<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported) DECEMBER 17, 1997
INTERACTIVE ENTERTAINMENT LIMITED
(FORMERLY SKY GAMES INTERNATIONAL LTD.)
(Exact name of registrant as specified in its charter)
BERMUDA 0-22622 98-0170199
(State or other (Commission File Number) (IRS Employer
Jurisdiction of Identification Number)
incorporation)
845 CROSSOVER LANE
SUITE D-215
MEMPHIS, TENNESSEE 38117
(901) 537-3800
(Address, including zip code,
and telephone number, including area code,
of registrant's principal executive offices)
<PAGE>
ITEM 5. OTHER EVENTS.
On December 17, 1997, Interactive Entertainment Limited (the "Company")
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closed the sale of (i) 1,000 shares (the "Preferred Shares") of the Company's
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Series A Convertible Preferred Stock of the Company's Class B Preferred Stock
(the "Preferred Stock") to two accredited investors (the "Purchasers") and (ii)
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two Warrants, each entitling the holder thereof to purchase 30,859 shares (the
"Warrant Shares") of the Company's Common Shares (the "Common Stock"), at a
- --------------- ------------
purchase price for such Preferred Shares and Warrants equal to $1,000 multiplied
by the number of Preferred Shares purchased by such Purchaser (the "Purchase
--------
Price") in a tranche with an aggregate purchase price of $1,000,000 ("Tranche
- ----- -------
A"). A second tranche of Preferred Shares and Warrants (which Warrants shall be
for the purchase of an aggregate of 123,433 Warrant Shares) with an aggregate
purchase price of $2,000,000 ("Tranche B") may be sold by the Company and shall
---------
be purchased by the Purchasers, upon the terms and subject to the satisfaction
or waiver of certain conditions, at the option of the Company, which option
shall be exercisable once the Company's gaming software has been installed and
is available to paying passengers in the entire cabin of one B-747-400, B-777 or
A-340 on Singapore Airlines. In the event that the Purchasers receive notice
electing that the Tranche B transaction be consummated, each Purchaser shall be
obligated to purchase its pro rata share of Preferred Shares and Warrants (based
on the number of shares of Preferred Stock purchased by such Purchaser with
respect to the closing of Tranche A relative to the number of shares of
Preferred Stock purchased by all the Purchasers hereunder with respect to such
closing) within the time period designated in the notice. Unless it has
delivered a notice, the Company shall have no obligation (i) to sell securities
pursuant to or (ii) to permit a Purchaser to purchase securities pursuant to
Tranche B. The Company's option with respect to Tranche B shall expire if not
exercised within six months of December 17, 1997.
The Preferred Shares are convertible into such number of fully paid and
non-assessable shares of Common Stock ("Conversion Shares") as is computed in
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accordance with the terms of resolutions adopted by the Executive Committee of
the Board of Directors of the Company (a "Conversion") at any time and from time
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to time, from and after the earlier to occur of (i) the date which is three
months following the closing of Tranche A and (ii) the date on which the
Registration Statement (pursuant to the Registration Rights Agreement discussed
below) is declared effective (the "Initial Conversion Date").
-----------------------
The number of Conversion Shares to be delivered by the Company pursuant to
a Conversion shall be determined by dividing the aggregate stated value of the
Preferred Shares to be converted by the Conversion Price (as defined herein) in
effect on the Conversion Date. "Conversion Price" shall mean the lesser of (A)
----------------
110% of the average of the closing bid prices for the Common Stock on the five
trading days occurring immediately prior to (but not including) the closing date
of Tranche A (the "Fixed Conversion Price") and (B) a price (the "Floating
---------------------- --------
Conversion Price") calculated by (i) determining the average of the three lowest
- ----------------
closing bid prices for the Common Stock during the 30 trading days occurring
immediately prior to (but not including) the Conversion Date, and (ii)
multiplying such average by a percentage determined as described below (the
"Conversion Percentage"). In the event that, prior to the expiration of the
- ----------------------
period ending on the later of the six month anniversary of the closing date of
Tranche A or the 45th day following the Effective Date (as defined in the
Registration Rights Agreement), the Company incurs, assumes or guarantees any
indebtedness in excess of $1,500,000, individually or in the aggregate, without
the prior written consent of the holders of two-thirds of the Series A Preferred
Stock then outstanding then the Conversion Percentage for all conversions of
Preferred Shares thereafter shall be 85%. In the event the Company exceeds
the foregoing limitations without the requisite approval, the Company shall give
each Purchaser written notice of such event within five business days of the
date the limitation was exceeded.
<PAGE>
The Conversion Percentage shall otherwise be determined in accordance with
the following schedule, where "X" represents the Conversion Date:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Number of Days
After Closing of Tranche A Conversion Percentage
- ---------------------------------------------------------------------------------------------------------
<S> <C>
0 less than and equal to X less than and equal to 90 100%
- ---------------------------------------------------------------------------------------------------------
90 less than X less than and equal to 120 95%
- ---------------------------------------------------------------------------------------------------------
120 less than X less than and equal to 180 92.5%
- ---------------------------------------------------------------------------------------------------------
180 less than X less than and equal to 210 90%
- ---------------------------------------------------------------------------------------------------------
210 less than X less than and equal to 360 87.5%
- ---------------------------------------------------------------------------------------------------------
360 less than X 85%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to each Warrant, the Holder thereof shall have the right to
exercise the Warrant at any time and from time to time following the expiration
of six months from December 17, 1997 (the "Issue Date") up to and including 5:00
----------
p.m., eastern time, on December 17, 1999 as to all or any part of the shares of
Common Stock covered thereby (the "Warrant Shares"). The "Exercise Price"
-------------- --------------
payable by the Holder in connection with the exercise of the Warrant shall be
equal to the lesser of (i) $4.25 and (ii) 110% of the average of the closing bid
prices for the Common Stock on the five trading days occurring immediately prior
to (but not including) the closing date of Tranche A.
The Company has agreed to effect the registration of the Conversion Shares,
the Warrant Shares and the shares of Common Stock issued as payment of dividends
on the Preferred Stock under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Rights Agreement of even date
- ----------------
herewith by and among the Company and the Purchasers (the "Registration Rights
-------------------
Agreement").
- ---------
European Venture Finance, Ltd. acted as broker for the placement of the
Preferred Shares and Warrants, and will receive a commission of 8% of the
proceeds of this financing, offset by the Company's direct costs in the
placement. There was no underwriter for the placement of the Preferred Shares
and Warrants. The Preferred Shares and Warrant were placed in reliance on the
exemption from registration under the Securities Act provided by Regulation D
promulgated under the Securities Act.
The agreements and documents discussed above are attached as exhibits
hereto and are incorporated herein by reference.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits (numbered in accordance with Item 601 of Regulation
S-K).
4(a). Resolutions of the Board of Directors of Interactive
Entertainment Limited setting forth the Rights and
Preferences of the Series A Convertible Preferred Stock of
the Class B Preference Shares.
(b). Form of Warrant issued to each of Credit Suisse First
Boston and CC Investments, LDC.
4(c). Form of Registration Rights Agreement with each of Credit
Suisse First Boston and CC Investments, LDC dated December
17, 1997.
99. Form of Securities Purchase Agreement with each of Credit
Suisse First Boston and CC Investments, LDC dated December
17, 1997, without exhibits.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERACTIVE ENTERTAINMENT LIMITED
December 23, 1997 By: /s/ David S. Lamm
---------------------------------------
David S. Lamm
Chief Financial Officer, Secretary and
Treasurer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
4(a) Resolutions of the Board of Directors of Interactive xx
Entertainment Limited setting forth the Rights and
Preferences of the Series A Convertible Preferred
Stock of the Class B Preference Shares.
4(b) Form of Warrant issued to each of Credit Suisse First xx
Boston and CC Investments, LDC.
4(c) Form of Registration Rights Agreement with each of xx
Credit Suisse First Boston and CC Investments, LDC
dated December 17, 1997.
99 Form of Securities Purchase Agreement with each of xx
Credit Suisse First Boston and CC Investments, LDC
dated December 17, 1997, without exhibits.
</TABLE>
<PAGE>
EXHIBIT 4(a)
- ------------
RESOLVED, that pursuant to the authority granted to the Board of Directors
of Interactive Entertainment Limited, a Bermuda exempted company (the
"Company"), in accordance with the provisions of the Corporation's Bye-Laws, the
Executive Committee of the Board of Directors hereby authorizes a series of the
Corporation's previously authorized Class B Preference Shares, par value $.01
per share (the "Preferred Stock"), and hereby states the designation and number
---------------
of shares, and fixes the relative rights, preferences, privileges and
restrictions thereof as follows:
1. DESIGNATION AND AMOUNT.
----------------------
The designation of this series, which consists of three thousand (3,000)
shares (the "Preferred Shares") of Class B Preferred Stock, is the Series A
----------------
Convertible Preference Shares (the "Series A Preferred Stock") and the face
------------------------
amount shall be One Thousand Dollars ($1,000) per share (the "Stated Value").
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2. DIVIDENDS.
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(a) Dividend Rate; Payments. The holders (each, a "Holder" and
----------------------- ------
collectively, the "Holders") of Preferred Shares shall be entitled to receive,
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to the extent permitted by applicable law, subject to the prior, full payment of
any accumulated and unpaid dividends on any class or series of Senior Securities
(as defined below) and in preference to the payment of any dividend on any class
or series of Junior Securities (as defined below), cumulative dividends
("Dividends") on each Preferred Share in an amount equal to, on an annualized
- -----------
basis, the Stated Value of such Preferred Share times eight percent (8%).
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Dividends shall accrue, whether or not declared, on each Preferred Share from
the date of the original issuance thereof (the "Purchase Date") pursuant to the
-------------
terms of the Securities Purchase Agreement governing the issuance and sale of
the Preferred Stock (the "Securities Purchase Agreement")through the earlier to
-----------------------------
occur of (A) the Maturity Date (as defined below) and (B) the redemption or
conversion thereof in accordance with the terms hereof. Accrued Dividends on a
Preferred Share shall be payable on each Conversion Date (as defined below) and
on the Maturity Date (as defined below) (each, a "Dividend Payment Date"). If,
---------------------
on any date, Dividends on any outstanding Preferred Shares have not been paid or
declared by the Board of Directors in accordance with applicable law and set
aside for payment with respect to all Dividend Payment Dates preceding such
date, the aggregate amount of such Dividends shall be fully paid or declared and
set aside for payment before any distribution, whether by way of dividend or
otherwise, shall be declared, paid or set apart with respect to any Junior
Securities on or after such date. Dividends shall be paid either in cash or, at
the option of the Corporation (the "Stock Payment Option"), and subject to the
--------------------
satisfaction of the conditions set forth in paragraph 2(e) below (the "Stock
-----
Payment Conditions"), in shares (the "Dividend Payment Shares") of the
- ------------------ -----------------------
Corporation's common stock (the "Common Stock"). Cash Dividends shall be paid
------------
to each Holder within five (5) Business Days following the applicable Dividend
Payment Date by delivering immediately available funds to such Holder in
accordance with such Holder's wiring instructions. Any amount of Dividends
payable in cash which is not paid within five (5) Business Days of the
applicable Dividend Payment Date shall bear interest at an annual rate equal to
the lower of (x) the "prime" rate (as published in the Wall Street Journal) on
-------------------
such fifth (5th) Business Day plus three percent (3%) and (y) the highest rate
----
permitted by applicable law, for the number of days elapsed from such Dividend
Payment Date until such amount is paid in full (the "Default Interest Rate").
---------------------
<PAGE>
(b) Exercise of Stock Payment Option. In order for the Corporation to
--------------------------------
exercise the Stock Payment Option, it must deliver written notice thereof (a
"Stock Payment Exercise Notice") to each Holder on the Tranche A Closing Date
- ------------------------------
(as defined in the Securities Purchase Agreement, the "Tranche A Closing Date")
----------------------
and on or before the tenth (10th) Business Day prior to each calendar quarter
thereafter specifying that the Corporation shall pay Dividends during such
calendar quarter (or shorter period in the case of the notice delivered on such
Closing Date) in Dividend Payment Shares. The Corporation's election as set
forth in a Stock Payment Exercise Notice shall be irrevocable during the period
to which it relates.
(c) Delivery of Dividend Payment Shares. Upon exercise of the Stock
-----------------------------------
Payment Option, the Corporation shall deliver to each Holder, on or before the
third (3rd) Business Day following the applicable Dividend Payment Date (the
"Dividend Payment Share Delivery Date"), the aggregate number of whole Dividend
- -------------------------------------
Payment Shares that is determined by dividing (x) the amount of the Dividend to
which such Holder is entitled as of such Dividend Payment Date with respect to
all of such Holder's Preferred Shares by (y) the applicable Conversion Price (as
defined below) on such Dividend Payment Date. The Corporation shall effect
delivery of Dividend Payment Shares to a Holder by, as long as the Corporation's
transfer agent is participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer program, crediting the account of such Holder or
its nominee at DTC with the number of Dividend Payment Shares required to be
delivered, no later than the close of business on such Dividend Payment Share
Delivery Date. In the event that the condition specified in the immediately
preceeding sentence is not satisfied as of the applicable Dividend Payment Share
Delivery Date, or if a Holder specifies in the applicable Conversion Notice (as
defined below) or otherwise notifies the Corporation in writing prior to the
applicable Dividend Payment Date that such Holder wishes to receive physical
certificates, the Corporation shall effect delivery of Dividend Payment Shares
by delivering to the Holder or its nominee physical certificates representing
such Dividend Payment Shares, no later than the close of business on such
Dividend Payment Share Delivery Date. No fractional Dividend Payment Shares
shall be issued; the Corporation shall, in lieu thereof, issue a number of
Dividend Payment Shares which reflects a rounding up to the next whole number of
shares. Dividend Payment Shares shall be fully paid and non-assessable, free and
clear of any liens, claims, preemptive rights or encumbrances imposed by or
through the Corporation other than as provided for in the Corporation's Bye-
laws.
<PAGE>
(d) Failure to Deliver Dividend Payment Shares. In the event that the
------------------------------------------
Corporation fails for any reason to deliver to a Holder certificates
representing or to have credited to Holder's or its nominee's account at DTC the
appropriate number of Dividend Payment Shares on or before the Dividend Payment
Share Delivery Date therefor, and such failure continues for three (3) Business
Days following the Dividend Payment Share Delivery Date, the Corporation shall
pay to such Holder payments in the amount of (i) (N/365) multiplied by (ii) the
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amount of such Dividend multiplied by (iii) the lower of twenty-four percent
-------------
(24%) and the maximum rate permitted by applicable law, where "N" equals the
number of days elapsed between the original Dividend Payment Share Delivery Date
for such Dividend Payment Shares and the date on which all of the certificates
representing such Dividend Payment Shares are issued and delivered to such
Holder. Amounts payable under this subparagraph (d) shall be paid to the Holder
in immediately available funds on or before the fifth (5th) Business Day of the
calendar month immediately following the calendar month in which such amounts
have accrued. If the Corporation fails to issue and deliver the appropriate
number of Dividend Payment Shares to a Holder on or before the tenth (10th)
Business Day following the applicable Dividend Payment Share Delivery Date, the
Corporation shall, upon written notice by such Holder, immediately pay the
amount of the Dividend in cash, together with interest at the Default Interest
Rate on such unpaid amount calculated from the applicable Dividend Payment Date
until the date on which such amount is paid. Each Holder shall have the right
to pursue actual damages for the Corporation's failure to issue and deliver
Dividend Payment Shares on the Dividend Payment Share Delivery Date for a
Dividend, including, without limitation, damages relating to any purchase of
shares of Common Stock by such Holder to make delivery on a sale effected in
anticipation of receiving Dividend Payment Shares, such damages to be in an
amount equal to (A) the aggregate amount paid by such Holder for the shares of
Common Stock so purchased minus (B) (i) the aggregate amount of net proceeds, if
-----
any, received by such Holder from the sale of the Dividend Payment Shares issued
by the Corporation with respect to such Dividend and (ii) the amount of any cash
received in lieu of such Dividend Payment Shares pursuant to the third sentence
of this paragraph (d), and such Holder shall have the right to pursue all
remedies available to it at law or in equity (including, without limitation, a
decree of specific performance and/or injunctive relief).
(e) Conditions to Stock Payment Option. The Corporation may exercise the
----------------------------------
Stock Payment Option with respect to Dividends payable to a Holder only if each
of the following conditions has been satisfied as of the applicable Dividend
Payment Date:
(i) the number of shares of Common Stock authorized, unissued and
unreserved for all other purposes, is sufficient to effect the issuance and
delivery of at least 175 % of the aggregate of (i) the number of shares of
Common Stock into which all outstanding Preferred Shares are convertible (the
"Conversion Shares"), (ii) the number of shares of Common Stock (the "Warrant
- ------------------ -------
Shares") issuable upon exercise in full of the Warrants (the "Warrants") issued
- ------ --------
and sold pursuant to the terms of the Securities Purchase Agreement and which
are then outstanding, and (iii) the number of Dividend Payment Shares issuable
pursuant to such exercise;
(ii) the Common Stock is authorized for quotation on the Nasdaq
SmallCap Market, or for listing or quotation on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq National Market;
<PAGE>
(iii) (A) a Registration Statement covering the resale of shares of
Common Stock (the "Registration Statement") is effective and available for the
----------------------
sale of no less than 175 % of the aggregate of (i) the number of Conversion
Shares into which all outstanding Preferred Shares are then convertible, (ii)
the number of Warrant Shares then issuable upon the exercise in full of all
outstanding Warrants in full, (iii) the number of Conversion Shares and Warrant
Shares, respectively, that are then held by all of the Holders and with respect
to which a registration statement is required to be maintained under the terms
of the Registration Rights Agreement pursuant to which the Conversion Shares,
the Warrant Shares and the Dividend Payment Shares are required to be registered
under the Registration Statement (the "Registration Rights Agreement") and (iv)
-----------------------------
the number of Dividend Payment Shares issuable pursuant to such exercise or (B)
a Registration Statement is no longer required to be maintained under the
Registration Rights Agreement;
(iv) a Mandatory Redemption Event (as defined herein) has not
occurred;
(v) the Corporation shall have delivered a Stock Payment Exercise
Notice to such Holder in accordance with the terms hereof and elected to pay
such Dividends in Common Stock; and
(vi) such payment in Dividend Payment Shares, after giving effect to
the Conversion of all Preferred Shares, the exercise of all Warrants and the
prior issuance of all shares of Common Stock hereunder, in each case effected on
or before such Dividend Payment Date, will not violate the limitations set forth
in Section 5 below.
For purposes of subparagraphs (e)(i) and (e)(iii) above, the determination
of the number of Conversion Shares or Warrant Shares issuable at any time shall
be made without regard to the limitations set forth in Section 5 below or in
paragraph 4 of the Warrant.
3. PRIORITY.
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(a) Payment upon Dissolution.
------------------------
(i) Upon the occurrence of (x) any insolvency or bankruptcy
proceedings, or any receivership, liquidation, reorganization or other similar
proceedings in connection therewith, commenced by the Corporation's creditors
(which is not dismissed within sixty (60) days) or by the Corporation, as such,
or relating to its assets, (y) the dissolution or other winding up of the
Corporation whether total or partial, whether voluntary or involuntary and
whether or not involving insolvency or bankruptcy proceedings, or (z) any
assignment for the benefit of creditors or any marshaling of the material assets
or material liabilities of the Corporation (each, a "Liquidation Event"), no
-----------------
distribution shall be made to the holders of any shares of Junior Securities (as
defined below) unless, following the payment of preferential amounts on all
Senior Securities (as defined below), each Holder shall have received the
Liquidation Preference (as defined below) with respect to each Preferred Share
then held by such Holder. In the event that upon the occurrence of a
Liquidation Event, and following the payment of preferential amounts on all
Senior Securities (as defined below), the assets available for distribution to
the Holders and the holders of securities ranking pari passu with the Preferred
Stock in respect of dividends, redemption or distribution upon liquidation (the
"Pari Passu Securities") are insufficient to pay the Liquidation Preference with
---------------------
respect to all of the outstanding Preferred Shares and the preferential amounts
payable to such holders, the entire assets of the Corporation shall be
distributed ratably among the Preferred Shares and the shares of Pari Passu
Securities in proportion to the ratio that the preferential amount payable on
each such share (which shall be the Liquidation Preference in the case of a
Preferred Share) bears to the aggregate preferential amount payable on all such
shares.
<PAGE>
(ii) The "Liquidation Preference" with respect to a Preferred Share
----------------------
shall mean an amount equal to the Stated Value of such Preferred Share plus any
accrued and unpaid Dividends thereon. "Junior Securities" shall mean the Common
-----------------
Stock and all other capital stock of the Corporation that are not Pari Passu
Securities or do not have a preference over the Preferred Stock in respect of
dividends, redemption or distribution upon liquidation. "Senior Securities"
-----------------
shall mean any securities of the Corporation which by their terms have a
preference over the Preferred Stock in respect of dividends, redemption or
distribution upon liquidation.
4. CONVERSION.
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(a) Right to Convert. Subject to the limitations contained in Section 5
----------------
below, each Holder shall have the right to convert, at any time and from time to
time, from and after the earlier to occur of (i) the date which is three (3)
months following the Tranche A Closing Date and (ii) the date on which the
Registration Statement is declared effective (the "Initial Conversion Date"),
-----------------------
all or any part of the Preferred Shares held by such Holder into such number of
fully paid and non-assessable shares of Common Stock ("Conversion Shares") as is
-----------------
computed in accordance with the terms hereof (a "Conversion").
----------
(b) Conversion Notice. In order to convert Preferred Shares, a Holder
-----------------
shall send by facsimile transmission, at any time prior to 6:00 p.m., eastern
time, on the date on which such Holder wishes to effect such Conversion (the
"Conversion Date"), (i) a notice of conversion (a "Conversion Notice") to the
- ---------------- -----------------
Corporation and to its designated transfer agent for the Common Stock (the
"Transfer Agent") stating the number of Preferred Shares to be converted, the
- ---------------
applicable Conversion Price (as defined below) and a calculation of the number
of shares of Common Stock issuable upon such Conversion and (ii) a copy of the
certificate or certificates representing the Preferred Shares being converted.
The Holder shall thereafter send the original of the Conversion Notice and of
such certificate or certificates to the Transfer Agent. The Corporation shall
issue a new certificate for Preferred Shares in the event that less than all of
the Preferred Shares represented by a certificate delivered to the Corporation
in connection with a Conversion are converted. In the case of a dispute between
the Corporation and a Holder as to the calculation of the Conversion Price or
the number of Conversion Shares issuable upon a Conversion, the Corporation
shall promptly issue to such Holder the number of Conversion Shares that are not
disputed and shall submit the disputed calculations to its independent
accountant within one (1) Business Day of receipt of such Holder's Conversion
Notice. The Corporation shall cause such accountant to calculate the Conversion
Price as provided herein and to notify the Corporation and such Holder of the
results in writing no later than two (2) Business Days following the day on
which it received the disputed calculations. Such accountant's calculation
shall be deemed conclusive absent manifest error. The fees of any such
accountant shall be borne by the party whose calculations were most at variance
with those of such accountant.
(c) Number of Conversion Shares; Conversion Price. The number of
---------------------------------------------
Conversion Shares to be delivered by the Corporation pursuant to a Conversion
shall be determined by dividing the aggregate Stated Value of the Preferred
Shares to be converted by the Conversion Price (as defined herein) in effect on
the Conversion Date. "Conversion Price" shall mean the lesser of (A) 110% of
----------------
the average of the Closing Bid Prices for the Common Stock on the five (5)
Trading Days (as defined herein) occurring immediately prior to (but not
including) theTranche A Closing Date (the "Fixed Conversion Price") and (B) a
----------------------
price (the "Floating Conversion Price") calculated by (i) determining the
-------------------------
average of the three (3) lowest Closing Bid Prices for the Common Stock during
the thirty (30) Trading Days occurring immediately prior to (but not including)
the Conversion Date, and (ii) multiplying such average by a percentage
determined as described below (the "Conversion Percentage"). In the event that,
---------------------
prior to the expiration of the period ending on the later of the six (6) month
anniversary of the Tranche A Closing Date or the forty-fifth (45th) day
following the Effective Date (as defined in the Registration Rights Agreement),
the Company incurs, assumes or guarantees any indebtedness in excess of one
million five hundred thousand dollars ($1,500,000), individually or in the
aggregate, without the prior written consent of the holders of two-thirds (2/3)
of the Series A Preferred Stock then outstanding then the Conversion Percentage
for all conversions of Preferred Shares thereafter shall be eighty-five percent
(85%). In the event the Company exceeds the foregoing limitations without the
requisite approval, the Company shall give each Purchaser written notice of such
event within five (5) Business Days of the date the limitation was exceeded.
<PAGE>
The Conversion Percentage shall otherwise be determined in accordance with the
following schedule, where "X" represents the Conversion Date:
<TABLE>
<CAPTION>
Number of Days
After Tranche A Closing Date Conversion Percentage
- -------------------------------------------------------------------------------
<S> <C>
0 less than equal to X less than equal to 90 100%
- -------------------------------------------------------------------------------
90 less than X less than and equal to 120 95%
- -------------------------------------------------------------------------------
120 less than X less than equal to 180 92.5%
- -------------------------------------------------------------------------------
180 less than X less than equal to 210 90%
- -------------------------------------------------------------------------------
210 less than X less than equal to 360 87.5%
- -------------------------------------------------------------------------------
360 less than X 85%
- -------------------------------------------------------------------------------
</TABLE>
(d) Certain Definitions. "Trading Day" shall mean any day on which the
------------------- -----------
Common Stock is traded on the Nasdaq SmallCap Market or on the principal
securities exchange or market on which the Common Stock is then traded.
"Closing Bid Price" means, with respect to a security, the closing bid price of
-----------------
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by The Nasdaq Stock Market, Inc. or, if
The Nasdaq Stock Market, Inc. is not then reporting closing bid prices of such
security, Bloomberg Financial Markets or a comparable reporting service of
national reputation selected by the Corporation and reasonably acceptable to
holders of a majority of the then outstanding Preferred Shares (collectively,
"Bloomberg"), or if the foregoing does not apply, the last reported bid price of
---------
such security in the over-the-counter market on the electronic bulletin board
for such security as reported by Bloomberg, or, if no bid price is reported for
such security by Bloomberg, the average of the bid prices of all market makers
for such security as reported in the "pink sheets" by the National Quotation
Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on
any of the foregoing bases, the Closing Bid Price of such security shall be the
fair market value as reasonably determined by an investment banking firm
selected by the Holders (which may be a Holder) of a majority of the then
outstanding Preferred Shares and reasonably acceptable to the Corporation, with
the costs of such appraisal to be borne by the Corporation. "Business Day" means
------------
any day on which the New York Stock Exchange and commercial banks located in the
City of New York and the city of Vancouver, British Columbia are open for
business.
<PAGE>
(e) Delivery of Common Stock Upon Conversion. Upon receipt of a Conversion
----------------------------------------
Notice from a Holder pursuant to paragraph 4(b) above, the Corporation shall, no
later than the close of business on the later to occur of (i) the third (3rd)
Business Day following the Conversion Date set forth in such Conversion Notice
and (ii) the first Business Day following delivery of the original certificates,
duly endorsed, representing the Preferred Shares being converted pursuant
thereto (the "Delivery Date"), issue and deliver or cause to be delivered to
-------------
such Holder the number of Conversion Shares as shall be determined as provided
herein. The Corporation shall effect delivery of Conversion Shares to a Holder
by, as long as the Corporation's transfer agent is participating in the DTC Fast
Automated Securities Transfer program, crediting the account of such Holder or
its nominee at DTC with the number of Conversion Shares required to be
delivered, no later than the close of business on such Delivery Date. In the
event that the condition specified in the immediately preceding sentence is not
satisfied as of the applicable Delivery Date, or if a Holder so specifies in a
Conversion Notice or otherwise in writing, the Corporation shall effect delivery
of Conversion Shares by delivering to the Holder or its nominee physical
certificates representing such Conversion Shares, no later than the close of
business on such Delivery Date. If any Conversion would create a fractional
Conversion Share, such fractional Conversion Share shall be disregarded and the
number of Conversion Shares issuable upon such Conversion, in the aggregate,
shall be rounded up to the nearest whole number of shares. Conversion Shares
delivered to the Holder shall not contain any restrictive legend as long as the
sale of such Conversion Shares is covered by an effective Registration Statement
or may be made pursuant to Rule 144(k) under the Securities Act of 1933, as
amended (the "Securities Act"), or any successor rule or provision.
--------------
(f) Failure to Deliver Conversion Shares.
------------------------------------
(i) In the event that the Corporation fails for any reason (other
than by operation of Section 5 below) to deliver to a Holder certificates
representing the number of Conversion Shares specified in the applicable
Conversion Notice on or before the Delivery Date therefor (a "Conversion
----------
Default"), such Holder shall notify the Corporation by facsimile of such
- -------
Conversion Default (a "Default Notice"). If, after the Holder has sent a
--------------
Default Notice to the Corporation, the Corporation has not delivered such
certificates, and such failure continues for three (3) Business Days following
the Delivery Date, the Corporation shall pay to such Holder payments
("Conversion Default Payments") in the amount of (i) (N/365) multiplied by (ii)
- ----------------------------- -------------
the aggregate Liquidation Preference of the Preferred Shares represented by the
Conversion Shares which remain the subject of such Conversion Default multiplied
----------
by (iii) the lower of twenty-four percent (24%) and the maximum rate permitted
- --
by applicable law, where "N" equals the number of days elapsed between the
original Delivery Date for such Conversion Shares and the earlier to occur of
(A) the date on which all of the certificates representing such Conversion
Shares are issued and delivered to such Holder, (B) the date on which such
Preferred Shares are redeemed pursuant to the terms hereof and (C) the date on
which a Withdrawal Notice (as defined below) is delivered to the Corporation.
Amounts payable under this subparagraph (f) shall be paid to the Holder in
immediately available funds on or before the fifth (5th) Business Day of the
calendar month immediately following the calendar month in which such amounts
have accrued.
(ii) In the event that a Holder has not received certificates
representing the Conversion Shares by the tenth (10th) Business Day following a
Conversion Default, such Holder may, upon written notice (a "Withdrawal Notice")
-----------------
delivered to the Corporation on such Business Day or on any Business Day
thereafter (unless, prior to the delivery of such notice, such Conversion Shares
are delivered to such Holder), withdraw its Conversion Notice with respect to
such Conversion Shares and regain its rights as a Holder of the Preferred Shares
that are the subject of such Conversion Default. In such event, the Conversion
Price that would otherwise be in effect when such Preferred Shares are
thereafter converted in accordance with the terms hereof shall be reduced by one
percent (1%) for each day occurring during the period immediately following such
10th Business Day until the day on which the such Holder delivers a Withdrawal
Notice to the Corporation; provided, however, that the maximum percentage by
which such Conversion Price may be reduced hereunder shall be fifty percent
(50%). (For example, if such Conversion Default were to continue for five days
following such 10th Business Day, such Conversion Price would be reduced by 5%;
if for ten days, by 10%; and for fifty days or more, 50%, so that the number of
Conversion Shares deliverable upon conversion of such Preferred Shares would be
increased proportionately). Upon delivery by a Holder of a Withdrawal Notice,
such Holder shall retain all of such Holder's rights and remedies with respect
to the Corporation's failure to deliver such Conversion Shares (including
without limitation the right to receive the cash payments specified in
subparagraph 4(f)(i) above).
<PAGE>
(iii) Nothing herein shall limit a Holder's right to pursue actual
damages for the Corporation's failure to issue and deliver Conversion Shares on
the applicable Delivery Date (including, without limitation, damages relating to
any purchase of shares of Common Stock by such Holder to make delivery on a sale
effected in anticipation of receiving Conversion Shares upon Conversion such
damages to be in an amount equal to (A) the aggregate amount paid by such Holder
for the shares of Common Stock so purchased minus (B) the aggregate amount of
net proceeds, if any, received by such Holder from the sale of the Conversion
Shares issued by the Corporation pursuant to such Conversion), and such Holder
shall have the right to pursue all remedies available to it at law or in equity
(including, without limitation, a decree of specific performance and/or
injunctive relief).
(g) Conversion at Maturity. On the date which is three (3) years following
----------------------
the Purchase Date for Preferred Shares (the "Maturity Date"), all such Preferred
-------------
Shares then outstanding shall be automatically converted into the number of
shares of Common Stock equal to the Stated Value of such shares divided by the
----------
Conversion Price then in effect (a "Mandatory Conversion"); provided, however,
--------------------
that if either (x) the Common Stock is not designated for quotation on the
Nasdaq SmallCap Market or the Nasdaq National Market or listed on the New York
Stock Exchange or American Stock Exchange or (y) the Corporation delivers a
written notice to each Holder at least twenty-five (25) Business Days prior to
the Maturity Date for such Preferred Shares stating that it intends to redeem
the outstanding Preferred Shares for cash, the Corporation shall, within five
(5) Business Days following such Maturity Date, pay to each Holder, in
immediately available funds, an amount equal to the Stated Value for the
Preferred Shares then held by such Holder. In the event that a Holder does not
receive such amount within such five (5) Business Day period, such Holder shall
have the option, upon written notice to the Corporation, to regain its rights as
a holder of Preferred Shares, including without limitation, the right to convert
such Preferred Shares in accordance with the terms of paragraphs 4(a) through
4(f) hereof and, upon delivery of such notice, such shares shall no longer be
subject to Mandatory Conversion hereunder. If a Mandatory Conversion occurs,
the Corporation and each Holder shall follow the procedures for Conversion set
forth in this Section 4, with the Maturity Date therefor deemed to be the
Conversion Date, except that the Holder shall not be required to send a
Conversion Notice as contemplated by paragraph 4(b).
5. CONVERSION LIMITATIONS.
----------------------
In no event shall a Holder be permitted to convert any Preferred Shares in
excess of the number of such shares, upon the Conversion of which (x) the number
of shares of Common Stock beneficially owned by such Holder (other than shares
of Common Stock issuable upon conversion of such Preferred Shares or which would
otherwise be deemed beneficially owned except for being subject to a limitation
on conversion or exercise analogous to the limitation contained in this
paragraph) plus (y) the number of shares of Common Stock issuable upon the
----
Conversion of such Preferred Shares, would be equal to or exceed (z) 4.99% of
the number of shares of Common Stock then issued and outstanding. As used
herein, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and the rules
thereunder. To the extent that the limitation contained in this paragraph
applies, the determination of whether Preferred Shares are convertible (in
relation to other securities owned by a Holder) and of which Preferred Shares
are convertible shall be in the sole discretion of such Holder, and the
submission of Preferred Shares for Conversion shall be deemed to be such
Holder's determination that such Preferred Shares are convertible pursuant to
the terms hereof, and the Corporation shall have no obligation whatsoever to
verify or confirm the accuracy of such determination. This paragraph may be
amended (i) in order to clarify an ambiguity or otherwise to give effect to such
limitation, by the Holders of three-fourths (3/4) of the Preferred Shares then
outstanding and (ii) for any other reason, with the further consent of the
holders of a majority of the shares of Common Stock then outstanding. Nothing
contained herein shall be deemed to restrict the right of a Holder to convert
Preferred Shares at such time as the Conversion thereof will not violate the
provisions of this paragraph. The restriction contained in this paragraph shall
not apply in the event of a Mandatory Conversion.
<PAGE>
6. ADJUSTMENT TO CONVERSION PRICE.
------------------------------
(a) Adjustment to Fixed Conversion Price Due to Stock Split, Stock
--------------------------------------------------------------
Dividend. Etc. If, prior to the Conversion of all of the Preferred Shares, (A)
- -------------
the number of outstanding shares of Common Stock is increased by a stock split,
a stock dividend on the Common Stock, a reclassification of the Common Stock,
the distribution to holders of Common Stock of rights or warrants entitling them
to subscribe for or purchase Common Stock at less than the then current market
price thereof (based upon the subscription or exercise price of such rights or
warrants at the time of the issuance thereof) or other similar event, the Fixed
Conversion Price shall be proportionately reduced, or (B) the number of
outstanding shares of Common Stock is decreased by a reverse stock split,
combination or reclassification of shares or other similar event, the Fixed
Conversion Price shall be proportionately increased. In such event, the
Corporation shall notify the Transfer Agent of such change on or before the
effective date thereof. For purposes hereof, the market price per share of
Common Stock on any date shall be the average Closing Bid Price for the Common
Stock on the five (5) consecutive Trading Days occurring immediately prior to
but not including the earlier of such date and the Trading Day before the "ex"
date, if any, with respect to the issuance or distribution requiring such
computation. The term " 'ex' date", when used with respect to any issuance or
distribution, means the first Trading Day on which the Common Stock trades
regular way in the market from which such average Closing Bid Price is then to
be determined without the right to receive such issuance or distribution.
(b) Adjustment to Floating Conversion Price. If, prior to the Conversion
---------------------------------------
of all of the Preferred Shares, the number of outstanding shares of Common Stock
is increased or decreased by a stock split, a stock dividend on the Common
Stock, a combination, a reclassification of the Common Stock or other similar
event, and such event takes place during the reference period for the
determination of the Floating Conversion Price for any Conversion thereof, the
Floating Conversion Price shall be calculated giving appropriate effect to the
stock split, stock dividend, combination, reclassification or other similar
event for all Trading Days occurring during such reference period.
<PAGE>
(c) Adjustment Due to Merger, Consolidation, Etc. If, prior to the
--------------------------------------------
Conversion of all of the Preferred Shares, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, redemption
or other similar event, as a result of which shares of Common Stock shall be
changed into the same or a different number of shares of the same or another
class or classes of stock or securities of the Corporation or another entity or
there is a sale of all or substantially all the Corporation's assets or there is
a Change of Control Transaction (as defined below) with respect to which, in any
such case, a Holder does not exercise its right to a Mandatory Redemption (as
defined below) of the Preferred Stock, then such Holder shall thereafter have
the right to receive upon Conversion of Preferred Shares, upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon Conversion, such stock, securities and/or
other assets, if any, which such Holder would have been entitled to receive in
such transaction had such shares been converted immediately prior to such
transaction, and in any such case appropriate provisions shall be made with
respect to the rights and interests of such Holder to the end that the
provisions hereof (including, without limitation, provisions for the adjustment
of the Conversion Price and of the number of shares issuable upon a Conversion)
shall thereafter be applicable as nearly as may be practicable in relation to
any securities thereafter deliverable upon the exercise hereof. The Corporation
shall not effect any transaction described in this subparagraph 6(c) unless (i)
it first gives to each Holder ten (10) days prior written notice of such merger,
consolidation, exchange of shares, recapitalization, reorganization, redemption
or other similar event, and makes a public announcement of such event at the
same time that it gives such notice and (ii) the resulting successor or
acquiring entity (if not the Corporation) assumes by written instrument the
obligations of the Corporation hereunder, including the terms of this
subparagraph 6(c).
(d) Distribution of Assets. If the Corporation shall declare or make any
----------------------
distribution of cash, evidences of indebtedness or other securities or assets
(other than cash dividends or distributions payable out of earned surplus or net
profits for the current or the immediately preceding year), or any rights to
acquire any of the foregoing to holders of Common Stock as a partial liquidating
dividend, by way of return of capital or otherwise, including any dividend or
distribution in shares of capital stock of a subsidiary of the Corporation
(collectively, a "Distribution"), then, upon a Conversion by a Holder occurring
------------
after the record date for determining shareholders entitled to such
Distribution, the Fixed Conversion Price for Preferred Shares not converted
prior to the record date of a Distribution shall be reduced to a price
determined by decreasing the Fixed Conversion Price in effect immediately prior
to the record date of the Distribution by an amount equal to the fair market
value of the assets so distributed with respect to each share of Common Stock,
such fair market value to be determined by an investment banking firm selected
by the holders of at least three-fourths (3/4) of the Preferred Shares then
outstanding and reasonably acceptable to the Company.
(e) Adjustment Due to Major Announcement. If the Corporation (i) makes a
------------------------------------
public announcement that it intends to enter into a Change of Control
Transaction (as defined below) or (ii) any person, group or entity (including
the Corporation) publicly announces a tender offer, exchange offer or other
transaction to purchase 50% or more of the Common Stock (such announcement being
referred to herein as a "Major Announcement" and the date on which a Major
------------------
Announcement is made, the "Announcement Date"), then, in the event that a Holder
-----------------
seeks to convert Preferred Shares on or following the Announcement Date, the
Conversion Price shall, effective upon the Announcement Date and continuing
through the earlier to occur of the consummation of the proposed transaction or
tender offer, exchange offer or other transaction and the Abandonment Date (as
defined below), be equal to the lower of (x) the average Closing Bid Price for
the Common Stock on the five (5)Trading Days immediately preceding (but not
including) the Announcement Date and (y) the Conversion Price in effect on the
Conversion Date for such Preferred Shares. "Abandonment Date" means with respect
----------------
to any proposed transaction or tender offer, exchange offer or other transaction
for which a public announcement as contemplated by this paragraph 6(e) has been
made, the date upon which the Corporation (in the case of clause (i) above) or
the person, group or entity (in the case of clause (ii) above) publicly
announces the termination or abandonment of the proposed transaction or tender
offer, exchange offer or another transaction which caused this paragraph 6(e) to
become operative.
(f) No Fractional Shares. If any adjustment under this Section would
--------------------
create a fractional share of Common Stock or a right to acquire a fractional
share of Common Stock, such fractional share shall be disregarded and the number
of shares of Common Stock issuable upon Conversion shall be rounded up to the
next whole number of shares or, at the option of the Corporation, shall be paid
in cash in an amount calculated by multiplying the amount of the fractional
share times the Closing Bid Price used to calculate the Conversion Price for
-----
such Conversion.
<PAGE>
7. MANDATORY REDEMPTION BY CORPORATION.
-----------------------------------
(a) Mandatory Redemption. In the event that a Mandatory Redemption Event
--------------------
(as defined below) occurs, each Holder shall have the right, to the extent
permitted by applicable law and subject to the rights and preferences of the
Senior Securities, to have all or any portion of the Preferred Shares held by
such Holder redeemed by the Corporation (a "Mandatory Redemption") at the
--------------------
Mandatory Redemption Price (as defined herein) in same day funds. In order to
exercise its right to effect a Mandatory Redemption, a Holder must deliver a
written notice (a "Mandatory Redemption Notice") to the Corporation at any time
---------------------------
during which such event is continuing; provided, however, that, in the case of
subparagraph (b)(v) below, the following procedure shall be followed in lieu
thereof: (a) no sooner than fifteen (15) days nor later than ten (10) days
prior to the Corporation's good faith estimate of the consummation of a Change
of Control Transaction (as defined below), but not prior to the public
announcement of such Change of Control Transaction, the Corporation shall
deliver a written notice (a "Notice of Change of Control Transaction") to each
---------------------------------------
Holder, and (b) within five (5) days of delivery by the Corporation of a Notice
of Change of Control Transaction but in any case prior to the abandonment of
such Change of Control Transaction, each Holder who wishes to exercise its right
to effect a Mandatory Redemption hereunder shall deliver a Mandatory Redemption
Notice to the Corporation. The Mandatory Redemption Notice shall specify the
effective date of such Mandatory Redemption (the "Mandatory Redemption Date")
-------------------------
and the number of such shares to be redeemed. In the event that a Change of
Control Transaction occurs and the Corporation does not deliver to a Holder a
Notice of Change of Control Transaction, such Holder may exercise its right to a
Mandatory Redemption hereunder by delivering a Mandatory Redemption Notice to
the Corporation (or to the surviving or successor entity) at any time on or
before the twentieth (20th) Business Day following such Change of Control
Transaction.
(b) Mandatory Redemption Event. Each of the following events shall be
--------------------------
deemed a "Mandatory Redemption Event":
--------------------------
(i) the Corporation fails for any reason (including without
limitation as a result of not having a sufficient number of shares of Common
Stock authorized and reserved for issuance, but not including by reason of the
provisions of Section 5 hereof) to issue shares of Common Stock to a Holder and
deliver certificates representing such shares to such Holder as and when
required by the provisions hereof upon Conversion of any Preferred Shares, and
such failure continues for ten (10) Business Days;
(ii) the Corporation breaches, in a material respect, any covenant or
other material term or condition (including any material representation or
warranty) of the Securities Purchase Agreement, the Registration Rights
Agreement or the terms hereof and such breach continues for a period of ten (10)
Business Days after written notice thereof to the Corporation from a Holder;
<PAGE>
(iii) the Registration Statement is not declared effective by one
hundred eighty (180) days following the Purchase Date or if the Registration
Statement has been declared effective by such date and, while the effectiveness
of the Registration Statement is required to be maintained pursuant to the terms
of the Registration Rights Agreement, the effectiveness of the Registration
Statement lapses for any reason (including without limitation, the issuance of a
stop order) or is unavailable to the Holder for the sale of Conversion Shares
except in accordance with the terms of the Registration Rights Agreement, unless
the Corporation is using its best efforts to remedy such lapse or unavailability
to utilize such registration statement; provided that in no event shall such
failure exist for a total of more than ten (10) Business Days in any twelve (12)
month period, and provided, further, that the cause of such lapse or
--------
unavailability is not due to factors within the control of the Holder;
(iv) the Common Stock is not quoted on the Nasdaq SmallCap Market or
listed on the New York Stock Exchange, the Nasdaq National Market or the
American Stock Exchange and such failure to be so quoted or listed continues for
a period of five (5) Business Days; and
(v) there occurs the sale, conveyance or disposition of all or
substantially all of the assets of the Corporation, or the effectuation of a
transaction or series of related transactions, in which more than fifty percent
(50%) of the voting power of the Corporation is disposed of, or the
consolidation, merger or other business combination of the Corporation with or
into any other entity, immediately following which the prior shareholders of the
Corporation fail to own, directly or indirectly, at least fifty percent (50%) of
the surviving entity (a "Change of Control Transaction").
-----------------------------
(c) Mandatory Redemption Price. The "Mandatory Redemption Price" shall be
-------------------------- --------------------------
equal to the greater of (i) the Liquidation Preference of the Preferred Shares
being redeemed multiplied by one hundred and thirty percent (130%) and (ii) an
-------------
amount determined by dividing the Liquidation Preference of the Preferred Shares
being redeemed by the Conversion Price in effect on the Mandatory Redemption
Date and multiplying the resulting quotient by the average Closing Bid Price for
the Common Stock on the five (5) Trading Days immediately preceding (but not
including) the Mandatory Redemption Date.
(d) Payment of Mandatory Redemption Price.
-------------------------------------
(i) The Corporation shall pay the Mandatory Redemption Price to the
Holder exercising its right to redemption within five (5) Business Days
following the Mandatory Redemption Date. Upon the redemption of a Preferred
Share, and payment of the Mandatory Redemption Price to the Holder thereof, such
Holder will promptly return such share to the Corporation for cancellation.
(ii) If the Corporation fails to pay the Mandatory Redemption Price
to the Holder within five (5) Business Days of the Mandatory Redemption Date,
the Holder shall be entitled to interest thereon, from and after the Mandatory
Redemption Date until the Mandatory Redemption Price has been paid in full, at
an annual rate equal to the Default Interest Rate.
(iii) If the Corporation fails to pay the Mandatory Redemption Price
within ten (10) Business Days of the Mandatory Redemption Date, then the Holder
shall have the right at any time, so long as the Corporation remains in default,
to require the Corporation, upon written notice, to immediately issue, in lieu
of the Mandatory Redemption Price, the number of shares of Common Stock of the
Corporation equal to the Mandatory Redemption Price divided by the Conversion
----------
Price in effect on such Conversion Date as is specified by the Holder in writing
to the Corporation, such Conversion Price to be reduced by one percent (1%) for
each day beyond such 10th Business Day in which the failure to pay the Mandatory
Redemption Price continues; provided, however, that the maximum percentage by
which such Conversion Price may be reduced hereunder shall be fifty percent
(50%).
<PAGE>
8. MISCELLANEOUS.
-------------
(a) Transfer of Preferred Shares. A Holder may sell or transfer all or any
----------------------------
portion of the Preferred Shares to any person or entity as long as such sale or
transfer is the subject of an effective registration statement under the
Securities Act or is exempt from registration thereunder and otherwise is made
in accordance with the terms of the Securities Purchase Agreement. Such
transferring Holder shall notify the Corporation in writing of such transfer
setting forth (i) the number of shares being transferred and (ii) the person or
persons to whom such transfer is being made. From and after the date of such
sale or transfer, the transferee hereof shall be deemed to be a Holder;
provided, however, that any such transfer shall be void if the notice provided
for in this paragraph 8(a) is not complied with. Upon any such sale or
transfer, the Corporation shall, promptly following the return of the
certificate or certificates representing the Preferred Shares that are the
subject of such sale or transfer, issue and deliver to such transferee a new
certificate in the name of such transferee.
(b) Notices. Except as otherwise provided herein, any notice, demand or
-------
request required or permitted to be given pursuant to the terms hereof, the form
or delivery of which notice, demand or request is not otherwise specified
herein, shall be in writing and shall be deemed given (i) when delivered
personally or by verifiable facsimile transmission on or before 5:00 p.m.,
eastern time, on a Business Day or, if such day is not a Business Day, on the
next succeeding Business Day, (ii) on the next Business Day after timely
delivery to an overnight courier and (iii) on the third Business Day after
deposit in the U.S. mail (certified or registered mail, return receipt
requested, postage prepaid), addressed to the parties as follows:
If to the Corporation:
Interactive Entertainment Limited
845 Crossover Lane
Suite D-215
Memphis, Tennessee 38117
Attn.: David B. Lamm
Fax: (901) 537-3801
With a copy to:
Altheimer & Gray
10 South Wacker Drive
Suite 4000
Chicago, Illinois 60606
Attn: Andrew W. McCune
Fax: (312) 715-4800
and if to any Holder, to such address for such Holder as shall be designated by
such Holder in writing to the Corporation.
(c) Lost or Stolen Certificate. Upon receipt by the Corporation of
--------------------------
evidence of the loss, theft, destruction or mutilation of a certificate
representing Preferred Shares, and (in the case of loss, theft or destruction)
of indemnity or security reasonably satisfactory to the Corporation, and upon
surrender and cancellation of such certificate if mutilated, the Corporation
shall execute and deliver to the Holder a new certificate identical in all
respects to the original certificate.
(d) No Voting Rights. Except as provided by applicable law and paragraph
----------------
8(e) below, the Holders of the Preferred Shares shall have no voting rights with
respect to the business, management or affairs of the Corporation; provided that
the Corporation shall provide each Holder with prior notification of each
meeting of stockholders (and copies of proxy statements and other information
sent to such stockholders).
(e) Protective Provisions.
---------------------
So long as shares of Series A Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval of the Holders of at
least three-fourths (3/4) of the then outstanding shares of Series A Preferred
Stock:
(i) alter or change the rights, preferences or privileges of the
Preferred Stock or any other capital stock of the Corporation so as to affect
adversely the Series A Preferred Stock;
(ii) create any new class or series of capital stock having a
preference over or ranking pari passu with the Series A Preferred Stock as to
redemption, the payment of dividends or distribution of assets upon a
Liquidation Event or any other liquidation, dissolution or winding up of the
Corporation;
(iii) increase the authorized number of shares of Series A Preferred
Stock;
(iv) issue any shares of Series A Preferred Stock other than
pursuant to the Securities Purchase Agreement; or
(v) issue any Senior Securities or Pari Passu Securities.
In the event that Holders of at least three-fourths (3/4) of the then
outstanding shares of Series A Preferred Stock agree to allow the Corporation to
alter or change the rights, preferences or privileges of the shares of Series A
Preferred Stock pursuant to the terms hereof, then the Corporation will deliver
notice of such approved change to the holders of the Series A Preferred Stock
that did not agree to such alteration or change (the "Dissenting Holders") and
------------------
the Dissenting Holders shall have the right for a period of thirty (30) days
following such delivery to convert their Preferred Shares pursuant to the terms
hereof as they existed prior to such alteration or change, or to continue to
hold such Preferred Shares. No such change shall be effective to the extent
that, by its terms, it applies to less than all of the Holders of Preferred
Shares then outstanding.
<PAGE>
EXHIBIT 4(b)
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE, SOLD OR
TRANSFERRED UNLESS A REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS SHALL BE EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. THIS WARRANT (THIS
"WARRANT") AND THE WARRANTS OF EVEN DATE HEREWITH (TOGETHER WITH THIS WARRANT,
-------
THE "WARRANTS") ARE ISSUED SUBJECT TO THE TERMS OF (A) A SECURITIES PURCHASE
--------
AGREEMENT, DATED AS OF DECEMBER 17, 1997 ("PURCHASE AGREEMENT"), BY AND BETWEEN
------------------
INTERACTIVE ENTERTAINMENT LIMITED AND THE HOLDER OF THIS WARRANT AND (B) A
REGISTRATION RIGHTS AGREEMENT, DATED AS OF DECEMBER 17, 1997 ("REGISTRATION
------------
RIGHTS AGREEMENT"), BY AND BETWEEN INTERACTIVE ENTERTAINMENT LIMITED AND THE
- ----------------
HOLDER OF THIS WARRANT.
WARRANT TO PURCHASE
_______ SHARES
WARRANT TO PURCHASE COMMON STOCK
OF
INTERACTIVE ENTERTAINMENT LIMITED
THIS CERTIFIES that CC INVESTMENTS, LDC or its registered assigns (the
-------------------
"Holder"), has the right to purchase from INTERACTIVE ENTERTAINMENT LIMITED, a
------
Bermuda exempted company (the "Company"), up to fully paid and nonassessable
-------
shares of the Company's Common Shares (the "Common Stock"), subject to
------------
adjustment as provided herein, at a price equal to the Exercise Price (as
defined below), at any time beginning on _______,______ (the "Inital Exercise
---------------
Date") and ending at 5:00 p.m., eastern time, on_______,______ (the "Expiration
- ---- ----------
Date"). This Warrant is issued, and all rights hereunder shall be, subject to
- ----
all of the conditions, limitations and provisions set forth herein.
<PAGE>
9. Exercise.
--------
(i) Right to Exercise; Exercise Price. The Holder shall have the
right to exercise this Warrant at any time and from time to time following the
expiration of six (6) months from December 17, 1997 (the "Issue Date") up to and
including the Expiration Date as to all or any part of the shares of Common
Stock covered hereby (the "Warrant Shares"). The "Exercise Price" payable by
-------------- --------------
the Holder in connection with the exercise of this Warrant shall be equal to the
lesser of (i) $4.25 and (ii) one hundred and ten percent (110%) of the average
of the Closing Bid Prices (as defined below) for the Common Stock on the five
(5) Trading Days (as defined below) occurring immediately prior to (but not
including) the Tranche A Closing Date (as defined in the Purchase Agreement).
"Trading Day" shall mean any day on which the Common Stock is traded for any
-----------
period on the Nasdaq SmallCap Market or on the principal securities exchange or
market on which the Common Stock is then traded. "Closing Bid Price" means, with
-----------------
respect to a security, the closing bid price of such security on the Nasdaq
SmallCap Market or on the principal securities exchange or market where such
security is listed or traded as reported by The Nasdaq Stock Market, Inc. or, if
The Nasdaq Stock Market, Inc. is not then reporting closing bid prices of such
security, Bloomberg Financial Markets or a comparable reporting service of
national reputation selected by the Company and reasonably acceptable to the
Holders (collectively, "Bloomberg"), or if the foregoing does not apply, the
---------
last reported sale price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
sale price is reported for such security by Bloomberg, the average of the bid
prices of all market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as reasonably determined by an investment banking firm selected by the Holder
(which may be the Holder or an affiliate thereof), and reasonably acceptable to
the Company, with the costs of such appraisal to be borne by the Company.
(ii) Exercise Notice. In order to exercise this Warrant, the Holder
shall send by facsimile transmission, at any time prior to 6:00 p.m., eastern
time, on the date on which the Holder wishes to effect such exercise (the
"Exercise Date"), to the Company and to its designated transfer agent for the
- --------------
Common Stock (the "Transfer Agent") (i) a copy of the notice of exercise in the
--------------
form attached hereto as Exhibit A (the "Exercise Notice") stating the number of
--------- ---------------
Warrant Shares as to which such exercise applies and the calculation therefor
and (ii) a copy of this Warrant. The Holder shall thereafter deliver to the
Company the original Exercise Notice, the original Warrant and the Exercise
Price. In the case of a dispute as to the calculation of the Exercise Price or
the number of Warrant Shares issuable hereunder, the Company shall promptly
issue to the Holder the number of Warrant Shares that are not disputed and shall
submit the disputed calculations to its independent accountant within one (1)
business day following the Exercise Date. The Company shall cause such
accountant to calculate the Exercise Price and/or the number of Warrant Shares
issuable hereunder and to notify the Company and the Holder of the results in
writing no later than two (2) business days following the day on which it
received the disputed calculations. Such accountant's calculation shall be
deemed conclusive absent manifest error. The fees of any such accountant shall
be borne by the party whose calculations were most at variance with those of
such accountant.
(iii) Cancellation of Warrant/Reduction of Warrant Shares. This
Warrant shall be cancelled upon its exercise and the Holder shall be entitled to
receive, as soon as practicable after the Exercise Date, a new Warrant or
Warrants (containing terms identical to this Warrant) representing any
unexercised portion of this Warrant. If the Holder shall have, prior to the
Initial Exercise Date, sold or otherwise disposed of any portion of the
Preferred Shares acquired pursuant to the Purchase Agreement (or Common Stock
into which such Preferred Shares have been converted (the "Converted Common
----------------
Stock")) the number of Warrant Shares into which this Warrant is exercisable
- -----
shall be automatically reduced on a pro rata basis in the same proportion as (A)
the number of Preferred Shares which have been so sold or otherwise disposed of
plus the number of Preferred Shares represented by the shares of Converted
- ----
Common Stock which have been so sold or otherwise disposed of bears to (B) the
number of Preferred Shares originally purchased by the Holder pursuant to the
Purchase Agreement. In such event, the Holder shall be entitled to receive (on
the later of the Initial Exercise Date or the day which is five (5) days
following the date of the delivery of written notice to the Company of such sale
or disposition) a new Warrant or Warrants (containing terms identical to this
Warrant) exercisable into such reduced number of Warrant Shares.
<PAGE>
10. Delivery of Warrant Shares Upon Exercise. Upon receipt of a Exercise
----------------------------------------
Notice pursuant to paragraph 1 above, the Company shall, (A) in the case of a
Cashless Exercise (as defined below), no later than the close of business on the
third (3rd) business day following the Exercise Date set forth in such Exercise
Notice, and (B) in the case of a Cash Exercise (as defined below) no later than
the close of business on the earlier to occur of (i) the third (3rd) business
day following the Exercise Date set forth in such Exercise Notice and (ii) such
later date on which the Company shall have received payment of the Exercise
Price (the "Delivery Date"), issue and deliver or caused to be delivered to the
-------------
Holder the number of Warrant Shares as shall be determined as provided herein.
Warrant Shares delivered to the Holder shall not contain any restrictive legend
as long as the sale of such Warrant Shares is covered by an effective
Registration Statement (as defined in the Registration Rights Agreement) or may
be made pursuant to Rule 144(k) under the Securities Act of 1933, as amended, or
any successor rule or provision.
11. Failure to Deliver Warrant Shares.
---------------------------------
(i) Exercise Default. In the event that the Company fails for any
reason (other than by operation of paragraph 4 below) to deliver to a Holder
certificates representing the number of Warrant Shares in accordance with
subparagraph (a) above on or before the Delivery Date therefor (an "Exercise
--------
Default"), such Holder shall notify the Company by facsimile of such Exercise
- -------
Default (a "Default Notice"). If, after the Holder has sent a Default Notice to
--------------
the Company, the Company has not delivered such certificates and such failure
continues for three (3) business days following the Delivery Date, the Company
shall pay to such Holder payments ("Exercise Default Payments") in the amount of
-------------------------
(i) (N/365) multiplied by (ii) the aggregate Exercise Price for the Warrant
-------------
Shares which are the subject of such Conversion Default on the five (5) Trading
Days occurring immediately prior to (but not including) the applicable Exercise
Date multiplied by (iii) the lower of twenty-four percent (24%) and the maximum
-------------
rate permitted by applicable law, where "N" equals the number of days elapsed
between the original Delivery Date for such Warrant Shares and the date on which
all of such Warrant Shares are issued and delivered to such Holder. Amounts
payable under this subparagraph 3(a) shall be paid to the Holder in immediately
available funds on or before the fifth (5th) business day of the calendar month
immediately following the calendar month in which such amount has accrued.
(ii) Buy-in. Nothing herein shall limit a Holder's right to pursue
actual damages for the Company's failure to issue and deliver Warrant Shares in
connection with an exercise on the applicable Delivery Date (including, without
limitation, damages relating to any purchase of shares of Common Stock by such
Holder to make delivery on a sale effected in anticipation of receiving Warrant
Shares upon exercise, such damages to be in an amount equal to (A) the aggregate
amount paid by such Holder for shares of Common Stock so purchased minus (B) the
aggregate amount of net proceeds, if any, received by such Holder from the sale
of the Warrant Shares issued by the Company pursuant to such exercise, and such
Holder shall have the right to pursue all remedies available to it at law or in
equity (including, without limitation, a decree of specific performance and/or
injunctive relief)).
(iii) Withdrawal of Exercise. In the event that a Holder has not
received certificates representing the Warrant Shares by the tenth (10th)
business day following an Exercise Default, such Holder may, upon written notice
to the Company, regain on such business day the rights of a Holder of this
Warrant, or part thereof, with respect to the Warrant Shares that are the
subject of such Exercise Default. In such event, such Holder shall retain all
of such Holder's rights and remedies with respect to the Company's failure to
deliver such Warrant Shares (including without limitation the right to receive
the cash payments specified in subparagraph 3(a) above).
(iv) Holder of Record. Each Holder, for all purposes, shall be
deemed to have become the holder of record of Warrant Shares on the Exercise
Date of this Warrant, irrespective of the date of delivery of such Warrant
Shares. Nothing in this Warrant shall be construed as conferring upon the Holder
hereof any rights as a shareholder of the Company.
<PAGE>
12. Exercise Limitations. In no event shall a Holder be permitted to
--------------------
exercise this Warrant, or part thereof, with respect to Warrant Shares in excess
of the number of such shares, upon the issuance of which, (x) the number of
shares of Common Stock beneficially owned by such Holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned except
for being subject to a limitation on conversion or exercise analogous to the
limitation contained in this Section 4) plus (y) the number of shares of Common
----
Stock issuable upon such exercise, would be equal to or exceed (z) 4.99% of the
number of shares of Common Stock then issued and outstanding. Nothing contained
herein shall be deemed to restrict the right of a Holder to exercise this
Warrant, or part thereof, at such time as such exercise will not violate the
provisions of this Section 4.
13. Payment of the Exercise Price. The Holder may pay the Exercise Price
-----------------------------
in either of the following forms or, at the election of Holder, a combination
thereof:
(a) Cash Exercise: by delivery of immediately available funds.
(b) Cashless Exercise: by surrender of this Warrant to the
Company together with a notice of cashless exercise, in which event the Company
shall issue to the Holder the number of Warrant Shares determined as follows:
X = Y x (A-B)/A
where: X = the number of Warrant Shares to be issued to the
Holder.
Y = the number of Warrant Shares with respect to which this
Warrant is being exercised.
A = the average of the Closing Bid Prices of the Common
Stock for the five (5) Trading Days immediately prior to
(but not including) the Exercise Date.
B = the Exercise Price.
For purposes of Rule 144 under the Securities Act of 1933, as amended, it
is intended, understood and acknowledged that the Warrant Shares issued in
a cashless exercise transaction shall be deemed to have been acquired by
the Holder, and the holding period for the Warrant Shares shall be deemed
to have been commenced, on the Issue Date.
14. Anti-Dilution Adjustments.
-------------------------
(i) Stock Dividend. If the Company shall at any time declare a
dividend payable in shares of Common Stock, then the Holder hereof, upon
exercise of this Warrant after the record date for the determination of Holders
of Common Stock entitled to receive such dividend, shall be entitled to receive,
in addition to the number of shares of Common Stock as to which this Warrant is
exercised, such additional shares of Common Stock as such Holder would have
received had this Warrant been exercised immediately prior to such record date
and the Exercise Price will be proportionately adjusted.
(ii) Recapitalization or Reclassification. If the Company shall at
any time effect a recapitalization, reclassification or other similar
transaction of such character that the shares of Common Stock shall be changed
into or become exchangeable for a larger or smaller number of shares, then upon
the effective date thereof, the number of shares of Common Stock which the
Holder hereof shall be entitled to purchase upon exercise of this Warrant shall
be increased or decreased, as the case may be, in direct proportion to the
increase or decrease in the number of shares of Common Stock by reason of such
recapitalization, reclassification or similar transaction, and the Exercise
Price shall be, in the case of an increase in the number of shares,
proportionally decreased and, in the case of decrease in the number of shares,
proportionally increased. The Company shall give the Warrant Holder the same
notice at the same time it provides such notice to holders of Common Stock of
any transaction described in this Section 6(b).
<PAGE>
(iii) Distributions. If the Company shall at any time distribute to
Holders of Common Stock cash, evidences of indebtedness or other securities or
assets (other than cash dividends or distributions payable out of earned surplus
or net profits for the current or a preceding year) then, in any such case, the
Holder of this Warrant shall be entitled to receive, upon exercise of this
Warrant, with respect to each share of Common Stock issuable upon such exercise,
the amount of cash or evidences of indebtedness or other securities or assets
which such Holder would have been entitled to receive with respect to each such
share of Common Stock as a result of the happening of such event had this
Warrant been exercised immediately prior to the record date or other date fixing
shareholders to be affected by such event (the "Determination Date") or, in lieu
------------------
thereof, if the Board of Directors of the Company should so determine at the
time of such distribution, a reduced Exercise Price determined by multiplying
the Exercise Price on the Determination Date by a fraction, the numerator of
which is the difference between (x) such Exercise Price and (y) the value of
such distribution applicable to one share of Common Stock (such value to be
determined by the Board in its discretion), and the denominator of which is such
Exercise Price.
(iv) Notice of Consolidation or Merger. In the event of a merger,
consolidation, exchange of shares, recapitalization, reorganization or other
similar event, as a result of which shares of Common Stock of the Company shall
be changed into the same or a different number of shares of the same or another
class or classes of stock or securities or other assets of the Company or
another entity or there is a sale of all or substantially all the Company's
assets (a "Corporate Change"), then this Warrant shall be exercisable into such
----------------
class and type of securities or other assets as the Holder would have received
had the Holder exercised this Warrant immediately prior to such Corporate
Change; provided, however, that Company may not affect any Corporate Change
unless it first shall have given ten (10) business days' notice to the Holder
hereof of any Corporate Change.
(v) Exercise Price as Adjusted. As used in its Warrant, the term
"Exercise Price" shall mean the purchase price per share specified in paragraph
- ---------------
1 of this Warrant, until the occurrence of an event stated in subsection (a),
(b) or (c) of this paragraph 6, and thereafter shall mean said price as adjusted
from time to time in accordance with the provisions of said subsection. No such
adjustment under this paragraph 6 shall be made unless such adjustment would
change the Exercise Price at the time by $.01 or more; provided, however, that
all adjustments not so made shall be deferred and made when the aggregate
thereof would change the Exercise Price at the time by $.01 or more.
(vi) Adjustments: Additional Shares, Securities or Assets. In the
event that at any time, as a result of an adjustment made pursuant to this
Section 6, the Holder of this Warrant shall, upon exercise of this Warrant,
become entitled to receive shares and/or other securities or assets (other than
Common Stock) then, wherever appropriate, all references herein to shares of
Common Stock shall be deemed to refer to and include such shares and/or other
securities or assets; and thereafter the number of such shares and/or other
securities or assets shall be subject to adjustment from time to time in a
manner and upon terms as nearly equivalent as practicable to the provisions of
this paragraph 6.
<PAGE>
15. Fractional Interests. No fractional shares or scrip representing
--------------------
fractional shares shall be issuable upon the exercise of this Warrant, but on
exercise of this Warrant, the Holder hereof may purchase only a whole number of
shares of Common Stock. If, on exercise of this Warrant, the Holder hereof
would be entitled to a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon exercise shall be the next
higher number of shares.
16. Transfer of this Warrant. The Holder may sell, transfer, assign,
------------------------
pledge or otherwise dispose of this Warrant, in whole or in part, as long as
such sale or other disposition is made pursuant to pursuant to an effective
registration statement or an exemption to the registration requirements of the
Securities Act of 1933, as amended, and applicable state laws. Upon such
transfer or other disposition, the Holder shall deliver a written notice to
Company, substantially in the form of the Transfer Notice attached hereto as
Exhibit B (the "Transfer Notice"), indicating the person or persons to whom this
- --------- ---------------
Warrant shall be transferred and, if less than all of this Warrant is
transferred or this Warrant is transferred in parts, the number of Warrant
Shares to be covered by the part of this Warrant to be transferred to each such
person. Within three (3) business days of receiving a Transfer Notice and the
original of this Warrant, the Company shall deliver to the each transferee
designated by the Holder a Warrant or Warrants of like tenor and terms for the
appropriate number of Warrant Shares.
17. Benefits of this Warrant. Nothing in this Warrant shall be construed
------------------------
to confer upon any person other than the Holder of this Warrant any legal or
equitable right, remedy or claim under this Warrant and this Warrant shall be
for the sole and exclusive benefit of the Holder of this Warrant.
18. Loss, theft, destruction or mutilation of Warrant. Upon receipt by
-------------------------------------------------
the Company of evidence of the loss, theft, destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) of indemnity or
security reasonably satisfactory to the Company, and upon surrender of this
Warrant, if mutilated, the Company shall execute and deliver a new Warrant of
like tenor and date.
19. Notice or Demands. Except as otherwise provided herein, any notice,
-----------------
demand or request required or permitted to be given pursuant to the terms of
this Warrant shall be in writing and shall be deemed given (i) when delivered
personally or by verifiable facsimile transmission (with an original to follow)
on or before 5:00 p.m., eastern time, on a business day or, if such day is not a
business day, on the next succeeding business day, (ii) on the next business day
after timely delivery to a nationally-recognized overnight courier and (iii) on
the third business day after deposit in the U.S. mail (certified or registered
mail, return receipt requested, postage prepaid), addressed as follows:
If to the Company:
Interactive Entertainment Limited
845 Crossover Lane
Suite D-215
Memphis, Tennessee 38117
Attn: David B. Lamm
Fax: (901) 537-3801
With a copy to:
Altheimer & Gray
10 South Wacker Drive
Suite 4000
Chicago, Illinois 60606
Attn: Andrew W. McCune
Fax: (312) 715-4800
and if to the Holder, to such address as shall be designated by the Holder
in writing to the Company.
20. Applicable Law. This Warrant is issued under and shall for all
--------------
purposes be governed by and construed in accordance with the laws of the state
of New York, without giving effect to conflict of law provisions thereof.
<PAGE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the
____ day of __________, 1997.
INTERACTIVE ENTERTAINMENT LIMITED
By: _________________________________________
Name:
Title:
<PAGE>
EXHIBIT A TO WARRANT
--------------------
EXERCISE NOTICE
---------------
The undersigned Holder hereby irrevocably exercises the right to purchase
__________ of the shares of Common Stock ("Warrant Shares") of INTERACTIVE
--------------
ENTERTAINMENT LIMITED, a Bermuda exempted company (the "Company"), evidenced by
-------
the attached Warrant (the "Warrant"). Capitalized terms used herein and not
-------
otherwise defined shall have the respective meanings set forth in the Warrant.
1. Form of Exercise Price. The Holder intends that payment of the Exercise
Price shall be made as:
________________ a Cash Exercise with respect to ________________ Warrant
Shares; and/or
________ a Cashless Exercise with respect to ________________ Warrant
-----------------
Shares.
2. Payment of Exercise Price. In the event that the Holder has elected a Cash
Exercise with respect to some or all of the Warrant Shares to be issued pursuant
hereto, the Holder shall pay the sum of $_________________ to the Company in
accordance with the terms of the Warrant.
3. Delivery of Warrant Shares. The Company shall deliver to the Holder
____________ Warrant Shares in accordance with the terms of the Warrant.
Date:_____________________________
__________________________________
Name of Registered Holder
By:_______________________________
Name:
Title:
<PAGE>
EXHIBIT B TO WARRANT
--------------------
TRANSFER NOTICE
---------------
FOR VALUE RECEIVED, the undersigned Holder of the attached Warrant hereby
sells, assigns and transfers unto the person or persons named below the right to
purchase _______ shares of the Common Stock of INTERACTIVE ENTERTAINMENT LIMITED
evidenced by the attached Warrant.
Date:_____________________________
__________________________________
Name of Registered Holder
By:_______________________________
Name:
Title:
Transferee Name and Address:
__________________________________
__________________________________
__________________________________
<PAGE>
EXHIBIT 4(c)
- ------------
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of December 17,
---------
1997, by and among Interactive Entertainment Limited, a Bermuda exempted company
(the "Company"), and each of the entities whose names appear on the signature
-------
pages hereof. Such entities are each referred to herein as a "Purchaser" and,
---------
collectively, as the "Purchasers".
----------
The Company has agreed, on the terms and subject to the conditions set
forth in the Securities Purchase Agreement of even date herewith (the
"Securities Purchase Agreement"), to issue and sell to each Purchaser (i) shares
- ------------------------------
(the "Preferred Shares") of the Company's Series A Convertible Preference Shares
----------------
(the "Preferred Stock") and (ii) a Warrant (each, a "Warrant" and, when taken
-------
together with all of the warrants issued pursuant to the terms of the Securities
Purchase Agreement, the "Warrants") entitling the holder thereof to purchase
--------
shares (the "Warrant Shares") of Common Stock (as defined below). The Preferred
--------------
Shares are convertible into shares (the "Conversion Shares") of the Company's
-----------------
Common Stock (the "Common Stock"), pursuant to the terms approved by the
------------
Company's Board of Directors (the "Authorized Terms"). In order to induce the
----------------
Purchasers to enter into the Securities Purchase Agreement, the Company has
agreed to provide the certain registration rights provided herein under the
Securities Act of 1933, as amended (the "Securities Act"), and under applicable
--------------
state securities laws. Capitalized terms used herein and not otherwise defined
shall have the respective meanings set forth in the Securities Purchase
Agreement.
In consideration of each Purchaser entering into and consummating its
obligations under the Securities Purchase Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
4. DEFINITIONS.
-----------
For purposes of this Agreement, the following terms shall have the meanings
specified:
(a) "Tranche A Closing Date" and "Tranche B Closing Date" shall have
---------------------- ----------------------
the respective meanings specified in the Securities Purchase Agreement;
(b) "Registration Deadline" means the one hundred and thirty fifth
---------------------
(135th) day following the Tranche A Closing Date;
<PAGE>
(c) "Holder" means any person owning or having the right to acquire,
------
through conversion of Preferred Shares or exercise of the Warrants, Registrable
Securities, including initially each Purchaser and thereafter any permitted
assignee thereof;
(d) "Register", "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement or
statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act ("Rule 415") or any successor rule providing for the offering
--------
of securities on a continuous basis ("Registration Statement"), and the
----------------------
declaration or ordering of effectiveness of the Registration Statement by the
Securities and Exchange Commission (the "Commission"); and
----------
(e) "Registrable Securities" means the Conversion Shares, the Warrant
----------------------
Shares and the Dividend Payment Shares, and any other shares of Common Stock
issued or issuable pursuant to the terms of the Preferred Stock, whether as a
dividend, payment of a redemption price or otherwise, and any shares of capital
stock issued or issuable from time to time (with any adjustments) in replacement
of, in exchange for or otherwise in respect of the Conversion Shares, the
Warrant Shares or such Dividend Payment Shares.
5. MANDATORY REGISTRATION.
----------------------
(a) The Company shall prepare and file with the Commission a
Registration Statement on Form S-3 (or, if Form S-3 is not available, on such
form of Registration Statement as is then available to effect a registration of
the Registrable Securities, subject to the consent of each Purchaser, which
consent will not be unreasonably withheld) as a "shelf" registration statement
under Rule 415 covering the resale of at least 200% of the number of shares of
Registrable Securities then issuable on (i) conversion of the Preferred Shares
then issued or issuable (assuming conversion at the Fixed Conversion Price) and
(ii) exercise in full of the Warrants then issued or issuable. The Registration
Statement shall state, to the extent permitted by Rule 416 under the Securities
Act, that it also covers such indeterminate number of shares of Common Stock as
may be required to effect (i) conversion of the Preferred Shares to prevent
dilution resulting from stock splits, stock dividends or similar events, or by
reason of changes in the Conversion Price in accordance with the terms of the
Authorized Terms; and (ii) exercise of the Warrants in full to prevent dilution
resulting from stock splits, stock dividends or similar events.
(b) The Company shall use its best efforts to cause the Registration
Statement to become effective as soon as practicable following the filing
thereof, but in no event later than the Registration Deadline, and shall submit
to the Commission, within five (5) business days after the Company learns that
no review of the Registration Statement will be made by the staff of the
Commission or that the staff of the Commission has no further comments on the
Registration Statement, as the case may be, a request for acceleration of the
effectiveness of the Registration Statement to a time and date not later than
forty-eight (48) hours after the submission of such request (the "Effective
---------
Date"), and maintain the effectiveness of the Registration Statement until the
earlier to occur of (i) the date on which all of the Registrable Securities have
been sold pursuant to the Registration Statement, (ii) the date on which all of
the remaining Registrable Securities (in the opinion of counsel to the Purchaser
reasonably acceptable to the Company) may be immediately sold to the public
without registration and without regard to the amount of Registrable Securities
which may be sold by a Holder thereof at a given time and (iii) the twenty-four
(24) month anniversary of the Tranche B Closing Date (the "Registration
------------
Period").
<PAGE>
(c) If (A) the Registration Statement is not declared effective by
the Commission on or before the Registration Deadline, (B) after the
Registration Statement has been declared effective by the Commission, sales of
Registrable Securities cannot be made by a Holder under the Registration
Statement for any reason not within the control of such Holder or not permitted
by the terms hereof (other than such Registrable Securities as are then freely
saleable pursuant to Rule 144(k) under the Securities Act) or (C) the Common
Stock is not included for quotation on the Nasdaq SmallCap Market or the Nasdaq
National Market ("Nasdaq") or listed on the New York Stock Exchange or other
------
national securities exchange at any time after the Registration Deadline, the
Company shall pay to such Holder an amount equal to the lesser of (x) two
percent (2%) per month and (y) the highest rate permitted by applicable law,
times the aggregate purchase price of the Preferred Shares held by such Holder,
- -----
accruing daily and compounded monthly, from the Registration Deadline or, where
the Registration Statement has become effective, from the date on which the
Registration Statement lapses or is otherwise unavailable, until the Effective
Date or the date on which the Registration Statement becomes available for sales
of Registrable Securities, as the case may be. The amounts paid or payable by
the Company hereunder shall be in lieu of any other remedies available to the
Purchaser at law or in equity or pursuant to the terms of any other Transaction
Document. Payments of cash pursuant hereto shall be made within five (5)
business days after the end of each period that gives rise to such obligation,
provided that, if any such period extends for more than thirty (30) days,
payments shall be made within five (5) business days after the end of each
thirty-day period.
(d) Restrictions on Sales Pursuant to Mandatory Registrations.
----------------------------------------------------------
Following the Effective Date, the Company may, by delivery of written notice to
the Holders of Registrable Securities identified in the Registration Statement
(the "Blackout Notice"), require that such Holders not sell any of the
Registrable Securities for the period set forth in the Blackout Notice (the
"Blackout Period"); provided, however, that in no event shall the duration of
any one Blackout Period exceed five (5 ) days and in no event shall the Company
require more than (i) two (2) Blackout Periods in the first (1st) twelve (12)
month period after the date hereof and (ii) four (4) Blackout Periods in the
second (2nd) twelve (12) month period after the date hereof.
6. PIGGYBACK REGISTRATION.
----------------------
If at any time prior to the expiration of the Registration Period, (i) the
Company proposes to register shares of Common Stock under the Securities Act in
connection with the public offering of such shares for cash (other than a
registration relating solely to the sale of securities to participants in a
Company stock plan or employee stock award or a registration on Form S-4 or Form
S-8 under the Securities Act or any successor or similar form registering stock
issuable upon a reclassification, a business combination involving an exchange
of securities or an exchange offer for securities of the issuer or another
entity) (a "Proposed Registration") and (ii) a registration statement covering
---------------------
the sale of all of the Registrable Securities is not then effective and
available for sales thereof by the Holders (other than as provided herein), the
Company shall, at such time, promptly give each Holder written notice of such
Proposed Registration. Each Holder shall have ten (10) days from its receipt of
such notice to deliver to the Company a written request specifying the amount of
Registrable Securities that such Holder intends to sell and such Holder's
intended method of distribution. Upon receipt of such request, the Company
shall use its best efforts to cause all Registrable Securities which the Company
has been requested to register to be registered under the Securities Act to the
extent necessary to permit their sale or other disposition in accordance with
the intended methods of distribution specified in the request of such Holder;
provided, however, that the Company shall have the right to postpone or withdraw
- -------- -------
any registration effected pursuant to this Section 3 without obligation to the
Holder. If, in connection with any underwritten public offering for the account
of the Company, the managing
<PAGE>
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, marketing or other factors dictate such
limitation is necessary to facilitate public distributions, then the Company
shall be obligated to include in such Registration Statement only such limited
portion of the Registrable Securities with respect to which each Holder has
requested inclusion hereunder as such underwriter(s) shall permit. Any exclusion
of Registrable Securities shall be made pro rata among the Holders seeking to
include Registrable Securities in the Registration Statement, 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 to inclusion of such securities in such Registration
Statement or are not entitled to pro rata inclusion with the Registrable
Securities; 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 the Registration Statement subject to any rights of priority by
Holders of other securities. If an offering in connection with which a Holder is
entitled to registration under this Section 3 is an underwritten offering, then
as a condition of participating in the registration each Holder whose
Registrable Securities are included in such Registration Statement shall, unless
otherwise agreed by the Company, offer and sell such Registrable Securities in
an underwritten offering using the same underwriter or underwriters, subject to
the provisions of this Agreement (including, without limitation, Section 5(c)),
on the same terms and conditions as other shares of Common Stock included in the
same underwritten offering and shall join in the same underwriting agreement as
the other participants in the offering.
7. OBLIGATIONS OF THE COMPANY.
--------------------------
In addition to performing its obligations hereunder, including those
pursuant to paragraphs 2(a) and 2(b) above, the Company shall:
(a) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary to comply with the
provisions of the Securities Act or to maintain the effectiveness of the
Registration Statement during the Registration Period, or as may be reasonably
requested by a Holder in order to incorporate information concerning such Holder
or such Holder's intended method of distribution;
(b) in the event that the number of shares available under the
Registration Statement filed by the Company hereunder is insufficient during any
period of three (3) consecutive trading days to cover 150% of the Registrable
Securities then issued or issuable, the Company shall promptly amend the
Registration Statement, or file a new Registration Statement, or both, so as to
cover 200% of such Registrable Securities, in any event as soon as practicable,
but not later than the tenth (10th) business day in the case of an amendment and
the twentieth (20th) business day in the case of a Registration Statement,
following the last day of such three (3) day period; any Registration Statement
filed pursuant to this Section 4 shall state that, to the extent permitted by
Rule 416 under the Securities Act, such Registration Statement also covers such
indeterminate number of additional shares of Common Stock as may become issuable
upon conversion of the Preferred Shares or exercise of the Warrants in full.
Unless and until such amendment or new Registration Statement becomes effective,
each Holder shall have the rights described in Section 2(c) above;
(c) use its reasonable best efforts to maintain the designation and
quotation of the Registrable Securities on the Nasdaq SmallCap Market or the
listing thereof on the New York Stock Exchange or other national securities
exchange;
<PAGE>
(d) furnish to each Holder such number of copies of the prospectus
included in such Registration Statement, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other documents
as such Holder may reasonably request in order to facilitate the disposition of
such Holder's Registrable Securities;
(e) use all commercially reasonable efforts to register or qualify
the Registrable Securities under the securities or "blue sky" laws of such
jurisdictions within the United States as shall be reasonably requested from
time to time by a Holder, and do any and all other acts or things which may be
necessary or advisable to enable such Holder to consummate the public sale or
other disposition of the Registrable Securities in such jurisdictions; provided
that the Company shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such jurisdiction;
(f) in the event of an underwritten public offering of the
Registrable Securities, enter into and perform its obligations under an
underwriting agreement, in usual and customary form reasonably acceptable to the
Company, with the managing underwriter of such offering;
(g) notify each Holder immediately upon the occurrence of any event
as a result of which the prospectus included in such Registration Statement, as
then in effect, contains an untrue statement of material fact or omits to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing,
and as promptly as practicable, prepare, file and furnish to each Holder a
reasonable number of copies of a supplement or an amendment to such prospectus,
as may be necessary so that such prospectus does not contain an untrue statement
of material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing;
(h) use all commercially reasonable efforts to prevent the issuance
of any stop order or other order suspending the effectiveness of such
Registration Statement and, if such an order is issued, to obtain the withdrawal
thereof at the earliest possible time and to notify each Holder of the issuance
of such order and the resolution thereof;
(i) furnish to each Holder, on the date that such Registration
Statement becomes effective, (x) an opinion, dated such date, of outside counsel
representing the Company (and reasonably acceptable to such Holder) addressed to
such Holder, regarding the effectiveness of the Registration Statement and the
absence of any stop order, and (y) in the case of an underwriting, (A) an
opinion, dated such date, of such outside counsel, in form and substance as is
customarily given to underwriters in an underwritten public offering, and (B) a
letter, dated such date, from the Company's independent certified public
accountants, in form and substance as is at the time customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters, if any, and to each Holder;
(j) pursuant to the preparation of a Registration Statement, provide
each Holder and its representatives the opportunity to conduct a reasonable
inquiry of the Company's financial and other records during normal business
hours and make available its officers, directors and employees for questions
regarding information which such Holder may reasonably request in order to
fulfill any due diligence obligation on its part; provided as a condition to the
conduct of any such due diligence inquiry that each Holder conducting such
inquiry shall execute and deliver a confidentiality agreement reasonably
required
<PAGE>
by the Company and that such inquiry be conducted in a manner which does not
interfere with the operations of the Company; and
(k) permit counsel for each Holder (at such Holder's expense) to
review such Registration Statement and all amendments and supplements thereto a
reasonable period of time prior to the filing thereof with the Commission.
8. OBLIGATIONS OF EACH HOLDER.
--------------------------
In connection with the registration of the Registrable Securities pursuant
to the Registration Statement, each Holder shall:
(a) furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
Registrable Securities as the Company shall reasonably request in order to
effect the registration thereof and shall execute such documents in connection
with such registration as the Company may reasonably request;
(b) upon receipt of any notice from the Company of the happening of
any event of the kind described in paragraph 4(h), immediately discontinue
disposition of Registrable Securities pursuant to the Registration Statement
until withdrawal of the stop order referred to in paragraph 4(h) and, if so
directed by the Company, such Holder shall deliver to the Company (at the
expense of the Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Holder's possession, of the prospectus covering
such Registrable Securities at the time of receipt of such notice, provided that
each Holder may retain a limited number of file copies of such prospectuses;
(c) in the event of an underwritten offering of the Registrable
Securities no Holder may participate in any underwritten distribution hereunder
unless such Holder: (i) enters into a customary and reasonable underwriting
agreement; (ii) completes and executes such questionnaires, powers of attorney,
indemnities, underwriting agreements, and other documents as the managing
underwriter for such offering may reasonably request; and (iii) agrees to pay
its pro rata share of all underwriting discounts and commissions and any
expenses in excess of those payable by the Company;
(d) each Holder, by such Holder's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Holder has notified the Company in writing of
such Holder's election to exclude all of such Holder's Registrable Securities
from the Registration Statement; and
(e) each Holder whose Registrable Securities are included in a
Registration Statement understands that the Securities Act may require delivery
of a prospectus relating to such Registration Statement, and each such Holder
shall comply with the applicable delivery requirements of the Securities Act in
connection with any such sale.
9. INDEMNIFICATION.
---------------
In the event that any Registrable Securities are included in a Registration
Statement under this Agreement:
<PAGE>
(a) To the extent permitted by law, the Company shall indemnify and
hold harmless each Holder, the officers, directors, employees, agents and
representatives of such Holder, and each person, if any, who controls such
Holder within the meaning of the Securities Act or the Securities Exchange Act
of 1934, as amended (the "1934 Act"), against any losses, claims, damages,
--------
liabilities or reasonable out-of-pocket expenses (whether joint or several)
(collectively, including legal or other expenses reasonably incurred in
connection with investigating or defending same, "Losses"), insofar as any such
------
Losses arise out of (i) any untrue statement or alleged untrue statement of a
material fact contained in such Registration Statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, or (ii) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Company will reimburse such Holder, and each such officer,
director, employee, agent, representative or controlling person for any legal or
other expenses as reasonably incurred by any such entity or person in connection
with investigating or defending any Loss; provided, however, that the foregoing
indemnity shall not apply to amounts paid in settlement of any Loss if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be obligated to indemnify
any person for any Loss to the extent that such Loss arises out of or is based
upon and in conformity with written information furnished by such person
expressly for use in such Registration Statement; and provided, further, that
the Company shall not be required to indemnify any person to the extent that any
Loss results from such person selling Registrable Securities (i) to a person to
whom there was not sent or given, at or prior to the written confirmation of the
sale of such shares, a copy of the prospectus, as most recently amended or
supplemented, if the Company has previously furnished or made available copies
thereof or (ii) during any period following written notice by the Company to
such Holder of an event described in Section 4(g) or 4(h); and provided,
further, however, that, in no event shall the indemnity under this subsection
6(a) exceed, in the aggregate, $3,000,000.
(b) To the extent permitted by law, each Holder, acting severally and
not jointly, shall indemnify and hold harmless the Company, the officers,
directors, employees, agents and representatives of the Company, and each
person, if any, who controls the Company within the meaning of the Securities
Act or the 1934 Act, against any Losses to the extent (and only to the extent)
that any such Losses arise out of or are based upon and in conformity with
written information furnished by such Holder expressly for use in such
Registration Statement; and such Holder will reimburse any legal or other
expenses as reasonably incurred by the Company and any such officer, director,
employee, agent, representative, or controlling person, in connection with
investigating or defending any such Loss; provided, however, that the foregoing
indemnity shall not apply to amounts paid in settlement of any such Loss if such
settlement is effected without the consent of such Holder; provided, that, in no
event shall any indemnity under this subsection 6(b) exceed the net purchase
price of securities sold by such Holder under the Registration Statement.
(c) Promptly after receipt by an indemnified party under this Section
6 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in and to assume the
defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the reasonably incurred fees and expenses of one such counsel to
be paid by the indemnifying party, if representation of such indemnified party
by the counsel retained by the indemnifying party would be inappropriate under
applicable standards of professional conduct due to actual conflicting interests
between such indemnified party and any other party represented by such counsel
in such proceeding. The failure to
<PAGE>
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action, to the extent prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 6 with respect to such action, but the
omission so to deliver written notice to the indemnifying party will not relieve
it of any liability that it may have to any indemnified party otherwise than
under this Section 6 or with respect to any other action.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 6 is unavailable or insufficient to hold harmless an indemnified
party for any reason, the Company and each Holder agree, severally and not
jointly, to contribute to the aggregate Losses to which the Company or such
Holder may be subject in such proportion as is appropriate to reflect the
relative fault of the Company and such Holder in connection with the statements
or omissions which resulted in such Losses; provided, however, that in no case
shall such Holder be responsible for any amount in excess of the net purchase
price of securities sold by it under the Registration Statement and the Company
shall not be responsible for any amount in excess of $3,000,000. Relative fault
shall be determined by reference to whether any alleged untrue statement or
omission relates to information provided by the Company or by such Holder. The
Company and each Holder agree that it would not be just and equitable if
contribution were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this paragraph (d), 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 is not
guilty of such fraudulent misrepresentation. For purposes of this Section 6,
each person who controls a Holder within the meaning of either the Securities
Act or the Exchange Act and each officer, director, employee, agent or
representative of such Holder shall have the same rights to contribution as such
Holder, and each person who controls the Company within the meaning of either
the Securities Act or the Exchange Act and each officer, director, employee,
agent or representative of the Company shall have the same rights to
contribution as the Company, subject in each case to the applicable terms and
conditions of this paragraph (d).
(e) The obligations of the Company and each Holder under this Section
6 shall survive the conversion or redemption, if any, of the Preferred Shares,
the exercise of the Warrant, the completion of any offering of Registrable
Securities pursuant to a Registration Statement under this Agreement, or
otherwise.
10. REPORTS.
-------
With a view to making available to each Holder the benefits of Rule 144
under the Securities Act ("Rule 144") and any other similar rule or regulation
--------
of the Commission that may at any time permit such Holder to sell securities of
the Company to the public without registration, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934 Act; and
(c) furnish to such Holder, so long as such Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company, if true, that it has complied with the reporting requirements of Rule
144, the Securities Act and the 1934 Act, (ii) a copy of the most recent annual
or quarterly report of the Company and such other reports and documents so filed
by the Company, and (iii)
<PAGE>
such other information as may be reasonably requested in availing such Holder of
any rule or regulation of the Commission which permits the selling of any such
securities without registration.
11. MISCELLANEOUS.
-------------
(a) Expenses of Registration. All expenses, other than underwriting
------------------------
discounts and commissions and fees and expenses of counsel to each Holder,
incurred in connection with the registrations, filings or qualifications
described herein, including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees, the fees and disbursements of
counsel for the Company, and the fees and disbursements incurred in connection
with the opinion and letter described in paragraph 4(i) hereof, shall be borne
by the Company.
(b) Amendment; Waiver. Any provision of this Agreement may be
-----------------
amended only pursuant to a written instrument executed by the Company and
Holders of two-thirds (2/3) of the outstanding Registrable Securities. Any
waiver of the provisions of this Agreement may be made only pursuant to a
written instrument executed by the party against whom enforcement is sought. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each Holder, each future Holder, and the Company.
(c) Notices. Any notice, demand or request required or permitted to
-------
be given by any party to any other party pursuant to the terms of this Agreement
shall be in writing and shall be deemed given (i) when delivered personally or
by verifiable facsimile transmission (with an original to follow) on or before
5:00 p.m., eastern time, on a business day or, if such day is not a business
day, on the next succeeding business day, (ii) on the next business day after
timely delivery to a nationally-recognized overnight courier and (iii) on the
third business day after deposit in the U.S. mail (certified or registered mail,
return receipt requested, postage prepaid), addressed to the parties as follows:
If to the Company:
Interactive Entertainment Limited
845 Crossover Lane
Suite D-215
Memphis, Tennessee 38117
Attn.: David S. Lamm
Fax.: (901) 537-3801
With a copy to:
Altheimer & Gray
10 South Wacker Drive
` Suite 4000
Chicago, Illinois 60606
Attn: Andrew W. McCune
Fax: (312) 715-4800
and if to any Holder, to such address as shall be designated by such Holder in
writing to the Company.
<PAGE>
(d) Termination. This Agreement shall terminate on the earlier to
-----------
occur of (a) the end of the Registration Period and (b) the date on which all of
the Registrable Securities have been publicly distributed; but any such
termination shall be without prejudice to (i) the parties' rights and
obligations arising from breaches of this Agreement occurring prior to such
termination and (ii) the indemnification and contribution obligations under this
Agreement.
(e) Assignment. The rights of a Holder hereunder shall be assigned
----------
automatically to any transferee of the Preferred Shares, the Warrant or
Registrable Securities from such Holder as long as: (i) the Company is, within a
reasonable period of time following such transfer, furnished with written notice
of (x) the name and address of such transferee and (y) the Securities with
respect to which the Registration Rights are being transferred, (ii) the
transferee agrees in writing with the Company to be bound by all of the
provisions hereof and (iii) such transfer is made in accordance with the
applicable requirements of the Securities Purchase Agreement, the Authorized
Terms or the Warrant, as the case may be.
(f) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York without regard to the
conflict of laws provisions thereof.
(g) Registered Holder. A person or entity is deemed to be a Holder
-----------------
of Registrable Securities whenever such person or entity owns of record such
Registrable Securities. If the Company receives conflicting instructions,
notices or elections from two or more persons or entities with respect to the
same Registrable Securities, the Company shall act upon the basis of
instructions, notice or election received from the registered owner of such
Registrable Securities.
(h) No Waiver. Failure of any party to exercise any right or remedy
---------
under this Agreement or otherwise, or delay by a party in exercising such right
or remedy, shall not operate as a waiver thereof.
(i) Entire Agreement. This Agreement, the Preferred Stock, the
----------------
Warrants and the Securities Purchase Agreement constitute the entire agreement
among the parties hereto with respect to the subject matter hereof and thereof.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein and therein. This Agreement, the Preferred
Stock, the Warrants and the Securities Purchase Agreement supersede all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
(j) Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and assigns of each of the parties
hereto.
(k) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(l) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by facsimile transmission of a copy
of this Agreement bearing the signature of the party so delivering this
Agreement.
(m) Further Assurances. Each party shall do and perform, or cause to
------------------
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
(n) Severability. If any provisions of this Agreement shall be
------------
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date
first-above written.
INTERACTIVE ENTERTAINMENT LIMITED
By:/s/ David B. Lamm
-----------------------------------------------
Name:
Title:
PURCHASER NAME: CC Investments, LDC
----------------------------------
By: /s/ John Ziegelman
--------------------
Name: John Ziegelman
Title: Director
PURCHASER NAME: Convertible Proprietary Investment Group, Inc.
----------------------------------------------
By: /s/ Allan Weine
-----------------
Name: Allan Weine
Title: Vice President
<PAGE>
EXHIBIT 99
- ----------
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of December 17,
---------
1997, by and among Interactive Entertainment Limited, a Bermuda exempted company
(the "Company"), and each of the entities whose names appear on the signature
-------
pages hereof. Such entities are each referred to herein as a "Purchaser" and,
---------
collectively, as the "Purchasers".
----------
The Company wishes to sell to each Purchaser, and each Purchaser wishes to
buy, on the terms and subject to the conditions set forth in this Agreement, (i)
shares (the "Preferred Shares") of the Company's Series A Convertible Preferred
----------------
Stock of the Company's Class B Preferred Stock (the "Preferred Stock") in the
---------------
amount set forth below such Purchaser's name on the signature pages hereof and
(ii) a Warrant in the form of Exhibit A hereto (a "Warrant" and, when taken
--------- -------
together with all of the warrants issued hereunder, the "Warrants") entitling
--------
the holder thereof to purchase the number of shares (the "Warrant Shares") of
--------------
Common Stock (as defined below) set forth next to such Purchaser's name on the
signature pages hereof. The Preferred Shares are convertible into shares (the
"Conversion Shares") of the Company's Common Shares (the "Common Stock")
- ------------------ ------------
pursuant to the terms approved by the board of directors of the Company and
attached hereto as Exhibit B (the "Authorized Terms"). The Preferred Shares,
--------- ----------------
the Warrants, the Conversion Shares, the Warrant Shares and the Dividend Payment
Shares (as defined in the Authorized Terms) are collectively referred to herein
as the "Securities".
The Company has agreed to effect the registration of the Conversion Shares,
the Warrant Shares and the Dividend Payment Shares under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Rights
---------------
Agreement of even date herewith by and among the Company and the Purchasers (the
"Registration Rights Agreement"). The sale of the Preferred Shares and the
-----------------------------
Warrants by the Company to the Purchasers will be effected in reliance upon the
exemption from securities registration afforded by the provisions of Regulation
D ("Regulation D"), as promulgated by the Securities and Exchange Commission
------------
(the "Commission") under the Securities Act.
----------
The Company and the Purchasers hereby agree as follows:
12. PURCHASE AND SALE OF PREFERRED SHARES.
-------------------------------------
12.1 Agreement to Purchase and Sell. Upon the terms and subject to the
------------------------------
satisfaction or waiver of the conditions set forth herein, the Company agrees to
sell, and each Purchaser agrees to purchase (i) the number of Preferred Shares
set forth below such Purchaser's name on the signature pages hereof and (ii) a
Warrant entitling the holder thereof to purchase the number of Warrant Shares
set forth below such Purchaser's name on the signature pages hereof, at a
purchase price for such Preferred Shares and Warrant equal to one thousand
dollars ($1,000) times the number of Preferred Shares purchased by such
-----
Purchaser (the "Purchase Price") in a tranche with an aggregate Purchase Price
--------------
of one million dollars ($1,000,000) ("Tranche A"). A second tranche of Preferred
Shares and Warrants (which Warrants shall be for the purchase of an aggregate of
123,433 Warrant Shares) with an aggregate Purchase Price of two million dollars
($2,000,000) ("Tranche B") may be sold by the Company and shall be purchased by
the Purchasers, upon the terms and subject to the satisfaction or waiver of the
conditions set forth herein, at the option of the Company, which option shall be
exercised by means of delivery of a written notice from the Company to each
Purchaser electing that the Tranche B Closing (as defined below) occur within
not less than one (1) business day (as defined below) nor more than two (2)
business days following receipt of such notice by each of the Purchasers (a
"Purchase Option Notice"). In the event that the Purchasers receive such
- -----------------------
written notice electing that the Tranche B transaction be consummated, each
Purchaser shall be obligated to purchase, and the Company shall be obligated to
sell upon the terms and subject to the satisfaction or waiver of the conditions
set forth herein, its pro rata share of Preferred Shares and Warrants (based on
the number of shares of Preferred Stock purchased by such Purchaser hereunder
with respect to the Tranche A Closing (as defined below) relative to the number
of shares of Preferred Stock purchased by all the Purchasers hereunder with
respect to such Closing) within the time period designated in the written
notice. Unless it has delivered a Purchase Option Notice, the Company shall
have no obligation (i) to sell Securities pursuant to or (ii) to
<PAGE>
permit a Purchaser to purchase Securities pursuant to Tranche B. The Company's
option with respect to Tranche B shall not be exercisable until the Company's
gaming software has been installed and is available to paying passengers in the
entire cabin of one B-747-400, B-777 or A-340 on Singapore Airlines (and the
Company has delivered to each Purchaser written confirmation of the same from
Singapore Airlines) and shall expire if not exercised within six (6) months of
the date hereof.
12.2 Closing. Subject to the satisfaction or waiver of the conditions set
-------
forth herein, the closing of the purchase and sale of the Preferred Shares and
the Warrants pursuant to each of Tranche A (the "Tranche A Closing") and Tranche
-----------------
B (the "Tranche B Closing"), as the case may be, (each, a "Closing") will be
----------------- -------
deemed to occur when this Agreement and the other Transaction Documents (as
defined below) have been executed and delivered by the Company and each
Purchaser, and full payment of the Purchase Price for each of Tranche A or
Tranche B, as the case may be, has been made by each Purchaser by wire transfer
of immediately available funds against delivery by the Company of duly executed
certificates representing the Preferred Shares and the Warrants purchased by
such Purchaser hereunder. The date on which the Tranche A Closing occurs is
hereinafter referred to as the "Tranche A Closing Date" and the date on which
----------------------
the Tranche B Closing occurs is hereinafter referred to as the "Tranche B
---------
Closing Date". The Tranche A Closing Date and the Tranche B Closing Date are
- ------------
each sometimes referred to herein as a "Closing Date". For the avoidance of
------------
doubt, the parties acknowledge that the terms "Preferred Shares" and "Warrants"
shall include all Securities issued at the Tranche A Closing, and upon the
occurrence thereof, any Securities issued at the Tranche B Closing.
12.3 Certain Definitions. When used herein, (A) "business day" shall mean
-------------------
any day on which the New York Stock Exchange and commercial banks in the city of
New York and the city of Vancouver, British Columbia are open for business, (B)
an "affiliate" of a party shall mean any person or entity controlling,
controlled by or under common control with that party and (C) "control" shall
mean, with respect to an entity, the ability to direct the business, operations
or management of such entity, whether through an equity interest therein or
otherwise.
13. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.
------------------------------------------------
Each Purchaser, solely with respect to it, hereby makes the following
representations and warranties to the Company and agrees with the Company that,
as of the date of this Agreement and as of, with respect to the Tranche A
Closing, the Tranche A Closing Date and, with respect to the Tranche B Closing,
the Tranche B Closing Date:
13.1 Authorization; Enforceability. Such Purchaser is duly and validly
-----------------------------
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization with full power and authority
to purchase the Preferred Shares and the Warrants and to execute and deliver
this Agreement. This Agreement constitutes such Purchaser's valid and legally
binding obligation, enforceable in accordance with its terms, except as such
enforcement may be limited by (i) applicable bankruptcy, insolvency,
reorganization or other laws of general application relating to or affecting the
enforcement of creditors' rights generally and (ii) general principles of
equity.
13.2 Accredited Investor; Investment Intent. Such Purchaser is an
--------------------------------------
accredited investor as that term is defined in Rule 501 of Regulation D, and is
acquiring the Preferred Shares and the Warrants solely for its own account for
investment purposes as a principal and not with a view to the public resale or
distribution of all or any part thereof, except pursuant to sales that are
exempt from the registration requirements of the
<PAGE>
Securities Act and/or sales registered under the Securities Act. Such Purchaser
understands that such Purchaser must bear the economic risk of this investment
indefinitely, unless the securities are registered pursuant to the Securities
Act and any applicable state securities laws or an exemption from such
registration is available, and that the Company has no present intention of
registering such securities other than as contemplated by the Registration
Rights Agreement; provided, however that in making such representation, such
Purchaser does not agree to hold the Securities for any minimum or specific term
and reserves the right to sell, transfer or otherwise dispose of the Securities
at any time in accordance with the provisions of this Agreement and with Federal
and state securities laws applicable to such sale, transfer or disposition.
13.3 Reliance on Exemptions. Such Purchaser understands that the Preferred
----------------------
Stock and Warrants are being offered and sold to such Purchaser in reliance upon
specific exemptions from the registration requirements of Federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and such Purchaser's compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Purchaser set forth
herein in order to determine the availability of such exemptions and the
eligibility of such Purchaser to acquire the Preferred Stock and Warrants.
13.4 Information. The Company has provided such Purchaser with all
-----------
information regarding the business, operations and financial condition of the
Company which has been specifically requested by such Purchaser, and has granted
to such Purchaser the opportunity to ask questions of and receive answers which
it believes to be complete and satisfactory from representatives of the Company,
its officers, directors, employees and agents concerning the Company and
materials relating to the terms and conditions of the purchase and sale of the
Preferred Shares and the Warrants hereunder. Neither such information nor any
other investigation conducted by such Purchaser or any of its representatives
shall modify, amend or otherwise alter such Purchaser's right to rely on the
Company's representations and warranties contained in this Agreement. Such
Purchaser has no actual knowledge that any of the Company's representations or
warranties contained in this Agreement are untrue.
13.5 Governmental Review. Such Purchaser understands that no Federal or
-------------------
state agency has passed upon or made any recommendations or endorsement of the
Securities.
13.6 Limitations on Disposition. Such Purchaser acknowledges that, (i)
--------------------------
except as provided in the Registration Rights Agreement, the Securities have not
been and are not being registered under the Securities Act and may not be
transferred or resold without registration under the Securities Act or unless
pursuant to an exemption therefrom; (ii) any sale of such Securities made in
reliance on Rule 144 under the Securities Act (or a successor rule) ("Rule 144")
--------
may be made only in accordance with the terms of Rule 144 and further, if Rule
144 is not applicable, any resale of such Securities without registration under
the Securities Act under circumstances in which the seller may be deemed to be
an underwriter (as the term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the Commission thereunder; and (iii) neither the Company nor any
other person is under any obligation to register such Securities under the
Securities Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder (in each case, other than pursuant to
this Agreement or the Registration Rights Agreement).
13.7 Legend. Such Purchaser understands that the certificates representing
------
the Securities will bear at issuance a restrictive legend in substantially the
following form:
<PAGE>
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or the securities laws of any state of the United
States, and may not be offered, sold or transferred unless a
registration statement under the Securities Act and applicable state
securities laws shall have become effective with regard thereto, or an
exemption from registration under the Securities Act and applicable
state securities laws is available in connection with such offer, sale
or transfer. Such securities are issued subject to the provisions of
(i) the Authorized Terms adopted by the Board of Directors of
Interactive Entertainment Limited (the "Company"), as amended, (ii) a
Securities Purchase Agreement, dated December ___, 1997, by and among
the Company and the purchasers named therein, and (iii) a Registration
Rights Agreement, dated December___, 1997, by and among the Company
and such purchasers."
Notwithstanding the foregoing, it is agreed that, as long as the
resale of the Conversion Shares, the Warrant Shares or the Dividend Payment
Shares, as the case may be, is registered pursuant to an effective registration
statement or such shares are eligible for resale under Rule 144(k) under the
Securities Act, such shares shall be issued without any legend or other
restrictive language. The legend set forth above shall be removed and the
Company shall issue a new certificate without such legend to the holder of any
Security upon which it is stamped if (i) the resale of such Security is
registered under the Securities Act, (ii) such holder provides the Company with
an opinion of counsel, in form, substance and scope customary for opinions of
counsel in comparable transactions (the cost of which shall be borne by such
holder) to the effect that such Security can be sold publicly without
registration under the Securities Act, (iii) such holder provides the Company
with an opinion of counsel reasonably satisfactory to the Company that such
Security can be sold pursuant to Rule 144 without any restriction as to the
number of shares of or represented by such Security that can then be immediately
resold or (iv) such Security has been sold pursuant to Rule 144.
13.8 Residency. Such Purchaser is a resident of the jurisdiction set
---------
forth under such Purchaser's name on the signature page hereto executed by
Purchaser.
14. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company hereby makes the following representations and warranties to
each Purchaser and agrees with such Purchaser that, as of the date of this
Agreement and as of, with respect to the Tranche A Closing, the Tranche A
Closing Date and, with respect to the Tranche B Closing, the Tranche B Closing
Date:
14.1 Organization Good Standing and Qualification. Each of the Company and
--------------------------------------------
its subsidiaries is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation or organization and has all
requisite corporate power and authority to carry on its business as now
conducted. Each of the Company and its subsidiaries is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure so to qualify would have a material adverse effect on the consolidated
business or financial condition of the Company and its subsidiaries taken as a
whole. The term "subsidiaries" shall mean entities in which the Company has an
equity interest of 50% or greater.
14.2 Authorization; Consents. The Company has the requisite corporate
-----------------------
power and authority to enter into and perform its obligations under (i) this
Agreement, (ii) the Registration Rights Agreement and (iii) all other
agreements, documents, certificates or other instruments delivered by the
Company at the Closing (the instruments described in (i), (ii) and (iii) being
collectively referred to herein as the "Transaction Documents"), to execute and
---------------------
perform its obligations under Authorized Terms, to execute and perform its
obligations under the Warrants, to issue and sell the Preferred Shares and the
Warrants to such Purchaser in
<PAGE>
accordance with the terms hereof, to issue the Conversion Shares upon conversion
of the Preferred Shares in accordance with the Authorized Terms, to issue the
Warrant Shares upon exercise of the Warrant and to issue the Dividend Payment
Shares in accordance with the Authorized Terms. All corporate action on the part
of the Company by its officers, directors and shareholders necessary for (A) the
authorization, execution and delivery of, and the performance by the Company of
its obligations under, the Transaction Documents, (B) the authorization,
execution and filing of, and the performance by the Company of its obligations
under the Authorized Terms, and (C) the authorization and execution, and the
performance by the Company of its obligations under, the Warrants have been
taken, and no further consent or authorization of the Company, its Board of
Directors, its shareholders, any governmental agency or organization, or any
other person or entity is required.
14.3 Enforcement. The Transaction Documents, the Authorized Terms and the
-----------
Warrants constitute valid and legally binding obligations of the Company,
enforceable in accordance with their respective terms, except as such
enforcement may be limited by (i) applicable bankruptcy, insolvency,
reorganization or other laws of general application relating to or affecting the
enforcement of creditors' rights generally; (ii) general principles of equity;
and (iii) Federal or state securities laws as to rights to indemnity and
contribution under this Agreement or the Registration Rights Agreement.
14.4 Disclosure Documents; Material Agreements; Other Information. The
------------------------------------------------------------
Company has filed with the Commission: (i) the Company's Annual Report on Form
20-F for the year ended February 28, 1997, (ii) a Transition Report on Form 10-Q
for the four months ended June 30, 1997, (iii) a Quarterly Report on Form 10-Q
for the three months ended September 30, 1997, (iv) all Current Reports on Form
8-K required to be filed with the Commission since June 17, 1997 and (v) the
Company's definitive Proxy Statement for its 1997 Annual General Meeting of
Shareholders (the "Disclosure Documents"). The Company is not aware of any
--------------------
event occurring on or prior to the applicable Closing Date (other than the
transactions effected hereby, and the announced acquisition of Inflight
Interactive Limited or developments regarding Sky Games/TM/ software) that would
require the filing of, or with respect to which the Company intends to file, a
Form 8-K after the applicable Closing Date. Each Disclosure Document, as of the
date of the filing thereof with the Commission, conformed in all material
respects to the requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act "), and the rules and regulations thereunder and, as of the
-------------
date of such filing, such Disclosure Document did not contain an untrue
statement of 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. Except as described
on Schedule 3.4 hereto, all material agreements required to be filed as exhibits
------------
to the Disclosure Documents have been filed as required; neither the Company nor
any of its subsidiaries is in breach of any agreement where such breach is
reasonably likely to have a material adverse effect on the consolidated business
or financial condition of the Company and its subsidiaries taken as a whole.
The information described in paragraph 2.4 above does not contain an untrue
statement of 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 and does not include
any material, non-public information. Except as set forth in the Disclosure
Documents or any schedule or exhibit attached hereto, the Company has no
liabilities, contingent or otherwise, other than liabilities incurred in the
ordinary course of business which, under generally accepted accounting
principles, are not required to be reflected in such financial statements and
which, individually or in the aggregate, are not material to the consolidated
business or financial condition of the Company and its subsidiaries taken as a
whole. As of their respective dates, the financial statements of the Company
included in the Disclosure Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the Commission with respect thereto. Such financial statements
have been
<PAGE>
prepared in accordance with generally accepted accounting principles
consistently applied at the times and during the periods involved (except (i) as
may be otherwise indicated in such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end adjustments
and final review by the Company's independent auditors); provided, however, that
the Company's Annual Report on Form 20-F for the year ended February 28, 1997,
is intended to be amended on or about December 31, 1997 by the filing of a Form
20-F/A to reflect a change in the reconciliation of Canadian GAAP to U.S. GAAP
relating to (i) the reclassification of the preference shares held by B/E
Aerospace, Inc. in the amount of $2.6 million as debt as of February 28, 1997,
and (ii) an incremental expense of $703,000 related to the issuance of options
to non-related parties; provided, further, that the Company's Transition Report
on Form 10-Q for the four months ended June 30, 1997 has been amended by the
filing of a Form 10-Q/A to reflect changes in the accounting treatment of
certain transactions reflected in the financial statements contained therein.
14.5 Capitalization. The capitalization of the Company as of the date
--------------
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares issuable and reserved for issuance pursuant to
the Company's stock option plans, the number of shares issuable and reserved for
issuance pursuant to securities (other than the Preferred Stock and the
Warrants) exercisable for, or convertible into or exchangeable for any shares of
Common Stock and the number of shares initially to be reserved for issuance upon
conversion of the Preferred Shares and exercise of the Warrants in full is set
forth on Schedule 3.5 hereto. All of such outstanding shares of capital stock
------------
have been, or upon issuance will be, validly issued, fully paid and non-
assessable. No shares of the capital stock of the Company are subject to
preemptive rights or any other similar rights of the shareholders of the Company
or any liens or encumbrances created by or through the Company, other than those
preemptive rights created in favor of Harrah's Interactive Investment Company
("HIIC") and its affiliates, pursuant to that certain Registration and
Preemptive Rights Agreement dated June 17, 1997, between the Company and HIIC
("Harrah's Preemptive Rights"), and subject to the provisions of the Company's
Bye-laws. Except as disclosed on Schedule 3.5., or as contemplated herein, as
-------------
of the date of this Agreement and as of the applicable Closing Date, there are
no outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable or exchangeable for, any shares of capital stock
of the Company or any of its subsidiaries, or arrangements by which the Company
or any of its subsidiaries is or may become bound to issue additional shares of
capital stock of the Company or any of its subsidiaries.
14.6 Valid Issuance.
--------------
14.6.1 The Preferred Shares are duly authorized and, when issued,
sold and delivered in accordance with the terms hereof, (i) will be duly and
validly issued, fully paid and nonassessable, free and clear of any taxes,
liens, claims, preemptive or similar rights (except as set forth herein) or
encumbrances imposed by or through the Company, (ii) based in part upon the
representations of such Purchaser in this Agreement, will be issued, sold and
delivered in compliance with all applicable Federal and state securities laws,
and (iii) will be entitled to all of the rights, preferences and privileges set
forth in the Authorized Terms. The Conversion Shares are duly authorized and
reserved for issuance and, upon conversion of the Preferred Shares in accordance
with the terms of the Authorized Terms, will be duly and validly issued, fully
paid and nonassessable, free and clear of any taxes, liens, claims, preemptive
or similar rights or encumbrances imposed by or through the Company. The
Dividend Payment Shares are duly authorized and will be, upon
<PAGE>
the issuance thereof, duly and validly issued, fully paid and nonassessable,
free and clear of any taxes, liens, claims, preemptive or similar rights or
encumbrances imposed by or through the Company, subject to the provisions of the
Company's Bye-laws.
14.6.2 The Warrants are duly authorized and, when issued, sold and
delivered in accordance with the terms hereof, (i) will be duly and validly
issued, fully paid and nonassessable, free and clear of any taxes, liens,
claims, preemptive or similar rights or encumbrances imposed by or through the
Company, and (ii) based in part upon the representations of such Purchaser in
this Agreement, will be issued, sold and delivered in compliance with all
applicable Federal and state securities laws. The Warrant Shares are duly
authorized and reserved for issuance and, upon exercise of the Warrants in
accordance with the terms thereof, will be duly and validly issued, fully paid
and nonassessable, free and clear of any taxes, liens, claims, preemptive or
similar rights or encumbrances imposed by or through the Company subject to the
provisions of the Company's Bye-laws.
14.7 No Conflict with Other Instruments. Neither the Company nor
----------------------------------
any of its subsidiaries is in violation of any provisions of its charter, bye-
laws or other organizational documents or any other governing document as
amended and in effect on and as of the date hereof or in default (and no event
has occurred which, with notice or lapse of time or both, would constitute a
default) under any provision of any instrument or contract to which it is a
party or by which it is bound which would reasonably be expected to have a
material adverse effect on the consolidated business or financial condition of
the Company and its subsidiaries taken as a whole, or of any provision of any
Federal or state judgment, writ, decree, order, statute, rule or governmental
regulation applicable to the Company, which would have a material adverse effect
on the consolidated business or financial condition of the Company and its
subsidiaries taken as a whole. The (i) execution, delivery and performance of
this Agreement, the Warrant and the other Transaction Documents, (ii) approval
of the Approved Terms by the Board of Directors and (iii) consummation of the
transactions contemplated hereby and thereby (including without limitation, the
issuance of the Preferred Shares and the issuance and reservation for issuance
of the Conversion Shares and the Dividend Payment Shares) will not result in any
such violation or be in conflict with or constitute, with or without the passage
of time and giving of notice, either a default under any such provision,
instrument or contract or an event which results in the creation of any lien,
charge or encumbrance upon any assets of the Company or of any of its
subsidiaries, or the triggering of any anti-dilution rights on the part of
holders of the Company's securities.
14.8 Financial Condition; Taxes; Litigation.
--------------------------------------
14.8.1 The Company's financial condition is, in all material
respects, as described in the Disclosure Documents, except for changes in the
ordinary course of business and normal year-end adjustments that are not, in the
aggregate, materially adverse to the consolidated business or financial
condition of the Company and its subsidiaries taken as a whole. Except as
otherwise described in the Disclosure Documents, as of the date hereof and as of
the applicable Closing Date, there has been no material adverse change to the
Company's business, operations, properties, financial condition or results of
operations since the date of the Company's most recent audited financial
statements contained in the Disclosure Documents.
14.8.2 The Company has filed all tax returns required to be filed
by it and paid all taxes which are due, except for taxes which it reasonably
disputes or which could not reasonably be expected to have a material adverse
effect on the consolidated business or financial condition of the Company and
its subsidiaries taken as a whole.
<PAGE>
14.8.3 Except as set forth in Schedule 3.8.3, each of the Company
--------------
and its subsidiaries is not the subject of any pending or, to the Company's
knowledge, threatened inquiry, investigation or administrative or legal
proceeding by the Internal Revenue Service, the taxing authorities of any state
or local jurisdiction, the Commission or any state securities commission or
other governmental or regulatory entity which would reasonably be expected to
have a material adverse effect on the consolidated business or financial
condition of the Company and its subsidiaries taken as a whole.
14.8.4 Except as set forth in Schedule 3.8.4, there is no material
--------------
claim, litigation or administrative proceeding pending, or, to the Company's
knowledge, threatened, against the Company or any of its subsidiaries, or
against any officer, director or employee of the Company or any such subsidiary
in connection with such person's employment therewith. Neither the Company nor
any of its subsidiaries is a party to or subject to the provisions of, any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality which would reasonably be expected to have a material adverse
effect on the consolidated business or financial condition of the Company and
its subsidiaries taken as a whole.
14.9 Reporting Company; Form S-3. The Company is subject to the
---------------------------
reporting requirements of the Exchange Act, has a class of securities registered
under Section 12 of the Exchange Act, and has filed all reports required
thereby. The Company is eligible to register for resale shares of its Common
Stock on a registration statement on Form S-3 under the Securities Act.
14.10 Acknowledgment of Dilution. The Company acknowledges that
--------------------------
the issuance of (i) the Conversion Shares upon conversion of the Preferred
Shares in accordance with the terms of the Authorized Terms, (ii) the Warrant
Shares upon exercise of the Warrants, and (iii) the Dividend Payment Shares in
accordance with the terms of the Authorized Terms may result in dilution of the
outstanding shares of Common Stock, which dilution may be substantial under
certain market conditions. The Company further acknowledges that its obligation
(x) to issue Conversion Shares upon conversion of the Preferred Shares in
accordance with the terms of the Authorized Terms, (y) to issue Warrant Shares
upon exercise of the Warrants and (z) to issue Dividend Payment Shares in
accordance with the terms of the Authorized Terms is unconditional and absolute
regardless of the effect of any such dilution.
14.11 Intellectual Property. The Company and its subsidiaries own,
---------------------
possess or can acquire on reasonable terms adequate trademarks, trade names and
other rights to inventions, know-how, patents, copyrights, confidential
information and other intellectual property rights necessary to conduct the
business now operated by them, or presently employed by them, and have not
received any notice of infringement of or conflict with asserted rights of
others with respect to any such rights that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate have
a material adverse effect on the consolidated business or financial condition of
the Company and its subsidiaries taken as a whole.
14.12 Registration Rights; Rights of Participation. Except as
--------------------------------------------
described on Schedule 3.12 hereto, (A) the Company has not granted or agreed to
-------------
grant to any person or entity any rights (including "piggy-back" registration
rights) to have any securities of the Company registered with the Commission or
any other governmental authority which has not been satisfied and (B) no person
or entity, including, but not limited to, current or former shareholders of the
Company, underwriters, brokers, agents or other third parties, has any right of
first refusal, preemptive right, right of participation, or any similar right to
participate in the transactions contemplated by this Agreement or any other
Transaction Document which has not been waived.
<PAGE>
14.13 Trading on Nasdaq. The Common Stock is authorized for
-----------------
quotation on the Nasdaq SmallCap Market, and trading in the Common Stock on
Nasdaq is not suspended as of the date hereof. The Company is not in violation
of any designation criteria of the Nasdaq SmallCap Market, and does not
reasonably anticipate that the Common Stock will be delisted by the Nasdaq
SmallCap market for the foreseeable future.
14.14 Fees. Except as described on Schedule 3.14 hereto, the Company is
---- -------------
not obligated to pay any brokerage commissions, finder's fees or similar
payment, cost or related expenditure to any underwriter, broker, agent or
similar representative in connection with the transactions contemplated hereby.
14.15 Foreign Corrupt Practices. To the knowledge of the Company,
-------------------------
neither the Company, nor any of its subsidiaries nor any director, officer,
agent, employee or other person acting on behalf of the Company or any
subsidiary, has (i) used any corporate funds for any unlawful contribution,
gift, entertainment or other unlawful expenses relating to political activity,
(ii) made any direct or indirect unlawful payment to any foreign or domestic
government official or employee, or (iii) violated in a material aspect any
provision of the Foreign Corrupt Practices Act of 1977, as amended, or made any
unlawful bribe, rebate, payoff, influence payment, kickback or other payment to
any foreign or domestic government official or employee.
14.16 Other Issuances of Securities. Except as set forth on Schedule
----------------------------- --------
3.16 hereto, the Company has not issued (and will not issue) any shares of
- ----
Common Stock or shares of any series of preferred stock or other securities or
instruments convertible into, exchangeable for or otherwise entitling the holder
thereof to acquire shares of Common Stock which would be integrated with the
sale of the Preferred Shares to such Purchaser, or the issuance of the
Conversion Shares upon conversion thereof, for purposes of determining whether
shareholder approval is required under the designation criteria of the Nasdaq
SmallCap Market.
14.17 Regulatory Permits. The Company and its subsidiaries possess all
------------------
certificates, authorizations and permits issued by the appropriate Federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.
15. COVENANTS OF THE COMPANY.
------------------------
15.1 Corporate Existence. The Company shall, so long as any Purchaser
-------------------
or any affiliate of such Purchaser beneficially owns any Securities (but in no
event shall such obligation continue for longer than three (3) years from the
Tranche A Closing Date or until Purchasers no longer own any Securities
purchased hereunder), maintain its corporate existence in good standing and
shall pay all taxes owed by it when due except for taxes which the Company
reasonably disputes or as to which the failure to pay could not reasonably be
expected to have a material adverse effect on the consolidated business or
financial condition of the Company.
15.2 Provision of Information. The Company shall upon written request
------------------------
provide each Purchaser with copies of its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and proxy statements and other
materials sent to shareholders, in each such case promptly after the filing
thereof with the Commission, until the conversion or redemption of all of the
Preferred Shares and exercise of all of the Warrants held by such Purchaser.
<PAGE>
15.3 Reporting Status. As long as any Purchaser or any affiliate of
----------------
such Purchaser beneficially owns any Securities and until the date on which any
of the foregoing may be sold to the public pursuant to Rule 144(k) (or any
successor rule or regulation), (i) the Company shall file with the Commission
all reports required to be so filed pursuant to the Exchange Act and (ii) the
Company shall not terminate its status as an issuer required by the Exchange Act
to file reports thereunder even if the Exchange Act or the rules or regulations
thereunder would permit such termination (other than a termination resulting
from the sale, conveyance or disposition of all or substantially all of the
assets of the Company, the effectuation of a transaction or series of
transactions, in which more than 50% of the voting power of the Company is
disposed of, or the consolidation, merger or other business combination of the
Company with or into any other entity, immediately following which the prior
shareholders of the Company fail to own, directly or indirectly, at least fifty
percent (50%) of the surviving entity). The Company agrees to file with the
Commission a Form 8-K describing the terms of the transactions contemplated by
this Agreement and the other Transaction Documents, on or before the tenth
(10th) day following the applicable Closing Date in the form required by the
Exchange Act and attaching the Transaction Documents as exhibits.
15.4 Authorization of Common Stock. The Company shall at all times
-----------------------------
have authorized for issuance, free from any preemptive rights, solely for the
purpose of effecting conversions of the Preferred Shares hereunder and the
exercise of the Warrants, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all of the Preferred
Shares and the exercise of the Warrants in full (the "Reserved Amount"). As of
each Closing Date, the Reserved Amount shall be equal to no less than 200 % of
the number of shares of Common Stock issuable upon conversion of all of the
Preferred Shares to be issued at, or which are otherwise outstanding on, the
applicable Closing Date and exercise of the Warrants in full. If at any time the
Reserved Amount is less than 150% of the number of shares of Common Stock
issuable upon conversion of all of the Preferred Shares then outstanding and
exercise of the Warrants in full, the Company shall take action as soon as
practicable thereafter (including seeking shareholder authorization for
additional shares of Common Stock) to increase the Reserved Amount to no less
than 200% of the number of shares of Common Stock into which such outstanding
Preferred Shares are then convertible and such Warrants are exercisable. The
Company shall not reduce the number of shares reserved for issuance hereunder
without the written consent of the holders of two-thirds of the Preferred Shares
then outstanding.
15.5 Use of Proceeds. The Company shall use the proceeds from the sale
---------------
of the Preferred Shares and the Warrants for general corporate purposes and
shall not use such proceeds to make a loan to or an investment in any other
corporation, partnership or other entity, including a loan, other than in
connection with an employee benefit plan or a de minimus payroll advance, to any
employee, officer or director of the Company, and such proceeds shall not be
used by any such employee, officer or director for any purpose that is not
directly related to the business or operations of the Company.
15.6 Quotation on Nasdaq. The Company shall (i) promptly following the
-------------------
Tranche A Closing, secure the designation and quotation of the Conversion Shares
and the Warrant Shares on the Nasdaq SmallCap Market, (ii) prior to the issuance
thereof, secure the designation and quotation of the Dividend Payment Shares on
the Nasdaq SmallCap Market and (iii) use its reasonable best efforts to maintain
the designation and quotation, or listing, of the Common Stock on the Nasdaq
SmallCap Market, Nasdaq National Market, the New York Stock Exchange or the
American Stock Exchange; provided, however, that any failure to maintain such
designation, quotation or listing which is cured within five (5) business days
shall not be deemed a breach of this Agreement.
<PAGE>
15.7 Use of Purchaser Name. The Company shall not use, directly or
---------------------
indirectly, any Purchaser's name in any advertisement, announcement, press
release or other similar communication unless it has received the prior consent
of such Purchaser for the specific use contemplated or as otherwise required by
applicable law or regulation.
15.8 Company's Instructions to Transfer Agent. On or prior to the Tranche
----------------------------------------
A Closing, the Company shall execute and deliver irrevocable instructions to its
transfer agent (the "Transfer Agent") (i) to issue certificates representing
--------------
Conversion Shares upon conversion of the Preferred Shares in accordance with the
terms of the Authorized Terms and receipt of a valid Conversion Notice (as
defined in the Authorized Terms) from a Purchaser, in the amount specified in
such Conversion Notice in the name of such Purchaser or its nominee, (ii) to
issue certificates representing Warrant Shares upon exercise of the Warrants in
accordance with its terms upon receipt of a valid Exercise Notice (as defined in
the Warrants) from a Purchaser, in the amount specified in such Exercise Notice
in the name of such Purchaser or its nominee, (iii) to issue certificates
representing the Dividend Payment Shares upon the issuance thereof in accordance
with the Authorized Terms and (iv) to deliver such certificates to such
Purchaser no later than the close of business on the later to occur of (A) the
third (3rd) business day following the related Conversion Date or the Dividend
Payment Date (each as defined in the Authorized Terms) or Exercise Date (as
defined in the Warrants), as the case may be and (B) in the case of conversion
of Preferred Shares or exercise of the Warrants, the first business day
following the date of delivery to the Company or the Transfer Agent of the
original certificates, duly endorsed, representing the shares of Preferred Stock
being converted or the Warrant being exercised, as the case may be. The Company
represents to and agrees with each Purchaser that it will not give any
instruction to the Transfer Agent that will conflict with the foregoing
instruction or otherwise restrict such Purchaser's right to convert the
Preferred Shares or exercise the Warrants or issuance of the Dividend Payment
Shares, and as long as the Transfer Agent is a participant in the Depository
Trust Company ("DTC") Fast Automated Securities Transfer program, and such
Purchaser has not informed the Company that it wishes to receive physical
certificates, the transfer agent may effect delivery of Conversion Shares,
Warrant Shares or Dividend Payment Shares, as the case may be, by crediting the
account of such Purchaser or its nominee at DTC for the number of shares for
which delivery is required hereunder within the time frame specified above for
delivery of certificates. The Company represents to and agrees with each
Purchaser that it will not give any instruction to the Transfer Agent that will
conflict with the foregoing instruction or otherwise restrict such Purchaser's
rights to convert the Preferred Shares or exercise the Warrants or to receive
Conversion Shares or Dividend Payment Shares in accordance with the terms of the
Authorized Terms or to receive Warrant Shares in accordance with the terms of
the Warrant. In the event that the Company's relationship with the Transfer
Agent should be terminated for any reason, the Transfer Agent shall continue
acting as transfer agent pursuant to the terms hereof until such time that a
successor transfer agent is appointed by the Company and agrees to be bound by
the terms hereof.
15.9 Capital Raising Limitations. The Company will not, during the six (6)
---------------------------
month period following the Tranche A Closing Date (the "Limitation Period"),
-----------------
offer for sale or sell (i) Common Stock (A) at an issuance price of greater than
a fifteen percent (15%) discount to the market price of the Common Stock at the
time of such issuance or with warrants exercisable for more than twenty percent
(20%) of the Common Stock purchased or (B) for an aggregate purchase price in
excess of five million dollars ($5,000,000) or (ii) any security convertible
into, or exercisable or exchangeable for, Common Stock (other than the sale of
Preferred Stock to a Purchaser hereunder for an aggregate purchase price of up
to two million dollars ($2,000,000)) (collectively, the "Capital Raising
---------------
Limitations"). The Capital Raising Limitations shall not apply to any
- -----------
transaction involving issuances of securities as consideration in a merger,
consolidation, acquisition or sale of assets (in each case, the primary purpose
of which is not to raise equity capital) or
<PAGE>
pursuant to a strategic partnership or joint venture which is formed for a bona
fide commercial purpose, or as consideration for the acquisition of a business,
product or license by the Company or in connection with the exercise of options
by employees, directors or consultants. The Capital Raising Limitations also
shall not apply to (i) the issuance of Common Stock in a transaction pursuant to
a public offering (other than an offering conducted pursuant to Rule 415 under
the Securities Act); (ii) issuances of securities to the Company's or its
affiliates' employees, directors or consultants (or pursuant to options or
rights granted to persons who were employees, directors or consultants of the
Company or its affiliates as of the date of the grant) pursuant to a stock
purchase or option plan adopted by the Company; (iii) issuances of securities in
connection with an acquisition by the Company or its affiliates of the assets or
capital stock of a third party; (iv) issuances of securities pursuant to a stock
split, dividend, etc.; (v) issuances of securities upon the conversion of any
preference shares into Common Stock; or (vi) issuances of securities to any
lender in connection with the extension, renewal, modification or renegotiation
of any credit or indebtedness to the Company or its affiliates.
15.10 Right of First Offer. Prior to any offer or sale by the Company
--------------------
of Common Stock (or any securities convertible into or exchangeable for Common
Stock) during the one hundred eighty (180) day period following the Limitation
Period, the Company must first deliver to each Purchaser written notice
describing the proposed issuance, including the terms and conditions thereof,
and provide such Purchaser with an option during the five (5) business day
period following delivery of such notice to each Purchaser to purchase up to its
proportionate share (based on the number of shares of Preferred Stock purchased
by such Purchaser hereunder relative to the number of shares of Preferred Stock
purchased by all the Purchasers hereunder) of the securities being offered on
the same terms as contemplated by such issuance. The foregoing right of first
offer shall not apply to (i) the issuance of Common Stock in a transaction
pursuant to a public offering (other than an offering conducted pursuant to Rule
415 under the Securities Act); (ii) issuances of securities to the Company's or
its affiliates' employees, directors or consultants (or pursuant to options or
rights granted to persons who were employees, directors or consultants of the
Company or its affiliates as of the date of the grant) pursuant to a stock
purchase or option plan adopted by the Company; (iii) issuances of securities in
connection with an acquisition by Company or its affiliates of the assets or
capital stock of a third party; (iv) issuances of securities pursuant to a stock
split, dividend, etc.; (v) issuances of securities upon the conversion of any
preference shares into Common Stock; or (vi) issuances of securities to any
lender in connection with the extension, renewal, modification or renegotiation
of any credit or indebtedness to the Company or its affiliates.
15.11 Debt Covenant. The Company shall refrain during the period ending
-------------
on the later of the six (6) month anniversary of the Tranche A Closing Date or
the forty-fifth (45th) day following the Effective Date (as such term is defined
in the Registration Rights Agreement), from incurring, assuming or guaranteeing
any indebtedness. Following such period and until the first (1st) anniversary
of the Tranche A Closing Date, in the event that the Company incurs, assumes or
guarantees any indebtedness in excess of one million five hundred thousand
dollars ($1,500,000), individually or in the aggregate, without the prior
written consent of the holders of two-thirds (2/3) of the Preferred Shares then
outstanding the Conversion Percentage (as defined in the Authorized Terms) of
the Preferred Shares shall be eighty-five percent (85%). In the event the
Company exceeds the foregoing limitations without the requisite approval, the
Company shall give each Purchaser written notice of such event within five (5)
business days of date the limitation was exceeded.
16. COVENANTS OF THE PURCHASER
--------------------------
<PAGE>
Prohibition of Short Position. Each Purchaser acknowledges and agrees that
-----------------------------
it (i) will not make any short sales prior to the Effective Date ( as defined in
the Registration Rights Agreement) and (ii) does not intend to and that it shall
not, so long as such Purchaser or any affiliate of such Purchaser beneficially
owns any shares of the Preferred Stock, establish an aggregate short position
with respect to the Common Stock exceeding twenty percent (20%) of the number of
shares of Common Stock into which the shares of Preferred Stock then held by
such Purchaser are convertible at the Fixed Conversion Price (as defined in the
Authorized Terms); provided, however, that the foregoing shall not apply to the
extent that the average Closing Bid Price (as defined in the Authorized Terms)
in the immediately preceding five (5) Trading Days (as defined in the Authorized
Terms) exceeds the Fixed Conversion Price and provided further that
notwithstanding the foregoing, in no event shall a Purchaser be required to
close out or reduce any portion of a short position established in compliance
with the terms of this Section 5. For purposes of this Section 5, a short sale
shall not include any sale of Common Stock made within three (3) business days
prior to the delivery of a Conversion Notice (in the case of Preferred Shares)
or an Exercise Notice (in the case of a Warrant) to the Company in accordance
with the Authorized Terms.
17. CONDITIONS TO CLOSING.
---------------------
17.1 Conditions to Purchaser's Obligation at Closing. Each Purchaser's
-----------------------------------------------
obligation at each Closing, including without limitation its obligation to
purchase the Preferred Shares and the Warrant, are conditioned upon the
fulfillment of each of the following events:
17.1.1 the representations and warranties of the Company set forth
in this Agreement shall be true and correct in all material
respects as of the applicable Closing Date as if made on such
date;
17.1.2 the Company shall have complied with or performed all of the
agreements, obligations and conditions set forth in this
Agreement that are required to be complied with or performed
by the Company on or before such Closing;
17.1.3 the Company shall have delivered to such Purchaser a
certificate, signed by an officer of the Company, certifying
that the conditions specified in paragraphs 6.1.1 and 6.1.2
above have been fulfilled as of such Closing;
17.1.4 the directors of the Company shall have passed a resolution
designating the rights attaching to the Preferred Shares and
shall have furnished such Purchaser with a certified copy
thereof;
17.1.5 each of the executive officers of the Company who own shares
of Common Stock shall have executed and delivered the letter
agreement attached hereto as Exhibit 6.1.5 regarding such
-------------
person's agreement to refrain for one (1) year from the date
of this Agreement from selling more than fifteen percent
(15%) of such person's holdings of Common Stock until the
Registration Statement (as defined in the Registration Rights
Agreement) is declared effective; provided, however, that
Laurence Geller may sell up to two hundred thousand (200,000)
shares of Common Stock within such one (1) year period;
<PAGE>
17.1.6 the Company shall have delivered to such Purchaser an opinion
of counsel for the Company, dated as of the applicable
Closing Date, in form and substance reasonably acceptable to
such Purchaser;
17.1.7 the Company shall have executed and delivered the Registration
Rights Agreement;
17.1.8 the Common Stock shall on the applicable Closing Date be
designated for quotation and actively traded on the Nasdaq
SmallCap Market;
17.1.9 there shall have been no material adverse changes in the
Company's consolidated business or financial condition since
the date of the Company's most recent audited financial
statements contained in the Disclosure Documents;
17.1.10 the Company shall have authorized for issuance 200% of the
aggregate number of shares of Common Stock issuable upon (i)
conversion of all of the Preferred Shares to be issued at such
Closing, (ii) exercise of the Warrants in full, and (iii) the
conversion of such Preferred Shares and exercise of all of the
Warrants then outstanding, such number, in the case of a
conversion, to be determined using the Conversion Price in
effect on the applicable Closing Date; and
17.1.11 the Company shall have delivered to such Purchaser a copy of
HIIC's written waiver of Harrah's Preemptive Rights with
respect to the Securities; and
17.1.12 the Company shall have made available for inspection by such
Purchaser the certificates representing the Preferred Shares
and Warrants being purchased by such Purchaser hereunder.
17.2 Conditions to Company's Obligations at Closing. The Company's
----------------------------------------------
obligations at each Closing are conditioned upon the fulfillment of each of the
following events:
17.2.1 the representations and warranties of each Purchaser shall be
true and correct in all material respects as of the applicable
Closing Date as if made on such date;
17.2.2 each Purchaser shall have complied with and performed all of
the agreements, obligations and conditions set forth in this
Agreement that are required to be complied with or performed
by such Purchaser on or before such Closing;
17.2.3 Purchaser shall have executed the signature page to this
Agreement and the Registration Rights Agreement and delivered
the same to the Company;
17.2.4 Purchaser shall have wired to an escrow agent mutually agreed
upon by Purchaser and the Company the applicable Purchase
Price of the Preferred Stock and the Warrant; and
17.2.5 no statute, rule, regulation, executive order, decree, ruling
or injunction shall have been enacted, promulgated or endorsed
by any court or governmental authority of competent
jurisdiction or any self-regulatory organization having
authority over the
<PAGE>
matters contemplated hereby which restricts or prohibits the
consummation of any of the transactions contemplated by this
Agreement.
18. INDEMNIFICATION.
---------------
The Company agrees to indemnify and hold harmless each Purchaser and its
officers, directors, employees and agents, and each person who controls such
Purchaser within the meaning of the Securities Act or the Exchange Act (each, a
"Purchaser Indemnified Party") against any losses, claims, damages, liabilities
---------------------------
or reasonable out-of-pocket expenses (including the reasonable fees and
disbursements of counsel) as incurred, joint or several, to which it, they or
any of them, may become subject and not otherwise reimbursed, arising out of
the breach by the Company of any of its representations, warranties or covenants
made herein.
Each Purchaser agrees, severally and not jointly, to indemnify and hold
harmless the Company and its officers, directors, employees and agents, and each
person who controls the Company within the meaning of the Securities Act or the
Exchange Act (each, a "Company Indemnified Party") (a Purchaser Indemnified
-------------------------
Party and a Company Indemnified Party are each hereinafter referred to as an
"Indemnified Party") against any losses, claims, damages, liabilities or
- ------------------
expenses (including the fees and disbursements of counsel) as incurred, joint or
several, to which it, they or any of them, may become subject and not otherwise
reimbursed, arising out of the breach by such Purchaser of any of its
representations, warranties or covenants made herein.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action by a third party pursuant to which indemnification
may be sought hereunder, such Indemnified Party will, if a claim in respect
thereof is to be made against the other party (the "Indemnifying Party"),
------------------
deliver to the Indemnifying Party a written notice of the commencement thereof
and the Indemnifying Party shall have the right to participate in and to assume
the defense thereof with counsel reasonably selected by the Indemnifying Party;
provided, however, that an Indemnified Party shall have the right to retain its
own counsel, with the reasonably incurred fees and expenses of such counsel to
be paid by the Indemnifying Party, if representation of such Indemnified Party
by the counsel retained by the Indemnifying Party would be inappropriate due to
actual or potential conflicts of interest under applicable standards of
professional conduct between such Indemnified Party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the Indemnifying Party within a reasonable time of the commencement of
any such action will not relieve the Indemnifying Party of any of its
obligations hereunder with respect to such action except to the extent such
failure is prejudicial to the Indemnifying Party's ability to defend any such
action.
No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of pending or threatened action in
respect of which an Indemnified Party is or could have been a party and
indemnity could have been sought hereunder by such Indemnified Party unless such
settlement includes an unconditional release of such Indemnified Party from all
liability on any claims that are the subject matter of such action. An
Indemnifying Party will not be liable for any settlement of any action or claim
effected without its written consent.
Any implication herein to the contrary notwithstanding, (i) any Indemnified
Party shall not be entitled to recover under Section 7 hereof until the total
amount for which such Indemnified Party would recover under Section 7 hereof
exceeds $30,000, and then only for the excess over $30,000; and (ii) the
<PAGE>
maximum aggregate amount that any Indemnified Party shall be entitled to recover
under Section 7 hereof shall not exceed $3,000,000.
19. MISCELLANEOUS.
-------------
19.1 Survival; Severability. The representations, warranties, covenants
----------------------
and indemnities made by the parties herein shall survive each Closing
notwithstanding any due diligence investigation made by or on behalf of the
party seeking to rely thereon. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that in such case the parties shall
negotiate in good faith to replace such provision with a new provision which is
not illegal, unenforceable or void, as long as such new provision does not
materially change the economic benefits of this Agreement to the parties.
19.2 Successors and Assigns. The terms and conditions of this Agreement
----------------------
shall inure to the benefit of and be binding upon the respective successors and
permitted assigns of the parties. Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and permitted assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. The Purchaser may assign its rights hereunder, in connection
with any private sale or transfer of the Preferred Shares or the Warrant in
accordance with the terms hereof, as long as, as a condition precedent to such
transfer, the transferee executes an acknowledgment agreeing to be bound by the
applicable provisions of this Agreement, in which case the term "Purchaser"
shall be deemed to refer to such transferee as though such transferee were an
original signatory hereto; provided that no such transfer or assignment shall
--------
relieve any Purchaser of its obligations hereunder.
19.3 Independent Nature of Purchasers' Obligations and Rights. The
--------------------------------------------------------
obligations of each Purchaser hereunder are several and not joint with the
obligations of the other Purchasers hereunder, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at each Closing, and no action taken by any Purchaser
pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement or out of the other
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose.
19.4 No Reliance; Representations by Purchasers. Each party acknowledges
------------------------------------------
that (i) it has such knowledge in business and financial matters as to be fully
capable of evaluating this Agreement, the other Transaction Documents and the
transactions contemplated hereby and thereby, (ii) it is not relying on any
advice or representation of the other party in connection with entering into
this Agreement, the other Transaction Documents or such transactions (other than
the representations made in this Agreement or the other Transaction Documents),
(iii) it has not received from such party any assurance or guarantee as to the
merits (whether legal, regulatory, tax, financial or otherwise) of entering into
this Agreement or the other Transaction Documents or the performance of its
obligations hereunder and thereunder, and (iv) it has consulted with its own
legal, regulatory, tax, business, investment, financial and accounting advisors
to the
<PAGE>
extent that it has deemed necessary, and has entered into this Agreement and the
other Transaction Documents based on its own independent judgment and on the
advice of its advisors as it has deemed necessary, and not on any view (whether
written or oral) expressed by such party.
19.5 Injunctive Relief. The Company acknowledges that a breach by it of
-----------------
its obligations hereunder may cause irreparable harm to each Purchaser and that
the remedy or remedies at law for any such breach may be inadequate and agrees,
in the event of any such breach, in addition to all other available remedies, to
such Purchaser's ability to seek an injunction restraining any breach and
requiring immediate and specific performance of such obligations.
19.6 Governing Law; Jurisdiction. This Agreement shall be governed by and
---------------------------
construed under the laws of the State of New York without regard to the conflict
of laws provisions thereof. Each party hereby irrevocably submits to the non-
exclusive jurisdiction of the state and federal courts sitting in the City of
New York, borough of Manhattan, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law.
19.7 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
19.8 Headings. The headings used in this Agreement are used for
--------
convenience only and are not to be considered in construing or interpreting this
Agreement.
19.9 Notices. Any notice, demand or request required or permitted to be
-------
given by any party to any other party pursuant to the terms of this Agreement
shall be in writing and shall be deemed given (i) when delivered personally or
by verifiable facsimile transmission (with an original to follow) on or before
5:00 p.m., eastern time, on a business day or, if such day is not a business
day, on the next succeeding business day, (ii) on the next business day after
timely delivery to a nationally-recognized overnight courier and (iii) on the
third business day after deposit in the U.S. mail (certified or registered mail,
return receipt requested, postage prepaid), addressed to the parties as follows:
<PAGE>
If to the Company:
Interactive Entertainment Limited
845 Crossover Lane
Suite D-215
Memphis, Tennessee 38117
Attn.: David B. Lamm
Fax: (901) 537-3801
With a copy to:
Altheimer & Gray
10 South Wacker Drive
Suite 4000
Chicago, Illinois 60606
Attn: Andrew W. McCune
Fax: (312) 715-4800
and if to any Purchaser, to such address for such Purchaser as shall appear on
the signature page hereof executed by such Purchaser, or as shall be designated
by such Purchaser in writing to the Company.
19.10 Expenses. Except as otherwise specified herein, the Company and
--------
each Purchaser shall pay all costs and expenses that it incurs in connection
with the negotiation, execution, delivery and performance of this Agreement;
provided that the Company shall reimburse the Purchasers for their reasonable
out-of-pocket expenses, including legal expenses, not to exceed eight thousand
dollars ($8,000), in the aggregate, at Closing.
19.11 Entire Agreement; Amendments. This Agreement and the other
----------------------------
Transaction Documents constitute the entire agreement between the parties with
regard to the subject matter hereof and thereof, superseding all prior
agreements or understandings, whether written or oral, between or among the
parties. Except as expressly provided herein, neither this Agreement nor any
term hereof may be amended except pursuant to a written instrument executed by
the Company and the holders of at least two-thirds (2/3) of the Preferred Shares
then outstanding, and no provision hereof may be waived other than by a written
instrument signed by the party against whom enforcement of any such waiver is
sought.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first-above written.
INTERACTIVE ENTERTAINMENT LIMITED
By: /s/ David B. Lamm
---------------------------------
Name: David B. Lamm
Title: Chief Financial Officer and Treasurer
PURCHASER NAME:Convertible Proprietary Investment Group, Inc.
----------------------------------------------
By: /s/ Allan Weine
---------------------------------
Name: Allan Weine
Title: Vice President
ADDRESS:
c/o Credit Suisse First Boston
---------------------------------
11 Madison Avenue, 3rd Floor, New York, New York, 10010
-------------------------------------------------------
Tel: 212-325-2302
----------------------------
Fax: 212-325-6519
----------------------------
Number of Shares of Series A Convertible Preferred Stock to be Purchased: 500
---
Number of Shares of Common Stock to be
Represented by the Warrant to be Purchased: 30,859
------
S1
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first-above written.
INTERACTIVE ENTERTAINMENT LIMITED
By: /s/ David B. Lamm
----------------------------------
Name: David B. Lamm
Title: Chief Financial Officer and Treasurer
PURCHASER NAME:CC Investments, LDC
------------------------
By: /s/ John Ziegelman
----------------------------------
Name: John Ziegelman
Title: Director
ADDRESS:
c/o Castle Creek Partners, LLC
----------------------------------
333 West Wacker Drive, Suite 1410, Chicago, Illinois, 10010
-----------------------------------------------------------
Tel: 312-554-2770
-----------------------------
Fax: 312-435-2636
-----------------------------
Number of Shares of Series A Convertible Preferred Stock to be Purchased: 500
---
Number of Shares of Common Stock to be
Represented by the Warrant to be Purchased: 30,859
------
S1
<PAGE>
SCHEDULE 3.4
DISCLOSURE DOCUMENTS; MATERIAL AGREEMENTS; OTHER INFORMATION
None
S1
<PAGE>
SCHEDULE 3.5
CAPITALIZATION
<TABLE>
<CAPTION>
Common Stock, par value $.01,50,000,000 shares authorized
- ---------------------------------------------------------
<S> <C>
Shares issued as of 12-10-97 22,842,598
Less: Performance Shares (3,525,000)
Shares Outstanding 19,317,598
Shares reserved under the 1996 Stock Plan 1,130,000 1
Shares reserved under the MIP 4,070,105 2
Shares reserved under the Directors' Option Plan 500,000 3
Shares reserved for outstanding warrants 180,000
Shares reserved for conversion of outstanding debentures 284,732
Shares reserved for private placement commitment 462,873
Shares reserved for warrants associated with private placement 197,493
Reserved for options contingent on financing 100,000
Shares reserved for conversion of Class A Preference Shares 1,078,621 4
Shares issuable upon closing of purchase of Inflight Interactive Ltd. 500,000
Shares contingently issuable upon signing IIL "Designated Airline" 250,000
----------
Total common shares issued and reserved for issuance 28,071,422
</TABLE>
Class A Preference Shares, $.01 par value, 3,000 shares authorized
- ------------------------------------------------------------------
Shares outstanding as of December 10, 1997 2,737
Class B Preference Shares, $.01 par value, 5,000,000 shares authorized
- ----------------------------------------------------------------------
Shares outstanding as of December 10, 1997 0
<TABLE>
<CAPTION>
Convertible Debentures
----------------------
<S> <C> <C> <C>
Principal Initial 1 - All options are outstanding
Amount of Conversion Equivalent 2 - 2,537,950 options are outstanding
Debentures Price Shares 3 - 150,000 options are outstanding
- ---------- ----- ------
440,000 2.31600 189,983 4 - Shares are convertible at a 30% discount to market
300,000 3.16625 94,749
- ------- -------
740,000 284,732
</TABLE>
Common Shares to be reserved for issuance upon conversion of Preferred Shares*
752,351
Common Shares to be reserved for issuance of warrants
*Assumes conversion at $3.9875
S1
<PAGE>
SCHEDULE 3.8.3
None.
S1
<PAGE>
SCHEDULE 3.8.4
None.
S1
<PAGE>
SCHEDULE 3.12
REGISTRATION RIGHTS; RIGHTS OF PARTICIPATION
1. Harrah's Interactive Investment Company has two demand registration rights
with respect to 6,886,915 shares. Prior to June 30, 1998, no demand for
registration may be brought for more than 1,000,000 shares unless IEL
receives an opinion that the trading price of its Common Stock would not
fall by more than 25% for more than 15 consecutive trading days as a result
of such sale. Any offering must be underwritten by an underwriter chosen
by the Company. As long as HIIC owns at least 5% of the outstanding voting
shares, it also has customary piggy-back rights to include its shares in
registered offerings by the Company.
2. B/E Aerospace Inc. has registration rights with respect to Common Stock
issuable upon conversion of 2,737 Class A Preference Shares. Any such
offering must be for at least $2 million unless the shares proposed to be
sold constitute all such shares owned and the offering is expected to be at
least $1 million. The Company is also obligated to use its best efforts to
include Common Stock owned by BEA to be covered by any registration
statement filed by the Company.
3. Henderson International Investments Ltd. has been granted piggy-back
registration rights with respect to 925,747 shares of Common Stock and
185,150 shares of Common Stock issuable upon the exercise of warrants.
Registration rights apply only to a registration in conjunction with shares
issuable upon conversion of Class B, Series A Preference Shares.
4. Banque Franck S.A. has registration rights with respect to shares issuable
upon conversion of a $300,000 debenture due September 30, 1999. Shares are
registrable only if a change in regulations prevent the holder from being
able to sell securities under existing exemptions available under
Regulation S.
<PAGE>
SCHEDULE 3.14
FEES
1. A fee of 8.0% of the purchase price is payable to European Venture Finance.
The Company is allowed to offset its direct costs associated with the
offering against this fee.
2. The Company has an understanding with a director of the Company to receive
options covering 100,000 shares of Common Stock upon consummation of the
contemplated financing.
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SCHEDULE 3.16
OTHER ISSUANCES OF SECURITIES
The sale of the Preference Shares hereunder is part of a financing on behalf of
the Company of up to $8,000,000.
