<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1103425
(State of incorporation) (I.R.S. Employer Identification No.)
The Campus 5966 La Place Court, Carlsbad, California 92008
(Address of principal executive offices) (Zip Code)
(760) 438-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
----- -----
At November 16, 1998 the registrant had 28,073,000 shares of common stock,
$.005 par value, outstanding.
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PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
2
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
------------------ ----------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,647,000 4,764,000
Accounts receivable, net 2,062,000 2,724,000
Prepaid expenses and other current assets 1,071,000 902,000
------------------ ----------------------
Total current assets 7,780,000 8,390,000
Broadcast equipment and fixed assets, net 7,759,000 7,973,000
Software development costs, net 2,344,000 3,697,000
Note receivable 70,000 --
Other assets 126,000 211,000
------------------ ----------------------
Total assets $ 18,079,000 20,271,000
================== ======================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable 474,000 914,000
Accrued expenses 1,981,000 4,006,000
Accrual for management severance 764,000 1,154,000
Obligations under capital lease 202,000 46,000
Deferred revenue 612,000 1,483,000
Customer deposits 658,000 770,000
------------------ ----------------------
Total current liabilities 4,691,000 8,373,000
Obligations under capital lease 340,000 179,000
Accrual for settlement warrants 1,631,000 1,516,000
Accrual for management severance 775,000 1,093,000
Other long-term liabilities 107,000 384,000
------------------ ----------------------
Total liabilities 7,544,000 11,545,000
------------------ ----------------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock,
$.005 par value, 10,000,000 shares authorized;
161,000 issued and outstanding at September 30, 1998
and December 31, 1997 1,000 1,000
Series B 4% cumulative convertible preferred stock,
$.005 par value, 85,000 shares authorized; 56,000 and
70,000 shares issued and outstanding at September 30, 1998
and December 31, 1997, respectively 1,000 1,000
Common stock, $.005 par value, 50,000,000 shares authorized;
28,073,000 and 23,677,000 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 140,000 118,000
Additional paid-in capital 72,337,000 70,541,000
Accumulated deficit (58,945,000) (58,596,000)
Treasury stock, 330,000 and 782,000 shares at September 30,
1998 and December 31, 1997, respectively, at cost (2,999,000) (3,339,000)
------------------ ----------------------
Total shareholders' equity 10,535,000 8,726,000
------------------ ----------------------
Total liabilities and shareholders' equity $ 18,079,000 20,271,000
================== ======================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------- -----------------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Network services $ 4,565,000 4,981,000 13,975,000 14,301,000
Online/Internet services 506,000 825,000 1,680,000 2,381,000
Advertising revenues 226,000 313,000 642,000 747,000
Other revenues 506,000 720,000 1,607,000 2,211,000
------------------- ------------------ ------------------- -------------------
Total revenues 5,803,000 6,839,000 17,904,000 19,640,000
------------------- ------------------ ------------------- -------------------
Operating expenses:
Direct operating costs 1,189,000 1,496,000 3,671,000 5,524,000
Selling, general and
administrative 2,857,000 4,013,000 9,061,000 13,844,000
Litigation, legal and professional
fees 231,000 268,000 887,000 1,326,000
Equipment lease expense 267,000 233,000 774,000 699,000
Stock-based compensation expense -- 284,000 165,000 2,797,000
Depreciation and amortization 1,314,000 1,481,000 4,075,000 3,905,000
Research and development 254,000 -- 474,000 800,000
------------------- ------------------ ------------------- -------------------
Total operating expenses 6,112,000 7,775,000 19,107,000 28,895,000
------------------- ------------------ ------------------- -------------------
Operating loss (309,000) (936,000) (1,203,000) (9,255,000)
------------------- ------------------ ------------------- -------------------
Other income (expense):
Interest income 101,000 32,000 228,000 178,000
Interest expense (114,000) (230,000) (259,000) (632,000)
Gain on sale of interest in subsidiary -- -- 1,643,000 --
------------------- ------------------ ------------------- -------------------
Total other income (expense) (13,000) (198,000) 1,612,000 (454,000)
------------------- ------------------ ------------------- -------------------
Income (loss) before income taxes (322,000) (1,134,000) 409,000 (9,709,000)
------------------- ------------------ ------------------- -------------------
Provision for income taxes -- -- -- --
------------------- ------------------ ------------------- -------------------
Net income (loss) $ (322,000) (1,134,000) 409,000 (9,709,000)
=================== ================== =================== ===================
Accretion of beneficial conversion
feature on preferred stock $ -- -- (758,000) --
------------------- ------------------ ------------------- -------------------
Net loss available to
common shareholders $ (322,000) (1,134,000) (349,000) (9,709,000)
=================== ================== =================== ===================
Basic loss per common share $ (0.01) (0.05) (0.01) (0.41)
=================== ================== =================== ===================
Diluted loss per common share $ (0.01) (0.05) (0.01) (0.41)
=================== ================== =================== ===================
Weighted average shares outstanding - basic 26,857,000 23,623,000 25,516,000 23,411,000
=================== ================== =================== ===================
Weighted average shares outstanding - diluted 26,857,000 23,623,000 31,312,000 23,411,000
=================== ================== =================== ===================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ (322,000) (1,134,000) 409,000 (9,709,000)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Gain on sale of interest in subsidiary -- -- (1,643,000) --
Depreciation and amortization 1,314,000 1,481,000 4,075,000 3,905,000
Provision for doubtful accounts -- 275,000 625,000 750,000
Loss from disposition of broadcast
equipment 60,000 -- 180,000 --
Non-cash compensation charges -- 283,000 165,000 2,796,000
Accreted interest expense 66,000 -- 198,000 --
Stock issued in settlement of litigation -- 57,000 -- 169,000
Changes in assets and liabilities:
Accounts receivable 24,000 (1,310,000) (458,000) (2,322,000)
Prepaid expenses and other assets (237,000) (76,000) (171,000) 3,255,000
Accounts payable and accrued expense (168,000) (170,000) (1,030,000) (468,000)
Deferred revenue (141,000) 538,000 (667,000) 445,000
Customer deposits (23,000) (44,000) (112,000) (244,000)
Accruals for management severance and
other long-term liabilities (362,000) (353,000) (996,000) (843,000)
----------------- ---------------- ---------------- -----------------
Net cash provided by (used in)
operating activities 211,000 (453,000) 575,000 (2,266,000)
----------------- ---------------- ---------------- -----------------
Cash flows from (used in) investing activities:
Capital expenditures (992,000) (1,257,000) (2,404,000) (2,066,000)
Issuance of note receivable -- -- (70,000) --
Software development costs -- (246,000) (22,000) (831,000)
Proceeds from sale of interest in subsidiary -- -- 1,862,000 --
----------------- ---------------- ---------------- -----------------
Net cash used in investing
activities (992,000) (1,503,000) (634,000) (2,897,000)
----------------- ---------------- ---------------- -----------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited), Continued
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------- --------------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------- ------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Cash flows from (used in) financing activities:
Principal payments on debt $ -- (260,000) -- (5,830,000)
Proceeds from issuance of debt -- 231,000 -- 4,701,000
Principal payments under capital lease
obligations (35,000) -- (58,000) --
Proceeds from issuance of common stock,
less issuance costs -- 262,000 -- 1,035,000
----------------- ------------------ ----------------- -------------------
Net cash provided by (used
in) financing activities (35,000) 233,000 (58,000) (94,000)
----------------- ------------------ ----------------- -------------------
Net decrease in cash and cash equivalents (816,000) (1,723,000) (117,000) (5,257,000)
Cash and cash equivalents at beginning of period 5,463,000 3,045,000 4,764,000 6,579,000
----------------- ------------------ ----------------- -------------------
Cash and cash equivalents at end of period $ 4,647,000 1,322,000 4,647,000 1,322,000
================= ================== ================= ===================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 8,000 -- 13,000 --
================= ================== ================= ===================
Income taxes $ -- -- -- --
================= ================== ================= ===================
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of common stock in settlement of
legal claim $ 1,200,000 -- 1,332,000 --
================= ================== ================= ===================
Issuance of common stock in exchange for
cancellation of options and warrants $ -- -- 212,000 --
================= ================== ================= ===================
Equipment acquired under capital leases $ -- -- 375,000 --
================= ================== ================= ===================
Preferred dividend paid in capital stock $ -- -- 8,000 --
================= ================== ================= ===================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
In the opinion of management, the accompanying consolidated financial
statements include all adjustments that are necessary for a fair presentation of
the financial position of NTN Communications, Inc. and subsidiaries
(collectively "the Company") and the results of their operations and their cash
flows for the interim periods presented. Management has elected to omit
substantially all notes to the Company's consolidated financial statements as
permitted by the rules and regulations of the Securities and Exchange
Commission. Results of operations for the interim periods are not necessarily
indicative of results to be expected for any other interim period or for the
year ending December 31, 1998.
The consolidated financial statements for the three and nine months
ended September 30, 1998 and September 30, 1997 are unaudited and should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K, as amended, filed for the year ended
December 31, 1997.
Certain items in the prior period consolidated financial statements
have been reclassified to conform to the current period presentation.
2. Earnings (Loss) Per Share
The following table sets forth the computation of earnings (loss) per
share for the three and nine months ended September 30, 1998 and 1997. Options,
warrants and convertible preferred stock representing approximately 3,901,000,
847,000 and 1,286,000 potentially dilutive common shares have been excluded from
the computations of net loss per share for the three months ended September 30,
1998 and 1997 and the nine months ended September 30, 1997, respectively, as
their effect is anti-dilutive.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- -------------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Numerator for earnings (loss) per share -
Net loss available to common
shareholders $ (322,000) (1,134,000) (349,000) (9,709,000)
================= ================ ================== =================
Denominator:
Denominator for basic earnings per share -
Weighted average shares 26,857,000 23,623,000 25,516,000 23,411,000
Potential effect of dilutive securities:
Employee stock options and director fees -- -- 278,000 --
Warrants -- -- 50,000 --
Litigation settlements and management
severance -- -- 1,940,000 --
Convertible preferred stock -- -- 3,528,000 --
----------------- ---------------- ------------------ -----------------
Potentially dilutive common shares -- -- 5,796,000 --
----------------- ---------------- ------------------ -----------------
Denominator for diluted earnings per share -
Adjusted weighted average shares and
assumed conversions 26,857,000 23,623,000 31,312,000 23,411,000
================= ================ ================== =================
Basic earnings (loss) per share $ (0.01) (0.05) (0.01) (0.41)
================= ================ ================== =================
Diluted earnings (loss) per share $ (0.01) (0.05) (0.01) (0.41)
================= ================ ================== =================
</TABLE>
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The Company was recently notified that it may be required to issue common
stock pursuant to certain anti-dilution provisions of Stock Purchase Agreements
in connection with the sale of common stock in April 1995. Based on a
preliminary review, the Company may be required to issue 1,000,000 to 2,500,000
shares of common stock. As no final determination has been made, no amount was
included in the diluted earnings per share calculations.
Reflected in net loss available to common shareholders for the nine
months ended September 30, 1998 is the accretion of the beneficial conversion
feature on the Series B Preferred Stock in the amount of $758,000. The amount of
the beneficial conversion feature is measured at the date of issue of the
convertible security as the difference between the conversion price and the
market value of the common stock into which the security is convertible. This
amount is accounted for as a non-cash dividend on the convertible preferred
stock with the same amount credited to additional paid-in capital, allocated
over the period from issuance to first convertibility. Therefore, there is no
impact to total shareholders' equity. The beneficial conversion feature was
given effect as of January 1, 1998 as the impact to 1997 was not material to the
consolidated financial statements. The beneficial conversion feature was fully
accreted as of June 30, 1998. As described in Note 4 to the consolidated
financial statements, the Company entered into an exchange agreement with the
holders of the Series B Preferred Stock.
3. Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131 (SFAS), "Disclosure about Segments of an
Enterprise and Related Information". This statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company plans to adopt SFAS No. 131 in connection with the preparation of
the consolidated financial statements for the year ended December 31, 1998, as
permitted by the pronouncement. The Company has not yet assessed the impact of
the adoption of SFAS. No. 131 on its financial statement disclosures.
In March 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. The
adoption of this standard is not expected to have a material impact on
consolidated results, financial condition or long-term liquidity.
4. Subsequent Events
The following significant events have occurred subsequent to December
31, 1997:
On April 1, 1998, the Company reached an agreement in principle with
Omnigon, a California corporation, to sell up to 90% of the equity of its
subsidiary IWN, Inc. (IWN) to Omnigon on or before May 31, 1998. Omnigon paid
the Company $100,000 in April 1998 and an additional $100,000 in May 1998 for
the option to acquire IWN under specific terms. Subsequently, however, the
Company terminated negotiations with Omnigon for the proposed sale of IWN. As
agreed, the Company used the non-refundable payments made by Omnigon to pay the
operating expenses of IWN prior to the cancellation of the proposed transaction.
NTN redirected IWN's business strategy toward the Australian, New Zealand and
Asian marketplace, and building upon its existing venture in that market with
IWN Australasia Limited (IWN-A). NTN and IWN-A, in which NTN holds a 25% equity
interest, have agreed that IWN will provide research and development and
technical support for IWN-A operations over the next several months. IWN-A will
fund the development and support activities. NTN and IWN-A have also agreed they
will work to develop a more comprehensive strategy during the coming months to
build the asset base of IWN-A in the Australian, New Zealand and Asian
marketplace.
On June 16, 1998, the Company sold an 82.5% interest in LearnStar, Inc.
(LearnStar) to NewStar Learning Systems, L.L.C. (NewStar) for $1,862,000. The
transaction resulted in a gain of $1,643,000, which is included in other income
for the nine months ended September 30, 1998. Sally A Zoll, President of
LearnStar, and Joe King, a partner with former NTN Director Ed Frazier in
Frazier/King Media Holding, each hold an equity interest in NewStar. Upon
closing of the transaction, Ed Frazier resigned from the Board of Directors of
NTN in order to avoid any perception of a conflict of interest between his
ongoing business relationship with Mr. King and NTN's continued minority
interest in LearnStar.
In August, 1998, Barry Bergsman was appointed to the Board of
Directors. From 1985 to present Mr. Bergsman has been president of Intertel
Communications, Inc.
In September, 1998, the Company issued a total of 1,200,000 shares of
common stock, issued at a fixed price of $1.00 per share, pursuant to a
settlement of a class-action lawsuit approved by the court in January 1998 which
was originally filed against the Company and certain other defendants in April,
1995. An accrual related to this settlement of $1,200,000 was included in
accrued expenses as of December 31, 1997.
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In October 1998, the holders of the Company's outstanding Series B
Preferred Stock ("Preferred Stock") agreed to exchange their remaining
$5,600,000 of Preferred Stock (and accrued dividends) for 7% Convertible Senior
Subordinated Notes due February 1, 2001 with a fixed conversion price of $1.275
per common share. The convertible notes are to be issued three days following
the effective date of a registration statement which the Company has agreed to
file with the SEC covering the underlying shares issuable upon conversion of the
convertible notes. As of October 5, 1998, the aggregate principal amount of the
convertible notes would have been approximately $5,800,000 and the notes would
thus have been convertible into approximately 4,550,000 shares of common stock.
Interest on the convertible notes will be paid quarterly, in arrears, with the
first interest payments due December 1998. The Company has the option to pay
regularly scheduled interest payments in either cash or common stock. If paid in
common stock, the Company must provide written notice to the holders 45 days
prior to the interest payment date. In consideration of the stock for debt
exchange, the Company issued the Preferred Stock holders warrants expiring
February 1, 2001 to purchase an aggregate of one million shares of common stock.
The warrants have an initial exercise price of $1.25 per common share, which
will be subject to reduction in the event that the common stock trades at levels
above the exercise price. The convertible notes are subordinate in right of
payment to the prior payment of all senior debt as defined in the exchange
agreement. Pursuant to the terms of the exchange agreement, senior debt is not
to exceed $10,000,000 at any time. The Company is restricted under the terms of
the convertible notes from incurring any indebtedness (except senior debt and
subordinated debt as defined in the exchange agreement) in excess of $2,000,000
at any time.
The Company will be in default under the convertible notes if it fails
to pay any principal or interest on the convertible notes when due, and in
certain other events, including the event of a material adverse change in the
condition of the Company, financial or otherwise, or operations of the Company
as determined by the holders of the convertible notes in their discretion. If
the Company defaults under the convertible notes, in the discretion of the
holders the entire principal balance and accrued and unpaid interest will
immediately be due and payable in full.
In October 1998, the Board of Directors of the Company appointed
Stanley B. Kinsey as Chairman and Chief Executive Officer effective October 8,
1998. Gerald Sokol, Jr., formerly Chief Executive Officer, remains as the
Company's President and Chief Financial Officer pursuant to his Employment
Agreement which expires on June 30, 2000. The Company and Mr. Sokol are
currently seeking to reach an agreement concerning the terms and conditions of
Mr. Sokol's ongoing employment. However, Mr. Sokol has advised the Company that
it is his position that, if a new agreement cannot be reached, he will be
entitled to the entire remaining balance due him under his Employment Agreement
(including bonuses and employee benefits).
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
NTN Communications, Inc. develops, produces and distributes individual
and multi-player interactive programs to a variety of media platforms. The
Company broadcasts to a variety of delivery platforms 24 hours a day, providing
entertainment and informational programming, including multi-player sports and
trivia games. The NTN Network distributes programming to more than 15 million
viewer/participants per month throughout North America through hospitality
locations, such as hotels, bars and restaurants.
Results of Operations
Three months ended September 30, 1998 and September 30, 1997
Total revenues decreased 15% to $5,803,000 for the three months ended
September 30, 1998 from $6,839,000 for the three months ended September 30,
1997. This occurred primarily due to declines in network services,
Online/Internet services and other revenues.
Network services revenues decreased 8% to $4,565,000 for the three
months ended September 30, 1998 from $4,981,000 for the three months ended
September 30, 1997. This occurred primarily due to a reduction in average site
count and average billing rates.
Revenue from Online/Internet services decreased 39% to $506,000 for the
three months ended September 30, 1998 from $825,000 for the three months ended
September 30, 1997. The decrease was primarily a result of the Company entering
into a new contract with its Internet partner, America Online. During 1997
America Online paid the Company a one-time fee to renegotiate its then existing
contract. Excluding the termination fee revenue recorded in the three months
ended September 30, 1997 of $463,000, revenue from Online/Internet services
increased 40%. This increase resulted from an increase in revenues recognized
for production services.
Other revenues decreased 30% to $506,000 for the three months ended
September 30, 1998 from $720,000 for the three months ended September 30, 1997.
The third quarter of 1997 included approximately $300,000 in sales generated by
LearnStar. As a result of the sale of an 82.5% interest in LearnStar in June
1998, no such revenue was recorded for the three months ended September 30,
1998. Other revenues for the current period consist primarily of revenue
resulting from the Company's license agreement with its Canadian affiliate, and
other non-recurring revenue items. Excluding the revenue generated by LearnStar
in 1997, other revenue increased 20% due to an increase in revenue generated
from the Canadian licensee.
Direct operating costs decreased 21% to $1,189,000 for the three months
ended September 30, 1998 from $1,496,000 for the three months ended September
30, 1997. This decrease related to a reduction in site visit fees, commissions
and other field expenses due to (i) the Company's decreased reliance on
independent representatives in favor of employed field and marketing personnel
and (ii) a revision, effective January 1, 1998, in the Company's commission and
bonus structure for all field personnel. Additionally, the direct operating
costs for the three months ended September 30, 1997 included approximately
$70,000 of costs incurred by the Company's LearnStar operation.
Selling, general and administrative expenses decreased 29% to
$2,857,000 for the three months ended September 30, 1998 from $4,013,000 for the
three months ended September 30, 1997. This decrease was primarily attributable
to management's implementation of an organizational and strategic restructuring
aimed at reducing overhead costs. The restructuring involved a workforce
reduction and restructuring of management personnel and responsibilities. This
restructuring has resulted in overall cost reductions including payroll and
related costs, promotional and marketing material expenses. This decrease was
partially offset by an increase in employee-related costs associated with the
shift from independent representatives to employed field and marketing staff.
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There were no stock-based compensation expenses for the three months
ended September 30, 1998, compared to $284,000 for the three months ended
September 30, 1997. The 1997 charges resulted from the issuance of warrants and
options to nonemployees.
Research and development expenses were $254,000 for the three months
ended September 30, 1998. There were no research and development expenses
incurred for the same period of 1997. The current period expenses result from
the Company's research and development efforts related to the upgrade of the NTN
Network.
Interest expense decreased 50% to $114,000 for the three months ended
September 30, 1998 from $230,000 for the three months ended September 30, 1997.
The decrease was primarily due to interest expense recorded in 1997 related to a
note payable to GTECH Corporation which was paid in full in November 1997.
Nine months ended September 30, 1998 and September 30, 1997
Operations for the nine months ended September 30, 1998 resulted in net
income of $409,000 compared to a net loss of $9,709,000 for the nine months
ended September 30, 1997. The 1997 results included significant charges which
related only to 1997, including a $6,074,000 charge for management
reorganization and a $650,000 charge related to defective broadcast equipment.
The 1998 results include a gain of $1,643,000 related to the sale of an 82.5%
interest in LearnStar in June 1998.
Total revenues decreased 9% to $17,904,000 for the nine months ended
September 30, 1998 from $19,640,000 for the nine months ended September 30,
1997. This occurred primarily due to a reduction in network services,
Online/Internet services and other revenues.
Network services revenues decreased 2% to $13,975,000 for the nine
months ended September 30, 1998 from $14,301,000 for the nine months ended
September 30, 1997. This occurred primarily due to a reduction in average site
count and average billing rates.
Revenue from Online/Internet services decreased 29% to $1,680,000 for
the nine months ended September 30, 1998 from $2,381,000 for the nine months
ended September 30, 1997. The decrease was primarily a result of the Company
entering into a new contract with its Internet partner, America Online (AOL).
During the nine months ended September 30, 1997, America Online paid the Company
a fee to renegotiate its then existing contract. Excluding the termination fee
revenue recorded in the nine months ended September 30, 1997 of $463,000,
revenue from Online/Internet services decreased 12%. The new agreement, dated as
of December 1, 1997, provides for a flat monthly fee rather than fees based on
AOL member usage of the Company's content which resulted in slightly lower
revenue in the nine months ended September 30, 1998 compared to the same period
in 1997. This decrease was partially offset by an increase in revenue recognized
for production services.
Other revenues, which currently consist primarily of revenue resulting
from the Company's license agreement with its Canadian affiliate, and other
non-recurring revenue items, decreased 27% to $1,607,000 for the nine months
ended September 30, 1998 from $2,211,000 for the nine months ended September 30,
1997. Other revenues for the nine months ended September 30, 1997 included
approximately $411,000 in sales generated by LearnStar. As a result of the sale
of an 82.5% interest in LearnStar in June 1998, only six months of such revenue
totaling $280,000 is recorded for the nine months ended September 30, 1998.
Additionally, other revenue for the nine months ended September 30, 1997
included non-recurring items such as revenues related to the liquidation of
whole-life insurance policies for certain former officers.
Direct operating costs decreased 34% to $3,671,000 for the nine months
ended September 30, 1998 from $5,524,000 for the nine months ended September 30,
1997. This decrease related to a reduction in site visit fees, commissions and
other field expenses due to (i) the Company's decreased reliance on independent
representatives in favor of employed field and marketing personnel and (ii) a
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revision, effective January 1, 1998, in the Company's commission and bonus
structure for all field personnel. Additionally, the direct costs for the nine
months ended September 30, 1997 included approximately $260,000 of costs
incurred by the Company's LearnStar operation. Additionally, a $650,000 charge
was recorded in 1997 for the replacement and repair of defective equipment. No
such charge was recorded in 1998.
Selling, general and administrative expenses decreased 35% to
$9,061,000 for the nine months ended September 30, 1998 from $13,844,000 for the
nine months ended September 30, 1997. Excluding the charges of $3,277,000
related to a management reorganization in the nine months ended September 30,
1997, selling, general and administrative expenses decreased 14% in the nine
months ended September 30, 1998 as compared to the same period of 1997. The
decrease was primarily attributable to management's implementation of an
organizational and strategic restructuring aimed at reducing overhead costs. The
restructuring involved a workforce reduction, including five senior officers,
the buy-out of many high-rate lease commitments, and restructuring of management
personnel and responsibilities. This restructuring has resulted in overall cost
reductions including payroll and related costs, travel, promotional and
marketing material expenses. This decrease was partially offset by an increase
in employee-related costs associated with the shift from independent
representatives to employed field and marketing staff.
Litigation, legal and professional fees decreased 33% to $887,000 for
the nine months ended September 30, 1998 from $1,326,000 for the nine months
ended September 30, 1997. During the nine months ended September 30, 1997, an
accrual was recorded for pending litigation totaling $400,000. Subsequently, the
litigation was settled and the fees were paid. No such accrual was required for
the nine months ended September 30, 1998.
Stock-based compensation decreased 94% to $165,000 for the nine months
ended September 30, 1998 from $2,797,000 for the nine months ended September 30,
1997. The 1997 charge related to the reorganization of the Company's executive
management personnel.
Research and development expenses decreased 41% to $474,000 for the
nine months ended September 30, 1998 from $800,000 for the nine months ended
September 30, 1997. The decrease was due to certain research and development
endeavors which began in early 1997 that were completed by the end of the second
quarter of 1997. These efforts included initial design and implementation of the
Company website, redesign of the America Online site and content and other
production for third parties. For the nine-month period ended September 30,
1998, the Company's research and development efforts related to the upgrade of
the NTN network.
Interest expense decreased 59% to $259,000 for the nine months ended
September 30, 1998 from $632,000 for the nine months ended September 30, 1997.
The decrease was primarily due to interest expense recorded in 1997 in
connection with the Symphony put option which was paid in full in June 1997 and
the note payable to GTECH Corporation which was paid in full in November 1997.
In June 1998, the Company sold an 82.5% interest in LearnStar for
$1,862,000. The transaction resulted in a gain of $1,643,000, which is included
in other income for the nine months ended September 30, 1998.
Liquidity and Capital Resources
At September 30, 1998, the Company had cash and cash equivalents of
$4,647,000 and working capital (current assets in excess of current liabilities)
of $3,089,000, compared to cash and cash equivalents of $4,764,000 and working
capital of $17,000 at December 31, 1997. Net cash provided by operations was
$575,000 for the nine months ended September 30, 1998 and net cash used in
operations was $2,266,000 for the nine months ended September 30, 1997. Included
in net cash provided by operations for the nine months ended September 30, 1998
were severance payments made by the Company in compliance with management
reorganization agreements with former officers totaling $760,000. Net cash used
in investing activities was $634,000 for the nine months ended September 30,
1998 and $2,897,000 for the nine months ended September 30, 1997. Included in
net cash used in investing activities for the nine months ended September 30,
1998 were $2,404,000 in capital expenditures and $1,862,000 in proceeds from the
sale of an 82.5% interest in the Company's subsidiary, LearnStar, Inc. Net cash
used in financing activities was $58,000 and $94,000 for the nine months ended
September 30, 1998 and 1997, respectively.
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<PAGE> 13
The Company is in the process of implementing its plan to upgrade its
network, including improvements to its Playmakers(R) and related technology, as
well as migrating to a Windows-based platform. The Company believes that its
cash on hand and anticipated cash flows from its operations will be sufficient
to meet the Company's operating needs through 1998. It is very likely, the
Company will require additional financing to support its planned upgrade and
expansion of the NTN Network domestically and internationally. Capital financing
possibilities may include (i) licensing and related royalties of the Company's
technology and products; (ii) borrowing arrangements under fixed and revolving
credit agreements; or (iii) sale of additional equity securities. There can be
no assurance that the Company will be able to secure such financing. When the
timing of the plan to upgrade and replace Playmakers(R) and broadcast equipment
with new technology becomes definitive, the Company expects to evaluate the
estimated remaining useful lives of existing equipment and technology and
anticipates that depreciation will be accelerated and/or impairment losses
recognized. Impairment losses, if any, will be recognized in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
In October 1998, the holders of the Company's outstanding Series B
Preferred Stock agreed to exchange their remaining $5,600,000 of Preferred Stock
(and accrued dividends) for 7% senior convertible subordinated notes due
February 1, 2001 with a fixed conversion price of $1.275 per common share. In
consideration of the debt for stock exchange, the Company issued the Preferred
Stock holders warrants expiring February 1, 2001 to purchase an aggregate of one
million shares of common stock. The warrants have an initial exercise price of
$1.25 per common share which will be subject to reduction in the event that the
common stock trades at levels significantly above the exercise price. As a
result of this exchange, the Company expects to incur additional interest
expense related to both the convertible notes and the warrants beginning in the
fourth quarter of 1998.
The Playmaker(R) systems currently utilize MS-DOS software. The Company
currently does not have sufficient licenses to use MS-DOS for substantially all
of its Playmaker systems, and has received a letter from counsel representing
Business Software Alliance and from counsel for Microsoft Corporation requesting
certain information regarding our use of MS-DOS. It is possible that Microsoft
will require remuneration for past unlicensed use of MS-DOS as a condition to
granting any such future licenses. The Company's management is uncertain what
effect this may have on the financial condition or results of operations.
The Company, with the assistance of independent outside consultants,
has been assessing its "Year 2000" computer readiness and exposure to Year 2000
issue which relates to the inability of computer software programs to recognize
the arrival of the year 2000 because of a common software design feature that
describes the current year by only its last two digits. In connection with such
assessment, the Company initiated a review of the information technology systems
utilized in the Company's business and operations. Based on this review, the
Company has preliminarily determined that a substantial portion of the Company's
internal computer systems are not Year 2000 compliant. The Company has
inventoried its key information technology systems and is in the process of
assessing these key systems for compliance. The assessment phase is expected to
be completed by the end of 1998. These key systems include the NTN Network,
including its computer hardware in over 2,800 locations, the Company's internal
operating systems, system applications, database systems, business systems,
development tools and desktop software. This includes but is not limited to MS
NT 4.0 (service pack 3), MS NT 4.0 (enterprise server), Novell NetWare 3.11,
Windows 95, Cheyenne ARCServe, Norton AntiVirus, MacAfee 6.10, MS Exchange 5.0,
FAXServe, MS IIS, MS SQL 6.5 (service pack 3), MS SQL 6.5 (enterprise server),
Dbase IV, Access 97, Access 2.0, Platinum 3.3b, Platinum report writer, Platinum
FRx 4.70, Clientele 2.1.2099, Visual Studio 6.0, Visual Basic 4.0 and Cold
Fusion 2.0.
Information systems with non-compliant code are expected to be modified
or replaced with systems that are Year 2000 compliant, the most significant of
which will be the planned upgrade of the NTN Network. The cost for this upgrade
and other remediations could exceed $4,000,000. A majority of the total
estimated spending represents equipment expenditures to upgrade the NTN Network
which would have been incurred absent Year 2000 compliance issues. This estimate
assumes that the Company will not incur significant Year 2000 related costs on
behalf of its vendors, or other third parties. The Company has also
initiated a review of Year 2000 compliance by its principal vendors.
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<PAGE> 14
The Company's most likely worst-case scenario in the event the planned
upgrade of the NTN Network and other remediations are not completed is that the
Company would be unable to broadcast its programs to its network services
customers. Network services revenue represents 78% of total revenues for the
nine months ended September 30, 1998. The Company has not yet established a
contingency plan in the event that this occurs.
As a result, a failure of the Company's internal systems or systems of
third parties to be Year 2000 compliant would have a material adverse effect on
the Company's business, financial condition or operating results.
Forward Looking Statements
This Quarterly Report contains forward looking statements, including
statements relating to future growth, which are subject to risks and
uncertainties including the success of the Company's planned upgrade of its
broadcast platform, changing economic conditions, product demand and market
acceptance risks, the impact of competitive products and pricing, the effect of
the Company's accounting policy and other risk factors detailed in the Company's
Securities and Exchange Commission filings, including the Company's Report on
Form 10-K for the fiscal year ended December 31, 1997, its quarterly reports on
Form 10-Q and reports on Form 8-K.
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<PAGE> 15
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
In September 1998, the Company issued a total of 1,200,000 shares of
common stock pursuant to a court-approved settlement of a class-action lawsuit,
which was originally filed against the Company and certain other defendants in
April 1995. Included in the 1,200,000 shares were 483,333 shares issued to
counsel for the plaintiffs in the class action. All of these shares of common
stock were valued for this purpose at $1.00 per share.
Item 2. CHANGE IN SECURITIES.
In October 1997, the Company issued and sold to Investors an aggregate of
70,000 shares of the Company's Series B Preferred Stock for $7,000,000. As of
October 5, 1998, 14,000 shares of the Series B Preferred Stock (plus accrued
dividends) had previously been converted into 2,430,000 shares of common stock,
leaving 56,000 shares of Series B Preferred Stock outstanding. As of October 5,
1998, the Company and Investors entered into an Exchange Agreement by which the
Investors agreed to surrender for cancellation all of its shares of Series B
Preferred Stock in exchange for the Company's grant to the Investors of warrants
and convertible notes as described in note 3 of the notes to the financial
statements included in Part I of this Report, which is incorporated herein by
reference.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
4.1 Specimen common stock certificate (previously filed as an exhibit
to the Company's Registration Statement on Form 8-A, File No.
0-19383, and incorporated herein by reference).
4.2 Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock (previously filed as an exhibit to the
Company's Current Report on Form 8-K filed with the Commission on
November 7, 1997 and incorporated herein by reference).
4.3 Exchange Agreement dated as of October 5, 1998, by and among the
Company, Stark International and Shepherd Investments
International, Ltd.
4.4 Registration Rights Agreement dated as of October 5, 1998, by and
among the Company, Stark International and Shepherd Investments
International, Ltd. (filed as Exhibit A to the Exchange Agreement
filed herewith).
4.5 Warrant No. 10/05/98-1 issued to Stark International (filed as
Exhibit B to the Exchange Agreement filed herewith).
4.6 Warrant No. 10/05/98-2 issued to Shepherd Investments
International, Ltd. (filed as Exhibit B to the Exchange Agreement
filed herewith).
4.7 Form of 7% Convertible Senior Subordinated Note of the Company
(filed as Exhibit C to the Exchange Agreement filed herewith).
10.1 Employment Agreement dated July 1, 1998 by and between NTN
Communications, Inc. and Gerald Sokol, Jr.
27. Financial Data Schedule.
(b) Reports on Form 8-K
None
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NTN COMMUNICATIONS, INC.
Date: November 16, 1998 By: /s/GERALD SOKOL, JR.
--------------------------------------
Gerald Sokol, Jr.,
President and Chief Financial Officer
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<PAGE> 17
EXHIBIT INDEX
Exhibit
No. Description
- - ------- -----------
4.3 Exchange Agreement
4.4 Registration Rights Agreement dated as of October 5, 1998,
by and among the Company, Stark International and Shepherd
Investments International, Ltd. (filed as Exhibit A to the
Exchange Agreement filed herewith).
4.5 Warrant No. 10/05/98-1 issued to Stark International (filed
as Exhibit B to the Exchange Agreement filed herewith).
4.6 Warrant No. 10/05/98-2 issued to Shepherd Investments
International, Ltd. (filed as Exhibit B to the Exchange
Agreement filed herewith).
4.7 Form of 7% Convertible Senior Subordinated Note of the
Company (filed as Exhibit C to the Exchange Agreement filed
herewith).
10.1 Employment Agreement dated July 1, 1998
27 Financial Data Schedule
<PAGE> 1
EXCHANGE AGREEMENT
EXCHANGE AGREEMENT, dated as of October 5, 1998 (the
"AGREEMENT"), by and among NTN Communications, Inc., a Delaware corporation,
with headquarters located at 5966 La Place Court, Carlsbad, CA 92008 (the
"COMPANY"), and the investors listed on the Schedule of Buyers attached hereto
(individually, a "Buyer" and collectively, the "BUYERS").
WHEREAS:
A. The Company and the Buyers are parties to a Securities
Purchase Agreement, dated as of October 31, 1997 (the "SECURITIES PURCHASE
AGREEMENT"), pursuant to which, among other things, the Buyers purchased an
aggregate of $7 million of the Company's Series B Convertible Preferred Stock
(the "SERIES B PREFERRED SHARES"), which are convertible into shares of the
Company's Common Stock, $.005 par value per share (the "COMMON STOCK") (as
converted, the "CONVERSION SHARES"), in accordance with the terms of the
Company's Certificate of Designations, Preferences and Rights of the Series B
Preferred Shares, filed with the Delaware Secretary of State on October 31, 1997
(the "CERTIFICATE OF DESIGNATIONS");
B. There are currently 56,000 shares of Series B Preferred
Shares outstanding and held by the Buyers;
C. The Company and the Buyers executed a Modification
Agreement, dated as of July 31, 1998 (the "MODIFICATION AGREEMENT"), to modify
certain terms of the Series B Preferred Shares, the related Registration Rights
Agreement dated as of July 31, 1998 by and among the Company and the Buyers, and
the Common Stock Purchase Warrant (the "JULY 31 WARRANTS"), dated as of July 31,
1998, issued by the Company to each Buyer to purchase 500,000 shares of Common
Stock (collectively, the "MODIFICATION DOCUMENTS");
D. The Company and each Buyer desire to exchange the Series
B Preferred Shares for a convertible senior subordinated promissory note of the
Company and a warrant to purchase shares of Common Stock, each as more fully
described in Section 1(a) below;
E. The Company and the Buyers agree that this Agreement
shall supersede the terms of the Modification Documents and that said
Modification Documents shall be null and void and of no force and effect. Upon
execution of this Agreement and delivery of the fully executed Warrants, the
Buyers shall surrender to the Company the forms of July 31 Warrants in Buyers'
possession.
F. Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement in the form attached hereto as Exhibit A (the "REGISTRATION RIGHTS
AGREEMENT") pursuant to which the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended (the "1933
ACT") and the rules and regulations promulgated thereunder, and applicable state
securities laws.
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<PAGE> 2
NOW THEREFORE, the Company and the Buyers hereby agree as
follows:
CERTAIN DEFINED TERMS. As used in this Agreement, the
following terms shall have the following meanings:
"EXCHANGE PRICE" means, for each Buyer, an amount equal to
the sum of (A) the Stated Value (as defined in the Certificate of Designations)
for all such Buyer's Series B Preferred Shares outstanding on the Note Issuance
Date and (B) all accrued and unpaid dividends on such Series B Preferred Shares
due to such Buyer.
"NOTE ISSUANCE DATE" means the date that is three (3) days
immediately subsequent to the date that the Registration Statement (as defined
in the Registration Rights Agreement) is declared effective by the Securities
and Exchange Commission (the "SEC").
1. EXCHANGE AND CONVERSION OF SERIES B PREFERRED SHARES.
(a) Issuance of Warrants and Notes. On the date hereof, the
Company shall issue to each Buyer a Common Stock Purchase Warrant (the "WARRANT"
and collectively, the "WARRANTS") to purchase 500,000 shares of Common Stock
(the "WARRANT SHARES"), which Warrants shall be substantially in the form
attached hereto as Exhibit B. On the Note Issuance Date, the Company shall
deliver to each Buyer a convertible senior subordinated promissory note of the
Company (the "NOTE" and collectively, the "NOTES") in the principal amount of
the Exchange Price for such Buyer, convertible into shares of Common Stock of
the Company (the "NOTE CONVERSION SHARES"), made payable to the order of such
Buyer and otherwise substantially in the form attached hereto as Exhibit C. Upon
receipt of the Notes, the Series B Preferred Shares shall be deemed to be no
longer outstanding and the Buyers shall surrender the share certificates to the
Company.
(b) Conversion Right. From and after the date hereof and
until the Note Issuance Date, each Buyer shall be entitled, at any time or from
time to time, to convert such Buyer's Series B Preferred Shares in accordance
with the provisions of the Certificate of Designations as modified by the
provisions of Sections 1(c) and 1(d) hereof.
(c) Conversion Price. The parties hereto hereby agree that
notwithstanding the provisions of the Certificate of Designations, the
Conversion Price will be set such that from and after the date hereof
"CONVERSION PRICE" means $1.275, subject to adjustment for the events set forth
in Section 3(c) of the Note. Notwithstanding any provision of the Certificate of
Designations or of this Agreement, in no event shall any Buyer be entitled to
convert any Series B Preferred Shares in excess of that number of Series B
Preferred Shares which, upon giving effect to such conversion, would cause the
aggregate number of shares of Common Stock beneficially owned by the Buyer and
its affiliates to exceed 4.99% of the outstanding shares of the Common Stock
following such conversion; provided, however, that a Buyer may elect to waive
this restriction upon not less than sixty-one (61) days prior written notice to
the Company. For purposes of this paragraph, beneficial ownership shall be
calculated
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<PAGE> 3
in accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended (the "1934 ACT").
(d) Dividends. The parties hereto agree that notwithstanding
the provisions of the Certificate of Designations, it would be in the Company's
best interest to adjust the dividend rate for the Series B Preferred Shares such
that from and after the date hereof, the first sentence of Section (1) of the
Certificate of Designations shall read "The holders of the outstanding Series B
Preferred Shares shall be entitled to receive cumulative dividends at the annual
rate of $7.00 per Series B Preferred Share."
(e) Full Force. Other than as set forth in this Section 1,
the original terms of the Series B Preferred Shares as set forth in the
Certificate of Designations and the Securities Purchase Agreement remain in full
force and effect.
(f) Modification Documents. The Company and the Buyers agree
that this Agreement shall supersede the terms of the Modification Documents and
that said Modification Documents shall be null and void and of no force and
effect. Upon execution of this Agreement and delivery of the Warrants, the
Buyers shall surrender to the Company the forms of July 31 Warrants in Buyers'
possession.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants with respect to only
itself that:
(a) Investment Purpose. Such Buyer (i) shall acquire the
Notes and the Warrants and (ii) upon conversion of the Notes and exercise of the
Warrants, will acquire the Note Conversion Shares and Warrant Shares then
issuable, for its own account for investment only and not with a view towards,
or for resale in connection with, the public sale or distribution thereof,
except pursuant to sales registered or exempted under the 1933 Act; provided,
however, that by making the representations herein, such Buyer does not agree to
hold any Notes, Warrants, Note Conversion Shares or Warrant Shares for any
minimum or other specific term and reserves the right to dispose of the Notes or
Warrants at any time in accordance with or pursuant to a registration statement
or an exemption under the 1933 Act.
(b) Accredited Investor Status. Such Buyer is an "accredited
investor" as that term is defined in Rule 501(a)(3) of Regulation D.
(c) Reliance on Exemptions. Such Buyer understands that the
Notes, the Warrants, the Note Conversion Shares and the Warrant Shares are being
issued to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and such Buyer's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of such Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of such Buyer to acquire the
Notes, the Warrants, the Note Conversion Shares and the Warrant Shares.
3
<PAGE> 4
(d) Information. Such Buyer and its advisors, if any, have
been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the Notes, the Warrants, the
Note Conversion Shares and the Warrant Shares which have been requested by such
Buyer. Such Buyer and its advisors, if any, have been afforded the opportunity
to ask questions of the Company. Neither such inquiries nor any other due
diligence investigations conducted by such Buyer or its advisors, if any, or its
representatives shall modify, amend or affect such Buyer's right to rely on the
Company's representations and warranties contained in Section 3 below. Such
Buyer understands that its investment in the Notes, the Warrants, the Note
Conversion Shares and the Warrant Shares involves a high degree of risk. Such
Buyer has sought such accounting, legal and tax advice as it has considered
necessary to make an informed investment decision with respect to its
acquisition of the Notes, the Warrants, the Note Conversion Shares and the
Warrant Shares.
(e) No Governmental Review. Such Buyer understands that no
United States federal or state agency or any other government or governmental
agency has passed on or made any recommendation or endorsement of the Notes, the
Warrants, the Note Conversion Shares or the Warrant Shares or the fairness or
suitability of the investment in the Notes, the Warrants, the Note Conversion
Shares or the Warrant Shares nor have such authorities passed upon or endorsed
the merits of the Notes, the Warrants, the Note Conversion Shares or the Warrant
Shares.
(f) Transfer or Resale. Such Buyer understands that except
as provided in the Registration Rights Agreement: (i) the Notes, the Warrants,
the Note Conversion Shares and the Warrant Shares have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such
securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) such Buyer
provides the Company with reasonable assurance that such securities can be sold,
assigned or transferred pursuant to Rule 144 promulgated under the 1933 Act (or
a successor rule thereto) ("RULE 144"); (ii) any sale of such securities made in
reliance on Rule 144 may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable, any resale of such securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such securities under the 1933 Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder.
(g) Legends. Such Buyer understands that the certificates or
other instruments representing the Notes and the Warrants and, until such time
as the sale of Note Conversion Shares and the Warrant Shares have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Warrant Shares, except as set
forth below, shall bear a restrictive legend in substantially the
4
<PAGE> 5
following form (and a stop-transfer order may be placed against transfer of such
stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE
SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Notes, the Warrants or the
Warrant Shares upon which it is stamped, if (i) the Notes, the Warrants or the
Warrant Shares are registered for sale under the 1933 Act, (ii) in connection
with a sale transaction, such holder provides the Company with an opinion of
counsel, in a generally acceptable form, to the effect that a public sale,
assignment or transfer of the Notes, the Warrants or the Warrant Shares may be
made without registration under the 1933 Act, or (iii) such holder provides the
Company with reasonable assurances that the Notes, the Warrants or the Warrant
Shares can be sold pursuant to Rule 144 without any restriction as to the number
of securities acquired as of a particular date that can then be immediately
sold. Each Buyer acknowledges, covenants and agrees to sell the Notes, the
Warrants and the Warrant Shares represented by a certificate(s) from which the
legend has been removed, only pursuant to (i) a registration statement effective
under the 1933 Act, or (ii) advice of counsel that such sale is exempt from
registration required by Section 5 of the 1933 Act. In the event the above
legend is removed from the Notes, the Warrants or the Warrant Shares, the
Company may, upon reasonable advance notice to the holder, require that the
above legend be placed on any Notes, Warrants or Warrant Shares that cannot then
be sold pursuant to an effective registration statement or Rule 144(k) under the
1933 Act (or any successor rule thereto).
(h) Authorization; Enforcement. This Agreement has been duly
and validly authorized, executed and delivered on behalf of such Buyer and is a
valid and binding agreement of such Buyer enforceable in accordance with its
terms, subject as to enforceability to general principles of equity and to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
(i) Ownership. As of the date hereof, each Buyer (i) is the
beneficial owner of 28,000 Series B Preferred Shares and (ii) has not
transferred or assigned such Series B Preferred Shares to any Person, or any
interest therein or under the Modification Documents.
5
<PAGE> 6
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers
that except as (i) set forth on the indicated Schedule or (ii) disclosed in the
Company's Form 10-K for the fiscal year ended December 31, 1997, the Company's
Quarterly Reports on Form 10-Q for the three months ended March 31, 1998, and
for the three and six months ended June 30, 1998, and the Company's 1998 Proxy
Statement (collectively, the "SEC DOCUMENTS"):
(a) Organization and Qualification. The Company and its
subsidiaries (a complete list of which is set forth in Schedule 3(a)) are
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated, and have the requisite
corporate power to own their properties and to carry on their business as now
being conducted. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
subsidiaries taken as a whole or on the transaction contemplated by the
Securities Purchase Agreement or this Agreement.
(b) Authorization; Enforcement; Compliance with Other Laws.
(i) The Company has the requisite corporate power and authority to enter into
and perform this Agreement, the Registration Rights Agreement and the Notes and
to issue the Notes, the Warrants, the Note Conversion Shares and the Warrant
Shares in accordance with the terms of the Notes, the Warrants and this
Agreement, (ii) the execution and delivery of this Agreement, the Registration
Rights Agreement, the Notes and the Warrants by the Company and the consummation
by it of the transactions contemplated hereby and thereby, including without
limitation the issuance of the Notes and the Warrants and the reservation for
issuance and the issuance of the Note Conversion Shares and the Warrant Shares
have been duly authorized by the Company's Board of Directors and no further
consent or authorization is required by the Company, its Board of Directors or
its stockholders, (iii) this Agreement, the Registration Rights Agreement and
the Warrants have been and the Notes upon their issuance will be duly executed
and delivered by the Company, and (iv) this Agreement, the Registration Rights
Agreement and the Warrants constitute and the Notes upon execution and delivery
by the Company will constitute the valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, except as such
enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally, the enforcement of creditors' rights and
remedies.
(c) Capitalization. As of the date hereof, the authorized
capital stock of the Company consists of 50,000,000 shares of Common Stock, of
which as of September 30, 1998, 26,543,297 shares were issued and outstanding,
and 10,000,000 shares of Preferred Stock, $.005 par value per share (the
"PREFERRED Stock"), of which as of September 30, 1998, 161,112 shares of Series
A Preferred Stock, and 56,000 Shares of Series B Preferred Stock, respectively,
were issued and outstanding. All of such outstanding shares have been validly
issued and are fully paid and nonassessable. Except as disclosed in Schedule
3(c), no shares of Common Stock
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<PAGE> 7
or Preferred Stock are subject to preemptive rights or any other similar rights
or any liens or encumbrances suffered or permitted by the Company. Except as
disclosed in Schedule 3(c), as of the date hereof, (i) there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
subsidiaries is or may become bound to issue additional shares of capital stock
of the Company or any of its subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its subsidiaries, (ii) there are no outstanding debt
securities and (iii) there are no agreements or arrangements under which the
Company or any of its subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act (except the Registration Rights Agreement).
Except as disclosed in Schedule 3(c), there are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Notes, the Warrants, the Note Conversion Shares or the Warrant
Shares as described in this Agreement. The Company has furnished to the Buyers
true and correct copies of the Company's Certificate of Incorporation, as
amended and as in effect on the date hereof (the "CERTIFICATE OF
Incorporation"), and the Company's By-laws, as in effect on the date hereof (the
"BY-LAWS"), and the terms of all securities convertible into or exercisable for
Common Stock and the material rights of the holders thereof in respect thereto.
(d) Issuance of Securities. The Notes, the Warrants, the
Note Conversion Shares and the Warrant Shares are duly authorized and, upon
issuance in accordance with the terms of the Notes, the Warrants and this
Agreement, shall be (i) validly issued, fully paid and non-assessable and (ii)
free from all taxes, liens and charges with respect to the issue thereof and
(iii) the holders of the Note Conversion Shares and the Warrant Shares will be
entitled to all rights accorded to a holder of Common Stock. Not less than 100%
of the number of shares of Common Stock necessary to provide for the issuance of
the Note Conversion Shares, the Warrant Shares and any shares of Common Stock
issued to the Holders to pay interest on the Notes have been duly authorized and
reserved for issuance upon conversion of the Notes and exercise of the Warrants.
The reservation of the Note Conversion Shares and the Warrant Shares as of the
date hereof has been duly authorized.
(e) No Conflicts. Except as disclosed in Schedule 3(e), the
execution, delivery and performance of this Agreement, the Registration Rights
Agreement, the Notes and the Warrants by the Company, the performance by the
Company of its obligations under the Certificate of Designations, and the
consummation by the Company of the transactions contemplated hereby and thereby
will not (i) result in a violation of the Certificate of Incorporation, any
Certificate of Designations, Preferences and Rights of any outstanding series of
Preferred Stock of the Company or the Company's By-laws or (ii) conflict with,
or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, or result
in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations and the rules and
regulations of the principal market or
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<PAGE> 8
exchange on which the Common Stock is traded or listed) applicable to the
Company or any of its subsidiaries or by which any property or asset of the
Company or any of its subsidiaries is bound or affected. Except as disclosed in
Schedule 3(e), neither the Company nor its subsidiaries is in violation of any
term of or in default under its Certificate of Incorporation, Certificate of
Designations, Preferences and Rights of any outstanding series of Preferred
Stock or By-laws or their organizational charter or by-laws, respectively, or
any material contract, agreement, mortgage, indebtedness, indenture, instrument,
judgment, decree or order or any statute, rule or regulation applicable to the
Company or its subsidiaries. The business of the Company and its subsidiaries is
not being conducted, and shall not be conducted, in violation of any law,
ordinance or regulation of any governmental entity, except for those violations
that individually or in the aggregate would not have a material adverse effect
on the business of the Company or any of its subsidiaries. Except as
specifically contemplated by the Registration Rights Agreement and as required
under the 1933 Act, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental or regulatory or self-regulatory agency in order for it to execute,
deliver or perform any of its obligations under or contemplated by this
Agreement, the Registration Rights Agreement, the Notes or the Warrants in
accordance with the terms hereof or thereof. Except as disclosed in Schedule
3(e), all consents, authorizations, orders, filings and registrations which the
Company is required to obtain pursuant hereto or pursuant to the Securities
Purchase Agreement and Certificate of Designations have been obtained or
effected on or prior to the date hereof. The Company is not in violation of the
listing requirements of the American Stock Exchange ("AMEX"). The Company and
its subsidiaries are unaware of any facts or circumstances which might give rise
to any of the foregoing or to delisting of the Common Stock by the AMEX.
(f) SEC Documents; Financial Statements. Since June 30,
1997, the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the 1934 Act (all of the foregoing filed prior to the date
hereof and all exhibits included therein and financial statements and schedules
thereto and documents incorporated by reference therein being hereinafter
referred to as the "DESIGNATED SEC DOCUMENTS"). The Company has delivered to the
Buyers or their representative true and complete copies of the Designated SEC
Documents. As of their respective dates, the Designated SEC Documents complied
in all material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the Designated SEC
Documents, and none of the Designated SEC Documents, at the time they were filed
with the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial statements of
the Company included in the Designated SEC Documents complied as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto. Such financial statements
have been prepared in accordance with generally accepted accounting principles,
consistently applied during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto, or (ii) in the case
of unaudited interim statements, to the extent they may exclude footnotes or may
be condensed or summary statements) and fairly present in all material respects
the financial position of the Company as of
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<PAGE> 9
the dates thereof and the results of its operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). No other information provided by or on behalf of
the Company to the Buyer which is not included in the Designated SEC Documents
contains when read in conjunction with the SEC Documents and the Schedules
hereto any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they are or were made, not misleading.
(g) Absence of Certain Changes. Except as disclosed in
Schedule 3(g) or the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 and Quarterly Report on Form 10-Q for the three months ended
March 31, 1998 and for the three and six months ended June 30, 1998, since June
30, 1997 there has been no material adverse change and no material adverse
development in the business, properties, operations, financial condition,
results of operations or prospects of the Company and its subsidiaries taken as
a whole. The Company has not taken any steps, and does not currently expect to
take any steps, to seek protection pursuant to any bankruptcy law nor does the
Company or its subsidiaries have any knowledge or reason to believe that its
creditors intend to initiate involuntary bankruptcy proceedings.
(h) Absence of Litigation. There is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company or any of its subsidiaries, threatened against or
affecting the Company or its subsidiaries or their respective directors or
officers, or the Common Stock, wherein an unfavorable decision, ruling or
finding would (i) have a material adverse effect on the transactions
contemplated by the Securities Purchase Agreement or this Agreement (ii)
adversely affect the validity or enforceability of, or the authority or ability
of the Company to perform its obligations under, this Agreement, the Certificate
of Designations, the Registration Rights Agreement, the Notes, the Warrants or
any of the documents contemplated herein or therein or (iii), except as
expressly set forth in the SEC Documents or in Schedule 3(h), have a material
adverse effect on the business, operations, properties, financial condition,
results of operation or prospects of the Company and its subsidiaries taken as a
whole.
(i) Acknowledgment. The Company acknowledges that each Buyer
is not acting as a financial advisor or fiduciary of the Company (or in any
similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by any of the Buyers or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to the transactions
contemplated hereby. The Company further represents to each Buyer that the
Company's decision to enter into this Agreement has been based solely on the
independent evaluation by the Company and its representatives. The Company has
not provided to any Buyer any nonpublic information that, in the opinion of the
Company, is material to a decision to purchase or sell Common Stock.
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<PAGE> 10
(j) No General Solicitation. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Notes, the Warrants, the Note Conversion Shares or the Warrant Shares.
(k) No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of the
Notes, the Warrants, the Note Conversion Shares or the Warrant Shares under the
1933 Act or cause the offering of the Notes, the Warrants, the Note Conversion
Shares and the Warrant Shares to be integrated with prior offerings by the
Company for purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
the AMEX.
(l) Employee Relations. Neither the Company nor any of its
subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its subsidiaries, is any such dispute threatened. None of the
Company's or its subsidiaries' employees is a member of a union and the Company
and its subsidiaries believe that their relations with their employees are good.
(m) Intellectual Property Rights. Except as set forth on
Schedule 3(m), the Company and its subsidiaries own or possess adequate rights
or licenses to use all trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions,
licenses, approvals, governmental authorizations, trade secrets and rights
necessary to conduct their respective businesses as now conducted. Except as set
forth on Schedule 3(m), none of the Company's trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, government authorizations, trade
secrets or other intellectual property rights have expired or terminated, or are
expected to expire or terminate in the near future. The Company and its
subsidiaries do not have any knowledge of any event, fact or circumstance that
may have a material adverse effect on the business, operations, properties,
financial condition, results of operations or prospects of the Company and its
subsidiaries, either individually or taken as a whole, relating to (i) any
infringement by the Company or its subsidiaries of trademark, trade name rights,
patents, patent rights, copyrights, inventions, licenses, service names, service
marks, service mark registrations, trade secret or other similar rights of
others, or of any such development of similar or identical trade secrets or
technical information by others or (ii) any person or entity now infringing
trademark, trade name rights, patents, patent rights, copyrights, inventions,
licenses, service names, service marks, service mark registrations, trade secret
or other similar rights or any such development of similar or identical trade
secrets or technical information owned or used by the Company or any of its
subsidiaries and, except as set forth on Schedule 3(m), there is no claim,
action or proceeding being made or brought against, or to the Company's
knowledge, being threatened against, the Company or its subsidiaries regarding
trademark, trade name, patents, patent rights, invention, copyright, license,
service names, service marks, service mark registrations, trade secret or other
infringement; and the Company
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<PAGE> 11
and its subsidiaries are unaware of any facts or circumstances which might have
a reasonable likelihood to give rise to any of the foregoing. The Company and
its subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties.
(n) Environmental Laws. The Company and its subsidiaries (i)
are in compliance with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where the failure to
comply with such laws or regulations or to receive or comply with such permits,
licenses, approvals would not have a material adverse effect on the Company and
its subsidiaries taken as a whole.
(o) Title. The Company and its subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in Schedule 3(o) or such
as do not materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company and its
subsidiaries. Any real property and facilities held under lease by the Company
and its subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the Company
and its subsidiaries.
(p) Insurance. The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as is prudent and customary in the businesses in
which the Company and its subsidiaries are engaged. Neither the Company nor any
of its subsidiaries has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
(q) Regulatory Permits. The Company and its subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit except where the failure to
possess such certificates, authorizations and permits would not have a material
adverse effect on the business of the Company or any of its subsidiaries.
(r) Internal Accounting Controls. The Company and each of
its subsidiaries maintain a system of internal accounting controls sufficient,
in the judgment of the
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<PAGE> 12
Company's board of directors, to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(s) No Materially Adverse Contracts, Etc. Neither the
Company nor any of its subsidiaries is subject to any charter, corporate or
other legal restriction, or any judgment, decree, order, rule or regulation
which in the reasonable judgment of the Company's officers has a material
adverse effect on the business, properties, operations, financial condition,
results of operations or prospects of the Company or its subsidiaries.
(t) Tax Status. Except as set forth on Schedule 3(t), the
Company and each of its subsidiaries has made or filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and has set aside on
its books provision reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply
and there are no unpaid taxes in any material amount.
(u) Certain Transactions. Except as set forth on Schedule
3(u) or in the SEC Documents and except for arm's length transactions pursuant
to which the Company makes payments in the ordinary course of business upon
terms no less favorable than the Company could obtain from third parties and
other than the grant of stock options disclosed on Schedule 3(c), none of the
officers, directors or employees of the Company is presently a party to any
transaction with the Company (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing for
the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
(v) Dilutive Effect. The Company acknowledges that its
obligation to issue (x) Conversion Shares upon conversion of the Series B
Preferred Shares in accordance with the Securities Purchase Agreement and the
Certificate of Designations, (y) Note Conversion Shares upon conversion of the
Notes in accordance with this Agreement and the Notes and (z) Warrant Shares
upon exercise of the Warrants in accordance with this Agreement and the
Warrants, is absolute and unconditional regardless of the dilutive effect that
such issuance may have on the ownership interests of other stockholders of the
Company.
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(w) Covenants Contained in the Securities Purchase
Agreement. The Company has performed, satisfied and complied in all material
respects with the covenants and agreements contained in the Securities Purchase
Agreement required to be performed, satisfied or complied with by the Company at
or prior to the date hereof.
4. COVENANTS.
(a) Best Efforts. Each party shall use its best efforts
timely to satisfy each of the conditions to be satisfied by it as provided in
Section 6 of this Agreement.
(b) Form D. The Company agrees to file a Form D with respect
to the Notes, the Warrants, the Note Conversion Shares and the Warrant Shares as
required under Regulation D and to provide a copy thereof to each Buyer promptly
after such filing. The Company shall, on or before the date hereof, take such
action as the Company shall reasonably determine is necessary to qualify the
Notes, the Warrants, the Note Conversion Shares and the Warrant Shares for, or
to obtain exemption for the issuance of the Notes and the Warrants and the sale
of the Note Conversion Shares and Warrant Shares to the Buyers pursuant to this
Agreement under applicable securities or "Blue Sky" laws of the states of the
United States and shall provide evidence of any such action so taken to the
Buyers on or prior to the date hereof.
(c) Reporting Status. Until the earlier of (i) the date as
of which the Investors (as that term is defined in the Registration Rights
Agreement) may sell all of the Note Conversion Shares and the Warrant Shares
without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or
successor thereto), or (ii) the date on which (A) the Investors shall have sold
all the Note Conversion Shares and the Warrant Shares and (B) the Notes have
been fully converted and the Warrants have been fully exercised (the
"REGISTRATION Period"), the Company shall file all reports required to be filed
with the SEC pursuant to the 1934 Act, and the Company shall not terminate its
status as an issuer required to file reports under the 1934 Act even if the 1934
Act or the rules and regulations thereunder would otherwise permit such
termination.
(d) Financial Information. The Company agrees to send the
following to each Investor (as that term is defined in the Registration Rights
Agreement) during the Registration Period and for so long as amounts due under
the Notes shall remain unpaid: (i) within five (5) days after the filing thereof
with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly Reports
on Form 10-Q, any Current Reports on Form 8-K and any registration statements or
amendments filed pursuant to the 1933 Act; (ii) within one (1) day after release
thereof, copies of all press releases issued by the Company or any of its
subsidiaries and (iii) copies of any notices and other information made
available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the
stockholders.
(e) Reservation of Shares. The Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 100% of the number of shares of Common Stock needed to
provide for the issuance of the
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Note Conversion Shares, the Warrant Shares and any shares of Common Stock issued
to the Holders to pay interest on the Notes.
(f) Listing. The Company shall promptly secure the listing
of the Note Conversion Shares, the Warrant Shares and any shares of Common Stock
issued to the Holders to pay interest on the Notes upon the AMEX (subject to
official notice of issuance) and shall maintain, so long as any other shares of
Common Stock shall be so listed, the listing of all Note Conversion Shares and
Warrant Shares from time to time issuable under the terms of this Agreement, the
Registration Rights Agreement, the Notes and the Warrants on each national
securities exchange and automated quotation system (including the NASDAQ
National Marketing System), if any, upon which shares of Common Stock are then
listed. The Company shall promptly provide to each Buyer copies of any notices
it receives from the AMEX regarding the continued eligibility of the Common
Stock for listing on the AMEX. The Company shall pay all fees and expenses in
connection with satisfying its obligations under this Section 4(f).
(g) Expenses. Each of the Company and the Buyers shall each
pay its respective costs and expenses incurred by such party in connection with
the negotiation, investigation, preparation, execution, delivery and performance
of this Agreement, the Registration Rights Agreement and the other documents
contemplated hereby; provided, that, at the date hereof, the Company shall
reimburse the Buyers for Buyers' attorneys' fees and expenses in connection with
this Agreement, the Registration Rights Agreement and the other documents
contemplated hereby up to an aggregate of one-half of such fees and expenses.
(h) Transfer. Neither Buyer shall transfer any Series B
Preferred Shares, Notes or Warrants unless, on or prior to the effective date of
such transfer, the transferee agrees to be bound by and takes such Series B
Preferred Shares , Notes or Warrants subject to the terms and conditions of this
Agreement.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to its
transfer agent (in the form attached hereto as Exhibit D) to issue certificates,
registered in the name of each Buyer or its respective nominee(s), for the Note
Conversion Shares and the Warrant Shares in such amounts as specified from time
to time by each Buyer to the Company upon conversion of the Notes and exercise
of the Warrants (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to
registration of the Note Conversion Shares and the Warrant Shares under the 1933
Act, all such certificates shall bear the restrictive legend specified in the
Notes and Warrants. The Company warrants that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 5 will be
given by the Company to its transfer agent and that the Notes, the Warrants, the
Note Conversion Shares and the Warrant Shares shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement, the Registration Rights Agreement, the Notes and the
Warrants. Nothing in this Section 5 shall affect in any way each Buyer's
obligations and agreement to comply with all applicable securities laws upon
resale of the Notes, the Warrants, the Note Conversion Shares or the Warrant
Shares. If a Buyer provides the Company with an opinion of counsel, reasonably
satisfactory in form and substance
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<PAGE> 15
to the Company, that registration of a resale by such Buyer of any of the Notes,
the Warrants, the Note Conversion Shares or the Warrant Shares is not required
under the 1933 Act, the Company shall permit the transfer, and, in the case of
the Note Conversion Shares or Warrant Shares, promptly instruct its transfer
agent to issue one or more certificates in such name and in such denominations
as specified by such Buyer. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Buyers by vitiating the
intent and purpose of the transaction contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
under this Section 5 will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Section 5, that the
Buyers shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach and requiring immediate issuance and transfer,
without the necessity of showing economic loss and without any bond or other
security being required.
6. CONDITIONS TO EFFECTIVENESS.
The effectiveness of this Agreement is subject to the
satisfaction on or prior to the date hereof of each of the following conditions,
provided that these conditions are for each party's sole benefit and may be
waived by each of the parties hereto at any time in its sole discretion:
(a) The Company shall have executed this Agreement, the
Registration Rights Agreement, the Notes (as of the Note Issuance Date) and the
Warrants, and delivered the same to the Buyers.
(b) The Buyers shall have executed this Agreement and the
Registration Rights Agreement and delivered the same to the Company.
(c) The Common Stock shall be authorized for quotation on
the AMEX and trading in the Common Stock issuable upon conversion of the Notes
and exercise of the Warrants to be traded on the AMEX shall not have been
suspended by the SEC or the AMEX.
(d) Each party hereto shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied by such party
at or prior to the date hereof.
(e) The Buyers shall have received the opinion of the
Company's counsel dated as of the date hereof, in form, scope and substance
reasonably satisfactory to the Buyers and in substantially the form of Exhibit E
attached hereto.
(f) The Board of Directors of the Company shall have adopted
the resolutions in substantially the form of Exhibit F attached hereto.
(g) As of the date hereof, the Company shall have reserved
out of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion and exercise of the Notes and the Warrants, at least
100% of the number of shares of Common Stock
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<PAGE> 16
necessary to provide for the issuance of the Note Conversion Shares, the Warrant
Shares and any Shares of Common Stock issued to the Holders to pay interest on
the Notes.
(h) The Irrevocable Transfer Agent Instructions, in the form
of Exhibit D attached hereto, shall have been delivered to and acknowledged in
writing by the Company's transfer agent.
(i) The transactions contemplated hereby shall not violate
any law, regulation or order then in effect and applicable to Buyers or the
Company.
(j) Schulte Roth & Zabel LLP shall have been paid by the
Company the amount of $20,000 as payment for the Company's share of such
counsel's legal fees and disbursements.
(k) The Company is in compliance with all applicable laws,
rules and regulations.
7. INDEMNIFICATION.
(a) In consideration of each Buyer's execution and delivery
of this Agreement and in addition to all of the Company's other obligations
under this Agreement, the Company shall defend, protect, indemnify and hold
harmless each Buyer and each other holder of the Series B Preferred Shares, the
Conversion Shares, the Notes, the Warrants, the Note Conversion Shares and the
Warrant Shares and all of their officers, directors, employees and agents
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "BUYER
INDEMNITEES") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection herewith (irrespective of whether any such Buyer Indemnitee is a
party to the action for which indemnification hereunder is sought), and
including reasonable attorneys' fees and disbursements (the "BUYER INDEMNIFIED
LIABILITIES"), incurred by any Buyer Indemnitee (and shall advance the same) as
a result of, or arising out of, or relating to (a) any misrepresentation or
breach of any representation or warranty made by the Company in this Agreement,
the Registration Rights Agreement, the Notes, the Warrants or any other
certificate, instrument or document contemplated hereby or thereby, (b) any
breach of any covenant, agreement or obligation of the Company contained in this
Agreement, the Registration Rights Agreement, the Notes, the Warrants or any
other certificate, instrument or document contemplated hereby or thereby, or (c)
any cause of action, suit or claim brought or made against such Buyer Indemnitee
and arising out of or resulting from the execution, delivery, performance or
enforcement of this Agreement or any other instrument, document or agreement
executed pursuant hereto by any of the Buyer Indemnitees, any transaction
financed or to be financed in whole or in part, directly or indirectly, with the
proceeds of the issuance of the Notes or the Warrants or the status of such
Buyer or holder of the Series B Preferred Shares, the Notes, the Warrants, the
Note Conversion Shares or the Warrant Shares as an investor in the Company. To
the extent that the foregoing undertaking by the Company may be unenforceable
for any reason, the Company shall make the maximum contribution to the payment
and satisfaction of each of the Buyer Indemnified Liabilities which is
permissible under applicable law.
16
<PAGE> 17
(b) In consideration of the Company's execution and delivery
of this Agreement and in addition to all of the Buyers' other obligations under
this Agreement, the Buyers shall defend, protect, indemnify and hold harmless
the Company and all of its officers, directors, employees and agents (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the "COMPANY INDEMNITEES") from
and against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection herewith
(irrespective of whether any such Company Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys' fees and disbursements (the "COMPANY INDEMNIFIED LIABILITIES"),
incurred by any Company Indemnitee (and shall advance the same) as a result of,
or arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Buyers in this Agreement or the
Registration Rights Agreement, or (b) any breach of any covenant, agreement or
obligation of the Buyers contained in this Agreement or the Registration Rights
Agreement. To the extent that the foregoing undertaking by the Buyers may be
unenforceable for any reason, the Buyers shall make the maximum contribution to
the payment and satisfaction of each of the Company Indemnified Liabilities
which is permissible under applicable law.
8. GOVERNING LAW; MISCELLANEOUS.
(a) Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of Delaware without regard
to the principles of conflict of laws.
(b) Counterparts. This Agreement may be executed in two or
more identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. In the event any signature page is
delivered by facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages to be
physically delivered to the other party within five (5) days of the execution
and delivery hereof.
(c) Headings. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) Severability. If any provision of this Agreement shall
be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
(e) Entire Agreement; Amendments. This Agreement, the
Securities Purchase Agreement, the Registration Rights Agreement, the Notes and
the Warrants and the instruments referenced herein and therein contain the
entire understanding of the parties with respect to the matters specifically
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be
17
<PAGE> 18
waived or amended other than by an instrument in writing signed by the party to
be charged with enforcement.
(f) Notices. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile,
provided a copy is mailed by U.S. certified mail, return receipt requested;
(iii) three (3) days after being sent by U.S. certified mail, return receipt
requested, or (iv) one (1) day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:
If to the Company:
NTN Communications, Inc.
5966 La Place Court
Carlsbad, CA 92008
Telephone: (760) 438-7400
Facsimile: (760) 930-1187
Attention: President
With a copy to:
Troy & Gould
1801 Century Park East
16th Floor
Los Angeles, CA 90067
Telephone: (310 ) 553-4441
Facsimile: (310) 201-4746
Attention: William D. Gould
If to the Transfer Agent:
American Stock Transfer & Trust Co.
6201 16th Avenue
3rd Floor
Brooklyn, NY 11219
Telephone: (718) 921-8275
Facsimile: (718) 921-8331
Attention: Paula Caroppoli
If to a Buyer, to its address and facsimile number on the
Schedule of Buyers, with copies to such Buyer's counsel as set forth on the
Schedule of Buyers. Each party shall provide five (5) days' prior written notice
to the other party of any change in address or facsimile number.
18
<PAGE> 19
(g) Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
assigns, including any purchasers of the Series B Preferred Shares, the Notes
and the Warrants. The Company shall not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the Buyers. A Buyer
may assign some or all of its rights hereunder without the consent of the
Company, provided, however, that (i) any such assignment shall not release such
Buyer from its obligations hereunder unless such obligations are assumed by such
assignee and the Company has consented to such assignment and assumption and
(ii) no Buyer may assign its rights hereunder in a manner that would cause the
offering of the Notes or the Warrants hereunder to be required to be registered
under the 1933 Act.
(h) No Third Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns, and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
(i) Survival. The representations and warranties of the
Company and the Buyers contained in Sections 3 and 2, respectively, shall
survive the date hereof until one (1) year after the Company has filed its Form
10-K for the fiscal year ended after the Note Issuance Date, including without
limitation all financial statements thereto. The agreements and covenants set
forth in Sections 4, 5 and 8, and the indemnification provisions set forth in
Section 7, shall survive without limitation. Each Buyer shall be responsible
only for its own representations, warranties, agreements and covenants
hereunder.
(j) Publicity. The Company and each Buyer shall have the
right to approve before issuance any press releases or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of any
Buyer, to make any press release or other public disclosure with respect to such
transactions as is required by applicable law and regulations (although each
Buyer shall be consulted by the Company in connection with any such press
release or other public disclosure prior to its release and shall be provided
with a copy thereof).
(k) Further Assurances. Each party shall do and perform, or
cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
(l) Placement Agent. The Company acknowledges that it has
engaged a placement agent in connection with the transactions contemplated
hereby, which placement agent may have formally or informally engaged other
agents on its behalf. The Company shall be responsible for the payment of any
placement agent's fees or broker's commissions relating to or arising out of the
transactions contemplated hereby. The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including, without limitation,
attorney's fees and out of pocket expenses) arising in connection with any such
claim.
19
<PAGE> 20
(m) No Strict Construction. The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied against
any party.
(n) Judicial Proceedings. Any legal action, suit or
proceeding brought against the Company with respect to this Agreement or the
Securities Purchase Agreement or any of the documents executed in connection
with this Agreement or the Securities Purchase Agreement, may be brought in
federal or state court located in Delaware. The Company and the Buyers
irrevocably submit to the exclusive jurisdiction of the aforementioned Delaware
courts in such action, suit or proceeding, and by execution and delivery of this
Agreement, the Company and the Buyers hereby irrevocably and unconditionally
waive any claim (by way of motion, as a defense or otherwise) of improper venue,
that it is not subject personally to the jurisdiction of such court, that such
courts are an inconvenient forum or that this Agreement or the Securities
Purchase Agreement or the other documents executed in connection this Agreement
or the Securities Purchase Agreement or the subject matter may not be enforced
in or by such court. The Company and the Buyers hereby irrevocably and
unconditionally consent to the service of process of any of the aforementioned
courts in any such action, suit or proceeding by the mailing of copies thereof
by registered or certified mail, postage prepaid, at their respective addresses
set forth or provided for in Section 8, such service to become effective 10 days
after such mailing. Nothing herein contained shall be deemed to affect the right
of any party to serve process in any manner permitted by law or commence legal
proceedings or otherwise proceed against any other party in any other
jurisdiction to enforce judgments obtained in any action, suit or proceeding
brought pursuant to this Section.
(o) The Company agrees that all of the representations and
warranties made by the Company herein shall be true and correct as of the Note
Issuance Date.
(p) Termination. This Agreement shall, at the option of the
Buyers, terminate and shall have no further force and effect if the Note
Issuance Date shall not have occurred within 180 days after the date hereof.
20
<PAGE> 21
IN WITNESS WHEREOF, the Buyers and the Company have caused
this Exchange Agreement to be duly executed as of the date first written above.
COMPANY: BUYERS:
NTN COMMUNICATIONS, INC. STARK INTERNATIONAL
By: By:
------------------------- ----------------------------
Name: Name:
Its: Its:
SHEPHERD INVESTMENTS
INTERNATIONAL, LTD.
By:
----------------------------
Name:
Its:
21
<PAGE> 22
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
Investor Address and
Investor Name Facsimile Number Investor's Legal Counsel
- - ------------- -------------------- ------------------------
<S> <C> <C>
Stark International c/o Staro Asset Management Eleazer Klein, Esq.
(Bermuda) 1500 West Market Street Schulte Roth & Zabel LLP
Mequon, Wisconsin 53092 New York, NY 10022
Fax: (414) 241-1888 Fax: (212) 593-5955
Shepherd Investments c/o Staro Asset Management Eleazer Klein, Esq.
International, Ltd. 1500 West Market Street Schulte Roth & Zabel LLP
(British Virgin Islands) Mequon, Wisconsin 53092 New York, NY 10022
Fax: (414) 241-1888 Fax: (212) 593-5955
</TABLE>
22
<PAGE> 23
SCHEDULES TO EXCHANGE AGREEMENT OF __________ 1998
SCHEDULE 3(A)
SUBSIDIARIES
23
<PAGE> 24
SCHEDULES TO EXCHANGE AGREEMENT OF ________ 1998
SCHEDULE 3(C)
CAPITALIZATION
24
<PAGE> 25
SCHEDULES TO EXCHANGE AGREEMENT OF ________ 1998
SCHEDULE 3(E)
CONFLICTS
25
<PAGE> 26
SCHEDULES TO EXCHANGE AGREEMENT OF ________ 1998
SCHEDULE 3(G)
MATERIAL CHANGES
26
<PAGE> 27
SCHEDULES TO EXCHANGE AGREEMENT OF ________ 1998
SCHEDULE 3(H)
LITIGATION
27
<PAGE> 28
SCHEDULES TO EXCHANGE AGREEMENT OF ________ 1998
SCHEDULE 3(M)
INTELLECTUAL PROPERTY
28
<PAGE> 29
SCHEDULES TO EXCHANGE AGREEMENT OF ________ 1998
SCHEDULE 3(O)
LIENS
29
<PAGE> 30
SCHEDULES TO EXCHANGE AGREEMENT OF ________ 1998
SCHEDULE 3(T)
TAX STATUS
30
<PAGE> 31
SCHEDULES TO EXCHANGE AGREEMENT OF ________ 1998
SCHEDULE 3(U)
CERTAIN TRANSACTIONS
31
<PAGE> 32
EXHIBIT A
FORM OF REGISTRATION RIGHTS AGREEMENT
32
<PAGE> 33
EXHIBIT B
FORM OF WARRANTS
33
<PAGE> 34
EXHIBIT C
FORM OF CONVERTIBLE SENIOR SUBORDINATED PROMISSORY NOTE
34
<PAGE> 35
EXHIBIT D
FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS
35
<PAGE> 36
EXHIBIT E
FORM OF OPINION
36
<PAGE> 37
EXHIBIT F
FORM OF RESOLUTIONS ADOPTED BY THE COMPANY'S BOARD OF DIRECTORS
37
<PAGE> 1
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as
of October 5, 1998, by and among NTN Communications, Inc., a Delaware
corporation, with headquarters located at 5966 La Place Court, Carlsbad, CA
92008 (the "COMPANY"), and the undersigned buyers (each, a "BUYER" and
collectively, the "BUYERS").
WHEREAS:
A. The Company and the Buyers are parties to a Securities
Purchase Agreement, dated as of October 31, 1997 (the "SECURITIES PURCHASE
AGREEMENT"), pursuant to which, among other things, the Company issued and sold
to the Buyers $7 million of the Company's Series B Convertible Preferred Stock
(the "SERIES B PREFERRED SHARES"), which are convertible into shares of the
Company's Common Stock, $.005 par value per share (the "COMMON STOCK") (as
converted, the "CONVERSION SHARES"), in accordance with the terms of the
Company's Certificate of Designations, Preferences and Rights of the Series B
Preferred Shares, filed with the Delaware Secretary of State on October 31, 1997
(the "CERTIFICATE OF DESIGNATIONS").
B. The Company and the Buyers have agreed to exchange the
Series B Preferred Shares and in connection therewith have entered into an
Exchange Agreement dated as of even date herewith (the "EXCHANGE AGREEMENT")
pursuant to which, among other things, the Company and the Buyers have agreed
that (i) on the date hereof, the Company shall issue to each Buyer a Common
Stock Purchase Warrant, substantially in the form of Exhibit B to the Exchange
Agreement (the "WARRANT" and collectively, the "WARRANTS"), to purchase 500,000
shares of Common Stock (the "WARRANT SHARES"); and (ii) on the Note Issuance
Date (as defined in the Exchange Agreement), the Company shall deliver to each
Buyer a convertible senior subordinated promissory note of the Company (the
"NOTE" and collectively, the "NOTES") in the principal amount of the Exchange
Price (as defined in the Exchange Agreement) to such Buyer, convertible into
shares of Common Stock of the Company (the "NOTE CONVERSION SHARES") and
otherwise substantially in the form of Exhibit C to the Exchange Agreement.
C. To induce the Buyers to execute and deliver the Exchange
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 ACT"), and
applicable state securities laws:
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Buyers hereby agree as follows:
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<PAGE> 2
1. DEFINITIONS.
As used in this Agreement, the following terms shall have
the following meanings:
a. "AVERAGE MARKET PRICE" means, the average of the
Closing Prices of the Common Stock for the five (5) trading days immediately
preceding the applicable date.
b. "CLOSING PRICE" means, for any security as of any
date, the last closing price on the American Stock Exchange ("AMEX") as reported
by Bloomberg, L.P. ("BLOOMBERG"), or, if the AMEX is not the principal
securities exchange for such security, the last closing price of such security
on the principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or if the foregoing do not apply, the
last closing price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
closing price is reported for such security by Bloomberg, the last trade price
of such security as reported by Bloomberg, or, if no last trade price is
reported for such security by Bloomberg, the average of the bid prices of any
market makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc.
c. "INVESTOR" means a Buyer and any transferee or
assignee thereof to whom a Buyer assigns its rights under this Agreement and who
agrees to become bound by the provisions of this Agreement in accordance with
Section 9.
d. "PERSON" means a corporation, a limited liability
company, an association, a partnership, an organization, a business, an
individual, a governmental or political subdivision thereof or a governmental
agency.
e. "REGISTER," "REGISTERED," and "REGISTRATION" refer
to a registration effected by preparing and filing one or more Registration
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a continuous
basis ("RULE 415"), and the declaration or ordering of effectiveness of such
Registration Statement(s) by the United States Securities and Exchange
Commission (the "SEC").
f. "REGISTRABLE SECURITIES" means (i) the Note
Conversion Shares issued or issuable upon conversion of the Note, (ii) the
maximum number of shares issued or issuable as interest payments on the Note
assuming all interest payments thereunder are made in shares of Common Stock,
(iii) the Warrant Shares issued or issuable upon exercise of the Warrants and
(iv) any shares of capital stock issued or issuable with respect to the Note
Conversion Shares, the Notes, the Warrant Shares or the Warrants as a result of
any stock split, stock dividend, recapitalization, exchange or similar event.
g. "REGISTRATION STATEMENT" means a registration
statement of the Company filed under the 1933 Act.
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<PAGE> 3
Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Exchange Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare, and,
on or prior to thirty (30) days after the date hereof, file with the SEC a
Registration Statement or Registration Statements (as is necessary) on Form S-3
(or, if such form is unavailable for such a registration, on such other form as
is available for such a registration, subject to the consent of each Buyer and
the provisions of Section 2(c), which consent will not be unreasonably
withheld), covering the resale of all of the Registrable Securities, which
Registration Statement(s) shall state that, in accordance with Rule 416
promulgated under the 1933 Act, such Registration Statement(s) also covers such
indeterminate number of additional shares of Common Stock as may become issuable
upon conversion of the Notes and exercise of the Warrants (i) to prevent
dilution resulting from stock splits, stock dividends or similar transactions
and (ii) by reason of changes in the exercise price of the Warrants in
accordance with the terms of the Warrants. Such Registration Statement shall
register for resale at least that number of shares of Common Stock equal to the
number of Registrable Securities as of the date immediately preceding the date
the Registration Statement is initially filed with the SEC. Such registered
shares of Common Stock shall be allocated among the Investors pro rata based on
the total number of Registrable Securities issued or issuable as of each date
that a Registration Statement, as amended, relating to the resale of the
Registrable Securities is declared effective by the SEC. The Company shall use
its best efforts to have the Registration Statement declared effective by the
SEC within one hundred fifty (150) days after the date hereof. In the event that
the Registration Statement is not declared effective by the SEC within such
time, the Company will pay each Investor a penalty in cash, nonrefundable and in
advance for each sixty (60) day period thereafter that the Registration
Statement has not been declared effective at a rate equal to 1% of the product
of (i) the number of Registrable Securities and (ii) the Average Market Price
for each such share (the "DEFAULT AMOUNT") for the first sixty (60) day period
and 2% of the Default Amount for each sixty (60) day period thereafter.
b. Counsel and Investment Bankers. Subject to Section 5
hereof, in connection with any offering pursuant to this Section 2, the Buyers
shall have the right to select legal counsel and an investment banker or bankers
and manager or managers to administer their interest in the offering, which
investment banker or bankers or manager or managers shall be reasonably
satisfactory to the Company. The Company shall reasonably cooperate with any
such counsel and investment bankers.
c. Eligibility for Form S-3. The Company represents,
warrants and covenants that it currently meets the requirements for the use of
Form S-3 for registration of the sale by the Buyers and any other Investor of
the Registrable Securities and the Company has filed and shall file all reports
required to be filed by the Company with the SEC in a timely manner so as to
obtain and maintain such eligibility for the use of Form S-3. In the event that
Form S-3 is not available for sale by the Investors of the Registrable
Securities, then the Company (i) with the consent of each Investor pursuant to
Section 2(a), shall register the sale of
-3-
<PAGE> 4
the Registrable Securities on another appropriate form and (ii) the Company
shall undertake to register the Registrable Securities on Form S-3 as soon as
such form is available, provided that the Company shall maintain the
effectiveness of the Registration Statement then in effect until such time as a
Registration Statement on Form S-3 covering the Registrable Securities has been
declared effective by the SEC.
3. RELATED OBLIGATIONS.
At such time as the Company is obligated to file a
Registration Statement with the SEC pursuant to Section 2(a), the Company will
use its best efforts to effect the registration of the Registrable Securities in
accordance with the intended method of disposition thereof and, pursuant
thereto, the Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC
a Registration Statement with respect to the Registrable Securities (on or prior
to the thirtieth (30th) day after the date hereof) and use its best efforts to
cause such Registration Statement(s) relating to Registrable Securities to
become effective as soon as possible after such filing (but no later than one
hundred fifty (150) days after the date hereof), and keep the Registration
Statement(s) effective pursuant to Rule 415 at all times until the earlier of
(i) the date as of which the Investors may sell all of the Registrable
Securities without restriction pursuant to Rule 144(k) promulgated under the
1933 Act (or successor thereto) or (ii) the date on which (A) the Investors
shall have sold all the Registrable Securities and (B) the Notes have been fully
converted and the Warrants have been fully exercised (the "REGISTRATION
PERIOD"), which Registration Statement(s) (including any amendments or
supplements thereto and prospectuses contained therein) shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
b. The Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to the
Registration Statement(s) and the prospectus(es) used in connection with the
Registration Statement(s), which prospectus(es) are to be filed pursuant to Rule
424 promulgated under the 1933 Act, as may be necessary to keep the Registration
Statement(s) effective at all times during the Registration Period, and, during
such period, comply with the provisions of the 1933 Act with respect to the
disposition of all Registrable Securities of the Company covered by the
Registration Statement(s) until such time as all of such Registrable Securities
shall have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof as set forth in the Registration
Statement(s). The Company shall use it best efforts to cause such amendment
and/or new Registration Statement to become effective as soon as practicable
following the filing thereof.
c. The Company shall furnish to each Investor whose
Registrable Securities are included in the Registration Statement(s) and its
legal counsel without charge (i) prior to the filing with the SEC of any
Registration Statement and any amendment thereto, at least one copy of any cover
letter accompanying such Registration Statement and amendments
-4-
<PAGE> 5
thereto, by or on behalf of the Company to the SEC or the staff of the SEC, (ii)
promptly after the same is prepared and filed with the SEC at least one copy of
the Registration Statement and any amendment thereto, including financial
statements and schedules, all documents incorporated therein by reference and
all exhibits, the prospectus(es) included in such Registration Statement(s)
(including each preliminary prospectus) and, with regards to the Registration
Statement, any correspondence by or on behalf of the Company to the SEC or the
staff of the SEC and any correspondence from the SEC or the staff of the SEC to
the Company or its representatives, (iii) upon the effectiveness of any
Registration Statement, ten (10) copies of the prospectus included in such
Registration Statement and all amendments and supplements thereto (or such other
number of copies as such Investor may reasonably request) and (iv) such other
documents, including any preliminary prospectus, as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor.
d. The Company shall use reasonable efforts to (i) register
and qualify the Registrable Securities covered by the Registration Statement(s)
under such other securities or "blue sky" laws of such jurisdictions in the
United States as any Investor reasonably requests, (ii) prepare and file in
those jurisdictions, such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
service of process in any such jurisdiction. The Company shall promptly notify
each Investor who holds Registrable Securities of the receipt by the Company of
any notification with respect to the suspension of the registration or
qualification of any of the Registrable Securities for sale under the securities
or "blue sky" laws of any jurisdiction in the United States or its receipt of
actual notice of the initiation or threatening of any proceeding for such
purpose.
e. In the event Investors who hold a majority of the
Registrable Securities being offered in the offering select underwriters for the
offering, the Company shall 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
underwriters of such offering.
f. As promptly as practicable after becoming aware of such
event, the Company shall notify each Investor in writing of the happening of any
event, of which the Company has knowledge, as a result of which the prospectus
included in a Registration Statement, as then in effect, includes an untrue
statement of a material fact or omission to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and promptly prepare a
supplement or amendment to the Registration Statement to correct such untrue
statement or omission, and deliver ten (10) copies of such supplement or
amendment to each Investor (or such
-5-
<PAGE> 6
other number of copies as such Investor may reasonably request). The Company
shall also promptly notify each Investor in writing (i) when a prospectus or any
prospectus supplement or post-effective amendment has been filed, and when a
Registration Statement or any post-effective amendment has become effective
(notification of such effectiveness shall be delivered to each Investor by
facsimile on the same day of such effectiveness and by overnight mail), (ii) of
any request by the SEC for amendments or supplements to a Registration Statement
or related prospectus or related information, and (iii) of the Company's
reasonable determination that a post-effective amendment to a Registration
Statement would be appropriate.
g. The Company shall use its best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement, or the suspension of the qualification of any of the
Registrable Securities for sale in any jurisdiction and, if such an order or
suspension is issued, to obtain the withdrawal of such order or suspension at
the earliest possible moment and to notify each Investor who holds Registrable
Securities being sold (and, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.
h. The Company shall permit each Investor and a single firm
of counsel, initially Schulte Roth & Zabel LLP or such other counsel as
thereafter designated as selling stockholders' counsel by the Investors who hold
a majority of the Registrable Securities being sold, to review and comment upon
any cover letter accompanying a Registration Statement and amendments thereto,
by or on behalf of the Company to the SEC or the staff of the SEC and the
Registration Statement(s) and all amendments and supplements thereto in each
case at least three (3) business days prior to their filing with the SEC, and
not file any such document in a form to which such counsel reasonably objects.
The Company shall not submit a request for acceleration of the effectiveness of
a Registration Statement(s) or any amendment or supplement thereto without the
prior approval of such counsel, which consent shall not be unreasonably
withheld.
i. At the request of the Investors who hold a majority of
the Registrable Securities being sold, the Company shall furnish, on the date
that Registrable Securities are delivered to an underwriter, if any, for sale in
connection with the Registration Statement (i) if required by an underwriter, a
letter, dated such date, from the Company's independent certified public
accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, and (ii) an opinion, dated as of such date, of
counsel representing the Company for purposes of such Registration Statement, in
form, scope and substance as is customarily given in an underwritten public
offering, addressed to the underwriters and the Investors.
j. The Company shall make available for inspection by (i)
any Investor, (ii) any underwriter participating in any disposition pursuant to
a Registration Statement, (iii) one firm of attorneys and one firm of
accountants or other agents retained by the Investors, and (iv) one firm of
attorneys retained by all such underwriters (collectively, the
-6-
<PAGE> 7
"INSPECTORS") all pertinent financial and other records, and pertinent corporate
documents and properties of the Company (collectively, the "RECORDS"), as shall
be reasonably deemed necessary by each Inspector to enable each Inspector to
exercise its due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; provided, however, that
each Inspector shall hold in strict confidence and shall not make any disclosure
(except to an Investor) or use of any Record or other information which the
Company determines in good faith to be confidential, and of which determination
the Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement or is otherwise required under the 1933 Act, (b) the release of such
Records is ordered pursuant to a final, non-appealable subpoena or order from a
court or government body of competent jurisdiction, or (c) the information in
such Records has been made generally available to the public other than by
disclosure in violation of this or any other agreement. Each Investor agrees
that it shall, upon learning that disclosure of such Records is sought in or by
a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at its expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential.
k. The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a final, non-appealable
subpoena or order from a court or government body of competent jurisdiction, or
(iv) such information has been made generally available to the public other than
by disclosure in violation of this or any other agreement. The Company agrees
that it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt written notice to such Investor
and allow such Investor, at the Investor's expense, to undertake appropriate
action to prevent disclosure of, or to obtain a protective order for, such
information.
l. The Company shall use its best efforts either to (i)
cause all the Registrable Securities covered by a Registration Statement to be
listed on each securities exchange on which securities of the same class or
series issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange, or
(ii) secure designation and quotation of all the Registrable Securities covered
by the Registration Statement on the Nasdaq National Market System or, if,
despite the Company's best efforts to satisfy the preceding clause (i) or (ii),
the Company is unsuccessful in satisfying the preceding clause (i) or (ii), to
secure the inclusion for quotation on the Nasdaq SmallCap Market for such
Registrable Securities and, without limiting the generality of the foregoing, to
arrange for at least two market makers to register with the National Association
of Securities Dealers, Inc. as such with respect to such Registrable Securities.
The Company shall pay all fees and expenses in connection with satisfying its
obligation under this Section 3(l).
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<PAGE> 8
m. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and, to the extent applicable, any managing
underwriter or underwriters, to facilitate the timely preparation and delivery
of certificates (not bearing any restrictive legend) representing the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case may
be, as the managing underwriter or underwriters, if any, or, if there is no
managing underwriter or underwriters, the Investors may reasonably request and
registered in such names as the managing underwriter or underwriters, if any, or
the Investors may request. Not later than the date on which any Registration
Statement registering the resale of Registrable Securities is declared
effective, the Company shall deliver to its transfer agent instructions,
accompanied by any reasonably required opinion of counsel, that permit sales of
unlegended securities in a timely fashion that complies with then mandated
securities settlement procedures for regular way market transactions.
n. The Company shall take all other reasonable actions
necessary to expedite and facilitate disposition by the Investors of Registrable
Securities pursuant to a Registration Statement.
o. The Company shall provide a CUSIP number, a transfer
agent and registrar of all such Registrable Securities not later than the
effective date of such Registration Statement.
p. If requested by the managing underwriters or an Investor,
the Company shall immediately incorporate in a prospectus supplement or
post-effective amendment such information as the managing underwriters and the
Investors agree should be included therein relating to the sale and distribution
of Registrable Securities, including, without limitation, information with
respect to the number of Registrable Securities being sold to such underwriters,
the purchase price being paid therefor by such underwriters and with respect to
any other terms of the underwritten (or best efforts underwritten) offering of
the Registrable Securities to be sold in such offering; make all required
filings of such prospectus supplement or post-effective amendment as soon as
notified of the matters to be incorporated in such prospectus supplement or
post-effective amendment; and supplement or make amendments to any Registration
Statement if requested by an Investor or any underwriter of such Registrable
Securities.
q. The Company shall use its best efforts to cause the
Registrable Securities covered by the applicable Registration Statement to be
registered with or approved by such other governmental agencies or authorities
as may be necessary to consummate the disposition of such Registrable
Securities.
r. The Company shall otherwise use its best efforts to
comply with all applicable rules and regulations of the SEC in connection with
any registration hereunder.
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<PAGE> 9
4. OBLIGATIONS OF THE INVESTORS.
a. At least seven (7) days prior to the first anticipated
filing date of the Registration Statement, the Company shall notify each
Investor in writing of the information the Company requires from each such
Investor if such Investor elects to have any of such Investor's Registrable
Securities included in the Registration Statement. It shall be a condition
precedent to the obligations of the Company to complete the registration
pursuant to this Agreement with respect to the Registrable Securities of a
particular Investor that such Investor shall furnish to the Company such
information as may be requested in writing by the Company regarding itself, the
Registrable Securities held by it and the intended method of disposition of the
Registrable Securities held by it as shall be reasonably required to effect the
registration of such Registrable Securities and shall execute such documents in
connection with such registration as the Company may reasonably request.
b. Each Investor by such Investor's acceptance of the
Registrable Securities agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement(s) hereunder, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement.
c. Each Investor agrees that, upon receipt of any notice
from the Company of the happening of any event of the kind described in Section
3(g) or the first sentence of 3(f), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to the Registration Statement(s)
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Section 3(g) or the
first sentence of 3(f) and, if so directed by the Company, such Investor shall
deliver to the Company (at the expense of the Company) or destroy all copies in
such Investor's possession, of the prospectus covering such Registrable
Securities current at the time of receipt of such notice.
d. No Investor may participate in any underwritten
registration hereunder unless such Investor (i) agrees to sell such Investor's
Registrable Securities on the basis provided in any underwriting arrangements
approved by the Investors entitled hereunder to approve such arrangements, (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements, and (iii) agrees to pay its pro rata share of
all underwriting discounts and commissions.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts
and commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, and
fees and disbursements of counsel for the Company and fees and disbursements of
one counsel for the Investors, shall be paid by the Company.
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<PAGE> 10
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a
Registration Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will,
and hereby does, indemnify, hold harmless and defend each Investor who holds
such Registrable Securities, the directors, officers, partners, employees,
agents and each Person, if any, who controls any Investor within the meaning of
the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934
ACT"), and any underwriter (as defined in the 1933 Act) for the Investors, and
the directors and officers of, and each Person, if any, who controls, any such
underwriter within the meaning of the 1933 Act or the 1934 Act (each, an
"INDEMNIFIED PERSON"), against any losses, claims, damages, liabilities,
judgments, fines, penalties, charges, costs, attorneys' fees, amounts paid in
settlement or expenses, joint or several (collectively, "CLAIMS"), incurred in
investigating, preparing or defending any action, claim, suit, inquiry,
proceeding, investigation or appeal taken from the foregoing by or before any
court or governmental, administrative or other regulatory agency, body or the
SEC, whether pending or threatened, whether or not an indemnified party is or
may be a party thereto ("INDEMNIFIED DAMAGES"), to which any of them may become
subject insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or any post-effective amendment thereto or in any filing made in
connection with the qualification of the offering under the securities or other
"blue sky" laws of any jurisdiction in which Registrable Securities are offered,
or the omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus if used prior to the effective date of such
Registration Statement, or contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(iii) any violation or alleged violation by the Company of the 1933 Act, the
1934 Act, any other law, including, without limitation, any state securities
law, or any rule or regulation thereunder relating to the offer or sale of the
Registrable Securities pursuant to a Registration Statement (the matters in the
foregoing clauses (i) through (iii) being, collectively, "VIOLATIONS"). Subject
to the restrictions set forth in Section 6(d) with respect to the number of
legal counsel, the Company shall reimburse the Investors and each such
underwriter or controlling person, promptly as such expenses are incurred and
are due and payable, for any legal fees or other reasonable expenses incurred by
them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (i) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c); (ii) with respect to any preliminary prospectus, shall
not inure to the benefit of any such person from whom the person asserting any
such Claim purchased the Registrable Securities that are the subject thereof (or
to the benefit of any person controlling such person) if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus was
timely made available by the
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<PAGE> 11
Company pursuant to Section 3(c), and the Indemnified Person was promptly
advised in writing not to use the incorrect prospectus prior to the use giving
rise to a Violation and such Indemnified Person, notwithstanding such advice,
used it; (iii) shall not be available to the extent such Claim is based on a
failure of the Investor to deliver or to cause to be delivered the prospectus
made available by the Company; and (iv) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnified Person and shall survive the transfer of
the Registrable Securities by the Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to severally and not
jointly indemnify, hold harmless and defend, to the same extent and in the same
manner as is set forth in Section 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement, each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act
(collectively and together with an Indemnified Person, an "INDEMNIFIED PARTY"),
against any Claim or Indemnified Damages to which any of them may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or
Indemnified Damages 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 to the Company by such
Investor expressly for use in connection with such Registration Statement; and,
subject to Section 6(d), such Investor will reimburse any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) and the agreement with respect to contribution
contained in Section 7 shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of such
Investor, which consent shall not be unreasonably withheld; provided, further,
however, that the Investor shall be liable under this Section 6(b) for only that
amount of a Claim or Indemnified Damages as does not exceed the net proceeds to
such Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented.
c. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals
-11-
<PAGE> 12
participating in any distribution, to the same extent as provided above, with
respect to information such persons so furnished in writing expressly for
inclusion in the Registration Statement.
d. Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action or proceeding (including any governmental action or proceeding) involving
a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in
respect thereof is to be made against any indemnifying party under this Section
6, deliver to the indemnifying party a written notice of the commencement
thereof, and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume control of the defense thereof
with counsel mutually satisfactory to the indemnifying party and the Indemnified
Person or the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or 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 retained by the Indemnified Person or
Indemnified Party, the representation by such counsel of the Indemnified Person
or Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential differing interests between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding. The Company shall pay reasonable fees for only one separate legal
counsel for the Investors, and such legal counsel shall be selected by the
Investors holding a majority in interest of the Registrable Securities included
in the Registration Statement to which the Claim relates. The Indemnified Party
or Indemnified Person shall cooperate fully with the indemnifying party in
connection with any negotiation or defense of any such action or claim by the
indemnifying party and shall furnish to the indemnifying party all information
reasonably available to the Indemnified Party or Indemnified Person which
relates to such action or claim. The indemnifying party shall keep the
Indemnified Party or Indemnified Person fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. No
indemnifying party shall be liable for any settlement of any action, claim or
proceeding effected without its written consent, provided, however, that the
indemnifying party shall not unreasonably withhold, delay or condition its
consent. No indemnifying party shall, without the consent of the Indemnified
Party or Indemnified Person, consent to entry of any judgment or enter into any
settlement or other compromise which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party or
Indemnified Person of a release from all liability in respect to such claim or
litigation. Following indemnification as provided for hereunder, the
indemnifying party shall be subrogated to all rights of the Indemnified Party or
Indemnified Person with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been made. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action.
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<PAGE> 13
e. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or Indemnified Damages
are incurred.
f. The indemnity agreements contained herein shall be in
addition to (i) any cause of action or similar right of the Indemnified Party or
Indemnified Person against the indemnifying party or others, and (ii) any
liabilities the indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party
is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that: (i) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6; (ii) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any seller of Registrable Securities
who was not guilty of 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.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the
benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or
regulation of the SEC that may at any time permit the Investors to sell
securities of the Company to the public without registration ("RULE 144"), the
Company agrees to:
a. make and keep public information available, as those
terms are understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and
other documents required of the Company under the 1933 Act and the 1934 Act so
long as the Company remains subject to such requirements (it being understood
that nothing herein shall limit the Company's obligations under Section 4(c) of
the Exchange Agreement) and the filing of such reports and other documents is
required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities pursuant to Rule 144 without
registration.
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<PAGE> 14
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights to have the Company register Registrable
Securities pursuant to this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of Registrable Securities if:
(i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; (v) such transfer shall have been made in
accordance with the applicable requirements of the Exchange Agreement; (vi) such
transferee shall be an "accredited investor" as that term is defined in Rule 501
of Regulation D promulgated under the 1933 Act; and (vii) in the event the
assignment occurs subsequent to the date of effectiveness of the Registration
Statement required to be filed pursuant to Section 2(a), the transferee agrees
to pay all reasonable expenses of amending or supplementing such Registration
Statement to reflect such assignment.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the
observance thereof may be waived (either generally or in a particular instance
and either retroactively or prospectively), only with the written consent of the
Company and Investors who hold two-thirds (2/3) of the Registrable Securities.
Any amendment or waiver effected in accordance with this Section 10 shall be
binding upon each Investor and the Company.
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of
Registrable Securities whenever such person or entity owns of record such
Registrable Securities. If the Company receives conflicting instructions,
notices or elections from two or more persons or entities with respect to the
same Registrable Securities, the Company shall act upon the basis of
instructions, notice or election received from the registered owner of such
Registrable Securities.
b. Any notices consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy
is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days
after being sent by U.S. certified mail, return receipt requested; or (iv) one
(1) day after deposit with a nationally recognized overnight delivery service,
in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:
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<PAGE> 15
if to the Company:
NTN Communications, Inc.
5966 La Place Court
Carlsbad, CA 92008
Telephone: (760) 438-7400
Facsimile: (760) 930-1187
Attention: President
with a copy to:
Troy & Gould
1801 Century Park East
16th Floor
Los Angeles, CA 90067
Telephone: (310) 553-4441
Facsimile: (310) 201-4746
Attention: William D. Gould
if to a Buyer, to its address and facsimile number on
the Schedule of Buyers attached hereto, with copies
to such Buyer's counsel as set forth on the Schedule
of Buyers.
Each party shall provide five (5) days prior notice to the other
party of any change in address, phone number or facsimile number.
c. Failure of any party to exercise any right or remedy
under this Agreement or otherwise, or delay by a party in exercising such right
or remedy, shall not operate as a waiver thereof.
d. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York without regard to the
principles of conflict of laws. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. This Agreement, the Exchange Agreement (including all
schedules and exhibits thereto), the Note and the Warrants constitute the entire
agreement among the parties hereto with respect to the subject matter hereof and
thereof. There are no restrictions, promises, warranties or undertakings, other
than those set forth or referred to herein and therein.
f. Subject to the requirements of Section 9, this Agreement
shall inure to the benefit of and be binding upon the permitted successors and
assigns of each of the parties hereto.
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<PAGE> 16
g. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more identical
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by facsimile transmission of a copy
of this Agreement bearing the signature of the party so delivering this
Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
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<PAGE> 17
IN WITNESS WHEREOF, the parties have caused this
Registration Rights Agreement to be duly executed as of the day and year first
above written.
COMPANY: BUYERS:
NTN COMMUNICATIONS, INC. STARK INTERNATIONAL
By:___________________________________ By:_____________________________
Name: Name:
Its: Its:
SHEPHERD INVESTMENTS
INTERNATIONAL, LTD.
By:_____________________________
Name:
Its:
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<PAGE> 18
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
INVESTOR NAME INVESTOR ADDRESS AND FACSIMILE NUMBER INVESTOR'S LEGAL COUNSEL
- - ---------------------------- -------------------------------------------- ------------------------------------------
<S> <C> <C>
Stark International c/o Staro Asset Management Eleazer Klein, Esq.
1500 West Market Street Schulte Roth & Zabel LLP
Mequon, Wisconsin 53092 900 Third Avenue
Fax: (414) 241-1888 New York, New York 10022
Fax: (212) 593-5955
Shepherd Investments c/o Staro Asset Management Eleazer Klein, Esq.
International, Ltd. 1500 West Market Street Schulte Roth & Zabel LLP
Mequon, Wisconsin 53092 900 Third Avenue
Fax: (414) 241-1888 New York, New York 10022
Fax: (212) 593-5955
</TABLE>
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<PAGE> 1
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES
LAW OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. THIS WARRANT AND SUCH
SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN
COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THIS WARRANT, THE REGISTRATION
RIGHTS AGREEMENT DATED AS OF OCTOBER 5, 1998 BY AND AMONG NTN COMMUNICATIONS,
INC. (THE "COMPANY"), STARK INTERNATIONAL AND SHEPHERD INVESTMENTS
INTERNATIONAL, LTD. (COLLECTIVELY, THE "BUYERS") AND THE EXCHANGE AGREEMENT
DATED AS OF OCTOBER 5, 1998 BY AND AMONG THE COMPANY AND THE BUYERS.
NTN COMMUNICATIONS, INC.
COMMON STOCK PURCHASE WARRANT
No. W-10/05/98-1 October 5, 1998
Warrant to Purchase 500,000
Shares of Common Stock
NTN COMMUNICATIONS, INC., a Delaware corporation (the
"Company"), for value received, hereby certifies that STARK INTERNATIONAL, or
registered assigns (the "Holder"), is entitled to purchase from the Company
500,000 duly authorized, validly issued, fully paid and nonassessable shares of
Common Stock, par value $.005 per share, of the Company (the "Common Stock"), at
a purchase price per share equal to the Purchase Price (as defined in Section 1
below), at any time or from time to time prior to the earlier of (x) 5:00 P.M.,
New York City time, on February 1, 2001 or (y) the date set forth in Section 2.2
hereof (each of (x) or (y) is referred to herein as the "Expiration Date"), all
subject to the terms, conditions and adjustments set forth below in this
Warrant.
This Warrant is one of the Common Stock Purchase Warrants
(collectively, the "Warrants", such term to include any such warrants issued in
substitution therefor) originally issued in connection with the Exchange
Agreement dated as of October 5, 1998 (the "Exchange Agreement") by and among
the Company, the Holder and Shepherd Investments International, Ltd. The
Warrants originally so issued evidence rights to purchase an aggregate number of
1,000,000 shares of Common Stock subject to adjustment as provided herein.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings assigned such terms in the Exchange Agreement.
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1. DEFINITIONS. As used herein, unless the context otherwise
requires, the following terms shall have the meanings indicated:
"Additional Shares of Common Stock" shall mean all shares
(including treasury shares) of Common Stock issued or sold (or, pursuant to
Section 3.2 or 3.3, deemed to be issued) by the Company after the date hereof,
whether or not subsequently reacquired or retired by the Company, other than
(a) (i) shares issued upon the exercise of the Warrants and
(ii) such number of additional shares as may become issuable upon the
exercise of the Warrants by reason of adjustments required pursuant to
the anti-dilution provisions applicable to such Warrants as in effect
on the date hereof,
(b) (i) shares issued upon the exercise of options granted or
to be granted under the Company's stock option plans as in effect on
the date hereof or under any other employee stock option or purchase
plan or plans adopted or assumed after such date by the Company's Board
of Directors; provided in each such case that the exercise or purchase
price for any such share shall not be less than 85% of the fair market
value (determined in good faith by the Company's Board of Directors) of
the Common Stock on the date of grant, and (ii) such additional number
of shares as may become issuable pursuant to the terms of any such
plans by reason of adjustments required pursuant to anti-dilution
provisions applicable to such securities in order to reflect any
subdivision or combination of Common Stock, by reclassification or
otherwise, or any dividend on Common Stock payable in Common Stock, and
(c) shares of Common Stock issued upon the exercise of options
and warrants outstanding as of October 5, 1998.
"Applicable Amount" shall mean (i) initially, $1.25; (ii)
$0.75, if the daily Market Price on each day during any 10 consecutive trading
days shall be equal to or greater than $1.75 but less than $2.00; (iii) $0.625,
if the daily Market Price on each day during any 10 consecutive trading days
shall be equal to or greater than $2.00 but less than $2.25; (iv) $.050, if the
daily Market Price on each day during any 10 consecutive trading days shall be
equal to or greater than $2.25 but less than $2.50; (v) $0.375, if the daily
Market Price on each day during any 10 consecutive trading days shall be equal
to or greater than $2.50 but less than $3.00; (vi) $0.25, if the daily Market
Price on each day during any 10 consecutive trading days shall be equal to or
greater than $3.00 but less than $4.00; and (vii) $0.005, if the daily Market
Price on each day during any 10 consecutive trading days shall be equal to or
greater than $4.00. No adjustments to the Applicable Amount pursuant hereto
shall be made to increase the Applicable Amount then in effect.
"Business Day" shall mean any day other than a Saturday or a
Sunday or a day on which commercial banking institutions in the City of New York
are authorized by law to be closed. Any reference to "days" (unless Business
Days are specified) shall mean calendar days.
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"Common Stock" shall have the meaning assigned to it in the
introduction to this Warrant, such term to include any stock into which such
Common Stock shall have been changed or any stock resulting from any
reclassification of such Common Stock, and all other stock of any class or
classes (however designated) of the Company the holders of which have the right,
without limitation as to amount, either to all or to a share of the balance of
current dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference.
"Company" shall have the meaning assigned to it in the
introduction to this Warrant, such term to include any corporation or other
entity which shall succeed to or assume the obligations of the Company hereunder
in compliance with Section 4.
"Convertible Securities" shall mean any evidences of
indebtedness, shares of stock (other than Common Stock) or other securities
directly or indirectly convertible into or exchangeable for Additional Shares of
Common Stock.
"Current Market Price" shall mean, on any date specified
herein, the average of the daily Market Price during the 10 consecutive trading
days, except that, if on any such date the shares of Common Stock are not listed
or admitted for trading on any national securities exchange or quoted in the
over-the-counter market, the Current Market Price shall be the Market Price on
such date.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time, and the rules and regulations thereunder, or any
successor statute.
"Exchange Agreement" shall have the meaning assigned to it in
the introduction to this Warrant.
"Expiration Date" shall have the meaning assigned to it in the
introduction to this Warrant.
"Fair Value" shall mean, on any date specified herein (i) in
the case of cash, the dollar amount thereof, (ii) in the case of a security, the
Current Market Price, and (iii) in all other cases determined in good faith
jointly by the Company and the Holder; provided, however, that if such parties
are unable to reach agreement within a reasonable period of time, the Fair Value
shall be determined in good faith by an independent investment banking firm
selected jointly by the Company and the Holder or, if that selection cannot be
made within 10 days, by an independent investment banking firm selected by the
American Arbitration Association in accordance with its rules, and provided
further, that the Company shall pay all of the fees and expenses of any third
parties incurred in connection with determining the Fair Value.
"Holder" shall have the meaning assigned to it in the
introduction to this Warrant.
"Market Price" shall mean, on any date specified herein, the
amount per share of the Common Stock, equal to (i) the last reported sale price
of such Common Stock, regular way, on such date or, in case no such sale takes
place on such date, the average of the closing bid and
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asked prices thereof regular way on such date, in either case as officially
reported on the principal national securities exchange on which such Common
Stock is then listed or admitted for trading, (ii) if such Common Stock is not
then listed or admitted for trading on any national securities exchange but is
designated as a national market system security by the NASD, the last reported
trading price of the Common Stock on such date, (iii) if there shall have been
no trading on such date or if the Common Stock is not so designated, the average
of the closing bid and asked prices of the Common Stock on such date as shown by
the NASD automated quotation system, or (iv) if such Common Stock is not then
listed or admitted for trading on any national exchange or quoted in the
over-the-counter market, the fair value thereof (as of a date which is within 20
days of the date as of which the determination is to be made) determined in good
faith jointly by the Company and the Holder; provided, however, that if such
parties are unable to reach agreement within a reasonable period of time, the
Market Price shall be determined in good faith by an independent investment
banking firm selected jointly by the Company and the Holder or, if that
selection cannot be made within 10 days, by an independent investment banking
firm selected by the American Arbitration Association in accordance with its
rules, and provided further, that the Company shall pay all of the fees and
expenses of any third parties incurred in connection with determining the Market
Price.
"NASD" shall mean the National Association of Securities
Dealers, Inc.
"Note" shall mean the convertible senior subordinated
promissory note of the Company to be issued to the Holder pursuant to the terms
of the Exchange Agreement, such term to include any such notes issued in
substitution for such Note.
"Options" shall mean any rights, options or warrants to
subscribe for, purchase or otherwise acquire either Additional Shares of Common
Stock or Convertible Securities.
"Other Securities" shall mean any stock (other than Common
Stock) and other securities of the Company or any other Person (corporate or
otherwise) which the holders of the Warrants at any time shall be entitled to
receive, or shall have received, upon the exercise of the Warrants, in lieu of
or in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4 or otherwise.
"Person" shall mean any individual, firm, partnership,
corporation, trust, joint venture, association, joint stock company, limited
liability company, unincorporated organization or any other entity or
organization, including a government or agency or political subdivision thereof,
and shall include any successor (by merger or otherwise) of such entity.
"Purchase Price" shall mean, per share, the Applicable Amount,
subject to adjustment and readjustment from time to time as provided in Section
3, and, as so adjusted or readjusted, shall remain in effect until a further
adjustment or readjustment thereof is required by Section 3.
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"Registration Rights Agreement" shall mean the Registration
Rights Agreement dated as of October 5, 1998 by and among the Company and the
Buyers, substantially in the form of Exhibit A to the Exchange Agreement.
"Rights" shall have the meaning assigned to it in Section 3.9.
"Securities Act" shall mean the Securities Act of 1933, as
amended from time to time, and the rules and regulations thereunder, or any
successor statute.
"Warrants" shall have the meaning assigned to it in the
introduction to this Warrant.
2. EXERCISE OF WARRANT.
2.1. Manner of Exercise; Payment of the Purchase Price. (a)
This Warrant may be exercised by the Holder hereof, in whole or in part, at any
time or from time to time prior to the Expiration Date, by surrendering to the
Company at its principal office this Warrant, with the form of Election to
Purchase Shares attached hereto as Exhibit A (or a reasonable facsimile thereof)
duly executed by the Holder and accompanied by payment of the Purchase Price for
the number of shares of Common Stock specified in such form.
(b) Payment of the Purchase Price may be made as follows (or
by any combination of the following): (i) in United States currency by cash or
delivery of a certified check or bank draft payable to the order of the Company
or by wire transfer to the Company, (ii) by cancellation of such number of the
shares of Common Stock otherwise issuable to the Holder upon such exercise as
shall be specified in such Election to Purchase Shares, such that the excess of
the Current Market Price of such specified number of shares on the date of
exercise over the portion of the Purchase Price attributable to such shares
shall equal the Purchase Price attributable to the shares of Common Stock to be
issued upon such exercise, in which case such amount shall be deemed to have
been paid to the Company and the number of shares issuable upon such exercise
shall be reduced by such specified number, or (iii) by surrender to the Company
for cancellation certificates representing shares of Common Stock of the Company
owned by the Holder (properly endorsed for transfer in blank) having a Current
Market Price on the date of Warrant exercise equal to the Purchase Price.
2.2. Mandatory Exercise. Upon no less than 30 days prior
written notice to the Holder, the Company may elect by written notice to the
Holder to accelerate the Expiration Date to the date of consummation of a Major
Transaction (as defined in the Note) provided that the consideration per share
of Common Stock to be received in any such Major Transaction is greater than the
then applicable Purchase Price.
2.3. When Exercise Effective. Each exercise of this Warrant
shall be deemed to have been effected immediately prior to the close of business
on the Business Day on which this Warrant shall have been surrendered to, and
the Purchase Price shall have been received by, the Company as provided in
Section 2.1, and at such time the Person or Persons in whose name or names any
certificate or certificates for shares of Common Stock (or Other Securities)
shall be
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issuable upon such exercise as provided in Section 2.4 shall be deemed to have
become the holder or holders of record thereof for all purposes.
2.4. Delivery of Stock Certificates, etc.; Charges, Taxes and
Expenses.
(a) As soon as practicable after each exercise of this
Warrant, in whole or in part, and in any event within 3 Business Days
thereafter, the Company shall cause to be issued in the name of and
delivered to the Holder hereof or, subject to the Registration Rights
Agreement and the Exchange Agreement, as the Holder may direct,
(i) a certificate or certificates for the number of
shares of Common Stock (or Other Securities) to which the
Holder shall be entitled upon such exercise plus, in lieu of
issuance of any fractional share to which the Holder would
otherwise be entitled, if any, a check for the amount of cash
equal to the same fraction multiplied by the Current Market
Price per share on the date of Warrant exercise, and
(ii) in case such exercise is for less than all of
the shares of Common Stock purchasable under this Warrant, a
new Warrant or Warrants of like tenor, for the balance of the
shares of Common Stock purchasable hereunder.
(b) Issuance of certificates for shares of Common Stock upon
the exercise of this Warrant shall be made without charge to the Holder
hereof for any issue or transfer tax or other incidental expense, in
respect of the issuance of such certificates, all of which such taxes
and expenses shall be paid by the Company.
2.5. Company to Reaffirm Obligations. The Company shall, at
the time of each exercise of this Warrant, upon the request of the Holder
hereof, acknowledge in writing its continuing obligation to afford to such
Holder all rights to which such Holder shall continue to be entitled after such
exercise in accordance with the terms of this Warrant, provided that if the
Holder of this Warrant shall fail to make any such request, such failure shall
not affect the continuing obligation of the Company to afford such rights to the
Holder.
3. ADJUSTMENT OF COMMON STOCK ISSUABLE UPON EXERCISE.
3.1. Adjustment of Purchase Price.
3.1.1. Issuance of Additional Shares of Common Stock. In case
the Company at any time or from time to time after the date hereof shall issue
or sell Additional Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to Section 3.2 or 3.3 but excluding
Additional Shares of Common Stock purchasable upon exercise of Rights referred
to in Section 3.9) without consideration or for a consideration per share less
than the Current Market Price in effect immediately prior to such issue or sale,
then, and in each such case, subject to Section 3.7, the Purchase Price shall be
reduced, concurrently with such issue or sale, to a price (calculated to the
nearest .001 of a cent) determined by multiplying such Purchase Price by a
fraction
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(a) the numerator of which shall be the sum of (i) the number
of shares of Common Stock outstanding immediately prior to such issue
or sale and (ii) the number of shares of Common Stock which the
aggregate consideration received by the Company for the total number of
such Additional Shares of Common Stock so issued or sold would purchase
at such Current Market Price, and
(b) the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such issue or sale, provided
that, for the purposes of this Section 3.1.1, (x) immediately after any
Additional Shares of Common Stock are deemed to have been issued
pursuant to Section 3.2 or 3.3, such Additional Shares shall be deemed
to be outstanding, and (y) treasury shares shall not be deemed to be
outstanding.
3.1.2. Extraordinary Dividends and Distributions. In case the
Company at any time or from time to time after the date hereof shall declare,
order, pay or make a dividend or other distribution (including, without
limitation, any distribution of other or additional stock or other securities or
property or Options by way of dividend or spin-off, reclassification,
recapitalization or similar corporate rearrangement) on the Common Stock then,
in each such case, subject to Section 3.7, the Purchase Price in effect
immediately prior to the close of business on the record date fixed for the
determination of holders of any class of securities entitled to receive such
dividend or distribution shall be reduced, effective as of the close of business
on such record date, to a price determined by multiplying such Purchase Price by
a fraction
(x) the numerator of which shall be the Current Market Price
in effect on such record date or, if the Common Stock trades on an
ex-dividend basis, on the date prior to the commencement of ex-dividend
trading, less the Fair Value of such dividend or distribution
applicable to one share of Common Stock, and
(y) the denominator of which shall be such Current Market
Price.
3.2. Treatment of Options and Convertible Securities. In case
the Company at any time or from time to time after the date hereof shall issue,
sell, grant or assume, or shall fix a record date for the determination of
holders of any class of securities of the Company entitled to receive, any
Options or Convertible Securities (whether or not the rights thereunder are
immediately exercisable), then, and in each such case, the maximum number of
Additional Shares of Common Stock (as set forth in the instrument relating
thereto, without regard to any provisions contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or, in the
case of Convertible Securities and Options therefor, the conversion or exchange
of such Convertible Securities, shall be deemed to be Additional Shares of
Common Stock issued as of the time of such issue, sale, grant or assumption or,
in case such a record date shall have been fixed, as of the close of business on
such record date (or, if the Common Stock trades on an ex-dividend basis, on the
date prior to the commencement of ex-dividend trading), provided that such
Additional Shares of Common Stock shall not be deemed to have been issued unless
(i) the consideration per share (determined pursuant to Section 3.4) of such
shares would be less than the Current Market Price in effect on the date of and
immediately
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prior to such issue, sale, grant or assumption or immediately prior to the close
of business on such record date (or, if the Common Stock trades on an
ex-dividend basis, on the date prior to the commencement of ex-dividend
trading), as the case may be and (ii) such Additional Shares of Common Stock are
not purchasable pursuant to Rights referred to in Section 3.9, and provided,
further, that in any such case in which Additional Shares of Common Stock are
deemed to be issued
(a) whether or not the Additional Shares of Common Stock
underlying such Options or Convertible Securities are deemed to be
issued, no further adjustment of the Purchase Price shall be made upon
the subsequent issue or sale of Convertible Securities or shares of
Common Stock upon the exercise of such Options or the conversion or
exchange of such Convertible Securities;
(b) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company, or decrease in the number of
Additional Shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof (by change of rate or otherwise), the
Purchase Price computed upon the original issue, sale, grant or
assumption thereof (or upon the occurrence of the record date, or date
prior to the commencement of ex-dividend trading, as the case may be,
with respect thereto), and any subsequent adjustments based thereon,
shall, upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it affects
such Options, or the rights of conversion or exchange under such
Convertible Securities, which are outstanding at such time;
(c) upon the expiration (or purchase by the Company and
cancellation or retirement) of any such Options which shall not have
been exercised or the expiration of any rights of conversion or
exchange under any such Convertible Securities which (or purchase by
the Company and cancellation or retirement of any such Convertible
Securities the rights of conversion or exchange under which) shall not
have been exercised, the Purchase Price computed upon the original
issue, sale, grant or assumption thereof (or upon the occurrence of the
record date, or date prior to the commencement of ex-dividend trading,
as the case may be, with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration (or such
cancellation or retirement, as the case may be), be recomputed as if:
(i) in the case of Options for Common Stock or
Convertible Securities, the only Additional Shares of Common
Stock issued or sold were the Additional Shares of Common
Stock, if any, actually issued or sold upon the exercise of
such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the
consideration actually received by the Company for the issue,
sale, grant or assumption of all such Options, whether or not
exercised, plus the consideration actually received by the
Company upon such exercise, or for the issue or sale of all
such Convertible Securities which were actually converted or
exchanged, plus the additional
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consideration, if any, actually received by the Company upon
such conversion or exchange, and
(ii) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually
issued or sold upon the exercise of such Options were issued
at the time of the issue or sale, grant or assumption of such
Options, and the consideration received by the Company for the
Additional Shares of Common Stock deemed to have then been
issued was the consideration actually received by the Company
for the issue, sale, grant or assumption of all such Options,
whether or not exercised, plus the consideration deemed to
have been received by the Company (pursuant to Section 3.4)
upon the issue or sale of such Convertible Securities with
respect to which such Options were actually exercised;
(d) no readjustment pursuant to subdivision (b) or (c) above
shall have the effect of increasing the Purchase Price by an amount in
excess of the amount of the adjustment thereof originally made in
respect of the issue, sale, grant or assumption of such Options or
Convertible Securities; and
(e) in the case of any such Options which expire by their
terms not more than 30 days after the date of issue, sale, grant or
assumption thereof, no adjustment of the Purchase Price shall be made
until the expiration or exercise of all such Options, whereupon such
adjustment shall be made in the manner provided in subdivision (c)
above.
3.3. Treatment of Stock Dividends, Stock Splits, etc. In case
the Company at any time or from time to time after the date hereof shall declare
or pay any dividend on the Common Stock payable in Common Stock, or shall effect
a subdivision of the outstanding shares of Common Stock into a greater number of
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in Common Stock), then, and in each such case, Additional Shares of
Common Stock shall be deemed to have been issued (a) in the case of any such
dividend, immediately after the close of business on the record date for the
determination of holders of any class of securities entitled to receive such
dividend, or (b) in the case of any such subdivision, at the close of business
on the day immediately prior to the day upon which such corporate action becomes
effective.
3.4. Computation of Consideration. For the purposes of this
Section 3,
(a) the consideration for the issue or sale of any Additional
Shares of Common Stock shall, irrespective of the accounting treatment
of such consideration,
(i) insofar as it consists of cash, be computed at
the net amount of cash received by the Company, without
deducting any expenses paid or incurred by the Company or any
commissions or compensations paid or concessions or discounts
allowed to underwriters, dealers or others performing similar
services in connection with such issue or sale,
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(ii) insofar as it consists of property (including
securities) other than cash, be computed at the Fair Value
thereof at the time of such issue or sale, and
(iii) in case Additional Shares of Common Stock are
issued or sold together with other stock or securities or
other assets of the Company for a consideration which covers
both, be the portion of such consideration so received,
computed as provided in clauses (i) and (ii) above, allocable
to such Additional Shares of Common Stock, such allocation to
be determined in the same manner that the Fair Value of
property not consisting of cash or securities is to be
determined as provided in the definition of 'Fair Value'
herein;
(b) Additional Shares of Common Stock deemed to have been
issued pursuant to Section 3.2, relating to Options and Convertible
Securities, shall be deemed to have been issued for a consideration per
share determined by dividing
(i) the total amount, if any, received and receivable
by the Company as consideration for the issue, sale, grant or
assumption of the Options or Convertible Securities in
question, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for
a subsequent adjustment of such consideration to protect
against dilution) payable to the Company upon the exercise in
full of such Options or the conversion or exchange of such
Convertible Securities or, in the case of Options for
Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such
Convertible Securities, in each case computing such
consideration as provided in the foregoing subdivision (a),
by
(ii) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment
of such number to protect against dilution) issuable upon the
exercise of such Options or the conversion or exchange of such
Convertible Securities; and
(c) Additional Shares of Common Stock deemed to have been
issued pursuant to Section 3.3, relating to stock dividends, stock
splits, etc., shall be deemed to have been issued for no consideration.
3.5. Adjustments for Combinations, etc. In case the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
the Purchase Price in effect immediately prior to such combination or
consolidation shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
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3.6. Dilution in Case of Other Securities. In case any Other
Securities shall be issued or sold or shall become subject to issue or sale upon
the conversion or exchange of any stock (or Other Securities) of the Company (or
any issuer of Other Securities or any other Person referred to in Section 4) or
to subscription, purchase or other acquisition pursuant to any Options issued or
granted by the Company (or any such other issuer or Person) for a consideration
such as to dilute, on a basis consistent with the standards established in the
other provisions of this Section 3, the purchase rights granted by this Warrant,
then, and in each such case, the computations, adjustments and readjustments
provided for in this Section 3 with respect to the Purchase Price and the number
of shares purchasable upon Warrant exercise shall be made as nearly as possible
in the manner so provided and applied to determine the amount of Other
Securities from time to time receivable upon the exercise of the Warrants, so as
to protect the holders of the Warrants against the effect of such dilution.
3.7. De Minimis Adjustments. If the amount of any adjustment
of the Purchase Price per share required pursuant to this Section 3 would be
less than $.01 such amount shall be carried forward and adjustment with respect
thereto made at the time of and together with any subsequent adjustment which,
together with such amount and any other amount or amounts so carried forward,
shall aggregate a change in the Purchase Price of at least $.01 per share. All
calculations under this Warrant shall be made to the nearest .001 of a cent or
to the nearest one-hundredth of a share, as the case may be.
3.8. Abandoned Dividend or Distribution. If the Company shall
take a record of the holders of its Common Stock for the purpose of entitling
them to receive a dividend or other distribution (which results in an adjustment
to the Purchase Price under the terms of this Warrant) and shall, thereafter,
and before such dividend or distribution is paid or delivered to shareholders
entitled thereto, legally abandon its plan to pay or deliver such dividend or
distribution, then any adjustment made to the Purchase Price and number of
shares of Common Stock purchasable upon Warrant exercise by reason of the taking
of such record shall be reversed, and any subsequent adjustments, based thereon,
shall be recomputed.
3.9. Shareholder Rights Plan. Notwithstanding the foregoing,
in the event that the Company shall distribute "poison pill" rights pursuant to
a "poison pill" shareholder rights plan (the "Rights"), the Company shall, in
lieu of making any adjustment pursuant to Section 3.1.1 or Section 3.1.2 hereof,
make proper provision so that each Holder who exercises a Warrant after the
record date for such distribution and prior to the expiration or redemption of
the Rights shall be entitled to receive upon such exercise, in addition to the
shares of Common Stock issuable upon such exercise, a number of Rights to be
determined as follows: (i) if such exercise occurs on or prior to the date for
the distribution to the holders of Rights of separate certificates evidencing
such Rights (the "Distribution Date"), the same number of Rights to which a
holder of a number of shares of Common Stock equal to the number of shares of
Common Stock issuable upon such exercise at the time of such exercise would be
entitled in accordance with the terms and provisions of and applicable to the
Rights; and (ii) if such exercise occurs after the Distribution Date, the same
number of Rights to which a holder of the number of shares into which the
Warrant so exercised was exercisable immediately prior to the Distribution Date
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would have been entitled on the Distribution Date in accordance with the terms
and provisions of and applicable to the Rights.
3.10. Adjustment of Number of Shares. Upon each adjustment of
the Purchase Price as a result of the calculations made in this Section 3, this
Warrant shall thereafter evidence the right to receive, at the adjusted Purchase
Price, that number of shares of Common Stock (calculated to the nearest
one-hundredth) obtained by dividing (i) the product of the aggregate number of
shares covered by this Warrant immediately prior to such adjustment and the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price by (ii) the Purchase Price in effect immediately after such adjustment of
the Purchase Price.
4. CONSOLIDATION, MERGER, ETC.
4.1. Adjustments for Consolidation, Merger, Sale of Assets,
Reorganization, etc. In case the Company after the date hereof (a) shall
consolidate with or merge into any other Person and shall not be the continuing
or surviving corporation of such consolidation or merger, or (b) shall permit
any other Person to consolidate with or merge into the Company and the Company
shall be the continuing or surviving Person but, in connection with such
consolidation or merger, the Common Stock or Other Securities shall be changed
into or exchanged for stock or other securities of any other Person or cash or
any other property, or (c) shall transfer all or substantially all of its
properties or assets to any other Person, or (d) shall effect a capital
reorganization or reclassification of the Common Stock or Other Securities
(other than a capital reorganization or reclassification resulting in the issue
of Additional Shares of Common Stock for which adjustment in the Purchase Price
is provided in Section 3.1.1 or Section 3.1.2), then, and in the case of each
such transaction, proper provision shall be made so that, upon the basis and the
terms and in the manner provided in this Warrant, the Holder of this Warrant,
upon the exercise hereof at any time after the consummation of such transaction,
shall be entitled to receive (at the aggregate Purchase Price in effect at the
time of such consummation for all Common Stock or Other Securities issuable upon
such exercise immediately prior to such consummation), in lieu of the Common
Stock or Other Securities issuable upon such exercise prior to such
consummation, the highest amount of securities, cash or other property to which
such Holder would actually have been entitled as a shareholder upon such
consummation if such Holder had exercised this Warrant immediately prior
thereto, subject to adjustments (subsequent to such consummation) as nearly
equivalent as possible to the adjustments provided for in Sections 3 through 5,
provided that if a purchase, tender or exchange offer shall have been made to
and accepted by the holders of more than 50% of the outstanding shares of Common
Stock, and if the Holder so designates in a notice given to the Company on or
before the date immediately preceding the date of the consummation of such
transaction, the Holder of such Warrants shall be entitled to receive the
highest amount of securities, cash or other property to which it would actually
have been entitled as a shareholder if the Holder of such Warrants had exercised
such Warrants prior to the expiration of such purchase, tender or exchange offer
and accepted such offer, subject to adjustments (from and after the consummation
of such purchase, tender or exchange offer) as nearly equivalent as possible to
the adjustments provided for in Sections 3 through 5.
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<PAGE> 13
4.2. Assumption of Obligations. Notwithstanding anything
contained in the Warrants or in the Exchange Agreement to the contrary, the
Company shall not effect any of the transactions described in clauses (a)
through (d) of Section 4.1 unless, prior to the consummation thereof, each
Person (other than the Company) which may be required to deliver any stock,
securities, cash or property upon the exercise of this Warrant as provided
herein shall assume, by written instrument delivered to, and reasonably
satisfactory to, the Holder of this Warrant, (a) the obligations of the Company
under the Exchange Agreement and the Warrants (and if the Company shall survive
the consummation of such transaction, such assumption shall be in addition to,
and shall not release the Company from, any continuing obligations of the
Company under this Warrant), (b) the obligations of the Company under the
Exchange Agreement, the Note and the Registration Rights Agreement and (c) the
obligation to deliver to the Holder such shares of stock, securities, cash or
property as, in accordance with the foregoing provisions of this Section 4, the
Holder may be entitled to receive. Nothing in this Section 4 shall be deemed to
authorize the Company to enter into any transaction not otherwise permitted by
the Exchange Agreement.
5. OTHER DILUTIVE EVENTS. In case any event shall occur as to
which the provisions of Section 3 or Section 4 hereof are not strictly
applicable or if strictly applicable would not fairly protect the purchase
rights of the Holder in accordance with the essential intent and principles of
such Sections, then, in each such case, the Board of Directors of the Company
shall make an adjustment in the application of such provisions, in accordance
with such essential intent and principles, so as to preserve, without dilution,
the purchase rights represented by this Warrant.
6. NO DILUTION OR IMPAIRMENT. The Company shall not, by
amendment of its certificate of incorporation or through any consolidation,
merger, reorganization, transfer of assets, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such action as may be necessary or appropriate in order to protect the rights of
the Holder of this Warrant against dilution or other impairment. Without
limiting the generality of the foregoing, the Company (a) shall not permit the
par value of any shares of stock receivable upon the exercise of this Warrant to
exceed the amount payable therefor upon such exercise, (b) shall take all such
action as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable shares of stock, free from all
taxes, liens, security interests, encumbrances, preemptive rights and charges on
the exercise of the Warrants from time to time outstanding, (c) shall not take
any action which results in any adjustment of the Purchase Price if the total
number of shares of Common Stock (or Other Securities) issuable after the action
upon the exercise of all of the Warrants would exceed the total number of shares
of Common Stock (or Other Securities) then authorized by the Company's
certificate of incorporation and available for the purpose of issue upon such
exercise, and (d) shall not issue any capital stock of any class which is
preferred as to dividends or as to the distribution of assets upon voluntary or
involuntary dissolution, liquidation or winding-up, unless the rights of the
holders thereof shall be limited to a fixed sum or percentage of par value or a
sum determined by reference to a formula based on a published index of interest
rates, an interest rate publicly
13
<PAGE> 14
announced by a financial institution or a similar indicator of interest rates in
respect of participation in dividends and to a fixed sum or percentage of par
value in any such distribution of assets.
7. CERTIFICATE AS TO ADJUSTMENTS. In each case of any
adjustment or readjustment in the shares of Common Stock (or Other Securities)
issuable upon the exercise of this Warrant, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms of
this Warrant and prepare a certificate, signed by the Chairman of the Board,
President or one of the Vice Presidents of the Company, and by the Chief
Financial Officer, the Treasurer or one of the Assistant Treasurers of the
Company, setting forth such adjustment or readjustment and showing in reasonable
detail the method of calculation thereof and the facts upon which such
adjustment or readjustment is based, including a statement of (a) the
consideration received or to be received by the Company for any Additional
Shares of Common Stock issued or sold or deemed to have been issued, (b) the
number of shares of Common Stock outstanding or deemed to be outstanding, and
(c) the Purchase Price in effect immediately prior to such issue or sale and as
adjusted and readjusted (if required by Section 3) on account thereof. The
Company shall forthwith mail a copy of each such certificate to each holder of a
Warrant and shall, upon the written request at any time of any holder of a
Warrant, furnish to such holder a like certificate. The Company shall also keep
copies of all such certificates at its principal office and shall cause the same
to be available for inspection at such office during normal business hours by
any holder of a Warrant or any prospective purchaser of a Warrant designated by
the holder thereof. The Company shall, upon the request in writing of the Holder
(at the Company's expense), retain independent public accountants of recognized
national standing selected by the Board of Directors of the Company to make any
computation required in connection with adjustments under this Warrant, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of such adjustment, which shall be binding on the Holder and the Company.
8. NOTICES OF CORPORATE ACTION. In the event of:
(a) any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend payable otherwise than
out of earnings or earned surplus, determined in accordance with
generally accepted accounting principles (other than a regularly
scheduled cash dividend payable out of consolidated earnings or earned
surplus, determined in accordance with generally accepted accounting
principles, in an amount not exceeding the amount of the immediately
preceding cash dividend for such period) or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of
stock of any class or any other securities or property, or to receive
any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company, any consolidation or merger involving the Company and any
other Person, any transaction or series of transactions in which more
than 50% of the voting securities of the Company are transferred to
another
14
<PAGE> 15
Person, or any transfer, sale or other disposition of all or
substantially all the assets of the Company to any other Person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
the Company shall mail to each holder of a Warrant a notice specifying (i) the
date or expected date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right, and (ii) the date or expected date on which any
such reorganization, reclassification, recapitalization, consolidation, merger,
transfer, sale, disposition, dissolution, liquidation or winding-up is to take
place and the time, if any such time is to be fixed, as of which the holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
shares of Common Stock (or Other Securities) for the securities or other
property deliverable upon such reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution, liquidation or
winding-up. Such notice shall be mailed at least 20 days prior to the date
therein specified.
9. REGISTRATION OF COMMON STOCK. If any shares of Common Stock
required to be reserved for purposes of exercise of this Warrant require
registration with or approval of any governmental authority under any federal or
state law (other than the Securities Act) before such shares may be issued upon
exercise, the Company shall, at its expense and as expeditiously as possible,
use its best efforts to cause such shares to be duly registered or approved, as
the case may be. At any such time as Common Stock is listed on any national
securities exchange, the Company shall, at its expense, obtain promptly and
maintain the approval for listing on each such exchange, upon official notice of
issuance, the shares of Common Stock issuable upon exercise of the then
outstanding Warrants and maintain the listing of such shares after their
issuance; and the Company shall also list on such national securities exchange,
shall register under the Exchange Act and shall maintain such listing of, any
Other Securities that at any time are issuable upon exercise of the Warrants, if
and at the time that any securities of the same class shall be listed on such
national securities exchange by the Company.
10. RESERVATION OF STOCK, ETC. The Company shall at all times
reserve and keep available, solely for issuance and delivery upon exercise of
the Warrants, the number of shares of Common Stock (or Other Securities) from
time to time issuable upon exercise of all Warrants at the time outstanding. All
shares of Common Stock (or Other Securities) issuable upon exercise of any
Warrants shall be duly authorized and, when issued upon such exercise, shall be
validly issued and, in the case of shares, fully paid and nonassessable with no
liability on the part of the holders thereof, and, in the case of all
securities, shall be free from all taxes, liens, security interests,
encumbrances, preemptive rights and charges. The transfer agent for the Common
Stock, which may be the Company ("Transfer Agent"), and every subsequent
Transfer Agent for any shares of the Company's capital stock issuable upon the
exercise of any of the purchase rights represented by this Warrant, are hereby
irrevocably authorized and directed at all times until the Expiration Date to
reserve such number of authorized and unissued shares as shall be requisite for
such purpose. The Company shall keep copies of this Warrant on file with the
Transfer Agent for the Common Stock and with
15
<PAGE> 16
every subsequent Transfer Agent for any shares of the Company's capital stock
issuable upon the exercise of the rights of purchase represented by this
Warrant. The Company shall supply such Transfer Agent with duly executed stock
certificates for such purpose. All Warrant Certificates surrendered upon the
exercise of the rights thereby evidenced shall be canceled, and such canceled
Warrants shall constitute sufficient evidence of the number of shares of stock
which have been issued upon the exercise of such Warrants. Subsequent to the
Expiration Date, no shares of stock need be reserved in respect of any
unexercised Warrant.
11. REGISTRATION AND TRANSFER OF WARRANTS, ETC.
11.1. Warrant Register; Ownership of Warrants. Each Warrant
issued by the Company shall be numbered and shall be registered in a warrant
register (the "Warrant Register") as it is issued and transferred, which Warrant
Register shall be maintained by the Company at its principal office or, at the
Company's election and expense, by a Warrant Agent or the Company's transfer
agent. The Company shall be entitled to treat the registered Holder of any
Warrant on the Warrant Register as the owner in fact thereof for all purposes
and shall not be bound to recognize any equitable or other claim to or interest
in such Warrant on the part of any other Person, and shall not be affected by
any notice to the contrary, except that, if and when any Warrant is properly
assigned in blank, the Company may (but shall not be obligated to) treat the
bearer thereof as the owner of such Warrant for all purposes. A Warrant, if
properly assigned, may be exercised by a new holder without a new Warrant first
having been issued.
11.2. Transfer of Warrants. This Warrant and all rights
hereunder are transferable in whole or in part, without charge to the Holder
hereof, upon surrender of this Warrant with a properly executed Form of
Assignment attached hereto as Exhibit B at the principal office of the Company
together with an opinion of counsel, in generally acceptable form, to the effect
that such Warrant may be transferred pursuant to an exemption from registration
under the Securities Act of 1933. Upon any partial transfer, the Company shall
at its expense issue and deliver to the Holder a new Warrant of like tenor, in
the name of the Holder, which shall be exercisable for such number of shares of
Common Stock with respect to which rights under this Warrant were not so
transferred.
11.3. Replacement of Warrants. On receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Warrant and, in the case of any such loss, theft or
destruction of this Warrant, on delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender of such Warrant to the Company at its principal office
and cancellation thereof, the Company at its expense shall execute and deliver,
in lieu thereof, a new Warrant of like tenor.
11.4. Adjustments To Purchase Price and Number of Shares.
Notwithstanding any adjustment in the Purchase Price or in the number or kind of
shares of Common Stock purchasable upon exercise of this Warrant, any Warrant
theretofore or thereafter issued may continue to express the same number and
kind of shares of Common Stock as are stated in this Warrant, as initially
issued.
16
<PAGE> 17
11.5. Fractional Shares. Notwithstanding any adjustment
pursuant to Section 3 in the number of shares of Common Stock covered by this
Warrant or any other provision of this Warrant, the Company shall not be
required to issue fractions of shares upon exercise of this Warrant or to
distribute certificates which evidence fractional shares. In lieu of fractional
shares, the Company shall make payment to the Holder, at the time of exercise of
this Warrant as herein provided, in an amount in cash equal to such fraction
multiplied by the Current Market Price of a share of Common Stock on the date of
Warrant exercise.
12. REMEDIES; SPECIFIC PERFORMANCE. The Company stipulates
that there would be no adequate remedy at law to the Holder of this Warrant in
the event of any default or threatened default by the Company in the performance
of or compliance with any of the terms of this Warrant and accordingly, the
Company agrees that, in addition to any other remedy to which the Holder may be
entitled at law or in equity, the Holder shall be entitled to seek to compel
specific performance of the obligations of the Company under this Warrant,
without the posting of any bond, in accordance with the terms and conditions of
this Warrant in any court of the United States or any State thereof having
jurisdiction, and if any action should be brought in equity to enforce any of
the provisions of this Warrant, the Company shall not raise the defense that
there is an adequate remedy at law. Except as otherwise provided by law, a delay
or omission by the Holder hereto in exercising any right or remedy accruing upon
any such breach shall not impair the right or remedy or constitute a waiver of
or acquiescence in any such breach. No remedy shall be exclusive of any other
remedy. All available remedies shall be cumulative.
13. NO RIGHTS OR LIABILITIES AS SHAREHOLDER. Nothing contained
in this Warrant shall be construed as conferring upon the Holder hereof any
rights as a shareholder of the Company or as imposing any obligation on the
Holder to purchase any securities or as imposing any liabilities on the Holder
as a shareholder of the Company, whether such obligation or liabilities are
asserted by the Company or by creditors of the Company.
14. NOTICES. All notices and other communications (and
deliveries) provided for or permitted hereunder shall be made in writing by hand
delivery, telecopier, any courier guaranteeing overnight delivery or first class
registered or certified mail, return receipt requested, postage prepaid,
addressed (a) if to the Company, to the attention of its President at its
principal office located at 5966 La Place Court, Carlsbad, CA 92008 or such
other address as may hereafter be designated in writing by the Company to the
Holder in accordance with the provisions of this Section, or (b) if to the
Holder, at its address as it appears in the Warrant Register.
All such notices and communications (and deliveries) shall be
deemed to have been duly given: at the time delivered by hand, if personally
delivered; when receipt is acknowledged, if telecopied; on the next Business
Day, if timely delivered to a courier guaranteeing overnight delivery; and five
days after being deposited in the mail, if sent first class or certified mail,
return receipt requested, postage prepaid; provided, that the exercise of any
Warrant shall be effective in the manner provided in Section 2.
17
<PAGE> 18
15. AMENDMENTS. This Warrant and any term hereof may not be
amended, modified, supplemented or terminated, and waivers or consents to
departures from the provisions hereof may not be given, except by written
instrument duly executed by the party against which enforcement of such
amendment, modification, supplement, termination or consent to departure is
sought.
16. DESCRIPTIVE HEADINGS, ETC. The headings in this Warrant
are for convenience of reference only and shall not limit or otherwise affect
the meaning of terms contained herein. Unless the context of this Warrant
otherwise requires: (1) words of any gender shall be deemed to include each
other gender; (2) words using the singular or plural number shall also include
the plural or singular number, respectively; (3) the words "hereof", "herein"
and "hereunder" and words of similar import when used in this Warrant shall
refer to this Warrant as a whole and not to any particular provision of this
Warrant, and Section and paragraph references are to the Sections and paragraphs
of this Warrant unless otherwise specified; (4) the word "including" and words
of similar import when used in this Warrant shall mean "including, without
limitation," unless otherwise specified; (5) "or" is not exclusive; and (6)
provisions apply to successive events and transactions.
17. GOVERNING LAW. This Warrant shall be governed by, and
construed in accordance with, the laws of the State of Delaware (without giving
effect to the conflict of laws principles thereof).
18. JUDICIAL PROCEEDINGS. Any legal action, suit or proceeding
brought against the Company with respect to this Warrant may be brought in any
federal or any state court located in Delaware, and by execution and delivery of
this Warrant, the Company hereby irrevocably and unconditionally waives any
claim (by way of motion, as a defense or otherwise) of improper venue, that it
is not subject personally to the jurisdiction of such court, that such courts
are an inconvenient forum or that this Warrant or the subject matter may not be
enforced in or by such court. The Company hereby irrevocably and unconditionally
consents to the service of process of any of the aforementioned courts in any
such action, suit or proceeding by the mailing of copies thereof by registered
or certified mail, postage prepaid, at its address set forth or provided for in
Section 14, such service to become effective 10 days after such mailing. Nothing
herein contained shall be deemed to affect the right of any party to serve
process in any manner permitted by law or commence legal proceedings or
otherwise proceed against any other party in any other jurisdiction to enforce
judgments obtained in any action, suit or proceeding brought pursuant to this
Section. The Company irrevocably submits to the exclusive jurisdiction of the
aforementioned courts in such action, suit or proceeding.
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<PAGE> 19
19. REGISTRATION RIGHTS AGREEMENT. The shares of Common Stock
(and Other Securities) issuable upon exercise of this Warrant (or upon
conversion of any shares of Common Stock issued upon such exercise) shall
constitute Registrable Securities (as such term is defined in the Registration
Rights Agreement). Each holder of this Warrant shall be entitled to all of the
benefits afforded to a holder of any such Registrable Securities under the
Registration Rights Agreement and such holder, by its acceptance of this
Warrant, agrees to be bound by and to comply with the terms and conditions of
the Registration Rights Agreement applicable to such holder as a holder of such
Registrable Securities.
NTN COMMUNICATIONS, INC.
By:
---------------------------------
Name:
Title:
19
<PAGE> 20
EXHIBIT A to
Common Stock Purchase Warrant
[FORM OF]
ELECTION TO PURCHASE SHARES
The undersigned hereby irrevocably elects to exercise the
Warrant to purchase ____ shares of Common Stock, par value $.005 per share
("Common Stock"), of NTN COMMUNICATIONS, INC. and hereby [makes payment of
$________ therefor] [or] [makes payment therefor by reduction pursuant to
Section 2.1(b)(ii) of the Warrant of the number of shares of Common Stock
otherwise issuable to the Holder upon Warrant exercise by ___ shares] [or]
[makes payment therefor by delivery of the following Common Stock Certificates
of the Company (properly endorsed for transfer in blank) for cancellation by the
Company pursuant to Section 2.1(b)(iii) of the Warrant, certificates of which
are attached hereto for cancellation _____________________ [list certificates
by number and amount]]. The undersigned hereby requests that certificates for
such shares be issued and delivered as follows:
ISSUE TO:
----------------------------------------------------------------------
(NAME)
- - -------------------------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE)
- - -------------------------------------------------------------------------------
(SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)
DELIVER TO:
--------------------------------------------------------------------
(NAME)
- - -------------------------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE)
If the number of shares of Common Stock purchased (and/or
reduced) hereby is less than the number of shares of Common Stock covered by the
Warrant, the undersigned requests that a new Warrant representing the number of
shares of Common Stock not so purchased (or reduced) be issued and delivered as
follows:
ISSUE TO:
----------------------------------------------------------------------
(NAME OF HOLDER1)
- - -------------------------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE)
DELIVER TO:
--------------------------------------------------------------------
(NAME OF HOLDER1)
- - -------------------------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE)
Dated: _____________, 19__ [NAME OF HOLDER1]
By
-----------------------------------
Name:
Title:
- - --------
1 Name of Holder must conform in all respects to name of holder as
specified on the face of the Warrant.
20
<PAGE> 21
EXHIBIT B to
Common Stock Purchase Warrant
[FORM OF] ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto the Assignee named below all of the rights of the undersigned to
purchase Common Stock, par value $.005 per share ("Common Stock") of NTN
Communications, Inc. represented by the Warrant, with respect to the number of
shares of Common Stock set forth below:
<TABLE>
<CAPTION>
Name of Assignee Address No. of Shares
- - ---------------- ------- -------------
<S> <C> <C>
</TABLE>
and does hereby irrevocably constitute and appoint ________ Attorney to make
such transfer on the books of NTN Communications, Inc. maintained for that
purpose, with full power of substitution in the premises.
Dated: _______________, 199_ [NAME OF HOLDER2]
By
-------------------------------
Name:
Title:
- - --------
2 Name of Holder must conform in all respects to name of holder as
specified on the face of the Warrant.
21
<PAGE> 1
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES
LAW OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. THIS WARRANT AND SUCH
SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN
COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THIS WARRANT, THE REGISTRATION
RIGHTS AGREEMENT DATED AS OF OCTOBER 5, 1998 BY AND AMONG NTN COMMUNICATIONS,
INC. (THE "COMPANY"), STARK INTERNATIONAL AND SHEPHERD INVESTMENTS
INTERNATIONAL, LTD. (COLLECTIVELY, THE "BUYERS") AND THE EXCHANGE AGREEMENT
DATED AS OF OCTOBER 5, 1998 BY AND AMONG THE COMPANY AND THE BUYERS.
NTN COMMUNICATIONS, INC.
COMMON STOCK PURCHASE WARRANT
No. W-10/05/98-2 October 5, 1998
Warrant to Purchase 500,000
Shares of Common Stock
NTN COMMUNICATIONS, INC., a Delaware corporation (the
"Company"), for value received, hereby certifies that SHEPHERD INVESTMENTS
INTERNATIONAL, LTD., or registered assigns (the "Holder"), is entitled to
purchase from the Company 500,000 duly authorized, validly issued, fully paid
and nonassessable shares of Common Stock, par value $.005 per share, of the
Company (the "Common Stock"), at a purchase price per share equal to the
Purchase Price (as defined in Section 1 below), at any time or from time to time
prior to the earlier of (x) 5:00 P.M., New York City time, on February 1, 2001
or (y) the date set forth in Section 2.2 hereof (each of (x) or (y) is referred
to herein as the "Expiration Date"), all subject to the terms, conditions and
adjustments set forth below in this Warrant.
This Warrant is one of the Common Stock Purchase Warrants
(collectively, the "Warrants", such term to include any such warrants issued in
substitution therefor) originally issued in connection with the Exchange
Agreement dated as of October 5, 1998 (the "Exchange Agreement") by and among
the Company, the Holder and Stark International. The Warrants originally so
issued evidence rights to purchase an aggregate number of 1,000,000 shares of
Common Stock subject to adjustment as provided herein. Capitalized terms used
herein and not otherwise defined herein shall have the meanings assigned such
terms in the Exchange Agreement.
1
<PAGE> 2
1. DEFINITIONS. As used herein, unless the context otherwise
requires, the following terms shall have the meanings indicated:
"Additional Shares of Common Stock" shall mean all shares
(including treasury shares) of Common Stock issued or sold (or, pursuant to
Section 3.2 or 3.3, deemed to be issued) by the Company after the date hereof,
whether or not subsequently reacquired or retired by the Company, other than
(a) (i) shares issued upon the exercise of the Warrants and
(ii) such number of additional shares as may become issuable upon the
exercise of the Warrants by reason of adjustments required pursuant to
the anti-dilution provisions applicable to such Warrants as in effect
on the date hereof,
(b) (i) shares issued upon the exercise of options granted or
to be granted under the Company's stock option plans as in effect on
the date hereof or under any other employee stock option or purchase
plan or plans adopted or assumed after such date by the Company's Board
of Directors; provided in each such case that the exercise or purchase
price for any such share shall not be less than 85% of the fair market
value (determined in good faith by the Company's Board of Directors) of
the Common Stock on the date of grant, and (ii) such additional number
of shares as may become issuable pursuant to the terms of any such
plans by reason of adjustments required pursuant to anti-dilution
provisions applicable to such securities in order to reflect any
subdivision or combination of Common Stock, by reclassification or
otherwise, or any dividend on Common Stock payable in Common Stock, and
(c) shares of Common Stock issued upon the exercise of options
and warrants outstanding as of October 5, 1998.
"Applicable Amount" shall mean (i) initially, $1.25; (ii)
$0.75, if the daily Market Price on each day during any 10 consecutive trading
days shall be equal to or greater than $1.75 but less than $2.00; (iii) $0.625,
if the daily Market Price on each day during any 10 consecutive trading days
shall be equal to or greater than $2.00 but less than $2.25; (iv) $.050, if the
daily Market Price on each day during any 10 consecutive trading days shall be
equal to or greater than $2.25 but less than $2.50; (v) $0.375, if the daily
Market Price on each day during any 10 consecutive trading days shall be equal
to or greater than $2.50 but less than $3.00; (vi) $0.25, if the daily Market
Price on each day during any 10 consecutive trading days shall be equal to or
greater than $3.00 but less than $4.00; and (vii) $0.005, if the daily Market
Price on each day during any 10 consecutive trading days shall be equal to or
greater than $4.00. No adjustments to the Applicable Amount pursuant hereto
shall be made to increase the Applicable Amount then in effect.
"Business Day" shall mean any day other than a Saturday or a
Sunday or a day on which commercial banking institutions in the City of New York
are authorized by law to be closed. Any reference to "days" (unless Business
Days are specified) shall mean calendar days.
2
<PAGE> 3
"Common Stock" shall have the meaning assigned to it in the
introduction to this Warrant, such term to include any stock into which such
Common Stock shall have been changed or any stock resulting from any
reclassification of such Common Stock, and all other stock of any class or
classes (however designated) of the Company the holders of which have the right,
without limitation as to amount, either to all or to a share of the balance of
current dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference.
"Company" shall have the meaning assigned to it in the
introduction to this Warrant, such term to include any corporation or other
entity which shall succeed to or assume the obligations of the Company hereunder
in compliance with Section 4.
"Convertible Securities" shall mean any evidences of
indebtedness, shares of stock (other than Common Stock) or other securities
directly or indirectly convertible into or exchangeable for Additional Shares of
Common Stock.
"Current Market Price" shall mean, on any date specified
herein, the average of the daily Market Price during the 10 consecutive trading
days, except that, if on any such date the shares of Common Stock are not listed
or admitted for trading on any national securities exchange or quoted in the
over-the-counter market, the Current Market Price shall be the Market Price on
such date.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time, and the rules and regulations thereunder, or any
successor statute.
"Exchange Agreement" shall have the meaning assigned to it in
the introduction to this Warrant.
"Expiration Date" shall have the meaning assigned to it in the
introduction to this Warrant.
"Fair Value" shall mean, on any date specified herein (i) in
the case of cash, the dollar amount thereof, (ii) in the case of a security, the
Current Market Price, and (iii) in all other cases determined in good faith
jointly by the Company and the Holder; provided, however, that if such parties
are unable to reach agreement within a reasonable period of time, the Fair Value
shall be determined in good faith by an independent investment banking firm
selected jointly by the Company and the Holder or, if that selection cannot be
made within 10 days, by an independent investment banking firm selected by the
American Arbitration Association in accordance with its rules, and provided
further, that the Company shall pay all of the fees and expenses of any third
parties incurred in connection with determining the Fair Value.
"Holder" shall have the meaning assigned to it in the
introduction to this Warrant.
"Market Price" shall mean, on any date specified herein, the
amount per share of the Common Stock, equal to (i) the last reported sale price
of such Common Stock, regular way, on such date or, in case no such sale takes
place on such date, the average of the closing bid and
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asked prices thereof regular way on such date, in either case as officially
reported on the principal national securities exchange on which such Common
Stock is then listed or admitted for trading, (ii) if such Common Stock is not
then listed or admitted for trading on any national securities exchange but is
designated as a national market system security by the NASD, the last reported
trading price of the Common Stock on such date, (iii) if there shall have been
no trading on such date or if the Common Stock is not so designated, the average
of the closing bid and asked prices of the Common Stock on such date as shown by
the NASD automated quotation system, or (iv) if such Common Stock is not then
listed or admitted for trading on any national exchange or quoted in the
over-the-counter market, the fair value thereof (as of a date which is within 20
days of the date as of which the determination is to be made) determined in good
faith jointly by the Company and the Holder; provided, however, that if such
parties are unable to reach agreement within a reasonable period of time, the
Market Price shall be determined in good faith by an independent investment
banking firm selected jointly by the Company and the Holder or, if that
selection cannot be made within 10 days, by an independent investment banking
firm selected by the American Arbitration Association in accordance with its
rules, and provided further, that the Company shall pay all of the fees and
expenses of any third parties incurred in connection with determining the Market
Price.
"NASD" shall mean the National Association of Securities
Dealers, Inc.
"Note" shall mean the convertible senior subordinated
promissory note of the Company to be issued to the Holder pursuant to the terms
of the Exchange Agreement, such term to include any such notes issued in
substitution for such Note.
"Options" shall mean any rights, options or warrants to
subscribe for, purchase or otherwise acquire either Additional Shares of Common
Stock or Convertible Securities.
"Other Securities" shall mean any stock (other than Common
Stock) and other securities of the Company or any other Person (corporate or
otherwise) which the holders of the Warrants at any time shall be entitled to
receive, or shall have received, upon the exercise of the Warrants, in lieu of
or in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4 or otherwise.
"Person" shall mean any individual, firm, partnership,
corporation, trust, joint venture, association, joint stock company, limited
liability company, unincorporated organization or any other entity or
organization, including a government or agency or political subdivision thereof,
and shall include any successor (by merger or otherwise) of such entity.
"Purchase Price" shall mean, per share, the Applicable Amount,
subject to adjustment and readjustment from time to time as provided in Section
3, and, as so adjusted or readjusted, shall remain in effect until a further
adjustment or readjustment thereof is required by Section 3.
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"Registration Rights Agreement" shall mean the Registration
Rights Agreement dated as of October 5, 1998 by and among the Company and the
Buyers, substantially in the form of Exhibit A to the Exchange Agreement.
"Rights" shall have the meaning assigned to it in Section 3.9.
"Securities Act" shall mean the Securities Act of 1933, as
amended from time to time, and the rules and regulations thereunder, or any
successor statute.
"Warrants" shall have the meaning assigned to it in the
introduction to this Warrant.
2. EXERCISE OF WARRANT.
2.1. Manner of Exercise; Payment of the Purchase Price. (a)
This Warrant may be exercised by the Holder hereof, in whole or in part, at any
time or from time to time prior to the Expiration Date, by surrendering to the
Company at its principal office this Warrant, with the form of Election to
Purchase Shares attached hereto as Exhibit A (or a reasonable facsimile thereof)
duly executed by the Holder and accompanied by payment of the Purchase Price for
the number of shares of Common Stock specified in such form.
(b) Payment of the Purchase Price may be made as follows (or
by any combination of the following): (i) in United States currency by cash or
delivery of a certified check or bank draft payable to the order of the Company
or by wire transfer to the Company, (ii) by cancellation of such number of the
shares of Common Stock otherwise issuable to the Holder upon such exercise as
shall be specified in such Election to Purchase Shares, such that the excess of
the Current Market Price of such specified number of shares on the date of
exercise over the portion of the Purchase Price attributable to such shares
shall equal the Purchase Price attributable to the shares of Common Stock to be
issued upon such exercise, in which case such amount shall be deemed to have
been paid to the Company and the number of shares issuable upon such exercise
shall be reduced by such specified number, or (iii) by surrender to the Company
for cancellation certificates representing shares of Common Stock of the Company
owned by the Holder (properly endorsed for transfer in blank) having a Current
Market Price on the date of Warrant exercise equal to the Purchase Price.
2.2. Mandatory Exercise. Upon no less than 30 days prior
written notice to the Holder, the Company may elect by written notice to the
Holder to accelerate the Expiration Date to the date of consummation of a Major
Transaction (as defined in the Note) provided that the consideration per share
of Common Stock to be received in any such Major Transaction is greater than the
then applicable Purchase Price.
2.3. When Exercise Effective. Each exercise of this Warrant
shall be deemed to have been effected immediately prior to the close of business
on the Business Day on which this Warrant shall have been surrendered to, and
the Purchase Price shall have been received by, the Company as provided in
Section 2.1, and at such time the Person or Persons in whose name or names any
certificate or certificates for shares of Common Stock (or Other Securities)
shall be
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issuable upon such exercise as provided in Section 2.4 shall be deemed to have
become the holder or holders of record thereof for all purposes.
2.4. Delivery of Stock Certificates, etc.; Charges, Taxes and
Expenses.
(a) As soon as practicable after each exercise of this
Warrant, in whole or in part, and in any event within 3 Business Days
thereafter, the Company shall cause to be issued in the name of and
delivered to the Holder hereof or, subject to the Registration Rights
Agreement and the Exchange Agreement, as the Holder may direct,
(i) a certificate or certificates for the number of
shares of Common Stock (or Other Securities) to which the
Holder shall be entitled upon such exercise plus, in lieu of
issuance of any fractional share to which the Holder would
otherwise be entitled, if any, a check for the amount of cash
equal to the same fraction multiplied by the Current Market
Price per share on the date of Warrant exercise, and
(ii) in case such exercise is for less than all of
the shares of Common Stock purchasable under this Warrant, a
new Warrant or Warrants of like tenor, for the balance of the
shares of Common Stock purchasable hereunder.
(b) Issuance of certificates for shares of Common Stock upon
the exercise of this Warrant shall be made without charge to the Holder
hereof for any issue or transfer tax or other incidental expense, in
respect of the issuance of such certificates, all of which such taxes
and expenses shall be paid by the Company.
2.5. Company to Reaffirm Obligations. The Company shall, at
the time of each exercise of this Warrant, upon the request of the Holder
hereof, acknowledge in writing its continuing obligation to afford to such
Holder all rights to which such Holder shall continue to be entitled after such
exercise in accordance with the terms of this Warrant, provided that if the
Holder of this Warrant shall fail to make any such request, such failure shall
not affect the continuing obligation of the Company to afford such rights to the
Holder.
3. ADJUSTMENT OF COMMON STOCK ISSUABLE UPON EXERCISE.
3.1. Adjustment of Purchase Price.
3.1.1. Issuance of Additional Shares of Common Stock. In case
the Company at any time or from time to time after the date hereof shall issue
or sell Additional Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to Section 3.2 or 3.3 but excluding
Additional Shares of Common Stock purchasable upon exercise of Rights referred
to in Section 3.9) without consideration or for a consideration per share less
than the Current Market Price in effect immediately prior to such issue or sale,
then, and in each such case, subject to Section 3.7, the Purchase Price shall be
reduced, concurrently with such issue or sale, to a price (calculated to the
nearest .001 of a cent) determined by multiplying such Purchase Price by a
fraction
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(a) the numerator of which shall be the sum of (i) the number
of shares of Common Stock outstanding immediately prior to such issue
or sale and (ii) the number of shares of Common Stock which the
aggregate consideration received by the Company for the total number of
such Additional Shares of Common Stock so issued or sold would purchase
at such Current Market Price, and
(b) the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such issue or sale, provided
that, for the purposes of this Section 3.1.1, (x) immediately after any
Additional Shares of Common Stock are deemed to have been issued
pursuant to Section 3.2 or 3.3, such Additional Shares shall be deemed
to be outstanding, and (y) treasury shares shall not be deemed to be
outstanding.
3.1.2. Extraordinary Dividends and Distributions. In case the
Company at any time or from time to time after the date hereof shall declare,
order, pay or make a dividend or other distribution (including, without
limitation, any distribution of other or additional stock or other securities or
property or Options by way of dividend or spin-off, reclassification,
recapitalization or similar corporate rearrangement) on the Common Stock then,
in each such case, subject to Section 3.7, the Purchase Price in effect
immediately prior to the close of business on the record date fixed for the
determination of holders of any class of securities entitled to receive such
dividend or distribution shall be reduced, effective as of the close of business
on such record date, to a price determined by multiplying such Purchase Price by
a fraction
(x) the numerator of which shall be the Current Market Price
in effect on such record date or, if the Common Stock trades on an
ex-dividend basis, on the date prior to the commencement of ex-dividend
trading, less the Fair Value of such dividend or distribution
applicable to one share of Common Stock, and
(y) the denominator of which shall be such Current Market
Price.
3.2. Treatment of Options and Convertible Securities. In case
the Company at any time or from time to time after the date hereof shall issue,
sell, grant or assume, or shall fix a record date for the determination of
holders of any class of securities of the Company entitled to receive, any
Options or Convertible Securities (whether or not the rights thereunder are
immediately exercisable), then, and in each such case, the maximum number of
Additional Shares of Common Stock (as set forth in the instrument relating
thereto, without regard to any provisions contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or, in the
case of Convertible Securities and Options therefor, the conversion or exchange
of such Convertible Securities, shall be deemed to be Additional Shares of
Common Stock issued as of the time of such issue, sale, grant or assumption or,
in case such a record date shall have been fixed, as of the close of business on
such record date (or, if the Common Stock trades on an ex-dividend basis, on the
date prior to the commencement of ex-dividend trading), provided that such
Additional Shares of Common Stock shall not be deemed to have been issued unless
(i) the consideration per share (determined pursuant to Section 3.4) of such
shares would be less than the Current Market Price in effect on the date of and
immediately prior to such issue, sale, grant or assumption or immediately
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prior to the close of business on such record date (or, if the Common Stock
trades on an ex-dividend basis, on the date prior to the commencement of
ex-dividend trading), as the case may be and (ii) such Additional Shares of
Common Stock are not purchasable pursuant to Rights referred to in Section 3.9,
and provided, further, that in any such case in which Additional Shares of
Common Stock are deemed to be issued
(a) whether or not the Additional Shares of Common Stock
underlying such Options or Convertible Securities are deemed to be
issued, no further adjustment of the Purchase Price shall be made upon
the subsequent issue or sale of Convertible Securities or shares of
Common Stock upon the exercise of such Options or the conversion or
exchange of such Convertible Securities;
(b) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company, or decrease in the number of
Additional Shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof (by change of rate or otherwise), the
Purchase Price computed upon the original issue, sale, grant or
assumption thereof (or upon the occurrence of the record date, or date
prior to the commencement of ex-dividend trading, as the case may be,
with respect thereto), and any subsequent adjustments based thereon,
shall, upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it affects
such Options, or the rights of conversion or exchange under such
Convertible Securities, which are outstanding at such time;
(c) upon the expiration (or purchase by the Company and
cancellation or retirement) of any such Options which shall not have
been exercised or the expiration of any rights of conversion or
exchange under any such Convertible Securities which (or purchase by
the Company and cancellation or retirement of any such Convertible
Securities the rights of conversion or exchange under which) shall not
have been exercised, the Purchase Price computed upon the original
issue, sale, grant or assumption thereof (or upon the occurrence of the
record date, or date prior to the commencement of ex-dividend trading,
as the case may be, with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration (or such
cancellation or retirement, as the case may be), be recomputed as if:
(i) in the case of Options for Common Stock or
Convertible Securities, the only Additional Shares of Common
Stock issued or sold were the Additional Shares of Common
Stock, if any, actually issued or sold upon the exercise of
such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the
consideration actually received by the Company for the issue,
sale, grant or assumption of all such Options, whether or not
exercised, plus the consideration actually received by the
Company upon such exercise, or for the issue or sale of all
such Convertible Securities which were actually converted or
exchanged, plus the additional
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consideration, if any, actually received by the Company upon
such conversion or exchange, and
(ii) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually
issued or sold upon the exercise of such Options were issued
at the time of the issue or sale, grant or assumption of such
Options, and the consideration received by the Company for the
Additional Shares of Common Stock deemed to have then been
issued was the consideration actually received by the Company
for the issue, sale, grant or assumption of all such Options,
whether or not exercised, plus the consideration deemed to
have been received by the Company (pursuant to Section 3.4)
upon the issue or sale of such Convertible Securities with
respect to which such Options were actually exercised;
(d) no readjustment pursuant to subdivision (b) or (c) above
shall have the effect of increasing the Purchase Price by an amount in
excess of the amount of the adjustment thereof originally made in
respect of the issue, sale, grant or assumption of such Options or
Convertible Securities; and
(e) in the case of any such Options which expire by their
terms not more than 30 days after the date of issue, sale, grant or
assumption thereof, no adjustment of the Purchase Price shall be made
until the expiration or exercise of all such Options, whereupon such
adjustment shall be made in the manner provided in subdivision (c)
above.
3.3. Treatment of Stock Dividends, Stock Splits, etc. In case
the Company at any time or from time to time after the date hereof shall declare
or pay any dividend on the Common Stock payable in Common Stock, or shall effect
a subdivision of the outstanding shares of Common Stock into a greater number of
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in Common Stock), then, and in each such case, Additional Shares of
Common Stock shall be deemed to have been issued (a) in the case of any such
dividend, immediately after the close of business on the record date for the
determination of holders of any class of securities entitled to receive such
dividend, or (b) in the case of any such subdivision, at the close of business
on the day immediately prior to the day upon which such corporate action becomes
effective.
3.4. Computation of Consideration. For the purposes of this
Section 3,
(a) the consideration for the issue or sale of any Additional
Shares of Common Stock shall, irrespective of the accounting treatment
of such consideration,
(i) insofar as it consists of cash, be computed at
the net amount of cash received by the Company, without
deducting any expenses paid or incurred by the Company or any
commissions or compensations paid or concessions or discounts
allowed to underwriters, dealers or others performing similar
services in connection with such issue or sale,
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(ii) insofar as it consists of property (including
securities) other than cash, be computed at the Fair Value
thereof at the time of such issue or sale, and
(iii) in case Additional Shares of Common Stock are
issued or sold together with other stock or securities or
other assets of the Company for a consideration which covers
both, be the portion of such consideration so received,
computed as provided in clauses (i) and (ii) above, allocable
to such Additional Shares of Common Stock, such allocation to
be determined in the same manner that the Fair Value of
property not consisting of cash or securities is to be
determined as provided in the definition of 'Fair Value'
herein;
(b) Additional Shares of Common Stock deemed to have been
issued pursuant to Section 3.2, relating to Options and Convertible
Securities, shall be deemed to have been issued for a consideration per
share determined by dividing
(i) the total amount, if any, received and receivable
by the Company as consideration for the issue, sale, grant or
assumption of the Options or Convertible Securities in
question, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for
a subsequent adjustment of such consideration to protect
against dilution) payable to the Company upon the exercise in
full of such Options or the conversion or exchange of such
Convertible Securities or, in the case of Options for
Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such
Convertible Securities, in each case computing such
consideration as provided in the foregoing subdivision (a),
by
(ii) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment
of such number to protect against dilution) issuable upon the
exercise of such Options or the conversion or exchange of such
Convertible Securities; and
(c) Additional Shares of Common Stock deemed to have been
issued pursuant to Section 3.3, relating to stock dividends, stock
splits, etc., shall be deemed to have been issued for no consideration.
3.5. Adjustments for Combinations, etc. In case the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
the Purchase Price in effect immediately prior to such combination or
consolidation shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
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3.6. Dilution in Case of Other Securities. In case any Other
Securities shall be issued or sold or shall become subject to issue or sale upon
the conversion or exchange of any stock (or Other Securities) of the Company (or
any issuer of Other Securities or any other Person referred to in Section 4) or
to subscription, purchase or other acquisition pursuant to any Options issued or
granted by the Company (or any such other issuer or Person) for a consideration
such as to dilute, on a basis consistent with the standards established in the
other provisions of this Section 3, the purchase rights granted by this Warrant,
then, and in each such case, the computations, adjustments and readjustments
provided for in this Section 3 with respect to the Purchase Price and the number
of shares purchasable upon Warrant exercise shall be made as nearly as possible
in the manner so provided and applied to determine the amount of Other
Securities from time to time receivable upon the exercise of the Warrants, so as
to protect the holders of the Warrants against the effect of such dilution.
3.7. De Minimis Adjustments. If the amount of any adjustment
of the Purchase Price per share required pursuant to this Section 3 would be
less than $.01 such amount shall be carried forward and adjustment with respect
thereto made at the time of and together with any subsequent adjustment which,
together with such amount and any other amount or amounts so carried forward,
shall aggregate a change in the Purchase Price of at least $.01 per share. All
calculations under this Warrant shall be made to the nearest .001 of a cent or
to the nearest one-hundredth of a share, as the case may be.
3.8. Abandoned Dividend or Distribution. If the Company shall
take a record of the holders of its Common Stock for the purpose of entitling
them to receive a dividend or other distribution (which results in an adjustment
to the Purchase Price under the terms of this Warrant) and shall, thereafter,
and before such dividend or distribution is paid or delivered to shareholders
entitled thereto, legally abandon its plan to pay or deliver such dividend or
distribution, then any adjustment made to the Purchase Price and number of
shares of Common Stock purchasable upon Warrant exercise by reason of the taking
of such record shall be reversed, and any subsequent adjustments, based thereon,
shall be recomputed.
3.9. Shareholder Rights Plan. Notwithstanding the foregoing,
in the event that the Company shall distribute "poison pill" rights pursuant to
a "poison pill" shareholder rights plan (the "Rights"), the Company shall, in
lieu of making any adjustment pursuant to Section 3.1.1 or Section 3.1.2 hereof,
make proper provision so that each Holder who exercises a Warrant after the
record date for such distribution and prior to the expiration or redemption of
the Rights shall be entitled to receive upon such exercise, in addition to the
shares of Common Stock issuable upon such exercise, a number of Rights to be
determined as follows: (i) if such exercise occurs on or prior to the date for
the distribution to the holders of Rights of separate certificates evidencing
such Rights (the "Distribution Date"), the same number of Rights to which a
holder of a number of shares of Common Stock equal to the number of shares of
Common Stock issuable upon such exercise at the time of such exercise would be
entitled in accordance with the terms and provisions of and applicable to the
Rights; and (ii) if such exercise occurs after the Distribution Date, the same
number of Rights to which a holder of the number of shares into which the
Warrant so exercised was exercisable immediately prior to the Distribution Date
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would have been entitled on the Distribution Date in accordance with the terms
and provisions of and applicable to the Rights.
3.10. Adjustment of Number of Shares. Upon each adjustment of
the Purchase Price as a result of the calculations made in this Section 3, this
Warrant shall thereafter evidence the right to receive, at the adjusted Purchase
Price, that number of shares of Common Stock (calculated to the nearest
one-hundredth) obtained by dividing (i) the product of the aggregate number of
shares covered by this Warrant immediately prior to such adjustment and the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price by (ii) the Purchase Price in effect immediately after such adjustment of
the Purchase Price.
4. CONSOLIDATION, MERGER, ETC.
4.1. Adjustments for Consolidation, Merger, Sale of Assets,
Reorganization, etc. In case the Company after the date hereof (a) shall
consolidate with or merge into any other Person and shall not be the continuing
or surviving corporation of such consolidation or merger, or (b) shall permit
any other Person to consolidate with or merge into the Company and the Company
shall be the continuing or surviving Person but, in connection with such
consolidation or merger, the Common Stock or Other Securities shall be changed
into or exchanged for stock or other securities of any other Person or cash or
any other property, or (c) shall transfer all or substantially all of its
properties or assets to any other Person, or (d) shall effect a capital
reorganization or reclassification of the Common Stock or Other Securities
(other than a capital reorganization or reclassification resulting in the issue
of Additional Shares of Common Stock for which adjustment in the Purchase Price
is provided in Section 3.1.1 or Section 3.1.2), then, and in the case of each
such transaction, proper provision shall be made so that, upon the basis and the
terms and in the manner provided in this Warrant, the Holder of this Warrant,
upon the exercise hereof at any time after the consummation of such transaction,
shall be entitled to receive (at the aggregate Purchase Price in effect at the
time of such consummation for all Common Stock or Other Securities issuable upon
such exercise immediately prior to such consummation), in lieu of the Common
Stock or Other Securities issuable upon such exercise prior to such
consummation, the highest amount of securities, cash or other property to which
such Holder would actually have been entitled as a shareholder upon such
consummation if such Holder had exercised this Warrant immediately prior
thereto, subject to adjustments (subsequent to such consummation) as nearly
equivalent as possible to the adjustments provided for in Sections 3 through 5,
provided that if a purchase, tender or exchange offer shall have been made to
and accepted by the holders of more than 50% of the outstanding shares of Common
Stock, and if the Holder so designates in a notice given to the Company on or
before the date immediately preceding the date of the consummation of such
transaction, the Holder of such Warrants shall be entitled to receive the
highest amount of securities, cash or other property to which it would actually
have been entitled as a shareholder if the Holder of such Warrants had exercised
such Warrants prior to the expiration of such purchase, tender or exchange offer
and accepted such offer, subject to adjustments (from and after the consummation
of such purchase, tender or exchange offer) as nearly equivalent as possible to
the adjustments provided for in Sections 3 through 5.
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4.2. Assumption of Obligations. Notwithstanding anything
contained in the Warrants or in the Exchange Agreement to the contrary, the
Company shall not effect any of the transactions described in clauses (a)
through (d) of Section 4.1 unless, prior to the consummation thereof, each
Person (other than the Company) which may be required to deliver any stock,
securities, cash or property upon the exercise of this Warrant as provided
herein shall assume, by written instrument delivered to, and reasonably
satisfactory to, the Holder of this Warrant, (a) the obligations of the Company
under the Exchange Agreement and the Warrants (and if the Company shall survive
the consummation of such transaction, such assumption shall be in addition to,
and shall not release the Company from, any continuing obligations of the
Company under this Warrant), (b) the obligations of the Company under the
Exchange Agreement, the Note and the Registration Rights Agreement and (c) the
obligation to deliver to the Holder such shares of stock, securities, cash or
property as, in accordance with the foregoing provisions of this Section 4, the
Holder may be entitled to receive. Nothing in this Section 4 shall be deemed to
authorize the Company to enter into any transaction not otherwise permitted by
the Exchange Agreement.
5. OTHER DILUTIVE EVENTS. In case any event shall occur as to
which the provisions of Section 3 or Section 4 hereof are not strictly
applicable or if strictly applicable would not fairly protect the purchase
rights of the Holder in accordance with the essential intent and principles of
such Sections, then, in each such case, the Board of Directors of the Company
shall make an adjustment in the application of such provisions, in accordance
with such essential intent and principles, so as to preserve, without dilution,
the purchase rights represented by this Warrant.
6. NO DILUTION OR IMPAIRMENT. The Company shall not, by
amendment of its certificate of incorporation or through any consolidation,
merger, reorganization, transfer of assets, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such action as may be necessary or appropriate in order to protect the rights of
the Holder of this Warrant against dilution or other impairment. Without
limiting the generality of the foregoing, the Company (a) shall not permit the
par value of any shares of stock receivable upon the exercise of this Warrant to
exceed the amount payable therefor upon such exercise, (b) shall take all such
action as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable shares of stock, free from all
taxes, liens, security interests, encumbrances, preemptive rights and charges on
the exercise of the Warrants from time to time outstanding, (c) shall not take
any action which results in any adjustment of the Purchase Price if the total
number of shares of Common Stock (or Other Securities) issuable after the action
upon the exercise of all of the Warrants would exceed the total number of shares
of Common Stock (or Other Securities) then authorized by the Company's
certificate of incorporation and available for the purpose of issue upon such
exercise, and (d) shall not issue any capital stock of any class which is
preferred as to dividends or as to the distribution of assets upon voluntary or
involuntary dissolution, liquidation or winding-up, unless the rights of the
holders thereof shall be limited to a fixed sum or percentage of par value or a
sum determined by reference to a formula based on a published index of interest
rates, an interest rate publicly
13
<PAGE> 14
announced by a financial institution or a similar indicator of interest rates in
respect of participation in dividends and to a fixed sum or percentage of par
value in any such distribution of assets.
7. CERTIFICATE AS TO ADJUSTMENTS. In each case of any
adjustment or readjustment in the shares of Common Stock (or Other Securities)
issuable upon the exercise of this Warrant, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms of
this Warrant and prepare a certificate, signed by the Chairman of the Board,
President or one of the Vice Presidents of the Company, and by the Chief
Financial Officer, the Treasurer or one of the Assistant Treasurers of the
Company, setting forth such adjustment or readjustment and showing in reasonable
detail the method of calculation thereof and the facts upon which such
adjustment or readjustment is based, including a statement of (a) the
consideration received or to be received by the Company for any Additional
Shares of Common Stock issued or sold or deemed to have been issued, (b) the
number of shares of Common Stock outstanding or deemed to be outstanding, and
(c) the Purchase Price in effect immediately prior to such issue or sale and as
adjusted and readjusted (if required by Section 3) on account thereof. The
Company shall forthwith mail a copy of each such certificate to each holder of a
Warrant and shall, upon the written request at any time of any holder of a
Warrant, furnish to such holder a like certificate. The Company shall also keep
copies of all such certificates at its principal office and shall cause the same
to be available for inspection at such office during normal business hours by
any holder of a Warrant or any prospective purchaser of a Warrant designated by
the holder thereof. The Company shall, upon the request in writing of the Holder
(at the Company's expense), retain independent public accountants of recognized
national standing selected by the Board of Directors of the Company to make any
computation required in connection with adjustments under this Warrant, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of such adjustment, which shall be binding on the Holder and the Company.
8. NOTICES OF CORPORATE ACTION. In the event of:
(a) any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend payable otherwise than
out of earnings or earned surplus, determined in accordance with
generally accepted accounting principles (other than a regularly
scheduled cash dividend payable out of consolidated earnings or earned
surplus, determined in accordance with generally accepted accounting
principles, in an amount not exceeding the amount of the immediately
preceding cash dividend for such period) or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of
stock of any class or any other securities or property, or to receive
any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company, any consolidation or merger involving the Company and any
other Person, any transaction or series of transactions in which more
than 50% of the voting securities of the Company are transferred to
another
14
<PAGE> 15
Person, or any transfer, sale or other disposition of all or
substantially all the assets of the Company to any other Person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
the Company shall mail to each holder of a Warrant a notice specifying (i) the
date or expected date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right, and (ii) the date or expected date on which any
such reorganization, reclassification, recapitalization, consolidation, merger,
transfer, sale, disposition, dissolution, liquidation or winding-up is to take
place and the time, if any such time is to be fixed, as of which the holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
shares of Common Stock (or Other Securities) for the securities or other
property deliverable upon such reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution, liquidation or
winding-up. Such notice shall be mailed at least 20 days prior to the date
therein specified.
9. REGISTRATION OF COMMON STOCK. If any shares of Common Stock
required to be reserved for purposes of exercise of this Warrant require
registration with or approval of any governmental authority under any federal or
state law (other than the Securities Act) before such shares may be issued upon
exercise, the Company shall, at its expense and as expeditiously as possible,
use its best efforts to cause such shares to be duly registered or approved, as
the case may be. At any such time as Common Stock is listed on any national
securities exchange, the Company shall, at its expense, obtain promptly and
maintain the approval for listing on each such exchange, upon official notice of
issuance, the shares of Common Stock issuable upon exercise of the then
outstanding Warrants and maintain the listing of such shares after their
issuance; and the Company shall also list on such national securities exchange,
shall register under the Exchange Act and shall maintain such listing of, any
Other Securities that at any time are issuable upon exercise of the Warrants, if
and at the time that any securities of the same class shall be listed on such
national securities exchange by the Company.
10. RESERVATION OF STOCK, ETC. The Company shall at all times
reserve and keep available, solely for issuance and delivery upon exercise of
the Warrants, the number of shares of Common Stock (or Other Securities) from
time to time issuable upon exercise of all Warrants at the time outstanding. All
shares of Common Stock (or Other Securities) issuable upon exercise of any
Warrants shall be duly authorized and, when issued upon such exercise, shall be
validly issued and, in the case of shares, fully paid and nonassessable with no
liability on the part of the holders thereof, and, in the case of all
securities, shall be free from all taxes, liens, security interests,
encumbrances, preemptive rights and charges. The transfer agent for the Common
Stock, which may be the Company ("Transfer Agent"), and every subsequent
Transfer Agent for any shares of the Company's capital stock issuable upon the
exercise of any of the purchase rights represented by this Warrant, are hereby
irrevocably authorized and directed at all times until the Expiration Date to
reserve such number of authorized and unissued shares as shall be requisite for
such purpose. The Company shall keep copies of this Warrant on file with the
Transfer Agent for the Common Stock and with
15
<PAGE> 16
every subsequent Transfer Agent for any shares of the Company's capital stock
issuable upon the exercise of the rights of purchase represented by this
Warrant. The Company shall supply such Transfer Agent with duly executed stock
certificates for such purpose. All Warrant Certificates surrendered upon the
exercise of the rights thereby evidenced shall be canceled, and such canceled
Warrants shall constitute sufficient evidence of the number of shares of stock
which have been issued upon the exercise of such Warrants. Subsequent to the
Expiration Date, no shares of stock need be reserved in respect of any
unexercised Warrant.
11. REGISTRATION AND TRANSFER OF WARRANTS, ETC.
11.1. Warrant Register; Ownership of Warrants. Each Warrant
issued by the Company shall be numbered and shall be registered in a warrant
register (the "Warrant Register") as it is issued and transferred, which Warrant
Register shall be maintained by the Company at its principal office or, at the
Company's election and expense, by a Warrant Agent or the Company's transfer
agent. The Company shall be entitled to treat the registered Holder of any
Warrant on the Warrant Register as the owner in fact thereof for all purposes
and shall not be bound to recognize any equitable or other claim to or interest
in such Warrant on the part of any other Person, and shall not be affected by
any notice to the contrary, except that, if and when any Warrant is properly
assigned in blank, the Company may (but shall not be obligated to) treat the
bearer thereof as the owner of such Warrant for all purposes. A Warrant, if
properly assigned, may be exercised by a new holder without a new Warrant first
having been issued.
11.2. Transfer of Warrants. This Warrant and all rights
hereunder are transferable in whole or in part, without charge to the Holder
hereof, upon surrender of this Warrant with a properly executed Form of
Assignment attached hereto as Exhibit B at the principal office of the Company
together with an opinion of counsel, in generally acceptable form, to the effect
that such Warrant may be transferred pursuant to an exemption from registration
under the Securities Act of 1933. Upon any partial transfer, the Company shall
at its expense issue and deliver to the Holder a new Warrant of like tenor, in
the name of the Holder, which shall be exercisable for such number of shares of
Common Stock with respect to which rights under this Warrant were not so
transferred.
11.3. Replacement of Warrants. On receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Warrant and, in the case of any such loss, theft or
destruction of this Warrant, on delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender of such Warrant to the Company at its principal office
and cancellation thereof, the Company at its expense shall execute and deliver,
in lieu thereof, a new Warrant of like tenor.
11.4. Adjustments To Purchase Price and Number of Shares.
Notwithstanding any adjustment in the Purchase Price or in the number or kind of
shares of Common Stock purchasable upon exercise of this Warrant, any Warrant
theretofore or thereafter issued may continue to express the same number and
kind of shares of Common Stock as are stated in this Warrant, as initially
issued.
16
<PAGE> 17
11.5. Fractional Shares. Notwithstanding any adjustment
pursuant to Section 3 in the number of shares of Common Stock covered by this
Warrant or any other provision of this Warrant, the Company shall not be
required to issue fractions of shares upon exercise of this Warrant or to
distribute certificates which evidence fractional shares. In lieu of fractional
shares, the Company shall make payment to the Holder, at the time of exercise of
this Warrant as herein provided, in an amount in cash equal to such fraction
multiplied by the Current Market Price of a share of Common Stock on the date of
Warrant exercise.
12. REMEDIES; SPECIFIC PERFORMANCE. The Company stipulates
that there would be no adequate remedy at law to the Holder of this Warrant in
the event of any default or threatened default by the Company in the performance
of or compliance with any of the terms of this Warrant and accordingly, the
Company agrees that, in addition to any other remedy to which the Holder may be
entitled at law or in equity, the Holder shall be entitled to seek to compel
specific performance of the obligations of the Company under this Warrant,
without the posting of any bond, in accordance with the terms and conditions of
this Warrant in any court of the United States or any State thereof having
jurisdiction, and if any action should be brought in equity to enforce any of
the provisions of this Warrant, the Company shall not raise the defense that
there is an adequate remedy at law. Except as otherwise provided by law, a delay
or omission by the Holder hereto in exercising any right or remedy accruing upon
any such breach shall not impair the right or remedy or constitute a waiver of
or acquiescence in any such breach. No remedy shall be exclusive of any other
remedy. All available remedies shall be cumulative.
13. NO RIGHTS OR LIABILITIES AS SHAREHOLDER. Nothing contained
in this Warrant shall be construed as conferring upon the Holder hereof any
rights as a shareholder of the Company or as imposing any obligation on the
Holder to purchase any securities or as imposing any liabilities on the Holder
as a shareholder of the Company, whether such obligation or liabilities are
asserted by the Company or by creditors of the Company.
14. NOTICES. All notices and other communications (and
deliveries) provided for or permitted hereunder shall be made in writing by hand
delivery, telecopier, any courier guaranteeing overnight delivery or first class
registered or certified mail, return receipt requested, postage prepaid,
addressed (a) if to the Company, to the attention of its President at its
principal office located at 5966 La Place Court, Carlsbad, CA 92008 or such
other address as may hereafter be designated in writing by the Company to the
Holder in accordance with the provisions of this Section, or (b) if to the
Holder, at its address as it appears in the Warrant Register.
All such notices and communications (and deliveries) shall be
deemed to have been duly given: at the time delivered by hand, if personally
delivered; when receipt is acknowledged, if telecopied; on the next Business
Day, if timely delivered to a courier guaranteeing overnight delivery; and five
days after being deposited in the mail, if sent first class or certified mail,
return receipt requested, postage prepaid; provided, that the exercise of any
Warrant shall be effective in the manner provided in Section 2.
17
<PAGE> 18
15. AMENDMENTS. This Warrant and any term hereof may not be
amended, modified, supplemented or terminated, and waivers or consents to
departures from the provisions hereof may not be given, except by written
instrument duly executed by the party against which enforcement of such
amendment, modification, supplement, termination or consent to departure is
sought.
16. DESCRIPTIVE HEADINGS, ETC. The headings in this Warrant
are for convenience of reference only and shall not limit or otherwise affect
the meaning of terms contained herein. Unless the context of this Warrant
otherwise requires: (1) words of any gender shall be deemed to include each
other gender; (2) words using the singular or plural number shall also include
the plural or singular number, respectively; (3) the words "hereof", "herein"
and "hereunder" and words of similar import when used in this Warrant shall
refer to this Warrant as a whole and not to any particular provision of this
Warrant, and Section and paragraph references are to the Sections and paragraphs
of this Warrant unless otherwise specified; (4) the word "including" and words
of similar import when used in this Warrant shall mean "including, without
limitation," unless otherwise specified; (5) "or" is not exclusive; and (6)
provisions apply to successive events and transactions.
17. GOVERNING LAW. This Warrant shall be governed by, and
construed in accordance with, the laws of the State of Delaware (without giving
effect to the conflict of laws principles thereof).
18. JUDICIAL PROCEEDINGS. Any legal action, suit or proceeding
brought against the Company with respect to this Warrant may be brought in any
federal or any state court located in Delaware, and by execution and delivery of
this Warrant, the Company hereby irrevocably and unconditionally waives any
claim (by way of motion, as a defense or otherwise) of improper venue, that it
is not subject personally to the jurisdiction of such court, that such courts
are an inconvenient forum or that this Warrant or the subject matter may not be
enforced in or by such court. The Company hereby irrevocably and unconditionally
consents to the service of process of any of the aforementioned courts in any
such action, suit or proceeding by the mailing of copies thereof by registered
or certified mail, postage prepaid, at its address set forth or provided for in
Section 14, such service to become effective 10 days after such mailing. Nothing
herein contained shall be deemed to affect the right of any party to serve
process in any manner permitted by law or commence legal proceedings or
otherwise proceed against any other party in any other jurisdiction to enforce
judgments obtained in any action, suit or proceeding brought pursuant to this
Section. The Company irrevocably submits to the exclusive jurisdiction of the
aforementioned courts in such action, suit or proceeding.
18
<PAGE> 19
19. REGISTRATION RIGHTS AGREEMENT. The shares of Common Stock
(and Other Securities) issuable upon exercise of this Warrant (or upon
conversion of any shares of Common Stock issued upon such exercise) shall
constitute Registrable Securities (as such term is defined in the Registration
Rights Agreement). Each holder of this Warrant shall be entitled to all of the
benefits afforded to a holder of any such Registrable Securities under the
Registration Rights Agreement and such holder, by its acceptance of this
Warrant, agrees to be bound by and to comply with the terms and conditions of
the Registration Rights Agreement applicable to such holder as a holder of such
Registrable Securities.
NTN COMMUNICATIONS, INC.
By:
-------------------------------------
Name:
Title:
19
<PAGE> 20
EXHIBIT A to
Common Stock Purchase Warrant
[FORM OF]
ELECTION TO PURCHASE SHARES
The undersigned hereby irrevocably elects to exercise the
Warrant to purchase ____ shares of Common Stock, par value $.005 per share
("Common Stock"), of NTN COMMUNICATIONS, INC. and hereby [makes payment of
$________ therefor] [or] [makes payment therefor by reduction pursuant to
Section 2.1(b)(ii) of the Warrant of the number of shares of Common Stock
otherwise issuable to the Holder upon Warrant exercise by ___ shares] [or]
[makes payment therefor by delivery of the following Common Stock Certificates
of the Company (properly endorsed for transfer in blank) for cancellation by the
Company pursuant to Section 2.1(b)(iii) of the Warrant, certificates of which
are attached hereto for cancellation [list certificates by number and amount]].
The undersigned hereby requests that certificates for such shares be issued and
delivered as follows:
ISSUE TO:
----------------------------------------------------------------------
(NAME)
- - -------------------------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE)
- - -------------------------------------------------------------------------------
(SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)
DELIVER TO:
--------------------------------------------------------------------
(NAME)
- - -------------------------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE)
If the number of shares of Common Stock purchased (and/or
reduced) hereby is less than the number of shares of Common Stock covered by the
Warrant, the undersigned requests that a new Warrant representing the number of
shares of Common Stock not so purchased (or reduced) be issued and delivered as
follows:
ISSUE TO:
----------------------------------------------------------------------
(NAME OF HOLDER1)
- - -------------------------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE)
DELIVER TO:
--------------------------------------------------------------------
(NAME OF HOLDER1)
- - -------------------------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE)
Dated: _____________, 19__ [NAME OF HOLDER1]
By
----------------------------------
Name:
Title:
- - --------
1 Name of Holder must conform in all respects to name of holder as
specified on the face of the Warrant.
20
<PAGE> 21
EXHIBIT B to
Common Stock Purchase Warrant
[FORM OF] ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto the Assignee named below all of the rights of the undersigned to
purchase Common Stock, par value $.005 per share ("Common Stock") of NTN
Communications, Inc. represented by the Warrant, with respect to the number of
shares of Common Stock set forth below:
<TABLE>
<CAPTION>
Name of Assignee Address No. of Shares
- - ---------------- ------- -------------
<S> <C> <C>
</TABLE>
and does hereby irrevocably constitute and appoint ________ Attorney to make
such transfer on the books of NTN Communications, Inc. maintained for that
purpose, with full power of substitution in the premises.
Dated: _______________, 199_ [NAME OF HOLDER2]
By
------------------------------
Name:
Title:
- - --------
2 Name of Holder must conform in all respects to name of holder as
specified on the face of the Warrant.
21
<PAGE> 1
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS,
AND MAY NOT BE OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE SECURITIES UNDER THE SECURITIES ACT OR APPLICABLE STATE
SECURITIES LAW, OR AN EXEMPTION FROM SUCH REGISTRATION.
[__________*]
NTN COMMUNICATIONS, INC.
7% CONVERTIBLE SENIOR SUBORDINATED NOTE DUE 2001
FOR VALUE RECEIVED, NTN COMMUNICATIONS, INC., a Delaware
corporation (the "Company"), HEREBY PROMISES TO PAY to [STARK INTERNATIONAL]
[SHEPHERD INVESTMENTS INTERNATIONAL, LTD.] (the "Holder") the principal sum of
* ($ ) on February 1, 2001 (the "Maturity Date") and to pay
interest on the principal amount outstanding from time to time under this note
(the "Outstanding Principal Amount"), at the rate of 7% per annum, payable
quarterly in arrears on the last day of each calendar quarter during the term
hereof and on the final day when such principal amount becomes due (each such
date, an "Interest Payment Date").
This note is one of two convertible senior subordinated
promissory notes (the "Note" and collectively, the "Notes") of the Company
referred to in Section 1(a) of the Exchange Agreement, dated as of October 5,
1998 by and among the Company, Holder and [Stark International] [Shepherd
Investments International, Ltd.] (the "Exchange Agreement") and was issued by
the Company to the Holder in exchange for Holder's outstanding shares of the
Company's Series B Convertible Preferred Stock.
1. Definitions. For purposes hereof the following
definitions shall apply:
"Acceleration Price" shall have the meaning set forth in
Section 5(b).
"Additional Shares of Common Stock" shall mean all shares
(including treasury shares) of Common Stock issued or sold or deemed to be
issued by the Company after the date hereof, whether or not subsequently
reacquired or retired by the Company other than (i) shares of Common Stock
issued upon conversion of the Notes, (ii) shares of Common Stock issued upon
exercise of the Warrants (iii) shares of Common Stock issued pursuant to
Approved Stock Plans and (iv) shares issued upon exercise of options and
warrants outstanding as of October 5, 1998.
- - ----------------------
* Insert Stated Value plus accrued but unpaid dividends on Series B Convertible
Preferred Shares outstanding at close of business on day prior to exchange date.
<PAGE> 2
"Adjusting Closing Bid Prices" shall have the meaning set
forth in Section 3(c).
"Approved Stock Plan" shall mean any contract, plan or
agreement which has been or shall be approved by the Board of Directors of the
Company, pursuant to which the Company's securities may be issued to any
employee, officer, director, consultant or other service provider of the Company
in an aggregate amount that does not exceed 110% of the number of securities
issuable as of October 5, 1998 pursuant to any currently existing Approved Stock
Plan.
"Average Market Price" shall mean the average of the Closing
Bid Prices of the Common Stock for the five trading days immediately preceding
the applicable date.
"Blockage Notice" shall have the meaning set forth in
Section 18(b).
"Business Day" shall have the meaning set forth in
Section 2(c).
"Buy in Actual Damages" shall have the meaning set forth in
Section 3(d)(v).
"Closing Bid Price" shall mean, for any security as of any
date, the last closing bid price on the American Stock Exchange ("AMEX") as
reported by Bloomberg, L.P. ("Bloomberg"), or, if the AMEX is not the principal
securities exchange for such security, the last closing bid price of such
security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price of such security in the over-the-counter
market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no closing bid price is reported for such security by
Bloomberg, the last closing trade price of such security as reported by
Bloomberg, or, if no last closing trade price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau, Inc.
"Common Stock" shall mean the common stock of the Company,
$.005 par value per share.
"Company" shall have the meaning set forth in the Preamble.
"Conversion Date" shall have the meaning set forth in
Section 3(d).
"Conversion Notice" shall have the meaning set forth in
Section 3(d).
"Conversion Price" shall mean $_____1, subject to certain
adjustments as described in Section 3(c).
- - ----------------------
1 Insert $1.275 per share, as adjusted for any dilutive events set forth in
Section 3(c) that occur between the signing of the Exchange Agreement and the
Note Issuance Date. Any disputes between the Company and the Holder as to the
determination of the Conversion Price shall be resolved in accordance with the
provisions of Section 3(d)(iii) hereof.
-2-
<PAGE> 3
"Conversion Shares" shall have the meaning set forth in
Section 5(d)(i)
"Convertible Securities" shall have the meaning set forth in
Section 3(c)(iv).
"Default" shall have the meaning set forth in Section 20.
"Default Rate" shall have the meaning set forth in Section
2(a)(i).
"Document" or "Documents" shall have the meaning set forth in
Section 7(a).
"Exchange Agreement" shall have the meaning set forth in the
Preamble.
"Forced Prepayment Date" shall have the meaning set forth in
Section 4.
"Forced Prepayment Notice" shall have the meaning set forth in
Section 4.
"Holder" shall have the meaning set forth in the Preamble.
"Holders" shall mean the Holder and [Stark International]
[Shepherd Investment International, Ltd.]
"Inability to Fully Convert Notice" shall have the meaning set
forth in Section 6(b).
"Indebtedness" shall have the meaning set forth in Section
20(a).
"Interest Payment Date" shall have the meaning set forth in
the Preamble.
"Interest Payment Notice" shall have the meaning set forth in
Section 2(a)(ii).
"Major Transaction Acceleration Price" shall have the meaning
set forth in Section 5(a).
"Major Transaction" shall have the meaning set forth in
Section 5(c).
"Mandatory Payment" shall have the meaning set forth in
Section 6(a)(i).
"Mandatory Payment Price" shall have the meaning set forth in
Section 6(a)(i).
"Optional Prepayment Date" shall mean any date subsequent to a
20 consecutive trading day period during which the Market Price for the Common
Stock on each day in such period equals or exceeds $1.75 (subject to adjustment
for the events set forth in Section 3(c)(i), (ii) and (iii) hereof).
"Market Price" shall mean, on any date specified herein, the
amount per share of the Common Stock, equal to (i) the last reported sale price
of such Common Stock, regular way, on such date or, in case no such sale takes
place on such date, the average of the closing bid and asked prices thereof
regular way on such date, in either case as officially reported on the
-3-
<PAGE> 4
principal national securities exchange on which such Common Stock is then listed
or admitted for trading, (ii) if such Common Stock is not then listed or
admitted for trading on any national securities exchange but is designated as a
national market system security by the NASD, the last reported trading price of
the Common Stock on such date, or in case no such sale takes place on such date,
or if the Common Stock is not so designated, the average of the closing bid and
asked prices of the Common Stock on such date as shown by the NASD automated
quotations system, or (iii) if such Common Stock is not then listed or admitted
for trading on any national exchange or quoted in the over-the-counter market,
the fair value thereof (as of a date which is within 20 days of the date as of
which the determination is to be made) determined in good faith jointly by the
Board of Directors of the Company and the Holder, provided, however, that if
such parties are unable to reach agreement within a reasonable period of time,
the Market Price shall be determined in good faith by an independent investment
banking firm selected jointly by the Company and the Holder or, if that
selection cannot be made within ten days, by an independent investment banking
firm selected by the American Arbitration Association in accordance with its
rules, and provided further, that the Company shall pay all of the fees and
expenses of any third parties incurred in connection with determining the Market
Price.
"Maturity Date" shall have the meaning set forth in the
Preamble.
"New Option Issuance Price" shall have the meaning set forth
in Section 3(c)(iv).
"Note" or "Notes" shall have the meaning set forth in the
Preamble.
"Note Register" shall have the meaning set forth in Section
17(b).
"Notice of Acceleration at Option of Holder Upon Triggering
Event" shall have the meaning set forth in Section 5(e).
"Notice of Major Transaction" shall have the meaning set forth
in Section 5(e).
"Notice in Response to Inability to Convert" shall have the
meaning set forth in Section 6(b).
"Notice of Triggering Event" shall have the meaning set forth
in Section 5(e)
"Options" shall have the meaning set forth in Section
3(c)(iv).
"Organic Change" shall mean any recapitalization,
reorganization, reclassification, consolidation, merger, sale of all or
substantially all of the Company's assets to another Person or other transaction
which is effected in such a way that holders of Common Stock are entitled to
receive (either directly or upon subsequent liquidation) stock, securities or
assets with respect to or in exchange for Common Stock.
"Other Taxes" shall have the meaning set forth in Section 21.
"Outstanding Principal Amount" shall have the meaning set
forth in the Preamble.
-4-
<PAGE> 5
"Person" shall mean an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.
"Proceeding" shall mean, with respect to the Company or any of
its Subsidiaries, (i) any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other similar proceeding relating
to such Person or its properties as such, (ii) any proceeding for any
liquidation, dissolution or other winding up of such Person, voluntary or
involuntary, or (iii) any assignment for the benefit of creditors or marshaling
of the assets of such Person.
"Registration Rights Agreement" shall mean the Registration
Rights Agreement, dated as of October 5, 1998, by and among the Company, the
Holder and [Stark International][Shepherd Investments International, Ltd.].
"Securities Act" means the Securities Act of 1933, as amended
from time to, and the rules and regulations thereunder, or any successor
statute.
"Senior Debt" shall mean all senior indebtedness of the
Company for borrowed money now or hereafter existing in favor of (a) a bank,
insurance company or other financial institution or (b) a lender for the purpose
of financing the purchase or lease of capital equipment, under a Senior Loan
Document, for principal and interest (including interest accruing subsequent to
the commencement of any Proceeding) unless the Senior Loan Document expressly
provides that it is not senior or superior in right of payment to this Note,
excluding, however, in each case the principal of and interest on this Note,
provided that such senior indebtedness shall not exceed $10 million at any time
outstanding. Notwithstanding the foregoing, "Senior Debt" shall not include (i)
any indebtedness of the Company to any of its Subsidiaries or its affiliates, or
(ii) any indebtedness that is expressly subordinated to any other indebtedness
of the Company.
"Senior Debt Default" shall have the meaning set forth in
Section 18(b).
"Senior Loan Document" shall mean a credit agreement, loan
agreement, indenture or other agreement, document or instrument evidencing or
governing any Senior Debt.
"Solvent" shall mean, with respect to any Person on a
particular date, that on such date (i) the fair value of the property of such
Person is not less than the total amount of the liabilities of such Person, (ii)
the present fair salable value of the assets of such Person is not less than the
amount required to pay the probable liability on such Person's existing debts as
they become absolute and matured, (iii) such Person is able to realize upon its
assets and pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (iv) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature and (v) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital.
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<PAGE> 6
"Subordinated Debt" shall mean all indebtedness of the Company
now or hereafter evidenced by the Notes and all interest thereon.
"Subsidiary" shall mean any entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other Persons performing similar functions are at the
time directly or indirectly owned by the Company.
"Suspension Days" shall have the meaning set forth in Section
5(d)(i).
"Suspension Period" shall have the meaning set forth in
Section 5(d)(i).
"Taxes" shall have the meaning set forth in Section 21.
"Transfer Agent" shall have the meaning set forth in Section
3(d)(i).
"Triggering Event" shall have the meaning set forth in Section
5(d).
"Triggering Event Acceleration Price" shall have the meaning
set forth in Section 5(b).
"Warrants" shall mean the Common Stock Purchase Warrants to
purchase 1,000,000 shares of the Company's Common Stock, issued to the Holders
by the Company pursuant to the terms of the Exchange Agreement.
"Warrants Shares" shall have the meaning set forth in Section
5(d)(i).
2. General Provisions. (a) (i) Any amount of principal hereof
that is not paid when due (whether upon demand, by acceleration or otherwise)
shall bear interest from the day when due until such principal amount is paid in
full, payable on demand, at an interest rate per annum equal at all times to 15%
per annum (the "Default Rate"). All interest shall be computed on the basis of a
year of 360 days for the actual number of days (including the first day but
excluding the last day) elapsed. Notwithstanding any other provision of this
Note, interest paid or becoming due hereunder shall in no event exceed the
maximum rate permitted by applicable law.
(ii) All regularly scheduled interests payments made hereunder
may be made either (I) in cash or (II) at the option of the Company, in full or
in part by issuing shares of Common Stock with each such share issued at a value
determined by multiplying the average of the Closing Bid Prices of the Common
Stock for the ten trading days immediately preceding the applicable Interest
Payment Date by 0.90; provided, however, that the Company may elect to make such
interest payments in shares of Common Stock if and only if such shares are duly
reserved for issuance, duly authorized, fully paid and non-assessable, and fully
registered for resale pursuant to the Securities Act and in accordance with the
terms of the Registration Rights Agreement; provided further that the Company
may elect to make such interest payments in shares of Common Stock if and only
if the Company has delivered an irrevocable written notice
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<PAGE> 7
(the "Interest Payment Notice") to the Holder no less than 45 days prior to the
applicable Interest Payment Date stating that the next interest payment shall be
made in shares of Common Stock, and with a copy of such Interest Payment Notice
to the Transfer Agent authorizing the Transfer Agent to deliver such Common
Stock, without any restrictive legends, on the Interest Payment Date. If the
Company fails to deliver a Interest Payment Notice at least 45 days prior to any
Interest Payment Date, then interest payments on such interest Payment Date
shall be made solely in cash.
(b) All payments made to the Holder in
accordance with the terms hereof on account of principal hereof shall be noted
by the Holder on Schedule I attached hereto and hereby made a part hereof and
shall be binding absent manifest error; provided, however, that any error or
omission by the Holder in this regard shall not affect the obligation of the
Company to pay the full amount of the principal and interest due hereunder.
(c) If any amount payable hereunder shall be
due on a Saturday or a Sunday or a day on which commercial banking institutions
in the City of New York are authorized by law to be closed (any other day being
a "Business Day"), such payment may be made on the next succeeding Business Day,
and such extension of time shall in such case be included in the computation of
interest payable hereon.
(d) Both principal and interest are payable in
lawful money of the United States and in immediately available funds at the
offices of Holder, c/o Staro Asset Management, 1500 West Market Street, Mequon,
Wisconsin 53092, or at such other place as the Holder shall designate in writing
to the Company.
(e) This Note may be transferred in whole or
in part only by registration of such transfer on the Note Register maintained
for such purpose by the Company as provided in Section 17(b) hereof.
3. Holder's Conversion of Note.
(a) Conversion Right. The Holder shall have the
right, at its option, to convert the Note, in whole or in part, into fully paid,
validly issued and nonassessable shares of the Company's Common Stock at any
time and from time to time (including, without limitation, during the
continuance of a Senior Debt Default) that this Note is outstanding. If this
Note is converted in part, the remaining portion of this Note not so converted
shall remain entitled to the conversion and other rights provided herein.
(b) Conversion Rate. The number of shares of
Common Stock issuable upon conversion of the Note pursuant to Section 3(a) shall
be determined in accordance with the following formula:
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<PAGE> 8
P
---------------------
Conversion Price
P = Outstanding Principal Amount submitted for
conversion plus accrued but unpaid
interest thereon.
(c) Anti-Dilution. In order to prevent dilution of
the rights granted under this
Note, the Conversion Price and the Closing Bid Prices for any days during any
measuring period prior to any of the events set forth below (the "Adjusting
Closing Bid Prices") will be subject to adjustment from time to time as provided
in this Section 3(c):
(i) Dividends and Distributions. If the Company shall
declare or pay to the holders of the Common Stock a dividend or other
distribution payable in shares of Common Stock or any other security
convertible into or exchangeable for shares of Common Stock, the Holder
of the Note thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock or other securities
convertible into or exchangeable for shares of Common Stock, as
applicable, which such Holder would have owned or been entitled to
receive after the declaration and payment of such dividend or other
distribution as if the Note had been converted immediately prior to the
record date for the determination of stockholders entitled to receive
such dividend or other distribution.
(ii) Stock Splits and Combinations. If the Company
shall subdivide (by means of any stock split, stock dividend,
recapitalization or otherwise) the outstanding shares of Common Stock
into a greater number of shares of Common Stock, or combine (by means
of any combination, reverse stock split or otherwise) the outstanding
shares of Common Stock into a lesser number of shares, or issue by
reclassification of shares of Common Stock any shares of the Company,
the Conversion Price and the Adjusting Closing Bid Prices in effect
immediately prior thereto shall be adjusted so that the Holder shall
receive the number of shares of Common Stock which such Holder would
have owned or been entitled to receive after the happening of any and
each of the events described above if such Note had been converted
immediately prior to the happening of each such event on the day upon
which such subdivision or combination, as the case may be, becomes
effective.
(iii) Organic Changes. In case the Company shall
effect an Organic Change, then the Holder shall be given a written
notice from the Company informing such Holder of the terms of such
Organic Change and of the record date thereof for any distribution
pursuant thereto, at least ten days in advance of such record date,
and, if such record date shall precede the Maturity Date, the Holder
shall have the right thereafter to receive, upon conversion of the
Note, the number of shares of stock or other securities, property or
assets of the Company, or of its successor or transferee or any
affiliate thereof, or cash receivable upon or as a result of such
Organic Change that would have been received by a holder of the number
of shares of Common Stock equal to the number
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<PAGE> 9
of shares the Holder would have received had such Holder converted the
Note prior to such event at the Conversion Price immediately prior to
such event. In any such case, the Company will make appropriate
provision (in form and substance reasonably satisfactory to the Holder)
with respect to such Holders' rights and interests to insure that the
provisions of this Section 3(c)(iii) will thereafter be applicable to
the Note (including, in the case of any such Organic Change in which
the successor entity or purchasing entity is other than the Company, an
immediate adjustment of the Conversion Price to the value for the
Common Stock reflected by the terms of such Organic Change, if the
value so reflected is less than the Conversion Price in effect
immediately prior to such Organic Change). The Company will not effect
any such Organic Change unless prior to the consummation thereof the
successor entity (if other than the Company) resulting from such
Organic Change assumes, by written instrument (in form and substance
satisfactory to the Holder), the obligation to deliver to Holder such
shares of stock, securities or assets as, in accordance with the
foregoing provisions, such Holder may be entitled to acquire. The
provisions of this subparagraph (iii) shall similarly apply to
successive Organic Changes.
(iv) Adjustment upon Issuance of Options. If the
Company in any manner grants any rights or options to subscribe for or
to purchase one or more classes of its Common Stock (other than
pursuant to an Approved Stock Plan or upon conversion of the Notes) or
any stock or other securities convertible into or exchangeable for
Common Stock (such rights or options being herein called "Options" and
such convertible or exchangeable stock or securities being herein
called "Convertible Securities") and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities (the "New Option
Issuance Price") is less than the Average Market Price immediately
prior to such time, then, from and after the time of such issue or
sale, the Conversion Price shall be reduced, if necessary, so that it
shall not exceed the New Option Issuance Price. For purposes of this
Section 3(c)(iv), the New Option Issuance Price shall mean the amount
determined by dividing (I) the total amount, if any, received or
receivable by the Company as consideration for the granting of such
Options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such Options, plus in
the case of such Options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable
to the Company upon the issuance or sale of such Convertible Securities
and the conversion or exchange thereof, by (II) the total maximum
number of shares of Common Stock issuable upon exercise of such Options
or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options. No further adjustment of
the Conversion Price shall be made upon the actual issuance of such
Common Stock or of such Convertible Securities upon the exercise of
such Options or upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities.
(v) Change in Option Price or Rate of Conversion. If
the purchase price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion or exchange
of any Convertible Securities, or the rate at which any
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<PAGE> 10
Convertible Securities are convertible into or exchangeable for any
class of Common Stock change at any time, the Conversion Price at the
time of such change shall be readjusted, effective on and after the
date of such change, to the Conversion Price which would have been in
effect on the date of such change had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may
be, at the time initially granted, issued or sold; provided that no
adjustment shall be made if such adjustment would result in an increase
of the Conversion Price then in effect.
(vi) Issuance of Additional Shares of Common Stock.
In case the Company at any time or from time to time after the date
hereof shall issue or sell Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to
Section 3(c)(ii), (iv) or (v)), without consideration or for a
consideration per share less than the Average Market Price in effect
immediately prior to such issue or sale, then, and in each such case,
the Conversion Price shall be reduced, to a price determined by
multiplying such Conversion Price by a fraction
(A) the numerator of which shall be the sum of
(i) the number of shares of Common Stock outstanding immediately
prior to such issue or sale and (ii) the number of shares of
Common Stock which the aggregate consideration received by the
Company for the total number of such Additional Shares of Common
Stock so issued or sold would purchase at the Market Price, and
(B) the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such
issue or sale, provided that, for the purposes of this Section
3(c)(vi), immediately after any Additional Shares of Common Stock
are deemed to have been issued pursuant to Section 3(c)(ii) (iv)
or (v), such Additional Shares of Common Stock shall be deemed to
be outstanding, and (y) treasury shares of Common Stock shall not
be deemed to be outstanding.
(vii) Other Dilutive Events. In case any event shall
occur as to which the provisions of this Section 3(c) are not strictly
applicable or if strictly applicable would not fairly protect the
conversion rights of the Holder in accordance with the essential intent
and principles of this Section 3(c), then, in each such case, the Board
of Directors of the Company shall make an adjustment in the application
of such provisions, in accordance with such essential intent and
principles, so as to preserve, without dilution, the conversion rights
represented by this Note.
(viii) No Dilution or Impairment. The Company shall
not, by amendment of its certificate of incorporation or through any
Organic Change or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms of this Note, but
will at all times in good faith assist in the carrying out of all such
terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder against
dilution or other impairment. Without limiting the generality of the
foregoing, the Company (i) shall take all such action as may be
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<PAGE> 11
necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable shares of Common Stock, free
from all taxes, liens, security interests, encumbrances, preemptive
rights and charges on the conversion of this Note from time to time
outstanding, (ii) shall not take any action which results in any
adjustment of the Conversion Price or the Adjusting Closing Bid Prices
if the total number of shares of Common Stock issuable after the action
upon the conversion of this Note would exceed the total number of
shares of Common Stock then authorized by the Borrower's certificate of
incorporation and available for the purpose of issue upon such
exercise, (iii) shall not permit the par value of any shares of stock
receivable upon the conversion of this Note to exceed the amount
payable therefor upon such exercise, and (iv) shall not issue any
capital stock of any class which is preferred as to dividends or as to
the distribution of assets upon voluntary or involuntary dissolution,
liquidation or winding-up, unless the rights of the holders thereof
shall be limited to a fixed sum or percentage of par value or a sum
determined by reference to a formula based on a published index of
interest rates, an interest rate publicly announced by a financial
institution or a similar indicator of interest rates in respect of
participation in dividends and to a fixed sum or percentage of par
value in any such distribution of assets.
(ix) Notices.
(A) Immediately upon any adjustment pursuant
hereto of the Conversion Price or the Adjusting Closing Bid
Prices, the Company will give written notice thereof to the
Holder, setting forth in reasonable detail and certifying the
calculation of such adjustment.
(B) The Company will give written notice to the
Holder at least twenty (20) days prior to the date on which the
Company closes its books or takes a record (I) with respect to
any dividend or distribution upon the Common Stock, or (II) for
determining rights to vote with respect to any Organic Change,
dissolution or liquidation; provided that in no event shall such
notice be provided to the Holder prior to such information being
made known to the public.
(C) The Company will also give written notice to
the Holder at least twenty (20) days prior to the date on which
any Organic Change, dissolution or liquidation will take place.
(x) Further Adjustments. Successive adjustments in
the Conversion Price and Adjusting Closing Bid Prices shall be made
whenever any event specified above shall occur. All calculations under
this Section 3(c) shall be made to the nearest cent. No adjustment in
the Conversion Price or the Adjusting Closing Bid Prices shall be made
if the amount of such adjustment would be less than $0.01, but any such
amount shall be carried forward and an adjustment with respect thereto
shall be made at the time of and together with any subsequent
adjustment which, together with such amount and any other amount or
amounts so carried forward, shall aggregate $0.01 or more.
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<PAGE> 12
(d) Mechanics of Conversion. Subject to the Company's
inability to fully satisfy its obligations under a Conversion Notice as provided
for in Section 6 below:
(i) Holder's Delivery Requirements. To convert the
Note into full shares of Common Stock on any date (the "Conversion
Date"), the Holder shall (A) deliver or transmit by facsimile, for
receipt on or prior to 11:59 p.m., Pacific Time on such date, a copy of
a fully executed notice of conversion in the form attached hereto as
Exhibit A (the "Conversion Notice"), to the Company or its designated
transfer agent (the "Transfer Agent") to the effect that the Holder
elects to convert a specified principal amount of the Outstanding
Principal Amount of this Note (plus accrued interest), and (B)
surrender to a common carrier for delivery to the Company or the
Transfer Agent as soon as practicable following such date, the
originally executed Conversion Notice.
(ii) Company's Response. Upon receipt by the Company
of a facsimile copy of a Conversion Notice, the Company shall
immediately send, via facsimile, a confirmation of receipt of such
Conversion Notice to the Holder. Upon receipt by the Company or the
Transfer Agent of the originally executed Conversion Notice, the
Company or the Transfer Agent (as applicable) shall, on the next
Business Day following the date of receipt (or the second Business Day
following the date of receipt if received after 11:00 a.m. local time
of the Company or Transfer Agent, as applicable), (I) issue and
surrender to a common carrier for overnight delivery to the address as
specified in the Conversion Notice, a certificate, registered in the
name of the Holder or its designee, for the number of shares of Common
Stock to which the Holder shall be entitled, or (II) credit such
aggregate number of shares of Common Stock to which the Holder shall be
entitled to the Holder's or its designee's balance account with The
Depository Trust Company.
(iii) Dispute Resolution. In the case of a dispute as
to the determination of the Conversion Price, the Company shall
promptly issue to the Holder the number of shares of Common Stock that
is not disputed and shall submit the disputed determinations or
arithmetic calculations to the Holder via facsimile within one (1)
Business Day of receipt of such Holder's Conversion Notice. If such
Holder and the Company are unable to agree upon the determination of
the Conversion Price within one (1) Business Day of such disputed
determination or arithmetic calculation being submitted to the Holder,
then the Company shall within one (1) Business Day submit via facsimile
the disputed determination of the Conversion Price to an independent,
reputable accounting firm of national standing acceptable to the
Company and the Holder. The Company shall cause such accounting firm to
perform the determinations or calculations and notify the Company and
the Holder of the results no later than forty-eight (48) hours from the
time it receives the disputed determinations or calculations. Such
accounting firm's determination shall be binding upon all parties
absent manifest error.
(iv) Record Holder. The Person or Persons entitled to
receive the shares of Common Stock issuable upon a conversion of the
Note shall be treated for all
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<PAGE> 13
purposes as the record holder or holders of such shares of Common Stock
on the applicable Conversion Date.
(v) Company's Failure to Timely Convert. If the
Company shall fail (other than as a result of the situations described
in Section 6(a) with respect to which the Holder has elected, and the
Company has satisfied its obligations under, one of the options set
forth in subparagraphs (i) through (iv) of Section 6(a)) to issue to
the Holder on a timely basis as described in this Section 3(d), a
certificate(s) for the aggregate number of shares of Common Stock to
which the Holder is entitled upon the Holder's conversion of the Note
as reflected in the applicable Conversion Notice, the Company shall pay
damages to the Holder equal to the greater of (A) actual damages
incurred by the Holder as a result of the Holder's needing to "buy in"
shares of Common Stock to the extent necessary to satisfy its
securities delivery requirements ("Buy In Actual Damages") and (B)
after the effective date of the Registration Statement (as defined in
the Exchange Agreement) if the Company fails to deliver such
certificates within five days after the last possible date which the
Company could have issued such Common Stock to the Holder without
violating this Section 3(d), on each date such conversion is not timely
effected in an amount equal to 1% of the product of (I) the number of
shares of Common Stock not issued to the Holder on a timely basis and
to which the Holder is entitled and (II) the Closing Bid Price of the
Common Stock on the last possible date which the Company could have
issued such Common Stock to the Holder without violating this Section
3(d).
(e) Fractional Shares. The Company shall not issue any
fraction of a share of Common Stock upon any conversion. All shares of Common
Stock (including fractions thereof) issuable upon any conversion shall be
rounded up or down to the nearest whole share.
(f) Taxes. The Company shall pay any and all taxes which may
be imposed upon it with respect to the issuance and delivery of Common Stock
upon any conversion.
4. Acceleration at the Option of the Company.
If all or any portion of the Note remains outstanding on a
Optional Prepayment Date, then upon irrevocable written notice (the "Forced
Prepayment Notice") from the Company to the Holder delivered no later than ten
(10) days after any such Optional Prepayment Date and specifying a date for
mandatory prepayment which is forty-five (45) days after the Holder's receipt of
the Forced Prepayment Notice (the "Forced Prepayment Date") the Note shall be
prepaid as of the Forced Prepayment Date in immediately available funds in an
amount equal to 105% of the Outstanding Principal Amount being prepaid, plus
accrued and unpaid interest to the date of such prepayment, and the Holder shall
thereupon on or prior to the Forced Prepayment Date surrender the Note, duly
endorsed for cancellation, to the Company or the Transfer Agent. No Person shall
thereafter have any rights in respect of the Note, except the right to receive
the payment set forth in this Section 4. The provisions of this Section 4 shall
not be deemed to restrict the ability of the Holder to convert the Note pursuant
to the provisions of Section 3 at any time prior to the Forced Prepayment Date.
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<PAGE> 14
5. Acceleration Provisions.
(a) Acceleration Upon Major Transaction.
Promptly after a Major Transaction and provided that the consideration per share
of Common Stock in any such Major Transaction is not less than $1.50 per share
(subject to adjustment for the events set forth in Section 3(c)(i) & (ii)
hereof), the Company shall be required to prepay the Outstanding Principal
Amount of the Note in an amount equal to 105% of the Outstanding Principal
Amount being prepaid, plus accrued and unpaid interest to the date of such
prepayment ("Major Transaction Acceleration Price"). The provisions of this
Section 5(a) shall not be deemed to restrict the ability of the Holder to
convert the Note pursuant to the provisions of Section 3 at any time and from
time to time before the consummation of a Major Transaction.
(b) Acceleration Option Upon Triggering Event.
In addition to all other rights of the Holder contained herein (including,
without limitation, the provisions of Section 3), after a Triggering Event, the
Holder shall have the right, at the Holder's option, to declare all or a portion
of the Outstanding Principal Amount of the Note to be due and payable at a price
equal to the product of (i) the aggregate number of shares of Common Stock for
which the amount of the Note being converted would be converted into as of the
date immediately preceding such Triggering Event on which the exchange or market
on which the Common Stock is traded is open multiplied by (ii) the Average
Market Price of the Common Stock on such date ("Triggering Event Acceleration
Price" and, collectively with "Major Transaction Acceleration Price," the
"Acceleration Price"). The provisions of this Section 5(b) shall not be deemed
to restrict the ability of the Holder to convert the Note pursuant to the
provisions of Section 3 at any time and from time before the Holder receives the
Triggering Event Acceleration Price.
(c) "Major Transaction". A "Major Transaction"
shall be deemed to have occurred at such time as any of the following events:
(i) the consolidation or merger of the Company with
or into another Person (other than pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of
incorporation of the Company or pursuant to a merger after which the
holders of the Company's outstanding capital stock immediately prior to
the merger own a number of shares of the resulting company's
outstanding capital stock sufficient to elect a majority of the
resulting company's board of directors) ;
(ii) the sale, transfer, lease, disposal or
abandonment of (whether in one transaction or in a series of
transactions) substantially all of the Company's assets (other than a
sale or transfer to an entity controlling, controlled by or under
common control with the Company); or
(iii) a purchase, tender or exchange offer for more
than 50% of the outstanding shares of Common Stock is made and accepted
by the holders thereof.
(d) "Triggering Event". A "Triggering Event"
shall be deemed to have occurred at such time as any of the following events:
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<PAGE> 15
(i) notice from the Company that Common Stock issued
or issuable upon conversion of the Note (the "Conversion Shares") or
the Warrants (the "Warrant Shares") cannot be sold under the
Registration Statement covering such Common Stock (the "Suspension
Period"), for any period of 45 consecutive days that is (A) after the
date the Registration Statement has been declared effective by the SEC
and (B) prior to the time that the Conversion Shares may be sold
without limitation in accordance with Rule 144(k) under the 1933 Act;
provided that any demand for acceleration under this Section 5(d)(i)
must be made by the Holder within 10 days after receipt of notice from
the Company of the termination of the Suspension Period; and, provided
further that if the aggregate number of days in all Suspension Periods
(the "Suspension Days") is equal to or greater than forty-five (45)
days, then the Maturity Date shall be extended by the number of
Suspension Days;
(ii) the failure of the Common Stock, or Conversion
Shares, or Warrant Shares to be listed on the AMEX, The New York Stock
Exchange or the Nasdaq National Market System for a period of 15
consecutive days; provided, however, that any demand for acceleration
under this Section 5(d)(ii) must be made by the Holder within 30 days
after receipt of the Notice of Triggering Event (as defined in Section
5(f)); or
(iii) the Company's notice to the Holder, including
by way of public announcement, at any time, of its intention not to
comply with proper requests for conversion of the Notes or exercise of
the Warrants into shares of Common Stock, including due to any of the
reasons set forth in Section 6(a) below, except in any case in which
the basis for such intention by the Company is a bona fide dispute as
to the right of the Holder to such conversion.
(e) Mechanics of Acceleration Upon Major
Transaction. No sooner than fifteen (15) days nor later than ten (10) days prior
to the consummation of a Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver written notice
thereof via facsimile and overnight courier ("Notice of Major Transaction") to
the Holder.
(f) Mechanics of Acceleration at Option of
Holder Upon Triggering Event. Within one (1) day after the occurrence of a
Triggering Event, the Company shall deliver written notice thereof via facsimile
and overnight courier ("Notice of Triggering Event") to the Holder. At any time
after receipt of a Notice of Triggering Event, but only for as long as the facts
giving rise to the Triggering Event continue to exist, the Holder may require
the Company to prepay the Note by delivering written notice thereof via
facsimile and overnight courier ("Notice of Acceleration at Option of Holder
Upon Triggering Event") to the Company, which Notice of Acceleration at Option
of Holder Upon Triggering Event shall indicate the applicable Acceleration
Price, as calculated pursuant to Section 5(b) above.
(g) Payment of Acceleration Price. Promptly
after the occurrence of a Major Transaction or upon the Company's receipt of a
Notice of Acceleration at Option of Holder Upon Triggering Event from the
Holder, the Company shall immediately notify the
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<PAGE> 16
Holder by facsimile of the mechanics of the delivery of the Holder's Note and
the Holder shall thereafter promptly send the Note to the Company or its
Transfer Agent. The Company shall deliver the applicable Acceleration Price to
the Holder within thirty (30) days after the Company's delivery of a Notice of
Major Transaction or the Company's receipt of the applicable notice to affect an
acceleration; provided that the Holder's Note shall have been so delivered to
the Company or its Transfer Agent. In the event of a dispute as to the
determination of the arithmetic calculation of the Acceleration Price, such
dispute shall be resolved pursuant to Section 3(d)(iii) above. Payments provided
for in this Section 5 shall have priority to payments to other stockholders in
connection with a Major Transaction.
6. Inability to Fully Convert Note.
(a) Holder's Option if Company Cannot Fully
Convert. If, upon the Company's receipt of a Conversion Notice, the Company
cannot issue shares of Common Stock registered for resale under the Registration
Statement for any reason, including, without limitation, because the Company (x)
does not have a sufficient number of shares of Common Stock authorized and
available, (y) is otherwise prohibited by applicable law or by the rules or
regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Company or its
securities, including without limitation the AMEX, from issuing all of the
Common Stock which is to be issued to the Holder pursuant to a Conversion Notice
or (z) fails to have a sufficient number of shares of Common Stock registered
for resale under the Registration Statement, then the Company shall issue as
many shares of Common Stock as it is able to issue in accordance with the
Holder's Conversion Notice and pursuant to Section 3(d) above and, with respect
to the unconverted portion of the Note, the Holder, solely at its option, can
elect to (unless the Company issues and delivers the Conversion Shares
underlying the unconverted portion of the Note prior to the Holder's election
hereunder, in which case the Holder shall only be entitled to receive Buy In
Actual Damages under Section 3(d)(v)):
(i) require the Company to pay the Holder for the
portion of Outstanding Principal Amount of the Note plus accrued
interest thereon for which the Company is unable to issue Common Stock
in accordance with the Holder's Conversion Notice ("Mandatory Payment")
in an amount (the "Mandatory Payment Price") equal to the Triggering
Event Acceleration Price as of such Conversion Date;
(ii) if the Company's inability to fully convert the
Note is pursuant to Section 6(a)(z) above, require the Company to issue
restricted shares of Common Stock in accordance with the Holder's
Conversion Notice and pursuant to Section 3(d) above;
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted portion of the Note that
was to be converted pursuant to the Holder's Conversion Notice; or
(iv) if the Company's inability to fully convert the
Note is pursuant to the AMEX rules and regulations described in Section
6(a)(y) above, require the Company to issue shares of Common Stock in
accordance with the Holder's Conversion Notice and
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<PAGE> 17
pursuant to Section 3(d) above at a Conversion Price equal to the
Average Market Price of the Common Stock for the five (5) consecutive
trading days preceding the Holder's Notice in Response to Inability to
Convert.
(b) Mechanics of Fulfilling Holder's Election.
The Company shall immediately send via facsimile to the Holder, upon receipt of
a facsimile copy of a Conversion Notice from the Holder which cannot be fully
satisfied as described in Section 6(a) above, a notice of the Company's
inability to fully satisfy the Holder's Conversion Notice (the "Inability to
Fully Convert Notice"). Such Inability to Fully Convert Notice shall indicate
(i) the reason why the Company is unable to fully satisfy the Holder's
Conversion Notice, (ii) the portion of the Outstanding Principal Amount of the
Note plus accrued interest thereon which cannot be converted and (iii) the
applicable Mandatory Payment Price. The Holder must within five (5) Business
Days after receipt of such Inability to Fully Convert Notice deliver written
notice via facsimile to the Company ("Notice in Response to Inability to
Convert") of its election pursuant to Section 6(a) above.
(c) Payment. If the Holder shall elect to have its
Note prepaid pursuant to Section 6(a)(i) above, the Company shall pay the
Mandatory Payment Price in immediately available funds to the Holder within
thirty (30) days of the Company's receipt of the Holder's Notice in Response to
Inability to Convert. If the Company shall fail to pay the applicable Mandatory
Payment Price to the Holder on a timely basis as described in this Section 6(c)
(other than pursuant to a dispute as to the determination of the arithmetic
calculation of the Acceleration Price), in addition to any remedy the Holder may
have under this Note, such unpaid amount shall bear interest at the Default Rate
until paid in full. Until the full Mandatory Payment Price is paid in full to
the Holder, the Holder may void the request for the Mandatory Payment with
respect to the portion of the Note for which the full Mandatory Payment Price
has not been paid and in no event shall such voidance be deemed forgiveness of
any amounts due under this Note. Notwithstanding the foregoing, if the Company
fails to pay the applicable Mandatory Payment Price within such thirty (30) days
time period due to a dispute as to the determination of the arithmetic
calculation of the Acceleration Price, such dispute shall be resolved pursuant
to Section 3(d)(iii) above.
(d) Pro-rata Conversion and Acceleration. In
the event the Company receives a Conversion Notice from more than one Holder on
the same day and the Company can convert and redeem some, but not all, of the
Notes pursuant to this Section 6, the Company shall convert and purchase from
each Holder electing to have such Note converted and purchased at such time an
amount equal to such Holder's pro-rata amount (based on the Outstanding
Principal Amount of the Note held by such Holder relative to aggregate
Outstanding Principal Amount of Notes outstanding) of all Notes being converted
and redeemed.
7. Representations and Warranties.
(a) The Company represents and warrants as follows: (i) the
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware; (ii) the execution, delivery and
performance by the Company of this Note and each
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<PAGE> 18
other instrument, agreement and document executed and delivered by the Company
to the Holder whether now existing or hereinafter executed and delivered in
connection with this Note (together with the Exchange Agreement, the other
Notes, the Warrants, the Registration Rights Agreement and the other agreements,
instruments and other documents heretofore or hereafter furnished in connection
therewith are hereinafter referred to individually as a "Document" and
collectively as the "Documents") are within the Company's corporate powers, have
been duly authorized by all necessary corporate action, and do not contravene
(A) the Company's charter or by-laws or (B) any law or any contractual
restriction binding on or affecting the Company; (iii) no authorization or
approval or other action by, and no notice to or filing with, any governmental
authority, regulatory body or third Person is required for the due execution,
delivery and performance by the Company of any Document; (iv) each Document
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms; (v) the Company has all
requisite corporate power and authority to conduct its business as now conducted
and to consummate the transactions contemplated by the Documents; (vi) the
Company is duly qualified to conduct its business and is in good standing in
each jurisdiction in which the character of the properties owned or leased by
it, or in which the transaction of its business makes such qualification
necessary; (vii) the Company's most recent 10-K or 10-Q, whichever contains the
Company's most recent financial statements, fairly represents the financial
condition of the Company and the results of operations of the Company for the
period ended on the date thereof, all in accordance with generally accepted
accounting principles consistently applied, and since the date thereof there has
been no material adverse change in the operations, business, property, assets or
condition of the Company; (viii) there is no pending or threatened action or
proceeding affecting the Company before any governmental agency or arbitrator
which challenges or relates to the Documents or any transactions contemplated in
connection therewith or which may materially adversely affect the financial
condition or operations of the Company; (ix) no fact is known to the Company
which is reasonably likely to have a material adverse effect on the business,
operations, condition, financial or otherwise, performance or prospects of the
Company and has not been disclosed in the Company's 10-K or 10-Q, whichever has
been filed more recently by the Company with the Securities and Exchange
Commission; and (x) after giving effect to the transactions contemplated by this
Note and the other Documents, the Company is, individually and with its
Subsidiaries on a consolidated basis, Solvent.
(b) Each of the representations and warranties made by the
Company in the Exchange Agreement as in effect on the date hereof, without
regard to any amendment, modification or waiver of such provisions, is true and
correct on the date hereof as if made on the date hereof (except for those
representations and warranties that speak as of a specific date), which
representations and warranties (together with all related definitions and
ancillary provisions) are hereby incorporated by reference as if set forth
herein in their entirety, provided, that: (A) references to "this Agreement",
"herein", "hereunder", and words of similar import shall mean and be a reference
to this Note; (B) references to an "Exhibit" and "Schedule" shall mean and be a
reference to the applicable Exhibit and Schedule to the Exchange Agreement (as
in effect on the date hereof, without regard to any amendment, modification or
waiver of such provisions and without regard to whether or not the Exchange
Agreement remains in effect); and (C) references to Sections in such
representations and warranties shall be references to Sections
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<PAGE> 19
of the Exchange Agreement, provided that to the extent such referenced Sections
are themselves incorporated in this Note by reference, references herein to such
Sections shall be to such Sections as they are incorporated.
8. Covenants. So long as any principal or interest is due
hereunder and shall remain unpaid, the Company will, unless the Holder shall
otherwise consent in writing:
(a) Furnish to the Holder: (i) as soon as
possible and in any event within five days after the occurrence of a Default or
any event that, with the giving of notice or the lapse of time or both, would
constitute a Default, the written statement of the chief financial officer of
the Company, setting forth the details of such Default or event and the action
that the Company proposes to take with respect thereto and (ii) promptly upon
request, such other information concerning the condition or operations,
financial or otherwise, of the Company or any of its Subsidiaries as the Holder
from time to time may reasonably request.
(b) Comply, and cause each of its Subsidiaries
to comply, in all material respects with all applicable laws, rules, regulations
and orders, such compliance to include, without limitation, payment before the
same become delinquent all taxes, assessments and governmental charges imposed
upon it or upon its property except to the extent contested in good faith and
for which adequate reserves (as determined in accordance with generally accepted
accounting principles consistently applied) have been set aside.
(c) Maintain and preserve its existence, rights
and privileges, and obtain, maintain and preserve all permits, licenses,
authorizations and approvals that are necessary in the proper conduct of its
business.
(d) Keep adequate and proper records and books
of account, in which complete and correct entries will be made in accordance
with generally accepted accounting principals consistently applied, reflecting
all financial transactions of the Company.
(e) Comply with each of the affirmative and
negative covenants contained in the Exchange Agreement (as in effect on the date
hereof, without regard to any amendment, modification or waiver of such
provisions and without regard to whether or not the Exchange Agreement remains
in effect) which covenants are hereby incorporated by reference as if set forth
herein in their entirety provided that any reference changes provided for in
Section 8 hereof shall also be applicable to this Section 8(e).
(f) Not incur any indebtedness except Senior Debt,
Subordinated Debt and other indebtedness in the ordinary course of business not
to exceed $2 million at any time outstanding.
9. Reservation of Shares. The Company shall, so long as any
principal or interest is due hereunder, reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Note, such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of the Note;
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<PAGE> 20
provided that the number of shares of Common Stock so reserved shall at no time
be less than 200% of the number of shares of Common Stock for which the Note is
at any time convertible.
10. No Impairment. The Company shall not intentionally take
any action which would impair the rights and privileges of the Note set forth
herein or the Holder.
11. Limitation on Number of Conversion Shares. Notwithstanding
any provision to the contrary contained herein, in no event shall the Holder be
entitled to convert this Note such that upon giving effect to such conversion,
the aggregate number of shares of Common Stock then beneficially owned by the
Holder and its "affiliates" as defined in Rule 144 of the Act would exceed 4.99%
of the total issued and outstanding shares of the Common Stock following such
conversion; provided, however, that Holder may elect to waive this restriction
upon not less than sixty-one (61) days prior written notice to the Company. For
purposes of this Section, beneficial ownership shall be calculated in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended.
12. Obligations Absolute. No provision of this Note shall
alter or impair the obligation of the Company, which is absolute and
unconditional, to convert this Note pursuant to the provisions of Section 3, and
to pay the principal of, and interest on, this Note at the time, place and rate,
and in the manner, herein prescribed.
13. Waivers of Demand, Etc. The Company hereby expressly
waives demand and presentment for payment, notice of nonpayment, protest, notice
of protest, notice of dishonor, notice of acceleration or intent to accelerate,
bringing of suit and diligence in taking any action to collect amounts called
for hereunder and will be directly and primarily liable for the payment of all
sums owing and to be owing hereon, regardless of and without any notice,
diligence, act or omission as or with respect to the collection of any amount
called for hereunder.
14. Replacement Note. In the event that the Holder notifies
the Company that its Note has been lost, stolen or destroyed, a replacement Note
identical in all respects to the original Note (except for registration number
and Outstanding Principal Amount, if different than that shown on the original
Note) shall be issued by the Company to the Holder, provided that the Holder
executes and delivers to the Company an agreement reasonably satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection with
such Note, but in no event shall the aggregate amount of such indemnification
exceed the Outstanding Principal Amount of the Note.
15. Payment of Expenses. The Company agrees to pay on demand
(i) one-half of all reasonable costs and expenses (including, without
limitation, fees and expenses of counsel to the Holder) incurred by the Holder
in connection with any waiver or amendment of any provision of this Note and the
other Documents and (ii) all costs and expenses (including, without limitation,
fees and expenses of counsel to the Holder) incurred by the Holder in connection
with any Default under this Note and the enforcement of the Holder's rights
and/or the collection of all amounts due under this Note, the Registration
Rights Agreement or the Exchange Agreement. The Company hereby agrees to
indemnify and hold harmless the Holder and its members, partners, agents,
employees, affiliates and advisors from and against any and all claims, damages,
losses, liabilities
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<PAGE> 21
and expenses (including without limitation, all fees and other client charges of
counsel to the Holder) which may be incurred by or asserted against the Holder
or any such member, partner, agent, employee, affiliate or advisor in connection
with or arising out of any investigation, litigation or proceeding related to or
arising out of this Note or any other Document or any transaction contemplated
hereby or thereby. The obligations of the Company under this paragraph shall
survive the payment in full of this Note.
16. Restriction on Cash Dividends With Respect to Common
Stock. Until the Note has been converted or redeemed in its entirety as provided
herein, the Company shall not, directly or indirectly, declare or pay any cash
dividend on its Common Stock without the prior express written consent of the
Holder.
17. Assignment and Transfer of Note.
(a) This Note may not be sold, assigned, or in
any manner transferred or disposed of, in whole or in part, except in compliance
with the terms and conditions hereof.
(b) This Note shall be registered in a
register (the "Note Register") as it is issued and transferred, which Note
Register shall be maintained by the Company at its principal office or, at the
Company's election and expense, by the Company's Transfer Agent. The Company
shall be entitled to treat the registered holder of the Note on the Note
Register as the owner in fact thereof for all purposes and shall not be bound to
recognize any equitable or other claim to or interest in such Note on the part
of any other Person, and shall not be affected by any notice to the contrary,
except that, if and when any Note is properly assigned in blank, the Company may
(but shall not be obligated to) treat the bearer thereof as the owner of such
Note for all purposes. All of the rights provided to the Holder under this Note,
if properly assigned, may be exercised by a new holder without a new note first
having been issued.
(c) Subject to the restrictions on transfer
contained herein, if applicable, this Note and all rights hereunder are
transferable in whole or in part, without charge to the Holder hereof, upon
surrender of this Note with a properly executed Form of Assignment attached
hereto as Exhibit B at the principal office of the Company.
18. Subordination.
(a) Agreement to Subordinate. The Subordinated
Debt is and shall be subordinate, to the extent and in the manner hereinafter
set forth, in right of payment to the prior payment in full of the Senior Debt.
(b) Restrictions on Payment of the Subordinated
Debt. All Senior Debt shall first be paid in full, or such payment shall have
been provided for, before any payment shall be made to the Holder in respect of
the Subordinated Debt; provided, however, that the Holder may receive, and the
Company may pay, principal of and interest on the Subordinated Debt evidenced by
the Note in the stated amounts and on the stated dates of payment hereof or,
with respect to interest payments, Common Stock issued pursuant to the
provisions of Section 2(a)(ii) hereof, unless (i) a default in connection with
the Senior Debt (a "Senior Debt Default")
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<PAGE> 22
arising out of the failure by the Company to make a payment on account of
principal of or interest on Senior Debt has occurred and is continuing and (ii)
the Company and the Holder have received written notice of such occurrence (a
"Blockage Notice") from one or more holders of the Senior Debt in the aggregate
principal amount of at least 50% of the Senior Debt outstanding; provided,
further, however, that the Company may resume making payments on account of
Subordinated Debt if at the time of any such payment 90 days shall have elapsed
since the occurrence of such Senior Debt Default, or on such earlier date, if
any, on which the Senior Debt has been paid in full in cash, in other property
or securities or such Senior Debt Default is cured or is waived in writing by
the applicable holders of the Senior Debt or such Blockage Notice has been
withdrawn or rescinded by the holders of the Senior Debt. Not more than one
Blockage Notice may be provided with respect to the Subordinated Debt during any
period of 365 consecutive days.
(c) Senior Indebtedness Unconditional.
(i) All rights and interests of the
holders of the Senior Debt hereunder, and all agreements and
obligations of the Company hereunder, shall remain in full force and
effect irrespective of: (A) any lack of validity or enforceability of
any Senior Loan Document or any other agreement or instrument relating
thereto, (B) any change in the time, manner or place of payment of, or
in any other term in respect of, all or any of the Senior Debt, or any
other amendment or waiver of or any consent to departure from any
Senior Loan Document, (C) any exchange or release of, or non-perfection
of any lien on or security interest in, any collateral, or any release
or amendment or waiver of or consent to departure from any guaranty,
for all or any of the Senior Debt, or (D) any other circumstance which
might otherwise constitute a defense available to, or a discharge of,
the Company in respect of the Senior Debt or the Company in respect of
this Note.
(ii) This Section of this Note shall
continue to be effective or shall be reinstated, as the case may be, if
at any time any payment of any of the Senior Debt is rescinded or must
otherwise be returned by a holder of Senior Debt upon the commencement
of a Proceeding or otherwise, all as though such payment had not been
made.
(d) Waivers. Except as otherwise expressly
provided herein, each of the Holder and the Company hereby waives (i) promptness
and diligence, (ii) notice of acceptance and notice of the incurrence of any
Senior Debt by the Company, (iii) notice of any actions taken by the holder of
any Senior Debt or the Company or any other person under any Senior Loan
Document or any other agreement or instrument relating thereto, (iv) all other
notices, demands and protests, and all other formalities of every kind in
connection with the enforcement of the Senior Debt or of the obligations of the
Holder and the Company hereunder, the omission of or delay in which, but for the
provisions of this Section, might constitute grounds for relieving the Holder or
the Company of its obligations hereunder and (v) any requirement that any holder
of Senior Debt protect, secure, perfect or insure any security interest or other
lien or
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<PAGE> 23
any property subject thereto or exhaust any right to take any action against the
Company or any other person or any collateral.
(e) Subrogation. No payment or distribution to
a holder of Senior Debt pursuant to the provisions of this Note shall entitle
the Holder to exercise any rights of subrogation in respect thereof until the
Senior Debt shall have been paid in full. After the Senior Debt shall have been
paid in full, the Holder shall be subrogated to the rights of the holders of the
Senior Debt to receive payments or distributions of assets of the Company
applicable to the Senior Debt until all amounts owing in respect of the
Subordinated Debt shall be paid in full, and for the purpose of such
subrogation, no such payments or distributions to the holders of the Senior Debt
by or on behalf of the Company or by or on behalf of the Holder by virtue of
this Section 19 of this Note which otherwise would have been made to the Holder
shall, as among the Company, its creditors (other than the holders of its Senior
Debt) and the Holder, be deemed to be payment by the Company to or on account of
the Senior Debt, it being understood that the above provisions relating to
subordination are solely for the purpose of defining the relative rights of the
holders of the Senior Debt, on the one hand, and the Holder, on the other hand.
(f) Subordination.
(i) Except to the extent that the
Holder has authorized the Company, and the Company has bound itself, not to make
any payment on the Subordinated Debt other than in accordance with this Note, as
set forth in the Company's undertaking appearing in this Note, nothing contained
herein shall impair, as between the Company and the Holder, the obligation of
the Company, which is absolute and unconditional, to convert this Note pursuant
to the provisions of Section 3 and to pay the principal amount of and interest
on the Subordinated Debt in accordance with the terms hereof, or affect the
relative rights of the Holder and creditors of the Company other than the
holders of the Senior Debt, nor shall anything herein prevent the Holder from
exercising all remedies otherwise permitted by applicable law upon default,
subject to the rights, if any, under this Note of the holders of the Senior
Debt. In no event shall any term, covenant, condition or restriction in this
Section 20 of this Note affect in any way any right, power or privilege of the
Holder in respect of principal of or interest on the Note, or any related
obligation.
(ii) The Holder shall not at any time be
charged with knowledge of the existence of any facts which would prohibit the
making of any payment to it or the taking of any other action under this Note,
unless and until the Holder and the Company shall have received a notice thereof
from the applicable holders of the Senior Debt and, prior to the receipt of any
such notice, the Holder shall be entitled to assume that no such facts exist.
19. Intentionally Omitted.
20. Events of Default. If any of the following shall occur
(each a "Default"):
(a) the Company shall fail to pay any principal of or interest
on this Note when due (whether by scheduled maturity, acceleration, demand or
otherwise); or (b) any representation or warranty made by the Company in this
Note, in any other Document heretofore
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<PAGE> 24
or hereafter furnished by or on behalf of the Company (including, without
limitation, the Exchange Agreement) or in any document or certificate in
connection with the execution and delivery of this Note shall have been
incorrect in any material respect when made; or (c) the Company shall fail to
perform or observe any term, covenant or agreement contained in any Document
(including, without limitation, the failure to honor any Conversion Notice or an
Election to Purchase Shares (as defined in the Warrants)) to be performed or
observed by the Company, or (d) the Company shall fail to pay any debt for
borrowed money or other similar obligation or liability ("Indebtedness")
(excluding Indebtedness evidenced by this Note), or any interest or premium
thereon, when due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise) and such failure shall continue after the
applicable grace period, if any, specified in the agreement or instrument
relating to such Indebtedness, or any other default under any agreement or
instrument relating to any such Indebtedness, or any other event, shall occur
and shall continue after the applicable grace period, if any, specified in such
agreement or instrument, if the effect of such default or event is to
accelerate, or to permit the acceleration of, the maturity of such Indebtedness;
or any such Indebtedness shall be declared to be due and payable, or required to
be prepaid (other than by a regularly scheduled required prepayment), prior to
the stated maturity thereof; or (e) one or more judgments or orders for the
payment of money exceeding any applicable insurance coverage shall be rendered
against the Company, and either (i) enforcement proceedings shall have been
commenced by any creditor upon any such judgment or order, or (ii) there shall
be any period of ten (10) consecutive days during which a stay of enforcement of
any such judgment or order, by reason of a pending appeal or otherwise, shall
not be in effect; or (f) the Company shall be generally not paying its debts as
such debts become due, or shall admit in writing its inability to pay its debts
generally, or shall make a general assignment for the benefit of creditors; or
any proceeding shall be instituted by or against the Company seeking to
adjudicate it a bankrupt or insolvent, or seeking dissolution, liquidation,
winding up, reorganization, arrangement, adjustment, protection, relief or
composition of it or its debts under any law relating to bankruptcy, insolvency
or reorganization or relief of debtors, or seeking the entry of an order for
relief or the appointment of a receiver, trustee, custodian or other similar
official for the Company or for any substantial part of its property and such
proceeding shall remain undismissed or unstayed for a period of thirty (30)
days; or the Company shall take any action to authorize or effect any of the
actions set forth above in this clause (f); or (g) any provision of this Note or
any other Document (including, without limitation, the Exchange Agreement) shall
at any time for any reason be declared to be null and void by a court of
competent jurisdiction, or the validity or enforceability thereof shall be
contested by the Company, or a proceeding shall be commenced by the Company
seeking to establish the invalidity or unenforceability thereof, or the Company
shall deny that it has any liability or obligation hereunder or thereunder; or
(h) a material adverse change in the condition or operations, financial or
otherwise, of the Company, as determined by the Holder in its sole discretion,
shall occur and written notice thereof shall have been given to the Company by
the Holder; or (i) a Senior Debt Default shall have occurred and be continuing;
then the Holder may (i) declare the Outstanding Principal Amount of this Note
and all other amounts due hereunder to be immediately due and payable, whereupon
the Outstanding Principal Amount of this Note and all such other amounts shall
become and shall be forthwith due and payable, without diligence, presentment,
demand, protest or other notice of any kind, all of which
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<PAGE> 25
are hereby expressly waived and all such amounts, if unpaid, shall bear interest
at the Default Rate, and (ii) exercise any and all of its other rights under
applicable law, hereunder and under the other Documents. In such event, this
Note shall be prepaid at a prepayment price equal to 125% of the Outstanding
Principal Amount of the Note plus accrued but unpaid interest thereon.
21. Taxes, etc. All payments made by the Company hereunder
will be made without setoff, counterclaim or other defense. All such payments
shall be made free and clear of and without deduction for any present or future
income, stamp or other taxes, levies, imposts, deductions, charges, fees,
withholding, restrictions or conditions of any nature now or hereafter imposed,
levied, collected, withheld or assessed by any jurisdiction or by any political
subdivision or taxing authority thereof or therein, and all interest, penalties
or similar liabilities, excluding taxes on the overall net income of the Holder
(such non-excluded taxes are hereinafter collectively referred to as the
"Taxes"). If the Company shall be required by law to deduct or to withhold any
Taxes from or in respect of any amount payable hereunder, (i) the amount so
payable shall be increased to the extent necessary so that after making all
required deductions and withholdings (including Taxes on amounts payable to the
Holder pursuant to this sentence) the Holder receives an amount equal to the sum
it would have received had no such deductions or withholdings been made, (ii)
the Company shall make such deductions or withholdings and (iii) the Company
shall pay the full amount deducted or withheld to the relevant taxation
authority in accordance with applicable law. Whenever any Taxes are payable by
the Company, as promptly as possible thereafter the Company shall send the
Holder an official receipt showing payment. In addition, the Company agrees to
pay any present or future taxes, charges or similar levies which arise from any
payment made hereunder or from the execution, delivery, performance, recordation
or filing of, or otherwise with respect to, this Note or any other Document
(hereinafter referred to as "Other Taxes"). The Company will indemnify the
Holder for the full amount of Taxes or Other Taxes (including, any Taxes or
Other Taxes on amounts payable to the Holder under this paragraph) paid by the
Holder and any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, upon written demand by the Holder therefor.
22. Miscellaneous.
(a) The Company agrees that all notices or other
communications provided for hereunder shall be in writing (including
telecommunications) and shall be mailed, telecopied or delivered to the Company
at the address of the Company set forth next to its signature, or at such other
address as may hereafter be specified by the Company to the Holder in writing.
All notices and communications shall be effective (i) if mailed, when received,
(ii) if telecopied, when transmitted, and (iii) if delivered, upon delivery.
(b) No failure on the part of the Holder to exercise, and no
delay in exercising, any right, power, privilege or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise thereof by
the Holder preclude any other or further exercise thereof or the exercise of any
other right, power, privilege or remedy of the Holder. No amendment or waiver of
any provision of this Note, nor consent to any departure by the Company
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Holder, and
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<PAGE> 26
then such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given.
(c) Any provision hereof which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective only to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
(d) The Company hereby (i) irrevocably submits to the
jurisdiction of any Delaware State or Federal court in any action or proceeding
arising out of or relating to this Note, (ii) waives any defense based on
doctrines of venue or forum non conveniens, or similar rules or doctrines, and
(iii) irrevocably agrees that all claims in respect of such an action or
proceeding may be heard and determined in such Delaware State or Federal court.
The Company would (by its acceptance hereof) waive any right to trial by jury in
any action, proceeding or counterclaim arising out of or relating to this Note.
-26-
<PAGE> 27
(e) This Note shall be governed by, and construed in
accordance with, the laws of the State of New York.
NTN COMMUNICATIONS, INC.
By: ___________________________________________
Name:
Title:
Address:
5966 La Place Court
Carlsbad, CA 92008
Attention: President
Telephone: (760) 438-7400
Telecopier: (760) 930-1187
-27-
<PAGE> 28
SCHEDULE I
PAYMENTS OF PRINCIPAL
<TABLE>
<CAPTION>
Principal Principal Notation
Paid or Prepaid Balance Made By
--------------- --------- --------
<S> <C> <C>
</TABLE>
-28-
<PAGE> 29
EXHIBIT A
NTN COMMUNICATIONS, INC.
CONVERSION NOTICE
Reference is made to the 7% convertible senior subordinated note due February 1,
2001 (the "NOTE"), made by NTN Communications, Inc., a Delaware corporation (the
"COMPANY"), to the order of [Stark International][Shepherd Investments
International, Ltd.]. In accordance with and pursuant to the Note, the
undersigned hereby elects to convert the amount under this Note indicated below
into shares of Common Stock, $.005 par value per share of the Company (the
"COMMON STOCK"), by tendering the Note as of the date specified below.
Date of Conversion:
---------------------------------
Outstanding Principal Amount of Note to be
converted:
Please confirm the following information:
Conversion Price:
---------------------------------
Number of shares of Common Stock
to be issued:
---------------------------------
---------------------------------
Please issue the Common Stock and, if applicable, any check drawn on an account
of the Company into which Note is being converted in the following name and to
the following address:
Issue to:
---------------------------------
---------------------------------
---------------------------------
---------------------------------
Facsimile Number:
---------------------------------
Authorization:
---------------------------------
By:
-----------------------------
Title:
--------------------------
Dated:
---------------------------------
-29-
<PAGE> 30
Exhibit B
FORM OF ASSIGNMENT
[To be executed only upon assignment of the Note]
For value received, the undersigned registered Holder of the within Note hereby
sells, assigns and transfers unto ______ the right represented by such Note, and
appoints _____________ Attorney to make such transfer on the Note Register of
NTN Communications, Inc., maintained for such purpose, with full power of
substitution in the premises.
Dated:
----------------
(Signature must conform in all respects to the
name of holder as specified on the face of the
Note)
----------------------------------------------
(Street Address)
----------------------------------------------
(City) (State) Zip Code)
Signed in the presence of:
-30-
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated July 1, 1998 by and between NTN COMMUNICATIONS,
INC., a Delaware corporation (the "Company"), and Gerald Sokol, Jr. (the
"Executive").
1. Term of Employment
Subject to the provisions of Section 10 below, the Company shall employ the
Executive, and the Executive shall serve the Company in the capacity of
President and Chief Executive Officer for a term of two (2) years commencing as
of July 1, 1998 and ending June 30, 2000 (the "Term of Employment").
2. Duties
During the Term of Employment, the Executive will serve the Company
faithfully, diligently, and competently and to the best of his ability, will
devote full regular working time to his employment with management and executive
authority and responsibility for the business, affairs and operations of the
Company and any subsidiaries thereof, subject to the terms of this Agreement and
the direction and control of the Board of Directors.
3. Compensation
During the Term of Employment, the Company shall pay to the Executive as
compensation for the performance of his duties and obligations hereunder a
salary at the rate of $262,500 per annum during the first year and the term of
this Agreement. After the first year, the Executive's salary shall be increased
on the anniversary date each year during the Term of Employment in proportion to
any upward changes in Consumer Price Index of the U.S. Bureau of Labor
Statistics of Urban Wage Earners and Clerical Workers, U.S. City Average
(1967=100) during the calendar year immediately preceding each such anniversary
date (in the event that such index shall be changed or discontinued, the index
published by the United States government which is most nearly the same as such
index shall be used to make the foregoing calculations).
In addition, Executive will be paid a bonus for the 1998 fiscal year based
upon the "Operating Cash Flow" of the Company for 1998. Operating Cash Flow is
defined herein to mean revenue less operating and SG&A expenses, excluding
depreciation, amortization, interest expense and any one time or extraordinary
charges. Operating Cash Flow shall exclude all business activity (including
charges associated with the acquisition or sale) of any entity which is acquired
by, or which acquires, the Company. Such bonus shall be paid within 60 days
after the determination of Operating Cash Flow. A schedule setting forth the
formula for calculating such bonus is attached hereto as Exhibit A. The
Compensation Committee of the Board of Directors and the Executive will mutually
agree on a bonus program for the period of this Agreement occurring after
December 1998.
<PAGE> 2
4. Expenses and Other Benefits
All travel, entertainment and other reasonable business expenses incident
to the rendering of services by the Executive hereunder will be promptly paid
or reimbursed by the Company subject to submission by the Executive in
accordance with the Company's policies in effect from time to time.
The Executive shall be entitled during the Term of Employment to
participate in employee benefit and welfare plans and programs of the Company
including any employee incentive stock option plans, qualified or unqualified,
to the extent that any other executives or officers of the Company or its
subsidiaries are eligible to participate and subject to the provisions, rules,
regulations, and laws applicable thereto. Notwithstanding the foregoing, the
Company shall provide the Executive, at a minimum, with the following benefits:
(a) Coverage, at no expense to the Executive, of the Executive, his
wife, if any, and those of his children who qualify as his dependents under
Section 152 of the Internal Revenue Code of 1954, under a major medical
insurance program with an annual cumulative deductible amount of no more than
$500;
(b) Coverage of the Executive by life insurance, payable to his
designated beneficiary, in the amount of $1,000,000 and, in the event of
accidental death or dismemberment, in the amount of $2,000,000. Coverage shall
begin the first day of the Term of Employment hereunder and shall continue
throughout the Term of Employment; and
(c) A paid vacation of four (4) weeks, in addition to any authorized
holidays of the Company, during each 12-month period during the Term of
Employment.
5. Death or Disability.
This Agreement shall be terminated by the death of the Executive and also
may be terminated by the Board of Directors of the Company if the Executive
shall be rendered incapable by illness or any physical or mental disability
(individually, a "disability") from substantially complying with the terms,
conditions and provisions to be observed and performed on his part for a period
in excess of six months (whether or not consecutive) during any 12 months
during the Term of Employment. If this Agreement is to be terminated by reason
of illness, or any physical or mental disability of the Executive, the Company
shall give thirty days' written notice to that effect to the Executive in the
manner provided herein and the Executive shall be entitled to 75% of the
Executive's compensation that was to accrue during the balance of the Term of
Employment, including those benefits described in Sections 4(a) and (b) hereof.
6. Disclosure of Information; Inventions and Discoveries
The Executive shall promptly disclose to the Company all processes,
trademarks, inventions, improvements, discoveries and other information
(collectively, "developments") directly related to the business of the Company
conceived, developed or acquired by him alone or with others during the Term
of Employment or during any earlier or later period of employment with the
Company, whether or not during regular working hours or through the use
2
<PAGE> 3
of material or facilities of the Company. For the purpose of Sections 6, 7 and
8 hereof, the business of the Company includes without limitation the fields of
electronically simulated sports games or interactive television applications.
All such developments shall be the sole and exclusive property of the Company,
and upon request the Executive shall deliver to the Company all drawings,
sketches, models and other data and records relating to such development. In the
event any such development shall be deemed by the Company to be patentable, the
Executive shall, at the expense of the Company, assist the Company in obtaining
a patent or patents thereon and execute all documents and do all other things
necessary or proper to obtain letters of patent and invest the Company with full
title thereto.
7. Non-Competition
The Company and the Executive agree that the services rendered by the
Executive hereunder are unique and irreplaceable. During his employment by the
Company and for a period of one year thereafter, the Executive shall not become
an executive officer (other than an officer whose function substantially relates
to financial matters) of any business in the fields of electronically simulated
sports games or interactive television, which in the judgment of the Company is,
or as a result of the Executive's engagement or participation would become,
directly competitive with any aspect of the business of the Company.
8. Non-Disclosure
The Executive will not at any time after the date of this Employment
Agreement divulge, furnish or make accessible to anyone (otherwise than in the
regular course of business of the Company) any knowledge or information with
respect to confidential or secret processes, inventions, discoveries,
improvements, formulas, plans, material, devices, ideas or other know-how,
whether patentable or not, with respect to any confidential or secret
engineering, development or research work or with respect to any other
confidential or secret aspect of the business of the Company (including, without
limitation, customer lists, supplier lists and pricing arrangements with
customers or suppliers).
9. Remedies
The Company may pursue any appropriate legal, equitable or other remedy,
including injunctive relief, in respect of any failure by the Executive to
comply with the provisions of Section 6, 7 or 8 hereof, it being acknowledged by
the Executive that the remedy at law for any such failure would be inadequate.
If the Company shall have failed to cure any material breach by the Company of
any material provision of this Agreement within 30 days after notice by the
Executive to the Company specifying such breach with particularity, the
Executive may, in addition to other remedies, give notice to the Company of
acceleration of the entire amount of compensation which was to accrue to the
Executive during the balance of the Term of Employment, and such amount shall be
immediately due and payable to the Executive.
3.
<PAGE> 4
10. Termination
Executive's employment with the Company may be terminated by the Board of
Directors of the Company (i) upon three (3) days' notice to the Executive in the
event of the Executive's personal dishonesty, willful misconduct or breach of
fiduciary duty or (ii) upon thirty (30) days' notice to the Executive if the
Executive shall be in material breach of any material provision of this
Employment Agreement other than as provided in clause (i) above and shall have
failed to cure such breach during such thirty day period. Any such notice to the
Executive shall specify with particularity the reason for termination or
proposed termination. In the event of termination under this Section 10 or
Section 5 (except as provided therein), the Company's unaccrued obligations
under this Agreement shall cease and the Executive shall forfeit all right to
receive any unaccrued compensation or benefits hereunder but shall have the
right to reimbursement of expenses already incurred. Notwithstanding any
termination of the Agreement pursuant to this Section 10 or by reason of
disability under Section 5, the Executive, in consideration of his employment
hereunder to the date of such termination, shall remain bound by the provisions
of Section 6, 7 and 8 (unless this Agreement is terminated on account of the
breach hereof by the Company) of this Agreement except that if this Agreement is
terminated following a Change in Control Event (as defined below) then Executive
shall remain bound only by the provisions of Sections 6 and 8. Termination
without cause or any attempt by the Board of Directors of the Company to
reassume any of the responsibilities or duties from the Executive or to change
the duties of the Executive without cause shall be deemed a breach of this
Agreement by the Company without cause and shall immediately entitle the
Executive, as liquidated damages therefore, to the entire remaining balance due
him as compensation pursuant to this Agreement.
Executive's employment with the Company may be terminated at any time by
Executive upon sixty (60) days' notice to the Company (which period shall not be
shortened by the Board of Directors). In the event Executive performs his duties
hereunder in good faith during such sixty (60) day period, Executive shall be
entitled to receive twelve (12) months salary but, if Executive's employment is
terminated prior to the end of the Company's fiscal year, Executive shall not be
entitled to receive a pro rata portion of the bonus to which Executive would
otherwise have been entitled had he remained employed by the Company.
Notwithstanding anything to the contrary contained herein, Executive or the
Company shall have the option to terminate this Agreement at any time following
a "Change in control Event." In the event of such termination by Executive
following a Change in Control Event, Executive shall be entitled to receive
[one] year's salary as provided in Section 3 together with a pro rata portion of
the bonus to which Executive would have been entitled. In the event of such
termination by the Company following a Change in Control Event Executive shall
be entitled to receive the greater of (i) one year's salary together with a pro
rata portion of the bonus to which Executive would have been entitled; or (ii)
the entire remaining balance due Executive as compensation pursuant to this
Agreement. A "Change in Control Event" shall mean:
(a) The acquisition by any individual entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (a "Person") of beneficial ownership of 50% or
more of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Voting Securities");
4.
<PAGE> 5
provided, however, that the following acquisitions shall not constitute a
change in Control Event: (A) any acquisition by the Company or (B) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company.
(b) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual who becomes a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board; but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation (a "transaction"), unless, following such transaction
in each case, more than 50% of, respectively, the then outstanding shares of
common stock of the Company resulting from such transaction and the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then beneficially
owned, directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively of the outstanding
Common stock and Outstanding Voting Securities immediately prior to such
transaction; or
(d) Approval by the shareholders of the Company of (A) a complete
liquidation or dissolution of the Company or (B) the sale or other disposition
of all or substantially all of the assets of the Company unless such assets are
sold to a corporation and following such sale or other disposition, the
condition described in paragraph (c) above is satisfied.
11. Resignation
In the event that the Executive's services hereunder are terminated under
Section 5 or 10 of this Agreement (except by death), the Executive agrees that
he will deliver his written resignation as an officer of the Company and/or
director of the Company to the Board of Directors, such resignation to become
effective immediately.
12. Data
Upon expiration of the Term of Employment or termination pursuant to
Section 5 or 10 hereof, the Executive or his personal representative shall
promptly deliver to the Company all books, memoranda, plans, records and
written data of every kind relating to the business and affairs of the Company
which are then in his possession on account of his employment hereunder, but
excluding all such materials in the Executive's possession on account of his
past or current status as a director or shareholder of the Company.
5.
<PAGE> 6
13. Arbitration
Any dispute or controversy arising under this Agreement or relating to its
interpretation or the breach hereof, including the arbitrability of any such
dispute or controversy, shall be determined and settled by arbitration in San
Diego, California pursuant to the Rules then obtaining of the American
Arbitration Association. Any award rendered herein shall be final and binding on
each and all of the parties, and judgment may be entered thereon in any court of
competent jurisdiction.
14. Insurance
The Company shall have the right at its own cost and expense to apply for
and to secure in its own name, or otherwise, life, health or accident insurance
or any or all of them covering the Executive, and the Executive agrees to submit
to any usual and customary medical examination and otherwise to cooperate with
the Company in connection with the procurement of any such insurance, and any
claims thereunder.
15. Waiver of Breach
Any waiver of any breach of this Employment Agreement shall not be
construed to be a continuing waiver or consent to any subsequent breach on the
part either of the Executive or of the Company.
16. Assignment
Neither party hereto may assign his or its rights or delegate his or its
duties under this Employment Agreement without the prior written consent of the
other party; provided, however, that this Agreement shall inure to the benefit
of and be binding upon the successors and assignees of the Company, all as
though such successors and assignees of the Company and their respective
successors and assignees were of the Company, upon (a) a sale of all or
substantially all of the Company's assets, or upon merger or consolidation of
the Company with or into any other corporation, and (b) upon delivery on the
effective day of such sale, merger or consolidation to the Executive of a
binding instrument of assumption by such successors and assigns of the rights
and liabilities of the Company under this Agreement.
17. Notices
Any notice required or desired to be given hereunder shall be in writing
and shall be deemed sufficiently given when delivered or 3 days after mailing in
United States certified or registered mail, postage prepaid, to the party for
whom intended at the following address:
The Company:
NTN COMMUNICATIONS, INC.
5966 La Place Court
Suite 100
Carlsbad, CA 92008
6.
<PAGE> 7
The Executive:
Gerald Sokol, Jr.
2220 Sara Way
Carlsbad, CA 92008
or to such other address as either party may from time to time designate by
like notice to the other.
18. General
The terms and provisions of this Agreement shall constitute the entire
agreement by the Company and the Executive with respect to the subject matter
hereof, and shall supersede any and all prior agreements or understandings
between the Executives and the Company, whether written or oral. This Agreement
may be amended or modified only by a written instrument executed by the
Executive and the Company, and any such amendment or modification or any
termination of this Agreement shall become effective only after written
approval thereof has been received by the Executive. This Agreement shall be
governed by and construed in accordance with California law. In the event that
any terms or provisions of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect the
validity or enforceability of the remaining terms and provisions hereof. In the
event of any judicial, arbitral or other proceeding between the parties hereto
with respect to the subject matter hereof, the prevailing party shall be
entitled, in addition to all other relief, to reasonable attorneys' fees and
expenses and court costs.
IN WITNESS WHEREOF, the parties have executed this Agrement as of the day
and year first above written.
NTN COMMUNICATIONS, INC.
By: /s/ F. KEVIN LOUGHRAN
----------------------------------
F. Kevin Loughran
Vice President
AGREED TO AND ACCEPTED:
By: /s/ GERALD SOKOL, JR.
------------------------------
Gerald Sokol, Jr.
7.
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<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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