<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 23346
EQUITY MARKETING, INC.
(Exact name of registrant as specified in its charter.)
DELAWARE 13-3534145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6330 SAN VICENTE BLVD.
LOS ANGELES, CA 90048
(Address of principal executive offices) (Zip Code)
(323) 932-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $.001 Par Value, 6,290,612 shares as of May 10, 2000.
<PAGE> 2
EQUITY MARKETING, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,131 $ 1,169
Accounts receivable (net of allowances of $5,370 and
$4,004 as of December 31, 1999 and March 31, 2000, respectively) 37,385 26,883
Note receivable, current portion 5,024 7,780
Inventory 8,742 21,326
Prepaid expenses and other current assets 5,696 6,323
------- -------
Total current assets 63,978 63,481
FIXED ASSETS, net 4,907 4,667
INTANGIBLE ASSETS, net 21,846 21,892
NOTE RECEIVABLE, long-term portion 5,491 6,311
OTHER ASSETS 1,022 956
------- -------
Total assets $97,244 $97,307
======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
<PAGE> 4
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ --------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt $ 12,500 $ 4,500
Accounts payable 21,726 24,516
Accrued liabilities 18,707 11,818
-------- --------
Total current liabilities 52,933 40,834
LONG-TERM LIABILITIES 2,286 2,214
-------- --------
Total liabilities 55,219 43,048
-------- --------
COMMITMENTS AND CONTINGENCIES
Mandatory redeemable preferred stock, Series A senior cumulative
participating convertible, $.001 par value, 11,900 issued and
outstanding, stated at liquidation preference of $1,000 per
share ($11,900), net of issuance costs -- 10,346
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value per share; 1,000,000
shares authorized, 11,900 Series A issued and outstanding -- --
Common stock, par value $.001 per share, 20,000,000
shares authorized, 6,220,100 and 6,281,435 shares outstanding
as of December 31, 1999 and March 31, 2000, respectively -- --
Additional paid-in capital 15,942 16,522
Retained earnings 28,477 29,766
-------- --------
44,419 46,288
Less--
Treasury stock, 1,921,299 shares, at cost, as of
December 31, 1999 and March 31, 2000, respectively (2,129) (2,129)
Stock subscription receivable (21) (21)
Unearned compensation (244) (225)
-------- --------
Total stockholders' equity 42,025 43,913
-------- --------
Total liabilities and stockholders' equity $ 97,244 $ 97,307
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
4
<PAGE> 5
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 2000
----------- ----------
<S> <C> <C>
REVENUES $ 27,457 $ 43,477
COST OF SALES 20,545 33,203
----------- ----------
Gross profit 6,912 10,274
----------- ----------
OPERATING EXPENSES:
Salaries, wages and benefits 3,471 3,401
Selling, general and administrative 3,660 4,819
----------- ----------
Total operating expenses 7,131 8,220
----------- ----------
Income (loss) from operations (219) 2,054
INTEREST INCOME (EXPENSE), net (222) 85
----------- ----------
Income (loss) before provision (benefit) for income taxes (441) 2,139
PROVISION (BENEFIT) FOR INCOME TAXES (176) 845
----------- ----------
Net income (loss) (265) 1,294
=========== ==========
NET INCOME (LOSS) $ (265) $ 1,294
PREFERRED STOCK DIVIDENDS -- 6
----------- ----------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS (265) 1,288
=========== ==========
BASIC NET INCOME (LOSS) PER SHARE $ (0.04) $ 0.21
=========== ==========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 6,210,497 6,236,718
=========== ==========
DILUTED NET INCOME (LOSS) PER SHARE $ (0.04) $ 0.20
=========== ==========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 6,210,497 6,473,471
=========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
5
<PAGE> 6
EQUITY MARKETING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (265) $ 1,294
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 681 659
Provision for doubtful accounts 52 557
Tax benefit from exercise of stock options 32 102
Issuance of treasury stock to 401(k) Tax Deferred Saving Plan 74 --
Changes in operating assets and liabilities:
Increase (decrease) in cash and cash equivalents:
Accounts receivable 35,768 9,945
Note receivable -- (3,576)
Inventory 7,657 (12,584)
Prepaid expenses and other current assets 804 (627)
Other assets (121) 66
Accounts payable (14,837) 2,790
Accrued liabilities (11,018) (8,248)
Long-term liabilities 24 (72)
-------- --------
Net cash provided by (used in) operating activities 18,851 (9,694)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (103) (137)
Proceeds from sale of fixed assets -- 21
Payment for purchase of Contract Marketing, Inc. and
U.S. Import and Promotions Co. -- (349)
-------- --------
Net cash used in investing activities (103) (465)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on line of credit (25,000) (8,000)
Proceeds from issuance of preferred stock and warrants
including $1,353 of accrued offering costs not yet paid -- 11,772
Proceeds from exercise of stock options 20 425
-------- --------
Net cash provided by (used in) financing activities (24,980) 4,197
-------- --------
Net decrease in cash and cash equivalents (6,232) (5,962)
CASH AND CASH EQUIVALENTS, beginning of period 7,250 7,131
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 1,018 $ 1,169
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest $ 269 $ 238
======== ========
Income taxes $ -- $ 2,721
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
6
<PAGE> 7
EQUITY MARKETING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND BUSINESS
Equity Marketing, Inc., a Delaware corporation (the "Company"), is a leading
marketing services company, providing a wide range of custom promotional
programs that build sales and brand awareness for retailers, restaurant chains
and consumer goods companies such as Burger King Corporation, The Coca-Cola
Company, Exxon Company USA, Sunoco, Inc., CVS/pharmacy and others. The Company
is also a developer and marketer of distinctive, branded consumer products that
complement its core promotions business and are based on trademarks it owns or
classic licensed properties. The Company primarily sells to customers in the
United States.
Equity Marketing Hong Kong, Ltd., a Delaware corporation ("EMHK"), is a 100%
owned subsidiary of the Company. EMHK manages production of the Company's
products by third parties in the Far East and currently is responsible for
performing and/or procuring product sourcing, product engineering, quality
control inspections, independent safety testing and export/import documentation.
In April 1998, the Company purchased 100% of the common stock of Corinthian
Marketing, Inc., a Delaware corporation ("Corinthian"). Corinthian is engaged
principally in the design, manufacture, marketing and distribution of the
Headliners(R) brand of collectible sports figurines.
In July 1998, the Company acquired substantially all of the assets of Contract
Marketing, Inc. ("CMI"), a Massachusetts corporation, and U.S. Import and
Promotions Co. ("USI"), a Florida corporation, (CMI and USI are collectively
referred to herein as "USI"). USI focuses primarily on promotions for oil and
gas and other retailers. The Company intends to continue to use the acquired
assets for this purpose. The primary operations of USI are located in West
Boylston, Massachusetts and St. Augustine, Florida. In March 2000, the Company
paid $349 to the former stockholders of USI as additional cash consideration
related to the Company's purchase of USI. This amount was allocated to Goodwill.
NOTE 2 -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management and subject to year-end audit, the accompanying
unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. The results of operations
for the interim periods are not necessarily indicative of the results for a full
year. These consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
NET INCOME PER SHARE
Basic net income (loss) per share ("EPS") is computed by dividing net income
(loss) available to common stockholders by the weighted average number of common
shares outstanding during each period. Net income (loss) available to common
stockholders represent reported net (loss) income less preferred stock dividend
requirements.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. Diluted EPS includes in-the-money options and warrants using the treasury
stock method and includes the assumed conversion of preferred stock using the
if-converted method. During a loss period, the assumed exercise of in-the-money
stock options and warrants and the assumed conversion of preferred stock has an
antidilutive effect. As a result, stock options and warrants are excluded from
the weighted average shares outstanding of 6,210,497 used in the calculation of
diluted loss per share for the three months ended March 31, 1999. The impact of
including unexercised dilutive options and warrants (assuming net income) would
have been to increase weighted average shares outstanding by 78,028 for the
three months ended March 31, 1999. For the three months ended March 31, 2000,
the impact of including dilutive options and warrants was to increase the
weighted average number of shares outstanding by 236,753. Options and warrants
to purchase 1,337,295 and 1,317,666 shares of common stock, $.001 par value per
share (the "Common Stock"), as of March 31, 1999, and 2000, respectively were
excluded from the computation of diluted EPS as they would have been
anti-dilutive. For the three months ended March 31, 2000, the preferred stock
that was convertible into the weighted average of 26,892 shares of Common Stock
was not included in computation of diluted EPS as it would have been
anti-dilutive.
7
<PAGE> 8
INVENTORY
Inventory consists of production-in-process which primarily represents tooling
costs which are deferred and amortized over the life of the products and
purchased finished goods held for sale to customers and purchased finished goods
in transit to customers' distribution centers. Inventory is stated at the lower
of average cost or market. As of December 31, 1999 and March 31, 2000, inventory
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
<S> <C> <C>
Production-in-process $ 1,088 $ 3,395
Finished goods 7,654 17,931
------- -------
$ 8,742 $21,326
======= =======
</TABLE>
NOTE 3 -- SHORT-TERM DEBT
At December 31, 1999 and March 31, 2000, the Company was party to a revolving
credit agreement ("Credit Agreement") with two commercial banks. The agreement,
as amended on March 13, 2000, provides for a line of credit of $25,000 through
June 30, 2001 with borrowing availability determined by a formula based on
qualified assets. Interest on outstanding borrowings is based on either a fixed
rate equivalent to LIBOR plus 3.00 percent or a variable rate equivalent to the
lead bank's reference rate plus .50 percent. The Company is also required to pay
an unused line fee of .50 percent per annum and certain letter of credit fees.
The Credit Agreement is secured by substantially all of the Company's assets.
The Credit Agreement requires the Company to comply with certain restrictions
and financial covenants as defined in the agreement. As of March 31, 2000, the
Company was in compliance with these requirements.
As of December 31, 1999 and March 31, 2000 there was $12,500 and $4,500,
respectively, outstanding under the Credit Agreement. Letters of credit amounts
outstanding as of December 31, 1999 and March 31, 2000 was $401.
NOTE 4 -- RESTRUCTURING RESERVE
On December 21, 1998, the Company announced its decision to exit the
event-based-license consumer products business along with its retail pin
business. In connection with this decision, the Company recorded a restructuring
charge of $4,121 in 1998. The restructuring charge includes a provision for
projected minimum royalty guarantee shortfalls associated with long-term
licenses which the Company has decided to discontinue, severance for workforce
reductions of 30 employees, a provision for outstanding inventory purchase
commitments on purchase orders the Company cancelled, and a provision for costs
associated with the planned closure of the Company's warehouse facility. Details
of the restructuring charge are as follows:
<TABLE>
<CAPTION>
Utilized Three
Original Utilized Utilized Reversed Charged Months Ended To Be
Charge 1998 1999 1999 1999 March 31, 2000 Utilized
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Provision for projected minimum royalty
guarantee shortfalls $2,187 $ -- $ (267) $ (641) $ -- $(1,062) $ 217
Employee severance and termination benefits 738 (127) (648) -- 37 -- --
Outstanding inventory purchase commitments 800 -- (716) -- -- -- 84
Lease commitment for warehouse facility 396 -- (31) -- -- (22) 343
- ---------------------------------------------------------------------------------------------------------------------
$4,121 $ (127) $ (1,662) $ (641) $ 37 $(1,084) $ 644
=====================================================================================================================
</TABLE>
NOTE 5 - MANDATORY REDEEMABLE PREFERRED STOCK
On March 29, 2000, Crown EMAK Partners, LLC, a Delaware limited liability
company ("Crown"), invested $11.9 million in the Company in exchange for
preferred stock and warrants to purchase additional preferred stock. Under the
terms of the investment, Crown acquired 11,900 shares of Series A senior
cumulative participating convertible preferred stock, par value $.001 per share,
of the Company (the "Series A Stock") with a conversion price of $14.75 per
share. In connection with such purchase, the Company granted to Crown five year
warrants (collectively, the "Warrants") to purchase 5,712 shares of Series B
senior cumulative participating convertible preferred stock, par value $.001 per
share, of the Company (the "Series B Stock") at an exercise price of $1,000 per
share, and 1,428 shares of Series C senior cumulative participating convertible
preferred stock, par value $.001 per share, of the Company (the "Series C
Stock") at an exercise price of $1,000 per share. The Warrants are immediately
exercisable. The conversion prices of the Series B Stock and the Series C Stock
are $16.00 and $18.00, respectively. Contingent upon the completion of certain
conditions (the "Second Closing"), Crown will pay an additional $13.1 million to
8
<PAGE> 9
the Company in exchange for an additional 13,100 shares of Series A Stock with a
conversion price of $14.75 per share. In connection with such purchase, the
Company will grant to Crown Warrants to purchase an additional 6,288 shares of
Series B Stock and an additional 1,572 shares of Series C Stock. As of the date
hereof, each share of Series A Stock is currently convertible into 67.7966
shares of Common Stock, representing 1,694,915 shares of Common Stock in the
aggregate following the Second Closing. As of the date hereof, each share of
Series B Stock and Series C Stock is currently convertible into 62.5 and 55.5556
shares of Common Stock, respectively, representing 916,666 shares of Common
Stock in the aggregate following the Second Closing. Also in connection with
such purchase, the Company agreed to pay Crown a commitment fee in the aggregate
amount of $1.25 million, paid in equal quarterly installments of $62.5
commencing on June 30, 2000 and ending on March 31, 2005.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of the
affairs of the Company, Crown, as holder of the preferred stock, will be
entitled to payment out of the assets of the Company available for distribution
of an amount equal to the greater of (a) the liquidation preference of $1,000
per share (the "Liquidation Preference") plus all accrued and unpaid dividends
or (b) the aggregate amount of payment that the outstanding preferred stock
holder would have received assuming conversion to Common Stock immediately prior
to the date of liquidation of capital stock, before any payment is made to other
stockholders.
The Series A Stock, Series B Stock and Series C Stock are subject to mandatory
redemption at 101% of the aggregate Liquidation Preference plus accrued and
unpaid dividends if a change in control of the Company occurs.
Crown has voting rights equivalent to the number of shares of Common Stock into
which their preferred stock is convertible on the relevant record date. Crown is
also entitled to receive a quarterly dividend equal to 6% of the Liquidation
Preference per share outstanding, payable in cash.
Crown currently holds 100% of the outstanding shares of Series A Stock, and
consequently, has designated two individuals to the Board of Directors of the
Company.
The Series A Stock is recorded in the accompanying condensed consolidated
balance sheets at its Liquidation Preference net of issuance costs. The issuance
costs total approximately $1.6 million and include an accrual of approximately
$1 million for the present value of the commitment fee discussed above. The
Warrants issued on March 29, 2000 have been valued at approximately $1.4 million
and are recorded with the Series A Stock in the accompanying condensed
consolidated balance sheet.
NOTE 6 - LEGAL PROCEEDINGS
On December 27, 1999, Burger King Corporation ("Burger King") announced that in
cooperation with the Consumer Product Safety Commission ("CPSC") it would
conduct a voluntary recall of Pokemon(TM) balls included with Burger King kids
meals. The recall resulted primarily from the death of a 13 month old child in
Sonora, California on December 11, 1999. The child reportedly suffocated when
one half of a Pokemon(TM) ball covered her nose and mouth. In announcing the
recall, Burger King stated that the balls may pose a suffocation hazard to
children under three years of age. Burger King further stated that consumers
should immediately take the balls away from children under the age of three and
either discard the balls or return them to a Burger King restaurant in exchange
for a free small order of french fries. Subsequent to the announcement of the
recall, on January 25, 2000, a 4 month old child in Indianapolis, Indiana also
reportedly suffocated when one half of a Pokemon(TM) ball covered his nose and
mouth.
The Company designed and manufactured 151 trading cards and 57
gift-with-purchase products based on Pokemon(TM) for Burger King. The Company
believes that these products met or exceeded federal safety guidelines and
underwent rigorous safety testing by an independent, third party laboratory
during and after production.
On May 4, 2000, a lawsuit entitled Estate of Kira Alexis Murphy, Madelyne Ariana
Alto, Netanya Noel Alto and Jill Ann Alto v. Burger King Corporation, Fast Food
Enterprise of California, Inc., Equity Marketing, Inc., and Specialized
Technology Resources, Inc., Case No. B C229358, was filed in the Superior Court
of the State of California for the County of Los Angeles. The lawsuit was filed
by plaintiffs who allege that the Pokemon(TM) ball caused the death of Kira
Alexis Murphy. The lawsuit asserts causes of action for product liability,
breach of warranty, wrongful death and negligent infliction of emotional
distress, and seeks an unspecified amount of damages and attorneys fees.
The Company may be contractually required to indemnify Burger King and its
franchisees for the expenses and damages, if any, incurred in connection with
this lawsuit. Burger King has not yet requested indemnification for such
expenses and damages, if any. While the Company believes this lawsuit is without
merit and intends to defend it vigorously, it may, regardless of the outcome,
result in substantial expenses and damages to the Company and may significantly
divert the attention of the Company's management. There can be no assurance that
the Company will be able to achieve a favorable settlement of this lawsuit or
obtain a favorable resolution of such lawsuit if it is not settled. An
unfavorable resolution of this lawsuit or prolonged litigation, the costs of
which may be substantial, could have a material adverse effect on the Company's
business, financial condition and results of operations.
9
<PAGE> 10
NOTE 7 - SEGMENTS
The Company has identified two reportable segments through which it conducts its
continuing operations: promotions and consumer products. The factors for
determining the reportable segments were based on the distinct nature of their
operations. They are managed as separate business units because each requires
and is responsible for executing a unique business strategy. The promotions
segment produces promotional products used as free premiums or sold in
conjunction with the purchase of other items at a retailer or quick service
restaurant. Promotional products are used for marketing purposes by both the
companies sponsoring the promotions and the licensors of the entertainment
properties on which the promotional products are based. The consumer products
segment designs and contracts for the manufacture of toys and other consumer
products for sale to major mass market retailers, who in turn sell the products
to consumers.
Earnings of industry segments and geographic areas exclude interest income,
interest expense, depreciation, and other unallocated corporate expenses. Income
taxes are allocated to segments on the basis of operating results. Identified
assets are those assets used in the operations of the segments and include
accounts receivable, note receivable, inventory, goodwill and the Headliners(R)
trademark. Corporate assets consist of cash, certain corporate receivables,
fixed assets, and certain trademarks.
INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------------------
CONSUMER
PROMOTIONS PRODUCTS CORPORATE TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $24,319 $ 3,138 $ -- $ 27,457
=====================================================================================================
Income (loss) before provision (benefit)
for income taxes $ 4,196 $ (27) $ (4,610) $ (441)
Provision (benefit) for income taxes 1,678 (11) (1,843) (176)
- -----------------------------------------------------------------------------------------------------
Net income (loss) $ 2,518 $ (16) $ (2,767) $ (265)
=====================================================================================================
Fixed asset additions, net $ -- $ -- $ 103 $ 103
=====================================================================================================
Depreciation and amortization $ 187 $ 128 $ 366 $ 681
=====================================================================================================
Total assets $36,036 $13,741 $ 14,733 $ 64,510
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000
---------------------------------------------------
CONSUMER
PROMOTIONS PRODUCTS CORPORATE TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $40,202 $ 3,275 $ -- $ 43,477
=====================================================================================================
Income (loss) before provision (benefit)
for income taxes $ 5,663 $ 256 $ (3,780) $ 2,139
Provision (benefit) for income taxes 2,237 101 (1,493) 845
- -----------------------------------------------------------------------------------------------------
Net income (loss) $ 3,426 $ 155 $ (2,287) $ 1,294
=====================================================================================================
Fixed asset additions, net $ -- $ -- $ 137 $ 137
=====================================================================================================
Depreciation and amortization $ 183 $ 119 $ 357 $ 659
=====================================================================================================
Total assets $72,661 $11,375 $ 13,271 $ 97,307
=====================================================================================================
</TABLE>
10
<PAGE> 11
NOTE 8 - AMERISERVE BANKRUPTCY
The Company regularly extends credit to several distribution companies in
connection with its business with Burger King. One of these distribution
companies, AmeriServe Food Distribution, Inc. together with certain of its
affiliates (including its affiliates, "AmeriServe") accounted for more than 50
percent of the products purchased from the Company by the Burger King system in
1999. AmeriServe filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code on January 31, 2000. As of January 31, 2000, AmeriServe
owed the Company approximately $28.8 million in trade receivables. AmeriServe
was able to secure temporary debtor in possession funding to enable it to
continue operating in the short-term post bankruptcy.
Restaurant Services, Inc. ("RSI"), a not-for-profit purchasing cooperative that
has as its members Burger King franchisees and Burger King, is the exclusive
purchasing agent for the Burger King system of franchisee-owned and
company-owned restaurants located in the United States. Subsequent to January
31, 2000, the Company reached an agreement with RSI in which RSI purchased all
pre-petition trade receivables owed to the Company by AmeriServe in exchange for
a two-year non-interest-bearing note valued at approximately $16.0 million and
the satisfaction of certain contractual obligations owed by the Company to RSI.
This agreement resulted in a net pre-tax charge of approximately $1.0 million
for the year ended December 31, 1999. A note receivable of approximately $10.5
million has been recorded on the accompanying condensed consolidated balance
sheet as of December 31, 1999. Approximately $6.6 million of the $28.8 million
pre-petition trade receivables relate to sales made in January 2000.
Accordingly, the remaining $5.5 million portion of the note receivable was
recorded in January 2000, and resulted in a net pre-tax charge of approximately
$0.5 million for the three months ended March 31, 2000. This charge was
partially offset by approximately $0.3 million of imputed interest income
recorded on the note receivable for the three months ended March 31, 2000. The
balance of the note receivable as of March 31, 2000 was approximately $14.1
million, $6.3 million of which was classified as long-term.
Burger King has assumed responsibility for all payments of the Company's
post-petition shipments to AmeriServe. There can be no assurance, however, that
AmeriServe will successfully reorganize and emerge from Chapter 11 proceedings.
In this event, the Company believes it can either ship Burger King product
directly to franchisees or to alternative distribution companies established in
place of AmeriServe; provided, however, that direct shipments to franchisees may
result in substantial additional expenses to the Company and that alternative
distribution companies may not be available to service certain or all of the
geographic areas currently serviced by AmeriServe. Accordingly, any failure by
AmeriServe to successfully reorganize and emerge from Chapter 11 proceedings
could negatively impact the Company's business, financial condition, and results
of operations.
In a press release issued on April 12, 2000, Burger King announced that "it
plans an orderly transition of distribution services as the Burger King(R)
system leaves its relationship with AmeriServe Food Distribution, Inc." The
press release stated that Burger King had arranged for alternative distribution
services for the Burger King restaurants currently served by AmeriServe. The
press release further stated that Burger King expects to complete the transition
to alternative distributors by July, 2000 and that the debtor-in-possession
financing provided by Burger King to AmeriServe would remain in effect until
August, 2000.
11
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
Certain expectations and projections regarding the future performance of Equity
Marketing, Inc. (the "Company") discussed in this quarterly report are
forward-looking and are made under the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These expectations and projections are
based on currently available competitive, financial and economic data along with
the Company's operating plans and are subject to future events and
uncertainties. Forward-looking statements can be identified by the use of
forward looking terminology, such as may, will, should, expect, anticipate,
estimate, continue, plans, intends or other similar terminology. Management
cautions you that the following factors, among others, could cause the Company's
actual consolidated results of operations and financial position in 2000 and
thereafter to differ significantly from those expressed in forward-looking
statements:
MARKETPLACE RISKS
- - Dependence on a single customer, Burger King, which may adversely affect
the Company's financial condition and results of operations
- - Significant quarter-to-quarter variability in the Company's revenues and
net income, which may result in operating results below the expectations of
securities analysts and investors
- - Dependence on the popularity of licensed entertainment properties, which
may adversely affect the Company's financial condition and results of
operations
- - Dependence on the ability to license, develop and market new products,
which may adversely affect the Company's financial condition and results of
operations
- - Increased competitive pressure, which may affect the sales of the Company's
products
- - Dependence on foreign manufacturers, which may increase the costs of the
Company's products and affect the demand for such products
- - Concentration risk associated with accounts receivable. The Company
regularly extends credit to several distribution companies in connection
with its business with Burger King. One of these distribution companies,
AmeriServe Food Distribution, Inc. ("AmeriServe"), accounted for more than
50% of the products purchased from the Company by the Burger King system in
1999. AmeriServe filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code on January 31, 2000 (see "AmeriServe Bankruptcy").
Failure by one or more distribution companies to honor their payment
obligations to the Company could have a material adverse effect on the
Company's business, financial condition and results of operations
FINANCING RISKS
- - Currency fluctuations, which may affect the Company's suppliers and the
Company's reportable income
- - Need for additional working capital to fund the Company's business, which
may not be available at all or on favorable terms when required
OTHER RISKS
- - Potential negative impact of past or future acquisitions, which may disrupt
the Company's ongoing business, distract senior management and increase
expenses
- - Adverse results of litigation, governmental proceedings or environmental
matters, which may lead to increased costs or interruption in normal
business operations of the Company
- - Changes in laws or regulations, both domestically and internationally,
including those affecting consumer products or environmental activities or
trade restrictions, which may lead to increased costs
- - Exposure to liability for the costs related to product recalls. These costs
can include legal expenses, advertising, collection and destruction of
product, and free goods. The Company's product liability insurance coverage
generally excludes such costs and damages resulting from product recall
The Company undertakes no obligation to publicly release the results of any
revisions to forward-looking statements, which may be made to reflect events or
circumstance after the date hereof or to reflect the occurrence of unanticipated
events. The risks highlighted herein should not be assumed to be the only items
that could affect future performance of the Company. In addition to the
information contained in this document, readers are advised to review the
Company's Form 10-K for the year ended December 31, 1999, under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cautionary Statements and Risk Factors."
12
<PAGE> 13
ORGANIZATION AND BUSINESS
Equity Marketing, Inc., a Delaware corporation (the "Company"), is a leading
marketing services company, providing a wide range of custom promotional
programs that build sales and brand awareness for retailers, restaurant chains
and consumer goods companies such as Burger King Corporation, The Coca-Cola
Company, Exxon Company USA, Sunoco, Inc., CVS/pharmacy and others. The Company
is also a developer and marketer of distinctive, branded consumer products that
complement its core promotions business and are based on trademarks it owns or
classic licensed properties. The Company primarily sells to customers in the
United States.
Equity Marketing Hong Kong, Ltd., a Delaware corporation ("EMHK"), is a 100%
owned subsidiary of the Company. EMHK manages production of the Company's
products by third parties in the Far East and currently is responsible for
performing and/or procuring product sourcing, product engineering, quality
control inspections, independent safety testing and export/import documentation.
In April 1998, the Company purchased 100% of the common stock of Corinthian
Marketing, Inc., a Delaware corporation ("Corinthian"). Corinthian is engaged
principally in the design, manufacture, marketing and distribution of the
Headliners brand of collectible sports figurines.
In July 1998, the Company acquired substantially all of the assets of Contract
Marketing, Inc. ("CMI"), a Massachusetts corporation, and U.S. Import and
Promotions Co. ("USI"), a Florida corporation, (CMI and USI are collectively
referred to as "USI"). USI focuses primarily on promotions for oil and gas and
other retailers. The Company intends to continue to use the acquired assets for
this purpose. The primary operations of USI are located in West Boylston,
Massachusetts and St. Augustine, Florida.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
operating results as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1999 2000
----- -----
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of sales 74.8 76.4
----- -----
Gross profit 25.2 23.6
----- -----
Operating Expenses:
Salaries, wages and benefits 12.6 7.8
Selling, general and administrative 13.3 11.1
----- -----
Total operating expenses 25.9 18.9
----- -----
Income (loss) from operations (0.7) 4.7
Interest income (expense), net (0.8) 0.2
----- -----
Income (loss) before provision (benefit) for income taxes (1.5) 4.9
Provision (benefit) for income taxes (0.6) 1.9
----- -----
Net income (loss) (0.9)% 3.0%
===== =====
</TABLE>
EBITDA
While many in the financial community consider earnings before interest, taxes,
depreciation and amortization ("EBITDA") to be an important measure of
comparative operating performance, it should be considered in addition to, but
not as a substitute for or superior to, operating income, net earnings, cash
flow and other measures of financial performance prepared in accordance with
accounting principles generally accepted in the United States. EBITDA does not
reflect cash available to fund cash requirements, and the items excluded from
EBITDA, such as depreciation and amortization, are significant components in
assessing the Company's financial performance. Other significant uses of cash
flows are required before cash will be available to the Company, including debt
service, taxes and cash expenditures for various long-term assets. The Company's
calculation of EBITDA may be different from the calculation used by other
companies and, therefore, comparability may be limited. The following table sets
forth EBITDA for the periods indicated:
13
<PAGE> 14
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED MARCH 31,
--------------------------------
1999 2000
- -------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $(265) $ 1,294
Add: Depreciation and amortization 681 659
Interest (income) expense, net 222 (85)
Provision (benefit) for income taxes (176) 845
- -------------------------------------------------------------------------------------
EBITDA $ 462 $ 2,713
=====================================================================================
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
(000'S OMITTED):
Revenues for the three months ended March 31, 2000 increased $16,020 or 58% to
$43,477 from $27,457 in the comparable period in 1999. Promotions revenues
increased $15,883 to $40,202 primarily as a result of increased revenues
associated with several Burger King promotions. Consumer Product revenues
increased $137 to $3,275 primarily due to increased sales of Scooby-Doo and Tub
Tints product, partially offset by reduced sales of Headliners(R).
Cost of sales increased $12,658 to $33,203 (76.4% of revenues) for the three
months ended March 31, 2000 from $20,545 (74.8% of revenues) in the comparable
period in 1999 due to higher sales in 2000. The gross margin percentage for the
period decreased to 23.6% for the three months ended March 31, 2000 from 25.2%
in the comparable period for 1999 primarily due to a larger percentage of
revenue being generated by promotions which tend to have a lower gross margin
than consumer products.
Salaries, wages and benefits decreased $70, or 2% to $3,401 (7.8% of revenues).
This decrease was primarily attributable to staffing reductions resulting from
the Company's decision to exit the event-based-license consumer products
business in 1998.
Selling, general and administrative expenses increased $1,159, or 32% to $4,819
(11.1% of revenues). This increase is due primarily to increased freight out and
warehousing costs resulting from the increase in sales volume. Approximately
$500 of this increase resulted from additional bad debt expense recorded for the
bankruptcy of AmeriServe (see "AmeriServe Bankruptcy"). Selling, general and
administrative expenses decreased as a percentage of revenues from 13.3% to
11.1% as a result of revenues which increased at a greater rate.
Net interest income was $85 for the three months ended March 31, 2000 compared
to net interest expense of $222 for the three months ended March 31, 1999. The
interest income in 2000 was attributable to approximately $300 of imputed
interest income recorded on a note receivable (see "AmeriServe Bankruptcy").
The effective tax rate for the three months ended March 31, 2000 decreased to
39.50% from 40.0% for the three months ended March 31, 1999. This decrease was
attributable to the diminished impact of non-deductible goodwill as a percentage
of net income before provision for income tax.
Net income increased $1,559 or 588% to $1,294 (3% of revenues) from $(265)
((.9)% of revenues) in 1999 primarily due to greater gross profit earned on the
increased revenues in 2000 partially offset by increased selling, general and
administrative expenses.
In 2000 EBITDA increased $2,251 or 487.2 % to $2,713 from $462 in 1999 primarily
due to greater gross profit earned on increased revenues in 2000. This increase
was partially offset by the increase in selling, general and administrative
expenses for the three months ended March 31, 2000.
FINANCIAL CONDITION AND LIQUIDITY
As of March 31, 2000, the Company's investment in accounts receivable decreased
$10,502 from the balance at December 31, 1999. This decrease was attributable to
the sale of the AmeriServe trade receivables to Restaurant Services, Inc.
("RSI") (see "AmeriServe Bankruptcy") and to collections of substantially all of
the receivables related to sales shipped late in the 1999 fourth quarter. As of
March 31, 2000, inventory increased approximately $12,584 from December 31, 1999
primarily due to the timing and frequency of Burger King promotions.
As of March 31, 2000, accounts payable increased $2,790 compared to December 31,
1999. This increase is attributable to accounts payable to vendors associated
with the manufacturing related to second quarter 2000 Burger King promotions.
14
<PAGE> 15
As of March 31, 2000, accrued liabilities decreased $6,889 compared to December
31, 1999. This decrease is primarily attributable to the payment of employee
bonuses related to 1999, the payment of royalty guarantees associated with the
restructuring charge recorded in 1998, the payment of royalties associated with
fourth quarter 1999 Consumer Products revenue, and the payment of federal and
state income taxes related to 1999 net income.
As of March 31, 2000, working capital was $22,647 compared to $11,045 at
December 31, 1999. The increase in working capital was primarily due to the cash
received from the issuance of senior cumulative participating convertible
preferred stock on March 29, 2000 (see "Issuance of Preferred Stock"). The
Company did not have any significant investing activities in the quarter. The
Company believes that its cash from operations, cash on hand at March 31, 2000
and its credit facility will be sufficient to fund its working capital needs for
at least the next twelve months. The statements set forth herein are
forward-looking; and actual results may differ materially.
CREDIT FACILITIES
The Company maintains and periodically amends or replaces a credit agreement
with two commercial banks that is utilized to finance the seasonal working
capital requirements of its operations. The credit facility is secured by
substantially all of the Company's assets. The agreement, as amended on March
13, 2000, provides for a line of credit of $25,000 through June 30, 2001 with
borrowing availability determined by a formula based on qualified assets. As of
March 31, 2000, $4,500 was outstanding under the credit facility. Letters of
credit outstanding as of March 31, 2000 was $401. The credit agreement requires
the Company to comply with certain financial covenants, including minimum
tangible net worth, minimum current ratio, ratio of total liabilities to net
worth, maximum funded debt coverage ratio, minimum fixed charge coverage ratio
and net profit after taxes. As of March 31, 2000, the Company was in compliance
with these covenants.
ISSUANCE OF PREFERRED STOCK
On March 29, 2000, Crown EMAK Partners, LLC, a Delaware limited liability
company ("Crown"), invested $11.9 million in the Company in exchange for
preferred stock and warrants to purchase additional preferred stock. Under the
terms of the investment, Crown acquired 11,900 shares of Series A senior
cumulative participating convertible preferred stock, par value $.001 per share,
of the Company (the "Series A Stock") with a conversion price of $14.75 per
share. In connection with such purchase, the Company granted to Crown five year
warrants (collectively, the "Warrants") to purchase 5,712 shares of Series B
senior cumulative participating convertible preferred stock, par value $.001 per
share, of the Company (the "Series B Stock") at an exercise price of $1,000 per
share, and 1,428 shares of Series C senior cumulative participating convertible
preferred stock, par value $.001 per share, of the Company (the "Series C
Stock") at an exercise price of $1,000 per share. The Warrants are immediately
exercisable. The conversion prices of the Series B Stock and the Series C Stock
are $16.00 and $18.00, respectively. Contingent upon the completion of certain
conditions (the "Second Closing"), Crown will pay an additional $13.1 million to
the Company in exchange for an additional 13,100 shares of Series A Stock with a
conversion price of $14.75 per share. In connection with such purchase, the
Company will grant to Crown Warrants to purchase an additional 6,288 shares of
Series B Stock and an additional 1,572 shares of Series C Stock. As of the date
hereof, each share of Series A Stock is currently convertible into 67.7966
shares of Common Stock, representing 1,694,915 shares of Common Stock in the
aggregate following the Second Closing. As of the date hereof, each share of
Series B Stock and Series C Stock is currently convertible into 62.5 and 55.5556
shares of Common Stock, respectively, representing 916,666 shares of Common
Stock in the aggregate following the Second Closing. Also in connection with
such purchase, the Company agreed to pay Crown a commitment fee in the aggregate
amount of $1.25 million, paid in equal quarterly installments of $62.5
commencing on June 30, 2000 and ending on March 31, 2005.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of the
affairs of the Company, Crown, as holder of the preferred stock, will be
entitled to payment out of the assets of the Company available for distribution
of an amount equal to the greater of (a) the liquidation preference of $1,000
per share (the "Liquidation Preference") plus all accrued and unpaid dividends
or (b) the aggregate amount of payment that the outstanding preferred stock
holder would have received assuming conversion to Common Stock immediately prior
to the date of liquidation of capital stock, before any payment is made to other
stockholders.
The Series A Stock, Series B Stock and Series C Stock are subject to mandatory
redemption at 101% of the aggregate Liquidation Preference plus accrued and
unpaid dividends if a change in control of the Company occurs.
Crown has voting rights equivalent to the number of shares of Common Stock into
which their preferred stock is convertible on the relevant record date. Crown is
also entitled to receive a quarterly dividend equal to 6% of the Liquidation
Preference per share outstanding, payable in cash.
Crown currently holds 100% of the outstanding shares of Series A Stock, and
consequently, has designated two individuals to the Board of Directors of the
Company.
15
<PAGE> 16
The Series A Stock is recorded in the accompanying condensed consolidated
balance sheets at its Liquidation Preference net of issuance costs. The issuance
costs total approximately $1.6 million and include an accrual of approximately
$1 million for the present value of the commitment fee discussed above. The
Warrants issued on March 29, 2000 have been valued at approximately $1.4 million
and are recorded with the Series A Stock in the accompanying condensed
consolidated balance sheet.
INFORMATION SYSTEMS
YEAR 2000 UPDATE
To address the year 2000 issue the Company established and implemented a plan to
remediate and test its most critical computer systems and applications,
including its enterprise resource planning system, computer networks and desktop
applications. The plan also included steps to verify that all key third-party
suppliers and customers were taking measures to ensure their own readiness.
Based on strategic and operational assessments, the Company decided to replace
its existing information systems in 1998. The new enterprise resource planning
system is designed to enhance management information, financial reporting,
inventory management, order entry and cost evaluation and control and has the
added benefit of addressing the year 2000 issue. The new enterprise resource
planning system went into operation in January 1999. All phases of the year 2000
readiness plan were completed as scheduled. To date, the Company has not
experienced any material year 2000 issues with its internal systems or with its
third party customers and suppliers. In addition, the Company did not experience
any loss of revenues due to the year 2000 issue. The Company will continue to
monitor its critial computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent year 2000 matters that may
arise are promptly addressed.
Although unlikely given that the Company has not experienced any year 2000
issues to date, there can be no assurance that any future unforeseen year 2000
issues will not materially adversely affect the Company's results of operations,
liquidity and financial position or adversely affect the Company's relationships
with customers, vendors or others.
AMERISERVE BANKRUPTCY
The Company regularly extends credit to several distribution companies in
connection with its business with Burger King. One of these distribution
companies, AmeriServe, accounted for more than 50 percent of the products
purchased from the Company by the Burger King system in 1999. AmeriServe filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code on
January 31, 2000. As of January 31, 2000, AmeriServe owed the Company
approximately $28.8 million in trade receivables. AmeriServe was able to secure
temporary debtor in possession funding to enable it to continue operating in the
short-term post bankruptcy.
RSI, a not-for-profit purchasing cooperative that has as its members Burger King
franchisees and Burger King, is the exclusive purchasing agent for the Burger
King system of franchisee-owned and company-owned restaurants located in the
United States. Subsequent to January 31, 2000, the Company reached an agreement
with RSI in which RSI purchased all pre-petition trade receivables owed to the
Company by AmeriServe in exchange for a two-year non-interest-bearing note
valued at approximately $16.0 million and satisfaction of certain contractual
obligations owed by the Company to RSI. This agreement resulted in a net pre-tax
charge of approximately $1.0 million for the quarter ended December 31, 1999. A
note receivable of approximately $10.5 million has been recorded on the
accompanying condensed consolidated balance sheet as of December 31, 1999.
Approximately $6.6 million of the $28.8 million pre-petition trade receivables
relate to sales made in January 2000. Accordingly, the remaining $5.5 million
portion of the note receivable was recorded in January 2000, and resulted in a
net pre-tax charge of approximately $0.5 million for the quarter ending March
31, 2000. This charge was partially offset by approximately $0.3 million of
imputed interest income recorded on the note receivable for the three months
ended March 31, 2000. The balance of the note receivable as of March 31, 2000
was approximately $14.1 million, $6.3 million of which was classified as
long-term.
Burger King has assumed responsibility for all payments of the Company's
post-petition shipments to AmeriServe. There can be no assurance, however, that
AmeriServe will successfully reorganize and emerge from Chapter 11 proceedings.
In this event, the Company believes it can either ship Burger King product
directly to franchisees or to alternative distribution companies established in
place of AmeriServe; provided, however, that direct shipments to franchisees may
result in substantial additional expenses to the Company and that alternative
distribution companies may not be available to service certain or all of the
geographic areas currently serviced by AmeriServe. Accordingly, any failure by
AmeriServe to successfully reorganize and emerge from Chapter 11 proceedings
could negatively impact the Company's business, financial condition, and results
of operations. The statements set forth herein are forward looking and actual
results may differ materially.
16
<PAGE> 17
In a press release issued on April 12, 2000, Burger King announced that "it
plans an orderly transition of distribution services as the Burger King(R)
system leaves its relationship with AmeriServe Food Distribution, Inc." The
press release stated that Burger King had arranged for alternative distribution
services for the Burger King restaurants currently served by AmeriServe. The
press release further stated that Burger King expects to complete the transition
to alternative distributors by July, 2000 and that the debtor-in-possession
financing provided by Burger King to AmeriServe would remain in effect until
August, 2000.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 27, 1999, Burger King Corporation ("Burger King") announced that in
cooperation with the Consumer Product Safety Commission ("CPSC") it would
conduct a voluntary recall of Pokemon(TM) balls included with Burger King kids
meals. The recall resulted primarily from the death of a 13 month old child in
Sonora, California on December 11, 1999. The child reportedly suffocated when
one half of a Pokemon(TM) ball covered her nose and mouth. In announcing the
recall, Burger King stated that the balls may pose a suffocation hazard to
children under three years of age. Burger King further stated that consumers
should immediately take the balls away from children under the age of three and
either discard the balls or return them to a Burger King restaurant in exchange
for a free small order of french fries. Subsequent to the announcement of the
recall, on January 25, 2000, a 4 month old child in Indianapolis, Indiana also
reportedly suffocated when one half of a Pokemon(TM) ball covered his nose and
mouth.
The Company designed and manufactured 151 trading cards and 57
gift-with-purchase products based on Pokemon(TM) for Burger King. The Company
believes that these products met or exceeded federal safety guidelines and
underwent rigorous safety testing by an independent, third party laboratory
during and after production.
On May 4, 2000, a lawsuit entitled Estate of Kira Alexis Murphy, Madelyne Ariana
Alto, Netanya Noel Alto and Jill Ann Alto v. Burger King Corporation, Fast Food
Enterprise of California, Inc., Equity Marketing, Inc., and Specialized
Technology Resources, Inc., Case No. B C229358, was filed in the Superior Court
of the State of California for the County of Los Angeles. The lawsuit was filed
by plaintiffs who allege that the Pokemon(TM) ball caused the death of Kira
Alexis Murphy. The lawsuit asserts causes of action for product liability,
breach of warranty, wrongful death and negligent infliction of emotional
distress, and seeks an unspecified amount of damages and attorneys fees.
The Company may be contractually required to indemnify Burger King and its
franchisees for the expenses and damages, if any, incurred in connection with
this lawsuit. Burger King has not yet requested indemnification for such
expenses and damages, if any. While the Company believes this lawsuit is without
merit and intends to defend it vigorously, it may, regardless of the outcome,
result in substantial expenses and damages to the Company and may significantly
divert the attention of the Company's management. There can be no assurance that
the Company will be able to achieve a favorable settlement of this lawsuit or
obtain a favorable resolution of such lawsuit if it is not settled. An
unfavorable resolution of this lawsuit or prolonged litigation, the costs of
which may be substantial, could have a material adverse effect on the Company's
business, financial condition and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.0 Certificate of Designation of Series A Senior Cumulative
Participating Convertible Preferred Stock, Series B Senior
Cumulative Participating Convertible Preferred Stock and
Series C Senior Cumulative Participating Convertible Preferred
Stock of the Company, dated March 29, 2000
4.0 Form of Warrant to Purchase Shares of Series B Senior
Cumulative Participating Convertible Preferred Stock, dated
March 29, 2000
4.1 Form of Warrant to Purchase Shares of Series C Senior
Cumulative Participating Convertible Preferred Stock, dated
March 29, 2000
10.0 Securities Purchase Agreement by and between Crown Acquisition
Partners, LLC and Equity Marketing, Inc., dated March 29, 2000
10.1 Registration Rights Agreement by and between Crown Acquisition
Partners, LLC and Equity Marketing, Inc., dated March 29, 2000
27 Financial Data Schedule
(b) Reports on Form 8-K:
Report on Form 8-K filed with the Securities and Exchange Commission
on April 11, 2000
Report on Form 8-K filed with the Securities and Exchange Commission
on April 24, 2000
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles
and State of California on the 15th day of May, 2000.
EQUITY MARKETING, INC.
/s/ TERESA P. COVINGTON
-------------------------------------------
Teresa P. Covington
Vice President, Finance
(Principal Financial and Accounting Officer)
19
<PAGE> 20
EXHIBIT INDEX
EXHIBIT
3.0 Certificate of Designation of Series A Senior Cumulative
Participating Convertible Preferred Stock, Series B Senior
Cumulative Participating Convertible Preferred Stock and Series C
Senior Cumulative Participating Convertible Preferred Stock of
the Company, dated March 29, 2000
4.0 Form of Warrant to Purchase Shares of Series B Senior Cumulative
Participating Convertible Preferred Stock, dated March 29, 2000
4.1 Form of Warrant to Purchase Shares of Series C Senior Cumulative
Participating Convertible Preferred Stock, dated March 29, 2000
10.0 Securities Purchase Agreement by and between Crown Acquisition
Partners, LLC and Equity Marketing, Inc., dated March 29, 2000
10.1 Registration Rights Agreement by and between Crown Acquisition
Partners, LLC and Equity Marketing, Inc., dated March 29, 2000
27 Financial Data Schedule
20
<PAGE> 1
EXHIBIT 3.0
CERTIFICATE OF DESIGNATION
OF
SERIES A SENIOR CUMULATIVE
PARTICIPATING CONVERTIBLE PREFERRED STOCK,
SERIES B SENIOR CUMULATIVE
PARTICIPATING CONVERTIBLE PREFERRED STOCK
AND
SERIES C SENIOR CUMULATIVE
PARTICIPATING CONVERTIBLE PREFERRED STOCK
OF
EQUITY MARKETING, INC.
----------------
Pursuant To Section 151 Of The
General Corporation Law Of The State Of Delaware
----------------
Equity Marketing, Inc., a Delaware corporation (the "Corporation"),
certifies that pursuant to the authority contained in Article Fourth of its
Certificate of Incorporation (the "Certificate of Incorporation"), and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors of the Corporation at a meeting
duly called and held on March 23, 2000 duly approved and adopted the following
resolution which resolution remains in full force and effect on the date hereof:
RESOLVED, that pursuant to the authority vested in the Board of
Directors by the Certificate of Incorporation, the Board of Directors does
hereby designate, create, authorize and provide for the issue of three series of
preferred stock having a par value of $.001 per share, each with a liquidation
preference of $1,000 per share (the "Liquidation Preference"), which shall be
separately designated as the "Series A Senior Cumulative Participating
Convertible Preferred Stock (the "Series A Preferred Stock"), the Series B
Senior Cumulative Participating Convertible Preferred Stock (the "Series B
Preferred Stock") and the Series C Senior Cumulative Participating Convertible
Preferred Stock (the "Series C Preferred Stock"), respectively (the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock are
collectively referred to as the "Preferred Stock") and which shall consist of
25,000 shares of Series A
<PAGE> 2
Preferred Stock, 12,000 shares of Series B Preferred Stock and 3,000 shares of
Series C Preferred Stock, respectively, and which shall have the following
voting powers, preferences and relative, participating, optional and other
special rights, and qualifications, limitations and restrictions thereof as
follows:
1. Ranking.
The Preferred Stock shall, with respect to dividend distributions and
distributions upon the liquidation, winding-up and dissolution of the
Corporation, rank (i) senior to all classes of Common Stock of the Corporation
and to each other class of capital stock or series of preferred stock
established after the Preferred Stock Issue Date by the Board of Directors the
terms of which do not expressly provide that it ranks senior to or on a parity
with the Preferred Stock as to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of the Corporation (collectively
referred to with the Common Stock of the Corporation as "Junior Securities");
(ii) on a parity with any additional shares of Preferred Stock issued by the
Corporation in the future and any other class of capital stock or series of
preferred stock issued by the Corporation established after the Preferred Stock
Issue Date by the Board of Directors, the terms of which expressly provide that
such class or series will rank on a parity with the Preferred Stock as to
dividend distributions and distributions upon the liquidation, winding-up and
dissolution of the Corporation (collectively referred to as "Parity
Securities"); and (iii) junior to each class of capital stock or series of
preferred stock issued by the Corporation established after the Preferred Stock
Issue Date by the Board of Directors, the terms of which expressly provide that
such class or series will rank senior to the Preferred Stock as to dividend
distributions and distributions upon liquidation, winding-up and dissolution of
the Corporation (collectively referred to as "Senior Securities"). The issuance
of any Junior Securities, Parity Securities or Senior Securities shall be
subject to paragraph 6 and the other provisions of this Certificate of
Designation.
2. Dividends.
(i) The holders of shares of the Preferred Stock shall be entitled to
receive, when, as and if dividends are declared by the Board of Directors out of
funds of the Corporation legally available therefor, cumulative dividends from
the date of issuance of the Preferred Stock accruing at the rate per annum of 6%
of the Liquidation Preference per share, payable quarterly in arrears on each
March 31, June 30, September 30 and December 31, commencing on June 30, 2000
(each a "Dividend Payment Date"), to the holders of record as of the preceding
March 15, June 15, September 15 and December 15 (each, a "Record Date") whether
or not such Record Date is a Business Day. If any Dividend Payment Date is not a
Business Day, such payment shall be made on the next succeeding Business Day.
Dividends on the Preferred Stock when and if paid, shall be paid in cash.
Notwithstanding the foregoing, neither the Corporation nor the Board of
Directors shall at any time be obligated to declare and pay any such dividend.
Unpaid dividends (whether or not declared) shall accrue and cumulate as provided
herein.
(ii) Dividends on the Preferred Stock shall be cumulative and shall
accrue whether or not the Corporation has earnings or profits, whether or not
there are funds legally available for the payment of such dividends and whether
or not dividends are declared. Dividends will accumulate to the extent they are
not paid on the Dividend Payment Date for the period to which
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they relate, compounded quarterly so that such accrued and unpaid dividends
shall be added (solely for the purpose of calculating dividends payable on the
Preferred Stock) to the Liquidation Preference of the Preferred Stock effective
on the Dividend Payment Date on which such dividends were not paid and shall
thereafter accrue additional dividends in respect thereof at the rate set forth
in subparagraph 2(i) above until such accrued and unpaid dividends have been
paid in full.
(iii) If the Corporation declares or pays any cash dividends on the
Common Stock, the Corporation shall also declare and pay to the holders of the
Preferred Stock at the same time that it declares and pays such dividends, the
dividends which would have been declared and paid with respect to the Common
Stock issuable upon conversion of the Preferred Stock had all of the outstanding
Preferred Stock been converted immediately prior to the record date for such
dividend.
(iv) No dividend whatsoever shall be declared or paid upon, or any sum
set apart for the payment of dividends upon, any outstanding share of the
Preferred Stock with respect to any dividend period unless all dividends for all
preceding dividend periods have been declared and paid, or declared and a
sufficient sum set apart for the payment of such dividend, upon all outstanding
shares of Preferred Stock. Unless full cumulative dividends on all outstanding
shares of Preferred Stock for all past dividend periods shall have been declared
and paid, or declared and a sufficient sum for the payment thereof set apart,
then: (a) no dividend (other than a dividend payable solely in shares of any
Junior Securities or securities to purchase Junior Securities) shall be declared
or paid upon, or any sum set apart for the payment of dividends upon, any shares
of Junior Securities or Parity Securities; (b) no other distribution shall be
declared or made upon, or any sum set apart for the payment of any distribution
upon, any shares of Junior Securities or Parity Securities, other than a
distribution consisting solely of Junior Securities or securities to purchase
Junior Securities; (c) no shares of Junior Securities or Parity Securities shall
be purchased, redeemed or otherwise acquired or retired for value (excluding an
exchange for shares of other Junior Securities or Parity Securities) by the
Corporation or any of its subsidiaries; and (d) no monies shall be paid into or
set apart or made available for a sinking or other like fund for the purchase,
redemption or other acquisition or retirement for value of any shares of Junior
Securities or Parity Securities by the Corporation or any of its subsidiaries.
Holders of the Preferred Stock will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of the full cumulative dividends
and the dividends provided for in paragraph 2(iii) above as herein described.
3. Conversion Rights.
(i) A holder of shares of Preferred Stock may convert all or any portion
of such shares at any time, unless previously redeemed, at the option of the
holder thereof into shares of Common Stock of the Corporation. For the purposes
of conversion, each share of Preferred Stock shall be valued at the Liquidation
Preference plus an amount equal to all accrued and unpaid dividends, which shall
be divided by the Conversion Price in effect on the Conversion Date (defined
below) to determine the number of shares of Common Stock issuable upon
conversion, except that the right to convert shares of Preferred Stock tendered
for redemption shall terminate at the close of business on the Business Day
preceding the Redemption Date and shall be lost if not exercised prior to that
time, unless the Corporation shall default in payment of
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the redemption price contemplated by Section 5. Immediately following such
conversion, the rights of the holders of the shares of converted Preferred Stock
shall cease (other than the right to receive the shares of Common Stock issued
as a result of the conversion) and the persons entitled to receive the Common
Stock upon the conversion of Preferred Stock shall be treated for all purposes
as having become the owners of such Common Stock. In addition, for purposes of
determining whether any adjustments should be made to the Conversion Price
pursuant to this paragraph 3, all shares of Preferred Stock shall be deemed to
have been issued on the Preferred Stock Issue Date (whether or not issued on or
after such date and whether or not issued after the date of any event giving
rise to any such adjustment under this paragraph 3).
(ii) To convert shares of Preferred Stock, a holder must (A) surrender
the certificate or certificates evidencing the shares of Preferred Stock to be
converted, duly endorsed in a form reasonably satisfactory to the Corporation,
at the office of the Corporation or transfer agent for the Preferred Stock, (B)
notify the Corporation at such office that such holder elects to convert
Preferred Stock and the number of shares such holder wishes to convert, (C)
state in writing the name or names in which such holder wishes the certificate
or certificates for shares of Common Stock to be issued, and (D) pay any
transfer or similar tax to the extent required under paragraph 3(iv). In the
event that a holder fails to notify the Corporation of the number of shares of
Preferred Stock which such holder wishes to convert, such holder shall be deemed
to have elected to convert all shares represented by the certificate or
certificates surrendered for conversion. The date on which the holder satisfies
all those requirements is the "Conversion Date." As soon as practical following
the Conversion Date, the Corporation shall deliver to the holder a certificate
for the number of full shares of Common Stock issuable upon the conversion, and
a new certificate representing the unconverted portion, if any, of the shares of
Preferred Stock represented by the certificate or certificates surrendered for
conversion. The person in whose name the Common Stock certificate is registered
shall be treated as the stockholder of record on and after the Conversion Date.
The holder of record of a share of Preferred Stock at the close of business on a
Record Date with respect to the payment of dividends on the Preferred Stock will
be entitled to receive such dividends with respect to such share of Preferred
Stock on the corresponding Dividend Payment Date, notwithstanding the conversion
of such share after such Record Date and prior to such Dividend Payment Date.
The dividend payment with respect to a share of Preferred Stock tendered for
redemption on a date during the period from the close of business on any Record
Date for the payment of dividends to the close of business on the Business Day
immediately following the corresponding Dividend Payment Date will be payable on
such Dividend Payment Date to the record holder of such share on such Record
Date, notwithstanding the conversion of such share after such Record Date and
prior to such Dividend Payment Date, and the holder converting such share of
Preferred Stock need not include a payment of such dividend amount upon
surrender of such share of Preferred Stock for conversion. If a holder of
Preferred Stock converts more than one share at a time, the number of full
shares of Common Stock issuable upon conversion shall be based on the total
Liquidation Preferences plus accrued and unpaid dividends thereon of all shares
of Preferred Stock converted.
(iii) The Corporation shall not issue any fractional shares of Common
Stock upon conversion of Preferred Stock. Instead the Corporation shall pay an
amount of cash equal to the product of (A) the fraction of a share otherwise
issuable and (B) the Closing Price of the Common Stock on the Business Day prior
to the Conversion Date.
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(iv) If a holder converts shares of Preferred Stock, the Corporation
shall pay any documentary, stamp or similar issue or transfer tax due on the
issue of shares of Common Stock upon the conversion. However, the holder shall
pay any such tax that is due because the shares are issued in a name other than
the holder's name.
(v) The Corporation has reserved and shall continue to reserve out of
its authorized but unissued Common Stock or its Common Stock held in treasury
enough shares of Common Stock to permit the conversion of the Preferred Stock in
full. All shares of Common Stock that may be issued upon conversion of Preferred
Stock shall be fully paid and nonassessable.
(vi) In case the Corporation shall pay or make a dividend or other
distribution on any class of capital stock of the Corporation (other than the
Preferred Stock) payable in shares of Common Stock, the Conversion Price in
effect at the opening of business on the day following the date fixed for the
determination of stockholders entitled to receive such dividend or other
distribution shall be reduced by multiplying such Conversion Price by a fraction
the numerator of which shall be the number of shares of Common Stock outstanding
at the close of business on the date fixed for such determination and the
denominator of which shall be the sum of such number of shares and the total
number of shares constituting such dividend or other distribution, such
reduction to become effective immediately after the opening of business on the
day following the date fixed for such determination of the holders entitled to
such dividends and distributions. For the purposes of this paragraph 3(vi), the
number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Corporation. The Corporation will not pay any
dividend or make any distribution on shares of Common Stock held in the treasury
of the Corporation.
(vii) In case the Corporation shall issue or sell (a) Common Stock, (b)
rights, warrants or options entitling the holders thereof to subscribe for or
purchase shares of Common Stock or (c) any security convertible into Common
Stock, in each case at a price, or having an exercise or conversion price, per
share less than the then-current market price per share of Common Stock
(determined as provided in paragraph 3(xii) below) on (x) the date of such
issuance or sale or (y) in the case of a dividend or distribution of such
rights, warrants, options or convertible securities to the holders of Common
Stock, the date fixed for determination of the holders of such Common Stock
entitled to such dividend or distribution (the date specified in clause (x) or
(y) being the "Relevant Date") (excluding any issuance for which an appropriate
and full adjustment has been made pursuant to the preceding subparagraph (vi)),
the Conversion Price shall be reduced by multiplying the then-current Conversion
Price by a fraction of which (A) the numerator shall be the number of shares of
Common Stock outstanding at the open of business on the Relevant Date (including
such shares of Common Stock, rights, warrants or options or convertible
securities (described in clauses (a), (b) and (c) above) as are issued or sold
on the Relevant Date) plus the number of shares of Common Stock which the
aggregate consideration received or receivable (I) for the total number of
shares of Common Stock, rights, warrants or options or convertible securities so
issued or sold, and (II) upon the exercise or conversion of all such rights,
warrants, options or securities, would purchase at the then-current market price
per share of Common Stock (determined as provided in paragraph 3(xii) and (B)
the denominator shall be the number of shares of Common Stock outstanding at the
close of business on the Relevant Date plus (without duplication) the number of
shares of Common Stock subject to all such rights, warrants, options and
convertible securities, such reduction of the Conversion Price
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to be effective at the opening of business on the day following the Relevant
Date; provided, that if any such dividend or distribution is rescinded and not
paid, then the Conversion Price shall, as of the date when it is determined that
such dividend or distribution will be rescinded, revert back to the Conversion
Price in effect prior to the adjustment made pursuant to this paragraph. The
grant and/or issuance of any shares of Common Stock or other rights, warrants,
options or convertible securities pursuant to (a) any restricted stock or stock
option plan or program of the Corporation involving the grant or issuance of
stock or options or rights solely to officers, directors, employees and/or
consultants of the Corporation or its subsidiaries at the then-current market
price per share of Common Stock on the date of grant or issuance (without regard
to the computation set forth in clause (xii) below), (b) any option, warrant,
right, or convertible security outstanding as of the date hereof, (c) the terms
of a firmly committed bona fide underwritten public offering, or (d) any merger,
acquisition, consolidation, or similar transaction, shall not be deemed to
constitute an issuance or sale to which this clause (vii) applies. Upon the
expiration of any right, option or warrant to purchase Common Stock, the
issuance of which resulted in an adjustment in the Conversion Price pursuant to
this paragraph 3(vii), if any such right, option or warrant shall expire and
shall not have been exercised, the Conversion Price shall be recomputed
immediately upon such expiration and effective immediately upon such expiration
shall be increased to the price it would have been (but reflecting any other
adjustments to the Conversion Price made pursuant to the provisions of this
paragraph 3 after the issuance of such rights, options or warrants) had the
adjustment of the Conversion Price made upon the issuance of such rights,
options or warrants been made on the basis of offering for subscription or
purchase only that number of shares of Common Stock actually purchased upon the
exercise of such rights, options or warrants. No further adjustment shall be
made upon exercise of any right, option or warrant if any adjustment shall be
made upon the issuance of such security. For the purposes of this paragraph
3(vii), the number of shares of Common Stock at any time outstanding shall not
include shares held in the treasury of the Corporation.
(viii) In case the outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the Conversion Price
in effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be reduced, and, conversely, in case
the outstanding shares of Common Stock shall each be combined into a smaller
number of shares of Common Stock, the Conversion Price in effect at the opening
of business on the day following the day upon which such combination becomes
effective shall be increased, in each case to equal the product of the
Conversion Price in effect on such date and a fraction the numerator of which
shall be the number of shares of Common Stock outstanding immediately prior to
such subdivision or combination, as the case may be, and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
after such subdivision or combination, as the case may be. Such reduction or
increase, as the case may be, shall become effective immediately after the
opening of business on the day following the day upon which such subdivision or
combination becomes effective.
(ix) In case the Corporation shall, by dividend or otherwise, distribute
to all holders of its Common Stock (A) evidences of its indebtedness or (B)
shares of any class of capital stock, cash or other assets (including
securities, but excluding (x) any Common Stock, rights, options or warrants
referred to in paragraph 3(vii) above, (y) any dividends or distributions
referred to in paragraph 3(vi) or 3(viii) above, and (z) cash dividends), then
in each case, the Conversion Price in effect at the opening of business on the
day following the date fixed for the determination of
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holders of Common Stock entitled to receive such distribution shall be adjusted
by multiplying such Conversion Price by a fraction of which the numerator shall
be the current market price per share (determined as provided in paragraph
3(xii) below) of the Common Stock on such date of determination (or, if earlier,
on the date on which the Common Stock goes "ex-dividend" in respect of such
distribution) less the then fair market value as determined by the Board of
Directors (whose determination shall be conclusive and shall be described in a
statement filed with the Transfer Agent) of the portion of the capital stock,
cash or other assets or evidences of indebtedness so distributed (and for which
an adjustment to the Conversion Price has not previously been made pursuant to
the terms of this paragraph 3) applicable to one share of Common Stock, and the
denominator shall be such current market price per share of the Common Stock,
such adjustment to become effective immediately after the opening of business on
the day following such date of determination of the holders entitled to such
distribution.
(x) In case a tender or exchange offer made by the Corporation or any
subsidiary of the Corporation for all or any portion of the Common Stock shall
expire and such tender or exchange offer shall involve the payment by the
Corporation or such subsidiary of consideration per share of Common Stock having
a fair market value (as determined by the Board of Directors or, to the extent
permitted by applicable law, a duly authorized committee thereof, whose
determination shall be conclusive and described in a resolution of the Board of
Directors or such duly authorized committee thereof, as the case may be) at the
last time (the "Expiration Time") tenders or exchanges may be made pursuant to
such tender or exchange offer (as it shall have been amended) that exceeds the
current market price per share (determined as provided in paragraph 3(xii)
below) of the Common Stock on the Trading Day next succeeding the Expiration
Time, the Conversion Price shall be reduced so that the same shall equal the
price determined by multiplying the Conversion Price in effect immediately prior
to the Expiration Time by a fraction of which the numerator shall be the number
of shares of Common Stock outstanding (including any tendered or exchanged
shares) on the Expiration Time multiplied by the current market price per share
of the Common Stock on the Trading Day next succeeding the Expiration Time and
the denominator shall be the sum of (x) the fair market value (determined as
aforesaid) of the aggregate consideration payable to stockholders based on the
acceptance (up to any maximum specified in the terms of the tender or exchange
offer) of all shares validly tendered or exchanged and not withdrawn as of the
Expiration Time (the shares deemed so accepted, up to any such maximum, being
referred to as the "Purchased Shares") and (y) the product of the number of
shares of Common Stock outstanding (less any Purchased Shares) on the Expiration
Time and the current market price per share of the Common Stock on the Trading
Day next succeeding the Expiration Time, such reduction to become effective
immediately prior to the opening of business on the day following the Expiration
Time. For the purposes of this paragraph 3(x), the number of shares of Common
Stock at any time outstanding shall not include shares held in the treasury of
the Corporation.
(xi) The reclassification or change of Common Stock into securities,
including securities other than Common Stock (other than any reclassification
upon a consolidation or merger to which paragraph 3(xix) below shall apply)
shall be deemed to involve (A) a distribution of such securities other than
Common Stock to all holders of Common Stock (and the effective date of such
reclassification shall be deemed to be "the date fixed for the determination of
holders of Common Stock entitled to receive such distribution" within the
meaning of paragraph 3(ix) above), and (B) a subdivision or combination, as the
case may be, of
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the number of shares of Common Stock outstanding immediately prior to such
reclassification into the number of Common Shares outstanding immediately
thereafter (and the effective date of such reclassification shall be deemed to
be "the day upon which such subdivision becomes effective" or "the day upon
which such combination becomes effective," as the case may be, and "the day upon
which such subdivision or combination becomes effective" within the meaning of
paragraph 3(viii) above).
(xii) For the purpose of any computation under paragraph 3(vii), or
3(ix) or 3(x) above, the current market price per share of Common Stock on any
day shall be deemed to be the average of the Closing Prices of the Common Stock
for the 20 consecutive Trading Days ending on the day before the day in
question; provided, that, in the case of paragraph 3(ix), if the period between
the date of the public announcement of the dividend or distribution and the date
for the determination of holders of Common Stock entitled to receive such
dividend or distribution (or, if earlier, the date on which the Common Stock
goes "ex-dividend" in respect of such dividend or distribution) shall be less
than 20 Trading Days, the period shall be such lesser number of Trading Days
but, in any event, not less than 5 Trading Days.
(xiii) No adjustment in the Conversion Price need be made until all
cumulative adjustments amount to 1% or more of the Conversion Price as last
adjusted. Any adjustments that are not made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this paragraph
3 shall be made to the nearest 1/10,000th of a cent or to the nearest 1/10,000th
of a share, as the case may be.
(xiv) For purposes of this Certificate of Designation, "Common Stock"
includes any stock of any class of the Corporation which has no preference in
respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation and which
is not subject to redemption by the Corporation. However, subject to the
provisions of paragraph 3(xix) below, shares issuable on conversion of shares of
Preferred Stock shall include only shares of the class designated as Common
Stock of the Corporation on the Preferred Stock Issue Date or shares of any
class or classes resulting from any reclassification thereof and which have no
preferences in respect of dividends or amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation and which are not subject to redemption by the Corporation; provided
that, if at any time there shall be more than one such resulting class, the
shares of each such class then so issuable shall be substantially in the
proportion which the total number of shares of such class resulting from all
such reclassifications bears to the total number of shares of all such classes
resulting from all such reclassifications.
(xv) No adjustment in the Conversion Price shall reduce the Conversion
Price below the then par value of the Common Stock. No adjustment in the
Conversion Price need be made under paragraphs 3(vi), 3(vii) and 3(ix) above if
the Corporation issues or distributes to each holder of Preferred Stock the
shares of Common Stock, evidences of indebtedness, assets, rights, options or
warrants referred to in those paragraphs which each holder would have been
entitled to receive had the Preferred Stock been converted into Common Stock
prior to the happening of such event or the record date with respect thereto.
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(xvi) Whenever the Conversion Price is adjusted or an adjustment is made
pursuant to clause (xix), the Corporation shall promptly mail to holders of
Preferred Stock, first class, postage prepaid, a notice of the adjustment. The
Corporation shall file with the transfer agent for the Preferred Stock, if any,
a certificate from the Corporation's independent public accountants briefly
stating the facts requiring the adjustment and the manner of computing it.
Unless holders of a majority of the outstanding shares of Preferred Stock shall
notify (a "Dispute Notice") the Corporation, within 30 days of the date the
Corporation mails such notice of adjustment, that such holders (the "Disputing
Holders") dispute such adjustment, such adjustment shall be final and binding.
The Dispute Notice shall set forth in reasonable detail the basis for such
dispute and shall name a representative (the "Representative") for the Disputing
Holders. The Corporation and the Representative shall jointly engage an
accounting firm of national reputation which shall be instructed to resolve such
dispute as promptly as practicable. The decision of such accounting firm shall
be final and binding. The Corporation and the Representative, on behalf of the
Disputing Holders, shall each bear one-half of the fees and expenses (including
the responsibility for any indemnity or similar obligations) of such accounting
firm.
(xvii) The Corporation from time to time may reduce the Conversion Price
if it considers such reductions to be advisable in order that any event treated
for federal income tax purposes as a dividend of stock or stock rights will not
be taxable to the holders of Common Stock by any amount, but in no event may the
Conversion Price be less than the par value of a share of Common Stock. Whenever
the Conversion Price is reduced, the Corporation shall mail to holders of
Preferred Stock a notice of the reduction. The Corporation shall mail, first
class, postage prepaid, the notice at least 15 days before the date the reduced
Conversion Price takes effect. The notice shall state the reduced Conversion
Price and the period it will be in effect. A reduction of the Conversion Price
pursuant to this paragraph 3(xvii) does not change or adjust the Conversion
Price otherwise in effect for purposes of paragraphs 3(vi), 3(vii), 3(viii),
3(ix) and 3(x) above.
(xviii) If:
(a) the Corporation takes any action which would require an
adjustment in the Conversion Price pursuant to paragraph 3 (vi), 3(vii),
3(viii), 3(ix), 3(x) or 3(xi) above;
(b) the Corporation consolidates or merges with, or transfers
all or substantially all of its assets to, another entity, and stockholders of
the Corporation must approve the transaction; or
(c) there is a dissolution or liquidation of the Corporation;
the Corporation shall mail to holders of the Preferred Stock, first class,
postage prepaid, a notice stating the proposed record or effective date, as the
case may be. The Corporation shall mail the notice at least 10 days before such
date. However, failure to mail the notice or any defect in it shall not affect
the validity of any transaction referred to in clause (a), (b) or (c) of this
paragraph 3(xviii).
(xix) In the case of any consolidation of the Corporation or the merger
of the Corporation with or into any other entity or the sale or transfer of all
or substantially all the assets of the Corporation pursuant to which the
Corporation's Common Stock is converted into other securities, cash or assets,
upon consummation of such transaction, each share of Preferred
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Stock shall automatically become convertible into the kind and amount of
securities, cash or other assets receivable upon the consolidation, merger, sale
or transfer by a holder of the number of shares of Common Stock into which such
share of Preferred Stock is convertible immediately prior to such consolidation,
merger, transfer or sale (assuming such holder of Common Stock failed to
exercise any rights of election and received per share the kind and amount of
consideration receivable per share by a plurality of non-electing shares).
Appropriate adjustment (as determined by the Board of Directors of the
Corporation) shall be made in the application of the provisions herein set forth
with respect to the rights and interests thereafter of the holders of Preferred
Stock, to the end that the provisions set forth herein (including provisions
with respect to changes in and other adjustment of the Conversion Price) shall
thereafter be applicable, as nearly as reasonably may be, in relation to any
shares of stock or other securities or property thereafter deliverable upon the
conversion of Preferred Stock. If this paragraph 3(xix) applies, paragraphs
3(vi), 3(viii) and 3(xi) do not apply.
(xx) In any case in which this paragraph 3 shall require that an
adjustment as a result of any event becomes effective from and after a record
date, the Corporation may elect to defer until after the occurrence of such
event the issuance to the holder of any shares of Preferred Stock converted
after such record date and before the occurrence of such event of the additional
shares of Common Stock issuable upon such conversion over and above the shares
issuable on the basis of the Conversion Price in effect immediately prior to
adjustment; provided, however, that if such event shall not have occurred and
authorization of such event shall be rescinded by the Corporation, the
Conversion Price shall be recomputed immediately upon such rescission to the
price that would have been in effect had such event not been authorized,
provided that such rescission is permitted by and effective under applicable
laws.
4. Liquidation Preference.
Upon any voluntary or involuntary liquidation, dissolution or winding-up
of the Corporation or reduction or decrease in its capital stock resulting in a
distribution of assets to the holders of any class or series of the
Corporation's capital stock, each holder of shares of the Preferred Stock will
be entitled to payment out of the assets of the Corporation available for
distribution of an amount equal to the greater of (a) the Liquidation Preference
plus an amount equal to all accrued and unpaid dividends on the Preferred Shares
as of the date fixed for liquidation, dissolution, winding-up or reduction or
decrease in capital stock per share of Preferred Stock held by such holder times
the number of shares of Preferred Stock held by such holder or (b) the amount
that would have been paid to such holder of the Preferred Stock with respect to
Common Stock issuable upon conversion of such holder's Preferred Stock had each
share of such holder's outstanding Preferred Stock been converted to Common
Stock immediately prior to the date of the liquidation, dissolution, winding-up
or reduction or decrease in capital stock (such sum, the "Total Liquidation
Payment"), before any distribution is made on any Junior Securities, including,
without limitation, Common Stock of the Corporation. After payment in full of
the Total Liquidation Payment to which holders of Preferred Stock are entitled,
such holders will not be entitled to any further participation in any
distribution of assets of the Corporation. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation, the amounts payable
with respect to the Preferred Stock and all other Parity Securities are not paid
in full, the holders of the Preferred Stock and the Parity Securities will share
equally and ratably in any distribution of assets of the Corporation in
proportion to the full
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liquidation preference and accumulated and unpaid dividends, if any, to which
each is entitled. However, neither the voluntary sale, conveyance, exchange or
transfer (for cash, shares of stock, securities or other consideration) of all
or substantially all of the property or assets of the Corporation nor the
consolidation or merger of the Corporation with or into one or more Persons will
be deemed to be a voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation or reduction or decrease in capital stock, unless
such sale, conveyance, exchange or transfer shall be in connection with a
liquidation, dissolution or winding-up of the business of the Corporation or
reduction or decrease in capital stock.
5. Redemption Upon Change of Control.
(i) Upon the occurrence of a Change of Control, each holder of shares of
Preferred Stock shall have the right to require the Corporation to repurchase
all, but not less than all, of such holder's Preferred Stock pursuant to the
offer described below (the "Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate Liquidation Preference thereof plus an amount
equal to all accrued and unpaid dividends thereon to the date of purchase (the
"Change of Control Payment"). For purposes of this paragraph 5(i), a holder of
shares of Preferred Stock and any of its Affiliates that may also hold shares of
Preferred Stock shall be deemed to be one holder.
(ii) The Corporation shall comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable in connection with the
repurchase of the Preferred Stock as a result of a Change of Control.
(iii) At least 15 days prior to any Change of Control, the Corporation
shall send, by first-class, postage prepaid, mail, a notice to each holder of
Preferred Stock at such holder's address as it appears in the register
maintained by the Corporation or, if applicable, the Transfer Agent, which
notice shall govern the terms of the Change of Control Offer. The notices of the
Change of Control Offer shall include all instructions and materials necessary
to enable holders of Preferred Stock to tender their shares of Preferred Stock
pursuant to the Change of Control Offer. In addition to any information required
by law, such notice of the Change of Control Offer shall state:
(a) that the Change of Control Offer is being made pursuant to
this paragraph 5 and that all shares of Preferred Stock tendered will be
accepted for payment;
(b) the purchase price and the purchase date, which shall be no
earlier than 30 days nor later than 60 days from the date such notice is mailed
(the "Change of Control Payment Date");
(c) that any share of Preferred Stock not tendered will continue
to accrue dividends;
(d) that, unless the Corporation fails to pay the Change of
Control Payment, all shares of Preferred Stock accepted for payment pursuant to
the Change of Control Offer shall cease to accrue dividends after the Change of
Control Payment Date;
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(e) that holders of Preferred Stock electing to have any shares of
Preferred Stock purchased pursuant to a Change of Control Offer will be required
to surrender the shares of Preferred Stock, with a completed copy of the form
entitled "Option of Holder to Elect Purchase" which shall be included with the
notice of the Change of Control, to the paying agent (which may be the
Corporation) at the address specified in the notice of the Change of Control
prior to the close of business on the third Business Day preceding the Change of
Control Payment Date;
(f) that holders of Preferred Stock will be entitled to withdraw
their election if the paying agent receives, not later than the close of
business on the second Business Day preceding the Change of Control Payment
Date, a telegram, telex, facsimile transmission or letter setting forth the name
of the holder of the Preferred Stock, the number of shares of Preferred Stock
delivered for purchase, and a statement that such holder of Preferred Stock is
withdrawing his election to have such shares purchased; and
(g) the circumstances and relevant facts regarding such Change of
Control (including, but not limited to, information with respect to pro forma
historical financial information after giving effect to such Change of Control
and information regarding the Person or Persons acquiring control).
(iv) On the Change of Control Payment Date, the Corporation shall (i)
accept for payment all shares of Preferred Stock properly tendered pursuant to
the Change of Control Offer, (ii) deposit with the paying agent an amount equal
to the Change of Control Payment in respect of all shares of Preferred Stock so
tendered and (iii) deliver or cause to be delivered to the paying agent the
shares of Preferred Stock so accepted together with an Officers' Certificate of
the Corporation stating the aggregate Liquidation Preference plus accrued and
unpaid dividends on the shares of Preferred Stock being purchased by the
Corporation. The failure of the holder to accept such offer prior to the close
of business on the third Business Day preceding the Change of Control Payment
Date in accordance with the provisions of this paragraph 5 shall be deemed a
rejection of such offer, and the provisions of this Certificate of Designation
(including paragraph 3(xix)) shall continue to apply to any shares of Preferred
Stock not tendered for redemption. The paying agent shall promptly send by
registered mail to each holder of Preferred Stock so tendered the Change of
Control Payment for such Preferred Stock, and the Transfer Agent shall promptly
authenticate and send by registered mail (or cause to be transferred by book
entry) to each holder a new certificate representing the shares of Preferred
Stock equal in Liquidation Preference amount to any unpurchased portion of the
shares of Preferred Stock surrendered, if any.
6. Voting Rights.
(i) So long as there remain outstanding at least 25% of the shares of
Preferred Stock issued on or after the Preferred Stock Issue Date pursuant to
this Certificate of Designation, the holders of the Preferred Stock shall have
the exclusive right, voting separately as a class and to the exclusion of the
holders of all other classes of capital stock of the Corporation, to elect two
directors to the Board of Directors; provided, however, if at any time the Board
of Directors is increased to include more than eight members, then, so long as
there remain outstanding at least 25% of the shares of Preferred Stock issued on
or after the Preferred Stock Issue Date pursuant
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to this Certificate of Designation, the holders of the Preferred Stock shall
have the exclusive right, voting separately as a class and to the exclusion of
the holders of all other classes of capital stock of the Corporation, to elect
one additional director to the Board of Directors. For as long the holders of
Preferred Stock voting separately as a class are entitled to elect two (or if
applicable, three) directors to the Board of Directors (the "Separate Voting
Period"), the holders of Preferred Stock shall not be entitled to vote in the
election of any other directors of the Corporation (and following the expiration
of the Separate Voting Period, the holders of Preferred Stock shall be entitled
to vote with the holders of the Common Stock for the election of directors
pursuant to paragraph 6(ii) below). Each director to be designated and elected
to the Board of Directors by the holders of the Preferred Stock shall be
designated and elected at each annual meeting of stockholders or any special
meeting called for the purpose of electing directors. Each director shall be
elected at the annual meeting of stockholders and shall serve until the earlier
of (i) the next annual meeting of stockholders to elect directors or (ii) his or
her earlier resignation or removal. Each such director may be removed during his
or her term of office by and only by the affirmative vote of the holders of a
majority of the outstanding shares of Preferred Stock, given at a special
meeting of such holders duly called for such purpose. Any vacancy existing or
created in the office of such directors may be filled at a special meeting of
the holders of the majority of the Preferred Stock entitled to elect the
director to serve in such directorship, by the holders of a majority of the
Preferred Stock at a special meeting duly called for such purpose. Any special
meetings of the holders of Preferred Stock shall be called by the Secretary of
the Corporation upon the written request of 10% or more of the number of shares
of Preferred Stock then outstanding; provided, however, that if the Secretary of
the Corporation shall fail to call any such meeting within 10 days after any
such request, such meeting may be called by any holder of Preferred Stock
designated for that purpose by the holders of record of 10% or more of the
number of shares of Preferred Stock then outstanding. Any action that could
otherwise be taken at a special meeting of the holders of Preferred Stock,
including the election of directors, may be taken by written consent of a
majority of the holders of outstanding Preferred Stock. Notwithstanding the
election of directors as provided in this paragraph 6(i), each such director
shall have equal rights and duties with all other directors of the Corporation.
(ii) The holders of Preferred Stock shall vote together with the holders
of the shares of Common Stock as a single class, except as provided in paragraph
6(i) above and 6(iii), below, with each share of Common Stock entitled to one
vote and each share of Preferred Stock entitled to one vote for each share of
Common Stock issuable upon conversion of such Preferred Stock as of the relevant
record date.
(iii) The Corporation shall not, without the affirmative vote or consent
of the holders of at least 50% of the shares of Preferred Stock then outstanding
(with shares held by the Corporation as treasury stock not being considered to
be outstanding for this purpose), voting or consenting as the case may be,
separately as one class:
(a) issue any Senior Securities or Parity Securities (other than
as contemplated by the Securities Purchase Agreement and the Warrants);
(b) amend this Certificate of Designation, the Corporation's
Certificate of Incorporation or Bylaws (whether by merger, consolidation or
otherwise) in any manner that adversely affects the rights, preferences or
powers of holders of Preferred Stock;
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(c) authorize the issuance of any additional shares of Preferred
Stock (other than as contemplated by the Securities Purchase Agreement and this
Certificate of Designation);
(d) issue any preferred stock which is not a Senior Security or
Parity Security and which has voting rights ("Other Preferred Stock") unless
such Other Preferred Stock votes on all matters as a single class with the
Common Stock and the Preferred Stock, except that holders of Other Preferred
Stock may have the right to vote separately as a single class (i) with respect
to matters required by law to be voted on by such holders voting as a separate
class, (ii) to approve the issuance of preferred stock ranking (x) senior to
such Other Preferred Stock and (y) junior to the Preferred Stock, in each case,
with respect to dividend distributions and distributions upon liquidation,
winding-up and dissolution of the Corporation and (iii) for the election of not
more than one director in the aggregate so long as either (x) holders of the
Preferred Stock have the right, voting separately as a class, to elect two
directors pursuant to this Certificate of Designation or (y) Investor or its
Affiliates has the right to nominate two directors pursuant to Section 4.4 of
the Securities Purchase Agreement; provided that holders of Other Preferred
Stock may be granted the right to vote separately as a class for the election of
not more than two directors in the aggregate during any period that either (x)
holders of the Preferred Stock have the right, voting separately as a class, to
elect three directors pursuant to this Certificate of Designation or (y)
Investor or its Affiliates has the right to nominate three directors pursuant to
Section 4.4 of the Securities Purchase Agreement.
7. Exclusion Of Other Rights.
Except as may otherwise be required by law, the shares of Preferred
Stock shall not have any voting powers, preferences and relative, participating,
optional or other special rights, other than those specifically set forth in
this resolution (as such resolution may be amended from time to time in
accordance with the Certificate of Designation) and in the Certificate of
Incorporation. The shares of Preferred Stock shall have no preemptive or
subscription rights.
8. Headings Of Subdivisions.
The headings of the various subdivisions hereof are for convenience of
reference only and shall not affect the interpretation of any of the provisions
hereof.
9. Severability Of Provisions.
If any voting powers, preferences and relative, participating, optional
and other special rights of the Preferred Stock and qualifications, limitations
and restrictions thereof set forth in this resolution (as such resolution may be
amended from time to time) is invalid, unlawful or incapable of being enforced
by reason of any rule of law or public policy, all other voting powers,
preferences and relative, participating, optional and other special rights of
Preferred Stock and qualifications, limitations and restrictions thereof set
forth in this resolution (as so amended) which can be given effect without the
invalid, unlawful or unenforceable voting powers, preferences and relative,
participating, optional or other special rights of Preferred Stock and
qualifications, limitations and restrictions thereof herein set forth.
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10. Re-Issuance Of Preferred Stock.
Shares of Preferred Stock that have been issued and reacquired in any
manner, including shares purchased or redeemed or exchanged or converted, shall
(upon compliance with any applicable provisions of the laws of Delaware) have
the status of authorized but unissued shares of preferred stock of the
Corporation undesignated as to series and may be designated or re-designated and
issued or reissued, as the case may be, as part of any series of preferred stock
of the Corporation, provided that any issuance of such shares as Preferred Stock
must be in compliance with the terms hereof.
11. Mutilated Or Missing Preferred Stock Certificates.
If any of the Preferred Stock certificates shall be mutilated, lost,
stolen or destroyed, the Corporation shall issue, in exchange and in
substitution for and upon cancellation of the mutilated Preferred Stock
certificate, or in lieu of and substitution for the Preferred Stock certificate
lost, stolen or destroyed, a new Preferred Stock certificate of like tenor and
representing an equivalent amount of shares of Preferred Stock, but only upon
receipt of evidence of such loss, theft or destruction of such Preferred Stock
certificate and indemnity, if requested, satisfactory to the Corporation and the
transfer agent (if other than the Corporation).
12. Certain Definitions.
As used in this Certificate of Designation, the following terms shall
have the following meanings (with terms defined in the singular having
comparable meanings when used in the plural and vice versa), unless the context
otherwise requires:
"Business Day" means any day except a Saturday, a Sunday, or any day on
which banking institutions in New York, New York are required or authorized by
law or other governmental action to be closed.
"Change of Control" shall mean (A) the acquisition by any person (other
than Investor and its Affiliates) or group (within the meaning of Section
12(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934), of beneficial
ownership, direct or indirect, of securities of the Corporation representing 50%
or more of the combined voting power of the Corporation's then outstanding
equity securities, (B) the acquisition by any person or group (other than Donald
Kurz, Stephen Robeck or the Investor or their respective Affiliates) of
beneficial ownership, direct or indirect, of securities of the Corporation
representing 20% or more of the combined voting power of the Corporation's then
outstanding equity securities, and either (x) a representative or nominee of
such person or group shall be elected or appointed to the Board of Directors of
the Corporation without the support of at least one (1) of the members of the
Board of Directors of the Corporation to be elected by the holders of the
Preferred Stock pursuant to paragraph 6 of this Certificate of Designation (the
condition contained in this subparagraph (x) will no longer be applicable once
the holders of such Preferred Stock no longer have the right to elect directors
pursuant to paragraph 6 of this Certificate of Designation) or (y) a person
designated by the Investor (as defined in the Securities Purchase Agreement)
pursuant to Section 4.4 of such Securities Purchase Agreement shall not be
elected to the Board of Directors of the Corporation as provided in such Section
or (C) the consolidation of the Corporation with, or the
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merger of the Corporation with or into, another Person or the sale, assignment
or transfer of all or substantially all of the Corporation's assets to any
Person, or the consolidation of any Person with, or the merger of any Person
with or into, the Corporation, in any such event in a transaction in which the
outstanding voting capital stock of the Corporation is converted into or
exchanged for cash, securities or other property, provided that following such
transaction the holders of voting stock of the Corporation immediately prior to
such transaction do not own more than 50% of the voting stock of the company
surviving such transaction or to which such assets are transferred.
"Closing Price" means, for each Trading Day, the last reported sale
price on the Nasdaq National Market or, if the Common Stock is not quoted on the
Nasdaq National Market, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
selected from time to time by the corporation for that purpose.
"Common Stock" means the Common Stock, par value $.001 per share, of the
Corporation.
"Conversion Price" shall initially mean $14.75 per share of Series A
Preferred Stock, $16.00 per share of Series B Preferred Stock and $18.00 per
share of Series C Preferred Stock and thereafter shall be subject to adjustment
from time to time pursuant to the terms of paragraph 3 hereof.
"Exchange Act" means the Securities Exchange Act of 1934 and the rules
and regulations promulgated thereunder.
"Person" means any individual or corporation, partnership (limited,
general or otherwise), joint venture, limited liability company, association,
joint stock company, trust, unincorporated organization, government or any
agency or political subdivision thereof or any other entity.
"Preferred Stock Issue Date" means March 29, 2000.
"Securities Purchase Agreement" means the Securities Purchase Agreement
dated as of March 29, 2000 between the Corporation and Crown Acquisition
Partners, LLC. A copy of the Securities Purchase Agreement is on file at the
principal executive offices of the Corporation and shall be provided to any
stockholder of the Corporation upon written request and without charge.
"Trading Day" means any day on which the Nasdaq National Market or other
applicable stock exchange or market is open for business.
"Transfer Agent" shall be the Corporation unless and until a successor
is selected by the Corporation.
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IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be duly executed by Donald A. Kurz, Chairman of the Board and
Chief Executive Officer on this 29th day of March 2000.
EQUITY MARKETING, INC.
By: /s/ DONALD A. KURZ
-------------------------------------
Name: Donald A. Kurz
Title: Chairman of the Board and Chief
Executive Officer
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<PAGE> 1
EXHIBIT 4.0
THIS WARRANT AND THE SECURITIES TO BE ISSUED UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. NEITHER THIS
WARRANT NOR ANY INTEREST HEREIN NOR THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (II) AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE
STATE SECURITIES LAWS, SUCH EXEMPTION TO BE EVIDENCED BY SUCH
DOCUMENTATION AS THE COMPANY MAY REASONABLY REQUEST.
Warrant to Purchase:
5,712 Shares of Series B Senior Cumulative Participating
Convertible Preferred Stock
Dated: March 29, 2000
WARRANT
TO PURCHASE SHARES OF SERIES B SENIOR CUMULATIVE PARTICIPATING
CONVERTIBLE PREFERRED STOCK OF
EQUITY MARKETING, INC.
THIS IS TO CERTIFY THAT Crown Acquisition Partners, LLC, a
Delaware limited liability company (the "Investor"), is entitled, at any time
prior to March 29, 2005 (the "Expiration Date"), to purchase from Equity
Marketing, Inc., a Delaware corporation (the "Company"), 5,712 shares of Series
B Senior Cumulative Participating Convertible Preferred Stock (the "Series B
Preferred Stock") as described in the attached Certificate of Designation of the
Company (the "Certificate of Designation"), in whole or in part, at a purchase
price of $1,000 per share (the "Exercise Price"), all on the terms and
conditions and pursuant to the provisions hereinafter set forth. The Exercise
Price is subject to adjustment as provided herein.
1. Definitions.
As used in this Warrant, the following terms have the respective
meanings set forth below:
"Business Day" shall mean any day that is not a Saturday or Sunday or
a day on which banks are required or permitted to be closed in the State of New
York.
<PAGE> 2
"Closing Price" shall have the meaning set forth in the Certificate
of Designation.
"Closing Date" shall mean March 29, 2000.
"Common Stock" shall have the meaning set forth in the Certificate of
Designation.
"Holder" means Investor and any person or entity that acquires all or
a portion of this Warrant from Investor or its transferees.
"Trading Day" means any day in which the Nasdaq National Market or
other applicable stock exchange or market is open for business.
"Trading Price" shall mean the average of the Closing Prices of the
Common Stock for the 20 consecutive Trading Days ending on the day before the
day in question.
"Warrant Price" shall mean an amount equal to (i) the number of
shares of Series B Preferred Stock being purchased upon exercise of this Warrant
pursuant to Section 2.1, multiplied by (ii) the Exercise Price.
"Warrant Stock" shall mean the shares of Series B Preferred Stock
purchased by the Holder upon the exercise hereof.
2. Exercise of Warrant.
2.1. Manner of Exercise. At any time or from time to time from and
after the Closing Date and until 5:00 P.M., New York time, on the Expiration
Date, Holder may exercise this Warrant, on any Business Day, for all or any part
of the number of shares of Series B Preferred Stock purchasable hereunder.
In order to exercise this Warrant, in whole or in part, Holder shall
deliver to the Company at its principal office at 6330 San Vicente Boulevard,
Los Angeles, California 90048 (i) a written notice of Holder's election to
exercise this Warrant, which notice shall specify the number of shares of Series
B Preferred Stock to be purchased, (ii) payment of the Warrant Price (x) in
immediately available funds or (y) by the withholding from the shares of Warrant
Stock to be issued upon exercise that number of shares of Series B Preferred
Stock that, if converted as of the date of exercise, would be convertible into
shares of Common Stock with an aggregate Trading Price as of the date of
exercise equal to the Warrant Price and (iii) this Warrant. Such notice shall be
substantially in the form appearing at the end of this Warrant as Exhibit A,
duly executed by Holder. Upon receipt of the items specified in the second
preceding sentence, the Company shall execute or cause to be executed and
deliver or cause to be delivered to Holder a certificate or certificates
representing the aggregate number of full shares of Series B Preferred Stock
issuable upon such exercise, together with cash in lieu of any fraction of a
share, as hereinafter provided. The stock certificate or certificates so
delivered shall be in such denomination or denominations as Holder shall request
in the notice and shall be registered in the name of Holder. This Warrant shall
be deemed to have been exercised and such certificate or certificates shall be
deemed to have been issued, and Holder shall be deemed to have become a holder
of record of such shares for all purposes, as of the date the notice, together
with the
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<PAGE> 3
Warrant Price and this Warrant, are received by the Company as described above.
If this Warrant shall have been exercised in part, the Company shall, at the
time of delivery of the certificate or certificates representing Warrant Stock,
deliver to Holder a new Warrant evidencing the right of Holder to purchase the
unpurchased shares of Series B Preferred Stock called for by this Warrant, which
new Warrant shall in all other respects be identical with this Warrant, or, at
the request of Holder, appropriate notation may be made on this Warrant and the
same returned to Holder.
2.2. Shares to be Validly Issued. All shares of Series B Preferred
Stock issuable upon the exercise of this Warrant shall be validly issued, fully
paid and nonassessable. The Company shall be entitled to withhold any amounts
required to be withheld under applicable law from any amounts to be paid to the
Holder hereunder.
2.3. No Fractional Shares. The Company shall not be required to issue
fractions of shares upon the exercise of this Warrant. If any fraction of a
share would otherwise be issuable, the Company shall pay to the Holder an amount
in cash equal to such fraction multiplied by the Liquidation Preference (as
defined in the Certificate of Designation).
3. Adjustments.
3.1. In case the Company shall (i) declare a dividend or make a
distribution on its Series B Preferred Stock payable in shares of its capital
stock, (ii) subdivide its outstanding shares of Series B Preferred Stock through
stock split or otherwise, or (iii) combine its outstanding shares of Series B
Preferred Stock into a smaller number of shares of Series B Preferred Stock, the
number and/or nature of Warrant Shares purchasable upon exercise of each Warrant
immediately prior thereto shall be adjusted so that the Holder shall be entitled
to receive the kind and number of Warrant Shares or other securities of the
Company which he would have owned or have been entitled to receive after the
happening of any of the events described above, had such Warrant been exercised
immediately prior to the happening of such event or any record date with respect
thereto. An adjustment made pursuant to this paragraph (a) shall become
effective retroactively as of the record date of such event.
3.2. Merger, Consolidation Or Disposition Of Assets. In the case of
any capital reorganization or reclassification of the capital stock of the
Company or in the case of consolidation of the Company or the merger of the
Company with or into any other entity or the sale or transfer of all or
substantially all the assets of the Company pursuant to which the Series B
Preferred Stock is converted into other securities, cash or assets, upon
consummation of such transaction, this Warrant shall automatically become
exercisable for the kind and amount of securities, cash or other assets
receivable upon the reorganization, reclassification, consolidation, merger,
sale or transfer by a holder of the number of shares of Series B Preferred Stock
into which this Warrant might have been converted immediately prior to such
consolidation, merger, transfer or sale. Appropriate adjustment shall be made in
the application of the provisions herein set forth with respect to the rights
and interests thereafter of the Holder, to the end that the provisions set forth
herein shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other securities or property thereafter
deliverable upon the exercise of this Warrant.
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3.3. Adjustments to Exercise Price. Whenever the number of shares of
Warrant Stock purchasable upon the exercise of each Warrant is adjusted, as
provided in this Section 3, the Exercise Price with respect to the Warrant Stock
shall be adjusted by multiplying such Exercise Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the number of shares
of Warrant Stock purchasable upon the exercise of each Warrant immediately prior
to such adjustment, and of which the denominator shall be the number of shares
of Warrant Stock so purchasable immediately thereafter.
3.4. Adjustments To Common Stock. The Common Stock or other
consideration into which the Warrant Stock may be converted shall be subject to
the adjustments set forth in Section 3 of the Certificate of Designation as if
such Warrant Stock had been outstanding since the Preferred Stock Issue Date (as
defined in the Certificate of Designation). Notwithstanding the foregoing, no
single event shall give rise to more than one such adjustment or entitle the
Holder to a larger amount of Common Stock than such Holder would have received
had it exercised this Warrant immediately and converted the Warrant Stock
immediately following the time of the adjustment set forth in the immediately
preceding sentence, or entitle the Holder to any dividends on the Common Stock
for any periods prior to such exercise and conversion.
4. Rights of Holder.
4.1. No Impairment. The Company shall not by any action, including,
without limitation, amending its Certificate of Incorporation or comparable
governing instruments or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate to protect the rights of Holder against impairment.
Without limiting the generality of the foregoing, the Company will (a) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Series B
Preferred Stock upon the exercise of this Warrant and (b) obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof as may be necessary to enable the Company to perform its
obligations under this Warrant.
5. Reservation and Authorization of Series B Preferred Stock.
From and after the Closing Date, the Company shall at all times
reserve and keep available for issue upon the exercise of Warrants such number
of its authorized but unissued shares of Series B Preferred Stock as will be
sufficient to permit the exercise in full of all outstanding Warrants. All
shares of Series B Preferred Stock which shall be so issuable, when issued upon
exercise of any Warrant and payment therefor in accordance with the terms of
such Warrant, shall be duly and validly issued and fully paid and nonassessable,
and not subject to preemptive rights.
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<PAGE> 5
6. Transferability; Form of Warrants.
6.1. Transfer. None of the Warrant nor the Shares issuable upon
exercise hereof nor any interest therein may be offered, sold, transferred,
pledged, hypothecated or otherwise disposed of, except pursuant to (i) an
effective registration statement under the Securities Act and any applicable
state securities laws or (ii) an exemption from the registration requirements of
the Securities Act and any applicable state securities laws, such exemption to
be evidenced by such documentation as the Company may reasonably request,
including an opinion of counsel, in writing and addressed to the Company (which
counsel and opinion shall be reasonably satisfactory to the Company), that such
transfer is not in violation of the Securities Act and any applicable state
laws. The Company shall treat the Holder as the holder and owner hereof for all
purposes, unless the Company has been given notice to the contrary. Subject to
compliance with the transfer restrictions set forth above, upon the delivery to
the Company at its principal corporate office of this Warrant along with a duly
completed Assignment Form substantially in the form of Exhibit B hereto, the
Company shall execute and deliver a new Warrant in the form of this Warrant, but
registered in the name of the transferee, to purchase the Warrant Shares
assigned to the transferee. In case the Holder shall assign this Warrant with
respect to less than all of the Warrant Shares, the Company shall execute a new
warrant in the form of this Warrant for the balance of the Warrant Shares and
deliver such new warrant to the transferring Holder.
6.2. Warrant Register; Ownership of Warrant. The Company will keep at
its principal office a register in which the Company will provide for the
registration of Warrants and the registration of transfers of Warrants. The
Company may treat the person in whose name any Warrant is registered on such
register as the owner thereof for all other purposes, and the Company shall not
be affected by any notice to the contrary.
6.3. Restrictive Legend. Each certificate for Warrant Stock shall be
stamped or otherwise imprinted with the following legend:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS SECURITY NOR ANY INTEREST HEREIN MAY BE OFFERED, SOLD, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR (ii) AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, SUCH EXEMPTION TO
BE EVIDENCE BY SUCH DOCUMENTATION AS THE ISSUER MAY REASONABLY REQUEST.
Any certificate issued at any time in exchange or substitution for
any certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Securities Act ) shall also bear such legend unless, the holder of such
certificate shall have delivered to the Company an opinion of counsel, in
writing and addressed to the Company (which counsel and opinion shall be
reasonably
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<PAGE> 6
acceptable to the Company), that the securities represented thereby need no
longer be subject to restrictions on resale under the Securities Act or any
state securities laws.
6.4. Registration Rights. The holder of Warrants and Warrant Stock
shall have the registration rights set forth in the Registration Rights
Agreement, dated as of March 29, 2000 between the Holder and the Company.
7. Loss or Mutilation. Upon receipt by the Company from any Holder of
evidence reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Warrant and indemnity reasonably satisfactory
to it, and in case of mutilation upon surrender and cancellation hereof, the
Company will execute and deliver in lieu hereof a new Warrant of like tenor to
such Holder; provided, in the case of mutilation, no indemnity shall be required
if this Warrant in identifiable form is surrendered to the Company for
cancellation.
8. Miscellaneous.
8.1. Expiration. This Warrant shall expire and be of no further force
and effect on the Expiration Date.
8.2. Notice Generally. Any notice, demand, request, consent,
approval, declaration, delivery or other communication hereunder to be made
pursuant to the provisions of this Warrant shall be sufficiently given or made
if in writing and either delivered in person with receipt acknowledged or sent
by registered or certified mail, return receipt requested, postage prepaid or by
a nationally recognized overnight courier or by telecopy and confirmed by
telecopy answerback, addressed as follows:
(a) If to the Holder, at its last known address appearing on the
books of the Company maintained for such purpose.
with a copy to: Latham & Watkins
633 West Fifth Street, Suite 4000
Los Angeles, California 90071
Attn: W. Alex Voxman
Facsimile: (213) 891-8763
(b) If to the Company at:
6330 San Vicente Boulevard
Los Angeles, California 90048
Attn: Leland P. Smith
Facsimile: (323) 932-4488
with a copy to: Riordan & McKinzie
300 S. Grand Avenue, 29th Floor
Los Angeles, CA 90071
Attn: Thomas M. Cleary, Esq.
Facsimile: (213) 229-8550
6
<PAGE> 7
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration, delivery or other communication hereunder shall
be deemed to have been duly given or served (i) on the date on which personally
delivered, with receipt acknowledged, (ii) on the date on which telecopied and
confirmed by written or telephonic acknowledgment, (iii) on the date set forth
on the executed return receipt in the case of registered or certified mail or
(iv) on the next business day after the same shall have been deposited for
overnight delivery with a nationally recognized overnight courier, provided that
proof of receipt is received. Failure or delay in delivering copies of any
notice, demand, request, approval, declaration, delivery or other communication
to the Person designated above to receive a copy shall in no way adversely
affect the effectiveness of such notice, demand, request, approval, declaration,
delivery or other communication.
8.3. No Rights as Shareholders. This Warrant shall not entitle
the Holder to any rights as a stockholder of the Company.
8.4. Successors and Assigns. Subject to the provisions of
Section 3.2, this Warrant and the rights evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company.
8.5. Amendment. This Warrant may be modified or amended or the
provisions hereof waived only with the written consent of the Company and the
Holder.
8.6. Severability. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Warrant, provided that no such
severance shall be effective if it would change the economic costs or benefits
of this Warrant to the Company or the Holder.
8.7. Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
8.8. Governing Law. This Warrant shall be governed by the laws
of the State of Delaware, without regard to the provisions thereof relating to
conflict of laws.
Signature page follows
7
<PAGE> 8
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed as of the date first above written.
Dated: March 29, 2000
EQUITY MARKETING, INC.
By: /s/ DONALD A. KURZ
----------------------------------------
Name: Donald A. Kurz
Title: Chairman of the Board and Chief
Executive Officer
Acknowledged and Agreed:
CROWN ACQUISITION PARTNERS, LLC
By: /s/ JEFFREY S. DEUTSCHMAN
-----------------------------
Name: Jeffrey S. Deutschman
Title: Manager
8
<PAGE> 9
EXHIBIT A
EXERCISE FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably
exercises this Warrant for the purchase of _____ Shares of Series B Preferred
Stock of Equity Marketing, Inc. and herewith makes payment therefor, all at the
price and on the terms and conditions specified in this Warrant and requests
that certificates for the shares of Series B Preferred Stock hereby purchased
(and any securities or other property issuable upon such exercise) be issued in
the name of the undersigned, if such shares of Series B Preferred Stock shall
not include all of the shares of Series B Preferred Stock issuable as provided
in this Warrant, that a new Warrant of like tenor and date for the balance of
the shares of Series B Preferred Stock issuable hereunder be delivered to the
undersigned.
Check the following box in the case of a "cashless exercise"
pursuant to Section 2.1(ii)(y)...............[ ]
___________________________________
(Name of Registered Owner)
___________________________________
(Signature of Registered Owner)
___________________________________
(Street Address)
___________________________________
(City) (State) (Zip Code)
NOTICE: The signature on this subscription must correspond with
the name as written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever.
A-1
<PAGE> 10
EXHIBIT B
ASSIGNMENT FORM
[To be executed only upon transfer of Warrant]
For value received, the undersigned registered holder of the within Warrant
hereby sells, assigns and transfers unto ____________________ the right
represented by such Warrant to purchase __________________(1) Warrant Shares and
appoints _________________ Attorney to make such transfer on the books of Equity
Marketing, Inc. maintained for such purpose, with full power of substitution in
the premises.
Dated:
(Signature must conform in all respects to
name of holder as specified on the face of
Warrant)
__________________________________________
(Street Address
__________________________________________
(City) (State) (Zip Code)
Signed in the presence of:
____________________________
____________________________
- ---------------
(1) Insert here the number of Warrant Shares as to which this Warrant is being
assigned. In the case of a partial assignment, a new Warrant or Warrants
will be issued and delivered, representing the unassigned portion of the
Warrant, to the holder surrendering the Warrant.
B-1
<PAGE> 1
EXHIBIT 4.1
THIS WARRANT AND THE SECURITIES TO BE ISSUED UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. NEITHER THIS
WARRANT NOR ANY INTEREST HEREIN NOR THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (II) AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE
STATE SECURITIES LAWS, SUCH EXEMPTION TO BE EVIDENCED BY SUCH
DOCUMENTATION AS THE COMPANY MAY REASONABLY REQUEST.
Warrant to Purchase:
1,428 Shares of Series C Senior Cumulative Participating
Convertible Preferred Stock
Dated: March 29, 2000
WARRANT
TO PURCHASE SHARES OF SERIES C SENIOR CUMULATIVE PARTICIPATING
CONVERTIBLE PREFERRED STOCK OF
EQUITY MARKETING, INC.
THIS IS TO CERTIFY THAT Crown Acquisition Partners, LLC, a
Delaware limited liability company (the "Investor"), is entitled, at any time
prior to March 29, 2005 (the "Expiration Date"), to purchase from Equity
Marketing, Inc., a Delaware corporation (the "Company"), 1,428 shares of Series
C Senior Cumulative Participating Convertible Preferred Stock (the "Series C
Preferred Stock") as described in the attached Certificate of Designation of the
Company (the "Certificate of Designation"), in whole or in part, at a purchase
price of $1,000 per share (the "Exercise Price"), all on the terms and
conditions and pursuant to the provisions hereinafter set forth. The Exercise
Price is subject to adjustment as provided herein.
1. Definitions.
As used in this Warrant, the following terms have the respective
meanings set forth below:
"Business Day" shall mean any day that is not a Saturday or Sunday or
a day on which banks are required or permitted to be closed in the State of New
York.
<PAGE> 2
"Closing Price" shall have the meaning set forth in the Certificate
of Designation.
"Closing Date" shall mean March 29, 2000.
"Common Stock" shall have the meaning set forth in the Certificate of
Designation.
"Holder" means Investor and any person or entity that acquires all or
a portion of this Warrant from Investor or its transferees.
"Trading Day" means any day in which the Nasdaq National Market or
other applicable stock exchange or market is open for business.
"Trading Price" shall mean the average of the Closing Prices of the
Common Stock for the 20 consecutive Trading Days ending on the day before the
day in question.
"Warrant Price" shall mean an amount equal to (i) the number of
shares of Series C Preferred Stock being purchased upon exercise of this Warrant
pursuant to Section 2.1, multiplied by (ii) the Exercise Price.
"Warrant Stock" shall mean the shares of Series C Preferred Stock
purchased by the Holder upon the exercise hereof.
2. Exercise of Warrant.
2.1. Manner of Exercise. At any time or from time to time from and
after the Closing Date and until 5:00 P.M., New York time, on the Expiration
Date, Holder may exercise this Warrant, on any Business Day, for all or any part
of the number of shares of Series C Preferred Stock purchasable hereunder.
In order to exercise this Warrant, in whole or in part, Holder shall
deliver to the Company at its principal office at 6330 San Vicente Boulevard,
Los Angeles, California 90048 (i) a written notice of Holder's election to
exercise this Warrant, which notice shall specify the number of shares of Series
C Preferred Stock to be purchased, (ii) payment of the Warrant Price (x) in
immediately available funds or (y) by the withholding from the shares of Warrant
Stock to be issued upon exercise that number of shares of Series C Preferred
Stock that, if converted as of the date of exercise, would be convertible into
shares of Common Stock with an aggregate Trading Price as of the date of
exercise equal to the Warrant Price and (iii) this Warrant. Such notice shall be
substantially in the form appearing at the end of this Warrant as Exhibit A,
duly executed by Holder. Upon receipt of the items specified in the second
preceding sentence, the Company shall execute or cause to be executed and
deliver or cause to be delivered to Holder a certificate or certificates
representing the aggregate number of full shares of Series C Preferred Stock
issuable upon such exercise, together with cash in lieu of any fraction of a
share, as hereinafter provided. The stock certificate or certificates so
delivered shall be in such denomination or denominations as Holder shall request
in the notice and shall be registered in the name of Holder. This Warrant shall
be deemed to have been exercised and such certificate or certificates shall be
deemed to have been issued, and Holder shall be deemed to have become a holder
of record of such shares for all purposes, as of the date the notice, together
with the
2
<PAGE> 3
Warrant Price and this Warrant, are received by the Company as described above.
If this Warrant shall have been exercised in part, the Company shall, at the
time of delivery of the certificate or certificates representing Warrant Stock,
deliver to Holder a new Warrant evidencing the right of Holder to purchase the
unpurchased shares of Series C Preferred Stock called for by this Warrant, which
new Warrant shall in all other respects be identical with this Warrant, or, at
the request of Holder, appropriate notation may be made on this Warrant and the
same returned to Holder.
2.2. Shares to be Validly Issued. All shares of Series C Preferred
Stock issuable upon the exercise of this Warrant shall be validly issued, fully
paid and nonassessable. The Company shall be entitled to withhold any amounts
required to be withheld under applicable law from any amounts to be paid to the
Holder hereunder.
2.3. No Fractional Shares. The Company shall not be required to issue
fractions of shares upon the exercise of this Warrant. If any fraction of a
share would otherwise be issuable, the Company shall pay to the Holder an amount
in cash equal to such fraction multiplied by the Liquidation Preference (as
defined in the Certificate of Designation).
3. Adjustments.
3.1. In case the Company shall (i) declare a dividend or make a
distribution on its Series C Preferred Stock payable in shares of its capital
stock, (ii) subdivide its outstanding shares of Series C Preferred Stock through
stock split or otherwise, or (iii) combine its outstanding shares of Series C
Preferred Stock into a smaller number of shares of Series C Preferred Stock, the
number and/or nature of Warrant Shares purchasable upon exercise of each Warrant
immediately prior thereto shall be adjusted so that the Holder shall be entitled
to receive the kind and number of Warrant Shares or other securities of the
Company which he would have owned or have been entitled to receive after the
happening of any of the events described above, had such Warrant been exercised
immediately prior to the happening of such event or any record date with respect
thereto. An adjustment made pursuant to this paragraph (a) shall become
effective retroactively as of the record date of such event.
3.2. Merger, Consolidation Or Disposition Of Assets. In the case of
any capital reorganization or reclassification of the capital stock of the
Company or in the case of consolidation of the Company or the merger of the
Company with or into any other entity or the sale or transfer of all or
substantially all the assets of the Company pursuant to which the Series C
Preferred Stock is converted into other securities, cash or assets, upon
consummation of such transaction, this Warrant shall automatically become
exercisable for the kind and amount of securities, cash or other assets
receivable upon the reorganization, reclassification, consolidation, merger,
sale or transfer by a holder of the number of shares of Series C Preferred Stock
into which this Warrant might have been converted immediately prior to such
consolidation, merger, transfer or sale. Appropriate adjustment shall be made in
the application of the provisions herein set forth with respect to the rights
and interests thereafter of the Holder, to the end that the provisions set forth
herein shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other securities or property thereafter
deliverable upon the exercise of this Warrant.
3
<PAGE> 4
3.3. Adjustments to Exercise Price. Whenever the number of shares of
Warrant Stock purchasable upon the exercise of each Warrant is adjusted, as
provided in this Section 3, the Exercise Price with respect to the Warrant Stock
shall be adjusted by multiplying such Exercise Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the number of shares
of Warrant Stock purchasable upon the exercise of each Warrant immediately prior
to such adjustment, and of which the denominator shall be the number of shares
of Warrant Stock so purchasable immediately thereafter.
3.4. Adjustments To Common Stock. The Common Stock or other
consideration into which the Warrant Stock may be converted shall be subject to
the adjustments set forth in Section 3 of the Certificate of Designation as if
such Warrant Stock had been outstanding since the Preferred Stock Issue Date (as
defined in the Certificate of Designation). Notwithstanding the foregoing, no
single event shall give rise to more than one such adjustment or entitle the
Holder to a larger amount of Common Stock than such Holder would have received
had it exercised this Warrant immediately and converted the Warrant Stock
immediately following the time of the adjustment set forth in the immediately
preceding sentence, or entitle the Holder to any dividends on the Common Stock
for any periods prior to such exercise and conversion.
4. Rights of Holder.
4.1. No Impairment. The Company shall not by any action, including,
without limitation, amending its Certificate of Incorporation or comparable
governing instruments or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate to protect the rights of Holder against impairment.
Without limiting the generality of the foregoing, the Company will (a) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Series C
Preferred Stock upon the exercise of this Warrant and (b) obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof as may be necessary to enable the Company to perform its
obligations under this Warrant.
5. Reservation and Authorization of Series C Preferred Stock.
From and after the Closing Date, the Company shall at all times
reserve and keep available for issue upon the exercise of Warrants such number
of its authorized but unissued shares of Series C Preferred Stock as will be
sufficient to permit the exercise in full of all outstanding Warrants. All
shares of Series C Preferred Stock which shall be so issuable, when issued upon
exercise of any Warrant and payment therefor in accordance with the terms of
such Warrant, shall be duly and validly issued and fully paid and nonassessable,
and not subject to preemptive rights.
6. Transferability; Form of Warrants.
4
<PAGE> 5
6.1. Transfer. None of the Warrant nor the Shares issuable upon
exercise hereof nor any interest therein may be offered, sold, transferred,
pledged, hypothecated or otherwise disposed of, except pursuant to (i) an
effective registration statement under the Securities Act and any applicable
state securities laws or (ii) an exemption from the registration requirements of
the Securities Act and any applicable state securities laws, such exemption to
be evidenced by such documentation as the Company may reasonably request,
including an opinion of counsel, in writing and addressed to the Company (which
counsel and opinion shall be reasonably satisfactory to the Company), that such
transfer is not in violation of the Securities Act and any applicable state
laws. The Company shall treat the Holder as the holder and owner hereof for all
purposes, unless the Company has been given notice to the contrary. Subject to
compliance with the transfer restrictions set forth above, upon the delivery to
the Company at its principal corporate office of this Warrant along with a duly
completed Assignment Form substantially in the form of Exhibit B hereto, the
Company shall execute and deliver a new Warrant in the form of this Warrant, but
registered in the name of the transferee, to purchase the Warrant Shares
assigned to the transferee. In case the Holder shall assign this Warrant with
respect to less than all of the Warrant Shares, the Company shall execute a new
warrant in the form of this Warrant for the balance of the Warrant Shares and
deliver such new warrant to the transferring Holder.
6.2. Warrant Register; Ownership of Warrant. The Company will keep at
its principal office a register in which the Company will provide for the
registration of Warrants and the registration of transfers of Warrants. The
Company may treat the person in whose name any Warrant is registered on such
register as the owner thereof for all other purposes, and the Company shall not
be affected by any notice to the contrary.
6.3. Restrictive Legend. Each certificate for Warrant Stock shall be
stamped or otherwise imprinted with the following legend:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE.
NEITHER THIS SECURITY NOR ANY INTEREST HEREIN MAY BE OFFERED, SOLD, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR (ii) AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, SUCH EXEMPTION TO
BE EVIDENCE BY SUCH DOCUMENTATION AS THE ISSUER MAY REASONABLY REQUEST.
Any certificate issued at any time in exchange or substitution for
any certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Securities Act ) shall also bear such legend unless, the holder of such
certificate shall have delivered to the Company an opinion of counsel, in
writing and addressed to the Company (which counsel and opinion shall be
reasonably acceptable to the Company), that the securities represented thereby
need no longer be subject to restrictions on resale under the Securities Act or
any state securities laws.
5
<PAGE> 6
6.4. Registration Rights. The holder of Warrants and Warrant Stock
shall have the registration rights set forth in the Registration Rights
Agreement, dated as of March 29, 2000 between the Holder and the Company.
7. Loss or Mutilation. Upon receipt by the Company from any Holder of
evidence reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Warrant and indemnity reasonably satisfactory
to it, and in case of mutilation upon surrender and cancellation hereof, the
Company will execute and deliver in lieu hereof a new Warrant of like tenor to
such Holder; provided, in the case of mutilation, no indemnity shall be required
if this Warrant in identifiable form is surrendered to the Company for
cancellation.
8. Miscellaneous.
8.1. Expiration. This Warrant shall expire and be of no further force
and effect on the Expiration Date.
8.2. Notice Generally. Any notice, demand, request, consent,
approval, declaration, delivery or other communication hereunder to be made
pursuant to the provisions of this Warrant shall be sufficiently given or made
if in writing and either delivered in person with receipt acknowledged or sent
by registered or certified mail, return receipt requested, postage prepaid or by
a nationally recognized overnight courier or by telecopy and confirmed by
telecopy answerback, addressed as follows:
(a) If to the Holder, at its last known address appearing on the
books of the Company maintained for such purpose.
with a copy to: Latham & Watkins
633 West Fifth Street, Suite 4000
Los Angeles, California 90071
Attn: W. Alex Voxman
Facsimile: (213) 891-8763
(b) If to the Company at:
6330 San Vicente Boulevard
Los Angeles, California 90048
Attn: Leland P. Smith
Facsimile: (323) 932-4488
with a copy to: Riordan & McKinzie
300 S. Grand Avenue, 29th Floor
Los Angeles, CA 90071
Attn: Thomas M. Cleary, Esq.
Facsimile: (213) 229-8550
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration, delivery or other
6
<PAGE> 7
communication hereunder shall be deemed to have been duly given or served (i) on
the date on which personally delivered, with receipt acknowledged, (ii) on the
date on which telecopied and confirmed by written or telephonic acknowledgment,
(iii) on the date set forth on the executed return receipt in the case of
registered or certified mail or (iv) on the next business day after the same
shall have been deposited for overnight delivery with a nationally recognized
overnight courier, provided that proof of receipt is received. Failure or delay
in delivering copies of any notice, demand, request, approval, declaration,
delivery or other communication to the Person designated above to receive a copy
shall in no way adversely affect the effectiveness of such notice, demand,
request, approval, declaration, delivery or other communication.
8.3. No Rights as Shareholders. This Warrant shall not entitle the
Holder to any rights as a stockholder of the Company.
8.4. Successors and Assigns. Subject to the provisions of Section
3.2, this Warrant and the rights evidenced hereby shall inure to the benefit of
and be binding upon the successors of the Company.
8.5. Amendment. This Warrant may be modified or amended or the
provisions hereof waived only with the written consent of the Company and the
Holder.
8.6. Severability. Wherever possible, each provision of this Warrant
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Warrant, provided that no such
severance shall be effective if it would change the economic costs or benefits
of this Warrant to the Company or the Holder.
8.7. Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
8.8. Governing Law. This Warrant shall be governed by the laws of the
State of Delaware, without regard to the provisions thereof relating to conflict
of laws.
Signature page follows
7
<PAGE> 8
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed as of the date first above written.
Dated: March 29, 2000
EQUITY MARKETING, INC.
By: /s/ DONALD A. KURZ
----------------------------------------
Name: Donald A. Kurz
Title: Chairman of the Board and Chief
Executive Officer
Acknowledged and Agreed:
CROWN ACQUISITION PARTNERS, LLC
By: /s/ JEFFREY S. DEUTSCHMAN
-----------------------------
Name: Jeffrey S. Deutschman
Title: Manager
8
<PAGE> 9
EXHIBIT A
EXERCISE FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably
exercises this Warrant for the purchase of _____ Shares of Series C Preferred
Stock of Equity Marketing, Inc. and herewith makes payment therefor, all at the
price and on the terms and conditions specified in this Warrant and requests
that certificates for the shares of Series C Preferred Stock hereby purchased
(and any securities or other property issuable upon such exercise) be issued in
the name of the undersigned, if such shares of Series C Preferred Stock shall
not include all of the shares of Series C Preferred Stock issuable as provided
in this Warrant, that a new Warrant of like tenor and date for the balance of
the shares of Series C Preferred Stock issuable hereunder be delivered to the
undersigned.
Check the following box in the case of a "cashless exercise" pursuant to
Section 2.1(ii)(y)...............[ ]
___________________________________
(Name of Registered Owner)
___________________________________
(Signature of Registered Owner)
___________________________________
(Street Address)
___________________________________
(City) (State) (Zip Code)
NOTICE: The signature on this subscription must correspond with the
name as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
A-1
9
<PAGE> 10
EXHIBIT B
ASSIGNMENT FORM
[To be executed only upon transfer of Warrant]
For value received, the undersigned registered holder of the within Warrant
hereby sells, assigns and transfers unto ____________________ the right
represented by such Warrant to purchase __________________(1) Warrant Shares and
appoints _________________ Attorney to make such transfer on the books of Equity
Marketing, Inc. maintained for such purpose, with full power of substitution in
the premises.
Dated: __________________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
Warrant)
__________________________________________
(Street Address
__________________________________________
(City) (State) (Zip Code)
Signed in the presence of:
____________________________
____________________________
- ---------------
(1) Insert here the number of Warrant Shares as to which this Warrant is being
assigned. In the case of a partial assignment, a new Warrant or Warrants
will be issued and delivered, representing the unassigned portion of the
Warrant, to the holder surrendering the Warrant.
B-1
<PAGE> 1
EXHIBIT 10.0
SECURITIES PURCHASE AGREEMENT
DATED AS OF MARCH 29, 2000
BY AND BETWEEN
CROWN ACQUISITION PARTNERS, LLC
AND
EQUITY MARKETING, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I. DEFINITIONS................................................................2
Section 1.1 Certain Defined Terms.............................................2
ARTICLE II. SALE AND TRANSFER OF SECURITIES; CLOSINGS.................................7
Section 2.1 Sale And Purchase Of Securities...................................7
Section 2.2 Purchase Price; Payment...........................................7
Section 2.3 Commitment Fee....................................................7
Section 2.4 Closings and Closing Deliveries...................................8
ARTICLE III. REPRESENTATIONS AND WARRANTIES...........................................9
Section 3.1 Disclosure Schedule...............................................9
Section 3.2 Representations And Warranties Of The Company.....................9
Section 3.3 Representations And Warranties Of The Investor...................19
ARTICLE IV. COVENANTS OF THE COMPANY.................................................21
Section 4.1 No Solicitation..................................................21
Section 4.2 Certain Agreements...............................................23
Section 4.3 Continuing Covenants.............................................23
Section 4.4 Governance.......................................................24
ARTICLE V. ADDITIONAL AGREEMENTS.....................................................25
Section 5.1 Preparation Of The Proxy Statement; Stockholder Meeting..........25
Section 5.2 Best Efforts.....................................................26
Section 5.3 Public Announcements.............................................26
Section 5.4 Takeover Statutes................................................26
Section 5.5 Restrictive Legend...............................................27
Section 5.6 Standstill.......................................................27
Section 5.7 Enforceability Opinion...........................................28
ARTICLE VI. CLOSING DELIVERIES.......................................................28
Section 6.1 Conditions To The Obligation Of The Investor To Effect The First
Closing..........................................................28
Section 6.2 Conditions To The Obligation Of The Company To Effect The First
Closing..........................................................30
Section 6.3 Conditions To The Investor's Obligation To Effect The Second
Closing..........................................................30
Section 6.4 Conditions to the Company's Obligation to Effect The Second
Closing..........................................................31
ARTICLE VII. TERMINATION.............................................................32
Section 7.1 Termination of Second Closing by Either Party....................32
Section 7.2 Termination of Second Closing by Investor........................32
Section 7.3 Termination Date.................................................33
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE VIII. INDEMNIFICATION; REMEDIES..............................................33
Section 8.1 Survival; Right To Indemnification Not Affected By Knowledge.....33
Section 8.2 Indemnification And Payment Of Damages By The Company............33
Section 8.3 Indemnification And Payment Of Damages By The Investor...........34
Section 8.4 Limitation On Amount.............................................34
Section 8.5 Procedure For Indemnification -- Third Party Claims..............35
Section 8.6 Procedure For Indemnification -- Other Claims....................36
Section 8.7 Remedies Exclusive...............................................36
ARTICLE IX. GENERAL PROVISIONS.......................................................36
Section 9.1 Notices..........................................................36
Section 9.2 Interpretation...................................................37
Section 9.3 Counterparts.....................................................37
Section 9.4 Entire Agreement; No Third Party Beneficiaries...................37
Section 9.5 Costs And Expenses...............................................37
Section 9.6 Governing Law....................................................38
Section 9.7 Assignment.......................................................38
Section 9.8 Enforcement......................................................38
Section 9.9 Severability.....................................................38
Section 9.10 Further Assurances...............................................38
Section 9.11 Construction.....................................................39
Section 9.12 Amendment........................................................39
</TABLE>
EXHIBITS
Exhibit A - Series B Warrant
Exhibit B - Series C Warrant
Exhibit C - Certificate of Designation of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock
Exhibit D - Registration Rights Agreement
Exhibit E - Voting Agreement of Donald Kurz
Exhibit F - Voting Agreement of Stephen Robeck
Exhibit G - NASD Determination Letter
Exhibit H - Opinion of Riordan & McKinzie
Exhibit I - Opinion of the General Counsel of Equity Marketing, Inc.
SCHEDULES
Schedule 3.2(a) - Organization, Standing and Corporate Power
Schedule 3.2(b) - Subsidiaries
Schedule 3.2(c) - Capitalization; Valid Issuance of Shares
Schedule 3.2(d) - Authority; Noncontravention
Schedule 3.2(e) - SEC Documents; Undisclosed Liabilities
Schedule 3.2(g) - Absence of Certain Changes or Events
Schedule 3.2(h) - Litigation; Labor Matters; Compliance with Laws
ii
<PAGE> 4
Schedule 3.2(i) - Employee Matters
Schedule 3.2(j) - Tax Returns and Tax Payments
Schedule 3.2(m) - Properties Schedule 3.2(n) - Intellectual Property
Schedule 3.2(o) - Brokers
iii
<PAGE> 5
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is entered
into as of March 29, 2000 by and between Crown Acquisition Partners, LLC, a
Delaware limited liability company (the "Investor"), and Equity Marketing, Inc.,
a Delaware corporation (the "Company").
RECITALS
WHEREAS, the Company desires to sell to the Investor, and the
Investor desires to purchase from the Company, (i) a total of 25,000 shares of
Series A Senior Cumulative Participating Convertible Preferred Stock of the
Company, par value $.001 per share (the "Series A Preferred Stock"), (ii)
warrants, in the form attached hereto as Exhibit A (each individually a "Series
B Warrant," and collectively the "Series B Warrants"), to purchase 12,000 shares
of Series B Senior Cumulative Participating Convertible Preferred Stock of the
Company, par value $.001 per share (the "Series B Preferred Stock"), and (iii)
warrants, in the form attached hereto as Exhibit B (each individually a "Series
C Warrant" and collectively the "Series C Warrants") to purchase 3,000 shares of
Series C Senior Cumulative Participating Convertible Preferred Stock of the
Company, par value $.001 per share (the "Series C Preferred Stock" and, together
with the Series A Preferred Stock and the Series B Preferred Stock, the
"Preferred Stock") in each case, pursuant to the terms and conditions set forth
in this Agreement. The Series B Warrants and the Series C Warrants are
collectively referred to as the "Warrants";
WHEREAS, the Board of Directors of the Company has approved, and
deemed it advisable, that the Company (i) execute and deliver this Agreement and
consummate the Contemplated Transactions, and (ii) issue and sell to the
Investor such shares of Series A Preferred Stock and the Warrants on the terms
and conditions set forth herein;
WHEREAS, prior to the closing of the transactions contemplated by
this Agreement, the Company has filed the Certificate of Designation of its
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
in the form attached hereto as Exhibit C (the "Certificate of Designation") with
the Secretary of State of the State of Delaware.
WHEREAS, concurrently with the closing of the transactions
contemplated by this Agreement, the Company will enter into a registration
rights agreement with the Investor with respect to the shares of Series A
Preferred Stock and the Warrants being acquired by the Investor herein (the
"Registration Rights Agreement"), in the form attached hereto as Exhibit D;
WHEREAS, concurrently with the execution of this Agreement,
certain stockholders of the Company are entering into a voting agreement with
the Investor, in the form attached hereto as Exhibit E with respect to Donald A.
Kurz and Exhibit F with respect to Stephen P. Robeck (each, a "Voting
Agreement," and collectively the "Voting Agreements"), whereby such stockholders
have agreed, for certain periods of time, to vote their shares in favor (a) of
the Company Stockholder Approval (as defined in Section 5.1(b)), if a Company
Stockholders Meeting is required to be held pursuant to Section 5.1(b), and any
other vote, consent or action as required of the stockholders of the Company to
approve the Contemplated
<PAGE> 6
Transactions and (b) the election of certain nominees selected by Investor to
the Board of Directors of the Company, in each case as provided herein; and
NOW, THEREFORE, in consideration of the representations,
warranties, covenants, restrictions and agreements contained in this Agreement,
the parties agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1 Certain Defined Terms.
"Affiliate" means, with respect to any Person, another Person
that directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such first Person.
"Agreement" or "Securities Purchase Agreement" means this
Securities Purchase Agreement, including all Exhibits and Disclosure Schedules
attached hereto, as amended from time to time in accordance with the provisions
of Section 9.12. Words such as "herein," "hereinafter," "hereof," "hereto" and
"hereunder" refer to this Agreement as a whole, unless the context otherwise
requires.
"Best Efforts" means the commercially reasonable efforts that a
prudent Person desirous of achieving a result would use in good faith in similar
circumstances to ensure that such result is achieved as expeditiously as can
reasonably be expected.
"Business Day" means any day other than a Saturday, Sunday or a
day which is a legal holiday in the State of Delaware.
"Certificate of Designation" means the Certificate of Designation
for the Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock attached hereto as Exhibit C.
"Closings" has the meaning set forth in Section 2.4.
"Code" means the Internal Revenue Code of 1986, as amended, or
any successor law, and regulations issued by the IRS pursuant to the Internal
Revenue Code or any successor law.
"Common Shares" has the meaning set forth in Section 3.2(c).
"Company" has the meaning set forth in the Preamble.
"Company Indemnified Persons" has the meaning set forth in
Section 8.2.
"Company SEC Financial Statements" has the meaning set forth in
Section 3.2(e).
"Company SEC Documents" has the meaning set forth in Section
3.2(e).
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<PAGE> 7
"Company Stock Options" means all outstanding officer, employee,
director or consultant stock options to purchase Common Stock granted under the
Option Plans.
"Company Stockholder Approval" has the meaning set forth in
Section 5.1(b).
"Company Stockholders Meeting" has the meaning set forth in
Section 5.1(b).
"Confidentiality Agreement" means the Confidentiality Agreement
dated as of October 11, 1999 between the Company and Crown Capital Group
Incorporated.
"Contemplated Transactions" means all of the transactions
contemplated by this Agreement, including, without limitation, (i) the sale by
the Company of the Series A Preferred Stock and the Warrants to the Investor,
(ii) the execution, delivery, and performance of the Registration Rights
Agreement and the Voting Agreements, (iii) the performance by the Investor and
the Company of their respective covenants and obligations under this Agreement,
and (iv) the Investor's acquisition and ownership of the Purchased Securities.
"Credit Facility" means the Amended and Restated Credit Agreement
dated as of December 10, 1998 by and among the Company, Sanwa Bank California
and the other lenders party thereto, as amended to date by Amendments No. 1, 2,
3, 4, 5 and 6 thereto.
"Damages" has the meaning set forth in Section 8.2.
"Designees" has the meaning set forth in Section 4.4(b).
"DGCL" means the General Corporation Law of the State of
Delaware, as amended.
"Disclosure Schedule" has the meaning set forth in Section 3.1.
"Environmental Laws" has the meaning set forth in Section 3.2(l).
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, or any successor law, and regulations and rules issued
pursuant to that Act or any successor law.
"ERISA Affiliate" has the meaning set forth in Section 3.2(i).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor law, and regulations and rules issued pursuant to that
Act or any successor law.
"GAAP" means generally accepted accounting principles as used in
the United States.
"Governmental Entit(y/ies)" has the meaning set forth in Section
3.2(d).
"Houlihan Opinion" has the meaning set forth in Section 3.2(p).
"HSR Act" has the meaning set forth in Section 3.2(d).
3
<PAGE> 8
"Inconsistent Transaction" has the meaning set forth in Section
4.1.
"Inconsistent Transaction Agreement" means any letter of intent,
agreement in principle, acquisition agreement or other similar agreement related
to any Inconsistent Transaction.
"Indemnified Persons" means the Investor Indemnified Persons and
the Company Indemnified Persons, each an "Indemnified Person."
"Intellectual Property" has the meaning set forth in Section
3.2(n).
"Investor" has the meaning set forth in the Preamble.
"Investor Indemnified Persons" has the meaning set forth in
Section 8.3.
"IRS" means the United States Internal Revenue Service or any
successor agency, and, to the extent relevant, the United States Department of
the Treasury.
"Knowledge" means, with respect to an individual, that such
individual will be deemed to have "Knowledge" of a particular fact or other
matter if (a) such individual is actually aware of such fact or other matter, or
(b) a prudent individual would be expected to discover or otherwise become aware
of such fact or other matter in the course of conducting a reasonably
comprehensive investigation concerning the existence of such fact or other
matter. The Company will be deemed to have "Knowledge" of a particular fact or
other matter only if any of Donald Kurz, Leland Smith, Teresa Covington, Scott
Landsbaum, Edward Boyd, Kim Thompson or Gaetano Metropasqua has, or at any time
had, Knowledge of such fact or other matter.
"Liens" has the meaning set forth in Section 3.2(b).
"Material Adverse Change" or "Material Adverse Effect" means any
change or effect that either individually or in the aggregate with all other
such changes or effects is, or would reasonably be expected to be, materially
adverse to the business, assets, financial condition or results of operations of
the Company and its Subsidiaries taken as a whole (except for changes affecting
the economy generally or resulting from the announcement or execution of this
Agreement or the consummation of the Contemplated Transactions);
"Material Contracts" has the meaning set forth in Section 3.2(d).
"NASD" has the meaning set forth in Section 3.2(r).
"Nasdaq" has the meaning set forth in Section 3.2(r).
"NASD Determination Letter" means that certain letter that may be
issued by Nasdaq in response to the Company's letter of even date herewith and
attached hereto as Exhibit G (the "Company Request Letter") requesting that
Nasdaq confirm the Company's conclusions that the Contemplated Transactions do
not require stockholder approval under the Quantitative Maintenance Criteria of
Rule 4460(i) or under the Qualification Requirements For
4
<PAGE> 9
Domestic and Canadian Securities of Rule 4310(c)(25)(G) of the rules of The
Nasdaq Stock Market.
"Option Plans" mean the Equity Marketing, Inc. Stock Option Plan,
the Equity Marketing, Inc. 1995 Stock Award Plan and the Equity Marketing, Inc.
Non-Employee Director Stock Option Plan.
"Organizational Documents" means (i) the articles or certificate
of incorporation and the bylaws of a corporation, (ii) the partnership agreement
and any statement of partnership of a general partnership, (iii) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership, (iv) any charter or similar document adopted or filed in connection
with the creation, formation, or organization of a Person, and (v) any amendment
to any of the foregoing (including any pending or proposed amendments).
"Permitted Liens" means (i) liens, charges and encumbrances for
any taxes, assessments or other governmental charges for sums not yet due; (ii)
liens granted under the Credit Facility; (iii) purchase money liens, and (iv)
such other liens, restrictions and other encumbrances, if any, which do not
materially detract from the value of, or materially interfere with, the present
use of the Company of the property subject thereof or affected thereby.
"Person" means an individual, or a corporation, partnership, a
limited liability company, joint venture, association, trust, unincorporated
organization or other entity.
"Preferred Shares" has the meaning set forth in Section 3.2(c).
"Proceeding" means any action, arbitration, audit, hearing,
investigation, litigation, or suit (whether civil, criminal, administrative,
investigative, or informal) commenced, brought, conducted, or heard by or
before, or otherwise involving, any Governmental Entity or arbitrator.
"Proxy Statement" has the meaning set forth in Section 5.1(a).
"Purchase Price" has the meaning set forth in Section 2.2.
"Purchased Securities" has the meaning set forth in Section 2.1.
"Recent Company SEC Documents" has the meaning set forth in
Section 3.2(e).
"Registration Rights Agreement" has the meaning set forth in the
Recitals.
"Representative" means with respect to a particular Person, any
authorized director, officer, employee, agent, consultant, advisor, or other
authorized representative of such Person, including legal counsel, accountants,
and financial advisors.
"SEC" has the meaning set forth in Section 3.2(d).
"Securities Act" means the Securities Act of 1933, as amended, or
any successor law, and regulations and rules issued pursuant to that Act or any
successor law.
5
<PAGE> 10
"Series A Preferred Shares" means the shares of Series A
Preferred Stock.
"Series B Preferred Shares" means the shares of Series B
Preferred Stock issuable upon exercise of the Series B Warrants.
"Series C Preferred Shares" means the shares of Series C
Preferred Stock issuable upon exercise of the Series C Warrants.
"Software" has the meaning set forth in Section 3.2(n).
"Stock Plans" means the Option Plans and any other plan, program,
agreement or arrangement providing for the issuance or grant of any interest in
respect of the capital stock of the Company or any Subsidiary of the Company.
"Subsidiary" of any Person means another Person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its board of directors or
other governing body or, if there are no such voting interests, 50% or more of
the equity interest of which, is owned directly or indirectly by such first
Person.
"Tax Return(s)" means any return(s), report(s) or statement(s)
required to be filed with any Governmental Entity with respect to any Tax(es).
"Tax(es)" means any and all tax(es) of any kind, including,
without limitation, those on or measured by or referred to as income, gross
receipts, sales, use, ad valorem, franchise, profits, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, value added,
property or windfall profits taxes, customs, duties or similar fees, assessments
or charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any Governmental Entity.
"Termination Date" has the meaning set forth in Section 7.3.
"Threatened" means a claim, Proceeding, dispute, action, or other
matter will be deemed to have been "Threatened" if any demand or statement has
been made (orally or in writing) or any notice has been given (orally or in
writing).
"Threshold Amount" means the lesser of (i) 25% of the Common
Shares (or an equivalent adjusted number of shares of voting securities of the
Company into which such Common Shares have been converted following any
reclassification, conversion, reorganization, stock dividend, stock split,
reverse splits or combination or similar change to the common stock of the
Company) underlying the Preferred Shares and Warrants purchased by Investor
(assuming conversion of all shares of Series A Preferred Stock purchased by
Investor and exercise of all the Warrants and conversion of all shares of Series
B Preferred Stock and Series C Preferred Stock issuable upon exercise of the
Warrants) and (ii) 9.9% of the outstanding Common Shares. For purposes of clause
(i) this definition, if the Second Closing does not occur, only the Initial
Purchased Securities shall be taken into account in determining the number of
shares purchased by Investor hereunder.
6
<PAGE> 11
"Voting Agreements" means the Voting and Irrevocable Proxy
Agreements, entered into as of the date hereof and as amended from time to time
pursuant to the provisions of Section 4.2 thereof, by and among the Investor and
the stockholders of the Company listed on the signature page thereof or who
subsequently become a party thereto.
"Warrants" has the meaning set forth in the Recitals.
ARTICLE II.
SALE AND TRANSFER OF SECURITIES; CLOSINGS
Section 2.1 Sale And Purchase Of Securities.
(a) Upon the terms and subject to the conditions set forth in
this Agreement, the Company shall sell, transfer, assign, convey and deliver to
the Investor, and the Investor shall purchase, accept, and acquire from the
Company, on the date hereof (the "First Closing Date"), (i) 11,900 shares of
Series A Preferred Stock (the "Initial Preferred Shares"), (ii) a Series B
Warrant (the "Initial Series B Warrant") to purchase 5,712 shares of Series B
Preferred Stock and (iii) a Series C Warrant to purchase 1,428 shares of Series
C Preferred Stock (the "Initial Series C Warrant," and together with the Initial
Series B Warrant, the "Initial Warrants"). The Initial Warrants and the Initial
Preferred Shares are collectively referred to as the "Initial Securities."
(b) Upon the terms and subject to the conditions set forth in
this Agreement, the Company shall sell, transfer, assign, convey and deliver to
the Investor, and the Investor shall purchase, accept, and acquire from the
Company, at the Second Closing Date (defined below), (i) 13,100 shares of Series
A Preferred Stock (the "Additional Preferred Shares") (ii) a Series B Warrant
(the "Additional Series B Warrant") to purchase 6,288 shares of Series B
Preferred Stock and (iii) a Series C Warrant to purchase 1,572 shares of Series
C Preferred Stock (the "Additional Series C Warrant," and together with the
Additional Series B Warrant, the "Additional Warrants"). The Additional Warrants
and the Additional Preferred Shares are collectively referred to as the
"Additional Securities." The Initial Securities and the Additional Securities
are collectively referred to as the "Purchased Securities."
Section 2.2 Purchase Price; Payment. In consideration of the
sale, transfer, assignment, conveyance and delivery to the Investor of the
Purchased Securities, the Investor agrees to pay to the Company, (i) on the
First Closing Date, by wire transfer of immediately available funds to an
account specified by the Company, an aggregate purchase price of Eleven Million
Nine Hundred Thousand Dollars ($11,900,000) (the "Initial Purchase Price") and
(ii) on the Second Closing Date, by wire transfer of immediately available funds
to an account specified by the Company, an aggregate purchase price of Thirteen
Million One Hundred Thousand Dollars ($13,100,000) (the "Second Purchase Price,"
and together with the Initial Purchase Price, the "Purchase Price").
Section 2.3 Commitment Fee. The Company agrees to pay to Investor
or any Affiliate of Investor designated by it (including Crown Capital Group
Incorporated), a commitment fee in the amount of $1,250,000. Such fee shall be
paid in equal quarterly installments of $62,500 commencing on June 30, 2000 and
ending on March 31, 2005. All such payments shall be made
7
<PAGE> 12
in cash by wire transfer of immediately available funds to an account specified
by Investor. The parties agree that any Affiliate of Investor (including Crown
Capital Group Incorporated) designated by Investor to receive all or any portion
of the Commitment Fee shall be a third party beneficiary of this Section 2.3 of
this Agreement.
Section 2.4 Closings and Closing Deliveries.
(a) First Closing. The sale of the Initial Securities to be
purchased by the Investor contemplated by Section 2.1(a) shall take place at the
offices of Latham & Watkins, 633 West Fifth Street, Los Angeles, California at
10:00 a.m., Pacific Time, on the date hereof or at such other time and place as
the Company and the Investor may mutually agree in writing (such event being
called the "First Closing" and such date, the "First Closing Date"). All
transactions required to occur at the First Closing shall be deemed to have
occurred simultaneously, and no such transaction shall be deemed to have
occurred until all have occurred.
(b) At the First Closing, the Company will deliver the following
to the Investor:
(i) A certified copy of the Certificate of Designation, which
shall have been duly filed under the laws of the State of Delaware;
(ii) A duly executed stock certificate evidencing the Initial
Preferred Shares registered in the name of the Investor;
(iii) The duly executed Initial Warrants registered in the
name of the Investor;
(iv) The Registration Rights Agreement duly executed and
delivered by the Company;
(v) The Voting Agreements duly executed and delivered by the
stockholders of the Company listed on the signature pages thereof; and
(vi) The documents, instruments and writings contemplated or
required to be delivered by the Company at the First Closing pursuant to Section
6.1 or otherwise contemplated or required under this Agreement.
(c) At the First Closing, the Investor will deliver the following
to the Company:
(i) The Initial Purchase Price;
(ii) The Registration Rights Agreement duly executed and
delivered by the Investor; and
(iii) The documents, instruments and writings contemplated or
required to be delivered by the Investor at the First Closing pursuant to
Section 6.2 or otherwise contemplated or required under this Agreement.
8
<PAGE> 13
(d) Second Closing. The sale of the Additional Securities to be
purchased by the Investor contemplated by Section 2.1(b) shall take place at the
offices of Latham & Watkins, 633 West Fifth Street, Los Angeles, California at
10:00 a.m., Pacific Time, or at such other time and place as the Company and the
Investor may mutually agree in writing, as soon as practicable and in any event
within five (5) Business Days following, and subject to, the prior fulfillment
or waiver of all conditions (other than conditions to be satisfied at the Second
Closing, but subject to those conditions) set forth in Sections 6.3 and 6.4
hereof (such event being called the "Second Closing," and such date, the "Second
Closing Date"). The First Closing and the Second Closing are collectively
referred to as the "Closings."
(e) At the Second Closing, the Company will deliver the following
to the Investor:
(i) A certified copy of the Certificate of Designation (which
shall not have been amended following the First Closing except with the consent
of Investor);
(ii) A duly executed stock certificate evidencing the
Additional Preferred Shares registered in the name of the Investor;
(iii) The duly executed Additional Warrants registered in the
name of the Investor;
(iv) The documents, instruments and writings contemplated or
required to be delivered by the Company at the Second Closing pursuant to
Section 6.3 or otherwise contemplated or required under this Agreement.
(f) At the Second Closing, the Investor will deliver the
following to the Company:
(i) The Second Purchase Price;
(ii) The documents, instruments and writings contemplated or
required to be delivered by the Investor at the Second Closing pursuant to
Section 6.4 or otherwise contemplated or required under this Agreement.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
Section 3.1 Disclosure Schedule. On the date hereof, the Company
has delivered to the Investor a schedule (the "Disclosure Schedule") setting
forth, among other things, items the disclosure of which is necessary or
appropriate either in response to an express disclosure requirement contained in
a provision hereof or as an exception to one or more representations or
warranties contained in Section 3.2, or to one or more of its covenants
contained herein.
Section 3.2 Representations And Warranties Of The Company. The
Company represents and warrants to the Investor, except as set forth in the
Disclosure Schedule, as follows:
9
<PAGE> 14
(a) Organization, Standing And Corporate Power. Each of the
Company and each of its Subsidiaries is duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is incorporated and
has the requisite corporate power and authority to carry on its business as now
being conducted. Each of the Company and each of its Subsidiaries is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed
(individually or in the aggregate) would not have a Material Adverse Effect. The
Company has provided the Investor with complete and correct copies of the
Certificate of Incorporation and Bylaws of the Company and the comparable
Organizational Documents of each of its Subsidiaries.
(b) Subsidiaries. The only direct or indirect Subsidiaries of the
Company and other ownership interests held by the Company in any other Person
are those listed in Section 3.2(b) of the Disclosure Schedule, and other than
such listed Subsidiaries and Persons, the Company does not own (directly or
indirectly) any stock, securities or equity interests in any Person. All the
outstanding shares of capital stock or other ownership interests of each such
listed Subsidiary and Person have been validly issued and are fully paid and
nonassessable and are owned (of record and beneficially) by the Company, by
another Subsidiary (wholly owned) of the Company or by the Company and another
such Subsidiary (wholly owned), free and clear of all pledges, claims, liens,
charges, encumbrances and security interests of any kind or nature whatsoever
(collectively, "Liens").
(c) Capitalization; Valid Issuance Of Shares. The authorized
capital stock of the Company consists of 20,000,000 shares of common stock,
$0.001 par value per share (the "Common Shares"), and 1,000,000 shares of
preferred stock, $0.001 par value per share (the "Preferred Shares"). As of the
date of this Agreement, there are (i) 6,249,767 Common Shares issued and
outstanding, (ii) 1,921,299 Common Shares held in the treasury of the Company or
held by any Subsidiary of the Company; (iii) 2,740,000 Common Shares reserved
for issuance upon exercise of authorized but unissued Company Stock Options
pursuant to the Option Plans; (iv) 1,827,810 Common Shares issuable upon
exercise of outstanding Company Stock Options; and (v) no Preferred Shares
issued or outstanding. Section 3.2(c) of the Disclosure Schedule contains a
complete and accurate list of all Company Stock Options outstanding pursuant to
the Option Plans including the date of grant, name of option holder, exercise
price and expiration date. Except as set forth in this Section 3.2(c), no shares
of capital stock or other equity securities of the Company are issued, reserved
for issuance or outstanding. All outstanding shares of capital stock of the
Company are, and all shares which may be issued pursuant to the Stock Plans will
be when issued, duly authorized, validly issued, fully paid and nonassessable
and not subject to preemptive rights. The Series A Preferred Shares and the
Warrants when issued, paid for and delivered in accordance with the terms of
this Agreement, and the Series B Preferred Shares and Series C Preferred Shares
to be issued upon exercise of the Warrants, as applicable, will be duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. Except as set forth in Section 3.2(c) of the Disclosure
Schedule, there are
10
<PAGE> 15
no outstanding bonds, debentures, notes or other indebtedness or other
securities of the Company or any of its Subsidiaries having the right to vote
(or convertible into, or exchangeable for, securities having the right to vote)
on any matters on which stockholders of the Company or such Subsidiary may vote.
Except as set forth in Section 3.2(c) of the Disclosure Schedule, there are no
outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which the Company or any
of its Subsidiaries is a party or by which any of them is bound obligating the
Company or any of its Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or other equity or
voting securities of the Company or of any of its Subsidiaries or obligating the
Company or any of its Subsidiaries to issue, grant, extend or enter into any
such security, option, warrant, call, right, commitment, agreement, arrangement
or undertaking. Other than the Company Stock Options or as otherwise set forth
in Section 3.2(c) of the Disclosure Schedule, (x) there are no outstanding
contractual obligations, commitments, understandings or arrangements of the
Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire or
make any payment in respect of or measured or determined based on the value or
market price of any shares of capital stock of the Company or any of its
Subsidiaries and (y) to the Knowledge of the Company, there are no irrevocable
proxies with respect to shares of capital stock of the Company beneficially
owned by any officer or director of the Company or with respect to shares of
capital stock of any Subsidiary of the Company. Except as set forth in Section
3.2(c) of the Disclosure Schedule, there are no agreements or arrangements
pursuant to which the Company or any of its Subsidiaries is or would be required
to register Common Shares, Preferred Shares or other securities under the
Securities Act of 1933, as amended.
(d) Authority; Noncontravention. The Company has the requisite
corporate power and authority to enter into this Agreement, the Registration
Rights Agreement and the Warrants and to consummate the Contemplated
Transactions. The execution and delivery of this Agreement, the Registration
Rights Agreement and the Warrants by the Company and the consummation by the
Company of the Contemplated Transactions have been duly authorized by all
necessary corporate action on the part of the Company, subject to the approval
of the Company's stockholders of the issuance and sale of the Additional
Securities to the Investor. This Agreement has been duly executed and delivered
by the Company and constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to the
effect of applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws affecting the rights of creditors generally and the effect of
general principles of equity. Each of this Agreement, the Registration Rights
Agreement and the Initial Warrants constitute, and, when duly executed and
delivered by the Company at the Second Closing, the Additional Warrants shall
constitute, a valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms, subject to the effect of applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws
affecting the rights of creditors generally and the effect of general principles
of equity. Except as disclosed in Section 3.2(d) of the Disclosure Schedule, the
execution and delivery of this Agreement, the Registration Rights Agreement and
the Warrants does not, and the consummation of the Contemplated Transactions and
compliance with the provisions hereof will not, conflict with, or result in any
breach or violation of, or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation, payment or
acceleration of or "put" right with respect to any obligation or the loss of a
material benefit under, or result in the creation of any Lien upon any of the
properties or assets of the Company or any of its Subsidiaries under, (i) the
Certificate of Incorporation or Bylaws of the Company or the comparable
Organizational Documents of any of its Subsidiaries, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, lease, contract or other agreement,
instrument, permit, concession, franchise or license applicable to the Company
or any of its Subsidiaries or their respective properties or assets which is
material to
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<PAGE> 16
the Company and its Subsidiaries taken as a whole ("Material Contracts") or
(iii) subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance, rule,
regulation or arbitration award applicable to the Company or any of its
Subsidiaries or their respective properties or assets, other than, in the case
of clauses (ii) and (iii), any such conflicts, breaches, violations, defaults,
rights, losses or Liens that individually or in the aggregate would not have a
Material Adverse Effect and would not prevent or materially hinder or delay the
ability of the Company to consummate the Contemplated Transactions. No consent,
approval, order or authorization of, or registration, declaration or filing
with, or notice to, any federal, state or local government or any court,
administrative agency or commission or other governmental authority or agency,
domestic or foreign, (each a "Governmental Entity" and collectively,
"Governmental Entities"), or any other Person, is required by or with respect to
the Company or any of its Subsidiaries in connection with the execution and
delivery of this Agreement by the Company or the consummation by the Company of
the Contemplated Transactions, except for (i) the filing of a pre-merger
notification and report form by the Company under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") (with respect to
the consummation of the Second Closing only) (the "HSR Filing"), (ii) the filing
with the Securities and Exchange Commission (the "SEC") of (x) the Proxy
Statement, and (y) such other reports or schedules under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as may be required in connection
with this Agreement and the Contemplated Transactions, (iii) the Company
Stockholder Approval (with respect to the consummation of the Second Closing
only), and (iv) such other consents, approvals, orders, authorizations,
registrations, declarations, filings or notices for which the absence of such
would not, individually or in the aggregate, have a Material Adverse Effect or
as are set forth in Section 3.2(d) of the Disclosure Schedule; provided that the
exceptions set forth in clauses (ii)(x) and (iii) above shall not apply if the
NASD Determination Letter is obtained.
(e) SEC Documents; Undisclosed Liabilities. The Company has filed
all required reports, schedules, forms, statements and other documents with the
SEC since January 1, 1998 (collectively, and in each case including all exhibits
and schedules thereto and documents incorporated by reference therein, and
including without limitation the Recent Company SEC Documents (the "Company SEC
Documents"). As of their respective dates (or, if amended, at the time of such
amended filing or, in the case of Securities Act registration statements, on
their respective effective dates), the Company SEC Documents complied in all
material respects with the requirements of the Securities Act or the Exchange
Act, as the case may be, and the rules and regulations of the SEC promulgated
thereunder applicable to such Company SEC Documents, and none of the Company SEC
Documents (including any and all financial statements included therein) as of
such dates and as of the date hereof (except as set forth in subsequent filings
with the SEC prior to the date hereof) contained or contain any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of the Company included in the Company SEC Documents (the
"Company SEC Financial Statements") comply as to form in all material respects
with the published rules and regulations of the SEC with respect thereto, have
been prepared in accordance with GAAP (except, in the case of unaudited
consolidated quarterly statements, as permitted by Form 10-Q of the SEC) applied
on a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly present the consolidated financial position of the
Company and its consolidated Subsidiaries as of the dates
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<PAGE> 17
thereof and the consolidated results of their operations and cash flows for the
periods then ended (subject, in the case of unaudited quarterly statements, to
normal year-end audit adjustments). Since December 31, 1998, neither the Company
nor any of its Subsidiaries has incurred any liabilities or obligations required
to be reflected in its balance sheet (whether accrued, absolute, contingent or
otherwise) except (i) as and to the extent set forth on the audited balance
sheet of the Company and its Subsidiaries as of December 31, 1998 (including the
notes thereto), (ii) as incurred in connection with the Contemplated
Transactions, (iii) as set forth in Section 3.2(e) of the Disclosure Schedule,
(iv) as described in the Company SEC Documents filed since December 31, 1998,
but prior to the date of this Agreement, including for this purpose, the
Company's Report on Form 10-K for the fiscal year ended December 31, 1999 filed
with the SEC on March 28, 2000 (the "Recent Company SEC Documents") or (v) as
incurred in the ordinary course of business consistent with past practice in
amounts that are not material to the Company and its Subsidiaries taken as a
whole. Neither the Company, nor any of its Subsidiaries is, or has received any
notice or has any Knowledge that any other party is, in default or breach under
or is unable to perform in any material respect under any Material Contracts,
nor has there occurred any event that with the lapse of time or the giving of
notice or both would constitute such a default or breach, except for those
defaults, breaches or inability to perform which would not reasonably be
expected, either individually or in the aggregate, to have a Material Adverse
Effect.
(f) Information Supplied. None of the information supplied or to
be supplied by the Company for inclusion or incorporation by reference in the
Proxy Statement will, at the date it is first mailed to the Company's
stockholders or at the time of the Company Stockholders Meeting contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The Proxy
Statement will comply as to form in all material respects with the requirements
of the Exchange Act and the rules and regulations promulgated thereunder, except
that no representation is made by the Company with respect to statements made or
incorporated by reference therein based on information supplied in writing by
the Investor for inclusion or incorporation by reference therein.
(g) Absence Of Certain Changes Or Events. Except as disclosed in
the Recent Company SEC Documents or in Section 3.2(g) of the Disclosure
Schedule, since December 31, 1998, the Company has conducted its business only
in the ordinary course consistent with past practice, and there is not and has
not been: (i) any Material Adverse Change; (ii) any condition, event or
occurrence which, individually or in the aggregate, would reasonably be expected
to have a Material Adverse Effect or give rise to a Material Adverse Change;
(iii) any event which, if it had taken place following the execution of this
Agreement, would not have been permitted by Sections 4.2 or 4.4 without the
prior written consent of the Investor; or (iv) any condition, event or
occurrence which would prevent or materially hinder or delay the ability of the
Company to consummate the Contemplated Transactions.
(h) Litigation; Labor Matters; Compliance With Laws.
(i) Except as disclosed in the Company SEC Documents or in
Section 3.2(h) of the Disclosure Schedule, there is no suit, action, proceeding,
investigation or inquiry pending or, to the Knowledge of the Company, Threatened
against or affecting the
13
<PAGE> 18
Company or any of its Subsidiaries or, to the Knowledge of the Company, any
basis for any such suit, action, proceeding, investigation or inquiry that,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect or prevent or materially hinder or delay the ability of
the Company or the Investor to consummate the Contemplated Transactions, nor is
there any judgment, decree, injunction, rule or order of any Governmental Entity
or arbitrator outstanding against the Company or any of its Subsidiaries having,
or which, in the future would reasonably be expected to have, any such effect.
(ii) Neither the Company nor any of its Subsidiaries is a
party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is it
or any of its Subsidiaries the subject of any proceeding asserting that it or
any Subsidiary has committed an unfair labor practice or seeking to compel it to
bargain with any labor organization as to wages or conditions of employment nor
is there any strike, work stoppage or other labor dispute involving it or any of
its Subsidiaries pending or, to its Knowledge, Threatened, any of which would
reasonably be expected to have a Material Adverse Effect.
(iii) The conduct of the business of each of the Company and
each of its Subsidiaries complies with all statutes, laws, regulations,
ordinances, rules, judgments, orders, decrees or arbitration awards applicable
thereto, except for violations or failures so to comply, if any, that,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect.
(i) Employee Matters.
Except as disclosed in the Company SEC Documents or in Section
3.2(i) of the Disclosure Schedule, the Company maintains no employment,
severance, bonus, profit sharing, compensation, termination, stock option, stock
appreciation right, restricted stock, phantom stock, performance unit, pension,
retirement, deferred compensation, welfare or employee benefit plan, agreement,
trust fund or other arrangement, including any "employee benefit plan" as
defined in Section 3(3) of ERISA, or any union, guild or collective bargaining
agreement maintained or contributed to or required to be contributed to by the
Company or any of its ERISA Affiliates, for the benefit or welfare of any
current or former director, officer, employee, consultant of the Company or any
of its ERISA Affiliates (such plans, agreements, trust funds and arrangements
being collectively the "Employee Agreements and Plans"), other than employment
agreements which provide for compensation to an individual that is not in excess
of $60,000 per year (including any payments available upon acceleration,
termination, or change of control). Each of the Employee Agreements and Plans is
in material compliance with all applicable laws including ERISA and the Code.
The IRS has issued a determination letter stating that each Employee Agreement
and Plan that is intended to be a qualified plan under Section 401(a) of the
Code is so qualified and the Company is aware of no event occurring after the
date of such determination that would adversely affect such determination. The
liabilities accrued under each such Employee Agreement and Plan are reflected on
the latest balance sheet of the Company included in the Recent Company SEC
Documents to the extent required in accordance with GAAP. No condition exists
that is reasonably likely to subject the Company or any of its Subsidiaries to
any direct or indirect material liability under Title IV of ERISA or to a civil
penalty under Section 502(j) of ERISA or material liability under Section 4069
of ERISA or
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<PAGE> 19
4975, 4976, or 4980B of the Code or the loss of a federal tax deduction under
Section 280G of the Code or other material liability with respect to the
Employee Agreements and Plans that is not reflected on such balance sheet. No
Employee Agreement and Plan is subject to Title IV of ERISA and no Employee
Agreement and Plan is a "multiemployer plan," as defined in Section 3(37) of
ERISA. During the past six years, neither the Company nor any of its ERISA
Affiliates have made or been required to make contributions to any
"multiemployer plan," as defined in Section 3(37) of ERISA. There have been no
non-exempt "prohibited transactions" within the meaning of Section 4975 of the
Code or Section 406 of ERISA with respect to any Employee Agreement and Plan to
which either of those sections may apply, which might result in any material
liability of the Company. No Employee Agreement and Plan provides benefits,
including death, medical or health benefits (whether or not insured), after an
employee's retirement or termination of employment, other than (i) continuation
coverage required pursuant to Section 4980B of the Code and Part 6 of Title I of
ERISA, and the regulation thereunder, and any other applicable law. There are no
pending or, to the Knowledge of the Company, anticipated or Threatened claims
(other than routine claims for benefits or immaterial claims) by, on behalf of
or against any of the Employee Agreements and Plans or any trusts related
thereto. "ERISA Affiliate" means, with respect to any Person, any trade or
business, whether or not incorporated, that together with such Person would be
deemed a "single employer" within the meaning of Section 414 of the Code.
(j) Tax Returns And Tax Payments.
(i) The Company and each of its Subsidiaries has filed or
caused to be filed, on a timely basis, all Tax Returns that are or were required
to be filed by or with respect to any of them, either separately or as a member
of a group, pursuant to applicable law. Each of the Company and its Subsidiaries
has paid, or made provision for the payment of, all Taxes that have or may have
become due pursuant to those Tax Returns or otherwise, or pursuant to any
assessment received by the Company or its Subsidiaries, except such Taxes, if
any, as are listed in Section 3.2(j)(i) of the Disclosure Schedule and are being
contested in good faith and as to which adequate reserves (determined in
accordance with GAAP) have been provided in the Company SEC Financial
Statements;
(ii) The Company and its Subsidiaries have not granted the
IRS or relevant state tax authorities any extension or waiver of or the
applicable statute of limitations for their respective United States federal and
state income Tax Returns for any period. All deficiencies proposed as a result
of any audits of any Tax Returns have been paid, reserved against, settled, or,
as listed on Section 3.2(j)(ii) of the Disclosure Schedule, are being contested
in good faith by appropriate proceedings. No issues have been raised (and are
currently pending) by any taxing authority in connection with any Tax Return of
the Company or any of its Subsidiaries, and neither the Company nor any of its
Subsidiaries has given or been requested to give waivers or extensions (or is or
would be subject to a waiver or extension given by any other Person) of any
statute of limitations relating to the payment of Taxes of the Company or its
Subsidiaries for which any of them may be liable;
(iii) The charges, accruals, and reserves with respect to
Taxes on the respective books of each of the Company and its Subsidiaries are
adequate (determined in accordance with GAAP) and are at least equal to that
company's liability for Taxes. All Taxes
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<PAGE> 20
that the Company or any of its Subsidiaries is or was required by applicable law
to withhold or collect have been duly withheld or collected and, to the extent
required, have been paid to the proper governmental entity or other Person;
(iv) All Tax Returns filed by (or that include on a
consolidated basis) the Company and/or its Subsidiaries are true, correct, and
complete. There is no tax sharing agreement that will require any payment by the
Company or any of its Subsidiaries after the date of this Agreement. Except as
set forth in Section 3.2(j)(iv) of the Disclosure Schedule, neither the Company
nor any of its Subsidiaries is or has been a member of any consolidated,
combined, unitary or aggregate group for Tax purposes except such a group
consisting only of the Company and its Subsidiaries; and
(v) Neither the Company nor any of its Subsidiaries has filed
a consent pursuant to the collapsible corporation provisions of Section 341(f)
of the Code (or any corresponding provision of state, local or foreign income
tax law).
(k) State Antitakeover Laws Not Applicable; No Other
Restrictions. The Board of Directors of the Company has approved this Agreement
and the Contemplated Transactions (including the Voting Agreements) and such
approval constitutes approval of the Investor's acquisition of the Series A
Preferred Shares, the Warrants (and the shares of Series B Preferred Stock and
Series C Preferred Stock issuable upon exercise thereof) and the other
Contemplated Transactions by the Board of Directors of the Company under the
provisions of Section 203 of the DGCL such that the restrictions on "business
combinations" do not apply to Investor in connection with this Agreement or the
Contemplated Transactions. No other state takeover statute or similar statute or
regulation of the State of Delaware (or, to the Knowledge of the Company, of any
other state or jurisdiction) applies to this Agreement or the Contemplated
Transactions. No provision of the Certificate of Incorporation, Bylaws or other
governing instruments of the Company or any of its Subsidiaries or the terms of
any plan or agreement of the Company would, directly or indirectly, restrict or
impair (i) the ability of the Investor to vote, or otherwise to exercise the
rights of a stockholder with respect to, securities of the Company and its
Subsidiaries that may be acquired or controlled by the Investor by virtue of
this Agreement or the Contemplated Transactions or (ii) the rights granted
hereunder, or permit any stockholder to acquire securities of the Company or the
Investor, or any of their respective Subsidiaries, on a basis not available to
the Investor in the event that the Investor were to acquire securities of the
Company.
(l) Environmental Matters. There are no legal, administrative,
arbitral or other proceedings, claims, actions, causes of action or, to the
Knowledge of the Company, private environmental investigations or remediation
activities or governmental investigations of any nature seeking to impose, or
that would reasonably be expected to result in the imposition, on the Company or
any of its Subsidiaries of any liability or obligations arising under common law
standards relating to environmental protection, human health or safety, or under
any local, state, federal, national or supernational environmental statute,
regulation or ordinance, including the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (collectively, "Environmental
Laws"), pending or, to the Knowledge of the Company, Threatened, against the
Company or any of its Subsidiaries, which liability or obligation would have or
would reasonably be expected to have a Material Adverse Effect. To the Knowledge
of
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<PAGE> 21
the Company or any of its Subsidiaries, there is no reasonable basis for any
such proceeding, claim, action or governmental investigation that would impose
any liability or obligation that would have or would reasonably be expected to
have a Material Adverse Effect. To the Knowledge of the Company, during or prior
to the period of (i) its or any of its Subsidiaries' ownership or operation of
any of their respective current properties, or (ii) its or any of its
Subsidiaries' holding of a security interest or other interest in any property,
there was no release or Threatened release of hazardous, toxic, radioactive or
dangerous materials or other materials regulated under Environmental Laws in,
on, under or affecting any such property which would reasonably be expected to
have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries
is subject to any agreement, order, judgment, decree, letter or memorandum by or
with any court, regulatory agency, other Governmental Entity or third party
imposing any material liability or obligations pursuant to or under any
Environmental Law that would have or would reasonably be expected to have a
Material Adverse Effect.
(m) Properties. Except as disclosed in the Company SEC Documents
or in Section 3.2(m) of the Disclosure Schedule, each of the Company and its
Subsidiaries (i) has good and marketable title to all the properties and assets
reflected in the latest audited balance sheet included in such Recent Company
SEC Documents as being owned by the Company or one of its Subsidiaries or
acquired after the date thereof which are, individually or in the aggregate,
material to the Company's business on a consolidated basis (except properties
and assets sold or otherwise disposed of since the date thereof in the ordinary
course of business), free and clear of all Liens except Permitted Liens and (ii)
is the lessee of all leasehold estates reflected in the latest audited financial
statements included in such Recent Company SEC Documents or acquired after the
date thereof which are material to its business on a consolidated basis and is
in possession of the properties purported to be leased thereunder, and each such
lease is valid without material default thereunder by the lessee or, to the
Company's Knowledge, the lessor.
(n) Intellectual Property. Section 3.2(n) of the Disclosure
Schedule contains a list of all copyrights, patents, trademarks, service marks
and tradenames (including applications, continuations, reissues and similar
rights) ("Intellectual Property") and software (other than standard,
off-the-shelf software subject to "shrink wrap" licenses) ("Software") owned by
or licensed to the Company and its Subsidiaries which are material to the
conduct of business of the Company or any of its Subsidiaries. The Company or
the Subsidiary using such Intellectual Property or Software either (i) owns the
entire right, title and interest in and to the Intellectual Property and
Software free and clear of any Liens (other than Permitted Liens) or (ii) has
the right and license to use the same in its business, except where the failure
to so own or have such right or license would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. No
proceedings are pending or, to the Knowledge of the Company, Threatened, which
challenge the validity, use or ownership of any of the Intellectual Property or
Software listed in Section 3.2(n) of the Disclosure Schedule. To the Knowledge
of the Company, no infringement by the Company or any of its Subsidiaries of any
Intellectual Property of any other Person has occurred and the Company and its
Subsidiaries have not received notice of a claim that the Company or its
Subsidiaries are infringing any Intellectual Property of any other Person. To
the Knowledge of the Company, no Person is engaged in any unauthorized use of
the Intellectual Property of the Company.
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(o) Brokers. Except as described in Section 3.2(o) of the
Disclosure Schedule, no broker, investment banker, financial advisor or other
Person, other than Houlihan, Lokey, Howard & Zukin ("HLHZ"), the fees and
expenses of which will be paid by the Company, is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission in connection
with the Contemplated Transactions based upon arrangements made by or on behalf
of the Company. The Company has provided to the Investor a true and correct copy
of any agreement with HLHZ providing for payment of any such fee or commission.
(p) Opinion Of Financial Advisor. The Company has received, prior
to the execution of this Agreement, the oral opinion of HLHZ to the effect that
the purchase price to be received by the Company for the Purchased Securities is
fair, from a financial point of view, to the Company, a signed written copy of
which opinion, dated as of March 29, 2000 (the "Houlihan Opinion") will be
delivered to the Investor within five (5) Business Days of the date hereof.
(q) Board Recommendations. The Board of Directors of the Company,
at a meeting duly called and held, has by unanimous vote of those directors
present (who constituted four of six of the directors then in office) (i)
determined that this Agreement and the Contemplated Transactions are fair to and
in the best interests of the stockholders of the Company, (ii) approved the
Certificate of Designation in the form attached hereto as Exhibit C and resolved
that it be filed in accordance with applicable law as soon as practicable prior
to the First Closing Date, and (iii) resolved to recommend that the holders of
the Common Shares approve this Agreement and the Contemplated Transactions and
the issuance of the Additional Securities, if the Company is required to obtain
Company Stockholder Approval under Section 5.1(b).
(r) Common Shares Listing. The Common Shares are registered
pursuant to Section 12(g) of the Exchange Act and are listed on the Nasdaq
National Market ("Nasdaq").
The Company has taken no action designed to cause, or likely to
result in, the termination of the registration of the Common Shares under the
Exchange Act or the delisting of the Common Shares from Nasdaq, nor has the
Company received any notification that the SEC or the National Association of
Securities Dealers, Inc. ("NASD") is contemplating the termination of such
registration or listing.
(s) Required Vote. The Company Stockholder Approval that may be
required pursuant to NASD Rule 4460(i) or NASD Rule 4310(c)(25)(G) prior to the
purchase by the Investor of the Additional Securities in order to avoid the
possible delisting of the Common Shares from Nasdaq is the only vote of the
holders of any class or series of the Company's securities that may be necessary
to approve any of the Contemplated Transactions or this Agreement. The Company
Stockholder Approval will not be required if the Company receives the NASD
Determination Letter and consummates the Second Closing without obtaining the
Company Stockholder Approval.
(t) Customs Matters. Except as disclosed in Section 3.2(t) of the
Disclosure Schedule, there are no legal, administrative, arbitral or other
proceedings, claims, actions, causes of action or, to the Knowledge of the
Company, private customs investigations or governmental
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<PAGE> 23
investigations of any nature seeking to impose, or that would reasonably be
expected to result in the imposition, on the Company or any of its Subsidiaries
of any liability or obligations arising under the United States customs or
international trade laws or the regulations of the United States Customs Service
that would have or would reasonably be expected to have a Material Adverse
Effect. To the Knowledge of the Company or any of its Subsidiaries, there is no
such Threatened proceeding, claim, action or governmental investigation that
would impose any liability or obligation that would have or would reasonably be
expected to have a Material Adverse Effect. Except as disclosed in Section
3.2(t) of the Disclosure Schedule, the Company has not received from the United
Sates Customs Service any Notices of Investigation, Rate Advances Notices,
Proposed Rate Advance Notices, Liquidated Damages Notices, Requests for
Information, Notices of Audit or Compliance Assessment Review Initiation,
Marking Notices, or any of the notices relating to merchandise imported into the
United States for which the Company is the Importer of Record or Consignee.
Section 3.3 Representations And Warranties Of The Investor. The Investor
represents and warrants to the Company as follows:
(a) Organization, Standing And Power. The Investor is duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite power and authority to carry on its business as
now being conducted. The Investor is duly qualified or licensed to do business
and is in good standing in each jurisdiction in which the nature of its business
or the ownership or leasing of its properties makes such qualification or
licensing necessary, other than in such jurisdictions where the failure to be so
qualified or licensed (individually or in the aggregate) would not have a
material adverse effect on the Investor.
(b) Authority; Noncontravention. The Investor has all requisite
power and authority to enter into this Agreement and the Registration Rights
Agreement and to consummate the Contemplated Transactions. The execution and
delivery of this Agreement and the Registration Rights Agreement by the Investor
and the consummation by the Investor of the Contemplated Transactions have been
duly authorized by all necessary action on the part of the Investor. Each of
this Agreement and the Registration Rights Agreement has been duly executed and
delivered by, and constitutes the valid and binding obligation of, the Investor,
enforceable against the Investor in accordance with its terms, subject to the
effect of applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws affecting the rights of creditors generally and the effect of
general principles of equity. The execution and delivery of this Agreement and
the Registration Rights Agreement do not, and the consummation of the
Contemplated Transactions and compliance with the provisions hereof will not,
conflict with, or result in any breach or violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of or "put" right with respect to any
obligation or to loss of a benefit under, or result in the creation of any Lien
upon its or its Subsidiaries' properties or assets under, (i) the Investor's
Certificate of Formation or operating agreement, each as amended to date, (ii)
any loan or credit agreement, note, bond, mortgage, indenture, lease, contract
or other agreement, instrument, permit, concession, franchise or license
applicable to the Investor or any of its properties or assets which is material
to the Investor, each as amended to date or (iii) subject to the governmental
filings and other matters referred to in the following sentence, any judgment,
order, decree, statute, law,
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<PAGE> 24
ordinance, rule, regulation or arbitration award applicable to the Investor, or
its properties or assets, other than, in the case of clauses (ii) and (iii), any
such conflicts, breaches, violations, defaults, rights, losses or Liens that
individually or in the aggregate would not have a material adverse effect with
respect to the Investor or would not prevent or materially hinder or delay the
ability of the Investor to consummate the Contemplated Transactions. No consent,
approval, order or authorization of, or registration, declaration or filing
with, or notice to, any Governmental Entity or any other Person is required by
or with respect to the Investor or any Subsidiary of Investor in connection with
the execution and delivery of this Agreement or the consummation by the Investor
of any of the Contemplated Transactions, except for (i) the HSR Filing, (ii) the
filing with the SEC of such reports or schedules under the Exchange Act as may
be required in connection with this Agreement and the Contemplated Transactions,
(iii) such other consents, approvals, orders, authorizations, registrations,
declarations, filings or notices as may be required under the "takeover" or
"blue sky" laws of various states and (iv) such other consents, approvals,
orders, authorizations, registrations, declarations, filings or notices for
which the absence of such would not, individually or in the aggregate, have a
Material Adverse Effect.
(c) Information Supplied. None of the information supplied or to
be supplied by the Investor for inclusion or incorporation by reference in the
Proxy Statement will, at the date the Proxy Statement is first mailed to the
Company's stockholders or at the time of the Company Stockholders Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
(d) Litigation. There is no suit, action, proceeding,
investigation or inquiry pending or, to the Knowledge of the Investor,
Threatened against or affecting the Investor or any basis for any such suit,
action, proceeding, investigation or inquiry that, individually or in the
aggregate, would reasonably be expected to have a material adverse effect with
respect to the Investor or prevent or materially hinder or delay the ability of
the Company or the Investor to consummate the Contemplated Transactions, nor is
there any judgment, decree, injunction, rule or order of any Governmental Entity
or arbitrator outstanding against the Investor having, or which, in the future
would have, any such effect.
(e) Brokers. No broker, investment banker, financial advisor or
other Person, is entitled to any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the Contemplated Transactions
based upon arrangements made by or on behalf of the Investor.
(f) Investor Status. The Investor has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of its investment in the Series A Preferred Shares and the
Warrants (and the Series B Preferred Shares and Series C Preferred Shares
issuable upon exercise of the Series B Warrants or Series C Warrants, as
applicable) and is able to bear the economic risks of such investment.
(g) Accredited Investor. The Investor is an "accredited investor"
as defined in Rule 501(a) under the 1933 Act. The Investor is acquiring the
Series A Preferred Shares and the Warrants for its own account and not with a
view to any resale, distribution or other disposition
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of the Series A Preferred Shares or the Warrants (or the Series B Preferred
Shares or Series C Preferred Shares issuable upon exercise of the Series B
Warrants or the Series C Warrants, as applicable) in violation of the United
States securities laws.
(h) Financial Ability. The Investor has the financial capability
to consummate the Contemplated Transactions, and the Investor understands that
under the terms of this Agreement the Investor's obligations hereunder are not
in any way contingent or otherwise subject to (i) the Investor's consummation of
any financing arrangements or the Investor's obtaining any financing or (ii) the
availability of any financing to the Investor.
(i) No Other Agreements. Except for the Voting Agreements, the
Investor has made no other agreements, arrangements or understandings concerning
the Contemplated Transactions or the Company or any of its Subsidiaries with (a)
any director, officer, employee or consultant of the Company or any of its
Subsidiaries, or (b) any stockholder beneficially owning at least 5% of the
outstanding Common Shares.
(j) No Ownership. Other than the Initial Securities to be
purchased by Investor at the First Closing, neither Investor nor any of its
Affiliates will directly own any debt or equity securities of the Company (or
any securities convertible into such debt or equity securities) as of the First
Closing.
ARTICLE IV.
COVENANTS OF THE COMPANY
Section 4.1 No Solicitation.
(a) Subject to clause (b) below, from the date hereof through the
earlier of (i) the Second Closing or (ii) the Termination Date, the Company
shall not, nor shall it permit any of its Subsidiaries to, nor shall it
authorize (and shall use Best Efforts to prevent) any of its or its
Subsidiaries' Representatives to, directly or indirectly through another Person,
(i) solicit, initiate or encourage (including by way of furnishing non-public
information), or take any other action designed to facilitate, any inquiries or
the making of any proposals, inquiries or offers that would reasonably be
considered inconsistent with or would reasonably be expected to delay the
consummation of the Second Closing (each, an "Inconsistent Transaction
Proposal") or (ii) participate in any negotiations regarding any Inconsistent
Transaction Proposal. Without limiting the generality of the foregoing, any
proposal, inquiry or offer regarding the potential acquisition by any person or
"group" (as within the meaning of Section 13(d)(3) of the Exchange Act) of 10%
of the net assets, voting securities or other equity interests of the Company
shall be considered an Inconsistent Transaction Proposal, and any such
transaction shall be considered an "Inconsistent Transaction."
(b) Notwithstanding the provisions of clause (a) above, the
Company shall be permitted, at any time prior to the earlier of (x) the Second
Closing or (y) the Termination Date, to (i) solicit, initiate or encourage
(including by way of furnishing non-public information), or take any other
action designed to facilitate, an Inconsistent Transaction Proposal, (ii)
participate in any negotiations regarding any Inconsistent Transaction Proposal
and (iii) consummate an Inconsistent Transaction and only if it takes each of
the following actions (and the Company
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agrees to take and cause to be taken each of the actions described in (A), (B)
and (C) below if the Company takes or permits to be taken any actions described
in clauses (i), (ii) or (iii) of this Section 4.1(b)): (A) the Company takes all
such actions as may be necessary to ensure that Investor obtains the maximum
financial and other consideration, rights and benefits from any Inconsistent
Transaction that is consummated prior to the Second Closing that Investor could
have received if the Second Closing had been consummated prior to the
consummation of such Inconsistent Transaction (and the Investor had tendered the
Second Purchase Price), including, without limitation, making a cash payment to
Investor in an amount equal to (x) the amount of taxes incurred by Investor as a
result of such Inconsistent Transaction that would not have been incurred had
the Inconsistent Transaction not occurred prior to the Second Closing, and (y)
an amount sufficient to ensure that the consideration received by Investor is
equal, on an after-tax basis, to the amount Investor would have received if the
Second Closing had been consummated prior to the consummation of such
Inconsistent Transaction (the financial and other consideration, rights and
benefits to which Investor is entitled under this clause (A) being collectively
referred to as the "Make-Whole Consideration"), (B) the other parties to the
Inconsistent Transaction (and any successor entities thereto) acknowledge and
agree to be bound by the provisions of this Section 4.1(b), and (C) the Company
pays Investor a fee in the amount of $1,000,000 if an Inconsistent Transaction
is consummated. Without limiting the generality of the foregoing, the maximum
financial and other consideration, rights and benefits (on an after tax basis)
that Investor could have received will be deemed to include any such financial
and other consideration, rights and benefits (on an after tax basis) that
Investor could have received had the Second Closing occurred prior to the
consummation of the Inconsistent Transaction and had Investor taken all such
actions with respect to the Additional Securities as may be specified by
Investor to the Company (or its successor) ("Specified Actions") that Investor
would have been entitled to take prior to the consummation of the Inconsistent
Transaction (including, if specified by Investor, the exercise of any of the
Additional Warrants and conversion of any Preferred Stock that would have been
issuable upon exercise of such Additional Warrants). Following the occurrence of
the Inconsistent Transaction, Investor shall notify the Company (or its
successor) of the Specified Actions that should be taken into account in
calculating the amount and nature of the Make-Whole Consideration.
(c) Except in circumstances where the Company has specifically
complied with the terms and provisions of Section 4.1(b), neither the Board of
Directors of the Company nor any other committee thereof shall (i) withdraw or
modify, or propose publicly to withdraw or modify, in a manner adverse to the
Investor, the approval or recommendation by such Board of Directors of the
Contemplated Transactions, (ii) approve or recommend, or propose to approve or
recommend, any Inconsistent Transaction Proposal or (iii) cause the Company to
enter into any Inconsistent Transaction Agreement.
(d) In addition to the obligations of the Company set forth in
paragraphs (a) and (b) of this Section 4.1, the Company shall immediately (but
in any event within two business days) advise the Investor orally and in writing
of any request for information with respect to any Inconsistent Transaction or
the receipt of any Inconsistent Transaction Proposal, the material terms and
conditions of such initial request or Inconsistent Transaction Proposal and the
identity of the person making such request or Inconsistent Transaction Proposal.
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(e) Nothing contained in this Section 4.1 shall prohibit the
Company from taking and disclosing to its stockholders a position contemplated
by Rule 14e-2(a) promulgated under the Exchange Act if, in the good faith
judgment of the Board of Directors of the Company following consultation with
outside counsel, failure so to disclose would be a violation of its obligations
under applicable law; provided, however, that, neither the Company nor its Board
of Directors thereof shall withdraw or modify, or propose publicly to withdraw
or modify, its position with respect to this Agreement or the Contemplated
Transactions or approve or recommend, or propose publicly to approve or
recommend, an Inconsistent Transaction Proposal except as permitted in Section
4.1(c).
Section 4.2 Certain Agreements. The Company will immediately cease and
cause its Representatives to cease any and all existing activities, discussions
or negotiations with any parties conducted heretofore with respect to any
Inconsistent Transaction Proposal, and shall use its Best Efforts to cause such
parties in possession of confidential information about the Company or its
Subsidiaries that was furnished by or on behalf of the Company or its
Subsidiaries to return or destroy all such information in the possession of any
such party or in the possession of any attorney, agent, advisor or
representative of such party. Neither the Company nor any Subsidiary of the
Company will waive or fail to enforce any provision of any confidentiality
agreement entered into in connection with a potential Inconsistent Transaction
Proposal described in the first sentence of this Section 4.2 or standstill or
similar agreement to which it is a party without the prior written consent of
the Investor.
Section 4.3 Continuing Covenants. Without limiting the rights of the
holders of Preferred Stock under the Certificate of Designation, the Company
covenants that from and after the date of this Agreement and thereafter so long
as the Investor owns Common Shares and/or shares of Preferred Stock (including
shares underlying the Warrants) representing on an as converted basis, in the
aggregate, an amount at least equal to the Threshold Amount:
(a) The Company shall not issue or authorize for issuance any
shares of equity securities of the Company in violation of the provisions of the
Certificate of Designation;
(b) The Company shall use its Best Efforts to maintain its status
as a registrant under the Exchange Act that is not in default or contravention
of any requirement of the Exchange Act, except in the event that there is a
merger, sale of all or substantially all of the assets of the Company or similar
transaction involving the Company and its Subsidiaries and requiring approval of
the Board of Directors and stockholders of the Company (provided the Company
complies with its obligations under Section 4.1 in the case of any such
transaction occurring prior to the Second Closing);
(c) The Company shall use its Best Efforts to maintain the
listing and posting for trading of the Common Shares on Nasdaq, except in the
event that there is a merger, sale of all or substantially all of the assets of
the Company or similar transaction involving the Company and its Subsidiaries
and requiring approval of the Board of Directors and stockholders of the Company
(provided the Company complies with its obligations under Section 4.1 in the
case of any such transaction occurring prior to the Second Closing);
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(d) The Company shall at all times reserve and keep available,
solely for the issuance and delivery upon conversion of the Purchased
Securities, the number of Common Shares from time to time issuable upon
conversion of all of the Purchased Securities at the time outstanding. All
Common Shares issuable upon conversion of the Purchased Securities shall be duly
authorized and, when issued upon such conversion, shall be validly issued, fully
paid and nonassessable, and admitted for listing and quotation on Nasdaq.
Section 4.4 Governance.
(a) On the First Closing Date contemporaneously with the First
Closing, the Company shall immediately expand the size of the Board of Directors
to eight directors and, consistent with the terms of the Certificate of
Designation, appoint to the Board of Directors two individuals designated by the
Investor, as the holder of a majority of the outstanding shares of Preferred
Stock, to serve on the Board of Directors. Subject to their earlier resignation
or removal by the holders of a majority of the outstanding shares of the
Preferred Stock, the directors designated by such holders shall continue to
serve as directors until the next election of directors.
(b) Subject to the rights of the holders of a majority of the
Preferred Stock to designate and elect such directors as specified in the
Certificate of Designation (which holders may include the Investor and its
Affiliates), as long as the Investor and its Affiliates continue to own shares
of Preferred Stock and/or Common Shares (including any shares underlying the
Warrants) representing on an as converted basis, in the aggregate, an amount at
least equal to the Threshold Amount, the Investor and its Affiliates shall be
entitled to designate two individuals to be nominated to the Board of Directors
by the Company (or, if the size of the Board of Directors is increased to
include more than eight members, the Investor shall be entitled to designate one
additional individual to be nominated to the Board of Directors by the Company).
Any individual so designated by the Investor pursuant to this paragraph (b) is
referred to herein as a "Designee."
(c) As long as holders of Preferred Stock are entitled to
designate nominee(s) for election as director(s), such nominee(s) will be
elected to the Board of Directors by the holders of the Preferred Stock voting
separately as a class, as provided in the Certificate of Designation. If holders
of the Preferred Stock are not entitled to designate directors pursuant to the
Certificate of Designation but the Investor and its Affiliates are otherwise
entitled to designate individuals for nomination to the Board of Directors under
this Section 4.4, the Company shall nominate each such Designee for election as
a director as part of the management slate that is included in the proxy
statement (or consent solicitation or similar document) of the Company relating
to the election of directors, and shall provide the same support for the
election of each such Designee as it provides to other persons standing for
election as directors of the Company as part of the Company's management slate.
(d) Subject to the rights of the holders of a majority of the
Preferred Stock to designate and elect such directors as specified in the
Certificate of Designation (which holders may include the Investor and its
Affiliates) and subject to applicable law, in the event that any Designee shall
cease to serve as a director for any reason (other than the failure of the
stockholders of the Company to elect such person as director), the vacancy
resulting therefrom
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shall be filled by the remaining Designee(s) designated by the Investor (or if
no Designees then remain, or the remaining Designees are otherwise unable to
fill such vacancy, then such vacancy shall be filled by the persons and entities
entitled to designate individuals to fill such vacancies in accordance with
subparagraph (b) of this Section 4.4).
(e) For the avoidance of doubt, and subject to the prohibitions
on Investor and its Affiliates contained in Section 5.6 of this Agreement,
nothing in this Section 4.4 or elsewhere in this Agreement (other than as
provided in such Section 5.6) is intended to prohibit the Investor and its
Affiliates from nominating and electing a majority of the members of the Board
of Directors if the Investor and its Affiliates have actual ownership of voting
stock representing in the aggregate a majority of the total voting power.
(f) The Company will reimburse each Designee that serves as a
director for all reasonable costs and expenses (including travel expenses)
incurred in connection with such director's attendance at meetings of the Board
of Directors or any committee of the Board of Directors upon which such director
serves. The Company will not pay such director any other annual or other fees
for attending Board of Directors or committee meetings, except that following
the third anniversary of the date hereof, the Company shall make available and
issue to each such director options to purchase equity securities of the Company
on the same terms and conditions as are then available to the Company's other
non-employee directors. The Company shall indemnify and advance expenses to each
such director to the same extent it indemnifies and advances expenses to its
other directors pursuant to its Organizational Documents and applicable law.
(g) The right of Investor and its Affiliates to designate any
individuals to be nominated to the Board of Directors of the Company under this
Section 4.4 shall not apply during any period that the holders of a majority of
the Preferred Stock then outstanding are entitled to designate and elect, and
have designated and elected, directors, voting as a separate class, pursuant to
paragraph 6(i) of the Certificate of Designation.
ARTICLE V.
ADDITIONAL AGREEMENTS
Section 5.1 Preparation Of The Proxy Statement; Stockholder Meeting.
(a) If the NASD Determination Letter is not obtained on or prior
to May 5, 2000, then within seven (7) days thereafter, the Company shall prepare
and file with the SEC a Proxy Statement on Schedule 14A (the "Proxy Statement").
The Investor shall provide to the Company all information required by applicable
securities laws to be included in the Proxy Statement regarding the Investor and
its Affiliates and Designees (as described below in Section 5.1(b)). The Company
will use its Best Efforts to cause the Proxy Statement to be mailed to its
stockholders as promptly as practicable after any comments thereto issued by the
SEC are cleared by the SEC.
(b) If the NASD Determination Letter is not obtained on or prior
to May 5, 2000, then as promptly as practicable following the date of execution
of this Agreement, the Company will duly call, give notice of, convene and hold
a meeting of its stockholders (the
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"Company Stockholders Meeting") for the purpose of obtaining the approval of the
Company stockholders of the Company's issuance and sale of the Additional
Securities to the Investor by means of the affirmative vote of a majority of the
votes cast by holders of the outstanding Common Shares as required by Nasdaq
(such approval of the Company stockholders being referred to herein as the
"Company Stockholder Approval"). The Company will, through its Board of
Directors in accordance with the provisions of Section 3.2(q), recommend to its
stockholders that they vote in favor of the Company Stockholders Approval (the
"Board Recommendation"). Such recommendation, together with a copy of the
Houlihan Opinion, shall be included in the Proxy Statement. If the NASD
Determination Letter is not obtained as described above, the Company will use
its Best Efforts to hold such meeting as soon as practicable after the date of
execution of this Agreement.
Section 5.2 Best Efforts. Each of the parties agrees to use its Best
Efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable, to consummate, in the most expeditious manner
practicable, the Second Closing and the other Contemplated Transactions. The
Investor and the Company will use their Best Efforts and cooperate with one
another (i) in promptly determining whether any filings are required to be made
or consents, approvals, waivers, permits or authorizations are required to be
obtained under any applicable law or regulation or from any governmental
authorities or third parties in connection with the Contemplated Transactions,
(ii) in promptly making any such filings, in furnishing information required in
connection therewith, and (iii) in promptly seeking to obtain any such consents,
approvals, waivers, permits or authorizations, including any notification and
report forms and related material that it may be required to file with the
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice under the HSR Act. Each of the parties shall use its Best
Efforts to obtain an early termination of the applicable waiting period under
the HSR Act, and shall make any further filings or information submissions
pursuant thereto that may be necessary, proper or advisable.
Section 5.3 Public Announcements. The Investor and the Company will
consult with each other before issuing, and provide each other the opportunity
to review and comment upon, any press release or other public statements with
respect to the Contemplated Transactions, and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by applicable law, court process or by obligations pursuant to
any listing agreement with any national securities exchange or as are agreed
upon in advance. The parties agree that the initial press release or releases to
be issued with respect to the Contemplated Transactions shall be mutually agreed
upon prior to the issuance thereof.
Section 5.4 Takeover Statutes. If any "fair price," "moratorium,"
"control share acquisition" or other form of antitakeover statute or regulation
shall become applicable to the Contemplated Transactions, the Company and the
members of its Board of Directors, on the one hand, and the Investor and its
general partner, on the other hand, shall grant such approvals and take such
actions as are reasonably necessary so that the Contemplated Transactions may be
consummated as promptly as practicable on the terms contemplated hereby and
otherwise act to eliminate or minimize the effects of such statute or regulation
on the Contemplated Transactions.
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Section 5.5 Restrictive Legend. The Purchased Securities shall be
stamped or otherwise imprinted with the following legend and the Investor agrees
to transfer such Purchased Securities only in accordance therewith:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF
ANY STATE AND NEITHER THIS SECURITY, NOR ANY INTEREST THEREIN, MAY BE
OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED
OF EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (ii) AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND
ANY APPLICABLE STATE SECURITIES LAWS, SUCH EXEMPTION TO BE EVIDENCED BY
SUCH DOCUMENTATION AS THE ISSUER MAY REASONABLY REQUEST."
Section 5.6 Standstill. Investor agrees that until the earlier of March
29, 2005 and the date that Investor (together with its Affiliates) no longer
beneficially owns Common Shares and/or Preferred Shares (including shares
underlying the Warrants) representing on an as converted basis, in the
aggregate, at least equal to 10.0% of the Company's outstanding Common Shares
(making equitable adjustments for any conversions, reclassifications,
reorganizations, stock dividends, stock splits, reverse splits and similar
events which occur with respect to the Common Stock), neither Investor nor its
Affiliates will, directly or indirectly, without the prior written consent of a
majority of the Board of Directors of the Company (other than the nominees or
designees of the Investor) acquire, agree to acquire, make any proposal to
acquire or in any way participate in a "group" (within the meaning of Section
13(d)(3) of the Exchange Act) to do any of the foregoing, equity securities
(including convertible debt instruments and preferred stock but excluding the
shares of Series A Preferred Stock and the Warrants or any shares of capital
stock issuable upon the conversion or exercise thereof) of the Company
representing more than 30% of the voting power of all voting securities of the
Company on a fully diluted basis; provided, however, that the agreements of
Investor set forth in this Section 5.6 shall not apply (A) following the breach
by the Company of any of the covenants set forth in Sections 4.4(b) or 4.4(c)
(or, except as otherwise provided in the introductory clauses to Sections 4.4(b)
and 4.4(d) and in Section 4.4(g), the failure of the Designees of Investor to be
elected as directors during the period Investor has the right to designate any
individual for nomination to the Board of Directors pursuant to Section 4.4) in
which event such agreements of the Investor shall be of no further force and
effect; (B) in the event that any of the following events occurs (x) the
acquisition (whether by business combination, merger, tender or exchange offer,
or otherwise) by any "group" (within the meaning of Section 13(d)(3) of the
Exchange Act, and specifically excluding Donald A. Kurz and Stephen P. Robeck
(unless either Mr. Kurz or Mr. Robeck or any of their Affiliates acquire
additional Common Shares (or securities convertible into Common Shares), other
than through the grant or exercise of options approved by the Board of Directors
(or a committee thereof) and issued pursuant to an option plan of the Company,
representing 10% or more of the Common Shares held by Mr. Kurz or Mr. Robeck, as
applicable, as of the date hereof) and the Investor and its Affiliates) of 20%
of any class of equity securities of the Company or of substantially all of the
assets of the Company, (y) the solicitation of proxies by
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any Person or group (other than Investor and its Affiliates) to engage in any of
the transactions described in (x), or (z) the public announcement of any of the
foregoing, or of any intent to engage in the foregoing, in which event such
agreements of the Investor shall be of no further force or effect; provided that
if any transaction described in clause (y) or (z) above is definitively
abandoned prior to its consummation (or, in the case of a tender or exchange
offer, the Person making such tender or exchange offer does not acquire more
than 20% of any class of equity securities of the Company), then such agreements
shall thereupon be reinstated, subject to further suspension or reinstatement in
the event of the occurrence of further events described in clauses (x), (y) or
(z) of this proviso, respectively; and (C) (x) to the extent of any sales or
transfers of Common Shares prior to the earlier of the Second Closing or the
termination date of the applicable Voting Agreement, by any of the parties to
the Voting Agreements (other than the Investor), or any of their transferees, to
any Person not subject to the Voting Agreements, in which case the Investor
shall be permitted to acquire and/or solicit for the acquisition of Common
Shares up to the aggregate amount of any such sales or transfers, or (y) upon
the material breach of the Voting Agreements by any of the parties thereto
(other than the Investor) prior to the Second Closing or the termination date of
the applicable Voting Agreement, (1) upon which material breach, if arising from
the failure of the breaching party to vote such party's shares in accordance
with the provisions of the Voting Agreements and the Investor is unable to
exercise its proxy with respect to such shares, the Investor shall be entitled
to purchase the number of Common Shares equal to the percentage of ownership of
the outstanding capital stock of the Company owned by such breaching party or
parties immediately following the date of this Agreement (or as of the date any
such breaching party acquired its Common Shares if the breaching party is a
transferee of a party to the Voting Agreements which transferee agreed to bound
by the Voting Agreements), or (2) upon which material breach, if arising from
the sale or other transfer of Common Shares by the breaching party in violation
of the provisions of the Voting Agreements, the Investor shall be entitled to
purchase the number of Common Shares equal to the aggregate amount of any such
sales or transfers.
Section 5.7 Enforceability Opinion. The Company will use its Best
Efforts to deliver to Investor promptly following the First Closing Date an
opinion of the Company's Delaware counsel that this Agreement, the Registration
Rights Agreement and the Warrants constitute the legally valid and binding
obligations of the Company and are enforceable under Delaware law.
ARTICLE VI.
CLOSING DELIVERIES
Section 6.1 Conditions To The Obligation Of The Investor To Effect The
First Closing. The obligation of the Investor to effect the transactions to be
effected by it at the First Closing shall be subject to the satisfaction, or
waiver, on or prior to the First Closing Date of the following conditions:
(a) Representations And Warranties. The representations and
warranties of the Company set forth in this Agreement, shall be true and correct
in all respects, in each case as of the date of this Agreement. The Investor
shall have received a certificate signed on behalf of the Company by the chief
executive officer and the secretary of the Company, dated as of the First
Closing Date to such effect.
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(b) Performance Of Obligations Of The Company. The Company shall
have performed the obligations required to be performed by it under this
Agreement at or prior to the First Closing Date in all material respects, and
the Investor shall have received a certificate signed on behalf of the Company
by the chief executive officer and the secretary of the Company, dated as of the
date of the First Closing Date to such effect.
(c) Consents, Etc. Except for the NASD Determination Letter, the
Company Stockholder Approval and the expiration or early termination of the
applicable waiting period under the HSR Act, the Investor has received evidence,
in form and substance reasonably satisfactory to it, that such licenses,
permits, consents, approvals, authorizations, qualifications and orders of
Governmental Entities and other third parties as are necessary in connection
with the transactions contemplated hereby (including those to be consummated at
the Second Closing) have been obtained.
(d) Delivery Of Certain Documents. The Company shall have
delivered to the Investor (i) a certificate dated as of the First Closing Date
executed by an officer of the Company, attaching true and correct copies of the
Certificate of Incorporation and bylaws of the Company and the resolutions of
its Board of Directors made in connection with the Agreement and the
Contemplated Transactions, and certifying as to the genuineness and authenticity
of the signature, and the accuracy of the title, of each officer of the Company
executing this Agreement or any document delivered at the First Closing, (ii)
the legal opinion of Riordan and McKinzie dated as of the First Closing Date in
substantially the form attached as Exhibit H hereto and (iii) the legal opinion
of the General Counsel of the Company dated as of the First Closing Date in
substantially the form attached as Exhibit I hereto.
(e) Delivery And Performance Of Agreements. The Registration
Rights Agreement and the Initial Warrants shall have been duly executed and
delivered by the Company on the First Closing Date. The Voting Agreements shall
have been duly executed and delivered by the stockholders of the Company listed
on the signature page thereof on the First Closing Date.
(f) Certificate Of Designation. The Company shall have filed with
the Secretary of State of the State of Delaware the Certificate of Designation
and such instrument shall have become effective as of the First Closing Date.
(g) Board Election. The Board of Directors of the Company shall
have been expanded to eight (8) members and the Investor's two (2) nominees to
the Board of Directors shall have been elected, effective as of the First
Closing.
(h) Stock Certificate. The Company shall have delivered a duly
executed stock certificate evidencing the Initial Preferred Shares registered in
the name of Investor.
(i) Delivery of the Initial Warrants. The Company shall have
delivered duly executed Initial Warrants registered in the name of the Investor.
(j) Receipt. The Company shall have executed and delivered a
receipt confirming receipt of the Initial Purchase Price.
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<PAGE> 34
Section 6.2 Conditions To The Obligation Of The Company To Effect The
First Closing. The obligation of the Company to effect the transactions to be
effected by it at the First Closing shall be subject to the satisfaction, or
waiver, on or prior to the First Closing Date of the following conditions:
(a) Representations And Warranties. The representations and
warranties of the Investor set forth in this Agreement shall be true and correct
in all respects, in each case as of the date of this Agreement. The Company
shall have received a certificate signed on behalf of the Investor by an
authorized officer of the Investor, dated as of the date of the First Closing
Date to such effect.
(b) Performance Of Obligations Of The Investor. The Investor
shall have performed the obligations required to be performed by it under this
Agreement at or prior to the First Closing Date in all material respects, and
the Company shall have received a certificate signed on behalf of the Investor
by an authorized officer of the Investor, dated as of the date of the First
Closing Date to such effect.
(c) Delivery Of Certain Documents. The Investor shall have
delivered to the Company a certificate dated as of the First Closing Date
executed by an authorized officer of the Investor, attaching true and correct
copies of the Certificate of Formation of Investor, as amended to date, and the
resolutions of its managing member made in connection with this Agreement and
the Contemplated Transactions, and certifying as to the genuineness and
authenticity of the signature, and the accuracy of the title, of the authorized
officer of the Investor executing this Agreement or any document delivered at
the First Closing Date.
(d) Delivery And Performance Of Agreements. The Registration
Rights Agreement shall have been duly executed and delivered by the Investor,
and the Initial Purchase Price shall have been delivered to the Company pursuant
to Section 2.2.
(e) Initial Purchase Price. The Initial Purchase Price shall have
been delivered to the Company pursuant to Section 2.2.
(f) Receipt. Investor shall have executed and delivered a receipt
confirming Investor's receipt of the certificates evidencing the Initial
Preferred Shares and the Initial Warrants.
Section 6.3 Conditions To The Investor's Obligation To Effect The Second
Closing. The obligation of the Investor to effect the transactions to be
effected by it at the Second Closing shall be subject to the satisfaction, or
waiver, on or prior to the Second Closing Date of the following conditions:
(a) HSR Act. The waiting period (and any extension thereof)
applicable to the HSR Act shall have been terminated or shall have expired.
(b) NASD Determination Letter or Company Stockholder Approval.
Either (i) the NASD Determination Letter shall have been obtained in form and
substance reasonably satisfactory to the Investor or (ii) the Company
Stockholder Approval shall have been obtained.
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<PAGE> 35
(c) Performance Of Obligations Of The Company. The Company shall
have performed the obligations required to be performed by it under this
Agreement at or prior to the Second Closing Date in all material respects, and
the Investor shall have received a certificate signed on behalf of the Company
by the chief executive officer and the secretary of the Company, dated as of the
date of the Second Closing Date to such effect.
(d) Delivery Of Certain Documents. The Company shall have
delivered to the Investor a certificate dated as of the Second Closing Date
executed by an officer of the Company, attaching a true and correct copy of the
Certificate of Incorporation, as amended to date.
(e) No Injunctions Or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of any of the Contemplated Transactions shall be in effect;
provided, however, that the parties hereto shall use their Best Efforts to have
any such injunction, order, restraint or prohibition vacated.
(f) Nasdaq Listing. The Company shall not have received any
notice (which notice has not subsequently been withdrawn) that the Common Shares
will not be eligible or approved for listing or quotation on Nasdaq as a result
of the Contemplated Transactions.
(g) Stock Certificate. The Company shall have delivered a duly
executed Stock Certificate evidencing the Additional Preferred Shares registered
in the name of Investor.
(h) Delivery of the Additional Warrants. The Company shall have
delivered duly executed Additional Warrants registered in the name of Investor.
(i) Receipt. The Company shall have executed and delivered a
receipt confirming receipt of the Second Purchase Price.
Section 6.4 Conditions to the Company's Obligation to Effect The Second
Closing.
(a) HSR Act. The waiting period (and any extension thereof)
applicable to the HSR Act shall have been terminated or shall have expired.
(b) NASD Determination Letter or Company Stockholder Approval.
Either (i) the NASD Determination Letter shall have been obtained in form and
substance reasonably satisfactory to the Company or (ii) the Company Stockholder
Approval shall have been obtained.
(c) Performance Of Obligations Of The Investor. The Investor
shall have performed the obligations required to be performed by it under this
Agreement at or prior to the Second Closing Date in all material respects, and
the Company shall have received a certificate signed on behalf of the Investor
by an authorized officer of the Investor, dated as of the date of the Second
Closing Date to such effect.
(d) No Injunctions Or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of any of the Contemplated
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<PAGE> 36
Transactions shall be in effect; provided, however, that the parties hereto
shall use their Best Efforts to have any such injunction, order, restraint or
prohibition vacated.
(e) Second Purchase Price. The Second Purchase Price shall have
been delivered to the Company pursuant to Section 2.2.
(f) Receipt. Investor shall have executed and delivered a receipt
confirming Investor's receipt of the certificates evidencing the Additional
Preferred Shares and the Additional Warrants.
ARTICLE VII.
TERMINATION
Section 7.1 Termination of Second Closing by Either Party. In the event
that either (a) the waiting period (and any extension thereof) applicable to the
HSR Act shall not have terminated or otherwise expired on or prior to August 31,
2000, or (b) there exists an injunction or restraint described in Section 6.3(e)
or Section 6.4(c) of this Agreement, which injunction or restraint the parties
hereto have been unable to have removed or terminated on or before August 31,
2000 by using their Best Efforts as required by Section 5.2 of this Agreement
(and provided that such injunction or restraint has not been effected by the
party that would otherwise terminate this Agreement pursuant to this Section
7.1), then either party may elect to terminate such party's obligations to
consummate the Second Closing by written notice to the other on or within five
(5) business days of such date; provided, that a party may not exercise such
termination right if it is in material breach of its obligations under this
Agreement. In the event of such termination by either party pursuant to this
Section 7.1, the remaining terms of this Agreement (including without limitation
Article VIII) shall continue to be in full force and effect, and no party shall
be liable to the other party for any amount as a result of such termination,
except as provided in Section 9.5 of this Agreement.
Section 7.2 Termination of Second Closing by Investor. If, after the
occurrence of the First Closing, (i) the Board of Directors withdraws or
adversely changes the Board Recommendation, or takes any similar action, or (ii)
the Company fails for any reason to consummate the Second Closing on or before
September 30, 2000 (other than as a result only of (a) the failure of the
waiting period (and any extension thereof) applicable to the HSR Act to
terminate or otherwise expire prior to such time, or (b) the existence of any
injunction or restraint described in Section 6.4(c) of this Agreement) and
provided that the Investor is not then in material breach of its obligations
under this Agreement, then Investor may elect to terminate its obligations to
acquire the Additional Securities and to consummate the Second Closing, by
written notice to the Company. Notwithstanding the foregoing, in the event that
the Company determines to pursue an Inconsistent Transaction Proposal, and as a
result thereof, fails to consummate the Second Closing on or before September
30, 2000, Investor shall retain the right to terminate its obligations as
described herein, without limiting Investor's rights under Section 4.1 with
respect to the Inconsistent Transaction that is the subject of such Inconsistent
Transaction Proposal. In the event that the Investor elects to exercise its
termination right as provided in this Section 7.2, then the Company shall pay to
Investor a cash fee of $1,000,000, as well as all fees and expenses to be paid
to Investor as provided in Section 9.5 of this Agreement. In the event of such
termination by Investor pursuant to this Section 7.2, the remaining terms of
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<PAGE> 37
this Agreement (including without limitation Article VIII) shall continue to be
in full force and effect, and no party shall be liable to the other party for
any amount as a result of such termination, except as provided in the preceding
sentence.
Section 7.3 Termination Date. The date that either the Company or
Investor terminates the parties' obligations to consummate the Second Closing
pursuant to this Article VII, if at all, shall be deemed to be the "Termination
Date".
ARTICLE VIII.
INDEMNIFICATION; REMEDIES
Section 8.1 Survival; Right To Indemnification Not Affected By
Knowledge. All representations and warranties in this Agreement, the Disclosure
Schedule and in any certificate or document delivered pursuant to this Agreement
shall survive until June 30, 2001; provided, however, that the representations
and warranties in Sections 3.2(c), 3.2(d), 3.2(k) and 3.3(b) shall survive in
perpetuity and the representations and warranties in Section 3.2(j) shall
survive until 30 days following the expiration of the applicable statute of
limitations; further, provided, that this Section 8.1 shall not limit any
covenant, restriction, obligation or other agreement of the parties set forth or
contemplated herein, each of which shall survive for its respective term set
forth in this Agreement. The right to indemnification, payment of Damages or
other remedy based on such representations, warranties, covenants, restrictions,
obligations and agreements will not be affected by any investigation conducted
with respect to, or any Knowledge acquired (or capable of being acquired) at any
time, whether before or after the execution and delivery of this Agreement or
the applicable Closing Date, with respect to the accuracy or inaccuracy of or
compliance with, any such representation, warranty, covenant, or obligation. The
waiver of any condition based on the accuracy of any representation or warranty,
or on the performance of or compliance with any covenant or obligation, will not
affect the right to indemnification, payment of Damages, or other remedy based
on such representations, warranties, covenants, and obligations.
Section 8.2 Indemnification And Payment Of Damages By The Company. The
Company will indemnify and hold harmless the Investor and its Representatives,
partners, controlling persons, and Affiliates and each of their respective
Representatives (collectively, the "Company Indemnified Persons") from and
against, and will pay to the Company Indemnified Persons the amount of, any and
all losses, liabilities, claims, damages, or expenses (including costs of
investigation, defense, litigation and reasonable attorneys' fees), whether or
not involving a third-party claim (collectively, "Damages"), arising, directly
or indirectly, from or in connection with:
(a) any breach of any representation or warranty made by the
Company in this Agreement, the Disclosure Schedule or any other certificate or
document delivered by the Company pursuant to this Agreement, provided that
notice of such breach is given to the Company pursuant to Section 8.5 or 8.6, as
applicable, on or prior to June 30, 2001 (with respect to the representations
and warranties other than those in Sections 3.2(c), 3.2(d), 3.2(j) or 3.2(k)) or
the expiration of the survivability of the representation or warranty in Section
3.2(j) (it being understood that there shall be no time limitation for claims
based on breaches of the
33
<PAGE> 38
F representations and warranties in Sections 3.2(c),
3.2(d) or 3.2(k) or notices in respect of such claims); or
(b) any breach by the Company of any covenant, restriction,
obligation or agreement of the Company in this Agreement.
Section 8.3 Indemnification And Payment Of Damages By The Investor. The
Investor will indemnify and hold harmless the Company, its respective
Representatives, and Affiliates and each of their respective Representatives
(collectively, the "Investor Indemnified Persons"), and will pay to the Company
the amount of any Damages arising, directly or indirectly, from or in connection
with:
(a) any breach of any representation or warranty made by the
Investor in this Agreement or in any certificate or document delivered by the
Investor pursuant to this Agreement, provided that notice of such breach is
given to the Investor pursuant to Section 8.5 or 8.6, as applicable, on or prior
to June 30, 2001 (with respect to the representations and warranties other than
those in Section 3.3(b)) (it being understood that there shall be no time
limitation for claims based on breaches of the representations and warranties in
Section 3.3(b) or notices in respect of such claims); or
(b) any breach by the Investor of any covenant, restriction,
obligation or agreement of the Investor in this Agreement.
Section 8.4 Limitation On Amount.
(a) The Company will have no liability (for indemnification or
otherwise) with respect to the matters described in clause (a) of Section 8.2
until the total of all Damages attributable to the Company with respect to such
matters taken as a whole exceeds $125,000 (the "Threshold"), after which the
amount of such Damages in excess of such Threshold shall be recoverable
hereunder up to a maximum recovery equal to the entire amount of the Purchase
Price paid by the Investor to the Company hereunder. The Threshold shall be
increased to $250,000 on the date that the Second Closing is consummated, if at
all (or the Termination Date, if applicable) (and, to the extent an
indemnification payment has been made prior to such date, the indemnified party
shall remit, within five (5) business days thereafter, to the indemnifying party
any amount that the indemnifying party paid to the indemnified party that it
would not have been required to pay if the Threshold had been $250,000 at the
time of such payment). Notwithstanding the foregoing, this Section 8.4(a) will
not apply to any breach of any of the Company's representations and warranties
set forth in Section 3.2(o), and the Company will be liable for all Damages with
respect to such breaches.
(b) The Investor will have no liability (for indemnification or
otherwise) with respect to the matters described in clause (a) of Section 8.3
until the total of all Damages incurred by the Company with respect to such
matters taken as a whole exceeds the Threshold, after which the amount of such
Damages in excess of the Threshold shall be recoverable hereunder up to a
maximum recovery equal to $10,000,000. Notwithstanding the foregoing, this
Section 8.4(b) will not apply to any breach of any of Investor's representations
and warranties set
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<PAGE> 39
forth in Section 3.3(e), and the Investor will be liable for all Damages with
respect to such breaches.
Section 8.5 Procedure For Indemnification -- Third Party Claims.
(a) Promptly after receipt by an Indemnified Person described in
Section 8.2 or 8.3 of notice of the commencement of any Proceeding against it,
including reasonable details as to the basis for such claim (to the extent
within the Knowledge of the Indemnified Person), such Indemnified Person will,
if a claim is to be made against an indemnifying party under such Section, give
notice to the indemnifying party of the commencement of such claim, but the
failure to notify the indemnifying party will not relieve the indemnifying party
of any liability that it may have to any Indemnified Person, except to the
extent that the indemnifying party demonstrates that the defense of such action
is prejudiced by the Indemnified Person's failure to give such notice.
(b) If any Proceeding referred to in Section 8.5(a) is brought
against an Indemnified Person and it gives notice to the indemnifying party of
the commencement of such Proceeding, the indemnifying party will be entitled to
participate in such Proceeding and, to the extent that it wishes (unless the
indemnifying party fails to provide reasonable assurance to the Indemnified
Person of its financial capacity to defend such Proceeding and provide
indemnification with respect to such Proceeding), to assume the defense of such
Proceeding with counsel reasonably satisfactory to the Indemnified Person and,
after notice from the indemnifying party to the Indemnified Person of its
election to assume the defense of such Proceeding, the indemnifying party will
not, as long as it diligently conducts such defense, be liable to the
Indemnified Person under this Article 8 for any fees of other counsel or any
other expenses with respect to the defense of such Proceeding, in each case
subsequently incurred by the Indemnified Person in connection with the defense
of such Proceeding, other than reasonable costs of investigation; provided that
if the indemnifying party is also a party to such Proceeding and, under
applicable standards of professional conduct, joint representation of the
Indemnified Person and the indemnifying party would be inappropriate, then the
Indemnified Person shall be entitled to retain separate counsel whose fees and
expenses shall be paid by the indemnifying party. If the indemnifying party
assumes the defense of a Proceeding, (i) no compromise or settlement of such
claims may be effected by the indemnifying party without the Indemnified
Person's consent not to be unreasonably withheld unless (A) there is no finding
or admission of any violation of Legal Requirements or any violation of the
rights of any Person and no effect on any other claims that may be made against
the Indemnified Person, and (B) the sole relief provided is monetary damages
that are paid in full by the indemnifying party; and (ii) the Indemnified Person
will have no liability with respect to any compromise or settlement of such
claims effected without its consent. If notice is given to an indemnifying party
of the commencement of any Proceeding and the indemnifying party does not,
within ten (10) days after the Indemnified Person's notice is given, give notice
to the Indemnified Person of its election to assume the defense of such
Proceeding, the indemnifying party will be bound by any determination made in
such Proceeding or any compromise or settlement effected by the Indemnified
Person. The Indemnified Person shall provide its reasonable cooperation with the
indemnifying party in connection with the defense of a proceeding assumed by the
indemnifying party hereunder, including the provision of information reasonably
requested by the indemnifying party.
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(c) The Company and the Investor hereby consent to the
non-exclusive jurisdiction of any court in which a Proceeding is brought against
any Indemnified Person for purposes of any claim that an Indemnified Person may
have under this Agreement with respect to such Proceeding or the matters alleged
therein, and agree that process may be served on the Company and the Investor
with respect to such a claim anywhere in the world.
Section 8.6 Procedure For Indemnification -- Other Claims. A claim for
indemnification for any matter not involving a third-party claim may be asserted
by notice to the party from whom indemnification is sought.
Section 8.7 Remedies Exclusive. The remedies provided in this Article
VIII shall be the exclusive remedies of the parties hereto in connection with
any breach of a representation or warranty contained herein except in the case
of actual fraud, willful misconduct or gross negligence, with respect to which
the remedies shall not be limited to those set forth herein.
ARTICLE IX.
GENERAL PROVISIONS
Section 9.1 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given when received if delivered personally, on the next Business Day if sent by
overnight courier for next Business Day delivery (providing proof of delivery),
when confirmation is received, if sent by facsimile or in 5 Business Days if
sent by U.S. registered or certified mail, postage prepaid (return receipt
requested) to the other parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Investor, to:
Crown Acquisition Partners, LLC
660 Madison Avenue, 15th Floor
New York, New York
Attn: Kenneth Squire
Facsimile: (212) 207-8001
with a copy to:
Latham & Watkins
633 West Fifth Street, Suite 4000
Los Angeles, California 90071-2007
Attn: W. Alex Voxman
Facsimile: (213) 891-8763
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<PAGE> 41
(b) if to the Company, to:
Equity Marketing, Inc.
6330 San Vicente Blvd.
Los Angeles, California 90048
Attn: Leland P. Smith
Facsimile: (323) 932-4488
with a copy to:
Riordan & McKinzie
300 S. Grand Avenue, 29th Floor
Los Angeles, California 90071
Attn: Thomas M. Cleary
Facsimile: (213) 229-8550
Section 9.2 Interpretation. A reference made in this Agreement to an
Article, Section, Exhibit or Schedule, shall be to an Article or Section of, or
an Exhibit or Schedule to, this Agreement unless otherwise indicated. The table
of contents and headings contained in this Agreement are for reference purposes
only and shall not affect the meaning or interpretation of this Agreement.
Whenever the words "include," "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation."
Section 9.3 Counterparts. This Agreement may be executed in one or more
counterparts (which may be by facsimile), all of which shall be considered one
and the same agreement and shall become effective when one or more counterparts
have been signed by each of the parties and delivered to the other parties.
Section 9.4 Entire Agreement; No Third Party Beneficiaries. This
Agreement, the Registration Rights Agreement and the Confidentiality Agreement
together constitute the entire agreement between the parties with respect to the
subject hereof and thereof, and supersede all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter of such agreements. Except as explicitly provided in Sections 8.2
and 8.3, this Agreement is not intended to confer upon any Person other than the
parties any rights or remedies.
Section 9.5 Costs And Expenses. All costs and expenses in connection
with the negotiation, preparation, execution, delivery and performance of this
Agreement and the Contemplated Transactions (including, irrespective of whether
the Closings shall have occurred, costs incurred by the Investor and its
Affiliates in connection with an investment in the Company, which include,
without limitation, all reasonable attorney fees and other consultant and
advisor fees, including all fees and expenses arising from any due diligence
investigation and reasonable fees of brokers, investment bankers or financial
advisors, and all filing fees under the HSR Act) and all reasonable
out-of-pocket expenses incurred by Investor and its Affiliates (excluding,
unless the Company otherwise agrees, fees of brokers, investment bankers,
consultants and financial and other advisors) in connection with Investor and
its Affiliates providing strategic advice to the Company, in each case whether
incurred prior to or after the
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consummation of the Contemplated Transactions, shall be borne by the Company,
and the Company shall reimburse the Investor for all such costs and expenses (i)
no later than 30 days following the First Closing Date (with respect to costs
and expenses incurred through the First Closing), and (ii) for all other costs
and expenses, within 30 days following receipt by the Company from Investor or
its Affiliates of an invoice for such costs and expenses (together with such
documentation as may reasonably be requested by the Company).
Section 9.6 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
Section 9.7 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise, by any of the parties without the prior
written consent of the other parties. Any assignment in violation of the
preceding sentence shall be void. Subject to the preceding two sentences, this
Agreement will be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
Section 9.8 Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the State of Delaware
or of the United States located in the State of Delaware in the event any
dispute arises out of this Agreement or any of the Contemplated Transactions,
and each party agrees (a) it will not attempt to deny or defeat personal
jurisdiction or venue in any such court by motion or other request for leave
from any such court and (b) it will not bring any action relating to this
Agreement or any of the Contemplated Transactions in any court other than any
such court.
Section 9.9 Severability. Whenever possible, each provision or portion
of any provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein, so long as the economic and legal substance of the
Contemplated Transactions are not affected in a manner materially adverse to any
party hereto.
Section 9.10 Further Assurances. The parties agree (i) to furnish upon
request to each other such further information, (ii) to execute and deliver to
each other such other documents, and (iii) to do such other acts and things, all
as the other party may reasonably request for the purpose of carrying out the
intent of this Agreement and the documents referred to in this Agreement.
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Section 9.11 Construction. In entering into this Agreement, each party
represents and warrants that such party does so freely and voluntarily, after
having had the opportunity to meet and confer with such party's respective
attorneys regarding the contents and legal effect of this Agreement. Each party
represents and warrants that such party has full power and authority to enter
into and execute this Agreement. Every covenant, term, and provision of this
Agreement shall be construed simply according to its fair meaning and not
strictly for or against any party. In the event any claim is made by any party
relating to any conflict, omission, or ambiguity in this Agreement, no
presumption or burden of proof or persuasion shall be implied by virtue of the
fact that this Agreement was prepared by or at the request of a particular party
or such party's counsel.
Section 9.12 Amendment. This Agreement may be amended by mutual
agreement of the parties at any time, but only pursuant to an instrument in
writing duly executed on behalf of each of the Company and the Investor.
(Signature page follows)
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<PAGE> 44
IN WITNESS WHEREOF, the Investor and the Company have caused this
Agreement to be signed by their respective officers hereunto duly authorized,
all as of the date first written above.
CROWN ACQUISITION PARTNERS, LLC
By: /s/ JEFFREY S. DEUTSCHMAN
---------------------------------------
Name: Jeffrey S. Deutschman
Its: Manager
EQUITY MARKETING, INC.
By: /s/ DONALD A. KURZ
---------------------------------------
Name: Donald A. Kurz
Its: Chairman of the Board and Chief
Executive Officer
40
<PAGE> 1
EXHIBIT 10.1
REGISTRATION RIGHTS AGREEMENT
BETWEEN
CROWN ACQUISITION PARTNERS, LLC
AND
EQUITY MARKETING, INC.
DATED AS OF MARCH 29, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Section 1. Definitions...................................................................1
Section 2. Demand Registration...........................................................3
(a) Requests for Registration by Holders..........................................3
(b) Filing and Effectiveness......................................................4
(c) Priority on Demand Registration...............................................4
(d) Postponement of Demand Registration...........................................5
Section 3. Piggyback Registration........................................................5
(a) Right to Piggyback............................................................5
(b) Priority on Piggyback Registrations...........................................5
Section 4. Restrictions on Sale by Holders...............................................6
Section 5. Registration Procedures.......................................................6
Section 6. Registration Expenses........................................................11
Section 7. Indemnification..............................................................12
(a) Indemnification by the Company...............................................12
(b) Indemnification by Holders...................................................12
(c) Conduct of Indemnification Proceedings.......................................13
(d) Contribution.................................................................13
Section 8. Underwritten Registrations...................................................14
Section 9. Other Agreements.............................................................14
Section 10. Miscellaneous................................................................14
(a) Remedies.....................................................................14
(b) Amendments and Waivers.......................................................14
(c) Notices......................................................................15
(d) Merger or Consolidation of the Company.......................................15
(e) Successors and Assigns.......................................................15
(f) Counterparts.................................................................16
(g) Headings.....................................................................16
(h) Governing Law................................................................16
(i) Severability.................................................................16
(j) Entire Agreement.............................................................16
</TABLE>
<PAGE> 3
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and
entered into as of March 29, 2000, by and between Equity Marketing, Inc., a
Delaware corporation (the "Company") , Crown Acquisition Partners, LLC, a
Delaware limited liability company ("Investor"), and each other person who
becomes a Holder hereunder.
RECITALS
WHEREAS, pursuant to a Securities Purchase Agreement dated as of
even date hereof (the "Securities Purchase Agreement") between the Company and
the Investor, the Investor is purchasing shares of Series A Senior Cumulative
Participating Convertible Preferred Stock of the Company, par value $0.001 per
share (including any securities into which such preferred stock may be or has
been converted or exchanged in any merger, consolidation or reclassification,
the "Series A Preferred Stock") and warrants (the "Warrants") to purchase shares
of Series B Senior Cumulative Participating Convertible Preferred Stock of the
Company, par value $.001 per share (including any securities into which such
preferred stock may be or has been converted or exchanged in any merger,
consolidation or reclassification, the "Series B Preferred Stock") and shares of
Series C Senior Cumulative Participating Convertible Preferred Stock of the
Company, par value $.001 per share (including any securities into which such
preferred stock may be or has been converted or exchanged in any merger,
consolidation or reclassification, the "Series C Preferred Stock", and, together
with the Series A Preferred Stock, and the Series B Preferred Stock, the
"Preferred Stock"), with each share of Preferred Stock being convertible into
Common Stock of the Company, par value $0.001 per share (the "Common Stock") ;
and
WHEREAS, the Company's shares of Common Stock are registered with
the SEC and quoted on the Nasdaq Stock Market; and
WHEREAS, to induce Investor to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide to the Holders (as defined
below) certain registration rights under the Securities Act; and
WHEREAS, the execution and delivery of this agreement by the
parties hereto is a condition to the closing of the transactions contemplated by
the Securities Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual promises and
agreements set forth herein and in the Securities Purchase Agreement, and other
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
Section 1. Definitions. For purposes of this Agreement, the following
capitalized terms have the following meanings:
"Affiliates:" Any person that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under common control
with, such first Person.
<PAGE> 4
"Common Stock:" The Common Stock of the Company and any
securities into which such common stock may be or has been converted or
exchanged in any merger, consolidation or reclassification.
"Holders:" The Investor and its Affiliates that from time to time
own Registrable Securities and each of their permitted transferees pursuant to
Section 10(e) who agree to be bound by the provisions of this Agreement in
accordance with said section.
"Person:" An individual or a corporation, partnership, a limited
liability company, joint venture, association, trust, unincorporated
organization or other entity.
"Preferred Stock:" The Preferred Stock issued pursuant to the
terms of the Securities Purchase Agreement, including the Preferred Stock to be
issued upon the exercise of the Warrants issued pursuant thereto.
"Prospectus:" The prospectus included in any Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by such
Registration Statement and all other amendments and supplements to such
prospectus, including posteffective amendments, and all material incorporated by
reference or deemed to be incorporated by reference in such prospectus.
"Registrable Securities:" All shares of Common Stock issued or
issuable upon the conversion of the Preferred Stock into Common Stock (including
Preferred Stock acquired upon exercise of the Warrants), excluding shares of
Common Stock that have been disposed of by a Holder pursuant to a Registration
Statement relating to the sale thereof that has become effective under the
Securities Act or pursuant to Rule 144 or Rule 145 under the Securities Act.
Registrable Securities shall also include any shares of the Common Stock or
other securities (or shares of Common Stock underlying such other securities)
that may be received by the Holders (x) as a result of a stock dividend on or
stock split of Registrable Securities or (y) on account of Registrable
Securities in a recapitalization of or other transaction involving the Company.
"Registration Statement:" Any registration statement of the
Company under the Securities Act that covers any of the Registrable Securities
pursuant to the provisions of this Agreement, including the related Prospectus,
any preliminary prospectus, all amendments and supplements to such registration
statement (including post-effective amendments), all exhibits and all material
incorporated by reference or deemed to be incorporated by reference in such
registration statement.
"SEC:" The Securities and Exchange Commission.
"Securities Act:" The Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Underwritten Offering:" A distribution, registered pursuant to
the Securities Act, in which securities of the Company are sold to the public
through one or more underwriters.
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<PAGE> 5
Section 2. Demand Registration.
(a) Requests for Registration by Holders. At any time and from
time to time after the earlier to occur of (i) the Second Closing Date (as
defined in the Securities Purchase Agreement), (ii) the Termination Date (as
defined in the Securities Purchase Agreement), or (iii) September 30, 2000,
subject to the conditions set forth in this Agreement: (i) the Holders will have
the right, by written notice delivered to the Company (a "Demand Notice"), to
require the Company to register Registrable Securities under and in accordance
with the provisions of the Securities Act (a "Demand Registration"), provided
that the Holders may not make in the aggregate more than four (4) Demand
Registrations under this Agreement; provided, further, that: (i) no such Demand
Registration may be required unless the Holders requesting such Demand
Registration provide to the Company a certificate (the "Authorizing
Certificate"), seeking to include Registrable Securities in such Demand
Registration with a market value of at least $5,000,000 (calculated based on the
closing sale price of such securities on the principal securities exchange where
such securities are listed on the business day immediately preceding the date of
the Demand Notice) as of the date the Demand Notice is given; and (ii) no Demand
Notice may be given prior to six (6) months after the effective date of the
immediately preceding Demand Registration or, if later, the date on which a
registration pursuant to this Section 2 is terminated in its entirety prior to
the effective date of the applicable registration statement. Each Demand Notice
shall set forth (A) the name of the Holder(s) seeking to include Registrable
Securities in such Demand Registration, (B) the number of Registrable Securities
held by each such Holder, and, if different, the number of Registrable
Securities such Holder has elected to have registered, and (C) the intended
methods of disposition of the Registrable Securities. Notwithstanding the
foregoing, a good faith decision by a Holder to withdraw Registrable Securities
from registration will not affect the Company's obligations hereunder even if
the amount remaining to be registered has a market value of less than $5,000,000
(calculated as aforesaid), provided that: (1) such continuing registration shall
constitute a Demand Registration and (2) the withdrawing Holder reimburses the
Company for any registration and filing fees (including any fees payable to the
National Association of Securities Dealers, Inc. or any successor organization)
it has incurred with respect to the withdrawn Registrable Securities (unless all
Registrable Securities are withdrawn, in which case the withdrawing Holder(s)
shall reimburse the Company for all registration and filing fees and other costs
and expenses described in Section 6 incurred by it in connection with the
registration of such Registrable Securities). Subject to compliance with clause
(2) of the proviso contained in the preceding sentence, a registration that is
terminated in its entirety prior to the effective date of the applicable
registration statement will not constitute a Demand Registration and,
notwithstanding the proviso contained in the preceding sentence, the withdrawing
Holder shall not be obligated to reimburse the Company for any registration or
filing fees or other costs and expenses incurred by the Company with respect to
the withdrawn Registrable Securities if such withdrawal is based upon a material
adverse event or change involving the Company that has occurred or been
disclosed after the date of Holder's Demand Notice (including a decrease of 20%
or more in the trading price of the Company's Common Stock, calculated based on
the difference between the closing price of the Company's Common Stock on the
date of the Demand Notice when compared with the closing price of the Company's
Common Stock on the date that the Holder's request for withdrawal is transmitted
to the Company) or material adverse information relating to the Company that has
been disclosed to Holder after the date of Holder's Demand Notice.
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<PAGE> 6
(b) Filing and Effectiveness. The Company will file a
Registration Statement relating to any Demand Registration as promptly as
practicable (but in any event within (i) 60 days if the Company is not eligible
to file a registration statement on Form S-3 or (ii) 30 days if the Company is
eligible to file a registration statement on Form S-3 (unless the Company is
required to file a registration statement on Form S-1 or Form S-2 at the request
of the Holders holding a majority of the Registrable Securities to be included
in the applicable Demand Registration) following the date on which the Demand
Notice is given and will use its reasonable best efforts to cause the same to be
declared effective by the SEC as soon as practicable thereafter. If any Demand
Registration is requested to be effected as a shelf registration pursuant to
Rule 415 under the Securities Act by the Holders demanding such Demand
Registration, the Company will keep the Registration Statement filed in respect
thereof effective for a period of six (6) months from the date on which the SEC
declares such Registration Statement effective (subject to extension pursuant to
Section 5) or such shorter period that will terminate when all Registrable
Securities covered by such Registration Statement have been sold pursuant to
such Registration Statement.
Within ten (10) business days after receipt of such Demand
Notice, the Company will serve written notice thereof (the "Notice") to all
other Holders and will, subject to the provisions of Section 2(c), include in
such registration all Registrable Securities with respect to which the Company
receives written requests for inclusion therein within ten (10) business days
after receipt of the Notice by the applicable Holder. Subject to the terms of
Section 2(a), the Holder will be permitted to withdraw in good faith all or part
of the Registrable Securities from a Demand Registration at any time prior to
the effective date of such Demand Registration, in which event the Company will
promptly amend or, if applicable, withdraw the related Registration Statement.
(c) Priority on Demand Registration. If Registrable Securities
are to be registered pursuant to a Demand Registration, the Company shall
provide written notice to the other Holders and will permit all such Holders who
request to be included in the Demand Registration to include any or all
Registrable Securities held by such Holders in such Demand Registration.
Notwithstanding the foregoing, if the managing underwriter or underwriters of an
Underwritten Offering to which such Demand Registration relates advises the
Holders that the total amount of Registrable Securities that such Holders intend
to include in such Demand Registration is in the aggregate such as to materially
and adversely affect the success of such offering, then the number of
Registrable Securities to be included in such Demand Registration will, if
necessary, be reduced and there will be included in such Underwritten Offering
the number of Registrable Securities that, in the opinion of such managing
underwriter or underwriters, can be sold without materially and adversely
affecting the success of such Underwritten Offering. The Registrable Securities
of the Holder or Holders initiating the Demand Registration shall receive
priority in such Underwritten Offering to the full extent of the Registrable
Securities such Holder or Holders desire to sell (unless these securities would
materially and adversely affect the success of such offering, in which case the
number of such Holder's Registrable Securities included in the offering shall be
reduced to the extent necessary) and the remaining allocation available for
sale, if any, shall be allocated pro rata among the other Holders on the basis
of the amount of Registrable Securities requested to be included therein by each
such Holder.
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<PAGE> 7
(d) Postponement of Demand Registration. The Company will be
entitled to postpone the filing period of any Demand Registration for a
reasonable period of time not in excess of 90 calendar days if the Company
determines, in the good faith exercise of the business judgment of its Board of
Directors, that such registration and offering could materially interfere with a
bona fide business or financing transaction of the Company or would require
disclosure of information, the premature disclosure of which could materially
and adversely affect the Company; provided, that the Company shall be entitled
to exercise its rights under this Section 2(d) only once in any twelve month
period. If the Company postpones the filing of a Registration Statement, it will
promptly notify the Holders in writing (i) when the events or circumstances
permitting such postponement have ended and (ii) that the decision to postpone
was made by the Board of Directors of the Company in accordance with this
Section 2(d).
Section 3. Piggyback Registration.
(a) Right to Piggyback. If at any time the Company proposes to
file a Registration Statement, whether or not for sale for the Company's own
account, on a form and in a manner that would also permit registration of
Registrable Securities, the Company shall give to Holders holding Registrable
Securities, written notice of such proposed filing at least thirty (30) days
before the anticipated filing. The notice referred to in the preceding sentence
shall offer Holders the opportunity to register such amount of Registrable
Securities as each Holder may request (a "Piggyback Registration"). Subject to
Section 3(b), the Company will include in each such Piggyback Registration all
Registrable Securities with respect to which the Company has received written
requests for inclusion therein. Subject to clause (2) of the proviso at the end
of Section 2(a), the Holders will be permitted to withdraw all or part of the
Registrable Securities from a Piggyback Registration at any time prior to the
effective date of such Piggyback Registration.
Notwithstanding the foregoing, the Company will not be obligated
to effect any registration of Registrable Securities under this Section 3 as a
result of the registration of any of its securities solely in connection with
mergers, acquisitions, exchange offers, dividend reinvestment and share purchase
plans offered solely to current holders of the Common Stock, rights offerings or
option or other employee benefit plans.
(b) Priority on Piggyback Registrations. The Company will cause
the managing underwriter or underwriters of a proposed Underwritten Offering to
permit Holders holding Registrable Securities requested to be included in the
registration for such offering to include therein all such Registrable
Securities requested to be so included on the same terms and conditions as any
securities of the Company included therein (other than the indemnification by
the Holders, which will be limited as set forth in Section 7 hereof).
Notwithstanding the foregoing, if the managing underwriter or underwriters of
such Underwritten Offering advises the Holders to the effect that the total
amount of securities that such Holders and the Company propose to include in
such Underwritten Offering is such as to materially and adversely affect the
success of such offering, then the Company will include in such registration (i)
first, and subject to the provisions of Section 2(c), if applicable, the Common
Stock of the Person who has demanded such registration, if any, (ii) second,
100% of the Common Stock the Company proposes to sell, and (iii) third, to the
extent of the number of Registrable Securities requested to be included in such
registration which, with the advice of such managing underwriter, can be sold
without having the adverse effect referred to above, the number of Registrable
Securities
5
<PAGE> 8
which the Holders have requested to be included in such registration, such
amount to be allocated pro rata among all requesting Holders on the basis of the
relative number of Registrable Securities then held by each such Holder.
No registration of Registrable Securities effected under this
Section 3 shall relieve the Company of its obligation to effect a registration
of Registrable Securities pursuant to Section 2 hereof.
Section 4. Restrictions on Sale by Holders. Each Holder agrees, if such
Holder is so requested (pursuant to a timely written notice) by the managing
underwriter or underwriters in an Underwritten Offering, not to effect any
public sale or distribution of any of the Company's securities of such class or
securities convertible or exchangeable into such class (except as part of such
Underwritten Offering), including a sale pursuant to Rule 144 under the
Securities Act, during the 15-calendar day period prior to, and during the
90-calendar day period beginning on, the closing date of such Underwritten
Offering.
Section 5. Registration Procedures. In connection with the Company's
registration obligations pursuant to Sections 2 and 3, the Company will effect
such registrations to permit the sale of such Registrable Securities in
accordance with the intended method or methods of disposition thereof, and
pursuant thereto the Company will as expeditiously as possible, and in each case
to the extent applicable (it being understood that the obligations of the
Company in clauses (a), (b), (d), (h), (j), (k), (1), (n) and (q) of this
Section 5 will be subject to the first sentence of Section 3(b) and, except as
provided in Section 3(b), the Holders will not have any right to effect an
underwritten public offering under Section 3):
(a) Prepare and file with the SEC a Registration Statement
or Registration Statements on any appropriate form under the Securities
Act available for the sale of the Registrable Securities by the holders
thereof in accordance with the intended method or methods of
distribution thereof, and cause each such Registration Statement to
become effective and remain effective as provided herein; provided,
however, that before filing a Registration Statement or Prospectus or
any amendments or supplements thereto (including documents that would be
incorporated or deemed to be incorporated therein by reference) the
Company will furnish to the Holders holding Registrable Securities
covered by such Registration Statement, not more than one counsel chosen
by Holders holding a majority of the Registrable Securities being
registered ("Special Counsel") and the managing underwriters, if any,
copies of all such documents proposed to be filed, which documents will
be subject to the review of such Holders, such Special Counsel and such
underwriters, and the Company will not file any such Registration
Statement or amendment thereto or any Prospectus or any supplement
thereto (excluding such documents that, upon filing, will be
incorporated or deemed to be incorporated by reference therein) to which
the Holders holding a majority of the Registrable Securities covered by
such Registration Statement or the managing underwriter, if any, shall
reasonably object.
(b) Prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be
necessary to keep such Registration Statement continuously effective for
the applicable periods specified in Section 2; cause the related
Prospectus to be supplemented by any required Prospectus
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<PAGE> 9
supplement, and as so supplemented to be filed pursuant to Rule 424 (or
any similar provisions then in force) under the Securities Act; and
comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such Registration Statement
during the applicable period in accordance with the intended methods of
disposition by the sellers thereof set forth in such Registration
Statement as so amended or in such Prospectus as so supplemented.
(c) Notify the selling Holders and the managing
underwriters, if any, promptly, and (if requested by any such person)
confirm such notice in writing, (i) when a Prospectus or any Prospectus
supplement or post-effective amendment has been filed, and, with respect
to a Registration Statement or any post-effective amendment, when the
same has become effective, (ii) of any request by the SEC or any other
federal or state governmental authority for amendments or supplements to
a Registration Statement or related Prospectus or for additional
information, (iii) of the issuance by the SEC or any other federal or
state governmental authority of any stop order suspending the
effectiveness of a Registration Statement or the initiation of any
proceedings for that purpose, (iv) if at any time the representations
and warranties of the Company contained in any agreement contemplated by
Section 5(n) (including any underwriting agreement) cease to be true and
correct in any material, respect, (v) of the receipt by the Company of
any notification with respect to the suspension of the qualification or
exemption from qualification of any of the Registrable Securities for
sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose, (vi) of the occurrence of any event that
makes any statement made in such Registration Statement or related
Prospectus or any document incorporated or deemed to be incorporated
therein by reference untrue in any material respect or that requires the
making of any changes in a Registration Statement, Prospectus or any
such document so that, in the case of the Registration Statement, it
will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading and, in the case of the
Prospectus, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading, and (vii) of the Company's reasonable
determination that a post-effective amendment to a Registration
Statement would be appropriate.
(d) Use its reasonable best efforts to obtain the
withdrawal of any order suspending the effectiveness of a Registration
Statement, or the lifting of any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for
sale in any jurisdiction, at the earliest possible moment.
(e) If requested by the managing underwriters, if any, or
Holders holding a majority of the Registrable Securities being
registered, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment such information as the managing underwriters,
if any, and such Holders agree should be included therein as may be
required by applicable law and (ii) make all required filings of such
Prospectus supplement or such post-effective amendment as soon as
practicable after the Company has received notification of the matters
to be incorporated in such Prospectus supplement or post-effective
amendment; provided, however, that the Company will not be required
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<PAGE> 10
to take any actions under this Section 5(e) that are not, in the opinion
of counsel for the Company, in compliance with applicable law.
(f) Furnish to each selling Holder and each managing
underwriter, if any, without charge, at least one conformed copy of the
Registration Statement and any posteffective amendment thereto,
including financial statements (but excluding schedules, all documents
incorporated or deemed incorporated therein by reference and all
exhibits, unless requested in writing by such holder or underwriter).
(g) Deliver to each selling Holder and the underwriters,
if any, without charge as many copies of the Prospectus or Prospectuses
relating to such Registrable Securities (including each preliminary
prospectus) and any amendment or supplement thereto as such persons may
reasonably request; and, subject to the last paragraph of this Section
5, the Company hereby consents to the use of such Prospectus or each
amendment or supplement thereto by each of the selling Holders and the
underwriters, if any, in connection with the offering and sale of the
Registrable Securities covered by such Prospectus or any amendment or
supplement thereto.
(h) Prior to any public offering of Registrable
Securities, to register or qualify or cooperate with the selling
Holders, the underwriters, if any, and their respective counsel in
connection with the registration or qualification (or exemption from
such registration or qualification) of such Registrable Securities for
offer and sale under the securities or blue sky laws of such
jurisdictions within the United States as any seller or underwriter
reasonably requests in writing; use its reasonable best efforts to keep
such registration or qualification (or exemption therefrom) effective
during the period the applicable Registration Statement is required to
be kept effective and do any and all other acts or things necessary or
advisable to enable the disposition in each such jurisdiction of the
Registrable Securities covered by the applicable Registration Statement;
provided, however, that the Company will not be required to (i) qualify
to do business in any jurisdiction where it is not then so qualified or
(ii) take any action that would subject it to taxation or service of
process in any such jurisdiction where it is not then so subject.
(i) Cooperate with the selling Holders and the managing
underwriters, if any, to facilitate the timely preparation and delivery
of certificates representing Registrable Securities to be sold and
enable such Registrable Securities to be in such denominations and
registered in such names as the managing underwriters, if any, shall
request at least two business days prior to any sale of Registrable
Securities to the underwriters.
(j) Use its reasonable best efforts to cause the
Registrable Securities covered by the applicable Registration Statement
to be registered with or approved by such other governmental agencies or
authorities within the United States except as may be required solely as
a consequence of the nature of any selling Holder's business, in which
case the Company will cooperate in all reasonable respects with the
filing of such Registration Statement and the granting of such approvals
as may be necessary to enable the seller or sellers thereof or the
underwriters, if any, to consummate the disposition of such Registrable
Securities.
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<PAGE> 11
(k) Upon the occurrence of any event contemplated by
Section 5(c)(vi) or 5(c)(vii), prepare a supplement or post-effective
amendment to each Registration Statement or a supplement to the related
Prospectus or any document incorporated therein by reference or file any
other required document so that, as thereafter delivered to the
purchasers of the Registrable Securities being sold thereunder, such
Prospectus will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(l) If requested by Holders holding a majority of the
Registrable Securities covered by such Registration Statement or the
managing underwriters, if any, use its reasonable best efforts to cause
all Registrable Securities covered by such Registration Statement to be
(i) listed on each securities exchange, if any, on which securities
issued by the Company of the same class are then listed or, if no such
securities issued by the Company are then so listed, on the New York
Stock Exchange or another national securities exchange if the securities
qualify to be so listed or (ii) authorized to be quoted on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq")
or the National Market System of Nasdaq, if the securities qualify to be
so quoted.
(m) As needed, (i) engage an appropriate transfer agent
and provide the transfer agent with printed certificates for the
Registrable Securities in a form eligible for deposit with The
Depository Trust Company and (ii) provide a CUSIP number for the
Registrable Securities.
(n) Enter into such customary agreements (including, in
the event of an Underwritten Offering, an underwriting agreement in
form, scope and substance as is customary in underwritten offerings) and
take all such other commercially reasonable and customary actions in
connection therewith (including those reasonably requested by the
Holders holding a majority of the Registrable Securities being sold or,
in the event of an Underwritten offering, those reasonably requested by
the managing underwriters) in order to facilitate the disposition of
such Registrable Securities and in such connection, but only where an
underwriting agreement is entered into in connection with an
underwritten registration, (i) make such representations and warranties
to the underwriters with respect to the businesses of the Company and
its subsidiaries, the Registration Statement, Prospectus and documents
incorporated by reference or deemed incorporated by reference therein,
if any, in each case, in form, substance and scope as are customarily
made by issuers to underwriters in underwritten offerings and confirm
the same if and when requested; (ii) obtain opinions of counsel to the
Company and updates thereof, which counsel and opinions (in form, scope
and substance) shall be reasonably satisfactory to the managing
underwriters, if any, addressed to each of the underwriters covering the
matters customarily covered in opinions requested in underwritten
offerings and such other matters as may be reasonably requested by such
underwriters; (iii) use its reasonable best efforts to obtain "comfort"
letters and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other certified
public accountants of any subsidiary of the Company or of any business
acquired by the Company for which financial statements and financial
data is, or is
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<PAGE> 12
required to be, included in the Registration Statement), addressed to
each of the underwriters, such letters to be in customary form and
covering matters of the type customarily covered in "comfort" letters in
connection with underwritten offerings; and (iv) deliver such documents
and certificates as may be reasonably requested by the managing
underwriters, if any, to evidence the continued validity of the
representations and warranties of the Company and its subsidiaries made
pursuant to clause (i) above and to evidence compliance with any
customary conditions contained in the underwriting agreement entered
into by the Company. The foregoing actions will be taken in connection
with each closing under such underwriting agreement as and to the extent
required thereunder.
(o) Make available for reasonable inspection during normal
business hours by a representative of the Holders holding Registrable
Securities being sold, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by
such selling Holders or underwriter, all financial and other records,
pertinent corporate documents and properties of the company and its
subsidiaries, and cause the officers, directors and employees of the
Company and its subsidiaries to supply all information reasonably
requested by any such representative, underwriter, attorney or
accountant in connection with such Registration statement; provided,
however, that any records, information or documents that are designated
by the Company in writing as confidential at the time of delivery of
such records, information or documents will be kept confidential by such
persons unless such records, information or documents are in the public
domain or otherwise publicly available, (ii) disclosure of such records,
information or documents is required by court or administrative order or
is necessary to respond to inquiries of regulatory authorities, or (iii)
disclosure of such records, information or documents, in the reasonable
opinion of counsel to such person, is otherwise required by law
(including, without limitation, pursuant to the requirements of the
Securities Act).
(p) Comply with all applicable rules and regulations of
the SEC and make generally available to its security holders earning
statements satisfying the provisions of Section 11(a) of the Securities
Act and Rule 158 thereunder (or any similar rule promulgated under the
Securities Act) no later than 45 calendar days after the end of any
12-month period (or 90 calendar days after the end of any 12-month
period if such period is a fiscal year) (i) commencing at the end of any
fiscal quarter in which Registrable Securities are sold to underwriters
in a firm commitment or reasonable best efforts underwritten offering,
or (ii) if not sold to underwriters in such an offering, commencing on
the first day of the first fiscal quarter of the Company, after the
effective-date of a Registration Statement, which statements shall cover
such 12-month period.
(q) In connection with any underwritten offering, cause
appropriate members of management to cooperate and participate on a
reasonable basis in the underwriters, "road show" conferences related to
such offering.
The Company may require each seller of Registrable Securities as
to which any registration is being effected to furnish to the Company such
information regarding the distribution of such Registrable Securities as the
Company may, from time to time, reasonably
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<PAGE> 13
request in writing, and the Company may exclude from such registration the
Registrable Securities of any seller who unreasonably fails to furnish such
information within a reasonable time after receiving such request.
Each Holder will be deemed to have agreed by virtue of its
acquisition of Registrable Securities that, upon receipt of any notice from the
Company of the occurrence of any event of the kind described in Section
5(c)(ii), 5(c)(iii), 5(c)(v), 5(c)(vi) or 5 (c) (vii) ("Suspension Notice") ,
such Holder will forthwith discontinue disposition of such Registrable
Securities covered by such Registration Statement or Prospectus (a "Black-Out")
until such Holder's receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 5(k), or until it is advised in writing (the
"Advice") by the Company that the use of the applicable Prospectus may be
resumed, and such Holder has received copies of any additional or supplemental
filings that are incorporated or deemed to be incorporated by reference in such
Prospectus. Except as expressly provided herein, there shall be no limitation
with regard to the number of Suspension Notices that the Company is entitled to
give hereunder; provided, however, that in no event shall the aggregate number
of days the Holders are subject to Black-Out during any period of 12 consecutive
months exceed 180 days.
Section 6. Registration Expenses. Subject to the terms of Section 2(a),
all fees and expenses incident to the performance of or compliance with this
Agreement by the Company will be borne by the Company whether or not any of the
Registration Statements become effective. Such fees and expenses will include,
without limitation, (i) all registration and filing fees (including, without
limitation, fees and expenses for compliance with securities or "blue sky" laws)
, (ii) printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities in a form eligible for deposit with The
Depository Trust Company and of printing a reasonable number of prospectuses if
the printing of such prospectuses is requested by the Holders holding a majority
of the Registrable Securities included in any Registration Statement), (iii)
messenger, telephone and delivery expenses incurred by the Company, (iv) fees
and disbursements of counsel for the Company incurred by the Company, (v) fees
and disbursements of all independent certified public accountants referred to in
Section 5(n)(iii) (including the expenses of any special audit and "comfort"
letter required by or incident to such performance) incurred by the Company,
(vi) Securities Act liability insurance, if any, and (vii) fees and expenses of
Special Counsel retained by the Holders in connection with the registration and
sale of their Registrable Securities (which counsel will be selected by the
Holders of a majority of the Registrable Securities being sold). In addition,
the Company will pay internal expenses (including without limitation all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit, the fees and expenses
incurred in connection with the listing of the securities to be registered on
any securities exchange on which securities of the same class issued by the
Company are then listed and the fees and expenses of any person, including
special experts, retained by the Company. In no event, however, will the Company
be responsible for any underwriting discount or selling commission with respect
to any sale of Registrable Securities pursuant to this Agreement, and the
Holders shall be responsible on a pro rata basis for any taxes of any kind
(including, without limitation, transfer taxes) with respect to any disposition,
sale or transfer of Registrable Securities.
11
<PAGE> 14
Section 7. Indemnification.
(a) Indemnification by the Company. The Company will, without
limitation as to time, indemnify and hold harmless, to the fullest extent
permitted by law, each Holder holding Registrable Securities registered pursuant
to this Agreement, the officers, directors and agents and employees of each of
them, each person who controls such a Holder (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of any such controlling person, from and against
all losses, claims, damages, liabilities, costs (including without limitation
the costs of investigation and attorneys' fees and expenses) (collectively,
"Losses") incurred, arising out of or based upon any untrue or alleged untrue
statement of a material fact contained in any Registration Statement, Prospectus
or form of Prospectus or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar and to
the extent as the same are based upon information furnished in writing to the
Company by such Holder for use therein; provided, however, that the Company will
not be liable to any Holder to the extent that any such Losses arise out of or
are based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Registration Statement, Prospectus or preliminary
prospectus if either (A) (i) such Holder failed to send or deliver a copy of the
Prospectus with or prior to the delivery of written confirmation of the sale by
such Holder of a Registrable Security to the person asserting the claim from
which such Losses arise and (ii) the Prospectus would have corrected such untrue
statement or alleged untrue statement or such omission or alleged omission; or
(B) such untrue statement or alleged untrue statement, omission or alleged
omission is corrected in an amendment or supplement to the Prospectus previously
furnished by or on behalf of the Company with copies of the Prospectus, and such
Holder thereafter fails to deliver such Prospectus as so amended or supplemented
prior to or concurrently with the sale of a Registrable Security to the person
asserting the claim from which such Losses arise.
(b) Indemnification by Holders. In connection with any
Registration Statement in which a Holder is participating, such Holder will
furnish to the Company in writing such information as the Company reasonably
requests for use in connection with any Registration Statement, Prospectus or
preliminary prospectus and will indemnify, to the fullest extent permitted by
law, the Company, its directors and officers, agents and employees, each person
who controls the Company (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, agents or
employees of such controlling persons, from and against all Losses arising out
of or based upon any untrue statement of a material fact contained in any
Registration Statement, Prospectus or preliminary prospectus or arising out of
or based upon any omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, to the extent, but only
to the extent, that such untrue statement or omission is contained in any
information so furnished in writing by such Holder to the Company for use in
such Registration Statement, Prospectus or preliminary prospectus and was relied
upon by the Company in the preparation of such Registration Statement,
Prospectus or preliminary prospectus. In no event will the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the
proceeds (net of payment of all expenses) received by such Holder upon the sale
of the Registrable Securities giving rise to such indemnification obligation.
12
<PAGE> 15
(c) Conduct of Indemnification Proceedings. If any person shall
become entitled to indemnity hereunder (an "indemnified party") , such
indemnified party shall give prompt notice to the party from which such
indemnity is sought (the "indemnifying party") of any claim or of the
commencement of any action or proceeding with respect to which such indemnified
party seeks indemnification or contribution pursuant hereto; provided, however,
that the failure to so notify the indemnifying party will not relieve the
indemnifying party from any obligation or liability except to the extent that
the indemnifying party has been prejudiced materially by such failure. All
reasonable fees and expenses (including any reasonable fees and expenses
incurred in connection with investigating or preparing to defend such action or
proceeding) will be paid to the indemnified party (provided appropriate
documentation for such expenses is also submitted with such notice), as
incurred, within five calendar days of written notice thereof to the
indemnifying party (regardless of whether it is ultimately determined that an
indemnified party is not entitled to indemnification hereunder). The
indemnifying party will not consent to entry of any judgment or enter into any
settlement or otherwise seek to terminate any action or proceeding in which any
indemnified party is or could be a party and as to which indemnification or
contribution could be sought by such indemnified party under this Section 7,
unless such judgment, settlement or other termination includes as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release, in form and substance reasonably satisfactory to
the indemnified party, from all liability in respect of such claim or litigation
for which such indemnified party would be entitled to indemnification hereunder.
(d) Contribution. If the indemnification provided for in this
Section 7 is unavailable to an indemnified party under Section 7(a) or 7(b) in
respect of any Losses or is insufficient to hold such indemnified party
harmless, then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, will, severally but not jointly, contribute to the amount
paid or payable by such indemnified party as a result of such Losses, in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party or indemnifying parties, on the one hand, and such indemnified party, on
the other hand, in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party or indemnifying parties, on the
one hand, and such indemnified party, on the other hand, will be determined by
reference to, among other things, whether any action in question, including any
untrue or alleged untrue statement of a material fact or omission or alleged
omission of a material fact, has been taken or made by, or related to
information supplied by, such indemnifying party or indemnified party, and the
parties, relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses will be deemed to include any legal
or other fees or expenses incurred by such party in connection with any action
or proceeding.
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this section 7(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 7(d), an indemnifying party that
is a selling Holder will not be required to contribute any amount in excess of
the amount by which the total price at which the Registrable Securities sold by
such indemnifying party and distributed to the public were offered to the public
exceeds the amount of
13
<PAGE> 16
any damages that such indemnifying party has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) will be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
The indemnity, contribution and expense reimbursement obligations
of the Company hereunder will be in addition to any liability the Company may
otherwise have hereunder or otherwise. The provisions of this Section 7 will
survive so long as Registrable Securities remain outstanding, notwithstanding
any permitted transfer of the Registrable Securities by any Holder thereof or
any termination of this Agreement.
Section 8. Underwritten Registrations. If any of the Registrable
Securities included in any Demand Registration are to be sold in an Underwritten
Offering, the Holders holding a majority of the Registrable Securities included
in the Demand Notice may select an investment banker or investment bankers and
manager or managers to manage the Underwritten Offering, in each case subject to
the reasonable approval of the Company. If any Piggyback Registration is an
Underwritten Offering, the Company will have the right to select the investment
banker or investment bankers and manager or managers to administer the offering.
The Company agrees that, in connection with any Underwritten Offering hereunder,
it shall offer customary indemnification to the participating underwriters and
each Holder agrees that, in connection with any Underwritten Offering hereunder
in which such Holder is selling Registrable Securities, such Holder will offer
indemnification to the participating underwriters to the same extent that such
Holder is required to indemnify the Company under Section 7(b).
Section 9. Other Agreements. The Company shall not enter into any
agreement or instrument which would conflict with or result in a material breach
or violation of any of the terms or provisions of this Agreement. In addition,
the Company shall not enter into any agreement or instrument with any Person
which grants such Person demand registration rights similar to those in Section
2(a) which preclude the Holders of Registrable Securities from exercising their
rights pursuant to Section 2(a) hereof in connection with any registration
statement filed pursuant to which such Person will sell securities of the
Company.
Section 10. Miscellaneous.
(a) Remedies. In the event of a breach by a party of its
obligations under this Agreement, each other party, in addition to being
entitled to exercise all rights granted by law, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement.
Each party agrees that monetary damages would not be adequate compensation for
any loss incurred by reason of a breach by it of any provision of this Agreement
and hereby further agrees that, in the event of any action for specific
performance in respect of such breach, it will waive the defense that a remedy
at law would be adequate.
(b) Amendments and Waivers. The provisions of this Agreement may
not be amended, modified or supplemented without the prior written consent of
the Company, and Holders holding in excess of 50% of the Registrable Securities
in respect of which Registrable Securities are issuable.
14
<PAGE> 17
(c) Notices. Except as set forth below, all notices and other
communications provided for or permitted hereunder shall be in writing and shall
be deemed to have been duly given if delivered personally or sent by telex or
telecopier, registered or certified mail (return receipt requested), postage
prepaid or courier or overnight delivery service to the Company at the following
address and to the initial Holder at the following address (or at such other
address for any party as shall be specified by like notice, provided that
notices of a change of address shall be effective only upon receipt thereof):
If to the Company: Equity Marketing, Inc.
6330 San Vicente Boulevard
Los Angeles, California 90048
Attn: Leland P. Smith
Facsimile: (323) 932-4488
With a copy to: Riordan & McKinzie
300 S. Grand Avenue, 29th Floor
Los Angeles, CA 90071
Attn: Thomas M. Cleary, Esq.
Facsimile: (213) 229-8550
If to the Investor: Crown Acquisition Partners, LLC
660 Madison Avenue, 15th Floor
New York, NY 10021
Attn: Kenneth Squire
Facsimile: (212) 207-8001
with copies to: Latham & Watkins
633 West Fifth Street
Suite 4000
Los Angeles, CA 90071
Attention: W. Alex Voxman
Facsimile: (213) 891-8763
(d) Merger or Consolidation of the Company. If the Company is a
party to any merger or consolidation pursuant to which the Preferred Stock or
Registrable Securities are converted into or exchanged for securities or the
right to receive securities of any other person ("Conversion Securities") , the
issuer of such Conversion Securities shall assume (in a writing delivered to all
Holders) all obligations of the Company hereunder. The Company will not effect
any merger or consolidation described in the immediately preceding sentence
unless the issuer of the Conversion Securities complies with this Section 10(d).
(e) Successors and Assigns. Any transferee of all or a portion of
the Preferred Stock, Warrants or Registrable Securities (i) that is an Affiliate
of a Holder (without regard to the amount of Preferred Stock, Warrants or
Registrable Securities acquired by such Affiliate) or (ii) that acquires
Preferred Stock, Warrants or Registrable Securities with a market value of at
least $2.5 million (calculated on an as exercised and as converted basis based
on the closing sale price of the Common Stock as of the date of the transfer)
shall become a Holder hereunder to the extent it agrees in writing to be bound
by all of the provisions applicable hereunder to the
15
<PAGE> 18
transferring Holder (such acknowledgment being evidenced by execution of a
Counterpart and Acknowledgment substantially in the form of Exhibit A). Subject
to the requirements of this Section 10(e), this Agreement shall inure to the
benefit of and be binding upon the successors and assigns of the parties hereto.
(f) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts (which may be by
facsimile), each of which when so executed will be deemed to be an original and
all of which taken together will constitute one and the same instrument.
(g) Headings. The headings in this Agreement are for convenience
of reference only and will not limit or otherwise affect the meaning.
(h) Governing Law. This agreement will be governed by and
construed in accordance with the laws of the State of Delaware, as applied to
contracts made and performed within the State of Delaware, without regard to
principles of conflict of laws.
(i) Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein will remain in full force and effect and will in
no way be affected, impaired or invalidated, and the parties hereto will use
their reasonable best efforts to find and employ an alternative means to achieve
the same or substantially the same result as that contemplated by such term,
provision, covenant or restriction. It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
(j) Entire Agreement. This Agreement is intended by the parties
as a final expression of their agreement and intended to be the complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein, with respect to such subject matter. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
(k) Termination. This Agreement and the rights provided to the
Holders as contained herein shall terminate on the earlier of (a) March 29, 2010
(with respect to all Holders), or (b) at such time that a Holder may sell all of
its Registrable Securities pursuant to Rule 144 contained in the Securities Act
without any volume limitation (with respect to such Holder).
(Signature page follows)
16
<PAGE> 19
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
EQUITY MARKETING, INC.
By: /s/ DONALD A. KURZ
----------------------------------------
Name: Donald A. Kurz
Title: Chairman of the Board and Chief
Executive Officer
CROWN ACQUISITION PARTNERS, LLC
By: /s/ JEFFREY S. DEUTSCHMAN
----------------------------------------
Name: Jeffrey S. Deutschman
Title: Manager
17
<PAGE> 20
EXHIBIT A
REGISTRATION RIGHTS AGREEMENT
COUNTERPART AND ACKNOWLEDGMENT
TO: The Company
RE: The Registration Rights Agreement (the
"Agreement") dated as of __________, 2000, by
and among the Company and the Holders (as
defined in the Agreement)
The undersigned hereby agrees to be bound by the terms of the Agreement
as a party to the Agreement, and shall be entitled to all benefits of the
Holders (as defined in the Agreement) and shall be subject to all obligations
and restrictions of the Holders pursuant to the Agreement, as fully and
effectively as though the undersigned had executed a counterpart of the
Agreement together with the other parties to the Agreement. The undersigned
hereby acknowledges having received and reviewed a copy of the Agreement.
DATED this ______ day of _______________, ________
By:
Title:
Number of
Shares of
Registrable Securities:
18
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,169
<SECURITIES> 0
<RECEIVABLES> 38,667
<ALLOWANCES> 4,004
<INVENTORY> 21,326
<CURRENT-ASSETS> 63,481
<PP&E> 8,975
<DEPRECIATION> 4,308
<TOTAL-ASSETS> 97,307
<CURRENT-LIABILITIES> 40,834
<BONDS> 0
10,346
0
<COMMON> 0
<OTHER-SE> 43,913
<TOTAL-LIABILITY-AND-EQUITY> 97,307
<SALES> 43,477
<TOTAL-REVENUES> 43,477
<CGS> 33,203
<TOTAL-COSTS> 33,203
<OTHER-EXPENSES> 8,220
<LOSS-PROVISION> 557
<INTEREST-EXPENSE> 240
<INCOME-PRETAX> 2,139
<INCOME-TAX> 845
<INCOME-CONTINUING> 1,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,294
<EPS-BASIC> .21
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