<PAGE> 1
FORM 10-Q
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 30, 1997
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from to
-------------- ------------
Commission File Number 0-25296
PlayNet Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-2706304
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
152 West 57th Street, New York, New York 10019
(Address of principal executive offices) (Zip Code)
(212) 586-2400
(Registrant's telephone number, including area code)
Aristo International Corporation
(Former name, former address, and former fiscal year, if changed since last
report)
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 such
filing requirements for the past 90 days. Yes X No
----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at June 9, 1997
--------------------------------- ---------------------------
Common Stock, $.001 par value 14,980,319
<PAGE> 2
PLAYNET TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ARISTO INTERNATIONAL CORPORATION)
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I - Financial Information
Item 1 Consolidated Balance Sheets as of April 30,
1997 and October 31, 1996............................................................... 3
Consolidated Statements of Operations for the Three Months Ended
April 30, 1997 and 1996; for the Six Months Ended April 30, 1997 and
1996; and for the Cumulative Period June 4, 1990 (inception) to
April 30, 1997.......................................................................... 4
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended October 31, 1991, 1992 1993, 1994, 1995, 1996 and for the
Cumulative Period June 4, 1990 (inception) to April 30, 1997............................ 5
Consolidated Statements of Cash Flows for the Six Months Ended April
30, 1997 and 1996 and for the Cumulative Period June 4, 1990
(inception) to April 30, 1997........................................................... 8
Notes to Consolidated Financial Statements.............................................. 11
Management's Discussion and Analysis of Financial
Conditions and Results of Operations.................................................... 16
Part II - Other Information
Item 1 Legal Proceedings....................................................................... 24
Item 6 Exhibits and Reports on Form 8-K........................................................ 24
Signatures......................................................................................... 25
</TABLE>
2
<PAGE> 3
PlayNet Technologies, Inc. and Subsidiaries
(Formerly Aristo International Corporation)
(A Development Stage Enterprise)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS April 30, 1997 October 31, 1996
-------------- ----------------
(Unaudited)
--------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 335,478 $ 2,331,761
Restricted cash 250,000 250,000
Inventory 3,031,167 --
Prepaid expenses and other current assets 63,125 15,200
------------ ------------
Total current assets 3,679,770 2,596,961
Equipment, net 950,694 695,784
Capitalized software, net 3,203,565 4,940,528
Goodwill, net 905,465 991,697
Restricted cash - noncurrent 89,039 89,039
Other assets 353,424 355,672
------------ ------------
Total assets $ 9,181,957 $ 9,669,681
============ ============
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,912,145 $ 2,439,666
Notes payable - bank 406,000 406,000
Notes payable - bridge financing (net of deferred financing charges) 2,147,820 --
Notes payable - all others (net of deferred financing charges) 2,025,354
Convertible term loans - stockholders 776,500 776,500
Payable to stockholder 270,000
Capital leases 45,791 121,166
------------ ------------
Total current liabilities 12,313,610 4,013,332
Convertible term loans - stockholders 1,330,000 1,330,000
Capital leases - long term 280,768 151,693
Deferred rent 138,169 145,076
------------ ------------
Total liabilities 14,062,547 5,640,101
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.001 par value; authorized
1,000,000 shares; issued and outstanding
none at 1997 and 1996 -- --
Common stock, $.001 par value; authorized
39,000,000 shares; issued and outstanding
14,980,319 and 14,966,755, respectively 14,980 14,967
Additional paid in-capital 33,942,926 31,736,496
Deficit accumulated during the development stage (38,838,496) (27,721,883)
------------ ------------
Total stockholders' equity (4,880,590) 4,029,580
------------ ------------
Total liabilities and stockholders' equity $ 9,181,957 $ 9,669,681
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
PlayNet Technologies, Inc. and Subsidiaries
(Formerly Aristo International Corporation)
(A Development Stage Enterprise)
Consolidated Statements of Operations
For the three month period ended April 30,1997 and 1996;
for the six month period ended April 30,1997 and 1996;
and for the cumulative period from June 4, 1990 (inception)
to April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Three Months ended Six Months ended Since
April 30, April 30, June 4, 1990
--------------------------- ----------------------------- (inception) to
1997 1996 1997 1996 April 30, 1997 *
----------- ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Sales - Net $ 340,740 $ -- $ 340,740 $ -- $ 340,740
Royalty revenue 6,345 1,655 9,227 3,202 134,654
Production revenue -- 142,513 -- 182,836 340,647
------------ ------------ ------------ ------------ ------------
Total revenue 347,085 144,168 349,967 186,038 816,041
Costs of sales (990,455) -- (990,455) -- (990,455)
------------ ------------ ------------ ------------ ------------
Gross profit (loss) (643,370) 144,168 (640,488) 186,038 (174,414)
Selling, general and administrative expenses (2,109,804) (1,503,593) (3,749,477) (2,575,295) (21,058,927)
Research and development expenses (2,452,433) (554,626) (4,020,122) (935,668) (10,393,499)
Amortization of capitalized software costs
(including impairment write downs) (1,063,067) (288,813) (1,736,963) (577,626) (5,106,445)
Interest and other income (expense) (807,428) (5,780) (969,563) (68,419) (1,290,002)
------------ ------------ ------------ ------------ ------------
Net loss (7,076,102) (2,208,644) (11,116,613) (3,970,970) (38,023,287)
Dividends on preferred stock -- (11,551) -- (15,402) (19,804)
------------ ------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (7,076,102) $ (2,220,195) $(11,116,613) $ (3,986,372) $(38,043,091)
============ ============ ============ ============ ============
Weighted average number of common
shares outstanding 14,973,537 13,375,472 14,968,693 13,375,472
============ ============ ============ ============
Net loss per share $(0.47) $(0.17) $(0.74) $(0.30)
============ ============ ============ ============
</TABLE>
* Excludes cumulative losses of The Astro-Stream Corporation of $795,405 at the
time of the merger.
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
PlayNet Technologies, Inc. and Subsidiaries
(Formerly Aristo International Corporation)
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity
For the Fiscal Years ended October 31, 1992, 1993, 1994, 1995, 1996
and for the six month period ended April 30, 1997 and for the cumulative
period from June 4, 1990 (inception) to April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock
--------- ------
Shares Amount
--------- ------
<S> <C> <C>
Issuance of common stock for initial capitalization ($0.18 per share)
Sale of common stock during November for cash ($0.12 per share)
Sale of common stock during October for cash ($1.29 per share)
Exchange of common stock during October for services at estimated value ($1.28 per share)
Net loss for the year ended October 31, 1991
--------- ------
Balance, October 31, 1991
--------- ------
Sale of common stock during the year for cash ($0.85 per share)
Sale of common stock during the year for cash ($1.17 per share)
Exchange of common stock during August for services at estimated value ($1.28 per share)
Net loss for the year ended October 31, 1992
--------- ------
Balance, October 31, 1992
--------- ------
Sale of common stock during the year for cash ($1.63 per share)
Sale of common stock during the year for cash ($1.28 per share)
Exchange of common stock during May for services at estimated value ($1.29 per share)
Exchange of common stock during October for services at estimated value ($1.33 per share)
Exchange of common stock during October for patent rights at estimated value ($1.28 per share)
Purchase of treasury stock for cash ($0.04 per share)
Net loss for the year ended October 31, 1993
--------- ------
Balance, October 31, 1993
--------- ------
Sale of common stock during the year for cash ($1.46 per share)
Exchange of common stock during January for services at estimated value ($1.33 per share)
Exchange of common stock during January for services at estimated value ($1.46 per share)
Conversion of note payable and accrued interest into common stock ($1.53 per share)
Conversion of note payable into common stock ($1.26 per share)
Repayment of stock subscription receivable
Retirement of treasury stock during October
Net loss for the year ended October 31, 1994
--------- ------
Balance, October 31, 1994
--------- ------
Conversion of notes payable into common stock ($1.23 per share)
Sale of common stock during November for cash ($1.53 per share)
Sale of common stock during March for cash ($2.22 per share)
Exchange of common stock in March for graphic illustrations ($2.22 per share)
Issuance of common stock per anti-dilution provision
Sale of preferred stock in May for cash ($3.00 per share) 33,350 $33
Equity acquired from the reverse acquisition with Astro-Stream
Issuance of common stock as a result of the acquisition of Borta, Inc. ($4.67 per share)
Grant of common stock ($5.50 per share)
Sale of common stock during August for cash ($4.50 per share)
Sale of common stock during August for cash ($5.50 per share)
</TABLE>
<TABLE>
<CAPTION>
Common Stock (1) Additional
--------- --------- Paid in
Shares Amount Capital
--------- --------- ---------
<S> <C> <C> <C>
Issuance of common stock for initial capitalization ($0.18 per share) 3,334,780 $3,335 $596,665
Sale of common stock during November for cash ($0.12 per share) 1,764,099 1,764 218,526
Sale of common stock during October for cash ($1.29 per share) 155,067 155 199,845
Exchange of common stock during October for services at estimated value ($1.28 per share) 78,367 78 99,922
Net loss for the year ended October 31, 1991
--------- ------ ---------
Balance, October 31, 1991 5,332,313 5,332 1,114,958
--------- ------ ---------
Sale of common stock during the year for cash ($0.85 per share) 1,589,023 1,589 1,348,411
Sale of common stock during the year for cash ($1.17 per share) 235,102 235 274,765
Exchange of common stock during August for services at estimated value ($1.28 per share) 78,367 78 99,921
Net loss for the year ended October 31, 1992
--------- ------ ---------
Balance, October 31, 1992 7,234,805 7,235 2,838,055
--------- ------ ---------
Sale of common stock during the year for cash ($1.63 per share) 611,932 612 999,388
Sale of common stock during the year for cash ($1.28 per share) 195,085 195 249,805
Exchange of common stock during May for services at estimated value ($1.29 per share) 116,717 117 149,883
Exchange of common stock during October for services at estimated value ($1.33 per share) 15,006 15 19,985
Exchange of common stock during October for patent rights at estimated value ($1.28 per share) 39,184 39 49,961
Purchase of treasury stock for cash ($0.04 per share)
Net loss for the year ended October 31, 1993
--------- ------ ---------
Balance, October 31, 1993 8,212,729 8,213 4,307,077
--------- ------ ---------
Sale of common stock during the year for cash ($1.46 per share) 1,030,447 1,030 1,498,970
Exchange of common stock during January for services at estimated value ($1.33 per share) 15,007 15 19,985
Exchange of common stock during January for services at estimated value ($1.46 per share) 34,181 34 49,966
Conversion of note payable and accrued interest into common stock ($1.53 per share) 171,741 172 261,892
Conversion of note payable into common stock ($1.26 per share) 159,236 159 199,841
Repayment of stock subscription receivable
Retirement of treasury stock during October (1,667,390) (1,667) (58,333)
Net loss for the year ended October 31, 1994 (2,228,644)
--------- ------ ---------
Balance, October 31, 1994 7,955,951 7,956 6,279,398
--------- ------ ---------
Conversion of notes payable into common stock ($1.23 per share) 834,529 835 1,024,165
Sale of common stock during November for cash ($1.53 per share) 235,936 236 359,764
Sale of common stock during March for cash ($2.22 per share) 450,195 450 999,550
Exchange of common stock in March for graphic illustrations ($2.22 per share) 115,050 115 255,440
Issuance of common stock per anti-dilution provision 38,350 38 (38)
Sale of preferred stock in May for cash ($3.00 per share) -- -- 100,017
Equity acquired from the reverse acquisition with Astro-Stream 1,098,997 1,099 806,205
Issuance of common stock as a result of the acquisition of Borta, Inc. ($4.67 per share) 1,818,182 1,818 8,498,182
Grant of common stock ($5.50 per share) 357,143 357 1,963,929
Sale of common stock during August for cash ($4.50 per share) 66,666 67 299,933
Sale of common stock during August for cash ($5.50 per share) 93,500 94 514,156
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During Deferred
Development Compensation
Stage Expense
------------ ------------
<S> <C> <C>
Issuance of common stock for initial capitalization ($0.18 per share)
Sale of common stock during November for cash ($0.12 per share)
Sale of common stock during October for cash ($1.29 per share)
Exchange of common stock during October for services at estimated value ($1.28 per share)
Net loss for the year ended October 31, 1991 ($1,478,158)
----------- ------------
Balance, October 31, 1991 (1,478,158)
----------- ------------
Sale of common stock during the year for cash ($0.85 per share)
Sale of common stock during the year for cash ($1.17 per share)
Exchange of common stock during August for services at estimated value ($1.28 per share)
Net loss for the year ended October 31, 1992 (1,480,812)
----------- ------------
Balance, October 31, 1992 (2,958,970)
----------- ------------
Sale of common stock during the year for cash ($1.63 per share)
Sale of common stock during the year for cash ($1.28 per share)
Exchange of common stock during May for services at estimated value ($1.29 per share)
Exchange of common stock during October for services at estimated value ($1.33 per share)
Exchange of common stock during October for patent rights at estimated value ($1.28 per share)
Purchase of treasury stock for cash ($0.04 per share)
Net loss for the year ended October 31, 1993 (1,636,310)
----------- ------------
Balance, October 31, 1993 (4,595,280)
----------- ------------
Sale of common stock during the year for cash ($1.46 per share)
Exchange of common stock during January for services at estimated value ($1.33 per share)
Exchange of common stock during January for services at estimated value ($1.46 per share)
Conversion of note payable and accrued interest into common stock ($1.53 per share)
Conversion of note payable into common stock ($1.26 per share)
Repayment of stock subscription receivable
Retirement of treasury stock during October
Net loss for the year ended October 31, 1994 (2,228,644)
----------- ------------
Balance, October 31, 1994 (6,823,924)
----------- ------------
Conversion of notes payable into common stock ($1.23 per share)
Sale of common stock during November for cash ($1.53 per share)
Sale of common stock during March for cash ($2.22 per share)
Exchange of common stock in March for graphic illustrations ($2.22 per share)
Issuance of common stock per anti-dilution provision
Sale of preferred stock in May for cash ($3.00 per share)
Equity acquired from the reverse acquisition with Astro-Stream (795,405)
Issuance of common stock as a result of the acquisition of Borta, Inc. ($4.67 per share)
Grant of common stock ($5.50 per share) $(1,964,286)
Sale of common stock during August for cash ($4.50 per share)
Sale of common stock during August for cash ($5.50 per share)
</TABLE>
<TABLE>
<CAPTION>
Common Stock Held in Treasury
-----------------------------
Shares Amount
-----------------------------
<S> <C> <C>
Issuance of common stock for initial capitalization ($0.18 per share)
Sale of common stock during November for cash ($0.12 per share)
Sale of common stock during October for cash ($1.29 per share)
Exchange of common stock during October for services at estimated value ($1.28 per share)
Net loss for the year ended October 31, 1991
---------- -----------
Balance, October 31, 1991
Sale of common stock during the year for cash ($0.85 per share)
Sale of common stock during the year for cash ($1.17 per share)
Exchange of common stock during August for services at estimated value ($1.28 per share)
Net loss for the year ended October 31, 1992
----------- ------------
Balance, October 31, 1992
----------- ------------
Sale of common stock during the year for cash ($1.63 per share)
Sale of common stock during the year for cash ($1.28 per share)
Exchange of common stock during May for services at estimated value ($1.29 per share)
Exchange of common stock during October for services at estimated value ($1.33 per share)
Exchange of common stock during October for patent rights at estimated value ($1.28 per share)
Purchase of treasury stock for cash ($0.04 per share) (1,667,390) $(60,000)
Net loss for the year ended October 31, 1993
----------- ------------
Balance, October 31, 1993 (1,667,390) (60,000)
----------- ------------
Sale of common stock during the year for cash ($1.46 per share)
Exchange of common stock during January for services at estimated value ($1.33 per share)
Exchange of common stock during January for services at estimated value ($1.46 per share)
Conversion of note payable and accrued interest into common stock ($1.53 per share)
Conversion of note payable into common stock ($1.26 per share)
Repayment of stock subscription receivable
Retirement of treasury stock during October 1,667,390 60,000
Net loss for the year ended October 31, 1994
----------- ------------
Balance, October 31, 1994 0 0
----------- ------------
Conversion of notes payable into common stock ($1.23 per share)
Sale of common stock during November for cash ($1.53 per share)
Sale of common stock during March for cash ($2.22 per share)
Exchange of common stock in March for graphic illustrations ($2.22 per share)
Issuance of common stock per anti-dilution provision
Sale of preferred stock in May for cash ($3.00 per share)
Equity acquired from the reverse acquisition with Astro-Stream
Issuance of common stock as a result of the acquisition of Borta, Inc. ($4.67 per share)
Grant of common stock ($5.50 per share)
Sale of common stock during August for cash ($4.50 per share)
Sale of common stock during August for cash ($5.50 per share)
</TABLE>
<TABLE>
<CAPTION>
Stock
Subscription Total
Receivable
------------ -----
<S> <C> <C>
Issuance of common stock for initial capitalization ($0.18 per share) $600,000
Sale of common stock during November for cash ($0.12 per share) 220,290
Sale of common stock during October for cash ($1.29 per share) 200,000
Exchange of common stock during October for services at estimated value ($1.28 per share) 100,000
Net loss for the year ended October 31, 1991 (1,478,158)
------------ ----------
Balance, October 31, 1991 (357,868)
------------ ----------
Sale of common stock during the year for cash ($0.85 per share) 1,350,000
Sale of common stock during the year for cash ($1.17 per share) 275,000
Exchange of common stock during August for services at estimated value ($1.28 per share) 99,999
Net loss for the year ended October 31, 1992 (1,480,812)
------------ ----------
Balance, October 31, 1992 (113,680)
------------ ----------
Sale of common stock during the year for cash ($1.63 per share) $(80,000) 920,000
Sale of common stock during the year for cash ($1.28 per share) 250,000
Exchange of common stock during May for services at estimated value ($1.29 per share) 150,000
Exchange of common stock during October for services at estimated value ($1.33 per share) 20,000
Exchange of common stock during October for patent rights at estimated value ($1.28 per share) 50,000
Purchase of treasury stock for cash ($0.04 per share) (60,000)
Net loss for the year ended October 31, 1993 (1,636,310)
------------ ----------
Balance, October 31, 1993 (80,000) (419,990)
------------ ----------
Sale of common stock during the year for cash ($1.46 per share) 1,500,000
Exchange of common stock during January for services at estimated value ($1.33 per share) 20,000
Exchange of common stock during January for services at estimated value ($1.46 per share) 50,000
Conversion of note payable and accrued interest into common stock ($1.53 per share) 262,064
Conversion of note payable into common stock ($1.26 per share) 200,000
Repayment of stock subscription receivable 80,000 80,000
Retirement of treasury stock during October --
Net loss for the year ended October 31, 1994 (2,228,644)
------------ ----------
Balance, October 31, 1994 0 (536,570)
------------ ----------
Conversion of notes payable into common stock ($1.23 per share) 1,025,000
Sale of common stock during November for cash ($1.53 per share) 360,000
Sale of common stock during March for cash ($2.22 per share) 1,000,000
Exchange of common stock in March for graphic illustrations ($2.22 per share) 255,555
Issuance of common stock per anti-dilution provision --
Sale of preferred stock in May for cash ($3.00 per share) 100,050
Equity acquired from the reverse acquisition with Astro-Stream 11,899
Issuance of common stock as a result of the acquisition of Borta, Inc. ($4.67 per share) 8,500,000
Grant of common stock ($5.50 per share) --
Sale of common stock during August for cash ($4.50 per share) 300,000
Sale of common stock during August for cash ($5.50 per share) 514,250
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
(Formerly Aristo International Corporation)
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity
For the Fiscal Years ended October 31, 1992, 1993, 1994, 1995, 1996
and for the six month period ended April 30, 1997 and for the cumulative
period from June 4, 1990 (inception) to April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock
--------- -----
Shares Amount
--------- ------
<S> <C> <C>
Exchange of common stock in August for consulting services ($6.50 per share)
Exchange of common stock in August for consulting services ($5.75 per share)
Exchange of common stock in August for consulting services ($5.50 per share)
Sale of common stock during September for cash ($5.50 per share)
Sale of common stock during October for cash ($5.50 per share)
Amortization of deferred compensation expense
Dividend on preferred stock
Net loss for the year ended October 31, 1995
--------------------
Balance, October 31, 1995 33,350 33
--------------------
Sale of common stock during November for cash ($5.50 per share)
Sale of common stock during December for cash ($5.50 per share)
Conversion of notes payable into common stock in December ($3.00 per share)
Sale of preferred stock during January for cash ($5.50 per share) 40,000 40
Exchange of common stock in January for consulting services ($5.50 per share)
Sale of common stock during February for cash ($5.50 per share)
Sale of common stock during March for cash ($5.50 per share)
Sale of common stock during April for cash ($5.50 per share)
Reversal of prior year deferred compensation expense
Write-off of deferred compensation expense
Sale of common stock during May for cash ($5.50 per share)
Exchange of common stock in May for consulting services ($5.76 per share)
Exchange of common stock in May for consulting services ($4.82 per share)
Conversion of preferred stock into common stock in May (73,350) (73)
Sale of common stock during June for cash ($5.50 per share)
Exchange of common stock in June for consulting services ($5.50 per share)
Sale of common stock during July for cash ($5.50 per share)
Exchange of common stock in July for consulting services ($5.50 per share)
Exchange of common stock in August for product rights ($5.00 per share)
Sale of common stock in August for cash ($5.00 per share)
Sale of common stock in August for cash ($5.50 per share)
Sale of common stock in September for cash ($5.00 per share)
Sale of common stock in September for cash ($5.50 per share)
Exchange of common stock in September for consulting services ($5.50 per share)
Exchange of common stock in September for goods ($5.50 per share)
Grant of common stock as signing bonuses ($5.50 per share)
Sale of common stock in October for cash ($5.00 per share)
Sale of common stock in October for cash ($5.50 per share)
Issuance of warrants in exchange for consulting services ($8.25 per share)
Issuance of warrants in exchange for consulting services ($5.50 per share)
Dividend on preferred stock
Net loss for the fiscal year ended October 31, 1996
--------------------
Balance, October 31, 1996 -- --
--------------------
Issuance of warrants pursuant to bridge financing agreements($5.50 per share)-December 1996
</TABLE>
<TABLE>
<CAPTION>
Common Stock (1) Additional
------ --------- Paid in
Shares Amount Capital
--------- --------- ---------
<S> <C> <C> <C>
Exchange of common stock in August for consulting services ($6.50 per share) 25,000 25 162,475
Exchange of common stock in August for consulting services ($5.75 per share) 3,687 4 21,196
Exchange of common stock in August for consulting services ($5.50 per share) 395 -- 2,172
Sale of common stock during September for cash ($5.50 per share) 96,364 96 529,904
Sale of common stock during October for cash ($5.50 per share) 10,000 10 54,990
Amortization of deferred compensation expense
Dividend on preferred stock
Net loss for the year ended October 31, 1995 --
-------------------------------------
Balance, October 31, 1995 13,199,945 13,200 21,871,438
-------------------------------------
Sale of common stock during November for cash ($5.50 per share) 60,000 60 329,940
Sale of common stock during December for cash ($5.50 per share) 164,000 164 901,836
Conversion of notes payable into common stock in December ($3.00 per share) 66,667 67 199,933
Sale of preferred stock during January for cash ($5.50 per share) 219,960
Exchange of common stock in January for consulting services ($5.50 per share) 500 1 2,749
Sale of common stock during February for cash ($5.50 per share) 10,000 10 54,990
Sale of common stock during March for cash ($5.50 per share) 60,000 60 329,940
Sale of common stock during April for cash ($5.50 per share) 56,363 56 309,944
Reversal of prior year deferred compensation expense
Write-off of deferred compensation expense (357,143) (357) (1,963,929)
Sale of common stock during May for cash ($5.50 per share) 59,362 59 326,432
Exchange of common stock in May for consulting services ($5.76 per share) 421 -- 2,423
Exchange of common stock in May for consulting services ($4.82 per share) 1,100 1 5,302
Conversion of preferred stock into common stock in May 58,191 58 15
Sale of common stock during June for cash ($5.50 per share) 57,638 58 316,951
Exchange of common stock in June for consulting services ($5.50 per share) 1,000 1 5,499
Sale of common stock during July for cash ($5.50 per share) 152,000 152 835,848
Exchange of common stock in July for consulting services ($5.50 per share) 12,000 12 65,988
Exchange of common stock in August for product rights ($5.00 per share) 30,000 30 149,970
Sale of common stock in August for cash ($5.00 per share) 700,000 700 3,254,300
Sale of common stock in August for cash ($5.50 per share) 23,636 24 129,976
Sale of common stock in September for cash ($5.00 per share) 80,000 80 371,920
Sale of common stock in September for cash ($5.50 per share) 46,000 46 252,954
Exchange of common stock in September for consulting services ($5.50 per share) 15,625 16 85,921
Exchange of common stock in September for goods ($5.50 per share) 11,800 12 99,988
Grant of common stock as signing bonuses ($5.50 per share) 51,250 51 281,824
Sale of common stock in October for cash ($5.00 per share) 400,000 400 1,853,600
Sale of common stock in October for cash ($5.50 per share) 6,400 6 35,194
Issuance of warrants in exchange for consulting services ($8.25 per share) 1,183,942
Issuance of warrants in exchange for consulting services ($5.50 per share) 221,648
Dividend on preferred stock
Net loss for the fiscal year ended October 31, 1996
-------------------------------------
Balance, October 31, 1996 14,966,755 14,967 31,736,496
-------------------------------------
Issuance of warrants pursuant to bridge financing agreements($5.50 per share)-December 1996 736,780
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During Deferred
Development Compensation
Stage Expense
------------ ------------
<S> <C> <C>
Exchange of common stock in August for consulting services ($6.50 per share)
Exchange of common stock in August for consulting services ($5.75 per share)
Exchange of common stock in August for consulting services ($5.50 per share)
Sale of common stock during September for cash ($5.50 per share)
Sale of common stock during October for cash ($5.50 per share)
Amortization of deferred compensation expense 117,857
Dividend on preferred stock (4,585)
Net loss for the year ended October 31, 1995 (4,116,457)
------------------------------
Balance, October 31, 1995 (11,740,371) (1,846,429)
------------------------------
Sale of common stock during November for cash ($5.50 per share)
Sale of common stock during December for cash ($5.50 per share)
Conversion of notes payable into common stock in December ($3.00 per share)
Sale of preferred stock during January for cash ($5.50 per share)
Exchange of common stock in January for consulting services ($5.50 per share)
Sale of common stock during February for cash ($5.50 per share)
Sale of common stock during March for cash ($5.50 per share)
Sale of common stock during April for cash ($5.50 per share)
Reversal of prior year deferred compensation expense (117,857)
Write-off of deferred compensation expense (1,964,286)
Sale of common stock during May for cash ($5.50 per share)
Exchange of common stock in May for consulting services ($5.76 per share)
Exchange of common stock in May for consulting services ($4.82 per share)
Conversion of preferred stock into common stock in May
Sale of common stock during June for cash ($5.50 per share)
Exchange of common stock in June for consulting services ($5.50 per share)
Sale of common stock during July for cash ($5.50 per share)
Exchange of common stock in July for consulting services ($5.50 per share)
Exchange of common stock in August for product rights ($5.00 per share)
Sale of common stock in August for cash ($5.00 per share)
Sale of common stock in August for cash ($5.50 per share)
Sale of common stock in September for cash ($5.00 per share)
Sale of common stock in September for cash ($5.50 per share)
Exchange of common stock in September for consulting services ($5.50 per share)
Exchange of common stock in September for goods ($5.50 per share)
Grant of common stock as signing bonuses ($5.50 per share)
Sale of common stock in October for cash ($5.00 per share)
Sale of common stock in October for cash ($5.50 per share)
Issuance of warrants in exchange for consulting services ($8.25 per share)
Issuance of warrants in exchange for consulting services ($5.50 per share)
Dividend on preferred stock (15,219)
Net loss for the fiscal year ended October 31, 1996 (15,966,292)
------------------------------
Balance, October 31, 1996 (27,721,883) --
------------------------------
Issuance of warrants pursuant to bridge financing agreements($5.50 per share)-December 1996
</TABLE>
<TABLE>
<CAPTION>
Common Stock Held in Treasury
-----------------------------
Shares Amount
-----------------------------
<S> <C>
Exchange of common stock in August for consulting services ($6.50 per share)
Exchange of common stock in August for consulting services ($5.75 per share)
Exchange of common stock in August for consulting services ($5.50 per share)
Sale of common stock during September for cash ($5.50 per share)
Sale of common stock during October for cash ($5.50 per share)
Amortization of deferred compensation expense
Dividend on preferred stock
Net loss for the year ended October 31, 1995
-----------------------------
Balance, October 31, 1995 -- --
-----------------------------
Sale of common stock during November for cash ($5.50 per share)
Sale of common stock during December for cash ($5.50 per share)
Conversion of notes payable into common stock in December ($3.00 per share)
Sale of preferred stock during January for cash ($5.50 per share)
Exchange of common stock in January for consulting services ($5.50 per share)
Sale of common stock during February for cash ($5.50 per share)
Sale of common stock during March for cash ($5.50 per share)
Sale of common stock during April for cash ($5.50 per share)
Reversal of prior year deferred compensation expense
Write-off of deferred compensation expense
Sale of common stock during May for cash ($5.50 per share)
Exchange of common stock in May for consulting services ($5.76 per share)
Exchange of common stock in May for consulting services ($4.82 per share)
Conversion of preferred stock into common stock in May
Sale of common stock during June for cash ($5.50 per share)
Exchange of common stock in June for consulting services ($5.50 per share)
Sale of common stock during July for cash ($5.50 per share)
Exchange of common stock in July for consulting services ($5.50 per share)
Exchange of common stock in August for product rights ($5.00 per share)
Sale of common stock in August for cash ($5.00 per share)
Sale of common stock in August for cash ($5.50 per share)
Sale of common stock in September for cash ($5.00 per share)
Sale of common stock in September for cash ($5.50 per share)
Exchange of common stock in September for consulting services ($5.50 per share)
Exchange of common stock in September for goods ($5.50 per share)
Grant of common stock as signing bonuses ($5.50 per share)
Sale of common stock in October for cash ($5.00 per share)
Sale of common stock in October for cash ($5.50 per share)
Issuance of warrants in exchange for consulting services ($8.25 per share)
Issuance of warrants in exchange for consulting services ($5.50 per share)
Dividend on preferred stock
Net loss for the fiscal year ended October 31, 1996
-----------------------------
Balance, October 31, 1996 -- --
-----------------------------
Issuance of warrants pursuant to bridge financing agreements($5.50 per share)-December 1996
</TABLE>
<TABLE>
<CAPTION>
Stock
Subscription Total
Receivable
------------ -----
<S> <C> <C>
Exchange of common stock in August for consulting services ($6.50 per share) 162,500
Exchange of common stock in August for consulting services ($5.75 per share) 21,200
Exchange of common stock in August for consulting services ($5.50 per share) 2,172
Sale of common stock during September for cash ($5.50 per share) 530,000
Sale of common stock during October for cash ($5.50 per share) 55,000
Amortization of deferred compensation expense 117,857
Dividend on preferred stock (4,585)
Net loss for the year ended October 31, 1995 (4,116,457)
--------------------------
Balance, October 31, 1995 -- 8,297,871
--------------------------
Sale of common stock during November for cash ($5.50 per share) 330,000
Sale of common stock during December for cash ($5.50 per share) 902,000
Conversion of notes payable into common stock in December ($3.00 per share) 200,000
Sale of preferred stock during January for cash ($5.50 per share) 220,000
Exchange of common stock in January for consulting services ($5.50 per share) 2,750
Sale of common stock during February for cash ($5.50 per share) 55,000
Sale of common stock during March for cash ($5.50 per share) 330,000
Sale of common stock during April for cash ($5.50 per share) 310,000
Reversal of prior year deferred compensation expense (117,837)
Write-off of deferred compensation expense --
Sale of common stock during May for cash ($5.50 per share) 326,491
Exchange of common stock in May for consulting services ($5.76 per share) 2,423
Exchange of common stock in May for consulting services ($4.82 per share) 5,303
Conversion of preferred stock into common stock in May --
Sale of common stock during June for cash ($5.50 per share) 317,009
Exchange of common stock in June for consulting services ($5.50 per share) 5,500
Sale of common stock during July for cash ($5.50 per share) 836,000
Exchange of common stock in July for consulting services ($5.50 per share) 66,000
Exchange of common stock in August for product rights ($5.00 per share) 150,000
Sale of common stock in August for cash ($5.00 per share) 3,255,000
Sale of common stock in August for cash ($5.50 per share) 130,000
Sale of common stock in September for cash ($5.00 per share) 372,000
Sale of common stock in September for cash ($5.50 per share) 253,000
Exchange of common stock in September for consulting services ($5.50 per share) 85,937
Exchange of common stock in September for goods ($5.50 per share) 100,000
Grant of common stock as signing bonuses ($5.50 per share) 281,875
Sale of common stock in October for cash ($5.00 per share) 1,854,000
Sale of common stock in October for cash ($5.50 per share) 35,200
Issuance of warrants in exchange for consulting services ($8.25 per share) 1,183,942
Issuance of warrants in exchange for consulting services ($5.50 per share) 221,648
Dividend on preferred stock (15,219)
Net loss for the fiscal year ended October 31, 1996 (15,966,292)
--------------------------
Balance, October 31, 1996 -- 4,029,580
--------------------------
Issuance of warrants pursuant to bridge financing agreements($5.50 per share)-December 1996 736,780
</TABLE>
6
<PAGE> 7
(Formerly Aristo International Corporation)
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity
For the Fiscal Years ended October 31, 1992, 1993, 1994, 1995, 1996
and for the six month period ended April 30, 1997 and for the cumulative
period from June 4, 1990 (inception) to April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock
-------------------
Shares Amount
--------- ------
<S> <C> <C>
Issuance of warrants pursuant to bridge financing agreements ($5.50 per share)-January 1997
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-February 1997
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-March 1997
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-April 1997
Issuance of warrants in exchange for consulting services ($5.50 per share)-April 1997
Exercise of option to purchase 10,000 shares of common stock ($5.50 per share).
Issuance of 3,564 shares of common stock ($5.50 per share) to two employees pursuant
to employment agreements.
Net loss for the six month period ended April 30, 1997
-------------------
Balance, April 30, 1997 -- --
===================
</TABLE>
<TABLE>
<CAPTION>
Common Stock (1) Additional
------ --------- Paid in
Shares Amount Capital
--------- --------- ---------
<S> <C> <C> <C>
Issuance of warrants pursuant to bridge financing agreements ($5.50 per share)-January 1997 367,430
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-February 1997 366,123
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-March 1997 361,556
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-April 1997 294,130
Issuance of warrants in exchange for consulting services ($5.50 per share)-April 1997 5,822
Exercise of option to purchase 10,000 shares of common stock ($5.50 per share). 10,000 10 54,990
Issuance of 3,564 shares of common stock ($5.50 per share) to two employees pursuant
to employment agreements. 3,564 3 19,599
Net loss for the six month period ended April 30, 1997
--------------------------------------
Balance, April 30, 1997 14,980,319 $14,980 $33,942,926
======================================
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During Deferred
Development Compensation
Stage Expense
------------ ------------
<S> <C> <C>
Issuance of warrants pursuant to bridge financing agreements ($5.50 per share)-January 1997
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-February 1997
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-March 1997
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-April 1997
Issuance of warrants in exchange for consulting services ($5.50 per share)-April 1997
Exercise of option to purchase 10,000 shares of common stock ($5.50 per share).
Issuance of 3,564 shares of common stock ($5.50 per share) to two employees pursuant
to employment agreements.
Net loss for the six month period ended April 30, 1997 (11,116,613)
--------------------------------
Balance, April 30, 1997 $(38,838,496 --
================================
</TABLE>
<TABLE>
<CAPTION>
Common Stock Held in Treasury
-----------------------------
Shares Amount
-----------------------------
<S> <C>
Issuance of warrants pursuant to bridge financing agreements ($5.50 per share)-January 1997
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-February 1997
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-March 1997
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-April 1997
Issuance of warrants in exchange for consulting services ($5.50 per share)-April 1997
Exercise of option to purchase 10,000 shares of common stock ($5.50 per share).
Issuance of 3,564 shares of common stock ($5.50 per share) to two employees pursuant
to employment agreements.
Net loss for the six month period ended April 30, 1997
-----------------------------
Balance, April 30, 1997 -- --
=============================
</TABLE>
<TABLE>
<CAPTION>
Stock
Subscription
Receivable Total
------------ -----
<S> <C> <C>
Issuance of warrants pursuant to bridge financing agreements ($5.50 per share)-January 1997 367,430
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-February 1997 366,123
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-March 1997 361,556
Issuance of warrants pursuant to certain financing agreements($5.50 per share)-April 1997 294,130
Issuance of warrants in exchange for consulting services ($5.50 per share)-April 1997 5,822
Exercise of option to purchase 10,000 shares of common stock ($5.50 per share). 55,000
Issuance of 3,564 shares of common stock ($5.50 per share) to two employees pursuant --
to employment agreements. 19,602
Net loss for the six month period ended April 30, 1997 (11,116,613)
-----------------------------
Balance, April 30, 1997 -- ($4,880,590)
=============================
</TABLE>
Note 1. All common shares information has been restated since inception to
reflect conversion of the outstanding shares of PlayNet's (formerly Aristo)
common stock into 90% of the common stock of Astro-Stream pursuant to the Merger
agreement.
7
<PAGE> 8
PlayNet Technologies, Inc. and Subsidiaries
(Formerly Aristo International Corporation)
(A Development Stage Enterprise)
Consolidated Statement of Cash Flows
For the six month period ended April 30,1997 and 1996
and for the cumulative period from June 4, 1990 (inception)
to April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Since
Six Months ended June 4, 1990
April 30, (inception) to
---------------------------
1997 1996 January 31, 1997
----------- ---------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss during development stage $(11,116,613) $(3,970,970) $(38,023,287)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,578,646 732,575 3,585,024
Expenses paid by issuance of common stock 5,500 2,750 1,931,163
Deferred rent (6,908) (6,907) 138,168
Deferred financing costs 614,192 -- 614,192
Loss on disposal of fixed asset -- 19,200
Net realized loss on sale of marketable securities 38 51,845
Net unrealized gain on marketable securities (7,713)
Write down of capitalized software 389,171 -- 2,314,588
Charges related to issuance of warrants 5,822 -- 1,411,412
Impairment of patents -- 71,306
Reserve for bad debt -- 132,538
Changes in assets and liabilities:
(Increase) in prepaid expenses, other current assets and other assets (46,023) (3,072) (180,122)
(Increase) in inventory (3,031,167) -- (3,031,167)
Increase in accounts payable and accrued expenses 4,471,760 374,293 6,774,641
------------ ----------- ------------
Net cash used in operating activities (7,135,620) (2,871,293) (24,198,212)
------------ ----------- ------------
Cash flows from investing activities:
Investment in Borta, Inc., net of cash acquired -- (238,615)
Expenditures for equipment, leasehold improvements, patents and --
organization costs (270,456) (244,455) (1,025,012)
Purchase of marketable securities -- (1,517,601)
Sales of marketable securities 1,462 1,473,469
Purchase of computer software -- (110,000)
Increase (decrease) in other assets (8,068) (170,639)
Increase in restricted cash (3,738) (339,039)
------------ ----------- ------------
Net cash used in investing activities (270,456) (254,799) (1,927,437)
------------ ----------- ------------
Cash flows from financing activities:
Net proceeds (repayments) from notes payable - bank -- 359,857
Proceeds from notes payable - stockholders -- 793,500
Repayments of notes payable - stockholders (270,000) (75,000) (843,500)
Repayments of notes payable - other 4,100,000 4,100,000
Repayments of notes payable - other (165,000) -- (165,000)
Proceeds from notes payable - bridge financing 1,750,000 -- 1,750,000
Proceeds acquired in connection with the Astro-Stream merger -- 59,494
Proceeds from issuance of preferred stock 220,000 320,050
Proceeds from issuance of common stock 55,000 1,927,000 16,915,237
Proceeds from convertible term loans 970,000 3,761,500
Repayments of convertible term loans (450,000)
Reduction of capital lease obligations (60,207) (60,207)
Purchase of treasury stock -- (60,000)
Dividends on preferred stock (15,402) (19,804)
------------ ----------- ------------
Net cash provided by financing activities 5,409,793 3,026,598 26,461,127
------------ ----------- ------------
Net (decrease) increase in cash and cash equivalents (1,996,283) (99,494) 335,478
Cash and cash equivalents, beginning of period 2,331,761 540,297 --
------------ ----------- ------------
Cash and cash equivalents, end of period $ 335,478 $ 440,803 $ 335,478
============ =========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 54,418 $ 82,268 $ 226,167
============ =========== ============
Taxes $ 18,098 $ 7,859 $ 37,724
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
8
<PAGE> 9
PlayNet Technologies, Inc. and Subsidiaries
(Formerly Aristo International Corporation)
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows, continued
(Unaudited)
Supplemental schedule of noncash investing and financing activities:
The Company, on June 4, 1990, issued 3,334,780 shares of common stock in
exchange for technical know-how and patents valued at $600,000.
During October 1993, the Company issued 39,184 shares of common stock in
exchange for the rights to a patent valued at $50,000.
During 1994, notes payable of $250,000 and $12,064 of accrued interest thereon
were converted into 171,741 shares of common stock.
During 1994, a note payable of $200,000 was converted into 159,236 shares of
common stock.
During 1994, the Company retired 1,667,390 shares of treasury stock valued at
$60,000.
During 1995, convertible term loans of $1,025,000 were converted into 834,529
shares of common stock.
During 1995, the Company issued 115,050 shares of common stock in exchange for
original graphic illustrations valued at $255,555.
In connection with the Merger with Astro-Stream, the Company assumed liabilities
of $47,595 and acquired cash of $59,494.
The Company purchased all of the capital stock of Borta, Inc. The details of
the business acquired are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of current assets acquired $ 67,418
Fair value of fixed assets acquired 43,258
Intangible assets of business acquired:
Capitalized software 8,086,750
Excess of cost over net assets acquired (goodwill) 5,008,049
Deferred tax liability (3,800,772)
Liabilities assumed (104,703)
Intercompany payable to the Company (50,000)
----------
Total purchase price consideration 9,250,000
Common stock issued 8,500,000
----------
Total cash to be paid to sellers 750,000
Liabilities to former stockholder 500,000
----------
Cash paid to sellers at closing of the acquisition 250,000
Less, cash acquired 11,385
----------
Net cash payment at closing of the acquisition $ 238,615
==========
</TABLE>
In connection with the purchase of Borta, the Company issued 357,143 shares of
restricted common stock valued at $1,964,286 to the president of Borta as
deferred compensation. These shares are subject to forfeiture.
The accompanying notes are an integral part of these consolidated financial
statements
9
<PAGE> 10
PlayNet Technologies, Inc. and Subsidiaries
(Formerly Aristo International Corporation)
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows, continued
(Unaudited)
Supplemental schedule of noncash investing and financing activities:
During 1995, the Company issued 25,000 shares of common stock in exchange for
consulting services valued at $162,500.
During 1995, the Company issued 4,082 shares of common stock in exchange for
consulting services valued at $23,372.
During December 1995, convertible term loans of $200,000 were converted into
66,667 shares of common stock.
During 1996, the Company issued 42,446 shares of common stock in exchange for
consulting services valued at $267,915.
During 1996, the Company issued 58,191 shares of common stock in exchange for
the 73,350 outstanding shares of preferred stock.
During 1996, the Company issued 30,000 shares of common stock in exchange for
product rights valued at $150,000.
During 1996, the Company issued 51,250 shares of common stock as signing bonuses
pursuant to employment agreements to two key personnel valued at $281,875.
During 1996, pursuant to a Settlement Agreement with the former president of
Borta, Inc. the Company canceled 357,143 shares of common stock originally
issued as deferred compensation.
In connection with warrants issued in 1996 in exchange for consulting services,
the Company recorded charges of $1,405,590.
In the first quarter of fiscal year 1997, the Company issued warrants in
connection with bridge financing and recorded deferred charges of
$1,104,210.
In the second quarter of fiscal year 1997, the Company issued warrants in
connection with certain financing transactions and recorded deferred
financing charges in the aggregate amount of $381,365.
In the second quarter of fiscal year 1997, the Company issued warrants in
connection with financial consulting services rendered and recorded an
expense of $5,822.
In the second quarter of fiscal year 1997, the Company 3,564 shares of Common
Stock at a price of $5.50 per share to two former employees pursuant to
employment agreements for an aggregate amount of $19,602.
The accompanying notes are an integral part of these consolidated financial
statements
10
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The interim consolidated financial statements reflect adjustments, consisting
only of normal recurring accruals, which are, in the opinion of management,
necessary for a fair presentation of the financial position and results of
operations for the periods presented. Sales and the net loss for any interim
period are not necessarily indicative of the results for a full year. These
consolidated financial statements should be read in conjunction with the
Company's annual report Form 10-KSB for the fiscal year ended October 31, 1996
and the related audited financial statements included therein. The financial
statements have been prepared on a going-concern basis, which contemplates
realization of assets and liquidation of liabilities in the normal course of
business. The Company, as of April 30, 1997, has a working capital deficit of
$9,121,894. The Company expects to incur substantial costs and expenses during
the ensuing twelve months as the Company continues to develop new products and
commence sales of its PlayNet Web networked entertainment terminals. Since
inception through April 30, 1997, the Company raised approximately $25,750,000
through the private placement of stock and convertible and promissory notes.
The Company intends to continue to fund operations through equity and/or debt
financing together with available funds and cash flows expected to be generated
by sales until the cash flows from the commercial sales of its products are
sufficient to do so. If cash generated by operations proves to be insufficient
to satisfy the Company's liquidity requirements, the Company may need to raise
additional funding through public or private debt financing. If additional
funds are raised through the issuance of equity securities, the percentage of
ownership of the then current stockholders of the Company may be reduced and
such equity securities may have rights, preferences or privileges senior to
those of the holders of the Company's common stock. There can be no assurance
that additional financing will be available on terms favorable to the Company.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition Policy-
Effective February 1997 the Company commenced shipping its PlayNet Web
terminals, the first of its product line, to domestic distributors who will
resell them to operators for installation in bars and restaurants in the United
States. As the PlayNet Web is a new product in the market without proven
acceptance or performance, the Company has elected to implement a conservative
revenue recognition policy. As the PlayNet Web gains acceptance in the market,
the Company will analyze actual results of sales and adjust its policy
accordingly.
Hardware Sales:
The Company will recognize revenue from the sale of its PlayNet Web product
upon shipment to the end customer and when financing is completed or paymment
has been received. Under certain circumstances, the Company may be required to
sell its product on a recourse basis. Revenue is recognized for transactions
involving recourse financing arrangements in the same manner as non-recourse
transactions. However, in connection therewith, the Company will record a
reserve against its recourse sales. The reserve will be adjusted as the
contingent liability for the sale is reduced. As more terminals are sold, the
Company will assess its experience with the recourse transactions and adjust
its reserve policy accordingly.
11
<PAGE> 12
Warranty Reserve on Hardware:
The PlayNet Web terminals carry a 90-day warranty covering parts and service.
The Company has established a warranty reserve account based on 2% of the sales
price of each unit sold. The Company will assess its warranty experience and
adjust the warranty reserve based on actual experience.
Usage Revenues:
Upon the installation of the PlayNet Web terminals at the operators' locations
and connection to the Internet Service Provider, the terminals features will
become fully functional. At this point the Company will begin to generate
revenues through an agreement with the operators of the PlayNet Web terminals.
This agreement provides for the Company to receive a percentage of the revenues
that are generated by certain of the functions and content on the terminals. The
terminals are programmed to transmit activity data to the Company's accounting
system, which will generate on a monthly basis machine detail statements
reporting the revenues by feature, as well as, invoices to the operators for
PlayNet's share of the earnings. The Company will recognize the revenues from
its share of the terminals earnings upon invoicing the customer. However, the
Company will estimate and record a provision for uncollectible receivables and
will periodically assess the provision based upon actual collection experience.
No usage revenues have been recorded to date.
NOTE 3 - INVENTORIES
Inventory is stated at the lower of cost or market. At April 30, 1997, inventory
consisted of $1,893,344 in finished goods, $1,000,323 in raw materials and
assembly costs and $137,500 in completed units used for demonstration and test
purposes for the Company's PlayNet Web networked entertainment terminals (see
Note 5).
NOTE 4 - FINANCING
On December 30, 1996, the Company entered into a bridge financing agreement with
Allen & Company Incorporated ("Allen") pursuant to which Allen acted as the
Company's placement agent in the sale of senior secured notes for aggregate
gross proceeds of up to $18,000,000, subject to achievement of certain
prescribed operating targets. Through April 30, 1997 the Company had received
gross proceeds of $3,250,000. The promissory notes related thereto bear interest
at a rate of 12% per annum payable on the maturity date of the note. As partial
consideration for the issuance of these notes, the ten holders of these notes
were granted warrants to purchase an aggregate of 650,000 shares of the
Company's common stock at an exercise price of between $5.00 and $7.50 per share
and exercisable six months from the date of the note through December 21, 1997.
It is unlikely that the Company will draw down on the balance of the funds
available under this agreement.
On March 6, 1997, the Company entered into a short term revolving line of credit
for the total principal sum of $850,000 subject to a draw down and repayment
schedule bearing a repayment premium of 15%. As of April 30, 1997, the Company
had received the total $850,000 in draw down payments and made principal
repayments in the amount of $165,000, pursuant to the terms of the line of
credit. As consideration for this line of credit, the holder received a security
interest in certain purchase orders for the PlayNet Web product and warrants to
purchase 66,000 shares of the Company's common stock at an exercise price of
$8.625 per share, the closing price per share of the Company's common stock as
quoted on the Nasdaq Small Cap Market. On April 30, 1997, the repayment schedule
of this instrument was extended and, in consideration thereof, the holder shall
receive an additional 5% premium on the outstanding balance and additional
warrants to purchase 20,000 shares of the Company's common stock at an exercise
price of $7.50 per share.
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In April 1997, the Company also raised an additional $1,750,000 through the
issuance of short-term promissory notes which bear interest at the rate of 10%
per annum and are due and payable on the earlier of (i) the closing of an
Offering, as defined, or (ii) June 30, 1997. These notes are collateralized by
certain of the Company's purchase orders for its PlayNet Web terminals. As
partial consideration for the issuance of the notes, the holders also received
warrants to purchase an aggregate of 175,000 shares of the Company's Common
Stock. Warrants to purchase 125,000 shares have an exercise price per share of
$7.50 and warrants to purchase 50,000 shares have an exercise price of $7.00
per share.
In the three month period ended April 30, 1997 and to current date, the Company
recorded an aggregate deferred charge of $2,126,020 related to the issuance of
warrants to purchase an aggregate of 911,000 shares of its common stock pursuant
to the bridge financing arrangement between the Company and senior secured note
holders and other short term line of credit note holders. Through April 30,
1997, the Company recorded $614,192 of interest expense in connection with the
amortization of these deferred charges.
NOTE 5 - HARDWARE SALES
On February 22, 1997, the Company launched its PlayNet Web networked
entertainment terminals. Through April 30, 1997, the Company had shipped 537
PlayNet Web terminals. Of these the Company recorded net sales totaling
$340,740 representing 152 units, consistent with its revenue recognition
policy, for which cash had been received or for which financing had been
completed. The remaining 385 shipped units, which have been shipped subject to
certain return provisions, represent potential gross sales of $960,575, to be
recognized upon customer acceptance and completed financing or receipt of
payment.
NOTE 6 - COMMITMENTS
(a) Internet Service Provider
In February 1997 the Company finalized a one-year renewable agreement with IBM
Global Services ("IBM") for delivery of Internet dial up access services.
Negotiations with IBM for a long-term commitment for the delivery of server farm
management services and increased dial up access services are still in process.
In connection therewith, the Company agreed, that in the event the parties do
not enter into an agreement relating to the services contemplated, it will
reimburse IBM for reasonable, documented costs and expenses actually incurred by
IBM in an effort to implement the services in accordance with the Company's
scheduled timeline, the amount of which is not to exceed $500,000. Payment terms
and amortization periods related thereto are to be determined as part of the
negotiation process. As of April 30, 1997, IBM had substantially completed the
delivery of the contracted Internet dial up access services and, in connection,
therewith, the Company recorded a charge of $500,000 for network services.
(b) Financial Services Agreement
On April 29, 1997, the Company engaged LKB Financial LLC ("LKB") to provide
financial advisory services, including identifying and introducing the Company
to prospective investors and assisting in the negotiations of the terms of any
resulting financial transaction. Through LKB, the Company contacted and, on May
20, 1997, closed a financing transaction with Southbrook International
Investments, Ltd. ("Southbrook") as described below (the "Southbrook
Transaction"). As compensation for its services in connection with the
Southbrook Transaction, the Company paid a $200,000 cash fee to LKB and issued
to LKB warrants to purchase 200,000 shares of Common Stock at an exercise price
of $6.88 per share (subject to certain adjustments) at any time between May 20,
1998 and April 1, 2000. (See Note 9(a).)
NOTE 7 - DELISTING FROM NASDAQ SMALLCAP MARKET
On April 4, 1997, the Company received a notice from Nasdaq asserting a
deficiency in its compliance with the maintenance standards for continued
inclusion on the Nasdaq SmallCap Market. In response to this notice, the Company
submitted a proposal for achieving compliance with such standards and requested
a delay of any action to delist the Common Stock from
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the Nasdaq SmallCap Market. However, Nasdaq declined the Company's request, and
gave notice to the Company on May 15, 1997 that the Common Stock would be
delisted effective with the close of business on May 23, 1997, subject, however,
to the Company's appeal of the Nasdaq decision. Accordingly, the Company has
applied for an oral hearing to review the delisting decision. A hearing has been
scheduled for June 27, 1997. Pending such hearing and the determination of the
hearing officer, the delisting decision has been stayed, and the Common Stock
has remained included in the Nasdaq SmallCap Market. The Company believes that
it has meritorious arguments to support reversal of the delisting decision and
the continued inclusion of the Common Stock on the Nasdaq SmallCap Market.
However, there can be no assurances that the Company will prevail at the review
hearing or that the delisting decision will be reversed and the Common Stock
will remain included on the Nasdaq SmallCap Market.
NOTE 8 - CAPITALIZED SOFTWARE
In connection with its quarterly review procedures, management evaluates the
recoverability of its intangible assets based on projected future revenue
streams and financial results for each of the related products. In early April
1997, the Company experienced system failure based on unexpected software
incompatibility, which has subsequently been corrected. As a result of this
system failure, management revised its revenue projections for the short term
for the PlayNet Web product. In connection therewith, the Company recorded a
charge in the amount of $389,171 to reflect the impairment of this asset.
NOTE 9 - EVENTS SUBSEQUENT TO APRIL 30, 1997
(a) Financing - 10% Convertible Debentures
In May 1997, the Company issued and sold to Southbrook International
Investments, Ltd. ("Southbrook") 10% Convertible Debentures (the "Debentures")
in the aggregate principal amount of $4,000,000 at a purchase price equal to 90%
of par to yield gross proceeds of $3,600,000. Of such amount, Southbrook
retained $250,000, which will become payable to the Company on the earliest to
occur of the dates on which either (i) the Form S-1 Registration Statement,
originally filed on October 16, 1996, becomes effective; (ii) a certain
stockholder of the Company delivers a lock-up agreement to Southbrook; or (iii)
Southbrook no longer holds any of the Debentures. Interest on the Debentures
accrues daily at the rate of 10% per annum on the principal amount thereof and
is payable quarterly, or at the Company's option, subject to certain conditions,
in shares of its Common Stock.
The Debentures mature on May 20, 1998, subject to prior conversion or repayment.
The Company may, at its option, (a) prior to September 17, 1997, repay all, but
not less than all, of the outstanding Debentures at a price equal to the
aggregate principal amount thereof, together with all interest accrued but
unpaid thereon, and an amount equal to the product of $6,666.66 and the number
of days elapsed after June 20, 1997 until the date of repayment, and (b) at any
time on or after May 21, 1997, repay all or any portion of the outstanding
Debentures at a price equal to 110% of the aggregate principal amount of the
Debentures so repaid, together with all interest accrued but unpaid thereon.
On or after September 17, 1997 and until maturity, the Debentures are
convertible at the option of the holders thereof into shares of Common Stock at
a conversion price equal to the lesser of (a) 95% of the average per Share
Market Value (as defined) for the ten (10) trading days preceding the conversion
date and (b) the average of the five lowest per Share Market Values over the 90
trading days preceding the conversion date. The Company is required to pay each
holder of Debentures that does not so convert the Debentures before November 16,
1997 on such date and at the end of each 30-day period thereafter a bonus equal
to .75% of the aggregate principal amount not so converted. Such bonus shall be
paid in cash, except that after May 20, 1998, the Company may, at its option,
pay such bonus in shares of Common Stock.
If any Debentures remain outstanding on or after September 17, 1997 the Company
will issue to the holders thereof warrants to purchase 152,381 shares of Common
Stock at an exercise price of $5.25 per share.
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The Company has agreed to file on or prior to September 17, 1997 a "shelf
registration" with respect to the Common Stock issuable upon conversion of the
Debentures or the payment of interest thereon or upon the exercise of the
Southbrook warrants and granted certain "piggyback registration right" to
holders of such Common Stock.
The Company has also granted to Southbrook a right of first refusal until
November 17, 1997 to undertake certain financings of the Company, if any,
involving the sale of securities of the Company at a discount to market price or
fair market value.
(b) Contingency for Closing New York City Headquarters Office Effective June 30,
1997, the Company will relocate its corporate headquarters to its California
facility to maximize the use of its assets and more efficiently manage the
business. At that time the New York City headquarter offices will be closed. In
connection with this decision, in the second quarter of fiscal 1997 the Company
recorded a charge in the amount of $394,477 related to moving expenses, lease
settlements and severance payments.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying consolidated financial
statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
A number of statements contained in this report are forward-looking within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve
risks and uncertainties that could cause actual results to differ materially
from those expressed or implied herein. These risks and uncertainties include
but are not limited to the recent development and commencement of operations;
dependence on new products; risks related to technological factors; dependence
on certain third party vendors and on the Internet; and other risks described in
the Company's Registration Statement on Form S-1 filed on October 16, 1996.
OVERVIEW
The Company designs, develops and sells entertainment systems which include
pay-per-play electronic game, entertainment and music juke box terminals
networked over the Internet. The Company's primary products, PlayNet Web, as
well as two products currently under development, PlayNet Music Station and
PlayNet Sports, are all designed to accept both cash and credit cards, have
touch screens, user-friendly interfacing and come pre-loaded with the Company's
proprietary software and other licensed content. The market for the Company's
products includes bars, theme bars and restaurants, hotel and restaurant
chains, coffee cafes, theme parks, studio stores, gyms, airport lounges and new
"cyber" establishments. All three products are intended to run on Microsoft
Windows NT platform networked by IBM Global Services.
CURRENT OPERATIONS
Through April 1997, the Company shipped 537 PlayNet Web networked entertainment
terminals. The 537 units aggregated revenues of approximately $1.15 million, to
be accounted for in accordance with the Company's revenue recognition policy.
Additionally, the Company currently has purchase orders outstanding for the
shipment of another 3,156 terminals, which is expected to generate sales of
approximately $7.1 million. However, in early April 1997 the Company
experienced system failure based on unexpected software incompatibility, the
malfunction being triggered by the daylight savings time change. To date, this
malfunction has been corrected, all units previously shipped have received the
appropriate upgrades and normal operations have resumed. However, the
resolution of this malfunction and the related upgrading of all the PlayNet Web
terminals has caused a delay in completing the financing arrangements and/or
receiving payments for certain of the shipped terminals. Completion of these
sales transactions is dependent upon the demonstration of the reliability of
the terminals.
On May 20, 1997, the Company entered into a non-binding agreement with
Tournament Associates, Inc. ("TAI") relating to a joint venture that will
operate computerized poker tournaments through retail locations in
Pennsylvania. TAI owns the proprietary rights to electronic video software that
supports competition and tournament poker play. Rulings under Federal and
Pennsylvania law have held that the poker game system is not a gambling device
because it awards prizes based on a player's skill rather than random chance.
Accordingly, the game can be offered throughout Pennsylvania in tournaments in
which prizes are awarded to contestants. The non-binding agreement contemplates
that TAI will grant a non-exclusive, non-transferable sublicense to the joint
venture for the use of its poker game software and related intellectual
property, and that PlayNet will provide the hardware for integrating the
licensed software into its PlayNet Web terminals and will be responsible
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for the promotion, distribution, placement and servicing of such terminals.
Under the proposed agreement, PlayNet and TAI will each own one-half of the
issued and outstanding capital stock of the joint venture, make equal capital
contributions to fund operations, if required, and share equally in
distributions. It is expected that the joint venture will continue for an
initial term of two years, and thereafter, be renewable annually. The Company
is still in the process of negotiating and completing final agreements.
If consummated, PlayNet believes this agreement will accelerate its
opportunities with respect to its business strategy to develop new markets and
for revenues generated from tournaments.
Effective June 30, 1997, the Company will relocate its corporate headquarters to
its California facility to maximize the use of its assets and more efficiently
manage the business. At that time the New York City headquarter offices will be
closed. It is estimated that this relocation could reduce the general and
administrative costs of the organization approximately $1.0 million annually. In
connection with this relocation, the Company recorded a one time charge of
$394,477 in the second quarter for expenditures related to the closing of the
New York office.
COMPARISON OF THE SIX MONTH PERIOD ENDED APRIL 30, 1997 VS. APRIL 30, 1996
Consolidated net revenues for the six months ended April 30, 1997 were $349,967
as compared to revenues of $186,038 for the same period in 1996. In 1997
revenues were primarily attributable to the sale of the PlayNet Web terminals,
which was initially shipped in February 1997. For the same period in 1996 the
Company received revenues primarily from its software development activities.
Royalties on the Company's consumer products represented 3% and 2% of total
revenues in 1997 and 1996, respectively.
In connection with the sales of the PlayNet Web terminals in the period ended
April 30, 1997, the Company recorded costs of goods sold in the amount of
$990,455, which resulted in a gross loss on sales of $640,488. The cost of each
unit sold is recorded using a standard cost method. Inventories are reconciled
quarterly and variances are recorded to a costs of sales variance account.
Approximately $513,000 of the costs of sales is directly attributable to
the costs of the units shipped, including the costs of parts, assembly and
software licenses. Approximately $300,000 is related to non-production charges
incurred from the manufacturer for minimum production levels that were not
achieved. In connection with the physical count of the inventory at April 30,
1997, the Company recorded a charge to the costs of sales variance account
of approximately $ 169,000. Pursuant to the Company's revenue recognition policy
and in connection with the sale of 152 PlayNet Web terminals, a warranty reserve
of $7,585, representing 2% of gross sales, was recorded.
Selling, general and administrative expenses for the six months ended April 30,
1997 increased to $3,749,477 as compared to $2,575,295 for the six months ended
April 30, 1996. Of the total selling, general and administrative expenses for
1997, $1,381,794 or 37% is related to salaries and benefits as compared to
approximately $580,071 or 23% for the prior period. This increase was
attributable to an increase of 4 personnel from April 30, 1997 as compared to
April 30, 1996, the increase being primarily executive and professional staff,
to support the Company's preparations for the development and commercial launch
of its networked entertainment terminal products.
Occupancy expense for the current period amounted to $300,037 as compared to
$165,383 for the same period in 1996. This increase is related to the leasing of
additional office space in the Company's New York office and an engineering and
design facility in California, which was occupied beginning in April 1996. Of
the total selling, general and administrative expenses, occupancy expense
represents 8% and 6% for the six months period under review in 1997 and 1996,
respectively.
Amortization and depreciation expenses related to equipment and furniture
totaled $46,689 and $32,763 respectively, for the six months ended April 30,
1997 and 1996. The increase of approximately $14,000 resulted primarily from the
capital expenditures in fiscal years 1997 and 1996 related to the acquisition of
equipment and leasehold improvements as the Company developed the infrastructure
necessary to achieve its business objectives.
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Other selling, general and administrative expenses for the 1997 period under
review total approximately $2,020,000 as compared to approximately $1,797,000
for the same period in 1996. Included in these other expenses is $533,000
related to professional and consulting services, of which $310,000 was for
financial consulting services and $217,000 was for legal and accounting
services, primarily related to the financing of the Company. In the same period
of 1996, other expenses related to professional fees totaled approximately $
431,000, of which $380,000 was primarily attributable to Borta, Inc.and the
development of related business plans and funding. Travel and entertainment
expenditures decreased in 1997 to $221,000 as compared to $345,000 in 1996.
This decrease in travel and related expenditures is due to the development of
the Company's infrastructure in its California and Virginia offices. Insurance
expenses increased to $154,588 in 1997 as compared to $72,352 in 1996. This is
attributable to the additional coverage necessary to insure the additional
facilities, equipment and personnel of the business as it has grown
significantly from the period under review in 1996 versus the same period in
1997. In the six months ended April 30, 1997 the Company incurred expenses
totaling approximately $260,000 related to its marketing activities. Also in
the period ended April 30, 1997, the Company recorded one-time charges in the
amount of $394,477 related to the relocation of its New York offices and in the
amount $100,000 related to the settlement of certain vendor disputes. In the
period ended April 30, 1996, the Company recorded a one-time reorganization
charge in the amount of $200,000. The balance of approximately $255,000 of
other expenses for the 1997 period under review are primarily attributable to
the increase in office and related expenses necessary to support the increase
in the general corporate activity.
Research and development costs for the six months ended April 30, 1997 increased
to $4,020,122 as compared to $935,668 for the comparable period in 1996. This
increase was attributable to (i) an increase in payroll expenses from
approximately $806,000 in 1996 to $2,167,118 in 1997, reflecting an increase in
personnel to 60 as of April 30, 1997 from 30 as of April 30, 1996; (ii) $548,000
attributable to network development, of which $500,000 is related to the
commitment to IBM for Internet access services; and (iii) increased travel and
related expenditures in the amount of $294,000 for testing of prototypes,
exhibition at trade shows and the development of distribution networks. In
addition for the six months ended April 30, 1997, the Company recorded $176,000
of amortization and depreciation expenses primarily for additional equipment and
furniture acquisitions, an increase of approximately $55,000 over the comparable
period in 1996. Approximately $198,000 of expenditures for outside services,
such as personnel placement agencies, independent contractors for programming
and writing manuals was recorded for the six months period ended April 30, 1997.
There were also expenditures of approximately $146,000 for hardware and software
requirements in the current period under review. Additionally, approximately
$400,000 of other expenditures related to the increased number of personnel and
facilities, such as telephone services, office supplies and services was
recorded in the current period.
The increase of $1,159,337 in amortization of capitalized software costs
expense from the comparable period in 1996 to 1997 is related to the change
(reduction) in the estimated life of the Company's capitalized software asset,
which occurred at October 31, 1996 and has resulted in a higher monthly
amortization. Also, in the second quarter of 1997, the Company recorded an
additional impairment of its capitalized software asset in the amount of
$389,171, as a result of an unexpected software incompatibility with the
PlayNet Web terminals. (See Current Operations.)
Interest expense net of interest and other income for the six months ended April
30, 1997 was $969,563 as compared to $68,419 for the same period in the prior
year. This increase is primarily attributable to interest recorded in connection
with the convertible, promissory, and bridge financing notes in the amount of
$345,446 and to the amortization of deferred financing charges related to the
issuance of warrants in the amount of $614,192.
COMPARISON OF THE QUARTER ENDED APRIL 30, 1997 VS. APRIL 30, 1996
Consolidated revenues for the three months ended April 30, 1997 were $347,085 as
compared to revenues of $144,513 for the same period in 1996. In 1997 revenues
were primarily attributable to the sale of the PlayNet Web terminals, which was
initially shipped in February 1997. For the same period in 1996 the Company
received revenues primarily from the its software development activities.
Royalties on the Company's consumer products represented 2% and 1% of total
revenues in 1997 and 1996, respectively.
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In connection with the sales of the PlayNet Web terminals in the period ended
April 30, 1997, the Company recorded costs of goods sold in the amount of
$990,455, which resulted in a gross loss on sales of $640,488. The cost of each
unit sold is recorded using a standard cost method. Inventories are reconciled
quarterly and variances are recorded to a costs of goods sold variance account.
Approximately $513,000 of the costs of goods sold is directly attributable to
the costs of the units shipped, including the costs of parts, assembly and
software licenses. Approximately $300,000 is related to non-production charges
incurred from the manufacturer for minimum production levels that were not
achieved. In connection with the physical count of the inventory at April 30,
1997, the Company recorded a charge to the costs of goods sold variance account
of approximately $169,000. Pursuant to the Company's revenue recognition policy
and in connection with the sale of 152 PlayNet Web terminals, a warranty reserve
of $7,585, representing 2% of gross sales, was recorded.
Selling, general and administrative expenses for the three months ended April
30, 1997 increased to $2,109,804 as compared to $1,503,593 for the three months
ended April 30, 1996. Of the total selling, general and administrative expenses
for 1997, $687,442 or 33% is related to salaries and benefits as compared to
$290,341 or 19% for the prior period under review. This increase was
attributable to an increase of 4 personnel from April 30, 1997 as compared to
April 30, 1996, the increase being primarily executive and professional staff,
to support the Company's preparations for the development and commercial launch
of its networked entertainment terminal products.
Occupancy expense for the current period amounted to $121,632 as compared to
$82,507 for the same period in 1996. This increase is related to the leasing of
additional office space in the Company's New York office and an engineering and
design facility in California, which was occupied beginning in April 1996. Of
the total selling, general and administrative expenses, occupancy expense
represents 6% and 5% for the three months period under review in 1997 and 1996,
respectively.
Amortization and depreciation expenses related to equipment and furniture
totaled $23,669 and $25,294 respectively, for the three months ended April 30,
1997 and 1996. While there was an increase in the capital expenditures in fiscal
years 1997 and 1996 related to the acquisition of equipment and leasehold
improvements required to develop the infrastructure necessary for the Company to
achieve its business objectives, certain assets were fully depreciated within
the periods under review and certain assets were reclassified in subsequent
periods to better reflect the nature of those assets.
Other selling, general and administrative expenses for the three month period
ended April 30, 1997 total approximately $1,277,000 as compared to approximately
$1,105,000 for the same period in 1996. Included in these other expenses is
approximately $250,000 related to professional and consulting services, of which
$100,000 was for financial consulting services and $140,000 was for legal and
accounting services, primarily related to the financing of the Company. In the
same period of 1996, other expenses related to professional fees totaled
approximately $204,000, of which $173,000 was primarily attributable to the
acquisition of Borta and the development of related business plans and funding.
Travel and entertainment expenditures decreased in 1997 to $134,000 as compared
to $220,000 in 1996. This decrease in travel and related expenditures is due to
the development of the Company's infrastructure in its California and Virginia
offices. Insurance expenses increased to $110,905 in 1997 as compared to $34,329
in 1996. This is attributable to the additional coverage necessary to insure the
additional facilities, equipment and personnel of the business as it has grown
significantly from the period under review in 1996 versus the same period in
1997. In the three months ended April 30, 1997 the Company incurred expenses
totaling approximately $160,000 related to its marketing activities. Also in the
period ended April 30, 1997, the Company recorded one-time charges in the amount
of $394,477 related to the relocation of its New York offices and $100,000
related to the settlement of certain vendor disputes. In the period ended April
30, 1996, the Company recorded a one-time reorganization charge in the amount of
$200,000. The balance of approximately $128,000 of other expenses for the 1997
period under review are primarily attributable to the increase in office
supplies and related expenses necessary to support the increase in the general
corporate activity.
Research and development costs for the three months ended April 30, 1997
increased to $2,452,433 as compared to $554,626 for the comparable period in
1996. This increase was attributable to (i) an increase in payroll expenses from
approximately $436,000 in 1996 to $1,205,000 in 1997, reflecting an increase in
personnel to 60 as of April 30, 1997 from 30 as of April 30, 1996; (ii)
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$519,000 attributable to network development, of which $500,000 is related to
the commitment to IBM for Internet access services; and (iii) increased travel
and related expenditures in the amount of $184,000 for testing of prototypes,
exhibition at trade shows and the development of distribution networks. In
addition for the three months ended April 30, 1997, the Company recorded $90,000
of amortization and depreciation expenses primarily for additional equipment and
furniture acquisitions, an increase of approximately $32,000 over the comparable
period in 1996. Approximately $77,000 of expenditures for outside services, such
as personnel placement agencies, independent contractors for programming and
writing manuals was recorded for the three months period ended April 30, 1997.
There were also expenditures of approximately $116,000 for hardware and software
requirements in the current period under review. Additionally, approximately
$258,000 of other expenditures related to the increased number of personnel and
facilities, such as telephone services, office supplies and services, was
recorded in the current period under review.
The increase to $1,063,067 in amortization of capitalized software costs expense
from $288,813 for the comparable period in 1996 to 1997 is related to the change
(reduction) in the estimated life of the Company's capitalized software asset,
which occurred at October 31, 1996 and has resulted in a higher monthly
amortization. Also, in the second quarter of 1997, the Company recorded an
additional impairment of its capitalized software asset in the amount of
$389,171, as a result of an unexpected software incompatibility with the PlayNet
Web terminals.
Interest expense net of interest and other income for the three months ended
April 30, 1997 was $807,428 as compared to $5,780 for the same period in the
prior year. This increase was primarily attributable to interest recorded in
connection with the convertible, promissory, and bridge financing notes in the
amount of $287,339 and to the amortization of deferred financing charges related
to the issuance of warrants in the amount of $522,174.
LIQUIDITY AND CAPITAL RESOURCES
Since inception the Company has funded its operations primarily through cash
generated from private placements of debt and equity securities and bank
financing. In February 1997, the Company commenced commercial operations and
began shipping one of its products, the PlayNet Web terminals. The Company is
expected to begin to generate cash from its operations as the distributors and
owners (i) complete the financing of the terminals through an arrangement with
independent third party financing sources or (ii) pay within the terms agreed to
by the Company and its customer.
The Company has two revolving credit facilities with The Merchants Bank of New
York in an aggregate amount of up to $500,000. As of April 30, 1997, the Company
had drawn $406,000 upon these, of which $250,000 is collateralized by a
certificate of deposit. Both of these facilities have been renewed for a
one-year term expiring on May 20, 1998 and bearing interest at rates of 7% and
1.5% over the prime rate (10%) per annum.
As of April 30, 1997, the Company had outstanding notes in the aggregate
principal amount of $2,106,500 which mature on May 30, 1997 and July 31, 1997.
The notes with maturity dates of May 30, 1997 have been extended to June 30,
1997. One promissory note, in the principal amount of $260,000, requires
quarterly payments of interest each in the amount of $13,000 on April 1, July 1,
October 1 and January 1; one promissory note in the principal amount of
$500,000, bears interest at a rate of 10% per annum; one promissory note in the
principal amount of $500,000, bears interest at a rate of 12% per annum; five
refundable options to purchase Common Stock in the amount off $516,500 bearing
interest at a rate of 12% per annum, payable on demand; and one promissory note,
in the principal amount of $330,000, bears interest at the prime rate. The
Company has agreed, if a holder of any of the forgoing notes so elects, to issue
shares of common stock in full payment (in lieu of cash) of the principal amount
of each of these notes, based on a price of $5.50 per share, representing an
aggregate of 383,000 shares. Three of such holders, with notes aggregating
$1,330,000, have given notice to the Company of their intention to convert the
principal amount of such notes into shares of Common Stock although no such
holder is under any legal obligation to do so. The holders of two of the
promissory notes that have been paid in full were granted options to purchase a
total of 101,818 additional shares of Common Stock at an exercise price of $5.50
per share. The holder of one promissory note was also granted an option to
purchase 60,000 additional shares of Common Stock at an exercise
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price of $5.50 per share. Accordingly, the Company may issue up to an aggregate
of 430,909 shares of common stock in the event all such promissory notes are
converted and options and warrants are exercised.
In December 1996, the Company entered into a bridge financing arrangement with
Allen & Company Incorporated (Allen) pursuant to which Allen acted as the
Company's placement agent in connection with the sale of senior secured notes
and warrants for aggregate gross proceeds of up to $18,000,000, subject to the
achievement of certain prescribed operating targets. The Company had received
gross proceeds of $3,250,000 pursuant to the conditions of the Bridge financing.
These Bridge Notes bear interest at the rate of 12% per annum and become due and
payable on the earlier of (i) the closing of any public offering of common stock
with gross proceeds of at least $15,000,000 or any privately arranged financing
transaction or series of transactions raising aggregate proceeds of at least
$15,000,000 or (ii) one year from the date of each Bridge Note. As partial
consideration for the issuance of these notes, the ten holders also received
warrants to purchase an aggregate of 650,000 shares of the Company's Common
Stock at an exercise price of between $5.00 and $7.50 per share and exercisable
six months from the date of the note through December 31, 1997. In the event
that Allen is unsuccessful in completing the bridge financing or if the Company
does not achieve its targets, the Company has received a commitment from a
principal stockholder to fund a minimum of an additional $4,900,000 of capital
and/or convertible debt during 1997.
On March 6, 1997, the Company entered into a short term revolving line of credit
for a total principal sum of $850,000 subject to a draw down and repayment
schedule bearing a repayment premium of 15%. As of April 30, 1997, the Company
had received $850,000 in draw down payments and made repayments in the amount of
$189,750, pursuant to the terms of the line of credit, of which $165,000 was the
principal. As consideration for this line of credit, the holder received a
security interest in certain purchase orders for the PlayNet Web product and
warrants to purchase 66,000 shares of the Company's common stock at a price per
share equal to the closing price of $8.625 of the Company's common stock as
quoted on the Nasdaq Small Cap Market. As consideration for the extending the
maturity date of the line of credit note to April 30, 1997, the holder shall
receive an additional 5% repayment premium and additional warrants to purchase
another 20,000 shares of the Company's Common Stock at a price of $7.50 per
share.
In April 1997, the Company also raised an additional $1,750,000 through the
issuance of short-term promissory notes which bear interest at the rate of 10%
per annum and are due and payable on the earlier of (i) the closing of this
Offering or (ii) June 30, 1997. Certain of the Company's purchase orders for its
PlayNet Web terminals collaterialize these notes. As partial consideration for
the issuance of the notes, the holders also received warrants to purchase an
aggregate of 175,000 shares of the Company's Common Stock. Warrants to purchase
125,000 shares have an exercise price per share of $7.50 and warrants to
purchase 50,000 shares have an exercise price of $7.00 per share.
On April 29, 1997, the Company engaged LKB Financial LLC ("LKB") to provide
financial advisory services, including identifying and introducing the Company
to prospective investors and assisting in the negotiation of the terms of any
resulting financial transaction. Through LKB, the Company contacted and, on May
20, 1997, closed a financing transaction with Southbrook International
Investments, Ltd. ("Southbrook") as described below (the "Southbrook
Transaction"). As compensation for its services in connection with the
Southbrook Transaction, the Company paid a $200,000 cash fee to LKB and issued
to LKB warrants to purchase 200,000 shares of Common Stock at an exercise price
of $6.88 per share (subject to certain adjustments) at any time between May 20,
1998 and April 1, 2000.
In the Southbrook Transaction, the Company issued and sold to Southbrook 10%
Convertible Debentures (the "Debentures") in the aggregate principal amount of
$4,000,000 at a purchase price equal to 90% of par to yield gross proceeds of
$3,600,000. Of such amount, Southbrook retained $250,000, which will become
payable to the Company on the earliest to occur of the dates on which either (i)
the Form S-1 Registration Statement, originally filed on October 16, 1996,
becomes effective; (ii) a certain stockholder of the Company delivers a lock-up
agreement to Southbrook; or (iii) Southbrook no longer holds any of the
Debentures. Interest on the Debentures accrues daily at the rate of 10% per
annum on the principal amount thereof and is payable quarterly, or at the
Company's option, subject to certain conditions, in shares of its Common Stock.
21
<PAGE> 22
The Debentures mature on May 20, 1998, subject to prior conversion or repayment.
The Company may, at its option, (a) prior to September 17, 1997, repay all, but
not less than all, of the outstanding Debentures at a price equal to the
aggregate principal amount thereof, together with all interest accrued but
unpaid thereon, and an amount equal to the product of $6,666.66 and the number
of days elapsed after June 20, 1997 until the date of repayment, and (b) at any
time on or after May 21, 1997, repay all or any portion of the outstanding
Debentures at a price equal to 110% of the aggregate principal amount of the
Debentures so repaid, together with all interest accrued but unpaid thereon.
On or after September 17, 1997 and until maturity, the Debentures are
convertible at the option of the holders thereof into shares of Common Stock at
a conversion price equal to the lesser of (a) 95% of the average per Share
Market Value (as defined) for the ten (10) trading days preceding the conversion
date and (b) the average of the five lowest per Share Market Values over the 90
trading days preceding the conversion date. The Company is required to pay each
holder of Debentures that does not so convert the Debentures before November 16,
1997 on such date and at the end of each 30-day period thereafter a bonus equal
to .75% of the aggregate principal amount not so converted. Such bonus shall be
paid in cash, except that after May 20, 1998, the Company may, at its option,
pay such bonus in shares of Common Stock.
If any Debentures remain outstanding on or after September 17, 1997 the Company
will issue to the holders thereof warrants to purchase 152,381 shares of Common
Stock at an exercise price of $5.25 per share.
The Company has agreed to file on or prior to September 17, 1997 a "shelf
registration" with respect to the Common Stock issuable upon conversion of the
Debentures or the payment of interest thereon or upon the exercise of the
Southbrook warrants and granted certain "piggyback registration right" to
holders of such Common Stock.
The Company has also granted to Southbrook a right of first refusal until
November 17, 1997 to undertake certain financing of the Company, if any,
involving the sale of securities of the Company at a discount to market price or
fair market value.
On April 4, 1997, the Company received a notice from Nasdaq asserting a
deficiency in its compliance with the maintenance standards for continued
inclusion on the Nasdaq SmallCap Market. In response to this notice, the Company
submitted a proposal for achieving compliance with such standards and requested
a delay of any action to delist the Common Stock from the Nasdaq SmallCap
Market. However, Nasdaq declined the Company's request, and gave notice to the
Company on May 15, 1997 that the Common Stock would be delisted effective with
the close of business on May 23, 1997, subject, however, to the Company's appeal
of the Nasdaq decision. Accordingly, the Company has applied for an oral hearing
to review the delisting decision. A hearing has been scheduled for June 27,
1997. Pending such hearing and the determination of the hearing officer, the
delisting decision has been stayed, and the Common Stock has remained included
in the Nasdaq SmallCap Market. The Company believes that has meritorious
arguments to support reversal of the delisting decision and the continued
inclusion of the Common Stock on the Nasdaq SmallCap Market. However, there can
be no assurances that the Company will prevail at the review hearing or that the
delisting decision will be reversed and the Common Stock will remain included on
the Nasdaq SmallCap Market. Delisting from the Nasdaq SmallCap Market would
materially adversely affect the trading prices and liquidity of the Company's
Common Stock.
The Company, as of April 30, 1997, had a working capital deficiency of
$9,121,894. Furthermore, in its continuing transition from the development stage
to the commercial operating stage, the Company's losses are expected to continue
as a result of expenditures required to continue network and software
development efforts and increase marketing and sales activities. The Company has
begun a cost reduction program to offset some of the necessary increases in
expenses. The Company has decided to close the New York City headquarters
office. This decision was made primarily in response to management's belief that
it is in the best interest of the organization to consolidate the functions of
each of these facilities at one location. However, the decision to close the New
York City office also addresses the issue of reducing the cost structure of the
organization. It is estimated that this decision could reduce the general and
administrative costs of the organization approximately $1.0 million
22
<PAGE> 23
annually. The Company's ability to meet its obligations in the ordinary course
of business is dependent upon its ability to continue to obtain adequate
financing and/or to successfully distribute its new entertainment software
products.
At the recommendation of its investment bankers, the Company has delayed the
filing of its amended Form S-1 due to certain operational issues, as described
earlier. Consequently, the Company is actively pursuing financing options, as
well as the planned public offering. The Company believes that the net
proceeds from either the public offering or the alternative financing options,
together with available funds and cash flows expected to be generated by sales,
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next twelve months. In the event the
Company's plans change, its assumptions change or prove to be inaccurate or if
the proceeds of the bridge financing and the public offering or cash flows
prove to be insufficient to fund operations, the Company may find it necessary
or desirable to seek additional financing or curtail its activities. There can
be no assurance that additional financing will be available on terms favorable
to the Company, or at all. If adequate funds are not available or are not
available on acceptable terms, the Company may not be able to take advantage of
opportunities, develop new products or otherwise respond to competitive
pressures. Such inability could have a material adverse effect on the Company's
business, and financial condition and results of operations.
23
<PAGE> 24
PART II OTHER INFORMATION
ITEM 1-LEGAL PROCEEDINGS
(a) On or about May 6, 1997 the Company and Orbach, Inc. reached a
settlement with respect to the legal proceedings commenced in October 1996
by Orbach, Inc. against the Company alleging breach of a finder's fee
agreement and unjust enrichment. In full settlement thereof, the Company
agreed to pay $42,500.00 upon execution of the settlement agreement and
$10,000.00 per month beginning June 16, 1997 and ending October 16, 1997,
representing a total settlement amount of $92,500.00.
(b) The Company and MicroLeague Multimedia, Inc. ("MMI") have begun the
arbitration proceedings related to the demand for arbitration filed by
MMI on or about December 24, 1996 alleging breach of a
licensing/co-development agreement between the parties. The Company
continues to use its best efforts to aggressively defend its position.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
LKB Financing Documents (10% Convertible Debenture).
(b) Reports on Form 8-K.
None.
24
<PAGE> 25
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 thereunto duly signed.
Dated: June 23, 1997
PLAYNET TECHNOLOGIES, INC.
(Formerly known as Aristo International
Corporation)
By: /s/ Shmuel Cohen
-----------------------------
Shmuel Cohen
President
By: /s/ Glenn P. Sblendorio
-----------------------------
Glenn P. Sblendorio
Executive Vice President,
Chief Financial Officer and
Treasurer
25
<PAGE> 1
================================================================================
CONVERTIBLE DEBENTURE
PURCHASE AGREEMENT
Between
PLAYNET TECHNOLOGIES, INC.
and
SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD.
------------------------------
Dated as of May 20, 1997
------------------------------
================================================================================
<PAGE> 2
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, dated as of May 20,
1997 (this "Agreement"), between PlayNet Technologies, Inc., a Delaware
corporation (the "Company"), and Southbrook International Investments, Ltd., a
corporation organized and existing under the laws of The British Virgin Islands
(the "Purchaser").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchaser and the
Purchaser desire to acquire certain of the Company's 10% Convertible Debentures
due May 20, 1999, in the form attached hereto as Exhibit A (the "Convertible
Debentures").
IN CONSIDERATION of the mutual covenants and agreements set
forth herein and for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. Certain Definitions. As used in this Agreement,
unless the context requires a different meaning, the following terms have the
meanings indicated in this Section 1.1:
"Affiliate" means, with respect to any Person, any Person
that, directly or indirectly, controls, is controlled by or is under common
control with such Person. For the purposes of this definition, "control"
(including, with correlative meanings, the terms "controlled by" and "under
common control with") shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities or by contract or
otherwise.
"Agreement" shall have the meaning set forth in the recitals
hereto.
"Business Day" means any day except Saturday, Sunday and any
day which shall be a Federal legal holiday or a day on which banking
institutions in the State of New York are authorized or required by law or other
government actions to close.
"Closing" shall have the meaning set forth in Section 2.1(b).
"Closing Date" shall have the meaning set forth in Section
2.1(b).
"Code" means the Internal Revenue Code of 1986, as amended,
and the rules and regulations thereunder as in effect on the date hereof.
<PAGE> 3
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, par value
$.001 per share.
"Company" shall have the meaning set forth in the recitals
hereto.
"Convertible Debentures" shall have the meaning set forth in
the recitals hereto.
"Conversion Price" shall have the meaning set forth in the
Convertible Debentures.
"Disclosure Materials" means, collectively, the SEC Documents,
the disclosure package delivered to the Purchaser in connection with the
offering by the Company of the Convertible Debentures and the Schedules to this
Agreement furnished by or on behalf of the Company pursuant to Section 3.1.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, right of first refusal, charge, security interest or encumbrance of any
kind in or on such asset or the revenues or income thereon or therefrom.
"Material Adverse Effect" shall have the meaning set forth in
Section 3.1(a).
"Original Issue Date" shall have the meaning set forth in the
Convertible Debenture.
"Per Share Market Value" shall have the meaning set forth in
the Convertible Debentures.
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Purchase Price" shall have the meaning set forth in Section
2.1(a).
"Purchaser" shall have the meaning set forth in the recitals
hereto.
"Registration Rights Agreement" means the registration rights
agreement, dated as of the date hereof, between the Company and the Purchaser,
in the form of Exhibit B, as the same may be amended, supplemented or otherwise
modified in accordance with its terms.
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<PAGE> 4
"Required Approvals" shall have the meaning set forth in
Section 3.1(f).
"SEC Documents" shall have the meaning set forth in Section
3.1(l).
"Securities Act" means the Securities Act of 1933, as amended.
"Subsequent Financing" shall have the meaning set forth in
Section 4.9.
"Subsequent Financing Notice" shall have the meaning set forth
in Section 4.9.
"Subsidiaries" shall have the meaning set forth in Section
3.1(a).
"Trading Day" shall have the meaning set forth in the
Convertible Debentures.
"Transaction Documents" shall have the meaning set forth in
Section 3.1(a).
"Underlying Shares" means the shares of Common Stock issuable
upon conversion of Convertible Debentures or as payment of interest on account
thereof, in each case in accordance with the terms thereof, and upon exercise of
the Warrant in accordance with the terms thereof.
"Underlying Shares Registration Statement" shall have the
meaning set forth in Section 3.1(f).
"Warrant" means the Common Stock purchase Warrant, to be
issued to the Purchaser on the 121st day after the Closing Date in the event
that the Convertible Debentures are not repaid within 120 days after Closing
Date pursuant to Section 6(a) of the Convertible Debentures, in the form of
Exhibit E as the same may be amended, supplemented or otherwise modified in
accordance with its terms.
ARTICLE II
PURCHASE OF CONVERTIBLE DEBENTURES
Section 2.1. Purchase of Convertible Debentures; Closing.
(a) Subject to the terms and conditions set forth in this
Agreement, the Company shall issue and sell to the Purchaser, and the Purchaser
shall purchase from the Company on the Closing Date an aggregate principal
amount of up to $4,000,000 of Convertible Debentures. The "Purchase Price" to be
paid to the Company on account of Convertible Debentures shall be equal to 90%
of the aggregate principal amount of Convertible Debentures to be purchased in
accordance with the terms hereof.
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<PAGE> 5
(b) The closing of the purchase and sale of the Convertible
Debentures (the "Closing") shall take place at the offices of Robinson Silverman
Pearce Aronsohn & Berman LLP, 1290 Avenue of the Americas, New York, New York
10104, immediately following the execution hereof, or at such other time and/or
place as the Purchaser and the Company may agree. The date of the Closing is
referred to herein as the "Closing Date".
(c) At the Closing, (i) the Company shall deliver to the
Purchaser, (A) Convertible Debentures in an aggregate principal amount equal to
the amount purchased by it hereunder, registered in the name of the Purchaser,
and (B) the legal opinion addressed to it and dated the Closing Date, of Philip
Yachmetz, Esq. counsel for the Company, substantially in the form of Exhibit C;
(ii) the Purchaser shall deliver to the Company, the Purchase Price in United
States dollars in immediately available funds by wire transfer to an account
designated in writing by the Company prior to the Closing; and (iii) to the
party entitled thereto, all documents, instruments and writings required to have
been delivered at or prior to Closing by either the Company or the Purchaser
pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1. Representations and Warranties of the Company.
The Company hereby represents and warrants to each Purchaser as follows:
(a) Organization and Qualification. The Company is a
corporation, duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, with the requisite corporate power and authority
to own and use its properties and assets and to carry on its business as
currently conducted. The Company has no subsidiaries other than as set forth in
the SEC Documents or in Schedule 3.1(a) (collectively, the "Subsidiaries").
Other than as specifically set forth in Schedule 3.1(a) the Company owns,
beneficially and of record, all of the issued and outstanding capital stock of
the subsidiaries. Each of the Subsidiaries is a corporation, duly incorporated,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, with the requisite corporate power and authority to own and use
its properties and assets and to carry on its business as currently conducted.
Each of the Company and the Subsidiaries is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in which the
nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, (x)
adversely affect the legality, validity or enforceability of this Agreement or
any of the Convertible Debentures, the Warrant or the Registration Rights
Agreement (collectively with this Agreement, the "Transaction Documents"), (y)
have a material adverse effect on the results of operations, assets, prospects,
or financial condition of the Company and the Subsidiaries, taken as a whole or
(z) adversely impair the
-4-
<PAGE> 6
Company's ability to perform fully on a timely basis its obligations under the
Transaction Documents (a "Material Adverse Effect").
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents and to otherwise carry out its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company, including, without limitation, approval thereof by the
Company's Board of Directors. Each of the Transaction Documents has been duly
executed and delivered by the Company and constitutes the legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of creditors' rights and
remedies or by other equitable principles of general application. Neither the
Company nor any Subsidiary is in violation of any of the provisions of its
respective certificate of incorporation, bylaws or other charter documents.
(c) Capitalization. The authorized, issued and outstanding
capital stock of the Company and each of the Subsidiaries is set forth in
Schedule 3.1(c). No shares of Common Stock are entitled to preemptive or similar
rights. Except as specifically disclosed in Schedule 3.1(c), there are no
outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or, except as a result of
the purchase and sale of the Convertible Debentures hereunder, securities,
rights or obligations convertible into or exchangeable for, or giving any Person
any right to subscribe for or acquire any shares of Common Stock, or contracts,
commitments, understandings, or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock, or
securities or rights convertible or exchangeable into shares of Common Stock,
whether or not, in each case above, at the option of the Company. To the
knowledge of the Company, except as specifically disclosed in the SEC Documents
or Schedule 3.1(c), no Person beneficially owns (as determined pursuant to Rule
13d-3 promulgated under the Exchange Act) or has the right to acquire by
agreement with or by obligation binding upon the Company beneficial ownership of
in excess of 5% of the Common Stock.
(d) Issuance of Convertible Debentures, Warrants and
Underlying Shares. The Convertible Debentures and Warrant have been duly and
validly authorized for issuance, offer and sale pursuant to this Agreement and,
when issued and delivered as provided hereunder against payment therefor, shall
be valid and legally binding obligations of the Company enforceable against the
Company in accordance with their terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement
of creditors' rights and remedies or by other equitable principles of general
application. The Company has and at all times while the Convertible Debentures
and Warrants are outstanding will maintain a reserve of shares of Common Stock
to enable it to perform its conversion and other obligations under this
Agreement, the Convertible Debentures and obligations under the
-5-
<PAGE> 7
Warrant, which reserve shall be no less than 1,726,409 shares of Common Stock;
provided, however, if the sum of the number of shares of Common Stock issuable
(a) upon conversion in full of the aggregate principal balance of all then
outstanding and previously unconverted Convertible Debentures into Common Stock,
(b) as the payment of interest on account of the Convertible Debentures and (c)
upon exercise of the Warrant in each case, pursuant to the terms hereof, the
Convertible Debentures and the Warrants, as the case may be, exceeds 1,726,409
shares, then the Company shall duly reserve an adequate number of shares of
Common Stock for issuance upon the conversion of Convertible Debentures and of
payment of dividends on account of Convertible Debentures and provide to the
Purchaser a valid resolution of the Company's board of directors authorizing
such reservation. When issued in accordance with the terms hereof, and the
Convertible Debentures or the Warrants, as the case may be, the Underlying
Shares will have been duly authorized, validly issued, fully paid and
nonassessable, and free and clear of any Liens.
(e) No Conflicts. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its certificate of incorporation or bylaws (each as
amended through the date hereof) or (ii) subject to obtaining the consents
specified in Section 3.1(f), 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 agreement, indenture, loans or credit agreement or other
instrument or agreement to which the Company is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment, injunction, decree or
other restriction of any court or governmental authority to which the Company is
subject (including Federal and state securities laws and regulations), or by
which any property or asset of the Company is bound or affected, except in the
case of each of clauses (ii) and (iii), such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as could not,
individually or in the aggregate, have or result in a Material Adverse Effect.
The business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental authority.
(f) Consents and Approvals. Except as specifically set forth
in Schedule 3.1(f), neither the Company nor any Subsidiary is required to obtain
any consent, waiver, authorization or order of, or make any filing or
registration with, any court or other Federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, except for
(i) the filing of the registration statement covering, among other things, as
specified and limited by the terms of the Registration Rights Agreement, the
Underlying Shares (the "Underlying Shares Registration Statement") with the
Commission and the making of the applicable blue-sky filings under state
securities laws, each as contemplated by the Registration Rights Agreement, and
(ii) other than, in all other cases, where the failure to obtain such consent,
waiver, authorization or order, or to give or make such notice or filing, could
not, individually or in the aggregate, have or would result in a Material
Adverse Effect (together with the consents, waivers, authorizations, orders,
notices and filings referred to in Schedule 3.1(f), the "Required Approvals").
-6-
<PAGE> 8
(g) Litigation; Proceedings. There is no action, suit, notice
of violation, proceeding or investigation pending or, to the best knowledge of
the Company, threatened against or affecting the Company or any of its
Subsidiaries or any of their respective properties before or by any court,
governmental or administrative agency or regulatory authority (Federal, state,
county, local or foreign) which relates to or challenges the legality, validity
or enforceability of the Transaction Documents, or Underlying Shares or which
could, individually or in the aggregate, have or result in a Material Adverse
Effect.
(h) No Default or Violation. Except as set forth on Schedule
3.1(h), neither the Company nor any Subsidiary (i) is, or has been notified that
it is, in default under or in violation of any indenture, promissory note loan
or credit agreement or any other agreement or instrument to which it is a party
or by which it or any of its properties is bound, (ii) is in violation of any
order of any court, arbitrator or governmental body, or (iii) is in violation of
any statute, rule or regulation of any governmental authority, except as could
not, in any case of (i) or (iii) above, individually or in the aggregate, have
or result in a Material Adverse Effect.
(i) Certain Fees. Except for $200,000 payable by the Company
to LKB Financial LLC ("LKB") pursuant to a certain Contract of Engagement
between the Company and LKB dated as of April 29, 1997 and certain warrants to
be issued to LKB, no fees or commissions are or will be payable by the Company
to any broker, finder, investment banker or bank with respect to the
consummation of the transactions contemplated hereby. The Purchaser shall have
no obligation with respect to such fees or with respect to any claims made by
other Persons for fees of a type contemplated in this Section due in connection
with this transaction.
(j) Disclosure Materials. The Disclosure Materials (other than
the SEC Documents) do not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(k) Private Offering. Neither the Company nor any Person
acting on its behalf has taken or will take any action (including, without
limitation, any offering of securities of the Company under circumstances which
would require the integration of such offering with the offering of the
Convertible Debentures, the Warrant or the Underlying Shares under the
Securities Act) which might subject the offering, issuance or sale of the
Convertible Debentures, Warrant or the Underlying Shares to the registration
requirements of Section 5 of the Securities Act.
(l) SEC Documents. The Company has filed all reports required
to be filed by it under the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the three years preceding the date hereof (or such shorter
period as the Company was required by law to file such material) (the foregoing
materials being collectively referred to herein as the "SEC Documents") on a
timely basis, or has received a valid extension of such time of filing (in which
case it has made all such filings in the time required by such extension). As of
their respective dates, the SEC Documents complied in all material
-7-
<PAGE> 9
respects with the requirements of the Securities Act and the Exchange Act and
the published rules and regulations of the Commission promulgated thereunder,
and none of the SEC Documents, when filed, 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. The financial
statements of the Company included in the SEC Documents comply in all material
respects with applicable accounting requirements and the rules and regulations
of the Commission with respect thereto as in effect on the date of the filing.
Such financial statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the periods
involved, except as may be otherwise specifically indicated in such financial
statements or the notes thereto, and fairly present in all material respects the
financial position of the Company and its consolidated subsidiaries as of and
for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal
year-end audit adjustments. The Company last filed audited financial statements
with the Commission on February 13, 1997 and the Company has not received any
comments from the Commission in respect of such audited financial statements.
Since the date of the financial statements included in the Company's Quarterly
Report on Form 10-Q for the Quarterly Period ended January 31, 1997, there has
been no event, occurrence or development that has had, could have or would
result in a Material Adverse Effect which is not specifically disclosed in the
Disclosure Materials.
(m) Form S-3 Eligibility. The Company is eligible to register
securities for resale with the Commission under Form S-3 promulgated under the
Securities Act.
(n) Investment Company. The Company is not and is not an
Affiliate of an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(o) Exclusivity. The Company shall not issue and sell
Convertible Debentures to any Person other than the Purchaser, except with the
specific prior written consent of the Purchaser.
(p) Listing and Maintenance Requirements Compliance. Other
than as specifically listed in Schedule 3.1(p), since September 25, 1995 the
Company has not received written notice from the Nasdaq SmallCap Market or any
other stock exchange or market on which the Common Stock is or has been listed
(or on which it is or has been quoted) to the effect that the Company is not in
compliance with the listing or maintenance requirements of such exchange or
market. The Company has provided to the Purchaser true and complete copies of
any notices referenced in Schedule 3.1(p).
(q) Use of Proceeds. Approximately $126,000 from the placement
of the Convertible Debentures and Warrants are to be used by the Company to pay
its obligations under its leases for 152 West 57th Street, New York, New York
and for One Maritime Plaza, San Francisco, California. The balance of the net
proceeds from the placement of the Convertible Debentures and Warrants shall be
used by the Company for working capital and
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<PAGE> 10
general corporate purposes; but may not be used by the Company to pay down or
otherwise retire indebtedness.
Section 3.2. Representations and Warranties of the Purchaser.
The Purchaser hereby represents and warrants to the Company as follows:
(a) Organization; Authority. The Purchaser is a corporation
duly and validly existing and in good standing under the laws of the
jurisdiction of its incorporation. The Purchaser has the requisite corporate
power and authority to enter into and to consummate the transactions
contemplated hereby and by the Registration Rights Agreement and otherwise to
carry out its obligations hereunder and thereunder. The purchase of the
Convertible Debentures and Warrants by the Purchaser hereunder has been duly
authorized by all necessary action on the part of the Purchaser. Each of this
Agreement and the Registration Rights Agreement has been duly executed and
delivered by or on behalf of the Purchaser and constitutes the valid and legally
binding obligation thereof, enforceable against the Purchaser in accordance with
its terms.
(b) Investment Intent. The Purchaser is acquiring the
Convertible Debentures, Warrants and the Underlying Shares for its own account
(and/or on behalf of managed accounts who are purchasing solely for their own
accounts for investment) for investment purposes only and not with a view to or
for distributing or reselling such Convertible Debentures, Warrants or
Underlying Shares or any part thereof or interest therein, without prejudice,
however, to the Purchaser's right, subject to the provisions of the Transaction
Documents, at all times to sell or otherwise dispose of all or any part of such
Convertible Debentures, Warrants or Underlying Shares under an effective
registration statement under the Securities Act and in compliance with
applicable State securities laws or under an exemption or exclusion from such
registration.
(c) Purchaser Status. At the time the Purchaser (and any
account for which it is purchasing) was offered the Convertible Debentures and
Warrants, it (and any managed account for which it is purchasing) was, and at
the date hereof, it (and any managed account for which it is purchasing) is, and
at the Closing Date, it (and any managed account for which it is purchasing)
will be, an "accredited investor" as defined in Rule 501(a) under the Securities
Act.
(d) Experience of Purchaser. The Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Convertible Debentures
and Warrants, and has so evaluated the merits and risks of such investment.
(e) Ability of Purchaser to Bear Risk of Investment. The
Purchaser is able to bear the economic risk of an investment in the Convertible
Debentures and Warrants and, at the present time, is able to afford a complete
loss of such investment.
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<PAGE> 11
(f) Prohibited Transactions. The Convertible Debentures and
Warrants are not being acquired, directly or indirectly, with the assets of any
"employee benefit plan", within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended.
(g) Access to Information. The Purchaser has reviewed the SEC
Documents and has been afforded the opportunity to ask questions of and receive
answers from the Company and its executive officers relating to its investment
in the convertible Debentures and Warrants.
(h) Reliance. The Purchaser understands and acknowledges that
(i) the Convertible Debentures and Warrants are being offered and sold, and the
Underlying Shares are being offered, to it without registration under the
Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption
depends in part on, and that the Company will rely upon the accuracy and
truthfulness of, the foregoing representations and the Purchaser hereby consents
to such reliance.
The Company acknowledges and agrees that the Purchaser makes
no representation or warranty with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
Section 4.1. Transfer Restrictions. (a) If the Purchaser
should decide to dispose of any portion of the principal amount of the
Convertible Debentures or any portion of the Warrant, at the case may be (and
upon conversion or exercise thereof as the case may be, any of the Underlying
Shares), held by it, the Purchaser understands and agrees that it may do so only
pursuant to an effective registration statement under the Securities Act, to the
Company or pursuant to an available exemption from, or in a transaction that is
not subject to, the registration requirements thereof. In connection with any
transfer of any portion of the principal amount of the Convertible Debentures,
any portion of the Warrant or any Underlying Shares other than pursuant to an
effective registration statement or to the Company, the Company may require the
transferor of such Convertible Debentures to provide to the Company an opinion
of counsel experienced in the area of United States securities laws selected by
the transferor, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not require
registration of such Convertible Debentures or Underlying Shares under the
Securities Act.
(b) The Purchaser agrees to the imprinting, so long as is
required by this Section 4.1(b), of the following legend on the Convertible
Debentures, and Warrant or Underlying Shares:
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<PAGE> 12
[NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] [THE SECURITIES REPRESENTED
HEREBY] HAVE [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
[FOR CONVERTIBLE DEBENTURES ONLY] THIS CONVERTIBLE DEBENTURE
IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND CONVERSION SET FORTH
IN A CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, DATED AS OF MAY 20,
1997, BETWEEN PLAYNET TECHNOLOGIES, INC. (THE "COMPANY") AND THE
ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF THE COMPANY.
The Underlying Shares issuable upon conversion of Convertible
Debentures or exercise of the Warrant shall not contain the legend set forth
above if the conversion of Convertible Debentures or exercise of the Warrant, as
the case may be, occurs at any time while the Underlying Shares Registration
Statement is effective under the Securities Act or in the event there is not an
effective Underlying Shares Registration Statement at such time, at such time
that in the opinion of counsel to the Company experienced in the area of United
States securities laws determines that such legend is not required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission). The
Convertible Debentures, Warrant and the Underlying Shares shall also bear any
other legends required by applicable Federal or state securities laws, which
legends shall be removed when not required in accordance with this Section
4.1(b). The Company agrees that it will provide the Purchaser, upon request,
with a certificate or certificates representing Underlying Shares, free from
such legend at such time as such legend is no longer required hereunder or
pursuant to applicable law.
Section 4.2. Stop Transfer Instruction. The Company may not
make any notation on its records or give instructions to any transfer agent of
the Company which enlarge the restrictions of transfer set forth in Section 4.1.
Section 4.3. Furnishing of Information. For so long as the
Purchaser owns Convertible Debentures, Warrants or Underlying Shares, the
Company covenants to timely file (or obtain valid extensions in respect thereof)
all reports required to be filed by the Company after the date hereof pursuant
to Section 13(a) or 15(d) of the Exchange Act and to promptly furnish the
Purchaser with true and complete copies of all such filings. If the Company is
not at the time required to file reports pursuant to such sections, it will
prepare
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<PAGE> 13
and furnish to the Purchaser annual and quarterly financial statements, together
with a discussion and analysis of such financial statements in form and
substance substantially similar to those that would otherwise be required to be
included in reports required by Section 13(a) or 15(d) of the Exchange Act in
the time period that such filings would have been required to have been made
under the Exchange Act.
Section 4.4. Use of Disclosure Materials. The Company consents
to the use of the Disclosure Materials, and any amendments and supplements
thereto, by the Purchaser in connection with resales of Convertible Debentures,
the Warrant or Underlying Shares other than pursuant to an effective
registration statement but the Company makes no representation or warranty that
such Disclosure Schedules are true and accurate after the Closing Date.
Section 4.5. Increase in Authorized Shares. At such time as
the Company would be, if a notice of conversion or exercise (as the case may be)
were to be delivered on such date, precluded from (a) converting the full
outstanding principal amount of Convertible Debentures (and paying any accrued
but unpaid interest in respect thereof in shares of Common Stock) that remain
unconverted at such date or (b) honoring the exercise in full of the Warrant due
to the unavailability of authorized but unissued or re-acquired Common Stock,
the Board of Directors of the Company shall promptly (and in any case within 14
Business Days from such date) prepare and mail to the shareholders of the
Company proxy materials requesting authorization to amend the Company's restated
certificate of incorporation to increase the number of shares of Common Stock
which the Company is authorized to issue to at least 54,000,000 shares. In
connection therewith, the Board of Directors shall (a) adopt proper resolutions
authorizing such increase, (b) recommend to and otherwise use its best efforts
to promptly and duly obtain stockholder approval to carry out such resolutions
(and hold a special meeting of the shareholders no later than the 30th day after
delivery of the proxy materials relating to such meeting) and (c) within 5
Business Days of obtaining such shareholder authorization, file an appropriate
amendment to the Company's certificate of incorporation to evidence such
increase.
Section 4.6. Blue Sky Laws. In accordance with the
Registration Rights Agreement, the Company shall qualify the Underlying Shares
under the securities or Blue Sky laws of such jurisdictions as the Purchaser may
request and continue such qualification at all times until the Purchaser
notifies the Company in writing that it no longer owns Convertible Debentures,
Warrants or Underlying Shares; provided, however, that neither the Company nor
its Subsidiaries shall be required in connection therewith to qualify as a
foreign corporation where they are not now so qualified.
Section 4.7. Integration. The Company shall not and shall use
its best efforts to ensure that no Affiliate shall sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with the
offer or sale of the Convertible Debentures, the Warrant or the Underlying
Shares in a manner that would require the registration under the Securities Act
of the sale of the Convertible Debentures, the Warrant or Underlying Shares to
the Purchaser.
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<PAGE> 14
Section 4.8. Solicitation Materials. The Company shall not (i)
distribute any offering materials in connection with the offering and sale of
the Convertible Debentures or Underlying Shares other than the Disclosure
Materials and any amendments and supplements thereto prepared in compliance
herewith or (ii) solicit any offer to buy or sell Convertible Debentures, the
Warrant or Underlying Shares by means of any form of general solicitation or
advertising.
Section 4.9. Right of First Refusal; Subsequent Registrations;
Certain Corporate Actions. (a) The Company shall not, directly or indirectly,
without the prior written consent of the Purchaser, offer, sell, grant any
option to purchase, or otherwise dispose (or announce any offer, sale, grant or
any option to purchase or other disposition) of any of its or its Affiliates
equity or equity-equivalent securities (which shall include debt instruments
convertible or exchangeable into shares of Common Stock) at a price which is on
the face thereof or implied therein, less than either the market price or fair
market value for such securities (a "Subsequent Financing") for a period of 180
days after Closing Date, except (i) the granting of options to employees,
officers and directors, and the issuance of shares upon exercise of options
granted, under any stock option plan heretofore or hereinafter duly adopted by
the Company, (ii) shares issued upon exercise of any currently outstanding
warrants and upon conversion of any currently outstanding convertible preferred
stock or debt instruments in each case as and to the extent specifically
disclosed in Schedule 3.1(c), and (iii) shares of Common Stock issued upon
conversion of Convertible Debentures in accordance herewith and the terms of the
Convertible Debentures, (iv) shares of Common Stock issued as part of the
purchase price in any merger or acquisition (if stock or assets) conducted by
the Company, (v) shares of Common Stock issued under a joint venture or
partnership agreement to which the Company is a party and (ii) shares of Common
Stock issued as part of a firm commitment underwriting of the Common Stock,
unless (A) the Company delivers to the Purchaser a written notice (the
"Subsequent Financing Notice") of its intention to effect such Subsequent
Financing, which Subsequent Financing Notice shall describe in reasonable detail
the proposed terms of such Subsequent Financing, the amount of proceeds intended
to be raised thereunder, the Person with whom such Subsequent Financing shall be
affected, and a term sheet or similar document relating thereto shall be
attached to such Subsequent Financing Notice and (B) the Purchaser shall not
have notified the Company by 5:00 p.m. (Eastern Time) on the tenth Business Day
after its receipt of the Subsequent Financing Notice of its willingness to enter
into good faith negotiations to provide (or to cause its sole designee to
provide) financing to the Company on substantially the terms set forth in the
Subsequent Financing Notice. If the Purchaser does not notify the Company of its
intention to enter into such negotiations within such time period, the Company
may effect the Subsequent Financing substantially upon the terms and to the
Persons (or Affiliates of such Persons) set forth in the Subsequent Financing
Notice; provided, that the Company shall provide the Purchaser with a second
Subsequent Financing Notice, and the Purchaser shall again have the right of
first refusal set forth above in this paragraph (a), if the Subsequent Financing
subject to the initial Subsequent Financing Notice shall not have been
consummated for any reason on the terms set forth in such Subsequent Financing
Notice within 60 Business Days after the date of the initial Subsequent
Financing Notice with the Person (or an Affiliate of such Person) identified in
the Subsequent Financing Notice. Notwithstanding anything to the contrary
contained herein, this Section 4.9(a) shall not apply
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<PAGE> 15
if the Convertible Debentures are repaid pursuant to Section 6(a) of the
Convertible Debenture.
(b) Other than Underlying Shares and other "Registrable
Securities" (as such term is defined in the Registration Rights Agreement) to be
registered in accordance with the Registration Rights Agreement, the Company
shall not, without the prior written consent of the Purchaser, (i) issue or sell
any of its or any of its Affiliates' equity or equity-equivalent securities
(which shall include debt instruments convertible into shares of Common Stock)
pursuant to Regulation S promulgated under the Securities Act, or (ii) register
for resale any securities of the Company for a period of not less than 90
Trading Days after the date that the Underlying Shares Registration Statement is
declared effective by the Commission. Any days that the Purchaser is unable to
sell Underlying Shares under the Underlying Shares Registration Statement shall
be added to such 90 Trading Day period for the purposes of (i) and (ii) above.
Notwithstanding anything to the contrary contained herein, this Section 4.9(b)
shall not apply if the Convertible Debentures are repaid pursuant to Section
6(a) of the Convertible Debenture.
(c) As long as the Warrant is or the Convertible Debentures
are outstanding, the Company shall not and shall cause the Subsidiaries not to,
without the consent of the Purchaser, (i) amend its certificate of
incorporation, bylaws or other charter documents so as to adversely affect any
rights of the Purchaser; (ii) repay, repurchase or offer to repay, repurchase or
otherwise acquire shares of its Common Stock or any outstanding Company
indebtedness other than the Underlying Shares; or (iii) enter into any agreement
or orally commit with respect to any of the foregoing.
Section 4.10. Purchaser Ownership of Common Stock. The
Purchaser may not use its ability to convert Convertible Debentures hereunder or
under the terms of the Convertible Debentures to the extent that such conversion
would result in the Purchaser beneficially owning (for purposes of Rule 13d-3
under the Exchange Act) more than 4.999% of the outstanding shares of the Common
Stock; provided, however, that if ten days shall have elapsed since the
Purchaser has declared an event of default under any Transaction Document and
such event shall not have been cured to the Purchaser's satisfaction prior to
the expiration of such ten-day period, the provisions of this Section 4.10 shall
be null and void ab initio.
Section 4.11. Listing of Underlying Shares. The Company shall
(a) not later than the 121st day following the Closing Date, prepare and file
with the Nasdaq SmallCap Market (and each other national securities exchange or
market on which the Common Stock is then listed) an additional shares listing
application covering at least 1,726,409 Underlying Shares, (b) take all steps
necessary to cause such shares to be approved for listing on such exchanges and
markets as soon as possible thereafter, and (c) provide to the Purchaser
evidence of such filing and listing, and the Company shall maintain the listing
of its Common Stock on such exchange.
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<PAGE> 16
Section 4.12. Purchaser's Rights if Trading in Common Stock is
Suspended or Delisted. If at any time while the Purchaser (or any assignee
thereof) owns any Convertible Debentures, the Warrant or any Underlying Shares
trading in the shares of the Common Stock is suspended on or delisted from the
Nasdaq SmallCap Market or any other principal market or exchange for such shares
(other than as a result of the suspension of trading in securities on such
market or exchange generally or temporary suspensions pending the release of
material information) for more than three Trading Days, at the Purchaser's
option exercisable by five Business Days prior written notice to the Company,
the Company shall repay the entire principal amount of then outstanding
Convertible Debentures and redeem all then outstanding Underlying Shares then
held by the Purchaser, at an aggregate purchase price equal to the sum of (I)
the aggregate outstanding principal amount of Convertible Debentures then held
by the Purchaser multiplied by (1) the average Per Share Market Value for the
five (5) Trading Days immediately preceding (a) the day of such notice or (b)
the date of payment in full of the repurchase price calculated under this
Section 4.12, whichever is greater, divided by (2) the Conversion Price on the
date of the repurchase notice, (II) the aggregate of all accrued but unpaid
interest and other non-principal amounts then payable in respect of all
Convertible Debentures to be repaid, (III) the number of Underlying Shares then
held by such Purchaser multiplied by the average Per Share Market Value for the
five (5) Trading Days immediately preceding (A) the date of the notice or (B)
the date of payment in full by the Company of the repurchase price calculated
under this Section 4.12, whichever is greater, and (IV) interest on the amounts
set forth in I - III above accruing from the 5th day after such notice until the
repurchase price under this Section 4.12 is paid in full at the rate of 15% per
annum.
Section 4.13. No Violation of Applicable Law. Notwithstanding
any provision of this Agreement to the contrary, if any repurchase or redemption
of Convertible Debentures or Underlying Shares otherwise required under the
Transaction Documents would be prohibited by the relevant provisions of the
Delaware General Corporation Law, such redemption shall be effected as soon as
it is permitted under such law; provided, however, that, interest payable by the
Company with respect to any such repurchase or redemption shall continue to
accrue in accordance with Section 4.12 during any such period.
Section 4.14. Repayment Restrictions. Notwithstanding any
provision of this Agreement to the contrary, if any repurchase of Convertible
Debentures or redemption of Underlying Shares otherwise required under this
Agreement would be prohibited in the absence of consent from any lender of the
Company or of any Subsidiary, or by the holders of any class of securities or
instruments of debt issued by the Company, the Company shall use its best
efforts to obtain such consent as promptly as practicable after the redemption
is required. Interest payable by the Company with respect to any such repurchase
or redemption shall continue to accrue in accordance with Section 4.12 until
such consent is obtained. Nothing contained in this Section shall be construed
as a waiver by the Purchaser of any rights it may have by virtue of any breach
of any representation or warranty of the Company herein as to the absence of any
requirement to obtain any such consent.
Section 4.15. Notice of Breaches. Each of the Company and the
Purchaser shall give prompt written notice to the other of any breach of any
representation, warranty or
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<PAGE> 17
other agreement contained in this Agreement or in the Registration Rights
Agreement, as well as any events or occurrences arising after the date hereof
and prior to the Closing Date, which could reasonably be likely to cause any
representation or warranty or other agreement of such party, as the case may be,
contained herein or therein to be incorrect or breached as of such Closing Date.
However, no disclosure by any party pursuant to this Section shall be deemed to
cure any breach of any representation, warranty or other agreement contained
herein or in the Registration Rights Agreement. Neither the Company, any
Subsidiary nor the Purchaser will take, or agree to commit to take, any action
that is intended to make any representation or warranty of the Company or the
Purchaser, as the case may be, contained herein or in the Registration Rights
Agreement inaccurate in any respect at the Closing Date.
Notwithstanding the generality of the foregoing, the Company
shall promptly notify the Purchaser of any notice or claim (written or oral)
that it receives from any lender or by any holder of any class of securities or
instrument of debt issued by of the Company to the effect that the consummation
of the transactions contemplated by any of the Transaction Documents violates or
would violate any written agreement or understanding between such lender or such
holder and the Company, and the Company shall promptly furnish by facsimile to
the holders of the Convertible Debentures a copy of any written statement in
support of or relating to such claim or notice.
Section 4.16. Conversion Procedures. Exhibit D attached hereto
sets forth the procedures with respect to the conversion of the Convertible
Debentures, including the forms of conversion notice to be provided upon
conversion, instructions as to the procedures for conversion, the form of legal
opinion, if necessary, that shall be rendered to the Company's transfer agent
and such other information and instructions as may be reasonably necessary to
enable the Purchaser to exercise their right of conversion smoothly and
expeditiously.
Section 4.17. Conversion Obligations of the Company. The
Company covenants to honor any and all conversion notices delivered in respect
of Convertible Debenture and any and all exercise notices delivered in respect
of the Warrant and in each case, to deliver Underlying Shares in accordance with
the terms and conditions and time periods set forth in the Convertible
Debentures and Warrant in respect thereof.
Section 4.18. The Warrants. In connection with the Closing,
the Company shall issue to the Purchase on the 121st day after the Closing Date,
in the event that the Convertible Debentures are not repaid pursuant to Section
6.1(a) of the Convertible Debentures, a common stock purchase Warrant, in the
form of Exhibit E, pursuant to which the Purchaser shall have the right at any
time thereafter through the fifth anniversary of the date of issuance thereof,
to acquire up to 800,00 shares of Common Stock at an exercise price equal to
$5.25.
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<PAGE> 18
ARTICLE V
MISCELLANEOUS
Section 5.1. Fees and Expenses. Each party shall pay the fees
and expenses of its advisers, counsel, accountants and other experts, if any,
and all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement, except as
set forth in the Registration Rights Agreement. The Company shall pay all stamp
and other taxes and duties levied in connection with the issuance of the
Convertible Debentures (and upon conversion thereof, the Underlying Shares) and
Warrants pursuant hereto. The Purchaser shall be responsible for its own tax
liability that may arise as a result of the investment hereunder or the
transactions contemplated by this Agreement.
Section 5.2. Entire Agreement. This Agreement, together with
the Exhibits and Schedules hereto, the Convertible Debentures, the Warrant, the
Registration Rights Agreement and the Side Agreement between the Company and the
Purchaser dated the date hereof (together with the respective Exhibits and
Schedules thereto) contain the entire understanding of the parties with respect
to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters.
Section 5.3. Notices. Any and all notices or other
communications or deliveries required or permitted to be provided hereunder
shall be in writing and shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
4:30 p.m. (New York City time) on a Business Day, (ii) the Business Day after
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in the Purchase Agreement
later than 4:30 p.m. (New York City time) on any date and earlier than 11:59
p.m. (New York City time) on such date, (iii) the Business Day following the
date of mailing, if sent by nationally recognized overnight courier service, or
(iv) upon actual receipt by the party to whom such notice is required to be
given.
If to the Company: PlayNet Technologies, Inc.
152 West 57th Street
New York, NY 10019
Facsimile No.: (212) 586-1652
Attn: Schmuel Cohen
With copies to: Philip K. Yachmetz
Attorney At Law
7 North Koewing Place
West Orange, NJ 07052-9333
Facsimile No.: (201) 243-9333
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<PAGE> 19
If to the Purchaser Southbrook International Investments, Ltd.
c/o Trippoak Advisors, Inc.
630 Fifth Avenue, Suite 2000
New York, NY 10111
Facsimile No.: (212) 332-3256
Attn: Robert Miller
With copies to: Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
Section 5.4. Amendments; Waivers. No provision of this
Agreement may be waived or amended except in a written instrument signed, in the
case of an amendment, by the Company and the Purchaser, or, in the case of a
waiver, by the party against whom enforcement of any such waiver is sought. No
waiver of any default with respect to any provision, condition or requirement of
this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right accruing to it thereafter.
Section 5.5. Headings. The headings herein are for convenience
only, do not constitute a part of this Agreement and shall not be deemed to
limit or affect any of the provisions hereof.
Section 5.6. Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties and their successors and
permitted assigns. Neither the Company nor the Purchaser may assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the other, except that the Purchaser may assign its rights hereunder
and under the Transaction Documents to an Affiliate thereof or to a managed
account of such Affiliate without the consent of the Company, provided, that
such assignee demonstrates to the reasonable satisfaction of the Company its
satisfaction of the representations and warranties set forth in Section 3.2
herein. This provision shall not limit the Purchaser's right to transfer
securities or transfer or assign rights hereunder or under the Registration
Rights Agreement.
Section 5.7. No Third-Party Beneficiaries. This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns and, other than with respect to permitted assignees, is
not for the benefit of, nor may any provision hereof be enforced by, any other
person.
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<PAGE> 20
Section 5.8. Governing Law. This Agreement shall be governed
by and construed and enforced in accordance with the internal laws of the State
of New York without regard to the principles of conflicts of law thereof.
Section 5.9. Survival. The representations and warranties of
the Company and the Purchaser contained in Article III and the agreements and
covenants of the parties contained in Article IV and this Article V shall
survive the Closing (or any earlier termination of this Agreement) and any
conversion of Convertible Debentures pr exercise of the Warrant hereunder.
Section 5.10. Counterpart Signatures. This Agreement may be
executed in two or more counterparts, all of which when taken together 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, it
being understood that both parties need not sign the same counterpart. In the
event that any signature is delivered by facsimile transmission, such signature
shall create a valid and binding obligation of the party executing (or on whose
behalf such signature is executed) the same with the same force and effect as if
such facsimile signature page were an original thereof.
Section 5.11. Publicity. The Company and the Purchaser shall
consult with each other in issuing any press releases or otherwise making public
statements with respect to the transactions contemplated hereby and neither
party shall issue any such press release or otherwise make any such public
statement without the prior written consent of the other, which consent shall
not be unreasonably withheld or delayed, except that no prior consent shall be
required if such disclosure is required by law, in which such case the
disclosing party shall provide the other party with prior notice of such public
statement.
Section 5.12. Severability. In case any one or more of the
provisions of this Agreement shall be invalid or unenforceable in any respect,
the validity and enforceability of the remaining terms and provisions of this
Agreement shall not in any way be affecting or impaired thereby and the parties
will attempt to agree upon a valid and enforceable provision which shall be a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.
Section 5.13. Remedies. In addition to being entitled to
exercise all rights provided herein or granted by law, including recovery of
damages, the Purchaser will be entitled to specific performance of the
obligations of the Company under the Transaction Documents and the Company will
be entitled to specific performance of the obligations of the Purchaser
hereunder with respect to the subsequent transfer of Convertible Debentures and
the Underlying Shares. Each of the Company and the Purchaser agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of any breach of its obligations described in the foregoing sentence and
hereby agrees to waive in any action for specific performance of any such
obligation the defense that a remedy at law would be adequate.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
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<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first indicated above.
Company:
PLAYNET TECHNOLOGIES, INC.
By: ____________________________________
Name: Glenn P. Sblendorio
Title: Executive Vice President
Purchaser:
SOUTHBROOK INTERNATIONAL
INVESTMENTS, LTD
By: ____________________________________
Name: Kenneth L. Henderson
Title: Assistant Secretary
<PAGE> 22
Schedule 3.1(a)
[To be provided by Company prior to the Closing]
<PAGE> 23
Schedule 3.1(c)
[To be provided by Company prior to the Closing]
<PAGE> 24
Schedule 3.1(f)
[To be provided by Company prior to the Closing]
<PAGE> 25
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND
CONVERSION SET FORTH IN A CONVERTIBLE DEBENTURE STOCK PURCHASE AGREEMENT, DATED
AS OF MAY 20, 1997, BETWEEN PLAYNET TECHNOLOGIES, INC. (THE "COMPANY") AND THE
ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICE OF THE COMPANY.
No. 38 U.S. $100,000.00
PLAYNET TECHNOLOGIES, INC.
10% CONVERTIBLE DEBENTURE DUE MAY 21, 1999
THIS DEBENTURE is one of a duly authorized issue of debentures of
Playnet Technologies, Inc., a Delaware corporation, having a principal place of
business at 152 West 57th Street, 29th Floor, New York, New York 10019 (the
"Company"), designated as its 10% Convertible Debentures, due May 21, 1999 (the
"Debentures"), in an aggregate principal amount of up to $4,000,000.
FOR VALUE RECEIVED, the Company promises to pay to Southbrook
International Investments, Ltd., or registered assigns (the "Holder"), the
principal sum of One Hundred Thousand Dollars (U.S. $100,000.00), on or prior to
May 21, 1999 or such earlier date as the Debentures are required to be repaid as
provided hereunder (the "Maturity Date") and to pay interest to the Holder on
the principal sum at the rate of 10% per annum, payable quarterly on each March
31, June 30, September 31 and December 31, commencing September 31, 1997, unless
earlier paid upon conversion as provided hereunder or on the Maturity Date.
Interest shall accrue daily commencing on the Original Issue Date (as defined in
Section 7) until payment in full of the principal sum, together with all accrued
and unpaid interest and other amounts which may become due hereunder, has been
made. Interest shall be calculated on the basis of a 360-day year and for the
actual number of days elapsed. Interest hereunder will be paid to the person in
whose name this Debenture (or one or more predecessor Debentures) is registered
on the records of the Company regarding registration and transfers of the
Debentures (the
<PAGE> 26
"Debenture Register") on the interest payment date, Conversion Date (as defined
below) or the Maturity Date, as the case may be; provided, however, that the
Company's obligation to a transferee of this Debenture arises only if such
transfer, sale or other disposition is made in accordance with the terms and
conditions hereof and of the Convertible Debenture Purchase Agreement, dated as
of May 20, 1997, as amended from time to time (the "Purchase Agreement"),
executed by the original Holder. All overdue, accrued and unpaid interest and
other amounts due hereunder shall bear interest at the rate of 15% per annum
from the day of the interest payment date, conversion hereunder or the Maturity
Date or earlier date on which this Debenture is accelerated through and
including the date of payment. The principal of, and interest on, this Debenture
are payable in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts, at the
address of the Holder last appearing on the Debenture Register, except that
interest due hereunder may, at the Company's option, be paid in shares of Common
Stock (as defined in Section 7) calculated based upon the average Per Share
Market Value for the five (5) Trading Days immediately preceding the interest
payment date, the Conversion Date or Maturity Date, as the case may be. All
amounts due hereunder other than interest shall be paid in cash. Notwithstanding
anything to the contrary contained herein, the Company may not issue shares of
Common Stock in payment of interest on the principal amount if: (i) the number
of shares of Common Stock at the time authorized, unissued and unreserved for
all purposes, or held as treasury stock, is insufficient to pay interest
hereunder in shares of Common Stock; (ii) the shares of Common Stock to be
issued in respect of interest hereunder are not registered for resale pursuant
to an effective registration statement that names the recipient of such interest
shares as a selling stockholder thereunder or may not be sold without volume
restrictions pursuant to Rule 144 promulgated under the Securities Act of 1933,
as amended (the "Securities Act") as determined by counsel to the Company
pursuant to a written opinion letter, addressed to the Holder, in form and
substance acceptable to the holder; (iii) the shares of Common Stock to be
issued in respect of such interest are not listed on the Nasdaq SmallCap Market
(or the American Stock Exchange, Nasdaq National Market or The New York Stock
Exchange), and any other exchange on which the Common Stock is then listed for
trading; or (iv) the issuance of such shares would result in the recipient
thereof beneficially owning more than 4.999% of the issued and outstanding
shares of Common Stock. A transfer of the right to receive principal and
interest under this Debenture shall be transferable only through an appropriate
entry in the Debenture Register as provided herein.
This Debenture is subject to the following additional provisions:
Section 1. The Debentures are issuable in denominations of One
Hundred Thousand Dollars ($100,000) and integral multiples of One Hundred
Thousand Dollars ($100,000) in excess thereof. The Debentures are exchangeable
for an equal aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holder surrendering the same but shall not be
issuable in denominations of less than integral multiplies of Fifty Thousand
Dollars ($50,000). No service charge will be made for such registration of
transfer or exchange.
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<PAGE> 27
Section 2. In the event any interest or principal due
hereunder is subject to any withholding tax under the income tax or other
applicable laws of the United States, the Company will pay to the Holder, in
addition to the payments otherwise due hereunder, such additional amount as is
necessary to provide that the net amount actually received by the Holder (free
and clear of any such withholding tax, whether assessed against the Company or
the Holder) will equal the full amount the Holder would have received had such
withholding tax not been assessed.
Section 3. This Debenture has been issued subject to certain
investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the
Securities Act and to an Affiliate of the Holder (as defined in the Purchase
Agreement) or to a managed account of such Holder or Affiliate of the Holder.
Prior to due presentment to the Company for transfer of this Debenture, the
Company and any agent of the Company may treat the person in whose name this
Debenture is duly registered on the Debenture Register as the owner hereof for
the purpose of receiving payment as herein provided and for all other purposes,
whether or not this Debenture is overdue, and neither the Company nor any such
agent shall be affected by notice to the contrary.
Section 4. Events of Default.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
(a) any default in the payment of the principal of or interest
on this Debenture two days after the same shall become due and payable
on the Conversion Date or the Maturity Date or by acceleration or
otherwise;
(b) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of, this Debenture, the Purchase Agreement or the Registration
Rights Agreement, dated as of May 20, 1997, between the Company and the
original Holder (the "Registration Rights Agreement"), and such failure
or breach shall not have been remedied within 30 days after the date on
which notice of such failure or breach shall have been given;
(c) the Company or any of its subsidiaries shall commence a
voluntary case under the United States Bankruptcy Code or insolvency
laws as now or hereafter in effect or any successor thereto (the
"Bankruptcy Code"); or an involuntary case is commenced against the
Company under the Bankruptcy Code and the petition is not controverted
within 30 days, or is not dismissed within 60 days, after commencement
of such involuntary case; or a "custodian" (as defined in the
Bankruptcy Code) is appointed for, or takes charge of, all or any
substantial part of the property of the Company or the Company
commences any other proceeding under any reorganization, arrangement,
-3-
<PAGE> 28
adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter
in effect relating to the Company or there is commenced against the
Company any such proceeding which remains undismissed for a period of
60 days; or the Company is adjudicated insolvent or bankrupt; or any
order of relief or other order approving any such case or proceeding is
entered; or the Company suffers any appointment of any custodian or the
like for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the Company makes
a general assignment for the benefit of creditors; or the Company shall
fail to pay, or shall state that it is unable to pay, or shall be
unable to pay, its debts generally as they become due; or the Company
shall call a meeting of its creditors with a view to arranging a
composition or adjustment of its debts; or the Company shall by any act
or failure to act indicate its consent to, approval of or acquiescence
in any of the foregoing; or any corporate or other action is taken by
the Company for the purpose of effecting any of the foregoing;
(d) the Company shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement
or other instrument under which there may be issued, or by which there
may be secured or evidenced any indebtedness of the Company in an
amount exceeding one hundred thousand dollars ($100,000), whether such
indebtedness now exists or shall hereafter be created and such default
shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and
payable, other than those disclosed in Schedule 3.1(h) to the Purchase
Agreement,;
(e) the Common Stock shall be delisted from the Nasdaq
SmallCap Market or other national securities exchange or market on
which such Common Stock is listed for trading or suspended from trading
thereon without being relisted or having such suspension lifted, as the
case may be, within five days; or
(f) the Company shall be a party to any merger or
consolidation pursuant to which the Company shall not be the surviving
entity or shall dispose of all or substantially all of its assets in
one or more transactions, or shall redeem more than a de minimis amount
of Junior Securities.
(g) use of the registration statement contemplated by the
Registration Rights Agreement is blacked out for more than 30 days in
any 12-month period.
If during the time that any portion of this Debenture remains outstanding, any
Event of Default occurs and is continuing, and in every such case, then the
Holder may, by notice to the Company, declare the full principal amount of this
Debenture, together with all accrued but unpaid interest and other amounts owing
hereunder, to the date of acceleration, to be, plus the "Adjustment Amount" (as
defined Section 7) whereupon the same shall become, immediately due and payable
in cash (notwithstanding anything herein contained to the contrary) without
presentment, demand, protest or other notice of any kind, all of which are
waived by the
-4-
<PAGE> 29
Company, notwithstanding anything herein contained to the contrary, and the
Holder may immediately and without expiration of any grace period enforce any
and all of its rights and remedies hereunder and all other remedies available to
it under applicable law. Such declaration may be rescinded and annulled by
Holder at any time prior to payment hereunder. No such rescission or annulment
shall affect any subsequent Event of Default or impair any right consequent
thereon.
Section 5. Conversion.
(a) (i) This Debenture shall be convertible into shares of the
Common Stock (subject to reduction pursuant to Section 5(a)(ii) below and
Section 4.10 of the Purchase Agreement) at the option of the Holder in whole or
in part at any time and from time to time after the 120th day after the Original
Issue Date and prior to the close of business on the Maturity Date. The Holder
shall effect conversions by surrendering the Debentures (or such portions
thereof) to be converted to the Company, together with the form of conversion
notice attached hereto as Exhibit A (the "Conversion Notice"). Each Conversion
Notice shall specify the principal amount of Debentures to be converted and the
date on which such conversion is to be effected, which date may not be prior to
the date the Holder delivers such Conversion Notice by facsimile (the
"Conversion Date"). If no Conversion Date is specified in a Conversion Notice,
the Conversion Date shall be the date that the Conversion Notice is deemed
delivered pursuant to Section 5(h). Subject to Sections 5(a)(ii) and 5(b) hereof
and Section 4.10 of the Purchase Agreement, each Conversion Notice, once given,
shall be irrevocable. If the Holder is converting less than all of the principal
amount represented by the Debenture(s) tendered by the Holder with the
Conversion Notice, or if a conversion hereunder cannot be effected in full for
any reason, the Company shall honor such conversion to the extent permissible
hereunder and shall promptly deliver to such Holder (in the manner and within
the time set forth in Section 5(b)) a new Debenture for such principal amount as
have not been converted. As a bonus for refraining from converting Debentures
hereunder, commencing on the 181st day after the Original Issue Date and for
each complete 30-day period thereafter, the Company shall pay to the Holder a
bonus, in cash, equal to .75% of the aggregate principal amount of Debentures
that have not been tendered for conversion prior to such date, except that after
the 361st day after the Original Issue Date, at the Company's option, each such
bonus accrued thereafter may be paid in shares of Common Stock calculated based
upon the average Per Share Market Value for the five (5) Trading Days
immediately preceding the such bonus payment date. Notwithstanding anything to
the contrary contained herein, the Company may not issue shares of the Common
Stock in payment of such bonus if: (i) the number of shares of Common Stock at
the time authorized, unissued and unreserved for all purposes, or held as
treasury stock, is insufficient to pay such bonus hereunder in shares of Common
Stock; (ii) the shares of Common Stock to be issued in respect of such bonus
hereunder are not registered for resale pursuant to an effective registration
statement that names the recipient of such interest shares as a selling
stockholder thereunder or may not be sold without volume restrictions pursuant
to Rule 144 promulgated under the Securities Act as determined by counsel to the
Company pursuant to a written opinion letter, addressed to the holder, in form
and substance acceptable to the holder; (iii) the shares of Common Stock to be
issued in respect of such interest
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<PAGE> 30
are not listed on the Nasdaq SmallCap Market (or the American Stock Exchange,
Nasdaq National Market or The New York Stock Exchange), and any other exchange
on which the Common Stock is then listed for trading; or (iv) the issuance of
such shares would result in the recipient thereof beneficially owning more than
4.999% of the issued and outstanding shares of Common Stock.
(ii) Certain Regulatory Approval. If on the
Conversion Date applicable to any conversion, (A) the Common Stock is then
listed for trading on the Nasdaq National Market or the American Stock Exchange
or, if the rules of the Nasdaq Stock Market are hereafter amended to extend Rule
4460(i) promulgated thereby (or any successor or replacement provision thereof)
to the Nasdaq SmallCap Market and the Common Stock is then listed for trading on
the Nasdaq SmallCap Market (B) the Conversion Price then in effect is such that
the aggregate number of shares of the Common Stock that would then be issuable
upon conversion of the entire outstanding principal amount of Debentures,
together with any shares of the Common Stock previously issued upon conversion
of Debentures and in respect of payment of interest hereunder, and any shares of
Common Stock issued upon exchange of the Class B Preferred Stock and in payment
of dividends in respect thereof would equal or exceed 20% of the number of
shares of the Common Stock outstanding on the Original Issue Date (the "Issuable
Maximum"), and (C) the Company has not previously obtained the Stockholder
Approval (as defined below), then the Company shall issue to the Holder
requesting such conversion the Issuable Maximum and, with respect to any shares
of the Common Stock that otherwise would have been issuable to such holder in
respect of the Conversion Notice at issue or in respect of payment of interest
hereunder in excess of the Issuable Maximum, the Holder shall have the option to
require the Company to either (1) as promptly as possible, but in no event later
than 60 days after such Conversion Date, convene a meeting of the holders of the
Common Stock and use its best efforts to obtain the Stockholder Approval or (2)
repay, from funds legally available therefor at the time of such repayment, the
balance of the principal amount of the Debentures subject to such Conversion
Notice and the remaining aggregate principal amount of Debentures then
outstanding and held by such Holder at a price equal to the principal amount of
Debentures then outstanding and held by such Holder multiplied by the product of
(i) the average Per Share Market Value for the five (5) Trading Days immediately
preceding (1) the Conversion Date or (2) the date of payment in full by the
Company of such repayment price, whichever is greater, divided by (ii) the
Conversion Price calculated on the Conversion Date; provided, however, that if
the Holder has requested that the Company obtain Stockholder Approval under
paragraph (1) above and the Company fails for any reason to obtain such
Stockholder Approval within the time period set forth in (1) above, the Company
shall be obligated to repay Debentures in accordance with the provisions of
paragraph (2) above, and in such case the interest contemplated by the
immediately succeeding sentence shall be deemed to accrue from the Conversion
Date. If the Holder has requested that the Company repay Debentures pursuant to
this Section and the Company fails for any reason to pay the repayment price
under (2) above within seven days after the Conversion Date, the Company will
pay interest on such repayment price at a rate of 15% per annum to the
converting Holder, accruing from the Conversion Date until the repayment price
plus any accrued interest thereon is paid in full. The entire repayment price,
including interest thereon, shall be paid in cash. "Stockholder Approval" means
the approval by a
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<PAGE> 31
majority of the total votes cast on the proposal, in person or by proxy, at a
meeting of the stockholders of the Company held in accordance with the Company's
Certificate of Incorporation and by-laws, of the issuance by the Company of
shares of the Common Stock exceeding the Issuable Maximum as a consequence of
the conversion of Debentures into the Common Stock at a price less than the
greater of the book or market value on the Original Issue Date as and to the
extent required pursuant to Rule 4460(i) of the Nasdaq Stock Market or Rule 713
of the American Stock Exchange (or any successor or replacement provision
thereof), as applicable.
(b) Not later than three Trading Days after the Conversion
Date, the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other than
those required by Section 4.1(b) of the Purchase Agreement) representing the
number of shares of the Common Stock being acquired upon the conversion of
Debentures (subject to reduction pursuant to Section 5(a)(ii) hereof and Section
4.10 of the Purchase Agreement), (ii) Debentures in a principal amount equal to
the principal amount of Debentures not converted; (iii) a bank check in the
amount of all accrued and unpaid interest (if the Company has elected to pay
accrued interest in cash), together with all other amounts then due and payable
in accordance with the terms hereof, in respect of Debentures tendered for
conversion and (iv) if the Company has elected to pay accrued interest in shares
of the Common Stock, certificates, which shall be free of restrictive legends
and trading restrictions (other than those required by law), representing such
number of shares of the Common Stock as equals such interest divided by the
average Per Share Market Value for the five trading Days immediately preceding
the Conversion Date; provided, however, that the Company shall not be obligated
to issue certificates evidencing the shares of the Common Stock issuable upon
conversion of the principal amount of Debentures, until Debentures are either
delivered for conversion to the Company or any transfer agent for the Debentures
or the Common Stock, or the Holder notifies the Company that such Debenture has
been lost, stolen or destroyed and provides a bond (or other adequate security)
reasonably satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection therewith. The Company shall, upon request of the
Holder, use its reasonable efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions so long as the Company's transfer agent
uses this practice. If in the case of any Conversion Notice such certificate or
certificates, including for purposes hereof, any shares of the Common Stock to
be issued on the Conversion Date on account of accrued but unpaid interest
hereunder, are not delivered to or as directed by the applicable Holder by the
third Trading Day after the Conversion Date, the Holder shall be entitled by
written notice to the Company at any time on or before its receipt of such
certificate or certificates thereafter, to rescind such conversion, in which
event the Company shall immediately return the Debentures tendered for
conversion. Furthermore, if the Company fails to deliver to the Holder such
certificate or certificates pursuant to this Section, including for purposes
hereof, any shares of the Common Stock to be issued on the Conversion Date on
account of accrued but unpaid interest hereunder, prior to the third Trading Day
after the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, $500 for each $100,000 of the aggregate
principal amount of Debentures then held by the Holder for each day after such
third Trading Day until the tenth day after the
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<PAGE> 32
Conversion Date and $1,000 for each $100,000 of the aggregate principal amount
of Debentures then held by the Holder for each day after such tenth day until
such certificates are delivered. If the Company fails to deliver to the Holder
such certificate or certificates pursuant to this Section prior to the 20th day
after the Conversion Date, the Company shall, at the Holder's option (i) repay,
from funds legally available therefor at the time of such repayment, the
aggregate of the principal amount of Debentures then held by such Holder, as
requested by such Holder, and (ii) pay all accrued but unpaid interest on
account of the Debentures for which the Company shall have failed to issue the
Common Stock certificates hereunder, in cash. The repayment price shall be equal
to the sum of (A) the aggregate of all accrued but unpaid interest and other
non-principal amounts then payable in respect of all Debentures to be repaid
hereunder and for which repayment hereunder is demanded, plus (B) the aggregate
of the principal amount of Debentures then held by such Holder multiplied by (1)
the average Per Share Market Value for the five (5) Trading Days immediately
preceding (x) the Conversion Date or (y) the date of payment in full by the
Company of such repayment price, whichever is greater, divided by, (2) the
Conversion Price calculated on the Conversion Date. If the Holder has requested
that the Company repay Debentures pursuant to this Section and the Company fails
for any reason to pay the repayment price within seven days after such notice is
deemed delivered pursuant to Section 5(h), the Company will pay interest on the
repayment price at a rate of 15% per annum, in cash to such Holder, accruing
from such seventh day until the repayment price and any accrued interest thereon
is paid in full.
(c) (i) The conversion price (the "Conversion Price") in
effect on any Conversion Date shall be the lesser of (a) 95% of the average Per
Share Market Value for the ten (10) Trading Days immediately preceding the
Conversion Date or (b) the average of the five (5) lowest Per Share Market
Values for the ninety (90) Trading Days immediately preceding the Conversion
Date; provided that, (a) if the registration statement registering the resale of
the shares of Common Stock issuable upon conversion of the Debentures and
payment of interest thereunder and naming the Holder as a Selling Stockholder
thereunder (the "Underlying Shares Registration Statement") is not filed on or
prior to the 121st day after the Original Issue Date, or (b) the Company fails
to file with the Commission a request for acceleration in accordance with Rule
12d1-2 promulgated under the Securities Exchange Act of 1934, as amended, within
five (5) days of the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that an Underlying Shares Registration
Statement will not be "reviewed" or is not subject to further review or comment,
or (c) if such Underlying Shares Registration Statement is filed with and
declared effective by the Commission but thereafter ceases to be effective as to
all Registrable Securities (as such term is defined in the Registration Rights
Agreement) at any time prior to the expiration of the "Effectiveness Period" (as
such term as defined in the Registration Rights Agreement), without being
succeeded by a subsequent Underlying Shares Registration Statement filed with
and declared effective by the Commission within 10 Business Days (as defined in
Section 7), or (d) if trading in the Common Stock shall be suspended for any
reason for more than three Trading Days, or (e) if the conversion rights of the
Holders of Debentures hereunder are suspended for any reason (any such failure
being referred to as an "Event," and for purposes of clauses (a) and (e) the
date on which such Event occurs, or for purposes of clause (b) the date on which
such five (5) days period is exceeded,
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<PAGE> 33
or for purposes of clause (e) the date which such 10 Business Day-period is
exceeded, or for purposes of clause (d) the date on which such three Trading Day
period is exceeded, being referred to as "Event Date"), the Conversion Price
shall be decreased by 2% each month (i.e., 2% decrease as of the Event Date and
4% as of the one-month anniversary of the Event Date) until the earlier to occur
of the second month anniversary after the Event Date and such time as the
applicable Event is cured. Commencing the second month anniversary after the
Event Date, at the option of each Holder for each applicable monthly period
either (a) the Company shall pay to the Holders 2% of the product of the
principal amount of outstanding Debentures (each Holder being entitled to
receive such portion of such amount as equals its pro rata portion of Debentures
then outstanding), in cash or (b) the Conversion Price shall be decreased by 2%
for each additional such month (to be effective in full on the monthly
applicable Event Date) as liquidated damages, and not as a penalty on the first
day of each monthly anniversary of the Event Date in either case until such time
as the applicable Event is cured. Furthermore, if the Underlying Shares
Registration Statement is not declared effective by the Commission on or prior
to the 180th day after the Original Issue Date, the Company shall pay to the
Holder in cash, as liquidated damages and not as a penalty, 2% per 30-day
period, of the product of the principal amount of outstanding Debentures for
each 30-day period commencing on the 181st day after the Original Issue Date,
until the earlier to occur of the 240th day after the Original Issue Date and
such time as the Underlying Shares Registration Statement is declared effective
by the Commission. Commencing on the 241st day after the Original Issue Date,
the Company shall pay to the Holder in cash, as liquidated damages and not as a
penalty, 3% per 30-day period, of the product of the principal amount of
outstanding Debentures for each 30-day period until the earlier to occur of the
300th day after the Original Issue Date and such time as the Underlying Shares
Registration Statement is declared effective by the Commission. Commencing 300
days after the Original Issue Date, the Conversion Price shall be decreased by
1% each 30 days (i.e., 1% decrease as of the 301st day after the Original Issue
Date and 2% as of the 331st day after the Original Issue Date) until the date
the Underlying Shares Registration Statement is declared effective by the
Commission, up to a maximum discount of 20%. Any decrease in the Conversion
Price pursuant to this Section shall remain in effect notwithstanding the fact
that the Event causing such decrease has been subsequently cured and further
monthly decreases have ceased. The provisions of this Section are not exclusive
and shall in no way limit the Company's obligations under the Registration
Rights Agreement. Notwithstanding anything to the contrary set forth herein, the
Company may not, without the prior written consent of the Holders, pay
liquidated damages hereunder in cash unless it shall have received the prior
written consent of all lenders, debt holders or holders of any class of
securities of the Company or its Affiliates that have the right to require such
consent or to subordinate any such cash payment, which consent shall provide
that the payment by the Company of any such liquidated damages hereunder (and
the retention of such sum by the receiving Holder) is not subject to any
applicable subordination rights of such lender or holders of such class of
securities.
(ii) If the Company, at any time while any Debentures
are outstanding, (a) shall pay a stock dividend or otherwise make a distribution
or distributions on shares of its Junior Securities (as defined in Section 7)
payable in shares of the Common Stock, (b) subdivide
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<PAGE> 34
outstanding shares of the Common Stock into a larger number of shares, (c)
combine outstanding shares of the Common Stock into a smaller number of shares,
or (d) issue by reclassification of shares of the Common Stock any shares of
capital stock of the Company, the Initial Conversion Price shall be multiplied
by a fraction of which the numerator shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding before such event and of
which the denominator shall be the number of shares of the Common Stock
outstanding after such event. Any adjustment made pursuant to this Section
5(c)(ii) shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.
(iii) If the Company, at any time while any
Debentures are outstanding, shall issue rights or warrants to all holders of the
Common Stock (and not to Holders of Debentures) entitling them to subscribe for
or purchase shares of the Common Stock at a price per share less than the Per
Share Market Value of the Common Stock at the record date mentioned below, the
Initial Conversion Price shall be multiplied by a fraction, of which the
denominator shall be the number of shares of the Common Stock (excluding
treasury shares, if any) outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of the Common Stock offered for
subscription or purchase, and of which the numerator shall be the number of
shares of the Common Stock (excluding treasury shares, if any) outstanding on
the date of issuance of such rights or warrants plus the number of shares which
the aggregate offering price of the total number of shares so offered would
purchase at such Per Share Market Value. Such adjustment shall be made whenever
such rights or warrants are issued, and shall become effective immediately after
the record date for the determination of stockholders entitled to receive such
rights or warrants. However, upon the expiration of any right or warrant to
purchase shares of the Common Stock the issuance of which resulted in an
adjustment in the Initial Conversion Price pursuant to this Section 5(c)(iii),
if any such right or warrant shall expire and shall not have been exercised, the
Initial Conversion Price shall immediately upon such expiration be recomputed
and effective immediately upon such expiration be increased to the price which
it would have been (but reflecting any other adjustments in the Initial
Conversion Price made pursuant to the provisions of this Section 5 after the
issuance of such rights or warrants) had the adjustment of the Initial
Conversion Price made upon the issuance of such rights or warrants been made on
the basis of offering for subscription or purchase only that number of shares of
the Common Stock actually purchased upon the exercise of such rights or warrants
actually exercised.
(iv) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of the Common Stock (and not to
Holders of Debentures) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security (excluding those referred to
in Sections 5(c)(ii) and (iii) above), then in each such case the Initial
Conversion Price at which Debentures shall thereafter be convertible shall be
determined by multiplying the Initial Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
Per Share Market Value of the Common Stock determined as of the
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<PAGE> 35
record date mentioned above, and of which the numerator shall be such Per Share
Market Value of the Common Stock on such record date less the then fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith; provided, however,
that in the event of a distribution exceeding ten percent (10%) of the net
assets of the Company, such fair market value shall be determined by a
nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the holders of a majority in interest of
Debentures then outstanding; and provided, further, that the Company, after
receipt of the determination by such Appraiser shall have the right to select an
additional Appraiser, in good faith, in which case the fair market value shall
be equal to the average of the determinations by each such Appraiser. In either
case the adjustments shall be described in a statement provided to the holders
of Debentures of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of the Common
Stock. Such adjustment shall be made whenever any such distribution is made and
shall become effective immediately after the record date mentioned above.
(v) All calculations under this Section 5 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Initial Conversion Price is
adjusted pursuant to Section 5(c)(ii),(iii) or (iv), the Company shall promptly
mail to each holder of Debentures, a notice setting forth the Initial Conversion
Price after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.
(vii) In case of any reclassification of the Common
Stock or any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property, the Holder of this Debenture
shall have the right thereafter to, at its option, (A) convert the then
outstanding principal amount, together with all accrued by unpaid interest and
any other amounts then owing hereunder in respect of this Debenture only into
the shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of the Common Stock following such reclassification
or share exchange, and the Holders of the Debentures shall be entitled upon such
event to receive such amount of securities, cash or property as the shares of
the Common Stock of the Company into which the then outstanding principal
amount, together with all accrued but unpaid interest and any other amounts then
owing hereunder in respect of this Debenture could have been converted
immediately prior to such reclassification or share exchange would have been
entitled or (B) require the Company to repay, from funds legally available
therefor at the time of such repayment, all of its Debentures at a price equal
to the sum of (i) the aggregate of the principal amount of Debentures then held
by the Holder multiplied by (a) the average Per Share Market Value for the five
(5) Trading Days immediately preceding (1) the effective date of the
reclassification or share exchange triggering such repayment right or (2) the
date of payment in full by the Company of the repayment price hereunder,
whichever is greater, divided by (b) the Conversion Price calculated on such
effective
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<PAGE> 36
date, plus (ii) the aggregate of all accrued by unpaid interest and other
amounts then payable in respect of all Debentures to be repaid hereunder. The
entire redemption price shall be paid in cash, and the terms of payment of such
redemption price shall be subject to the provisions set forth in Section 6(b).
The terms of any such reclassification or share exchange shall include such
terms so as to continue to give to the Holder the right to receive the
securities, cash or property set forth in this Section 5(c)(vii) upon any
conversion following such event. This provision shall similarly apply to
successive reclassifications or share exchanges.
(viii) If:
A. the Company shall declare a dividend (or
any other distribution) on its Common
Stock; or
B. the Company shall declare a special
nonrecurring cash dividend on or a
redemption of its Common Stock; or
C. the Company shall authorize the granting
to all holders of the Common Stock rights
or warrants to subscribe for or purchase
any shares of capital stock of any class
or of any rights; or
D. the approval of any stockholders of the
Company shall be required in connection
with any reclassification of the Common
Stock of the Company, any consolidation or
merger to which the Company is a party,
any sale or transfer of all or
substantially all of the assets of the
Company, of any compulsory share of
exchange whereby the Common Stock is
converted into other securities, cash or
property; or
E. the Company shall authorize the voluntary
or involuntary dissolution, liquidation or
winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of the Debentures, and shall cause to be mailed to the
Holders of Debentures at their last addresses as they shall appear upon the
stock books of the Company, at least 30 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of the Common Stock of record shall
be entitled to
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<PAGE> 37
exchange their shares of the Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer or
share exchange; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice. Holders are entitled
to convert Debentures during the 30-day period commencing the date of such
notice to the effective date of the event triggering such notice.
(d) If at any time conditions shall arise by reason of action
taken by the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might be reasonably
expected to materially and adversely affect the rights of the Holders (different
than or distinguished from the effect generally on rights of holders of any
class of the Company's capital stock) or if at any time any such conditions are
expected to arise by reason of any action contemplated by the Company, the
Company shall mail a written notice briefly describing the action contemplated
and the material adverse effects of such action on the rights of the Holders at
least 30 calendar days prior to the effective date of such action, and an
Appraiser selected by the Holders of majority in interest of the Debentures
shall give its opinion as to the adjustment, if any (not inconsistent with the
standards established in this Section 5), of the Conversion Price (including, if
necessary, any adjustment as to the securities into which Debentures may
thereafter be convertible) and any distribution which is or would be required to
preserve without diluting the rights of the Holders; provided, however, that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in good faith, in which case the
adjustment shall be equal to the average of the adjustments recommended by each
such Appraiser. The Board of Directors shall make the adjustment recommended
forthwith upon the receipt of such opinion or opinions or the taking of any such
action contemplated, as the case may be; provided, however, that no such
adjustment of the Conversion Price shall be made which in the opinion of the
Appraiser(s) giving the aforesaid opinion or opinions would result in an
increase of the Conversion Price to more than the Conversion Price then in
effect.
(e) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued shares of the Common Stock
solely for the purpose of issuance upon conversion of the Debentures and payment
of interest on the Debentures, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(c)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder. The Company covenants that all shares of the Common Stock that shall
be so issuable shall, upon issue, be duly and validly authorized, issued and
fully paid, nonassessable and, if the Underlying Shares Registration Statement
has been declared effective under the Securities Act, freely tradeable.
(f) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of the
Common Stock, but may if otherwise
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<PAGE> 38
permitted, make a cash payment in respect of any final fraction of a share based
on the Per Share Market Value at such time. If the Company elects not, or is
unable, to make such a cash payment, the holder shall be entitled to receive, in
lieu of the final fraction of a share, one whole share of Common Stock.
(g) The issuance of certificates for shares of the Common
Stock on conversion of the Debentures shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such Debentures so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(h) Any and all notices or other communications or deliveries
to be provided by the Holders of the Debentures hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the Company, at
152 West 57th Street, 29th Floor, New York, New York 10019 (facsimile number
(212) 586-1652), attention Chief Executive Officer, or such other address or
facsimile number as the Company may specify for such purposes by notice to the
Holders delivered in accordance with this Section. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service or sent by certified or registered mail, postage
prepaid, addressed to each Holder of the Debentures at the facsimile telephone
number or address of such Holder appearing on the books of the Company, or if no
such facsimile telephone number or address appears, at the principal place of
business of the holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 4:30 p.m. (Eastern
Time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 4:30 p.m. (Eastern Time) on any date and
earlier than 11:59 p.m. (Eastern Time) on such date, (iii) four days after
deposit in the United States mails, (iv) the Business Day following the date of
mailing, if send by nationally recognized overnight courier service, or (v) upon
actual receipt by the party to whom such notice is required to be given.
Section 6. Repayments.
(a) The Company shall have the right, exercisable at any time
prior to the 120th day after the Original Issue Date upon prior written notice
to the Holder to repay, from funds legally available therefor at the time of
such repayment, all of the outstanding aggregate principal amount of Debentures
at a repayment price equal to the sum of (i) 100% of the
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<PAGE> 39
outstanding principal amount of the Debentures, (ii) the aggregate of all
accrued but unpaid interest and other amounts owing in respect of the Debentures
to be repaid and (iii) $6,666.66 for each day commencing on the 31st day and
ending on the 121st day after the Original Issue Date that the Company does not
exercise the repayment right set forth in this Section 6(a) and pay such
repayment amount to the Holders, until such repayment price is delivered to the
Holder pursuant to this Section 6(a). The entire repayment price shall be paid
in cash. Notwithstanding anything to the contrary contained herein, the Company
shall not have the right to repay the Debenture pursuant to this Section 6(a) if
repayment of the Debenture is required pursuant to another section of this
Debenture or pursuant to the Purchase Agreement.
(b) The Company shall have the right, exercisable at any time
upon 10 Trading Days notice to the Holder of the Debentures given at any time
after the one-year anniversary of the Original Issue Date to repay, from funds
legally available therefor at the time of such repayment, all or any portion of
the outstanding principal amount of the Debentures which have not previously
been converted or repaid, at a price equal to the sum of 110% of the aggregate
principal amount of Debentures to be repaid plus the aggregate of all accrued
but unpaid interest and other amounts owing in respect of the Debentures to be
repaid. The entire repayment price shall be paid in cash. Holders of the
Debentures may convert the Debentures, including the Debentures subject to a
repayment notice given under this Section, during the period from the date of
such repayment notice through the 9th Trading Day thereafter. Notwithstanding
anything to the contrary contained herein, the Company shall not have the right
to repay the Debenture pursuant to this Section 6(b) if repayment of the
Debenture is required pursuant to another section of this Debenture or pursuant
to the Purchase Agreement.
(c) If any portion of the applicable repayment price under
Sections 6(a) or 6(b) shall not be paid by the Company within seven (7) calendar
days after the date due, interest shall accrue thereon at the rate of 15% per
annum until the repayment price plus all such interest is paid in full (which
amount shall be paid as liquidated damages and not as a penalty). In addition,
if any portion of such repayment price remains unpaid for more than 7 calendar
days after the date due, the Holder of the Debentures subject to such repayment
may elect, by written notice to the Company given within 30 days after the date
due, to either (i) demand conversion in accordance with the formula and the time
frame therefor set forth in Section 5 of all Debentures for which such repayment
price, plus accrued liquidated damages thereof, has not been paid in full (the
"Unpaid Repayment Shares"), in which event the Per Share Market Price for such
shares shall be the lower of the Per Share Market Price calculated on the date
such repayment price was originally due and the Per Share Market Price as of the
Holder's written demand for conversion, or (ii) invalidate ab initio such
repayment, notwithstanding anything herein contained to the contrary. If the
Holder elects option (i) above, the Company shall within three (3) Trading Days
of its receipt of such election deliver to the Holder the shares of the Common
Stock issuable upon conversion of the Unpaid Repayment Shares subject to such
Holder conversion demand and otherwise perform its obligations hereunder with
respect thereto; or, if the Holder elects option (ii) above, the Company shall
promptly, and in any event not later than three (3) Trading Days from receipt of
holder's notice of such election, return to the holder all of the Unpaid
Repayment Shares. Notwithstanding anything to the contrary contained herein,
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<PAGE> 40
the Company may not, without the written consent of the holder, repay Debentures
unless both the payment thereof and the retention of such paid cash by the
holder is consented to in writing free of any subordination prior thereto by all
lenders or holders of any indebtedness or class of securities of the Company who
have the right to consent to or force the subordination of such payment.
Section 7. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"Adjustment Amount" is equal to (i) the aggregate principal
amount of Debentures then outstanding multiplied by (A) the average Per Share
Market Value for the five Trading Days immediately preceding (1) the applicable
Trigger Date or (2) the date of payment of all amounts due as a result of such
Event of Default, whichever is greater, divided by (B) the Conversion Price with
respect to the aggregate principal amount of Debentures then outstanding
calculated on the applicable Trigger Date, MINUS (ii) the aggregate principal
amount of Debentures then outstanding, plus all accrued and unpaid interest
thereon, and all other amounts due, except for those referred to in (i) above
pursuant to the terms hereof.
"Business Day" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"Common Stock" means the Company's common stock, $.001 par
value per share, of the Company and stock of any other class into which such
shares may hereafter have been reclassified or changed.
"Junior Securities" means the Common Stock and all other
equity securities of the Company and all other debt that is subordinated to the
Debentures by its terms.
"Original Issue Date" shall mean the date of the first
issuance of any Debentures regardless of the number of transfers of any
Debenture and regardless of the number of instruments which may be issued to
evidence such Debenture.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the Nasdaq
SmallCap Market or other stock exchange or quotation system on which the Common
Stock is then listed or if there is no such price on such date, then the closing
bid price on such exchange or quotation system on the date nearest preceding
such date, or (b) if the Common Stock is not listed then on the Nasdaq SmallCap
Market or any stock exchange or quotation system, the closing bid price for a
share of the Common Stock in the over-the-counter market, as reported by the
Nasdaq Stock Market or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the
close of business on such date, or (c) if the Common Stock is not then reported
by the National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the
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<PAGE> 41
"Pink Sheet" quotes for the relevant conversion period, as determined in good
faith by the holder, or (d) if the Common Stock is not then publicly traded the
fair market value of a share of Common Stock as determined by an Appraiser
selected in good faith by the holders of a majority in interest of the
Debentures; provided, however, that the Company, after receipt of the
determination by such Appraiser, shall have the right to select an additional
Appraiser, in which case, the fair market value shall be equal to the average of
the determinations by each such Appraiser.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated May 20, 1997, between the Company and the original holder of
Debentures.
"Trading Day" means (a) a day on which the Common Stock is
traded on the American Stock Exchange or other stock exchange or market on which
the Common Stock has been listed, or (b) if the Common Stock is not listed on
the American Stock Exchange or any stock exchange or market, a day on which the
Common Stock is traded in the over-the-counter market, as reported by the OTC
Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin
Board, a day on which the Common Stock is quoted in the over-the-counter market
as reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices).
"Trigger Date" shall mean, (i) with respect to an Event of
Default caused by an event described in Section 4(a), the date the payment of
principal or interest at issue was due, (ii) with respect to an Event of Default
caused by an event described in Section 4(b), the date specified in any other
provision of this Debenture, the Purchase Agreement, the Class B Exchange
Agreement or the Registration Rights Agreement that require repayment of the
outstanding principal amount of this Debenture as a result of an event so
contemplated, if not, the date such event becomes an Event of Default pursuant
to Section 4(b), and (iii) with respect to an Event of Default caused by an
event described in Section 4(c), (d), (e) and (f), the date of such event
becomes an Event of Default pursuant to such Sections.
"Underlying Shares" means the number of shares of Common Stock
into which the Shares are convertible in accordance with the terms hereof and
the Purchase Agreement.
Section 8. Except as expressly provided herein, no provision
of this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, and interest on, this
Debenture at the time, place, and rate, and in the coin or currency, herein
prescribed. This Debenture is a direct obligation of the Company. This Debenture
ranks pari passu with all other Debentures now or hereafter issued under the
terms set forth herein. The Company may only prepay the outstanding principal
amount on the Debentures in accordance with Section 6 hereof.
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<PAGE> 42
Section 9. This Debenture shall not entitle the Holder to any
of the rights of a stockholder of the Company, including without limitation, the
right to vote, to receive dividends and other distributions, or to receive any
notice of, or to attend, meetings of stockholders or any other proceedings of
the Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
Section 10. If this Debenture shall be mutilated, lost, stolen
or destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Debenture, or in lieu of
or in substitution for a lost, stolen or destroyed debenture, a new Debenture
for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed but only upon receipt of evidence of such loss, theft or destruction
of such Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
Section 11. This Debenture shall be governed by and construed
in accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof.
Section 12. Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture. The failure of the Company or the Holder to
insist upon strict adherence to any term of this Debenture on one or more
occasions shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Debenture. Any waiver must be in writing.
Section 13. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
Section 14. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day (or, if such next succeeding Business Day falls
in the next calendar month, the preceding Business Day in the appropriate
calendar month).
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<PAGE> 43
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed by an officer thereunto duly authorized as of the date first
above indicated.
PLAYNET TECHNOLOGIES, INC.
By:________________________________
Name:
Title:
Attest:
By:___________________________
Name:
Title:
<PAGE> 44
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert Debenture No. 40 into shares of Common
Stock, par value $.001 per share (the "Common Stock"), of PlayNet Technologies,
Inc. (the "Company") according to the conditions hereof, as of the date written
below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
________________________________________________
Date to Effect Conversion
________________________________________________
Principal Amount of Debentures to be Converted
________________________________________________
Number of shares of Common Stock to be Issued
________________________________________________
Applicable Conversion Price
________________________________________________
Signature
________________________________________________
Name
________________________________________________
Address
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested hereby),
notify the converting holder by facsimile of the number of shares of Common
Stock outstanding on such date and the number of shares of Common Stock which
would be issuable to the holder if the conversion requested in this conversion
notice were effected in full, whereupon, if the Company determines that such
conversion would result in it owning in excess of 4.9% of the outstanding shares
of Common Stock on such date, the Company shall convert up to an amount equal to
4.9% of the outstanding shares of Common Stock and issue to the holder one or
more certificates representing Debentures which have not been converted as a
result of this provision.
<PAGE> 45
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made
and entered into as of May 20, 1997, by and among PlayNet Technologies, Inc., a
Delaware corporation (the "Company"), and Southbrook International Investments
Ltd., a corporation organized under the laws of the British Virgin Islands (the
"Purchaser").
This Agreement is made pursuant to the Convertible Debenture
Purchase Agreement, dated as of the date hereof between the Company and the
Purchaser (the "Purchase Agreement").
The Company and the Purchaser hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein shall
have the meanings given such terms in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:
"Advice" shall have meaning set forth in Section 3(o).
"Affiliate" means, with respect to any Person, any other
Person that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "control," when
used with respect to any Person, means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms of "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
state of New York generally are authorized or required by law or other
government actions to close.
"Closing Date" shall have the meaning set forth in the
Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value
$.001 per share.
<PAGE> 46
"Debentures" mean the 10% Convertible Debentures purchased by
the Purchasers pursuant to the Purchase Agreement.
"Effectiveness Date" means the 181st day following the Closing
Date.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Filing Date" means the 121st day following the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in
Section 5(c).
"Indemnifying Party" shall have the meaning set forth in
Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"New York Courts" shall have the meaning set forth in Section
7(h).
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" means the shares of Common Stock
issuable (a) upon conversion of all Debentures (b) upon payment of interest in
respect of the Debentures and (c) upon exercise of the Common Stock purchase
warrants issued by the Company to the Purchaser in connection with the
transactions contemplated by the Purchase Agreement; provided, however that in
order to account for the fact that the number of shares of Common
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<PAGE> 47
Stock that are issuable upon conversion of Debentures is determined in part upon
the market price of the Common Stock at the time of conversion, Registrable
Securities shall include (but not be limited to) a number of shares of Common
Stock equal to no less than the sum of (1) two times the number of shares of
Common Stock issuable upon conversion in full of the Debentures, assuming such
conversion occurred on the Closing Date, (2) the number of shares of Common
Stock issuable upon conversion in full of the warrants described above, and (3)
any shares of Common Stock issuable in payment of interest accrued on the
Debentures. Notwithstanding anything herein contained to the contrary, if the
actual number of shares of Common Stock issuable upon conversion in full of the
Debentures at any time exceeds twice the number of shares of Common Stock
issuable if such conversion occurred on the Closing Date, the term "Registrable
Securities" shall be deemed to include two times the number of such additional
shares of Common Stock and the Company shall promptly, but in any case within 15
days of notice of such fact, file one or more additional Registration Statements
covering two times the number of such additional shares of Common Stock. The
Company shall use its best efforts to cause such additional Registration
Statements to be declared effective as promptly as possible.
"Registration Statement" means the registration statement
contemplated by Section 2(a) (and any additional Registration Statements
contemplated in the definition of Registrable Securities), including (in each
case) the Prospectus, amendments and supplements to such registration statement
or Prospectus, including pre- and post-effective amendments, all exhibits
thereto, and all material incorporated by reference or deemed to be incorporated
by reference in such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means any one special counsel to all of the
Holders, for which the Holders will be reimbursed by the Company pursuant to
Section 4.
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<PAGE> 48
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
2. Shelf Registration
(a) On or prior to the Filing Date, the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis pursuant
to Rule 415. The Registration Statement shall be on Form S-3 (except if
otherwise directed by the Holders in accordance herewith). The Company shall (i)
not permit any securities other than the Registrable Securities to be included
in the Registration Statement and (ii) use its best efforts to cause the
Registration Statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event prior to the
Effectiveness Date, and to keep such Registration Statement continuously
effective under the Securities Act until the date which is two years after the
date that such Registration Statement is declared effective by the Commission or
such earlier date when all Registrable Securities covered by such Registration
Statement have been sold or may be sold without volume restrictions pursuant to
Rule 144 as determined by the counsel to the Company pursuant to a written
opinion letter, addressed to the Holders to such effect (the "Effectiveness
Period"); provided, however, that the Company shall not be deemed to have used
its best efforts to keep the Registration Statement effective during the
Effectiveness Period if it voluntarily takes any action that would result in the
Holders not being able to sell the Registrable Securities covered by such
Registration Statement during the Effectiveness Period, unless such action is
required under applicable law or the Company has filed a post-effective
amendment to the Registration Statement and the Commission has not declared it
effective.
(b) If the Holders of a majority of the Registrable Securities
so elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and if the managing underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable Securities proposed to
be sold in such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there shall be
included in such Underwritten Offering the amount of such Registrable Securities
which in the opinion of such managing underwriters can be sold, and such amount
shall be allocated pro rata among the Holders proposing to sell Registrable
Securities in such Underwritten Offering.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by the Holders of
a majority of the Registrable Securities included in such offering. No Holder
may participate in any Underwritten Offering hereunder unless such Person (i)
agrees to sell its Registrable Securities on the basis provided in any
underwriting agreements approved by the Persons entitled hereunder to
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<PAGE> 49
approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such arrangements.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date a Registration Statement on Form S-3 (or such other form if directed
by the Holders in connection with an Underwritten Offering hereunder) in
accordance with the method or methods of distribution thereof as specified by
the Holders (except if otherwise directed by the Holders), and cause the
Registration Statement to become effective and remain effective as provided
herein; provided, however, that not less than five (5) Business Days prior to
the filing of the Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated or deemed to be incorporated therein by reference), the Company
shall (i) furnish to the Holders, their Special Counsel and any managing
underwriters, copies of all such documents proposed to be filed, which documents
(other than those incorporated or deemed to be incorporated by reference) will
be subject to the review of such Holders, their Special Counsel and such
managing underwriters, and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as shall
be necessary, in the opinion of respective counsel to such Holders and such
underwriters, to conduct a reasonable investigation within the meaning of the
Securities Act. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto to which the Holders of
a majority of the Registrable Securities, their Special Counsel, or any managing
underwriters, shall reasonably object within five (5) Business Days of their
receipt thereof.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to all
Registrable Securities for the Effectiveness Period and prepare and file with
the Commission such additional Registration Statements in order to register for
resale under the Securities Act all of the Registrable Securities; (ii) cause
the related Prospectus to be amended or supplemented by any required Prospectus
supplement, and as so supplemented or amended to be filed pursuant to Rule 424
(or any similar provisions then in force) promulgated under the Securities Act;
(iii) respond as promptly as practicable to any comments received from the
Commission with respect to the Registration Statement or any amendment thereto
and promptly provide the Holders true and complete copies of all correspondence
from and to the Commission relating to the Registration Statement; and (iv)
comply with the provisions of the Securities Act and the Exchange Act with
respect to the disposition of all Registrable Securities covered by the
Registration Statement during the applicable period in accordance with the
intended methods
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<PAGE> 50
of disposition by the Holders thereof set forth in the Registration Statement as
so amended or in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters immediately (and, in the
case of (i)(A) below, not less than five (5) days prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later than one
(1) Business Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is proposed
to be filed; (B) when the Commission notifies the Company whether there will be
a "review" of such Registration Statement and whenever the Commission comments
in writing on such Registration Statement and (C) with respect to the
Registration Statement or any post-effective amendment, when the same has become
effective; (ii) of any request by the Commission or any other Federal or state
governmental authority for amendments or supplements to the Registration
Statement or Prospectus or for additional information; (iii) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) if at any time any of the
representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement made
in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The Company shall promptly (and in any event within two
days of its receipt thereof) deliver to the Purchaser true and complete copies
of all correspondence it receives from and all correspondence it sends to the
Commission (provided such correspondence will not place the Purchaser in the
possession of material non-public information regarding the Company) in respect
of a Registration Statement, including without limitation all comment or "no
review" letters of the Commission in response to the filing of a Registration
Statement, any stop or suspension orders with respect to a Registration
Statement, and any letter declaring a Registration Statement effective.
(d) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness of
the Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
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<PAGE> 51
(e) If requested by any managing underwriter or the Holders of
a majority of the Registrable Securities to be sold in connection with an
Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as such
managing underwriters and such Holders reasonably agree should be included
therein and (ii) make all required filings of such Prospectus supplement or such
post-effective amendment as soon as practicable after the Company has received
notification of the matters to be incorporated in such Prospectus supplement or
post-effective amendment; provided, however, that the Company shall not be
required to take any action pursuant to this Section 3(e) that would, in the
opinion of counsel for the Company, violate applicable law.
(f) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel,
and any underwriters, without charge, as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders and any underwriters in connection with
the offering and sale of the Registrable Securities covered by such Prospectus
and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the selling
Holders, any underwriters and their Special Counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any Holder or underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness Period
and to do any and all reasonable other acts or things reasonably necessary or
advisable to enable the disposition in such jurisdictions of the Registrable
Securities covered by a Registration Statement; provided, however, that the
Company shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action that would
subject it to general service of process in any such jurisdiction where it is
not then so subject or subject the Company to any material tax in any such
jurisdiction where it is not then so subject.
(i) Cooperate with the Holders and any managing underwriters
to facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold, which certificates shall be free of all
restrictive legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any such managing
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<PAGE> 52
underwriters or Holders may request at least two Business Days prior to any sale
of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as practicable, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(k) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on the Nasdaq SmallCap
Market and any other securities exchange, quotation system, market or
over-the-counter bulletin board, if any, on which similar securities issued by
the Company are then listed as and when required pursuant to the Purchase
Agreement.
(l) Enter into such agreements (including an underwriting
agreement in form, scope and substance as is customary in Underwritten
Offerings) and take all such other reasonable actions in connection therewith
(including those reasonably requested by any managing underwriters and the
Holders of a majority of the Registrable Securities being sold) in order to
expedite or facilitate the disposition of such Registrable Securities, and
whether or not an underwriting agreement is entered into, (i) make such
representations and warranties to such Holders and such underwriters as are
customarily made by issuers to underwriters in underwritten public offerings,
and confirm the same if and when requested; (ii) obtain and deliver copies
thereof to each Holder and the managing underwriters, if any, of opinions of
counsel to the Company and updates thereof addressed to each selling Holder and
each such underwriter, in form, scope and substance reasonably satisfactory to
any such managing underwriters and Special Counsel to the selling Holders
covering the matters customarily covered in opinions requested in Underwritten
Offerings and such other matters as may be reasonably requested by such Special
Counsel and underwriters; (iii) immediately prior to the effectiveness of the
Registration Statement, and, in the case of an Underwritten Offering, at the
time of delivery of any Registrable Securities sold pursuant thereto, obtain and
deliver copies to the Holders and the managing underwriters, if any, of "cold
comfort" letters and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other independent certified
public accountants of any subsidiary of the Company or of any business acquired
by the Company for which financial statements and financial data is, or is
required to be, included in the Registration Statement), addressed to each
selling Holder and each of the underwriters, if any, in form and substance as
are customary in connection with Underwritten Offerings; (iv) if an underwriting
agreement is entered into, the same shall contain indemnification provisions and
procedures no less favorable to the selling Holders and the underwriters, if
any, than those set forth in Section 6 (or such other provisions and procedures
acceptable to the managing underwriters, if any,
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<PAGE> 53
and holders of a majority of Registrable Securities participating in such
Underwritten Offering; and (v) deliver such documents and certificates as may be
reasonably requested by the Holders of a majority of the Registrable Securities
being sold, their Special Counsel and any managing underwriters to evidence the
continued validity of the representations and warranties made pursuant to clause
3(l)(i) above and to evidence compliance with any customary conditions contained
in the underwriting agreement or other agreement entered into by the Company.
(m) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the
Commission and make generally available to its security holders earning
statements satisfying the provisions of Section 11(a) of the Securities Act and
Rule 158 not later than 45 days after the end of any 12-month period (or 90 days
after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Securities are
sold to underwriters in a firm commitment or best efforts Underwritten Offering
and (ii) if not sold to underwriters in such an offering, commencing on the
first day of the first fiscal quarter of the Company after the effective date of
the Registration Statement, which statement shall cover said 12-month period, or
end shorter periods as is consistent with the requirements of Rule 158.
(o) Provide a CUSIP number for all Registrable Securities, not
later than the effective date of the Registration Statement.
The Company may require each selling Holder to furnish to the
Company such information regarding the distribution of such Registrable
Securities as is required by law to be disclosed in the Registration Statement
and the Company may exclude from such
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<PAGE> 54
registration the Registrable Securities of any such Holder who unreasonably
fails to furnish such information within a reasonable time after receiving such
request.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (i) the inclusion therein of language, in form and
substance reasonably satisfactory to such Holder, to the effect that the
ownership by such Holder of such securities is not to be construed as a
recommendation by such Holder of the investment quality of the Company's
securities covered thereby and that such ownership does not imply that such
Holder will assist in meeting any future financial requirements of the Company,
or (ii) if such reference to such Holder by name or otherwise is not required by
the Securities Act or any similar Federal statute then in force, the deletion of
the reference to such Holder in any amendment or supplement to the Registration
Statement filed or prepared subsequent to the time that such reference ceases to
be required.
Each Purchaser covenants and agrees that (i) it will not offer
or sell any Registrable Securities under the Registration Statement until it has
received copies of the Prospectus as then amended or supplemented as
contemplated in Section 3(g) and notice from the Company that such Registration
Statement and any post-effective amendments thereto have become effective as
contemplated by Section 3(c) and (ii) the Purchaser and its officers, directors
or Affiliates, if any, will comply with the prospectus delivery requirements of
the Securities Act as applicable to them in connection with sales of Registrable
Securities pursuant to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of such
Registrable Securities until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement contemplated by
Section 3(j), or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed, and, in either case,
has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
4. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall be borne by the Company
whether or not the Registration Statement is filed or becomes effective and
whether or not any Registrable Securities are sold pursuant to the Registration
Statement. The fees and expenses referred to in the foregoing sentence shall
include, without limitation, (i) all registration and filing fees (including,
without limitation, fees and expenses (A) with respect to filings required to be
made with the Nasdaq SmallCap Market and each other securities exchange or
market on which Registrable Securities are required hereunder to be listed and
(B) in compliance with
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state securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel for the underwriters or Holders in connection with Blue
Sky qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as the managing underwriters, if any, or the Holders of a majority
of Registrable Securities may designate)), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable Securities
and of printing prospectuses if the printing of prospectuses is requested by the
managing underwriters, if any, or by the holders of a majority of the
Registrable Securities included in the Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company and Special Counsel for the Holders, (v) fees and disbursements of all
independent certified public accountants referred to in Section 3(l)(iii)
(including, without limitation, the expenses of any special audit and "cold
comfort" letters required by or incident to such performance), (vi) Securities
Act liability insurance, if the Company so desires such insurance, and (vii)
fees and expenses of all other Persons retained by the Company in connection
with the consummation of the transactions contemplated by this Agreement. In
addition, the Company shall be responsible for all of its internal expenses
incurred in connection with the consummation of the transactions contemplated by
this Agreement (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit, the fees and expenses incurred in connection with the listing
of the Registrable Securities on any securities exchange as required hereunder.
(b) In connection with the Registration Statement, the Company
shall reimburse the Holders for the reasonable fees and disbursements of one
firm of attorneys chosen by the Holders of a majority of the Registrable
Securities.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement and without limitation as to
time, indemnify and hold harmless each Holder, the officers, directors, agents
(including any underwriters retained by such Holder in connection with the offer
and sale of Registrable Securities), brokers (including brokers who offer and
sell Registrable Securities as principal as a result of a pledge or any failure
to perform under a margin call of Common Stock), investment advisors and
employees of each of them, each Person who controls any such Holder (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
and the officers, directors, agents and employees of each such controlling
Person, to the fullest extent permitted by applicable law, from and against any
and all losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or relating to any untrue
or alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case of
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any Prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to the
Company by or on behalf of such Holder expressly for use therein, which
information was reasonably relied on by the Company for use therein or to the
extent that such information relates to such Holder or such Holder's proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in the Registration
Statement, such Prospectus or such form of Prospectus or in any amendment or
supplement thereto. The Company shall notify the Holders promptly of the
institution, threat or assertion of any Proceeding of which the Company is aware
in connection with the transactions contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, the directors,
officers, agents and employees, each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons, to
the fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or arising solely out of or based solely
upon any omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading to the extent, but only to the
extent, that such untrue statement or omission is contained in any information
so furnished in writing by such Holder to the Company specifically for inclusion
in the Registration Statement or such Prospectus and that such information was
reasonably relied upon by the Company for use in the Registration Statement,
such Prospectus or such form of prospectus or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus. In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall notify the
Person from whom indemnity is sought (the "Indemnifying Party") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent
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<PAGE> 57
jurisdiction (which determination is not subject to appeal or further review)
that such failure shall have proximately and materially adversely prejudiced the
Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed to
pay such fees and expenses; or (2) the Indemnifying Party shall have failed
promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a conflict of interest
is likely to exist if the same counsel were to represent such Indemnified Party
and the Indemnifying Party (in which case, if such Indemnified Party notifies
the Indemnifying Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within 10 Business Days of written notice thereof to the Indemnifying
Party (regardless of whether it is ultimately determined that an Indemnified
Party is not entitled to indemnification hereunder; provided, that the
Indemnifying Party may require such Indemnified Party to undertake to reimburse
all such fees and expenses to the extent it is finally judicially determined
that such Indemnified Party is not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material fact,
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<PAGE> 58
has been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set forth
in Section 5(c), any attorneys' or other fees or expenses incurred by such party
in connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section was available to such party in accordance with its terms.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5(d) were determined by pro
rata allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 5(d), the Purchaser
shall not be required to contribute, in the aggregate, any amount in excess of
the amount by which the proceeds actually received by the Purchaser from the
sale of the Registrable Securities subject to the Proceeding exceeds the amount
of any damages that the Purchaser has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.
6. Rule 144
The Company shall file the reports required to be filed by it
under the Securities Act and the Exchange Act in a timely manner and, if at any
time the Company is not required to file such reports, they will, upon the
request of any Holder, make publicly available other information so long as
necessary to permit sales of its securities pursuant to Rule 144. The Company
further covenants that it will take such further action as any Holder may
reasonably request, all to the extent required from time to time to enable such
Holder to sell Registrable Securities without registration under the Securities
Act within the limitation of the exemptions provided by Rule 144. Upon the
request of any Holder, the Company shall deliver to such Holder a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
7. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages
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<PAGE> 59
would not provide adequate compensation for any losses incurred by reason of a
breach by it of any of the provisions of this Agreement and hereby further
agrees that, in the event of any action for specific performance in respect of
such breach, it shall waive the defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Except as and to the extent
specifically set forth in Schedule 7(b) attached hereto, neither the Company nor
any of its subsidiaries has, as of the date hereof, nor shall the Company or any
of its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities that is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except as and to the extent specifically set forth in
Schedule 7(b) attached hereto, neither the Company nor any of its subsidiaries
has previously entered into any agreement granting any registration rights with
respect to any of its securities to any Person. Without limiting the generality
of the foregoing, without the written consent of the Holders of a majority of
the then outstanding Registrable Securities, the Company shall not grant to any
Person the right to request the Company to register any securities of the
Company under the Securities Act unless the rights so granted are subject in all
respects to the prior rights in full of the Holders set forth herein, and are
not otherwise in conflict or inconsistent with the provisions of this Agreement.
(c) No Piggyback on Registrations. Except as and to the extent
specifically set forth on Schedule 7(c) hereto, neither the Company nor any of
its security holders (other than the Holders in such capacity pursuant hereto)
may include securities of the Company in the Registration Statement other than
the Registrable Securities, and the Company shall not enter into any agreement
providing any such right to any of its securityholders.
(d) Piggy-Back Registrations. Except as otherwise set forth in
the Purchase Agreement or any secondary offering within 120 days of the Closing
Date, if at any time the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, the Company shall send to each holder of Registrable Securities
written notice of such determination and, if within twenty (20) days after
receipt of such notice, any such holder shall so request in writing, the Company
shall include in such registration statement all or any part of the Registrable
Securities such holder requests to be registered, except that if, in connection
with any Underwritten Offering for the account of the Company the managing
underwriter(s) thereof shall impose a limitation on the number of shares of
Common Stock which may be included in the registration statement because, in
such underwriter(s)' judgment, such limitation is necessary to effect an orderly
public distribution of securities covered thereby, then the Company shall be
obligated to include in such registration statement only such limited portion of
the Registrable Securities for to which such holder has
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<PAGE> 60
requested inclusion hereunder. Any exclusion of Registrable Securities shall be
made pro rata among the holders seeking to include Registrable Securities, in
proportion to the number of Registrable Securities sought to be included by such
holders; provided, however, that the Company shall not exclude any Registrable
Securities unless the Company has first excluded all outstanding securities the
holders of which are not entitled by right to inclusion of securities in such
registration statement; and provided, further, however, that, after giving
effect to the immediately preceding proviso, any exclusion of Registrable
Securities shall be made pro rata with holders of other securities having the
right to include such securities in such registration statement. No right to
registration of Registrable Securities under this Section shall be construed to
limit any registration otherwise required hereunder.
(e) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least a majority of the then outstanding Registrable
Securities; provided, however, that, for the purposes of this sentence,
Registrable Securities that are owned, directly or indirectly, by the Company,
or an Affiliate of the Company are not deemed outstanding. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with
respect to a matter that relates exclusively to the rights of Holders and that
does not directly or indirectly affect the rights of other Holders may be given
by Holders of at least a majority of the Registrable Securities to which such
waiver or consent relates; provided, however, that the provisions of this
sentence may not be amended, modified, or supplemented except in accordance with
the provisions of the immediately preceding sentence.
(f) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 4:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 4:30
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given.
If to the Company: PlayNet Technologies, Inc.
152 West 57th Street
29th Floor
New York, New York 10019
Facsimile No.: (212) 586-1652
Attention: Schmuel Cohen
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<PAGE> 61
with copies to: Philip K. Yachmetz
Attorney At Law
7 North Koewing Place
West Orange, NJ 07052-9333
Facsimile No.: (201) 243-9333
If to the Purchaser Southbrook International
Investments, Ltd.
c/o Trippoak Advisors, Inc.
630 Fifth Avenue
Suite 2000
New York, NY 10111
Facsimile No.: (212) 332-3256
Attn: Robert L. Miller
with copies to: Robinson Silverman Pearce
Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
If to any other Person who is then the registered Holder:
To the address of such Holder
as it appears in the stock
transfer books of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(g) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. The Purchaser may assign its rights hereunder in the manner and to
the Persons as permitted hereunder and under the Purchase Agreement.
(h) Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding
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<PAGE> 62
obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
were the original thereof.
(i) Governing Law; Submission to Jurisdiction;. This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York, without regard to principles of conflicts of law. The Company hereby
irrevocably submits to the jurisdiction of any New York state court sitting in
the Borough of Manhattan in the City of New York or any federal court sitting in
the Borough of Manhattan in the City of New York (collectively, the "New York")
in respect of any Proceeding arising out of or relating to this Agreement, and
irrevocably accepts for itself and in respect of its property, generally and
unconditionally, jurisdiction of the New York Courts. The Company irrevocably
waives to the fullest extent it may effectively do so under applicable law any
objection that it may now or hereafter have to the laying of the venue of any
such Proceeding brought in any New York Court and any claim that any such
Proceeding brought in any New York Court has been brought in an inconvenient
forum. Nothing herein shall affect the right of any Holder to serve process in
any manner permitted by law or to commence legal proceedings or otherwise
proceed against the company in any other jurisdiction.
(j) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(k) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(l) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(m) Shares Held by The Company and its Affiliates. Whenever
the consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than the Purchaser or transferees or successors or assigns
thereof if such Persons are deemed to be Affiliates solely by reason of their
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
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<PAGE> 63
(n) Assignment of Registration Rights. The rights of the
Purchaser hereunder, including the right to have the Company register for resale
the Registrable Securities in accordance with the terms of this Agreement, shall
be automatically assignable by the Purchaser to any assignee or transferee of
all or a portion of the Convertible Debentures, the Warrant or the Registrable
Securities if: (i) the Purchaser 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 such registration rights are being
transferred or assigned, (iii) following such transfer or assignment the further
disposition of such securities by the transferee or assignees restricted under
the Securities Act and applicable state securities laws, (iv) at or before the
time the Company receives the written notice contemplated by clause (ii) of this
Section, the transferee or assignee agrees in writing with the Company to be
bound by all of the provisions of this Agreement, and (v) such transfer shall
have been made in accordance with the applicable requirements of the Purchase
Agreement. The rights to assignment shall apply to the Purchaser's (and to
subsequent) successors and assigns.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
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<PAGE> 64
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
PLAYNET TECHNOLOGIES, INC.
By: _____________________________
Name: Glenn P. Sblendorio
Title: Executive Vice President
SOUTHBROOK INTERNATIONAL
INVESTMENTS, LTD.
By: _____________________________
Name: Kenneth L. Henderson
Title: Assistant Secretary
<PAGE> 65
Schedule 7(c)
[To be provided by Company prior to closing]
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<PAGE> 66
EXHIBIT E
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
PLAYNET TECHNOLOGIES, INC.
WARRANT
Dated August 20, 1997
PlayNet Technologies, Inc., a Delaware corporation (the "Company"),
hereby certifies that, for value received, Southbrook International Investments,
Ltd., or its registered assigns ("Holder"), is entitled, subject to the terms
set forth below, to purchase from the Company up to a total of 800,000 shares of
Common Stock, $.001 par value per share (the "Common Stock"), of the Company
(each such share, a "Warrant Share" and all such shares, the "Warrant Shares")
at an exercise price equal to $5.25 per share (as adjusted from time to time as
provided in Section 8, the "Exercise Price"), at any time and from time to time
from and after the date hereof and through and including August 20, 2002 (the
"Expiration Date"), and subject to the following terms and conditions:
1. Registration of Warrant. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
2. Registration of Transfers and Exchanges.
(a) The Company shall register the transfer of any portion
of this Warrant in the Warrant Register, upon surrender of this Warrant, with
the Form of Assignment attached hereto duly completed and signed, to the Company
at the office specified in or pursuant to Section 3(b). Upon any such
registration or transfer, a new warrant to purchase Common Stock, in
substantially the form of this Warrant (any such new warrant, a "New Warrant"),
evidencing the portion of this Warrant so transferred shall be issued to the
transferee and a New Warrant evidencing the remaining portion of this Warrant
not so transferred, if any, shall be issued to the transferring Holder. The
acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance of such transferee of all of the rights and obligations of a holder
of a Warrant.
<PAGE> 67
(b) This Warrant is exchangeable, upon the surrender hereof
by the Holder to the office of the Company specified in or pursuant to Section
3(b) for one or more New Warrants, evidencing in the aggregate the right to
purchase the number of Warrant Shares which may then be purchased hereunder. Any
such New Warrant will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered
Holder on any business day before 5:30 P.M., New York time, at any time and from
time to time on or after the date hereof to and including the Expiration Date.
At 5:30 P.M., New York time on the Expiration Date, the portion of this Warrant
not exercised prior thereto shall be and become void and of no value.
(b) Subject to Sections 2(b), 4 and 9, upon surrender of
this Warrant, with the Form of Election to Purchase attached hereto duly
completed and signed, to the Company at its office at 152 West 57th Street, New
York, NY 10019 Attention: Chief Executive Officer, or at such other address as
the Company may specify in writing to the then registered Holder, and upon
payment of the Exercise Price multiplied by the number of Warrant Shares that
the Holder intends to purchase hereunder, in lawful money of the United States
of America, in cash or by certified or official bank check or checks, all as
specified by the Holder in the Form of Election to Purchase, the Company shall
promptly (but in no event later than 3 business days after the date of exercise)
issue or cause to be issued and cause to be delivered to or upon the written
order of the Holder and in such name or names as the Holder may designate, a
certificate for the Warrant Shares issuable upon such exercise, free of
restrictive legends other than as required by applicable law. Any person so
designated by the Holder to receive Warrant Shares shall be deemed to have
become holder of record of such Warrant Shares as of the Date of Exercise of
this Warrant.
A "Date of Exercise" means the date on which the Company
shall have received (i) this Warrant (or any New Warrant, as applicable), with
the Form of Election to Purchase attached hereto (or attached to such New
Warrant) appropriately completed and duly signed, and (ii) payment of the
Exercise Price for the number of Warrant Shares so indicated by the holder
hereof to be purchased.
(c) This Warrant shall be exercisable, either in its
entirety or, from time to time, for a portion of the number of Warrant Shares.
If less than all of the Warrant Shares which may be purchased under this Warrant
are exercised at any time, the Company shall issue or cause to be issued, at its
expense, a New Warrant evidencing the right to purchase the remaining number of
Warrant Shares for which no exercise has been evidenced by this Warrant.
4. Demand Registration. At any time during the term of this
Warrant when the Warrant Shares are not registered pursuant to an effective
registration statement, the Holder may make a written request for the
registration under the Securities Act of 1933, as amended, (a "Demand
Registration") of all or any part of the Warrant Shares (the "Registrable
Securities"), and the Company shall use its best efforts to effect such Demand
Registration as promptly as possible, but in any case within 90 days thereafter.
Any request for a Demand Registration shall specify the aggregate number of
Registrable Securities proposed to be sold and shall also specify the intended
method of disposition thereof. The right to cause a registration of the
Registrable Securities under this Section 4 shall be limited to two such
registration. In any registration initiated as a Demand Registration, the
Company will pay all registration expenses in connection therewith. A Demand
Registration shall not be counted as a Demand Registration hereunder until such
Demand Registration has been declared effective by the
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<PAGE> 68
Securities and Exchange Commission and maintained continuously effective for a
period of at least 360 days or such shorter period when all Registrable
Securities included therein have been sold in accordance with such Demand
Registration, provided, however that any days on which such registration
statement is not effective or on which the Holder is not permitted by the
Company or any governmental authority to sell Warrant Shares under such
registration statement shall not count towards such 360 day period.
5. Payment of Taxes. The Company will pay all documentary
stamp taxes attributable to the issuance of Warrant Shares upon the exercise of
this Warrant; provided, however, that the Company shall not be required to pay
any such tax which may be payable in respect of any transfer involved in the
registration of any certificates for Warrant Shares or Warrants in a name other
than that of the Holder, and the Company shall not be required to issue or cause
to be issued or deliver or cause to be delivered the certificates for Warrant
Shares unless or until the person or persons requesting the issuance thereof
shall have paid to the Company the amount of such tax or shall have established
to the satisfaction of the Company that such tax has been paid. The Holder shall
be responsible for all other tax liability that may arise as a result of holding
or transferring this Warrant or receiving Warrant Shares upon exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated, lost,
stolen or destroyed, the Company may in its discretion issue or cause to be
issued in exchange and substitution for and upon cancellation hereof, or in lieu
of and substitution for this Warrant, a New Warrant, but only upon receipt of
evidence reasonably satisfactory to the Company of such loss, theft or
destruction and indemnity, if requested, satisfactory to it. Applicants for a
New Warrant under such circumstances shall also comply with such other
reasonable regulations and procedures and pay such other reasonable charges as
the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants that
it will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant as herein provided, the
number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holders (taking into
account the adjustments and restrictions of Section 8). The Company covenants
that all Warrant Shares that shall be so issuable and deliverable shall, upon
issuance and the payment of the applicable Exercise Price in accordance with the
terms hereof, be duly and validly authorized, issued and fully paid and
nonassessable.
8. Certain Adjustments. The Exercise Price and number of
Warrant Shares issuable upon exercise of this Warrant are subject to adjustment
from time to time as set forth in this Section 8. Upon each such adjustment of
the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior
to the Expiration Date be entitled to purchase, at the Exercise Price resulting
from such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock (as
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<PAGE> 69
defined below) or on any other class of capital stock and not the Common Stock)
payable in shares of the Common Stock, (ii) subdivide outstanding shares of the
Common Stock into a larger number of shares, or (iii) combine outstanding shares
of the Common Stock into a smaller number of shares, the Exercise Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of
the Common Stock (excluding treasury shares, if any) outstanding before such
event and of which the denominator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding after such event. Any adjustment
made pursuant to this Section shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision or combination, and shall apply to
successive subdivisions and combinations.
(b) In case of any reclassification of the Common Stock,
any consolidation or merger of the Company with or into another person, the sale
or transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of the
Common Stock following such reclassification, consolidation, merger, sale,
transfer or share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property equal to the amount of securities
or property that such Holder would have been entitled to had such Holder
exercised this Warrant immediately prior to such reclassification,
consolidation, merger, sale, transfer or share exchange, subject to continuing
adjustment as set forth herein (except that such adjustment, if any, should be
in regard of the new entity or reclassified securities). The terms of any such
consolidation, merger, sale, transfer or share exchange shall include such terms
so as to continue to give to the Holder the right to receive the securities or
property set forth in this Section 8(b) upon any exercise following any such
reclassification, consolidation, merger, sale, transfer or share exchange.
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to holders
of this Warrant) evidences of its indebtedness or assets or rights or warrants
to subscribe for or purchase any security (excluding those referred to in
Sections 8(a), (b) and (d)), then in each such case the Exercise Price shall be
determined by multiplying the Exercise Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
a nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the holders of a majority in interest of
the Warrants then outstanding.
(d) If, at any time while this Warrant is outstanding, the
Company shall issue or cause to be issued rights or warrants to acquire or
otherwise sell or distribute shares of Common Stock to all holders of Common
Stock for a consideration per share less than the Exercise Price then in effect,
then, forthwith upon such issue or sale, the Exercise Price shall be reduced to
the price (calculated to the nearest cent) determined by dividing (i) an amount
equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such issue or sale multiplied by the Exercise Price, and
-4-
<PAGE> 70
(B) the consideration, if any, received or receivable by the Company upon such
issue or sale by (ii) the total number of shares of Common Stock outstanding
immediately after such issue or sale.
(e) For the purposes of this Section 8, the following
clauses shall also be applicable:
(i) Record Date. In case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them (A)
to receive a dividend or other distribution payable in shares of the Common
Stock or in Convertible Securities, or (B) to subscribe for or purchase Common
Stock or Convertible Securities, then such record date shall be deemed to be the
date of the issue or sale of the shares of the Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) Treasury Shares. The number of shares of the
Common Stock outstanding at any given time shall not include shares owned or
held by or for the account of the Company, and the disposition of any such
shares shall be considered an issue or sale of the Common Stock.
(f) All calculations under this Section 8 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to
Section 8(c) above, the Company, after receipt of the determination by the
Appraiser, shall have the right to select an additional Appraiser, in good
faith, in which case the adjustment shall be equal to the average of the
adjustments recommended by each Appraiser. The Company shall promptly mail or
cause to be mailed to each Holder, a notice setting forth the Exercise Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment. Such adjustment shall become effective immediately after the
record date mentioned above. All determinations with respect to adjustments by
the Company hereunder shall be made by the Board of Directors in good faith.
(h) If:
(i) the Company shall
declare a dividend
(or any other
distribution) on its
Common Stock; or
(ii) the Company shall
declare a special
nonrecurring cash
dividend on or a
redemption of its
Common Stock; or
(iii) the Company shall
authorize the
granting to all
holders of the
Common Stock rights
or warrants to
subscribe for or
purchase any shares
of capital stock of
any class or of any
rights; or
(iv) the approval of any
stockholders of the
Company shall be
required in
connection with any
reclassification of
the Common Stock of
the
-5-
<PAGE> 71
Company, any
consolidation or
merger to which the
Company is a party,
any sale or transfer
of all or
substantially all of
the assets of the
Company, or any
compulsory share
exchange whereby the
Common Stock is
converted into other
securities, cash or
property; or
(v) the Company shall
authorize the
voluntary
dissolution,
liquidation or
winding up of the
affairs of the
Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
9. Fractional Shares. The Company shall not be required to
issue or cause to be issued fractional Warrant Shares on the exercise of this
Warrant. The number of full Warrant Shares which shall be issuable upon the
exercise of this Warrant shall be computed on the basis of the aggregate number
of Warrant Shares purchasable on exercise of this Warrant so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 9,
be issuable on the exercise of this Warrant, the Company shall pay an amount in
cash equal to the Exercise Price multiplied by such fraction.
10. Notices. Any and all notices or other communications or
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section prior to 4:30 p.m. (Eastern Standard Time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 4:30 p.m. (Eastern Standard Time) on any date and earlier
than 11:59 p.m. (Eastern Standard Time) on such date, (iii) the business day
following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is
required to be given. The addresses for such communications shall be: (1) if to
the Company, to PlayNet Technologies, Inc., 152 West 57th Street, New York, New
York 10019, Attention: Chief Executive Officer, or to facsimile no. (212)
586-1652 or (ii) if to the Holder, to the Holder at the address or facsimile
number appearing on the Warrant Register or such other address or facsimile
number as the Holder may provide to the Company in accordance with this Section
10.
-6-
<PAGE> 72
11. Warrant Agent.
(a) The Company shall serve as warrant agent under
this Warrant. Upon thirty (30) days' notice to the Holder, the Company may
appoint a new warrant agent.
(b) Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any consolidation
to which the Company or any new warrant agent shall be a party or any
corporation to which the Company or any new warrant agent transfers
substantially all of its corporate trust or shareholders services business shall
be a successor warrant agent under this Warrant without any further act. Any
such successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed (by first class mail, postage prepaid) to the Holder
at the Holder's last address as shown on the Warrant Register.
12. Miscellaneous.
(a) This Warrant shall be binding on, and inure to
the benefit of, the parties hereto and their respective successors and permitted
assigns. This Warrant may be amended only in writing signed by the Company and
the Holder.
(b) Subject to Section 12(a), above, nothing in this
Warrant shall be construed to give to any person or corporation other than the
Company and the Holder any legal or equitable right, remedy or cause under this
Warrant; this Warrant shall be for the sole and exclusive benefit of the Company
and the Holder.
(c) This Warrant shall be governed by and construed
and enforced in accordance with the internal laws of the State of New York
without regard to the principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do
not constitute a part of this Warrant and shall not be deemed to limit or affect
any of the provisions hereof.
(e) In case any one or more of the provisions of this
Warrant shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall not
in any way be affected or impaired thereby and the parties will attempt in good
faith to agree upon a valid and enforceable provision which shall be a
commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Warrant.
-7-
<PAGE> 73
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its authorized officer as of the date first indicated above.
PLAYNET TECHNOLOGIES, INC.
By:______________________________
Name:
Title:
<PAGE> 74
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To PlayNet Technologies, Inc.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of Common Stock ("Common Stock"), $.0021 par value per share, of PlayNet
Technologies, Inc. and encloses herewith $________ in cash or certified or
official bank check or checks, which sum represents the aggregate Exercise Price
(as defined in the Warrant) for the number of shares of Common Stock to which
this Form of Election to Purchase relates, together with any applicable taxes
payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
Dated:__________________, ____ Name of Holder:
(Print)_________________________________________
(By:) _________________________________________
(Name:)
(Title:)
(Signature must conform in all respects to name
of holder as specified on the face of the
Warrant)
<PAGE> 75
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of PlayNet Technologies,
Inc. to which the within Warrant relates and appoints ________________ attorney
to transfer said right on the books of PlayNet Technologies, Inc. with full
power of substitution in the premises.
Dated:
_________________, _____
_______________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the
Warrant)
_______________________________________________
Address of Transferee
_______________________________________________
_______________________________________________
In the presence of:
______________________
<PAGE> 76
AGREEMENT
Agreement, dated as of May 20, 1997 (the "Agreement"), between
PlayNet Technologies, Inc., a Delaware corporation (the "Company"), and
Southbrook International Investments, Ltd., a corporation organized and existing
under the laws of the British Virgin Islands ("Southbrook").
WHEREAS, the Company and Southbrook are entering into a
Convertible Debenture Purchase Agreement (the "Purchase Agreement") pursuant to
which the Company will issue and sell to Southbrook and Southbrook will acquire
certain of the Company's Convertible Debentures (the "Debentures").
WHEREAS, the purchase price of the Debentures is $3,600,000
(the "Purchase Price").
WHEREAS, in connection with the Purchase Agreement, certain of
the Company's shareholders have entered into Lock-Up Agreements with Southbrook
(the "Lock-Up Agreements").
WHEREAS, Ron Borta, a shareholder of the Company, has not
delivered a Lock-Up Agreement to Southbrook.
WHEREAS, the Company has agreed to use its best efforts to
obtain a Lock-Up Agreement from Ron Borta by June 30, 1997 in the event that the
Company's registration statement on Form S-1 (the "S-1 Registration Statement")
is not declared effective by the Securities and Exchange Commission prior to
June 20, 1997.
IN CONSIDERATION of the mutual covenants and agreements set
forth herein and for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows:
1. The Company acknowledges the receipt of executed copies of
the Lock-Up Letters from each of Shmuel Cohen, Castellon Ltd., N.Y. Holdings,
Ltd and KF Chemical Co. Inc. (collectively, the "Shareholders") to Southbrook
pursuant to which each of the Shareholders have agreed not to sell, offer to
sell, grant any option for the sale of, assign, transfer, loan, pledge,
hypothecate, or otherwise encumber or dispose of any legal or beneficial
interest in any shares of common stock, par value $.001 per share, of the
Company (the "Common Stock") such Shareholder beneficially owns for a period
commencing on the date hereof until the earlier of (i) the date the Company pays
the full repayment price to Southbrook pursuant to Section 6(a) of the
Debentures, or (ii) 180 days after the Securities and Exchange Commission
declares effective the registration statement on Form S-3 covering the resale of
the shares of Common Stock into which the Debentures are convertible.
2. The Company represents and warrants that it shall use its
best efforts to obtain a Lock-Up Agreement from Ron Borta, in the form annexed
hereto as Exhibit "A", by June 30, 1997 in the event that the S-1 Registration
Statement is not declared effective by the Commission on or prior to June 20,
1997.
3. The Company acknowledges that Southbrook is holding back
$250,000 of the Purchase Price (the "Hold Back Amount") because Ron Borta has
not delivered to Southbrook a
<PAGE> 77
Lock-Up Agreement and the Company agrees that such hold back shall not
constitute a default by Southbrook under the Purchase Agreement.
4. Southbrook represents and warrants that it shall pay the
Hold Back Amount upon the earliest of (i) the date the S-1 Registration
Statement is declared effective by the Commission, (ii) the date Southbrook
receives a Lock-Up Agreement from Ron Borta as described in paragraph 2 above or
(iii) the date on which Southbrook no longer holds any Debentures.
5. Each of the Company and Southbrook hereby represent and
warrant to the other that the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on its part and, when executed and delivered,
this Agreement shall have been validly executed and delivered by it and shall
constitute the legal, valid and binding obligation of it, enforceable against it
in accordance with its terms.
6. This Agreement may be executed in one or more counterparts,
each of which shall for all purposes be deemed to be an original and all of
which shall constitute the same instrument. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
7. No amendment of this letter agreement shall be binding
unless in a writing executed by each party hereto. Any provisions of this
Agreement may be waived at any time in a writing signed by the party which is
entitled to the benefits of the provisions so waived. No waiver of any of
provision of this Agreement shall be deemed to or shall constitute a waiver of
any other provision hereof. No delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof.
8. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York without
regard to the principles of conflicts of law thereof.
-2-
<PAGE> 78
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first indicated above.
PLAYNET TECHNOLOGIES, INC.
By:________________________________
Glenn P. Sblendorio
Executive Vice President
SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD.
By:________________________________
Kenneth L. Henderson
Assistant Secretary
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) PLAYNET
TECHNOLOGIES, INC. AND SUBMSIDIARIES FOR THE QUARTERLY PERIOD ENDED APRIL 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FILING ON FORM
10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<CASH> 335,478
<SECURITIES> 0
<RECEIVABLES> 152,538
<ALLOWANCES> 152,538
<INVENTORY> 3,031,167
<CURRENT-ASSETS> 3,679,770
<PP&E> 1,291,110
<DEPRECIATION> 340,416
<TOTAL-ASSETS> 9,181,957
<CURRENT-LIABILITIES> 12,313,610
<BONDS> 0
0
0
<COMMON> 14,980
<OTHER-SE> (4,895,570)
<TOTAL-LIABILITY-AND-EQUITY> 9,181,957
<SALES> 347,085
<TOTAL-REVENUES> 347,085
<CGS> (990,455)
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,625,284
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 807,428
<INCOME-PRETAX> (7,076,102)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,076,102)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
