comprising the Units will be separately tradable
upon issuance and are hereinafter referred to as the "Firm Securities." Each
Redeemable Warrant is exercisable commencing on [____________] [twelve months
after the date of the Prospectus] until [______________] [five years after the
date of the Prospectus], unless previously redeemed by the Company, at an
initial exercise price of $[____________] per share [120% of the initial public
offering price of the Common Stock]. The Redeemable Warrants may be redeemed by
the Company, in whole but not in part, at a redemption price of $.10 per warrant
at any time commencing [__________] [eighteen months after the date of the
Prospectus] on thirty (30) days' prior written notice, provided that the average
closing sale price of the Common Stock as reported on the American Stock
Exchange equals or exceeds $11.25 per share, for any twenty
<PAGE>
(20) days within a period of thirty (30) consecutive trading days ending on the
fifth (5th) trading day prior to the date of the notice of redemption, all in
accordance with the terms and conditions of the Warrant Agreement (herein
defined).
Upon the Representative's request, as provided in Section 2(b) of this
Agreement, the Company shall also issue and sell to the Underwriters up to an
additional 180,000 Units for the purpose of covering over-allotments, if any
(the "Option Securities"). The Shares of Common Stock issuable upon exercise of
the Redeemable Warrants are hereinafter referred to as the "Warrant Securities".
The redeemable Common Stock purchase warrants issuable upon exercise of the
Representative's Warrants are hereinafter sometimes referred to herein as the
"Representative's Redeemable Warrants". The Representative's Redeemable Warrants
are identical to the Redeemable Warrants. The shares of Common Stock issuable
upon exercise of the Representative's Warrants and the shares of Common Stock
issuable upon exercise of the Representative's Redeemable Warrants are
hereinafter collectively referred to as the "Representative's Securities." The
Representative's Redeemable Warrants and the Representative's Securities are
sometimes referred to herein as the "Representative's Securities." Further, an
additional 822,103 shares of Comm Stock (collectively, the "Selling
Stockholders' Securities") are being registered for the account of certain
selling stockholders in connection with this offering which are not being
underwritten by the Underwriter. The Company also proposes to issue and sell
warrants to the Representative (the "Representative's Warrants") pursuant to the
Representative's Warrant Agreement (the "Representative's Warrant Agreement")
for the purchase of an additional 120,000 Units. The shares of Common Stock and
Redeemable Warrants issuable upon exercise of the Representative's Warrants are
hereinafter referred to as the "Representative's Securities." The Firm
Securities, the Option Securities, the Representative's Warrants, the
Representative's Redeemable Warrants, the Representative's Securities and the
Selling Stockholders' Securities (collectively, hereinafter referred to as the
"Securities") are more fully described in the Registration Statement and the
Prospectus referred to below.
1. Representations and Warranties of the Company.
(a) The Company represents and warrants to, and agrees with, the
Representative as of the date hereof, and as of the Closing Date (hereinafter
defined) and the Option Closing Date (hereinafter defined), if any, as follows:
(i) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (No. 333-_____), including
any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Firm Securities and the Option Securities under the
Securities Act of 1933, as amended (the "Act"), which registration
statement and amendment or amendments have been prepared by the Company in
conformity with the requirements of the Act, and the rules and regulations
(the "Regulations") of the Commission under the Act. The Company will not
file any other amendment to said registration statement which the
Representative shall have objected to in writing after having been
furnished with a copy thereof. Except as the
<PAGE>
context may otherwise require, such registration statement, as amended, on
file with the Commission at the time the registration statement becomes
effective (including the prospectus, financial statements, schedules,
exhibits and all other documents filed as a part thereof or incorporated
therein (including, but not limited to those documents or information
incorporated by reference therein) and all information deemed to be a part
thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the
Regulations), is hereinafter called the "Registration Statement", and the
form of prospectus in the form first filed with the Commission pursuant to
Rule 424(b) of the Regulations, is hereinafter called the "Prospectus." For
purposes hereof, "Rules and Regulations" mean the rules and regulations
adopted by the Commission under either the Act or the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as applicable.
(ii) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary
Prospectus, the Registration Statement or the Prospectus or any part of any
thereof and no proceedings for a stop order suspending the effectiveness of
the Registration Statement or any of the Company's securities have been
instituted or are pending or to the Company's knowledge, threatened. Each
of the Preliminary Prospectus, Registration Statement and Prospectus at the
time of filing thereof conformed with the requirements of the Act and the
Rules and Regulations, and none of the Preliminary Prospectus, Registration
Statement or Prospectus at the time of filing thereof contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein and necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to statements made in
reliance upon and in conformity with written information furnished to the
Company with respect to the Underwriters by or on behalf of the
Underwriters expressly for use in such Preliminary Prospectus, Registration
Statement or Prospectus. The Company has filed all reports, forms or other
documents required to be filed under the Act or the Exchange Act and the
respective Rules and Regulations thereunder, and all such reports, forms or
other documents, when so filed or as subsequently amended, complied in all
material respects with the Act and the Exchange Act and the respective
rules and regulations thereunder.
(iii) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date and each Option Closing
Date, if any, and during such longer period as the Prospectus may be
required to be delivered in connection with sales by the Underwriters or a
dealer, the Registration Statement and the Prospectus will contain all
statements which are required to be stated therein in accordance with the
Act and the Rules and Regulations, and will conform to the requirements of
the Act and the Rules and Regulations; neither the Registration Statement
nor the Prospectus, nor any amendment or supplement thereto, will contain
any untrue statement of a material fact or omit to state any 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,
provided, however, that this representation and warranty does not apply to
statements made or statements omitted in reliance upon and in
<PAGE>
conformity with information furnished to the Company in writing by or on
behalf of any Underwriters expressly for use in the Preliminary Prospectus,
Registration Statement or Prospectus or any amendment thereof or supplement
thereto.
(iv) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of its
incorporation. The Company does not own an interest in any corporation,
partnership, trust, joint venture or other business entity. The Company is
duly qualified and licensed and in good standing as a foreign corporation
in each jurisdiction in which its ownership or leasing of any properties or
the character of its operations requires such qualification or licensing.
The Company has all requisite corporate power and authority, and the
Company has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without
limitation, those having jurisdiction over environmental or similar
matters), to own or lease its properties and conduct its business as
described in the Prospectus; the Company is and has been doing business in
compliance with all such authorizations, approvals, orders, licenses,
certificates, franchises and permits and all federal, state and local laws,
rules and regulations; and the Company has not received any notice of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would materially and adversely affect the
condition, financial or otherwise, or the earnings, position, prospects,
value, operation, properties, business or results of operations of the
Company. The disclosures in the Registration Statement concerning the
effects of federal, state and local laws, rules and regulations on the
Company's business as currently conducted and as contemplated are correct
in all material respects and do not omit to state a material fact necessary
to make the statements contained therein, in light of the circumstances in
which they were made, not misleading.
(v) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, under "Capitalization" and
"Description of Securities" and will have the adjusted capitalization set
forth therein on the Closing Date and the Option Closing Date, if any,
based upon the assumptions set forth therein, and the Company is not a
party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options or
other securities, except for this Agreement, the Representative's Warrant
Agreement and the Warrant Agreement (as defined in Section 1(a)(xxxiii) of
this Agreement) and as described in the Prospectus. The Securities and all
other securities issued or issuable by the Company conform or, when issued
and paid for, will conform, in all respects to all statements with respect
thereto contained in the Registration Statement and the Prospectus. All
issued and outstanding securities of the Company have been duly authorized
and validly issued and are fully paid and non-assessable and the holders
thereof have no rights of rescission with respect thereto, and are not
subject to personal liability by reason of being such holders; and none of
such securities were issued in violation of the preemptive rights of any
holders of any security of the Company or similar contractual rights
granted by the
<PAGE>
Company. The Securities to be sold by the Company hereunder and pursuant to
the Representative's Warrant Agreement and the Warrant Agreement are not
and will not be subject to any preemptive or other similar rights of any
stockholder, have been duly authorized and, when issued, paid for and
delivered in accordance with the terms hereof, will be validly issued,
fully paid and non-assessable and will conform to the description thereof
contained in the Prospectus; the holders thereof will not be subject to any
liability solely as such holders; all corporate action required to be taken
for the authorization, issue and sale of the Securities has been duly and
validly taken; and the certificates representing the Securities will be in
due and proper form. Upon the issuance and delivery pursuant to the terms
hereof and the Representative's Warrant Agreement of the Securities to be
sold by the Company hereunder, the Underwriters will acquire good and
marketable title to such Securities free and clear of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction
or equity of any kind whatsoever asserted against the Company or any
affiliate of the Company.
(vi) The financial statements, including the related notes and
schedules thereto, included in the Registration Statement, each Preliminary
Prospectus and the Prospectus fairly present the financial position,
income, changes in cash flow, changes in stockholders' equity, and the
results of operations of the Company at the respective dates and for the
respective periods to which they apply and the pro forma financial
information included in the Registration Statement and Prospectus presents
fairly on a basis consistent with that of the audited financial statements
included therein, what the Company's pro forma capitalization would have
been for the respective periods and as of the respective dates to which
they apply after giving effect to the adjustments described therein. Such
financial statements have been prepared in conformity with generally
accepted accounting principles and the Rules and Regulations, consistently
applied throughout the periods involved. There has been no adverse change
or development involving a material prospective change in the condition,
financial or otherwise, or in the earnings, position, prospects,
stockholders' equity, value, operation, properties, business, or results of
operations of the Company, whether or not arising in the ordinary course of
business, since the date of the financial statements included in the
Registration Statement and the Prospectus and the outstanding debt, the
property, both tangible and intangible, and the business of the Company
conform in all material respects to the descriptions thereof contained in
the Registration Statement and the Prospectus. Financial information set
forth in the Prospectus under the headings "Summary Financial Information,"
"Selected Financial Information," "Capitalization," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
fairly present, on the basis stated in the Prospectus, the information set
forth therein, have been derived from or compiled on a basis consistent
with that of the audited financial statements included in the Prospectus.
(vii) The Company (i) has paid all federal, state, local, and foreign
taxes for which it is liable, including, but not limited to, withholding
taxes and amounts payable under Chapters 21 through 24 of the Internal
Revenue Code of 1986 (the "Code"), and has furnished all information
returns it is required to furnish pursuant to the
<PAGE>
Code, (ii) has established adequate reserves for such taxes which are not
due and payable, and (iii) does not have any tax deficiency or claims
outstanding, proposed or assessed against it.
(viii) No transfer tax, stamp duty or other similar tax is payable by
or on behalf of the Underwriters in connection with (i) the issuance by the
Company of the Securities, (ii) the purchase by the Underwriters of the
Firm Securities and Option Securities from the Company, and the purchase by
the Representative of the Representative's Warrants from the Company, (iii)
the consummation by the Company of any of its obligations under this
Agreement or the Representative's Warrant Agreement, or (iv) resales of the
Firm Securities and the Option Securities in connection with the
distribution contemplated hereby.
(ix) The Company maintains insurance policies, including, but not
limited to, general liability and property insurance, which insures the
Company and its employees, against such losses and risks generally insured
against by comparable businesses. The Company (A) has not failed to give
notice or present any insurance claim with respect to any matter, including
but not limited to the Company's business, property or employees, under the
insurance policy or surety bond in a due and timely manner, (B) does not
have any disputes or claims against any underwriter of such insurance
policies or surety bonds or has not failed to pay any premiums due and
payable thereunder, or (C) has not failed to comply with all conditions
contained in such insurance policies and surety bonds. There are no facts
or circumstances under any such insurance policy or surety bond which would
relieve any insurer of its obligation to satisfy in full any valid claim of
the Company.
(x) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against (or
circumstances that may give rise to the same), or involving the properties
or business of, the Company which (i) questions the validity of the capital
stock of the Company, this Agreement, the Representative's Warrant
Agreement or the Warrant Agreement or of any action taken or to be taken by
the Company pursuant to or in connection with this Agreement, the
Representative's Warrant Agreement or the Warrant Agreement, (ii) is
required to be disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all material respects), or (iii)
might materially and adversely affect the condition, financial or
otherwise, or the earnings, position, prospects, stockholders' equity,
value, operation, properties, business or results of operations of the
Company.
(xi) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, enter into this
Agreement, the Representative's Warrant Agreement and the Warrant Agreement
and to consummate the transactions provided for in such agreements; and
this Agreement, the Representative's
<PAGE>
Warrant Agreement and the Warrant Agreement have each been duly and
properly authorized, executed and delivered by the Company. Each of this
Agreement, the Representative's Warrant Agreement and the Warrant Agreement
constitutes a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, except (i) as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws affecting
creditors' rights generally, (ii) as enforceability of any indemnification
or contribution provisions may be limited under applicable laws or the
public policies underlying such laws and (iii) that the remedies of
specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before
which any proceedings may be brought. None of the Company's issue and sale
of the Securities, execution or delivery of this Agreement, the
Representative's Warrant Agreement or the Warrant Agreement, its
performance hereunder and thereunder, its consummation of the transactions
contemplated herein and therein, or the conduct of its business as
described in the Registration Statement and the Prospectus, and any
amendments or supplements thereto, conflicts with or will conflict with or
results or will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or result
in the creation or imposition of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of any
kind whatsoever upon, any property or assets (tangible or intangible) of
the Company pursuant to the terms of, (i) the certificate of incorporation
or by-laws of the Company, (ii) any license, contract, indenture, mortgage,
deed of trust, voting trust agreement, stockholders agreement, note, loan
or credit agreement or any other agreement or instrument to which the
Company is a party or by which it is or may be bound or to which any of its
properties or assets (tangible or intangible) is or may be subject, or any
indebtedness, or (iii) any statute, judgment, decree, order, rule or
regulation applicable to the Company of any arbitrator, court, regulatory
body or administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having jurisdiction
over the Company or any of its activities or properties.
(xii) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic
or foreign, is required for the issuance of the Securities pursuant to the
Prospectus and the Registration Statement, the issuance of the
Representative's Warrants, the performance of this Agreement, the
Representative's Warrant Agreement and the Warrant Agreement and the
transactions contemplated hereby and thereby, including without limitation,
any waiver of any preemptive, first refusal or other rights that any entity
or person may have for the issue and/or sale of any of the Securities,
except such as have been or may be obtained under the Act or may be
required under state securities or Blue Sky laws and the rules of the
National Association of Securities Dealers, Inc. (the "NASD") in connection
with the Underwriters' purchase and distribution of the Securities and the
Representative's Warrants to be sold by the Company hereunder.
<PAGE>
(xiii) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to
the Registration Statement to which the Company is a party or by which it
may be bound or to which any of its assets, properties or business may be
subject have been duly and validly authorized, executed and delivered by
the Company, and constitute the legal, valid and binding agreements of the
Company, enforceable against the Company, in accordance with their
respective terms. The descriptions in the Registration Statement of
agreements, contracts and other documents are accurate in all material
respects and fairly present the information required to be shown with
respect thereto by Form SB-2, and there are no contracts or other documents
which are required by the Act to be described in the Registration Statement
or filed as exhibits to the Registration Statement which are not described
or filed as required, and the exhibits which have been filed are in all
material respects complete and correct copies of the documents of which
they purport to be copies.
(xiv) Subsequent to the respective dates as of which information is
set forth in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has
not (i) issued any securities or incurred any liability or obligation,
direct or contingent, for borrowed money, (ii) entered into any transaction
other than in the ordinary course of business, or (iii) declared or paid
any dividend or made any other distribution on or in respect of its capital
stock of any class, and there has not been any change in the capital stock,
or any material change in the debt (long or short term) or liabilities or
material adverse change in or affecting the condition, financial or
otherwise, earnings, prospects, stockholders' equity, value, operations,
properties, business or results of operations of the Company.
(xv) No default exists in the due performance and observance of any
term, covenant or condition of any license, contract, indenture, mortgage,
installment sale agreement, lease, deed of trust, voting trust agreement,
stockholders agreement, partnership agreement, note, loan or credit
agreement, purchase order, or any other agreement or instrument evidencing
an obligation for borrowed money, or any other material agreement or
instrument to which the Company is a party or by which the Company may be
bound or to which the property or assets (tangible or intangible) of the
Company is subject or affected.
(xvi) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in compliance with
all federal, state, local, and foreign laws and regulations respecting
employment and employment practices, terms and conditions of employment and
wages and hours. There are no pending investigations involving the Company
by the U.S. Department of Labor, or any other governmental agency
responsible for the enforcement of such federal, state, local, or foreign
laws and regulations. There is no unfair labor practice charge or complaint
against the Company pending before the National Labor Relations Board or
any strike, picketing, boycott, dispute, slowdown or stoppage pending or
threatened against or involving the Company or any predecessor entity, and
none has ever occurred. No representation question exists respecting the
employees of the Company, and no
<PAGE>
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is
pending under any expired or existing collective bargaining agreements of
the Company. No labor dispute with the employees of the Company exists, or
is imminent.
(xvii) The Company does not maintain, sponsor or contribute to any
program or arrangement that is an "employee pension benefit plan," an
"employee welfare benefit plan," or a "multiemployer plan" as such terms
are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA
Plans"). The Company does not maintain or contribute, now or at any time
previously, to a defined benefit plan, as defined in Section 3(35) of
ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or
Section 4975 of the Code, which could subject the Company to any tax
penalty on prohibited transactions and which has not adequately been
corrected. Each ERISA Plan is in compliance with all reporting, disclosure
and other requirements of the Code and ERISA as they relate to any such
ERISA Plan. Determination letters have been received from the Internal
Revenue Service with respect to each ERISA Plan which is intended to comply
with Code Section 401(a), stating that such ERISA Plan and the attendant
trust are qualified thereunder. The Company has never completely or
partially withdrawn from a "multiemployer plan."
(xviii) Neither the Company nor any of its employees, directors,
stockholders, partners, or affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
be expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Securities or otherwise.
(xix) None of the patents, patent applications, trademarks, service
marks, service names, trade names and copyrights and none of the licenses
and rights to the foregoing presently owned or held by the Company are in
dispute or are in any conflict with the right of any other person or
entity. The Company (i) owns or has the right to use, free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects
or other restrictions or equities of any kind whatsoever, all patents,
patent applications, trademarks, service marks, service names, trade names
and copyrights, technology and licenses and rights with respect to the
foregoing, used in the conduct of its business as now conducted or proposed
to be conducted without infringing upon or otherwise acting adversely to
the right or claimed right of any person, corporation or other entity under
or with respect to any of the foregoing and (ii) is not obligated or under
any liability whatsoever to make any payment by way of royalties, fees or
otherwise to any owner or licensee of, or other claimant to, any patent,
patent application, trademark, service mark, service names, trade name,
copyright, know-how, technology or other intangible asset, with respect to
the use thereof or in connection with the conduct of its business or
otherwise. There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental or other proceeding, domestic or
<PAGE>
foreign, pending or threatened (or circumstances that may give rise to the
same) against the Company which challenges the exclusive rights of the
Company with respect to any trademarks, trade names, service marks, service
names, copyrights, patents, patent applications or licenses or rights to
the foregoing used in the conduct of its business, or which challenge the
right of the Company to use any technology presently used or contemplated
to be used in the conduct of its business.
(xx) The Company owns and has the unrestricted right to use all trade
secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
inventions, technology, designs, processes, works of authorship, computer
programs and technical data and information (collectively herein
"intellectual property") that are material to the development, manufacture,
operation and sale of all products and services sold or proposed to be sold
by the Company, free and clear of and without violating any right, lien, or
claim of others, including without limitation, former employers of its
employees; provided, however, that the possibility exists that other
persons or entities.
(xxi) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property
stated in the Prospectus, to be owned or leased by it free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects,
or other restrictions or equities of any kind whatsoever, other than those
referred to in the Prospectus and liens for taxes not yet due and payable.
(xxii) PriceWaterhouseCoopers LLP ("PriceWaterhouseCoopers"), whose
report is filed with the Commission as a part of the Registration
Statement, are independent certified public accountants as required by the
Act and the Rules and Regulations.
(xxiii) The Company has caused to be duly executed legally binding and
enforceable agreements ("Lock-Up Agreement") pursuant to which all of the
officers and directors of the Company, holders of [_____] shares of Common
Stock and holders of securities exchangeable or exercisable for or
convertible into shares of Common Stock have agreed not to, directly or
indirectly, offer, sell, grant any option for the sale of, assign,
transfer, pledge, hypothecate, distribute or otherwise encumber or dispose
of any shares of Common Stock or securities convertible into, exercisable
or exchangeable for or evidencing any right to purchase or subscribe for
any shares of Common Stock (either pursuant to Rule 144 of the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein for
a period of not less than twelve (12) months following the effective date
of the Registration Statement without the prior written consent of the
Representative and the Company. Any shares of Common Stock issued in
connection with a private placement which occurs after the date hereof
shall be subject to Lock-Up Agreements for a period of six (6) months
following the effective date of the Registration Statement. Holders of
[_______] shares of Common Stock have agreed not to, directly or
indirectly, offer, sell, transfer, pledge, assign, hypothecate, or
otherwise encumber any
<PAGE>
such shares of Common Stock or any securities convertible into, exercisable
or exchangeable for or evidencing any right to purchase or subscribe for
any shares of Common Stock (either pursuant to Rule 144 of the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein for
a period of not less than nine (9) months following the effective date of
the Registration Statement without the prior written consent of the
Representative and the Company. If at any time commencing 180 days after
the effective date of the Registration Statement, the closing sale or bid
price of the Common Stock is greater than 150% of the initial public
offering price of the Common Stock for a period of five (5) consecutive
trading days, the Representative will, upon request, release any securities
subject to a lock-up agreement specified above. In addition, the Company
shall not sell or offer for sale any of its securities for a period of six
(6) months from the effective date of the Registration Statement without
the consent of the Representative except pursuant to options and warrants
issued on the effective date of the Registration Statement. The Company
will cause the Transfer Agent, as defined below, to mark an appropriate
legend on the face of stock certificates representing all of such
securities and to place "stop transfer" orders on the Company's stock
ledgers.
(xxiv) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities
hereunder or any other arrangements, agreements, understandings, payments
or issuance with respect to the Company or any of its officers, directors,
stockholders, partners, employees or affiliates that may affect the
Underwriters' compensation, as determined by the NASD.
(xxv) The Common Stock and Redeemable Warrants have been approved for
quotation on the American Stock Exchange ("Amex").
(xxvi) Neither the Company nor any of its directors, officers,
employees, agents, or any other person acting on behalf of the Company,
has, directly or indirectly, given or agreed to give any money, gift or
similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent
of a customer or supplier, or official or employee of any governmental
agency (domestic or foreign) or instrumentality of any government (domestic
or foreign) or any political party or candidate for office (domestic or
foreign) or other person who was, is, or may be in a position to help or
hinder the business of the Company (or assist the Company in connection
with any actual or proposed transaction) which (a) might subject the
Company, or any other such person to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign),
(b) if not given in the past, might have had a materially adverse effect on
the assets, business or operations of the Company, or (c) if not continued
in the future, might adversely affect the assets, business, operations or
prospects of the Company. The Company's internal accounting controls are
sufficient to cause the Company to comply with the Foreign Corrupt
Practices Act of 1977, as amended.
<PAGE>
(xxvii) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the
Company further agrees that if it or any affiliate commences engaging in
business with the government of Cuba or with any person or affiliate
located in Cuba after the date the Registration Statement becomes or has
become effective with the Commission or with the Florida Department of
Banking and Finance (the "Department"), whichever date is later, or if the
information reported or incorporated by reference in the Prospectus, if
any, concerning the Company's, or any affiliate's, business with Cuba or
with any person of affiliate located in Cuba changes in any material way,
the Company will provide the Department notice of such business or change,
as appropriate, in a form acceptable to the Department.
(xxviii) Except as set forth in the Prospectus, no officer, director
or stockholder of the Company, or any "affiliate" or "associate" (as these
terms are defined in Rule 405 promulgated under the Rules and Regulations)
of any of the foregoing persons or entities has, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or
sells services or products which are furnished or sold or are proposed to
be furnished or sold by the Company, or (B) purchases from or sells or
furnishes to the Company any goods or services, or (ii) a beneficial
interest in any contract or agreement to which the Company is a party or by
which it may be bound or affected. Except as set forth in the Prospectus
under "Certain Transactions," there are no existing agreements,
arrangements, understandings or transactions, or proposed agreements,
arrangements, understandings or transactions, between or among the Company
and any officer, director, or Principal Stockholder (as such term is
defined in the Prospectus) of the Company or any partner, affiliate or
associate of any of the foregoing persons or entities.
(xxix) Any certificate signed by any officer of the Company, and
delivered to the Representative or to Underwriters' Counsel (as defined
herein) shall be deemed a representation and warranty by the Company to the
Representative as to the matters covered thereby.
(xxx) The minute books of the Company have been made available to the
Representative and contain a complete summary of all meetings and actions
of the directors, stockholders, audit committee, compensation committee and
any other committee of the Board of Directors of the Company, respectively,
since the time of its incorporation, and reflects all transactions referred
to in such minutes accurately in all material respects.
(xxxi) Except and to the extent described in the Prospectus, no
holders of any securities of the Company or of any options, warrants or
other convertible or exchangeable securities of the Company have the right
to include any securities issued by the Company in the Registration
Statement or any registration statement to be filed by the Company or to
require the Company to file a registration statement under the Act and no
<PAGE>
person or entity holds any anti-dilution rights with respect to any
securities of the Company.
(xxxii) The Company has as of the effective date of the Registration
Statement entered into employment agreements with Joshua Sharfman and
Thomas Stigler in the forms filed as Exhibits to the Registration
Statements.
(xxxiii) The Company has entered into a warrant agreement,
substantially in the form filed as Exhibit __ to the Registration Statement
(the "Warrant Agreement"), with American Stock Transfer & Trust Company, in
form and substance satisfactory to the Underwriter, with respect to the
Redeemable Warrants and providing for the payment of warrant solicitation
fees. The Warrant Agreement has been duly and validly authorized by the
Company and, assuming due execution by the parties thereto other than the
Company, constitutes a valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms (except as
such enforceability may be limited by aplicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to
or affecting the enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as
obligations to indemnify or contribute to losses may be limited by
applicable law).
(xxxiv) The Company has entered into a financial advisory and
consulting agreement substantially in the form filed as Exhibit _____ to
the Registration Statement (the "Consulting Agreement") with the
Underwriter, with respect to the rendering of consulting services by the
Underwriter to the Company. The Consulting Agreement has been duly and
validly authorized by the Company and assuming due execution by the parties
thereto other than the Company, constitutes a valid and legally binding
agreement of the Company, enforceable against the Company in accordance
with its terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and
the application of equitable principles in any action, legal or equitable,
and except as rights to indemnify or contribution may be limited by
applicable law).
(xxxv) The Company has filed a Form 8-A with the Commission providing
for the registration under the Exchange Act of the Securities and such Form
8-A has been declared effective by the Commission.
2. Purchase, Sale and Delivery of the Securities and Representative's
Warrants.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter
agrees to purchase from the Company at a price of $____ per Unit [90% of the
initial public offering price], that number of Firm Securities set forth in
Schedule A opposite the name of such Underwriter, subject to adjustment as the
Representative in its sole discretion shall make to eliminate any sales or
purchases of fractional
<PAGE>
shares, plus any additional number of Firm Securities which such Underwriter may
become obligated to purchase pursuant to the provisions of Section 11 hereof.
(b) In addition, on the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters to purchase
all or any part of an additional 180,000 Units at a price of $___ per Unit [90%
of the initial public offering price]. The option granted hereby will expire 45
days after (i) the date the Registration Statement becomes effective, if the
Company has elected not to rely on Rule 430A under the Rules and Regulations, or
(ii) the date of this Agreement if the Company has elected to rely upon Rule
430A under the Rules and Regulations, and may be exercised in whole or in part
from time to time only for the purpose of covering over-allotments which may be
made in connection with the offering and distribution of the Firm Securities
upon notice by the Representative to the Company setting forth the number of
Option Securities as to which Representative is then exercising the option and
the time and date of payment and delivery for any such Option Securities. Any
such time and date of delivery (an "Option Closing Date") shall be determined by
the Representative, but shall not be later than seven full business days after
the exercise of said option, nor in any event prior to the Closing Date, as
hereinafter defined, unless otherwise agreed upon by the Representative and the
Company. Nothing herein contained shall obligate the Underwriters to make any
over-allotments. No Option Securities shall be delivered unless the Firm
Securities shall be simultaneously delivered or shall theretofore have been
delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates for,
the Firm Securities shall be made at the offices of Security Capital Trading,
Inc. at 520 Madison Avenue, New York, New York, 10022, or at such other place as
shall be agreed upon by the Representative and the Company. Such delivery and
payment shall be made at 10:00 a.m. (New York City time) on __________, 1998 or
at such other time and date as shall be agreed upon by the Representative and
the Company, but not less than three (3) nor more than seven (7) full business
days after the effective date of the Registration Statement (such time and date
of payment and delivery being herein called "Closing Date"). In addition, in the
event that any or all of the Option Securities are purchased by the
Underwriters, payment of the purchase price for, and delivery of certificates
for, such Option Securities shall be made at the above-mentioned office of the
Representative or at such other place as shall be agreed upon by the
Representative and the Company on each Option Closing Date as specified in the
notice from the Representative to the Company. Delivery of the certificates for
the Firm Securities and the Option Securities, if any, shall be made to the
Underwriters against payment by the Underwriters of the purchase price for the
Firm Securities and the Option Securities, if any, to the order of the Company
for the Firm Securities and the Option Securities, if any, by New York Clearing
House funds. Certificates for the Firm Securities and the Option Securities, if
any, shall be in definitive, fully registered form, shall bear no restrictive
legends and shall be in such denominations and registered in such names as the
Representative may request in writing at least two (2) business days prior to
the Closing Date or the relevant Option Closing Date, as the case may be. The
certificates for the Firm Securities and the Option Securities, if any, shall be
made available to the Representative at such office or such other place as the
Representative may designate for
<PAGE>
inspection, checking and packaging no later than 9:30 a.m. on the last business
day prior to Closing Date or the relevant Option Closing Date, as the case may
be.
(d) On the Closing Date, the Company shall issue and sell the
Representative's Warrants to the Representative at a purchase price of $.0001
per warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of 120,000 Units. The Representative's Warrants shall be exercisable
for a period of four (4) years commencing one (1) year from the effective date
of the Registration Statement at a price equaling one hundred twenty percent
(120%) of the initial public offering price of the Units. The Representative's
Redeemable Warrants are identical to the Redeemable Warrants. The
Representative's Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibit __ to the Registration Statement.
Payment for the Representative's Warrants shall be made on the Closing Date.
3. Public Offering of the Units. As soon after the Registration Statement
becomes effective as the Representative deems advisable, the Underwriters shall
make a public offering of the Firm Securities and such Option Securities as the
Representative may determine (other than to residents of or in any jurisdiction
in which qualification of the Units is required and has not become effective) at
the price and upon the other terms set forth in the Prospectus. The
Representative may from time to time increase or decrease the public offering
price after distribution of the Units has been completed to such extent as the
Representative, in its discretion deems advisable. The Underwriters may enter
into one of more agreements as the Underwriters, in each of their sole
discretion, deem advisable with one or more broker-dealers who shall act as
dealers in connection with such public offering.
4. Covenants and Agreements of the Company. The Company covenants and
agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the Units by the Underwriters of which
the Representative shall not previously have been advised and furnished with a
copy, or to which the Representative shall have objected or which is not in
compliance with the Act, the Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof, the
Company will advise the Representative and confirm the notice in writing, (i)
when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose, (iii) of
<PAGE>
the issuance by the Commission or by any state securities commission of any
proceedings for the suspension of the qualification of any of the Securities for
offering or sale in any jurisdiction or of the initiation, or the threatening,
of any proceeding for that purpose, (iv) of the receipt of any comments from the
Commission; and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state securities commission
authority shall enter a stop order or suspend such qualification at any time,
the Company will make every effort to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of business on the
earlier of (i) the second business day following the execution and delivery of
this Agreement and (ii) the fifteenth business day after the effective date of
the Registration Statement.
(d) The Company will give the Representative notice of its intention to
file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Representative in connection with the offering of the Securities which differs
from the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations),
and will furnish the Representative with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such prospectus to which the
Representative or Orrick, Herrington & Sutcliffe LLP ("Underwriters' Counsel"),
shall object.
(e) The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representative may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a foreign corporation
or file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative agrees that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered under the
Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and
<PAGE>
Regulations, as from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Securities in accordance with the
provisions hereof and the Prospectus, or any amendments or supplements thereto.
If at any time when a prospectus relating to the Securities is required to be
delivered under the Act, any event shall have occurred as a result of which, in
the opinion of counsel for the Company or Underwriters' Counsel, the Prospectus,
as then amended or supplemented, includes an untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Act, the Company will notify the Representative
promptly and prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act, each such amendment or
supplement to be satisfactory to Underwriters' Counsel, and the Company will
furnish to the Representative copies of such amendment or supplement as soon as
available and in such quantities as the Representative may request.
(g) As soon as practicable, but in any event not later than 45 days after
the end of the 12-month period beginning on the day after the end of the fiscal
quarter of the Company during which the effective date of the Registration
Statement occurs (90 days in the event that the end of such fiscal quarter is
the end of the Company's fiscal year), the Company shall make generally
available to its security holders, in the manner specified in Rule 158(b) of the
Rules and Regulations, and to the Representative, an earnings statement which
will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and
Regulations, which statement need not be audited unless required by the Act,
covering a period of at least twelve (12) consecutive months after the effective
date of the Registration Statement.
(h) During a period of seven (7) years after the date hereof, the Company
will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the Representative:
(i) concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in the
form furnished to the Company's stockholders and certified by the Company's
principal financial or accounting officer;
(ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, stockholders' equity,
and cash flows of the Company for such fiscal year, accompanied by a copy
of the certificate thereon of independent certified public accountants;
(iii) as soon as they are available, copies of all reports (financial
or other) mailed to stockholders;
<PAGE>
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD or
any securities exchange;
(v) every press release and every material news item or article of
interest to the financial community in respect of the Company, or its
affairs which was released or prepared by or on behalf of the Company; and
(vi) any additional information of a public nature concerning the
Company (and any future subsidiary) or its businesses which the
Representative may request.
(vii) During such seven-year period, if the Company has an active
subsidiary, the foregoing financial statements will be on a consolidated
basis to the extent that the accounts of the Company and its subsidiary are
consolidated, and will be accompanied by similar financial statements for
any significant subsidiary which is not so consolidated.
(i) The Company will maintain a Transfer Agent and Warrant Agent ("Transfer
Agent") and, if necessary under the jurisdiction of incorporation of the
Company, a Registrar (which may be the same entity as the Transfer Agent) for
its Common Stock and Redeemable Warrants.
(j) The Company will furnish to the Representative or on Representative's
order, without charge, at such place as the Representative may designate, copies
of each Preliminary Prospectus, the Registration Statement and any pre-effective
or post-effective amendments thereto (two of which copies will be signed and
will include all financial statements and exhibits), the Prospectus, and all
amendments and supplements thereto, including any prospectus prepared after the
effective date of the Registration Statement, in each case as soon as available
and in such quantities as the Representative may request.
(k) On or before the effective date of the Registration Statement, the
Company shall provide the Representative with true copies of duly executed,
legally binding and enforceable agreements pursuant to which, for a period of
twelve (12) months from the effective date of the Registration Statement, the
officers and directors of the Company, holders of [____] shares of Common Stock
and holders of securities exchangeable or exercisable for or convertible into
shares of Common Stock, agree that it or he or she will not directly or
indirectly, issue, offer to sell, sell, grant an option for the sale of, assign,
transfer, pledge, hypothecate, distribute or otherwise encumber or dispose of
any shares of Common Stock or securities convertible into, exercisable or
exchangeable for or evidencing any right to purchase or subscribe for any shares
of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or
otherwise) or dispose of any beneficial interest therein without the prior
written consent of the Representative and the Company. On or before the
effective date of the Registration Statement, the Company shall provide the
Representative with true copies of duly executed, legally binding and
enforceable agreements, pursuant to which, for a period of nine (9) months from
the effective date of the Registration Statement, holders of [_____] shares of
Common Stock agree that it or
<PAGE>
he or she will not, directly or indirectly, issue, offer, sell, grant an option
for the sale of, assign, transfer, pledge, hypothecate, distribute or otherwise
encumber or dispose of such shares of Common Stock or any securities convertible
into, exercisable or exchangeable for or evidencing any right to purchase or
subscribe for any shares of Common Stock (either pursuant to Rule 144 of the
Rules and Regulations or otherwise) or dispose of any beneficial interest
therein without the prior written consent of the Representative and the Company
(together with the agreements described above, the "Lock-up Agreements"). During
the six (6) month period commencing with the effective date of the Registration
Statement, the Company shall not, without the prior written consent of the
Representative, sell, contract or offer to sell, issue, transfer, assign,
pledge, hypothecate, distribute, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any options, rights or warrants with
respect to any shares of Common Stock, except as set forth in clause(s) of
Section 4 hereof. On or before the Closing Date, the Company shall deliver
instructions to the Transfer Agent authorizing it to place appropriate legends
on the certificates representing the securities subject to the Lock-up
Agreements and to place appropriate stop transfer orders on the Company's
ledgers.
(l) Neither the Company, nor any of its officers, directors, stockholders,
nor any of their respective affiliates (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or which
might in the future reasonably be expected to cause or result in, stabilization
or manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. Except as described in the Prospectus, no portion
of the net proceeds will be used, directly or indirectly, to acquire any
securities issued by the Company.
(n) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
(o) The Company shall furnish to the Representative as early as practicable
prior to each of the date hereof, the Closing Date and each Option Closing Date,
if any, but no later than two (2) full business days prior thereto, a copy of
the latest available unaudited interim financial statements of the Company
(which in no event shall be as of a date more than thirty (30) days prior to the
date of the Registration Statement) which have been read by the Company's
independent public accountants, as stated in its letter to be furnished pursuant
to Section 6(j) hereof.
(p) The Company shall cause the Common Stock and the Redeemable Warrants to
be quoted on Amex and for a period of seven (7) years from the date hereof, use
its best efforts to maintain the Amex quotation of the Common Stock and the
Redeemable Warrants to the extent outstanding.
<PAGE>
(q) For a period of five (5) years from the Closing Date, the Company shall
furnish to the Representative at the Representative's request and at the
Company's sole expense, (i) daily consolidated transfer sheets relating to the
Common Stock and the Redeemable Warrants (ii) the list of holders of all of the
Company's securities and (iii) a Blue Sky "Trading Survey" for secondary sales
of the Company's securities prepared by counsel to the Company.
(r) As soon as practicable, but in no event more than 30 days from the
effective date of the Registration Statement, take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions and
Moody's OTC Manual and to continue such inclusion for a period of not less than
seven (7) years.
(s) [The Company hereby agrees that it will not for a period of thirteen
(13) months from the effective date of the Registration Statement, adopt,
propose to adopt or otherwise permit to exist any employee, officer, director,
consultant or compensation plan or arrangement permitting the grant, issue or
sale of any shares of Common Stock or other securities of the Company (i) in an
amount greater than an aggregate of 500,000 shares, (ii) at an exercise or sale
price per share less than the greater of (a) the initial public offering price
of the Shares set forth herein and (b) the fair market value of the Common Stock
on the date of grant or sale, (iii) to any direct or indirect beneficial holder
on the date hereof of more than 10% of the issued and outstanding shares of
Common Stock, (iv) with the payment for such securities with any form of
consideration other than cash, (v) upon payment of less than the full purchase
or exercise price for such shares of Common Stock or other securities of the
Company on the date of grant or issuance, or (vi) permitting the existence of
stock appreciation rights, phantom options or similar arrangements.]
(t) Until the completion of the distribution of the Firm Securities and the
Option Securities, the Company shall not without the prior written consent of
the Representative and Underwriters' Counsel, issue, directly or indirectly, any
press release or other communication or hold any press conference with respect
to the Company or its activities or the offering contemplated hereby, other than
trade releases issued in the ordinary course of the Company's business
consistent with past practices with respect to the Company's operations.
(u) For a period equal to the lesser of (i) three (3) years from the date
hereof, and (ii) the sale to the public of the Representative's Securities, the
Company will not take any action or actions which may prevent or disqualify the
Company's use of Form SB-2 or Form S-1 (or other appropriate form) for the
registration under the Act of the Representative's Securities.
(v) For a period of five (5) years after the effective date of the
Registration Statement, the Representative shall have the right to designate for
election one (1) individual to the Company's Board of Directors (the "Board").
Such person shall be mutually acceptable to the Company and the Representative.
In the event the Representative elects not to exercise such right, then it may
designate one (1) individual to attend meetings of the Company's Board. The
Company shall notify the Representative of each meeting of the Board and the
Company shall send to such individual all notices and other correspondence and
communications sent by the
<PAGE>
Company to members of the Board. Such individual shall be reimbursed for all
out-of-pocket expenses incurred in connection with his attendance of meetings of
the Board.
(w) For a period of twenty four (24) months after the effective date of the
Registration Statement, the Company shall not restate, amend or alter any term
of any written employment, consulting or similar agreement entered into between
the Company and any officer, director or key employee as of the effective date
of the Registration Statement in a manner which is more favorable to such
officer, director or key employee, without the prior written consent of the
Representative.
(x) For a period of three (3) years after the effective date of the
Registration Statement, the Company, any subsidiaries and any affiliates hereby
grant a right of first refusal for any sale of securities to be made by the
Company, any affiliates and any subsidiaries.
(y) The Company will use its best efforts to maintain the effectiveness of
the Registration Statement for a period of five years after the date hereof.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing Date and the
Option Closing Date (to the extent not paid at the Closing Date) all expenses
and fees (other than fees of Underwriters' Counsel, except as provided in (iv)
below) incident to the performance of the obligations of the Company under this
Agreement and the Representative's Warrant Agreement, including, without
limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing, (including mailing and handling charges)
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of postage
with respect thereto) and delivery of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreements, and related documents, including
the cost of all copies thereof and of the Preliminary Prospectuses and of the
Prospectus and any amendments thereof or supplements thereto supplied to the
Underwriters and such dealers as the Underwriters may request, in quantities as
hereinabove stated, (iii) the printing, engraving, issuance and delivery of the
Securities including, but not limited to, (x) the purchase by the Underwriters
of the Firm Securities and the Option Securities and the purchase by the
Representative of the Representative's Warrants from the Company, (y) the
consummation by the Company of any of its obligations under this Agreement and
the Representative's Warrant Agreement, and (z) resale of the Firm Securities
and the Option Securities by the Underwriters in connection with the
distribution contemplated hereby, (iv) the qualification of the Securities under
state or foreign securities or "Blue Sky" laws and determination of the status
of such securities under legal investment laws, including the costs of printing
and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, and disbursements and fees
of counsel in connection therewith, (v) advertising costs and expenses,
including but not limited to costs and expenses in connection with the "road
show", information meetings and presentations, bound volumes and prospectus
memorabilia and "tomb-
<PAGE>
stone" advertisement expenses, (vi) costs and expenses in connection with due
diligence investigations, including but not limited to the fees of any
independent counsel or consultant retained, (vii) fees and expenses of the
transfer agent and registrar, (viii) applications for assignments of a rating of
the Securities by qualified rating agencies, (ix) the fees payable to the
Commission and the NASD, and (x) the fees and expenses incurred in connection
with the quotation of the Securities on Amex and any other exchange.
(b) If this Agreement is terminated by the Underwriters in accordance with
the provisions of Section 6 or Section 11, (i) the Company shall reimburse and
indemnify the Representative for all of its actual out-of-pocket expenses,
including the fees and disbursements of Underwriters' Counsel, less any amounts
already paid pursuant to Section 5(c) hereof.
(c) The Company further agrees that, in addition to the expenses payable
pursuant to subsection (a) of this Section 5, it will pay to the Representative
on the Closing Date by certified or bank cashier's check or, at the election of
the Representative, by deduction from the proceeds of the offering contemplated
herein a non-accountable expense allowance equal to three percent (3%) of the
gross proceeds received by the Company from the sale of the Firm Securities,
$25,000 of which has been paid to date. In the event the Representative elects
to exercise the over-allotment option described in Section 2(b) hereof, the
Company agrees to pay to the Representative on the Option Closing Date (by
certified or bank cashier's check or, at the Representative's election, by
deduction from the proceeds of the Option Securities) a non-accountable expense
allowance equal to three percent (3%) of the gross proceeds received by the
Company from the sale of the Option Securities.
6. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, with respect to the
Company as if it had been made on and as of the Closing Date or each Option
Closing Date, as the case may be; the accuracy on and as of the Closing Date or
Option Closing Date, if any, of the statements of the officers of the Company
made pursuant to the provisions hereof; and the performance by the Company on
and as of the Closing Date and each Option Closing Date, if any, of its
covenants and obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective not later than
12:00 Noon, New York time, on the date of this Agreement or such later date and
time as shall be consented to in writing by the Representative, and, at Closing
Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Shares and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the
<PAGE>
prescribed time period, and prior to Closing Date the Company shall have
provided evidence satisfactory to the Representative of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A of
the Rules and Regulations.
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Representative shall have received
from Underwriters' Counsel, such opinion or opinions with respect to the
organization of the Company, the validity of the Securities, the
Representative's Warrants, the Registration Statement, the Prospectus and other
related matters as the Representative may request and Underwriters' Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.
(d) At Closing Date, the Underwriter shall have received the favorable
opinion of Ehrenreich Eilenberg Krause & Zivian LLP, counsel to the Company,
dated the Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) the Company (A) has been duly organized and is validly existing as
a corporation in good standing under the laws of its jurisdiction, (B) is
duly qualified and licensed and in good standing as a foreign corporation
in each jurisdiction in which its ownership or leasing of any properties or
the character of its operations requires such qualification or licensing,
and (C) has all requisite corporate power and authority; and the Company
has obtained any and all necessary authorizations, approvals, orders,
licenses, certificates, franchises and permits of and from all governmental
or regulatory officials and bodies (including, without limitation, those
having jurisdiction over environmental or similar matters), to own or lease
its properties and conduct its business as described in the Prospectus; the
Company is and has been doing business in material compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all federal, state and local laws, rules and regulations; the
Company has not received any notice of proceedings relating to the
revocation or modification of any such authorization, approval, order,
license, certificate, franchise, or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would materially adversely affect the business, operations, condition,
financial or otherwise, or the earnings, business affairs, position,
prospects, value, operation, properties, business or results of operations
of the Company. The disclosures in the
<PAGE>
Registration Statement concerning the effects of federal, state and local
laws, rules and regulations on the Company's business as currently
conducted and as contemplated are correct in all material respects and do
not omit to state a fact necessary to make the statements contained therein
not misleading in light of the circumstances in which they were made;
(ii) the Company does not own an interest in any other corporation,
partnership, joint venture, trust or other business entity;
(iii) the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or
supplement thereto, under "Capitalization" and "Description of Securities,"
and the Company is not a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital stock, rights,
warrants, options or other securities, except for this Agreement, the
Representative's Warrant Agreement and the Warrant Agreement and as
described in the Prospectus. The Securities, and all other securities
issued or issuable by the Company conform in all material respects to all
statements with respect thereto contained in the Registration Statement and
the Prospectus. All issued and outstanding securities of the Company have
been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of rescission with
respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of
the preemptive rights of any holders of any security of the Company. The
Securities to be sold by the Company hereunder and under the
Representative's Warrant Agreement and the Warrant Agreement are not and
will not be subject to any preemptive or other similar rights of any
stockholder, have been duly authorized and, when issued, paid for and
delivered in accordance with the terms hereof, will be validly issued,
fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; the holders thereof will not be subject to any
liability solely as such holders; all corporate action required to be taken
for the authorization, issue and sale of the Securities has been duly and
validly taken; and the certificates representing the Securities are in due
and proper form. The Representative's Warrants constitute valid and binding
obligations of the Company to issue and sell, upon exercise thereof and
payment therefor, the number and type of securities of the Company called
for thereby. Upon the issuance and delivery pursuant to this Agreement,
Representative's Warrant Agreement and the Warrant Agreement of the
Securities to be sold by the Company, the Underwriters and the
Representative, respectively, will acquire good and marketable title to
such Securities free and clear of any pledge, lien, charge, claim,
encumbrance, pledge, security interest, or other restriction or equity of
any kind whatsoever. No transfer tax is payable by or on behalf of the
Underwriters in connection with (A) the issuance by the Company of the Firm
Securities, the Option Securities, (B) the purchase by the Underwriters of
the Securities from the Company, (C) the consummation by the Company of any
of its obligations under this Agreement, the Representative's Warrant
Agreement or the Warrant Agreement, or (D) resales of the Securities in
connection with the distribution contemplated hereby;
<PAGE>
(iv) the Registration Statement is effective under the Act, and, if
applicable, filing of all pricing information has been timely made in the
appropriate form under Rule 430A, and no stop order suspending the use of
the Preliminary Prospectus, the Registration Statement or Prospectus or any
part of any thereof or suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or, to the best of such counsel's knowledge,
threatened or contemplated under the Act;
(v) each of the Preliminary Prospectus, the Registration Statement,
and the Prospectus and any amendments or supplements thereto (other than
the financial statements and other financial and statistical data included
therein, as to which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the Rules and
Regulations;
(vi) (A) there are no agreements, contracts or other documents
required by the Act to be described in the Registration Statement and the
Prospectus and filed as exhibits to the Registration Statement other than
those described in the Registration Statement (or required to be filed
under the Exchange Act if upon such filing they would be incorporated, in
whole or in part, by reference therein) and the Prospectus and filed as
exhibits thereto, and the exhibits which have been filed are correct copies
of the documents of which they purport to be copies; (B) the descriptions
in the Registration Statement and the Prospectus and any supplement or
amendment thereto of contracts and other documents to which the Company is
a party or by which it is bound, including any document to which the
Company is a party or by which it is bound, incorporated by reference into
the Prospectus and any supplement or amendment thereto, are accurate in all
material respects and fairly represent the information required to be shown
by Form SB-2; (C) there is not pending or threatened against the Company
any action, arbitration, suit, proceeding, inquiry, investigation,
litigation, governmental or other proceeding (including, without
limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against (or
circumstances that may give rise to the same), or involving the properties
or business of the Company which (x) is required to be disclosed in the
Registration Statement which is not so disclosed (and such proceedings as
are summarized in the Registration Statement are accurately summarized in
all material respects), (y) questions the validity of the capital stock of
the Company or this Agreement, the Representative's Warrant Agreement or
the Warrant Agreement, or of any action taken or to be taken by the Company
pursuant to or in connection with any of the foregoing; (D) no statute or
regulation or legal or governmental proceeding required to be described in
the Prospectus is not described as required; and (E) there is no action,
suit or proceeding pending, or threatened, against or affecting the Company
before any court or arbitrator or governmental body, agency or official (or
any basis thereof known to such counsel) in which there is a reasonable
possibility of an adverse decision which may result in a material adverse
change in the condition, financial or otherwise, or the earnings, position,
prospects, stockholders' equity, value, operation, properties, business or
results of operations of the Company, which could adversely affect the
present or prospective ability of the Company to
<PAGE>
perform its obligations under this Agreement, the Representative's Warrant
Agreement or the Warrant Agreement or which in any manner draws into
question the validity or enforceability of this Agreement, the
Representative's Warrant Agreement or the Warrant Agreement;
(vii) the Company has full legal right, power and authority to enter
into each of this Agreement, the Representative's Warrant Agreement and the
Warrant Agreement and to consummate the transactions provided for herein
and therein; and each of this Agreement, the Representative's Warrant
Agreement and the Warrant Agreement has been duly authorized, executed and
delivered by the Company. Each of this Agreement, the Representative's
Warrant Agreement and the Warrant Agreement, assuming due authorization,
execution and delivery by each other party thereto constitutes a legal,
valid and binding agreement of the Company enforceable against the Company
in accordance with its terms (except as such enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other
laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any
action, legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law), and none of the Company's
execution or delivery of this Agreement, the Representative's Warrant
Agreement and the Warrant Agreement, its performance hereunder or
thereunder, its consummation of the transactions contemplated herein or
therein, or the conduct of its business as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto,
conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or
will constitute a default under, or result in the creation or imposition of
any lien, charge, claim, encumbrance, pledge, security interest, defect or
other restriction or equity of any kind whatsoever upon, any property or
assets (tangible or intangible) of the Company pursuant to the terms of,
(A) the certificate of incorporation or by-laws of the Company, (B) any
license, contract, indenture, mortgage, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement or any
other agreement or instrument to which the Company is a party or by which
it is or may be bound or to which any of its respective properties or
assets (tangible or intangible) is or may be subject, or any indebtedness,
or (C) any statute, judgment, decree, order, rule or regulation applicable
to the Company of any arbitrator, court, regulatory body or administrative
agency or other governmental agency or body (including, without limitation,
those having jurisdiction over environmental or similar matters), domestic
or foreign, having jurisdiction over the Company or any of its activities
or properties;
(viii) no consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic
or foreign (other than such as may be required under Blue Sky laws, as to
which no opinion need be rendered) is required in connection with the
issuance of the Securities pursuant to the Prospectus, the Registration
Statement, the performance of this Agreement, the Representative's Warrant
Agreement and the Warrant Agreement, and the transactions contemplated
hereby and thereby;
<PAGE>
(ix) the properties and business of the Company conform in all
material respects to the description thereof contained in the Registration
Statement and the Prospectus; and the Company has good and marketable title
to, or valid and enforceable leasehold estates in, all items of real and
personal property stated in the Prospectus to be owned or leased by it, in
each case free and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects or other restrictions or equities of
any kind whatsoever, other than those referred to in the Prospectus and
liens for taxes not yet due and payable.
(x) the Company is not in breach of, or in default under, any term or
provision of any license, contract, indenture, mortgage, installment sale
agreement, deed of trust, lease, voting trust agreement, stockholders'
agreement, partnership agreement, note, loan or credit agreement or any
other agreement or instrument evidencing an obligation for borrowed money,
or any other agreement or instrument to which the Company is a party or by
which the Company may be bound or to which the property or assets (tangible
or intangible) of the Company is subject or affected; and the Company is
not in violation of any term or provision of (A) its certificate of
incorporation by-laws, (B) any order, license, certificate, franchise or
permit of any governmental or regulatory official or body or (C) any
judgment, decree, order, statute, rule or regulation to which it is
subject;
(xi) the statements in the Prospectus under "PROSPECTUS SUMMARY," "THE
COMPANY," "RISK FACTORS," "BUSINESS," "MANAGEMENT," "PRINCIPAL
SHAREHOLDERS," "CERTAIN TRANSACTIONS," "DESCRIPTION OF SECURITIES," and
"SHARES ELIGIBLE FOR FUTURE SALE" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes,
licenses, rules or regulations or legal conclusions, are correct in all
material respects;
(xii) the Firm Securities and Option Securities have been accepted for
quotation on Amex;
(xiii) the persons listed under the caption "PRINCIPAL SHAREHOLDERS"
in the Prospectus are the respective "beneficial owners" (as such phrase is
defined in regulation 13d-3 under the Exchange Act) of the securities set
forth opposite their respective names thereunder as and to the extent set
forth therein;
(xiv) no person, corporation, trust, partnership, association or other
entity has the right to include and/or register any securities of the
Company in the Registration Statement, require the Company to file any
registration statement or, if filed, to include any security in such
registration statement;
(xv) there are no claims, payments, issuances, arrangements or
understandings for services in the nature of a finder's or origination fee
with respect to the sale of the Securities hereunder or financial
consulting arrangement or any other
<PAGE>
arrangements, agreements, understandings, payments or issuances that may
affect the Underwriters' compensation, as determined by the NASD;
(xvi) assuming due execution by the parties thereto other than the
Company, the Lock-up Agreements are legal, valid and binding obligations of
parties thereto, enforceable against the party and any subsequent holder of
the securities subject thereto in accordance with their terms; and
(xvii) except as described in the Prospectus, the Company does not (A)
maintain, sponsor or contribute to any ERISA Plans, (B) maintain or
contribute, now or at any time previously, to a defined benefit plan, as
defined in Section 3(35) of ERISA, and (C) has never completely or
partially withdrawn from a "multiemployer plan".
Such counsel shall state that such counsel has participated in conferences
with officers and other representatives of the Company and representatives of
the independent public accountants for the Company at which conferences such
counsel made inquiries of such officers, representatives and accountants and
discussed the contents of the Preliminary Prospectus, the Registration
Statement, the Prospectus, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement and Prospectus, on the basis
of the foregoing, no facts have come to the attention of such counsel which lead
them to believe that either the Registration Statement or any amendment thereto,
at the time such Registration Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or amendment or supplement thereto as of
the date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or Prospectus), or any supplements or
amendments thereto.
Such opinion shall not state that it is to be governed or qualified by, or
that it is otherwise subject to, any treatise, written policy or other document
relating to legal opinions, including, without limitation, the Legal Opinion
Accord of the ABA Section of Business Law (1991), or any comparable State bar
accord.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company, and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel if requested. The opinion shall also
state
<PAGE>
that the Underwriters' Counsel is entitled to rely thereon. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and that the Underwriters and they are
justified in relying thereon.
At each Option Closing Date, if any, the Underwriters shall have received
the favorable opinion of Ehrenreich Eilenberg Krause & Zivian LLP, counsel to
the Company dated the Option Closing Date, addressed to the Underwriters and in
form and substance satisfactory to Underwriters' Counsel, confirming as of
Option Closing Date the statements made by each of Ehrenreich Eilenberg Krause &
Zivian LLP and [_______________] in their respective opinions delivered on the
Closing Date.
(e) On or prior to each of the Closing Date and the Option Closing Date, if
any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
(f) Prior to each of the Closing Date and each Option Closing Date, if any,
(i) there shall have been no material adverse change nor development involving a
prospective change in the condition, financial or otherwise, prospects,
stockholders' equity or the business activities of the Company, whether or not
in the ordinary course of business, from the latest dates as of which such
condition is set forth in the Registration Statement and Prospectus; (ii) there
shall have been no transaction, not in the ordinary course of business, entered
into by the Company, from the latest date as of which the financial condition of
the Company is set forth in the Registration Statement and Prospectus which is
materially adverse to the Company; (iii) the Company shall not be in default
under any provision of any instrument relating to any outstanding indebtedness;
(iv) the Company shall not have issued any securities (other than the
Securities); the Company shall not have declared or paid any dividend or made
any distribution in respect of its capital stock of any class; and there has not
been any change in the capital stock of the Company, or any material change in
the debt (long or short term) or liabilities or obligations of the Company
(contingent or otherwise); (v) no material amount of the assets of the Company
shall have been pledged or mortgaged, except as set forth in the Registration
Statement and Prospectus; (vi) no action, suit or proceeding, at law or in
equity, shall have been pending or threatened (or circumstances giving rise to
same) against the Company, or affecting any of its properties or business before
or by any court or federal, state or foreign commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
adversely affect the business, operations, prospects or financial condition or
income of the Company, except as set forth in the Registration Statement and
Prospectus; and (vii) no stop order shall have been issued under the Act and no
proceedings therefor shall have been initiated, threatened or contemplated by
the Commission.
(g) At each of the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing
<PAGE>
Date or Option Closing Date, as the case may be, to the effect that each of such
persons has carefully examined the Registration Statement, the Prospectus and
this Agreement, and that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or
the Option Closing Date, as the case may be, and the Company has complied
with all agreements and covenants and satisfied all conditions contained in
this Agreement on its part to be performed or satisfied at or prior to such
Closing Date or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued, and no proceedings for that
purpose have been instituted or are pending or, to the best of each of such
person's knowledge, after due inquiry are contemplated or threatened under
the Act;
(iii) The Registration Statement and the Prospectus and, if any, each
amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the Registration
Statement, the Prospectus nor any amendment or supplement thereto includes
any untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading and neither the Preliminary Prospectus or any supplement
thereto included 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 therein, in light of the circumstances under which they were
made, not misleading; and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (a) the Company has
not incurred up to and including the Closing Date or the Option Closing
Date, as the case may be, other than in the ordinary course of its
business, any material liabilities or obligations, direct or contingent;
(b) the Company has not paid or declared any dividends or other
distributions on its capital stock; (c) the Company has not entered into
any transactions not in the ordinary course of business; (d) there has not
been any change in the capital stock of the Company or any material change
in the debt (long or short-term) of the Company; (e) the Company has not
sustained any material loss or damage to its property or assets, whether or
not insured; (g) there is no litigation which is pending or threatened (or
circumstances giving rise to same) against the Company, or any affiliated
party of any of the foregoing which is required to be set forth in an
amended or supplemented Prospectus which has not been set forth; and (h)
there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(g) are to such documents as amended and supplemented at the date of such
certificate.
(h) By the Closing Date, the Underwriters will have received clearance from
the NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
<PAGE>
(i) At the time this Agreement is executed, the Underwriters shall have
received a letter, dated such date, addressed to the Underwriters in form and
substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from PriceWaterhouseCoopers LLP;
(i) confirming that they are independent certified public accountants
with respect to the Company within the meaning of the Act and the
applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial statements
and supporting schedules of the Company included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations thereunder
and that the Underwriters may rely upon the opinion of
PriceWaterhouseCoopers LLP with respect to such financial statements and
supporting schedules included in the Registration Statement;
(iii) stating that, on the basis of a limited review which included a
reading of the latest available unaudited interim financial statements of
the Company, a reading of the latest available minutes of the stockholders
and board of directors and the various committees of the boards of
directors of the Company, consultations with officers and other employees
of the Company responsible for financial and accounting matters and other
specified procedures and inquiries, nothing has come to their attention
which would lead them to believe that (A) the pro forma financial
information contained in the Registration Statement and Prospectus does not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or is not fairly
presented in conformity with generally accepted accounting principles
applied on a basis consistent with that of the audited financial statements
of the Company or the unaudited pro forma financial information included in
the Registration Statement, (B) the unaudited financial statements and
supporting schedules of the Company included in the Registration Statement
do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations or are not
fairly presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the
audited financial statements of the Company included in the Registration
Statement, or (C) at a specified date not more than five (5) days prior to
the effective date of the Registration Statement, there has been any change
in the capital stock of the Company, any change in the long-term debt of
the Company, or any decrease in the stockholders' equity of the Company or
any decrease in the net current assets or net assets of the Company as
compared with amounts shown in the June 30, 1998 balance sheets included in
the Registration Statement, other than as set forth in or contemplated by
the Registration Statement, or, if there was any change or decrease,
setting forth the amount of such change or decrease, and (D) during the
period from June 30, 1998 to a specified date not more than five (5) days
prior to the effective date of the Registration Statement, there was any
decrease in net revenues or net earnings of the Company or increase in net
earnings per common share of the Company, in each case as
<PAGE>
compared with the corresponding period beginning June 30, 1997 other than
as set forth in or contemplated by the Registration Statement, or, if there
was any such decrease, setting forth the amount of such decrease;
(iv) setting forth, at a date not later than five (5) days prior to
the date of the Registration Statement, the amount of liabilities of the
Company (including a break-down of commercial paper and notes payable to
banks);
(v) stating that they have compared specific dollar amounts, numbers
of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus
in each case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general accounting
records, including work sheets, of the Company and excluding any questions
requiring an interpretation by legal counsel, with the results obtained
from the application of specified readings, inquiries and other appropriate
procedures (which procedures do not constitute an examination in accordance
with generally accepted auditing standards) set forth in the letter and
found them to be in agreement; and
(vi) statements as to such other matters incident to the transaction
contemplated hereby as the Underwriters may request.
(j) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from PriceWaterhouseCoopers LLP a letter, dated
as of the Closing Date or the Option Closing Date, as the case may be, to the
effect that they reaffirm the statements made in the letter furnished pursuant
to subsection (j) of this Section hereof except that the specified date referred
to shall be a date not more than five days prior to the Closing Date or the
Option Closing Date, as the case may be, and, if the Company has elected to rely
on Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of subsection (j) of this
Section with respect to certain amounts, percentages and financial information
as specified by the Underwriters and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
(k) The Company shall have delivered to the Representative a letter from
PriceWaterhouseCoopers addressed to the Company stating that they have not
during the immediately preceding two year period brought to the attention of the
Company's management any "weakness" as defined in Statement of Auditing
Standards No. 60 "Communication of Internal Control Structure Related Matters
Noted in an Audit," in any of the Company's internal controls.
(l) On each of the Closing Date and Option Closing Date, if any, there
shall be duly tendered to the Representative the appropriate number of
Securities.
<PAGE>
(m) No order suspending the sale of the Securities in any jurisdiction
designated by the Representative pursuant to subsection (e) of Section 4 hereof
shall have been issued on either the Closing Date or the Option Closing Date, if
any, and no proceedings for that purpose shall have been instituted or shall be
contemplated.
(n) On or before the Closing Date, the Company shall have executed and
delivered to the Representative, (i) the Representative's Warrant Agreement
substantially in the form filed as Exhibit __ to the Registration Statement in
final form and substance satisfactory to the Representative, and (ii) the
Representative's Warrants in such denominations and to such designees as shall
have been provided to the Company.
(o) On or before the Closing Date, the Common Stock and the Redeemable
Warrants shall have been duly approved for quotation on Amex, subject to
official notice of issuance.
(p) On or before the Closing Date, there shall have been delivered to the
Representative all of the Lock-up Agreements, in form and substance satisfactory
to Representative's Counsel.
(q) On or before the effective date of the Registration Statement, the
Company and American Stock Transfer & Trust Company shall have executed and
delivered to the Underwriter the Warrant Agreement, substantially in the form
filed as Exhibit _____ to the Registration Agreement.
If any condition to the Representative's obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representative may terminate this
Agreement or, if the Representative so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
7. Indemnification.
(a) The Company, agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7, "Underwriters" shall include the
officers, directors, partners, employees, agents and counsel of the
Underwriters, including specifically each person who may be substituted for an
Underwriter as provided in Section 11 hereof), and each person, if any, who
controls the Underwriter ("controlling person") within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, from and against any and all
losses, claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries, and suits in respect thereof),
whatsoever (including but not limited to any and all costs and expenses
whatsoever reasonably incurred in investigating, preparing or defending against
such action, proceeding, investigation, inquiry or suit, commenced or
threatened, or any claim whatsoever), as such are incurred, to which the
Underwriter or such controlling person may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise or under the
laws of foreign countries, arising out of or based upon (A) any untrue statement
or alleged untrue statement of a material fact contained (i) in any Preliminary
Prospectus, the Registration
<PAGE>
Statement or the Prospectus (as from time to time amended and supplemented);
(ii) in any post-effective amendment or amendments or any new registration
statement and prospectus in which is included securities of the Company issued
or issuable upon exercise of the Securities; or (iii) in any application or
other document or written communication (in this Section 7 collectively called
"application") executed by the Company or based upon written information
furnished by the Company filed, delivered or used in any jurisdiction in order
to qualify the Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, Amex or any other
securities exchange, (B) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made), or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriters expressly for use in any Preliminary Prospectus, the
Registration Statement or any Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be.
The indemnity agreement in this subsection (a) shall be in addition to any
liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriter but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Securities set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus have been furnished by the Underwriter expressly for
use therein and constitute the only information furnished in writing by or on
behalf of the Underwriters for inclusion in the Prospectus.
The indemnity agreement in this subsection (b) shall be in addition to any
liability which the Underwriters may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any action, suit or proceeding, such indemnified
party shall, if a claim in respect thereof is to be made against one or more
indemnifying parties under this
<PAGE>
Section 7, notify each party against whom indemnification is to be sought in
writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 7 except to the extent that it has been prejudiced in any
material respect by such failure or from any liability which it may have
otherwise). In case any such action, investigation, inquiry, suit or proceeding
is brought against any indemnified party, and it notifies an indemnifying party
or parties of the commencement thereof, the indemnifying party or parties will
be entitled to participate therein, and to the extent it may elect by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to employ its
or their own counsel in any such case but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying parties in connection with the defense of such action at the
expense of the indemnifying party, (ii) the indemnifying parties shall not have
employed counsel reasonably satisfactory to such indemnified party to have
charge of the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action, investigation, inquiry, suit or
proceeding on behalf of the indemnified party or parties), in any of which
events such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action, investigation, inquiry, suit or proceeding or separate but
similar or related actions, investigations, inquiries, suits or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances. Anything in this Section 7 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or action
effected without its written consent; provided, however, that such consent was
not unreasonably withheld. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle compromise or consent to the
entry of any judgment with respect to any pending or threatened claim, action,
investigation, inquiry, suit or proceeding in respect of which indemnification
or contribution may be sought hereunder (whether or not the indemnified parties
are actual or potential parties to such claim or action), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party form all liability arising out of such claim, action, suit or
proceeding and (ii) doe snot include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(d) In order to provide for just and equitable contribution in any case in
which (i) an indemnified party makes claim for indemnification pursuant to this
Section 7, but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that the express provisions of
this Section 7 provide for indemnification in such case, or (ii) contribution
under
<PAGE>
the Act may be required on the part of any indemnified party, then each
indemnifying party shall contribute to the amount paid as a result of such
losses, claims, damages, expenses or liabilities (or actions, investigations,
inquiries, suits or proceedings in respect thereof) (A) in such proportion as is
appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand, from the offering of the Securities or (B) if the allocation
provided by clause (A) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each of the contributing
parties, on the one hand, and the party to be indemnified on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In any case where the Company is the contributing
party and the Underwriters are the indemnified party, the relative benefits
received by the Company on the one hand, and the Underwriters, on the other,
shall be deemed to be in the same proportion as the total net proceeds from the
offering of the Securities (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the Cover Page of the Prospectus. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, or by the
Underwriters, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, expenses or liabilities (or actions, investigations, inquiries,
suits or proceedings in respect thereof) referred to above in this subdivision
(d) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action, claim, investigation, inquiry, suit or proceeding. Notwithstanding the
provisions of this subdivision (d) the Underwriters shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Securities purchased by the Underwriters hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7, each person, if
any, who controls the Company within the meaning of the Act, each officer of the
Company who has signed the Registration Statement, and each director of the
Company shall have the same rights to contribution as the Company, subject in
each case to this subparagraph (d). Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit, inquiry,
investigation or proceeding against such party in respect to which a claim for
contribution may be made against another party or parties under this
subparagraph (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this subparagraph (d), or to
the extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All representations,
warranties and agreements contained in this Agreement or contained in
certificates of officers of
<PAGE>
the Company submitted pursuant hereto, shall be deemed to be representations,
warranties and agreements at the Closing Date and the Option Closing Date, as
the case may be, and such representations, warranties and agreements of the
Company and the indemnity agreements contained in Section 7 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter, the Company, any controlling person of any
Underwriter or the Company, and shall survive termination of this Agreement or
the issuance and delivery of the Securities to the Underwriters.
9. Effective Date.
(a) This Agreement shall become effective at 10:00 a.m., New York City
time, on the next full business day following the date hereof, or at such
earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Securities for sale to the
public; provided, however, that the provisions of Sections 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this Section 9, the
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Representative of telegrams to securities
dealers releasing such shares for offering or the release by the Representative
for publication of the first newspaper advertisement which is subsequently
published relating to the Securities.
10. Termination.
(a) Subject to subsection (b) of this Section 10, the Representative shall
have the right to terminate this Agreement, after the date hereof, (i) if any
domestic or international event or act or occurrence has materially disrupted,
or in the Representative's opinion will in the immediate future materially
adversely disrupt the financial markets; or (ii) any material adverse change in
the financial markets shall have occurred; or (iii) if trading generally shall
have been suspended or materially limited on or by, as the case may be, any of
the New York Stock Exchange, the American Stock Exchange, the National
Association of Securities Dealers, Inc., the Boston Stock Exchange, the Chicago
Board of Trade, the Chicago Board of Options Exchange, the Chicago Mercantile
Exchange, the Commission or any other government authority having jurisdiction;
or (iv) if trading of any of the securities of the Company shall have been
suspended, or any of the securities of the Company shall have been delisted, on
any exchange or in any over-the-counter market; or (v) if the United States
shall have become involved in a war or major hostilities, or if there shall have
been an escalation in an existing war or major hostilities or a national
emergency shall have been declared in the United States; or (vi) if a banking
moratorium has been declared by a state or federal authority; or (vii) if a
moratorium in foreign exchange trading has been declared; or (viii) if the
Company shall have sustained a loss material or substantial to the Company by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act which, whether or not such loss shall have been insured, will,
in the Representative's opinion, make it inadvisable to proceed with the
delivery of the Securities; or (viii) if there shall have occurred any outbreak
or escalation of hostilities or any calamity or crisis or there shall have been
such a material adverse change in the conditions or prospects of the Company, or
such material adverse change in the general market, political or economic
<PAGE>
conditions, in the United States or elsewhere as in the Representative's
judgment would make it inadvisable to proceed with the offering, sale and/or
delivery of the Securities.
(b) If this Agreement is terminated by the Representative in accordance
with the provisions of Section 10(a) the Company shall promptly reimburse and
indemnify the Representative for all of its actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriters (less
amounts previously paid pursuant to Section 5(c) above). Notwithstanding any
contrary provision contained in this Agreement, if this Agreement shall not be
carried out within the time specified herein, or any extension thereof granted
to the Representative, by reason of any failure on the part of the Company to
perform any undertaking or satisfy any condition of this Agreement by it to be
performed or satisfied (including, without limitation, pursuant to Section 6 or
Section 12) then, the Company shall promptly reimburse and indemnify the
Underwriter for all of their actual out-of-pocket expenses, including the fees
and disbursements of counsel for the Underwriter (less amounts previously paid
pursuant to Section 5(c) above). In addition, the Company shall remain liable
for all Blue Sky counsel fees and expenses and filing fees. Notwithstanding any
contrary provision contained in this Agreement, any election hereunder or any
termination of this Agreement (including, without limitation, pursuant to
Sections 6, 10 and 12 hereof), and whether or not this Agreement is otherwise
carried out, the provisions of Section 5 and Section 7 shall not be in any way
affected by such election or termination or failure to carry out the terms of
this Agreement or any part hereof.
11. Substitution of the Underwriters. If one or more of the Underwriters
shall fail otherwise than for a reason sufficient to justify the termination of
this Agreement (under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representative
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other Underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Representative shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the total
number of Firm Securities to be purchased on such date, the non-defaulting
Underwriters shall be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total number
of Firm Securities, this Agreement shall terminate without liability on the part
of any non-defaulting Underwriters.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default which does not result in a termination of
this Agreement, the Representative shall have the right to postpone the Closing
Date for a period not exceeding
<PAGE>
seven days in order to effect any required changes in the Registration Statement
or Prospectus or in any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the Closing Date
or at any Option Closing Date, as applicable, to sell and deliver the number of
Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Securities to be purchased on an Option Closing Date, the Underwriters
may at their option, by notice from the Underwriters or the Representative to
the Company, terminate the Underwriters' obligation to purchase Option
Securities from the Company on such date) without any liability on the part of
any non-defaulting party other than pursuant to Section 5, Section 7 and Section
10 hereof. No action taken pursuant to this Section shall relieve the Company
from liability, if any, in respect of such default.
13. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Representative shall be directed to the
Representative at 520 Madison Avenue, New York, New York 10022, Attention:
Timothy Ryan, with a copy to Orrick, Herrington & Sutcliffe LLP, 30 Rockefeller
Plaza, New York, New York 10112, Attention: Lawrence B. Fisher, Esq. Notices to
the Company shall be directed to the Company at 10850 Wilshire Boulevard, Suite
1260, Los Angeles, California 90024, Attention: Joshua D.J. Sharfman, with a
copy to Ehrenreich Eilenberg Krause & Zivian LLP, 11 East 44th Street, New York,
New York 10017, Attention: Adam D. Eilenberg, Esq.
14. Parties. This Agreement shall inure solely to the benefit of and shall
be binding upon, the Underwriters, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Securities from the Underwriters shall be deemed to be a successor
by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement and the Representative's
Warrant Agreement constitute the entire agreement of the parties hereto and
supersede all prior written or oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may not be amended
except in a writing, signed by the Representative and the Company.
<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
DIGITAL LAVA, INC.
By:
---------------------------------
Name:
Title:
Confirmed and accepted as of
the date first above written.
SECURITY CAPITAL TRADING, INC.
By:
---------------------------------
Name:
Title:
<PAGE>
SCHEDULE A
Underwriter Number of Units
- ----------- ---------------
Security Capital Trading, Inc.
TOTAL 1,200,000
A-1
EXHIBIT 3 (d)
<PAGE>
BY-LAWS
OF
DIGITAL LAVA INC.
(formerly LAVA INC.)
a Delaware corporation
ARTICLE I
OFFICES
The registered office shall be in the City of Wilmington, County of New
Castle, State of Delaware.
The corporation may also have offices at such other places both within and
without the State of Delaware as the board of directors may from time to time
determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 All meetings of the stockholders for the election of directors shall be
held in New York, NY, at such place as may be fixed from time to time by the
board of directors, or at such other place either within or without the State of
Delaware as shall be designated from time to time by the board of directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
2.2 Annual Meetings. Annual meetings of stockholders, commencing with the
year 1996, shall be held on the First Monday in November if not a legal holiday,
and if a legal holiday, then on the next business day following, at 10:00 a.m.,
or at such other date and time as shall be designated from time to time by the
board of directors and stated in the notice of the meeting, at which they shall
elect by a plurality vote a board of directors, and transact such other business
as may properly be brought before the meeting.
2.3 Annual Meeting Notices. Written notice of the annual meeting stating
the place, date and hour of the meeting shall be given to each stockholder
entitled to vote at such meeting not less than ten or more than sixty days
before the date of meeting.
2.4 Voting Lists. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list
<PAGE>
of the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
2.5 Special Meetings. Special meetings of the stockholders, for any purpose
or purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or the secretary at the request in writing of a majority of the board
of directors, or at the request in writing of stockholders owning capital stock
of the corporation representing a majority of the total votes entitled to be
cast by stockholders of the corporation. Such request shall state the purpose or
purposes of the proposed meeting.
2.6 Special Meeting Notices. Written notice of a special meeting stating
the place, date and hour of the meeting and the purpose or purposes for which
the meeting is called, shall be given not less than ten nor more than sixty days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
2.7 Quorum. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any questions brought before such meeting, unless the
question is one upon which by express provision of the statutes or of the
certificate of incorporation, a different vote is required in which case such
express provision shall govern and control the decision of such questions.
2.8 Voting of Shares. Unless otherwise specifically provided by statute or
the certificate of incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one vote for each share of the capital stock having
voting power held by such stockholder.
<PAGE>
2.9 Proxies. Each stockholder entitled to vote at a meeting of stockholders
or to express consent or dissent to corporate action in writing without a
meeting may authorize another person or persons to act for him or her by proxy,
but no proxy shall be voted or acted upon after three years from its date,
unless the proxy provides for a longer period.
2.10 Informal Action by Stockholders. Except as otherwise provided in the
certificate of incorporation and subject to the requirements of statute, any
action required or permitted to be taken at any annual or special meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of any corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE III
DIRECTORS
3.1 Number, Tenure and Qualifications. The number of directors which shall
constitute the whole board shall be such number of members, not less than One
(1) nor more than Seven (7), as the board of directors may from time to time
determine by resolution. The directors shall be elected at the annual meeting of
the stockholders, except as provided in section 3.2 of this Article, and each
director elected shall hold office until his or her successor is elected and
qualified, or until his or her earlier resignation or removal. Directors need
not be stockholders.
3.2 Vacancies. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and any director so chosen shall hold office until the next annual
election and until his or her successor is duly elected and shall qualify, or
until his or her earlier resignation or removal. If there are no directors in
office, then an election of directors may be held in the manner provided by
statute. If, at the time of filling any vacancy or newly created directorship,
the directors then in office shall constitute less than a majority of the whole
board (as constituted immediately prior to any such increase), the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten per cent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office.
3.3 General Powers. The business of the corporation shall be managed by its
board of directors which may exercise all such powers of the corporation and do
all such lawful acts and things as are not by statute or by certificate of
incorporation or by these by-laws directed or required to be exercised or done
by the stockholders.
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3.4 Meetings. The board of directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
3.5 First Meeting. The first meeting of each newly elected board of
directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix that time or place of such first meeting of the newly
elected board of directors, or in event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors, or as shall be specified in a
written waiver signed by all of the directors.
3.6 Regular Meetings. Regular meetings of the board of directors may be
held without notice at such time and at such place as shall from time to time be
determined by the board.
3.7 Special Meetings. Special meetings of the board of directors may be
called by the president on two days' notice to each director, either personally
or by mail or by telegram; special meetings shall be called by the president or
the secretary in a like manner and on like notice on the written request of two
directors.
3.8 Quorum. At all meetings of the board a majority of the directors shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the board of directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be present
at any meeting of the board of directors the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
3.9 Informal Action by Directors. Unless otherwise restricted by the
certificate of incorporation or these by-laws, any action required or permitted
to be taken at any meeting of the board of directors or of any committee thereof
may be taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the board or committee.
3.10 Participation by Conference Telephone. Unless otherwise restricted by
the certificate of incorporation or these by-laws, members of the board of
directors, or any committee designated by the board, may participate in a
meeting of the board or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
section shall constitute presence in person at such meeting.
3.11 Committees. The board of directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any
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meeting of the committee; provided, however, that, if the resolution of the
board of directors so provides, in the absence or disqualification of any such
member or alternate member of such committee or committees, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he, she or they constitute a quorum, may unanimously appoint another
member of the board of directors to act at the meeting in the place of any such
absent or disqualified member or alternate member. Any such committee, to the
extent provided in the resolution of the board of directors, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all the papers which may require it,
but no such committee shall have the power or authority in reference to amending
the certificate of incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution or amending the by-laws of the corporation; and, unless the
resolution expressly so provides, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the board of directors.
3.12 Meeting Minutes. Each committee shall keep regular minutes of its
meetings and report the same to the board of directors when required.
3.13 Compensation of Directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the board of directors and may be paid
a fixed sum for attendance at each meeting of the board of directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allow like compensation for attending
committee meetings.
ARTICLE IV
NOTICES
4.1 Written Notice. Whenever, under the provisions of the statutes or of
the certificate of incorporation or of these by-laws, notice is required to be
given to any director or stockholder, such notice shall be in writing and shall
be given in person or by mail to such director or stockholder. If mailed, such
notice shall be addressed to such director or stockholder at his or her address
as it appears on the records of the corporation, with postage thereon prepaid,
and shall be deemed to be given at the time when the same shall be deposited in
the United States mail. Notice to directors may also be given by telegram. If
notice be given by telegram, such notice shall be deemed to be delivered when
the telegram is delivered to the telegraph company.
4.2 Waiver of Notice. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, a waiver
<PAGE>
thereof in writing, signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto.
ARTICLE V
OFFICERS
5.1 Number. The officers of the corporation shall be chosen by the board of
directors and shall be a president, a treasurer and a secretary. The board of
directors may also choose vice-presidents, and one or more assistant treasurers
and assistant secretaries. The board of directors may appoint such other
officers and agents as it shall deem desirable who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board. Any number of offices may be held by
the same person, unless the certificate of incorporation or these by-laws
otherwise provide.
5.2 Election and Term of Office. The board of directors at its first
meeting after each annual meeting of stockholders shall choose a president, a
treasurer and a secretary. The officers of the corporation shall hold office
until their successors are chosen and qualify.
5.3 Removal. Any officer elected or appointed by the board of directors may
be removed at any time by the affirmative vote of a majority of the board of
directors.
5.4 Vacancies. Any vacancy occurring in any office of the corporation shall
be filled by the board of directors.
5.5 Salaries. The salaries of all officers of the corporation shall be
fixed by the board of directors.
5.6 The President. The president shall be the chief executive officer of
the corporation, shall preside at all meetings of the stockholders and the board
of directors, shall have general and active management of the business of the
corporation and shall see that all orders and resolutions of the board of
directors are carried into effect. The President shall execute bonds, mortgages,
and other contracts requiring a seal, under the seal of the corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated by
the board of directors to some other officer or agent of the corporation; the
president shall vote all shares of stock of any other corporation standing in
the name of this corporation except where the voting thereof shall be expressly
delegated by the board of directors to some other officer or agent of the
corporation; and in general shall perform all duties incident to the office of
the president and such other duties as may be prescribed by the board of
directors from time to time.
5.6 The Vice-Presidents. In the absence of the president or in the event of
his or her inability or refusal to act, the vice-president, if one shall be
elected (or in the event there be more than one vice-president, the
vice-presidents in the order designated, or in the absence of any designation,
then in the order of their election) shall perform the duties of the president,
and when so acting, shall have all the powers of and be subject to all the
restrictions upon the
<PAGE>
president. The vice-presidents shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.
5.7 The Treasurer. If required by the board of directors, the treasurer
shall give a bond for the faithful discharge of his or her duties in such sum
and with such surety or sureties as the board of directors shall determine. The
treasurer shall: (a) have charge and custody of and be responsible for all funds
and securities of the corporation; receive and give receipts for moneys due and
payable to the corporation from any source whatsoever, and deposit all such
moneys in the name of the corporation in such banks, trust companies or other
depositaries as shall be selected in accordance with the provisions of Article
VII of these by-laws; (b) in general perform all the duties incident to the
office of treasurer and such other duties as from time to time may be assigned
to him or her by the president or by the board of directors.
5.8 The Secretary. The secretary shall: (a) keep the minutes of the
stockholders' and of the board of directors' meetings in one or more books
provided for that purpose; (b) see that all notices are duly given in accordance
with the provisions of these by-laws or as required by law; (c) be custodian of
the corporate records and of the seal of the corporation and see that the seal
of the corporation is affixed to all certificates for shares prior to the issue
thereof and to all documents, the execution of which on behalf of the
corporation under its seal is duly authorized in accordance with the provisions
of these by-laws; (d) keep a register of the post office address of each
stockholder which shall be furnished to the secretary by such stockholder; (e)
have general charge of the stock transfer books of the corporation; (f) in
general perform all duties incident to the office of secretary and such other
duties as from time to time may be assigned to him or her by the president or by
the board of directors.
5.9 The Assistant Treasurers and Assistant Secretaries. The assistant
treasurers shall respectively, if required by the board of directors, give bonds
for the faithful discharge of their duties in such sums and with such surety or
sureties as the board of directors shall determine. The assistant treasurers and
assistant secretaries, in general, shall perform such duties as shall be
assigned to them by the treasurer or the secretary, respectively, or by the
president or the board of directors, and in the event of the absence, inability
or refusal to act of the treasurer or the secretary, the assistant treasurers
and assistant secretaries (in the order designated, or in the absence of any
designation, then in the order of their election) shall perform the duties of
the treasurer or the secretary, respectively.
ARTICLE VI
INTERESTED DIRECTORS AND OFFICERS
No contract or transaction between the corporation and one or more of its
directors or officers, or between the corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors or officers are directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the director
or officer is present at or participates in the meeting of the board of
directors or a committee thereof which authorizes the contract or transaction,
or solely because his, her or their votes are counted for such purpose, if:
<PAGE>
(a) The material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the board
of directors or the committee, and the board or committee in good faith
authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or
(b) The material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders without
counting the vote of any stockholder who is an interested director; or
(c) The contract or transaction is fair as to the corporation as of
the time it is authorized, approved or ratified, by the board of directors,
a committee thereof, or the stockholders.
The common or interested directors may be counted in determining the
presence of a quorum at a meeting of the board of directors or of a committee
which authorizes the contract or transaction.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
7.1 Right to Indemnification. Each person who was or is made a party or is
threatened to be made a party to or is involved in or called as a witness in any
Proceeding because he or she is an Indemnified Person, shall be indemnified and
held harmless by the corporation to the fullest extent permitted under the
Delaware General Corporation Law (the "DGCL"), as the same now exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the corporation to provide broader indemnification
rights than the DGCL permitted the corporation to provide prior to such
amendment). Such indemnification shall cover all expenses incurred by an
Indemnified Person (including, but not limited to, attorneys' fees and other
expenses of litigation) and all liabilities and losses (including, but not
limited to, judgments, fines, ERISA or other excise taxes or penalties and
amounts paid or to be paid in settlement) incurred by such person in connection
therewith.
Notwithstanding the foregoing, except with respect to indemnification
specified in section 7.3 of this Article, the corporation shall indemnify an
Indemnified Person in connection with a Proceeding (or part thereof) initiated
by such person only if such Proceeding (or part thereof) was authorized by the
board of directors of the corporation.
For purposes of this Article:
(a) a "Proceeding" is an action, suit or proceeding, whether civil,
criminal, administrative or investigative, and any appeal therefrom;
<PAGE>
(b) an "Indemnified Person" is a person who is, was, or had agreed to
become a director or an officer or a Delegate, as defined herein, of the
corporation or the legal representative of any of the foregoing; and
(c) a "Delegate" is a person serving at the request of the corporation
or a subsidiary of the corporation as a director, trustee, fiduciary, or
officer of such subsidiary or of another corporation, partnership, joint
venture, trust or other enterprise.
7.2 Expenses. Expenses, including attorneys' fees, incurred by a person
indemnified pursuant to section 7.1 of this Article in defending or otherwise
being involved in a Proceeding shall be paid by the corporation in advance of
the final disposition of such Proceeding, including any appeal therefrom, upon
receipt of an undertaking (the "Undertaking") by or on behalf of such person to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the corporation; provided, that in connection with
a Proceeding (or part thereof) initiated by such person, except a Proceeding
authorized by section 7.3 of this Article, the corporation shall pay said
expenses in advance of final disposition only if such Proceeding (or part
thereof) was authorized by the board of directors. A person to whom expenses are
advanced pursuant hereto shall not be obligated to repay pursuant to the
Undertaking until the final determination of any pending Proceeding in a court
of competent jurisdiction concerning the right of such person to be indemnified
or the obligation of such person to repay pursuant to the Undertaking.
7.3 Protection of Rights. If a claim under section 7.1 of this Article is
not promptly paid in full by the corporation after a written claim has been
received by the corporation or if expenses pursuant to section 7.2 of this
Article have not been promptly advanced after a written request for such
advancement accompanied by the Undertaking has been received by the corporation,
the claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim or the advancement of expenses. If
successful, in whole or in part, in such suit, such claimant shall also be
entitled to be paid the reasonable expense thereof. It shall be a defense to any
such action (other than an action brought to enforce a claim for expenses
incurred in defending any Proceeding in advance of its final disposition where
the required Undertaking has been tendered to the corporation) that
indemnification of the claimant is prohibited by law, but the burden of proving
such defense shall be on the corporation. Neither the failure of the corporation
(including its board of directors, independent legal counsel, or its
stockholders) to have made a determination, if required, prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances, nor an actual determination by the corporation (including its
board of directors, independent legal counsel, or its stockholders) that
indemnification of the claimant is prohibited, shall be a defense to the action
or create a presumption that indemnification of the claimant is prohibited.
7.4 Miscellaneous.
(a) Non-Exclusivity of Rights. The rights conferred on any person by this
Article shall not be exclusive of any other rights which such person may have or
hereafter acquire under any statute, provision of the certificate of
incorporation, by-law, agreement, vote of stockholders or
<PAGE>
disinterested directors or otherwise. The board of directors shall have the
authority, by resolution, to provide for such indemnification of employees or
agents of the corporation or others and for such other indemnification of
directors, officers or Delegates as it shall deem appropriate.
(b) Insurance, Contracts and Funding. The corporation may maintain
insurance, at its expense, to protect itself and any director, officer,
employee, or agent of, or person serving in any other capacity with, the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expenses, liabilities or losses, whether or not the
corporation would have the power to indemnify such person against such expenses,
liabilities or losses under the DGCL. The corporation may enter into contracts
with any director, officer or Delegate of the corporation in furtherance of the
provisions of this Article and may create a trust fund, grant a security
interest or use other means (including, without limitation, a letter of credit)
to ensure the payment of such amounts as may be necessary to effect the
advancing of expenses and indemnification as provided in this Article.
(c) Contractual Nature. The provisions of this Article shall be applicable
to all Proceedings commenced or continuing after its adoption, whether such
arise out of events, acts or omissions which occurred prior or subsequent to
such adoption, and shall continue as to a person who has ceased to be a
director, officer or Delegate and shall inure to the benefit of the heirs,
executors and administrators of such person. This Article shall be deemed to be
a contract between the corporation and each person who, at any time that this
Article is in effect, serves or agrees to serve in any capacity which entitles
him or her to indemnification hereunder and any repeal or other modification of
this Article or any repeal or modification of the DGCL or any other applicable
law shall not limit any Indemnified Person's entitlement to the advancement of
expenses or indemnification under this Article for Proceedings then existing or
later arising out of events, acts or omissions occurring prior to such repeal or
modification, including, without limitation, the right to indemnification for
Proceedings commenced after such repeal or modification to enforce this Article
with regard to Proceedings arising out of acts, omissions or events occurring
prior to such repeal or modification.
(d) Severability. If this Article or any portion hereof shall be
invalidated or held to be unenforceable on any ground by any court of competent
jurisdiction, the decision of which shall not have been reversed on appeal, such
invalidity or unenforceability shall not affect the other provisions hereof, and
this Article shall be construed in all respects as if such invalid or
unenforceable provisions had been omitted therefrom.
ARTICLE VIII
CERTIFICATES OF STOCK
8.1 Certificates of Stock. Every holder of stock in the corporation shall
be entitled to have a certificate, signed by, or in the name of the corporation
by the president or a vice-president and by the treasurer or an assistant
treasurer or the secretary or an assistant secretary of the corporation,
certifying the number of shares owned by him or her in the corporation. Any of
or all of the signatures on the certificate may be a facsimile. In case any
officer,
<PAGE>
transfer agent or register who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he or she were such officer, transfer
agent or registrar at the date of issue.
8.2 Lost Certificates. The board of directors may direct a new certificate
or certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the board of directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his or
her legal representative, to advertise the same in such manner it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificates alleged to have been lost, stolen or destroyed.
8.3 Transfers of Stock. Upon surrender to the corporation or the transfer
agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its book.
8.4 Fixing Record Date. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
8.5 Registered Stockholders. The corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner, and to hold liable for calls
and assessments a person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of Delaware.
<PAGE>
ARTICLE IX
GENERAL PROVISIONS
9.1 Dividends. Dividends upon the capital stock of the corporation, subject
to the provisions of the certificate of incorporation, if any, may be declared
by the board of directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation. Before payment of
any dividend, there may be set aside out of any funds of the corporation
available for dividends such sum or sums as the directors from time to time, in
their absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the corporation, or for such other purpose as the directors shall
think conducive to the interest of the corporation, and the directors may modify
or abolish any such reserve in the manner in which it was created.
9.2 Checks. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
9.3 Fiscal Year. The fiscal year of the corporation shall end on the last
day of December in each year.
9.4 Seal. The corporate seal shall have inscribed thereon the name of the
corporation and the words "Corporate Seal, Delaware". The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
ARTICLE X
AMENDMENTS
These by-laws may be altered, amended or repealed and new by-laws may be
adopted by the board of directors at any meeting of the board.
EXHIBIT 4 (a)
<PAGE>
FORM OF COMMON STOCK CERTIFICATE
[Front]
Number Shares
*** ***
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
DIGITAL LAVA INC.
PREFERRED STOCK 5,000,000 SHARES (PAR VALUE $.0001 EACH COMMON STOCK) 35,000,000
SHARES (PAR VALUE $.0001 EACH)
This Certifies that *********** is the owner of ********** fully paid and
non-assessable
SHARES OF THE COMMON STOCK OF DIGITAL LAVA INC.,
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon the surrender of this Certificate properly
endorsed.
The corporation will furnish without charge to each shareholder who so
requests, powers, designations, preferences and relative, participating optional
or other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and to be sealed with the Seal of the
Corporation, this *** day of ***** A.D. 19**.
/s/ Danny Gampe [Corporate Seal] /s/ Joshua D.J. Sharfman
- --------------- ------------------------
Secretary Chief Executive Officer
<PAGE>
[Back]
For Value Received, _________________ hereby sells, assign and transfer unto
____________ _________________________ Shares represented by the written
Certificate, and do hereby irrevocably constitute and appoint
______________________ Attorney to transfer the said Shares on the books of the
within named Corporation with full power of substitution in the premises.
Dated _________________________19__________
In the presence of
________________________________ ________________________________
THIS SPACE IS NOT TO BE COVERED IN ANY WAY
EXHIBIT 4 (d)
<PAGE>
DIGITAL LAVA INC.
a Delaware corporation
1996 Incentive and Non-Qualified Stock Option Plan
I. Purpose. The purposes of this 1996 Incentive and Non-Qualified Stock
Option Plan are to attract and retain the best available personnel, to provide
additional incentive to the Employees, Consultants, and Directors of DIGITAL
LAVA INC., a Delaware corporation (the "Company"), and to promote the success of
the Company's business.
Options granted hereunder may, consistent with the terms of this Plan, be
either Incentive Stock Options or Nonstatutory Stock Options, at the discretion
of the Committee and as reflected in the terms of the written option agreement.
II. Definitions. As used in this Plan, the following definitions shall
apply:
(A) "Board" means the Board of Directors of the Company.
(B) "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and the rules and regulations promulgated thereunder.
(C) "Commission" means the United States Securities and Exchange
Commission.
(D) "Committee" means the Committee appointed by the Board pursuant to
Section 4(a) of this Plan.
(E) "Common Stock" means the common stock of the Company, $.0001 par value
per share.
(F) "Consultant" means any person who is engaged by the Company or any
Parent or Subsidiary to render services and is compensated for such services.
(G) "Continuous Status as an Employee, Consultant or Director" means the
absence of any interruption or termination of service as an Employee, Consultant
or Director, as applicable. Continuous Status as an Employee, Consultant or
Director shall not be considered interrupted in the case of sick leave or
military leave, any other leave provided pursuant to a written policy of the
Company in effect at the time of determination, or any other leave of absence
approved by the Board or the Committee; provided that such leave is for a period
of not more than the greatest of (i) 90 days, (ii) the date of the resumption of
such service upon the expiration of such leave which is guaranteed by contract
or statute or is provided in a written policy of the Company which was in effect
upon the commencement of such leave, or (iii) such period of leave as may be
determined by the Board or the Committee in its sole discretion.
(H) "Director" means any member of the Board of Directors of the Company
who is not an Employee or Consultant.
<PAGE>
(I) "Employee" means any person employed by the Company or any Parent or
Subsidiary of the Company, including employees who are also officers or
directors or both of the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(J) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and the rules and regulations promulgated thereunder.
(K) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code, and the
rules and regulations promulgated thereunder.
(L) "Nonstatutory Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
(M) "Option" means a stock option granted pursuant to this Plan.
(N) "Optioned Stock" means the Common Stock subject to an Option.
(O) "Optionee" means an Employee, Consultant or Director who receives an
Option.
(P) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(Q) "Plan" means this Digital Lava Inc. 1996 Incentive and Non-Qualified
Stock Option Plan, as amended from time to time.
(R) "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission under
Section 16(b) of the Exchange Act, as such rule is amended from time to time and
as interpreted by the Commission.
(S) "Securities Act" means the Securities Act of 1933, as amended from time
to time, and the rules and regulations promulgated thereunder.
(T) "Share" means a share of the Common Stock, as adjusted in accordance
with Section 10 of this Plan.
(U) "Subsidiary" means a "subsidiary corporation," whether now or hereafter
existing, as defined in Section 424(f) of the Code.
III. Scope of Plan. Subject to the provisions of Section 10 of this Plan,
and unless otherwise amended by the Board and approved by the stockholders of
the Company as required by law, the maximum aggregate number of Shares issuable
under this Plan is 1,500,000, and such Shares are hereby made available and
shall be reserved for issuance under this Plan. The Shares may be authorized but
unissued, or reacquired, Common Stock.
<PAGE>
If an Option shall expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares subject thereto shall
(unless this Plan shall have terminated) become available for grants of other
Options under this Plan.
IV. Administration of Plan.
(A) Procedure. This Plan shall be administered by the Board, provided
however, if the Board, in the exercise of its discretion, creates a Committee
consisting of at least two members of the Board to administer this Plan, this
Plan may be administered by such Committee.
(B) Powers of Committee. Subject to the provisions of this Plan, the
Committee shall have full and final authority in its discretion to: (i) grant
Incentive Stock Options and Nonstatutory Stock Options, (ii) determine, upon
review of relevant information and in accordance with Section 7 below, the Fair
Market Value of the Common Stock; (iii) determine the exercise price per share
of Options to be granted, in accordance with this Plan, (iv) determine the
Employees and Consultants, to whom, and the time or times at which, Options
shall be granted, and the number of shares to be represented by each Option; (v)
cancel, with the consent of the Optionee, outstanding Options and grant new
Options in substitution therefor; (vi) interpret this Plan; (vii) accelerate or
defer (with the consent of Optionee) the exercise date of any Option; (viii)
prescribe, amend and rescind rules and regulations relating to this Plan; (ix)
determine the terms and provisions of each Option granted (which need not be
identical) by which Options shall be evidenced and, with the consent of the
holder thereof, modify or amend any provisions (including without limitation
provisions relating to the exercise price and the obligation of any Optionee to
sell purchased Shares to the Company upon specified terms and conditions) of any
Option; (x) require withholding from or payment by an Optionee of any federal,
state or local taxes; (xi) appoint and compensate agents, counsel, auditors or
other specialists as the Committee deems necessary or advisable; (xii) correct
any defect or supply any omission or reconcile any inconsistency in this Plan
and any agreement relating to any Option, in such manner and to such extent the
Committee determines to carry out the purposes of this Plan, and; (xiii)
construe and interpret this Plan, any agreement relating to any Option, and make
all other determinations deemed by the Committee to be necessary or advisable
for the administration of this Plan.
A majority of the Committee shall constitute a quorum at any meeting, and
the acts of a majority of the members present, or acts unanimously approved in
writing by the entire Committee without a meeting, shall be the acts of the
Committee. A member of the Committee shall not participate in any decisions with
respect to himself under this Plan.
(C) Effect of Committee's Decision. All decisions, determinations and
interpretations of the Committee shall be final and binding on all Optionees and
any other holders of any Options granted under this Plan.
V. Eligibility.
(A) Options may be granted to any Employee, Consultant, or Director as the
Committee may from time to time designate, provided that Incentive Stock Options
may be
<PAGE>
granted only to Employees. In selecting the individuals to whom Options shall be
granted, as well as in determining the number of Options granted, the Committee
shall take into consideration such factors as it deems relevant in connection
with accomplishing the purpose of this Plan. Subject to the provisions of
Section 3 above, an Optionee may, if he or she is otherwise eligible, be granted
an additional Option or Options if the Committee shall so determine.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. Notwithstanding
such designations, if and to the extent that the aggregate Fair Market Value of
the Shares with respect to which Options designated as Incentive Stock Options
are exercisable for the first time by any Optionee during any calendar year
(under all plans of the Company) exceeds $100,000, such options shall be treated
as Nonstatutory Stock Options. For purposes of this Section 5(b), Options shall
be taken into account in the order in which they are granted, and the Fair
Market Value of the Shares shall be determined as of the time the Option with
respect to such Shares is granted.
(c) This Plan shall not confer upon any Optionee any right with respect to
continuation of employment by or the rendition of services to the Company or any
Parent or Subsidiary, nor shall it interfere in any way with his or her right or
the right of the Company or any Parent or Subsidiary to terminate his or her
employment or services at any time, with or without cause. The terms of this
Plan or any Options granted hereunder shall not be construed to give any
Optionee the right to any benefits not specifically provided by this Plan or in
any manner modify the Company's right to modify, amend or terminate any of its
pension or retirement plans.
VI. Term of Plan. This Plan shall become effective upon the later to occur
of its adoption by the Board or its approval by vote of the holders of a
majority of the outstanding shares of the Company entitled to vote on the
adoption of this Plan, and shall terminate no later than December 1, 2006. No
grants shall be made under this Plan after the date of termination of this Plan.
Any termination, either partially or wholly, shall not affect any Options then
outstanding under this Plan.
VII. Exercise Price and Consideration.
(A) Exercise Price. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the Committee as
follows:
(1) In the case of an Incentive Stock Option granted to any Employee, the
per Share exercise price shall be no less than 100% of the Fair Market Value per
Share on the date of grant, but if granted to an Employee who, at the time of
the grant of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(2) In the case of a Nonstatutory Stock Option, the per Share exercise
price shall be a price determined by the Committee in its discretion, but if
granted to an Employee who, at
<PAGE>
the time of the grant of such Nonstatutory Stock Option, owns stock representing
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the per Share exercise price shall be no
less than 110% of the Fair Market Value per Share on the date of grant.
For purposes of this Section 7(a), if an Option is amended to reduce the
exercise price, the date of grant of such option shall thereafter be considered
to be the date of such amendment.
(3) With respect to (i) or (ii) above, the per Share exercise price is
subject to adjustment as provided in Section 10 below.
(B) Fair Market Value. The "Fair Market Value" of the Common Stock shall be
determined by the Committee in its discretion; provided, that if the Common
Stock is listed on a stock exchange, the Fair Market Value per Share shall be
the closing price on such exchange on the date of grant of the Option as
reported in the Wall Street Journal (or, (i) if not so reported, as otherwise
reported by the exchange, and (ii) if not reported on the date of grant, then on
the last prior date on which a sale of the Common Stock was reported); or if not
listed on an exchange but traded on the National Association of Securities
Dealers Automated Quotation National Market System ("NASDAQ"), the Fair Market
Value per Share shall be the closing price per share of the Common Stock for the
date of grant, as reported in the Wall Street Journal (or, (i) if not so
reported, as otherwise reported by NASDAQ, and (ii) if not reported on the date
of grant, then on the last prior date on which a sale of the Common Stock was
reported); or, if the Common Stock is otherwise publicly traded, the mean of the
closing bid price and asked price for the last known sale.
(C) Consideration. The consideration to be paid for the Shares to be issued
upon exercise of an Option, including the method of payment, shall be determined
by the Committee (and in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash; (2)
check; (3) the Optionee's personal interest-bearing full recourse promissory
note with such terms and provisions as the Committee may authorize (provided
that no person who is not an Employee of the Company may purchase Shares with a
promissory note); (4) other Shares of Common Stock which (X) either have been
owned by the Optionee for more than six (6) months on the date of surrender or
were not acquired directly or indirectly from the Company, and (Y) have a Fair
Market Value on the date of surrender (determined without regard to any
limitations on transferability imposed by securities laws) equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised; (5) any combination of such methods of payment; or (6) such other
consideration and method of payment for the issuance of Shares to the extent
permitted under applicable laws.
(D) Withholding. No later than the date as of which an amount first becomes
includable in the gross income of the Optionee for Federal income tax purposes
with respect to an option, the Optionee shall pay to the Company (or other
entity identified by the Committee), or make arrangements satisfactory to the
Company or other entity identified by the Committee regarding the payment of,
any Federal, state, local or foreign taxes of any kind required by law to be
withheld with respect to such amount required in order for the Company to obtain
a current deduction. Unless otherwise determined by the Committee, withholding
obligations
<PAGE>
may be settled with Common Stock, including Common Stock underlying the subject
option, provided that any applicable requirements under Section 16 of the
Exchange Act are satisfied so as to avoid liability thereunder. The obligations
of the Company under this Plan shall be conditional upon such payment or
arrangements, and the Company shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment otherwise due to the Optionee.
VIII. Options.
(A) Term of Option. The term of each Option granted shall be for a period
of no more than ten (10) years from the date of grant thereof or such shorter
term as may be provided in the Option agreement. However, in the case of an
Option granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant thereof or such shorter time as may be
provided in the Option Agreement.
(B) Exercise of Options.
(1) Procedure for Exercise; Rights as a Stockholder. Any Option granted
under this Plan shall be exercisable at such times and under such conditions as
determined by the Committee, including performance criteria with respect to the
Company and/or the Optionee, and as shall otherwise be permissible under the
terms of this Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Committee, consist of any
consideration and method of payment allowable under Section 7 of this Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 10 of this Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of this
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(2) Method of Exercise. An Optionee may exercise an Option, in whole or in
part, at any time during the option period by the Optionee's giving written
notice of exercise on a form provided by the Committee (if available) to the
Company specifying the number of shares
<PAGE>
of Common Stock subject to the Option to be purchased. Such notice shall be
accompanied by payment in full of the purchase price by cash or check or such
other form of payment as the Company may accept. If approved by the Committee,
payment in full or in part may also be made (A) by delivering Common Stock
already owned by the Optionee having a total Fair Market Value on the date of
such delivery equal to the exercise price of the subject Option; (B) by the
execution and delivery of a note or other evidence of indebtedness (and any
security agreement thereunder) satisfactory to the Committee; (C) by authorizing
the Company to retain shares of Common Stock which would otherwise be issuable
upon exercise of the Option having a total Fair Market Value on the date of
delivery equal to the exercise price of the subject Option; (D) by the delivery
of cash by a broker-dealer to whom the Optionee has submitted an irrevocable
notice of exercise (in accordance with Part 220, Chapter II, Title 12 of the
Code of Federal Regulations, so called "cashless" exercise); or (E) by any
combination of the foregoing. In the case of an Incentive Stock Option, the
right to make a payment in the form of already owned shares of Common Stock of
the same class as the Common Stock subject to the Option may be authorized only
at the time the Option is granted. No shares of Common Stock shall be issued
until full payment therefor has been made. An Optionee shall have all of the
rights of a stockholder of the Company holding the class of Common Stock that is
subject to such Option (including, if applicable, the right to vote the shares
and the right to receive dividends), when the Optionee has given written notice
of exercise, has paid in full for such shares and such shares have been recorded
on the Company's official stockholder records as having been issued or
transferred.
(3) Termination of Status as an Employee, Consultant or Director. If an
Optionee's Continuous Status as an Employee, Consultant or Director (as the case
may be) is terminated for any reason whatever, such Optionee may, but only
within such period of time as provided in the Option agreement, after the date
of such termination (but in no event later than the date of expiration of the
term of such Option as set forth in the Option agreement), exercise the Option
to the extent that such Employee, Consultant or Director was entitled to
exercise it at the date of such termination pursuant to the terms of the Option
agreement. To the extent that such Employee, Consultant or Director was not
entitled to exercise the Option at the date of such termination, or if such
Employee, Consultant or Director does not exercise such Option (which such
Employee, Consultant or Director was entitled to exercise) within the time
specified in the Option agreement, the Option shall terminate.
(4) Company Loan or Guarantee. Upon the exercise of any Option and subject
to the pertinent Option agreement and the discretion of the Committee, the
Company may at the request of the Optionee: (A) lend to the Optionee, with
recourse, an amount equal to such portion of the option exercise price as the
Committee may determine; or (B) guarantee a loan obtained by the Optionee from a
third-party for the purpose of tendering the option exercise price.
IX. Non-transferability of Options. An Option granted hereunder shall by
its terms not be sold, pledged, assigned, hypothecated, transferred, or disposed
of in any manner other than by will or the laws of descent and distribution. An
Option may be exercised during the Optionee's lifetime only by the Optionee.
<PAGE>
X. Adjustments Upon Changes in Capitalization or Merger.
(A) Capitalization. Subject to any required action by the stockholders of
the Company, the number of shares of Common Stock which have been authorized for
issuance under this Plan but as to which no Options have yet been granted or
which have been returned to this Plan upon cancellation or expiration of an
Option, and the number of shares of Common Stock subject to each outstanding
Option, as well as the price per share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock of the Company or the payment of a stock dividend with respect
to the Common Stock. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option.
(B) Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, each Option will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the
Committee. The Committee may, in the exercise of its sole discretion in such
instances, declare that any Option shall terminate as of a date fixed by the
Committee and give each Optionee the right to exercise his or her Option as to
all or any part of the Optioned Stock, including Shares as to which the Option
would not otherwise be exercisable.
(C) Sale or Merger. "Sale" means: (i) sale (other than a sale by the
Company) of securities entitled to more than 75% of the voting power of the
Company in a single transaction or a related series of transactions; or (ii)
sale of substantially all of the assets of the Company; or (iii) approval by the
stockholders of the Company of a reorganization, merger or consolidation of the
Company, as a result of which the persons who were the stockholders of the
Company immediately prior to such reorganization, merger or consolidation do not
own securities immediately after the reorganization, merger or consolidation
entitled to more than 50% of the voting power of the reorganized, merged or
consolidated company. Immediately prior to a Sale, each Optionee may exercise
his or her Option as to all Shares then subject to the Option, regardless of any
vesting conditions otherwise expressed in the Option. Voting power, as used in
this Section 10(c), shall refer to those securities entitled to vote generally
in the election of directors, and securities of the Company not entitled to vote
but which are convertible into, or exercisable for, securities of the Company
entitled to vote generally in the election of directors shall be counted as if
converted or exercised, and each unit of voting securities shall be counted in
proportion to the number of votes such unit is entitled to cast.
(D) Purchased Shares. No adjustment under this Section 10 shall apply to
any purchased Shares already deemed issued at the time any adjustment would
occur.
(E) Notice of Adjustments. Whenever the purchase price or the number or
kind of securities issuable upon the exercise of the Option shall be adjusted
pursuant to Section 10, the Company shall give each Optionee written notice
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, and the method by which such adjustment was
calculated.
<PAGE>
(f) Certain Cash Payments. If an Optionee would not be permitted to
exercise an Option or any portion thereof (for purposes of this subsection (f)
only, each such Option being referred to as a "Subject Option") or dispose of
the Shares received upon the exercise thereof without loss or liability (other
than a loss or liability for the exercise price, applicable withholding or any
associated transactional cost), or if the Board determines that the Optionee may
not be permitted to exercise the same rights or receive the same consideration
with respect to the Sale of the Company as a stockholder of the Company with
respect to any Subject Options or portion thereof or the Shares received upon
the exercise thereof, then notwithstanding any other provision of this Plan and
unless the Committee shall provide otherwise in an agreement with such Optionee
with respect to any Subject Options, such Optionee shall have the right, whether
or not the Subject Option is fully exercisable or may be otherwise realized by
the Optionee, by giving notice during the 60-day period from and after a Sale to
the Company, to elect to surrender all or part of any Subject Options to the
Company and to receive cash, within 30 days of such notice, in an amount equal
to the amount by which the "Sale Price" (as defined herein) per share of Common
Stock on the date of such election shall exceed the amount which the Optionee
must pay to exercise the Subject Options per share of Common Stock under such
Subject Options (the "Spread") multiplied by the number of shares of Common
Stock granted under the Subject Options as to which the right granted hereunder
shall be applicable and shall have been exercised; provided, however, that if
the end of such 60-day period from and after a Sale is within six months of the
date of grant of a Subject Option held by an Optionee (except an Optionee who
has deceased during such six month period) who is an officer or director of the
Company (within the meaning of Section 16(b) of the Exchange Act), such Subject
Option shall be canceled in exchange for a payment to the Optionee, effective on
the day which is six months and one day after the date of grant of such Subject
Option, equal to the Spread multiplied by the number of shares of Common Stock
granted under the Subject Option. With respect to any Optionee who is an officer
or director of the Company (within the meaning of Section 16(b) of the Exchange
Act), the 60-day period shall be extended, if necessary, to include the "window
period" of Rule 16(b)-3 which first commences on or after the date of the Sale,
and the Committee shall have sole discretion, if necessary, to approve the
Optionee's exercise hereunder and the date on which the Spread is calculated may
be adjusted, if necessary, to a later date if necessary to avoid liability to
such Optionee under Section 16(b). For purposes of the Plan, "Sale Price" means
the higher of (a) the highest reported sales price of a share of Common Stock in
any transaction reported on the principal exchange on which such shares are
listed or on NASDAQ during the 60-day period prior to and including the date of
a Sale or (b) if the Sale is the result of a tender or exchange offer or a
corporate transaction, the highest price per share of Common Stock paid in such
tender or exchange offer or a corporate transaction, except that, in the case of
Incentive Stock Options, such price shall be based only on the Fair Market Value
of the Common Stock on the date such Incentive Stock Option is exercised. To the
extent that the consideration paid in any such transaction described above
consists all or in part of securities or other non-cash consideration, the value
of such securities or other non-cash consideration shall be determined in the
sole discretion of the Committee.
(g) Mitigation of Excise Tax. If any payment or right accruing to an
Optionee under this Plan (without the application of this Section), either alone
or together with other payments or rights accruing to the Optionee from the
Company or an affiliate ("Total Payments") would constitute a "parachute
payment" (as defined in Section 280G of the Code and regulations
<PAGE>
thereunder), the Committee may in each particular instance determine to reduce
such payment or right to the largest amount or greatest right that will result
in no portion of the amount payable or right accruing under the Plan being
subject to an excise tax under Section 4999 of the Code or being disallowed as a
deduction under Section 280G of the Code, or take such other actions, or make
such other arrangements or payments with respect to any such payment or right as
the Committee may determine in the circumstances. Any such determination shall
be made by the Committee in the exercise of its sole discretion, and such
determination shall be conclusive and binding on the Optionee. The Optionee
shall cooperate as may be requested by the Committee in connection with the
Committee's determination, including providing the Committee with such
information concerning such Optionee as the Committee may deem relevant to its
determination.
XI. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Committee makes the determination granting
such Option. Notice of the determination shall be given to each Employee,
Consultant, or Director to whom an Option is so granted within a reasonable time
after the date of such grant. If the Committee cancels, with the consent of
Optionee, any Option granted under this Plan, and a new Option is substituted
therefor, the date that the canceled Option was originally granted shall be the
date used to determine the earliest date for exercising the new substituted
Option under Section 7 so that the Optionee may exercise the substituted Option
at the same time as if the Optionee had held the substituted Option since the
date the canceled Option was granted.
XII. Amendment and Termination of Plan.
(A) Amendment and Termination. The Board or the Committee may amend, waive
or terminate this Plan from time to time in such respects as it shall deem
advisable; provided that, to the extent necessary to comply with Rule 16b-3 or
with Section 422 of the Code (or any other successor or applicable law or
regulation), the Company shall obtain stockholder approval of any Plan amendment
in such a manner and to such a degree as is required by the applicable law, rule
or regulation.
(B) Effect of Amendment or Termination. Any such amendment or termination
of this Plan shall not affect Options already granted and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the
Committee, which agreement must be in writing and signed by the Optionee and the
Company.
XIII. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act,
the Exchange Act, and the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares
<PAGE>
are being purchased only for investment and without any present intention to
sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required by any of the aforementioned relevant
provisions of law.
XIV. Restrictions on Shares. Shares of Common Stock issued upon exercise of
an Option shall be subject to the terms and conditions specified herein and to
such other terms, conditions and restrictions as the Committee in its discretion
may determine or provide in the grant. The Company shall not be required to
issue or deliver any certificates for shares of Common Stock, cash or other
property prior to (A) the listing of such shares on any stock exchange (or other
public market) on which the Common Stock may then be listed (or regularly
traded), (B) the completion of any registration or qualification of such shares
under federal or state law, or any ruling or regulation of any government body
which the Committee determines to be necessary or advisable, and (C) the
satisfaction of any applicable withholding obligation in order for the Company
or an affiliate to obtain a deduction with respect to the exercise of an Option.
The Company may cause any certificate for any share of Common Stock to be
delivered to be properly marked with a legend or other notation reflecting the
limitations on transfer of such Common Stock as provided in this Plan or as the
Committee may otherwise require. The Committee may require any person exercising
an Option to make such representations and furnish such information as it may
consider appropriate in connection with the issuance or delivery of the shares
of Common Stock in compliance with applicable law or otherwise. Fractional
shares shall not be delivered, but shall be rounded to the next lower whole
number of shares.
XV. Stockholder Rights. No person shall have any rights of a stockholder as
to shares of Common Stock subject to an Option until, after proper exercise of
the Option or other action required, such shares shall have been recorded on the
Company's official stockholder records as having been issued or transferred.
Subject to the preceding Section and upon exercise of the Option or any portion
thereof, the Company will have thirty (30) days in which to issue the shares,
and the Optionee will not be treated as a stockholder for any purpose whatsoever
prior to such issuance. No adjustment shall be made for cash dividends or other
rights for which the record date is prior to the date such shares are recorded
as issued or transferred in the Company's official stockholder records, except
as provided herein or in an agreement.
XVI. Registration. If there has been a public offering, the Company may
register under the Securities Act the Common Stock delivered or deliverable
pursuant to Options on Commission Form S-8 if available to the Company for this
purpose (or any successor or alternate form that is substantially similar to
that form to the extent available to effect such registration), in accordance
with the rules and regulations governing such forms, as soon as such forms are
available for registration to the Company for this purpose. The Company will, if
it so determines, use its good faith efforts to cause the registration statement
to become effective as soon as possible and will file such supplements and
amendments to the registration statement as may be necessary to keep the
registration statement in effect until the earliest of (a) one year following
the expiration of the option period of the last Option outstanding, (b) the date
the Company is no longer a reporting company under the Exchange Act and (c) the
date all Optionees have disposed of all shares delivered pursuant to any Option.
The Company may delay the foregoing actions at any time and from time to time if
the Committee determines in
<PAGE>
its discretion that any such registration would materially and adversely affect
the Company's interests or if there is no material benefit to Optionees.
XVII. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to permit the exercise of all Options outstanding under this Plan.
The inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is deemed by the Company's counsel to be necessary
to the lawful issuance and sale of any Shares hereunder, shall relieve the
Company of any liability in respect of the failure to issue or sell such Shares
as to which such requisite authority shall not have been obtained for any
reason.
XVIII. Option Agreements. Options shall be evidenced by written Option
agreements in such form as the Committee shall approve.
XIX. Information to Optionees. To the extent required by applicable law,
the Company shall provide to each Optionee, during the period for which such
Optionee has one or more Options outstanding, copies of all annual reports and
other information which are provided to all stockholders of the Company. Except
as otherwise noted in the foregoing sentence, the Company shall have no
obligation or duty to affirmatively disclose to any Optionee, and no Optionee
shall have any right to be advised of, any material information regarding the
Company or any Parent or Subsidiary at any time prior to, upon or otherwise in
connection with, the exercise of an Option.
XX. Funding. Benefits payable under this Plan to any person shall be paid
directly by the Company. The Company shall not be required to fund or otherwise
segregate assets to be used for payment of benefits under this Plan.
XXI. Indemnification. In addition to such other rights of indemnification
as they may have as directors or as members of the Committee, the members of the
Committee shall be indemnified by the Company against the reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with this Plan or any option
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding; provided that within 60 days after institution of any such
action, suit or proceeding a Committee member shall in writing offer the Company
the opportunity, at its own expense, to handle and defend the same. The
foregoing right of indemnification shall not be exclusive and shall be
independent of any other rights of indemnification to which such persons may be
entitled under the Company's Certificate of Incorporation or by-laws, by
contract, as a matter of law, or otherwise.
XXII. Controlling Law. This Plan shall be governed by the laws of the State
of Delaware applicable to contracts made and performed wholly in Delaware
between Delaware residents.
EXHIBIT 4 (e)
<PAGE>
[40,000 - Millenium]
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of September 30, 1996, between LAVA, L.L.C., a
New Jersey limited liability company (the "Company"), and Millenium Capital
Management ("Holder").
Millenium has acted as a finder for the Company in connection with the
acquisition by Miracle Investment Co. ("Miracle") of 9 units of the Company's
securities ("Units"), each Unit consisting of a Senior Note in the denomination
of $50,000 and ten year warrants to purchase 50,000 units of ownership
("Ownership Interests") of the Company at an exercise price equal to $1.25 per
Ownership Interest and in connection therewith the Company has agreed to issue
to Millenium 20,000 ten year warrants at an exercise price of $1.25 per
Ownership Interest (the "$1.25 Warrants") and 20,000 ten year Warrants at an
exercise price of $2.00 per Ownership Interest (the $2.00 Warrants;
collectively, the "Warrants").
In consideration of the premises herein set forth and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Issue. The Company hereby issues to Holder two certificate (the "Warrant
Certificates") dated as of the date hereof providing Holder with the right to
purchase, at any time, until 5:30 p.m., New York time, on September 30, 2006,
40,000 Ownership Interests of the Company in the aggregate (the "Warrant
Ownership Interests") (subject to adjustment as provided in Section 8 hereof) at
an initial exercise price (subject to adjustment as provided in Section 8
hereof) of the 20,000 $1.25 Warrants equal to $1.25 per Ownership Interest and
of the 20,000 $2.00 Warrants equal to $2.00 per Ownership Interest.
2. Warrant Certificate. The Warrant Certificates to be delivered pursuant
to this Agreement shall be in the form set forth in Exhibit X, attached hereto
and made a part hereof, with such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by this
Agreement.
3. Exercisability of Warrants. The Warrants shall be immediately
exercisable.
4. [Intentionally Omitted]
5. Procedure for Exercise of Warrants.
5.1 Cash Exercise. The Warrants are exercisable at an aggregate initial
exercise price per Ownership Interest set forth in Section 8 hereof payable by
certified check or official bank check in New York Clearing House funds. Upon
surrender of a Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the Exercise Price (as hereinafter
defined) for the Warrant Ownership Interests purchased, at the Company's
principal offices in California (presently located at 10850 Wilshire Boulevard,
Suite 1260, Los Angeles, CA 90024) Holder shall be entitled to receive a
certificate for the
<PAGE>
Warrant Ownership Interests so purchased. The purchase rights represented by the
Warrant Certificate are exercisable at the option of the Holder thereof, in
whole or in part (but not as to fractional Ownership Interests underlying the
Warrants). In the case of the purchase of less than all the Warrant Ownership
Interest purchasable under the Warrant Certificate, the Company shall cancel
said Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the Warrant
Ownership Interests purchasable thereunder.
5.2 Cashless Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 5.1 above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Ownership Interests equal to the product of (x) the
number of Ownership Interests as to which the Warrants are being exercised
multiplied by (y) a fraction, the numerator of which is the Current Market Price
of the Ownership Interests (as defined below) less the Exercise Price then in
effect and the denominator of which is the Current Market Price.
5.3 Current Market Price. The term "Current Market Price" shall mean (i) if
the Ownership Interests (and/or other securities (including shares of Common
Stock of the Company following the conversion of the Company into a
corporation), properties or rights issuable upon exercise of the Warrants
(collectively referred to as "Other Securities")) are traded in the
over-the-counter market or on the National Association of Securities Dealers,
Inc. Automated Quotations System ("NASDAQ"), the average per Ownership Interest
(or equivalent unit of Other Securities) closing bid prices on the 20
consecutive trading days immediately preceding the date of exercise, as reported
by NASDAQ or an equivalent generally accepted reporting service, or (ii) if the
Ownership Interests (or Other Securities) are traded on a national securities
exchange, the average for the 20 consecutive trading days immediately preceding
the exercise date of the daily per Ownership Interest (or equivalent unit of
Other Securities) closing prices on the principal stock exchange on which the
Ownership Interests (or Other Securities) are listed, as the case may be. The
closing price referred to in clause (ii) above shall be the last reported sales
price or, if no such reported sale takes place on such day, the average of the
reported closing bid and asked prices, in either case on the national securities
exchange on which the Ownership Interests (or Other Securities) are then listed.
6. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Ownership Interests (or Other Securities) shall be
made forthwith (and in any event within five (5) business days thereafter)
without charge to the Holder thereof including, without limitation, any tax
which may be payable in respect of the issuance thereof, and such certificate
shall (subject to the provisions of Sections 7 and 9 hereof) be issued in the
name of, or in such names as may be directed by, the Holder thereof; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
such certificate in a name other than that of the Holder and the Company shall
not be required to issue or deliver such certificate unless or until the person
or persons requesting the issuance thereof shall have paid to the Company
<PAGE>
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
The Warrant Certificate and the certificate representing the Warrant
Ownership Interests (or Other Securities) shall be executed on behalf of the
Company by the manual or facsimile signature of the then present Chairman or
Vice Chairman of the Board of Directors or President or any Vice President of
the Company under its corporate seal reproduced thereon, attested to by the
manual or facsimile signature of the then present Secretary or any Assistant
Secretary of the Company. The Warrant Certificate shall be dated the date of
execution by the Company upon initial issuance, division, exchange, substitution
or transfer.
7. Transfer of Warrants. The Holder of the Warrant Certificate, by its
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof. The Warrants may
be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole
or in part, without restriction, subject to compliance with applicable
securities laws.
8. Exercise Price.
8.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 8 hereof, the initial exercise price of each Warrant shall be the price
set forth in Section 1 hereof per Warrant Ownership Interests issued thereunder.
The adjusted exercise price shall be the price which shall result from time to
time from any and all adjustments of the initial exercise price in accordance
with the provisions of Section 10 hereof.
8.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
9. Registration Under the Securities Act of 1933. The Warrants, the Warrant
Ownership Interests and any of the Other Securities issuable upon exercise of
the Warrants have not been registered under the Securities Act of 1933, as
amended (the "Act"). Upon exercise, in whole or in part, of the Warrants, a
certificate representing the Warrant Ownership Interests underlying the
Warrants, and any of the Other Securities issuable upon exercise of the Warrants
(collectively, the "Warrant Securities") shall bear the following legend unless
such Warrant Ownership Interests previously have been registered under the Act
in accordance with the terms hereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR
ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES),
OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY
SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION
UNDER THE ACT IS AVAILABLE.
<PAGE>
Notwithstanding the foregoing, the Warrant Ownership Interests issuable
upon the exercise of the Warrants are entitled to certain registration rights as
more fully described in the Registration Agreement dated as of the date hereof
between the Company and Miracle, which is hereby incorporated herein by
reference in full. The Company agrees that the Warrant Ownership Interests shall
be deemed "Registrable Securities" thereunder.
10. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Ownership Interests purchasable
upon the exercise of the Warrants, shall be subject to adjustment from time to
time upon the occurrence of certain events described in this Section 10.
10.1 Subdivision or Combination of Ownership Interests and Ownership
Interest Dividend. In case the Company shall at any time subdivide its
outstanding Ownership Interests into a greater number of Ownership Interests or
declare a dividend upon its Ownership Interests payable solely in Ownership
Interests, the Exercise Price in effect immediately prior to such subdivision or
declaration shall be proportionately reduced, and the number of Warrant
Ownership Interests issuable upon exercise of the Warrants shall be
proportionately increased. Conversely, in case the outstanding Ownership
Interests of the Company shall be combined into a smaller number of Ownership
Interests, the Exercise Price in effect immediately prior to such combination
shall be proportionately increased, and the number of Warrant Ownership
Interests issuable upon exercise of the Warrants shall be proportionately
reduced.
10.2 Dilutive Issuances. In the event that the Company shall sell or issue
at any time after the date of this Warrant and prior to its termination,
Ownership Interests (other than Excluded Ownership Interests, as defined in
Section 10.2.5) at a consideration per Ownership Interest less than $1.00, then
the Exercise Price shall be adjusted to a new Exercise Price (calculated to the
nearest cent) determined by dividing
(a) an amount equal to (i) the total number of Ownership Interests
Outstanding (as defined below and subject to adjustment in the manner set forth
in Section 10.1) on the date of issuance of this Warrant multiplied by the
Exercise Price in effect on the date of issuance of this Warrant (subject,
however, to adjustment in the manner set forth in Section 10.1), plus (ii) the
aggregate of the amount of all consideration, if any, received by the Company
for the issuance or sale of Ownership Interests since the date of issuance of
this Warrant, by
(b) the total number of Ownership Interests Outstanding immediately after
such issuance or sale.
In no event shall any such adjustment be made pursuant to this Section 10.2
if it would increase the Exercise Price in effect immediately prior to such
adjustment, except as provided in Sections 10.2.3 and 10.2.4. Upon each
adjustment of the Exercise Price pursuant to this Section 10.2, the holder of
this Warrant shall thereafter be entitled to purchase, at the Exercise Price
resulting from such adjustment, the number of Warrant Ownership Interests
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Ownership Interests purchasable pursuant
hereto immediately prior to such adjustment, and dividing the product thereof by
the Exercise Price resulting from such adjustment.
<PAGE>
10.2.1 Definitions. For purposes of this Section 10.2, the following
definitions shall apply:
(a) "Convertible Securities" shall mean any indebtedness or securities
convertible into or exchangeable for Ownership Interests.
(b) "Options" shall mean any rights, warrants or options to subscribe for
or purchase Ownership Interests or Convertible Securities other than rights,
warrants or options to purchase Excluded Securities (as defined in Section
10.2.5).
(c) "Ownership Interests Outstanding" shall mean the aggregate of all
Ownership Interests outstanding and all Ownership Interests issuable upon
exercise of all outstanding Options and conversion of all outstanding
Convertible Securities.
10.2.2 For the purposes of this Section 10.2, the following provisions
shall also be applicable:
10.2.2.1 Cash Consideration. In case of the issuance or sale of additional
Ownership Interests for cash, the consideration received by the Company therefor
shall be deemed to be the amount of cash received by the Company for such
Ownership Interests (or, if such Ownership Interests are offered by the Company
for subscription, the subscription price, or, if such Ownership Interests are
sold to underwriters or dealers for public offering without a subscription
offering, the public offering price), without deducting therefrom any
compensation or discount paid or allowed to underwriters or dealers or others
performing similar services or for any expenses incurred in connection
therewith.
10.2.2.2 Non-Cash Consideration. In case of the issuance (otherwise than
upon conversion or exchange of Convertible Securities) or sale of additional
Ownership Interests, Options or Convertible Securities for a consideration other
than cash or a consideration a part of which shall be other than cash, the fair
value of such consideration as determined by the Board of Directors (if any,
otherwise by the Managers) of the Company in the good faith exercise of its
business judgment, irrespective of the accounting treatment thereof, shall be
deemed to be the value, for purposes of this Section 10, of the consideration
other than cash received by the Company for such securities.
10.2.2.3 Options and Convertible Securities. In case the Company shall in
any manner issue or grant any Options or any Convertible Securities, the total
maximum number of Ownership Interests of issuable upon the exercise of such
Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities at the time such Convertible Securities first become
convertible or exchangeable shall (as of the date of issue or grant of such
Options or, in the case of the issue or sale of Convertible Securities other
than where the same are issuable upon the exercise of Options, as of the date of
such issue or sale) be deemed to be issued and to be outstanding for the purpose
of this Section 10.2 and to have been issued for the sum of the amount (if any)
paid for such Options or Convertible Securities and the amount (if any) payable
upon the exercise of such Options or upon conversion or exchange of such
Convertible Securities at the time such Convertible Securities first become
convertible or exchangeable; provided that, subject to the provisions of Section
10.2.3, no
<PAGE>
further adjustment of the Exercise Price shall be made upon the actual issuance
of any such Ownership Interests or Convertible Securities or upon the conversion
or exchange of any such Convertible Securities.
10.2.3 Change in Option Price or Conversion Rate. In the event that the
purchase price provided for in any Option referred to in subsection 10.2.2.3, or
the rate at which any Convertible Securities referred to in subsection 10.2.2.3
are convertible into or exchangeable for Ownership Interests shall change at any
time (other than under or by reason of provisions designed to protect against
dilution), then, for purposes of any adjustment required by Section 10.2, the
Exercise Price in effect at the time of such event shall forthwith be readjusted
to the Exercise Price that would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate, as the case may be,
at the time initially granted, issued or sold, provided that if such
readjustment is an increase in the Exercise Price, such readjustment shall not
exceed the amount (as adjusted by Sections 10.1 and 10.2) by which the Exercise
Price was decreased pursuant to Section 10.2 upon the issuance of the Option or
Convertible Security. In the event that the purchase price provided for in any
such Option referred to in subsection 10.2.2.3, or the additional consideration
(if any) payable upon the conversion or exchange of any Convertible Securities
referred to in subsection 10.2.2.3, or the rate at which any Convertible
Securities referred to in subsection 10.2.2.3 are convertible into or
exchangeable for Ownership Interests, shall be reduced at any time under or by
reason of provisions with respect thereto designed to protect against dilution,
then in case of the delivery of Ownership Interests upon the exercise of any
such Option or upon conversion or exchange of any such Convertible Security; the
Exercise Price then in effect hereunder shall, upon issuance of such Ownership
Interests, be adjusted to such amount as would have obtained had such Option or
Convertible Security never been issued and had adjustments been made only upon
the issuance of the Ownership Interests delivered as aforesaid and for the
consideration actually received for such Option or Convertible Security and the
Ownership Interests, provided that if such readjustment is an increase in the
Exercise Price, such readjustment shall not exceed the amount (as adjusted by
Sections 10.1 and 10.2) by which the Exercise Price was decreased pursuant to
Section 10.2 upon the issuance of the Option or Convertible Security.
10.2.4 Termination Of Option or Conversion Rights. In the event of the
termination or expiration of any right to purchase Ownership Interests under any
Option granted after the date of this Warrant or of any right to convert or
exchange Convertible Securities issued after the date of this Warrant, the
Exercise Price shall, upon such termination, be readjusted to the Exercise Price
that would have been in effect at the time of such expiration or termination had
such Option or Convertible Security, to the extent outstanding immediately prior
to such expiration or termination, never been issued, and the Ownership
Interests issuable thereunder shall no longer be deemed to be Ownership
Interests Outstanding, provided that if such readjustment is an increase in the
Exercise Price, such readjustment shall not exceed the amount (as adjusted by
Sections 10.1 and 10.2) by which the Exercise Price was decreased pursuant to
Section 10.2 upon the issuance of the Option or Convertible Security. The
termination or expiration of any right to purchase Ownership Interests under any
Option granted prior to the date of this Warrant or of any right to convert or
exchange Convertible Securities issued prior to the date of this Warrant shall
not trigger any adjustment to the Exercise Price, but the Ownership Interests
issuable under such Options or Convertible
<PAGE>
Securities shall no longer be counted in determining the number of Ownership
Interests Outstanding on the date of issuance of this Warrant for purposes of
subsequent calculations under this Section 10.2.
10.2.5 Excluded Ownership Interests. Notwithstanding anything herein to the
contrary, the Exercise Price shall not be adjusted pursuant to this Section 10.2
by virtue of the issuance and/or sale of Excluded Ownership Interests, which
shall mean the following: (a) Ownership Interests issuable upon the exercise of
the Warrants; (b) Ownership Interests, Options or Convertible Securities to be
issued and/or sold to employees, advisors (including, without limitation,
financial, technical and legal advisers), directors, or officers of, or
consultants to, the Company or any of its subsidiaries pursuant to a Ownership
Interest grant, Ownership Interest option plan, Ownership Interest purchase
plan, pension or profit sharing plan or other Ownership Interest agreement or
arrangement existing as of the date hereof or approved by the Company's Board of
Directors (if any, otherwise by the Managers); (c) the issuance of Ownership
Interests, Options and/or Convertible Securities pursuant to Options and
Convertible Securities outstanding as of the date of this Warrant; (d) the
issuance of Ownership Interests, Options or Convertible Securities as a
Ownership Interest dividend or upon any subdivision or combination of Ownership
Interest or Convertible Securities; (e) the issuance of Ownership Interests,
Options or Convertible Securities in connection with strategic partnerships or
other business and/or product consolidations or joint ventures and (f) the
issuance of Ownership Interests, Options or Convertible Securities by the
Company in connection with a contemplated equity financing currently in progress
as of the date hereof. For all purposes of this Section 10.2, all Ownership
Interests of Excluded Ownership Interests shall be deemed to have been issued
for an amount of consideration per Ownership Interest equal to the initial
Exercise Price (subject to adjustment in the manner set forth in Section 10.1).
In addition, if the amount of any adjustment pursuant to this Section 10 shall
be less than two cents (2(cent)) per Warrant Ownership Interest no adjustment to
the Exercise Price or to the number of Warrant Ownership Interests issuable upon
the exercise of the Warrants shall be made; provided, however, that in such case
any adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to at least two cents (2(cent)) per Warrant Ownership Interest.
10.3 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Ownership Interests
purchasable upon the exercise of this Warrant, the Company shall give written
notice thereof, by first class mail, postage prepaid, addressed to the
registered holder of this Warrant at the address of such holder as shown on the
books of the Company. The notice shall be signed by the Company's chief
financial officer and shall state (i) the effective date of the adjustment and
the Exercise Price resulting from such adjustment and (ii) the increase or
decrease, if any, in the number of Ownership Interests purchasable at such price
upon the exercise of this Warrant, setting forth in reasonable detail the method
of calculation and the facts upon which such calculation is based.
10.4 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Ownership
Interests;
<PAGE>
(b) the Company shall declare any dividend upon its Ownership Interests
payable in securities (other than a dividend payable solely in Ownership
Interests) or make any special dividend or other distribution to the holders of
its Ownership Interests;
(c) there shall be any consolidation or merger of the Company with another
corporation, or a sale of all or substantially all of the Company's assets to
another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company, (i)
at least 15 days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote in respect of any such
dissolution, liquidation or winding-up; (ii) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 15 days' written notice
of the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
distribution or option rights, the date on which the holders of Ownership
Interests shall be entitled thereto. Any notice given in accordance with clause
(iii) above shall also specify the date on which the holders of Ownership
Interests shall be entitled to exchange their Ownership Interests for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, as the case
may be. If the Holder of the Warrant does not exercise this Warrant prior to the
occurrence of an event described above, except as provided in Sections 10.1 and
10.5, the Holder shall not be entitled to receive the benefits accruing to
existing holders of the Ownership Interests in such event.
10.5 Changes in Ownership Interests. In case at any time the Company shall
be a party to any transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the Company's assets or
recapitalization of the Ownership Interests) in which the previously outstanding
Ownership Interests shall be changed into or exchanged for different securities
of the Company or common stock or other securities of another corporation or
interests in a non-corporate entity or other property (including cash) or any
combination of any of the foregoing (each such transaction being herein called
the "Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then, as a condition of the consummation of the
Transaction, lawful and adequate provisions shall be made so that each Holder,
upon the exercise hereof at any time on or after the Consummation Date, shall be
entitled to receive, and this Warrant shall thereafter represent the right to
receive, in lieu of the Ownership Interests issuable upon such exercise prior to
the Consummation Date, the highest amount of securities or other property to
which such Holder would actually have been entitled as a holder of an Ownership
Interest upon the consummation
<PAGE>
of the Transaction if such Holder had exercised such Warrant immediately prior
thereto. The provisions of this Section 10.5 shall similarly apply to successive
Transactions.
11. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Ownership Interest in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
12. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Ownership Interests upon the
exercise of the Warrants, nor shall it be required to issue scrip or pay cash in
lieu of fractional interests, it being the intent of the parties that all
fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of Ownership Interests or Other Securities.
13. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized Ownership Interests, solely for the purpose
of issuance upon the exercise of the Warrants, such number of Ownership
Interests or Other Securities as shall be issuable upon the exercise thereof.
The Company covenants and agrees that, upon exercise of the Warrants and payment
of the Exercise Price therefor, all Ownership Interests or Other Securities
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any holder of
Ownership Interests.
14. Notices to Warrant Holder. Except as otherwise provided in Section
10.4, nothing contained in this Agreement shall be construed as conferring upon
the Holder by virtue of his holding the Warrant the right to vote or to consent
or to receive notice as a holder of an Ownership Interest in respect of any
meetings of such holders for the election of directors or any other matter, or
as having any rights whatsoever as such a holder of the Company.
15. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly made and sent when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
<PAGE>
(b) If to the Company, to the address set forth in Section 5 hereof or
to such other address as the Company may designate by notice to the Holder.
16. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.
17. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective successors and assigns hereunder. Any reference herein to the
"Company" shall include any corporation which is a successor to the limited
liability company structure currently used by the Company.
18. Termination. This Agreement shall terminate at the close of business on
the tenth anniversary of the issuance of the Warrants.
19. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
the State of New York without giving effect to the rules of the State of New
York governing the conflicts of laws.
20. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
21. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
22. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
23. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.
24. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be
duly executed, as of the day and year first above written.
LAVA, L.L.C.
By: /s/ Roger Berman
-------------------------------
Authorized Officer
HOLDER: MILLENIUM CAPITAL
MANAGEMENT
By: /s/ Alex Sheyfer
------------------------------
Name: Alex Sheyfer
Title: President
<PAGE>
EXHIBIT X
TO
WARRANT AGREEMENT
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
EXERCISABLE UNTIL
5:30 P.M., NEW YORK TIME, SEPTEMBER 30, 2006
No. W-LAVA-[302][303] [20,000][20,000] Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that Millenium Capital Management or its
registered assigns ("Holder"), is the registered holder of [20,000][20,000]
Warrants to purchase initially at any time until 5:30 p.m. New York time on
September 30, 2006 ("Expiration Date"), up to 450,000 fully-paid and
non-assessable economic ownership interests ("Ownership Interests") of LAVA,
L.L.C., a New Jersey limited liability company (the "Company"), at the initial
exercise price, subject to adjustment in certain events (the "Exercise Price"),
equal to [$1.25][2.00] per Ownership Interest upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the Warrant
Agreement dated as of the date hereof between the Company and Holder (the
"Warrant Agreement"). Payment of the Exercise Price shall be made by certified
check or official bank check in New York Clearing House funds payable to the
order of the Company, unless exercise is made pursuant to Section 5.2 of the
Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities
<PAGE>
thereunder of the Company and the Holder (the word "Holder" meaning the
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificate
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.
Dated as of September __, 1996
LAVA, L.L.C.
By: /s/ Roger Berman
-----------------------------
Authorized Officer
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________ Ownership
Interests and herewith tenders in payment for such securities a certified check
or official bank check payable in New York Clearing House Funds to the order of
LAVA, L.L.C. in the amount of $ , all in accordance with the terms of Section 5
of the Warrant Agreement dated as of September 30, 1996 between Lava, L.L.C. and
the undersigned (or its assignor). The undersigned requests that a certificate
for such securities be registered in the name of ____________________ whose
address is ____________________ and that such Certificate be delivered to
____________________ whose address is ____________________.
Dated:
Signature _____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
_______________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ___________ hereby
sells, assigns and transfers unto
_____________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ______ Attorney, to transfer
the within Warrant Certificate on the books of the within-named Company, with
full power of substitution.
Dated: ________________
Signature _____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
_______________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
EXHIBIT 4 (f)
<PAGE>
[450,000]
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of September 30, 1996, between LAVA, L.L.C., a
New Jersey limited liability company (the "Company"), and Miracle Investment Co.
("Holder").
Pursuant to a letter agreement of even date hereof between the Company and
Holder, Holder has acquired 9 units of the Company's securities ("Units"), each
Unit consisting of a Senior Note in the denomination of $50,000 and ten year
warrants (the "Warrants") to purchase 50,000 units of ownership ("Ownership
Interests") of the Company at an exercise price equal to $1.25 per Ownership
Interest.
In consideration of the premises herein set forth and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Issue. The Company hereby issues to Holder a certificate (the "Warrant
Certificate") dated as of the date hereof providing Holder with the right to
purchase, at any time, until 5:30 p.m., New York time, on September 30, 2006,
450,000 Ownership Interests of the Company (the "Warrant Ownership Interests")
(subject to adjustment as provided in Section 8 hereof) at an initial exercise
price (subject to adjustment as provided in Section 8 hereof) equal to $1.25 per
Ownership Interest.
2. Warrant Certificate. The Warrant Certificate to be delivered pursuant to
this Agreement shall be in the form set forth in Exhibit X, attached hereto and
made a part hereof, with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Agreement.
3. Exercisability of Warrants. The Warrants shall be immediately
exercisable.
4. [Intentionally Omitted]
5. Procedure for Exercise of Warrants.
5.1 Cash Exercise. The Warrants are exercisable at an aggregate initial
exercise price per Ownership Interest set forth in Section 8 hereof payable by
certified check or official bank check in New York Clearing House funds. Upon
surrender of a Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the Exercise Price (as hereinafter
defined) for the Warrant Ownership Interests purchased, at the Company's
principal offices in California (presently located at 10850 Wilshire Boulevard,
Suite 1260, Los Angeles, CA 90024) Holder shall be entitled to receive a
certificate for the Warrant Ownership Interests so purchased. The purchase
rights represented by the Warrant Certificate are exercisable at the option of
the Holder thereof, in whole or in part (but not as to fractional Ownership
Interests underlying the Warrants). In the case of the purchase of less than all
the Warrant Ownership Interest purchasable under the
<PAGE>
Warrant Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrant Ownership Interests purchasable
thereunder.
5.2 Cashless Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 5.1 above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Ownership Interests equal to the product of (x) the
number of Ownership Interests as to which the Warrants are being exercised
multiplied by (y) a fraction, the numerator of which is the Current Market Price
of the Ownership Interests (as defined below) less the Exercise Price then in
effect and the denominator of which is the Current Market Price.
5.3 Current Market Price. The term "Current Market Price" shall mean (i) if
the Ownership Interests (and/or other securities (including shares of Common
Stock of the Company following the conversion of the Company into a
corporation), properties or rights issuable upon exercise of the Warrants
(collectively referred to as "Other Securities")) are traded in the
over-the-counter market or on the National Association of Securities Dealers,
Inc. Automated Quotations System ("NASDAQ"), the average per Ownership Interest
(or equivalent unit of Other Securities) closing bid prices on the 20
consecutive trading days immediately preceding the date of exercise, as reported
by NASDAQ or an equivalent generally accepted reporting service, or (ii) if the
Ownership Interests (or Other Securities) are traded on a national securities
exchange, the average for the 20 consecutive trading days immediately preceding
the exercise date of the daily per Ownership Interest (or equivalent unit of
Other Securities) closing prices on the principal stock exchange on which the
Ownership Interests (or Other Securities) are listed, as the case may be. The
closing price referred to in clause (ii) above shall be the last reported sales
price or, if no such reported sale takes place on such day, the average of the
reported closing bid and asked prices, in either case on the national securities
exchange on which the Ownership Interests (or Other Securities) are then listed.
6. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Ownership Interests (or Other Securities) shall be
made forthwith (and in any event within five (5) business days thereafter)
without charge to the Holder thereof including, without limitation, any tax
which may be payable in respect of the issuance thereof, and such certificate
shall (subject to the provisions of Sections 7 and 9 hereof) be issued in the
name of, or in such names as may be directed by, the Holder thereof; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
such certificate in a name other than that of the Holder and the Company shall
not be required to issue or deliver such certificate unless or until the person
or persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
The Warrant Certificate and the certificate representing the Warrant
Ownership Interests (or Other Securities) shall be executed on behalf of the
Company by the manual or
<PAGE>
facsimile signature of the then present Chairman or Vice Chairman of the Board
of Directors or President or any Vice President of the Company under its
corporate seal reproduced thereon, attested to by the manual or facsimile
signature of the then present Secretary or any Assistant Secretary of the
Company. The Warrant Certificate shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
7. Transfer of Warrants. The Holder of the Warrant Certificate, by its
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof. The Warrants may
be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole
or in part, without restriction, subject to compliance with applicable
securities laws.
8. Exercise Price.
8.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 8 hereof, the initial exercise price of each Warrant shall be the price
set forth in Section 1 hereof per Warrant Ownership Interests issued thereunder.
The adjusted exercise price shall be the price which shall result from time to
time from any and all adjustments of the initial exercise price in accordance
with the provisions of Section 10 hereof.
8.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
9. Registration Under the Securities Act of 1933. The Warrants, the Warrant
Ownership Interests and any of the Other Securities issuable upon exercise of
the Warrants have not been registered under the Securities Act of 1933, as
amended (the "Act"). Upon exercise, in whole or in part, of the Warrants, a
certificate representing the Warrant Ownership Interests underlying the
Warrants, and any of the Other Securities issuable upon exercise of the Warrants
(collectively, the "Warrant Securities") shall bear the following legend unless
such Warrant Ownership Interests previously have been registered under the Act
in accordance with the terms hereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER
THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE
ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE.
10. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Ownership Interests purchasable
upon the exercise of the Warrants, shall be subject to adjustment from time to
time upon the occurrence of certain events described in this Section 10.
<PAGE>
10.1 Subdivision or Combination of Ownership Interests and Ownership
Interest Dividend. In case the Company shall at any time subdivide its
outstanding Ownership Interests into a greater number of Ownership Interests or
declare a dividend upon its Ownership Interests payable solely in Ownership
Interests, the Exercise Price in effect immediately prior to such subdivision or
declaration shall be proportionately reduced, and the number of Warrant
Ownership Interests issuable upon exercise of the Warrants shall be
proportionately increased. Conversely, in case the outstanding Ownership
Interests of the Company shall be combined into a smaller number of Ownership
Interests, the Exercise Price in effect immediately prior to such combination
shall be proportionately increased, and the number of Warrant Ownership
Interests issuable upon exercise of the Warrants shall be proportionately
reduced.
10.2 Dilutive Issuances. In the event that the Company shall sell or issue
at any time after the date of this Warrant and prior to its termination,
Ownership Interests (other than Excluded Ownership Interests, as defined in
Section 10.2.5) at a consideration per Ownership Interest less than $1.00, then
the Exercise Price shall be adjusted to a new Exercise Price (calculated to the
nearest cent) determined by dividing
(a) an amount equal to (i) the total number of Ownership Interests
Outstanding (as defined below and subject to adjustment in the manner set forth
in Section 10.1) on the date of issuance of this Warrant multiplied by the
Exercise Price in effect on the date of issuance of this Warrant (subject,
however, to adjustment in the manner set forth in Section 10.1), plus (ii) the
aggregate of the amount of all consideration, if any, received by the Company
for the issuance or sale of Ownership Interests since the date of issuance of
this Warrant, by
(b) the total number of Ownership Interests Outstanding immediately after
such issuance or sale.
In no event shall any such adjustment be made pursuant to this Section 10.2
if it would increase the Exercise Price in effect immediately prior to such
adjustment, except as provided in Sections 10.2.3 and 10.2.4. Upon each
adjustment of the Exercise Price pursuant to this Section 10.2, the holder of
this Warrant shall thereafter be entitled to purchase, at the Exercise Price
resulting from such adjustment, the number of Warrant Ownership Interests
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Ownership Interests purchasable pursuant
hereto immediately prior to such adjustment, and dividing the product thereof by
the Exercise Price resulting from such adjustment.
10.2.1 Definitions. For purposes of this Section 10.2, the following
definitions shall apply:
(a) "Convertible Securities" shall mean any indebtedness or securities
convertible into or exchangeable for Ownership Interests.
(b) "Options" shall mean any rights, warrants or options to subscribe for
or purchase Ownership Interests or Convertible Securities other than rights,
warrants or options to purchase Excluded Securities (as defined in Section
10.2.5).
<PAGE>
(c) "Ownership Interests Outstanding" shall mean the aggregate of all
Ownership Interests outstanding and all Ownership Interests issuable upon
exercise of all outstanding Options and conversion of all outstanding
Convertible Securities.
10.2.2 For the purposes of this Section 10.2, the following provisions
shall also be applicable:
10.2.2.1 Cash Consideration. In case of the issuance or sale of additional
Ownership Interests for cash, the consideration received by the Company therefor
shall be deemed to be the amount of cash received by the Company for such
Ownership Interests (or, if such Ownership Interests are offered by the Company
for subscription, the subscription price, or, if such Ownership Interests are
sold to underwriters or dealers for public offering without a subscription
offering, the public offering price), without deducting therefrom any
compensation or discount paid or allowed to underwriters or dealers or others
performing similar services or for any expenses incurred in connection
therewith.
10.2.2.2 Non-Cash Consideration. In case of the issuance (otherwise than
upon conversion or exchange of Convertible Securities) or sale of additional
Ownership Interests, Options or Convertible Securities for a consideration other
than cash or a consideration a part of which shall be other than cash, the fair
value of such consideration as determined by the Board of Directors (if any,
otherwise by the Managers) of the Company in the good faith exercise of its
business judgment, irrespective of the accounting treatment thereof, shall be
deemed to be the value, for purposes of this Section 10, of the consideration
other than cash received by the Company for such securities.
10.2.2.3 Options and Convertible Securities. In case the Company shall in
any manner issue or grant any Options or any Convertible Securities, the total
maximum number of Ownership Interests of issuable upon the exercise of such
Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities at the time such Convertible Securities first become
convertible or exchangeable shall (as of the date of issue or grant of such
Options or, in the case of the issue or sale of Convertible Securities other
than where the same are issuable upon the exercise of Options, as of the date of
such issue or sale) be deemed to be issued and to be outstanding for the purpose
of this Section 10.2 and to have been issued for the sum of the amount (if any)
paid for such Options or Convertible Securities and the amount (if any) payable
upon the exercise of such Options or upon conversion or exchange of such
Convertible Securities at the time such Convertible Securities first become
convertible or exchangeable; provided that, subject to the provisions of Section
10.2.3, no further adjustment of the Exercise Price shall be made upon the
actual issuance of any such Ownership Interests or Convertible Securities or
upon the conversion or exchange of any such Convertible Securities.
10.2.3 Change in Option Price or Conversion Rate. In the event that the
purchase price provided for in any Option referred to in subsection 10.2.2.3, or
the rate at which any Convertible Securities referred to in subsection 10.2.2.3
are convertible into or exchangeable for Ownership Interests shall change at any
time (other than under or by reason of provisions designed to protect against
dilution), then, for purposes of any adjustment required by Section 10.2, the
Exercise Price in effect at the time of such event shall forthwith be
<PAGE>
readjusted to the Exercise Price that would have been in effect at such time had
such Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or conversion rate, as the case
may be, at the time initially granted, issued or sold, provided that if such
readjustment is an increase in the Exercise Price, such readjustment shall not
exceed the amount (as adjusted by Sections 10.1 and 10.2) by which the Exercise
Price was decreased pursuant to Section 10.2 upon the issuance of the Option or
Convertible Security. In the event that the purchase price provided for in any
such Option referred to in subsection 10.2.2.3, or the additional consideration
(if any) payable upon the conversion or exchange of any Convertible Securities
referred to in subsection 10.2.2.3, or the rate at which any Convertible
Securities referred to in subsection 10.2.2.3 are convertible into or
exchangeable for Ownership Interests, shall be reduced at any time under or by
reason of provisions with respect thereto designed to protect against dilution,
then in case of the delivery of Ownership Interests upon the exercise of any
such Option or upon conversion or exchange of any such Convertible Security; the
Exercise Price then in effect hereunder shall, upon issuance of such Ownership
Interests, be adjusted to such amount as would have obtained had such Option or
Convertible Security never been issued and had adjustments been made only upon
the issuance of the Ownership Interests delivered as aforesaid and for the
consideration actually received for such Option or Convertible Security and the
Ownership Interests, provided that if such readjustment is an increase in the
Exercise Price, such readjustment shall not exceed the amount (as adjusted by
Sections 10.1 and 10.2) by which the Exercise Price was decreased pursuant to
Section 10.2 upon the issuance of the Option or Convertible Security.
10.2.4 Termination Of Option or Conversion Rights. In the event of the
termination or expiration of any right to purchase Ownership Interests under any
Option granted after the date of this Warrant or of any right to convert or
exchange Convertible Securities issued after the date of this Warrant, the
Exercise Price shall, upon such termination, be readjusted to the Exercise Price
that would have been in effect at the time of such expiration or termination had
such Option or Convertible Security, to the extent outstanding immediately prior
to such expiration or termination, never been issued, and the Ownership
Interests issuable thereunder shall no longer be deemed to be Ownership
Interests Outstanding, provided that if such readjustment is an increase in the
Exercise Price, such readjustment shall not exceed the amount (as adjusted by
Sections 10.1 and 10.2) by which the Exercise Price was decreased pursuant to
Section 10.2 upon the issuance of the Option or Convertible Security. The
termination or expiration of any right to purchase Ownership Interests under any
Option granted prior to the date of this Warrant or of any right to convert or
exchange Convertible Securities issued prior to the date of this Warrant shall
not trigger any adjustment to the Exercise Price, but the Ownership Interests
issuable under such Options or Convertible Securities shall no longer be counted
in determining the number of Ownership Interests Outstanding on the date of
issuance of this Warrant for purposes of subsequent calculations under this
Section 10.2.
10.2.5 Excluded Ownership Interests. Notwithstanding anything herein to the
contrary, the Exercise Price shall not be adjusted pursuant to this Section 10.2
by virtue of the issuance and/or sale of Excluded Ownership Interests, which
shall mean the following: (a) Ownership Interests issuable upon the exercise of
the Warrants; (b) Ownership Interests, Options or Convertible Securities to be
issued and/or sold to employees, advisors (including,
<PAGE>
without limitation, financial, technical and legal advisers), directors, or
officers of, or consultants to, the Company or any of its subsidiaries pursuant
to a Ownership Interest grant, Ownership Interest option plan, Ownership
Interest purchase plan, pension or profit sharing plan or other Ownership
Interest agreement or arrangement existing as of the date hereof or approved by
the Company's Board of Directors (if any, otherwise by the Managers); (c) the
issuance of Ownership Interests, Options and/or Convertible Securities pursuant
to Options and Convertible Securities outstanding as of the date of this
Warrant; (d) the issuance of Ownership Interests, Options or Convertible
Securities as a Ownership Interest dividend or upon any subdivision or
combination of Ownership Interest or Convertible Securities; (e) the issuance of
Ownership Interests, Options or Convertible Securities in connection with
strategic partnerships or other business and/or product consolidations or joint
ventures and (f) the issuance of Ownership Interests, Options or Convertible
Securities by the Company in connection with a contemplated equity financing
currently in progress as of the date hereof. For all purposes of this Section
10.2, all Ownership Interests of Excluded Ownership Interests shall be deemed to
have been issued for an amount of consideration per Ownership Interest equal to
the initial Exercise Price (subject to adjustment in the manner set forth in
Section 10.1). In addition, if the amount of any adjustment pursuant to this
Section 10 shall be less than two cents (2(cent)) per Warrant Ownership Interest
no adjustment to the Exercise Price or to the number of Warrant Ownership
Interests issuable upon the exercise of the Warrants shall be made; provided,
however, that in such case any adjustment that would otherwise be required then
to be made shall be carried forward and shall be made at the time of and
together with the next subsequent adjustment which, together with any adjustment
so carried forward, shall amount to at least two cents (2(cent)) per Warrant
Ownership Interest.
10.3 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Ownership Interests
purchasable upon the exercise of this Warrant, the Company shall give written
notice thereof, by first class mail, postage prepaid, addressed to the
registered holder of this Warrant at the address of such holder as shown on the
books of the Company. The notice shall be signed by the Company's chief
financial officer and shall state (i) the effective date of the adjustment and
the Exercise Price resulting from such adjustment and (ii) the increase or
decrease, if any, in the number of Ownership Interests purchasable at such price
upon the exercise of this Warrant, setting forth in reasonable detail the method
of calculation and the facts upon which such calculation is based.
10.4 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Ownership
Interests;
(b) the Company shall declare any dividend upon its Ownership Interests
payable in securities (other than a dividend payable solely in Ownership
Interests) or make any special dividend or other distribution to the holders of
its Ownership Interests;
(c) there shall be any consolidation or merger of the Company with another
corporation, or a sale of all or substantially all of the Company's assets to
another corporation; or
<PAGE>
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company, (i)
at least 15 days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote in respect of any such
dissolution, liquidation or winding-up; (ii) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 15 days' written notice
of the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
distribution or option rights, the date on which the holders of Ownership
Interests shall be entitled thereto. Any notice given in accordance with clause
(iii) above shall also specify the date on which the holders of Ownership
Interests shall be entitled to exchange their Ownership Interests for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, as the case
may be. If the Holder of the Warrant does not exercise this Warrant prior to the
occurrence of an event described above, except as provided in Sections 10.1 and
10.5, the Holder shall not be entitled to receive the benefits accruing to
existing holders of the Ownership Interests in such event.
10.5 Changes in Ownership Interests. In case at any time the Company shall
be a party to any transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the Company's assets or
recapitalization of the Ownership Interests) in which the previously outstanding
Ownership Interests shall be changed into or exchanged for different securities
of the Company or common stock or other securities of another corporation or
interests in a non-corporate entity or other property (including cash) or any
combination of any of the foregoing (each such transaction being herein called
the "Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then, as a condition of the consummation of the
Transaction, lawful and adequate provisions shall be made so that each Holder,
upon the exercise hereof at any time on or after the Consummation Date, shall be
entitled to receive, and this Warrant shall thereafter represent the right to
receive, in lieu of the Ownership Interests issuable upon such exercise prior to
the Consummation Date, the highest amount of securities or other property to
which such Holder would actually have been entitled as a holder of an Ownership
Interest upon the consummation of the Transaction if such Holder had exercised
such Warrant immediately prior thereto. The provisions of this Section 10.5
shall similarly apply to successive Transactions.
11. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant
<PAGE>
Ownership Interest in such denominations as shall be designated by the Holder
thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
12. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Ownership Interests upon the
exercise of the Warrants, nor shall it be required to issue scrip or pay cash in
lieu of fractional interests, it being the intent of the parties that all
fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of Ownership Interests or Other Securities.
13. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized Ownership Interests, solely for the purpose
of issuance upon the exercise of the Warrants, such number of Ownership
Interests or Other Securities as shall be issuable upon the exercise thereof.
The Company covenants and agrees that, upon exercise of the Warrants and payment
of the Exercise Price therefor, all Ownership Interests or Other Securities
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any holder of
Ownership Interests.
14. Notices to Warrant Holder. Except as otherwise provided in Section
10.4, nothing contained in this Agreement shall be construed as conferring upon
the Holder by virtue of his holding the Warrant the right to vote or to consent
or to receive notice as a holder of an Ownership Interest in respect of any
meetings of such holders for the election of directors or any other matter, or
as having any rights whatsoever as such a holder of the Company.
15. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to the registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 5 hereof or to
such other address as the Company may designate by notice to the Holder.
16. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.
<PAGE>
17. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective successors and assigns hereunder. Any reference herein to the
"Company" shall include any corporation which is a successor to the limited
liability company structure currently used by the Company.
18. Termination. This Agreement shall terminate at the close of business on
the tenth anniversary of the issuance of the Warrants.
19. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
the State of New York without giving effect to the rules of the State of New
York governing the conflicts of laws.
20. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
21. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
22. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
23. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.
24. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be duly executed, as of the day and year first above written.
LAVA, L.L.C.
By: /s/ Roger Berman
------------------------------
Authorized Officer
HOLDER
By: /s/ K.L. Speak
------------------------------
Name:
Title:
<PAGE>
EXHIBIT X
TO
WARRANT AGREEMENT
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i)
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
EXERCISABLE UNTIL
5:30 P.M., NEW YORK TIME, SEPTEMBER 30, 2006
No. W-LAVA-301 450,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that Miracle Investment Co. or its
registered assigns ("Holder"), is the registered holder of 450,000 Warrants to
purchase initially at any time until 5:30 p.m. New York time on September 30,
2006 ("Expiration Date"), up to 450,000 fully-paid and non-assessable economic
ownership interests ("Ownership Interests") of LAVA, L.L.C., a New Jersey
limited liability company (the "Company"), at the initial exercise price,
subject to adjustment in certain events (the "Exercise Price"), equal to $1.25
per Ownership Interest upon surrender of this Warrant Certificate and payment of
the Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Warrant Agreement dated as of the date
hereof between the Company and Holder (the "Warrant Agreement"). Payment of the
Exercise Price shall be made by certified check or official bank check in New
York Clearing House funds payable to the order of the Company, unless exercise
is made pursuant to Section 5.2 of the Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
Holder (the word "Holder" meaning the registered holder) of the Warrants.
<PAGE>
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificate
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.
Dated as of September __, 1996
LAVA, L.L.C.
By: /s/ Roger Berman
----------------------------------
Authorized Officer
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______ Ownership Interests
and herewith tenders in payment for such securities a certified check or
official bank check payable in New York Clearing House Funds to the order of
LAVA, L.L.C. in the amount of $ , all in accordance with the terms of Section 5
of the Warrant Agreement dated as of September 30, 1996 between Lava, L.L.C. and
the undersigned (or its assignor). The undersigned requests that a certificate
for such securities be registered in the name of _______________________ whose
address is _______________________ and that such Certificate be delivered to
__________________________ whose address is ________________________________.
Dated:
Signature __________________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED_____________________hereby
sells, assigns and transfers unto
_____________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint _______ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: ______________ Signature: ________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant
Certificate.)
__________________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
EXHIBIT 4 (g)
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION AGREEMENT (the "Agreement") dated as of September 30,
1996 is made by and among Lava, LLC, a New Jersey limited liability company (the
"Company"), and the persons listed on Schedule I hereto (collectively, the
"Holders", each a "Holder").
RECITALS
A. In connection with the purchase by the Holders of a minimum of 9 units
and a maximum of 16 units ("Units") in the aggregate of the Company's securities
(for an aggregate gross purchase price of $450,000 and $800,000, respectively),
each Unit consisting of a Senior Note in the denomination of $50,000
(collectively the "Senior Notes") and ten year warrants (the "Warrants") to
purchase 50,000 units of ownership interests ("Ownership Interests") of the
Company at an exercise price equal to $1.25 per Ownership Interest, the Holders
have acquired or will acquire, an aggregate of up to 800,000 Warrants.
B. The Company has agreed to grant to the Holders certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder (collectively, the "Securities Act") with respect to the
Ownership Interests issuable upon exercise of the Warrants (the "Warrant
Ownership Interests"). This Agreement sets forth the terms and conditions of
such undertaking.
AGREEMENTS
The Company and the Holders covenant and agree as follows:
1.Definitions. For purposes of this Agreement:
(a) The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
statements or similar documents 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 the effectiveness of such registration statement or document by
the Securities and Exchange Commission (the "SEC");
(b) The term "Registrable Securities" means (i) the Warrant Ownership
Interests, and (ii) any Ownership Interests issued as (or issuable upon the
conversion or exercise of any convertible security, warrant, right or other
security which is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of such Warrant Ownership Interests,
excluding in all cases, however, any Registrable Securities sold by a Holder in
a transaction in which its registration rights under this Agreement are not
assigned.
<PAGE>
2. Registration.
(a) Demand Registration. Subject to the limitations set forth in Section
2(c) below, the Company shall, upon the written request of Holders holding a
majority of the sum of (x) the outstanding Registrable Securities and (y) the
then outstanding and unexercised Warrants, use its best efforts to cause the
Registrable Securities specified in such request to be registered under the
Securities Act (a "Demand Registration"). In the event that the Company shall
receive a written request under this Section 2(a), the Company shall give prompt
written notice thereof to any Holder which did not join in such written request.
If requested in writing by any of such other Holders within fifteen days after
the Company gives the notice described in the preceding sentence, the Company
shall include among the Registrable Securities that it endeavors to register
under this Section 2(a) such Registrable Securities as shall be specified in the
request of such other Holders.
(b) Notice of Demand Registration. Each request delivered pursuant to
Section 2(a) shall: (i) specify the amount of Registrable Securities intended to
be offered and sold by each of the Holders joining in the request; (ii) express
the present intent to offer such Registrable Securities for distribution; (iii)
describe the nature or method of the proposed offer and sale of the Registrable
Securities; and (iv) contain the undertaking of the Holders to provide all such
information and materials and take all such action as may be required in order
to permit the Company to comply with all applicable requirements of the
Securities Act, the Registrable Securities and state securities and "blue sky"
laws, and to obtain acceleration of the effective date of the Registration
Statement (as defined below).
(c) Limitations on Demand Registrations. Notwithstanding anything herein to
the contrary, the obligations of the Company to cause any Registrable Securities
to be registered pursuant to Section 2(a) are subject to each of the following
limitations, conditions and qualifications:
(i) The Holders may only request that the Company make any Demand
Registration subsequent to the earlier of 180 days following (i) the
effective date of the registration statement for the initial public
offering of the Company's securities or (ii) any class of securities
otherwise becoming subject to the registration requirements of Section 12
of the Securities Exchange Act of 1934, as amended.
(ii) Any request for Demand Registration made by the Sellers pursuant
to Section 2(a), to be effective, shall request the registration of the
offering and sale or other distribution by the Holders of not less than
one-half of the Registrable Securities.
(iii) In the event the Holders request Demand Registration pursuant to
Section 2(a) and the related offering is to be underwritten, the managing
underwriter shall be a nationally recognized investment banking firm
approved by the Company in the reasonable exercise of its discretion.
(iv) The Company shall be required to effect only one Demand
Registration pursuant to Section 2(a).
<PAGE>
(d) Incidental Registration. Subject to the limitations set forth in
Section 2(f), at any time that the Company shall propose the registration under
the Securities Act of an offering of any of its securities on a registration
form which can be used for registration of the Registrable Securities, the
Company shall give written notice as promptly as possible of such proposed
registration to the Holders, and shall include in the offering such amount of
Registrable Securities as the Holders shall request to be included by written
notice to the Company received within fifteen days after receipt of the
Company's notice, upon the same terms (including the method of distribution) as
the securities being sold by the Company pursuant to any such offering (an
"Incidental Registration").
(e) Notice of Incidental Registration. Each request delivered pursuant to
Section 2(d) shall: (i) specify the amount of Registrable Securities intended to
be offered and sold by each of the Holders; and (ii) contain the undertaking of
the Holders to provide all such information and materials and take all such
action as may be required in order to permit the Company to comply with all
applicable requirements of the Securities Act, the SEC and state securities and
"blue sky" laws and to obtain acceleration of the effective date of the
Registration Statement.
(f) Limitations on Incidental Registrations. Notwithstanding anything
contained herein to the contrary, the obligations of the Company to cause
Registrable Securities to be registered pursuant to Section 2(d) are subject to
each of the following limitations, conditions and qualifications:
(i) The Company shall not be required to give notice or include
Registrable Securities in any registration pursuant to Section 2(d) if the
proposed registration is primarily: (A) a registration of a stock option,
thrift, employee benefit or compensation plan or of securities issued or
issuable pursuant to any such plan; (B) a registration of securities
proposed to be issued in connection with a dividend reinvestment and stock
purchase plan or customer stock purchase plan; (C) a registration of
securities proposed to be issued in exchange for securities or assets of,
or in connection with a merger or consolidation with, another corporation
or other entity; or (D) a registration of securities which is solely a
combination of any of the above.
(ii) If the Company is advised in writing by the managing underwriter
(or its investment banking firm if the offering is not underwritten) that
the inclusion of Registrable Securities may, in the opinion of such
underwriter or investment banking firm, as the case may be, interfere with
the orderly sale and distribution of the securities proposed to be offered
by the Company or adversely affect the price at which such securities may
be sold, the number of shares of Registrable Securities to be included in
the offering shall be reduced or eliminated to the extent necessary as
shall be reasonably determined by such underwriter or investment banker, as
the case may be, in good faith.
(iii) In the event the Holders request registration pursuant to
Section 2(d) and the related offering is to be underwritten, the Holders
will enter into an underwriting agreement containing representations,
warranties and agreements not substantially different from those
customarily made by an issuer and a selling shareholder in underwriting
agreements with respect to secondary distributions; provided, however, that
in the event the
<PAGE>
managing underwriter requires the Holders to agree to a lockup restricting
their ability to sell their Registrable Securities, despite the best
efforts of the Company to exclude the Registrable Securities from such
lockup, the Company will grant to each holder of the Warrants one
additional ten year Warrant (an "Additional Warrant") for every ten
Warrants held by a holder (a total of 80,000 Additional Warrants), and such
Additional Warrants will be considered Registrable Securities for purposes
of this Registration Agreement.
(iv) The Company may, in its sole discretion, without the consent of
the Holders and without liability to any Holder for such action, withdraw
such registration statement and abandon the proposed offering in which the
Holder had requested to participate at any time.
(v) The Company shall only be required to effect one Incidental
Registration pursuant to Section 2(d).
3. Obligations of the Company. When required under the Agreement to effect
the registration of the Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Registration Statements. Prepare and file with the SEC a registration
statement or statements or similar documents (the "Registration Statement") with
respect to all Registrable Securities, other than any Registrable Securities
excluded by Holders pursuant to Sections 2(a) and 2(d), and use its best efforts
to cause the Registration Statement to become effective and maintain the
effectiveness of the Registration Statement until the earlier of (i) the date
all such registered Registrable Securities are sold and any prospectus delivery
requirements under the Securities Act shall have lapsed, and (ii) (A) six months
(in the case of a registration statement on Form S-1 or comparable long-form
registration statement) or (B) six months following the latest expiration date
of the Warrants (in the case of a registration statement on Form S-3 or
comparable short-form registration statement).
(b) Amendments. 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 comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by the Registration Statement.
(c) Prospectuses. Furnish promptly to each Holders such numbers of copies
of a prospectus, including a preliminary prospectus, and all amendments and
supplements thereto, in conformity with the requirements of the Securities Act,
and such other documents as the Holders may reasonably request in order to
facilitate the disposition of Registrable Securities.
(d) Blue Sky. Use its best efforts to register and qualify the securities
covered by the Registration Statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders, and
to prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements and to take such other actions
necessary or advisable to maintain such registration and qualifications in
effect, and to take all other actions necessary or advisable to enable the
disposition of such securities
<PAGE>
in such jurisdictions, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or jurisdictions
or to provide any undertaking or make any change in its charter or bylaws which
the Board of Directors determines to be contrary to the best interest of the
Company and its stockholders.
(e) Underwriting Arrangements. Enter into and perform its obligations under
an underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering. The Holders shall also enter into and
perform their customary obligations under any such agreement including, without
limitation, customary indemnification and contribution obligations.
(f) Notification of Changes. Notify the Holders, at any time when a
prospectus relating to Registrable Securities covered by the Registration
Statement is required to be delivered under the Securities Act, of the happening
of any event as a result of which the prospectus including 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 not misleading in light of the circumstances then
existing. The Company shall promptly amend or supplement the Registration
Statement to correct any such untrue statement or omission.
(g) Notification of Stop Orders. Notify the Holders of the issuance by the
SEC of any stop order suspending the effectiveness of the Registration Statement
or the initiation of any proceedings for that purpose. The Company will make
every reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest possible
time.
(h) Review by Counsel. Permit a single firm of counsel designated as
selling stockholders' counsel by the holders of a majority in interest of the
Registrable Securities to review (at the expense of such selling stockholders)
the Registration Statement and all amendments and supplements thereto a
reasonable period of time prior to their filing, and shall not file any document
in a form to which counsel reasonably objects.
(i) Opinions. At the request of the Holders, use its best efforts to
furnish on the date that Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this
Agreement (i) an opinion, dated such date, of the counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters and (ii) a letter dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters.
(j) Due Diligence. Make available for inspection by the Holders, any
underwriters participating in the offering pursuant to the registration and the
counsel, accountants or other agents retained by the Holders or any such
underwriter, all pertinent financial and other
<PAGE>
records, corporate documents and properties of the Company, and cause the
Company's officers, directors and employees to supply all information reasonably
requested by the Holders or any such underwriters in connection with the
registration.
(k) Listing. If the class of the Company's securities is then listed on a
national securities exchange, use its best efforts to cause the Registrable
Securities to be listed on such exchange. If the Company's securities are not
then listed on a national securities exchange, use its best efforts to
facilitate the reporting of the Registrable Securities on NASDAQ.
(l) Further Actions. Take all other reasonable actions necessary to
expedite and facilitate disposition by the Holders of the Registrable Securities
pursuant to the Registration Statement.
4. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to each Holder that such Holder shall furnish to the Company such
information regarding itself, the Registrable Securities held by it, and the
intended method of disposition of such securities as shall be reasonably
required to effect the registration of the Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
5. Expenses of Registration. All expenses other than the underwriting
discounts and commissions incurred in connection with registration, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing, filing and qualification fees, printing and accounting
fees, the fees and disbursements of counsel for the Company (but excluding the
fees and disbursements of any counsel for the Holders) shall be borne by the
Company.
6. Indemnification. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
(a) By Company. To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the directors, if any, of such Holder, the
officers, if any, of such Holder who sign the Registration Statement, each
person, if any, who controls such Holder, any underwriter (as defined in the
Securities Act) for the Holders and each person, if any, who controls any such
underwriter within the meaning of the Securities Act or the Securities Act of
1934, as amended (the "1934 Act"), against any losses, claims, damages, expenses
or liabilities (joint or several) to which any of them may become subject under
the Securities Act, the 1934 Act or otherwise, insofar as such losses, claims,
damages, expenses or liabilities (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 (collectively, a "Violation"): (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein, in light of the
circumstance in which they are made, not misleading or (iii) any violation or
alleged violation by the Company of the Securities Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the
<PAGE>
Securities Act, the 1934 Act, any state securities law; and the Company will
reimburse the Holders and each such underwriter or controlling person, promptly
as such expenses are incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability action or proceeding; provided, however, that the
indemnity agreement contained in this Section 6(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company, which consent shall
not be unreasonably withheld, nor shall the Company be liable in any such case
for any such loss, claim, damage, liability or action to the extent that it
aries out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by the Holders or any such underwriter or controlling
person, as the case may be. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Holders or any such
underwriter or controlling person and shall survive the transfer of the
Registrable Securities by Holders.
(b) By Holders. To the extent permitted by law, each Holder, severally and
not jointly, will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the Registration Statement, each
person, if any, who controls the Company within the meaning of the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the 1934 Act, any underwriter and any other stockholder
selling securities pursuant to the Registration Statement or any of its
directors or officers or any person who controls such holder or underwriter,
against any losses, claims, damages or liabilities (joint or several) to which
any of them may become subject, under the Securities Act, the 1934 Act or other
federal state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration, and such Holder
will reimburse any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage
liability or action; provided, however, that the indemnity agreement contained
in this subsection 6(b) shall not apply to amounts paid in settlement of such
loss, claim, damage, liability or action if such settlement is effected without
the consent of such Holder, which consent shall not be unreasonably withheld;
and provided further, that the Holder shall be liable under this paragraph for
only that amount of losses, claims, damages and liabilities as does not exceed
the proceeds to such Holder as a result of the sale of Registrable Securities
pursuant to such registration.
(c) Procedure for Indemnification. Promptly after receipt by an indemnified
party under this Section 6 of notice of the commencement of any action
(including any governmental action), such indemnified party will, 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 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 parties; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
for the indemnifying party, representation of
<PAGE>
such indemnified party by the counsel retained by the indemnifying party would
be inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall relieve
such indemnifying party of any liability to the indemnified party under this
Section 6 only to the extent prejudicial to its ability to defend such action,
but the omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party other than
under this Section 6. 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, promptly as such expense, loss, damage or liability is
incurred.
(d) 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 otherwise would be
liable under this Section 6 to the extent permitted by law, provided that (i) no
contribution shall be made under the circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in this
Section 6, (ii) 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 (iii) 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.
7. Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of SEC Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit the Holders to sell securities of the Company to the public without
registration, the Company agrees, following the initial public offer of the
Company's securities, to:
(i) make and keep public information available, as those terms are
understood and defined in SEC Rule 144;
(ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934
Act; and
(iii) furnish to each Holder, so long as such Holder owns any
Registrable Securities, forthwith upon request (A) a written statement by
the Company that it has complied with the reporting requirements of SEC
Rule 144, the Securities Act and the 1934 Act, (B) 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 (C) such other information as may be
reasonably requested in availing the Holders of any rule or regulation of
the SEC which permits the selling of any securities without registration.
8. Assignment of Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement may be assigned by
the Holders to transferees or assignees of such securities provided the Company
is, within a reasonable time
<PAGE>
after such transfer, furnished with written notice of the name and address of
such transferee or assignee and the securities with respect to which such
registration rights are being assigned; provided, further, that such assignment
shall be effective only if immediately following such transfer the further
disposition of such securities by the transferee or assignee is restricted under
the Securities Act. The term "Holders" as used in this Agreement shall include
permitted assignees.
9. Miscellaneous.
(a) Notices. Notices required or permitted to be given hereunder shall be
in writing and shall be deemed to be sufficiently given when personally
delivered or sent by registered mail, return receipt requested, addressed (i) if
to the Company, at 10850 Wilshire Boulevard, Suite 1260, Los Angeles, CA 90024
(with a copy to: Fitzpatrick Eilenberg & Zivian, 666 Third Avenue, 30th Floor,
New York, NY 10017; Attention: Adam D. Eilenberg, Esq.) and (ii) if to a Holder
at the address set forth under his questionnaire, or at such other address as
each such party furnishes by notice given in accordance with this Section 9(a).
(b) Waiver. 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,
will not operate as a waiver thereof. No waiver will be effective unless and
until it is in writing and signed by the party giving the waiver.
(c) Governing Law. This Agreement shall be enforced, governed and construed
in all respects in accordance with the laws of the State of New York, as such
laws are applied by New York courts to agreements entered into and to be
performed in New York by and between residents of New York. In the event that
any provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute of rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not affect the validity or enforceability
of any other provision hereof.
(d) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and may be
amended only by a written
<PAGE>
agreement executed by the Company and the holders of a majority in interest of
the sum of (x) the Registrable Securities and (y) the then outstanding and
unexercised Warrants.
LAVA, LLC
By: /s/ Roger Berman
----------------------------------------
Authorized Officer
HOLDER: MILLENIUM CAPITAL
/s/ Alex Sheyfer
-------------------------------------
Name: Alex Sheyfer
HOLDER: MIRACLE INVESTMENT CO.
/s/ K.L. Speak
-------------------------------------
Name: K.L. Speak
<PAGE>
SCHEDULE I TO
REGISTRATION AGREEMENT
Holder No. Warrants
------ ------------
Miracle Investment Co. 450,000
Millenium Capital Management 40,000
EXHIBITS 4 (h)
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of November 1, 1996, between LAVA, L.L.C., a
New Jersey limited liability company (the "Company"), and EILENBERG & ZIVIAN
("Holder").
W I T N E S S E T H:
WHEREAS, Holder, in connection with and consideration for the sum of $10
and for its efforts in assisting the Company in its financing activities and in
locating potential investors for the Company, shall be issued an aggregate of
100,000 ten-year warrants (the "Warrants") to purchase economic ownership
interests of the Company ("Units") at an exercise price of $1.50 per Unit.
NOW, THEREFORE, in consideration of the premises herein set forth and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Issue. The Company hereby issues to Holder a certificate (the "Warrant
Certificate") dated as of the date hereof providing Holder with the right to
purchase, at any time, until 5:30 p.m., New York time, on November 1, 2006,
100,000 Units (the "Warrant Units") (subject to adjustment as provided in
Section 8 hereof) at an initial exercise price (subject to adjustment as
provided in Section 8 hereof) equal to $1.50 per Unit.
2. Warrant Certificate. The Warrant Certificate to be delivered pursuant to
this Agreement shall be in the form set forth in Exhibit X, attached hereto and
made a part hereof, with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Agreement.
3. Exercisability of Warrants. The Warrants shall be immediately
exercisable.
4. [Intentionally Omitted]
5. Procedure for Exercise of Warrants.
5.1 Cash Exercise. The Warrants are exercisable at an aggregate initial
exercise price per Units set forth in Section 8 hereof payable by certified
check or official bank check in New York Clearing House funds. Upon surrender of
a Warrant Certificate with the annexed Form of Election to Purchase duly
executed, together with payment of the Exercise Price (as hereinafter defined)
for the Warrant Units purchased, at the Company's principal offices in
California (presently located at 10850 Wilshire Boulevard, Suite 1260, Los
Angeles, CA 90024) Holder shall be entitled to receive a certificate for the
Warrant Units so purchased. The purchase rights represented by the Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part (but not as to fractional Units underlying the Warrants). In the case of
the purchase of less than all the Warrant Units purchasable under the Warrant
Certificate, the Company shall cancel said Warrant Certificate upon the
<PAGE>
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrant Units purchasable thereunder.
5.2 Cashless Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 5.1 above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Units equal to the product of (x) the number of Units
as to which the Warrants are being exercised multiplied by (y) a fraction, the
numerator of which is the Current Market Price of the Units (as defined below)
less the Exercise Price then in effect and the denominator of which is the
Current Market Price.
5.3 Current Market Price. The term "Current Market Price" shall mean (i) if
the Units (and/or other securities (including shares of Common Stock of the
Company following the conversion of the Company into a corporation), properties
or rights issuable upon exercise of the Warrants (collectively referred to as
"Other Securities")) are traded in the over-the-counter market or on the
National Association of Securities Dealers, Inc. Automated Quotations System
("NASDAQ"), the average per Unit (or equivalent unit of Other Securities)
closing bid prices on the 20 consecutive trading days immediately preceding the
date of exercise, as reported by NASDAQ or an equivalent generally accepted
reporting service, or (ii) if the Units (or Other Securities) are traded on a
national securities exchange, the average for the 20 consecutive trading days
immediately preceding the exercise date of the daily per Unit (or equivalent
unit of Other Securities) closing prices on the principal stock exchange on
which the Units (or Other Securities) are listed, as the case may be. The
closing price referred to in clause (ii) above shall be the last reported sales
price or, if no such reported sale takes place on such day, the average of the
reported closing bid and asked prices, in either case on the national securities
exchange on which the Units (or Other Securities) are then listed.
6. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Units (or Other Securities) shall be made forthwith
(and in any event within five (5) business days thereafter) without charge to
the Holder thereof including, without limitation, any tax which may be payable
in respect of the issuance thereof, and such certificate shall (subject to the
provisions of Sections 7 and 9 hereof) be issued in the name of, or in such
names as may be directed by, the Holder thereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate in a
name other than that of the Holder and the Company shall not be required to
issue or deliver such certificate unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificate and the certificate representing the Warrant Units
(or Other Securities) shall be executed on behalf of the Company by the manual
or facsimile signature of the then present Chairman or Vice Chairman of the
Board of Directors or President or any Vice President of the Company under its
corporate seal reproduced thereon, attested to by the manual or facsimile
signature of the then present Secretary or any Assistant Secretary of the
<PAGE>
Company. The Warrant Certificate shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
7. Transfer of Warrants. The Holder of the Warrant Certificate, by its
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof. The Warrants may
be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole
or in part, without restriction, subject to compliance with applicable
securities laws.
8. Exercise Price.
8.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 8 hereof, the initial exercise price of each Warrant shall be the price
set forth in Section 1 hereof per Warrant Units issued thereunder. The adjusted
exercise price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance with the
provisions of Section 10 hereof.
8.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
9. Registration Under the Securities Act of 1933. The Warrants, the Warrant
Units and any of the Other Securities issuable upon exercise of the Warrants
have not been registered under the Securities Act of 1933, as amended (the
"Act"). Upon exercise, in whole or in part, of the Warrants, a certificate
representing the Warrant Units underlying the Warrants, and any of the Other
Securities issuable upon exercise of the Warrants (collectively, the "Warrant
Securities") shall bear the following legend unless such Warrant Units
previously have been registered under the Act in accordance with the terms
hereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER
THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE
ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE.
Notwithstanding the foregoing, the Company has agreed that the Warrant
Units and any Other Securities issuable upon exercise of the Warrants shall be
deemed to be "Registrable Securities" under the Registration Agreement (the
"Registration Agreement") dated as of July 3, 1996 between the Company and the
persons listed on Schedule 1 annexed thereto, which Registration Agreement is
hereby incorporated herein by reference, and that the Holder shall have all the
rights and obligations of a "Holder" under the Registration Rights Agreement as
if it were a party thereto.
<PAGE>
10. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Units purchasable upon the
exercise of the Warrants, shall be subject to adjustment from time to time upon
the occurrence of certain events described in this Section 10.
10.1 Subdivision or Combination of Units and Unit Dividend. In case the
Company shall at any time subdivide its outstanding Units into a greater number
of Units or declare a dividend upon its Units payable solely in Units, the
Exercise Price in effect immediately prior to such subdivision or declaration
shall be proportionately reduced, and the number of Warrant Units issuable upon
exercise of the Warrants shall be proportionately increased. Conversely, in case
the outstanding Units of the Company shall be combined into a smaller number of
Units, the Exercise Price in effect immediately prior to such combination shall
be proportionately increased, and the number of Warrant Units issuable upon
exercise of the Warrants shall be proportionately reduced.
10.2 Dilutive Issuances. In the event that the Company shall sell or issue
at any time after the date of this Warrant and prior to its termination, Units
(other than Excluded Units, as defined in Section 10.2.5) at a consideration per
Unit less than $1.00, then the Exercise Price shall be adjusted to a new
Exercise Price (calculated to the nearest cent) determined by dividing
(a) an amount equal to (i) the total number of Units Outstanding (as
defined below and subject to adjustment in the manner set forth in Section 10.1)
on the date of issuance of this Warrant multiplied by the Exercise Price in
effect on the date of issuance of this Warrant (subject, however, to adjustment
in the manner set forth in Section 10.1), plus (ii) the aggregate of the amount
of all consideration, if any, received by the Company for the issuance or sale
of Units since the date of issuance of this Warrant, by
(b) the total number of Units Outstanding immediately after such issuance
or sale.
In no event shall any such adjustment be made pursuant to this Section 10.2
if it would increase the Exercise Price in effect immediately prior to such
adjustment, except as provided in Sections 10.2.3 and 10.2.4. Upon each
adjustment of the Exercise Price pursuant to this Section 10.2, the holder of
this Warrant shall thereafter be entitled to purchase, at the Exercise Price
resulting from such adjustment, the number of Warrant Units obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Units purchasable pursuant hereto immediately prior to
such adjustment, and dividing the product thereof by the Exercise Price
resulting from such adjustment.
10.2.1 Definitions. For purposes of this Section 10.2, the following
definitions shall apply:
(a) "Convertible Securities" shall mean any indebtedness or securities
convertible into or exchangeable for Units.
<PAGE>
(b) "Options" shall mean any rights, warrants or options to subscribe for
or purchase Units or Convertible Securities other than rights, warrants or
options to purchase Excluded Securities (as defined in Section 10.2.5).
(c) "Units Outstanding" shall mean the aggregate of all Units outstanding
and all Units issuable upon exercise of all outstanding Options and conversion
of all outstanding Convertible Securities.
10.2.2 For the purposes of this Section 10.2, the following provisions
shall also be applicable:
10.2.2.1 Cash Consideration. In case of the issuance or sale of additional
Units for cash, the consideration received by the Company therefor shall be
deemed to be the amount of cash received by the Company for such Units (or, if
such Units are offered by the Company for subscription, the subscription price,
or, if such Units are sold to underwriters or dealers for public offering
without a subscription offering, the public offering price), without deducting
therefrom any compensation or discount paid or allowed to underwriters or
dealers or others performing similar services or for any expenses incurred in
connection therewith.
10.2.2.2 Non-Cash Consideration. In case of the issuance (otherwise than
upon conversion or exchange of Convertible Securities) or sale of additional
Units, Options or Convertible Securities for a consideration other than cash or
a consideration a part of which shall be other than cash, the fair value of such
consideration as determined by the Board of Directors (if any, otherwise by the
Managers) of the Company in the good faith exercise of its business judgment,
irrespective of the accounting treatment thereof, shall be deemed to be the
value, for purposes of this Section 10, of the consideration other than cash
received by the Company for such securities.
10.2.2.3 Options and Convertible Securities. In case the Company shall in
any manner issue or grant any Options or any Convertible Securities, the total
maximum number of Units of issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities at the time such Convertible Securities first become convertible or
exchangeable shall (as of the date of issue or grant of such Options or, in the
case of the issue or sale of Convertible Securities other than where the same
are issuable upon the exercise of Options, as of the date of such issue or sale)
be deemed to be issued and to be outstanding for the purpose of this Section
10.2 and to have been issued for the sum of the amount (if any) paid for such
Options or Convertible Securities and the amount (if any) payable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities at the time such Convertible Securities first become convertible or
exchangeable; provided that, subject to the provisions of Section 10.2.3, no
further adjustment of the Exercise Price shall be made upon the actual issuance
of any such Units or Convertible Securities or upon the conversion or exchange
of any such Convertible Securities.
10.2.3 Change in Option Price or Conversion Rate. In the event that the
purchase price provided for in any Option referred to in subsection 10.2.2.3, or
the rate at which any
<PAGE>
Convertible Securities referred to in subsection 10.2.2.3 are convertible into
or exchangeable for Units shall change at any time (other than under or by
reason of provisions designed to protect against dilution), then, for purposes
of any adjustment required by Section 10.2, the Exercise Price in effect at the
time of such event shall forthwith be readjusted to the Exercise Price that
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold, provided that if such readjustment is an
increase in the Exercise Price, such readjustment shall not exceed the amount
(as adjusted by Sections 10.1 and 10.2) by which the Exercise Price was
decreased pursuant to Section 10.2 upon the issuance of the Option or
Convertible Security. In the event that the purchase price provided for in any
such Option referred to in subsection 10.2.2.3, or the additional consideration
(if any) payable upon the conversion or exchange of any Convertible Securities
referred to in subsection 10.2.2.3, or the rate at which any Convertible
Securities referred to in subsection 10.2.2.3 are convertible into or
exchangeable for Units, shall be reduced at any time under or by reason of
provisions with respect thereto designed to protect against dilution, then in
case of the delivery of Units upon the exercise of any such Option or upon
conversion or exchange of any such Convertible Security; the Exercise Price then
in effect hereunder shall, upon issuance of such Units, be adjusted to such
amount as would have obtained had such Option or Convertible Security never been
issued and had adjustments been made only upon the issuance of the Units
delivered as aforesaid and for the consideration actually received for such
Option or Convertible Security and the Units, provided that if such readjustment
is an increase in the Exercise Price, such readjustment shall not exceed the
amount (as adjusted by Sections 10.1 and 10.2) by which the Exercise Price was
decreased pursuant to Section 10.2 upon the issuance of the Option or
Convertible Security.
10.2.4 Termination Of Option or Conversion Rights. In the event of the
termination or expiration of any right to purchase Units under any Option
granted after the date of this Warrant or of any right to convert or exchange
Convertible Securities issued after the date of this Warrant, the Exercise Price
shall, upon such termination, be readjusted to the Exercise Price that would
have been in effect at the time of such expiration or termination had such
Option or Convertible Security, to the extent outstanding immediately prior to
such expiration or termination, never been issued, and the Units issuable
thereunder shall no longer be deemed to be Units Outstanding, provided that if
such readjustment is an increase in the Exercise Price, such readjustment shall
not exceed the amount (as adjusted by Sections 10.1 and 10.2) by which the
Exercise Price was decreased pursuant to Section 10.2 upon the issuance of the
Option or Convertible Security. The termination or expiration of any right to
purchase Units under any Option granted prior to the date of this Warrant or of
any right to convert or exchange Convertible Securities issued prior to the date
of this Warrant shall not trigger any adjustment to the Exercise Price, but the
Units issuable under such Options or Convertible Securities shall no longer be
counted in determining the number of Units Outstanding on the date of issuance
of this Warrant for purposes of subsequent calculations under this Section 10.2.
10.2.5 Excluded Units. Notwithstanding anything herein to the contrary, the
Exercise Price shall not be adjusted pursuant to this Section 10.2 by virtue of
the issuance and/or sale of Excluded Units, which shall mean the following: (a)
Units issuable upon the
<PAGE>
exercise of the Warrants; (b) Units, Options or Convertible Securities to be
issued and/or sold to employees, advisors (including, without limitation,
financial, technical and legal advisers), directors, or officers of, or
consultants to, the Company or any of its subsidiaries pursuant to a unit grant,
unit option plan, unit purchase plan, pension or profit sharing plan or other
unit agreement or arrangement existing as of the date hereof or approved by the
Company's Board of Directors (if any, otherwise by the Managers); (c) the
issuance of Units, Options and/or Convertible Securities pursuant to Options and
Convertible Securities outstanding as of the date of this Warrant; (d) the
issuance of Units, Options or Convertible Securities as a unit dividend or upon
any subdivision or combination of Units or Convertible Securities; (e) the
issuance of Units, Options or Convertible Securities in connection with
strategic partnerships or other business and/or product consolidations or joint
ventures and (f) the issuance of Units, Options or Convertible Securities by the
Company in connection with a contemplated equity financing currently in progress
as of the date hereof. For all purposes of this Section 10.2, all Units of
Excluded Units shall be deemed to have been issued for an amount of
consideration per Unit equal to the initial Exercise Price (subject to
adjustment in the manner set forth in Section 10.1). In addition, if the amount
of any adjustment pursuant to this Section 10 shall be less than two cents
(2(cent)) per Warrant Unit no adjustment to the Exercise Price or to the number
of Warrant Units issuable upon the exercise of the Warrants shall be made;
provided, however, that in such case any adjustment that would otherwise be
required then to be made shall be carried forward and shall be made at the time
of and together with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least two cents (2(cent)) per
Warrant Unit.
10.3 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Units purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
(i) the effective date of the adjustment and the Exercise Price resulting from
such adjustment and (ii) the increase or decrease, if any, in the number of
Units purchasable at such price upon the exercise of this Warrant, setting forth
in reasonable detail the method of calculation and the facts upon which such
calculation is based.
10.4 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Units;
(b) the Company shall declare any dividend upon its Units payable in
securities (other than a dividend payable solely in Units) or make any special
dividend or other distribution to the holders of its Units;
(c) there shall be any consolidation or merger of the Company with another
corporation, or a sale of all or substantially all of the Company's assets to
another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
<PAGE>
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company, (i)
at least 15 days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote in respect of any such
dissolution, liquidation or winding-up; (ii) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 15 days' written notice
of the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
distribution or option rights, the date on which the holders of Units shall be
entitled thereto. Any notice given in accordance with clause (iii) above shall
also specify the date on which the holders of Units shall be entitled to
exchange their Units for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, as the case may be. If the Holder of the Warrant does
not exercise this Warrant prior to the occurrence of an event described above,
except as provided in Sections 10.1 and 10.5, the Holder shall not be entitled
to receive the benefits accruing to existing holders of the Units in such event.
10.5 Changes in Units. In case at any time the Company shall be a party to
any transaction (including, without limitation, a merger, consolidation, sale of
all or substantially all of the Company's assets or recapitalization of the
Units) in which the previously outstanding Units shall be changed into or
exchanged for different securities of the Company or common stock or other
securities of another corporation or interests in a non-corporate entity or
other property (including cash) or any combination of any of the foregoing (each
such transaction being herein called the "Transaction" and the date of
consummation of the Transaction being herein called the "Consummation Date"),
then, as a condition of the consummation of the Transaction, lawful and adequate
provisions shall be made so that each Holder, upon the exercise hereof at any
time on or after the Consummation Date, shall be entitled to receive, and this
Warrant shall thereafter represent the right to receive, in lieu of the Units
issuable upon such exercise prior to the Consummation Date, the highest amount
of securities or other property to which such Holder would actually have been
entitled as a unitholder upon the consummation of the Transaction if such Holder
had exercised such Warrant immediately prior thereto. The provisions of this
Section 10.5 shall similarly apply to successive Transactions.
11. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Units in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or
<PAGE>
destruction, of indemnity or security reasonably satisfactory to it, and
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of the Warrants, if mutilated, the Company will
make and deliver a new Warrant Certificate of like tenor, in lieu thereof.
12. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Units upon the exercise of the
Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Units or Other Securities.
13. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized Units, solely for the purpose of issuance
upon the exercise of the Warrants, such number of Units or Other Securities as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all Units or Other Securities issuable upon such exercise shall be duly and
validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any unitholder.
14. Notices to Warrant Holder. Except as otherwise provided in Section
10.4, nothing contained in this Agreement shall be construed as conferring upon
the Holder by virtue of his holding the Warrant the right to vote or to consent
or to receive notice as a unitholder in respect of any meetings of unitholders
for the election of directors or any other matter, or as having any rights
whatsoever as a unitholder of the Company.
15. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly made and sent when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 5 hereof or to
such other address as the Company may designate by notice to the Holder.
16. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.
17. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective successors and assigns hereunder. Any reference herein to the
"Company" shall include any corporation
<PAGE>
which is a successor to the limited liability company structure currently used
by the Company.
18. Termination. This Agreement shall terminate at the close of business on
the tenth anniversary of the issuance of the Warrants.
19. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
the State of New York without giving effect to the rules of the State of New
York governing the conflicts of laws.
20. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
21. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
22. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
23. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.
24. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
LAVA, L.L.C.
By: /s/ Roger Berman
-----------------------------------
Name: Roger Berman
Title: President
EILENBERG & ZIVIAN
By: /s/ Adam D. Eilenberg
-----------------------------------
Name: Adam D. Eilenberg
Title: Partner
<PAGE>
EXHIBIT X
TO
WARRANT AGREEMENT
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i)
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
EXERCISABLE UNTIL
5:30 P.M., NEW YORK TIME, November 1, 2006
No. W-LAVA-304 100,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that Eilenberg & Zivian or its
registered assigns, is the registered holder of 100,000 Warrants to purchase
initially at any time until 5:30 p.m. New York time on November 1, 2006
("Expiration Date"), up to 100,000 fully-paid and non-assessable economic
ownership interests ("Units") of LAVA, L.L.C., a New Jersey limited liability
company (the "Company"), at the initial exercise price, subject to adjustment in
certain events (the "Exercise Price"), equal to $1.50 per Unit upon surrender of
this Warrant Certificate and payment of the Exercise Price at an office or
agency of the Company, but subject to the conditions set forth herein and in the
Warrant Agreement dated as of November 1, 1996 between the Company and Eilenberg
& Zivian (the "Warrant Agreement"). Payment of the Exercise Price shall be made
by certified check or official bank check in New York Clearing House funds
payable to the order of the Company, unless exercise is made pursuant to Section
5.2 of the Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holder (the word "holder" meaning the registered holder) of the Warrants.
<PAGE>
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificate
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.
Dated as of November 1, 1996
LAVA, L.L.C.
By: /s/ Roger Berman
----------------------------------------
Name: Roger Berman
Title: President
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _______________ Units and
herewith tenders in payment for such securities a certified check or official
bank check payable in New York Clearing House Funds to the order of LAVA, L.L.C.
in the amount of $_____ , all in accordance with the terms of Section 5 of the
Warrant Agreement dated as of November 1, 1996 between Lava, L.L.C. and
Eilenberg & Zivian. The undersigned requests that a certificate for such
securities be registered in the name of ____________________whose address is
____________________ and that such Certificate be delivered to ________________
whose address is ___________________________.
Dated:
Signature __________________________________
(Signature must conform in all respects
to name of holder as specified on the face
of the Warrant Certificate.)
_____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _____________ hereby
sells, assigns and transfers unto
______________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint ________________
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of substitution.
Dated: _____________
Signature:_________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant
Certificate.)
__________________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
EXHIBIT 4 (i)
<PAGE>
[1/97 WARRANTS]
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of January 27, 1997, between DIGITAL LAVA INC.,
a Delaware corporation (the "Company"), and Eilenberg & Zivian ("Holder").
W I T N E S S E T H:
WHEREAS, Holder, in connection with and consideration for the sum of $10
and for its additional efforts in 1997 in assisting the Company in its financing
activities and in locating potential investors for the Company, shall be issued
an aggregate of 100,000 ten-year warrants (the "Warrants") to purchase shares of
Common Stock of the Company ("Shares") at an exercise price of $1.50 per Share.
NOW, THEREFORE, in consideration of the premises herein set forth and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Issue. The Company hereby issues to Holder a certificate (the "Warrant
Certificate") dated as of the date hereof providing Holder with the right to
purchase, at any time, until 5:30 p.m., New York time, on January 27, 2007,
100,000 Shares (the "Warrant Shares") (subject to adjustment as provided in
Section 8 hereof) at an initial exercise price (subject to adjustment as
provided in Section 8 hereof) equal to $1.50 per Share.
2. Warrant Certificate. The Warrant Certificate to be delivered pursuant to
this Agreement shall be in the form set forth in Exhibit X, attached hereto and
made a part hereof, with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Agreement.
3. Exercisability of Warrants. The Warrants shall be immediately
exercisable.
4. [Intentionally Omitted]
5. Procedure for Exercise of Warrants.
5.1 Cash Exercise. The Warrants are exercisable at an aggregate initial
exercise price per Share set forth in Section 8 hereof payable by certified
check or official bank check in New York Clearing House funds. Upon surrender of
a Warrant Certificate with the annexed Form of Election to Purchase duly
executed, together with payment of the Exercise Price (as hereinafter defined)
for the Warrant Shares purchased, at the Company's principal offices in
California (presently located at 10850 Wilshire Boulevard, Suite 1260, Los
Angeles, CA 90024) Holder shall be entitled to receive a certificate for the
Warrant Shares so purchased. The purchase rights represented by the Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part (but not as to fractional Shares underlying the Warrants). In the case of
the purchase of less than all the Warrant Shares purchasable under the Warrant
Certificate, the Company shall cancel said Warrant Certificate upon the
<PAGE>
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrant Shares purchasable thereunder.
5.2 Cashless Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 5.1 above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Shares equal to the product of (x) the number of
Shares as to which the Warrants are being exercised multiplied by (y) a
fraction, the numerator of which is the Current Market Price of the Shares (as
defined below) less the Exercise Price then in effect and the denominator of
which is the Current Market Price.
5.3 Current Market Price. The term "Current Market Price" shall mean (i) if
the Shares are traded in the over-the-counter market or on the National
Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ"),
the average per Share closing bid prices on the 20 consecutive trading days
immediately preceding the date of exercise, as reported by NASDAQ or an
equivalent generally accepted reporting service, or (ii) if the Shares are
traded on a national securities exchange, the average for the 20 consecutive
trading days immediately preceding the exercise date of the daily per Share
closing prices on the principal stock exchange on which the Shares are listed,
as the case may be. The closing price referred to in clause (ii) above shall be
the last reported sales price or, if no such reported sale takes place on such
day, the average of the reported closing bid and asked prices, in either case on
the national securities exchange on which the Shares are then listed.
6. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Shares shall be made forthwith (and in any event
within five (5) business days thereafter) without charge to the Holder thereof
including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificate shall (subject to the provisions of
Sections 7 and 9 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificate unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificate and the certificate representing the Warrant Shares
shall be executed on behalf of the Company by the manual or facsimile signature
of the then present Chairman or Vice Chairman of the Board of Directors or
President or any Vice President of the Company under its corporate seal
reproduced thereon, attested to by the manual or facsimile signature of the then
present Secretary or any Assistant Secretary of the Company. The Warrant
Certificate shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer.
7. Transfer of Warrants. The Holder of the Warrant Certificate, by its
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not
<PAGE>
with a view to the distribution thereof. The Warrants may be sold, transferred,
assigned, hypothecated or otherwise disposed of, in whole or in part, without
restriction, subject to compliance with applicable securities laws.
8. Exercise Price.
8.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 8 hereof, the initial exercise price of each Warrant shall be the price
set forth in Section 1 hereof per Warrant Shares issued thereunder. The adjusted
exercise price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance with the
provisions of Section 10 hereof.
8.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
9. Registration Under the Securities Act of 1933. The Warrants, the Warrant
Shares and any of the Other Securities issuable upon exercise of the Warrants
have not been registered under the Securities Act of 1933, as amended (the
"Act"). Upon exercise, in whole or in part, of the Warrants, a certificate
representing the Warrant Shares underlying the Warrants, and any of the Other
Securities issuable upon exercise of the Warrants (collectively, the "Warrant
Securities") shall bear the following legend unless such Warrant Shares
previously have been registered under the Act in accordance with the terms
hereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER
THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE
ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE.
Notwithstanding the foregoing, the Company has agreed that the Warrant
Shares and any Other Securities issuable upon exercise of the Warrants shall be
deemed to be "Registrable Securities" under the Registration Agreement (the
"Registration Agreement") dated as of July 3, 1996 between the Company and the
persons listed on Schedule 1 annexed thereto, which Registration Agreement is
hereby incorporated herein by reference, and that the Holder shall have all the
rights and obligations of a "Holder" under the Registration Rights Agreement as
if it were a party thereto.
10. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Shares purchasable upon the
exercise of the Warrants, shall be subject to adjustment from time to time upon
the occurrence of certain events described in this Section 10.
<PAGE>
10.1 Subdivision or Combination of Shares and Share Dividend. In case the
Company shall at any time subdivide its outstanding Shares into a greater number
of Shares or declare a dividend upon its Shares payable solely in Shares, the
Exercise Price in effect immediately prior to such subdivision or declaration
shall be proportionately reduced, and the number of Warrant Shares issuable upon
exercise of the Warrants shall be proportionately increased. Conversely, in case
the outstanding Shares of the Company shall be combined into a smaller number of
Shares, the Exercise Price in effect immediately prior to such combination shall
be proportionately increased, and the number of Warrant Shares issuable upon
exercise of the Warrants shall be proportionately reduced.
10.2 Dilutive Issuances. In the event that the Company shall sell or issue
at any time after the date of this Warrant and prior to its termination, Shares
(other than Excluded Shares, as defined in Section 10.2.5) at a consideration
per Share less than $1.00, then the Exercise Price shall be adjusted to a new
Exercise Price (calculated to the nearest cent) determined by dividing
(a) an amount equal to (i) the total number of Shares Outstanding (as
defined below and subject to adjustment in the manner set forth in Section 10.1)
on the date of issuance of this Warrant multiplied by the Exercise Price in
effect on the date of issuance of this Warrant (subject, however, to adjustment
in the manner set forth in Section 10.1), plus (ii) the aggregate of the amount
of all consideration, if any, received by the Company for the issuance or sale
of Shares since the date of issuance of this Warrant, by
(b) the total number of Shares Outstanding immediately after such issuance
or sale.
In no event shall any such adjustment be made pursuant to this Section 10.2
if it would increase the Exercise Price in effect immediately prior to such
adjustment, except as provided in Sections 10.2.3 and 10.2.4. Upon each
adjustment of the Exercise Price pursuant to this Section 10.2, the holder of
this Warrant shall thereafter be entitled to purchase, at the Exercise Price
resulting from such adjustment, the number of Warrant Shares obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares purchasable pursuant hereto immediately prior to
such adjustment, and dividing the product thereof by the Exercise Price
resulting from such adjustment.
10.2.1 Definitions. For purposes of this Section 10.2, the following
definitions shall apply:
(a) "Convertible Securities" shall mean any indebtedness or securities
convertible into or exchangeable for Shares.
(b) "Options" shall mean any rights, warrants or options to subscribe for
or purchase Shares or Convertible Securities other than rights, warrants or
options to purchase Excluded Securities (as defined in Section 10.2.5).
<PAGE>
(c) "Shares Outstanding" shall mean the aggregate of all Shares outstanding
and all Shares issuable upon exercise of all outstanding Options and conversion
of all outstanding Convertible Securities.
10.2.2 For the purposes of this Section 10.2, the following provisions
shall also be applicable:
10.2.2.1 Cash Consideration. In case of the issuance or sale of additional
Shares for cash, the consideration received by the Company therefor shall be
deemed to be the amount of cash received by the Company for such Shares (or, if
such Shares are offered by the Company for subscription, the subscription price,
or, if such Shares are sold to underwriters or dealers for public offering
without a subscription offering, the public offering price), without deducting
therefrom any compensation or discount paid or allowed to underwriters or
dealers or others performing similar services or for any expenses incurred in
connection therewith.
10.2.2.2 Non-Cash Consideration. In case of the issuance (otherwise than
upon conversion or exchange of Convertible Securities) or sale of additional
Shares, Options or Convertible Securities for a consideration other than cash or
a consideration a part of which shall be other than cash, the fair value of such
consideration as determined by the Board of Directors (if any, otherwise by the
Managers) of the Company in the good faith exercise of its business judgment,
irrespective of the accounting treatment thereof, shall be deemed to be the
value, for purposes of this Section 10, of the consideration other than cash
received by the Company for such securities.
10.2.2.3 Options and Convertible Securities. In case the Company shall in
any manner issue or grant any Options or any Convertible Securities, the total
maximum number of Shares of issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities at the time such Convertible Securities first become convertible or
exchangeable shall (as of the date of issue or grant of such Options or, in the
case of the issue or sale of Convertible Securities other than where the same
are issuable upon the exercise of Options, as of the date of such issue or sale)
be deemed to be issued and to be outstanding for the purpose of this Section
10.2 and to have been issued for the sum of the amount (if any) paid for such
Options or Convertible Securities and the amount (if any) payable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities at the time such Convertible Securities first become convertible or
exchangeable; provided that, subject to the provisions of Section 10.2.3, no
further adjustment of the Exercise Price shall be made upon the actual issuance
of any such Shares or Convertible Securities or upon the conversion or exchange
of any such Convertible Securities.
10.2.3 Change in Option Price or Conversion Rate. In the event that the
purchase price provided for in any Option referred to in subsection 10.2.2.3, or
the rate at which any Convertible Securities referred to in subsection 10.2.2.3
are convertible into or exchangeable for Shares shall change at any time (other
than under or by reason of provisions designed to protect against dilution),
then, for purposes of any adjustment required by Section 10.2, the
<PAGE>
Exercise Price in effect at the time of such event shall forthwith be readjusted
to the Exercise Price that would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate, as the case may be,
at the time initially granted, issued or sold, provided that if such
readjustment is an increase in the Exercise Price, such readjustment shall not
exceed the amount (as adjusted by Sections 10.1 and 10.2) by which the Exercise
Price was decreased pursuant to Section 10.2 upon the issuance of the Option or
Convertible Security. In the event that the purchase price provided for in any
such Option referred to in subsection 10.2.2.3, or the additional consideration
(if any) payable upon the conversion or exchange of any Convertible Securities
referred to in subsection 10.2.2.3, or the rate at which any Convertible
Securities referred to in subsection 10.2.2.3 are convertible into or
exchangeable for Shares, shall be reduced at any time under or by reason of
provisions with respect thereto designed to protect against dilution, then in
case of the delivery of Shares upon the exercise of any such Option or upon
conversion or exchange of any such Convertible Security; the Exercise Price then
in effect hereunder shall, upon issuance of such Shares, be adjusted to such
amount as would have obtained had such Option or Convertible Security never been
issued and had adjustments been made only upon the issuance of the Shares
delivered as aforesaid and for the consideration actually received for such
Option or Convertible Security and the Shares, provided that if such
readjustment is an increase in the Exercise Price, such readjustment shall not
exceed the amount (as adjusted by Sections 10.1 and 10.2) by which the Exercise
Price was decreased pursuant to Section 10.2 upon the issuance of the Option or
Convertible Security.
10.2.4 Termination Of Option or Conversion Rights. In the event of the
termination or expiration of any right to purchase Shares under any Option
granted after the date of this Warrant or of any right to convert or exchange
Convertible Securities issued after the date of this Warrant, the Exercise Price
shall, upon such termination, be readjusted to the Exercise Price that would
have been in effect at the time of such expiration or termination had such
Option or Convertible Security, to the extent outstanding immediately prior to
such expiration or termination, never been issued, and the Shares issuable
thereunder shall no longer be deemed to be Shares Outstanding, provided that if
such readjustment is an increase in the Exercise Price, such readjustment shall
not exceed the amount (as adjusted by Sections 10.1 and 10.2) by which the
Exercise Price was decreased pursuant to Section 10.2 upon the issuance of the
Option or Convertible Security. The termination or expiration of any right to
purchase Shares under any Option granted prior to the date of this Warrant or of
any right to convert or exchange Convertible Securities issued prior to the date
of this Warrant shall not trigger any adjustment to the Exercise Price, but the
Shares issuable under such Options or Convertible Securities shall no longer be
counted in determining the number of Shares Outstanding on the date of issuance
of this Warrant for purposes of subsequent calculations under this Section 10.2.
10.2.5 Excluded Shares. Notwithstanding anything herein to the contrary,
the Exercise Price shall not be adjusted pursuant to this Section 10.2 by virtue
of the issuance and/or sale of Excluded Shares, which shall mean the following:
(a) Shares issuable upon the exercise of the Warrants; (b) Shares, Options or
Convertible Securities to be issued and/or sold to employees, advisors
(including, without limitation, financial, technical and legal advisers),
directors, or officers of, or consultants to, the Company or any of its
subsidiaries
<PAGE>
pursuant to a share grant, share option plan, share purchase plan, pension or
profit sharing plan or other share agreement or arrangement existing as of the
date hereof or approved by the Company's Board of Directors (if any, otherwise
by the Managers); (c) the issuance of Shares, Options and/or Convertible
Securities pursuant to Options and Convertible Securities outstanding as of the
date of this Warrant; (d) the issuance of Shares, Options or Convertible
Securities as a share dividend or upon any subdivision or combination of Shares
or Convertible Securities; (e) the issuance of Shares, Options or Convertible
Securities in connection with strategic partnerships or other business and/or
product consolidations or joint ventures and (f) the issuance of Shares, Options
or Convertible Securities by the Company in connection with a contemplated
equity financing currently in progress as of the date hereof. For all purposes
of this Section 10.2, all Shares of Excluded Shares shall be deemed to have been
issued for an amount of consideration per Share equal to the initial Exercise
Price (subject to adjustment in the manner set forth in Section 10.1). In
addition, if the amount of any adjustment pursuant to this Section 10 shall be
less than two cents (2(cent)) per Warrant Share no adjustment to the Exercise
Price or to the number of Warrant Shares issuable upon the exercise of the
Warrants shall be made; provided, however, that in such case any adjustment that
would otherwise be required then to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment which,
together with any adjustment so carried forward, shall amount to at least two
cents (2(cent)) per Warrant Share.
10.3 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
(i) the effective date of the adjustment and the Exercise Price resulting from
such adjustment and (ii) the increase or decrease, if any, in the number of
Shares purchasable at such price upon the exercise of this Warrant, setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based.
10.4 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Shares;
(b) the Company shall declare any dividend upon its Shares payable in
securities (other than a dividend payable solely in Shares) or make any special
dividend or other distribution to the holders of its Shares;
(c) there shall be any consolidation or merger of the Company with another
corporation, or a sale of all or substantially all of the Company's assets to
another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of
<PAGE>
such holder as shown on the books of the Company, (i) at least 15 days' prior
written notice of the date on which the books of the Company shall close or a
record shall be taken for such dividend, distribution or subscription rights or
for determining rights to vote in respect of any such dissolution, liquidation
or winding-up; (ii) at least 10 days' prior written notice of the date on which
the books of the Company shall close or a record shall be taken for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger or sale, and (iii) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, at least 15 days' written notice of the date when the same shall
take place. Any notice given in accordance with clause (i) above shall also
specify, in the case of any such dividend, distribution or option rights, the
date on which the holders of Shares shall be entitled thereto. Any notice given
in accordance with clause (iii) above shall also specify the date on which the
holders of Shares shall be entitled to exchange their Shares for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, as the case
may be. If the Holder of the Warrant does not exercise this Warrant prior to the
occurrence of an event described above, except as provided in Sections 10.1 and
10.5, the Holder shall not be entitled to receive the benefits accruing to
existing holders of the Shares in such event.
10.5 Changes in Shares. In case at any time the Company shall be a party to
any transaction (including, without limitation, a merger, consolidation, sale of
all or substantially all of the Company's assets or recapitalization of the
Shares) in which the previously outstanding Shares shall be changed into or
exchanged for different securities of the Company or common stock or other
securities of another corporation or interests in a non-corporate entity or
other property (including cash) or any combination of any of the foregoing (each
such transaction being herein called the "Transaction" and the date of
consummation of the Transaction being herein called the "Consummation Date"),
then, as a condition of the consummation of the Transaction, lawful and adequate
provisions shall be made so that each Holder, upon the exercise hereof at any
time on or after the Consummation Date, shall be entitled to receive, and this
Warrant shall thereafter represent the right to receive, in lieu of the Shares
issuable upon such exercise prior to the Consummation Date, the highest amount
of securities or other property to which such Holder would actually have been
entitled as a shareholder upon the consummation of the Transaction if such
Holder had exercised such Warrant immediately prior thereto. The provisions of
this Section 10.5 shall similarly apply to successive Transactions.
11. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation
<PAGE>
of the Warrants, if mutilated, the Company will make and deliver a new Warrant
Certificate of like tenor, in lieu thereof.
12. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Shares upon the exercise of the
Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Shares or Other Securities.
13. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized Shares, solely for the purpose of issuance
upon the exercise of the Warrants, such number of Shares or Other Securities as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all Shares or Other Securities issuable upon such exercise shall be duly and
validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any shareholder.
14. Notices to Warrant Holder. Except as otherwise provided in Section
10.4, nothing contained in this Agreement shall be construed as conferring upon
the Holder by virtue of his holding the Warrant the right to vote or to consent
or to receive notice as a shareholder in respect of any meetings of shareholders
for the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company.
15.Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to the registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 5 hereof or to
such other address as the Company may designate by notice to the Holder.
16. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.
17. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective successors and assigns hereunder. Any reference herein to the
"Company" shall include any corporation which is a successor to the limited
liability company structure currently used by the Company.
18. Termination. This Agreement shall terminate at the close of business on
the tenth anniversary of the issuance of the Warrants.
<PAGE>
19. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
the State of New York without giving effect to the rules of the State of New
York governing the conflicts of laws.
20. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
21. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
22. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
23. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.
24. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
DIGITAL LAVA INC.
By: /s/ Roger Berman
-----------------------------
Name: Roger Berman
Title: President
EILENBERG & ZIVIAN
By: /s/ Adam D. Eilenberg
----------------------------
Name: Adam D. Eilenberg
Title: Partner
<PAGE>
EXHIBIT X
TO
WARRANT AGREEMENT
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i)
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
EXERCISABLE UNTIL
5:30 P.M., NEW YORK TIME, JANUARY 27, 2007
No. W-97 LAVA-2 100,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that Eilenberg & Zivian or its
registered assigns, is the registered holder of 100,000 Warrants to purchase
initially at any time until 5:30 p.m. New York time on January 27, 2007
("Expiration Date"), up to 100,000 fully-paid and non-assessable shares of
Common Stock ("Shares") of DIGITAL LAVA INC., a Delaware corporation (the
"Company"), at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), equal to $1.50 per Share upon surrender of this
Warrant Certificate and payment of the Exercise Price at an office or agency of
the Company, but subject to the conditions set forth herein and in the Warrant
Agreement dated as of January 27, 1997 between the Company and Eilenberg &
Zivian (the "Warrant Agreement"). Payment of the Exercise Price shall be made by
certified check or official bank check in New York Clearing House funds payable
to the order of the Company, unless exercise is made pursuant to Section 5.2 of
the Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holder (the word "holder" meaning the registered holder) of the Warrants.
<PAGE>
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificate
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly
executed.
Dated as of January 27, 1997
DIGITAL LAVA INC.
By: /s/ Roger Berman
-----------------------------
Name: Roger Berman
Title: President
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _____ Shares and herewith
tenders in payment for such securities a certified check or official bank check
payable in New York Clearing House Funds to the order of DIGITAL LAVA INC. in
the amount of $ _____, all in accordance with the terms of Section 5 of the
Warrant Agreement dated as of January 27, 1997 between DIGITAL LAVA INC. and
Eilenberg & Zivian. The undersigned requests that a certificate for such
securities be registered in the name of ________________ whose address is
_________________ and that such Certificate be delivered to whose address is
_________________.
Dated:
Signature _____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
_______________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ___________ hereby
sells, assigns and transfers unto
____________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______ Attorney, to transfer
the within Warrant Certificate on the books of the within-named Company, with
full power of substitution.
Dated: ________________
Signature _____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
_______________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
EXHIBIT 4 (j)
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of May 30, 1997, between DIGITAL LAVA INC., a
Delaware corporation (the "Company"), and the persons whose names and addresses
are set forth on Schedule I annexed hereto (the "Holders").
W I T N E S S E T H:
WHEREAS, pursuant to a subscription agreement of even date hereof between
the Company and the Holders, Holders shall be issued an aggregate of up to 40
units of the Company's securities ("Units"), each Unit consisting of (i) a
senior non-negotiable promissory note in the principal amount of [______]
(individually, a "Bridge Note" and collectively, the "Bridge Notes"), and (ii)
warrants to purchase [______] shares of the Company's common stock, par value
$.0001 per share ("Common Stock," shares of Common Stock shall be referred to as
"Common Shares"), at an exercise price of $1.00 per share (the "Warrants").
NOW THEREFORE, in consideration of the premises herein set forth and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Issue. The Company shall issue to each Holder a certificate (the
"Warrant Certificate") dated as of the date hereof providing each such Holder
with the right to purchase, at any time, from May 30, 1998, until 5:30 p.m., New
York time, on May 30, 2003, the number of Common Shares listed next to the name
of each such Holder on Exhibit I (the "Warrant Shares") (subject to adjustment
as provided in Section 9 hereof), at an exercise price (subject to adjustment as
provided in Section 9 hereof) of $1.00 per Common Share; provided, however, that
if the Company elects, in its sole discretion, to extend the maturity date of
the Bridge Notes from November 30, 1997 to May 30, 1998, the exercise price of
the Warrants shall be $0.90 per Common Share (subject to adjustment as provided
in Section 9 hereof).
2. Warrant Certificate. The Warrant Certificate to be delivered pursuant to
this Agreement shall be in the form set forth in Exhibit X, attached hereto and
made a part hereof, with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Agreement.
3. Exercisability of Warrants. The Warrants shall be exercisable at any
time from May 30, 1998, until 5:30 p.m., New York time, on May 30, 2003.
4. Procedure for Exercise of Warrants.
4.1 Cash Exercise. The Warrants are exercisable at an aggregate initial
exercise price per Common Share set forth in Section 7 hereof payable by
certified check or official bank check in New York Clearing House funds. Upon
surrender of a Warrant Certificate with the
<PAGE>
annexed Form of Election to Purchase duly executed, together with payment of the
Exercise Price (as hereinafter defined) for the Warrant Shares purchased, at the
Company's principal offices in Los Angeles, California (presently located at
10850 Wilshire Boulevard, Suite 1260, Los Angeles, CA 90024) the registered
holder of a Warrant Certificate (individually a "Holder" and sometimes
collectively the "Holders") shall be entitled to receive a certificate for the
Warrant Shares so purchased. The purchase rights represented by the Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part (but not as to fractional Common Shares underlying the Warrants). In the
case of the purchase of less than all the Warrant Shares purchasable under the
Warrant Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrant Shares purchasable thereunder.
4.2 Cashless Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 4.1 above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Common Shares equal to the product of (x) the number
of Common Shares as to which the Warrants are being exercised multiplied by (y)
a fraction, the numerator of which is the Current Market Price of the Common
Shares (as defined below) less the Exercise Price then in effect and the
denominator of which is the Current Market Price.
5. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Shares (or Other Securities) shall be made
forthwith (and in any event within five (5) business days thereafter) without
charge to the Holder thereof including, without limitation, any tax which may be
payable in respect of the issuance thereof, and such certificate shall (subject
to the provisions of Sections 6 and 8 hereof) be issued in the name of, or in
such names as may be directed by, the Holder thereof; provided, however, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificate in
a name other than that of the Holder and the Company shall not be required to
issue or deliver such certificate unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificate and the certificate representing the Warrant Shares
(or Other Securities) shall be executed on behalf of the Company by the manual
or facsimile signature of the then present Chairman or Vice Chairman of the
Board of Directors or President or any Vice President of the Company under its
corporate seal reproduced thereon, attested to by the manual or facsimile
signature of the then present Secretary or any Assistant Secretary of the
Company. The Warrant Certificate shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
6. Transfer of Warrants. The Holder of the Warrant Certificate, by its
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof. The Warrants may
be sold, transferred, assigned,
<PAGE>
hypothecated or otherwise disposed of, in whole or in part, without restriction,
subject to compliance with applicable securities laws.
7. Exercise Price.
7.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 9 hereof, the initial exercise price of each Warrant shall be the price
set forth in Section 1 hereof per Warrant Shares issued thereunder. The adjusted
exercise price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance with the
provisions of Section 9 hereof.
7.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
8.Registration Under the Securities Act of 1933. Subject to the
Registration Rights Agreement between the Company and the Holders dated as of
the date hereof, the Warrants, the Warrant Shares and any of the Other
Securities issuable upon exercise of the Warrants have not been registered under
the Securities Act of 1933, as amended (the "Act"). Upon exercise, in whole or
in part, of the Warrants, a certificate representing the Warrant Shares
underlying the Warrants, and any of the Other Securities issuable upon exercise
of the Warrants (collectively, the "Warrant Securities") shall bear the
following legend unless such Warrant Shares previously have been registered
under the Act in accordance with the terms hereof: THE SECURITIES REPRESENTED BY
THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED ("ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING TO THE
DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION
SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION
FROM REGISTRATION UNDER THE ACT IS AVAILABLE.
9. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Shares purchasable upon the
exercise of the Warrants, shall be subject to adjustment from time to time upon
the occurrence of certain events described in this Section 9.
9.1 Subdivision or Combination of Common Shares and Common Share Dividend.
In case the Company shall at any time subdivide its outstanding Common Shares
into a greater number of Common Shares or declare a dividend upon its Common
Shares payable solely in Common Shares, the Exercise Price in effect immediately
prior to such subdivision or declaration shall be proportionately reduced, and
the number of Warrant Shares issuable upon exercise of the Warrants shall be
proportionately increased. Conversely, in case the outstanding Common Shares of
the Company shall be combined into a smaller number of Common Shares, the
Exercise Price in effect immediately prior to such combination shall be
<PAGE>
proportionately increased, and the number of Warrant Shares issuable upon
exercise of the Warrants shall be proportionately reduced.
9.2 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
(i) the effective date of the adjustment and the Exercise Price resulting from
such adjustment and (ii) the increase or decrease, if any, in the number of
Common Shares purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
9.3 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Common Shares;
(b) the Company shall declare any dividend upon its Common Shares payable
in securities (other than a dividend payable solely in Common Shares) or make
any special dividend or other distribution to the holders of its Common Shares;
(c) there shall be any consolidation or merger of the Company with another
corporation, or a sale of all or substantially all of the Company's assets to
another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company, (i)
at least 15 days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote in respect of any such
dissolution, liquidation or winding-up; (ii) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 15 days' written notice
of the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
distribution or option rights, the date on which the holders of Common Shares
shall be entitled thereto. Any notice given in accordance with clause (iii)
above shall also specify the date on which the holders of Common Shares shall be
entitled to exchange their Common Shares for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, as the case may be. If the Holder
of the Warrant does not exercise this Warrant prior to the occurrence of an
event
<PAGE>
described above, except as provided in Sections 9.1 and 9.4, the Holder shall
not be entitled to receive the benefits accruing to existing holders of the
Common Shares in such event.
9.4 Changes in Common Shares. In case at any time the Company shall be a
party to any transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the Company's assets or
recapitalization of the Common Shares) in which the previously outstanding
Common Shares shall be changed into or exchanged for different securities of the
Company or common stock or other securities of another corporation or interests
in a non-corporate entity or other property (including cash) or any combination
of any of the foregoing (each such transaction being herein called the
"Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then, as a condition of the consummation of the
Transaction, lawful and adequate provisions shall be made so that each Holder,
upon the exercise hereof at any time on or after the Consummation Date, shall be
entitled to receive, and this Warrant shall thereafter represent the right to
receive, in lieu of the Common Shares issuable upon such exercise prior to the
Consummation Date, the highest amount of securities or other property to which
such Holder would actually have been entitled as a holder of an Common Share
upon the consummation of the Transaction if such Holder had exercised such
Warrant immediately prior thereto. The provisions of this Section 9.4 shall
similarly apply to successive Transactions.
10. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
11. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Common Shares upon the exercise
of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Common Shares or Other Securities.
12. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized Common Shares, solely for the purpose of
issuance upon the exercise of the Warrants, such number of Common Shares or
Other Securities as shall be issuable upon the exercise thereof. The Company
covenants and agrees that, upon exercise of the Warrants and payment of the
Exercise Price therefor, all Common Shares or Other Securities issuable upon
such exercise shall be duly and validly issued, fully paid, non-assessable and
not subject to the preemptive rights of any holder of Common Shares.
<PAGE>
13. Notices to Warrant Holder. Except as otherwise provided in Section 9.4,
nothing contained in this Agreement shall be construed as conferring upon the
Holder by virtue of his holding the Warrant the right to vote or to consent or
to receive notice as a holder of an Common Share in respect of any meetings of
such holders for the election of directors or any other matter, or as having any
rights whatsoever as such a holder of the Company.
14. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to the registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 4 hereof (with
copy to: Eilenberg & Zivian, 666 Third Avenue, 30th Floor, New York, NY
10017/Attn. Jeffrey D. Abbey, Esq.) or to such other address as the Company may
designate by notice to the Holder.
15. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.
16. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the close of business on
the tenth anniversary of the issuance of the Warrants.
18. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
the State of New York without giving effect to the rules of the State of New
York governing the conflicts of laws.
19. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
<PAGE>
22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.
23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be duly executed, as of the day and year first above written.
Very truly yours,
DIGITAL LAVA INC.
By: /s/ Roger Berman
--------------------------------
Authorized Officer
ACCEPTED AND AGREED TO:
/s/ Irwin Ginsburg
- -----------------------------------
Irwin Ginsburg
/s/ James Ellis
- -----------------------------------
James Ellis
/s/ Richard Heller
- -----------------------------------
Richard Heller
/s/ Dennis Quirk
- -----------------------------------
Dennis Quirk
/s/ Lisa Quirk
- -----------------------------------
Lisa Quirk
<PAGE>
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
EXERCISABLE FROM May 30,1998
UNTIL
5:30 P.M., NEW YORK TIME, May 30, 2003
No. W-LAVA-97-[ ] [ ] Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that or his/her registered assigns
("Holder"), is the registered holder of [ ] Warrants to purchase initially at
any time from May 30, 1998, until 5:30 p.m. New York time on May 30, 2003
("Expiration Date"), up to [ ] fully-paid and non-assessable shares of common
stock, par value $.0001 per share ("Common Shares") of DIGITAL LAVA INC., a
Delaware corporation (the "Company"), at an initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), equal to $1.00 per Common
Share, upon surrender of this Warrant Certificate and payment of the initial
exercise price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Warrant Agreement dated as of the date
hereof between the Company and Holder (the "Warrant Agreement"). Payment of the
Exercise Price shall be made by certified check or official bank check in New
York Clearing House funds payable to the order of the Company, unless exercise
is made pursuant to Section 4.2 of the Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
Holder (the word "Holder" meaning the registered holder) of the Warrants.
<PAGE>
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificate
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.
Dated as of May 30, 1997
DIGITAL LAVA INC.
By: /s/ Roger Berman
-----------------------
Authorized Officer
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______________ Common
Shares and herewith tenders in payment for such securities a certified check or
official bank check payable in New York Clearing House Funds to the order of
DIGITAL LAVA INC. in the amount of $__________ , all in accordance with the
terms of Section 4 of the Warrant Agreement dated as of May 30, 1997 between
DIGITAL LAVA INC. and the undersigned (or its assignor). The undersigned
requests that a certificate for such securities be registered in the name of
________________ whose address is ______________ and that such Certificate be
delivered to _________________ whose address is _____________________.
Dated:_______________
Signature __________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
___________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ___________________ hereby
sells, assigns and transfers unto
_____________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated:____________ Signature: ______________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant
Certificate.)
________________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
EXHIBIT 4 (k)
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of May 30,
1997 is made by and among DIGITAL LAVA INC., a Delaware corporation (the
"Company"), and the persons listed on Schedule I hereto (collectively, the
"Holders", each a "Holder").
RECITALS
In connection with the purchase by the Holders of certain units ("Units")
of the Company's securities pursuant to a Subscription Agreement and a Warrant
Agreement, both between the Company and the Holders dated as of the date hereof,
which agreements among other things provide for the issuance to the Holders of
certain warrants (the "Warrants") to purchase shares of the Company's common
stock ("Common Stock"), the Company has agreed to grant to the Holders certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder (collectively, the "Securities Act") with respect to
the shares of Common Stock issuable upon exercise of the Warrants (the "Warrant
Shares"). This Agreement sets forth the terms and conditions of such
undertaking.
AGREEMENTS
The Company and the Holders covenant and agree as follows:
1. Definitions. For purposes of this Agreement:
(a) The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
statements or similar documents 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 the effectiveness of such registration statement or document by
the Securities and Exchange Commission (the "SEC");
(b) The term "Registrable Securities" means (i) the Warrant Shares and (ii)
any shares of Common Stock issued as (or issuable upon the conversion or
exercise of any convertible security, warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of such Warrant Shares, excluding in all cases, however, any
Registrable Securities sold by a Holder in a transaction in which its
registration rights under this Agreement are not assigned.
2. Registration.
(a) Demand Registration. Subject to the limitations set forth in Section
2(c) below, the Company shall, upon the written request of Holders holding a
majority of the sum of (x) the outstanding Registrable Securities and (y) the
then outstanding and unexercised Warrants,
<PAGE>
use its best efforts to cause the Registrable Securities specified in such
request to be registered under the Securities Act (a "Demand Registration"). In
the event that the Company shall receive a written request under this Section
2(a), the Company shall give prompt written notice thereof to any Holder which
did not join in such written request. If requested in writing by any of such
other Holders within fifteen days after the Company gives the notice described
in the preceding sentence, the Company shall include among the Registrable
Securities that it endeavors to register under this Section 2(a) such
Registrable Securities as shall be specified in the request of such other
Holders.
(b) Notice of Demand Registration. Each request delivered pursuant to
Section 2(a) shall: (i) specify the amount of Registrable Securities intended to
be offered and sold by each of the Holders joining in the request; (ii) express
the present intent to offer such Registrable Securities for distribution; (iii)
describe the nature or method of the proposed offer and sale of the Registrable
Securities; and (iv) contain the undertaking of the Holders to provide all such
information and materials and take all such action as may be required in order
to permit the Company to comply with all applicable requirements of the
Securities Act, the Registrable Securities and state securities and "blue sky"
laws, and to obtain acceleration of the effective date of the Registration
Statement (as defined below).
(c) Limitations on Demand Registrations. Notwithstanding anything herein to
the contrary, the obligations of the Company to cause any Registrable Securities
to be registered pursuant to Section 2(a) are subject to each of the following
limitations, conditions and qualifications:
(i) The Holders may only request that the Company make any Demand
Registration subsequent to the earlier of 180 days following (i) the
effective date of the registration statement for the initial public
offering of the Company's securities or (ii) any class of securities
otherwise becoming subject to the registration requirements of Section 12
of the Securities Exchange Act of 1934, as amended.
(ii) Any request for Demand Registration made by the Sellers pursuant
to Section 2(a), to be effective, shall request the registration of the
offering and sale or other distribution by the Holders of not less than
one-half of the Registrable Securities.
(iii) In the event the Holders request Demand Registration pursuant to
Section 2(a) and the related offering is to be underwritten, the managing
underwriter shall be a nationally recognized investment banking firm
approved by the Company in the reasonable exercise of its discretion.
(iv) The Company shall be required to effect only one Demand
Registration pursuant to Section 2(a).
(d) Incidental Registration. Subject to the limitations set forth in
Section 2(f), at any time that the Company shall propose the registration under
the Securities Act of an offering of any of its securities on a registration
form which can be used for registration of the Registrable Securities, the
Company shall give written notice as promptly as possible of such proposed
registration to the Holders, and shall include in the offering such amount of
<PAGE>
Registrable Securities as the Holders shall request to be included by written
notice to the Company received within fifteen days after receipt of the
Company's notice, upon the same terms (including the method of distribution) as
the securities being sold by the Company pursuant to any such offering (an
"Incidental Registration").
(e) Notice of Incidental Registration. Each request delivered pursuant to
Section 2(d) shall: (i) specify the amount of Registrable Securities intended to
be offered and sold by each of the Holders; and (ii) contain the undertaking of
the Holders to provide all such information and materials and take all such
action as may be required in order to permit the Company to comply with all
applicable requirements of the Securities Act, the SEC and state securities and
"blue sky" laws and to obtain acceleration of the effective date of the
Registration Statement.
(f) Limitations on Incidental Registrations. Notwithstanding anything
contained herein to the contrary, the obligations of the Company to cause
Registrable Securities to be registered pursuant to Section 2(d) are subject to
each of the following limitations, conditions and qualifications:
(i) The Company shall not be required to give notice or include
Registrable Securities in any registration pursuant to Section 2(d) if the
proposed registration is primarily: (A) a registration of a stock option,
thrift, employee benefit or compensation plan or of securities issued or
issuable pursuant to any such plan; (B) a registration of securities
proposed to be issued in connection with a dividend reinvestment and stock
purchase plan or customer stock purchase plan; (C) a registration of
securities proposed to be issued in exchange for securities or assets of,
or in connection with a merger or consolidation with, another corporation
or other entity; or (D) a registration of securities which is solely a
combination of any of the above.
(ii) If the Company is advised in writing by the managing underwriter
(or its investment banking firm if the offering is not underwritten) that
the inclusion of Registrable Securities may, in the opinion of such
underwriter or investment banking firm, as the case may be, interfere with
the orderly sale and distribution of the securities proposed to be offered
by the Company or adversely affect the price at which such securities may
be sold, the number of shares of Registrable Securities to be included in
the offering shall be reduced or eliminated to the extent necessary as
shall be reasonably determined by such underwriter or investment banker, as
the case may be, in good faith.
(iii) In the event the Holders request registration pursuant to
Section 2(d) and the related offering is to be underwritten, the Holders
will enter into an underwriting agreement containing representations,
warranties and agreements not substantially different from those
customarily made by an issuer and a selling shareholder in underwriting
agreements with respect to secondary distributions.
(iv) The Company may, in its sole discretion, without the consent of
the Holders and without liability to any Holder for such action, withdraw
such registration statement and abandon the proposed offering in which the
Holder had requested to participate at any time.
<PAGE>
(v) The Company shall only be required to effect one Incidental
Registration pursuant to Section 2(d).
3. Obligations of the Company. When required under the Agreement to effect
the registration of the Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Registration Statements. Prepare and file with the SEC a registration
statement or statements or similar documents (the "Registration Statement") with
respect to all Registrable Securities, other than any Registrable Securities
excluded by Holders pursuant to Sections 2(a) and 2(d), and use its best efforts
to cause the Registration Statement to become effective and maintain the
effectiveness of the Registration Statement until the earlier of (i) the date
all such registered Registrable Securities are sold and any prospectus delivery
requirements under the Securities Act shall have lapsed, and (ii) (A) six months
(in the case of a registration statement on Form S-1 or comparable long-form
registration statement) or (B) six months following the latest expiration date
of the Warrants (in the case of a registration statement on Form S-3 or
comparable short-form registration statement).
(b) Amendments. 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 comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by the Registration Statement.
(c) Prospectuses. Furnish promptly to each Holders such numbers of copies
of a prospectus, including a preliminary prospectus, and all amendments and
supplements thereto, in conformity with the requirements of the Securities Act,
and such other documents as the Holders may reasonably request in order to
facilitate the disposition of Registrable Securities.
(d) Blue Sky. Use its best efforts to register and qualify the securities
covered by the Registration Statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders, and
to prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements and to take such other actions
necessary or advisable to maintain such registration and qualifications in
effect, and to take all other actions necessary or advisable to enable the
disposition of such securities in such jurisdictions, provided that the Company
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions or to provide any undertaking or make any change in
its charter or bylaws which the Board of Directors determines to be contrary to
the best interest of the Company and its stockholders.
(e) Underwriting Arrangements. Enter into and perform its obligations under
an underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering. The Holders shall also enter into and
perform their customary obligations under any such agreement including, without
limitation, customary indemnification and contribution obligations.
<PAGE>
(f) Notification of Changes. Notify the Holders, at any time when a
prospectus relating to Registrable Securities covered by the Registration
Statement is required to be delivered under the Securities Act, of the happening
of any event as a result of which the prospectus including 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 not misleading in light of the circumstances then
existing. The Company shall promptly amend or supplement the Registration
Statement to correct any such untrue statement or omission.
(g) Notification of Stop Orders. Notify the Holders of the issuance by the
SEC of any stop order suspending the effectiveness of the Registration Statement
or the initiation of any proceedings for that purpose. The Company will make
every reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest possible
time.
(h) Review by Counsel. Permit a single firm of counsel designated as
selling stockholders' counsel by the holders of a majority in interest of the
Registrable Securities to review (at the expense of such selling stockholders)
the Registration Statement and all amendments and supplements thereto a
reasonable period of time prior to their filing, and shall not file any document
in a form to which counsel reasonably objects.
(i) Opinions. At the request of the Holders, use its best efforts to
furnish on the date that Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this
Agreement (i) an opinion, dated such date, of the counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters and (ii) a letter dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters.
(j) Due Diligence. Make available for inspection by the Holders, any
underwriters participating in the offering pursuant to the registration and the
counsel, accountants or other agents retained by the Holders or any such
underwriter, all pertinent financial and other records, corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by the Holders or any
such underwriters in connection with the registration.
(k) Listing. If the class of the Company's securities is then listed on a
national securities exchange, use its best efforts to cause the Registrable
Securities to be listed on such exchange. If the Company's securities are not
then listed on a national securities exchange, use its best efforts to
facilitate the reporting of the Registrable Securities on NASDAQ.
(l) Further Actions. Take all other reasonable actions necessary to
expedite and facilitate disposition by the Holders of the Registrable Securities
pursuant to the Registration Statement.
<PAGE>
4. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to each Holder that such Holder shall furnish to the Company such
information regarding itself, the Registrable Securities held by it, and the
intended method of disposition of such securities as shall be reasonably
required to effect the registration of the Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
5. Expenses of Registration. All expenses other than the underwriting
discounts and commissions incurred in connection with registration, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing, filing and qualification fees, printing and accounting
fees, the fees and disbursements of counsel for the Company (but excluding the
fees and disbursements of any counsel for the Holders) shall be borne by the
Company.
6. Indemnification. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
(a) By Company. To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the directors, if any, of such Holder, the
officers, if any, of such Holder who sign the Registration Statement, each
person, if any, who controls such Holder, any underwriter (as defined in the
Securities Act) for the Holders and each person, if any, who controls any such
underwriter within the meaning of the Securities Act or the Securities Act of
1934, as amended (the "1934 Act"), against any losses, claims, damages, expenses
or liabilities (joint or several) to which any of them may become subject under
the Securities Act, the 1934 Act or otherwise, insofar as such losses, claims,
damages, expenses or liabilities (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 (collectively, a "Violation"): (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein, in light of the
circumstance in which they are made, not misleading or (iii) any violation or
alleged violation by the Company of the Securities Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the 1934 Act, any state securities law; and the Company will reimburse the
Holders and each such underwriter or controlling person, promptly as such
expenses are incurred, for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability action or proceeding; provided, however, that the indemnity agreement
contained in this Section 6(a) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Company, which consent shall not be unreasonably
withheld, nor shall the Company be liable in any such case for any such loss,
claim, damage, liability or action to the extent that it aries out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by the Holders or any such underwriter or controlling person, as
the case may be. Such indemnity shall remain in full force and effect
<PAGE>
regardless of any investigation made by or on behalf of the Holders or any such
underwriter or controlling person and shall survive the transfer of the
Registrable Securities by Holders.
(b) By Holders. To the extent permitted by law, each Holder, severally and
not jointly, will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the Registration Statement, each
person, if any, who controls the Company within the meaning of the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the 1934 Act, any underwriter and any other stockholder
selling securities pursuant to the Registration Statement or any of its
directors or officers or any person who controls such holder or underwriter,
against any losses, claims, damages or liabilities (joint or several) to which
any of them may become subject, under the Securities Act, the 1934 Act or other
federal state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration, and such Holder
will reimburse any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage
liability or action; provided, however, that the indemnity agreement contained
in this subsection 6(b) shall not apply to amounts paid in settlement of such
loss, claim, damage, liability or action if such settlement is effected without
the consent of such Holder, which consent shall not be unreasonably withheld;
and provided further, that the Holder shall be liable under this paragraph for
only that amount of losses, claims, damages and liabilities as does not exceed
the proceeds to such Holder as a result of the sale of Registrable Securities
pursuant to such registration.
(c) Procedure for Indemnification. Promptly after receipt by an indemnified
party under this Section 6 of notice of the commencement of any action
(including any governmental action), such indemnified party will, 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 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 parties; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
for the indemnifying party, representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall relieve such indemnifying party of any
liability to the indemnified party under this Section 6 only to the extent
prejudicial to its ability to defend such action, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party other than under this Section 6. 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, promptly
as such expense, loss, damage or liability is incurred.
<PAGE>
(d) 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 otherwise would be
liable under this Section 6 to the extent permitted by law, provided that (i) no
contribution shall be made under the circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in this
Section 6, (ii) 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 (iii) 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.
7. Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of SEC Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit the Holders to sell securities of the Company to the public without
registration, the Company agrees, following the initial public offer of the
Company's securities, to:
(i) make and keep public information available, as those terms are
understood and defined in SEC Rule 144;
(ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934
Act; and
(iii) furnish to each Holder, so long as such Holder owns any
Registrable Securities, forthwith upon request (A) a written statement by
the Company that it has complied with the reporting requirements of SEC
Rule 144, the Securities Act and the 1934 Act, (B) 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 (C) such other information as may be
reasonably requested in availing the Holders of any rule or regulation of
the SEC which permits the selling of any securities without registration.
8. Assignment of Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement may be assigned by
the Holders to transferees or assignees of such securities provided the Company
is, within a reasonable time after such transfer, furnished with written notice
of the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; provided, further,
that such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act. The term "Holders" as used in
this Agreement shall include permitted assignees.
9. Miscellaneous.
(a) Notices. Notices required or permitted to be given hereunder shall be
in writing and shall be deemed to be sufficiently given when personally
delivered or sent by registered mail, return receipt requested, addressed (i) if
to the Company, at 10850 Wilshire Boulevard,
<PAGE>
Suite 1260, Los Angeles, CA 90024, (with a copy to: Eilenberg & Zivian, 666
Third Avenue, 30th Floor, New York, NY 10017; Attention: Jeffrey D. Abbey, Esq.)
and (ii) if to a Holder at the address set forth in Schedule I, or at such other
address as each such party furnishes by notice given in accordance with this
Section 9(a).
(b) Waiver. 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,
will not operate as a waiver thereof. No waiver will be effective unless and
until it is in writing and signed by the party giving the waiver.
(c) Governing Law. This Agreement shall be enforced, governed and construed
in all respects in accordance with the laws of the State of New York, as such
laws are applied by New York courts to agreements entered into and to be
performed in New York by and between residents of New York. In the event that
any provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute of rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not affect the validity or enforceability
of any other provision hereof.
[Balance of Page Intentionally Left Blank]
<PAGE>
(d) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and may be
amended only by a written agreement executed by the Company and the holders of a
majority in interest of the sum of (x) the Registrable Securities and (y) the
then outstanding and unexercised Warrants.
DIGITAL LAVA INC.
By: /s/ Roger Berman
-------------------------------
Authorized Officer
HOLDER:
/s/ Irwin Ginsburg
-----------------------------------
Irwin Ginsburg
/s/ James Ellis
-----------------------------------
James Ellis
/s/ Richard Heller
-----------------------------------
Richard Heller
/s/ Dennis Quirk
-----------------------------------
Dennis Quirk
/s/ Lisa Quirk
-----------------------------------
Lisa Quirk
EXHIBIT 4 (l)
<PAGE>
As of October 6, 1998
United Resources Partners (Dennis Quirk)
Irwin Ginsburg
Richard Heller
James Ellis
Re: Digital LAVA Inc. (the "Company")
Gentlemen:
This letter will confirm our understanding concerning your agreement to
forebear from and waive certain rights pursuant to promissory notes previously
issued to you by the Company. Each of you is referred to below as a "Holder" and
collectively as the "Holders".
The Company currently has the following outstanding obligations to the
Holders severally represented by five (5) promissory notes (the "Notes")
Lender Amount Date of Note Rate Maturity
United Resources $50,000 5/30/97 6.00% 5/30/98
(Dennis Quirk)
United Resources $50,000 5/30/97 6.00% 5/30/98
(Lisa Quirk)
I. Ginsburg $50,000 5/30/97 6.00% 5/30/98
R. Heller $25,000 5/30/97 6.00% 5/30/98
J. Ellis $12,500 5/30/97 6.00% 5/30/98
The Company acknowledges that, subject to the terms and conditions of this
letter agreement, the outstanding principal amount of the Notes, and interest
thereon, are now due and payable, the Company has failed to make such payments
pursuant to the Notes, and the Company has no defense against payment of the
Notes.
In connection with the loans represented by the Notes, the Company has
previously issued to the Holders severally warrants to purchase shares of the
Common Stock of the Company (the "Warrants") in the current amounts and for the
current exercise price as follows:
<PAGE>
Lender No. of Warrants Current Exercise Price
United Resources 50,000 $.90
(Dennis Quirk)
United Resources 50,000 $.90
(Lisa Quirk)
I. Ginsburg 50,000 $.90
R. Heller 25,000 $.90
J. Ellis 12,500 $.90
In consideration for the agreement of each Holder to waive (i) acceleration
of their respective Notes, and (ii) the failure of the Company to repay the
amounts previously owed under the Notes, and for the other covenants set forth
below, each of the Holders severally and the Company agree as follows:
1. Extension of Maturity Date. The maturity date of each Note is hereby
extended to June 30, 1999. Within three (3) business days of the receipt by the
Company of the proceeds (the "Payment Date") from the Company's initial public
offering currently being initiated by the Company (the "IPO"), the Company shall
pay to each Holder, pro rata in proportion to the principal amount of the Notes
held by each Holder, the aggregate sum of $93,750.
2. Payment of Interest. On the Payment Date, the Company shall pay to the
Holders interest accrued on the aggregate outstanding principal balance of the
Notes of $187,500 at the rate of 6% per annum, calculated as set forth in the
Notes, for the period from June 1, 1997, through and including May 30, 1998, and
shall also pay to the Holders on the Payment Date interest on the aggregate
outstanding principal balance of the Notes of $187,500 at the rate of 12% per
annum, calculated as set forth in the Notes, for the period from June 1, 1998,
through and including the Payment Date. Thereafter, the Notes shall bear
interest on the outstanding principal balance at the rate of 12% per annum
payable monthly in arrears on each monthly anniversary of the Payment Date
(prorated for any partial months), commencing with the first month following the
Payment Date, until paid in full. The outstanding principal balance of the Notes
may be prepaid in whole or in part at any time without premium or penalty.
3. Defaults; Acceleration. Each of the Holders hereby severally and jointly
waives any claims it may have against the Company resulting from the failure by
the Company to make any payments due under the Notes prior to the date of this
letter agreement. If (i) the IPO is terminated by the Company, (ii) the IPO is
not successfully consummated on or before December 31, 1998, or (iii) the
Company fails to make any interest payment on the Notes due and payable on or
after the Payment Date, then from and after the earliest to occur of the
foregoing events the entire outstanding principal balance of the Notes shall
become due and
<PAGE>
payable, the interest rate payable to the Holders for the period from June 1,
1998 through the date of payment to the Holders of the entire outstanding
principal balance of the Notes shall be increased by 4%, for a total interest
rate during such period of 16%, and such interest shall be payable on demand.
4. Warrants. As further consideration for the waiver and forbearance of the
Holders set forth above, the Company hereby extends the period in which the
Warrants may be exercised by the Holders to 5:30 p.m. New York time on May 30,
2005. In addition, the "Exercise Price" (as defined in the Warrants) is hereby
reduced to $.70 per share.
5. Security Interest. To secure the Company's obligations under the Notes
as amended pursuant to this letter agreement, the Company hereby agrees to enter
into and deliver to the Holders, for their joint and several benefit, the
Security Agreement of even date with this letter agreement (the "Security
Agreement") naming Mr. Dennis Quirk as collateral agent for the Holders and
certain other secured parties referred to below (the "Collateral Agent"). In
addition, the Company shall execute and deliver to counsel for the Holders a
UCC-1 Financing Statement with respect to the collateral subject to the Security
Agreement (the "Financing Statement"). Holders' counsel shall hold the Financing
Statement in escrow, and shall not file or permit the filing of the Financing
Statement unless and until the earliest to occur of (i) the termination of the
IPO by the Company, (ii) the Payment Date, or (iii) December 31, 1998. If the
Financing Statement is filed upon the occurrence of the event or date referenced
in subparts (i) and (ii) above, the Holders acknowledge and agree that the liens
perfected on and as of such date shall be junior and subordinate to the liens,
if any, granted by the Company to State Street Bank and Trust Company on behalf
of certain secured lenders to the Company having loaned the aggregate principal
amount of $1,750,000 to the Company between November, 1997 and February, 1998.
The Holders agree that, upon payment to the Holders of all amounts due under the
Notes, the Holders shall cause the collateral agent to execute and deliver to
the Company all instruments as the Company may prepare and request necessary to
terminate the Financing Statement and the Security Agreement, immediately upon
the request of the Company.
6. Expenses. The Company hereby agrees to reimburse the Holders in the
amount of $7,500 for legal fees and expenses incurred by the Holders,
immediately upon execution of this letter agreement.
7. Miscellaneous. This letter agreement, and the amendments and waivers
contained herein, shall not be effective unless and until this letter agreement
shall have been signed by the Company and each of the Holders. This letter
agreement may be executed in multiple counterparts, each of which when taken
together shall constitute one and the same agreement.
This letter agreement shall be governed by the laws of the State of New
York, without application of conflict of law principals. The parties hereby
consent to the jurisdiction of state and federal courts located in the county of
New York, New York, for purposes of any action in connection with this letter
agreement, and hereby further consent to service of process by U.S. registered
mail, postage prepaid, to the Company c/o Ehrenreich Eilenberg
<PAGE>
Krause & Zivian LLP, 11 East 44th Street, 17th Floor, New York, NY 10017, Attn:
Adam D. Eilenberg, and to the Lenders c/o Friedman & Siegelbaum LLP, Seven
Becker Farm Road, Roseland, NJ 07068, Attn: Shepard A. Federgreen, or to such
other address as either party may notify the other in accordance with this
paragraph.
This letter agreement sets forth the entire understanding of the Company
and the Holders concerning the matters addressed above, and may not be amended
except by written instrument signed by the Company and each Holder that agrees
to be bound by such amendment. This letter agreement shall be binding on, and
shall inure to the benefit of, the Company, the Holders severally, and each of
their respective heirs, successors, assigns and representatives. Except as set
forth above, the Notes, the Warrants, and all agreements and instruments
evidencing the Notes, the Warrants and any other agreements between or among any
of the Holders and the Company prior to the date hereof shall remain in full
force and effect in accordance with their respective terms.
Please sign this letter agreement where indicated below and return it to
the Company or our counsel at your earliest convenience.
Sincerely,
Digital LAVA, Inc.
By: /s/ Roger Berman
-----------------------------------------
An Authorized Officer
Accepted and agreed as of the date
first written above, by:
United Resources Partners
By: /s/ Dennis Quirk
--------------------------------
An Authorized Partner
<PAGE>
/s/ Irwin Ginsburg
- -------------------------------------
Irwin Ginsburg
/s/ Richard Heller
- -------------------------------------
Richard Heller
/s/ James Ellis
- -------------------------------------
James Ellis
EXHIBIT 4 (m)
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of July 11, 1997, between DIGITAL LAVA INC., a
Delaware corporation (the "Company"), and the persons whose names and addresses
are set forth on Schedule I annexed hereto (the "Holders").
W I T N E S S E T H:
WHEREAS, pursuant to a subscription agreement of even date hereof between
the Company and the Holders, Holders shall be issued an aggregate of up to 36
units of the Company's securities ("Units"), each Unit consisting of (i) a
senior non-negotiable (non-subordinated) promissory note in the principal amount
of [_____] (individually, a "Bridge Note" and collectively, the "Bridge Notes"),
and (ii) warrants to purchase [____] shares of the Company's common stock, par
value $.0001 per share ("Common Stock," shares of Common Stock shall be referred
to as "Common Shares"), at an exercise price of $.97 per share (the "Warrants").
NOW THEREFORE, in consideration of the premises herein set forth and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Issue. The Company shall issue to each Holder a certificate (the
"Warrant Certificate") dated as of the date hereof providing each such Holder
with the right to purchase, at any time, from July 11, 1998, until 5:30 p.m.,
New York time, on July 11, 2003, the number of Common Shares listed next to the
name of each such Holder on Exhibit I (the "Warrant Shares") (subject to
adjustment as provided in Section 9 hereof), at an exercise price (subject to
adjustment as provided in Section 9 hereof) of $.97 per Common Share; provided,
however, that if the Company elects, in its sole discretion, to extend the
maturity date of the Bridge Notes from January 11, 1998 to July 11, 1998, the
exercise price of the Warrants shall be $0.87 per Common Share (subject to
adjustment as provided in Section 9 hereof).
2. Warrant Certificate. The Warrant Certificate to be delivered pursuant to
this Agreement shall be in the form set forth in Exhibit X, attached hereto and
made a part hereof, with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Agreement.
3. Exercisability of Warrants. The Warrants shall be exercisable at any
time from July 11, 1998, until 5:30 p.m., New York time, on July 11, 2003.
4. Procedure for Exercise of Warrants.
4.1 Cash Exercise. The Warrants are exercisable at an aggregate initial
exercise price per Common Share set forth in Section 7 hereof payable by
certified check or official bank check in New York Clearing House funds. Upon
surrender of a Warrant Certificate with the annexed
<PAGE>
Form of Election to Purchase duly executed, together with payment of the
Exercise Price (as hereinafter defined) for the Warrant Shares purchased, at the
Company's principal offices in Los Angeles, California (presently located at
10850 Wilshire Boulevard, Suite 1260, Los Angeles, CA 90024) the registered
holder of a Warrant Certificate (individually a "Holder" and sometimes
collectively the "Holders") shall be entitled to receive a certificate for the
Warrant Shares so purchased. The purchase rights represented by the Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part (but not as to fractional Common Shares underlying the Warrants). In the
case of the purchase of less than all the Warrant Shares purchasable under the
Warrant Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrant Shares purchasable thereunder.
4.2 Cashless Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 4.1 above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Common Shares equal to the product of (x) the number
of Common Shares as to which the Warrants are being exercised multiplied by (y)
a fraction, the numerator of which is the Current Market Price of the Common
Shares (as defined below) less the Exercise Price then in effect and the
denominator of which is the Current Market Price.
4.3 Current Market Price. The term "Current Market Price" shall mean (i) if
the Shares are traded in the over-the-counter market or on the National
Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ"),
the average per Share closing bid prices on the 20 consecutive trading days
immediately preceding the date of exercise, as reported by NASDAQ or an
equivalent generally accepted reporting service, or (ii) if the Shares are
traded on a national securities exchange, the average for the 20 consecutive
trading days immediately preceding the exercise date of the daily per Share
closing prices on the principal stock exchange on which the Shares are listed,
as the case may be. The closing price referred to in clause (ii) above shall be
the last reported sales price or, if no such reported sale takes place on such
day, the average of the reported closing bid and asked prices, in either case on
the national securities exchange on which the Shares are then listed.
5. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Shares (or Other Securities) shall be made
forthwith (and in any event within five (5) business days thereafter) without
charge to the Holder thereof including, without limitation, any tax which may be
payable in respect of the issuance thereof, and such certificate shall (subject
to the provisions of Sections 6 and 8 hereof) be issued in the name of, or in
such names as may be directed by, the Holder thereof; provided, however, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificate in
a name other than that of the Holder and the Company shall not be required to
issue or deliver such certificate unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
<PAGE>
The Warrant Certificate and the certificate representing the Warrant Shares
(or Other Securities) shall be executed on behalf of the Company by the manual
or facsimile signature of the then present Chairman or Vice Chairman of the
Board of Directors or President or any Vice President of the Company under its
corporate seal reproduced thereon, attested to by the manual or facsimile
signature of the then present Secretary or any Assistant Secretary of the
Company. The Warrant Certificate shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
6. Transfer of Warrants. The Holder of the Warrant Certificate, by its
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof. The Warrants may
be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole
or in part, without restriction, subject to compliance with applicable
securities laws.
7. Exercise Price.
7.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 9 hereof, the initial exercise price of each Warrant shall be the price
set forth in Section 1 hereof per Warrant Shares issued thereunder. The adjusted
exercise price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance with the
provisions of Section 9 hereof.
7.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
8. Registration Under the Securities Act of 1933. Subject to the
Registration Rights Agreement between the Company and the Holders dated as of
the date hereof, the Warrants, the Warrant Shares and any of the Other
Securities issuable upon exercise of the Warrants have not been registered under
the Securities Act of 1933, as amended (the "Act"). Upon exercise, in whole or
in part, of the Warrants, a certificate representing the Warrant Shares
underlying the Warrants, and any of the Other Securities issuable upon exercise
of the Warrants (collectively, the "Warrant Securities") shall bear the
following legend unless such Warrant Shares previously have been registered
under the Act in accordance with the terms hereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii)
TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE
ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL,
IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT
AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE.
9. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Shares purchasable upon the
exercise of the Warrants, shall
<PAGE>
be subject to adjustment from time to time upon the occurrence of certain events
described in this Section 9.
9.1 Subdivision or Combination of Common Shares and Common Share Dividend.
In case the Company shall at any time subdivide its outstanding Common Shares
into a greater number of Common Shares or declare a dividend upon its Common
Shares payable solely in Common Shares, the Exercise Price in effect immediately
prior to such subdivision or declaration shall be proportionately reduced, and
the number of Warrant Shares issuable upon exercise of the Warrants shall be
proportionately increased. Conversely, in case the outstanding Common Shares of
the Company shall be combined into a smaller number of Common Shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased, and the number of Warrant Shares issuable upon
exercise of the Warrants shall be proportionately reduced.
9.2 Dilutive Issuances. In the event that the Company shall sell or issue
at any time after the date of this Warrant and prior to its termination, Shares
(other than Excluded Shares, as defined in Section 9.2.5) at a consideration per
Share less than $.97, then the Exercise Price shall be adjusted to a new
Exercise Price (calculated to the nearest cent) determined by dividing
(a) an amount equal to (i) the total number of Shares Outstanding (as
defined below and subject to adjustment in the manner set forth in Section 9.1)
on the date of issuance of this Warrant multiplied by the Exercise Price in
effect on the date of issuance of this Warrant (subject, however, to adjustment
in the manner set forth in Section 9.1), plus (ii) the aggregate of the amount
of all consideration, if any, received by the Company for the issuance or sale
of Shares since the date of issuance of this Warrant, by
(b) the total number of Shares Outstanding immediately after such issuance
or sale.
In no event shall any such adjustment be made pursuant to this Section 9.2
if it would increase the Exercise Price in effect immediately prior to such
adjustment, except as provided in Sections 9.2.3 and 9.2.4. Upon each adjustment
of the Exercise Price pursuant to this Section 9.2, the holder of this Warrant
shall thereafter be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares purchasable pursuant hereto immediately prior to such adjustment,
and dividing the product thereof by the Exercise Price resulting from such
adjustment.
9.2.1 Definitions. For purposes of this Section 9.2, the following
definitions shall apply:
(a) "Convertible Securities" shall mean any indebtedness or securities
convertible into or exchangeable for Shares.
(b) "Options" shall mean any rights, warrants or options to subscribe for
or purchase Shares or Convertible Securities other than rights, warrants or
options to purchase Excluded Securities (as defined in Section 9.2.5).
<PAGE>
(c) "Shares Outstanding" shall mean the aggregate of all Shares outstanding
and all Shares issuable upon exercise of all outstanding Options and conversion
of all outstanding Convertible Securities.
9.2.2 For the purposes of this Section 9.2, the following provisions shall
also be applicable:
9.2.2.1 Cash Consideration. In case of the issuance or sale of additional
Shares for cash, the consideration received by the Company therefor shall be
deemed to be the amount of cash received by the Company for such Shares (or, if
such Shares are offered by the Company for subscription, the subscription price,
or, if such Shares are sold to underwriters or dealers for public offering
without a subscription offering, the public offering price), without deducting
therefrom any compensation or discount paid or allowed to underwriters or
dealers or others performing similar services or for any expenses incurred in
connection therewith.
9.2.2.2 Non-Cash Consideration. In case of the issuance (otherwise than
upon conversion or exchange of Convertible Securities) or sale of additional
Shares, Options or Convertible Securities for a consideration other than cash or
a consideration a part of which shall be other than cash, the fair value of such
consideration as determined by the Board of Directors (if any, otherwise by the
Managers) of the Company in the good faith exercise of its business judgment,
irrespective of the accounting treatment thereof, shall be deemed to be the
value, for purposes of this Section 9, of the consideration other than cash
received by the Company for such securities.
9.2.2.3 Options and Convertible Securities. In case the Company shall in
any manner issue or grant any Options or any Convertible Securities, the total
maximum number of Shares of issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities at the time such Convertible Securities first become convertible or
exchangeable shall (as of the date of issue or grant of such Options or, in the
case of the issue or sale of Convertible Securities other than where the same
are issuable upon the exercise of Options, as of the date of such issue or sale)
be deemed to be issued and to be outstanding for the purpose of this Section 9.2
and to have been issued for the sum of the amount (if any) paid for such Options
or Convertible Securities and the amount (if any) payable upon the exercise of
such Options or upon conversion or exchange of such Convertible Securities at
the time such Convertible Securities first become convertible or exchangeable;
provided that, subject to the provisions of Section 9.2.3, no further adjustment
of the Exercise Price shall be made upon the actual issuance of any such Shares
or Convertible Securities or upon the conversion or exchange of any such
Convertible Securities.
9.2.3 Change in Option Price or Conversion Rate. In the event that the
purchase price provided for in any Option referred to in subsection 9.2.2.3, or
the rate at which any Convertible Securities referred to in subsection 9.2.2.3
are convertible into or exchangeable for Shares shall change at any time (other
than under or by reason of provisions designed to protect against dilution),
then, for purposes of any adjustment required by Section 9.2, the Exercise Price
in effect at the time of such event shall forthwith be readjusted to the
Exercise Price that would have been in effect at such time had such Options or
Convertible Securities still outstanding
<PAGE>
provided for such changed purchase price, additional consideration or conversion
rate, as the case may be, at the time initially granted, issued or sold,
provided that if such readjustment is an increase in the Exercise Price, such
readjustment shall not exceed the amount (as adjusted by Sections 9.1 and 9.2)
by which the Exercise Price was decreased pursuant to Section 9.2 upon the
issuance of the Option or Convertible Security. In the event that the purchase
price provided for in any such Option referred to in subsection 9.2.2.3, or the
additional consideration (if any) payable upon the conversion or exchange of any
Convertible Securities referred to in subsection 9.2.2.3, or the rate at which
any Convertible Securities referred to in subsection 9.2.2.3 are convertible
into or exchangeable for Shares, shall be reduced at any time under or by reason
of provisions with respect thereto designed to protect against dilution, then in
case of the delivery of Shares upon the exercise of any such Option or upon
conversion or exchange of any such Convertible Security; the Exercise Price then
in effect hereunder shall, upon issuance of such Shares, be adjusted to such
amount as would have obtained had such Option or Convertible Security never been
issued and had adjustments been made only upon the issuance of the Shares
delivered as aforesaid and for the consideration actually received for such
Option or Convertible Security and the Shares, provided that if such
readjustment is an increase in the Exercise Price, such readjustment shall not
exceed the amount (as adjusted by Sections 9.1 and 9.2) by which the Exercise
Price was decreased pursuant to Section 9.2 upon the issuance of the Option or
Convertible Security.
9.2.4 Termination Of Option or Conversion Rights. In the event of the
termination or expiration of any right to purchase Shares under any Option
granted after the date of this Warrant or of any right to convert or exchange
Convertible Securities issued after the date of this Warrant, the Exercise Price
shall, upon such termination, be readjusted to the Exercise Price that would
have been in effect at the time of such expiration or termination had such
Option or Convertible Security, to the extent outstanding immediately prior to
such expiration or termination, never been issued, and the Shares issuable
thereunder shall no longer be deemed to be Shares Outstanding, provided that if
such readjustment is an increase in the Exercise Price, such readjustment shall
not exceed the amount (as adjusted by Sections 9.1 and 9.2) by which the
Exercise Price was decreased pursuant to Section 9.2 upon the issuance of the
Option or Convertible Security. The termination or expiration of any right to
purchase Shares under any Option granted prior to the date of this Warrant or of
any right to convert or exchange Convertible Securities issued prior to the date
of this Warrant shall not trigger any adjustment to the Exercise Price, but the
Shares issuable under such Options or Convertible Securities shall no longer be
counted in determining the number of Shares Outstanding on the date of issuance
of this Warrant for purposes of subsequent calculations under this Section 9.2.
9.2.5 Excluded Shares. Notwithstanding anything herein to the contrary, the
Exercise Price shall not be adjusted pursuant to this Section 9.2 by virtue of
the issuance and/or sale of Excluded Shares, which shall mean the following: (a)
Shares issuable upon the exercise of the Warrants; (b) Shares, Options or
Convertible Securities to be issued and/or sold to employees, advisors
(including, without limitation, financial, technical and legal advisers),
directors, or officers of, or consultants to, the Company or any of its
subsidiaries pursuant to a share grant, share option plan, share purchase plan,
pension or profit sharing plan or other share agreement or arrangement existing
as of the date hereof or approved by the Company's Board of Directors (if any,
otherwise by the Managers); (c) the issuance of Shares, Options and/or
Convertible
<PAGE>
Securities pursuant to Options and Convertible Securities outstanding as of the
date of this Warrant; (d) the issuance of Shares, Options or Convertible
Securities as a share dividend or upon any subdivision or combination of Shares
or Convertible Securities; (e) the issuance of Shares, Options or Convertible
Securities in connection with strategic partnerships or other business and/or
product consolidations or joint ventures and (f) the issuance of Shares, Options
or Convertible Securities by the Company in connection with a contemplated
equity financing currently in progress as of the date hereof. For all purposes
of this Section 9.2, all Shares of Excluded Shares shall be deemed to have been
issued for an amount of consideration per Share equal to the initial Exercise
Price (subject to adjustment in the manner set forth in Section 9.1). In
addition, if the amount of any adjustment pursuant to this Section 9 shall be
less than two cents (2(cent)) per Warrant Share no adjustment to the Exercise
Price or to the number of Warrant Shares issuable upon the exercise of the
Warrants shall be made; provided, however, that in such case any adjustment that
would otherwise be required then to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment which,
together with any adjustment so carried forward, shall amount to at least two
cents (2(cent)) per Warrant Share.
9.3 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
(i) the effective date of the adjustment and the Exercise Price resulting from
such adjustment and (ii) the increase or decrease, if any, in the number of
Common Shares purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
9.4 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Common Shares;
(b) the Company shall declare any dividend upon its Common Shares payable
in securities (other than a dividend payable solely in Common Shares) or make
any special dividend or other distribution to the holders of its Common Shares;
(c) there shall be any consolidation or merger of the Company with another
corporation, or a sale of all or substantially all of the Company's assets to
another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company, (i)
at least 15 days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote in respect of any such
<PAGE>
dissolution, liquidation or winding-up; (ii) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 15 days' written notice
of the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
distribution or option rights, the date on which the holders of Common Shares
shall be entitled thereto. Any notice given in accordance with clause (iii)
above shall also specify the date on which the holders of Common Shares shall be
entitled to exchange their Common Shares for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, as the case may be. If the Holder
of the Warrant does not exercise this Warrant prior to the occurrence of an
event described above, except as provided in Sections 9.1 and 9.5, the Holder
shall not be entitled to receive the benefits accruing to existing holders of
the Common Shares in such event.
9.5 Changes in Common Shares. In case at any time the Company shall be a
party to any transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the Company's assets or
recapitalization of the Common Shares) in which the previously outstanding
Common Shares shall be changed into or exchanged for different securities of the
Company or common stock or other securities of another corporation or interests
in a non-corporate entity or other property (including cash) or any combination
of any of the foregoing (each such transaction being herein called the
"Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then, as a condition of the consummation of the
Transaction, lawful and adequate provisions shall be made so that each Holder,
upon the exercise hereof at any time on or after the Consummation Date, shall be
entitled to receive, and this Warrant shall thereafter represent the right to
receive, in lieu of the Common Shares issuable upon such exercise prior to the
Consummation Date, the highest amount of securities or other property to which
such Holder would actually have been entitled as a holder of an Common Share
upon the consummation of the Transaction if such Holder had exercised such
Warrant immediately prior thereto. The provisions of this Section 9.5 shall
similarly apply to successive Transactions.
10. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
<PAGE>
11. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Common Shares upon the exercise
of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Common Shares or Other Securities.
12. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized Common Shares, solely for the purpose of
issuance upon the exercise of the Warrants, such number of Common Shares or
Other Securities as shall be issuable upon the exercise thereof. The Company
covenants and agrees that, upon exercise of the Warrants and payment of the
Exercise Price therefor, all Common Shares or Other Securities issuable upon
such exercise shall be duly and validly issued, fully paid, non-assessable and
not subject to the preemptive rights of any holder of Common Shares.
13. Notices to Warrant Holder. Except as otherwise provided in Section 9.4,
nothing contained in this Agreement shall be construed as conferring upon the
Holder by virtue of his holding the Warrant the right to vote or to consent or
to receive notice as a holder of an Common Share in respect of any meetings of
such holders for the election of directors or any other matter, or as having any
rights whatsoever as such a holder of the Company.
14. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to the registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 4 hereof (with
copy to: Eilenberg & Zivian, 666 Third Avenue, 30th Floor, New York, NY
10017/Attn. Jeffrey D. Abbey, Esq.) or to such other address as the Company may
designate by notice to the Holder.
15. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.
16. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the close of business on
the tenth anniversary of the issuance of the Warrants.
18. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes
<PAGE>
shall be construed in accordance with the laws of the State of New York without
giving effect to the rules of the State of New York governing the conflicts of
laws.
19. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.
23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be
duly executed, as of the day and year first above written.
Very truly yours,
DIGITAL LAVA INC.
By: /s/ Roger Berman
------------------------------
Authorized Officer
ACCEPTED AND AGREED TO:
/s/ Greg Louis Rondinelli
- -----------------------------------
Greg Louis Rondinelli
/s/ Ahmed Alfi
- -----------------------------------
Ahmed Alfi
/s/ Nuvrty, Inc.
- -----------------------------------
Nuvrty, Inc.
/s/ Redwood Forest Investments
- -----------------------------------
Redwood Forest Investments
/s/ Dabney Resnick
- -----------------------------------
Dabney Resnick
/s/ Eric Appell
- -----------------------------------
Eric Appell
/s/ Shahrokh Sedaghat
- -----------------------------------
Shakhrokh "Shawn" Sedaghat
<PAGE>
EXHIBIT X
TO
WARRANT AGREEMENT
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
EXERCISABLE FROM JULY 11, 1998
UNTIL
5:30 P.M., NEW YORK TIME, JULY 11, 2003
No. W-LAVA-97-[ ] [ ] Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ______________ or his/her
registered assigns ("Holder"), is the registered holder of [ ] Warrants to
purchase initially at any time from July 11, 1998, until 5:30 p.m. New York time
on July 11, 2003 ("Expiration Date"), up to [ ] fully-paid and non-assessable
shares of common stock, par value $.0001 per share ("Common Shares") of DIGITAL
LAVA INC., a Delaware corporation (the "Company"), at an initial exercise price,
subject to adjustment in certain events (the "Exercise Price"), equal to $.97
per Common Share, upon surrender of this Warrant Certificate and payment of the
initial exercise price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Warrant Agreement dated as of the date
hereof between the Company and Holder (the "Warrant Agreement"). Payment of the
Exercise Price shall be made by certified check or official bank check in New
York Clearing House funds payable to the order of the Company, unless exercise
is made pursuant to Section 4.2 of the Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder
<PAGE>
of the Company and the Holder (the word "Holder" meaning the registered holder)
of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificate
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.
Dated as of July 11, 1997
DIGITAL LAVA INC.
By: /s/ Roger Berman
----------------------------
Authorized Officer
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _________ Common Shares and
herewith tenders in payment for such securities a certified check or official
bank check payable in New York Clearing House Funds to the order of DIGITAL LAVA
INC. in the amount of $_____, all in accordance with the terms of Section 4 of
the Warrant Agreement dated as of [June 13, 1997] between DIGITAL LAVA INC. and
the undersigned (or its assignor). The undersigned requests that a certificate
for such securities be registered in the name of _______________ whose address
is _______________ and that such Certificate be delivered to whose address is
_______________.
Dated:
Signature _____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
_______________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED __________ hereby
sells, assigns and transfers unto
_____________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______ Attorney, to transfer
the within Warrant Certificate on the books of the within-named Company, with
full power of substitution.
Dated: ________________
Signature _____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
_______________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
EXHIBIT 4 (n)
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of July 11,
1997 is made by and among DIGITAL LAVA INC., a Delaware corporation (the
"Company"), and the persons listed on Schedule I hereto (collectively, the
"Holders", each a "Holder").
RECITALS
In connection with the purchase by the Holders of certain units ("Units")
of the Company's securities pursuant to a Subscription Agreement and a Warrant
Agreement, both between the Company and the Holders dated as of the date hereof,
which agreements among other things provide for the issuance to the Holders of
certain warrants (the "Warrants") to purchase shares of the Company's common
stock ("Common Stock"), the Company has agreed to grant to the Holders certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder (collectively, the "Securities Act") with respect to
the shares of Common Stock issuable upon conversion of the Notes included in the
Units (the "Conversion Shares") and upon exercise of the Warrants (the "Warrant
Shares"). This Agreement sets forth the terms and conditions of such
undertaking.
AGREEMENTS
The Company and the Holders covenant and agree as follows:
1. Definitions. For purposes of this Agreement:
(a) The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
statements or similar documents 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 the effectiveness of such registration statement or document by
the Securities and Exchange Commission (the "SEC");
(b) The term "Registrable Securities" means (i) the Conversion Shares and
the Warrant Shares and (ii) any shares of Common Stock issued as (or issuable
upon the conversion or exercise of any convertible security, warrant, right or
other security which is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of such Conversion Shares and Warrant
Shares, excluding in all cases, however, any Registrable Securities sold by a
Holder in a transaction in which its registration rights under this Agreement
are not assigned.
<PAGE>
2. Registration.
(a) Demand Registration. Subject to the limitations set forth in Section
2(c) below, the Company shall, upon the written request of Holders holding a
majority of the sum of (x) the outstanding Registrable Securities and (y) the
then outstanding and unexercised Warrants, use its best efforts to cause the
Registrable Securities specified in such request to be registered under the
Securities Act (a "Demand Registration"). In the event that the Company shall
receive a written request under this Section 2(a), the Company shall give prompt
written notice thereof to any Holder which did not join in such written request.
If requested in writing by any of such other Holders within fifteen days after
the Company gives the notice described in the preceding sentence, the Company
shall include among the Registrable Securities that it endeavors to register
under this Section 2(a) such Registrable Securities as shall be specified in the
request of such other Holders.
(b) Notice of Demand Registration. Each request delivered pursuant to
Section 2(a) shall: (i) specify the amount of Registrable Securities intended to
be offered and sold by each of the Holders joining in the request; (ii) express
the present intent to offer such Registrable Securities for distribution; (iii)
describe the nature or method of the proposed offer and sale of the Registrable
Securities; and (iv) contain the undertaking of the Holders to provide all such
information and materials and take all such action as may be required in order
to permit the Company to comply with all applicable requirements of the
Securities Act, the Registrable Securities and state securities and "blue sky"
laws, and to obtain acceleration of the effective date of the Registration
Statement (as defined below).
(c) Limitations on Demand Registrations. Notwithstanding anything herein to
the contrary, the obligations of the Company to cause any Registrable Securities
to be registered pursuant to Section 2(a) are subject to each of the following
limitations, conditions and qualifications:
(i) The Holders may only request that the Company make any Demand
Registration subsequent to the earlier of 180 days following the effective
date of the registration statement for the initial public offering of the
Company's securities.
(ii) Any request for Demand Registration made by the Sellers pursuant
to Section 2(a), to be effective, shall request the registration of the
offering and sale or other distribution by the Holders of not less than
one-half of the Registrable Securities.
(iii) In the event the Holders request Demand Registration pursuant to
Section 2(a) and the related offering is to be underwritten, the managing
underwriter shall be a nationally recognized investment banking firm
approved by the Company in the reasonable exercise of its discretion.
(iv) The Company shall be required to effect only one Demand
Registration pursuant to Section 2(a); provided, however, that a
registration shall not count as a Demand Registration unless 90% of the
Registrable Securities requested to be included in such registration are
sold pursuant to such registration statement.
(d) Incidental Registration. Subject to the limitations set forth in
Section 2(f), at any time that the Company for its account or the account of
others shall propose the registration under the
<PAGE>
Securities Act of an offering of any of its securities on a registration form
which can be used for registration of the Registrable Securities, the Company
shall give written notice as promptly as possible of such proposed registration
to the Holders, and shall include in the offering such amount of Registrable
Securities as the Holders shall request to be included by written notice to the
Company received within fifteen days after receipt of the Company's notice, upon
the same terms (including the method of distribution) as the securities being
sold by the Company pursuant to any such offering (an "Incidental
Registration").
(e) Notice of Incidental Registration. Each request delivered pursuant
to Section 2(d) shall: (i) specify the amount of Registrable Securities intended
to be offered and sold by each of the Holders; and (ii) contain the undertaking
of the Holders to provide all such information and materials and take all such
action as may be required in order to permit the Company to comply with all
applicable requirements of the Securities Act, the SEC and state securities and
"blue sky" laws and to obtain acceleration of the effective date of the
Registration Statement.
(f) Limitations on Incidental Registrations. Notwithstanding anything
contained herein to the contrary, the obligations of the Company to cause
Registrable Securities to be registered pursuant to Section 2(d) are subject to
each of the following limitations, conditions and qualifications:
(i) The Company shall not be required to give notice or include
Registrable Securities in any registration pursuant to Section 2(d) if the
proposed registration is primarily: (A) a registration of a stock option,
thrift, employee benefit or compensation plan or of securities issued or
issuable pursuant to any such plan; (B) a registration of securities
proposed to be issued in connection with a dividend reinvestment and stock
purchase plan or customer stock purchase plan; (C) a registration of
securities proposed to be issued in exchange for securities or assets of,
or in connection with a merger or consolidation with, another corporation
or other entity; or (D) a registration of securities which is solely a
combination of any of the above.
(ii) If the Company is advised in writing by the managing underwriter
(or its investment banking firm if the offering is not underwritten) that
the inclusion of Registrable Securities may, in the opinion of such
underwriter or investment banking firm, as the case may be, interfere with
the orderly sale and distribution of the securities proposed to be offered
by the Company or adversely affect the price at which such securities may
be sold, the number of shares of Registrable Securities to be included in
the offering shall be reduced or eliminated to the extent necessary as
shall be reasonably determined by such underwriter or investment banker, as
the case may be, in good faith.
(iii) In the event the Holders request registration pursuant to
Section 2(d) and the related offering is to be underwritten, the Holders
will enter into an underwriting agreement containing representations,
warranties and agreements consistent with those customarily made by an
issuer and a selling shareholder in underwriting agreements with respect to
secondary distributions.
<PAGE>
(iv) The Company may, in its sole discretion, without the consent of
the Holders and without liability to any Holder for such action, withdraw
such registration statement and abandon the proposed offering in which the
Holder had requested to participate at any time.
(v) The Holders of Registrable Securities may exercise Incidental
Registrations pursuant to Section 2(d) so long as such Holders continue to
hold Registrable Securities.
3. Obligations of the Company. When required under the Agreement to effect
the registration of the Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Registration Statements. Prepare and file with the SEC a registration
statement or statements or similar documents (the "Registration Statement") with
respect to all Registrable Securities, other than any Registrable Securities
excluded by Holders pursuant to Sections 2(a) and 2(d), and use its best efforts
to cause the Registration Statement to become effective and maintain the
effectiveness of the Registration Statement until the earlier of (i) the date
all such registered Registrable Securities are sold and any prospectus delivery
requirements under the Securities Act shall have lapsed, and (ii) (A) six months
(in the case of a registration statement on Form S-1 or comparable long-form
registration statement) or (B) six months following the latest expiration date
of the Warrants (in the case of a registration statement on Form S-3 or
comparable short-form registration statement).
(b) Amendments. 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 comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by the Registration Statement.
(c) Prospectuses. Furnish promptly to each Holders such numbers of copies
of a prospectus, including a preliminary prospectus, and all amendments and
supplements thereto, in conformity with the requirements of the Securities Act,
and such other documents as the Holders may reasonably request in order to
facilitate the disposition of Registrable Securities.
(d) Blue Sky. Use its best efforts to register and qualify the securities
covered by the Registration Statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders, and
to prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements and to take such other actions
necessary or advisable to maintain such registration and qualifications in
effect, and to take all other actions necessary or advisable to enable the
disposition of such securities in such jurisdictions, provided that the Company
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions or to provide any undertaking or make any change in
its charter or bylaws which the Board of Directors determines to be contrary to
the best interest of the Company and its stockholders.
<PAGE>
(e) Underwriting Arrangements. Enter into and perform its obligations under
an underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering. The Holders shall also enter into and
perform their customary obligations under any such agreement including, without
limitation, customary indemnification and contribution obligations.
(f) Notification of Changes. Notify the Holders, at any time when a
prospectus relating to Registrable Securities covered by the Registration
Statement is required to be delivered under the Securities Act, of the happening
of any event as a result of which the prospectus including 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 not misleading in light of the circumstances then
existing. The Company shall promptly amend or supplement the Registration
Statement to correct any such untrue statement or omission.
(g) Notification of Stop Orders. Notify the Holders of the issuance by the
SEC of any stop order suspending the effectiveness of the Registration Statement
or the initiation of any proceedings for that purpose. The Company will make
every reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest possible
time.
(h) Review by Counsel. Permit a single firm of counsel designated as
selling stockholders' counsel by the holders of a majority in interest of the
Registrable Securities to review (at the expense of such selling stockholders)
the Registration Statement and all amendments and supplements thereto a
reasonable period of time prior to their filing, and shall not file any document
in a form to which counsel reasonably objects.
(i) Opinions. At the request of the Holders, use its best efforts to
furnish on the date that Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this
Agreement (i) an opinion, dated such date, of the counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters and (ii) a letter dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters.
(j) Due Diligence. Make available for inspection by the Holders, any
underwriters participating in the offering pursuant to the registration and the
counsel, accountants or other agents retained by the Holders or any such
underwriter, all pertinent financial and other records, corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by the Holders or any
such underwriters in connection with the registration.
(k) Listing. If the class of the Company's securities is then listed on a
national securities exchange, use its best efforts to cause the Registrable
Securities to be listed on such exchange.
<PAGE>
If the Company's securities are not then listed on a national securities
exchange, use its best efforts to facilitate the reporting of the Registrable
Securities on NASDAQ.
(l) Further Actions. Take all other reasonable actions necessary to
expedite and facilitate disposition by the Holders of the Registrable Securities
pursuant to the Registration Statement.
4. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to each Holder that such Holder shall furnish to the Company such
information regarding itself, the Registrable Securities held by it, and the
intended method of disposition of such securities as shall be reasonably
required to effect the registration of the Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
5. Expenses of Registration. All expenses other than the underwriting
discounts and commissions incurred in connection with registration, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing, filing and qualification fees, printing and accounting
fees, the fees and disbursements of counsel for the Company (but excluding the
fees and disbursements of any counsel for the Holders) shall be borne by the
Company.
6. Indemnification. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
(a) By Company. To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the directors, if any, of such Holder, the
officers, if any, of such Holder who sign the Registration Statement, each
person, if any, who controls such Holder, any underwriter (as defined in the
Securities Act) for the Holders and each person, if any, who controls any such
underwriter within the meaning of the Securities Act or the Securities Act of
1934, as amended (the "1934 Act"), against any losses, claims, damages, expenses
or liabilities (joint or several) to which any of them may become subject under
the Securities Act, the 1934 Act or otherwise, insofar as such losses, claims,
damages, expenses or liabilities (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 (collectively, a "Violation"): (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein, in light of the
circumstance in which they are made, not misleading or (iii) any violation or
alleged violation by the Company of the Securities Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the 1934 Act, any state securities law; and the Company will reimburse the
Holders and each such underwriter or controlling person, promptly as such
expenses are incurred, for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability action or proceeding; provided, however, that the indemnity agreement
contained in this Section 6(a) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Company, which consent shall not be
<PAGE>
unreasonably withheld, nor shall the Company be liable in any such case for any
such loss, claim, damage, liability or action to the extent that it aries out of
or is based upon a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by the Holders or any such underwriter or controlling person, as
the case may be. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Holders or any such underwriter
or controlling person and shall survive the transfer of the Registrable
Securities by Holders.
(b) By Holders. To the extent permitted by law, each Holder, severally and
not jointly, will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the Registration Statement, each
person, if any, who controls the Company within the meaning of the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the 1934 Act, any underwriter and any other stockholder
selling securities pursuant to the Registration Statement or any of its
directors or officers or any person who controls such holder or underwriter,
against any losses, claims, damages or liabilities (joint or several) to which
any of them may become subject, under the Securities Act, the 1934 Act or other
federal state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration, and such Holder
will reimburse any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage
liability or action; provided, however, that the indemnity agreement contained
in this subsection 6(b) shall not apply to amounts paid in settlement of such
loss, claim, damage, liability or action if such settlement is effected without
the consent of such Holder, which consent shall not be unreasonably withheld;
and provided further, that the Holder shall be liable under this paragraph for
only that amount of losses, claims, damages and liabilities as does not exceed
the proceeds to such Holder as a result of the sale of Registrable Securities
pursuant to such registration.
(c) Procedure for Indemnification. Promptly after receipt by an indemnified
party under this Section 6 of notice of the commencement of any action
(including any governmental action), such indemnified party will, 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 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 parties; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
for the indemnifying party, representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall relieve such indemnifying party of any
liability to the indemnified party under this Section 6 only to the extent
prejudicial to its ability to defend such action, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party other than under this Section 6. The
<PAGE>
indemnification required by this Section 6 shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, promptly
as such expense, loss, damage or liability is incurred.
(d) 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 otherwise would be
liable under this Section 6 to the extent permitted by law, provided that (i) no
contribution shall be made under the circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in this
Section 6, (ii) 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 (iii) 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.
7. Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of SEC Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit the Holders to sell securities of the Company to the public without
registration, the Company agrees, following the initial public offer of the
Company's securities, to:
(i) make and keep public information available, as those terms are
understood and defined in SEC Rule 144;
(ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934
Act; and
(iii) furnish to each Holder, so long as such Holder owns any
Registrable Securities, forthwith upon request (A) a written statement by
the Company that it has complied with the reporting requirements of SEC
Rule 144, the Securities Act and the 1934 Act, (B) 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 (C) such other information as may be
reasonably requested in availing the Holders of any rule or regulation of
the SEC which permits the selling of any securities without registration.
8. Assignment of Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement may be assigned by
the Holders to transferees or assignees of such securities provided the Company
is, within a reasonable time after such transfer, furnished with written notice
of the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; provided, further,
that such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act. The term "Holders" as used in
this Agreement shall include permitted assignees.
<PAGE>
9. Miscellaneous.
(a) Notices. Notices required or permitted to be given hereunder shall be
in writing and shall be deemed to be sufficiently given when personally
delivered or sent by registered mail, return receipt requested, addressed (i) if
to the Company, at 10850 Wilshire Boulevard, Suite 1260, Los Angeles, CA 90024,
(with a copy to: Eilenberg & Zivian, 666 Third Avenue, 30th Floor, New York, NY
10017; Attention: Jeffrey D. Abbey, Esq.) and (ii) if to a Holder at the address
set forth in Schedule I, or at such other address as each such party furnishes
by notice given in accordance with this Section 9(a).
(b) Waiver. 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,
will not operate as a waiver thereof. No waiver will be effective unless and
until it is in writing and signed by the party giving the waiver.
(c) Governing Law. This Agreement shall be enforced, governed and construed
in all respects in accordance with the laws of the State of New York, as such
laws are applied by New York courts to agreements entered into and to be
performed in New York by and between residents of New York. In the event that
any provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute of rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not affect the validity or enforceability
of any other provision hereof.
[Balance of Page Intentionally Left Blank]
<PAGE>
(d) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and may be
amended only by a written agreement executed by the Company and the holders of a
majority in interest of the sum of (x) the Registrable Securities and (y) the
then outstanding and unexercised Warrants.
DIGITAL LAVA INC.
By: /s/ Roger Berman
-----------------------------
Authorized Officer
HOLDER:
/s/ Greg Louis Rondinelli
- -----------------------------------
Greg Louis Rondinelli
/s/ Ahmed Alfi
- -----------------------------------
Ahmed Alfi
/s/ Nuvrty, Inc.
- -----------------------------------
Nuvrty, Inc.
/s/ Redwood Forest Investments
- -----------------------------------
Redwood Forest Investments
/s/ Dabney Resnick
- -----------------------------------
Dabney Resnick
/s/ Eric Appell
- -----------------------------------
Eric Appell
/s/ Shahrokh Sedaghat
- -----------------------------------
Shakhrokh "Shawn" Sedaghat
EXHIBIT 4 (p)
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of February 19, 1998, between DIGITAL LAVA
INC., a Delaware corporation (the "Company"), and the persons whose names and
addresses are set forth on Schedule I annexed hereto (the "Holders").
W I T N E S S E T H:
WHEREAS, pursuant to a subscription agreement of even date hereof between
the Company and the Holders, Holders shall be issued an aggregate of up to 175
units of the Company's securities ("Units"), each Unit consisting of (i) a
non-negotiable secured convertible promissory note in the principal amount of
$10,000 (individually, a "Promissory Note" and collectively, the "Promissory
Notes"), and (ii) warrants (the "Warrants") to purchase shares of the Company's
common stock, par value $.0001 per share ("Common Stock," shares of Common Stock
shall be referred to as "Shares" or "Common Shares").
NOW THEREFORE, in consideration of the premises herein set forth and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Issue. At the earlier of (x) the first closing of one or more equity
offerings by the Company (a 'Private Placement') or (y) the first anniversary of
the date hereof (the 'Warrant Certificate Delivery Date'), the Company shall
issue to each Holder a certificate (the "Warrant Certificate") dated as of the
date hereof providing each Holder with the right to purchase, at any time until
5:30 p.m., New York time, on February 19, 2003, up to that number of Common
Shares equal to the product of (i) the number of Units purchased by such Holder
times (ii) $10,000 divided by (iii) the offering price per Common Share (the
'Offering Price') at the first closing of a Private Placement. Such shares shall
be referred to as the 'Warrant Shares.' The number of Warrant Shares shall be
subject to adjustment as provided in Section 9 hereof, and the exercise price
per Warrant Share (also subject to adjustment as provided in Section 9 hereof)
shall equal the Offering Price. If no Private Placement occurs by the first
anniversary of the date hereof, the number of Warrant Shares per Unit will equal
10,000 times (x) the number of fully diluted Common Shares outstanding as of
such first anniversary (the 'Fully Diluted Shares Outstanding') divided by (y)
15,000,000 and the exercise price of the Warrants will equal (A) $15,000,000
divided by (B) the number of Fully Diluted Shares Outstanding. The Company will
give prompt written notice of the actual exercise price to the Holders, pursuant
to Section 9.3 hereof, as determined in accordance with the foregoing sentence.
2. Warrant Certificate. A Warrant Certificate shall be delivered to each
Holder, to further evidence rights herein and shall be in the form set forth in
Exhibit X, attached hereto and made a part hereof, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Agreement.
<PAGE>
3. Exercisability of Warrants. The Warrants shall be exercisable at any
time until 5:30 p.m., New York time, on February 19, 2003.
4. Procedure for Exercise of Warrants.
4.1 Cash Exercise. The Warrants are exercisable at an aggregate initial
exercise price per Warrant Share set forth in Section 1 hereof payable by
certified check or official bank check in New York Clearing House funds. Upon
surrender of a Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the Exercise Price (as hereinafter
defined) for the Warrant Shares purchased, at the Company's principal offices in
Los Angeles, California (presently located at 10850 Wilshire Boulevard, Suite
1260, Los Angeles, CA 90024) the registered holder of a Warrant Certificate
(individually a "Holder" and sometimes collectively the "Holders") shall be
entitled to receive a certificate for the Warrant Shares so purchased. The
purchase rights represented by the Warrant Certificate are exercisable at the
option of the Holder thereof in whole or in part (but not as to fractional
Common Shares underlying the Warrants). In the case of the purchase of less than
all the Warrant Shares purchasable under the Warrant Certificate, the Company
shall cancel said Warrant Certificate upon the surrender thereof and shall
execute and deliver a new Warrant Certificate of like tenor for the balance of
the Warrant Shares purchasable thereunder.
4.2 Cashless Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 4.1 above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Warrant Shares equal to the product of (x) the number
of Warrant Shares as to which the Warrants are being exercised multiplied by (y)
a fraction, the numerator of which is the Current Market Price of the Common
Shares (as defined below) less the Exercise Price then in effect and the
denominator of which is the Current Market Price.
4.3 Current Market Price. The term "Current Market Price" shall be deemed
to be the last reported sale price, or, in case no reported sale takes place on
such day, the average of the last reported sales price for the last three (3)
trading days, in either case as officially reported by the principal securities
exchange on which the Common Shares are listed or admitted to trading, or if the
Common Shares are not listed or admitted to trading on any national securities
exchange or quotation by NASDAQ-NMS, the average closing bid price as reported
through NASDAQ (or any similar organization if NASDAQ is no longer reporting
such bid) or, if the Common Shares are not so listed, admitted or quoted, as
determined in good faith by the Board of Directors of the Company based on the
best information available to it.
5. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Shares (or Other Securities) shall be made
forthwith (and in any event
<PAGE>
within five (5) business days thereafter) without charge to the Holder thereof
including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificate shall (subject to the provisions of
Sections 6 and 8 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificate unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificate and the certificate representing the Warrant Shares
(or Other Securities) shall be executed on behalf of the Company by the manual
or facsimile signature of the then present Chairman or Vice Chairman of the
Board of Directors or President or any Vice President of the Company under its
corporate seal reproduced thereon, attested to by the manual or facsimile
signature of the then present Secretary or any Assistant Secretary of the
Company. The Warrant Certificate shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
5.1 Ownership of Common Shares. Upon the Holder exercising the Warrant, it
shall be deemed to be the owner of the Warrant Shares upon delivery to the
Company, regardless of when the certificates representing the Warrant Shares are
issued.
6. Transfer of Warrants. The Holder of the Warrant Certificate, by its
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof. The Warrants may
be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole
or in part, without restriction, subject to compliance with applicable
securities laws.
7. Exercise Price.
7.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 9 hereof, the initial exercise price of each Warrant shall be the price
set forth in Section 1 hereof. The adjusted exercise price shall be the price
which shall result from time to time from any and all adjustments of the initial
exercise price in accordance with the provisions of Section 9 hereof.
7.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
8. Registration Under the Securities Act of 1933. Subject to the
Registration Rights Agreement between the Company and the Holders dated as of
the date hereof, the Warrants, the Warrant Shares and any of the Other
Securities issuable upon exercise of the Warrants have not been registered under
the Securities Act of 1933, as amended (the "Act"). Upon exercise, in whole or
in part, of the Warrants, a certificate representing the Warrant Shares
<PAGE>
underlying the Warrants, and any of the Other Securities issuable upon exercise
of the Warrants (collectively, the "Warrant Securities") shall bear the
following legend unless such Warrant Shares or other securities previously have
been registered under the Act in accordance with the terms hereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii)
TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE
ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL,
IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT
AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE.
9. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Shares purchasable upon the
exercise of the Warrants, shall be subject to adjustment from time to time upon
the occurrence of certain events described in this Section 9.
9.1 Subdivision or Combination of Common Shares and Common Share Dividend.
In case the Company shall at any time subdivide its outstanding Common Shares
into a greater number of Common Shares or declare a dividend upon its Common
Shares payable solely in Common Shares, the Exercise Price in effect immediately
prior to such subdivision or declaration shall be proportionately reduced, and
the number of Warrant Shares issuable upon exercise of the Warrants shall be
proportionately increased. Conversely, in case the outstanding Common Shares of
the Company shall be combined into a smaller number of Common Shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased, and the number of Warrant Shares issuable upon
exercise of the Warrants shall be proportionately reduced.
9.2 Dilutive Issuances. In the event that the Company shall sell or issue
at any time after the date of this Warrant and prior to its termination, Shares
(other than Excluded Shares, as defined in Section 9.2.5), or any other equity
securities or rights (including Company treasury stock) which are exercisable,
exchangeable or convertible into Shares, at a consideration per Share less than
the Exercise Price, then the Exercise Price shall be adjusted to a new Exercise
Price (calculated to the nearest cent) determined by dividing
(a) an amount equal to (i) the total number of Shares Outstanding (as
defined below and subject to adjustment in the manner set forth in Section 9.1)
on the date of issuance of this Warrant before such issuance or sale multiplied
by the Exercise Price in effect on the date of issuance of this Warrant
(subject, however, to adjustment in the manner set forth in Section 9.1), plus
(ii) the aggregate of the amount of all consideration, if any, received by the
Company for the issuance or sale of Shares since the date of issuance of this
Warrant, by
<PAGE>
(b) the total number of Shares Outstanding immediately after such issuance
or sale.
In no event shall any such adjustment be made pursuant to this Section 9.2 if it
would increase the Exercise Price in effect immediately prior to such
adjustment, except as provided in Sections 9.2.3 and 9.2.4. Upon each adjustment
of the Exercise Price pursuant to this Section 9.2, the holder of this Warrant
shall thereafter be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares purchasable pursuant hereto immediately prior to such adjustment,
and dividing the product thereof by the Exercise Price resulting from such
adjustment.
9.2.1 Definitions. For purposes of this Section 9.2, the following
definitions shall apply:
(a) "Convertible Securities" shall mean any indebtedness or securities
convertible into or exchangeable for Shares.
(b) "Options" shall mean any rights, warrants or options to subscribe for
or purchase Shares or Convertible Securities other than rights, warrants or
options to purchase Excluded Securities (as defined in Section 9.2.5).
(c) "Shares Outstanding" shall mean the aggregate of all Shares outstanding
and all Shares issuable upon exercise of all outstanding Options and conversion
of all outstanding Convertible Securities.
9.2.2 For the purposes of this Section 9.2, the following provisions shall
also be applicable:
9.2.2.1 Cash Consideration. In case of the issuance or sale of additional
Shares for cash, the consideration received by the Company therefor shall be
deemed to be the amount of cash received by the Company for such Shares (or, if
such Shares are offered by the Company for subscription, the subscription price,
or, if such Shares are sold to underwriters or dealers for public offering
without a subscription offering, the public offering price), without deducting
therefrom any compensation or discount paid or allowed to underwriters or
dealers or others performing similar services or for any expenses incurred in
connection therewith.
9.2.2.2 Non-Cash Consideration. In case of the issuance (otherwise than
upon conversion or exchange of Convertible Securities) or sale of additional
Shares, Options or Convertible Securities for a consideration other than cash or
a consideration a part of which shall be other than cash, the fair value of such
consideration as determined by the Board of Directors (if any, otherwise by the
Managers) of the Company in the good faith exercise of its business judgment (in
a duly authorized resolution certified by the secretary of the Company),
irrespective of the accounting treatment thereof, shall be deemed to be the
value, for purposes of this Section 9, of the consideration other than cash
received by the Company for such securities. If the Holder does not agree with
the valuation, he may seek the opinion of a mutually acceptable appraiser. This
cost shall be borne by the Company, unless the value determined by the appraiser
is within 5% of the value determined by the Board.
<PAGE>
9.2.2.3 Options and Convertible Securities. In case the Company shall in
any manner issue or grant any Options or any Convertible Securities, the total
maximum number of Shares of issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities at the time such Convertible Securities first become convertible or
exchangeable shall (as of the date of issue or grant of such Options or, in the
case of the issue or sale of Convertible Securities other than where the same
are issuable upon the exercise of Options, as of the date of such issue or sale)
be deemed to be issued and to be outstanding for the purpose of this Section 9.2
and to have been issued for the sum of the amount (if any) paid for such Options
or Convertible Securities and the amount (if any) payable upon the exercise of
such Options or upon conversion or exchange of such Convertible Securities at
the time such Convertible Securities first become convertible or exchangeable;
provided that, subject to the provisions of Section 9.2.3, no further adjustment
of the Exercise Price shall be made upon the actual issuance of any such Shares
or Convertible Securities or upon the conversion or exchange of any such
Convertible Securities.
9.2.3 Change in Option Price or Conversion Rate. In the event that the
purchase price provided for in any Option referred to in subsection 9.2.2.3, or
the rate at which any Convertible Securities referred to in subsection 9.2.2.3
are convertible into or exchangeable for Shares shall change at any time (other
than under or by reason of provisions designed to protect against dilution),
then, for purposes of any adjustment required by Section 9.2, the Exercise Price
in effect at the time of such event shall forthwith be readjusted to the
Exercise Price that would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold, provided that if such readjustment is an
increase in the Exercise Price, such readjustment shall not exceed the amount
(as adjusted by Sections 9.1 and 9.2) by which the Exercise Price was decreased
pursuant to Section 9.2 upon the issuance of the Option or Convertible Security.
In the event that the purchase price provided for in any such Option referred to
in subsection 9.2.2.3, or the additional consideration (if any) payable upon the
conversion or exchange of any Convertible Securities referred to in subsection
9.2.2.3, or the rate at which any Convertible Securities referred to in
subsection 9.2.2.3 are convertible into or exchangeable for Shares, shall be
reduced at any time under or by reason of provisions with respect thereto
designed to protect against dilution, then in case of the delivery of Shares
upon the exercise of any such Option or upon conversion or exchange of any such
Convertible Security; the Exercise Price then in effect hereunder shall, upon
issuance of such Shares, be adjusted to such amount as would have obtained had
such Option or Convertible Security never been issued and had adjustments been
made only upon the issuance of the Shares delivered as aforesaid and for the
consideration actually received for such Option or Convertible Security and the
Shares, provided that if such readjustment is an increase in the Exercise Price,
such readjustment shall not exceed the amount (as adjusted by Sections 9.1 and
9.2) by which the Exercise Price was decreased pursuant to Section 9.2 upon the
issuance of the Option or Convertible Security.
<PAGE>
9.2.4 Termination Of Option or Conversion Rights. In the event of the
termination or expiration of any right to purchase Shares under any Option
granted after the date of this Warrant or of any right to convert or exchange
Convertible Securities issued after the date of this Warrant, the Exercise Price
shall, upon such termination, be readjusted to the Exercise Price that would
have been in effect at the time of such expiration or termination had such
Option or Convertible Security, to the extent outstanding immediately prior to
such expiration or termination, never been issued, and the Shares issuable
thereunder shall no longer be deemed to be Shares Outstanding, provided that if
such readjustment is an increase in the Exercise Price, such readjustment shall
not exceed the amount (as adjusted by Sections 9.1 and 9.2) by which the
Exercise Price was decreased pursuant to Section 9.2 upon the issuance of the
Option or Convertible Security. The termination or expiration of any right to
purchase Shares under any Option granted prior to the date of this Warrant or of
any right to convert or exchange Convertible Securities issued prior to the date
of this Warrant shall not trigger any adjustment to the Exercise Price, but the
Shares issuable under such Options or Convertible Securities shall no longer be
counted in determining the number of Shares Outstanding on the date of issuance
of this Warrant for purposes of subsequent calculations under this Section 9.2.
9.2.5 Excluded Shares. Notwithstanding anything herein to the contrary, the
Exercise Price shall not be adjusted pursuant to this Section 9.2 by virtue of
the issuance and/or sale of Excluded Shares, which shall mean the following: (a)
Shares issuable upon the exercise of the Warrants; (b) Shares, Options or
Convertible Securities to be issued and/or sold to employees, advisors
(including, without limitation, financial, technical and legal advisers),
directors, or officers of, or consultants to, the Company or any of its
subsidiaries pursuant to the Company's existing 1996 Stock Option Plan (which
has reserved for issuance 1,500,000 Common Shares); (c) the issuance of Shares,
Options and/or Convertible Securities pursuant Options and Convertible
Securities outstanding as of the date of this Warrant; (d) the issuance of
Shares, Options or Convertible Securities as a share dividend or upon any
subdivision or combination of Shares or Convertible Securities (for which
appropriate adjustments are to be made pursuant to Section 9.1 hereof); and (e)
the issuance of Shares (including those Shares issuable upon the exercise or
conversion of Options or Convertible Securities) in connection a strategic
partnership or other business and/or product consolidation or joint venture. For
all purposes of this Section 9.2, all Shares of Excluded Shares shall be deemed
to have been issued for an amount of consideration per Share equal to the
initial Exercise Price (subject to adjustment in the manner set forth in Section
9.1). In addition, if the amount of any adjustment pursuant to this Section 9
shall be less than two cents (2(cent)) per Warrant Share no adjustment to the
Exercise Price or to the number of Warrant Shares issuable upon the exercise of
the Warrants shall be made; provided, however, that in such case any adjustment
that would otherwise be required then to be made shall be carried forward and
shall be made at the time of and together with the next subsequent adjustment
which, together with any adjustment so carried forward, shall amount to at least
two cents (2(cent)) per Warrant Share.
9.3 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Shares purchasable upon the
exercise of this
<PAGE>
Warrant, the Company shall give written notice thereof, by first class mail,
postage prepaid, addressed to the registered holder of this Warrant at the
address of such holder as shown on the books of the Company. The notice shall be
signed by the Company's chief financial officer and shall state (i) the
effective date of the adjustment and the Exercise Price resulting from such
adjustment and (ii) the increase or decrease, if any, in the number of Common
Shares purchasable at such price upon the exercise of this Warrant, setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based.
9.4 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Common Shares;
(b) the Company shall declare any dividend upon its Common Shares payable
in securities (other than a dividend payable solely in Common Shares) or make
any special dividend or other distribution to the holders of its Common Shares;
(c) there shall be any consolidation or merger of the Company with another
corporation, or a sale of all or substantially all of the Company's assets to
another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by
certified or registered mail, postage prepaid, addressed to the registered
holder of this Warrant at the address of such holder as shown on the books of
the Company, (i) at least 15 days' prior written notice of the date on which the
books of the Company shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such dissolution, liquidation or winding-up; (ii) at least 10 days' prior
written notice of the date on which the books of the Company shall close or a
record shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 15 days' written notice
of the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
distribution or option rights, the date on which the holders of Common Shares
shall be entitled thereto. Any notice given in accordance with clause (iii)
above shall also specify the date on which the holders of Common Shares shall be
entitled to exchange their Common Shares for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, as the case may be. If the Holder
of the Warrant does not exercise this Warrant prior to the occurrence of an
event described above, except as provided in Sections 9.1 and 9.5, the Holder
shall not be entitled to receive the benefits accruing to existing holders of
the Common Shares in such event.
9.5 Changes in Common Shares. In case at any time the Company shall be a
party to any transaction (including, without limitation, a merger,
consolidation, business
<PAGE>
combination or other sale or conveyance of all or substantially all of the
Company's assets or recapitalization of the Common Shares) in which the
previously outstanding Common Shares shall be changed into or exchanged for
different securities of the Company or common stock or other securities of
another corporation or interests in a non-corporate entity or other property
(including cash) or any combination of any of the foregoing (each such
transaction being herein called the "Transaction" and the date of consummation
of the Transaction being herein called the "Consummation Date"), then, as a
condition of the consummation of the Transaction, lawful and adequate provisions
shall be made so that each Holder, upon the exercise hereof at any time on or
after the Consummation Date, shall be entitled to receive, and this Warrant
shall thereafter represent the right to receive, in lieu of the Common Shares
issuable upon such exercise prior to the Consummation Date, the highest amount
of Common Shares and/or other securities, rights and property receivable upon
such consolidation, merger, sale or conveyance to which such Holder would
actually have been entitled as a holder of an Common Share upon the consummation
of the Transaction if such Holder had exercised such Warrant immediately prior
thereto. The provisions of this Section 9.5 shall similarly apply to successive
Transactions.
10. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
11. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Common Shares upon the exercise
of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Common Shares or Other Securities.
12. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized Common Shares, solely for the purpose of
issuance upon the exercise of the Warrants, such number of Common Shares or
Other Securities as shall be issuable upon the exercise thereof. The Company
covenants and agrees that, upon exercise of the Warrants and payment of the
Exercise Price therefor, all Common Shares or Other Securities issuable upon
such exercise shall be duly and validly issued, fully paid, non-assessable and
not subject to the preemptive rights of any holder of Common Shares.
<PAGE>
13. Notices to Warrant Holder. Except as otherwise provided in Section 9.4,
nothing contained in this Agreement shall be construed as conferring upon the
Holder by virtue of his holding the Warrant the right to vote or to consent or
to receive notice as a holder of a Common Share in respect of any meetings of
such holders for the election of directors or any other matter, or as having any
rights whatsoever as such a holder of the Company.
14. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to the registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 4 hereof (with
copy to: Ehrenreich Eilenberg Krause & Zivian, LLP 11 East 44th Street, 17th
Floor, New York, NY 10017/Attn. Jeffrey D. Abbey, Esq.) or to such other address
as the Company may designate by notice to the Holder.
15. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.
16. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the close of business on
the fifth anniversary of the issuance of the Warrants.
18. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
the State of New York without giving effect to the rules of the State of New
York governing the conflicts of laws. Any action or proceeding relating to this
Agreement and the Warrant Certificate may be brought in the courts of New York
sitting in New York County, or in the United States courts located in New York
County, New York, and each of the parties irrevocably consents to the
jurisdiction of such courts in any such action or proceeding.
19. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
<PAGE>
20. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
22. Delays or Omission. No delay or omission to exercise any right, power
or remedy accruing to any party to this Agreement (other than delays by the
Holder in the timely exercise of the Warrant), upon any breach or default of
another party under this Agreement, shall impair any such right, power or remedy
of such party nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. All remedies, either under this Agreement or by law or otherwise
afforded to any party, shall be cumulative and not alternative.
23. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.
24. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be duly executed, as of the day and year first above written.
Very truly yours,
DIGITAL LAVA INC.
By: /s/ Danny Gampe
------------------------
Authorized Officer
ACCEPTED AND AGREED TO:
/s/ Alfons Melohn
- ---------------------------------------
Alfons Melohn
/s/ Jay Lobell
- ---------------------------------------
Jay Lobell
/s/ Donald Drapkin
- ---------------------------------------
Donald Drapkin
/s/ Fahnestock & Company
- ---------------------------------------
Fahnestock & Company
/s/ Frederick Tramutola
- ---------------------------------------
Frederick Tramutola
/s/ Jeffrey Benton
- ---------------------------------------
Jeffrey Benton
/s/ Paul S. Freyer
- ---------------------------------------
Paul S. Freyer
/s/ Yasser Hosny Moustafa
- ---------------------------------------
Yasser Hosny Moustafa
/s/ Patrick E. Murphy
- ---------------------------------------
Patrick E. Murphy
/s/ Gerard Klauer Mattison & Co., Inc.
- ---------------------------------------
Gerard Klauer Mattison & Co., Inc.
/s/ Prism Ventures II
- ---------------------------------------
Prism Ventures II
<PAGE>
EXHIBIT X
TO
WARRANT AGREEMENT
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i)
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
EXERCISABLE FROM [Closing Date]
UNTIL
5:30 P.M., NEW YORK TIME, [5th anniversary of Closing Date]
No. W-LAVA-97-[ ] [ ] Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ______________ or his/her
registered assigns ("Holder"), is the registered holder of [____] Warrants to
purchase initially at any time until 5:30 p.m. New York time on [fifth
anniversary of Closing Date] ("Expiration Date"), up to [_____] fully-paid and
non-assessable shares of common stock, par value $.0001 per share ("Common
Shares") of DIGITAL LAVA INC., a Delaware corporation (the "Company"), at an
initial exercise price, subject to adjustment in certain events (the "Exercise
Price"), equal to [$____] per share, upon surrender of this Warrant Certificate
and payment of the initial exercise price at an office or agency of the Company,
but subject to the conditions set forth herein and in the Warrant Agreement
dated as of the date hereof between the Company and Holder (the "Warrant
Agreement"). Payment of the Exercise Price shall be made by certified check or
official bank check in New York Clearing House funds payable to the order of the
Company, unless exercise is made pursuant to Section 4.2 of the Warrant
Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant
<PAGE>
Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
Holder (the word "Holder" meaning the registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificate
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly
executed.
Dated as of February 19, 1998
DIGITAL LAVA INC.
By: /s/ Danny Gampe
------------------------
Authorized Officer
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______________ Common
Shares and herewith tenders in payment for such securities a certified check or
official bank check payable in New York Clearing House Funds to the order of
DIGITAL LAVA INC. in the amount of $_______ , all in accordance with the terms
of Section 4 of the Warrant Agreement dated as of [Closing Date] between DIGITAL
LAVA INC. and the undersigned (or its assignor). The undersigned requests that a
certificate for such securities be registered in the name of ________________
whose address is _________________ and that such Certificate be delivered to
__________________ whose address is ______________________.
Dated:
Signature __________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ___________________ hereby
sells, assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _________________ Attorney,
to transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated:____________ Signature:_______________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant
Certificate.)
_________________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
EXHIBIT 4 (q)
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of February
19, 1998 is made by and among DIGITAL LAVA INC., a Delaware corporation (the
"Company"), and the persons listed on Schedule I hereto (collectively, the
"Holders", each a "Holder").
RECITALS
In connection with the purchase by the Holders of certain units ("Units")
of the Company's securities pursuant to a Subscription Agreement and a Warrant
Agreement, both between the Company and the Holders dated as of the date hereof,
which agreements among other things provide for the issuance to the Holders of
certain warrants (the "Warrants") to purchase shares of the Company's common
stock ("Common Stock"), the Company has agreed to grant to the Holders certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder (collectively, the "Securities Act") with respect to
the shares of Common Stock issuable conversion of the Notes included in the
Units (the "Conversion Shares") and upon exercise of the Warrants (the "Warrant
Shares"). This Agreement sets forth the terms and conditions of such
undertaking.
AGREEMENTS
The Company and the Holders covenant and agree as follows:
1. Definitions. For purposes of this Agreement:
(a) The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
statements or similar documents 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 the effectiveness of such registration statement or document by
the Securities and Exchange Commission (the "SEC");
(b) The term "Registrable Securities" means (i) the Conversion Shares and
the Warrant Shares and (ii) any shares of Common Stock issued as (or issuable
upon the conversion or exercise of any convertible security, warrant, right or
other security which is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of such Conversion Shares and Warrant
Shares, excluding in all cases, however, any Registrable Securities sold by a
Holder in a transaction in which its registration rights under this Agreement
are not assigned.
<PAGE>
2. Registration Rights.
2.1 Demand Registration. Subject to the limitations set forth in Section
2.1(b) below, the Company shall, upon the written request of Holders holding a
majority of the sum of (x) the outstanding Registrable Securities and (y) the
then outstanding and unexercised Warrants, use its best efforts to cause the
Registrable Securities specified in such request to be registered under the
Securities Act (a "Demand Registration"). In the event that the Company shall
receive a written request under this Section 2.1, the Company shall give prompt
written notice thereof to any Holder which did not join in such written request.
If requested in writing by any of such other Holders within fifteen days after
the Company gives the notice described in the preceding sentence, the Company
shall include among the Registrable Securities that endeavors to register under
this Section 2.1 such Registrable Securities as shall be specified in the
request of such other Holders.
(a) Notice of Demand Registration. Each request delivered pursuant to
Section 2.1 shall: (i) specify the amount of Registrable Securities intended to
be offered and sold by each of the Holders joining in the request; (ii) express
the present intent to offer such Registrable Securities for distribution; (iii)
describe the nature or method of the proposed offer and sale of the Registrable
Securities; and (iv) contain the undertaking of the Holders to provide all such
information and materials and take all such action as may be required in order
to permit the Company to comply with all applicable requirements of the
Securities Act, the SEC and state securities and "blue sky" laws, and to obtain
acceleration of the effective date of the Registration Statement (as defined
below).
(b) Limitations on Demand Registrations. Notwithstanding anything herein to
the contrary, the obligations of the Company to cause any Registrable Securities
to be registered pursuant to Section 2.1 are subject to each of the following
limitations, conditions and qualifications:
(i) The Holders may only request that the Company make any Demand
Registration subsequent to the earlier of 180 days following the effective
date of the registration statement for the initial public offering of the
Company's securities.
(ii) Any request for Demand Registration made by the Sellers pursuant
to Section 2.1, to be effective, shall request the registration of the
offering and sale or other distribution by the Holders of not less than
one-half of the Registrable Securities.
(iii) In the event the Holders request Demand Registration pursuant to
Section 2.1 and the related offering is to be underwritten, the managing
underwriter shall be a nationally recognized investment banking firm
approved by the Company in the reasonable exercise of its discretion.
(iv) The Company shall be required to effect only two Demand
Registrations pursuant to Section 2.1; provided, however, that a
registration shall not count as a Demand
<PAGE>
Registration unless 90% of the Registrable Securities requested to be included
in such registration are sold pursuant to such registration statement.
2.2 Piggyback Registration. Subject to the limitations set forth in Section
2.2(b), at any time that the Company for its account or the account of others
shall propose the registration under the Securities Act of an offering of any of
its securities on a registration form which can be used for registration of the
Registrable Securities, the Company shall give written notice as promptly as
possible of such proposed registration to the Holders, and shall include in the
offering such amount of Registrable Securities as the Holders shall request to
be included by written notice to the Company received within fifteen days after
receipt of the Company's notice, upon the same terms (including the method of
distribution) as the securities being sold by the Company pursuant to any such
offering (a "Piggyback Registration").
(a) Notice of Piggyback Registration. Each request delivered pursuant to
Section 2.2 shall: (i) specify the amount of Registrable Securities intended to
be offered and sold by each of the Holders; and (ii) contain the undertaking of
the Holders to provide all such information and materials and take all such
action as may be required in order to permit the Company to comply with all
applicable requirements of the Securities Act, the SEC and state securities and
"blue sky" laws and to obtain acceleration of the effective date of the
Registration Statement.
(b) Limitations on Incidental Registrations. Notwithstanding anything
contained herein to the contrary, the obligations of the Company to cause
Registrable Securities to be registered pursuant to Section 2.2 are subject to
each of the following limitations, conditions and qualifications:
(i) The Company shall not be required to give notice or include
Registrable Securities in any registration pursuant to Section 2.2 if the
proposed registration is primarily: (A) a registration of a stock option,
thrift, employee benefit or compensation plan or of securities issued or
issuable pursuant to any such plan; (B) a registration of securities
proposed to be issued in connection with a dividend reinvestment and stock
purchase plan or customer stock purchase plan; (C) a registration of
securities proposed to be issued in exchange for securities or assets of,
or in connection with a merger or consolidation with, another corporation
or other entity; or (D) a registration of securities which is solely a
combination of any of the above.
(ii) If the Company is advised in writing by the managing underwriter
(or its investment banking firm if the offering is not underwritten) that
the inclusion of Registrable Securities may, in the opinion of such
underwriter or investment banking firm, as the case may be, interfere with
the orderly sale and distribution of the securities proposed to be offered
by the Company or adversely affect the price at which such securities may
be sold, the number of shares of Registrable Securities to be included in
the offering shall be reduced or eliminated to the extent necessary as
shall be reasonably determined by such underwriter or investment banker, as
the case may be, in good faith.
<PAGE>
(iii) In the event the Holders request registration pursuant to
Section 2.2 and the related offering is to be underwritten, the Holders
will enter into an underwriting agreement containing representations,
warranties and agreements consistent with those customarily made by an
issuer and a selling shareholder in underwriting agreements with respect to
secondary distributions.
(iv) The Company may, in its sole discretion, without the consent of
the Holders and without liability to any Holder for such action, withdraw
such registration statement and abandon the proposed offering in which the
Holder had requested to participate at any time.
(v) The Holders of Registrable Securities may exercise Piggyback
Registrations pursuant to Section 2.2 so long as such Holders continue to
hold Registrable Securities.
3. Obligations of the Company. When required under the Agreement to effect
the registration of the Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Registration Statements. Prepare and file with the SEC a registration
statement or statements or similar documents (the "Registration Statement") with
respect to all Registrable Securities, other than any Registrable Securities
excluded by Holders pursuant to Sections 2.1 and 2.2, and use its best efforts
to cause the Registration Statement to become effective and maintain the
effectiveness of the Registration Statement until the earlier of (i) the date
all such registered Registrable Securities are sold and any prospectus delivery
requirements under the Securities Act shall have lapsed, and (ii) six months.
(b) Amendments. 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 comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by the Registration Statement.
(c) Prospectuses. Furnish promptly to each Holders such numbers of copies
of a prospectus, including a preliminary prospectus, and all amendments and
supplements thereto, in conformity with the requirements of the Securities Act,
and such other documents as the Holders may reasonably request in order to
facilitate the disposition of Registrable Securities.
(d) Blue Sky. Use its best efforts to register and qualify the securities
covered by the Registration Statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders, and
to prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements and to take such other actions
necessary or advisable to maintain such registration and qualifications in
effect, and to take all other actions necessary or advisable to enable the
disposition of such securities
<PAGE>
in such jurisdictions, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or jurisdictions
or to provide any undertaking or make any change in its charter or bylaws which
the Board of Directors determines to be contrary to the best interest of the
Company and its stockholders.
(e) Underwriting Arrangements. Enter into and perform its obligations under
an underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering. The Holders shall also enter into and
perform their customary obligations under any such agreement including, without
limitation, customary indemnification and contribution obligations.
(f) Notification of Changes. Notify the Holders, at any time when a
prospectus relating to Registrable Securities covered by the Registration
Statement is required to be delivered under the Securities Act, of the happening
of any event 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 not misleading in light of the circumstances then
existing. The Company shall promptly amend or supplement the Registration
Statement to correct any such untrue statement or omission.
(g) Notification of Stop Orders. Notify the Holders of the issuance by the
SEC of any stop order suspending the effectiveness of the Registration Statement
or the initiation of any proceedings for that purpose. The Company will make
every reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest possible
time.
(h) Review by Counsel. Permit a single firm of counsel designated as
selling stockholders' counsel by the holders of a majority in interest of the
Registrable Securities to review the Registration Statement and all amendments
and supplements thereto a reasonable period of time prior to their filing, and
shall not file any document in a form to which counsel reasonably objects.
(i) Opinions. At the request of the Holders, use its best efforts to
furnish on the date that Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this
Agreement (i) an opinion, dated such date, of the counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters and (ii) a letter dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters.
<PAGE>
(j) Due Diligence. Make available for inspection by the Holders, any
underwriters participating in the offering pursuant to the registration and the
counsel, accountants or other agents retained by the Holders or any such
underwriter, all pertinent financial and other records, corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by the Holders or any
such underwriters in connection with the registration.
(k) Listing. If the class of the Company's securities is then listed on a
national securities exchange, use its best efforts to cause the Registrable
Securities to be listed on such exchange. If the Company's securities are not
then listed on a national securities exchange, use its best efforts to
facilitate the reporting of the Registrable Securities on NASDAQ.
(l) Further Actions. Take all other reasonable actions necessary to
expedite and facilitate disposition by the Holders of the Registrable Securities
pursuant to the Registration Statement.
4. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to each Holder that such Holder shall furnish to the Company such
information regarding itself, the Registrable Securities held by it, and the
intended method of disposition of such securities as shall be reasonably
required to effect the registration of the Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
5. Expenses of Registration. All expenses other than the underwriting
discounts and commissions incurred in connection with registration, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing, filing and qualification fees, printing and accounting
fees, the fees and disbursements of counsel for the Company (but excluding the
fees and disbursements of any counsel for the Holders) shall be borne by the
Company. If the Company shall fail to comply with the provisions of Sections 2
and 3 hereof, the Company shall, in addition to any equitable or other relief
available to such Holders, extend the Exercise Period by such number of days as
shall equal the delay caused by the Company's failure, and the Company shall be
liable for any damages incurred by such Holders.
6. Indemnification. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
(a) By Company. To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the directors, if any, of such Holder, the
officers, if any, of such Holder who sign the Registration Statement, each
person, if any, who controls such Holder, any underwriter (as defined in the
Securities Act) for the Holders and each person, if any, who controls any such
underwriter within the meaning of the Securities Act or the Securities Act of
1934, as amended (the "1934 Act"), against any losses, claims, damages, expenses
or liabilities (joint or several) to which any of them may become subject under
the Securities Act, the 1934 Act or otherwise, insofar as such losses, claims,
damages, expenses or
<PAGE>
liabilities (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 (collectively, a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstance in which
they are made, not misleading or (iii) any violation or alleged violation by the
Company of the Securities Act, the 1934 Act, any state securities law or any
rule or regulation promulgated under the Securities Act, the 1934 Act, any state
securities law; and the Company will reimburse the Holders and each such
underwriter or controlling person, promptly as such expenses are incurred, for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability action or
proceeding; provided, however, that the indemnity agreement contained in this
Section 6(a) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Company, which consent shall not be unreasonably withheld, nor
shall the Company be liable in any such case for any such loss, claim, damage,
liability or action to the extent that it arises out of or is based upon a
Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
the Holders or any such underwriter or controlling person, as the case may be.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Holders or any such underwriter or
controlling person and shall survive the transfer of the Registrable Securities
by Holders.
(b) By Holders. To the extent permitted by law, each Holder, severally and
not jointly, will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the Registration Statement, each
person, if any, who controls the Company within the meaning of the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the 1934 Act, any underwriter and any other stockholder
selling securities pursuant to the Registration Statement or any of its
directors or officers or any person who controls such holder or underwriter,
against any losses, claims, damages or liabilities (joint or several) to which
any of them may become subject, under the Securities Act, the 1934 Act or other
federal state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration, and such Holder
will reimburse any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage
liability or action; provided, however, that the indemnity agreement contained
in this subsection 6(b) shall not apply to amounts paid in settlement of such
loss, claim, damage, liability or action if such settlement is effected without
the consent of such Holder, which consent shall not be unreasonably withheld;
and provided further, that the Holder shall be liable under this paragraph for
only that amount of
<PAGE>
losses, claims, damages and liabilities as does not exceed the proceeds to such
Holder as a result of the sale of Registrable Securities pursuant to such
registration.
(c) Procedure for Indemnification. Promptly after receipt by an indemnified
party under this Section 6 of notice of the commencement of any action
(including any governmental action), such indemnified party will, 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 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 parties; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
for the indemnifying party, representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall relieve such indemnifying party of any
liability to the indemnified party under this Section 6 only to the extent
prejudicial to its ability to defend such action, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party other than under this Section 6. 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, promptly
as such expense, loss, damage or liability is incurred.
(d) 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 otherwise would be
liable under this Section 6 to the extent permitted by law, provided that (i) no
contribution shall be made under the circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in this
Section 6, (ii) 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 (iii) 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.
7. Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of SEC Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit the Holders to sell securities of the Company to the public without
registration, the Company agrees, following the initial public offer of the
Company's securities, to:
(i) make and keep public information available, as those terms are
understood and defined in SEC Rule 144;
<PAGE>
(ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934
Act; and
(iii) furnish to each Holder, so long as such Holder owns any
Registrable Securities, forthwith upon request (A) a written statement by
the Company that it has complied with the reporting requirements of SEC
Rule 144, the Securities Act and the 1934 Act, (B) 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 (C) such other information as may be
reasonably requested in availing the Holders of any rule or regulation of
the SEC which permits the selling of any securities without registration.
8. Assignment of Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement may be assigned by
the Holders to transferees or assignees of such securities provided the Company
is, within a reasonable time after such transfer, furnished with written notice
of the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; provided, further,
that such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act. The term "Holders" as used in
this Agreement shall include permitted assignees.
9. Timing of Exercise. Nothing contained in this Agreement shall be
construed as requiring the Holders to exercise their Warrants prior to the
initial filing of any registration statement or the effectiveness thereof.
Holders may seek registration until the last practicable moment.
10. Miscellaneous.
(a) Notices. Notices required or permitted to be given hereunder shall be
in writing and shall be deemed to be sufficiently given when personally
delivered or sent by registered mail, return receipt requested, addressed (i) if
to the Company, at 10850 Wilshire Boulevard, Suite 1260, Los Angeles, CA 90024,
(with a copy to: Ehrenreich Eilenberg Krause & Zivian LLP, 11 East 44th Street,
17th Floor, New York, NY 10017; Attention: Adam D. Eilenberg, Esq.) and (ii) if
to a Holder at the address set forth in Schedule I, or at such other address as
each such party furnishes by notice given in accordance with this Section 9(a).
(b) Waiver. 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,
will not operate as a waiver thereof. No waiver will be effective unless and
until it is in writing and signed by the party giving the waiver.
(c) Governing Law. This Agreement shall be enforced, governed and construed
in all respects in accordance with the laws of the State of New York, as such
laws are applied by New York courts to agreements entered into and to be
performed in New York by and between residents of New York. In the event that
any provision of this Agreement is invalid
<PAGE>
or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute of rule of
law. Any provision hereof which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision hereof.
<PAGE>
(d) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and may be
amended only by a written agreement executed by the Company and the holders of a
majority in interest of the sum of (x) the Registrable Securities and (y) the
then outstanding and unexercised Warrants.
DIGITAL LAVA INC.
By: /s/ Danmy Gampe
-----------------------------
Authorized Officer
ACCEPTED AND AGREED TO:
/s/ Alfons Melohn
- ---------------------------------------
Alfons Melohn
/s/ Jay Lobell
- ---------------------------------------
Jay Lobell
/s/ Donald Drapkin
- ---------------------------------------
Donald Drapkin
/s/ Fahnestock & Company
- ---------------------------------------
Fahnestock & Company
/s/ Frederick Tramutola
- ---------------------------------------
Frederick Tramutola
/s/ Jeffrey Benton
- ---------------------------------------
Jeffrey Benton
/s/ Paul S. Freyer
- ---------------------------------------
Paul S. Freyer
/s/ Yasser Hosny Moustafa
- ---------------------------------------
Yasser Hosny Moustafa
/s/ Patrick E. Murphy
- ---------------------------------------
Patrick E. Murphy
/s/ Gerard Klauer Mattison & Co., Inc.
- ---------------------------------------
Gerard Klauer Mattison & Co., Inc.
/s/ Prism Ventures II
- ---------------------------------------
Prism Ventures II
EXHIBIT 4 (r)
<PAGE>
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR UNDER THE PROVISIONS OF ANY APPLICABLE STATE
SECURITIES LAWS, BUT HAS BEEN ACQUIRED BY THE REGISTERED HOLDER HEREOF FOR
PURPOSES OF INVESTMENT AND IN RELIANCE OF STATUTORY EXEMPTIONS UNDER THE ACT AND
UNDER ANY APPLICABLE STATE SECURITIES LAWS. THIS PROMISSORY NOTE MAY NOT BE
SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT IN A TRANSACTION WHICH IS EXEMPT
UNDER PROVISIONS OF THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN THE CASE OF AN EXEMPTION, ONLY IF
THE MAKER HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE MAKER THAT SUCH
TRANSACTION DOES NOT REQUIRE REGISTRATION OF THIS PROMISSORY NOTE UNDER THE ACT
OR APPLICABLE STATE SECURITIES LAWS.
DIGITAL LAVA INC.
February 19, 1998 New York, New York
No. PN-LAVA-98-F-[__] $[____]
12% SECURED CONVERTIBLE PROMISSORY NOTE
DIGITAL LAVA INC., a Delaware corporation with an address at 10850 Wilshire
Boulevard, Suite 1260, Los Angeles, CA 90024 (the "Maker"), for value received,
hereby promises to pay to [name] or his/her registered assigns (the "Holder") on
the earliest of (a) November 20, 1998, or (b) the closing of an initial public
offering ("IPO") of the Maker's common stock, par value $.0001 per share (the
"Common Stock"), pursuant to the Act, or (c) the receipt by the Maker, in one or
more private equity offerings, of an aggregate amount of at least $5,000,000 in
gross proceeds from one or more equity offerings of the Maker (the "Private
Equity Placement"), or (d) the sale or other transfer of all or a majority of
the assets of the Maker or (e) a merger or consolidation or other business
combination involving the Maker where the Maker is not the surviving entity or
where, immediately following the merger, consolidation or business combination,
the current stockholders of the Maker do not own at least 51% of the fully
diluted equity of the Maker, or (f) a sale of equity securities (including
Common Stock) by the Maker or by current stockholders following which current
stockholders do not own at least 51% of the fully diluted equity in the Maker,
the principal sum of $[____] and interest (computed on the basis of a 360 day
year of twelve months) on the outstanding principal sum hereof at the rate of
12% per annum from the date hereof until the Maker's obligation with respect to
the payment of such principal sum shall be discharged as herein provided. The
date in which this Promissory Note is payable is hereinafter referred to as the
"Maturity Date." Principal and interest shall be payable on the Maturity Date in
such coin or currency of the United States of America as at the time of payment
shall be legal tender for the payment of public and private debts to the Holder
at the office of the Maker as hereinafter set forth. At the Maturity Date (or
earlier, as hereafter provided), the Maker shall also pay to Holder, in addition
to the outstanding principal sum and accrued interest
<PAGE>
thereon, a success fee equal to 10% of the original principal sum stated above
(the 'Success Fee').
This Promissory Note is one of a series of promissory notes of the Maker in the
aggregate principal amount of up to $1,750,000 (the "Aggregate Principal
Amount") issued or to be issued in connection with a private placement (the
"Offering") of the Maker of up to 175 units of its securities ("Units"), each
Unit consisting of a promissory note in denominations of $10,000 per Promissory
Note (collectively the "Promissory Notes") and warrants to purchase shares of
Common Stock (the "Warrants") all as described in the Subscription Agreement
dated February 19, 1998 to which Maker is a party. This Promissory Note shall
rank pari passu with all of the other Promissory Notes and is entitled to the
benefits of the Security Agreement (the 'Security Agreement') of even date
herewith between the Maker, as debtor, and State Street Bank and Trust Company,
as agent on behalf of the holders of the Promissory Notes, as secured party.
1. Transfers of Note to Comply with the Act
The Holder agrees that this Promissory Note may not be sold, transferred,
pledged, hypothecated or otherwise disposed of except as follows: (1) to a
person to whom the Promissory Note may legally be transferred without
registration and without delivery of a current prospectus under the Act with
respect thereto and then only against receipt of an agreement of such person to
comply with the provisions of this Section 1 with respect to any resale or other
disposition of the Promissory Note; or (2) to any person upon delivery of a
prospectus then meeting the requirements of the Act relating to such securities
and the offering thereof for such sale or disposition and thereafter to all
successive assignees.
2. Payment and Prepayment
All payments on this Promissory Note shall be applied first to the payment
of the Success Fee, second to the payment of accrued interest, and, third, any
remainder shall be applied to reduction of the principal sum.
Maker may prepay all or any part of the principal sum from time to time
without penalty at its sole discretion on a date that interest payments
hereunder become due and payable, provided that any such principal prepayment
shall be accompanied by all interest then accrued and shall be made on a pro
rata basis with all of the other Promissory Notes then outstanding and provided
further, that the Success Fee on the entire original principal amount of this
Promissory Note shall only be pre-payable at such time that the outstanding
principal sum of this Promissory Note is pre-paid in full.
3. Conversion of Promissory Note
(a) Maker will give Holder (and all other holders of the Promissory Notes)
written notice, by Federal Express or other recognized overnight courier or by
certified mail, return
<PAGE>
receipt requested, of the occurrence of the Private Placement and the resulting
acceleration of the Maturity Date (the 'Acceleration Notice'). Holder will have
fifteen business days from receipt of the Acceleration Notice (deemed to occur
on the next business day following delivery by Federal Express or other
recognized overnight courier or three business days from mailing) to elect in
writing (by means of the same forms of delivery) to convert the outstanding
principal amount of this Promissory Note, together with interest and the Success
Fee, into shares of the securities issued in the Private Equity Placement, at a
conversion price per share equal to the price per share of such securities in
the Private Equity Placement (or, if more than one closing occurs before the $5
million in aggregate is raised, at a price per share of such securities equal to
the average price per share at such closings). If the Holder fails to elect to
convert the Promissory Note, the Maker shall repay the Promissory Note (together
with accrued interest and the Success Fee).
(b) If the Maturity Date of this Promissory Note has not occurred before
the first anniversary of the date hereof, Holder may, at its sole option, elect
to convert this Promissory Note (and interest and the Success Fee) into shares
of Common Stock at a conversion price per share equal to $15,000,000 divided by
the number of shares of Common Stock outstanding as of such date of conversion
on a fully diluted basis; provided, however, that if a private equity placement
has occurred that did not constitute a Private Equity Placement by virtue of the
fact that less than $5 million in gross proceeds was raised by the Maker, the
conversion price will be the lesser of the foregoing conversion price or the
actual price of securities sold in the most recent private equity placement, and
the securities to be issued will be the same as those issued in such private
equity placement. Such election shall occur at any time in Holder's sole
discretion, and upon such election, the Maker will promptly provide to Holder
the information necessary to determine the conversion price and the number of
shares issuable upon conversion. Notwithstanding the foregoing, if Maker elects
to pay this Promissory Note at the Maturity Date, or at any time thereafter, it
shall give prior notice of such payment to Holder, and Holder shall only have
fifteen business days after receipt thereof to elect to convert the Promissory
Notes in lieu of such repayment.
(c) In the event of Holder's election to convert the Promissory Note,
Holder shall return this Promissory Note to Maker, and thereafter, Maker shall
issue and deliver to Holder the securities issuable upon conversion of the
Promissory Note. Upon due conversion of this Promissory Note, Holder shall no
longer receive any benefit pursuant to the Security Agreement.
4. Events of Default and Remedies
The entire unpaid principal sum, the Success Fee and all accrued interest
shall become immediately due and payable, without notice or demand (in the case
of clause (d) below) or upon notice from Holder (in case of other clauses), upon
the occurrence of any one or more of the following events of default ("Events of
Default"):
<PAGE>
(a) Maker shall fail to make payment of principal or interest hereunder or
under any other Promissory Note, for a period of five days from the date due
(taking into account the additional periods for conversion notices pursuant to
Section 3 hereof);
(b) Maker shall be unable, or admit in writing its inability, to pay its
debts or shall not pay its debts generally as they come due, or shall make any
assignment for the benefit of creditors;
(c) Maker shall take action to liquidate, wind up or dissolve or shall sell
all or substantially all of its assets;
(d) Maker shall commence, or there shall be commenced against Maker, any
case, proceeding or other action seeking to have an order for relief entered
with respect to Maker or to adjudicate Maker as a bankrupt or insolvent; or
(e) Maker shall breach any of its material representations, warranties,
covenants or agreements hereunder or under the Security Agreement, and such
breach shall not be cured within 15 days after the occurrence thereof.
5. Miscellaneous
No delay on the part of Holder in exercising any option, power or right
shall constitute a waiver thereof.
In the event this Promissory Note is turned over to an attorney for
collection, Maker agrees to pay all costs of collection, including reasonable
attorneys' fees, which amounts may, at Holder's option, be added to the
principal sum hereof.
No recourse under or upon any obligation, covenant or agreement of this
Promissory Note, or for any claim based thereon or in respect thereof, shall be
had against any principal, or against any past, present, or future member,
manager or economic interest holder as such, of Maker or of any incorporator,
stockholder, officer or director of any successor corporation, either directly
or through Maker; it being expressly agreed that this Promissory Note and the
obligations hereunder are solely organizational obligations of Maker and any
successor corporation.
This Promissory Note shall be governed as to validity, interpretation,
construction, effect and in all other respects by the laws and decisions of the
State of New York. Maker, and any endorsers, sureties and guarantors, agree that
the state courts located in the State of New York shall have subject matter
jurisdiction to entertain any action brought to enforce or collect upon this
Promissory Note and, by execution hereof, voluntarily submit to personal
jurisdiction of such courts; provided, however such jurisdiction shall not be
exclusive and, at its option, Holder may commence such action in any other court
which otherwise has jurisdiction.
<PAGE>
Maker waives service of process upon it and consents that all service of
process may be made be certified mail (return receipt requested) directed to it,
and service so shall be completed ten days after the same shall have been
deposited in the US mail.
Maker waives demand for payment, presentment for payment, notice of
nonpayment or dishonor, protest and notice of protest, and agrees to any
extension of time of payment and partial payments before, at or after maturity.
No renewal or extension of this Promissory Note, no release or surrender of any
security for this Promissory Note, no release of any person liable hereon, no
delay in the enforcement hereof and no delay or omission in exercising any right
or power hereunder shall affect the liability of Maker. No delay or omission by
Holder in exercising any power or right hereunder shall impair such right or
power or be construed to be a waiver of any default, nor shall any single or
partial exercise of any power or right hereunder preclude any or full exercise
thereof or the exercise of any other right or power. Each legal holder hereof
shall have and may exercise all the rights and powers given to Holder herein.
This Promissory Note may not be changed or terminated orally.
Maker hereby waives any right to trial by jury of any claim, demand, action
or cause of action arising under or in any way connected with or related to this
Promissory Note. The execution and delivery of this Promissory Note has been
authorized by the Board of Directors of the Maker.
This Promissory Note shall be binding upon the successors and assigns of
Maker and more to the benefit of the Holder and its successors, endorses and
assigns. If any term or provision of this Promissory Note shall be held invalid,
illegal or unenforceable, the validity of all other terms and provisions hereof
shall in no way be affected thereby.
<PAGE>
IN WITNESS WHEREOF, Maker has duly executed this Promissory Note on the
date first above written.
DIGITAL LAVA INC.
By: /s/ Danny Gampe
-----------------------------
Authorized Officer
EXHIBIT 4 (s)
<PAGE>
[WHITESTONE WARRANTS]
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of May 1, 1998, between DIGITAL LAVA INC., a
Delaware corporation (the "Company"), and The Whitestone Group, LLC ("Holder").
W I T N E S S E T H:
WHEREAS, Holder, in connection with and consideration for its provision of
financial advisory consulting services pursuant to a Consulting Agreement dated
as of the date hereof between the Company and Holder, shall be issued an
aggregate of 100,000 six-year warrants (the "Warrants") to purchase shares of
Common Stock of the Company ("Shares") at an exercise price of $.50 per Share.
NOW, THEREFORE, in consideration of the premises herein set forth and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Issue. The Company hereby issues to Holder a certificate (the "Warrant
Certificate") dated as of the date hereof providing Holder with the right to
purchase, at any time until 5:30 p.m., New York time, on April 30, 2003, 100,000
Shares (the "Warrant Shares") (subject to adjustment as provided in Section 8
hereof) at an initial exercise price (subject to adjustment as provided in
Section 8 hereof) equal to $.50 per Share.
2. Warrant Certificate. The Warrant Certificate to be delivered pursuant to
this Agreement shall be in the form set forth in Exhibit X, attached hereto and
made a part hereof, with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Agreement.
3. Exercisability of Warrants. The Warrants shall be immediately
exercisable.
4. Procedure for Exercise of Warrants.
4.1 Cash Exercise. The Warrants are exercisable at an aggregate initial
exercise price per Share set forth in Section 7 hereof payable by certified
check or official bank check in New York Clearing House funds. Upon surrender of
a Warrant Certificate with the annexed Form of Election to Purchase duly
executed, together with payment of the Exercise Price (as hereinafter defined)
for the Warrant Shares purchased, at the Company's principal offices in
California (presently located at 10850 Wilshire Boulevard, Suite 1260, Los
Angeles, CA 90024) Holder shall be entitled to receive a certificate for the
Warrant Shares so purchased. The purchase rights represented by the Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part (but not as to fractional Shares underlying the Warrants).
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In the case of the purchase of less than all the Warrant Shares purchasable
under the Warrant Certificate, the Company shall cancel said Warrant Certificate
upon the surrender thereof and shall execute and deliver a new Warrant
Certificate of like tenor for the balance of the Warrant Shares purchasable
thereunder.
4.2 Cashless Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 4.1 above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Shares equal to the product of (x) the number of
Shares as to which the Warrants are being exercised multiplied by (y) a
fraction, the numerator of which is the Current Market Price of the Shares (as
defined below) less the Exercise Price then in effect and the denominator of
which is the Current Market Price.
4.3 Current Market Price. The term "Current Market Price" shall mean (i) if
the Shares are traded in the over-the-counter market or on the National
Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ"),
the average per Share closing bid prices on the 5 consecutive trading days
immediately preceding the date of exercise, as reported by NASDAQ or an
equivalent generally accepted reporting service, or (ii) if the Shares are
traded on a national securities exchange, the average for the 20 consecutive
trading days immediately preceding the exercise date of the daily per Share
closing prices on the principal stock exchange on which the Shares are listed,
as the case may be. The closing price referred to in clause (ii) above shall be
the last reported sales price or, if no such reported sale takes place on such
day, the average of the reported closing bid and asked prices, in either case on
the national securities exchange on which the Shares are then listed.
5. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Shares shall be made forthwith (and in any event
within five (5) business days thereafter) without charge to the Holder thereof
including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificate shall (subject to the provisions of
Sections 6 and 8 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificate unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificate and the certificate representing the Warrant Shares
shall be executed on behalf of the Company by the manual or facsimile signature
of the then present Chairman or Vice Chairman of the Board of Directors or
President or any Vice President of the Company under its corporate seal
reproduced thereon, attested to by the manual or facsimile signature of the then
present Secretary or any Assistant Secretary of the Company.
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The Warrant Certificate shall be dated the date of execution by the Company upon
initial issuance, division, exchange, substitution or transfer.
6. Transfer of Warrants. The Holder of the Warrant Certificate, by its
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof. The Warrants may
be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole
or in part, without restriction, subject to compliance with applicable
securities laws.
7. Exercise Price.
7.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 7 hereof, the initial exercise price of each Warrant shall be the price
set forth in Section 1 hereof per Warrant Shares issued thereunder. The adjusted
exercise price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance with the
provisions of Section 9 hereof.
7.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
8.Registration Under the Securities Act of 1933. Subject to the
Registration Rights Agreement between the Company and the Holder dated as of the
date hereof, the Warrants, the Warrant Shares and any of the Other Securities
issuable upon exercise of the Warrants have not been registered under the
Securities Act of 1933, as amended (the "Act"). Upon exercise, in whole or in
part, of the Warrants, a certificate representing the Warrant Shares underlying
the Warrants, and any of the Other Securities issuable upon exercise of the
Warrants (collectively, the "Warrant Securities") shall bear the following
legend unless such Warrant Shares previously have been registered under the Act
in accordance with the terms hereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER
THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE
ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE.
9. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Shares purchasable upon the
exercise of the Warrants, shall be subject to adjustment from time to time upon
the occurrence of certain events described in this Section 9.
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9.1 Subdivision or Combination of Shares and Share Dividend. In case the
Company shall at any time subdivide its outstanding Shares into a greater number
of Shares or declare a dividend upon its Shares payable solely in Shares, the
Exercise Price in effect immediately prior to such subdivision or declaration
shall be proportionately reduced, and the number of Warrant Shares issuable upon
exercise of the Warrants shall be proportionately increased. Conversely, in case
the outstanding Shares of the Company shall be combined into a smaller number of
Shares, the Exercise Price in effect immediately prior to such combination shall
be proportionately increased, and the number of Warrant Shares issuable upon
exercise of the Warrants shall be proportionately reduced.
9.2 Dilutive Issuances. In the event that the Company shall sell or issue
at any time after the date of this Warrant and prior to its termination, Shares
(other than Excluded Shares, as defined in Section 9.2.5) at a consideration per
Share less than the Exercise Price then in effect, then the Exercise Price shall
be adjusted to a new Exercise Price (calculated to the nearest cent) determined
by dividing
(a) an amount equal to (i) the total number of Shares Outstanding (as
defined below and subject to adjustment in the manner set forth in Section 9.1)
on the date of issuance of this Warrant multiplied by the Exercise Price in
effect on the date of issuance of this Warrant (subject, however, to adjustment
in the manner set forth in Section 9.1), plus (ii) the aggregate of the amount
of all consideration, if any, received by the Company for the issuance or sale
of Shares since the date of issuance of this Warrant, by
(b) the total number of Shares Outstanding immediately after such issuance
or sale.
In no event shall any such adjustment be made pursuant to this Section 9.2
if it would increase the Exercise Price in effect immediately prior to such
adjustment, except as provided in Sections 9.2.3 and 9.2.4. Upon each adjustment
of the Exercise Price pursuant to this Section 9.2, the holder of this Warrant
shall thereafter be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares purchasable pursuant hereto immediately prior to such adjustment,
and dividing the product thereof by the Exercise Price resulting from such
adjustment.
9.2.1 Definitions. For purposes of this Section 9.2, the following
definitions shall apply:
(a) "Convertible Securities" shall mean any indebtedness or securities
convertible into or exchangeable for Shares.
(b) "Options" shall mean any rights, warrants or options to subscribe for
or purchase Shares or Convertible Securities other than rights, warrants or
options to purchase Excluded Securities (as defined in Section 9.2.5).
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(c) "Shares Outstanding" shall mean the aggregate of all Shares outstanding
and all Shares issuable upon exercise of all outstanding Options and conversion
of all outstanding Convertible Securities.
9.2.2 For the purposes of this Section 9.2, the following provisions shall
also be applicable:
9.2.2.1 Cash Consideration. In case of the issuance or sale of additional
Shares for cash, the consideration received by the Company therefor shall be
deemed to be the amount of cash received by the Company for such Shares (or, if
such Shares are offered by the Company for subscription, the subscription price,
or, if such Shares are sold to underwriters or dealers for public offering
without a subscription offering, the public offering price), without deducting
therefrom any compensation or discount paid or allowed to underwriters or
dealers or others performing similar services or for any expenses incurred in
connection therewith.
9.2.2.2 Non-Cash Consideration. In case of the issuance (otherwise than
upon conversion or exchange of Convertible Securities) or sale of additional
Shares, Options or Convertible Securities for a consideration other than cash or
a consideration a part of which shall be other than cash, the fair value of such
consideration as determined by the Board of Directors (if any, otherwise by the
Managers) of the Company in the good faith exercise of its business judgment,
irrespective of the accounting treatment thereof, shall be deemed to be the
value, for purposes of this Section 9, of the consideration other than cash
received by the Company for such securities.
9.2.2.3 Options and Convertible Securities. In case the Company shall in
any manner issue or grant any Options or any Convertible Securities, the total
maximum number of Shares of issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities at the time such Convertible Securities first become convertible or
exchangeable shall (as of the date of issue or grant of such Options or, in the
case of the issue or sale of Convertible Securities other than where the same
are issuable upon the exercise of Options, as of the date of such issue or sale)
be deemed to be issued and to be outstanding for the purpose of this Section 9.2
and to have been issued for the sum of the amount (if any) paid for such Options
or Convertible Securities and the amount (if any) payable upon the exercise of
such Options or upon conversion or exchange of such Convertible Securities at
the time such Convertible Securities first become convertible or exchangeable;
provided that, subject to the provisions of Section 9.2.3, no further adjustment
of the Exercise Price shall be made upon the actual issuance of any such Shares
or Convertible Securities or upon the conversion or exchange of any such
Convertible Securities.
9.2.3 Change in Option Price or Conversion Rate. In the event that the
purchase price provided for in any Option referred to in subsection 9.2.2.3, or
the rate at which any Convertible Securities referred to in subsection 9.2.2.3
are convertible into or exchangeable for Shares shall change at any time (other
than under or by reason of provisions designed to
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protect against dilution), then, for purposes of any adjustment required by
Section 9.2, the Exercise Price in effect at the time of such event shall
forthwith be readjusted to the Exercise Price that would have been in effect at
such time had such Options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration or conversion rate, as
the case may be, at the time initially granted, issued or sold, provided that if
such readjustment is an increase in the Exercise Price, such readjustment shall
not exceed the amount (as adjusted by Sections 9.1 and 9.2) by which the
Exercise Price was decreased pursuant to Section 9.2 upon the issuance of the
Option or Convertible Security. In the event that the purchase price provided
for in any such Option referred to in subsection 9.2.2.3, or the additional
consideration (if any) payable upon the conversion or exchange of any
Convertible Securities referred to in subsection 9.2.2.3, or the rate at which
any Convertible Securities referred to in subsection 9.2.2.3 are convertible
into or exchangeable for Shares, shall be reduced at any time under or by reason
of provisions with respect thereto designed to protect against dilution, then in
case of the delivery of Shares upon the exercise of any such Option or upon
conversion or exchange of any such Convertible Security; the Exercise Price then
in effect hereunder shall, upon issuance of such Shares, be adjusted to such
amount as would have obtained had such Option or Convertible Security never been
issued and had adjustments been made only upon the issuance of the Shares
delivered as aforesaid and for the consideration actually received for such
Option or Convertible Security and the Shares, provided that if such
readjustment is an increase in the Exercise Price, such readjustment shall not
exceed the amount (as adjusted by Sections 9.1 and 9.2) by which the Exercise
Price was decreased pursuant to Section 9.2 upon the issuance of the Option or
Convertible Security.
9.2.4 Termination Of Option or Conversion Rights. In the event of the
termination or expiration of any right to purchase Shares under any Option
granted after the date of this Warrant or of any right to convert or exchange
Convertible Securities issued after the date of this Warrant, the Exercise Price
shall, upon such termination, be readjusted to the Exercise Price that would
have been in effect at the time of such expiration or termination had such
Option or Convertible Security, to the extent outstanding immediately prior to
such expiration or termination, never been issued, and the Shares issuable
thereunder shall no longer be deemed to be Shares Outstanding, provided that if
such readjustment is an increase in the Exercise Price, such readjustment shall
not exceed the amount (as adjusted by Sections 9.1 and 9.2) by which the
Exercise Price was decreased pursuant to Section 9.2 upon the issuance of the
Option or Convertible Security. The termination or expiration of any right to
purchase Shares under any Option granted prior to the date of this Warrant or of
any right to convert or exchange Convertible Securities issued prior to the date
of this Warrant shall not trigger any adjustment to the Exercise Price, but the
Shares issuable under such Options or Convertible Securities shall no longer be
counted in determining the number of Shares Outstanding on the date of issuance
of this Warrant for purposes of subsequent calculations under this Section 9.2.
9.2.5 Excluded Shares. Notwithstanding anything herein to the contrary, the
Exercise Price shall not be adjusted pursuant to this Section 9.2 by virtue of
the issuance and/or sale of Excluded Shares, which shall mean the following: (a)
Shares issuable upon the
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exercise of the Warrants; (b) Shares, Options or Convertible Securities to be
issued and/or sold to employees, advisors (including, without limitation,
financial, technical and legal advisers), directors, or officers of, or
consultants to, the Company or any of its subsidiaries pursuant to a share
grant, share option plan, share purchase plan, pension or profit sharing plan or
other share agreement or arrangement existing as of the date hereof or approved
by the Company's Board of Directors; (c) the issuance of Shares, Options and/or
Convertible Securities pursuant to Options and Convertible Securities
outstanding as of the date of this Warrant; and (d) the issuance of Shares,
Options or Convertible Securities as a share dividend or upon any subdivision or
combination of Shares or Convertible Securities (for which appropriate
adjustments are to be made pursuant to Section 9.1 hereof). For all purposes of
this Section 9.2, all Shares of Excluded Shares shall be deemed to have been
issued for an amount of consideration per Share equal to the initial Exercise
Price (subject to adjustment in the manner set forth in Section 9.1). In
addition, if the amount of any adjustment pursuant to this Section 9 shall be
less than two cents (2(cent)) per Warrant Share no adjustment to the Exercise
Price or to the number of Warrant Shares issuable upon the exercise of the
Warrants shall be made; provided, however, that in such case any adjustment that
would otherwise be required then to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment which,
together with any adjustment so carried forward, shall amount to at least two
cents (2(cent)) per Warrant Share.
9.3 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
(i) the effective date of the adjustment and the Exercise Price resulting from
such adjustment and (ii) the increase or decrease, if any, in the number of
Shares purchasable at such price upon the exercise of this Warrant, setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based.
9.4 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Shares;
(b) the Company shall declare any dividend upon its Shares payable in
securities (other than a dividend payable solely in Shares) or make any special
dividend or other distribution to the holders of its Shares;
(c) there shall be any consolidation or merger of the Company with another
corporation, or a sale of all or substantially all of the Company's assets to
another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
<PAGE>
then, in any one or more of said cases, the Company shall give, by
certified or registered mail, postage prepaid, addressed to the registered
holder of this Warrant at the address of such holder as shown on the books of
the Company, (i) at least 15 days' prior written notice of the date on which the
books of the Company shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such dissolution, liquidation or winding-up; (ii) at least 10 days' prior
written notice of the date on which the books of the Company shall close or a
record shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 15 days' written notice
of the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
distribution or option rights, the date on which the holders of Shares shall be
entitled thereto. Any notice given in accordance with clause (iii) above shall
also specify the date on which the holders of Shares shall be entitled to
exchange their Shares for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, as the case may be. If the Holder of the Warrant does
not exercise this Warrant prior to the occurrence of an event described above,
except as provided in Sections 9.1 and 9.5, the Holder shall not be entitled to
receive the benefits accruing to existing holders of the Shares in such event.
9.5 Changes in Shares. In case at any time the Company shall be a party to
any transaction (including, without limitation, a merger, consolidation, sale of
all or substantially all of the Company's assets or recapitalization of the
Shares) in which the previously outstanding Shares shall be changed into or
exchanged for different securities of the Company or common stock or other
securities of another corporation or interests in a non-corporate entity or
other property (including cash) or any combination of any of the foregoing (each
such transaction being herein called the "Transaction" and the date of
consummation of the Transaction being herein called the "Consummation Date"),
then, as a condition of the consummation of the Transaction, lawful and adequate
provisions shall be made so that each Holder, upon the exercise hereof at any
time on or after the Consummation Date, shall be entitled to receive, and this
Warrant shall thereafter represent the right to receive, in lieu of the Shares
issuable upon such exercise prior to the Consummation Date, the highest amount
of securities or other property to which such Holder would actually have been
entitled as a shareholder upon the consummation of the Transaction if such
Holder had exercised such Warrant immediately prior thereto. The provisions of
this Section 9.5 shall similarly apply to successive Transactions.
10. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
<PAGE>
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
11. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Shares upon the exercise of the
Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Shares or Other Securities.
12. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized Shares, solely for the purpose of issuance
upon the exercise of the Warrants, such number of Shares or Other Securities as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all Shares or Other Securities issuable upon such exercise shall be duly and
validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any shareholder.
13. Notices to Warrant Holder. Except as otherwise provided in Section 9.4,
nothing contained in this Agreement shall be construed as conferring upon the
Holder by virtue of his holding the Warrant the right to vote or to consent or
to receive notice as a shareholder in respect of any meetings of shareholders
for the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company.
14. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to the registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 4 hereof or to
such other address as the Company may designate by notice to the Holder.
15. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.
16. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective successors and
<PAGE>
assigns hereunder. Any reference herein to the "Company" shall include any
corporation which is a successor to the limited liability company structure
currently used by the Company.
17. Termination. This Agreement shall terminate at the close of business on
the tenth anniversary of the issuance of the Warrants.
18. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
the State of New York without giving effect to the rules of the State of New
York governing the conflicts of laws.
19. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.
23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
DIGITAL LAVA INC.
By:/s/ Joshua Sharfman
---------------------------------------
Name: Joshua Sharfman
Title: President
THE WHITESTONE GROUP LLC
By: /s/ Jeffrey Rubin
---------------------------------------
Name: Jeffrey Rubin
Title: Principle and Managing Director
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EXHIBIT X
TO
WARRANT AGREEMENT
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i)
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
EXERCISABLE UNTIL
5:30 P.M., NEW YORK TIME, APRIL 30, 2003
No. W-98 LAVA-_ 100,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that The Whitestone Group, LLC or its
registered assigns, is the registered holder of 100,000 Warrants to purchase
initially at any time until 5:30 p.m. New York time on April 30, 2003
("Expiration Date"), up to 100,000 fully-paid and non-assessable shares of
Common Stock ("Shares") of DIGITAL LAVA INC., a Delaware corporation (the
"Company"), at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), equal to $.50 per Share upon surrender of this
Warrant Certificate and payment of the Exercise Price at an office or agency of
the Company, but subject to the conditions set forth herein and in the Warrant
Agreement dated as of May 1, 1998 between the Company and The Whitestone Group
LLC (the "Warrant Agreement"). Payment of the Exercise Price shall be made by
certified check or official bank check in New York Clearing House funds payable
to the order of the Company, unless exercise is made pursuant to Section 4.2 of
the Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and
<PAGE>
immunities thereunder of the Company and the holder (the word "holder" meaning
the registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificate
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.
Dated as of May 1, 1998
DIGITAL LAVA INC.
By: /s/ Joshua Sharfman
-----------------------
Name: Joshua Sharfman
Title: President
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______________ Shares and
herewith tenders in payment for such securities a certified check or official
bank check payable in New York Clearing House Funds to the order of DIGITAL LAVA
INC. in the amount of $________ , all in accordance with the terms of Section 4
of the Warrant Agreement dated as of May 1, 1998 between DIGITAL LAVA INC. and
THE WHITESTONE GROUP, LLC. The undersigned requests that a certificate for such
securities be registered in the name of ______________________________ whose
address is __________________________and that such Certificate be delivered to
________________________ whose address is ____________________________.
Dated:
Signature ______________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the
Warrant Certificate.)
_________________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ___________________ hereby
sells, assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint _________________
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of substitution.
Dated: ______________ Signature: _______________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant
Certificate.)
__________________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
EXHIBIT 4 (t)
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of May 1,
1998 is made by and among DIGITAL LAVA INC., a Delaware corporation (the
"Company"), and The Whitestone Group, LLC (the "Holder").
RECITALS
In connection with the issuance by the Company to the Holder of certain
warrants pursuant to a Warrant Agreement, both between the Company and the
Holder dated as of the date hereof, which agreement among other things provides
for the issuance to the Holders of certain warrants (the "Warrants") to purchase
shares of the Company's common stock ("Common Stock"), the Company has agreed to
grant to the Holders certain registration rights under the Securities Act of
1933, as amended, and the rules and regulations thereunder (collectively, the
"Securities Act") with respect to the shares of Common Stock issuable upon
exercise of the Warrants (the "Warrant Shares"). This Agreement sets forth the
terms and conditions of such undertaking.
AGREEMENTS
The Company and the Holder covenant and agree as follows:
1. Definitions. For purposes of this Agreement:
(a) The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
statements or similar documents 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 the effectiveness of such registration statement or document by
the Securities and Exchange Commission (the "SEC");
(b) The term "Registrable Securities" means (i) the Warrant Shares and (ii)
any shares of Common Stock issued as (or issuable upon the conversion or
exercise of any convertible security, warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of such Warrant Shares, excluding in all cases, however, any
Registrable Securities sold by Holder in a transaction in which its registration
rights under this Agreement are not assigned.
2. Registration.
(a) Demand Registration. Subject to the limitations set forth in Section
2(c) below, the Company shall, upon the written request of Holder use its best
efforts to cause the Registrable Securities specified in such request to be
registered under the Securities Act (a "Demand Registration"). In the event
there is more than one Holder and the Company shall
<PAGE>
receive a written request under this Section 2(a), the Company shall give prompt
written notice thereof to any Holder which did not join in such written request.
If requested in writing by any of such other Holders within fifteen days after
the Company gives the notice described in the preceding sentence, the Company
shall include among the Registrable Securities that it endeavors to register
under this Section 2(a) such Registrable Securities as shall be specified in the
request of such other Holders.
(b) Notice of Demand Registration. Each request delivered pursuant to
Section 2(a) shall: (i) specify the amount of Registrable Securities intended to
be offered and sold by each of the Holders joining in the request; (ii) express
the present intent to offer such Registrable Securities for distribution; (iii)
describe the nature or method of the proposed offer and sale of the Registrable
Securities; and (iv) contain the undertaking of the Holders to provide all such
information and materials and take all such action as may be required in order
to permit the Company to comply with all applicable requirements of the
Securities Act, the Registrable Securities and state securities and "blue sky"
laws, and to obtain acceleration of the effective date of the Registration
Statement (as defined below).
(c) Limitations on Demand Registrations. Notwithstanding anything herein to
the contrary, the obligations of the Company to cause any Registrable Securities
to be registered pursuant to Section 2(a) are subject to each of the following
limitations, conditions and qualifications:
(i) The Holders may only request that the Company make any Demand
Registration subsequent to the earlier of 180 days following (i) the
effective date of the registration statement for the initial public
offering of the Company's securities or (ii) any class of securities
otherwise becoming subject to the registration requirements of Section 12
of the Securities Exchange Act of 1934, as amended.
(ii) Any request for Demand Registration made by the Sellers pursuant
to Section 2(a), to be effective, shall request the registration of the
offering and sale or other distribution by the Holders of not less than
one-half of the Registrable Securities.
(iii) In the event the Holders request Demand Registration pursuant to
Section 2(a) and the related offering is to be underwritten, the managing
underwriter shall be a nationally recognized investment banking firm
approved by the Company in the reasonable exercise of its discretion.
(iv) The Company shall be required to effect only one Demand
Registration pursuant to Section 2(a).
(d) Incidental Registration. Subject to the limitations set forth in
Section 2(f), at any time that the Company shall propose the registration under
the Securities Act of an offering of any of its securities on a registration
form which can be used for registration of the Registrable Securities, the
Company shall give written notice as promptly as possible of such proposed
registration to the Holders, and shall include in the offering such amount of
<PAGE>
Registrable Securities as the Holders shall request to be included by written
notice to the Company received within fifteen days after receipt of the
Company's notice, upon the same terms (including the method of distribution) as
the securities being sold by the Company pursuant to any such offering (an
"Incidental Registration").
(e) Notice of Incidental Registration. Each request delivered pursuant to
Section 2(d) shall: (i) specify the amount of Registrable Securities intended to
be offered and sold by each of the Holders; and (ii) contain the undertaking of
the Holders to provide all such information and materials and take all such
action as may be required in order to permit the Company to comply with all
applicable requirements of the Securities Act, the SEC and state securities and
"blue sky" laws and to obtain acceleration of the effective date of the
Registration Statement.
(f) Limitations on Incidental Registrations. Notwithstanding anything
contained herein to the contrary, the obligations of the Company to cause
Registrable Securities to be registered pursuant to Section 2(d) are subject to
each of the following limitations, conditions and qualifications:
(i) The Company shall not be required to give notice or include
Registrable Securities in any registration pursuant to Section 2(d) if the
proposed registration is primarily: (A) a registration of a stock option,
thrift, employee benefit or compensation plan or of securities issued or
issuable pursuant to any such plan; (B) a registration of securities
proposed to be issued in connection with a dividend reinvestment and stock
purchase plan or customer stock purchase plan; (C) a registration of
securities proposed to be issued in exchange for securities or assets of,
or in connection with a merger or consolidation with, another corporation
or other entity; or (D) a registration of securities which is solely a
combination of any of the above.
(ii) If the Company is advised in writing by the managing underwriter
(or its investment banking firm if the offering is not underwritten) that
the inclusion of Registrable Securities may, in the opinion of such
underwriter or investment banking firm, as the case may be, interfere with
the orderly sale and distribution of the securities proposed to be offered
by the Company or adversely affect the price at which such securities may
be sold, the number of shares of Registrable Securities to be included in
the offering shall be reduced or eliminated to the extent necessary as
shall be reasonably determined by such underwriter or investment banker, as
the case may be, in good faith. Alternatively, the Company may require the
Holder to enter into a customary form of lockup agreement with the managing
underwriter in connection with the registration of the Registrable
Securities.
(iii) In the event the Holders request registration pursuant to
Section 2(d) and the related offering is to be underwritten, the Holders
will enter into an underwriting agreement containing representations,
warranties and agreements not substantially different from those
customarily made by an issuer and a selling shareholder in underwriting
agreements with respect to secondary distributions.
<PAGE>
(iv) The Company may, in its sole discretion, without the consent of
the Holders and without liability to any Holder for such action, withdraw
such registration statement and abandon the proposed offering in which the
Holder had requested to participate at any time.
(v) The Company shall only be required to effect one Incidental
Registration pursuant to Section 2(d).
3. Obligations of the Company. When required under the Agreement to effect
the registration of the Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Registration Statements. Prepare and file with the SEC a registration
statement or statements or similar documents (the "Registration Statement") with
respect to all Registrable Securities, other than any Registrable Securities
excluded by Holders pursuant to Sections 2(a) and 2(d), and use its best efforts
to cause the Registration Statement to become effective and maintain the
effectiveness of the Registration Statement until the earlier of (i) the date
all such registered Registrable Securities are sold and any prospectus delivery
requirements under the Securities Act shall have lapsed, and (ii) (A) six months
(in the case of a registration statement on Form S-1 or comparable long-form
registration statement) or (B) six months following the latest expiration date
of the Warrants (in the case of a registration statement on Form S-3 or
comparable short-form registration statement).
(b) Amendments. 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 comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by the Registration Statement.
(c) Prospectuses. Furnish promptly to each Holders such numbers of copies
of a prospectus, including a preliminary prospectus, and all amendments and
supplements thereto, in conformity with the requirements of the Securities Act,
and such other documents as the Holders may reasonably request in order to
facilitate the disposition of Registrable Securities.
(d) Blue Sky. Use its best efforts to register and qualify the securities
covered by the Registration Statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders, and
to prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements and to take such other actions
necessary or advisable to maintain such registration and qualifications in
effect, and to take all other actions necessary or advisable to enable the
disposition of such securities in such jurisdictions, provided that the Company
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions or to provide any undertaking or make any change in
its charter or bylaws which the Board of Directors determines to be contrary to
the best interest of the Company and its stockholders.
<PAGE>
(e) Underwriting Arrangements. Enter into and perform its obligations under
an underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering. The Holders shall also enter into and
perform their customary obligations under any such agreement including, without
limitation, customary indemnification and contribution obligations.
(f) Notification of Changes. Notify the Holders, at any time when a
prospectus relating to Registrable Securities covered by the Registration
Statement is required to be delivered under the Securities Act, of the happening
of any event as a result of which the prospectus including 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 not misleading in light of the circumstances then
existing. The Company shall promptly amend or supplement the Registration
Statement to correct any such untrue statement or omission.
(g) Notification of Stop Orders. Notify the Holders of the issuance by the
SEC of any stop order suspending the effectiveness of the Registration Statement
or the initiation of any proceedings for that purpose. The Company will make
every reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest possible
time.
(h) Review by Counsel. Permit a single firm of counsel designated as
selling stockholders' counsel by the holders of a majority in interest of the
Registrable Securities to review (at the expense of such selling stockholders)
the Registration Statement and all amendments and supplements thereto a
reasonable period of time prior to their filing, and shall not file any document
in a form to which counsel reasonably objects.
(i) Opinions. At the request of the Holders, use its best efforts to
furnish on the date that Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this
Agreement (i) an opinion, dated such date, of the counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters and (ii) a letter dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters.
(j) Due Diligence. Make available for inspection by the Holders, any
underwriters participating in the offering pursuant to the registration and the
counsel, accountants or other agents retained by the Holders or any such
underwriter, all pertinent financial and other records, corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by the Holders or any
such underwriters in connection with the registration.
<PAGE>
(k) Listing. If the class of the Company's securities is then listed on a
national securities exchange, use its best efforts to cause the Registrable
Securities to be listed on such exchange. If the Company's securities are not
then listed on a national securities exchange, use its best efforts to
facilitate the reporting of the Registrable Securities on NASDAQ.
(l) Further Actions. Take all other reasonable actions necessary to
expedite and facilitate disposition by the Holders of the Registrable Securities
pursuant to the Registration Statement.
4. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to each Holder that such Holder shall furnish to the Company such
information regarding itself, the Registrable Securities held by it, and the
intended method of disposition of such securities as shall be reasonably
required to effect the registration of the Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
5. Expenses of Registration. All expenses other than the underwriting
discounts and commissions incurred in connection with registration, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing, filing and qualification fees, printing and accounting
fees, the fees and disbursements of counsel for the Company (but excluding the
fees and disbursements of any counsel for the Holders) shall be borne by the
Company.
6. Indemnification. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
(a) By Company. To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the directors, if any, of such Holder, the
officers, if any, of such Holder who sign the Registration Statement, each
person, if any, who controls such Holder, any underwriter (as defined in the
Securities Act) for the Holders and each person, if any, who controls any such
underwriter within the meaning of the Securities Act or the Securities Act of
1934, as amended (the "1934 Act"), against any losses, claims, damages, expenses
or liabilities (joint or several) to which any of them may become subject under
the Securities Act, the 1934 Act or otherwise, insofar as such losses, claims,
damages, expenses or liabilities (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 (collectively, a "Violation"): (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein, in light of the
circumstance in which they are made, not misleading or (iii) any violation or
alleged violation by the Company of the Securities Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the 1934 Act, any state securities law; and the Company will reimburse the
<PAGE>
Holders and each such underwriter or controlling person, promptly as such
expenses are incurred, for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability action or proceeding; provided, however, that the indemnity agreement
contained in this Section 6(a) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Company, which consent shall not be unreasonably
withheld, nor shall the Company be liable in any such case for any such loss,
claim, damage, liability or action to the extent that it aries out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by the Holders or any such underwriter or controlling person, as
the case may be. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Holders or any such underwriter
or controlling person and shall survive the transfer of the Registrable
Securities by Holders.
(b) By Holders. To the extent permitted by law, each Holder, severally and
not jointly, will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the Registration Statement, each
person, if any, who controls the Company within the meaning of the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the 1934 Act, any underwriter and any other stockholder
selling securities pursuant to the Registration Statement or any of its
directors or officers or any person who controls such holder or underwriter,
against any losses, claims, damages or liabilities (joint or several) to which
any of them may become subject, under the Securities Act, the 1934 Act or other
federal state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration, and such Holder
will reimburse any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage
liability or action; provided, however, that the indemnity agreement contained
in this subsection 6(b) shall not apply to amounts paid in settlement of such
loss, claim, damage, liability or action if such settlement is effected without
the consent of such Holder, which consent shall not be unreasonably withheld;
and provided further, that the Holder shall be liable under this paragraph for
only that amount of losses, claims, damages and liabilities as does not exceed
the proceeds to such Holder as a result of the sale of Registrable Securities
pursuant to such registration.
(c) Procedure for Indemnification. Promptly after receipt by an indemnified
party under this Section 6 of notice of the commencement of any action
(including any governmental action), such indemnified party will, 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 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 parties; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying
<PAGE>
party, if, in the reasonable opinion of counsel for the indemnifying party,
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall relieve such indemnifying party of any liability to the indemnified
party under this Section 6 only to the extent prejudicial to its ability to
defend such action, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party other than under this Section 6. 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, promptly as such expense,
loss, damage or liability is incurred.
(d) 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 otherwise would be
liable under this Section 6 to the extent permitted by law, provided that (i) no
contribution shall be made under the circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in this
Section 6, (ii) 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 (iii) 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.
7. Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of SEC Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit the Holders to sell securities of the Company to the public without
registration, the Company agrees, following the initial public offer of the
Company's securities, to:
(i) make and keep public information available, as those terms are
understood and defined in SEC Rule 144;
(ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934
Act; and
(iii) furnish to each Holder, so long as such Holder owns any
Registrable Securities, forthwith upon request (A) a written statement by
the Company that it has complied with the reporting requirements of SEC
Rule 144, the Securities Act and the 1934 Act, (B) 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 (C) such other information as may be
reasonably requested in availing the Holders of any rule or regulation of
the SEC which permits the selling of any securities without registration.
<PAGE>
8. Assignment of Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement may be assigned by
the Holders to transferees or assignees of such securities provided the Company
is, within a reasonable time after such transfer, furnished with written notice
of the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; provided, further,
that such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act. The term "Holders" as used in
this Agreement shall include permitted assignees.
9. Miscellaneous.
(a) Notices. Notices required or permitted to be given hereunder shall be
in writing and shall be deemed to be sufficiently given when personally
delivered or sent by registered mail, return receipt requested, addressed (i) if
to the Company, at 10850 Wilshire Boulevard, Suite 1260, Los Angeles, CA 90024,
(with a copy to: Ehrenreich Eilenberg Krause & Zivian LLP, 11 East 44th Street,
New York, NY 10017; Attention: Adam D. Eilenberg, Esq.) and (ii) if to a Holder
at ____________________________________, or at such other address as each such
party furnishes by notice given in accordance with this Section 9(a).
(b) Waiver. 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,
will not operate as a waiver thereof. No waiver will be effective unless and
until it is in writing and signed by the party giving the waiver.
(c) Governing Law. This Agreement shall be enforced, governed and construed
in all respects in accordance with the laws of the State of New York, as such
laws are applied by New York courts to agreements entered into and to be
performed in New York by and between residents of New York. In the event that
any provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute of rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not affect the validity or enforceability
of any other provision hereof.
[Balance of Page Intentionally Left Blank]
<PAGE>
(d) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and may be
amended only by a written agreement executed by the Company and the holders of a
majority in interest of the sum of (x) the Registrable Securities and (y) the
then outstanding and unexercised Warrants.
DIGITAL LAVA INC.
By: /s/ Joshua Sharfman
-----------------------------------------
Authorized Officer
THE WHITESTONE GROUP, LLC
/s/ Jeffrey Rubin
---------------------------------------------
Name: Jeffrey Rubin
Title: Principal and Managing Director
Address:
EXHIBIT 4 (u)
<PAGE>
July 15, 1998
To: Digital LAVA Noteholders Set Forth on Schedule I
Dear Investors:
We are pleased to inform you that Digital LAVA, Inc. (the "Company") has
signed a letter of intent with Security Capital Trading, Inc. (the
"Underwriter") to act as managing underwriter in connection with a proposed
initial public offering (the "IPO") of the Company's common stock and redeemable
common stock purchase warrants. It is contemplated that the IPO will consist of
2,400,000 shares of common stock and 1,200,000 warrants at an anticipated price
of $7.50 per share of common stock and $.10 per warrant, resulting in proceeds
to the Company of approximately $18 million. The Company has agreed with the
Underwriter that prior to the IPO the Company will have no more than 2,400,000
shares of common stock outstanding. Accordingly, the Company contemplates an
approximately 1 for 9 reverse split immediately prior to the completion of the
IPO. Finally, the Underwriter has agreed that upon the completion of the IPO as
described above, anticipated to occur in the fourth quarter of 1998, the Company
may pay all of the outstanding notes held by you in full, including all accrued
interest and the 10% success fee.
As you know, in connection with your loan to the Company, you received
warrants to purchase shares of the Company's common stock. Section 1 of the
warrant agreement between you and the Company provides the formula for the
determination of the number of warrants and the warrant exercise price, and
based on our calculations (as shown on Schedule II), you collectively own an
aggregate of 2,289,208 warrants at an exercise price of $.944. Based on the
contemplated 1 for 9 reverse split, you collectively would own an aggregate of
254,357 warrants at an exercise price of $8.496.
The Underwriter has advised the Company that it would be beneficial to
simplify the Company's capital structure by converting as many of the Company's
outstanding convertible securities into common stock immediately prior to the
IPO. Accordingly, the Company is offering to issue you common stock equal in
value to 25% of the principal amount of your loan based on the IPO price in
exchange for the cancellation of your warrants. For example, if you loaned the
Company $100,000, you would have received warrants to purchase 11,771 shares of
common stock at $8.496, assuming a 1 for 9 reverse split. By accepting the
Company's offer, you would instead own 3,334 shares of common stock, assuming an
IPO price of $7.50. The number of shares you will receive will be based on the
actual IPO price. Thus, an investor who loaned the Company $100,000 will receive
common stock equal to $25,000, even if the IPO price is less than $7.50. The
common stock you receive will be registered at the same time as the IPO, but
will be subject
<PAGE>
to a lock-up agreement with the Underwriter, which we currently anticipate will
be for a period of 9 months from the date of the IPO (of course, any shares of
common stock from the exercise of the warrants which we are proposing you
surrender would be subject to a similar lock-up).
In addition to the repayment of your debt, the Underwriter has agreed that
the Company may use proceeds from the IPO to pay a portion of the outstanding
loans held by the Company's unsecured creditors. Assuming the IPO is completed
as described above, the Company will pay approximately $1.6 million of
approximately $3.1 million of outstanding unsecured debt. Simultaneously with
this offer to you, the Company is asking the unsecured creditors to convert the
unpaid portion of their notes and the warrants they currently hold into shares
of common stock immediately prior to the IPO. Assuming you and the unsecured
creditors accept the Company's offer, and assuming the conversion of warrants
held by certain other holders, based on an IPO price of $7.50, the capital
structure of the Company immediately prior to the IPO is set forth on Schedule
III.
In order to effect this recapitalization, we are asking you to agree to the
following:
(i) if the IPO is completed and the entire principal amount of your note,
plus accrued interest and the success fee, is paid in full, you agree to
accept common stock of the Company equal to 25% of the principal amount of
your note in lieu of the warrants you are entitled to pursuant to your
warrant agreement with the Company (the number of warrants and the exercise
price prior to the reverse split is set forth across from your name under
the column "original warrants" on Schedule III; based on an IPO price of
$7.50, the number of shares of common stock is set forth across from your
name under the column "stock issued for warrants" on Schedule III);
(ii) to (a) deliver to our counsel, Ehrenreich Eilenberg Krause & Zivian
LLP, as escrow agent (the "Escrow Agent"), your original note to be held in
escrow pending completion of the IPO or (b) if you have lost your note,
certify to such effect and to indemnify the Company by completing and
executing the Lost Note Affidavit and Indemnity Agreement included as
Schedule IV and returning it to the Escrow Agent (in the event the IPO is
not completed by the maturity date of your note, the Escrow Agent will
return your note to you (or a new note will be issued to you if you
executed the Lost Note Affidavit and Indemnity Agreement)); and
(iii) to re-confirm as of the date hereof that you are an accredited
investor as indicated in the questionnaire you completed in connection with
your original investment, reconfirm your original loan to the Company and
the acquisition of the warrants issuable to you and waive any right of
recission you may have.
In connection with making your investment decision, we have enclosed for
your review a Company Summary and the capitalization table (Schedule III).
<PAGE>
There can be no assurance, of course, that the IPO will be completed on the
terms described above, if at all. The Company believes, however, that the IPO
currently represents the best opportunity to raise needed capital, provide
liquidity to investors and meet its obligations to its various lenders. We
remain confident in the Company's Video Publishing software and are hopeful that
the financial markets will recognize the value of our technology.
[Remainder of page intentionally left blank]
<PAGE>
If you agree to accept the Company's offer, please do the following:
1. sign this letter where indicated below (we have provided you with an
extra copy for your records); and
2. return it, along with your original note or the Lost Note Affidavit and
Indemnity Agreement (Schedule IV completed and signed), to the Escrow Agent in
the Federal Express envelope which we have provided.
If you have any questions, please call either our Chief Financial Officer,
Danny Gampe, at (888)-222-5282 or Adam Eilenberg or Jeff Abbey of Ehrenreich
Eilenberg Krause & Zivian LLP at (212) 986-9700.
Thank you for your continued support of the Company.
Sincerely,
/s/ Joshua D.J. Sharfman /s/ Danny Gampe
Joshua D. J. Sharfman, Danny Gampe
Chief Executive Officer Chief Financial Officer
I hereby accept and agree to each of the statements set forth in paragraphs
(i), (ii) and (iii) on the foregoing page of this letter. I have had an
opportunity to read the Company Summary and review the capitalization table and
have had an opportunity to ask questions of the Company and its counsel. I have
been furnished with all materials relating to the Company and its proposed
activities which I have requested and have been afforded the opportunity to
obtain any additional information necessary to verify the accuracy of any
representations or information relating to the Company and its proposed
activities.
/s/ Andrew Holder /s/ Marc Roberts
- ----------------------------------- -----------------------------------
Andrew Holder Marc Roberts
/s/ R. Merrill Hunter /s/ Frank Loccisano
- ----------------------------------- -----------------------------------
R. Merrill Hunter Frank Loccisano
/s/ Lawrence Manus /s/ Chana Sasha Foundation
- ----------------------------------- -----------------------------------
Lawrence Manus Chana Sasha Foundation
/s/ Keith Alliots /s/ Ryan Shinman
- ----------------------------------- -----------------------------------
Keith Alliots Ryan Shinman
/s/ John Hancock Global
- -----------------------------------
John Hancock Global
Technology Fund
Accepted and Agreed to:
Escrow Agent:
/s/ Ehrenreich Eilenberg Krause & Zivian
- ----------------------------------------
Ehrenreich Eilenberg Krause & Zivian LLP
EXHIBIT 4 (v)
<PAGE>
July 16, 1998
To: Digital LAVA Noteholders Set Forth on Schedule I
Dear Investors:
We are pleased to inform you that Digital LAVA, Inc. (the "Company") has
signed a letter of intent with Security Capital Trading, Inc. (the
"Underwriter") to act as managing underwriter in connection with a proposed
initial public offering (the "IPO") of the Company's common stock and redeemable
common stock purchase warrants. It is contemplated that the IPO will consist of
2,400,000 shares of common stock and 1,200,000 warrants at an anticipated price
of $7.50 per share of common stock and $.10 per warrant, resulting in proceeds
to the Company of approximately $18 million. The Company has agreed with the
Underwriter that prior to the IPO the Company will have no more than 2,400,000
shares of common stock outstanding. Accordingly, the Company contemplates an
approximately 1 for 9 reverse split immediately prior to the completion of the
IPO. Finally, the Underwriter has agreed that upon the completion of the IPO as
described above, anticipated to occur in the fourth quarter of 1998, the Company
may pay 50% of the aggregate principal amount of the outstanding notes held by
you.
In connection with the IPO, the Company is hereby requesting that each of
you agree to convert the unpaid portion of your note, including accrued
interest, and all outstanding warrants held by you into shares of common stock
equal in value to 175% of the principal amount of your loan. The conversion
would occur immediately prior to the completion of the IPO, and only if the IPO
is actually completed and you receive 50% of the aggregate principal amount of
your notes. Thus, an investor who loaned the Company $100,000 will receive
$50,000 in cash and common stock equal to $175,000 based on the actual IPO
price.
For example, assume the investor described above received 100,000 warrants
with a current exercise price of $.90. Based on the contemplated 1 for 9 reverse
split, such investor would own 11,111 warrants at an exercise price of $8.10.
Assuming the successful completion of the IPO at a price of $7.50, these
warrants would be canceled and the investor would receive $50,000 in cash and
23,334 shares of common stock.
The common stock you receive in exchange for your warrants and the unpaid
balance and accrued interest on your notes will be registered at the same time
as the IPO, but will be subject to a lock-up agreement with the Underwriter,
which we currently anticipate will be for a period of 9 months from the date of
the IPO (of course, any shares of common stock from the exercise of the warrants
which we are proposing you surrender would be subject to a similar lock-up).
<PAGE>
In addition to the repayment of your debt, the Underwriter has agreed that
the Company may use proceeds from the IPO to pay all of the outstanding loans
held by the Company's secured lenders who participated in the last round of
bridge loan financings in late 1997 and early 1998. Assuming the IPO is
completed as described above, the Company will pay approximately $2 million of
outstanding secured debt. Simultaneously with this offer to you, the Company is
asking the secured lenders to convert the warrants they currently hold into
shares of common stock immediately prior to the IPO. Please note that the
secured lenders are being offered significantly fewer shares of common stock
than are being offered to you. Assuming you and the secured lenders accept the
Company's offer, and assuming the conversion of warrants held by certain other
holders, based on an IPO price of $7.50, the capital structure of the Company
immediately prior to the IPO is set forth on Schedule II.
In order to effect this recapitalization, we are asking you to agree to the
following:
(i) if the IPO is completed and 50% of the principal amount of your note is
paid, you agree to accept common stock of the Company equal to 175% of the
principal amount of your note in exchange for the cancellation of the
remaining balance of your note, including accrued interest, and your
warrants (the number of warrants and the exercise price prior to the
reverse split is set forth across from your name under the column "original
warrants" on Schedule II; based on an IPO price of $7.50, the number of
shares of Common Stock is set forth across from your name under the column
"stock issued for warrants and debt" on Schedule II);
(ii) to waive the current default of your note as a result of non-payment
on the original maturity date and extend the term of your note until the
earlier of the completion of the IPO or December 31, 1998.
(iii) to (a) deliver to our counsel, Ehrenreich Eilenberg Krause & Zivian
LLP, as escrow agent (the "Escrow Agent"), your original note and warrant
certificate to be held in escrow pending completion of the IPO or (b) if
you have lost your note and/or warrant certificate, certify to such effect
and to indemnify the Company by completing and executing the Lost Note
and/or Warrant Affidavit and Indemnity Agreement included as Schedule III
and returning it to the Escrow Agent (in the event the IPO is not completed
by December 31, 1998, the Escrow Agent will return your note and warrant
certificate to you (or a new note and/or warrant certificate will be issued
to you if you executed the Lost Note and/or Warrant Affidavit and Indemnity
Agreement)); and
(iv) to re-confirm as of the date hereof that you are an accredited
investor as indicated in the questionnaire you completed in connection with
your original investment, reconfirm your original loan to the Company and
the
<PAGE>
acquisition of the warrants issued to you and waive any right of recission
you may have.
In connection with making your investment decision, we have enclosed for
your review a Company Summary and the capitalization table (Schedule II).
There can be no assurance, of course, that the IPO will be completed on the
terms described above, if at all. The Company believes, however, that the IPO
currently represents the best opportunity to raise needed capital, provide
liquidity to investors and meet its obligations to its various lenders. We
remain confident in the Company's Video Publishing software and are hopeful that
the financial markets will recognize the value of our technology.
[Remainder of page intentionally left blank]
<PAGE>
If you agree to accept the Company's offer, please do the following:
1. sign this letter where indicated below (we have provided you with an
extra copy for your records); and
2. return it, along with your original note and warrant certificate or the
Lost Note and/or Warrant Affidavit and Indemnity Agreement (Schedule III
completed and signed), to the Escrow Agent in the Federal Express envelope which
we have provided.
If you have any questions, please call either our Chief Financial Officer,
Danny Gampe, at (888)-222-5282 or Adam Eilenberg or Jeff Abbey of Ehrenreich
Eilenberg Krause & Zivian LLP at (212) 986-9700.
Thank you for your continued support of the Company.
Sincerely,
/s/ Joshua D.J. Sharfman /s/ Danny Gampe
Joshua D.J. Sharfman, Danny Gampe,
Chief Executive Officer Chief Financial Officer
I hereby accept and agree to each of the statements set forth in paragraphs (i),
(ii), (iii) and (iv) on the foregoing page of this letter. I have had an
opportunity to read the Company Summary and review the capitalization table and
have had an opportunity to ask questions of the Company and its counsel. I have
been furnished with all materials relating to the Company and its proposed
activities which I have requested and have been afforded the opportunity to
obtain any additional information necessary to verify the accuracy of any
representations or information relating to the Company and its proposed
activities.
/s/ Arthur Steinberg IRA /s/ Broadway Partners
- ----------------------------------- -----------------------------------
Arthur Steinberg IRA Broadway Partners
/s/ Christine Wally /s/ Christopher Creamer
- ----------------------------------- -----------------------------------
Christine Wally Christopher Creamer
/s/ Ester Dusi /s/ Glenn Sutton III
- ----------------------------------- -----------------------------------
Ester Dusi Glenn Sutton III
/s/ John H. Glorieux /s/ Joseph Habert
- ----------------------------------- -----------------------------------
John H. Gloreiux Joseph Habert
/s/ Mitchell Steinberg /s/ Robert Ram Steinberg
- ----------------------------------- -----------------------------------
Mitchell Steinberg Robert Ram Steinberg
/s/ R. Steinberg Pension Trust /s/ Stephen Williams
- ----------------------------------- -----------------------------------
R. Steinberg Pension Trust Stephen Williams
/s/ Stephanie Rubin /s/ Irwin Ginsburg
- ----------------------------------- -----------------------------------
Stephanie Rubin Irwin Ginsburg
/s/ John Muzinsky /s/ Michael Zylberman
- ----------------------------------- -----------------------------------
John Muzinsky Michael Zylberman
/s/ Shiela Sconiers /s/ Eric Appell
- ----------------------------------- -----------------------------------
Shiela Sconiers Eric Appell
/s/ Georgia Schley /s/ Grace Terry
- ----------------------------------- -----------------------------------
Georgia Schley Grace Terry
/s/ Harold Wrobel /s/ Norman Veitzer
- ----------------------------------- -----------------------------------
Harold Wroble Norman Veitzer
/s/ Walter Terry
- -----------------------------------
Walter Terry
Accepted and Agreed to:
Escrow Agent:
/s/ Ehrenreich Eilenberg Krause & Zivian
- ----------------------------------------
Ehrenreich Eilenberg Krause & Zivian LLP
EXHIBIT 4 (w)
<PAGE>
July 29, 1998
To: Digital LAVA Noteholders Set Forth on Schedule I
Dear Investors:
We are pleased to inform you that Digital LAVA, Inc. (the "Company") has
signed a letter of intent with Security Capital Trading, Inc. (the
"Underwriter") to act as managing underwriter in connection with a proposed
initial public offering (the "IPO") of the Company's common stock and redeemable
common stock purchase warrants. It is contemplated that the IPO will consist of
2,400,000 shares of common stock and 1,200,000 warrants at an anticipated price
of $7.50 per share of common stock and $.10 per warrant, resulting in proceeds
to the Company of approximately $18 million. The Company has agreed with the
Underwriter that prior to the IPO the Company will have no more than 2,400,000
shares of common stock outstanding. Accordingly, the Company contemplates an
approximately 1 for 9 reverse split immediately prior to the completion of the
IPO. Finally, the Underwriter has agreed that upon the completion of the IPO as
described above, anticipated to occur in the fourth quarter of 1998, the Company
may pay 50% of the aggregate principal amount of the outstanding notes held by
you, plus an additional 10% success fee, for a total cash payment equal to 60%
of the aggregate principal amount of your notes.
In connection with the IPO, the Company is hereby requesting that each of
you agree to convert the unpaid portion of your note(s), including accrued
interest, and all outstanding warrants held by you into shares of common stock
equal in value to 175% of the principal amount of your loan. The conversion
would occur immediately prior to the completion of the IPO, and only if the IPO
is actually completed and you receive 60% of the aggregate principal amount of
your notes. Thus, an investor who loaned the Company $100,000 will receive
$60,000 in cash and common stock equal to $175,000 based on the actual IPO
price.
For example, assume the investor described above received 100,000 warrants
with a current exercise price of $.90. Based on the contemplated 1 for 9 reverse
split, such investor would own 11,111 warrants at an exercise price of $8.10.
Assuming the successful completion of the IPO at a price of $7.50, these
warrants would be canceled and the investor would receive $60,000 in cash and
23,334 shares of common stock.
The common stock you receive in exchange for your warrants and the unpaid
balance and accrued interest on your notes will be registered at the same time
as the IPO, but will be subject to a lock-up agreement with the Underwriter,
which we currently anticipate will be for a period of 9
<PAGE>
months from the date of the IPO (of course, any shares of common stock from the
exercise of the warrants which we are proposing you surrender would be subject
to a similar lock-up).
In addition to the repayment of your debt, and the repayment of 50% of the
debt held by the Company's other unsecured lenders, the Underwriter has agreed
that the Company may use proceeds from the IPO to pay all of the outstanding
loans held by the Company's secured lenders who participated in the last round
of bridge loan financings in late 1997 and early 1998. Assuming the IPO is
completed as described above, the Company will pay approximately $2 million of
outstanding secured debt. Simultaneously with this offer to you, the Company is
asking the secured lenders to convert the warrants they currently hold into
shares of common stock immediately prior to the IPO. Please note that the
secured lenders are being offered significantly fewer shares of common stock
than are being offered to you. Assuming you, the other unsecured lenders and the
secured lenders accept the Company's offer, and assuming the conversion of
warrants held by certain other holders, based on an IPO price of $7.50, the
capital structure of the Company immediately prior to the IPO is set forth on
Schedule II.
In order to effect this recapitalization, we are asking you to agree to the
following:
(i) if the IPO is completed and 60% of the principal amount of your note(s)
is paid, you agree to accept common stock of the Company equal to 175% of
the principal amount of your note in exchange for the cancellation of the
remaining balance of your note(s), including accrued interest, and your
warrants (the number of warrants and the exercise price prior to the
reverse split is set forth across from your name under the column "original
warrants" on Schedule II; based on an IPO price of $7.50, the number of
shares of Common Stock is set forth across from your name under the column
"stock issued for warrants and debt" on Schedule II);
(ii) to (a) deliver to our counsel, Ehrenreich Eilenberg Krause & Zivian
LLP, as escrow agent (the "Escrow Agent"), your original note(s) and
warrant certificate(s) to be held in escrow pending completion of the IPO
or (b) if you have lost your note(s) and/or warrant certificate(s), certify
to such effect and to indemnify the Company by completing and executing the
Lost Note and/or Warrant Affidavit and Indemnity Agreement included as
Schedule III and returning it to the Escrow Agent (in the event the IPO is
not completed by December 31, 1998, the Escrow Agent will return your
note(s) and warrant certificate(s) to you (or a new note and/or warrant
certificate will be issued to you if you executed the Lost Note and/or
Warrant Affidavit and Indemnity Agreement));
(iii) to waive certain rights of acceleration under your note(s) (you
retain the right to accelerate in the event of an equity raise of at least
$3.5 million, including the IPO) and to extend the maturity date of your
note(s) until December 31, 1998 by executing the extension letter included
as Schedule IV and returning it to the Escrow Agent; and
<PAGE>
(iv) to re-confirm as of the date hereof that you are an accredited
investor as indicated in the questionnaire you completed in connection with
your original investment, reconfirm your original loan to the Company and
the acquisition of the warrants issued to you and waive any right of
recission you may have.
In connection with making your investment decision, we have enclosed for
your review a Company Summary and the capitalization table (Schedule II).
We have been advised that the exchange of the unpaid portion of your note,
along with accrued interest on your entire note, for a portion of the common
stock of the Company which you will receive if you accept the Company's offer is
a taxable event and will result in the recognition of income by you.
Accordingly, please consult your tax advisor as to the potential tax impact of
accepting the offer.
There can be no assurance, of course, that the IPO will be completed on the
terms described above, if at all. The Company believes, however, that the IPO
currently represents the best opportunity to raise needed capital, provide
liquidity to investors and meet its obligations to its various lenders. We
remain confident in the Company's Video Publishing software and are hopeful that
the financial markets will recognize the value of our technology.
[Remainder of page intentionally left blank]
<PAGE>
If you agree to accept the Company's offer, please do the following:
1. sign this letter where indicated below (we have provided you with an
extra copy for your records);
2. sign the extension letter included as Schedule IV where indicated; and
3. return both executed letters, along with your original note and warrant
certificate or the Lost Note and/or Warrant Affidavit and Indemnity Agreement
(Schedule III completed and signed), to the Escrow Agent in the Federal Express
envelope which we have provided.
If you have any questions, please call either our Chief Financial Officer,
Danny Gampe, at (888)-222-5282 or Adam Eilenberg or Jeff Abbey of Ehrenreich
Eilenberg Krause & Zivian LLP at (212) 986-9700.
Thank you for your continued support of the Company.
Sincerely,
/s/ Joshua D.J. Sharfman /s/ Danny Gampe
Joshua J.D. Sharfman, Danny Gampe,
Chief Executive Officer Chief Financial Officer
I hereby accept and agree to each of the statements set forth in paragraphs (i),
(ii), (iii) and (iv) on the foregoing page of this letter. I have had an
opportunity to read the Company Summary and review the capitalization table and
have had an opportunity to ask questions of the Company and its counsel. I have
been furnished with all materials relating to the Company and its proposed
activities which I have requested and have been afforded the opportunity to
obtain any additional information necessary to verify the accuracy of any
representations or information relating to the Company and its proposed
activities.
/s/ Richard Stone
- -----------------------------------
Richard Stone
/s/ David Stone
- -----------------------------------
David Stone
/s/ Theodore Freidman
- -----------------------------------
Theodore Freidman
/s/ Jerry Heymann
- -----------------------------------
Jerry Heymann
/s/ Eli Jacobson
- -----------------------------------
Eli Jacobson
/s/ Navida Inc.
- -----------------------------------
Navida Inc.
Accepted and Agreed to:
Escrow Agent:
/s/ Ehrenreich Eilenberg Krause & Zivian
- ----------------------------------------
Ehrenreich Eilenberg Krause & Zivian LLP
EXHIBITS 4 (x)
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of October 7, 1998, between DIGITAL LAVA INC.,
a Delaware corporation (the "Company"), and ___________________ (the "Holder").
W I T N E S S E T H:
WHEREAS, pursuant to a letter agreement of even date with this Agreement
between the Company and certain other parties, including Mr. Shahrokh "Shawn"
Sedaghat (the "LETTER" Agreement@), the Company has agreed to issue to Holder
warrants to purchase the number of shares of the Company's common stock, par
value $.0001 per share as set forth below ("Common Stock," shares of Common
Stock shall be referred to as "Shares" or "Common Shares"), at an exercise price
as set forth below (the "Warrants").
NOW THEREFORE, in consideration of the premises herein set forth and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Issue. The Company shall issue to Holder a certificate (the "Warrant
Certificate") dated as of the date hereof providing each such Holder with the
right to purchase, at any time, from and after October 7, 1999, until 5:30 p.m.,
New York time, on October 7, 2005, _____ Common Shares the ("Warrant Shares")
(subject to adjustment as provided in Section 9 hereof), at an exercise price
(subject to adjustment as provided in Section 9 hereof) equal to ninety percent
(90%) of the gross sale price paid to the Company for each share of Common Stock
sold by the Company pursuant to its initial public offering (the "IPO").
Notwithstanding the foregoing, the number of Warrant Shares and the exercise
price for the Warrant Shares are subject to adjustment on the terms and subject
to the conditions set forth in Paragraph 3 of the Letter Agreement.
2. Warrant Certificate. The Warrant Certificate to be delivered pursuant to
this Agreement shall be in the form set forth in Exhibit X, attached hereto and
made a part hereof, with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Agreement.
3. Exercisability of Warrants. The Warrants shall be exercisable at any
time from and after October 7, 1999, until 5:30 p.m., New York time, on October
7, 2005.
<PAGE>
4. Procedure for Exercise of Warrants.
4.1 Cash Exercise. The Warrants are exercisable at an aggregate initial
exercise price per Common Share set forth in Section 7 hereof payable by
certified check or official bank check in New York Clearing House funds. Upon
surrender of a Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the Exercise Price (as hereinafter
defined) for the Warrant Shares purchased, at the Company's principal offices in
Los Angeles, California (presently located at 10850 Wilshire Boulevard, Suite
1260, Los Angeles, CA 90024) the Holder shall be entitled to receive a
certificate for the Warrant Shares so purchased. The purchase rights represented
by the Warrant Certificate are exercisable at the option of the Holder, in whole
or in part (but not as to fractional Common Shares underlying the Warrants). In
the case of the purchase of less than all the Warrant Shares purchasable under
the Warrant Certificate, the Company shall cancel said Warrant Certificate upon
the surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrant Shares purchasable thereunder.
4.2 Cashless Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 4.1 above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Common Shares equal to the product of (x) the number
of Common Shares as to which the Warrants are being exercised multiplied by (y)
a fraction, the numerator of which is the Current Market Price of the Common
Shares (as defined below) less the Exercise Price then in effect and the
denominator of which is the Current Market Price.
4.3 Current Market Price. The term "Current Market Price" shall mean (i) if
the Shares are traded in the over-the-counter market or on the National
Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ"),
the average per Share closing bid prices on the 20 consecutive trading days
immediately preceding the date of exercise, as reported by NASDAQ or an
equivalent generally accepted reporting service, (ii) if the Shares are traded
on a national securities exchange, the average for the 20 consecutive trading
days immediately preceding the exercise date of the daily per Share closing
prices on the principal stock exchange on which the Shares are listed or (iii)
if there is no public market for the Shares, a good faith determination of the
value of the Shares by the Company's Board of Directors, as evidenced by a duly
adopted Board resolution to such effect, as the case may be. The closing price
referred to in clause (ii) above shall be the last reported sales price or, if
no such reported sale takes place on such day, the average of the reported
closing bid and asked prices, in either case on the national securities exchange
on which the Shares are then listed.
5. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Shares (or Other Securities) shall be made
forthwith (and in any event within five (5) business days thereafter) without
charge to the Holder thereof including, without limitation, any tax which may be
payable in respect of the issuance thereof, and such
<PAGE>
certificate shall (subject to the provisions of Sections 6 and 8 hereof) be
issued in the name of, or in such names as may be directed by, the Holder;
provided, however, that the Company shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issuance and delivery
of any such certificate in a name other than that of the Holder and the Company
shall not be required to issue or deliver such certificate unless or until the
Holder shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificate and the certificate representing the Warrant Shares
(or Other Securities) shall be executed on behalf of the Company by the manual
or facsimile signature of the then present Chairman or Vice Chairman of the
Board of Directors or President or any Vice President of the Company under its
corporate seal reproduced thereon, attested to by the manual or facsimile
signature of the then present Secretary or any Assistant Secretary of the
Company. The Warrant Certificate shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
6. Transfer of Warrants. The Holder, by his acceptance of the Warrant
Certificate, covenants and agrees that the Warrants are being acquired as an
investment and not with a view to the distribution thereof. The Warrants may be
sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or
in part, without restriction, subject to compliance with applicable securities
laws.
7. Exercise Price.
7.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 9 hereof or as set forth in Paragraph 3 of the Letter Agreement, the
initial exercise price of each Warrant shall be the price set forth in Section 1
hereof per Warrant Shares issued thereunder. The adjusted exercise price shall
be the price which shall result from time to time from any and all adjustments
of the initial exercise price in accordance with the provisions of Section 9
hereof and Paragraph 3 of the Letter Agreement.
7.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
8. Registration Under the Securities Act of 1933. Subject to the
Registration Rights Agreement between the Company, the Holder and certain other
persons dated as of the date hereof, the Warrants, the Warrant Shares and any of
the Other Securities issuable upon exercise of the Warrants have not been
registered under the Securities Act of 1933, as amended (the "Act"). Upon
exercise, in whole or in part, of the Warrants, a certificate representing the
Warrant Shares underlying the Warrants, and any of the Other Securities issuable
upon exercise of the Warrants (collectively, the "Warrant Securities") shall
bear the following legend unless such Warrant Shares previously have been
registered under the Act in accordance with the terms hereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS
<PAGE>
AMENDED ("ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT
APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL,
IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER,
THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE.
9. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Shares purchasable upon the
exercise of the Warrants, shall be subject to adjustment from time to time upon
the occurrence of certain events described in this Section 9 and Paragraph 3 of
the Letter Agreement.
9.1 Subdivision or Combination of Common Shares and Common Share Dividend.
In case the Company shall at any time subdivide its outstanding Common Shares
into a greater number of Common Shares or declare a dividend upon its Common
Shares payable solely in Common Shares, the Exercise Price in effect immediately
prior to such subdivision or declaration shall be proportionately reduced, and
the number of Warrant Shares issuable upon exercise of the Warrants shall be
proportionately increased. Conversely, in case the outstanding Common Shares of
the Company shall be combined into a smaller number of Common Shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased, and the number of Warrant Shares issuable upon
exercise of the Warrants shall be proportionately reduced.
9.2 Dilutive Issuances. In the event that the Company shall sell or issue
at any time after the date of this Warrant and prior to its termination, Shares
(other than Excluded Shares, as defined in Section 9.2.5), or any other equity
securities or rights which are exercisable or convertible into Shares, at a
consideration per Share less than the Exercise Price then in effect, then the
Exercise Price shall be adjusted to a new Exercise Price (calculated to the
nearest cent) determined by dividing
(a) an amount equal to (i) the total number of Shares Outstanding (as
defined below and subject to adjustment in the manner set forth in Section
9.1) on the date of issuance of this Warrant multiplied by the Exercise
Price in effect on the date of issuance of this Warrant (subject, however,
to adjustment in the manner set forth in Section 9.1), plus (ii) the
aggregate of the amount of all consideration, if any, received by the
Company for the issuance or sale of Shares since the date of issuance of
this Warrant, by
(b) the total number of Shares Outstanding immediately after such
issuance or sale.
In no event shall any such adjustment be made pursuant to this Section 9.2 if it
would increase the Exercise Price in effect immediately prior to such
adjustment, except as provided
<PAGE>
in Sections 9.2.3 and 9.2.4. Upon each adjustment of the Exercise Price pursuant
to this Section 9.2, the Holder shall thereafter be entitled to purchase, at the
Exercise Price resulting from such adjustment, the number of Warrant Shares
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Exercise Price resulting from such adjustment.
9.2.1 Definitions. For purposes of this Section 9.2, the following
definitions shall apply:
(a) "Convertible Securities" shall mean any indebtedness or securities
convertible into or exchangeable for Shares.
(b) "Options" shall mean any rights, warrants or options to subscribe for
or purchase Shares or Convertible Securities other than rights, warrants or
options to purchase Excluded Securities (as defined in Section 9.2.5).
(c) "Shares Outstanding" shall mean the aggregate of all Shares outstanding
and all Shares issuable upon exercise of all outstanding Options and conversion
of all outstanding Convertible Securities.
9.2.2 For the purposes of this Section 9.2, the following provisions shall
also be applicable:
9.2.2.1 Cash Consideration. In case of the issuance or sale of additional
Shares for cash, the consideration received by the Company therefor shall be
deemed to be the amount of cash received by the Company for such Shares (or, if
such Shares are offered by the Company for subscription, the subscription price,
or, if such Shares are sold to underwriters or dealers for public offering
without a subscription offering, the public offering price), without deducting
therefrom any compensation or discount paid or allowed to underwriters or
dealers or others performing similar services or for any expenses incurred in
connection therewith.
9.2.2.2 Non-Cash Consideration. In case of the issuance (otherwise than
upon conversion or exchange of Convertible Securities) or sale of additional
Shares, Options or Convertible Securities for a consideration other than cash or
a consideration a part of which shall be other than cash, the fair value of such
consideration as determined by the Board of Directors of the Company in the good
faith exercise of its business judgment (in a duly authorized resolution
certified by the secretary of the Company), irrespective of the accounting
treatment thereof, shall be deemed to be the value, for purposes of this Section
9, of the consideration other than cash received by the Company for such
securities.
9.2.2.3 Options and Convertible Securities. In case the Company shall in
any manner issue or grant any Options or any Convertible Securities, the total
maximum number of Shares issuable upon the exercise of such Options or upon
<PAGE>
conversion or exchange of the total maximum amount of such Convertible
Securities at the time such Convertible Securities first become convertible or
exchangeable shall (as of the date of issue or grant of such Options or, in the
case of the issue or sale of Convertible Securities other than where the same
are issuable upon the exercise of Options, as of the date of such issue or sale)
be deemed to be issued and to be outstanding for the purpose of this Section 9.2
and to have been issued for the sum of the amount (if any) paid for such Options
or Convertible Securities and the amount (if any) payable upon the exercise of
such Options or upon conversion or exchange of such Convertible Securities at
the time such Convertible Securities first become convertible or exchangeable;
provided that, subject to the provisions of Section 9.2.3, no further adjustment
of the Exercise Price shall be made upon the actual issuance of any such Shares
or Convertible Securities or upon the conversion or exchange of any such
Convertible Securities.
9.2.3 Change in Option Price or Conversion Rate. In the event that the
purchase price provided for in any Option referred to in subsection 9.2.2.3, or
the rate at which any Convertible Securities referred to in subsection 9.2.2.3
are convertible into or exchangeable for Shares shall change at any time (other
than under or by reason of provisions designed to protect against dilution),
then, for purposes of any adjustment required by Section 9.2, the Exercise Price
in effect at the time of such event shall forthwith be readjusted to the
Exercise Price that would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold, provided that if such readjustment is an
increase in the Exercise Price, such readjustment shall not exceed the amount
(as adjusted by Sections 9.1 and 9.2) by which the Exercise Price was decreased
pursuant to Section 9.2 upon the issuance of the Option or Convertible Security.
In the event that the purchase price provided for in any such Option referred to
in subsection 9.2.2.3, or the additional consideration (if any) payable upon the
conversion or exchange of any Convertible Securities referred to in subsection
9.2.2.3, or the rate at which any Convertible Securities referred to in
subsection 9.2.2.3 are convertible into or exchangeable for Shares, shall be
reduced at any time under or by reason of provisions with respect thereto
designed to protect against dilution, then in case of the delivery of Shares
upon the exercise of any such Option or upon conversion or exchange of any such
Convertible Security; the Exercise Price then in effect hereunder shall, upon
issuance of such Shares, be adjusted to such amount as would have obtained had
such Option or Convertible Security never been issued and had adjustments been
made only upon the issuance of the Shares delivered as aforesaid and for the
consideration actually received for such Option or Convertible Security and the
Shares, provided that if such readjustment is an increase in the Exercise Price,
such readjustment shall not exceed the amount (as adjusted by Sections 9.1 and
9.2) by which the Exercise Price was decreased pursuant to Section 9.2 upon the
issuance of the Option or Convertible Security.
9.2.4 Termination of Option or Conversion Rights. In the event of the
termination or expiration of any right to purchase Shares under any Option
granted after the date of this Warrant or of any right to convert or exchange
Convertible Securities issued after the date of this Warrant, the Exercise Price
shall, upon such termination, be readjusted to the
<PAGE>
Exercise Price that would have been in effect at the time of such expiration or
termination had such Option or Convertible Security, to the extent outstanding
immediately prior to such expiration or termination, never been issued, and the
Shares issuable thereunder shall no longer be deemed to be Shares Outstanding,
provided that if such readjustment is an increase in the Exercise Price, such
readjustment shall not exceed the amount (as adjusted by Sections 9.1 and 9.2)
by which the Exercise Price was decreased pursuant to Section 9.2 upon the
issuance of the Option or Convertible Security. The termination or expiration of
any right to purchase Shares under any Option granted prior to the date of this
Warrant or of any right to convert or exchange Convertible Securities issued
prior to the date of this Warrant shall not trigger any adjustment to the
Exercise Price, but the Shares issuable under such Options or Convertible
Securities shall no longer be counted in determining the number of Shares
Outstanding on the date of issuance of this Warrant for purposes of subsequent
calculations under this Section 9.2.
9.2.5 Excluded Shares. Notwithstanding anything herein to the contrary, the
Exercise Price shall not be adjusted pursuant to this Section 9.2 by virtue of
the issuance and/or sale of Excluded Shares, which shall mean the following: (a)
Shares issuable upon the exercise of the Warrants; (b) Shares, Options or
Convertible Securities to be issued and/or sold to employees, advisors
(including, without limitation, financial, technical and legal advisers),
directors, or officers of, or consultants to, the Company or any of its
subsidiaries pursuant to the Company's existing 1996 Stock Option Plan (which
has reserved for issuance 1,500,000 shares of Common Stock); (c) the issuance of
Shares, Options and/or Convertible Securities pursuant to Options and
Convertible Securities outstanding as of the date of this Warrant; (d) the
issuance of Shares, Options or Convertible Securities as a share dividend or
upon any subdivision or combination of Shares or Convertible Securities (for
which appropriate adjustments are to be made pursuant to Section 9.1 hereof);
(e) the issuance of up to 500,000 Shares (including those Shares issuable upon
the exercise or conversion of Options or Convertible Securities) in connection
with a strategic partnership or other business and/or product consolidation or
joint venture; and (f) the reduction of the exercise price of the Warrants
pursuant to the terms of this Agreement. For all purposes of this Section 9.2,
all Shares of Excluded Shares shall be deemed to have been issued for an amount
of consideration per Share equal to the initial Exercise Price (subject to
adjustment in the manner set forth in Section 9.1). In addition, if the amount
of any adjustment pursuant to this Section 9 shall be less than two cents (24)
per Warrant Share no adjustment to the Exercise Price or to the number of
Warrant Shares issuable upon the exercise of the Warrants shall be made;
provided, however, that in such case any adjustment that would otherwise be
required then to be made shall be carried forward and shall be made at the time
of and together with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least two cents (24) per
Warrant Share.
9.3 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the holder of this Warrant at
the address of Holder as shown on the books of the Company. The notice shall be
signed by the Company's chief financial officer and shall state (i) the
effective date of the adjustment and the Exercise Price resulting from such
<PAGE>
adjustment and (ii) the increase or decrease, if any, in the number of Common
Shares purchasable at such price upon the exercise of this Warrant, setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based.
9.4 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Common Shares;
(b) the Company shall declare any dividend upon its Common Shares payable
in securities (other than a dividend payable solely in Common Shares) or make
any special dividend or other distribution to the holders of its Common Shares;
(c) there shall be any consolidation or merger of the Company with another
corporation, or a sale of all or substantially all of the Company's assets to
another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to the Holder at the address of the
Holder as shown on the books of the Company, (i) at least 15 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such dissolution, liquidation or
winding-up; (ii) at least 10 days' prior written notice of the date on which the
books of the Company shall close or a record shall be taken for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger or sale, and (iii) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, at least 15 days' written notice of the date when the same shall
take place. Any notice given in accordance with clause (i) above shall also
specify, in the case of any such dividend, distribution or option rights, the
date on which the holders of Common Shares shall be entitled thereto. Any notice
given in accordance with clause (iii) above shall also specify the date on which
the holders of Common Shares shall be entitled to exchange their Common Shares
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, as the case may be. If the Holder does not exercise this Warrant
prior to the occurrence of an event described above, except as provided in
Sections 9.1 and 9.5, the Holder shall not be entitled to receive the benefits
accruing to existing holders of the Common Shares in such event.
9.5 Changes in Common Shares. In case at any time the Company shall be a
party to any transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the Company's assets or
recapitalization of the Common Shares) in which the previously outstanding
Common Shares shall be changed into or exchanged for different securities of the
Company or common stock or other securities of another corporation or interests
in a non-corporate entity or other property (including cash) or any combination
of
<PAGE>
any of the foregoing (each such transaction being herein called the
"Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then, as a condition of the consummation of the
Transaction, lawful and adequate provisions shall be made so that Holder, upon
the exercise hereof at any time on or after the Consummation Date, shall be
entitled to receive, and this Warrant shall thereafter represent the right to
receive, in lieu of the Common Shares issuable upon such exercise prior to the
Consummation Date, the highest amount of securities or other property to which
the Holder would actually have been entitled as a holder of a Common Share upon
the consummation of the Transaction if Holder had exercised the Warrant
immediately prior thereto. The provisions of this Section 9.5 shall similarly
apply to successive Transactions.
10. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
Holder at the principal executive office of the Company, for a new Warrant
Certificate of like tenor and date representing in the aggregate the right to
purchase the same number of Warrant Shares in such denominations as shall be
designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
11. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Common Shares upon the exercise
of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Common Shares or Other Securities.
12. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized Common Shares, solely for the purpose of
issuance upon the exercise of the Warrants, such number of Common Shares or
Other Securities as shall be issuable upon the exercise thereof. The Company
covenants and agrees that, upon exercise of the Warrants and payment of the
Exercise Price therefor, all Common Shares or Other Securities issuable upon
such exercise shall be duly and validly issued, fully paid, non-assessable and
not subject to the preemptive rights of any holder of Common Shares.
13. Notices to Holder. Except as otherwise provided in Section 9.4, nothing
contained in this Agreement shall be construed as conferring upon the Holder by
virtue of his holding the Warrant the right to vote or to consent or to receive
notice as a holder of a Common Share in respect of any meetings of such holders
for the election of directors or any other matter, or as having any rights
whatsoever as such a holder of the Company.
<PAGE>
14. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly made and sent when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to the Holder, to the address of Holder as shown on the books
of the Company; or
(b) If to the Company, to the address set forth in Section 4 hereof
(with copy to: Ehrenreich Eilenberg Krause & Zivian LLP, 11 E. 44th Street,
17th Floor, New York, NY 10017/Attn. Jeffrey D. Abbey, Esq.) or to such
other address as the Company may designate by notice to the Holder.
15. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.
16. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective heirs, legal representatives, successors and assigns.
17. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
the State of New York without giving effect to the rules of the State of New
York governing the conflicts of laws.
18. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
19. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
20. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.
<PAGE>
22. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be
duly executed, as of the day and year first above written.
DIGITAL LAVA INC.
By: /s/ Danny Gampe
--------------------------------------
An Authorized Officer
ACCEPTED AND AGREED TO:
HOLDERS:
/s/ Shahrokh "Shawn" Sedaghat
--------------------------------------
Name: Shahrokh "Shawn" Sedaghat
Address: 1715 Green Acres Drive
Beverly Hills, CA 90210
Social Security/Tax I.D. No.: ________
/s/ Shapour and Parvindokht Sedaghat
--------------------------------------
Shapour and Parvindokht Sedaghat
Social Security/Tax I.D.
Nos:______________________
/s/ Andreas Iseli
--------------------------------------
Andreas Iseli
Social Security/Tax I.D.
No:________________________
<PAGE>
EXHIBIT X
TO
WARRANT AGREEMENT
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
EXERCISABLE FROM OCTOBER 7, 1999
UNTIL
5:30 P.M., NEW YORK TIME, OCTOBER 7, 2005
No. W-LAVA-98-[S_]
WARRANT CERTIFICATE
This Warrant Certificate certifies that _____________ ("Holder"), is the
registered holder of a Warrant to purchase initially at any time from October 7,
1999, until 5:30 p.m. New York time on October 7, 2005 ("Expiration Date"), up
to ______ fully-paid and non-assessable shares of common stock, par value $.0001
per share ("Common Shares") of DIGITAL LAVA INC., a Delaware corporation (the
"Company"), at an initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), equal to ninety percent (90%) of the gross sale
price paid to the Company for each share of Common Stock sold by the Company
pursuant to its initial public offering, upon surrender of this Warrant
Certificate and payment of the initial exercise price at an office or agency of
the Company, but subject to the conditions set forth herein and in the Warrant
Agreement dated as of the date hereof between the Company and Holder (the
"Warrant Agreement"). Payment of the Exercise Price shall be made by certified
check or official bank check in New York Clearing House funds payable to the
order of the Company, unless exercise is made pursuant to Section 4.2 of the
Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is
<PAGE>
hereby referred to for a description of the rights, limitation of rights,
obligations, duties and immunities thereunder of the Company and the Holder.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the Holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificate
shall not in any way change, alter, or otherwise impair, the rights of the
Holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the Holder in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the Holder a new Warrant
Certificate representing such number of unexercised Warrants.
The Company may deem and treat the Holder as the absolute owner of this
Warrant Certificate (notwithstanding any notation of ownership or other writing
hereon made by anyone), for the purpose of any exercise hereof, and of any
distribution to the Holder, and for all other purposes, and the Company shall
not be affected by any notice to the contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.
Dated as of October 7, 1998
DIGITAL LAVA INC.
By: /s/ Danny Gampe
-----------------------
Authorized Officer
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase __________ Common Shares
and herewith tenders in payment for such securities a certified check or
official bank check payable in New York Clearing House Funds to the order of
DIGITAL LAVA INC. in the amount of $__________, all in accordance with the terms
of Section 4 of the Warrant Agreement dated as of September __, 1998 between
DIGITAL LAVA INC. and the undersigned (or its assignor). The undersigned
requests that a certificate for such securities be registered in the name of
_________________ whose address is ______________ and that such Certificate be
delivered to ______________________ whose address is ___________________.
Dated:
Signature __________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
EXHIBIT 4 (y)
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of October 7,
1998 is made by and among DIGITAL LAVA INC., a Delaware corporation (the
"Company"), and the persons executing a counterpart of this Agreement on the
signature page hereof (each a "Holder" and collectively the "Holders").
RECITALS
In connection with the execution by the Holders of a letter agreement of
even date with this Agreement, the Company has agreed to issue to Holders
warrants (the "Warrant") to purchase 20,000 shares of the Company's common stock
("Common Stock"), and in connection therewith the Company has agreed to grant to
the Holders certain registration rights under the Securities Act of 1933, as
amended, and the rules and regulations thereunder (collectively, the "Securities
Act") with respect to the shares of Common Stock issuable upon exercise of the
Warrants (the "Warrant Shares"). This Agreement sets forth the terms and
conditions of such undertaking.
AGREEMENTS
The Company and the Holders covenant and agree as follows:
1. Definitions. For purposes of this Agreement:
(a) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
statements or similar documents 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 the effectiveness of such registration statement or document by
the Securities and Exchange Commission (the "SEC");
(b) The term "Registrable Securities" means (i) the Warrant Shares and (ii)
any shares of Common Stock issued as (or issuable upon the conversion or
exercise of any convertible security, warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of such Warrant Shares, excluding in all cases, however, any
Registrable Securities sold by a Holder in a transaction in which such Holder's
registration rights under this Agreement are not assigned.
<PAGE>
2. Registration.
(a) Demand Registration. Subject to the limitations set forth in Section
2(c) below, the Company shall, upon the written request of a Holder or Holders
of a majority of the Registrable Securities, use its best efforts to cause the
Registrable Securities specified in such request to be registered under the
Securities Act (a "Demand Registration").
(b) Notice of Demand Registration. Each request delivered pursuant to
Section 2(a) shall: (i) specify the amount of Registrable Securities intended to
be offered and sold by the Holders joining in the request; (ii) express the
present intent to offer such Registrable Securities for distribution; (iii)
describe the nature or method of the proposed offer and sale of the Registrable
Securities; and (iv) contain the undertaking of the Holders joining in such
request to provide all such information and materials and take all such action
as may be required in order to permit the Company to comply with all applicable
requirements of the Securities Act, the Registrable Securities and state
securities and "blue sky" laws, and to obtain acceleration of the effective date
of the Registration Statement (as defined below).
(c) Limitations on Demand Registrations. Notwithstanding anything herein to
the contrary, the obligations of the Company to cause any Registrable Securities
to be registered pursuant to Section 2(a) are subject to each of the following
further limitations, conditions and qualifications:
(i) The Holders may only request that the Company make any Demand
Registration subsequent to 180 days following the effective date of the
registration statement for the initial public offering of the Company's
securities.
(ii) Any request for Demand Registration made by a Holder or Holders
pursuant to Section 2(a), to be effective, shall request the registration
of the offering and sale or other distribution by the Holders of not less
than one-half of their Registrable Securities in the aggregate.
(iii) If a Holder or Holders request Demand Registration pursuant to
Section 2(a) and the related offering is to be underwritten, the managing
underwriter shall be a nationally recognized investment banking firm
approved by the Company in the reasonable exercise of its discretion.
(iv) The Company shall be required to effect only one Demand Registration
pursuant to Section 2(a); provided, however, that a registration shall not
count as a Demand Registration unless 90% of the Registrable Securities
requested to be included in such registration are sold pursuant to such
registration statement.
(d) Incidental Registration. Subject to the limitations set forth in
Section 2(f), at any time that the Company for its account or the account of
others shall propose the registration under the Securities Act of an offering of
any of its securities on a registration
<PAGE>
form which can be used for registration of the Registrable Securities, the
Company shall give written notice as promptly as possible of such proposed
registration to the Holders, and shall include in the offering such amount of
Registrable Securities as the Holders shall request to be included by written
notice to the Company received within fifteen days after receipt of the
Company's notice, upon the same terms (including the method of distribution) as
the securities being sold by the Company pursuant to any such offering (an
"Incidental Registration").
(e) Notice of Incidental Registration. Each request delivered pursuant to
Section 2(d) shall: (i) specify the amount of Registrable Securities intended to
be offered and sold by each of the Holders; and (ii) contain the undertaking of
each of the participating Holders to provide all such information and materials
and take all such action as may be required in order to permit the Company to
comply with all applicable requirements of the Securities Act, the SEC and state
securities and "blue sky" laws and to obtain acceleration of the effective date
of the Registration Statement.
(f) Limitations on Incidental Registrations. Notwithstanding anything
contained herein to the contrary, the obligations of the Company to cause
Registrable Securities to be registered pursuant to Section 2(d) are subject to
each of the following limitations, conditions and qualifications:
(i) The Company shall not be required to give notice or include Registrable
Securities in any registration pursuant to Section 2(d) if the proposed
registration is primarily: (A) a registration of a stock option, thrift,
employee benefit or compensation plan or of securities issued or issuable
pursuant to any such plan; (B) a registration of securities proposed to be
issued in connection with a dividend reinvestment and stock purchase plan
or customer stock purchase plan; (C) a registration of securities proposed
to be issued in exchange for securities or assets of, or in connection with
a merger or consolidation with, another corporation or other entity; or (D)
a registration of securities which is solely a combination of any of the
above.
(ii) If the Company is advised in writing by the managing underwriter (or
its investment banking firm if the offering is not underwritten) that the
inclusion of Registrable Securities may, in the opinion of such underwriter
or investment banking firm, as the case may be, interfere with the orderly
sale and distribution of the securities proposed to be offered by the
Company or adversely affect the price at which such securities may be sold,
the number of shares of Registrable Securities to be included in the
offering shall be reduced or eliminated to the extent necessary as shall be
reasonably determined by such underwriter or investment banker, as the case
may be, in good faith.
(iii) If the Holders request registration pursuant to Section 2(d) and the
related offering is to be underwritten, the participating Holders will
enter into an underwriting agreement containing representations, warranties
and agreements consistent with those customarily made by an issuer and a
selling
<PAGE>
shareholder in underwriting agreements with respect to secondary
distributions.
(iv) The Company may, in its sole discretion, without the consent of the
Holders and without liability to the Holders for such action, withdraw such
registration statement and abandon the proposed offering in which the
Holders had requested to participate at any time.
(v) The Holders may exercise Incidental Registrations pursuant to Section
2(d) so long as such Holders continue to hold Registrable Securities, and
so long as such Registrable Securities are not otherwise eligible for sale
pursuant to Rule 144 (or any successor rule) promulgated under the
Securities Act.
(vi) The Holders may exercise Incidental Registrations pursuant to Section
2(d) only subsequent to 180 days following the effective date of the
registration statement for the initial public offering of the Company's
securities.
3. Obligations of the Company. When required under the Agreement to
effect the registration of the Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Registration Statements. Prepare and file with the SEC a registration
statement or statements or similar documents (the "Registration Statement") with
respect to all Registrable Securities, other than any Registrable Securities
excluded by the Holders pursuant to Sections 2(a) and 2(d), and use its best
efforts to cause the Registration Statement to become effective and maintain the
effectiveness of the Registration Statement until the earlier of (i) the date
all such registered Registrable Securities are sold and any prospectus delivery
requirements under the Securities Act shall have lapsed, and (ii) 180 days.
(b) Amendments. 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 comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by the Registration Statement.
(c) Prospectuses. Furnish promptly to Holders such numbers of copies of a
prospectus, including a preliminary prospectus, and all amendments and
supplements thereto, in conformity with the requirements of the Securities Act,
and such other documents as the Holders may reasonably request in order to
facilitate the disposition of Registrable Securities.
(d) Blue Sky. Use its best efforts to register and qualify the securities
covered by the Registration Statement under such other securities or Blue Sky
laws of such
<PAGE>
jurisdictions as shall be reasonably requested by the Holders, and to prepare
and file in those jurisdictions such amendments (including post-effective
amendments) and supplements and to take such other actions necessary or
advisable to maintain such registration and qualifications in effect, and to
take all other actions necessary or advisable to enable the disposition of such
securities in such jurisdictions, provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions or to provide any undertaking or make any change in its charter
or bylaws which the Company determines to be contrary to the best interest of
the Company and its stockholders.
(e) Underwriting Arrangements. Enter into and perform its obligations under
an underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering. The Holders shall also enter into and
perform their customary obligations under any such agreement including, without
limitation, customary indemnification and contribution obligations.
(f) Notification of Changes. Notify the Holders, at any time when a
prospectus relating to Registrable Securities covered by the Registration
Statement is required to be delivered under the Securities Act, of the happening
of any event as a result of which the prospectus including 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 not misleading in light of the circumstances then
existing. The Company shall promptly amend or supplement the Registration
Statement to correct any such untrue statement or omission.
(g) Notification of Stop Orders. Notify the Holders of the issuance by the
SEC of any stop order suspending the effectiveness of the Registration Statement
or the initiation of any proceedings for that purpose. The Company will make
every reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest possible
time.
(h) Review by Counsel. Permit a single firm of counsel designated Holders
of a majority of the Registrable Securities subject to sale to review (at the
expense of such selling stockholders, subject to the proviso set forth in
Section 5 below) the Registration Statement and all amendments and supplements
thereto a reasonable period of time prior to their filing, and shall not file
any document in a form to which counsel reasonably objects.
(i) Opinions. At the request of the Holders, use its best efforts to
furnish on the date that Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this
Agreement (i) an opinion, dated such date, of the counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters and (ii) a letter dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent
<PAGE>
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters.
(j) Due Diligence. Make available for inspection by the Holders, any
underwriters participating in the offering pursuant to the registration and the
single counsel, accountants or other agents retained by the Holders or any such
underwriter, all pertinent financial and other records, corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by the Holders or any
such underwriters in connection with the registration.
(k) Listing. If the class of the Company's securities is then listed on a
national securities exchange, use its best efforts to cause the Registrable
Securities to be listed on such exchange. If the Company's securities are not
then listed on a national securities exchange, use its best efforts to
facilitate the reporting of the Registrable Securities on NASDAQ.
(l) Further Actions. Take all other reasonable actions necessary to
expedite and facilitate disposition by the Holders of the Registrable Securities
pursuant to the Registration Statement.
4. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to Holders that Holders shall furnish to the Company such information
regarding themselves, the Registrable Securities held by them, and the intended
method of disposition of such securities as shall be reasonably required to
effect the registration of the Registrable Securities and shall execute such
documents in connection with such registration as the Company may reasonably
request.
5. Expenses of Registration. All expenses other than the underwriting
discounts and commissions incurred in connection with registration, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing, filing and qualification fees, printing and accounting
fees, the fees and disbursements of counsel for the Company (but excluding the
fees and disbursements of any counsel for the Holders) shall be borne by the
Company; provided, however, that the reasonable fees and disbursements of not
more than one counsel for the Holders collectively shall be borne by the Company
in connection with any Demand Registration.
6. Indemnification. If any Registrable Securities are included in a
Registration Statement under this Agreement:
(a) By Company. To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Securities
Act) for the Holders and each person, if any, who controls any such underwriter
within the meaning of the Securities Act or the Securities Act of 1934, as
amended (the "1934 Act"), against any losses, claims, damages, expenses or
liabilities (joint or several) to which any of them may become subject under the
Securities Act, the 1934 Act or otherwise, insofar as such losses,
<PAGE>
claims, damages, expenses or liabilities (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 (collectively, a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein, in light of the circumstance in which they are made, not misleading or
(iii) any violation or alleged violation by the Company of the Securities Act,
the 1934 Act, any state securities law or any rule or regulation promulgated
under the Securities Act, the 1934 Act, any state securities law; and the
Company will reimburse the Holders and each such underwriter or controlling
person, promptly as such expenses are incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability action or proceeding; provided, however,
that the indemnity agreement contained in this subsection 6(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company, which
consent shall not be unreasonably withheld, nor shall the Company be liable in
any such case for any such loss, claim, damage, liability or action to the
extent that it aries out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by the Holders or any such underwriter
or controlling person, as the case may be. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of the
Holders or any such underwriter or controlling person and shall survive the
transfer of the Registrable Securities by Holders.
(b) By Holders. To the extent permitted by law, each Holder will severally
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement, each person, if any, who
controls the Company within the meaning of the Securities Act or the 1934 Act,
any underwriter and any other stockholder selling securities pursuant to the
Registration Statement or any of its directors or officers or any person who
controls such holder or underwriter, against any losses, claims, damages or
liabilities (joint or several) to which any of them may become subject, under
the Securities Act, the 1934 Act or other federal or state securities law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished by such Holder expressly for
use in connection with such registration, and such Holder will reimburse any
legal or other expenses reasonably incurred by any of them in connection with
investigating or defending any such loss, claim, damage liability or action;
provided, however, that the indemnity agreement contained in this subsection
6(b) shall not apply to amounts paid in settlement of such loss, claim, damage,
liability or action if such settlement is effected without the consent of such
Holder, which consent shall not be unreasonably withheld; and provided further,
that such Holder shall be liable under this paragraph for only that amount of
losses, claims, damages and liabilities as does not exceed the proceeds to such
Holder as a result of the sale of Registrable Securities pursuant to such
registration.
<PAGE>
(c) Procedure for Indemnification. Promptly after receipt by an indemnified
party under this Section 6 of notice of the commencement of any action
(including any governmental action), such indemnified party will, 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 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 parties; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
for the indemnifying party, representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall relieve such indemnifying party of any
liability to the indemnified party under this Section 6 only to the extent
prejudicial to its ability to defend such action, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party other than under this Section 6. 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, promptly
as such expense, loss, damage or liability is incurred.
(d) 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 otherwise would be
liable under this Section 6 to the extent permitted by law, provided that (i) no
contribution shall be made under the circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in this
Section 6, (ii) 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 (iii) 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.
7. Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of SEC Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit the Holders to sell securities of the Company to the public without
registration, the Company agrees, following the initial public offer of the
Company's securities, to:
(i) make and keep public information available, as those terms are
understood and defined in SEC Rule 144;
(ii) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the 1934 Act; and
<PAGE>
(iii) furnish to each Holder, so long as such Holder owns any Registrable
Securities, forthwith upon request (A) a written statement by the Company
that it has complied with the reporting requirements of SEC Rule 144, the
Securities Act and the 1934 Act, (B) 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 (C) such other information as may be reasonably
requested in availing the Holder of any rule or regulation of the SEC which
permits the selling of any securities without registration.
8. Miscellaneous.
(a) Notices. Notices required or permitted to be given hereunder shall be
in writing and shall be deemed to be sufficiently given when personally
delivered or sent by registered mail, return receipt requested, addressed (i) if
to the Company, at 10850 Wilshire Boulevard, Suite 1260, Los Angeles, CA 90024,
(with a copy to: Ehrenreich Eilenberg Krause & Zivian LLP, 11 East 44th Street,
17th Floor, New York, NY 10017, Attention: Jeffrey D. Abbey, Esq.) and (ii) if
to Holder to the address set forth for Mr. Shahrokh "Shawn" Sedaghat on the
signature page to this Agreement, or at such other address as each such party
furnishes by notice given in accordance with this Section 8(a).
(b) Waiver. 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,
will not operate as a waiver thereof. No waiver will be effective unless and
until it is in writing and signed by the party giving the waiver.
(c) Governing Law. This Agreement shall be enforced, governed and construed
in all respects in accordance with the laws of the State of New York, as such
laws are applied by New York courts to agreements entered into and to be
performed in New York by and between residents of New York. In the event that
any provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not affect the validity or enforceability
of any other provision hereof.
(d) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and may be
amended only by a written agreement executed by the Company and the holders of a
majority in interest of the sum of (x) the Registrable Securities and (y) the
then outstanding and unexercised Warrants.
(e) Assignability. The rights set forth in this Agreement shall accrue to
each subsequent holder of Registrable Securities originally issued to a Holder
who shall have executed a written consent agreeing to be bound by and subject to
the terms and conditions of this Agreement as a "Holder" with respect to such
Registrable Securities acquired by such transferee.
<PAGE>
DIGITAL LAVA INC.
By: /s/ Danny Gampe
----------------------------------
Authorized Officer
HOLDERS:
/s/ Shahrokh "Shawn" Sedaghat
--------------------------------------
Name: Shahrokh "Shawn" Sedaghat
Address: 1715 Green Acres Drive
Beverly Hills, CA 90210
Social Security/Tax I.D. No.: ________
/s/ Shapour and Parvindokht Sedaghat
--------------------------------------
Shapour and Parvindokht Sedaghat
Social Security/Tax I.D.
Nos:______________________
/s/ Andreas Iseli
--------------------------------------
Andreas Iseli
Social Security/Tax I.D.
No:________________________
EXHIBIT 4 (z)
<PAGE>
October 7, 1998
Mr. Shahrokh "Shawn" Sedaghat
1715 Green Acres Drive
Beverly Hills, CA 90210
Re: Digital LAVA Inc. (the "Company")
Dear Mr. Sedaghat:
This letter confirms the agreement of Shahrokh "Shawn" Sedaghat ("Mr.
Sedaghat"), Shapour and Parvindokht Sedaghat ("S&P") and Andreas Iseli
("Andreas"; collectively with Mr. Sedaghat and S&P, the "Lenders") to waive,
subject to the terms and conditions set forth herein, existing defaults and
extend the maturity date arising under certain promissory notes of the Company
and to accept the Company's recapitalization offer as reflected in its letter to
certain lenders of the Company dated July 16, 1998, a true and correct copy of
which is attached hereto as Exhibit A (the "Recapitalization Letter"), subject
only to modification as provided herein.
As you know, the Company currently has the following outstanding
obligations to the Lenders represented by three promissory notes (the "Notes"):
<TABLE>
<CAPTION>
Lender Amt. Date of Loan Maturity Date
<S> <C> <C> <C>
Mr. Sedaghat $150,000 7/28/97 7/28/98
S&P $150,000 7/28/97 7/28/98
Andreas $ 25,000 7/28/97 7/28/98
</TABLE>
In connection with the loans represented by the Notes, the Company also
issued to the Lenders warrants (the "Warrants") to purchase shares of Common
Stock of the Company (the "Common Stock"), as follows:
<TABLE>
<CAPTION>
Lender No. Warrants Originally Current No. Warrants after Current Exercise
Issued Exercise Price* anti-dilution Price after anti-
adjustments to date dilution
adjustments
<S> <C> <C> <C> <C>
Sedaghat 150,000** $.87 159,956 $.8159
S&P 150,000 $.87 159,956 $.8159
Andreas 25,000 $.87 26,660 $.8159
</TABLE>
* The Warrants had an original exercise price of $.97 per share, which was
reduced to $.87 per share upon the Company's election to extend the
maturity date of the loans represented by the Notes from 1/28/98 to
7/28/98.
** Does not include 24,375 finders' warrants originally issued to Mr. Sedaghat
(currently 25,993 Warrants with an exercise price of $.8159) (the "Finders'
Warrants").
<PAGE>
In consideration for the Lenders' waiver of their current rights to
acceleration under the Notes and to extend their maturity date, and for the
relinquishment by Mr. Sedaghat and the other Lenders of their rights as an
"observer" to meetings of the Company's Board of Directors ("Board Visitation
Rights"), as provided in a letter to Mr. Sedaghat from the Company dated as of
July 28, 1997 (the "Observer Letter") and in the Subscription Agreement between
the Company and the Investors dated as of July 28, 1997 (the "Subscription
Agreement"), we have agreed as follows:
1. The Lenders accept the offer of the Company provided in the Recapitalization
Letter, as modified herein: upon the consummation of the contemplated initial
public offering of the Company's securities ("IPO") and the repayment of 50% of
the outstanding principal amount of the Notes, the Lenders will cancel the
balance of the outstanding principal interest under the Notes and all accrued
interest thereon and will surrender all of their warrants (excluding Mr.
Sedahgat's Finder's Warrants and the Warrants granted to Mr. Sedaghat and/or his
designees pursuant to this Agreement), in exchange for that number of shares of
Common Stock (the offering of such shares having been duly registered under the
Securities Act of 1933, as amended, and subject to a lock-up agreement to be
entered into by the other "Unsecured Bridge Lenders" as defined below, the
Secured Lender, and the officers and directors of the Company having a lock-up
period no longer than the lock-up period to which the foregoing referenced
persons are subject) with a dollar value equal to 225% (the "Exchange
Percentage") of the entire principal amount of each Lender's Note, valued at the
price of the Company's Common Stock at the IPO. For example, assuming the price
of the Company's Common Stock in the IPO is $7.50 per share, the Company will
provide Mr. Sedaghat concurrently with the consummation of the IPO $75,000 in
cash and 45,000 shares of Common Stock (on a post-reverse split basis). The
foregoing recapitalization proposal is referred to herein as the
"Recapitalization Offer." The Recapitalization Letter provided for an Exchange
Percentage of 175%; after negotiations with several other lenders to the
Company, it was increased to 200% for all unsecured bridge lenders to the
Company with loans to the Company aggregating $3,019,500 principal amount
(collectively the "Unsecured Bridge Lenders"), including the Lenders. The
Lenders acknowledge that the increase of the Exchange Percentage to 225% is for
the benefit of all of the Unsecured Bridge Lenders who accept the
Recapitalization Offer.
2. The Company has agreed to retain Mr. Sedaghat as a consultant to provide
advice on general corporate matters commencing October 1, 1998, at an annual
rate of $100,000, payable monthly at a rate of $8,333.34, with the payments to
be accrued and deferred until the earliest of (i) 1/1/99, (ii) the termination
or abandonment of the IPO, (iii) the successful consummation of the IPO, or (iv)
upon the Company's breach of any of the covenants set forth in Section 5 of this
letter agreement.
3. In connection with Mr. Sedaghat's consultancy, the Company will also issue to
Mr. Sedaghat and/or his designees upon the consummation of the IPO, 20,000
warrants ("Consultant's Warrants") to purchase Common Stock (on a
post-reverse-split basis) at an
<PAGE>
exercise price equal to 90% of the IPO price of the Common Stock (currently
contemplated to be $7.50, so the exercise price would be $6.75 per share). The
Consultant's Warrants will not be exercisable for a period of one year from the
date of issuance and will expire on the seventh anniversary of the date of
issue. The Company will give Mr. Sedaghat unlimited piggyback and two demand
registration rights with respect to the shares of Common Stock issuable upon
exercise of the Consultant's Warrants and Finder's Warrants similar to the
registration rights granted with respect to shares of Common Stock issuable upon
exercise of the Warrants. The Consultant's Warrants will be in substantially
similar form to the Warrants and will contain equivalent anti-dilution
provisions. If the IPO is terminated, the Warrants will be issued on a
pre-reverse split basis (a 1 for 8.79 reverse split is contemplated, in which
case Mr. Sedaghat would be issued 175,800 Warrants at an exercise price of
$.7679 per share). Counsel for the Company will prepare a Consulting Agreement
and a Consultant's Warrant Agreement for review and execution promptly after the
execution of this letter by the parties, but no later than 7 days after the date
hereof.
4. In connection with the consulting arrangements outlined in paragraph 2 above,
several of the founders of the Company -- Messrs. Jim Stigler, Tom Stigler, Ken
Mendoza and Roger Berman (collectively the "Founders") -- will jointly and
severally guarantee the Company's obligations for up to $25,000, provided that
any payments by the Founders will not be due and payable until January 1, 1999.
In connection therewith, each of the Founders has simultaneously herewith
executed and delivered a Guaranty Agreement to Mr. Sedaghat.
5. Each of the Lenders hereby waives any default under the Notes and agrees to
extend the Maturity Date thereunder to December 31, 1998, subject to
satisfaction by the Company of the following covenants:
(A) The Company will prepare and file with the Securities and Exchange
Commission ("SEC") a registration statement on Form SB-2 or other
appropriate form (the "Registration Statement") on or prior to October 23,
1998;
(B) The Registration Statement will be declared effective by the SEC on or
before December 31, 1998;
(C) Neither the Company nor any of its subsidiaries will incur any
indebtedness for borrowed money or guarantee any such indebtedness of
another person or entity, issue or sell any debt securities or warrants or
other rights to acquire any debt securities of the Company or any of its
subsidiaries (except as set forth in subparagraph (E) below), guarantee any
debt securities of another person or entity, enter into any "keep well" or
other agreement to maintain any financial statement condition of another
person or entity or enter into any arrangement having the economic effect
of any of the foregoing or make any loans, advances or capital
contributions to, or investments in, any other person or entity; except the
Company and its subsidiaries may incur and make payments on (i) trade
payables and operating expenses incurred in the ordinary course of business
consistent with past
<PAGE>
practice, and (ii) indebtedness that is expressly junior and subordinated
to the indebtedness represented by the Notes;
(D) Neither the Company nor any of its subsidiaries will grant or permit to
exist any liens or other encumbrances on any of its assets, other than (i)
the existing first lien on its assets granted to certain secured lenders of
the Company who loaned the aggregate principal amount of $1,750,000 to the
Company between November 1997 and February 1998, and (ii) a lien to be
granted to certain of the Unsecured Bridge Lenders who have declined to
accept the Recapitalization Offer and who instead have accepted an offer of
the Company (the "Alternate Offer") to allow them to retain their warrants
and to continue as lenders to the Company with respect to those principal
amounts of their loans that will not repaid at the IPO, provided that no
more than $200,000 of such indebtedness is secured by any lien. To date,
Unsecured Bridge Lenders holding only $187,500 have opted for the Alternate
Offer, and true and correct copies of one term sheet reflecting the
Alternate Offer is attached hereto as Exhibit B;
(E) Neither the Company nor any of its subsidiaries will issue, deliver,
sell, pledge or otherwise encumber or amend any shares of its capital
stock, any other voting securities orany securities convertible into, or
any rights, warrants or options to acquire, any such shares, interests,
voting securities or convertible securities; except for (i) the Common
Stock and warrants to be issued in the IPO (including underwriters
compensation), (ii) Common Stock issued pursuant to the Recapitalization
Letter, (iii) warrants to purchase no more than 250,000 shares of Common
Stock (on a post-reverse split basis) at an exercise price not less than
130% of the per share price to the public in the IPO, issued in connection
with an unsecured, subordinated bridge loan to be made to the Company in a
principal amount not to exceed $500,000 on the initial filing of a
registration statement by the Company, or on such other terms which are
materially different than the above described terms as shall be reasonably
acceptable to Mr. Sedaghat, (iv) options to purchase 46,666 shares of
Common Stock to be granted to certain of the Company's employees
concurrently with the consummation of the IPO with exercise prices no less
than the per share price to the public in the IPO, and (v) sales of
securities (including the debt and equity securities referenced in
subparagraph (iii) above) to persons not affiliated with the Company at a
price not less than the fair market value of such securities as determined
in good faith by the Board of Directors of the Company, provided that in
connection with such sale the Company shall offer to Mr. Sedaghat or his
designees the right to purchase that number of the offered securities in
order to allow Mr. Sedaghat to maintain his percentage ownership of the
equity securities of the Company (determined exclusive of options
previously granted to employees of the Company), on the same terms and
conditions offered by the Company in connection with such sale of
securities;
(F) All of the documents to be executed and delivered by the Company shall
be executed and delivered to Mr. Sedaghat within the time limits specified
herein; and
<PAGE>
(G) True and correct copies of the resolutions of the Board of Directors of
the Company authorizing and approving the execution, delivery and
performance of this agreement and the other agreements and documents
referred to herein, shall be delivered (certified by the Company's
secretary) to Mr. Sedaghat within 7 days of the date hereof.
The covenants set forth in paragraphs (C), (D) and (E) above shall terminate and
be of no further force or effect upon the closing of the IPO, or ten (10)
business days after the Company has notified Mr. Sedaghat of the abandonment or
termination of the IPO, whichever is earlier. The Company will promptly notify
Mr. Sedaghat if any of the foregoing covenants are breached. In any case, the
loans represented by the Notes will become immediately due and payable upon any
such breach whether or not notice has been given to Mr. Sedaghat.
6. Effective immediately, Mr. Sedaghat and the other Lenders have relinquished
their Board Visitation Rights, as created by the Observer Letter, the
Subscription Agreement or otherwise.
7. The reasonable fees and disbursements of Mr. Sedaghat's counsel in connection
with the negotiation of this Agreement and related agreements and documents
shall be paid by the Company.
8. Mr. Sedaghat and the other Lenders acknowledge receipt of the
Recapitalization Letter, together with the attachments thereto. Mr. Sedaghat and
each Lender also agree to return their original Notes and Warrant certificates
(other than the certificates representing the Finders' Warrants and the
Consultant's Warrants), or the Lost Note and/or Warrant Affidavit and Indemnity
Agreement to Ehrenreich Eilenberg Krause & Zivian LLP to be held in escrow in
accordance with the terms of the Recapitalization Letter.
Each of the Lenders acknowledges that he or they have not relied upon any
representations or warranties of the Company or the Founders as to the Company,
its business, prospects or financial status, other than as provided herein
(including without limitation the Exhibits attached hereto), in the "Digital
LAVA, Inc. Company Summary" attached to the Recapitalization Letter, the pro
forma capitalization table attached hereto as Exhibit C, or in the other
materials included with the Recapitalization Letter. The parties acknowledge
that the agreements provided herein contain the entire understanding and
agreement of the parties hereto and supersede any and all prior negotiations,
discussions, understandings and agreements among the parties.
This Agreement shall be governed by, and shall be construed and interpreted
in accordance with, the substantive laws of the State of California, and any
disputes arising hereunder shall be tried in the courts of the State of
California, which shall have exclusive jurisdiction thereunder.
<PAGE>
The parties agree to execute and deliver such additional documents and
perform such further acts as may be reasonably necessary or appropriate to
effectuate the purposes of this Agreement.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original hereof and all of which, together, shall
constitute one and the same instrument.
<PAGE>
We appreciate your accommodations and thank you for your continued interest
and support.
Very truly yours,
DIGITAL LAVA INC.
By: /s/ Danny Gampe
---------------------
Authorized Officer
ACCEPTED AND AGREED TO:
/s/ Shahrokh Sedaghat
- ------------------------------------
Shahrokh "Shawn" Sedaghat
/s/ Shapour and Parvindokht Sedaghat
- ------------------------------------
Shapour and Parvindokht Sedaghat
/s/ Andreas Iseli
- ------------------------------------
Andreas Iseli
EXHIBIT 4 (aa)
<PAGE>
AMENDED AND RESTATED OPTION AGREEMENT
This Amended and Restated Option Agreement, dated as of May 1, 1998, is by
and between Roger Berman ("Berman"), James Stigler ("J. Stigler"), Thomas
Stigler ("T. Stigler"), Joshua Sharfman ("Sharfman"; together with Berman, J.
Stigler and T. Stigler collectively the "Founders" and each individually a
"Founder"), Digital Lava Inc., a Delaware corporation ("Lava" or the "Company"),
and Judson Cooper ("Cooper").
The parties previously entered into an Option Agreement, dated as of
January 31, 1997 (the "Option Agreement"), regarding the grant by each of the
Founders to Cooper of options to purchase shares of Series A Convertible
Preferred Stock of the Company in consideration for the agreement by Cooper to
provide financial advisory services to the Company and the Founders and to
introduce to the Company potential sources of financing.
Now, for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties desire to amend and restate the
Option Agreement as follows:
1. Grant of Options.
1.1 Each of the Founders, as to himself only, hereby grants to Cooper, an
irrevocable option (an "Option", collectively, the "Options"), for a period of
ten years from the date hereof (the "Option Period"), to designate in writing to
the Company and the Founders a person or persons, at his sole choice and
discretion, to be the "Purchaser" under the Share Purchase Agreement in the form
of Exhibit A annexed hereto ("Agreement") between such Purchaser and a Founder
for the sale of 20% of the number of shares of Common Stock of the Company
("Common Stock") or Series A Convertible Preferred Stock of the Company ("Series
A Preferred Stock") currently held by each of the Founders at an exercise price
of $1.00 per share of Series A Preferred Stock and $.10 per share of Common
Stock. The number of shares of Common Stock or Series A Preferred Stock held by
each of the Founders for purposes of determining the number of shares (20%)
subject to the Options shall be subject to reduction in connection with any
recapitalization of the Company's outstanding securities resulting in a
reduction in the number of shares held by the Founders so that, in any event,
the Options will give Cooper the right to purchase on an aggregate basis that
number of Shares and Converted Shares (both as defined below) that equals the
number of Converted Shares held by Messrs. Tom Stigler and Roger Berman, taking
into account a reduction equal to the number of Converted Shares covered by the
Options.
The shares of Common Stock held by Sharfman that are subject to this Option
Agreement are referred to herein as the "Shares"; the shares of Series A
Preferred Stock held by Berman, J. Stigler and T. Stigler that are subject to
this Option Agreement are referred to herein as the "Preferred Shares"; the
shares of Common Stock issuable upon conversion of the Preferred Shares are
referred to herein as the "Converted Shares" and the Shares, the Preferred
Shares and the Converted Shares together are referred to herein as the "Option
Shares."
<PAGE>
The total number of Shares and Converted Shares covered by any Option of
Cooper or any designated Purchaser shall be allocated among the Founders as
follows: Berman - 2/8; J. Stigler - 3/8; T. Stigler - 2/8 and Sharfman - 1/8
(for example, if a particular Purchaser has been designated by Cooper as having
the right to purchase 80 Shares and Converted Shares, the Option will provide
such Purchaser the right to purchase 2 Preferred Shares from Berman, 3 Preferred
Shares from J. Stigler, 2 Preferred Shares from T. Stigler and 10 Shares from
Sharfman).
1.2 If the Preferred Shares have been converted into Converted Shares prior
to the exercise of the Option hereunder, the Option with respect to Messrs.
Berman, T. Stigler and J. Stigler shall relate to Converted Shares, and the
exercise price per share shall be $.10, as adjusted pursuant to Section 2
hereof.
1.3 Upon the return to the Founders within the Option Period of an executed
Agreement by any person constituting a Purchaser (which each Founder agrees to
execute), c/o the Company, at 10850 Wilshire Boulevard, Suite 1260, Los Angeles,
CA 90024, together with payment for the Shares or Preferred Shares (or Converted
Shares, if the Preferred Shares have been converted as of such date) in the form
of a certified check or wire transfer of funds to each Founder for $.10 for each
Share or Converted Share of such Founder purchased and $1.00 for each Preferred
Share of such Founder purchased, a binding contract between the Founders and
such person with respect to the Shares, Preferred Shares or Converted Shares to
be purchased by such person shall come into force and effect.
1.4 Any Purchaser exercising an Option in whole or in part must exercise
the Option simultaneously among the Founders in a pro rata manner, as described
in the last paragraph of Section 1.1 hereof.
1.5 Cooper acknowledges that any Shares, Preferred Shares or Converted
Shares obtained by him or any Purchaser shall be subject to any "lockup"
agreements, risks of forfeiture or any other contractual restrictions imposed
upon the shares of capital stock held by the Founders (excluding employee stock
options).
2. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Shares, Preferred Shares (or Converted
Shares) subject to this Option Agreement, shall be subject to adjustment from
time to time upon the occurrence of certain events described in this Section 2.
2.1 Subdivision, Combination or Stock Dividend. If the Company shall at any
time subdivide its outstanding shares of Common Stock or Series A Preferred
Stock into a greater number of shares of Common Stock or Series A Preferred
Stock or declare a dividend upon its shares of Common Stock or Series A
Preferred Stock payable solely in shares of Common Stock or Series A Preferred
Stock, the Exercise Price with respect to the Shares or Preferred Shares in
effect immediately prior to such subdivision or declaration shall be
proportionately reduced, and the number of Shares or Preferred Shares subject to
<PAGE>
the option hereunder shall be proportionately increased. Conversely, in case the
outstanding shares of Common Stock or Series A Preferred Stock of the Company
shall be combined into a smaller number of shares of Common Stock or Series A
Preferred Stock, the Exercise Price for Shares or Preferred Shares in effect
immediately prior to such combination shall be proportionately increased, and
the number of Shares and Preferred Shares subject to the option hereunder shall
be proportionately reduced. If any such subdivision or combination with respect
only to the shares of Common Stock (and not with respect to the shares of Series
A Preferred Stock) occurs prior to the conversion of the Preferred Shares, the
Exercise Price for the Preferred Shares and the number of Preferred Shares
subject to this Option Agreement shall not be modified, since an adjustment to
the "Conversion Price" of the Preferred Shares (the basis for determining the
number of shares of Common Stock generally issuable upon conversion of the
Series A Preferred Stock) will be made pursuant to the provisions of Section 6.4
of Article 6 of the Company's Amended and Restated Certificate of Incorporation.
2.2 Notice of Adjustment. Promptly after any adjustment of the Exercise
Price or any increase or decrease in the number of Option Shares purchasable
upon the exercise of the options hereunder, the Company shall give written
notice thereof, by first class mail, postage prepaid, addressed to Cooper at 666
Third Avenue, 30th Floor, New York, NY 10017, or such other address as he (or
his transferee) designates. The notice shall be signed by the Company's chief
financial officer and shall state (i) the effective date of the adjustment and
the Exercise Price resulting from such adjustment and (ii) the increase or
decrease, if any, in the number of Option Shares purchasable at such price,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
2.3 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its shares of
Common Stock or Series A Preferred Stock;
(b) the Company shall declare any dividend upon its shares of Common
Stock or Series A Preferred Stock payable in securities (other than a
dividend payable solely in shares of Common Stock or Series A Preferred
Stock) or make any special dividend or other distribution to the holders of
its shares of Common Stock or Series A Preferred Stock;
(c) there shall be any consolidation or merger of the Company with
another corporation, or a sale of all or substantially all of the Company's
assets to another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation
or winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to Cooper (or his transferee) at his
address set forth above or otherwise designated by him (or his transferee), (i)
at least 15 days' prior written notice
<PAGE>
of the date on which the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such dissolution, liquidation or winding-up;
(ii) at least 10 days' prior written notice of the date on which the books of
the Company shall close or a record shall be taken for determining rights to
vote in respect of any such reorganization, reclassification, consolidation,
merger or sale, and (iii) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, at least 15 days' written notice of the date when the same shall
take place. Any notice given in accordance with clause (i) above shall also
specify, in the case of any such dividend, distribution or option rights, the
date on which the holders of shares of Common Stock or Series A Preferred Stock
shall be entitled thereto. Any notice given in accordance with clause (iii)
above shall also specify the date on which the holders of Common Shares shall be
entitled to exchange their shares of Common Stock or Series A Preferred Stock
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, as the case may be. If Cooper (or his transferee) does not exercise
his Options prior to the occurrence of an event described above, except as
provided in Sections 2.1 and 2.4, Cooper (or his transferee) shall not be
entitled to receive the benefits accruing to existing holders of shares of
Common Stock or Series A Preferred Stock, as the case may be, in such event.
2.4 Changes in Common Shares. In case at any time the Company shall be a
party to any transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the Company's assets or
recapitalization of the shares of Common Stock or Series A Preferred Stock) in
which the previously outstanding shares of Common Stock or Series A Preferred
Stock shall be changed into or exchanged for different securities of the Company
or common stock or other securities of another corporation or interests in a
non-corporate entity or other property (including cash) or any combination of
any of the foregoing (each such transaction being herein called the
"Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then Cooper (or his transferee), upon the
exercise of his options hereunder at any time on or after the Consummation Date,
shall be entitled to receive from the Founders, and his options shall thereafter
represent the right to receive from the Founders, in lieu of shares of Common
Stock or Series A Preferred Stock issuable upon such exercise prior to the
Consummation Date, the highest amount of securities or other property to which
Cooper would actually have been entitled as a holder of a share of Common Stock
or Series A Preferred Stock upon the consummation of the Transaction if such
Cooper (or his transferee) had exercised his option immediately prior thereto.
The provisions of this Section 2.4 shall similarly apply to successive
Transactions.
3. Registration Rights. The Options and the Shares, Preferred Shares and
Converted issuable upon exercise of the Options have not been registered under
the Securities Act of 1933, as amended (the "Act"). Upon exercise, in whole or
in part, of the Options a certificate representing the Shares, the Preferred
Shares and the Converted Shares issuable upon exercise of the Options
(collectively, the "Option Securities") shall bear the following legend unless
such Option Securities previously have been registered under the Act in
accordance with the terms hereof:
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR
ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES),
OR (iii) AN OPINION OF COUNSEL OBTAINED AND PAID FOR BY THE PERSON SEEKING
TO DISPOSE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE.
Notwithstanding the foregoing, the Company has agreed that the Option Shares
shall be deemed to be "Registrable Securities" under the Registration Agreement
(the "Registration Agreement") dated as of July 3, 1996 between the Company and
the persons listed on Schedule 1 annexed thereto, which Registration Agreement
is hereby incorporated herein by reference, and that Cooper or any transferee
shall have all the rights and obligations of a "Holder" under the Registration
Rights Agreement as if he were a party thereto; provided, however, that Cooper
(and any transferee) shall be required to execute and deliver any "lock-up"
agreement limiting his ability to resell his Option Shares that the Founders are
required to execute and deliver by any managing underwriter or other person.
Notwithstanding the foregoing, the parties agree that in the event of any
conflict, inconsistency or ambiguity between the provisions of the Registration
Agreement and the provisions of this Option Agreement, the provisions of this
Option Agreement shall prevail and control.
4. Representations, Warranties and Agreements of the Founders. Each
Founder, as to himself only, represents, warrants and agrees with Cooper that he
is the sole owner of the Shares or Preferred Shares subject to this Option
Agreement, that at the time of transfer to Cooper (or any other Purchaser), such
Shares or Preferred Shares (as applicable) will be free and clear of all liens
and encumbrances, and that performance by such Founder of his obligations under
this Option Agreement will not conflict with or violate (i) any indenture, loan
agreement, lease, mortgage or other agreement binding on the Founder, (ii) any
order of a court or administrative agency binding on the Founder or (iii) any
applicable law or governmental regulation. The Founders jointly and severally
represent and warrant to Cooper that, as of the date hereof, they currently own
the following shares of Common Stock and Series A Preferred Stock (without
taking into effect exercise of the Options granted hereby): (i) Berman --
202,391 shares of Series A Preferred Stock; (ii) J. Stigler -- 303,587 shares of
Series A Preferred Stock; (iii) T. Stigler -- 202,391 shares of Series A
Preferred Stock and (iv) Sharfman -- 1,011,960 shares of Common Stock, and that
each one share of Series A Preferred Stock is currently convertible into ten
shares of Common Stock. Each of the Founders agrees to waive any rights he may
have, by virtue of any agreement
<PAGE>
among the Founders, or otherwise, to acquire any of the Shares, Preferred Shares
or Converted Shares held by the other Founders.
5. Representations and Warranties of the Company. Execution and delivery of
this Option Agreement has been duly authorized by all necessary corporate action
of the Company. At the time of transfer to Cooper (or to any other Purchaser),
performance by the Company of its obligations under this Option Agreement will
not conflict with or violate the charter documents or bylaws of the Company, or
conflict with or violate, in any material respect, (i) any indenture, loan
agreement, lease, mortgage or other agreement binding on the Company, (ii) any
order of a court or administrative agency binding on the Company, or (iii) any
applicable law or governmental regulation, the effect of any of which would have
a material adverse effect on the Company or its subsidiaries, taken as a whole,
or materially impair or restrict the Company's power to perform its obligations
as contemplated hereby.
6. Representations and Warranties of Cooper. Cooper represents and warrants
to the Founders and to the Company that (i) he has been furnished with all
materials relating to the Company and its current and proposed activities which
he has requested and has been afforded the opportunity to obtain any additional
information necessary to verify the accuracy of any representations or
information relating to the Company and its current and proposed activities,
(ii) other than as set forth herein, no representations or warranties have been
made to him by the Founders or the Company with respect to the intended business
of the Company, the financial condition, prospects, profitability, operations
and/or potential of the Company and/or the economic or any other aspects of the
consequences of an investment in the Company by means of exercise of the
Options, (iii) he is acquiring the Options for his own account, as principal,
for investment and not with a current view to the resale or distribution of all
or any part of the Option or the Shares, Preferred Shares or Converted Shares
and (iv) he can now, and at all times in the future will be able to, bear the
economic risk of a complete loss of his entire investment in the Company without
materially affecting his financial condition, (v) he is an investor qualified
under applicable federal and state law to have issued to him the securities
described in this Option Agreement and is an "accredited investor" under Rule
501 of the Act and (vi) he has heretofore neither transferred nor agreed to
transfer to any person any of his rights under this Option Agreement, and will
not do so without showing this Option Agreement to each prospective Purchaser.
7. Transferability. The Options covered by this Option Agreement may be
sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or
in part, without restriction, subject to compliance with applicable securities
laws. Any transferee of Cooper shall execute and deliver to the Founders and to
the Company an undertaking to perform the obligations of Cooper hereunder with
respect to the Options acquired by him or it, and upon any such transfer, the
transferee shall have all of the rights of Cooper hereunder with respect to the
Options, including without limitation, the discretion under Section 1 hereof to
designate a Purchaser of those Shares, Preferred Shares or Converted Shares
obtainable upon exercise of the Options acquired by it from Cooper.
<PAGE>
8. Miscellaneous.
8.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York. Any action or proceeding
relating to this Agreement may be brought in the courts of New York sitting in
New York County, or in the United States courts located in New York County, New
York, and each of the parties irrevocably consents to the jurisdiction of such
courts in any such action or proceeding.
8.2 Successors and Assigns. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of and be binding upon the
successors and assigns of the parties.
8.3 Entire Agreement; Amendment. This Agreement, including any Exhibits
hereto, constitutes the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof. Neither this Agreement
nor any term hereof may be amended, waived, discharged or terminated except by a
written instrument signed by the Company, the Founders and Cooper (or his
transferees).
8.4 Notices. All notices and other communications required or permitted
hereunder shall be mailed by first-class mail, postage prepaid, by nationally
recognized overnight courier, or delivered either by hand or by messenger,
addressed (a) if to Cooper, as indicated herein or at such other address as he
(or any transferee) shall have furnished to the Company and to the Founders in
writing, (b) if to the Company, at its address set forth herein or at such other
address as the Company shall have furnished to Cooper (or any transferee) in
writing and (c) if to any Founder, to each of the Founders, c/o the Company, as
provided above. All such notices or communications shall be deemed given when
actually delivered by hand, messenger, facsimile or mailgram or, if mailed,
three days after deposit in the U.S. mail, or if sent by recognized overnight
courier, one day after duly sent.
8.5 Delays or Omission. No delay or omission to exercise any right, power
or remedy accruing to any party to this Option Agreement, upon any breach or
default of another party under this Option Agreement, shall impair any such
right, power or remedy of such party nor shall it be construed to be a waiver of
any such breach or default, or an acquiescence therein, or of or in any similar
breach or default thereafter occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore
or thereafter occurring. All remedies, either under this Option Agreement or by
law or otherwise afforded to any party, shall be cumulative and not alternative.
8.6 Severability. In case any provision of this Option Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
8.7 Titles and Subtitles. The titles of the Sections and Subsections of
this Option Agreement are for convenience of reference only and are not to be
considered in construing this Option Agreement.
<PAGE>
8.8 Counterparts. This Option Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amended and Restated
Option Agreement to be executed and delivered by their duly authorized officers
or partners, as the case may be, as of the day and year first above written.
DIGITAL LAVA INC.
By: /s/ Danny Gampe
----------------------------------------
Danny Gampe, Chief Financial Officer
/s/ Judson Cooper
--------------------------------------------
Judson Cooper
FOUNDERS:
/s/ Roger Berman
------------------------------------
Roger Berman
/s/ James Stigler
------------------------------------
James Stigler
/s/ Thomas Stigler
------------------------------------
Thomas Stigler
/s/ Joshua Sharfman
------------------------------------
Joshua Sharfman
EXHIBIT 4 (ab)
<PAGE>
AMENDED AND RESTATED OPTION AGREEMENT
This Amended and Restated Option Agreement, dated as of May 1, 1998, is by
and between Roger Berman ("Berman") and James Stigler ("Stigler"; together with
Berman the "Founders" and each individually a "Founder"), Digital Lava Inc., a
Delaware corporation ("Lava" or the "Company"), and E&Z Investments ("EZ").
The parties previously entered into an Option Agreement, dated as of
December 1, 1997 (the "Option Agreement"), regarding the grant by each of the
Founders to EZ of options to purchase shares of Series A Convertible Preferred
Stock of the Company in consideration for the introduction by EZ to the Company
of potential sources of financing.
Now, for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties desire to amend and restate the
Option Agreement as follows:
1. Grant of Options.
1.1 Each of the Founders, as to himself only, hereby grants to EZ, an
irrevocable option (an "Option", collectively, the "Options"), for a period of
ten years from the date hereof (the "Option Period"), to designate in writing to
the Company and the Founders a person or persons, at its sole choice and
discretion, to be the "Purchaser" under the Share Purchase Agreement in the form
of Exhibit A annexed hereto ("Agreement") between such Purchaser and a Founder
for the sale of the number of shares of Series A Convertible Preferred Stock of
the Company ("Series A Preferred Stock") and at the exercise price per share of
Series A Preferred Stock (the "Exercise Price") listed below:
Founder No. Shares No. Shares of Exercise
Series A Common Stock Price
Preferred Stock issuable upon per
covered by conversion of Series Share
Option A Preferred Stock
Berman 7,500 75,000 $1.00
Stigler 7,500 75,000 $1.00
The shares of Series A Preferred Stock that are subject to this Option Agreement
are referred to herein as the "Preferred Shares"; the shares of Common Stock of
the Company issuable upon conversion of the Preferred Shares are referred to
herein as the "Converted Shares" and the Shares, the Preferred Shares and the
Converted Shares together are referred to herein as the "Option Shares."
The total number of Shares and Converted Shares covered by any Option of EZ or
any designated Purchaser shall be allocated among the Founders as follows:
Berman - 1/2 and Stigler - 1/2 (for example, if a particular Purchaser has been
designated by EZ as having the
<PAGE>
right to purchase 100,000 Converted Shares, the Option will provide such
Purchaser the right to purchase 5,000 Preferred Shares from Berman and 5,000
Preferred Shares from Stigler).
1.2 If the Preferred Shares have been converted into Converted Shares prior
to the exercise of the Option hereunder, the Option shall relate to Converted
Shares, and the exercise price per share shall be $.10, as adjusted pursuant to
Section 2 hereof.
1.3 Upon the return to the Founders within the Option Period of an executed
Agreement by any person constituting a Purchaser (which each Founder agrees to
execute), c/o the Company, at 10850 Wilshire Boulevard, Suite 1260, Los Angeles,
CA 90024, together with payment for the Preferred Shares (or Converted Shares,
if the Preferred Shares have been converted as of such date) in the form of a
certified check or wire transfer of funds to each Founder for $.10 for each
Converted Share of such Founder purchased and $1.00 for each Preferred Share of
such Founder purchased, a binding contract between the Founders and such person
with respect to the Preferred Shares or Converted Shares to be purchased by such
person shall come into force and effect.
1.4 Any Purchaser exercising an Option in whole or in part must exercise
the Option simultaneously among the Founders in a pro rata manner, as described
in the last paragraph of Section 1.1 hereof.
1.5 EZ acknowledges that any Preferred Shares or Converted Shares obtained
by it or any Purchaser shall be subject to any "lockup" agreements, risks of
forfeiture or any other contractual restrictions imposed upon the shares of
capital stock held by the Founders (excluding employee stock options).
2. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Preferred Shares (or Converted Shares)
subject to this Option Agreement, shall be subject to adjustment from time to
time upon the occurrence of certain events described in this Section 2.
2.1 Subdivision, Combination or Stock Dividend. If the Company shall at any
time subdivide its outstanding shares of Common Stock or Series A Preferred
Stock into a greater number of shares of Common Stock or Series A Preferred
Stock or declare a dividend upon its shares of Common Stock or Series A
Preferred Stock payable solely in shares of Common Stock or Series A Preferred
Stock, the Exercise Price with respect to the Preferred Shares in effect
immediately prior to such subdivision or declaration shall be proportionately
reduced, and the number of Preferred Shares subject to the option hereunder
shall be proportionately increased. Conversely, in case the outstanding shares
of Common Stock or Series A Preferred Stock of the Company shall be combined
into a smaller number of shares of Common Stock or Series A Preferred Stock, the
Exercise Price for Preferred Shares in effect immediately prior to such
combination shall be proportionately increased, and the number of Preferred
Shares subject to the option hereunder shall be proportionately reduced. If any
such subdivision or combination with respect only to the shares of Common Stock
(and not with respect to the shares of Series A Preferred Stock) occurs prior to
the
<PAGE>
conversion of the Preferred Shares, the Exercise Price for the Preferred Shares
and the number of Preferred Shares subject to this Option Agreement shall not be
modified, since an adjustment to the "Conversion Price" of the Preferred Shares
(the basis for determining the number of shares of Common Stock generally
issuable upon conversion of the Series A Preferred Stock) will be made pursuant
to the provisions of Section 6.4 of Article 6 of the Company's Amended and
Restated Certificate of Incorporation.
2.2 Notice of Adjustment. Promptly after any adjustment of the Exercise
Price or any increase or decrease in the number of Option Shares purchasable
upon the exercise of the options hereunder, the Company shall give written
notice thereof, by first class mail, postage prepaid, addressed to EZ at 3006
Arlington Avenue, Bronx, New York 10463, or such other address as he (or his
transferee) designates. The notice shall be signed by the Company's chief
financial officer and shall state (i) the effective date of the adjustment and
the Exercise Price resulting from such adjustment and (ii) the increase or
decrease, if any, in the number of Option Shares purchasable at such price,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
2.3 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its shares of Common
Stock or Series A Preferred Stock;
(b) the Company shall declare any dividend upon its shares of Common Stock
or Series A Preferred Stock payable in securities (other than a dividend payable
solely in shares of Common Stock or Series A Preferred Stock) or make any
special dividend or other distribution to the holders of its shares of Common
Stock or Series A Preferred Stock;
(c) there shall be any consolidation or merger of the Company with another
corporation, or a sale of all or substantially all of the Company's assets to
another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to EZ(or his transferee) at his
address set forth above or otherwise designated by him (or his transferee), (i)
at least 15 days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote in respect of any such
dissolution, liquidation or winding-up; (ii) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 15 days' written notice
of the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
<PAGE>
distribution or option rights, the date on which the holders of shares of Common
Stock or Series A Preferred Stock shall be entitled thereto. Any notice given in
accordance with clause (iii) above shall also specify the date on which the
holders of Common Shares shall be entitled to exchange their shares of Common
Stock or Series A Preferred Stock for securities or other property deliverable
upon such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding-up, as the case may be. If EZ (or its
transferee) does not exercise its Options prior to the occurrence of an event
described above, except as provided in Sections 2.1 and 2.4, EZ (or its
transferee) shall not be entitled to receive the benefits accruing to existing
holders of shares of Common Stock or Series A Preferred Stock, as the case may
be, in such event.
2.4 Changes in Common Shares. In case at any time the Company shall be a
party to any transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the Company's assets or
recapitalization of the shares of Common Stock or Series A Preferred Stock) in
which the previously outstanding shares of Common Stock or Series A Preferred
Stock shall be changed into or exchanged for different securities of the Company
or common stock or other securities of another corporation or interests in a
non-corporate entity or other property (including cash) or any combination of
any of the foregoing (each such transaction being herein called the
"Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then EZ (or its transferee), upon the exercise
of its options hereunder at any time on or after the Consummation Date, shall be
entitled to receive from the Founders, and his options shall thereafter
represent the right to receive from the Founders, in lieu of shares of Common
Stock or Series A Preferred Stock issuable upon such exercise prior to the
Consummation Date, the highest amount of securities or other property to which
EZ would actually have been entitled as a holder of a share of Common Stock or
Series A Preferred Stock upon the consummation of the Transaction if such EZ (or
its transferee) had exercised its option immediately prior thereto. The
provisions of this Section 2.4 shall similarly apply to successive Transactions.
3. Registration Rights. The Options and Preferred Shares and Converted
Shares issuable upon exercise of the Options have not been registered under the
Securities Act of 1933, as amended (the "Act"). Upon exercise, in whole or in
part, of the Options a certificate representing the Preferred Shares and the
Converted Shares issuable upon exercise of the Options (collectively, the
"Option Securities") shall bear the following legend unless such Option
Securities previously have been registered under the Act in accordance with the
terms hereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR
ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES),
OR (iii) AN OPINION OF COUNSEL OBTAINED AND PAID FOR BY THE PERSON
<PAGE>
SEEKING TO DISPOSE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER,
THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE.
Notwithstanding the foregoing, the Company has agreed that the Option Shares
shall be deemed to be "Registrable Securities" under the Registration Agreement
(the "Registration Agreement") dated as of July 3, 1996 between the Company and
the persons listed on Schedule 1 annexed thereto, which Registration Agreement
is hereby incorporated herein by reference, and that EZ or any transferee shall
have all the rights and obligations of a "Holder" under the Registration Rights
Agreement as if he were a party thereto; provided, however, that EZ (and any
transferee) shall be required to execute and deliver any "lockup" agreement
limiting his ability to resell his Option Shares that the Founders are required
to execute and deliver by any managing underwriter or other person.
Notwithstanding the foregoing, the parties agree that in the event of any
conflict, inconsistency or ambiguity between the provisions of the Registration
Agreement and the provisions of this Option Agreement, the provisions of this
Option Agreement shall prevail and control.
4. Representations, Warranties and Agreements of the Founders. Each
Founder, as to himself only, represents, warrants and agrees with EZ that he is
the sole owner of the Preferred Shares subject to this Option Agreement, that at
the time of transfer to EZ (or any other Purchaser), such Preferred Shares (as
applicable) will be free and clear of all liens and encumbrances, and that
performance by such Founder of his obligations under this Option Agreement will
not conflict with or violate (i) any indenture, loan agreement, lease, mortgage
or other agreement binding on the Founder, (ii) any order of a court or
administrative agency binding on the Founder or (iii) any applicable law or
governmental regulation. Each Founder agrees to waive any rights he may have, by
virtue of any agreement among the Founders, or otherwise, to acquire any of the
Preferred Shares or Converted Shares held by the other Founder.
5. Representations and Warranties of the Company. Execution and delivery of
this Option Agreement has been duly authorized by all necessary corporate action
of the Company. At the time of transfer to EZ (or to any other Purchaser),
performance by the Company of its obligations under this Option Agreement will
not conflict with or violate the charter documents or bylaws of the Company, or
conflict with or violate, in any material respect, (i) any indenture, loan
agreement, lease, mortgage or other agreement binding on the Company, (ii) any
order of a court or administrative agency binding on the Company, or (iii) any
applicable law or governmental regulation, the effect of any of which would have
a material adverse effect on the Company or its subsidiaries, taken as a whole,
or materially impair or restrict the Company's power to perform its obligations
as contemplated hereby.
6. Representations and Warranties of EZ. EZ represents and warrants to the
Founders and to the Company that (i) it has been furnished with all materials
relating to the Company and its current and proposed activities which it has
requested and has been afforded the opportunity to obtain any additional
information necessary to verify the
<PAGE>
accuracy of any representations or information relating to the Company and its
current and proposed activities, (ii) other than as set forth herein, no
representations or warranties have been made to it by the Founders or the
Company with respect to the intended business of the Company, the financial
condition, prospects, profitability, operations and/or potential of the Company
and/or the economic or any other aspects of the consequences of an investment in
the Company by means of exercise of the Options, (iii) it is acquiring the
Options for its own account, as principal, for investment and not with a current
view to the resale or distribution of all or any part of the Option or Preferred
Shares or Converted Shares and (iv) it can now, and at all times in the future
will be able to, bear the economic risk of a complete loss of its entire
investment in the Company without materially affecting its financial condition,
(v) it is an investor qualified under applicable federal and state law to have
issued to it the securities described in this Option Agreement and (vi) it has
heretofore neither transferred nor agreed to transfer to any person any of its
rights under this Option Agreement, and will not do so without showing this
Option Agreement to each prospective Purchaser.
7. Transferability. The Options covered by this Option Agreement may be
sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or
in part, without restriction, subject to compliance with applicable securities
laws. Any transferee of EZ shall execute and deliver to the Founders and to the
Company an undertaking to perform the obligations of EZ hereunder with respect
to the Options acquired by it, and upon any such transfer, the transferee shall
have all of the rights of EZ hereunder with respect to the Options, including
without limitation, the discretion under Section 1 hereof to designate a
Purchaser of those Preferred Shares or Converted Shares obtainable upon exercise
of the Options acquired by it from EZ.
8. Miscellaneous.
8.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York. Any action or proceeding
relating to this Agreement may be brought in the courts of New York sitting in
New York County, or in the United States courts located in New York County, New
York, and each of the parties irrevocably consents to the jurisdiction of such
courts in any such action or proceeding.
8.2 Successors and Assigns. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of and be binding upon the
successors and assigns of the parties.
8.3 Entire Agreement; Amendment. This Agreement, including any Exhibits
hereto, constitutes the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof. Neither this Agreement
nor any term hereof may be amended, waived, discharged or terminated except by a
written instrument signed by the Company, the Founders and EZ (or its
transferees).
8.4 Notices. All notices and other communications required or permitted
hereunder shall be mailed by first-class mail, postage prepaid, by nationally
recognized
<PAGE>
overnight courier, or delivered either by hand or by messenger, addressed (a) if
to EZ, as indicated herein or at such other address as it (or any transferee)
shall have furnished to the Company and to the Founders in writing, (b) if to
the Company, at its address set forth herein or at such other address as the
Company shall have furnished to EZ (or any transferee) in writing and (c) if to
any Founder, to each of the Founders, c/o the Company, as provided above. All
such notices or communications shall be deemed given when actually delivered by
hand, messenger, facsimile or mailgram or, if mailed, three days after deposit
in the U.S. mail, or if sent by recognized overnight courier, one day after duly
sent.
8.5 Delays or Omission. No delay or omission to exercise any right, power
or remedy accruing to any party to this Option Agreement, upon any breach or
default of another party under this Option Agreement, shall impair any such
right, power or remedy of such party nor shall it be construed to be a waiver of
any such breach or default, or an acquiescence therein, or of or in any similar
breach or default thereafter occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore
or thereafter occurring. All remedies, either under this Option Agreement or by
law or otherwise afforded to any party, shall be cumulative and not alternative.
8.6 Severability. In case any provision of this Option Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
8.7 Titles and Subtitles. The titles of the Sections and Subsections of
this Option Agreement are for convenience of reference only and are not to be
considered in construing this Option Agreement.
8.8 Counterparts. This Option Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amended and Restated
Option Agreement to be executed and delivered by their duly authorized officers
or partners, as the case may be, as of the day and year first above written.
DIGITAL LAVA INC.
By: /s/ Danny Gampe
----------------------------------------
Danny Gampe, Chief Financial Officer
FOUNDERS:
/s/ Roger Berman
-------------------------------------
Roger Berman
/s/ James Stigler
-------------------------------------
James Stigler
E&Z INVESTMENTS
By: /s/ Adam D. Eilenberg
-------------------------------------
Adam D. Eilenberg,
General Partner
EXHIBIT 10 (a)
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), effective as of September 1,
1998 between Digital LAVA, Inc., a Delaware corporation (with its successors and
assigns, referred to as the "Corporation"), and Thomas Stigler (referred to as
"Employee").
Preliminary Statement
The Corporation desires to employ Employee, and Employee wishes to be
employed by the Corporation, upon the terms and subject to the conditions set
forth in this Agreement. The Corporation and Employee also wish to enter into
the other agreements set forth in this Agreement, all of which are related to
Employee's employment under this Agreement.
Agreement
Employee and the Corporation therefore agree as follows:
1. Employment for Term. The Corporation hereby employs Employee and
Employee hereby accepts employment with the Corporation for the period beginning
on the date (the "Commencement Date") of the consummation of the Corporation's
initial public offering (the "IPO") and ending on the two-year anniversary of
such date (the "Initial Term"), or upon the earlier termination of the Term
pursuant to Section 6. This Agreement shall be automatically renewed for
additional one-year periods (the "Renewal Terms;" together with the Initial
Term, the "Term") unless either party notifies the other in writing of its
intention not to so renew this Agreement no less than 180 days prior to the
expiration of the Initial Term or a Renewal Term. The termination of Employee's
employment under this Agreement shall end the Term but shall not terminate
Employee's or the Corporation's other agreements in this Agreement, except as
otherwise provided herein.
2. Position and Duties. During the Term, Employee shall serve as Vice
President of Sales and Business Strategy of the Corporation. During the Term,
Employee shall also hold such additional positions and titles as the Board of
Directors of the Corporation (the "Board") may determine from time to time.
During the Term, Employee shall devote his full business time and efforts to his
duties as an employee of the Corporation.
3. Compensation.
(a) Base Salary. The Corporation shall pay Employee a base salary,
beginning on the first day of the Term and ending on the last day of the Term,
of not less
<PAGE>
than $230,000 per annum, payable at least monthly on the Corporation's regular
pay cycle for professional employees.
(b) Additional Payment. Upon the Commencement Date, Employee shall receive
a payment of $60,000 in consideration for his efforts in connection with the
successful completion of the IPO.
(c) Stock Options. Pursuant to the Corporation's stock option plan, the
Corporation shall grant to Employee on the Commencement Date options under the
Corporation's 1996 Stock Option Plan to purchase 40,000 shares of the
Corporation's Common Stock (on a post-reverse split basis) at an exercise price
equal to the initial public offering price of the Common Stock of the
Corporation. The options shall be fully vested as of the Commencement Date and
shall expire on the tenth anniversary of the Commencement Date, regardless of
whether there has been any prior termination of Employee's status as an employee
with or consultant to the Corporation. The Corporation will prepare a stock
option agreement reflecting the terms of the option as provided herein.
(d) Other and Additional Compensation. The preceding sections establish the
minimum compensation during the Term and shall not preclude the Board from
awarding Employee a higher salary or any bonuses or stock options in the
discretion of the Board during the Term at any time.
4. Employee Benefits. During the Term, Employee shall be entitled to the
employee benefits, including vacation, 401(k) plan, health plan and other
insurance and additional benefits made available by the Corporation to any other
employee of the Corporation.
5. Expenses. The Corporation shall reimburse Employee for actual
out-of-pocket expenses incurred by him in the performance of his services for
the Corporation upon the receipt of appropriate documentation of such expenses.
6. Termination.
(a) General. The Term shall end immediately upon Employee's death. The Term
may also end for Cause or Disability, as defined in Section 7.
(b) Notice of Termination. Promptly after it ends the Term,
the Corporation shall give Employee notice of the termination, including a
statement of whether the termination was for Cause or Disability (as defined in
Section 7(a) and 7(b) below). The Corporation's failure to give notice under
this Section 6(b) shall not, however, affect the validity of the Corporation's
termination of the Term.
(c) Effective Termination by Corporation. If, during the Initial Term or
any Renewal Term, the Corporation (i) appoints an executive officer in charge of
sales and marketing (and senior in position or responsibility to Employee, (ii)
designates such executive officer or any other person as the Vice President of
Sales/Business Strategy of the Corporation, or (iii) requires Employee to
perform a material portion of his services at a
<PAGE>
location more than 25 miles from the Corporation's current location in Los
Angeles, then, at his option, Employee may elect to resign, and receive the
applicable severance benefits set forth in Section 7(c)(ii) or (iii) below. In
the case of Section 6(c)(i) or (ii) above, Employee shall give four (4) months'
prior written notice to the Corporation of such resignation, and in the case of
6(c)(iii) above, Employee shall only be required to give prior written notice to
the Corporation.
7. Severance Benefits.
(a) "Cause" Defined. "Cause" means (i) willful malfeasance or willful
misconduct by Employee in connection with his employment; (ii) Employee's gross
negligence in performing any of his duties under this Agreement; (iii)
Employee's conviction of, or entry of a plea of guilty to, or entry of a plea of
nolo contendere with respect to, any crime other than a traffic violation or
infraction which is a misdemeanor; (iv) Employee's material breach of any
written policy applicable to all employees adopted by the Corporation which is
not cured to the reasonable satisfaction of the Corporation within fifteen (15)
business days after notice thereof; or (v) material breach by Employee of any of
his agreements in this Agreement which is not cured to the reasonable
satisfaction of the Corporation within fifteen (15) business days after notice
thereof. Any determination by the Corporation of whether "Cause" exists to
terminate Employee shall be made by the Board, which shall give Employee 5 days'
prior written notice of a meeting to be held for such purpose, which Employee
and his counsel shall be offered an opportunity to attend.
(b) Disability Defined. "Disability" shall mean Employee's incapacity due
to physical or mental illness that results in his being unable to substantially
perform his duties hereunder for six consecutive months (or for six months out
of any nine month period). During a period of Disability, Employee shall
continue to receive his base salary hereunder, provided that if the Corporation
provides Employee with disability insurance coverage, payments of Employee's
base salary shall be reduced by the amount of any disability insurance payments
received by Employee due to such coverage. The Corporation shall give Employee
written notice of termination at the end of such 6 month period, which shall
take effect sixty (60) days after the date it is sent to Employee unless
Employee shall have returned to the performance of his duties hereunder during
such sixty (60) day period (whereupon such notice shall become void).
(c) Termination.
(i) If the Corporation ends the Term for Cause or Disability, or if
Employee resigns as an employee of the Corporation for reasons other than a
material breach by the Corporation of its obligations under this Agreement
or as provided in Section 6(c), or if Employee dies, then the Corporation
shall have no obligation to pay Employee any amount, whether for salary,
benefits, bonuses, or other compensation or expense reimbursements of any
kind, accruing after the end of the Term, and such rights shall, except as
otherwise required by law, be forfeited immediately upon the end of the
Term.
(ii) If the Corporation ends the Term without Cause or if Employee
elects to terminate during the Initial Term or a Renewal Term pursuant to
the provisions of
<PAGE>
Section 6(c)(iii), then the Corporation will be obligated to pay Employee a
severance payment equal to Employee's annual salary, payable upon the
effective date of termination. The "Severance Period", as used herein,
shall in such circumstances equal a period of twelve months.
(iii) If Employee elects to resign during the Initial Term or a
Renewal Term pursuant to Section 6(c)(i) or (ii), then Employee shall
receive a severance payment equal to eight months' salary (or the number of
months remaining in the Initial Term or Renewal Term then in effect, if
less than eight months), payable upon the effective date of resignation.
The "Severance Period", as used herein, shall in such circumstances equal a
period of eight months (or such shorter period, if the number of months
remaining in the Initial Term or the Renewal Term then in effect is less
than eight months). Notwithstanding the foregoing, if Employee is dismissed
without Cause during the four month period following Employee's notice of
resignation pursuant to Section 6(c)(i) or (ii), his severance payment will
be increased by an amount equal to the salary amount he would have received
during the remainder of the four month period had he not been terminated
without Cause. In such instance, the Severance Period will be increased by
the amount of time beginning on the date of the termination without Cause
and ending at the end of the four month period.
(iv) In the event of any termination pursuant to the provisions of
Sections 7(c)(ii) or (iii) above, Employee shall also be entitled to
receive health benefits at the Company's expense for the number of months
equal to the applicable Severance Period.
8. Confidentiality, Ownership, and Covenants.
(a) "Corporation Information" and "Inventions" Defined. "Corporation
Information" means all information, knowledge or data of or pertaining to (i)
the Corporation, its employees, and (ii) any other person, firm, corporation or
business organization with which the Corporation may do business during the
Term, that is not in the public domain (and whether relating to methods,
processes, techniques, discoveries, pricing, marketing or any other matters).
"Inventions" collectively refers to any and all inventions, trade secrets,
source and object codes, data, programs, other works of authorship and
developments regarding any of the foregoing.
(b) Confidentiality. (i) Employee hereby recognizes that the value of all
trade secrets and other proprietary data and all other information of the
Corporation not in the public domain disclosed by the Corporation in the course
of his employment with the Corporation may be attributable substantially to the
fact that such confidential information is maintained by the Corporation in
strict confidentiality and secrecy and would be unavailable to others without
the expenditure of substantial time, effort or money. Employee, therefore,
except as provided in the next two sentences, covenants and agrees that all
Corporation Information shall be kept secret and confidential at all times
during the Term and for the three (3) year period after the end of the Term and
shall not be used or divulged by him outside the scope of his employment as
contemplated by this Agreement, except as the Corporation may otherwise
expressly authorize by action of the Board and except if such Corporation
Information is then in the public domain through no action (or non-action) on
the part of Employee. In the event that Employee is requested in a judicial,
administrative
<PAGE>
or governmental proceeding to disclose any of the Corporation Information,
Employee will promptly so notify the Corporation so that the Corporation may
seek a protective order or other appropriate remedy and/or waive compliance with
this Agreement. If disclosure of any of the Corporation Information is required,
Employee may furnish the material so required to be furnished, but Employee will
furnish only that portion of the Corporation Information that legally is
required.
(ii) Employee also hereby agrees to keep the terms of this Agreement
confidential to the same extent that the Corporation maintains such
confidentiality (except with regard to any disclosure by the Corporation
required under applicable securities laws).
(c) Ownership of Inventions, Patents and Technology. Employee hereby
assigns to the Corporation all of Employee's right (including patent rights,
copyrights, trade secret rights, and all other rights throughout the world),
title and interest in and to Inventions, whether or not patentable or
registrable under copyright or similar statutes, made or conceived or reduced to
practice or learned by Employee, either alone or jointly with others, during the
course of the performance of services for the Corporation. Employee shall also
assign to, or as directed by, the Corporation, all of Employee's right, title
and interest in and to any and all Inventions, the full title to which is
required to be in the United States government by a contract between the
Corporation and the United States government or any of its agencies. The
Corporation shall have all right, title and interest in all research and work
product produced by Employee as an employee of the Corporation.
(d) Non-Competition Period Defined. "Non-Competition Period" means the
period beginning at the end of the Term and ending, in the case of termination
of employment under the circumstances identified in Section 7(c)(i)(other than
in the case of Disability, in which case there shall be no Non-Competition
Period), on the date that is six months after the date of termination of
employment and, in the case of termination of employment under the circumstances
identified in Section 7(c)(ii) or (iii), on the last date of the applicable
Severance Period. If the Term ends solely as a result of either party's timely
election not to renew in accordance with the provisions of Section 1, there
shall be no Non-Competition Period.
(e) Covenants Regarding the Term and Non-Competition Period. Employee
acknowledges and agrees that his services pursuant to this Agreement are unique
and extraordinary; that the Corporation will be dependent upon Employee for; and
that he will have access to and control of confidential information of the
Corporation. Employee further acknowledges that the business of the Corporation
is national in scope and cannot be confined to any particular geographic area of
the United States. For the foregoing reasons and to induce the Corporation to
enter this Agreement, Employee covenants and agrees that during the Term and the
Non-Competition Period, Employee shall not unless with written consent of the
Corporation:
(i) engage in the business of research and development for commercial
sale in direct or indirect competition with the Corporation of any digital
video analysis computer software program, product or process in which the
Corporation had been
<PAGE>
engaged during the last 90 days of the Term (the "Prohibited Activity") in
the United States or elsewhere for his own account;
(ii) directly or indirectly, enter the employ of, or render any
services with respect to any Prohibited Activity only, including but not
limited to consultations, to any individual, corporation, partnership or
other business entity (a "Person") engaged in any Prohibited Activity in
the United States or elsewhere; or
(iii) become interested in any Person engaged in any Prohibited
Activity in the United States, directly or indirectly, as an individual,
partner, shareholder, officer, principal, agent, employee, trustee,
consultant or in any other relationship or capacity; provided, however,
that Employee may serve as a director of any such Person and may own
directly or indirectly, solely as an investment, securities of any Person
which are traded on any national securities exchange if Employee (x) is not
a controlling person of, or a member of a group which controls, such person
or (y) does not, directly or indirectly, own 5% or more of any class of
securities of such person;
(iv) directly or indirectly solicit, entice or induce any person which
at any time during the last 180 days of the Term or during the entire
Non-Competition Period was a customer of the Corporation to become a
customer of any other person for any product or services related to any
Prohibited Activity; or
(v) directly or indirectly hire, employ or retain any person who at
any time during the last 90 days of the Term or during the entire
Non-Competition Period was an employee of the Corporation or directly or
indirectly solicit, entice, induce or encourage any such person to become
employed by any other person.
(f) Remedies. Employee hereby acknowledges that the covenants and
agreements contained in Section 8 (the "Restrictive Covenants") are reasonable
and valid in all respects and that the Corporation is entering into this
Agreement, inter alia, on such acknowledgment. If Employee breaches, or
threatens to commit a breach, of any of the Restrictive Covenants, the
Corporation shall have the following rights and remedies, each of which rights
and remedies shall be independent of the other and severally enforceable, and
all of which rights and remedies shall be in addition to, and not in lieu of,
any other rights and remedies available to the Corporation under law or in
equity: (i) the right and remedy to have the Restrictive Covenants specifically
enforced by any court having equity jurisdiction, it being acknowledged and
agreed that any such breach or threatened breach will cause irreparable injury
to the Corporation and that money damages will not provide an adequate remedy to
the Corporation; (ii) the right and remedy to require Employee to account for
and pay over to the Corporation all compensation, profits, monies, accruals,
increments or other benefits (collectively, "Benefits") derived or received by
Employee as the result of any transactions constituting a breach of any of the
Restrictive Covenants, and Employee shall account for and pay over such Benefits
to the Corporation; (iii) if any court determines that any of the Restrictive
Covenants, or any part thereof, is invalid or unenforceable, the remainder of
the Restrictive Covenants shall not thereby be affected and shall be given full
<PAGE>
effect, without regard to the invalid portions; and (iv) if any court construes
any of the Restrictive Covenants, or any part thereof, to be unenforceable
because of the duration of such provision or the area covered thereby, such
court shall have the power to reduce the duration or area of such provision and,
in its reduced form, such provision shall then be enforceable and shall be
enforced.
(g) Jurisdiction. The parties intend to and hereby confer jurisdiction to
enforce the Restrictive Covenants upon the courts of any jurisdiction within the
geographical scope of such Covenants. If the courts of any one or more such
jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of
the breadth of such scope or otherwise, it is the intention of the parties that
such determination not bar or in any way affect the Corporation's right to the
relief provided above in the courts of any other jurisdiction, within the
geographical scope of such Covenants, as to breaches of such Covenants in such
other respective jurisdictions such Covenants as they relate to each
jurisdiction being, for this purpose, severable into diverse and independent
covenants.
9. Successors and Assigns.
(a) Employee. This Agreement is a personal contract, and the rights and
interests that the Agreement accords to Employee may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him. All rights and benefits
of Employee shall be for the sole personal benefit of Employee, and no other
person shall acquire any right, title or interest under this Agreement by reason
of any sale, assignment, transfer, claim or judgment or bankruptcy proceedings
against Employee. Except as so provided, this Agreement shall inure to the
benefit of and be binding upon Employee and his personal representatives,
distributees and legatees.
(b) The Corporation. This Agreement shall be binding upon the Corporation
and inure to the benefit of the Corporation and of its successors and assigns,
including (but not limited to) any corporation that may acquire all or
substantially all of the Corporation's assets or business or into or with which
the Corporation may be consolidated or merged. The Corporation's obligations
under this Agreement shall cease, however, if the successor to, the purchaser or
acquirer either of the Corporation or of all or substantially all of its assets,
or the entity with which the Corporation has affiliated, shall assume in writing
the Corporation's obligations under this Agreement (and deliver an executed copy
of such assumption to Employee), in which case such successor or purchaser, but
not the Corporation, shall thereafter be the only party obligated to perform the
obligations that remain to be performed on the part of the Corporation under
this Agreement.
10. Entire Agreement. This Agreement represents the entire agreement
between the parties concerning Employee's employment with the Corporation and
supersedes all prior negotiations, discussions, understandings and agreements,
whether written or oral, between Employee and the Corporation relating to the
subject matter of this Agreement, including but not limited to the Employment
Agreement dated as of January 1, 1966 between the Corporation and Employee.
<PAGE>
11. Amendment or Modification, Waiver. No provision of this Agreement may
be amended or waived unless such amendment or waiver is agreed to in writing
signed by Employee and by a duly authorized officer of the Corporation. No
waiver by any party to this Agreement of any breach by another party of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
12. Notices. Any notice to be given under this Agreement shall be in
writing and delivered personally or sent by overnight courier or registered or
certified mail, postage prepaid, return receipt requested, addressed to the
party concerned at the address indicated below, or to such other address of
which such party subsequently may give notice in writing:
If to Employee: Thomas Stigler
937 Kagawa Street
Pacific Palisades, CA 90272
If to the Corporation: Digital LAVA, Inc.
10850 Wilshire Boulevard, Suite 1260
Los Angeles, CA 90024
Fax: 310-470-1769
Attention: Chairman
with a copy to: Ehrenreich Eilenberg Krause & Zivian LLP
11 East 44th Street, 17th Floor
New York, NY 10017
Fax: 212-986-2399
Attention: Jeffrey D. Abbey, Esq.
Any notice delivered personally or by overnight courier shall be deemed given on
the date delivered and any notice sent by registered or certified mail, postage
prepaid, return receipt requested, shall be deemed given on the date mailed.
13. Severability. If any provision of this Agreement or the application of
any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable shall not be affected, and each provision of this
Agreement shall be validated and shall be enforced to the fullest extent
permitted by law. If for any reason any provision of this Agreement containing
restrictions is held to cover an area or to be for a length of time that is
unreasonable or in any other way is construed to be too broad or to any extent
invalid, such provision shall not be determined to be entirely null, void and of
no effect; instead, it is the intention and desire of both the Corporation and
Employee that, to the extent that the provision is or would be valid or
enforceable under applicable law, any court of competent jurisdiction shall
construe and interpret or reform this Agreement to provide for a restriction
having the maximum enforceable area, time period and such other constraints or
conditions (although not greater
<PAGE>
than those contained currently contained in this Agreement) as shall be valid
and enforceable under the applicable law.
14. Survivorship. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
15. Headings. All descriptive headings of sections and paragraphs in this
Agreement are intended solely for convenience of reference, and no provision of
this Agreement is to be construed by reference to the heading of any section or
paragraph.
16. Withholding Taxes. All salary, benefits, reimbursements and any
other payments to Employee under this Agreement shall be subject to all
applicable payroll and withholding taxes and deductions required by any law,
rule or regulation of and federal, state or local authority.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together constitute one and same instrument.
18. Applicable Law; Arbitration. The validity, interpretation and
enforcement of this Agreement and any amendments or modifications hereto shall
be governed by the laws of the State of California, as applied to a contract
executed within and to be performed in such State. The parties agree that any
disputes shall be definitively resolved by binding arbitration before the
American Arbitration Association in Los Angeles, California and consent to the
jurisdiction to the federal court located in Los Angeles, California or, if
there shall be no jurisdiction, to the state courts located in Los Angeles,
California, to enforce any arbitration award rendered with respect thereto. Each
party shall choose one arbitrator and the two arbitrators shall choose a third
arbitrator. All costs and fees related to such arbitration (and judicial
enforcement proceedings, if any) shall be borne by the unsuccessful party.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
DIGITAL LAVA, INC.
By: /s/ James Stigler
----------------------------
James Stigler, Chairman
/s/ Thomas Stigler
----------------------------
Thomas Stigler
EXHIBIT 10 (b)
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), effective as of September 1,
1998 between Digital LAVA, Inc., a Delaware corporation (with its successors and
assigns, referred to as the "Corporation"), and Joshua D.J. Sharfman (referred
to as "Employee").
Preliminary Statement
The Corporation desires to employ Employee, and Employee wishes to be
employed by the Corporation, upon the terms and subject to the conditions set
forth in this Agreement. The Corporation and Employee also wish to enter into
the other agreements set forth in this Agreement, all of which are related to
Employee's employment under this Agreement.
Agreement
Employee and the Corporation therefore agree as follows:
1. Employment for Term. The Corporation hereby employs Employee and
Employee hereby accepts employment with the Corporation for the period beginning
on the date (the "Commencement Date") of the consummation of the Corporation's
initial public offering (the "IPO") and ending on the two-year anniversary of
such date (the "Initial Term"), or upon the earlier termination of the Term
pursuant to Section 6. This Agreement shall be automatically renewed for
additional one-year periods (the "Renewal Terms;" together with the Initial
Term, the "Term") unless either party notifies the other in writing of its
intention not to so renew this Agreement no less than 180 days prior to the
expiration of the Initial Term or a Renewal Term. The termination of Employee's
employment under this Agreement shall end the Term but shall not terminate
Employee's or the Corporation's other agreements in this Agreement, except as
otherwise provided herein.
2. Position and Duties. During the Term, Employee shall serve as President
and Chief Executive Officer of the Corporation. During the Term, Employee shall
also hold such additional positions and titles as the Board of Directors of the
Corporation (the "Board") may determine from time to time. During the Term,
Employee shall devote his full business time and efforts to his duties as an
employee of the Corporation.
3. Compensation.
(a) Base Salary. The Corporation shall pay Employee a base salary,
beginning on the first day of the Term and ending on the last day of the Term,
of not less than $230,000 per annum, payable at least monthly on the
Corporation's regular pay cycle for professional employees.
<PAGE>
(b) Additional Payment. Upon the Commencement Date, Employee shall receive
a payment of $60,000 in consideration for his efforts in connection with the
successful completion of the IPO.
(c) Stock Options. Pursuant to the Corporation's stock option plan, the
Corporation shall grant to Employee on the Commencement Date options under the
Corporation's 1996 Stock Option Plan to purchase 40,000 shares of the
Corporation's Common Stock (on a post-reverse split basis) at an exercise price
equal to the initial public offering price of the Common Stock of the
Corporation. The options shall be fully vested as of the Commencement Date and
shall expire on the tenth anniversary of the Commencement Date, regardless of
whether there has been any prior termination of Employee's status as an employee
with or consultant to the Corporation. The Corporation will prepare a stock
option agreement reflecting the terms of the option as provided herein.
(d) Other and Additional Compensation. The preceding sections establish the
minimum compensation during the Term and shall not preclude the Board from
awarding Employee a higher salary or any bonuses or stock options in the
discretion of the Board during the Term at any time.
4. Employee Benefits. During the Term, Employee shall be entitled to the
employee benefits, including vacation, 401(k) plan, health plan and other
insurance and additional benefits made available by the Corporation to any other
employee of the Corporation.
5. Expenses. The Corporation shall reimburse Employee for actual
out-of-pocket expenses incurred by him in the performance of his services for
the Corporation upon the receipt of appropriate documentation of such expenses.
6. Termination.
(a) General. The Term shall end immediately upon Employee's death. The Term
may also end for Cause or Disability, as defined in Section 7.
(b) Notice of Termination. Promptly after it ends the Term, the Corporation
shall give Employee notice of the termination, including a statement of whether
the termination was for Cause or Disability (as defined in Section 7(a) and 7(b)
below). The Corporation's failure to give notice under this Section 6(b) shall
not, however, affect the validity of the Corporation's termination of the Term.
(c) Effective Termination by Corporation. If, during the Initial Term or
any Renewal Term, the Corporation (i) appoints an executive officer senior in
position or responsibility to Employee, (ii) designates such executive officer
or any other person as the President or Chief Executive Officer of the
Corporation, or (iii) requires Employee to perform a material portion of his
services at a location more than 25 miles from the Corporation's current
location in Los Angeles, then, at his option, Employee may elect to resign, and
receive the applicable severance benefits set forth in Section 7(c)(ii) or (iii)
<PAGE>
below. In the case of Section 6(c)(i) or (ii) above, Employee shall give four
(4) months' prior written notice to the Corporation of such resignation, and in
the case of 6(c)(iii) above, Employee shall only be required to give prior
written notice to the Corporation.
7. Severance Benefits.
(a) "Cause" Defined. "Cause" means (i) willful malfeasance or willful
misconduct by Employee in connection with his employment; (ii) Employee's gross
negligence in performing any of his duties under this Agreement; (iii)
Employee's conviction of, or entry of a plea of guilty to, or entry of a plea of
nolo contendere with respect to, any crime other than a traffic violation or
infraction which is a misdemeanor; (iv) Employee's material breach of any
written policy applicable to all employees adopted by the Corporation which is
not cured to the reasonable satisfaction of the Corporation within fifteen (15)
business days after notice thereof; or (v) material breach by Employee of any of
his agreements in this Agreement which is not cured to the reasonable
satisfaction of the Corporation within fifteen (15) business days after notice
thereof. Any determination by the Corporation of whether "Cause" exists to
terminate Employee shall be made by the Board, which shall give Employee 5 days'
prior written notice of a meeting to be held for such purpose, which Employee
and his counsel shall be offered an opportunity to attend.
(b) Disability Defined. "Disability" shall mean Employee's incapacity due
to physical or mental illness that results in his being unable to substantially
perform his duties hereunder for six consecutive months (or for six months out
of any nine month period). During a period of Disability, Employee shall
continue to receive his base salary hereunder, provided that if the Corporation
provides Employee with disability insurance coverage, payments of Employee's
base salary shall be reduced by the amount of any disability insurance payments
received by Employee due to such coverage. The Corporation shall give Employee
written notice of termination at the end of such 6 month period, which shall
take effect sixty (60) days after the date it is sent to Employee unless
Employee shall have returned to the performance of his duties hereunder during
such sixty (60) day period (whereupon such notice shall become void).
(c) Termination.
(i) If the Corporation ends the Term for Cause or Disability, or if
Employee resigns as an employee of the Corporation for reasons other than a
material breach by the Corporation of its obligations under this Agreement
or as provided in Section 6(c), or if Employee dies, then the Corporation
shall have no obligation to pay Employee any amount, whether for salary,
benefits, bonuses, or other compensation or expense reimbursements of any
kind, accruing after the end of the Term, and such rights shall, except as
otherwise required by law, be forfeited immediately upon the end of the
Term.
(ii) If the Corporation ends the Term without Cause or if Employee
elects to terminate during the Initial Term or a Renewal Term pursuant to
the provisions of Section 6(c)(iii), then the Corporation will be obligated
to pay Employee a severance payment equal to Employee's annual salary,
payable upon the effective date of termination.
<PAGE>
The "Severance Period", as used herein, shall in such circumstances equal a
period of twelve months.
(iii) If Employee elects to resign during the Initial Term or a
Renewal Term pursuant to Section 6(c)(i) or (ii), then Employee shall
receive a severance payment equal to eight months' salary (or the number of
months remaining in the Initial Term or Renewal Term then in effect, if
less than eight months), payable upon the effective date of resignation.
The "Severance Period", as used herein, shall in such circumstances equal a
period of eight months (or such shorter period, if the number of months
remaining in the Initial Term or the Renewal Term then in effect is less
than eight months). Notwithstanding the foregoing, if Employee is dismissed
without Cause during the four month period following Employee's notice of
resignation pursuant to Section 6(c)(i) or (ii), his severance payment will
be increased by an amount equal to the salary amount he would have received
during the remainder of the four month period had he not been terminated
without Cause. In such instance, the Severance Period will be increased by
the amount of time beginning on the date of the termination without Cause
and ending at the end of the four month period.
(iv) In the event of any termination pursuant to the provisions of
Sections 7(c)(ii) or (iii) above, Employee shall also be entitled to
receive health benefits at the Company's expense for the number of months
equal to the applicable Severance Period.
8. Confidentiality, Ownership, and Covenants.
(a) "Corporation Information" and "Inventions" Defined. "Corporation
Information" means all information, knowledge or data of or pertaining to (i)
the Corporation, its employees, and (ii) any other person, firm, corporation or
business organization with which the Corporation may do business during the
Term, that is not in the public domain (and whether relating to methods,
processes, techniques, discoveries, pricing, marketing or any other matters).
"Inventions" collectively refers to any and all inventions, trade secrets,
source and object codes, data, programs, other works of authorship and
developments regarding any of the foregoing.
(b) Confidentiality. (i) Employee hereby recognizes that the value of all
trade secrets and other proprietary data and all other information of the
Corporation not in the public domain disclosed by the Corporation in the course
of his employment with the Corporation may be attributable substantially to the
fact that such confidential information is maintained by the Corporation in
strict confidentiality and secrecy and would be unavailable to others without
the expenditure of substantial time, effort or money. Employee, therefore,
except as provided in the next two sentences, covenants and agrees that all
Corporation Information shall be kept secret and confidential at all times
during the Term and for the three (3) year period after the end of the Term and
shall not be used or divulged by him outside the scope of his employment as
contemplated by this Agreement, except as the Corporation may otherwise
expressly authorize by action of the Board and except if such Corporation
Information is then in the public domain through no action (or non-action) on
the part of Employee. In the event that Employee is requested in a judicial,
administrative or governmental proceeding to disclose any of the Corporation
Information, Employee will promptly so notify the Corporation so that the
Corporation may seek a protective order or
<PAGE>
other appropriate remedy and/or waive compliance with this Agreement. If
disclosure of any of the Corporation Information is required, Employee may
furnish the material so required to be furnished, but Employee will furnish only
that portion of the Corporation Information that legally is required.
(ii) Employee also hereby agrees to keep the terms of this Agreement
confidential to the same extent that the Corporation maintains such
confidentiality (except with regard to any disclosure by the Corporation
required under applicable securities laws).
(c) Ownership of Inventions, Patents and Technology. Employee hereby
assigns to the Corporation all of Employee's right (including patent rights,
copyrights, trade secret rights, and all other rights throughout the world),
title and interest in and to Inventions, whether or not patentable or
registrable under copyright or similar statutes, made or conceived or reduced to
practice or learned by Employee, either alone or jointly with others, during the
course of the performance of services for the Corporation. Employee shall also
assign to, or as directed by, the Corporation, all of Employee's right, title
and interest in and to any and all Inventions, the full title to which is
required to be in the United States government by a contract between the
Corporation and the United States government or any of its agencies. The
Corporation shall have all right, title and interest in all research and work
product produced by Employee as an employee of the Corporation.
(d) Non-Competition Period Defined. "Non-Competition Period" means the
period beginning at the end of the Term and ending, in the case of termination
of employment under the circumstances identified in Section 7(c)(i)(other than
in the case of Disability, in which case there shall be no Non-Competition
Period), on the date that is six months after the date of termination of
employment and, in the case of termination of employment under the circumstances
identified in Section 7(c)(ii) or (iii), on the last date of the applicable
Severance Period. If the Term ends solely as a result of either party's timely
election not to renew in accordance with the provisions of Section 1, there
shall be no Non-Competition Period.
(e) Covenants Regarding the Term and Non-Competition Period. Employee
acknowledges and agrees that his services pursuant to this Agreement are unique
and extraordinary; that the Corporation will be dependent upon Employee for; and
that he will have access to and control of confidential information of the
Corporation. Employee further acknowledges that the business of the Corporation
is national in scope and cannot be confined to any particular geographic area of
the United States. For the foregoing reasons and to induce the Corporation to
enter this Agreement, Employee covenants and agrees that during the Term and the
Non-Competition Period, Employee shall not unless with written consent of the
Corporation:
(i) engage in the business of research and development for commercial
sale in direct or indirect competition with the Corporation of any digital
video analysis computer software program, product or process in which the
Corporation had been engaged during the last 90 days of the Term (the
"Prohibited Activity") in the United States or elsewhere for his own
account;
<PAGE>
(ii) directly or indirectly, enter the employ of, or render any
services with respect to a Prohibited Activity only, including but not
limited to consultations, to any individual, corporation, partnership or
other business entity (a "Person") engaged in any Prohibited Activity in
the United States or elsewhere; or
(iii) become interested in any Person engaged in any Prohibited
Activity in the United States, directly or indirectly, as an individual,
partner, shareholder, officer, principal, agent, employee, trustee,
consultant or in any other relationship or capacity; provided, however,
that Employee may serve as a director of any such Person and may own
directly or indirectly, solely as an investment, securities of any Person
which are traded on any national securities exchange if Employee (x) is not
a controlling person of, or a member of a group which controls, such person
or (y) does not, directly or indirectly, own 5% or more of any class of
securities of such person;
(iv) directly or indirectly solicit, entice or induce any person which
at any time during the last 180 days of the Term or during the entire
Non-Competition Period was a customer of the Corporation to become a
customer of any other person for any product or services related to any
Prohibited Activity; or
(v) directly or indirectly hire, employ or retain any person who at
any time during the last 90 days of the Term or during the entire
Non-Competition Period was an employee of the Corporation or directly or
indirectly solicit, entice, induce or encourage any such person to become
employed by any other person.
(f) Remedies. Employee hereby acknowledges that the covenants and
agreements contained in Section 8 (the "Restrictive Covenants") are reasonable
and valid in all respects and that the Corporation is entering into this
Agreement, inter alia, on such acknowledgment. If Employee breaches, or
threatens to commit a breach, of any of the Restrictive Covenants, the
Corporation shall have the following rights and remedies, each of which rights
and remedies shall be independent of the other and severally enforceable, and
all of which rights and remedies shall be in addition to, and not in lieu of,
any other rights and remedies available to the Corporation under law or in
equity: (i) the right and remedy to have the Restrictive Covenants specifically
enforced by any court having equity jurisdiction, it being acknowledged and
agreed that any such breach or threatened breach will cause irreparable injury
to the Corporation and that money damages will not provide an adequate remedy to
the Corporation; (ii) the right and remedy to require Employee to account for
and pay over to the Corporation all compensation, profits, monies, accruals,
increments or other benefits (collectively, "Benefits") derived or received by
Employee as the result of any transactions constituting a breach of any of the
Restrictive Covenants, and Employee shall account for and pay over such Benefits
to the Corporation; (iii) if any court determines that any of the Restrictive
Covenants, or any part thereof, is invalid or unenforceable, the remainder of
the Restrictive Covenants shall not thereby be affected and shall be given full
effect, without regard to the invalid portions; and (iv) if any court construes
any of the Restrictive Covenants, or any part thereof, to be unenforceable
because of the duration of such provision or the area covered thereby, such
court shall have the power to reduce the
<PAGE>
duration or area of such provision and, in its reduced form, such provision
shall then be enforceable and shall be enforced.
(g) Jurisdiction. The parties intend to and hereby confer jurisdiction to
enforce the Restrictive Covenants upon the courts of any jurisdiction within the
geographical scope of such Covenants. If the courts of any one or more such
jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of
the breadth of such scope or otherwise, it is the intention of the parties that
such determination not bar or in any way affect the Corporation's right to the
relief provided above in the courts of any other jurisdiction, within the
geographical scope of such Covenants, as to breaches of such Covenants in such
other respective jurisdictions such Covenants as they relate to each
jurisdiction being, for this purpose, severable into diverse and independent
covenants.
9. Successors and Assigns.
(a) Employee. This Agreement is a personal contract, and the rights and
interests that the Agreement accords to Employee may not be sold, transferred,
assigned, pledged, encumbered, or hypothecated by him. All rights and benefits
of Employee shall be for the sole personal benefit of Employee, and no other
person shall acquire any right, title or interest under this Agreement by reason
of any sale, assignment, transfer, claim or judgment or bankruptcy proceedings
against Employee. Except as so provided, this Agreement shall inure to the
benefit of and be binding upon Employee and his personal representatives,
distributees and legatees.
(b) The Corporation. This Agreement shall be binding upon the Corporation
and inure to the benefit of the Corporation and of its successors and assigns,
including (but not limited to) any corporation that may acquire all or
substantially all of the Corporation's assets or business or into or with which
the Corporation may be consolidated or merged. The Corporation's obligations
under this Agreement shall cease, however, if the successor to, the purchaser or
acquirer either of the Corporation or of all or substantially all of its assets,
or the entity with which the Corporation has affiliated, shall assume in writing
the Corporation's obligations under this Agreement (and deliver an executed copy
of such assumption to Employee), in which case such successor or purchaser, but
not the Corporation, shall thereafter be the only party obligated to perform the
obligations that remain to be performed on the part of the Corporation under
this Agreement.
10. Entire Agreement. This Agreement represents the entire agreement
between the parties concerning Employee's employment with the Corporation and
supersedes all prior negotiations, discussions, understandings and agreements,
whether written or oral, between Employee and the Corporation relating to the
subject matter of this Agreement, including but not limited to the Employment
Agreement dated as of April 1, 1966 between the Corporation and Employee.
11. Amendment or Modification, Waiver. No provision of this Agreement may
be amended or waived unless such amendment or waiver is agreed to in writing
signed by Employee and by a duly authorized officer of the Corporation. No
waiver by any party
<PAGE>
to this Agreement of any breach by another party of any condition or provision
of this Agreement to be performed by such other party shall be deemed a waiver
of a similar or dissimilar condition or provision at the same time, any prior
time or any subsequent time.
12. Notices. Any notice to be given under this Agreement shall be in
writing and delivered personally or sent by overnight courier or registered or
certified mail, postage prepaid, return receipt requested, addressed to the
party concerned at the address indicated below, or to such other address of
which such party subsequently may give notice in writing:
If to Employee: Joshua D.J. Sharfman
9425 Duxbury Road
Los Angeles, CA 90034
If to the Corporation: Digital LAVA, Inc.
10850 Wilshire Boulevard, Suite 1260
Los Angeles, CA 90024
Fax: 310-470-1769
Attention: Chairman
with a copy to: Ehrenreich Eilenberg Krause & Zivian LLP
11 East 44th Street, 17th Floor
New York, NY 10017
Fax: 212-986-2399
Attention: Jeffrey D. Abbey, Esq.
Any notice delivered personally or by overnight courier shall be deemed given on
the date delivered and any notice sent by registered or certified mail, postage
prepaid, return receipt requested, shall be deemed given on the date mailed.
13. Severability. If any provision of this Agreement or the application of
any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable shall not be affected, and each provision of this
Agreement shall be validated and shall be enforced to the fullest extent
permitted by law. If for any reason any provision of this Agreement containing
restrictions is held to cover an area or to be for a length of time that is
unreasonable or in any other way is construed to be too broad or to any extent
invalid, such provision shall not be determined to be entirely null, void and of
no effect; instead, it is the intention and desire of both the Corporation and
Employee that, to the extent that the provision is or would be valid or
enforceable under applicable law, any court of competent jurisdiction shall
construe and interpret or reform this Agreement to provide for a restriction
having the maximum enforceable area, time period and such other constraints or
conditions (although not greater than those contained currently contained in
this Agreement) as shall be valid and enforceable under the applicable law.
<PAGE>
14. Survivorship. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
15. Headings. All descriptive headings of sections and paragraphs in this
Agreement are intended solely for convenience of reference, and no provision of
this Agreement is to be construed by reference to the heading of any section or
paragraph.
16. Withholding Taxes. All salary, benefits, reimbursements and any other
payments to Employee under this Agreement shall be subject to all applicable
payroll and withholding taxes and deductions required by any law, rule or
regulation of and federal, state or local authority.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together constitute one and same instrument.
18. Applicable Law; Arbitration. The validity, interpretation and
enforcement of this Agreement and any amendments or modifications hereto shall
be governed by the laws of the State of California, as applied to a contract
executed within and to be performed in such State. The parties agree that any
disputes shall be definitively resolved by binding arbitration before the
American Arbitration Association in Los Angeles, California and consent to the
jurisdiction to the federal court located in Los Angeles, California or, if
there shall be no jurisdiction, to the state courts located in Los Angeles,
California, to enforce any arbitration award rendered with respect thereto. Each
party shall choose one arbitrator and the two arbitrators shall choose a third
arbitrator. All costs and fees related to such arbitration (and judicial
enforcement proceedings, if any) shall be borne by the unsuccessful party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
DIGITAL LAVA, INC.
By: /s/ James Stigler
---------------------------
James Stigler, Chairman
/s/ Joshua D.J. Sharfman
---------------------------
Joshua D.J. Sharfman
EXHIBIT 10 (c)
<PAGE>
Dated as of September 1, 1998
Mr. Roger Berman
11 Sagamore Road
Maplewood, New Jersey 07040
Dear Mr. Berman:
We are delighted you have agreed to serve as a consultant to Digital LAVA, Inc.
(the "Company"). In this letter, I would like to present the terms of your
engagement with the Company.
1. Duties and Term. In connection with your engagement, you will consult with
the Company concerning financial matters as the President or Chief Executive
Officer may request from time to time. Your engagement will commence only upon
the closing of the Company's initial public offering of its securities (the
"IPO") and will end on the second anniversary of such date. During your
engagement you agree to such time as may be necessary to your consulting duties.
2. Compensation. In consideration of your services, you will receive payments at
the rate of $5,000 per month during the term of your engagement, payable on the
last day of each month. In addition, upon the closing of the IPO, you will
receive a one-time cash payment of $60,000.
3. Other Benefits. You will not be entitled to any other compensation or
benefits for your services, regardless of the compensation or benefits offered
by the Company to its employees or other consultants. The Company will reimburse
you for actual out-of-pocket expenses incurred by you in the performance of your
services provided that such expenditures have been approved in advance by an
officer of the Company in writing.
4. Confidentiality. As a consultant to the Company, you may have access to
information about the Company and third parties which is confidential in nature.
You agree that you will not disclose any such information to any other person or
entity, nor shall you use such information for any purpose other than the
performance of your duties with the Company.
5. Miscellaneous. The agreements set forth in this letter are personal, and your
rights set forth above may not be transferred or assigned by you. This letter
agreement represents
<PAGE>
the entire agreement between you and the Company concerning your consulting and
supersedes all prior negotiations and agreements, whether written or oral,
relating to your engagement.
This letter agreement may not be amended or waived unless pursuant to a
writing signed by you and an officer of the Company. No waiver of any term of
this letter agreement or of any breach of any condition or provision to be
performed under this letter agreement shall be deemed a waiver of a similar or
dissimilar condition or provision at the same time, any prior time or any
subsequent time.
You will bear full and complete liability for the payment of all applicable
income, payroll, withholding and other taxes and deductions required to be paid
on account of amounts received by you pursuant to this Agreement by any law,
rule or regulation of any federal, state or local authority.
The laws of the State of California shall govern the interpretation,
validity and performance of the terms of this letter agreement, without
reference to conflicts of law rules.
You agree that you are an independent contractor to, and not an employee or
agent of, the Company, and that you do not have any authority or right to enter
into any agreements or binding obligations on behalf of the Company.
******
To acknowledge your agreement to the terms of your engagement set forth
above, please sign a copy of this letter where indicated and return it to me at
your earliest convenience.
Digital LAVA, Inc.
By: /s/ Danny Gampe
--------------------------
An Authorized Officer
Accepted and Agreed the
date first written above
/s/ Roger Berman
- --------------------------
Consultant
EXHIBIT 10 (d)
<PAGE>
Dated as of September 1, 1998
Dr. James Stigler
418 Arbramar Avenue
Pacific Palisades, CA 90034
Dear Dr. Stigler:
We are delighted you have agreed to serve as a consultant to Digital LAVA, Inc.
(the "Company"). In this letter, I would like to present the terms of your
engagement with the Company.
1. Duties and Term. In connection with your engagement, you will consult with
the Company concerning development, strategic and financial matters as the
President or Chief Executive Officer may request from time to time. Your
engagement will commence only upon the closing of the Company's initial public
offering of its securities (the "IPO") and will end on the second anniversary of
such date. During your engagement you agree to such time as may be necessary to
your consulting duties.
2. Compensation. In consideration of your services, you will receive payments at
the rate of $2,000 per month during the term of your engagement, payable on the
last day of each month. In addition, upon the closing of the IPO, you will
receive a one-time cash payment of $40,000.
3. Other Benefits. You will not be entitled to any other compensation or
benefits for your services, regardless of the compensation or benefits offered
by the Company to its employees or other consultants. The Company will reimburse
you for actual out-of-pocket expenses incurred by you in the performance of your
services provided that such expenditures have been approved in advance by an
officer of the Company in writing.
4. Confidentiality. As a consultant to the Company, you may have access to
information about the Company and third parties which is confidential in nature.
You agree that you will not disclose any such information to any other person or
entity, nor shall you use such information for any purpose other than the
performance of your duties with the Company.
5. Miscellaneous. The agreements set forth in this letter are personal, and your
rights set forth above may not be transferred or assigned by you. This letter
agreement represents the entire agreement between you and the Company concerning
your consulting and
<PAGE>
supersedes all prior negotiations and agreements, whether written or oral,
relating to your engagement.
This letter agreement may not be amended or waived unless pursuant to a
writing signed by you and an officer of the Company. No waiver of any term of
this letter agreement or of any breach of any condition or provision to be
performed under this letter agreement shall be deemed a waiver of a similar or
dissimilar condition or provision at the same time, any prior time or any
subsequent time.
You will bear full and complete liability for the payment of all applicable
income, payroll, withholding and other taxes and deductions required to be paid
on account of amounts received by you pursuant to this Agreement by any law,
rule or regulation of any federal, state or local authority.
The laws of the State of California shall govern the interpretation,
validity and performance of the terms of this letter agreement, without
reference to conflicts of law rules.
You agree that you are an independent contractor to, and not an employee or
agent of, the Company, and that you do not have any authority or right to enter
into any agreements or binding obligations on behalf of the Company.
******
To acknowledge your agreement to the terms of your engagement set forth
above, please sign a copy of this letter where indicated and return it to me at
your earliest convenience.
Digital LAVA, Inc.
By: /s/ Danny Gampe
------------------------
An Authorized Officer
Accepted and Agreed the
date first written above
/s/ James Stigler
--------------------------
Consultant
EXHIBIT 10 (e)
<PAGE>
Dated as of September 1, 1998
Prism Ventures LLC
420 Lexington Avenue, Suite 616
New York, NY 10170
Dear Sirs:
This letter agreement sets forth the terms of your engagement as a
consultant to Digital LAVA, Inc. (the "Company") during 1998. This letter
agreement supercedes and replaces the letter agreement between you and the
Company, dated October 30, 1997.
1. Duties and Term. In connection with your engagement, you have consulted, and
will continue to consult, with the Company concerning financial matters as the
President or Chief Executive Officer has requested, and may request, from time
to time. Your engagement commenced on January 1, 1998 and will end on December
31, 1998.
2. Compensation. In consideration of your services, you will receive payment of
$300,000. The compensation due to you will be paid on the earlier of (i) the
successful completion of an initial public offering of the Company's securities
or (ii) December 31, 1998.
3. Other Benefits. You will not be entitled to any other compensation or
benefits for your services, regardless of the compensation or benefits offered
by the Company to its employees or other consultants. The Company will reimburse
you for actual out-of-pocket expenses incurred by you in the performance of your
services provided that such expenditures have been approved in advance by an
officer of the Company in writing.
4. Confidentiality. As a consultant to the Company, you may have access to
information about the Company and third parties which is confidential in nature.
You agree that you will not disclose any such information to any other person or
entity, nor shall you use such information for any purpose other than the
performance of your duties with the Company.
5. Miscellaneous. The agreements set forth in this letter are personal, and your
rights set forth above may not be transferred or assigned by you. This letter
agreement represents the entire agreement between you and the Company concerning
your consulting and supersedes all prior negotiations and agreements, whether
written or oral, relating to your engagement.
This letter agreement may not be amended or waived unless pursuant to a
writing signed by you and an officer of the Company. No waiver of any term of
this letter agreement or of any breach of any condition or provision to be
performed under this letter
<PAGE>
agreement shall be deemed a waiver of a similar or dissimilar condition or
provision at the same time, any prior time or any subsequent time.
You will bear full and complete liability for the payment of all applicable
income, payroll, withholding and other taxes and deductions required to be paid
on account of amounts received by you pursuant to this Agreement by any law,
rule or regulation of any federal, state or local authority.
The laws of the State of California shall govern the interpretation,
validity and performance of the terms of this letter agreement, without
reference to conflicts of law rules.
You agree that you are an independent contractor to, and not an employee or
agent of, the Company, and that you do not have any authority or right to enter
into any agreements or binding obligations on behalf of the Company.
******
To acknowledge your agreement to the terms of your engagement set forth
above, please sign a copy of this letter where indicated and return it to me at
your earliest convenience.
Digital LAVA, Inc.
By: /s/ Danny Gampe
---------------------------
An Authorized Officer
Accepted and Agreed the
date first written above
PRISM VENTURES LLC
By: /s/ Judson Cooper
-------------------------
Member
EXHIBIT 23 (b)
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form SB-2 of our report dated July 31, 1998, except as
to Note 12 which is as of October 22, 1998, relating to the financial statements
of Digital Lava Inc., which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
October 23, 1998
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